[Senate Hearing 107-229]
[From the U.S. Government Publishing Office]
S. Hrg. 107-229
AGRICULTURE MARKET CONCENTRATION
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
MAY 17, 2001--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
__________
U.S. GOVERNMENT PRINTING OFFICE
76-970 PDF WASHINGTON : 2002
______________________________________________________________________
For sale by the Superintendent of Documents,
U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio TIM JOHNSON, South Dakota
MARY L. LANDRIEU, Louisiana
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
Terry Sauvain, Minority Staff Director
Subcommittee on Agriculture, Rural Development, and Related Agencies
THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky BYRON L. DORGAN, North Dakota
CONRAD BURNS, Montana DIANNE FEINSTEIN, California
LARRY CRAIG, Idaho RICHARD J. DURBIN, Illinois
TED STEVENS, Alaska TIM JOHNSON, South Dakota
(ex offico) ROBERT C. BYRD, West Virginia
(ex offico)
Professional Staff
Rebecca Davies
Martha Scott Poindexter
Les Spivey
Rachelle Schroeder
Galen Fountain (Minority)
Jessica Arden (Minority)
Administrative Support
Angela Lee (Minority)
C O N T E N T S
----------
Page
Opening statement of Senator Thad Cochran........................ 1
Statement of Senator Herb Kohl................................... 2
Statement of Senator Tim Johnson................................. 2
Prepared statement........................................... 4
Statement of Keith Collins, Chief Economist, Department of
Agriculture.................................................... 6
Structural change................................................ 7
Prepared statement of Keith Collins.............................. 8
Statement of JoAnn Waterfield, Deputy Administrator for Packers
and Stockyards Programs, Grain Inspection, Packers and
Stockyards Administration, Department of Agriculture........... 14
Prepared statement........................................... 17
Questions submitted by Senator Byron L. Dorgan................... 22
Attorneys employ by packers and stockyards programs.............. 23
Accountants versus economists.................................... 24
Transfer to the Department of Justice............................ 24
Questions submitted by Senator Tim Johnson....................... 25
Captive supply problem........................................... 25
Bargaining power for producers................................... 25
Use of economists instead of attorneys in investigations......... 25
General Accounting Office report on GIPSA........................ 26
Packers and stockyards programs regulatory personnel needs....... 27
Creation of an Office of Agriculture in the Department of Justice 27
Statement of John M. Nannes, Acting Assistant Attorney General,
Antitrust Division, Department of Justice...................... 27
Enforcement of antitrust laws.................................... 28
Agricultural mergers............................................. 28
Agricultural criminal enforcement actions........................ 29
Civil investigations............................................. 29
Prepared statement of John M. Nannes............................. 30
Mandatory price reporting........................................ 36
Antitrust enforcement............................................ 36
Statement of Senator Byron L. Dorgan............................. 36
Prepared statement........................................... 38
Market concentration's effect on economic growth................. 38
Antitrust vs. FTC responsibilities............................... 39
Dairy compacts................................................... 40
Effect of government programs on agricultural consolidation...... 40
Mandatory price reporting........................................ 41
3/60 rule........................................................ 43
Special counsel for agriculture.................................. 44
Less competition vs. increased concentration..................... 45
Food dollar trends to family farm................................ 46
Increased marketing costs........................................ 46
Clayton Act...................................................... 47
Prepared statement of Senator Richard J. Durbin.................. 48
Statement of Mark D. Dopp, Senior Vice President and General
Counsel, American Meat Institute............................... 49
Prepared statement........................................... 51
Statement of William Roenigk, Senior Vice President, National
Chicken Council................................................ 53
Prepared statement........................................... 54
Statement of Jon Caspers, Vice President, National Pork Producers
Council........................................................ 57
Prepared statement........................................... 60
Statement of David S. Reiff, President, Reiff Grain and Feed, on
behalf of the National Grain and Feed Association.............. 62
Prepared statement........................................... 63
Statement of Thomas F. Stokes, President, Organization for
Competitive Markets............................................ 66
Prepared statement........................................... 68
Statement of Dudley Butler, on behalf of the Mississippi
Cattlemen's Association........................................ 74
Prepared statement........................................... 77
Statement of Robert Carlson, President, North Dakota farmers
Union.......................................................... 83
Prepared statement........................................... 85
Statement of Peter C. Carstensen, Associate Dean for Research and
Faculity Development, University of Wisconsin-Madision Law
School......................................................... 91
Prepared statement........................................... 93
Statement of Dan Kelley, farmer, State of Illinois............... 104
Prepared statement........................................... 107
Statement of Tom Miller, Attorney General, State of Iowa......... 110
Prepared statement........................................... 111
Statement of David Reis, President-elect, Illinois Pork Producers 114
Prepared statement of the American Cotton Shippers Association... 119
AGRICULTURE MARKET CONCENTRATION
----------
THURSDAY, MAY 17, 2001
U.S. Senate,
Subcommittee on Agriculture, Rural
Development, and Related Agencies,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 10 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Thad Cochran (chairman) presiding.
Present: Senators Cochran, Specter, Kohl, Durbin, Dorgan,
and Johnson.
OPENING STATEMENT OF SENATOR THAD COCHRAN
Senator Cochran. Please come to order. It's a pleasure to
convene this morning a hearing of this subcommittee, the
Subcommittee on Appropriations for Agriculture Rural
Development and related agencies.
We meet today to consider the issue of market concentration
in agriculture and the effect it may have on the funding of
programs under the jurisdiction of this subcommittee.
In 1996, the Department of Agriculture formed an advisory
committee to investigate concentration in the agricultural
economy, and over the past several years, funds have been
appropriated to implement the advisory committees'
recommendations.
Among these recommendations were increased monitoring and
enforcement of antitrust and regulatory policy, advising
producers about requirements to obtain a contract, and action
to end inequities in meat inspection.
The advisory committee also recommended mandatory livestock
price reporting which was included in the fiscal year 2000
funding bill for the Department of Agriculture, and it
implemented by the department last month.
The debate over concentration and consolidation in
agriculture and the appropriate role of the Federal Government
in regulating markets and whether changes in current laws would
be appropriate will be issues for consideration during the
reauthorization of the farm bill.
We hope to learn more about these issues today, including
the consequences of activities we have funded in the past and
which have been implemented.
We're pleased to have with us three panels of witnesses
whose statements will be made a part of the record in full.
In the first panel, we're pleased to welcome Keith Collins
who is Chief Economist with the United States Department of
Agriculture. JoAnn Waterfield, Deputy Administrator of the
Packers and Stockyards Programs of the Department of
Agriculture. And John M. Nannes, who is Acting Assistant
Attorney General with the Antitrust Division of the Department
of Justice.
Before proceeding to hear from our witnesses, I'm going to
yield at this point to other senators on the subcommittee for
any comments or opening remarks they would like to make.
My distinguished friend from Wisconsin is the ranking
member on the committee, Senator Kohl.
STATEMENT OF SENATOR HERB KOHL
Senator Kohl. I thank you very much, Mr. Chairman. Mr.
Chairman, if there has been one single rallying cry over the
years, it is to support the Federal Farm Programs. It would be
a statement of determination to save the family farm. That
proclamation has been a constant theme in the halls of Congress
and throughout the countryside.
This phrase often conjures up the vision of the small
scale, fiercely independent operator modeled after the
principle of the yeoman operator that Thomas Jefferson
considered to be the basic ingredient of American democracy.
So we might ask what are we to save the farm from? One
obvious answer is to save it from the grip of unwarranted
market concentration.
Aside from our basic ideals of government, the United
States has perhaps no better demonstration of genius than our
economic system. The free flow of goods and services throughout
our country and our general principles of commerce have
established the most powerful economic force in the world.
The simple concepts of supply and demand do, in fact, work.
Our responsibility is to assure that conditions of law, policy,
and economics in which supply and demand thrive are always
present. And so our focus today is to examine the extent to
which market concentration threatens this delicate balance of
economic forces.
The panels assembled here today will provide a broad range
of information necessary to better understand just what is at
stake in this debate and the form in which the debate should be
drawn.
I especially want to recognize Professor Peter Carstensen
of the University of Wisconsin School of Law for his special
expertise and long work on these issues, and for his previous
assistance when we examined some of these issues before the
judiciary subcommittee on antitrust business rights and
competition, on which I am also the ranking member.
So I look forward, along with the rest of this panel, to
today's discussion and also to hearing suggestions on how this
subcommittee might better work to support a sound agricultural
economy. Thank you, Mr. Chairman.
Senator Cochran. Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman, for holding what
I think is a very timely and very important hearing.
Anticompetitive concentration issues are a matter of great
concern and importance all across farm and ranch country in
America today and certainly in my home State of South Dakota.
Over 60 rural groups recently wrote the House Ag Committee
seeking the first time inclusion of a competition title in the
next farm bill, a request that I enthusiastically support, of
which I think is a reflection about the broad-based concern
about the underlying structure of American agriculture and the
direction that we are going today.
This is not the Ag Committee, obviously. This is the
Agriculture Appropriations Subcommittee, and our issues are a
bit narrower but nonetheless critically important on this
subcommittee.
I'm concerned, Mr. Chairman, that USDA's marketing
regulatory operations budget has been slashed by $231 million
in fiscal 2001, and that the Ag Marketing Service has been cut
from $61 million in that fiscal year, a cut that I fear may not
permit the AMS to successfully administer our new mandatory
price reporting program, one of the key strategies that was put
in place just this past year in the hopes of leveling the
playing field, so to speak, between independent livestock
producers and the packing industry.
Moreover, the Grain Inspection Packers and Stockers
Administration or GIPSA budget has been essentially flat lined,
and I fear that that may not equip them to investigate and
guard against unfair trade practices in the packing industry.
Last year the GAO reported that GIPSA lacks the staff,
budget, and expertise to properly investigate anti-competitive
behavior in livestock markets. That was prior to taking on a
flat-line budget this year.
GAO recommended the GIPSA require an earlier integration of
attorneys in the planning and review of investigation and
closer consultation take place between GIPSA, the Department of
Justice, and FTC during investigations. And I look forward to
learning how GIPSA plans to meet these recommendations under
their tight budget constraints.
Farmers and ranchers have weathered a storm of mergers in
recent years between grain producers, seed and biotech
companies, railroads, equipment dealers, grocery chains, meat
packers. This is a matter of utmost importance.
Our farmers and ranchers, I think, understand that the open
marketplace is still the major price discovery mechanism that
independent producers must rely on to gain a fair price. But
when the open market is then lacking in activity, the ability
of one or two players to affect that market is enormous.
PREPARED STATEMENT
So I look forward to the testimony today. I welcome very
able panels that the chairman has invited to share some
insights with us today, and I look forward to this hearing.
Senator Cochran. Thank you, Senator.
Senator Johnson. I have a formal statement to offer.
Senator Cochran. That will be included in the record.
[The statement follows:]
Prepared Statement of Senator Tim Johnson
Thank you Chairman Cochran for holding this subcommittee hearing on
marketplace concentration in agriculture. Without a doubt,
concentration in agriculture is one of the most serious issues facing
family farmers and ranchers today. I believe Congress and the
Administration must always promote and protect real competition as a
key element of our free enterprise economy--the envy of the
capitalistic world--so I thank Chairman Cochran and Senator Kohl for
conducting our hearing.
I believe that if Congress and the Administration fail to cooperate
to restore competition in all commodity and livestock markets now, the
results will be crushing for independent family producers and the
entire fabric of rural America. Agricultural producers want to derive
income from the marketplace, but in order to assure that can happen,
Congress must act now to restore fair competition to crop and livestock
markets.
Given that farm income is in-part dependent upon competitive
commodity and livestock markets, over 60 farm and rural groups recently
wrote the House Agriculture Committee seeking the first-time inclusion
of a ``competition title'' in the next farm bill, a request I
enthusiastically support. It is clear by this recent appeal and the
number of witnesses present to testify on this subject today, that
competition policy is extremely important to the overall prosperity or
decline of rural America.
Regarding USDA's budget proposal for fiscal year 2002, I appreciate
the President's desire to fund national priorities in a restrained way
so as to provide significant tax relief to America's working families.
I too support a significant tax cut. Yet, we must address the budget
and tax cut in a balanced fashion, assuring efforts are made to pay
down the Federal debt and fund key programs--such as USDA efforts to
promote competition in agriculture. While USDA's proposed budget
adequately addresses some of our priorities, I believe it fails to make
some specific and significant investments in a secure farm safety net,
conservation programs, and efforts to restore marketplace competition.
For instance, the Agricultural Marketing Service (AMS) budget has
been cut by $61 million from fiscal year 2001. The mission of AMS is to
promote competitive and efficient markets, and AMS must carry out the
bulk of our new mandatory price reporting program. I am concerned a cut
in the AMS budget may not permit the successful and complete
administration of mandatory price reporting.
Moreover, the overall Marketing and Regulatory Programs budget has
been slashed $231 million from fiscal year 2001, the Grain Inspection,
Packers and Stockyards Administration (GIPSA) budget has been
essentially flat-lined, and I do not have confidence that GIPSA's
budget adequately equip that agency to investigate and guard against
the unfair trade practices by meatpackers. This is very troubling
because a September 2000 General Accounting Office (GAO) Report
asserted that GIPSA lacks the staff, budget, and expertise to
investigate anti-competitive behavior in livestock markets. Therefore,
GAO recommended that GIPSA require an earlier integration of attorneys
in the planning and review of investigations and closer consultation
take place between GIPSA, the Department of Justice, and the Federal
Trade Commission during investigations. Last year, Congress concurred
and required GIPSA to implement GAO's recommended improvements by the
passage of the Grain Standard and Warehouse Improvement Act of 2000
(Public Law 106-472). I look forward to learning how GIPSA plans to
meet the mandate of Congress on this matter.
Overall, it seems to me we need more competition in agriculture,
not less. However, the proposed wave of mergers and acquisitions among
agribusinesses has set the stage for anticompetititve agriculture.
Farmers and ranchers have weathered a storm of mergers in recent years
between grain processing giants, seed and biotechnology companies,
railroads, farm equipment dealers, retail grocery chains, and
meatpackers. Now that Tyson Foods has turned its back on the
acquisition of IBP, it's not clear if the meat giant's two other former
bidders remain interested. While many analysts suggest that IBP's
competitors are not now interested in a deal, the stage is still set
for concentration to sweep competition away, leaving independent
farmers and ranchers without an active marketplace in which to sell
their crops or livestock.
On a broad scale, concentration in agriculture results in a
marketplace with a small number of firms controlling transactions of
agricultural goods between producers and consumers--and these firms
leverage a dominating amount of bargaining power over both producers
and consumers. On a specific scale, consider the meatpacking industry.
Prior to 1990, horizontal concentration by meatpackers swept the
nation, leaving the U.S. with three or four big meatpackers left to
purchase beef cattle, pork, and lamb for slaughter. After 1990, these
same firms added the element of vertical integration to their arsenal,
effectively controlling much of their slaughter needs through captive
supply and outright livestock ownership. The consequence for
independent producers was a meager cash marketplace without much
competition among meatpackers at all.
Yet, that open marketplace is still the major price discovery
mechanism that independent producers rely upon to gain a fair price.
So, when the open market is thin and lacking activity, the ability of
one or two dominant meatpackers to affect the market is tremendous. For
instance, if in a given week a meatpacker utilizes all of its captive
supplies and packer owned livestock to fill its kill needs, it has the
ability to level off a price spike or even depress prices paid in the
open market. Despite a producer's best effort to raise a quality live
animal, the power leveraged by a packer or group of packers can destroy
the opportunity to ensure a fair price.
A USDA-GIPSA study of cattle procurement practices by meatpackers
in the Texas panhandle region of the U.S. found a ``robust
correlation'' between higher captive supplies (and packer ownership)
and lower spot cattle prices ``in every case.'' Captive supplies are
livestock generally controlled by packers through outright ownership or
contractual agreements. This indicates to me that when meatpackers own
large percentages of their slaughter requirements, the volume and vigor
of a cash or open market is significantly reduced.
According to Dr. Ron Plain, agricultural economist at the
University of Missouri, 75 percent of hogs are either packer-owned or
under production contracts by packers. Other studies and estimates
indicate at least nearly 60 percent of the slaughter market for hogs is
under packer ownership and control while some economists predict the
open market for live hogs will disappear in five years.
In beef cattle slaughter, meatpacker industry figures show that on
average about 5 percent of slaughter is actually packer owned. Yet,
because USDA seems unable to determine the exact level of captive
supply controlled by packers through contracts and other marketing
arrangements, this figure could be misleading. Additionally, due to a
small number of beef packers controlling around 80 percent of overall
slaughter, some regions of the country have one packer feeding and
owning around 14 percent of its slaughter needs. According to USDA-
GIPSA, overall captive supply, on average, is nearly 20 percent of
total fed beef slaughter.
Independent cattle feeders and farmers used to have several buyers
competing for their cattle every day of the week. With increasing
captive supplies, packers do not bid aggressively for cattle to fill
their slaughtering needs. In some instances, cattle feeders have only a
few hours within one or two days a week to accept packer bids for
cattle, most often in ``take-it-or-leave-it'' scenarios. Economists
consulting the Western Organization of Resource Councils found that for
each percent of captive supply, spot or cash prices decreased by eight
cents per hundred weight.
A decision on the part of one meatpacker may have a substantial
effect on the marketplace. For example, when Smithfield shut down the
pork plant in Huron, South Dakota--formerly owned by American Foods
Group--pork producers in my State were left with merely a single market
for their slaughter hogs. Alternatively, a decision on the part of a
livestock producer seller has little if any effect at all on price.
What does this mean? It means the marketplace is not competitive.
It is now evident that current meatpacker livestock procurement
practices (packer ownership, captive supplies, and other marketing
arrangements) tend to transpire outside the open, cash, spot market. As
a result, the process of bidding in an open fashion for the purpose of
procuring slaughter livestock--which is really central to competition
and a cornerstone to free-enterprise--is fading away. Therefore,
livestock producers--who depend upon competitive bidding to gain a fair
price--are forced to either enter into contractual, ownership, or
marketing arrangements with a packer or find themselves squeezed out of
marketing opportunities.
I have introduced bipartisan legislation to restore a competitive
bidding process to slaughter livestock markets, and in turn, ensure the
future economic security of independent livestock producers. I have
been joined by Senators Grassley (R-IA), Thomas (R-WY), and Daschle (D-
SD) in introducing S. 142 (the RANCHER Act) to prohibit meatpackers
from owning livestock prior to slaughter.
This legislation has the support of the National Farmers Union, the
South Dakota Farmers Union, the South Dakota Cattlemens Association,
the Center for Rural Affairs, the Organization for Competitive Markets,
Ranchers--Cattlemen Action Legal Fund (R-CALF), the Iowa Pork Producers
Association, and Illinois Farm Bureau Federation.
My legislation is timely because of recent movement in the
meatpacking industry (Tyson's failed effort to buy IBP, Smithfield's
uncertain plans with IBP) to choke-off market access from independent
livestock producers. My bill recognizes the need for greater value-
added opportunities and exempts producer owned and controlled
cooperatives and small producer owned meatpackers from the ownership
prohibition. This legislation is also retroactive, requiring
meatpackers to divest of ownership interests in slaughter livestock.
Despite the alleged criticism, a ban on packer ownership of
livestock would not drive packers out of business. As indicated in
earnings reports and press releases from the major packers, most of
their income and earnings are generated from branded products and
companies marketing products in a more direct fashion to consumers. My
bill would not limit IBP, Conagra, Cargill, or Smithfield from buying
food service companies, branding foods, or finding new global markets.
The bill simply forbids meatpackers from owning livestock prior to
slaughter.
It should also be noted that other industries in America have
limits on vertical integration. For example, network broadcasters are
limited in their ability to own local television and radio stations.
Similarly, movie production companies are not allowed to own movie
theaters. Finally, Barnes and Noble--the nation's largest bookseller--
was recently prevented from buying out the nation's largest book
distributer.
For many years, those who support captive supplies and vertical
integration have held contract poultry production up as a role model
for where to go with pork, beef, and lamb. Under their model, farmers
make significant investments in sole-purpose buildings using their own
capital, and sign contracts with large, integrated companies. The
contractual terms stipulate that the farmer provides the labor,
management, and facilities required to raise the company-owned birds to
the appropriate slaughter weight. Unfortunately, due to a lack of
bargaining power on the part of poultry growers, the typical contract
relationship between growers and the poultry companies has become more
and more one-sided, leaving many producers with ``take-it-or-leave-it''
contracts with very unfavorable terms. The companies control all the
production decisions, leaving the growers little if any independence in
the decision making process on their own farms.
Unfortunately, the poultry model is now being emulated by the
processors of other livestock and commodities. According to GIPSA,
``the percentage of hogs produced through various production and
marketing contracts has increased sharply in recent years, and now
accounts for 65 percent of all slaughter hogs.'' For the 2000 season,
all the major tobacco companies are now contracting with growers for
some portion of their domestic supplies. Other commodities commonly
produced under contract include, but are not limited to: beef cattle,
corn, soybeans, sugar cane, and cotton. Without the establishment of
basic farmer or rancher safeguards, many of the producers of these
commodities potentially face the same pattern of abuse experienced by
poultry growers.
It all boils down to whether we want independent producers in
agriculture, or if we will yield to concentration and see farmers and
ranchers become low wage employees on their own land. I'm proud to
stand up for competitive agriculture that boasts a broad base of
independent, family farmers and ranchers. I look forward to the insight
that today's witnesses will provide to our discussion of agriculture
concentration. Thank you Mr. Chairman, this concludes my opening
statement.
Senator Cochran. Mr. Collins, we'll begin with you. We
appreciate your attendance and furnishing us with a prepared
statement. It will be made a part of the record in full, and we
ask you make whatever summary statements you should choose.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, DEPARTMENT
OF AGRICULTURE
Mr. Collins. Thank you, Mr. Chairman, Mr. Kohl. Mr.
Johnson. Thanks for the invitation to participate in this
hearing today. I'm going to comment as an overview to start
your day on forces driving consolidation in food and
agriculture and some of the economic issues that these trends
have raised.
Consolidation and concentration in the food system refers
to changes in number, in the size distribution of firms and
agribusiness firms as well as changes in the business
arrangements they make among one another.
A primary cause is economies of scale, which allows larger
volumes to be produced and marketed at lower per unit cost, and
usually that's due to more efficient production plants or
managing systems or distribution methods.
Consolidation can also be caused by other factors.
Economies of size, for example, can provide, increased access
to capital for research and advertising, volume-based price
reductions on production inputs that a large firm can buy or
premium price on large volumes of specific outputs they might
be able to sell.
Still other factors that can generate concentration and
consolidation include the exit of firms from an industry due to
inability to compete or the desire to seek higher returns in a
different industry. The ability to serve larger markets may
also contribute to merger activity as firms try to build on
distribution networks of already established smaller firms.
STRUCTURAL CHANGE
An important aspect of structural change is increased
coordination in the farm to consumer chain, which refers to
contractual arrangements, alliances, joint ventures, or
vertical integration.
Consumers in America today are increasingly demanding
higher quality food products that offer nutritional benefits,
convenience, freshness, and taste. Contraction and vertical
integration help downstream firms ensure that they can provide
such characteristics, and that they are provided when they're
needed and with minimal inventory costs.
With these as driving forces, there has been substantial
consolidation and the emergence of large firms in a variety of
markets tied to farming, from input suppliers to retail
grocers.
For example, while we still have thousands of farm
machinery dealers today, very few companies produce tractors or
large equipment. Much of that consolidation occurred a long
time ago so that by 1986 the top four tractor firms had 80
percent of the market.
The more recent example of rising consolidation is in the
seed industry where major restructuring took place in the
1990s. Large chemical or pharmaceutical companies acquired seed
businesses as a way to complement their existing agricultural
chemical businesses and their expertise in molecular biology.
One study placed the four firm concentration ratio in 1998 at
67 percent for corn seed sales, 49 percent for soybean seed
sales, and 87 percent for cotton seed sales.
At the other end of the food chain, the market share of the
largest 20 food retailers increased from 39 percent to 52
percent during the 1990s. Analysis of the 100 largest U.S.
cities found that the market share of the four largest food
retailers was 72 percent in 1998. Although that was up very
little during the 1990s.
Consolidation has also occurred between the farm input
industry and the food retail markets. In farm production it has
been occurring for decades. And recently it has been very rapid
for hogs and milk production. It's also occurred in grain
handling and transportation, particularly among railroads and
barge lines.
It's occurred in much of the food processing sector such as
meat packing, especially for cattle slaughter during the mid
1980s and hog slaughter during the 1990s.
The economic growth in a market-oriented economy like the
one we live in involves business formation, internal expansion,
mergers, acquisitions, and alliances of various kinds. It also
includes spinoffs, divestitures, and exits. These dynamics of
change have generally resulted in consumer products being more
efficiently produced and of higher quality and lower price than
otherwise.
Nevertheless, there are a number of concerns that bear our
attention. One issue is the extent to which increasing
concentration increases the ability of firms to exercise market
power. The firms with market power may successively mark up
prices charged to consumers or depress prices paid to farmers
below competitive levels.
They may also shift costs to farmers by demanding certain
services. Increasing concentration may also facilitate
collusion or other relationships between firms that inhibit
competition. These issues need to be examined in well-defined
markets and with careful attention to the possible actions of
existing competitors which could include producers of
substitute products and the potential for entry of new
competitors.
A second issue is the extent to which increasing
concentration reduces product innovation and development.
A third issue is the extent to which increasing competition
affects the ability of sellers, such as farmers, to find
markets for their products as vertical integration thins out
some markets.
A fourth issue is market transparency and the need for
access to adequate, timely information on market conditions to
avoid putting firms at a competitive disadvantage.
As food and agricultural markets have moved from being
local markets to regional markets to national markets to global
markets, businesses in the food system have moved towards
larger scale of production. While this evolution can improve
coordination within the food chain and the response to changing
consumer preferences, the potential for market power increases.
This makes monitoring of markets, provision of information and
enforcement of the antitrust laws increasingly important to
farmers and consumers.
PREPARED STATEMENT
These are responsibilities that the Justice Department is
very concerned with, and these are responsibilities that we
take very seriously at USDA. And Ms. Waterfield will describe
some of our actions in that arena. Thank you, Mr. Chairman.
[The statement follows:]
Prepared Statement of Keith Collins
Mr. Chairman and members of the Subcommittee, thank you for the
invitation to participate in this hearing to discuss concentration in
the U.S. food system. All segments of the agricultural sector are
undergoing structural change for a wide variety of reasons. I will
examine some of the factors contributing to consolidation and
concentration in the food production and marketing system and briefly
present data on recent structural trends in the food system, including
farm inputs, farm production, transportation, processing,
merchandising, and retailing. Lastly, I will discuss some of the
economic issues that have been raised regarding increasing levels of
concentration in the food production and marketing system.
The U.S. food and fiber system, which includes farming and related
industries, accounted for 16 percent of U.S. gross domestic product
(GDP) in 1999 and employed over 24 million people, or 17 percent of the
U.S. labor force. Although farming employs only about 1 percent of the
U.S. workforce and accounts for less than 1 percent of total GDP, the
contribution of farming to the national economy is much greater because
of production agriculture's reliance on other industries for production
inputs and for the processing, merchandising, and retailing of the
products farmers and ranchers produce. The efficiency of this system
has enabled U.S. agriculture to provide an abundant, safe and
affordable food supply for U.S. citizens and to be a dominant supplier
of food and fiber to the rest of the world's population.
reasons for consolidation and concentration
Consolidation and concentration in the food system refers to
changes in the number and size distribution of farms and agribusiness
firms and the changing business arrangements farms and firms make with
one another. Structural change is studied because of concerns over the
economic and social effects of certain business structures,
particularly consolidation of farms and firms. Consolidation of firms
into very large production units is sometimes called
``industrialization.''
Many factors contribute to consolidation and concentration in the
U.S. food system. A primary cause is economies of scale. Economies of
scale allow larger volumes to be produced at lower per unit production
costs, thereby increasing a firm's potential profitability. These
economies can take many forms, such as larger and more automated
production and processing facilities, reduced overhead costs, and lower
distribution costs. Consolidation may also be encouraged by pecuniary
economies related to size, such as increased access to capital for
research and advertising, volume-based price reductions on production
inputs which can lower per unit production costs, or premium prices on
large volumes of specific outputs which increase per unit returns.
Other factors that can generate consolidation include the exit of firms
due to the inability to compete with more efficient firms, the decision
of entrepreneurs and providers of capital to seek more lucrative
business opportunities in other industries, and government programs,
including farm programs, tax provisions, research programs and credit
programs. The emerging global economy may contribute to merger
activity, as firms try to build on the distribution networks already
established by smaller firms operating within countries.
Some have suggested that the slow overall rate of growth in food
consumption also contributes to structural change. Slow growth in food
consumption may cause firms to look for a competitive edge by offering
new products and to expand long-term growth and profitability by
increasing and diversifying their product lines through mergers and
acquisitions.
An important aspect of structural change is increased
``coordination'' in the farm-to-consumer chain, which refers to
contractual arrangements, alliances, or vertical integration. Consumers
are increasingly demanding higher quality food products that offer
nutritional benefits, convenience, and taste, rather than simply bulk
or homogenous commodities purchased for home meal preparation.
Contracting and vertical integration help downstream firms ensure that
the commodities produced by farmers and ranchers and processed into
food products meet the specific characteristics consumers want and that
those products can be provided as needed with minimal inventory costs.
RECENT TRENDS IN CONCENTRATION
Farm Inputs: Farm Machinery.--In 1997, 1,263 establishments
produced farm machinery in the United States, delivering nearly $16
billion in products. That compares with 1,576 companies that delivered
about $7 billion in products 10 years earlier. The industry consists of
a small number of full-line manufacturers that produce complete lines
of equipment, including tractors, combines, tillage, and planting
equipment, and a large number of smaller firms producing specialized
equipment for regional markets. The industry has undergone substantial
consolidation for many decades, especially for producers of large
equipment, such as tractors. As farming transitioned from horse to
machine, numerous tractor manufacturers emerged. The fate of most of
these firms paralleled the consolidation in the auto industry with many
brand names disappearing as the century unfolded. A significant
industry shakeout occurred during the farm credit crisis of the 1980's
when farmers sharply reduced farm machinery purchases, leading to a
series of mergers, acquisitions, and joint ventures in the industry. By
1986, the top four firms accounted for 80 percent of tractor sales.
While no data are available on the current four-firm concentration
ratio-the percentage of market share controlled by the four largest
firms-tractor sales continue to be dominated by a few firms.
The number of farm machinery dealers also declined sharply as the
number of major manufacturers declined, inventory costs increased, and
small dealers could not the afford parts and service departments that
larger competitors could provide. In 1997, there were 6,937 farm
machinery dealers selling primarily to farmers, but many of these were
owned or franchised dealerships of manufacturing firms.
Farm Inputs: Seeds.--A major restructuring took place in the seed
industry during the 1990s as large, multinational agricultural
businesses purchased or formed joint ventures with smaller seed and
plant breeding companies. Many of the large companies were chemical or
pharmaceutical companies, so acquiring seed businesses appears driven
by an effort to complement their existing agricultural chemical
businesses and their expertise in molecular biology. The pace of
consolidation was rapid and significant in scope. One review of
consolidation activity for 1998 found that 10 biotechnology firms were
involved in 186 mergers, acquisitions, joint ventures or other
collaborations or alliances. A 1999 study by Iowa State University
placed the four-firm concentration ratio in 1998 at 67 percent for corn
seed, 49 percent for soybean seed, and 87 percent for cotton seed.
During 2000 and 2001, some of these multinational companies spun
off or announced plans to sell agricultural divisions. These decisions
may reflect ongoing difficulties in the biotech seed industry, such as
some consumer resistance, or higher-than-expected development and
commercialization costs. Nevertheless, the restructurings that occur
are likely to continue to leave the seed industry dominated by a few
large players.
Farm production.--Rapid consolidation occurred in farm production
between 1935 and 1970, as the number of U.S. farms fell by over 50
percent, from 6.8 million to under 3 million. The primary factor
contributing to the decline has been increasing mechanization.
Mechanical power, larger, more efficient farm equipment, and
improvements in farming methods greatly increased labor productivity in
agriculture after the mid-1930's. Because of increasing productivity,
less labor was needed to produce crops and livestock, allowing farmers
to expand the size of their operations. In addition, technological
advances in livestock, poultry, and milk production enabled large
numbers of animals to be managed in confined operations. Increasing
productivity tended to keep returns low especially for those producers
who failed to adopt cost-cutting technologies, contributing to the
decline in farm numbers. Despite the rapid consolidation in farm
numbers, over 90 percent of farms remain family operated.
Over the past decade, farm numbers have stabilized as many farm
households have been able to supplement their farm income with income
from off-farm jobs. In 1935, the incomes of farm-operator households
averaged 40 percent below the average income of non-farm families. In
recent years, the average income of farm-operator households has
exceeded the average income of non-farm families. In 1999, the income
of non-farm families averaged $55,000. The Economic Research Service
(ERS) estimates the total income of farm-operator households averaged
$64,000 in 1999, with about 90 percent of the income coming from off-
farm sources. While farm numbers have declined over time and a larger
share of production is accounted for by an increasingly smaller number
of producers, production remains largely unconcentrated for major
crops. According to the Census of Agriculture, there were 359,666 farms
growing corn for grain; 241,334 farms growing wheat for grain; and
353,566 farms growing soybeans in 1997.
There were 1.011 million farm operations with cattle in 1997. The
pace of concentration for cow-calf operations has remained well below
that of other livestock and poultry sectors. However, of the
approximately 110,000 feedlots in 1997, the largest 2 percent marketed
85 percent of the fed cattle. The four largest feeding firms had annual
feeding capacity in 2000 equal to 11 percent of total annual steer and
heifer slaughter. In 1997, there were 99,238 dairy, 63,246 poultry, and
102,108 hog farms. In 1997, 3 percent of hog farms accounted for over
50 percent of sales and 3 percent of dairy farms accounted for over
one-third of milk sales. Poultry production was less concentrated but
95 percent of the broilers are produced under contract to fewer than 40
firms. While consolidation in hog and poultry production appears to
have slowed, the movement to larger and fewer dairy operations
continues.
Handling and transportation.--Based on data from the Grain
Inspection, Packers and Stockyards Administration, market shares of the
four largest agricultural export firms ranged from 47 percent for wheat
to almost 70 percent for corn in 1998. While the share of total U.S.
wheat exports held by the four top firms has remained relatively
constant over time, the U.S. corn export market has become more
concentrated. The export share for soybeans of the four top firms
declined over the period from 1985-98. The changes in aggregate U.S.
market share may mask changes at a particular port and the fact that
the four top companies for some markets may have changed from period to
period. In general, those reporting areas where export volumes are
large and growing, such as New Orleans, tend to be less concentrated
than reporting areas with smaller and declining volumes. For example,
volume exported through the Atlantic Coast reporting area declined by
about two-thirds over 1985 to 1998. The number of firms fell to four or
less over the same period. Also, over the same period, the volume of
soybeans exported through the Great Lakes reporting area increased by
over 123 percent and the share of inspected exports by the four largest
firms fell from 100 percent in 1990 to 71 percent in 1998.
Control of storage capacity has implications for export facilities,
inland or country elevators, and overseas grain handling facilities.
While storage capacity is generally not limited to only a few firms at
the national or state level, local markets may be serviced by a limited
number of facilities, potentially constraining farmers' storage and
marketing options.
At the national level, the four largest firms account for about 27
percent of total elevator capacity. While there is much variation
across states, in general, concentration tends to be lowest in those
states with the largest off-farm storage capacities. Mississippi,
Louisiana, and Arkansas show relatively high concentration ratios
partially reflecting the exclusion of rice from the off-farm storage
capacity data for these States. Federally-inspected warehouse data also
do not reflect volume moving through warehouses, so concentration
levels could be higher if the amount of grain handled by the larger
firms is proportionately greater than their share of total elevator
capacity.
Of all transportation modes, trucking is the least concentrated.
While there are a couple of very large truck firms, there are no
significant obstacles for entry into the trucking industry. Specialized
refrigerated trucks are more problematic, but generally trucking is
much less concentrated than most other industries.
There are three major barge lines covering traffic on the
Mississippi River System and connecting rivers: American Commercial
Barge Lines (ACBL) is the largest, followed by American River
Transportation (owned by ADM) and Cargo Carriers (owned by Cargill).
These three barge lines own 55 percent of the total covered barges,
although there are 32 barge companies in total.
Over the period 1997-99, there have been approximately 30 mergers
in the ocean freight industry. The most recent acquisition of Sealand
by Maersk gives the new firm a 13 percent market share. The top ten
carriers in 1990 had a market share of 33 percent, rising to nearly 50
percent today.
The top five Class I railroads accounted for 57 percent of all
Class I railroad grain traffic in 1982, and by 1995, this figure had
climbed to 90 percent and then to 96 percent by 1999. In addition, 95
percent of all Class I railroad revenue ton-miles in 1997 were hauled
by the five largest railroads, compared to only 75 percent of Class I
railroad revenue ton-miles in 1990.
Rail competition is not only a function of the number of available
railroads, but also the quality and effectiveness of competitive
options from the other transportation modes in particular markets.
Although the number of Class I railroads has been reduced since
deregulation, some have argued competition may be more intense because
the remaining large railroads are stronger and their market reach is
greater.
The number of route miles operated by each of the remaining Class I
railroads has also increased greatly. Railroad mergers of the 1960's
and 1970's combined smaller rail systems which operated in smaller
geographic territories. In the 1980's, newly merged systems began to
gain dominance within some geographic regions. In 1960, the average
Class I railroad in the United States operated 1,956 route miles, which
rose to 4,226 route miles in 1980 and to 13,313 route miles in 1998.
Today, two large railroads dominate in the western United States, and
two large railroads dominate in the eastern United States.
Processing.--Concentration in food processing continues to trend
upward. The top four firms accounted for about 20 percent of food
processing sales in 1997, compared to nearly 12 percent in 1987. The
market share of the four largest firms in red meat packing rose from 47
percent in 1987 to over 60 percent in 1998. The four-firm concentration
ratio for steer and heifer slaughter rose from 50 percent in 1985 to 82
percent in 2000, but has remained stable since the mid 1990s. The four
largest hog slaughter firms accounted for 56 percent of total
commercial hog slaughter in 2000, up from 40 percent in 1990 and 34
percent in 1980.
The number of federally inspected hog slaughter plants fell from
1,322 in 1976 to 770 in 1996. USDA's 1996 study, Concentration in the
Red Meat Packing Industry, found no correlation between regional
concentration and price; rather, geographic hog pricing patterns were
found to be consistent with a single national market for slaughter
hogs. Hogs slaughtered in large plants (those slaughtering at least 1
million head annually) and steers and heifers slaughtered in large
plants (at least 500,000 head annually) continue to account for an
increasing share of annual slaughter. ERS analyses found that there are
economies of scale associated with these shifts in plant size, which
suggests lower costs for larger plants and lower consumer prices.
Larger dairy processing firms also account for an increasing share
of dairy processing. In 1998, companies with $800 million or more in
sales accounted for 69 percent of U.S. dairy sales. The market share of
large proprietary dairy companies increased from 39 percent in 1975 to
over 42 percent in 1998, while the market share of large U.S. dairy
cooperatives increased from 17 percent to 27 percent over the same
period.
Mergers and acquisitions have accounted for much of the
concentration in the food processing industry. A booming economy
appears to have driven the latest wave of consolidation in the food
industry. Dairy processors led the number of mergers and acquisitions
occurring from 1993 to the first half of 1998. Dairy processors
accounted for 69 mergers and acquisitions, meat processors for 60, soft
drink bottlers for 53, snack food processors for 44, and poultry
processors had 32 mergers and acquisitions. Mergers and acquisitions
continued into 2000. Within the 27 food or food related categories
tracked by The Food Institute, merger and acquisition activity
increased in 18 categories, with activity declining in 6, and remaining
unchanged in 3.
Food Merchandising.--The food wholesaling sector continues to
experience steady growth in sales and concentration through
acquisitions. Merchant food wholesalers work with processors to
distribute products to retailers and food service establishments.
Mergers and acquisitions of the leading general-line grocery
wholesalers have resulted in increased concentration. The top four
general-line wholesalers accounted for over 40 percent of sales in
1997, up from 26 percent in 1987. Wholesalers that specialize in meat
and poultry distribution have also experienced substantial increases in
concentration over the past ten years, especially since 1992, while
concentration in dairy product distribution has remained stable. As
their customer base continues to decline due to rapid consolidation by
supermarket chains, many grocery wholesalers continue to acquire
retailers. In addition, concentration has also become international in
scope as companies from outside the United States acquire U.S. food
wholesalers. Both consolidation and international trends are expected
to continue.
Mergers and acquisitions in food wholesaling can lead to efficiency
gains that reduce costs and provide flexibility to offer more variety
to customers within a market region. Furthermore, by growing in a
familiar geographic region, a company can gain a better understanding
of the consumer. By vertically expanding into retail markets, companies
attempt to create synergies that reduce operating costs.
Retailing.--Widespread consolidation within food retailing has
increased the share of total grocery store sales accounted for by the
largest firms. Between 1990 and 1999, the market share of the largest
20 food retailers increased from 39 percent to 52 percent. Much of the
increase in concentration took place between 1997 and 1999 when almost
3,500 supermarkets were purchased, representing $67 billion in sales.
Analysis by ERS of the 100-largest U.S. cities found that increases in
local market concentration has been moderate. In the 100 largest U.S.
cities, the market share of the four largest food retailers rose from
69 percent in 1992 to 72 percent in 1998.
A number of forces have led to food retail consolidation including
slow growth in annual grocery store sales, increased spending for
prepared foods and meals away from home, and growth of food sales by
nontraditional retailers. During the 1990's, grocery store sales,
adjusted for inflation, grew about 1 percent annually.
With incomes rising, consumers increased their preference for
greater convenience by purchasing more prepared foods and more meals
outside the home.
These trends help to promote a competitive food retailing industry.
The expansion of retail food sales by discount mass-merchandise,
warehouse club, and convenience stores has provided additional sources
of competition for traditional food retailers. Mass merchandisers such
as Wal-Mart, Kmart, and Target, and warehouse club store operators such
as Costco, Sam's, and BJ's have increased their share of retail food
sales from 5 percent in 1992 to 8 percent in 1998, while traditional
food stores' share of retail food sales fell from 85 to 80 percent of
sales over the same period. Further expansion of mass merchandisers in
the retail food business is expected to increase their market share of
retail food sales over the next several years.
Increasingly, consolidating retailers are using supply-chain
management practices, which are activities coordinated with suppliers
that generate operating, procurement, marketing, and distribution
efficiencies, to reduce costs. Retailers claim that expected efficiency
gains and lower investment requirements will allow them to maintain
profitability and allow them to compete with mass-merchandiser,
warehouse club stores, and other potential rivals. Retailers are likely
to continue to consolidate through mergers and acquisitions in order to
maintain profitability as competition heightens for the consumer food
dollar.
economic issues raised by concentration
Economic growth in an industry involves business formation and
expansion, mergers, acquisitions, alliances of various kinds, and
exits. These dynamics of change in a market-oriented economy, such as
ours, have generally resulted in consumer products more efficiently
produced and of higher quality and lower price than otherwise.
Nevertheless, economists cite several concerns with concentrated
markets.
One issue is the extent to which increasing market concentration
reduces competition and increases the ability of firms to exercise
market power. Firms with market power are able to capture a larger
return by offering consumers higher prices for goods of the same or
even lower quality. Such behavior may persist unless other firms emerge
to offer lower priced, better products. Likewise, concentrated buyers
may depress prices paid to their suppliers below competitive levels and
may shift costs to their suppliers by demanding that suppliers provide
certain services. In addition, increasing concentration may facilitate
collusion or other relationships between firms that inhibit
competition, resulting in higher prices being paid by consumers.
An important limitation to market power in any industry are the
possible actions of existing competitors, which could include producers
of substitute products, and the potential for new competitors. Price
distortions and market inefficiency, as reflected in abnormally large
returns on investment, can be an incentive for entry of new
competitors. Even when concentration is high, the potential threat of
new entrants may prevent firms in a concentrated industry from
maintaining high prices.
A second issue is the extent to which increasing concentration
reduces product innovation and development. Imitation of new
technologies is usually cheaper and quicker than conducting the basic
research needed to develop and bring new products to market. In
concentrated markets, product improvement may not be as necessary to
maintain market share, so firms may not be as inclined to invest in
research and product development. On the other hand, increasing
concentration does not necessarily mean less investment in research and
new products. Increasing concentration may enhance investment in new
technologies, since larger firms may be more able to obtain the capital
and human resources to fund research and market development programs.
A third issue is the extent to which increasing concentration
affects the ability of sellers, such as farmers, to find markets for
their products. This issue has been raised with respect to the
livestock and poultry industries where some producers have concerns
that their ability to independently raise animals and market them in
traditional cash markets is declining.
A fourth issue is market transparency. As markets consolidate
horizontally and vertically, access to market information could also
decline. As information continues to increase in importance as a means
to reduce costs and improve decisionmaking, lack of timely, relevant
information on market conditions becomes a competitive disadvantage.
Analysis of the effect concentration has on the prices received or
paid by farmers has been mixed. One broad indication of concentration
often cited is the farmers' declining share of retail food
expenditures. The farm-to-retail price spread--the difference between
the farm value and the retail price of food--rose 5 percent in 1999,
reflecting changes in the structure of the food marketing system,
consumer demand for food, along with higher prices for marketing
inputs, such as labor and energy. The nominal farm-to-retail price
spread for all food products rose 41 percent during the last decade. In
real terms, the farm-to-retail price spread for food increased 11
percent over the past 10 years. Higher costs for labor, packaging,
energy, transportation, and other marketing inputs pushed the farm-to-
retail spread wider, but increases in productivity can partially offset
these higher costs. Changes in the cost of these marketing inputs,
which are influenced by consumer demand for convenience and other
preferences, generally have a greater effect on the retail price of
food than do fluctuations in prices received by farmers. However, the
relationship between farm and retail prices is more pronounced for food
items that undergo little processing, such as fresh fruits and
vegetables or fluid milk.
By reducing competition, concentration may result in higher
consumer prices and a slower response by retail food prices when farm
prices decline. While concentration in food retailing has accelerated
since 1996, food-at-home prices, as measured by the CPI for all food-
at-home, have fallen relative to the CPI for all items. An ERS study
found that additional packing services and new products account for the
rising wholesale-to-retail price spread for meats. The study could not
attribute the rise in the wholesale-to-retail price spread for meat to
increased concentration in the meat packing industry.
As food and agricultural markets have moved from local to regional
to national to global, businesses in the food system has moved toward
increasing their scale of production. While this evolution can improve
coordination within the food chain and the response to changing
consumer preferences, the potential for market power increases. This
makes enforcement of antitrust laws increasingly important to farmers
and consumers. The Grain Inspection, Packers and Stockyards
Administration, the Department of Justice, and the Federal Trade
Commission take seriously their responsibilities in merger enforcement
actions, price fixing and market allocation, restraint of trade, and
other anticompetitive practices.
That completes my testimony. I will be happy to respond to
questions.
Senator Cochran. Thank you, Mr. Collins.
Ms. Waterfield, we'll hear from you now.
STATEMENT OF JOANN WATERFIELD, DEPUTY ADMINISTRATOR FOR PACKERS AND
STOCKYARDS PROGRAMS, GRAIN INSPECTION, PACKERS AND STOCKYARDS
ADMINISTRATION, DEPARTMENT OF AGRICULTURE
Ms. Waterfield. Thank you, Mr. Chairman. Mr. Chairman and
members of the subcommittee, good morning and thank you for
allowing me the privilege of speaking on behalf of the Grain
Inspection, Packers and Stockyards Administration.
Ms. Waterfield. The Packers and Stockyard Programs is
responsible for enforcing the Packers and Stockyards Act which
prohibits, among other things, unfair, deceptive, fraudulent
practices by market agencies, dealers, stockyards, packers, and
live poultry dealers in the livestock, poultry, and meat
packing industries.
I moved into the position of deputy administrator in
September 2000 from USDA's Office of the General Counsel where
I led litigation teams responsible for enforcing the Packers
and Stockyards Act and also the Perishable Agricultural
Commodities Act.
And let me say that I feel very privileged to represent the
men and women of the Packers and Stockyards Programs, and I
have long respected their professionalism, dedication, and
their tenacity in pursuing and developing complex
investigations and cases.
Concentration
I was asked to provide you with an overview on
concentration today in these industries, but I also hope to
provide you with a better understanding of the agency and our
contributions to the livestock, poultry, and meat packing
industries and ultimately the benefits we provide to American
agriculture.
Our ability to address concentration is limited to our
statutory authority. The Packers and Stockyards Act gives the
Secretary of Agriculture the authority to regulate dealers,
stockyards, market agencies, packers, and live poultry dealers
who operate in interstate and foreign commerce.
Certain provisions of the Federal Trade Commission Act were
made applicable to the Secretary's enforcement of the act and
grant the Secretary investigatory powers.
To protect the livestock, poultry, and meat packing
industries, the Act requires market agencies and dealers to
register. Market agencies and dealers are required to be
bonded, and market agencies, dealers, packers, and live poultry
dealers must meet specific payment requirements.
To protect unpaid sellers of livestock, packers are subject
to trust provisions that require packers to hold the proceeds
from all livestock purchased in cash sales and all inventory of
receivables of proceeds from meat, mean food products, or
livestock products derived therefrom, to be held in trust for
unpaid sellers until payment is made in full. There is a
similar provision for live poultry dealers, but there is not a
similar provision for livestock dealers.
The Packers and Stockyards Programs uses our statutory
authority to investigate alleged and potential violations of
the Act and regulations. And we prosecute violations that we
find through our investigations, either directly through our
administrative actions or through referral to the Department of
Justice.
And while high levels of concentration cause a red flag and
require additional oversight to ensure that there is no harm or
injury that the act was intended to prohibit in the livestock,
meat packing, and poultry industries, concentration in itself
is not a violation of the act.
Firms are largely free to pursue their own economic
interest by opening or closing plants, expanding into new
geographic areas, adopting new technology and cost cutting
innovations that are being integrated every day into livestock
production and slaughter.
The Packers and Stockyards Programs, and the Department of
Agriculture do not have pre-merger authority, and we don't have
the authority to stop mergers from taking place.
The authority to investigate mergers and acquisitions
resides with the Department of Justice and the Federal Trade
Commission. And, when requested, we supply information and
expertise to assist those agencies with their investigations of
mergers or competitive issues involving the grain, livestock,
meat packing, and poultry industries.
If we find and prove a violation of section 202 of the Act,
we request sanctions that include orders to cease and desist
from unlawful practices, and civil penalties.
We recognize that there are concerns about rising levels of
concentration in the livestock and meat packing industries
leading to fewer competitive marketing opportunities for
producers. However, again, the Packers and Stockyards Act does
not prohibit concentration.
Concentration has remained fairly constant since 1996 in
the meat packing industry, but we recognize that looking
further in the past, that concentration in both the cattle and
hog slaughtering industries has increased greatly since 1985.
PACKERS AND STOCKYARDS PROGRAMS' INITIATIVES
In the past few years, the Packers and Stockyards Programs
has been in a state of dynamic change. During fiscal year 2000,
for example, the reorganization and filling of crucial
positions within the Packers and Stockyards Program was
completed. We utilized cross-regional expertise to address
national issues, and we're looking more effectively now at
emerging technology, evolving, marketing strategies and other
issues affecting the industries and the constituencies we
serve.
We're monitoring the livestock meat packing and poultry
industries which are estimated by the Department of Commerce in
fiscal year 2000 to have an annual wholesale value of $142
billion.
At the close of calendar year 2000, there were 1,318
stockyards, 6,195 marketing agencies and dealers, more than
2,000 packer buyers registered with the Packers and Stockyards
Programs. There are an estimated 6,000 slaughtering and
processing packers subject to the Act.
Also, in fiscal year 2000, 266 slaughtering packers, each
of whom purchased more than $500,000 worth of livestock in
1999, were required to be bonded and file annual reports with
us.
In addition to that, 205 poultry firms, live poultry
dealers, and a significant number of meat distributors,
brokers, and dealers were subject to the Act.
Last year we conducted more than 1,800 investigations of
potential violations of the Act which was a 33 percent increase
over the previous year.
Last year we returned more than $15 million to the
industry, to our stakeholders, as a result of our custodial
audits, in working with insolvent dealers, market agencies, and
packers to correct their insolvencies, and in one poultry
trust.
This year, halfway through the fiscal year, we've returned
$14.6 million to the industry, and through a case that we
initiated against a major meat packer, that meat packer
reportedly returned $3 million to hog producers that it
underpaid as a result of failing to disclose a change in a
formula used to estimate lean percent that it purchased on a
carcass basis without notifying its producers.
Last year we sent 15 rapid response teams out as a result
of complaints we received in nine States, and those rapid
response teams helped recover more than $3 million for growers
and producers.
This year we've had 20 rapid response teams out, 2 of them
are out right now. We've returned more than $2.5 million as a
result of those rapid response teams.
We recognize that our regulatory responsibilities are at
the heart of our mission. And to this end we closely monitor
practices that may impede the trade of livestock, meat, and
poultry.
We place a high priority on investigating all complaints
and further developing information we receive concerning
allegations of anticompetitive, unjustly discriminatory or
unfair practices in the livestock, meat packing, and poultry
industries.
The agency also maintains a 24-hour hotline on which
constituents may anonymously voice their concerns. We respond
to and investigate all issues addressed by the callers. Last
year we responded to 140 calls compared to 126 in 1999, and
those were in addition to the calls we receive every day in our
three regional offices as well as in many headquarters.
We're also strengthening our investigations and assessments
of the competitive implications of structural changes in the
livestock, meat packing, and poultry industries. To further
this initiative, we're currently involved in six cooperative
research agreements which we anticipate will all be completed
this year.
We're also involved in rule-making initiatives. We
anticipate publishing our final rule on the swine contract
library later this year. We're working on implementing the
recommendations that were made in the GAO report that was
published last year. We intend to implement all of the
recommendations by November of 2001.
We currently have eight cases scheduled for hearing. We
have 40 cases being reviewed by the Office of the General
Counsel to see if there is sufficient evidence to go forward to
filing a complaint. We have 14 cases in headquarters being
reviewed by our branch chiefs for referral down to the Office
of the General Counsel.
We have three competitive investigation work plans being
reviewed which we will work with the Office of the General
Counsel if we decide to go forward with them.
And in addition to that, we are continuing to develop and
retain well qualified and talented staff to enhance our ability
to address complex industry issues.
Prepared statement and additional submitted questions
Mr. Chairman and members of the subcommittee, I want to
thank you again for the privilege of addressing you and
representing the Packers and Stockyards Programs. If you have
any further questions, I'll be happy to entertain them. If
there are any questions that I cannot address at this hearing,
I'll be happy to take your questions, research them further,
and get back to you at a later date. Thank you.
Senator Cochran. Ms. Waterfield, thank you.
[The information follows:]
Prepared Statement of JoAnn Waterfield
Mr. Chairman and members of the Committee, good afternoon and thank
you for allowing me the privilege of speaking on behalf of the Grain
Inspection, Packers and Stockyards Programs (GIPSA). I am JoAnn
Waterfield and I am the Deputy Administrator for GIPSA responsible for
oversight of the Packers and Stockyards Programs (P&SP). The P&SP is
responsible for enforcing the Packers and Stockyards Act (the Act)
which prohibits unfair, deceptive, fraudulent practices by market
agencies, dealers, stockyards, packers and live poultry dealers in the
livestock, poultry, and meatpacking industries. I moved into this
position in September 2000 from USDA's Office of the General Counsel
where I led litigation teams responsible for enforcing the Packers and
Stockyards Act. I feel privileged to represent the men and women of
P&SP and have long respected their professionalism, dedication, and
tenacity in pursuing and developing complex investigations and cases. I
was asked to provide you with an overview on concentration today, but I
also hope to provide you with a better understanding of the Agency and
its contributions to the livestock, poultry and meatpacking industries
and ultimately its benefit to American Agriculture.
Our ability to address concentration is limited to our statutory
authority. P&SP has responsibility for addressing issues relating to
competition and unfair trade practices in the livestock, meatpacking,
and poultry industries through our authority to enforce the Packers and
Stockyards Act of 1921, as amended and supplemented. The Act gives the
Secretary of Agriculture the authority to regulate dealers, stockyards,
market agencies, packers, and live poultry dealers who operate in
interstate and foreign commerce. The Act makes it unlawful for a
regulated entity to engage in unfair, unjustly discriminatory or
deceptive practices. Engaging in any course of business for the purpose
or effect of manipulating or controlling prices, creating a monopoly,
or restraining commerce is also a violation of the Act.
Certain provisions of the Federal Trade Commission Act were made
applicable to the Secretary's enforcement of the Act and grant the
Secretary investigatory powers, including the power to gather and
compile information, concerning the organization, business conduct, and
practices of regulated entities, and to require by subpoena the
attendance and testimony of witnesses in investigations.
To protect the livestock, poultry, and meatpacking industries, the
Act requires market agencies and dealers to register; market agencies,
packers, and dealers to be bonded; and market agencies, dealers,
packers, and live poultry dealers to meet specific payment
requirements. To protect the unpaid sellers of livestock, packers are
subject to trust provisions which require that all livestock purchased
in cash sales, and all inventories of, or receivables of proceeds from
meat, meat food products, or livestock products derived therefrom, be
held in trust for the unpaid sellers until payment is made in full.
There is a similar provision for live poultry dealers, but none for
livestock dealers.
P&SP uses its statutory authority to investigate alleged and
potential violations of the Act and regulations, and prosecute
violations detected through those investigations, either directly
through administrative actions or through referral to the Department of
Justice.
Concentration is not prohibited by the Act, and while high
concentration levels gave a ``red flag' requiring additional oversight
to ensure that there is no harm or injury that the Act was intended to
prevent in the livestock, meatpacking and/or poultry industries.
Concentration is not, in and of itself, a violation of the Act. Firms
are largely free to pursue their own economic interests by opening or
closing plants, expanding into new geographic areas, adopting new
technology, and cost-reducing innovations that are being integrated
into livestock production.
Since P&SP does not have pre-merger existing authority, PS&P does
not have the ability to stop mergers from taking place. The authority
to investigate mergers and acquisitions resides with the Department of
Justice and Federal Trade Commission, and, as requested, GIPSA supplies
information and expertise to these Agencies in any investigations of
mergers or competitiveness issues involving the grain, livestock, and
poultry industries.
If, however, packers engage in any of the acts prohibited by
Section 202 of the Act, GIPSA investigates and initiates enforcement
actions. Upon a finding of violation of Section 202, the Act provides
for sanctions that include an order to ``cease and desist'' from the
prohibited practice, and a civil penalty.
There is concern about the rising levels of concentration in the
livestock and meatpacking industries leading to fewer competitive
marketing opportunities for producers. Concentration has remained
fairly constant since 1994. However, if you look further in the past,
concentration in both cattle and hog slaughter has increased greatly
since 1985. The following chart provides an historic perspective of the
trends I have described.
FOUR-FIRM CONCENTRATION IN MEATPACKING, 1980-2000
[Percent of total commercial slaughter]
----------------------------------------------------------------------------------------------------------------
Steers &
Year Cattle \1\ heifers Cows & bulls Hogs Sheet & lambs
----------------------------------------------------------------------------------------------------------------
1980............................ 28 36 10 34 56
1981............................ 31 40 10 33 53
1982............................ 32 41 99 36 44
1983............................ 36 47 10 29 44
1984............................ 37 50 11 35 49
1985............................ 39 50 17 32 51
1986............................ 42 55 18 33 54
1987............................ 54 67 20 37 75
1988............................ 57 70 18 34 77
1989............................ 57 70 18 34 74
1990............................ 59 72 20 40 70
1991............................ 61 75 20 44 72
1992............................ 64 78 24 44 71
1993............................ 67 81 25 43 73
1994............................ 69 82 25 45 73
1995............................ 69 81 28 46 72
1996............................ 66 79 29 55 73
1997............................ 68 80 31 54 70
1998............................ 70 81 33 56 68
1999............................ 70 81 32 56 68
2000............................ 69 82 32 56 67
----------------------------------------------------------------------------------------------------------------
\1\ Includes steers, heifers, cows, and bulls.
Note: All figures for years 1980 through 1990 are based on firms' fiscal years as reported to GIPSA. Figures for
1991 through 2000 are based on calendar year federally-inspected slaughter.
For the past few years, P&SP has been in a state of dynamic change.
During fiscal year 2000, the reorganization and filling of crucial
positions within the Packers and Stockyards Programs was completed. The
agency now employs a total of 180, in three species-specific regional
offices (Atlanta--Poultry, Des Moines--Hogs, and Denver--Cattle and
Sheep) that are directed by headquarters in Washington D.C. A full
contingent of legal specialists (all of whom are attorneys),
economists, and financial specialists has been established. An
intensive training program and a multi-disciplinary approach to
developing investigation plans have also been developed. Economists now
on staff provide insight and guidance in developing, analyzing and
explaining complex econometric models used by the Agency in performing
its regulatory responsibilities, including litigation and market
oversight.
P&SP utilizes cross-regional expertise to address national issues
and to look more effectively at emerging technology, evolving marketing
strategies, and other issues affecting the industries and the
constituencies we serve. For example, we have a cross-regional team
looking at electronic transactions involving livestock. This team is
comprised of representatives from each regional office with differing,
but complementary areas of expertise . . . financial, legal, and
economic.
P&SP monitors the livestock, meatpacking, and poultry industries,
estimated by the Department of Commerce in fiscal year 2000 to have an
annual wholesale value of $142 billion. At the close of 2000, there
were 1,318 stockyards, 6,195 market agencies and dealers, and 2,039
packer buyers registered with P&SP. An estimated 6,000 slaughtering and
processing packers are subject to the Act. In fiscal year 2000, 266
slaughtering packers, each of whom purchased over $500,000 of livestock
in 1999, were required to be bonded and file reports with GIPSA. In
addition, 205 poultry firms and a significant number of meat
distributors, brokers, and dealers are subject to the Act.
Last year, P&SP conducted over 1,800 investigations of potential
violations of the P&S Act, a 33 percent increase over the previous
year. Most violations were corrected voluntarily, resulting in
livestock and poultry producers receiving payment for the sale of their
products. During fiscal year 2000, 17 administrative or Federal court
complaints were issued (a net increase of 5 over the previous year) to
bring subject firms into compliance with the Act. In addition, USDA
issued 13 decisions and orders against 21 individuals or firms for
violating the Act.
P&SP continues to provide payment protection to livestock and
poultry producers. Financial investigations conducted last year
resulted in $5.9 million being restored to custodial accounts
established and maintained for the benefit of livestock sellers. This
is more than double fiscal year 1999 restoration figures of $2.7
million. Since the 1976 amendments to the Act, livestock sellers have
been paid $59.7 million under the Act's statutory trust provision. In
2000, one poultry trust complaint received by GIPSA resulted in payment
of $250,000 to live poultry growers. By comparison, there were none in
1999. During fiscal year 2000, 192 insolvent dealers and market
agencies corrected or reduced their insolvencies by $6.7 million, an
increase of more than $2 million from the previous year. Insolvent
packers corrected or reduced insolvencies by $2.2 million.
Our regulatory responsibilities are at the heart of our mission. To
this end, P&S closely monitors practices that may impede the trade of
livestock, meat, and poultry. We place a high priority on investigating
all complaints and further developing information received concerning
allegations of anti-competitive, unjustly discriminatory, or unfair
practices in the livestock, meatpacking, and poultry industries.
Appropriate corrective action is initiated when evidence of these
practices is discovered.
Rapid Response teams continue to address urgent industry issues and
are deployed when a situation warrants immediate attention or action.
The ability of these teams to respond within 36 to 48 hours of being
notified of a crisis provides the public with more immediate
notification of problems with a stockyard or market agency. Last fiscal
year, 15 teams were deployed to investigate cases in 9 states. Teams
helped recover more than $3 million for growers and producers. The
Agency also provides a hotline (1-800-998-3447) on which constituents
may anonymously voice their concerns. P&SP responds to and investigates
all issues addressed by the callers. Last year, the Agency responded to
140 calls, compared to 126 in 1999.
P&SP is also strengthening investigations and assessments of the
competitive implications of structural changes in the livestock,
meatpacking, and poultry industries. To further this initiative, P&SP
entered into five cooperative research agreements in fiscal year 1999.
Two examine competitive conditions in beef markets, two address
competitive issues and compensation methods used in broiler production
in the poultry industry, and the final project examines bidding
behavior in a laboratory setting to gain insights into expected
behavior in actual cattle markets. These projects will be completed in
fiscal year 2001 and fiscal year 2002.
We have several hearings currently scheduled--at least two in
June--and two major cases, against two of the largest packers in the
Nation. The first involves a firm alleged to have violated the Act by
failing to notify sellers that it had changed its equation for
estimating the lean percent of animals purchased on a carcass merit
basis. We allege that as a result of this change the company underpaid
more than 1,250 farmers by about $1.8 million. The second case alleges
that a company retaliated against a feedlot for publishing a letter
critical of the company by failing to bid or purchase from the feedlot.
P&SP has incurred major litigation expenses and resources preparing for
each of these cases. We have spent almost $.5 million in litigation
expenses in the first case I described.
In addition to normal regulatory duties, P&SP has been tasked with
four Congressional Mandates, which will impact the Agency next year,
and in subsequent years. They are the Swine Contract Library, Captive
Supply Study, an Annual Assessment of the Cattle and Hog Industries,
and the Agency's implementation of the General Accounting Office's
recommendations in last year's report.
1. The first mandate, the Swine Contract Library, set out in the
Agricultural Rural Development, Food and Drug Administration, and
Related Agencies Appropriations Act of 2000 (Public Law 106-78) was
signed into law on October 22, 1999. It amended the P&S Act to require
P&SP to establish and maintain a library of contract provisions offered
by packers to swine producers for the purchase of swine and to make
that information available to the public. The swine contract library
must include contracts from swine packing plants with a slaughter
capacity of 100,000 swine or more per year; this includes approximately
50 plants owned by 29 packers which account for over 95 percent of the
market. In addition to providing all hog purchase contracts to P&SP,
these 29 packers are required to provide monthly reports to P&SP
specifying the number of swine committed and the maximum number of
swine to be delivered over the next six to twelve months by contract
type.
GIPSA published a Notice of Proposed Rulemaking on September 5,
2000 to implement the Swine Contract Library and is drafting the final
rule. In addition to the rulemaking process, P&SP has devoted resources
to implement the actual contract library, involving computer hardware
and software development, and data collection forms. The library will
use a Web-based system to facilitate real-time data input from swine
packers and data access by the public.
2. The second mandate arising out of last year's appropriations
bill, is in a Conference Report (House Report No. 106-948) that directs
GIPSA to complete a comprehensive study on Captive Supplies by
September 30, 2001. The report will examine and report on whether or
not cattle that are procured pursuant to a captive supply arrangement
by a packer's non-reporting subsidiary, affiliate and owners, officers
and employees are being included in the cattle reported as captive
supply. Additionally, the report will explain differences in the volume
of captive supplies reported in the P&SP Annual Statistical Report and
those reported by other entities. Because of the scope of the report
and the requirements of the Paperwork Reduction Act, we will not be
able to complete this report by September 30th of this year, however,
we will provide Congress with an interim report consisting of
qualitative analyses that are descriptive of the issues.
3. The third mandate requires the Agency to submit an annual report
to Congress that assesses the cattle and hog industries. The Packers
and Stockyards Act was amended in the Grain Standards and Warehouse
Improvement Act of 2000 (Public Law 106-472) to require the Agency to
submit an Annual Report Assessing the Cattle and Hog Industries. The
report will include an assessment of the general economic state of the
cattle and hog industries, changing business practices in these
industries and practices that appear to raise concerns under the P&S
Act. We estimate that 2,000 staff hours and $72,000 were spent in
compiling this report for 2000.
4. The final mandate began with the General Accounting Office's
(GAO) Report to Congress, issued in September 2000, ``Actions Needed to
Improve Investigations of Competitive Practices.'' The Grain Standards
and Warehouse Improvement Act of 2000 (Public Law 106-472) required
implementation of the recommendations in the GAO Report as well as a
report describing the actions taken to improve investigations of
competitive practices by November 9, 2001.
The GAO report addresses actions to improve P&SP's ability to
investigate complex issues. The report recommends that the Secretary of
Agriculture develop a teamwork approach with P&SP economists and the
Office of General Counsel (OGC) attorneys for complex investigations.
We began implementing this recommendation a month after the September
report with combined competition training for legal specialists,
economists, and OGC attorneys. P&SP now has two legal specialists in
each regional office, who have recently completed training provided by
OGC. We have formalized procedures within P&SP by instituting
investigation reviews by senior management when cases involve
competition issues, are complex, are large, involve more than one unit
(financial, competition, trade practices), involve more than one
region, or require unusual resources. A regional legal specialist
reviews each investigation plan before it is submitted for
consideration to senior P&SP management. Once senior management has
reviewed and approved each investigative plan, the investigation
proceeds. Each case is monitored throughout the investigation. OGC
reviews complex investigation plans prior to commencement of the
investigation and thus has been integrated into the investigative
process of complex cases.
The GAO report recommended that GIPSA improve its competitive
investigations by adopting methods and guidance similar to those used
by the Department of Justice (DOJ) and the Federal Trade Commission
(FTC). GIPSA, working through the Department's Office of the General
Counsel, is reviewing DOJ and FTC investigative procedures.
The GAO report recommended that the Secretary modify the grade
structure for economists. The process of upgrading economists' and
legal specialists' positions is underway and should be completed
shortly.
The GAO report also recommends that GIPSA provide industry
participants and Congress with clarifications of the Agency's views on
competitive activities by reporting changing business practices in the
cattle and hog industries and by identifying market operations or
activities that raise concerns. We have strengthened our commitment to
communicate our policies more clearly and effectively to our
stakeholders. We will publish an annual report assessing the cattle and
hog industries. We are in the process of hiring an outreach coordinator
to improve our communication with Congress and the public we serve.
In addition to the Congressional mandates, P&SP will be
participating in a GAO investigation initiated by Senator Daschle to
examine USDA's econometric models. He has asked the GAO to ``assess the
extent to which these models may be understating the effects of
imports, market concentration, and the use of marketing agreements and
forward contracts on domestic cattle prices.'' Senator Daschle has also
requested that GAO provide recommendations on how USDA models could be
``improved or revised, to provide the most comprehensive analysis
possible of the impact of certain factors on prices at the producer
level, including: import volumes and competition; increasing use of
marketing agreements and forward contracts; and increasing
consolidation in the processing, wholesaling and retail distribution
sectors.'' We fully expect GAO to review the 1996 packer concentration
study, the follow-up cooperative agreements with universities that
examined concentration and captive supplies, and other activities
relating to concentration and captive supplies. GAO expects to complete
its investigation within one year.
While working to be wholly responsive to Congressional mandates and
to provide timely information to GAO, P&SP has initiated the
development of regulations to help us better serve our various
constituencies. The regulations will support our enforcement of the
Act. We are currently working on several rulemaking initiatives.
P&SP will actively seek to serve the industry by: providing payment
protection to livestock and poultry producers; increasing the number of
investigations of potential competitive violations of the Act; pursuing
voluntary corrections of violations of the Act that will result in
livestock and poultry producers receiving additional funds; continuing
to reach out to both educate and inform constituencies served by the
Agency of the benefits and protections offered to livestock and poultry
producers; monitoring and responding rapidly to complaints of
anticompetitive, unjustly discriminatory or unfair practices in the
livestock, meat and poultry industries; pursuing cooperative agreements
that contribute valuable information to P&SP's understanding of the
industries; facing-off with industry giants and expending resources to
correct violations of the Act; responding thoroughly and responsibly to
all governmental and Congressional mandates; and pursuing rulemaking
that enhances P&SP's ability to investigate and litigate violations of
the Act. However, our ability to control or limit concentration lies
solely within parameters defined by the Act and limits set therein.
P&SP teams of legal, financial, and economic specialists are
currently addressing 14 cases, are working with OGC on 8 cases
scheduled for hearing, and are assisting in over 40 cases which are
being developed for enforcement by the OGC. In addition to managing
complex cases, we will be continuing to develop and retain well-
qualified and talented staff to enhance our ability to address industry
issues.
Mr. Chairmen and members of the subcommittee, thank you for the
privilege of addressing you and representing the P&SP. If you have
further questions, I would be happy to entertain them. If I cannot
address them at this hearing, I will have your questions researched
further and respond directly to you at a later date.
Questions Submitted by Senator Byron L. Dorgan
Question. In recent years there has been an assumption that
efficiency should be the primary goal in our agribusiness production
chain, but many so-called efficiencies gained by concentrated entities
are actually externalized costs shifted from the company to the
communities that must supply medical care for uninsured labor,
increased education costs for immigrant families, and environmental
problems resulting from concentrated production systems. Why haven't
you measured the full cost of production in these efficiency gains of
these concentrated companies?
Answer. In a market-based economy, business structures undergo
constant evolution, reflecting the emergence of new technology and new
profit-making opportunities. Over the past several years, markets have
generally become more concentrated and this trend is not unique to
agricultural markets. Despite increasing levels of concentration across
many markets, environmental problems and other market externalities,
for the most part, do not appear to have escalated appreciably. This
observation is not based on an exhaustive industry-by-industry study of
agribusiness firms but a reflection of the lack of pressure on
policymakers for new environmental laws and regulations. While it may
be useful to conduct in-depth industrial studies of the evolution and
transformation of companies and industries and of the indirect effects
that occur over time, including estimates of external costs, such as
medical, education, and environmental costs, these effects are
difficult to measure and may have limited application. Therefore, we
are focusing our research resources on areas where we believe results
can be obtained most cost effectively.
Question. Why aren't externalized costs part of how USDA measures
gains and losses particularly in the processing sector?
Answer. As indicated above, there is merit in conducting in-depth
industrial studies of the evolution and transformation of companies and
industries and of the direct and indirect efficiency gains or losses
that occur over time, including estimates of external costs. Estimates
of externalized costs would necessitate site-specific information on
production and hiring practices, air and water quality, and possibly
other environmental indicators. Using these environmental and other
indicators, methods would have to be developed to estimate the direct
and indirect costs imposed on society by an agribusiness processing
firm. At the present time, there are no widely accepted methods for
estimating the cumulative sum of these costs. Such activities would be
costly and compete for limited research resources. Thus, our research
priorities are focused on areas where we believe we can have the
greatest impact for our research dollar.
Question. For some time we have had an increase between what the
producer receives and what the consumer pays at the counter for food.
Why does USDA continually ignore the increasing pressure from both the
processing and retail sectors on both the commodity price and the price
the consumer pays?
Answer. USDA data indicates that farmers' share of the retail food
dollar has declined by over 50 percent since the early 1970's. Over the
same period, concentration levels have increased in food processing and
retailing. While some may conclude from the two trends that increasing
concentration is at least partially responsible for the drop in the
share of the retail food dollar going to farmers, correlation does not
necessarily imply causation. In fact, many economists argue that the
decline in the farmers' share of the retail food dollar reflects
consumers steadily increasing preference for convenience foods that
require special processing and packaging. The rising preference for
convenience foods is an outgrowth of higher income levels and rising
employment of both spouses outside the home. Another factor behind the
declining farm share of the retail dollar is the rapid productivity
growth in production agriculture compared with productivity growth in
food processing and transportation.
Question. To just simply say we pay such a low percentage for food
on a global comparison, when we have the largest disposable income in
the world, doesn't mean that consumers aren't being unfairly charged
for their purchases, does it?
Answer. You are correct. Comparing the percentage of income spent
on food by U.S. consumers relative to consumers in other countries does
not indicate whether consumers in this country are being overcharged.
Question. Why does USDA consistently return to the same economists
for so-called independent research on captive supply and market
concentration?
Answer. We've made every effort at USDA to elicit comments and
research on captive supplies and market concentration from all
interested parties. USDA has held two forums on captive supplies and
market concentration over the past couple of years. At each of those
forums, all interested parties were invited to participate. If you know
of any individuals that have conducted recent research on captive
supplies and market concentration that we may not be aware of, we would
appreciate receiving those reports and meeting with those individuals.
Question. Why aren't you using economists from universities outside
of the traditional land grants?
Answer. This question appears to relate to economic research
related to captive supplies and market concentration. As indicated in
the response to the previous question, we've made every effort at USDA
to elicit comments and research from all interested parties and from
economists both inside and outside of the traditional land grants. An
example would be the diverse peer reviewers we used for the Texas fed
cattle procurement studies.
Question. Do you check the background of the economists you award
grants to, to make sure they are independent of the entities they are
researching? Answer. USDA awards research grants to economists who are
recognized in their field of study and have a history of publishing
peer-reviewed research. Individuals receiving grants are noted by their
peers as conducting leading-edge, independent research in their field
of expertise. The Department does not conduct background checks, but
checks are made to see whether an individual received funding in the
past from an entity that they are researching. Each potential applicant
for an award is requested to disclose their funding sources.
Question. Given that a truly competitive market requires meaningful
choice by producers for marketing outlets, would you agree that the
market at the farm gate is almost non-existent in many parts of the
country?
Answer. In some parts of the country the number of buyers of farm
products and sellers of farm inputs may be limited. However, new and
emerging marketing outlets are creating new marketing opportunities for
farmers and ranchers. For example, we are seeing the re-emergence of
farmers' markets as a viable market for some producers. And, the
internet is greatly expanding the availability of market information
and the potential market for some products. Through the internet,
farmers and ranchers do not have to be restricted to buying from their
local farm input supplier or selling to the local cattle or grain
buyer. In addition, increasing availability of market information
through the internet and other sources, provides farmers and ranchers
with information on which to judge whether local prices offered by farm
input sellers and buyers of grain and cattle are fair. Increasing
market information may also motivate local buyers and sellers to offer
fair prices to farmers and ranchers.
Question. Most every Federal agency that does investigations
utilizes investigators that have legal training so they can analyze
facts in light of whether the law has been violated. However, USDA-
GIPSA uses economists with little or no legal training to perform
investigations. Would you agree that one reason that GIPSA has been
hampered in its enforcement duties is that it has not utilized
investigators which are trained in the law, especially the Packers and
Stockyards Act?
Answer. I do not agree that GIPSA's enforcement duties have been
hampered because investigators are not trained in the law, especially
the Packers and Stockyards Act. While an economist's academic training
alone does not prepare them to perform investigations, GIPSA's
economists undergo rigorous training programs once they come on board.
The objectives of these training programs are to help investigators
identify violations of the Packers and Stockyards Act and perform
investigations working in conjunction with other agencies, such as
USDA's Office of General Counsel and the Department of Justice.
ATTORNEYS EMPLOY BY PACKERS AND STOCKYARDS PROGRAMS
Question. How many attorneys will be directly employed by Packers
and Stockyards Programs--not general to USDA but specifically assigned
to P&S?
Answer. The Packers and Stockyards Programs (P&SP), Grain
Inspection, Packers and Stockyards Administration, has seven legal
specialist positions (one position is temporarily vacant at the present
time). All legal specialists employed by P&SP are licensed attorneys.
There are two legal specialists in each of the three regional offices,
and a supervisory legal specialist in the P&SP Washington headquarters
office. The supervisory legal specialist reports directly to the P&SP
Deputy Administrator, who is also a licensed attorney. The duties of
the legal specialists include: (1) participating in investigation
planning and execution; (2) consulting with the Office of the General
Counsel (OGC) attorneys; (3) conducting research; and (4) reviewing
P&SP correspondence. Additionally, the OGC Trade Practices Division
provides all legal services to P&SP. Trade Practices currently has
twelve attorneys who provide legal services to two programs, P&SP and
the Perishable Agricultural Commodities Branch of the Agricultural
Marketing Service.
Question. That compares to how many attorneys from IBP or Cargill
for example?
Answer. P&SP does not have access to information about how many
attorneys are employed by either IBP or Cargill. During the litigation
of the IBP case in 1997, IBP had six attorneys present at the
administrative hearing.
ACCOUNTANTS VERSUS ECONOMISTS
Question. In the past we've relied heavily on economists for
analysis on potential price fixing in the packing sector. Economists,
however, tend to use complicated formulas unreadable by the lay public
to ``study'' the possibility there may be price fixing. Isn't it more
logical to use accountants who can provide a more direct, substantive
analysis of figures that can be made understandable to the public and
therefore more intelligible to a jury, instead of just general,
industry-wide assumptions as we often see in the econometric formulas
USDA puts out?
Answer. Cases in which P&SP has alleged violations by packers of
section 202 of the Packers and Stockyards Act are tried before an
Administrative Law Judge in an administrative hearing. There is no jury
in those proceedings. Enforcement of section 202 alleging violation by
a live poultry dealer (processor) is through referral to the Department
of Justice and trial in Federal court where there may be a jury trial.
In preparation for litigation, P&SP economists work closely with OGC
attorneys to ensure evidence is presented in a clear, logical fashion
that is understandable. Economic formulas are sometimes necessary to
demonstrate causal relationships and/or harm to producers. During the
investigation of a case, P&SP legal specialists and OGC attorneys work
with the economists to ensure the data and evidence that are necessary
for the analysis is collected and after referral of the case to OGC,
the economists work with OGC to ensure that the analysis is presented
in clear and concise exhibits introduced by appropriate witness
explanation and clarification. Auditors and accountants, including
certified public accountants, are used in investigative teams, as are
marketing specialists, but auditing and accounting theory and practice
are not always adequate to prove causality and/or effects of economic
behavior such as price fixing, with the attendant economic and
competitive harm. One of the principal findings of the 1997 USDA Office
of the Inspector General investigation was that P&SP needed economists
to prepare economic models to demonstrate the adverse effects of
anticompetitive behavior in the marketplace. P&SP has formalized a
teamwork approach to ensure that GIPSA's economists, legal specialists,
auditors and marketing specialists work with OGC to identify and prove
violations of the Packers and Stockyards Act.
TRANSFER TO THE DEPARTMENT OF JUSTICE
Question. From your experience and knowledge of P&S and its
internal and external problems, should it be moved from USDA?
Answer. We believe P&SP can best address livestock and poultry
industry problems and regulate individuals and businesses subject to
the P&S Act as part of USDA. P&SP's collective expertise and experience
within USDA is essential to its continued effectiveness in the
regulation of the livestock, meatpacking, and poultry industries. We do
agree that P&SP can improve its effectiveness by studying other
agencies' investigative procedures, such as the procedures used by the
Department of Justice and the Federal Trade Commission. P&SP is
reviewing investigative procedures used by these agencies to improve
its investigations of anticompetitive practices. As part of OGC's
training of legal specialists in March, 2001, attorneys from the
Federal Trade Commission conducted a training session for P&SP legal
specialists, computer specialists, economists and recently hired OGC
attorneys on procedures for requesting and obtaining electronic records
for investigations.
Question. (1) How many major cases can you handle at once? (2) How
many attorneys are working on competition issues under the P&S Act? (3)
Would you object to the creation of an Office of Agriculture in DOJ to
address not only antitrust issues in agriculture generally, but to have
dual jurisdiction over the trade practices portion of your jurisdiction
under the Packers & Stockyards Act?
Answer. (1) We have the capability of handling multiple cases of
varying degrees of complexity at one time. Since each case differs with
regard to its level of complexity and its requirement of human and
fiscal resources, it is not possible to answer the question of how many
competition cases we could handle with exactness. For example, we could
handle two cases in the investigation state and two in the briefing
stage while there were two in litigation. We estimate that only two
complex cases could be handled simultaneously in active litigation,
which presumes administrative hearings held concurrently. (2) All P&SP
legal specialists (seven positions) and OGC Trade Practices Division
attorneys (12 attorneys) spend a significant amount of time working on
competition issues under the P&S Act. (3) P&SP takes no position
regarding the creation of an Office of Agriculture in the Department of
Justice (DOJ) to handle antitrust or trade practices. P&SP works
closely with the DOJ and the Federal Trade Commission (FTC) to monitor
the regulated industry regarding antitrust issues. We believe P&SP
currently has the experience, training, and expertise to properly
enforce the trade practices portion of our jurisdiction, as well as the
competition and financial portions. We further believe that together
the existing entities of P&SP, DOJ, and the FTC do an effective job
monitoring industry antitrust issues.
______
Questions Submitted by Senator Tim Johnson
CAPTIVE SUPPLY PROBLEM
Question. In September of 2000, USDA held a public forum on the
problem of captive supply in Denver. Captive supply can include
arrangements that meat packers utilize to lock-up or secure a given
amount of kill needs, such as packer-owned livestock, formula or
negotiated sales, or contracted production. Producers are concerned
that growing captive supply results in an inactive and anti-competitive
cash marketplace. What was the outcome of the forum and what does USDA
plan to do to address the growing issue of captive supply in livestock
markets?
Answer. At the September 2000 USDA public forum, a broad spectrum
of views were presented on whether captive supplies artificially
depress prices to cattle producers. Some presenters argued that captive
supplies were depressing cattle prices, while the majority of
economists held the viewpoint that captive supplies were not adversely
affecting prices offered to cattle producers. Thus, the current
available evidence, on balance, suggests captive supplies are not
contributing to an inactive and anti-competitive marketplace for
cattle. USDA continues to monitor captive supplies and to review
analytical studies as they become available. No other action regarding
captive supplies are being contemplated at this time.
BARGAINING POWER FOR PRODUCERS
Question. Given that a truly competitive market requires meaningful
choices for farmers and ranchers in terms of marketing outlets, would
you agree that the market at the farm-gate level is almost non-existent
in many parts of the country?
Answer. In some parts of the country the number of buyers of farm
products and sellers of farm inputs may be limited. However, new and
emerging marketing outlets are creating new marketing opportunities for
farmers and ranchers. For example, we are seeing the re-emergence of
farmers' markets as a viable market for some producers. And, the
internet is greatly expanding the availability of market information
and the potential marketplace for farm products. Through the internet,
farmers and ranchers do not have to be restricted to buying from their
local farm input supplier or selling to the local cattle or grain
buyer. In addition, increasing availability of market information
through the internet and other sources, provides farmers and ranchers
with information on which to judge whether local prices offered by farm
input sellers and buyers of grain and cattle are fair. Increasing
market information may also motivate local buyers and sellers to offer
fair prices to farmers and ranchers.
USE OF ECONOMISTS INSTEAD OF ATTORNEYS IN INVESTIGATIONS
Question. Most Federal agencies that conduct investigations
primarily utilize investigators that have legal training so they can
analyze facts in light of whether the law has been violated. However,
USDA-GIPSA uses economists with little or no legal training to perform
investigations. Would you agree that one reason that GIPSA has been
hampered in its enforcement duties is that it has not utilized
investigators which are trained in the law for trade practices and
competition cases, especially the Packers and Stockyards Act?
Answer. USDA's Office of the Inspector General issued a report in
1998 and the Government Accounting Office issued a report in 2000 that
found that a lack of legal expertise has hampered GIPSA's
investigations, particularly in complex cases such as restriction of
competition investigations. GAO recommended that GIPSA work more
closely with USDA's Office of the General Counsel (OGC) early in
investigations. GIPSA is working to increase the role of OGC attorneys
in competition investigations and include the Assistant General Counsel
of OGC's Trade Practice Division in the decisions of which
investigations to pursue and what evidence is necessary to pursue them.
GIPSA created seven legal specialist positions within P&SP, all are
licensed attorneys. The duties of the legal specialists include: (1)
participating in investigation planning and execution; (2) consulting
with OGC attorneys; (3) conducting research; and (4) reviewing P&SP
correspondence.
Question. How many attorneys are working on competition issues
under the P&S Act? Is this number adequate?
Answer. As noted above, P&SP has seven legal specialist positions;
two in each of the three regional offices, and a supervisory legal
specialist in the P&SP Washington headquarters office. These attorneys
provide assistance to our investigators in consultation with the
attorneys in OGC, and conduct research. The twelve attorneys in the
Trade Practices Division of OGC provide legal services to P&S,
including litigation services. All of these attorneys spend a
substantial amount of time on competition issues. At this point in
time, this number of attorneys is adequate to handle the cases that are
being developed.
Question. How many major cases can GIPSA handle at once?
Answer. We have the capability of handling multiple cases of
varying degrees of complexity at one time. Since each case differs with
regard to its level of complexity and its requirement of human and
fiscal resources, it is not possible to answer the question of how many
competition cases we could handle with exactness. For example, we could
handle two cases in the investigation state and two in the briefing
stage while there were two in litigation. We estimate that only two
complex cases could be handled simultaneously in active litigation,
which presumes administrative hearings held concurrently.
GENERAL ACCOUNTING OFFICE REPORT ON GIPSA
Question. A September 2000 General Accounting Office Report
asserted that the Grain Inspection, Packers and Stockyards
Administration lacks the staff, budget, and expertise to investigate
anticompetitive behavior in livestock markets, and GAO recommended
(Report# RCED-00-242) that GIPSA require an earlier integration of
attorneys in the planning and review of investigations and closer
consultation take place between GIPSA, the Department of Justice, and
the Federal Trade Commission during investigations. This will enable
GIPSA to implement GAO's recommended improvements as required by the
November 9, 2000 passage of the Grain Standard and Warehouse
Improvement Act of 2000 (Public Law 106-472). What is the status of
GIPSA efforts to comply with our Congressional mandate and GAO's
recommendations to secure more attorneys and integrate those attorneys
into investigations?
Answer. The General Accounting Office (GAO) issued the ``Actions
Needed to Improve Investigations of Competitive Practices'' report to
Congress in September 2000. The Grain Standards and Warehouse
Improvement Act of 2000 (Public Law 106-472) requires implementation of
the recommendations identified in the GAO report as well as a report
describing the actions taken to improve investigations of competitive
practices by November 9, 2001.
The GAO report addressed actions that will improve the ability of
Packers and Stockyards Programs (P&SP) to investigate complex issues.
The report recommends that the Secretary of Agriculture:
--develop a teamwork approach for complex investigations with P&SP
economists and Office of the General Counsel (OGC) attorneys,
--improve competition investigations by adopting methods and guidance
similar to the Department of Justice (DOJ) and the Federal
Trade Commission (FTC),
--modify the grade structure for economists, and
--provide industry participants and Congress with clarifications of
P&SP's views on competitive activities by reporting changing
business practices in the cattle and hog industries and
identifying market operations or activities which raise
concerns.
Developing a teamwork approach for complex investigations with P&SP
economists and OGC attorneys began one month after the September report
with training in the development and use of econometric evidence for
legal specialists, economists and OGC attorneys. In addition, OGC
conducted a one-week training program for P&SP legal specialists in
March 2001. P&SP is currently developing and implementing an
investigation review plan that will include OGC in the early stages of
a competition case's development and investigation. In response to
additional appropriations provided by Congress for the purpose, OGC
added two additional attorneys to the Trade Practices Division staff
with the possibility of adding an additional two attorneys as the
caseload requires. In addition, P&SP created a supervisory legal
specialist position to provide for central supervision of its legal
specialists. As part of the ``early and often'' consultation with OGC,
recommended by the GAO report, OGC conducted a week long training
program for P&SP legal specialists in March 2001.
We have formalized procedures within P&SP by instituting
investigation reviews by senior management. This review occurs when
several of the following criteria are present:
--the case involves issues of competition
--the case is complex
--the investigation is extensive
--the investigation involves more than one unit of P&SP (financial,
competition, trade practices) in the investigation,
--the case involves more than one regional office
--the case would require the commitment of large human or fiscal
resources
Once senior management has reviewed and approved each investigation
plan, the investigation proceeds, and each investigation is monitored
throughout the investigation. We ask OGC to review competition and
complex investigation plans prior to commencement of the investigation.
We continue to review DOJ and FTC investigative procedures to
improve our investigative procedures of alleged anticompetitive
practices. P&SP has contacted DOJ and FTC staff to set the stage for
further discussions. As part the OGC training for legal specialists
held in March of this year, attorneys from the FTC conducted a training
session for P&SP legal specialists, computer specialists, and
economists and recently hired OGC attorneys on procedures for
requesting and obtaining electronic records for investigations.
The process of upgrading economist positions is underway to allow
P&SP to hire and retain well-qualified individuals.
We have strengthened our commitment to communicate our policies
more clearly and effectively to our stakeholders. We have published an
annual report assessing the cattle and hog industries. We are in the
process of hiring additional staff to improve our communication with
Congress and the public we serve.
We are continuing to reach out to both educate and inform
constituencies served by the Agency of the benefits and protections
offered to livestock and poultry producers.
packers and stockyards programs regulatory personnel needs
Question. Does P&S have adequate personnel on board to promulgate
regulations in a timely fashion? How many reg writers does P&S
currently employ?
Answer. At the present time, P&SO has one regulatory analyst. We
plan to hire another program analyst with regulatory writing experience
to assist with promulgating regulations and other related P&SP program
activities. Due to the relatively small size and the nature of the
work, few regulations are issued during the course of the year so that
personnel working on regulations and rulemaking initiatives also work
on congressional mandates, proposed legislation, paperwork reduction
act requirements, and other program activities as needed.
creation of an office of agriculture in the department of justice
Question. Would you object to the creation of an Office of
Agricultural Competition in DOJ to address not only antitrust issues in
agriculture generally, but to have dual jurisdiction over the trade
practices and competition portion of your jurisdiction under the
Packers and Stockyards Act?
Answer: P&SP takes no position regarding the creation of an Office
of Agriculture in the Department of Justice (DOJ) to handle antitrust
or trade practices. P&SP works closely with the DOJ and the Federal
Trade Commission (FTC) to monitor the livestock, meatpacking, and
poultry industries regarding antitrust issues. We believe P&SP
currently has the experience, training, and expertise to properly
enforce the trade practices portion of our jurisdiction over these
industries, as well as the competition and financial portions. We
further believe that together the existing entities of P&SP, DOJ, and
the FTC do an effective job monitoring industry antitrust issues.
Senator Cochran. Mr. Nannes.
Mr. Nannes.
STATEMENT OF JOHN M. NANNES, ACTING ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Mr. Nannes. Thank you, Mr. Chairman. I'm pleased to have
the opportunity this morning to discuss antitrust enforcement
in the agricultural marketplace.
As I believe you know, we are awaiting a Senate vote on the
nomination of Charles James to be the Assistant Attorney
General for the Antitrust Division. Until that time, the
Division is deferring policy statements.
However, the Antitrust Division is first and foremost a law
enforcement agency, and our enforcement work continues even
during times of transition. For that reason, I thought it would
be helpful to the subcommittee if I were to describe how the
Division applies the antitrust laws to agricultural industries.
We know that the agricultural marketplace is undergoing
significant changes. In the midst of these changes, farmers and
especially family farmers have expressed concern about
concentration in agricultural markets. Farmers know that
antitrust enforcement is essential to assuring competitive
markets.
ENFORCEMENT OF ANTITRUST LAWS
The Antitrust Division has been very active in enforcing
the antitrust laws in the agricultural sector. Let me briefly
describe for you some of our recent enforcement actions.
In our conversations with farm groups, we have found that
farmers are especially concerned about the potential impact of
mergers, so let me start there. Section 7 of the Clayton Act
prohibits mergers or acquisitions that may tend to lessen
competition. In the past 3 years, the Antitrust Division has
challenged four significant mergers that we concluded could
have harmed competition in agricultural markets.
First, we challenged Monsanto's proposed acquisition of
DeKalb Genetics Corporation, which would have significantly
reduced competition in corn seed, biotechnology innovation to
the detriment of farmers.
Second, we challenged Cargill's proposed acquisition 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.
Third, we challenged New Holland's proposed acquisition of
Case, which would have significantly reduced competition in the
sale of tractors and hay tools to farmers.
Fourth, we challenged Monsanto's proposed acquisition of
Delta and Pine Land, which would have significantly reduced
competition in cotton seed, biotechnology, once again to the
detriment of farmers.
Agricultural mergers
Taken as a whole, I'd suggest that these enforcement
actions demonstrate the following points. First, we carefully
review agricultural mergers for their competitive implications.
Second, our focus is not limited to traditional
agricultural products, but extends also to technology
innovation.
Third, while we consider proposed divestitures to address
the competitive problems that we find with a merger, we won't
hesitate in challenging the entire merger if we conclude that
lesser forms of relief are not sufficient to address fully the
competitive problem presented by the merger.
Fourth, we'll challenge a merger, whether the likely harm
is that farmers will have to pay anticompetitively high prices
for the products they purchase, or that farmers will have to
accept anticompetitively low prices for products they sell, as
demonstrated by Cargill/Continental.
I want to emphasize this last point because I know it is a
matter of particular concern to the subcommittee and to farmers
who often have to sell their products to large agribusinesses.
For a while there seems to have been some uncertainty about
whether we can consider a merger's possible anticompetitive
harm to producers. The answer is: Cargill/Continental
demonstrates is that we can and we do.
We conducted a very substantial investigation of the
Cargill Continental merger. The merging parties were sellers of
grain and soybeans in the United States and in international
markets, and also were buyers of grains and soybeans in various
local and regional domestic markets. We looked at all of the
potentially affected markets.
We concluded the merger would not harm competition in the
markets in which the parties were sellers. However, we did find
that the merger would likely have had an anticompetitive effect
in some markets in which Cargill and Continental were buyers,
and could have depressed the prices received by farmers for
grain and soybeans in those regions.
We challenged the merger on that basis and on that theory,
and the parties resolved our concerns by restructuring the
merger and agreeing to significant divestitures of port, rail,
and river terminals. The district court judge to whom that
decree was submitted concluded that that decree was very much
in the public interest.
AGRICULTURAL CRIMINAL ENFORCEMENT ACTIONS
The Division has also brought a number of significant
criminal enforcement actions related to agriculture in the last
few years under section one of the Sherman Act, which makes
unlawful contracts, combinations, and conspiracies in restraint
of trade. Our criminal enforcement focuses on the types of
agreements that are blatantly anticompetitive, such as price
fixing and allocations of customers and markets.
In the agricultural sector, we have prosecuted companies
that fix prices for products purchased by farmers, such as
lysine and vitamins used as animal feed additives, securing
numerous convictions of companies and individuals and some of
the highest fines in antitrust enforcement history.
The Division also investigates other kinds of business
behavior that may have anticompetitive effects. Such conduct
may constitute an illegal restraint of trade or an unlawful
monopolization or attempted monopolization in violation of the
Sherman Act.
CIVIL INVESTIGATIONS
We have conducted a number of civil investigations in which
we have considered whether conduct is having an anticompetitive
impact on farmers, and if we determine that such is the case,
we will take appropriate enforcement action.
The Division works hard to ensure that it is receiving the
information necessary to make the best informed judgments with
respect to agricultural antitrust issues.
We often obtain valuable information for our merger
investigations from the USDA, and from time to time USDA has
referred to us other matters that have led to criminal
prosecution.
In turn, we have provided assistance to the USDA--mostly as
consultants on competition-related studies, and more recently
by sharing information regarding our investigative techniques
to follow up on the recommendations made in the recent GAO
report and subsequent legislation.
Our working relationship is reflected in a written
memorandum of understanding with the USDA, and we have a very
constructive working relationship with that agency as well as
with other Federal agencies that have responsibilities in these
areas, and the various state attorneys general.
prepared statement
In conclusion, the Antitrust Division understands the
concerns that have been expressed about competition in
agricultural markets. We take seriously our responsibility to
assure that the antitrust laws are enforced no less vigorously
in the agricultural markets than in the rest of our economy.
We believe our enforcement efforts demonstrate that
commitment, Mr. Chairman. I would be happy to respond to any
questions that you or your colleagues may have.
[The statement follows:]
Prepared Statement of John M. Nannes
Good morning, Mr. Chairman and members of the Subcommittee. I am
pleased to have the opportunity to discuss issues relating to antitrust
enforcement in the agricultural marketplace.
As I believe most of you know, we are awaiting a Senate vote on the
nomination of Charles James to be Assistant Attorney General for the
Antitrust Division. Until that time, the Division is deferring official
policy statements. However, the Antitrust Division is first and
foremost a law enforcement agency, and our enforcement work continues
even during times of transition. For that reason, I thought it would be
helpful to the Subcommittee if I were to describe how the Division
enforces the antitrust laws and review how those laws have been applied
in agricultural industries.
We know that the agricultural marketplace is undergoing significant
change. Farmers are adjusting to challenges in international markets,
to major technological and 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 level 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 ensuring 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
raise livestock, and also in their capacity as sellers of crops and
livestock to feed people, not only in our country but also throughout
the world.
The Antitrust Division takes these concerns seriously and has been
very active in enforcing the antitrust laws in the agricultural sector.
Under Section 7 of the Clayton Act, the Division can challenge a
merger or acquisition that it concludes may tend substantially to
lessen competition. During the past few years, the Division has
challenged a number of significant mergers that would have harmed
agricultural markets, such as:
--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 & Pine Land, which
would have significantly reduced competition in cotton seed
biotechnology to the detriment of farmers.
Under section 1 of the Sherman Act, the Antitrust Division can
challenge agreements between competitors that restrain trade. With
respect to the types of agreements that are obviously anticompetitive--
such as price fixing and allocations of markets and/or customers--the
Division often proceeds by criminally prosecuting the companies and
individuals involved. In recent years, the Division has criminally
prosecuted various companies for fixing prices for products purchased
by farmers--lysine and vitamins--and has secured numerous criminal
convictions and some of the highest fines in antitrust history. Under
the Sherman Act, the Division can also proceed civilly to challenge
other types of agreements or unlawful monopolies that it concludes are
injuring suppliers or customers; here, too, it brings enforcement
actions to challenge anticompetitive business conduct that injures
farmers.
MERGER ENFORCEMENT
In our conversations with farm groups, we have found that farmers
are especially concerned about the potential impact of mergers and
acquisitions (``mergers''). Farmers are concerned that mergers will
limit the number of sellers of seed, chemicals, machinery, and other
equipment from whom they can buy and will limit the number of customers
for crops and livestock to whom they can sell. For this reason, I think
it may be helpful to start with a discussion of the Antitrust
Division's merger enforcement program, with particular emphasis on
recent merger enforcement actions that the Antitrust Division has taken
in the agricultural sector.
MERGER ENFORCEMENT STANDARDS
Section 7 of the Clayton Act prohibits 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 anticompetitive mergers in their incipiency, to forestall
harm that would otherwise ensue but be difficult to undo after the
parties have consummated a merger. Thus, merger enforcement standards
are forward-looking and, while the Antitrust Division often considers
historic performance in an industry, the primary focus is to determine
the likely competitive effects of a proposed merger in the future.
The Antitrust Division shares merger enforcement authority with the
Federal Trade Commission (``FTC''), with the exception of certain
industries in which the FTC's jurisdiction is limited by statute. The
agencies jointly have developed Horizontal Merger Guidelines that
describe the inquiry they follow in analyzing mergers. ``The unifying
theme of the Guidelines is that mergers should not be permitted to
create or enhance market power or to facilitate its exercise. Market
power to a seller is the ability profitably to maintain prices above
competitive levels for a significant period of time.'' Merger
Guidelines Sec. 0.1.
We ordinarily seek to define the relevant markets in which the
parties to a merger compete and then to determine whether the merger
would be likely to lessen competition substantially in those markets.
In performing this analysis, the Antitrust Division and the FTC
consider both the post-merger market concentration and the increase in
concentration resulting from the merger. Generally speaking, the
Antitrust Division has been likely to challenge a transaction that
results in a substantial increase in concentration in a market that is
already highly concentrated, although appropriate consideration has
also been given to other factors, such as the likelihood of entry by
new competitors, that could affect whether the merger is likely to
create or enhance market power or facilitate its exercise.
In most instances, the concern raised by a merger is the potential
ability of the merging companies to raise above the competitive level
the price of the products or services they sell. Of course, it is also
possible that a merger will have the potential to substantially lessen
competition with respect to the price that the merging companies pay to
purchase products or services. This is a matter of particular concern
to farmers, who often sell their products to large agribusinesses. The
Merger Guidelines specifically provide that the same analytical
framework used to analyze the ``seller-side'' is also applied to the
``buyer-side'': Market power also encompasses the ability of a single
buyer (a ``monopsonist''), a coordinating group of buyers, or a single
buyer, not a monopsonist, to depress the price paid for a product to a
level that is below the competitive price and thereby depress output.
The exercise of market power by buyers (``monopsony power'') has
adverse effects comparable to those associated with the exercise of
market power by sellers. In order to assess potential monopsony
concerns, the Agency will apply an analytical framework analogous to
the framework of these Guidelines.
Merger Guidelines Sec. 0.1. Thus, the Antitrust Division has
reviewed mergers to determine not only whether they posed a competitive
threat to persons buying goods or services from the merged entity, but
also--as demonstrated by the Cargill/Continental case--whether they
posed a competitive threat to persons selling goods or services to the
merged entity.
While most of the merger challenges brought by the Antitrust
Division have involved companies that compete with one another
(``horizontal competitors''), the agencies also consider whether
mergers involving companies at different levels in the production and
marketing process (``vertical relationships'') may have anticompetitive
consequences. Challenges to vertical mergers are less frequent because
these mergers often allow the merged companies to compete more
efficiently in the marketplace, by reducing costs or streamlining
production. However, there are circumstances in which a vertical merger
may substantially lessen competition, such as by foreclosing
competitive access to one of the markets involved in a way that raises
barriers to entry or otherwise threatens competitive prices. In those
instances, the Division takes whatever enforcement action may be
warranted.
PROCEDURES FOR REVIEWING MERGERS
The Antitrust Division and the FTC use a clearance process to work
out which agency will review a particular merger. The primary
determinant is agency expertise about the product or service at issue,
so that a merger is usually reviewed by whichever of the two agencies
is most knowledgeable about the relevant product or service.
We take concentration into account from the beginning of our
review. In determining whether or not to conduct an investigation, we
consider the pre-merger and post-merger concentration levels in the
affected markets. In those industries already characterized by high
concentration levels, there is a substantially increased likelihood
that a proposed merger is subjected to a formal--and often quite
extensive--antitrust investigation.
The Antitrust Division and the FTC have an array of investigatory
tools from which to choose in conducting such an investigation. Parties
to most mergers meeting certain size thresholds must provide the
agencies with advance notice and observe a waiting period before
consummating the merger, during which time the reviewing antitrust
agency may obtain relevant information and conduct an investigation. In
circumstances in which such notice is not required, the reviewing
antitrust agency has other statutory powers for obtaining information.
If the reviewing antitrust agency concludes that the merger is not
competitively problematic, the investigation ends and the parties then
are generally free to proceed with the merger. However, if the
reviewing antitrust agency identifies competitive concerns, it explains
the nature of those concerns to the parties, and the parties have an
opportunity to address them. Unless the parties can convince the agency
that its competitive concerns are not warranted, the agency prepares to
file suit to seek an injunction against the merger.
Sometimes the parties make a proposal to address the competitive
concerns that the reviewing antitrust agency has identified. For
example, when a merger between multi-product firms raises competitive
concerns with respect to only a subset of their products, divestiture
of the competitively problematic product lines may solve the
competitive problem, allowing the parties to proceed with the rest of
the merger. There are times, however, when the merging parties'
proposed changes to the merger are not enough to solve the problem or
the problem is so pervasive that the agencies conclude the transaction
must be prohibited in its entirety. In those circumstances, the
reviewing antitrust agency challenges the merger in court, generally
seeking a preliminary injunction to prevent consummation of the merger
while it is being challenged.
recent merger enforcement actions in agriculture-related industries
As a result of the clearance process with the FTC, the Antitrust
Division has investigated the preponderance of mergers affecting
agriculture, with a prominent exception being grocery store mergers,
which are usually reviewed by the FTC. In the past few years, the
Antitrust Division has successfully challenged four significant
proposed mergers in agriculture-related industries that we concluded
would adversely affect farmers. Each of those transactions was
important in its own right, and, collectively, they demonstrate the
Division's commitment to enforce the antitrust laws in this vital
segment of our economy.
Three years ago, the Antitrust Division investigated Monsanto's
proposed acquisition of DeKalb Genetics Corporation. Both companies
were leaders in corn seed biotechnology and owned patents that gave
them control over important technology. We expressed strong concerns
about how the merger would affect competition for seed and
biotechnology innovation. To satisfy our concerns, Monsanto spun off to
an independent research facility its claims to agrobacterium-mediated
transformation technology, a recently developed technology used to
introduce new traits, such as insect resistance, into corn seed.
Monsanto also entered into binding commitments to license its Holden's
corn germplasm to over 150 seed companies that currently buy it from
Monsanto, so that they can use it to create their own corn hybrids.
Two years ago, the Antitrust Division comprehensively reviewed the
proposed purchase by Cargill of Continental's grain business, which
resulted in a suit to challenge the merger as originally proposed. The
merger affected a number of markets. The parties were buyers of grain
and soybeans in various local and regional domestic markets and also
sellers of grain and soybeans in the United States and abroad. We
carefully looked at all of the potentially affected markets, and
ultimately concluded that the proposed merger likely would have
anticompetitively depressed prices received by farmers for their grain
and soybeans in certain regions of the country; we were also concerned
that the merger would have had anticompetitive effects with respect to
certain futures markets.
To resolve our competitive concerns, Cargill and Continental agreed
to divest a number of facilities throughout the Midwest and in the
West, as well as in the Texas Gulf. The nature of the relief
demonstrates the individualized attention that we paid to local and
regional markets. We insisted on divestitures in three different
geographic markets where both Cargill and Continental operated
competing port elevators: (1) Seattle, where their elevators competed
to purchase corn and soybeans from farmers in portions of Minnesota,
North Dakota, and South Dakota; (2) Stockton, California, where their
elevators competed to purchase wheat and corn from farmers in central
California; and (3) Beaumont, Texas, where their elevators competed to
purchase soybeans and wheat from farmers in east Texas and western
Louisiana.
We also required divestitures of river elevators on the Mississippi
River in East Dubuque, Illinois, and Caruthersville, Missouri, and
along the Illinois River between Morris and Chicago, where the merger
would have otherwise harmed competition for the purchase of grain and
soybeans from farmers in those areas. The Illinois River divestitures
(and an additional required divestiture of a port elevator in Chicago)
also prevented the merger from anticompetitively concentrating
ownership of delivery points that have been authorized by the Chicago
Board of Trade for settlement of corn and soybean futures contracts.
In addition, we required divestiture of a rail terminal in Troy,
Ohio, and we prohibited Cargill from acquiring the rail terminal
facility in Salina, Kansas, that had formerly been operated by
Continental, and from acquiring the river elevator in Birds Point,
Missouri, in which Continental until recently had held a minority
interest, in order to protect competition for the purchase of grain and
soybeans in those areas.
This relief was designed to ensure that farmers in the affected
markets would continue to have alternative buyers for their grain and
soybeans. After reviewing public comments on the proposed consent
decree and the Division's response to those comments, the court
determined that the decree was in the public interest and entered it in
June 2000.
In November 1999, the Antitrust Division filed a complaint
challenging the proposed merger between New Holland and Case
Corporation because of our concern that the transaction would lead to
higher prices for certain types of machinery purchased by farmers. The
parties manufactured and sold two- and four-wheel drive tractors that
were used by farmers for a variety of applications, including pulling
implements to till soil and cultivate crops. They also manufactured and
sold a variety of hay and forage equipment, including square balers and
self-propelled windrowers. The Antitrust Division concluded that the
transaction would significantly lessen competition and lead to higher
prices and lower-quality products.
The parties agreed to significant divestitures in order to resolve
our concerns. Those divestitures included New Holland's large two-
wheel-drive agricultural tractor business, New Holland's four-wheel-
drive tractor business, and Case's interest in a joint venture that
makes hay and forage equipment. Following the public comment and
response period, the court determined that the decree was in the public
interest and entered it in March 2000.
Last year, Monsanto abandoned its proposed acquisition of Delta &
Pine Land Co., after the Antitrust Division indicated that it was
prepared to challenge the merger in court. The Division concluded that
the merger, which would have combined the two largest cotton seed
companies, would have anticompetitively harmed farmers raising cotton.
Taken as a whole, these enforcement actions provide a good picture
of our merger enforcement efforts in agriculture-related industries.
The Antitrust Division carefully reviews agricultural mergers for their
competitive implications, and files suit if a merger is likely to lead
to anticompetitive prices either for products purchased by farmers (New
Holland/Case) or for products sold by farmers (Cargill/Continental).
The Division's concerns are not limited to traditional agricultural
products, but extend also to biotechnology innovation (Monsanto/DeKalb
and Monsanto/Delta & Pine Land). And, while the Antitrust Division
considers proposed divestitures and other forms of relief that permit a
merger to proceed as restructured, the Division challenges a merger
outright if it concludes that lesser forms of relief are not likely to
address fully the competitive problems raised by the merger (Monsanto/
Delta & Pine Land).
CRIMINAL ENFORCEMENT OF THE ANTITRUST LAWS
In addition to enforcing the antitrust laws against anticompetitive
mergers, the Antitrust Division has moved aggressively to prosecute
companies that engage in price fixing or allocation of markets or
customers. Such conduct willfully subverts the operation of free
markets and can cause serious economic harm. It virtually always
results in inflated prices to purchasers or depressed prices to
suppliers; indeed, that is the very purpose of such conduct.
Section 1 of the Sherman Act prohibits contracts, combinations, and
conspiracies that restrain trade. The key to such illegal conduct is an
anticompetitive agreement among competitors. It is not enough for the
Antitrust Division to show that competitors charged the same or similar
prices for a product or service. We must prove that the competitors
agreed upon prices or price levels, or upon the allocation of customers
or markets. A company convicted of violating the antitrust laws is
subject to substantial fines, and an individual convicted of violating
the antitrust laws is subject to substantial fines and imprisonment.
In the past few years, the Antitrust Division has prosecuted a
number of cases and secured convictions and hefty fines in various
industries involving products purchased by farmers. Two prosecutions
deserve particular mention.
--Beginning in 1996, the Antitrust 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
pled guilty and was fined $100 million--at the time the largest
criminal antitrust fine in history. Two Japanese and two Korean
firms also were prosecuted for their participation in the
worldwide lysine cartel and were assessed multi-million-dollar
fines. In addition, three former ADM executives were convicted
for their personal roles in the cartel; two of them have been
sentenced to serve 36 and 33 months in prison, respectively,
and fined $350,000 apiece for their involvement, and the other
executive had 20 months added to a prison sentence he was
already serving for another offense.
--Two years ago, the Antitrust Division prosecuted the Swiss
pharmaceutical giant, F. Hoffmann-La Roche Ltd., and a German
firm, BASF Aktiengesellschaft, for their roles in a decade-long
worldwide conspiracy to fix prices and allocate sales volumes
for vitamins used as food and animal feed additives and
nutritional supplements. The vitamin conspiracy affected
billions of dollars of U.S. commerce. Hoffman-La Roche and BASF
pled guilty and were fined $500 million and $225 million,
respectively. These are the largest and second-largest
antitrust fines in history--in fact, the $500 million fine is
the largest criminal fine ever imposed in any Justice
Department proceeding under any statute. Three former Hoffmann-
La Roche executives from Switzerland and three former BASF
executives from Germany agreed to submit to U.S. jurisdiction,
to plead guilty, to serve time in a U.S. prison, and to pay
substantial fines for their role in the vitamin cartel. These
prosecutions were part of an ongoing investigation of the
worldwide vitamin industry, in which there have been 24
corporate and individual prosecutions to date, including
convictions of Swiss, German, Canadian, Japanese, and U.S.
firms, and convictions of 12 American and foreign executives
who are serving or have served time in Federal prison, and
another executive who has agreed to plead guilty and is
awaiting sentencing.
The lysine and vitamin cases received substantial publicity because
of the prominence of the companies involved, the amount of commerce at
stake, and the record size of the fines. But we have also brought
prosecutions on a smaller scale. We 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
conducted with valuable assistance from the Department of Agriculture
(``USDA''), which was investigating some of the same conduct under the
Packers and Stockyards Act. In short, we have brought charges against
companies that engage in criminal anticompetitive behavior that
adversely affects farmers, from isolated acts to multi-year
international conspiracies.
INVESTIGATIONS OF OTHER POTENTIAL ANTICOMPETITIVE CONDUCT
The Antitrust Division also investigates other forms of business
behavior that may have anticompetitive effects. Such conduct may
constitute an illegal restraint of trade under Section 1 of the Sherman
Act or unlawful monopolization or attempted monopolization under
Section 2 of the Sherman Act. Conduct that may raise competitive issues
of particular interest to farmers include strategic alliances between
agribusiness companies, joint ventures among suppliers, and
restrictions imposed on intellectual property rights.
The Antitrust Division has conducted a number of civil
investigations into whether some particular conduct is unreasonably
restraining trade to the detriment of farmers. One such investigation
resulted in the Division filing a lawsuit last fall to challenge a non-
compete agreement between developers of long-shelf-life-tomato seeds,
after we had concluded that the agreement was interfering with the
development of new seeds for use by American farmers. That case is
pending before the district court in Arizona.
other agriculture-related activities at the antitrust division
The Antitrust Division has a long-standing cooperative relationship
with USDA, through which we have provided assistance to each other in a
number of respects. Division attorneys and economists investigating
particular mergers have made extensive use of the wealth of information
about agricultural markets that USDA collects in the ordinary course of
its work. USDA has also contacted the Division to provide other useful
information regarding major agriculture-related mergers we were
investigating, and has forwarded investigative leads to the Division,
such as the one resulting in the prosecution of the two cattle buyers
in Nebraska for price-fixing. The Division has assisted USDA by
consulting on studies USDA has conducted regarding competition-related
aspects of agricultural markets, such as the red meat studies a few
years ago, as well as on USDA's recent efforts to revise its
investigative processes at the Grain Inspection, Packers and Stockyards
Administration.
Two years ago, the Division entered into a memorandum of
understanding with USDA, along with the FTC, to memorialize this
working relationship and to reaffirm our commitment to work together
and exchange information as appropriate on competitive developments in
the agricultural marketplace.
The Antitrust Division also works with other relevant Federal
agencies on specific matters of common interest. For example, the
Division worked closely with the Commodities Futures Trading Commission
during the investigation of the Cargill/Continental merger.
Last year, the Division created the position of special counsel for
agriculture. The special counsel reports directly to the Assistant
Attorney General and works exclusively on agricultural issues. The
Antitrust Division has a full contingent of attorneys and economists
available to work on agriculture-related matters, some of whom have
extensive experience and expertise in those markets, and the special
counsel has been a valuable complement to those existing enforcement
resources, providing a sustained focus and public presence to our
investigative and outreach efforts in agriculture. He has met with and
spoken to a number of agricultural producers and producer groups, both
here in Washington and in farm states, to explain to them how the
antitrust laws work and how to bring relevant information to our
attention. He has also met and maintained contact with a number of
state attorneys general from farm states.
CONCLUSION
Mr. Chairman and members of the Subcommittee, we in the Antitrust
Division understand the concerns that have been expressed about
competition in agricultural markets. We take seriously our
responsibility to ensure that the antitrust laws are enforced no less
vigorously in agricultural markets than they are elsewhere in our
economy. We believe that our enforcement record demonstrates that
commitment.
I would be happy to respond to whatever questions the Subcommittee
may have.
Senator Cochran. Thank you very much, Mr. Nannes, for that
overview of the Antitrust Division's role in this subject.
MANDATORY PRICE REPORTING
Ms. Waterfield, some are concerned that the mandatory price
reporting system that was implemented this past April has had
the effect of providing less information to producers than they
received under the old voluntary system. Is this an accurate
assessment? Or if it isn't, tell us what you think the benefits
have been, if any, from the mandatory price reporting system.
Ms. Waterfield. Well, Senator Cochran, the mandatory price
reporting system is legislation that is being handled, as you
know, by our sister agency, the Agricultural Marketing Service.
Obviously it affects the industries that we regulate and
monitor.
We currently have two rapid response teams out, both in the
cattle industry and the hog industry, talking with producers to
ensure that there are no problems in the industries that we
monitor as a result of mandatory price reporting.
What we found so far in the cattle industry is that there
has not been much of an adverse impact as a result of mandatory
price reporting.
ANTITRUST ENFORCEMENT
Senator Cochran. There has been some legislation proposed
that would create some additional antitrust enforcement
authority outside the Department of Justice at the USDA to
oppose pre-merger review opinions.
My question is do you believe that creating a special
counsel for competition within USDA who would have the same
power as the assistant attorney general for antitrust at the
Department of Justice would help in enforcement of agribusiness
merger violations?
Ms. Waterfield. Is that directed at me, Senator Cochran?
Senator Cochran. Yes.
Ms. Waterfield. That question would be better addressed to
the department's legislative affairs office.
Senator Cochran. Okay. Senator Dorgan had actually asked
that we convene this hearing, and we discussed the logistics
and where the hearing ought to be conducted and witnesses we
ought to invite. And Senator Dorgan had another commitment, had
to open a hearing at another appropriations subcommittee and
therefore was not here for opening statements.
I'm going to yield at this time to Senator Dorgan for any
opening statement that he would like to make.
STATEMENT OF SENATOR BYRON L. DORGAN
Senator Dorgan. Mr. Chairman, thank you. I will be brief,
and I was at the Treasury appropriations subcommittee with
Senator Campbell that we had to open up, and I apologize for
being a bit late. Thank you for your statements. I read the
statements of this panel and others.
If I might just use a couple of charts to make a couple of
points, I'll be quite brief. Market concentration in the meat
processing industry, the red line, is where we are now. Beef,
80 percent top four firms. Pork, 57 percent. Sheep, 73 percent.
Poultry, 55 percent.
If I had put that chart up 20 or 30 years ago, it would
have looked dramatically different than this, but this shows a
level of concentration in those industries. Why do ranchers in
my part of the country keep talking about concentration and the
danger it involves for them?
Well, this chart shows 76 percent of the cattle market. 76
percent of the cattle market are under contract by the Big Four
companies. Four percent bought on the public market by the Big
Four. So when we talk about market share, the Big Four, and
what it is doing to cattle market, and prices and so on, this
is why ranchers are very concerned and becoming increasingly
concerned as time goes on.
Let me just show two additional charts. Market
concentration in the grain processing industry. Flour milling,
top four firms, 62 percent. Wet corn milling, 74 percent.
Soybean crushing, 64 percent.
Finally, let me show the charts of the farmer's share of
the retail dollar, which interestingly enough moves in an
inverse relationship to the concentration in the various
industries. Farmer's share of the retail beef dollar is
dramatically different, dramatically reduced. The farmers'
share of the retail pork dollar exactly the same thing. The
farmer's share of the cereal grains dollars, exactly the same
thing.
The point is fairly obvious to me. As the enterprises in
which farmers purchase from and the enterprises in the
industries to which farmers sell become larger and have more
economic muscle, they are reducing the farmer's share of the
food dollar and increasing their own share.
And so our family farmers say is this a stacked deck? Is
this a fair economy for us to operate in, or is there
concentration here that is unhealthy? And I think the answer,
from my standpoint, is there is concentration that is
unhealthy.
I'm not an attorney who's schooled, for example, in
antitrust law, but as I listen to the discussion here, it seems
to me family farmers and ranchers in this country know that
something is wrong. We are moving in the wrong direction, and
somehow nobody seems to do much about it.
If I might just make a point, Ms. Waterfield said things
have been fairly stable since 1995. I think that was her
statement. In the pork industry, the four top pork producers in
1995, I believe, have become two pork producers through two
major acquisitions. So changes are occurring even as we speak.
This is moving very rapidly.
prepared statement
And the question is do we have a competitive market? And as
soon as I have the opportunity to ask questions, Mr. Chairman,
I'm going to ask questions. Do you think that the markets in
these areas are more competitive or less competitive? So we can
talk through that just a bit.
If they are, in fact, becoming less and less competitive
and I would expect you would agree that is the case, then what
are the remedies for that?
Mr. Chairman, you are kind to call on me for a statement,
and I appreciate it.
[The statement follows:]
Prepared Statement of Senator Byron L. Dorgan
Mr. Chairman, I'd first like to thank you for holding this hearing
on Market Concentration in agriculture. I requested that the
Subcommittee hold this hearing, and I appreciate all of the work that
you and your staff put into making it happen. Concentration in
agriculture has been a growing problem for years. But now, it's quite
obvious to most that the trend towards larger and fewer companies in
control of our major agriculture markets is accelerating. I'm hopeful
this hearing will help Congress find a solution to this ever pressing
problem, and I commend you for your support on this issue.
I'd also like to welcome the diverse panel of witnesses appearing
today. I say diverse, because we have with us today Federal agency
heads representing the Department of Agriculture and Justice, state and
university officials, livestock groups, farm groups, industry
representatives, and a farmer. I look forward to hearing your views and
any recommendations you may offer Congress in regards to legislative
action aimed towards controlling the growth of agriculture market
concentration.
During debate on the Packers and Stockyards Act of 1921, Wyoming
Senator John B. Kendrick said, ``The livestock industry has been
brought to such a high degree of concentration that it is dominated by
a few men. The big packers, so called, stand between hundreds of
thousands of producers on one hand and millions of consumers on the
other. They have their fingers on the pulse of both the producing and
consuming markets and are in such a position of strategic advantage
they have unrestrained power to manipulate both markets to their own
advantage and to the disadvantage of over 99 percent of the people of
the country. Such power is too great, Mr. President, to repose in the
hands of any men.''
Well, the Packers and Stockyards Act was passed. However, I believe
Senator Kendrick's words would ring true again today. The numbers speak
for themselves. The degree to which a few control these markets is
astounding. Worse yet, the degree of concentration is increasing at a
pace that causes compiled statistics to become obsolete soon after a
study is completed. For instance, the top four pork producers of a
couple of years ago are now just two Smithfield has devoured Murphy
Farms and Carroll's Foods.
To survive and be assured of some stability due to slumping
markets, farmers have increasingly turned to contract production.
However, one look at the plight of many poultry producers and segment
of agriculture which is almost exclusively controlled by contract
production should cause many to pause if they consider contract
agriculture the means to their salvation. I won't go into detail, but
let me just say that it's common knowledge that the ``first'' contract
offered a farmer is more than likely going to be the best. We've all
heard about the poultry producers who are offered unfavorable contracts
with a take-it-or-leave-it now ultimatum attached.
Almost every farmer out in the country cites growing market
concentration and all the associated ills this plague produces as a
serious problem that needs to be addressed. But, it isn't being
addressed. Obviously, something is wrong. Either our anti-trust laws
are not being enforced, or they need to be changed. Hopefully this
hearing will deduce what exactly the problem is and then offer up a
course of action to pursue to correct that problem.
Mr. Chairman, I want to thank you again for scheduling this
hearing.
Senator Cochran. Thank you very much, Senator.
MARKET CONCENTRATION'S EFFECT ON ECONOMIC GROWTH
Mr. Collins, in your testimony, you raise the issue of
market concentration and its affect on economic growth that
usually results in a more efficient and higher quality product.
Do you feel there has been a significant decline in research
and development to enhance products due to market
concentration? Or is it just the opposite?
Mr. Collins. Mr. Chairman, I think that is an issue that
can cut both ways. I think in a highly concentrated industry
where a firm may have market power, they may not necessarily
need to do research and product development, innovate as much
to maintain their market share. So that would be a force
working against research and development.
On the other hand, as firms have gotten larger, they get
deeper pockets, and they have more money available to conduct
research and product development. I'm not exactly sure where
that comes out. It would be something that you'd have to look
at industry by industry.
We could look at the food products that are delivered to
the American consumer today generally coming from the
concentrated industries that Mr. Dorgan just identified all
across the food processing and retailing. And yet we know that
the food industry has been highly innovative and have done a
lot to develop new products. I'll give you an example.
Back in the early 1970s, the food industry was producing
about 1,000 new products a year. By the time we got to the mid
1990s, the food industry was introducing something in the order
of 15,000 to 16,000 new products a year. That doesn't prove the
point one way or another, but it does seem to me that as the
economy has grown, despite concentration, we have seen a lot of
research and product development innovation.
ANTITRUST VS. FTC RESPONSIBILITIES
Senator Cochran. In addition, Mr. Nannes, to the work of
the Department of Justice and the Department of Agriculture
through the grain inspection, Packers and Stockyard Act, the
Federal Trade Commission also has some responsibilities. Are
there enough laws on the books now that give these agencies and
departments the powers they need to police and enforce or
prohibit anticompetitive activity?
Mr. Nannes. Senator, in response to your question, let me
note that, as you indicated, we and the Federal Trade
Commission share antitrust enforcement responsibility. We
worked out a liaison agreement with the Federal Trade
Commission so that industries don't face duplicative antitrust
investigations.
For example, the Federal Trade Commission is the agency
that over time has developed the expertise with respect to
supermarkets and grocery stores. So, it is the agency that has
brought enforcement actions in that particular field.
With respect to mergers, we apply the same statute, which
is section 7 of the Clayton Act, to which I made reference
earlier. This is the statute that applies generally throughout
the industry and across industry lines as the appropriate
demarcation as between mergers that may be pro-competitive and
efficient, and those that run the risk of creating or enhancing
market power of the kind that Dr. Collins has referred to.
Over time, sir, I think section 7 of the Clayton Act has
served as a very good framework for us to separate the
anticompetitive transactions from transactions that do not
present competitive risks.
Senator Cochran. It seems to me that the wording of the
act, as you referred to it in your statement, is very broad. It
gives the regulators a great deal of leeway to make decisions
and to bring actions and to challenge mergers.
Mr. Nannes. Sir, that is correct, with one important
limiting factor. And that is that we are a law enforcement
agency. The judgments we make as prosecutors we have to be able
to back up in court.
And so our ability to apply the antitrust laws is informed
very substantially by the courts' interpretations of those
laws. Over the course of the past 30-plus years, we have
developed at various times merger guidelines that indicate to
industry and to public bodies the factors we take into account
when we are doing our merger review. So that operates also to
inform the kind of judgments we make in merger review.
Senator Cochran. Senator Kohl.
Senator Kohl. Thank you very much, Senator Cochran.
DAIRY COMPACTS
Mr. Collins, in your prepared statement you said that
within the food processing industry, dairy processors led the
number of mergers and acquisitions in recent years. Could you
provide any insight into the effect that dairy compacts may
have on the trend towards concentration within the dairy
processing sector?
Mr. Collins. Mr. Kohl, the Northeast Interstate Dairy
Compact is very similar--the way it operates is very similar to
Federal, milk marketing orders. It sets a minimum price for
class 1 milk use for fluid consumption, just like Federal
orders do.
I don't know of any research that has linked the milk
marketing orders system to changes in consolidation or
concentration in dairy processing. So my first answer to your
question would be that I don't know of any studies that show a
link.
I would say, however, that if you look at some of the
theoretical factors that drive consolidation, one of the things
that we've seen is consolidation in some markets that have slow
growth. We've seen where there has been economies of scale,
firms get larger, merge, acquire to offset the slow growth of
demand.
They've gotten bigger to grow their own company by
increasing their market share.
So milk marketing orders, I think, do slow the consumption
of fluid milk. Fluid milk has been a stagnant industry anyway.
It has been competing with soft drinks and fruit juices and all
kinds of beverages. And when you raise the price of fluid milk
that much higher, it slows consumption that much more.
Only to the extent that we've seen in some slow growth
markets an incentive for firms to consolidate, I would argue
that would be a link to the compact. But I would say it would
probably be a fairly marginal, fairly small effect.
EFFECT OF GOVERNMENT PROGRAMS ON AGRICULTURAL CONSOLIDATION
Senator Kohl. Thank you, Mr. Collins. You mentioned
government programs can contribute to agricultural
consolidation, and concentration in a number of ways. Please
identify these programs most likely to increase or decrease
concentration in the ag sector, especially those that are
funded by this subcommittee.
Mr. Collins. That statement in my written testimony, Mr.
Kohl, was not to suggest that the subcommittee is funding
programs that spur consolidation. It was a general statement to
say that government programs, tax policy, and regulation can
encourage consolidation.
I think that some examples might be when we used to have
passive loss investing which encouraged investment in feed
lots, which led to consolidation in the feed lot business. I
think you know things like patent laws, for example, do confirm
a monopoly in the short term for firms.
It was just a general statement to say that government
programs can contribute, as well as all the other factors I
mentioned. I didn't mention that part in my opening statement.
I mentioned all the other factors because I think the others
have been more important, but government programs can be a
factor as well.
I think farm program payments are an example. They cut both
ways. We see farm program payments have raised agricultural
land values, that is a barrier to entry for beginning farmers
into agriculture or farm production. Payments going to large
producers may, in fact, help them provide the financial
leverage to buy out smaller producers.
It's a general statement that I think there are a lot of
programs that do affect the pace of consolidation. And it's
just something that we have to be mindful of when we implement
programs and pass laws.
Senator Kohl. I thank you, Mr. Collins. I thank you, Mr.
Chairman.
Senator Cochran. Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman.
MANDATORY PRICE REPORTING
Two years ago, Mr. Collins, Congress adopted a mandatory
price reporting legislation following passage in numerous
States of State-based price reporting laws. Now that USDA has
this legislation up and running, some livestock producers have
expressed concerns about the so-called 360 guideline.
The 360 guideline prohibits the publication of a markets
pricing information in any reporting period unless there are at
least three firms reporting information for that market, and no
firm has more than 60 percent of the trade for that market.
Producers have expressed concern to many of us that this
will prohibit the reporting of pricing data on a daily basis if
a firm with sizable concentration in an area of market is the
only firm buying livestock.
I recognize the type of confidentiality at work here may be
necessary to ensure proprietary business information not being
inappropriately reported, and at the very least, the problem
shed some light on the anticompetitive nature of the slaughter
livestock market as a result of meat packer concentration, a
larger issue that price reporting was never really intended to
combat.
I know that USDA is aware of the 360 problem and is
examining some alternatives, and I also believe it is only fair
to give USDA some time to implement price reporting. And at
this stage, the 360 rule I don't think should be seen as a
death knell of price reporting.
But if this problem grows and other problems spring up that
lead to less and untimely market information, then Congress may
need to take legislative action.
I believe it's in our mutual interest to ensure producers
have confidence in the rules and guidelines used to implement
the price reporting law. And so the questions I have for you,
first, does USDA have the authority to make adjustments to the
360 rule without new legislation, would it be helpful to back
up any price reporting changes with some sort of cleanup effort
on our part?
Second, any updates you have on the implementation and,
lastly, are additional funds needed in order to make this
program work?
Mr. Collins. Mr. Johnson, I would be happy to answer this
question as best I can. It's a similar question Mr. Cochran
asked Ms. Waterfield, I believe. I would like to step back and
just comment on this for a minute.
This is a story of good news, bad news, and hopefully good
news in the end. Certainly it is a story of some frustration at
the Department of Agriculture.
I know members on this committee like Mr. Dorgan, like
yourself were instrumental in supporting mandatory livestock
reporting which resulted in legislation in 1999. And on April
2nd we put into effect mandatory livestock reporting.
The good news about that is that an area of the farm
economy that needed more information has legislation and a
means now to get more information to help improve the
competitive bargaining power of producers.
We put out under mandatory price reporting what we call 91
reports, 91 data series; 41 of those are new and have never
been reported before. A lot of that has to do with forward
contracted sales and that sort of thing.
The good news is we've got a system up, it was put in place
April 2nd, and it's going to provide and it is providing more
information than we have provided before.
The bad news is there have been some glitches. The first
glitch has been what we're calling technical difficulties. And
there are two forms of technical difficulties.
One form is software problems. We have a contractor that
has developed the software. Sometimes the software has not
aggregated the data right, so we haven't reported a data point
on some days. At other times, the data that are reported, if
you've looked at any of these reports as I have, is hard to
read. You don't know what you're looking at sometimes when you
look at the data. So the reporting formats were not that good
initially.
Those problems are being addressed and fixed, by and large.
We did have another problem I think yesterday or the day before
with another software problem on a data series, but by and
large such errors happened mostly during the first week and a
half of April.
I think we're now down to the point where out of the 91
reports only like 3 or 4 are not being reported because of
technical difficulty. And I think within another week we're
going to have those resolved.
3/60 rule
The second source of problems that you identified has been
the confidentiality issue. And it has been widely publicized
that we have used this 3/60 rule to determine whether we're
going to report data on a particular day, particular time of
the day, such as 11:00 a.m. or 3:00 p.m. That 3/60 rule is one
that we've used elsewhere in the department.
The National Agricultural Statistics Service uses a similar
rule, having to require at least three entities to report with
each having no more than some share of the market. We use a 60
percent share, other Federal agencies have used 50 percent or
70 percent. It's a standard rule for determining
confidentiality.
The problem has been, of course, now if you look at our
reports, particularly for direct cattle purchases in certain
States, cash market cattle purchases in Texas, Oklahoma, in
Kansas, in Nebraska, we haven't been reporting because of
confidentiality. These were data we were reporting under the
voluntary reporting system, and this has led to a lot of
frustration by producers.
I can tell you the answer your question specifically, you
asked if the 3/60 rule to change that would require
legislation, the answer to that is no, it would not require
legislation. It was not in the statute, it was not in the
legislation. It's a reporting standard that we adopted
diligently.
Secretary Veneman has been involved on this and has met on
this issue. We're looking at alternative ways to approach this
question, and I don't know that I can go into that in much
detail.
There's some statistical formulaic ways you can use to see
the maximum amount of information without identifying somebody.
There's alternative ways of looking at the market in
deciding whether we're going to disclose the identity of a
buyer or seller based on the information that's being reported.
It's a little more complicated than I first thought. As the
statisticians have looked at it, I can tell you that we do have
a couple of options identified and they are in the review and
decision process right now.
And I think if we can get an agreement on doing something
other than what we've been doing, I think we can rectify a lot
of the problems that we're seeing with lack of reporting due to
confidentiality.
If we don't get an agreement, if the people who are
reviewing this stuff like our lawyers and others say no, we
can't do this, then the only alternative is the second part of
your question, do we need legislation? Yeah, that may be what
it comes down to. We might have to revert to voluntary
reporting for some series if there's no other way to get them.
Under voluntary reporting, the people that are reporting
wanted that information public, they didn't care about
disclosure. We could go back and do that again for the series
that we can't get the adequate information on.
But I think you also said something important that you need
to give the department a little time to work this out, and I
appreciate you saying that. Because I think--the way I'm
looking at it the moment sitting here today, I think we can do
something here. Maybe tomorrow that will be a different story,
but today I think we can go do something here.
So with a little more time, hopefully we can start
providing most of the 91 reports we're supposed to be
providing.
Mr. Johnson. Well, thank you, Dr. Collins. And I do realize
that this is complex, more complex than might first meet the
eye to a casual observer. And it does take time to work it
through.
On the other hand, we also want to urge you to be very
expeditious in trying to get this work at the kind of level
that it needs to work with.
Mr. Collins. It is a problem, Mr. Johnson, because there
are producers who have priced for a long time their animals off
of a base price. Now all of a sudden we're not reporting that
base price, and they have to make an adjustment.
That causes a lot of concern that they might be taken
advantage of. So we understand that, and we are working on this
very diligently. We have a big meeting planned on it tomorrow.
Senator Johnson. Very good. If I may, Mr. Chairman, may I
ask one additional brief question?
Senator Cochran. If it suits Senator Dorgan.
Senator Johnson. I should yield to Senator Dorgan.
SPECIAL COUNSEL FOR AGRICULTURE
Let me ask Mr. Nannes just very briefly, Senators Harkin
and Lugar and I worked on legislation last year to create a
special counsel for agricultural position in the DOJ's
Antitrust Division.
Subsequent to our introduction of that legislation,
Attorney General Reno created the position without our bill.
And appointed Mr. Doug Ross to serve in that capacity. Once
again this year, Senators Harkin, Lugar, and I are looking at
this legislation.
Can you shed any light on whether Attorney General Ashcroft
plans to have Mr. Ross continue in that role, or, if not,
whether a new special counsel for agriculture will be
appointed?
Mr. Nannes. I'll try, Senator. Senator, it's my
recollection that the decision to appoint a Special Counsel for
Agriculture in the Antitrust Division last year was actually
made by the Assistant Attorney General.
I have not spoken specifically with Charles James about
what his thoughts are with respect to a special counsel, and
that decision would ultimately rest with him. I do know, as a
general matter, that he is sensitive and understands the issues
associated with the appropriate enforcement of the antitrust
laws in agricultural industries. So it would be my expectation
that he would turn to that matter quite promptly upon his
confirmation.
Senator Johnson. I would appreciate it if you would convey
to Mr. James the strong interest I have and I know numerous
others have that there be a special focus on this effort within
DOJ. And it's my hope that some special counsel will be
appointed. I yield.
Senator Cochran. Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you. Some, myself
included, are concerned that we have kind of a slow motion
bureaucracy in dealing these issues of concentration, and
family farmers get very impatient. I'd like to ask a couple of
questions about these markets.
LESS COMPETITION VS. INCREASED CONCENTRATION
We have the Sherman Act, we have the Clayton Act. You, Mr.
Nannes, talked about section 7 of the Clayton Act. Both Sherman
and Clayton have been interpreted differently over a century,
and sometimes used aggressively, sometimes not used at all.
Is it generally agreed by the three of you that there is
less competition and more concentration in the following
areas--these are markets that family farmers must purchase
from--fertilizer, petroleum, seed, farm equipment. Would you
generally agree that there is more concentration in those
areas? And if there was more concentration, would you then
conclude there is less competition in those areas?
Mr. Collins. I will start. I would agree there is more
concentration. I think the question as to whether there is less
competition, you'd have to go market by market, and I may not
be fully informed on all of them. But I would say that is a
much more difficult question.
Within the economics profession, for example, in meat
packing, I would say there is no consensus. The body of
literature shows some studies would argue that there is the
exercise of market power, that we're not getting competitive
pricing. Other studies would argue that we are getting
competitive pricing.
The seed industry is almost another example on its own
because the seed industry is complicated not only by
concentration but it is complicated by very far-reaching patent
protection. So there are these reach-through-the-chain kinds of
patent protection which confer some market power on firms that
have such patents.
Senator Dorgan. Would you agree the loss of the share of
the food dollar that farmers are suffering? You saw the charts
I used. I would assume you would agree with the direction of
the charts, that you could logically conclude that the loss of
the farmer's share of the food dollar relates to the
concentration of those they sell to and buy from.
Mr. Collins. No, I don't think I could.
Senator Dorgan. Then let me ask it a different way. You
talked about markets that farmers sell into, pork, beef, grain
trade, and so on. Is there general agreement that there has
been substantial increased concentration in those areas?
Mr. Collins. Yes, I agree there has been.
Senator Dorgan. Do you generally agree, to the extent we
teach things in economics that stand the test of time, that
when you have more concentration that competition travels in an
inverse relationship to concentration?
Mr. Collins. Not necessarily. I think you certainly can
have increased concentration, but you can still have a
perfectly competitive outcome in industries, even though they
continue to concentrate.
Beyond some point, and there's no hard and fast rules about
this, I know there are merger guidelines, for example, the
Department of Justice would use, beyond some point they raise a
lot of flags.
You get so few firms that have such high market share that
then the prospect, the probability of anticompetitive pricing
arises. But whether it actually occurs or not requires you to
go in and look at the competitive behavior of the individual
firms. You certainly could have low barriers to entry. You
certainly could have substitute products that are not in that
industry that could constrain price, the exercise of market
power and constrain excess pricing.
Senator Dorgan. Could you have purchase competition with
two competitors in every one of these industries I've described
under your analysis ?
Mr. Collins. Theoretically, yes, but I doubt it. Unlikely.
Senator Dorgan. Is it more unlikely that you have purchase
competition or near purchase competition if you have 4
competitors controlling 80 percent of the industry versus 10
competitors 20 years ago or 30 competitors 50 years ago?
Mr. Collins. I would say that as a probability statement,
yes, the probability is that you would have less competitive
pricing in the more highly concentrated market.
But my problem with saying that with probability one is the
lack of the empirical literature to support it.
FOOD DOLLAR TRENDS TO FAMILY FARM
Senator Dorgan. Let me try one more time for just a moment
on this issue of the shrinking percentage of the food dollar
that is achieved by family farms in this country. To what would
you attribute that trend, if it is not to concentration in the
industries that farmers buy from and sell to? What other
conceivable reason would exist for that?
Mr. Collins. I'll take a shot at that. I haven't looked at
that trend for all time, but I have looked at it since the
1950s. The farm share of the consumer dollar and, by the data
we report, is the value at the farm level of the farm
production that goes into the products bought by consumers--
consumer expenditure for both food at home and food away from
home.
So in 1952 the farm share of that consumer expenditure
dollar was 42 percent. In 1999, it was 20 percent. So it
clearly has gone down, and it's gone down as industries have
concentrated.
The problem with drawing causation effect is there is a lot
of other things have happened too. Over the last 50 years,
we've seen dramatic changes in the structure of our economy.
We've seen women enter the work force. We've seen the demand
for convenience foods. We've seen the movement to eat food away
from home. We've seen the development of microwave ovens and
microwavable food.
INCREASED MARKETING COSTS
Mr. Collins. What we've seen is a tremendous increase in
the marketing costs that go into the retail price. And those
marketing costs are coming because the food that is sold today
is not the same food that was sold in 1950. It has a whole
bunch of services and characteristics associated it with it
that have changed over time to make it fresher, to make more
convenient, and to make it different.
I mentioned the statistic earlier that we were having 1,000
new food introductions in 1970, and we had 16,000 new food
introductions in mid 1990s, and there was also research and
development costs associated with all of these food
introductions.
Senator Dorgan. How many different companies, Mr. Collins?
Mr. Collins. I'm sure it is a much fewer number of
companies.
Senator Dorgan. How many companies do you think market
grains of the cereals at the grocery stores?
Mr. Collins. My guess is the four firm concentration ratio
is about 85 percent.
Senator Dorgan. There's a lot of different products, aren't
there?
Mr. Collins. There's a lot of different products.
Senator Dorgan. Highly concentrated on the grocery store
shelf.
Mr. Collins. All of those different products add to the
cost to the consumer through the research and development in
bringing that kind of product to market.
Senator Dorgan. I understand and I appreciate your
response. When I started economics, we also learned that you've
got to have empirical data to sustain a conclusion. On the
other hand, when you see cars drive at night with their lights
on, one can conclude it's because it's dark out. And----
Mr. Collins. Based on statistics.
Senator Dorgan. Yeah. Let me ask one final question, if I
might, of Mr. Nannes. I would like to submit a list of
questions to the panel. I appreciate the testimony of the
panel.
CLAYTON ACT
Mr. Nannes, do you think there is reason or need to take a
look at changing section 7 of the Clayton Act in any way? I
think your testimony suggested that you think it is working and
perfectly usable. Do you see a need for change at this point?
Mr. Nannes. Senator, my personal view would be not to
change section 7. The statute has been changed a couple of
times over the years. What it forces people to do then is to
substantially recalibrate the extent of permissible and
impermissible transactions and makes business much less
certain.
Right now we have a series of guidelines that have been
published by the Federal agencies and have been out there in
the marketplace for quite a while. I think they are appropriate
in that they set certain benchmarks of concentration levels
that prompt concern, but properly direct the agencies, once
they're looking at a transaction, to try to assess as best we
can the likely competitive effects of the transaction.
It would be difficult, I think, to change it without having
very substantial ripple effects across the broad range of not
only U.S. companies but also foreign companies that have to
deal with our antitrust laws.
Senator Dorgan. Mr. Chairman, we have two other panels, and
I appreciate the testimony of this panel. I must say in
conclusion a whole lot of farmers and ranchers feel they are
victims at this point to a marketplace that is not working to a
marketplace that is highly concentrated both in which they sell
their products and from which they buy their products.
They look to us to be the referees in determining what is
competitive and anticompetitive behavior. And the purpose of
holding this hearing is to plung the depths of some of these
topics, and I appreciate your testimony today.
Senator Cochran. Thank you, Senator. We appreciate your
being here. Thank you very much for your contribution to our
hearing.
We will now call our second panel to the witness table, and
I will introduce them as they are coming up to take their
places.
Mark Dopp is Senior Vice President and General Counsel of
the American Meat Institute. William Roenigk is the senior Vice
President of the National Chicken Council. John Caspers is Vice
President of the National Pork Producers Council. David Reiff
is representing the National Grain and Feed Association. And
Fred Stokes is president of the Organization for Competitive
Markets.
We have copies of the statements that have been prepared by
the members of this panel. We will print those statements in
the record in full and encourage our witnesses to summarize
their statements so we will have an opportunity to discuss the
issues with you in our question period.
PREPARED STATEMENT
I might say also that Senator Durbin of Illinois was here
at the beginning of this hearing and has an opening statement
which we will file and make a part of the record in full.
[The statement follows:]
Prepared Statement of Senator Richard J. Durbin
Mr. Chairman, Senator Kohl, thank you for holding this important
hearing today. First, I'd like to welcome David Reis (pronounced rice)
to this morning's hearing. He will testify later today--on the third
panel--about his experiences with a livestock cooperative in central
and southern Illinois.
David is a fifth generation family farmer from Ste. Marie in Jasper
County, Illinois and the president-elect of the Illinois Pork Producers
Association.
I invited David to come to Washington and to testify today because
of his active involvement in American Premium Foods Co-Op. Over a year
ago, David led a group of pork producers to Capitol Hill to discuss
ways to improve farm prices and the rural economy. He presented an
innovative co-op concept that would ultimately benefit more than 240
independent Illinois pork producers and help stabilize a shaky rural
economy.
Just a few years ago, our nation's pork producers had to struggle
with historic low hog prices that put many producers out of business.
Value-added ventures, such as American Premium Foods, will help small
to medium-sized producers compete in the ever-changing pork industry by
ensuring market access, reducing price risk, and generating greater net
returns.
As you will hear from David, starting a new business isn't easy.
David's story, determination, and common sense approach to marketing
agricultural products are good examples of a farmer who is embracing
modern, 21st Century solutions to old problems.
In addition to David Reis, I want to say a word of welcome to
another Illinoisan, Dan Kelley. Dan is the Chairman of the Board of
Growmark and is from Normal, Illinois. We all recognize Growmark as an
example of a successful and well-established cooperative.
I believe it is a testament to the cooperative system that we have
two Illinois representatives here today. Nationally, there are
approximately 48,000 cooperatives generating more than $500 billion in
annual economic activity. Although this concept of producers working
together is not new, many farmers are finding innovative ways to come
together in order to improve their position in the marketplace.
To help encourage the establishment of value-added cooperatives, I
will be working with my colleague, Sen. Charles Grassley, to fully fund
a Federal grant that helps cover start-up costs for these businesses.
These grants are the only funding dedicated to value-added businesses.
Unfortunately, as currently written, USDA's fiscal year 2002 budget
does not include adequate funding to cover start-up costs for these co-
ops.
Currently the Department has designated $10 million for a round of
these value-added grants. This doesn't begin to cover the growing
demand. More than 200 applications totaling at least $55 million were
recently submitted by cooperatives from throughout the country.
As we look at ways to address concentration in agriculture, we
should not forget that innovative cooperatives are a constructive
answer to helping individual producers maintain competitiveness. User-
owned, user-controlled, and user-benefitted cooperatives can help
family farms survive and thrive.
Thank you, Mr. Chairman. I look forward to working with you and the
Subcommittee to address the needs of our nation's cooperatives.
Senator Cochran. He also wanted me to extend a special
welcome to Mr. David Reis, who is going to be a member of our
third panel.
So let's begin with panel number 2. Mr. Dopp, you may
proceed.
STATEMENT OF MARK D. DOPP, SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, AMERICAN MEAT INSTITUTE
Mr. Dopp. Thank you, Mr. Chairman, other members of the
subcommittee. Since 1906, AMI has represented the nation's meat
and poultry industry, which today employs nearly 500,000
individuals and contributes about $90 billion in sales to the
nation's economy.
Along AMI's member companies, 60 percent are small family-
owned businesses employing fewer than 100 persons. These
companies operate in one of the toughest, most competitive, and
certainly the most scrutinized sectors of the economy. In fact,
adhering just last fall, a former USDA general counsel stated
the meat industry is probably the most studied industry in the
U.S. economy.
Food production, distribution, and marketing sector has
undergone a phenomenal change in the past decade. Consumers
demand a constant and geographically dispersed supply of
consistent quality, low-priced products. This demand has driven
consolidation in the retail sector and, in turn, food
manufactures have consolidated in an effort to keep peace with
the retail and food service customers.
We see similar trends in the healthcare, financial
services, high tech, and other industries.
Tough competition in the meat industry is driving
businesses to operate more efficiently and more aggressively
than ever before. My member companies believe consolidation is
a response to intense competition and marketplace realities. It
is not part of some sinister plot.
Mr. Chairman, mergers and acquisitions are viewed by
today's business and investment community as generally good
developments because they help sustain or strengthen
businesses, they reserve jobs, and often they keep communities
financially healthy.
The fact is it is better for a struggling meat packer to
merge or be acquired and stay in business than for that company
to cease operations costing all of the employees their jobs.
This fact is especially true in smaller rural communities
where meat packing company may be one of the community's larger
employers. Against this economic backdrop, AMI opposed the
various agribusiness antitrust bills that have been introduced
in recent years. Bills that would create new and different pre-
merger review processes and antitrust enforcement procedures
for the agribusiness sector. Allow me to comment on a few
specifics.
One idea would allow USDA to oppose the pre-merger review
opinions of the Justice Department, thus pitting one Federal
agency against another. This idea conflicts with the recent
recommendation of the international competition policy advisory
committee and it would also give USDA access to pre-merger
review documents containing extremely sensitive information
about the affected companies.
Last year GAO issued a report highly critical of grain
inspection Packers and Stockyards Administration. And given
those criticisms, it seems ill advised to confer more authority
on that agency.
Although the bills at issue are intended to save the rural
Americans, we believe they will have the opposite affect. A
merger or acquisition often is the only way to preserve a sales
outlet or input supplier for America's farmers. And bills that
seek to bar such mergers would have a chilling affect on the
already financially ailing agribusiness sector.
Stalling mergers could impede the flow of capital
investment to the agribusiness community and could drive
struggling businesses to close their doors. This hurts not only
the customers and the input suppliers of America's farmers, but
those farmers as well.
Some bills also would affect contracting. Contracts are
important to agribusiness and to farmers because they help
provide stability for buyers and for sellers.
For example, a bank may be more likely to approve a loan to
a farm with contracts for its commodities, thus helping to
finance expansion and efficiency. Currently such contracts are
already subject to a host of Federal and State statutes.
Legislation has been suggested that would set special
requirements for contracts between farmers and agribusinesses
and, in effect, would allow government officials to participate
in the contracting process. This concerns us.
It is one thing to call for a fair and legal contract, it
is quite another to impose unique and ambiguous standards on
one class of business that stem from a fundamental lack of
understanding.
In that regard, we commend USDA's agricultural marketing
service recently for posting on its web site information for
farmers and others about how to understand the growing trend in
contracting. In fact, educational efforts are probably a far
better solution than legislation in this case.
Also of concern is the impact these bills will have on
trade. Exports are key to the growth and viability of the
livestock and meat industry. But competition is fierce. For
example, U.S. exporters struggling for a share of markets in
the Far East face very difficult competition from Canadian,
Australian, New Zealand, Danish, and Argentine meat packers.
To the extent that the U.S. government adopts policies that
increase the regulatory burden on American meat producers and
processors or impedes structural adjustments that promote
efficiency, U.S. meats become more costly and less competitive
in foreign markets, and we risk losing market share.
Prepared statement
In conclusion, the meat industry is but one of numerous
sectors in the agribusiness community that would be hurt by the
bills at issue. I urge you not to single out the agribusiness
community for a different approach to pre-merger reviews and
antitrust enforcement. Thank you for the opportunity to appear
today, and I'd be happy to answer any questions.
[The statement follows:]
Prepared Statement of Mark D. Dopp
My name is Mark Dopp and I am senior vice president and general
counsel of the American Meat Institute. AMI has provided service to the
nation's meat and poultry industry--an industry that employs nearly
500,000 individuals and contributes about $90 billion in sales to the
nation's economy--for more than 94 years.
Among AMI's member companies, 60 percent are small, family-owned
businesses employing fewer than 100 individuals. These companies
operate, compete, sometimes struggle and mostly thrive in what has
become one of the toughest, most competitive and certainly the most
scrutinized sectors of our economy: meat packing and processing. In
fact, at a hearing just last fall, a former USDA General Counsel stated
that the meat industry is probably the most studied industry in the
U.S. economy. I believe my member companies, who have cooperated with
USDA, the General Accounting Office and many other interest groups and
academic researchers on numerous studies, would agree with that
assessment.
The food production, distribution and marketing sector has
undergone phenomenal change in the past decade. Consumers today demand
a constant and geographically dispersed supply of consistent quality,
low-priced products. This demand has driven consolidation in the retail
sector. Whether it's Home Depot for handyman supplies or McDonalds for
burgers or Safeway for groceries, the American consumer has driven and
benefited from this retail consolidation. In turn, food manufacturers
have consolidated in an effort to keep pace with their retail and
foodservice customers. And many that supply goods or services to food
manufacturers--such as farmers, equipment or ingredient suppliers--have
also consolidated. We see the same trends in the healthcare, financial
services, pharmaceutical, telecommunications, airline, banking,
automobile manufacturing and high-tech industries.
My member companies would argue that consolidation is a reaction to
intense competition and marketplace realities. It is not--as some have
suggested--some sinister plot in and of itself. Tough competition in
the meat industry is driving businesses to operate more efficiently and
more aggressively than ever before. And sometimes, that competition has
meant that businesses choose to merge or to acquire or to be acquired
in order to stay in business.
Mr. Chairman, mergers and acquisitions are viewed by today's
business and investment community as generally good developments,
because they help sustain or strengthen businesses, they preserve jobs
and many times they keep communities financially healthy. Let's face
it--it is better for a struggling meatpacker to merge or be acquired,
and stay in business, than for that company to cease operations and
release all of its employees. This fact is especially true in smaller,
rural communities, where a meatpacking company may be one of the
community's larger employers.
Against this economic backdrop, AMI's Board of Directors strongly
opposes the agribusiness antitrust bills that have been introduced in
recent years that would create new and different premerger review
processes and antitrust enforcement procedures for the agribusiness
sector.
REENGINEERING ANTITRUST ENFORCEMENT
One concept that has been discussed would give USDA the ability to
oppose the pre-merger review opinions of the Justice Department, thus
pitting one Federal agency against another. This idea conflicts with
the recent recommendation of the International Competition Policy
Advisory Committee (antitrust experts appointed by the U.S. Department
of Justice).
Such a process would add uncertainty to the application of
antitrust statutes. It would also give USDA access to pre-merger review
documents containing extremely sensitive information about the affected
companies (known as Hart-Scott-Rodino filings). Sharing such
proprietary information with yet another government agency may well
jeopardize its confidentiality, damaging the affected companies, their
shareholders and investors, as well as their suppliers and customers.
GAO last year issued a report highly critical of USDA's Grain
Inspection/Packers and Stockyards Administration (GIPSA). Given those
criticisms of GIPSA, I suggest that any efforts to confer greater
authority or responsibilities to that agency are, if not ill advised,
certainly ill timed.
Other bills have proposed even broader changes to antitrust
enforcement, affecting not only agribusiness, but also agriculture-
related businesses. Specifically, those bills would affect all
businesses that process agricultural commodities, as well as those who
do business with the agriculture sector. For example, it has been
proposed that businesses as diverse as banks, textile manufacturers,
food processors, supermarkets, paper mills, tobacco companies, seed
companies and farm machinery manufacturers to file separately with USDA
(in addition to the USDOJ) for pre-merger review and approval. These
businesses would be required to disclose highly confidential
information about contractual relationships and business alliances with
USDA each year.
UNINTENDED CONSEQUENCES
Although these types of bills are intended to assist rural
Americans, we believe they will have quite the opposite effect. It is
important to remember that a merger or acquisition often is the only
way to preserve a sales outlet or an input supplier for America's
farmers. We believe these bills will have a chilling effect on the
already financially-ailing agribusiness sector by creating obstacles to
mergers and requiring the sharing of proprietary business information.
Stalling mergers will impede the flow of capital investment to the
agribusiness community and may well drive struggling businesses to
close their doors rather than wade through a new morass of complicated
pre-merger approval processes. The customers and input-suppliers of
America's farmers will be hurt, and this will hurt, not help, America's
farmers.
MANDATING NEW TERMS FOR AGRIBUSINESS CONTRACTS
A growing number of transactions between agribusinesses and farmers
involve contracts. Provisions in these contracts cover everything from
the quality of the agricultural commodity to its method or date of
delivery to its volume to its price. Contracts provide a degree of
stability for both buyers and sellers. For example, banks may be more
likely to approve loans to farmers who hold contracts for their
commodities; thus farmers benefit from the financial security offered
by contracts. Currently, contracts between agribusinesses and farmers
are developed on a case-by-case basis, guided by the Uniform Commercial
Code and applicable provisions of the Packers and Stockyards Act, the
Perishable Agricultural Commodities Act and other Federal and State
statutes. Legislation to create new requirements for contracts between
farmers and agribusinesses will have significant, negative legal and
business implications.
Within some states and here in the U.S. Senate, some are
considering legislation that would set special new requirements for
contracts between farmers and agribusinesses. In general, the bills
would mandate all contracts between farmers and agribusinesses to
include a ``clear written disclosure statement'' describing material
risks of the contract to the farmer. They would also require that the
disclosure statement meet a host of ``readability requirements,'' such
as ``ten-point modern type, one-point leaded,'' being written in
``clear and coherent language using words and grammar that are
understandable by a person of average intelligence, education and
experience within the industry'' and the inclusion of a ``mandatory
cover page.'' The mandatory cover page must include this statement,
``READ YOUR CONTRACT CAREFULLY. This cover sheet provides only a brief
summary of your contract. This is not the contract and only the terms
of the actual contract are legally binding. The contract itself sets
forth, in detail, the rights and obligations of both you and the
contractor or processor. IT IS THEREFORE IMPORTANT THAT YOU READ YOUR
CONTRACT CAREFULLY.''
Some of the state bills also provide for each state attorney
general or other, suitable official to review agricultural contracts
and certify that they meet the requirements of the law. In the Senate
bill, the Secretary of Agriculture would have this responsibility. The
bill would also void all provisions of any agricultural contract that
are confidential. We have serious concerns about the ambiguous
provisions of this kind of legislation. It is one thing to call for a
fair and legal contract. It is quite different to impose unique and
ambiguous standards for one class of business that frankly stem from a
lack of understanding. USDA's Agricultural Marketing Service should be
commended for recently posting on its website new information for
farmers and others on how to understand the growing trend of
contracting. In fact, educational efforts are probably a far better
solution than legislation in this case.
the importance of international trade
Exports hold the key, in fact will be the primary engine, to the
future growth and viability of the U.S. livestock and meat industry.
Whether we like it, the long-term viability of the sector depends on
our ability to compete in world markets. U.S. exporters struggling for
a share of many of the promising, newly invigorated markets in the Far
East are facing ferocious competition from Canadian, Australian, New
Zealand, Danish and Argentine meat marketers. To the extent the U.S.
government adopts policies that increase the regulatory burden on U.S.
meat producers and processors or impede structural adjustments that
promote efficiency, U.S meats become more costly and less competitive
in foreign markets and we risk losing all-important market share.
We should remain focused on the fact that we are participating--or
attempting to participate--in a global marketplace. Misguided
decisions, intended to benefit one segment of the industry, could
easily backfire to the detriment of the entire industry if such actions
have the ultimate effect of pricing our meat products out of
international markets.
CONCLUSION
The meat industry is but one of numerous sectors in the
agribusiness community that would be hurt by antitrust or contract
reform bills of the type begin contemplated. In addition to AMI, these
bills are opposed by organizations as diverse as the antitrust section
of the American Bar Association, to the National Association of
Manufacturers, the U.S. Chamber of Commerce, the Grocery Manufacturers
of America, the Food Marketing Institute and virtually all food and
commodity processing organizations. I urge you not to single out the
agribusiness community for a different approach to premerger reviews
and antitrust enforcement. Thank you for the opportunity to appear
before you today.
Senator Cochran. Thank you. Mr. William Roenigk, Senior
Vice President of the National Chicken Council. Mr. Roenigk,
you may proceed.
STATEMENT OF WILLIAM ROENIGK, SENIOR VICE PRESIDENT,
NATIONAL CHICKEN COUNCIL
Mr. Roenigk. Good morning. Thank you, Mr. Chairman, Senator
Dorgan, and the other committee members for the opportunity to
present the National Chicken Council's comments regarding
agricultural market concentration. I will summarize my written
comments.
I am Bill Roenigk, Senior Vice President of the National
Chicken Council. Our organization represents companies that
produce, process, and market about 95 percent of the birds in
the United States. Almost without exception, these firms are
vertically integrated from the live bird to delivery of
consumer-ready products to the market.
These companies contract with independent farmers to have
them manage breeder hatchery supply flocks and grow flocks of
broilers. This arrangement has been the standard business model
for the U.S. broiler industry since the late 1950s.
Last year's production of broilers was 20 times the amount
in 1950. We believe such an impressive record of consistent
growth is a good evidence that the system is serving well
consumer, contract growers, and broiler companies.
At the same time, we've experienced this expansive
production, the broiler industry, like many other parts of
agriculture and agribusiness, continue to move towards fewer
but larger survivors. There are currently about 45
commercially-sized broiler companies.
As consolidation occurs, however, very few operating assets
cease production. Also I'm not aware of contract growers having
their operations disrupted by this trend towards consolidation.
If we could use GIPSA's latest annual report as a gauge of
performance, I believe if you review that, you will conclude,
like I do, that the industry's record is excellent, especially
for the larger, more established firms.
There are many factors and pressures driving the U.S.
Poultry industry towards fewer but larger companies. Continued
intense competition within our own business and with competing
red meat industry requires companies to have the financial
resources to sustain operations during prolonged periods of
less than satisfactory levels of financial returns. That means
losses.
The customers in the food sectors, whether they are
supermarkets, restaurants, institutional buyers of raw material
are not only becoming fewer and larger but more and more these
companies are emphasizing centralized purchasing of products
such as chicken.
As intense as the domestic market is, I believe the
international markets are just, if not more so, demanding of
the suppliers to the global market. These companies must be of
adequate size to provide significant quantities of products.
Being able to accept certain levels of market risk in the
international markets also tilts the chances for success
towards larger firms.
The dynamics of globalization are changing world markets.
Dr. Bruce Babcock with Iowa State University last month told
the Senate Agriculture Committee that the real action for U.S.
agriculture exports is no longer grain and oil seed commodities
but rather value added further processed products such as
poultry, red meat, and similar products.
The National Chicken Council believes with the right
regulatory and legislative and economic environment, the U.S.
Poultry industry can continue to build exports that will help
strengthen U.S. agriculture and the general economy.
Last year our industry exported over 18 percent of our
production. I believe within 5 years more than one out of four
pounds of U.S. chicken will be exported.
Also last month Secretary of Agriculture, Ann Veneman,
expressed views similar to Dr. Babcock's. She noted that the
sectors or the links in a food chain are more interconnected
than ever because we have changing consumer markets demanding
increasingly challenging the traditional ways of doing
business.
Technology in many areas is transforming world markets and
global relationships. The United States, according to the
secretary, must have agricultural producers who can rapidly
respond to the changes in global markets and all involved
should recognize the interdependencies of the links in the food
chain.
Prepared statement
I believe Dr. Babcock and Secretary Veneman are correct in
their assessments. It is time for us all to work across the
links in the food chain to grow the opportunities for all of
us.
I appreciate the opportunity to share the National Chicken
Council's views with the committee.
[The statement follows:]
Prepared Statement of William P. Roenigk
Thank you, Chairman Cochran, Senator Kohl, and Committee Members
for the opportunity to present the National Chicken Council's views and
recommendations regarding the very important issue of agricultural
market concentration. The National Chicken Council appreciates the
Chairman's invitation to be part of this very vital discussion. I am
William P. Roenigk, Senior Vice President of the National Chicken
Council.
The National Chicken Council represents companies that produce and
process about 95 percent of the young meat chickens (broilers) in the
United States. These vertically-integrated firms contract with growers
to raise the live birds for processing and contract with breeder
farmers to supply fertile eggs for hatching. The system of production,
processing and marketing is highly coordinated and operates using the
just-in-time method. Given the relatively short time from day-old chick
to market-ready chicken, it is critical that such a system be in place
and that all parts of the system operate in concert.
VERTICAL INTEGRATION
During the 1950s and 1960s broiler production and processing
evolved into the vertically-integrated industry structure that has been
the standard business model for five decades. Last year more than 8
billion broilers weighing over 41.5 billion pounds, liveweight, were
produced. This production level last year was 20 times the amount in
1950. Few, if any, agribusinesses can match this record of growth.
Success for achieving this amazing growth is based on providing
wholesome, high-quality food while making chicken a better food dollar
value essentially year after year. We believe the system has well
served consumers, growers, and processors.
Contract growers and processors are mutually dependent on each
other. It is in neither party's interest to jeopardize the economic
viability of the other party. Almost one-half of all contract broiler
growers have grown for the same processor for at least ten years and an
additional 25 percent have contracted with the same company for five to
nine years. Many growers have requested the opportunity to build more
growout housing so that they can expand their operations. Further, most
processors have waiting lists of other farmers who wish to begin
growing broilers. The stability and success of the contract system for
broilers has been good for agriculture.
REGULATORY AUTHORITY
The contractual relationship between broiler growers and the
broiler firms is regulated by USDA's Grain Inspection and Packers and
Stockyards Administration's (GIPSA). Periodically, this relationship is
reviewed by Congress. In 1987, the administrative enforcement authority
(including civil money penalty authority) of GIPSA with respect to
transactions involving live poultry and poultry products was fully and
carefully considered by Congress. Congress declined to provide more
authority to GIPSA for any violations of the Packers and Stockyards Act
(P&S Act) other than those relating to prompt payment and the statutory
trust for live poultry dealers. NCC is not aware of conditions that
have changed or developments that have occurred since 1987 that would
warrant Congress reversing its decision.
Also, at certain times GIPSA argues that it needs authority to
proceed administratively against, and impose civil penalties on,
poultry processors who violate the P&S Act's prohibition against unfair
or deceptive practices. GIPSA says such authority is needed because it
has this authority already for the red meat industry.
As previously noted, poultry is produced, processed, and marketed
in a very coordinated, vertically-integrated system. This business
model's structure is distinctly different than the methods used in many
other agribusinesses. Because young meat chicken is produced,
processed, and marketed in a distinctly different system and because
the vertically-integrated firms have successful, on-going contractual
relationships with their growers, it is unnecessary to burden business
with additional government regulations.
In short, unlike the situation in the production systems that are
not closely-linked from production to processing to markets, private
actions for breach of contract under common law contract principles, as
well as under statutory provisions protecting growers, are available to
police relationships among poultry growers, dealers, and processors,
thereby going a long way to ensure fair dealing for all. This legal
point about contractual obligations is important, but often overlooked
in the discussion of the broader issue of regulating contractual
relationships.
GIPSA, together with other government agencies, has more than
adequate authority to ensure fair dealing within the poultry industry.
First, GIPSA has authority to issue cease and desist orders and levy
civil penalties for violations of the P&S Act's protections regarding
prompt payment and the statutory trust. Second, GIPSA may investigate
and refer to the Department of Justice for enforcement in the Federal
Courts other violations of the P&S Act involving live poultry (for
example, weighing practices and contract compliance). Finally, the P&S
Act gives the Federal Trade Commission jurisdiction over marketing
practices involving poultry products. There exists ample oversight and
authority for poultry.
Regarding broiler companies performance with respect to GIPSA
regulations involving contract growers, the 2000 Annual Report of the
Grain Inspection, Packers and Stockyards Administration report, we
believe, gives the industry high marks. For example, GIPSA investigated
during fiscal year 2000 the operations of 97 live poultry dealers.
Nearly 44 percent of these investigations were the result of complaints
received from contract growers. GIPSA investigations are designed to
determine whether the contract settlement terms of live poultry dealers
throughout the United States are deceptive or unfair to the growers who
grow poultry under these agreements. According to the annual report,
one violation was found and the company resolved the issue through a
consent agreement.
Regarding protection for contract growers to be assured they
receive payments, there are safeguards. In February 1988, the P&S Act
was amended to include a statutory trust provision similar to the
packer trust giving payment protection to live poultry growers and
sellers. Since the 1988 amendments, live poultry producers have been
paid $7.5 million under the statutory trust provisions. It is important
to note, however, that during the twelve years since 1988 tens of
billions of dollars in contract payments have been made on a regular,
steady basis whether the market for chicken was robust or less-than-
robust. The poultry trust payouts reflect claims for unpaid purchases
of all types of poultry, including broilers, turkeys, and spent fowl.
GIPSA in its annual report said ``(i)t (trust payouts) primarily
shows the failure of small regional firms that have ceased operations
and failed to pay growers or poultry sellers. It does not accurately
portray an economic trend for the industry as a whole but only reflects
a sum of the failures of small marginal operations. The national firms
are large, completely integrated operations that are relatively stable
financially. Any changes that occur are the results of mergers or sales
of the total operation and do not usually result in losses to poultry
growers or sellers.'' In fiscal year 2000, one poultry trust complaint
was received by GIPSA, resulting in over $250,000 in payments to live
poultry producers, the agency noted. Given the experience since 1988,
it can be reasonably concluded that the statutory trust provision for
poultry works and does provide adequate protection.
CHANGING MARKETS
Although the U.S. poultry industry does not have the same degree of
market concentration as certain other meat processing industries, it
clearly is experiencing the same marketplace dynamics that are
occurring in many, if not most, food sectors. Intense competition
within the chicken business and within the competing meat complex
requires companies who want to be survivors to more carefully and
adroitly analyze the changing markets. Then, of course, the real
challenge is to convert the results of the analysis into a successful
marketing plan.
Market pressures to meet the requirements of large national food
chains, whether supermarkets or foodservice, is one major factor
driving chicken companies to expand through acquisitions, resulting in
a continued trend toward industry consolidation. However, the pressure
is not just domestic. International demands are also increasing the
global pressures on U.S. chicken companies.
A recent statement to the Senate Agricultural Committee by Dr.
Bruce A. Babcock/Center for Agricultural and Rural Development, Iowa
State University summarized this situation. He told the Committee. . .
. ``(a) significant change that has taken place over the last 10 years
is the greater integration of world agricultural markets. Increased
integration means that agricultural commodities will flow more readily
to markets that offer a price premium. From an economist's perspective
this means less price variability across markets and less price
variability within domestic markets. From agriculture's perspective,
greater integration means more competition and a greater need to
deliver products that the world's consumers want. A farm bill that
gives U.S. agriculture the right incentives to deliver the kinds of
food products overseas customers want will enhance the long-term health
and competitiveness of the sector.''
Dr. Babcock also explained the future success for U.S. agriculture
is likely to be capturing the trend toward more exports of value-added
products, such as poultry and other animal products, rather than
traditional commodities. To meet anticipated strong world demand, U.S.
poultry and livestock producers must be competitive with favorable
costs and high-quality products. In his testimony, he expressed his
conclusion as follows, ``(c)onsider the economic changes that have
taken place over the last 10 years. Ten years ago, program commodities
broadly defined (grains, feeds cotton, oilseeds and oilseed products)
accounted for 64 percent of the value of agricultural exports. In 2000,
they accounted for 49 percent. We project they will account for even
less in the future. The United States faces increased competition in
bulk grain and oilseed export markets. Export demand for higher-value
commodities, such as meat, processed foods, and fruit responds directly
to increased per-capita income levels. Thus, continued world economic
growth will result in relatively greater demand for U.S. exports of
these higher-value commodities.'' \1\
---------------------------------------------------------------------------
\1\Bruce A. Babcock, Center for Agricultural and Rural Development,
Iowa State University. Testimony Before The United States Senate
Committee on Agriculture, Nutrition and Forestry, April 25, 2001.
---------------------------------------------------------------------------
The important point is that the United States must maintain and
improve a regulatory, legislative, and economic environment that will
permit agribusiness to create, connect, and grow to meet this world
demand for animal agriculture products.
A similar conclusion was recently expressed by Secretary of
Agriculture Ann M. Veneman when she spoke at a recent agribusiness
forum. The Secretary explained that the changing and increasingly
demanding global market for U.S. agriculture products is impacting the
basics of American agriculture. Last month she said, ``(s)eventy years
later, it no longer makes sense to speak of the ``farm economy'' as if
it exists in some kind of vacuum. Today we must look at the entire food
chain. The various sectors of the food economy are more interconnected
than they've ever been, and they grow more interconnected every day.
U.S. agriculture operates in a global, high-tech, consumer-driven
environment. Capital and information flow instantly between buyer and
seller. And changing consumer demands are challenging existing
marketing institutions and traditional ways of doing business.''
The Secretary noted that multinational companies source raw
materials from all over the world, process them and then sell
throughout the world. Increasingly, she added, the global marketplace
is being driven by consumers who demand quality, safety, health, and
convenience, and who grow ever-more affluent. These globally-oriented
firms need to create and maintain flexible relationships, strategic
partnerships, and other alliances across the old boundaries that used
to separate producers from processors from retailers, the Secretary
explained.
Transforming world markets, Secretary Veneman said, are the
technological improvements in transportation, storage and food science.
Information technology is also vastly improving efficiency in all links
of the food chain. Biotechnology is generating new products that make
farmers more productive and consumers healthier. Further, the Secretary
said many links of the food chain have changed, and will continue to
change. For the U.S. broiler industry as it works to meet the stepped-
up demands of the marketplace, Secretary Veneman's analysis could not
be more correct.
Although Secretary Veneman's focus was on agricultural policy her
analysis and recommendations clearly apply to the policy issues
involving agricultural market concentration. She summarized the current
agricultural market situation by noting that ``(a)n agricultural policy
for the 21st century should be one that can respond to the rapidly
changing structure of global markets. It should be one that recognizes
the interdependencies of the food chain. The success of input
suppliers, farmers, processors, distributors, retailers, and consumers
all depend on one another. The best path to an agricultural policy
under which each of these segments of the food industry can prosper is
to have each segment come to the table and work together to design the
next generation of agricultural policies.'' \2\ We agree.
---------------------------------------------------------------------------
\2\ Ann M. Veneman, Secretary of Agriculture, The Sparks Companies
9th Annual Food & Agricultural Policy Conference, April 17, 2001,
Washington, DC.
---------------------------------------------------------------------------
CONCLUSION
Today's and tomorrow's market forces compel U.S. agribusiness to
work across the links in the food chain to grow the opportunities for
all. It is not a time to legislate and regulate about how best to
arrange the links in the food chain.
The National Chicken Council is pleased to have this opportunity to
provide our input. We look forward to working with the Subcommittee and
other interested groups to address the issue of agriculture market
concentration in a thoughtful, productive way.
Senator Cochran. Thank you very much.
Mr. Caspers, welcome.
STATEMENT OF JON CASPERS, VICE PRESIDENT, NATIONAL PORK
PRODUCERS COUNCIL
Mr. Caspers. Thank you, Mr. Chairman and members. I am a
pork producer from Swaledale, Iowa, and serve as Vice President
of the National Pork Producers Council.
Today I'm representing America's pork producers, and I'm
pleased to discuss with you what we believe is a growing
critical need for Federal Government investment and action
regarding agriculture concentration.
Agricultural concentration is a difficult and emotionally
charged issue. Many producers are concerned about their ability
to continue to compete and maintain market access in a hog
market that is experiencing increasing levels of concentration.
We need your help and understanding the relevant issues in
order to take appropriate actions to assure an efficient
marketplace that accurately rewards producers while providing
an abundant supply of affordable, safe, and nutritious pork.
The concentration in the pork packing sector is measured by
the four firm concentration ratio or CR4, grew from 32 percent
in 1985 to 56 percent in 1998. GIPSA's 2000 annual report shows
a CR4 of 56 in 1999. And the eight firm concentration ratio now
stands in excess of 75 percent.
While not guaranteeing--not a guarantee of non-competitive
conduct that increases consumer prices and producer prices,
these levels and their trends increase the possibility of such
conduct and provide ample incentive for ongoing research and
heightened vigilance.
The CR4 for the hog production segment has grown from
negligible levels in the early 1980s to about 18 percent
following the 1999 acquisition of Carroll's Foods and Murphy
Family Farms by Smithfield and the 2000 purchase of Lundies by
Premium Standard Farms.
Vertical integration of packers owning hogs has grown from
an estimated 6.4 percent in 1994 to roughly 24 percent today.
The recent efforts of Tyson Foods to buy IBP brought this topic
back to the forefront. We'll also submit a research paper
commissioned by NPPC as part of the official record for this
hearing. I believe it provides valuable insight into the
relevant economic issues that should be considered in cases of
mergers, especially those that involve vertical integration as
well.
In addition to increasing vertical integration, vertical
coordination through marketing contracts is increasing rapidly.
As recently as 1994, 71 percent of hogs were sold in the cash
market and only 20 percent were sold using a formula price. In
January 2001, 82.7 percent were purchased through some type of
contractual marketing agreement and only 17.3 percent were cash
market purchases.
This trend has reduced the size of the negotiated hog
market substantially and caused many concerns about the
efficiency and accuracy about today's price discovery process.
These concerns become even more acute when one considers that
the price is 17 percent of the hogs sold through cash market
transactions, directly sets the price for the 54 percent of all
hogs that are sold on formula price contracts.
Firms are getting larger and controlling larger market
shares at every level of the pork industry, including
production, packing, processing, and retailing.
There's no doubt that this increased concentration
increases the possibility for non-competitive behavior. To that
end, the Federal Government must be diligent and aggressive in
enforcing the Sherman Act, the Federal Trade Commission Act,
the Clayton Act, and the Packers and Stockyards Act.
Attacking perceived agricultural concentration problems
with a regulatory or judicial acts may not, however, be as
beneficial as sharpening the acts with more knowledge about
today's firms and systems and how they work.
In fiscal 1992, Congress appropriated $500,000 for USDA to
conduct a study of concentration in the red meat packing
industry. The vast majority of these funds were spent
investigating the fed cattle and fed beef segments, which and
are still among the most highly concentrated in agriculture.
Since that time, though, the pork industry has changed more
rapidly and more dramatically than virtually any other ag
sector. MPBC has repeatedly asked Congress to pay the same kind
of attention to the knowledge and understanding level of the
pork industry that it paid to the beef industry in 1992. I
renew that request today.
Specifically MPBC emplores this committee to approve
appropriations for the following research. First of all, the
Department of Agriculture should fund studies on hog market
structure and competitiveness issues within the pork industry.
All lying present realities, future scenarios, and the
implications for producers' economic well-being in our nations
food supply.
These studies would be similar to those done in the early
1990s for beef. We estimate they would cost approximately
$750,000.
Secondly, to establish a yardstick against which claims of
price discrimination could be compared, the Department of
Agriculture should fund a study of the factors that comprise
economically justifiable price differentials, including factors
such as volume, time of delivery, carcass specifications, et
cetera.
Such research may involve detailed work on packing plant
and packing firm economics, a portion of which MPBC has already
initiated and would be willing to share with USDA researchers
as part of a comprehensive research effort. We estimate this
project could be completed for approximately $400,000.
Thirdly, a study of the threshold levels of standard
concentration measures used by the Department of Justice to
trigger scrutiny or investigation of mergers should be
conducted. We believe the study should focus on current
threshold levels, why they are used, and most importantly,
whether they're applicable to a market for highly perishable
products such as livestock. We estimate such a study could be
completed for $150,000.
In summary, MPBC realizes guaranteeing U.S. agricultural
producers have a fair, transparent, and competitive market for
their products is a huge and continuing challenge. MPBC is
ready and willing to work with you and the subcommittee on
agriculture concentration issues.
Before closing, Mr. Chairman, I want to also point out that
USDA is still not to date fully carried out its full
legislative mandate under Mandatory Livestock Reporting Act of
1999.
To its credit, USDA is making progress on a number of the
mandated programs including the mandatory price reporting
system, the monthly hogs, and PGGs report and improved retail
meat price data.
But some mandated programs like the required reporting of
separate counts that barrow, gilt slaughter and yard alleys
have even to be designed. If this was due to funding, we would
urge this committee to rectify the situation at once.
Prepared statement
Mr. Chairman, cooperation driven by information and
knowledge rather than concentration is the key to finding
reasonable long term solutions to the complex issue of ag
concentration.
That concludes my comments. Thank you for the opportunity
to share National Pork Producers' views on this important
issue.
[The statement follows:]
Prepared Statement of Jon Caspers
Mr. Chairman and Members of the Subcommittee: My name is Jon
Caspers. I am a pork producer from Swaledale, Iowa and serve as the
Vice-President of the National Pork Producers Council (NPPC). Today, I
am representing America's pork producers and am pleased to discuss with
you what we believe is a growing, critical need for Federal government
investment and action regarding agriculture concentration.
Agricultural concentration is a difficult and emotionally charged
issue. It has become more-so as congressional committee after
congressional committee has held hearing upon hearing and yet done
little tangible work to even understand the critical issues. Many pork
producers are concerned about their ability to continue to compete and
maintain market access in a hog market that is experiencing increasing
levels of concentration. We need your help in understanding the
relevant issues in order to take appropriate actions to assure an
efficient marketplace that accurately rewards producers while providing
an abundant supply of affordable, safe, nutritious pork.
pork industry concentration
Allow me to update you and Subcommittee members on the current
status of concentration and vertical coordination in the pork industry.
Concentration in the pork packing sector as measured by the 4-firm
concentration ratio (CR-4) grew from 32.2 percent in 1985 to 56.3
percent in 1998. GIPSA's 2000 Annual Report shows a CR4 of 56 in 1999.
The market shares of Smithfield, IBP, Swift and Excel are currently
included in this measure of total market share. The eight-firm
concentration ratio now stands in excess of 75 percent. While not a
guarantee of non-competitive conduct that increases consumer prices
and/or reduces producer prices, these levels and their trends increase
the possibility of such conduct and provide ample incentive for ongoing
research and heightened vigilance.
The CR-4 for the hog production segment has grown from negligible
levels in the early 1980s to about 18 percent following the 1999
acquisition of Carroll's Foods and Murphy Family Farms by Smithfield
Foods and the 2000 purchase of Lundy's by Premium Standard Farms. The
market shares of Smithfield, Premium Standard Farms, Seaboard and
Prestage comprise this figure.
Vertical integration of packers owning hogs has grown from an
estimated 6.4 percent in 1994 to roughly 24 percent today. Smithfield,
Premium Standard Farms, Seaboard, Excel, and Farmland are the companies
contributing the most to this total. The recent efforts of Tyson Foods
and Smithfield Foods to buy IBP, Inc. brought this topic back to the
forefront. I also submit a research paper commissioned by NPPC and
authored Dr. Clem Ward of Oklahoma State University, Dr. Steve Meyer of
NPPC and Dr. Azzadine Azzam of the University of Nebraska as part of
the official record of this hearing. I believe it provides valuable
insight into the relevant economic issues that should be considered in
cases of mergers, especially those that involve vertical integration as
well.
In addition to increasing vertical integration (which NPPC defines
as actual ownership of hog production by a packer or of packing by a
hog producer), vertical coordination through marketing contracts is
increasing rapidly. As recently as 1994, 71 percent of the hogs were
sold on the cash market transactions and only 20 percent were sold
using a price formula. In January 2001, 82.7 percent were purchased
through some type of contractual marketing agreement and 17.3 percent
were cash market purchases. This trend has reduced the size of the
negotiated hog market substantially and caused many concerns about the
efficiency and accuracy of the today's price discovery process. These
concerns become even more acute when one considers that the price of
the 17.3 percent of hogs sold through cash market transactions directly
sets the price for an additional 54 percent of all hogs that are sold
on formula-priced contracts.
what should congress do
Firms are getting larger and controlling larger market shares at
every level of the pork industry, including production, packing,
processing and retailing. There is no doubt that this increased
concentration increases the possibility for non-competitive behavior.
To that end, the Federal government must be diligent and aggressive in
enforcing the Sherman Act, Federal Trade Commission Act, Clayton Act
and Packers and Stockyards Act. We urge the Congress and the
Administration to clearly communicate their resolve for such aggressive
enforcement and, wherever appropriate, to act upon that resolve.
Attacking perceived agriculture concentration problems with a
regulatory or judicial axe may not, however, be as beneficial as
sharpening that axe with more knowledge about today's firms and systems
and how they work. In fiscal 1992, Congress appropriated $500,000 for
USDA to conduct a study of concentration in the red meat packing
industry. The vast majority of these funds were spent investigating the
fed cattle and fed beef segments which were (and still are) among the
most highly concentrated in agriculture.
Since that time, though, the pork industry has changed more rapidly
and more dramatically than virtually any other agricultural sector.
NPPC has repeatedly asked Congress to pay the same kind of attention to
the knowledge and understanding level of pork industry that it paid to
the beef industry in 1992. As forcefully as respect for the members of
this committee will allow, I renew that request today. Specifically,
NPPC implores this committee to approve appropriations for the
following research:
--Hog Market Structure & Competitiveness Study.--The Department of
Agriculture should fund studies on hog market structure and
competitiveness issues within the pork industry, outlining
present realities, future scenarios and the implications for
producers' economic wellbeing and our nation's food supply.
These studies would be similar to those done in the early 1990s
for beef. We estimate that they would cost $750,000.
--Study of Justifiable Price Differentials.--To establish a yardstick
against which claims of price discrimination could be compared,
the Department of Agriculture should fund a study the factors
that comprise economically justifiable price differentials,
including factors such as volume, time of delivery, carcass
specifications, etc. Such research may involve detailed work on
packing plant and packing firm economics, a portion of which
NPPC has already initiated and would be willing to share with
USDA researchers as part of a comprehensive research effort. We
estimate that this project could be completed for $400,000.
--Study of DOJ Concentration Threshold Levels.--A study of the
threshold levels of standard concentration measures
(Herfendahl-Hirshman Index, Concentration Ratios, etc.) used by
the Department of Justice to trigger scrutiny or investigation
of mergers should be conducted. We believe the study should
focus on the current thresholds, why they are used and, most
importantly, whether they are applicable to a market for a
highly perishable product such as livestock. We estimate that
such a study could be completed for $150,000.
In addition to funding these projects, Congress should stipulate
that they be carried out in a timely fashion. The study of meat
industry concentration funded in fiscal 1992 was published in February
1996 largely due to delays in program implementation and to lengthy
reviews within USDA that many observers felt were unnecessary. These
delays invited criticism of the work even before it was published and,
we believe, unfairly reduced its credibility. It was a piece of
outstanding economic research that was discredited because of an
appearance of timidity and uncertainty. When you fund these pork
industry projects, please do everything in your power to see that they
do not meet the same fate.
SUMMARY
NPPC realizes that guaranteeing U.S. agricultural producers a fair,
transparent and competitive market for their products is a huge and
continuing challenge. NPPC is ready and willing to work with you and
the Subcommittee on agriculture concentration issues.
Before closing, Mr. Chairman, I want to also point out that USDA
has still not, to date, fully carried out its full legislative mandate
under the Mandatory Livestock Reporting Act of 1999. To its credit,
USDA is making progress on a number of the mandated programs, including
the mandatory price reporting system, monthly hogs and pigs reports and
improved retail meat price data. But some mandated programs, like the
required reporting of separate counts of barrow slaughter and gilt
slaughter, have, to our knowledge, yet to even be designed. If this is
due to funding, we urge this committee to rectify the situation at
once.
Mr. Chairman, cooperation driven by information and knowledge,
rather than confrontation, is the key to finding reasonable long-term
solutions to the complex issue of agriculture concentration. Such
cooperation can help the industry avoid the negative ``unintended
consequences'' of legislative and regulatory actions that, in the long
term, could harm producers in particular and the agricultural industry
in general.
That concludes my comments. Thank you for the opportunity to share
pork producers' views on this important issue.
Senator Cochran. Thank you for your testimony and your
solutions.
We'll now hear from Mr. David Reiff representing the
National Grain and Feed Association.
STATEMENT OF DAVID S. REIFF, PRESIDENT, REIFF GRAIN AND FEED,
ON BEHALF OF THE NATIONAL GRAIN AND FEED ASSOCIATION
Mr. Reiff. Thank you, Chairman Cochran, Ranking Member
Kohl, and distinguished members. I am Dave Reiff, president of
Reiff Grain and Feed, Fairfield, Iowa. I appreciate this
opportunity to speak today on this important issue.
First, a little bit about my company. Reiff Grain & Feed is
a country elevator firm in southeast Iowa, about 100 miles from
Des Moines. We offered feed milling, seeds, and agronomy
services to a few hundred family farms in our area.
We originate grain from these producers and offer it back
out to our livestock feeders as well as several exporters on
the mid Mississippi and several processors in the area.
Reiff Grain & Feed is a member of the National Grain and
Feed Association on whose board of directors I serve and on
whose behalf I'm testifying.
Agribusiness consolidation today is one of the hottest
topics in rural America. There's no doubt that grain businesses
are consolidated at the most integrated and capital intensive
level of the industry: Food processing and manufacturing. This
reflects a trend that is occurring in every part of the
economy.
As my written testimony explains in greater detail,
however, more important distinctions must be made between not
only the manufacturing first purchaser levels of the field but
also between the various user segments in the grain
marketplace.
In many cases there are dozens of separate potential first
purchasers for producers to market their grain to. Country
elevators, export elevators, warehouses, river terminals, on
farm buying are all customers of farmers.
In wheat country, it is not uncommon for elevators to be no
more than 20 miles apart. In corn areas, 10 miles is typical.
In my part of Iowa there are six elevators within a 30-mile
radius.
Further, cash and futures prices for thousands of markets
are posted around the clock on several different information
networks with truck, rail, river modes of transportation
directly competing in many areas, producers are able to move
their crops to the most attractive market at reasonable rates.
Competition, transparency, and accessibility make for a highly
competitive marketplace.
In addition, competition between various segments of the
industry is intense. Domestic and export users of grain must
vie for producer's business. There is fierce competition
between different domestic users, country elevators, feed
mills, feeders, processors, and industrial users.
I would like to mention a matter that is related to the
concentration issue. Much attention has been focused on the
practice of contracting between producers and agribusiness
firms. Cash grain contracting is the most important price risk
management tool used by grain farmers today. I urge Congress to
be very cautious in legislating how commerce is going to be
conducted because there can be some negative unintended
consequences.
For example, our local hog producers have an opportunity to
enter into a contract that will allow them to benefit in part
of the retail margin if the packer is successful with a branded
approach in the marketplace.
But now that producer benefit would be in danger of
possibly not passing scrutiny by the State attorney general's
office if produced Iowa legislation passes.
The competitive advantages contained in this contract may
be viewed as secret clauses, thus disallowing the contract.
However, if the competitive advantages are made pubic, they
may no longer have value to the producer in the marketplace.
Our farm producers badly need new opportunities to stay viable.
Another instance, the local feed lot operator is
contracting privately with a cattle finishing corporation to
provide yardage services. This seems to be very beneficial to
both parties. I hope this new partnership isn't stopped by a
requirement that terms their agreement be made public under the
new contracting proposal.
Thus while contracting legislation may be well intentioned,
there's a high probability of doing more harm than good. I
would like to submit to the record a white paper prepared by
the National Grain and Feed Association that goes into more
detail on this issue.
Prepared statement
In conclusion, I would like to emphasize to the
subcommittee that while consolidation is occurring at the top
level of grain handling industry, producers have access to a
competitive, available, and transparent market. Thank you
again. I will be pleased to try to respond to questions.
[The statement follows:]
Prepared Statement of David S. Reiff
INTRODUCTION
Chairman Cochran, Ranking Member Kohl, and Members of the
Subcommittee, my name is Dave Reiff, and I am president of Reiff Grain
and Feed, Inc., of Fairfield, Iowa. Thank you for this opportunity to
testify on the important subject of consolidation in the agriculture
economy, as it relates to the grain sector.
Reiff Grain & Feed, Inc. is a 25 year-old country elevator in Iowa,
about 100 miles southeast of Des Moines. We offer feed milling, seeds,
and agronomy services to a few hundred family farms in our area. We
originate grain from these producers and offer it out to our livestock
feeders as well as several exporters on the mid-Mississippi and several
processors in the area.
I appear today on behalf of the National Grain and Feed
Association, of which my firm is a member. The NGFA consists of about
1,000 grain, feed, processing and grain-related companies that operate
5,000 facilities that store, handle, merchandise, mill, process and
export more than two-thirds of all U.S. grains and oilseeds. About 70
percent of NGFA member firms are small businesses-country elevators and
feed mills. Also affiliated with the NGFA are 36 state and regional
grain and feed associations.
My testimony today will demonstrate that while many factors are
driving integration within the grain sector, competition among the
various segments within the industry remains strong; that the grain
market is highly transparent; and that substantial competition exists
at the first purchaser level for grain.
WHY IS CONSOLIDATION OCCURRING
Every industry in the U.S. and around the globe is consolidating,
particularly those industries that are mature and driven by competitive
pressures to reduce cost. The U.S. has 3 automobile manufacturers, two
major farm implement manufacturers, 4-5 major airlines, etc.
Consolidation (both horizontal and vertical) in grain, feed and food
processing industries is being driven not only by cost competition, but
also by other factors including:
A shrinking farmer customer base.--While the number of total farms
in the U.S. seems to have leveled off, the number of commercial farms
(those with $100,000 or more in gross sales) continues to decline. With
a shrinking customer base, fewer firms are necessary.
Incentives to provide enhanced services to producers.--Firms are
offering more services to producers in order to build affinity and
retain them as customers. Some examples include tailored risk
management plans, farm input consulting, application services, and
record keeping. This trend requires greater expertise and manpower on
the part of the grain handler.
Consolidation in rail transportation.--There are now only 7 major
grain-hauling railroads in the U.S. Rail accounts for 25 percent of
commercial grain shipments. Consolidation in the rail industry has
resulted in many ``captive shippers,'' or facilities that are served by
only one railroad and have limited access to alternative and price-
competitive modes of transport. This situation has resulted in many
grain firms having to operate facilities on separate rail lines in
order to ensure service in case of disruption or uneconomic pricing on
one line. In addition, the move toward lower rail rates for larger
shipment sizes has been accelerating. This trend saves producers money
in shipping to destination markets, but requires grain facilities to
increase their capacity to load.
Low rates of return among grain buyers/handlers.--This trend has
been documented in several government studies. Low rates of return push
individuals to compete or leave the industry and sell out to larger
companies.
Compliance with government regulations.--The increasing number and
complexity of government regulations tend to drive investment and
operational costs higher. Larger companies are required simply to
support the resources needed for regulatory compliance.
In addition, vertical integration and increased coordination in the
marketing/production chain is being driven by the need to provide both
more uniformity and more customer choice at the retail customer level.
In today's food marketplace, to meet the uniformity parameters
necessary for retail product consistency requires considerably more
management control over production, delivery and quality specifications
of raw and semi-processed products at each stage of the food chain.
Some firms are choosing to obtain this increased management control
through ownership--full vertical integration of a company and its
products going from raw materials through the final food product.
However, there are other firms that are taking different
approaches. Through joint ventures, sharing of resources to jointly
coordinate portions of the production-delivery stream for food, and
through the use of contracts that require tight quality specifications
and just-in-time delivery provisions, companies do have the option to
achieve retail product uniformity without full vertical integration.
COMPETITION WITHIN THE GRAIN SECTOR IS STRONG
The heaviest concentration in some segments of the grain and
processing sector tend to occur at levels that require extensive
capital investments--oilseed crushing, flour milling, wet corn milling,
and dry corn milling. However, the fact that fewer than 10 firms in
each of these sectors own or operate a high proportion of processing
capacity does not mean that markets into which farmers sell product are
lacking in competition. The chart below reflects the percentage market
share of each major commodity moving into various markets.
As an example, wet corn milling, which produces starch, corn
sweeteners, corn oil and livestock feed, accounts for about 15 percent
of total corn markets. There are fewer than 10 firms in the entire U.S.
corn wet milling industry, but these wet corn mills have to compete
against a large number of feed manufacturers and livestock producers,
dry corn millers, and exporters in bidding for corn. Considering that
grain markets are truly global in competition, the fact that the U.S.
produces less than 25 percent of all major grains indicates that
foreign competition and global markets have considerable influence on
the pricing of grain. This global influence tends to be reflected in
futures market prices in Chicago, Kansas City and Minneapolis, which in
turn affect cash prices offered on a given day.
U.S. MAJOR GRAINS AND OILSEEDS
[Percentage Market Share]
----------------------------------------------------------------------------------------------------------------
Domestic
-------------------------------- U.S. Prod. As
Food/ Export Total Percent of
Animal Feed Industrial World Market
----------------------------------------------------------------------------------------------------------------
Corn............................ 59 20 21 100 \1\ 31
Wheat........................... 12 40 48 100 11
Soybeans \2\.................... \3\ 62 38 100 \1\ 29
----------------------------------------------------------------------------------------------------------------
\1\ ``Corn'' percentage is actually a percentage of U.S. production of all coarse grains that compete mostly for
animal feed markets (other coarse grains include oats, barley, sorghum, and millet). ``Soybean'' percentage is
actually U.S. production of all oilseeds compared to the world (competing oilseeds include sunflower,
rapeseed, cottonseed, and palm).
\2\ Soybeans crushed (processed) subsequently go into food products (both oil and protein), animal feed (protein
meal), and a wide range of industrial use markets.
\3\ Domestic crush
THE GRAIN MARKET IS HIGHLY TRANSPARENT
The U.S. has three public futures exchanges: the Chicago Board of
Trade, Kansas City Board of Trade, and the Minneapolis Grain Exchange.
Thousands of buyers and sellers within the U.S. and throughout the
world openly participate and compete in these markets daily, with
current price information communicated on a global basis. For many
years this public market pricing information has been available through
daily newspapers and radio/television news services. Now in the
electronic age, public futures exchange prices are available through
very affordable computer link services through the internet or via
firms such as Data Transmission Network (DTN), Future Source Bridge,
Commodity Quote Graphics, and Reuters. Some of these services, in
addition to providing futures market price information, also offer cash
grain market prices and bids. For example, DTN releases daily cash
market prices from more than 2,000 locations in the U.S., updated
around the clock. This information reaches more than 100,000 customers
across the country. Similar data are available through other
electronic, voice and print media.
This very public and highly competitive method of price discovery
gives every farmer in the U.S. a strong indication of the value of the
commodity that he/she produces or holds in storage on a daily basis.
COMPETITION IS STRONG AT THE FIRST PURCHASER LEVEL
There are many options for producers when it comes to potential
customers for their product. The chart below contains a rough estimate
of the customers and facilities available to producers in key states:
----------------------------------------------------------------------------------------------------------------
Co-op/farmer-
Co-op/farmer- owned Private firms Private
owned firms facilities facilities
----------------------------------------------------------------------------------------------------------------
Illinois........................................ 162 473 198 578
Indiana......................................... 20 93 111 260
Iowa............................................ 104 209 134 326
Minnesota....................................... 124 135 280 320
Kansas.......................................... 107 122 133 288
Nebraska........................................ 56 242 74 156
North Dakota.................................... 150 300 40 140
Oklahoma........................................ 84 41 182 93
Pacific/Northwest............................... 208 112 715 385
----------------------------------------------------------------------------------------------------------------
In corn growing states, it is common to have competing elevators
located within 10 miles of each other; in wheat states, 20-25 miles
between elevators is typical. In some areas, there are also grain
buyers who travel to farms by truck and buy from the producer on-site.
It must be recognized that while grain and oilseed processors and
exporters often purchase grain directly from farmers, the companies
tend to buy the majority of their raw material from independent local
businesses operating elevators owned by private entities or farmer
cooperatives. These ``first buyers'' that purchase grain directly from
farmers participate in an intensely competitive, nearly atomistic
industry.
In addition, farmers' marketing alternatives are expanding. Since
grain can be trucked at affordable rates over substantial distances--by
hauling companies or producers themselves--producers can access the
highest-return markets, including elevators, river terminals, or
processors. This increases the competition among grain merchants for
customers, to the benefit of the producer. With regards to grain
storage, producers are as much competitors in the market as are grain
merchants. Commercial storage in the U.S. is estimated at 8 billion
bushels, while on-farm storage is more than 11 billion. Farmers must
manage the risk of quality deterioration, and the costs of placing the
grain in storage plus retrieving it, but the overall effect of on-farm
storage is a competitive alternative for the producer to either
commercial storage or spot sales.
CONCLUSION
The grain industry, like the rest of the economy, is consolidating.
This is occurring for many reasons, not the least of which is to
provide better and more cost-effective service to producer-customers.
This does not mean, however, that competition is lacking. To the
contrary, it is evident that robust competition exists at the first
buyer level and among the sectors of the industry; and that grain
markets are highly transparent. These factors work together to ensure
competitive markets remain the norm for grain farmers in the U.S.
This concludes my testimony. Thank you.
Senator Cochran. Thanks, Mr. Reiff. And the study you
referred to will be printed in the record. We thank you for
submitting that.
Mr. Fred Stokes, President for the Organization for
Competitive Markets. Welcome.
STATEMENT OF THOMAS F. STOKES, PRESIDENT, ORGANIZATION
FOR COMPETITIVE MARKETS
Mr. Stokes. Thank you, sir. Senator Cochran, Senator
Dorgan, I appreciate the opportunity to appear before this
hearing on a subject that we believe is at the center of the
current farm crisis. I'll make my remarks brief. And I ask that
my more detailed written testimony be included in the record.
The organization for competitive markets is a multi-
disciplinary non-profit group of farmers, ranchers, academics,
attorneys, business people, and State legislators working for a
fair, open, and competitive agricultural marketplace. We see
market concentration as a major impediment to bringing about
such marketplace.
The organization for competitive markets is among some 65
organizations that have advocated a separate title in the new
farm bill dealing with competition issues. Included in my
written testimony is our statement on this subject, and we hope
that it will be considered as this new bill is written.
Last year the merger of Cargill and Continental Grain was
finalized. Now Archer Daniels Midland is buying the grain-
handling facilities of Farmland, increasing their already
dominant position in grain market.
Essentially Cargill and ADM will come together and
constitute the market for grain. The proposed merger of Tyson
with IBP failed, though for reasons that are not completely
clear. IBP stock has since plummeted.
It looks like Smithfield might make another attempt to buy
the world's largest beef packer and the second largest pork
packer. Given recent history, it would say that such a merger
would be approved.
The concentrated and non-competitive marketplace
systematically and increasingly short changes farmers and
ranchers. Major packers made four times their normal earnings
when we had 8 cent hogs.
In a State legislative hearing when asked by a State
senator if they couldn't pay producers more in light of their
windfall profits, a representative of one of the major packers
said he didn't recall getting a Christmas present from any pork
producer.
In addition to concentration, there is the matter of
vertical integration. Dr. Neil Harl at Iowa State has dubbed
concentration and vertical integration the deadly combination.
They bring about contract farming. Company tractor drivers and
hog house janitors replacing family farmers. Some call this
chickenization.
Vertical integration through contracts give processors and
packers captive supplies. Captive supplies, in return, result
in fewer bitters and more passive bitters. Spot market prices
are lower, volume is also lower, and the resulting thin market
more subject to manipulation.
Consolidation in another area also robs farmers of their
rightful share of the consumer dollar. In 1964, President
Johnson established the National Food Marketing Commission. The
report from the commission concluded, among other things, that
retail food chains were rapidly emerging as the dominant player
in the food marketing system.
And in this study entitled Consolidation and Food Retailing
and Dairy, published January the 8th of this year, Dr. Bill
Heffernan pointed to the very rapid consolidation of the retail
food industry over the past three years, and he stated
retailers are now in a position to dictate terms to food
manufacturers who then force change back through the system at
the farm level.
Dr. Keith Collins, who testified in the earlier panel, is
on record as seeing retail margins as a problem. To get some
sense of how retail margins have escalated and have affected
farm gate prices, I have provided a chart which is very similar
to Senator Dorgan's chart which shows the relationship between
retail prices and the farmers--and the price farmers receive.
And I might add contrary to some testimony that's already
been given here, we would contend that this gap is not because
of food that is of higher quality or has been added. A whole
light of--beef would be an example. The retailer got a lower
margin for beef back in the days of hanging carcasses than it
does today when it gets it in box form which greatly decreases
his cost of processing.
So it's not necessarily true that these--that this gap is
because of these margins or because of the extra things the
retailer does.
In September of last year, ERS calculated that the retail
margin from the single steer was $722. Obviously this is out of
line. A significant portion of this should have gone to the
producer but went to the retailer because of his sell it or
smell it market power.
I realize the committee is not tasked with regulating
retail margins. You can, however, help foster a new marketing
system which provides a new route from the farm gate to food
consumers and gives producers a fairer share of the end value.
Programs such as the Value-Added Grant Program authored by
Senator Grassley. The new generation cooperatives offer promise
for a system that would reverse the drastic decline in the
farmer's share of the food dollar.
Global markets, mad cow disease, and the seemingly more
frequent incidence of food-borne illness have raised new
concerns about food. Consumers now want to know more about
where their food comes from and how it was handled.
Consumers have more confidence in food that was produced
and handled under the more stringent requirement in this
country. It's time we had country-of-origin labeling.
Free trade is not turning out to be the panacea it was
represented to be. It also raises the issue of food security.
Going to the low cost provider in the global marketplace for
our food makes about as much sense as having our more advanced
military weaponry made in China. We need markets that are
established and maintained in consonance with the original
intent of our antitrust laws.
Enforcement agencies should be headed with people who
desire to enforce these laws, and Congress should give them the
necessary resources to do their job. We need transparent
markets.
Prepared statement
Open, transparent, and competitive markets for agriculture
are our best bet for just recompense for those that tend the
flocks and till the soil. And for a safe, dependable, and
affordable food supply for our people. And I'll be happy to
respond to any questions.
[The statement follows:]
Prepared Statement of Fred Stokes
INTRODUCTION
Thank you for this opportunity to present testimony on agricultural
concentration issues. The Organization for Competitive Markets (OCM) is
a multidisciplinary nonprofit group of farmers, ranchers, academics,
attorneys, businesspersons and state legislators working for a fair,
open and competitive agricultural marketplace. OCM is the only
nonprofit organization in the country with a primary focus on antitrust
and trade practices policy in agriculture. This testimony is submitted
to enhance informed discussion on the propriety, and contents, of a
Competition Title in the next Farm Bill. Sixty-five organizations have
signed a letter in favor of including such a Competition Title. (See
Exhibit B, Letter to Sen. Lugar, May 1, 2001).
Family farmers ultimately derive their income from the agricultural
marketplace. These independent producers have always been in a position
of weakness in selling their product to large processors and in buying
their inputs from large suppliers. Though there has been a tremendous
focus on openness and competition in the export markets, the domestic
marketplace has become closed and noncompetitive. Today the position of
the family farmer has become even weaker as consolidation in
agribusiness and food retail has reached all time highs. Farmers have
fewer buyers and suppliers than ever before. The result is an
increasing loss of family farms and the smallest farm share of the
consumer dollar in history.
The Agricultural and Food subeconomy can be divided into four
sectors: 1) agricultural input suppliers; 2) farmers, ranchers and
growers; 3) processors and packers; and 4) food retailers. All but the
farm sector have experienced unprecedented consolidation in recent
years, surrounding farmers with 800 pound gorillas that are able to
squeeze farm income to zero. The result is that no matter the level of
income, even with the doubling of Federal support, farmers' income
languishes. Congress must comprehensively address this problem by
confronting the problems inherent in consolidation and vertical
integration.
One hundred years ago, this nation reacted appropriately to citizen
concerns about large, powerful companies by establishing rules
constraining such businesses when they achieved a level of market power
that harmed, or risked harming, the public interest, trade and
commerce. The United State Congress enacted the first competition laws
in the world to ensure that commerce remain free and fair. These
competition laws include the Sherman Act, Clayton Act, Federal Trade
Commission Act and Packers & Stockyards Act. Since that time, many
countries in the world have followed this U.S. example to constrain
undue market power in their domestic economies.
DANGERS POSED BY A CONSOLIDATED AND VERTICALLY INTEGRATED FOOD AND
AGRIBUSINESS SECTOR
Unfortunately, competition policy has been severely weakened in
this country, especially in agriculture, due to Federal caselaw,
underfunded enforcement, and unfounded reliance on efficiency claims.
These weakening factors have resulted in a significant degradation of
the domestic agricultural market infrastructure. For instance, the
cattle, hog and poultry sectors all have structures ripe for unfair
methods of competition by the packer or processor. In cattle, the top
four slaughter firms control over eighty percent of the market, with
IBP, Inc. controlling thirty two percent of the steer and heifer
market. The top four hog packers control about fifty-six percent of the
market, including Smithfield with over eighteen percent. The poultry
industry is similar to hogs, with Tyson controlling over a quarter of
the market. This trend toward consolidation continues. Just recently
IBP was the subject of a bidding war between Smithfield and Tyson. ADM
announced that it plans to take control of Farmland's grain assets
throughout the U.S. Purina announced that it is in discussions with a
suitor to sell its assets.
The dangers posed by horizontal concentration are exacerbated by
the spiraling vertical integration in these industries. Vertical
integration, where one firm controls numerous sectors in the production
cycle, has long been utilized in poultry. In that industry, poultry
integrators installed a system in which the processor owns the
chickens; and the grower owns the land, buildings, equipment, chicken
litter and the dead chickens. The same dynamic has overtaken the hog
industry. Only about seventeen percent of all hogs were marketed on the
open or spot market in 2000. The rest of the hogs are either owned by
packers or contracted in advance so the packer avoids the open market.
With the emergence of genetically modified crops and the seed company's
monopoly control of life forms, these companies increasingly utilize
exclusive vertical relationships to maintain control of their product.
These trends have led to what Professor Harl calls ``the deadly
combination of concentration and vertical integration.'' The
combination of the two leaves the producer in an unenviable position:
suddenly he has very few, possibly one, processor with whom to deal in
his region, and no open market to send his product. Nevertheless,
financers and other agricultural advisors have short-sightedly urged
farmers to lock themselves into contracts, thinking that abandoning the
open market would allow the farmer, and the bank, to circumvent risk.
The price risk of the open market might have been avoided; but the
increased risk of unfair and anticompetitive practices was ushered in
with the proliferation of contracts.
The result of contracts on the aggregate market is that processors
and packers now have captive markets. Captive supplies result in not
only fewer bidders, but the remaining bidders are much more passive
because they have captured supply through non-price means: forward
contracts, production contracts, marketing agreements and packer and
processor ownership. This gives the processor more control over
inventory while transforming them into passive bidders that can procure
the balance of their supply through conservative bidding. Spot market
transactions are priced lower, are lower in volume, and the thin market
increases the risk of manipulation. (For a thorough discussion of the
dangers of captive supply and the USDA authority to address these
dangers, see Exhibit A, Written Testimony of Organization for
Competitive Markets Before the USDA's Public Forum on Captive Supplies
in the Livestock Sector, Denver, Colorado September 21, 2000, also at
http://www.competitivemarkets.com/library/testimony/gipsa/
GIPSA.OCM.web.092100.htm.)
Yet another sector that funnels the food dollar away from farmers
is the food retail sector. The margin that retailers have retained of
the consumer dollar has soared, while the farmers' share has plunged.
Consolidation in food retail has also harmed consumers. The top five
food retailers in the United States now account for 42 percent of all
sales. This number has skyrocketed from 24 percent in 1997. Regionally,
consolidation and its effects are even more stark. For instance, Dr.
Ron Cotteril, of the University of Connecticut Food Marketing Policy
Center, recently released a case study on consumer milk prices in the
Northeast that showed three supermarkets accounted for 85 percent of
all milk sales. At the same time that the retail sector was
consolidating, consumer milk prices steadily increased. The study
concluded that a $50 million increase in the milk bill paid by
consumers is due exclusively to the market power of private companies,
i.e. supermarket retailers and dairy processors.
We urge Congress to strengthen competition and trade practices
policy by enacting legislation that protects family farmers from
anticompetitive and unfair practices. Over 65 groups including OCM have
joined together recently to urge Congress to create a Competition
Policy title in the farm bill. (See Exhibit B, Letter to Sen. Richard
Lugar, May 1, 2001). Congress must address the disparities in market
power at the same time that it considers provisions to improve farm
income. Otherwise, input suppliers, processors and retailers will
continue to reap farmers' share of the food dollar.
RECOMMENDATIONS FOR IMPROVED POLICY AND ENFORCEMENT
OCM believes that Congress needs to take a comprehensive approach
in addressing the complicated problems associated with concentration
and vertical integration. For purposes of analytical discussion, we
have divided our recommendations into four areas: Antitrust policy and
enforcement; competition and trade practices policy and enforcement in
the livestock sector; fairness in contracting; and creating new
competition.
Antitrust Policy and Enforcement in Agriculture
General antitrust laws, such as the Sherman, Clayton and FTC Acts
were originally intended to hinder huge firms from exercising undue
market power. The Federal judiciary and past administrations have
gutted the enforcement of these laws. The Department of Justice and the
FTC woefully lack the resources to address the explosion of mergers and
increased consolidation. The policies and court interpretations of
these laws intended to protect consumers, small businesses and farmers
have degraded to the point where Congressional clarification is
required. Enforcement officials and judges have been too quick to
blindly accept efficiency arguments, without proof, while ignoring the
plight of small businesses and independent suppliers such as farmers.
To breath life back into antitrust policy, Congress should:
--Clarify that the antitrust laws focus on supplier harm in addition
to consumer harm;
--Enact new legislation to prohibit mergers or acquisitions that
allow a firm to gain more than a fifteen percent market share
nationally in any agricultural business, including the retail
supermarket trade. This allows firms to reach peak efficiencies
of scale without achieving the dominance which has
anticompetitive results;
--Create and fund an Office of Agricultural Competition in the
Department of Justice to increase the resources and talent
available at DOJ for agriculture;
--Amend the Clayton Antitrust Act to make it clear that a person who
suffers indirect or pass-through harm can recover damages
resulting from anti-competitive conduct (repeal the Illinois
Brick decision);
--Enact legislation easing the ability of farmers to achieve class
status in litigation involving anticompetitive practices by
agricultural businesses, including the retail supermarket
trade; and
--Significantly increase funding for enforcement of antitrust laws
generally.
COMPETITION AND TRADE PRACTICE POLICY AND ENFORCEMENT IN THE LIVESTOCK
SECTOR
Congress has long recognized the special nature of the livestock
industry and the increased likelihood that packers and processors will
treat farmers and ranchers unfairly. In 1921 Congress passed the
Packers and Stockyards Act to address the problems inherent in a
consolidated packing industry that had vertical relationships with the
marketing channels of the day, the stockyards and rail lines. Although
OCM and others have long argued that sufficient authority exists within
the far-reaching Act to affect real change in the livestock industry,
the USDA has not acted. Farmers and ranchers can wait no longer.
Congress must step in to prohibit deleterious practices associated with
the consolidated and vertically integrated sector. It has been eighty
years since a Congress substantively affected the P&S Act. Congress
must act again.
We urge Congress to:
--Consider transferring jurisdiction over competition issues in the
livestock sector from the United States Department of
Agriculture to a newly created Office of Agricultural
Competition in the Department of Justice;
--Prohibit red meat processors from owning livestock or livestock
production operations;
--Enact a two-year suspension on mergers and acquisitions between
firms in the red meat and poultry processing sectors;
--Create an transparent, fully functioning market in livestock
contracting through requiring all contracts to be offered for
bidding in an open, public manner and necessitating that a
fixed base price be negotiated at the time of the agreement (as
opposed to formulating the price from another market);
--Declare discrimination in non-price procurement terms by processors
as to producers as anticompetitive or discriminatory practices
unless such benefits are offered to all in an open, public
manner. Such non-price benefits include, but are not limited
to, delivery terms, processor financing, and processor leasing/
ownership of facilities or land;
--Provide poultry growers with full protection under the P&S Act; and
--Increase transparency and full information in the marketplace by
eliminating the 3/60 rule from the administration of mandatory
price reporting by the USDA Market News Service.
FAIRNESS IN CONTRACTING
Contracting provides packers and processors relational market
power. A number of ways exist for a firm to exert this ``lock-in''
power: (1) packers exploit farmer's sunk costs reasonably incurred in
connection with carrying the packer's contract requirements; (2) the
packer imposes additional costs on a disfavored farmer; and (3) the
packer refuses to offer the farmer favorable business opportunities
available to other farmers. Examples of this type of market power
abound in both the poultry and hog contracting sectors. This market
power provides the packing and processing firms the ability to pressure
farmers and growers in a number of ways. Contracts that require
substantial investment for a packer's particular requirements put the
farmer at risk of exploitation in the future. These types of contracts
are common. In poultry, contracts provide the integrator great
discretion in what it may demand as far as capital requirements. In
hogs, some packers require that the farmer restock its entire herd with
the packer's preferred genetic line, and restrict the farmer from
selling offspring of those genetics. Once the farmer has built new
buildings for hundreds of thousands of dollars or restocked his entire
herd, he is no longer in the position to freely seek other processors
with whom to deal. He is set up to serve one particular packer or
processor. This ``lock-in'' effect allows the processor to treat the
farmer less favorably in the future and the contracts are written in a
way that allows processors to do this. Because the farmer is locked in
to the processor's system, he will suffer the injurious conduct because
he has no better options.
To the extent that contracting is allowed between agricultural
producers and processors, we urge that Congress enact the following
provisions:
--Prohibit confidentiality clauses in contracts;
--Require contracts to be in plain language and to disclose material
risks;
--Prohibit mandatory arbitration clauses;
--Provide contract producers with a three-day right to review
contracts;
--Prohibit unfair practices, including tournament contracts that base
pay on a ranking system based on variables outside of the
farmers' control;
--Prohibit arbitrary cancellation of contracts that required
significant capital investment;
--Provide producers with a first-priority lien for payments due under
a contract;
--Protect producers from having contracts terminated capriciously or
as a form of retribution; and
--Prohibit processors from retaliating or discriminating against
producers who exercise rights including the right to join
producer organizations.
CREATING NEW COMPETITION
The establishment of new competitors in the agriculture sector is
key to diffusing the power of the dominant firms and providing
profitable opportunities for family farmers. Federal and State
governments provide tremendous amounts of money to dominant firms in
the form of grants, loans, tax breaks, research and development
subsidies. We urge the Congress to redirect much of these funds to spur
the development of new start-ups that will provide new opportunities
for family farmers to market their products.
--Target most food and agriculture related grant and loan programs to
small to mid-sized farms and farmer-owned businesses. This
should not be limited to entities structured as cooperatives;
--Focus most research performed within USDA or funded by USDA on
small to mid-sized farms and farmer-owned businesses;
--Provide a preference to bids from farmer-owned food entities for
government food procurement contracts. Government contracts
should also require smaller volumes, as opposed to the large
volumes currently included in such contracts, to allow small
suppliers to bid. Further, a study should be done to identify
barriers to government buying from farm-based or farmer-owned
food suppliers in an effort to find and implement solutions to
such barriers;
--Increase the level of funding for the USDA Value Added Agriculture
grant programs facilitated by Sen. Charles Grassley last year;
and
--Foster direct procurement from farmers and farmer-owned entities
for the Federal Food Stamp program and Women, Infants and
Children program. The electronic funds transfer cards used to
transfer moneys and pay food providers in these programs are
barriers to farmer participation. These constraints came be
overcome.
CONCLUSION
Congress has focused, in recent years, on open and competitive
markets at the international level. It should now work harder for open
and competitive markets at the farm gate level domestically. It is at
the farm gate where producers derive their income from the marketplace.
Marketing choices are necessary for a functioning market. Concentration
allows private economic power the proven ability to unduly drive farm
gate prices down and consumer food prices up. Competition and choice
will provide more marketing choices for farmers, fewer barriers to
entry for new competition, and prices which more accurately reflect
supply and demand. It is time for a Competition Title to be included in
the Farm Bill to address these problems in a comprehensive manner.
Senator Cochran. Thank you, Mr. Stokes. I appreciate you
coming up from Mississippi to be with us today. I've talked
with you on the phone several times and in person a couple of
times. It's good to have you as part of this panel.
I think we've had a balanced overview from this panel of
the different commodity and food group areas that are
represented, and we appreciate very much the statements that
you have prepared to make a part of this record.
Because we have another panel, and we have some other
obligations that are developing on the floor of the Senate, I
don't want you to feel like we don't care about you if we don't
ask you a bunch of questions. But to hear the other panel and
to have them to have an opportunity to speak, our questions are
going to be abbreviated.
I just want you to know it won't be an insult to you. I
hope you won't consider it as such.
One thing Mr. Stokes mentioned I was going to ask all of
the panel about, he referred to cooperatives. And I can
remember the time when individual producers decided that that
was one of the answers to concentration in the industry groups
that were buying farm products and commodities to compete.
Farmer-owned cooperatives would be one of the answers.
Isn't it true that that has worked to help provide power in
the marketplace to individual farmers? I'll just start with Mr.
Caspers and see what your reaction to that is.
Mr. Caspers. Yes, we're very supportive of farmer-owned
cooperatives and some of the new generation cooperatives that
are farming. I think there is a lot of interest amongst our
members all across the country. MPPC was instrumental
approximately two years ago in starting what has developed into
pork America.
They continue to develop and have a number of members
across the country, and I think on the next panel you have a
member of ours that's involved in a pork cooperative venture in
Illinois that hopes to go to construction this year.
Senator Cochran. Mr. Dopp, what's your view of that?
Mr. Dopp. Well, Senator, I'm not sure I can add much to
that other than to comment that one of our large members, in
fact Farmland Foods is part of a cooperative, and they have
been successful on a number of levels and a number of areas for
a number of years.
Senator Cochran. Mr. Roenigk?
Mr. Roenigk. Yes, thank you. As a general statement,
agricultural cooperatives are beneficial to agriculture;
however, in the broiler industry, for whatever reason, many,
many years ago we had several cooperatives. Today we have just
one survivor that is a cooperative.
In fact, in the 1980s I think the government helped start
at least one if not more cooperatives to see if they worked
again, but whatever the dynamics are, they don't seem to work
in our industry. But as a general principle, I agree.
Cooperatives are a good thing to have.
Senator Cochran. Mr. Reiff.
Mr. Reiff. Really not much to add. The Farmland/ADM recent
joint venture was mentioned. They obviously found value in
linking up, and the cooperative itself was having some
difficulty. But I think by and large it probably is viable.
Senator Cochran. Mr. Stokes?
Mr. Stokes. Well, I generally agree that they're a good
thing. There are some who have run amuck, in my opinion. And I
wouldn't necessarily hold Farmland up as an outstanding example
of what cooperatives could do.
Senator Cochran. One of the industries in our State, a new
industry, catfish production, falls away from the processing,
the growing of the fish, and the processing, growing grain.
Some of these are cooperatives, some are owned by corporate
parent companies. Like ConAgra, as a matter of fact, has gotten
into that business.
I don't know whether this is less competition. It seems to
me that there has been a proliferation of different businesses
in that industry. It's a fairly new industry. I wonder if any
of you have any comments about that, if you know anything about
it, whether you think that's bad or good. It's competing with
the chickens probably a little more than they want.
What do you think, Mr. Roenigk?
Mr. Roenigk. I'm certainly not a catfish industry expert,
so I hesitate to speak about the catfish industry. But you're
correct that in Mississippi there's a large catfish industry
like some of our neighboring States.
The broiler industry is very strong in Mississippi,
Arkansas, and many other States. The investment and
relationship is probably still evolving in the catfish
industry. At some point, a business model probably will emerge
where it has some better opportunity to exercise its advantage
in the marketplace, whether it is branding or further
processing or exporting or whatever.
So, as you say, it's still a new industry. This mix will
probably stay for a while until one model beats out another
model, not that that will be totally the way the market is, but
it's still evolving. I realize that's not a very helpful
answer, but that's the best I know.
Senator Cochran. I appreciate that, and we appreciate your
contribution.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, we have the reconciliation
bill and the tax cut beginning to be on the Floor about a half
an hour ago, so I'm going to forego questions of the panel.
I think your contributions have provided substantially
different perspectives from I guess different viewpoints on
these issues, and I think they contribute to our ability to
understand how various groups and interests feel about these
issues.
So we appreciate the statements you've made. We do have, I
think, five or six people on the third panel, and I want to be
able to get to that before we have to go to the Floor of the
Senate.
Senator Cochran. Thank you, Senator. Thank you all for your
preparation. We appreciate it very much.
Our third panel of witnesses we would ask to come forward
to the witness table. I will introduce them as they are coming
forward. Mr. Dudley Butler represents the Mississippi
Cattleman's Association.
Robert Carlson is the President of the North Dakota's
Farmers Union. Peter Carstensen is Associate Dean for Research
and Faculty Development at the University of Wisconsin Madison
Law School. Mr. Dan Kelley is an Illinois farmer. Tom Miller is
the Attorney General of the State of Iowa, and David Reiss who
is President Elect of the Illinois Pork Producers Association.
We have copies of your prepared statements, and they will
be made a part of the record in full. I would encourage you to
make summary comments from your statement, and then we'll have
an opportunity, I hope, to ask you some questions.
Let's start off with our first witness in this third panel,
Mr. Dudley Butler.
STATEMENT OF DUDLEY BUTLER, ON BEHALF OF THE
MISSISSIPPI CATTLEMEN'S ASSOCIATION
Mr. Butler. Mr. Chairman and members of the committee, I
appreciate the opportunity you're giving me to testify. As you
said, my name is Dudley Butler. I live on my ranch in Yazoo
County, Mississippi. I'm also a practicing trial lawyer,
arbitrator, mediator, as well as a cattleman.
I serve as cochair of the ADR subcommittee, promotion
subcommittee for the Bar Association, and I'm also acting as
special assistant to the President of the National Cattleman's
Beef Association.
I want to speak to you about the contracts that are used in
agriculture now, and most specifically about some of the
clauses that are put in those contracts. I believe that
arbitration is a valuable alternative to dispute resolution
procedure if entered into knowingly and voluntarily.
Under the right circumstances, it can be fair, cost
effective, and time saving. Under the wrong circumstances, it
is unfair and totally inequitable.
Although I first became involved in the poultry industry
while trying to promote arbitration and mediation, I must tell
you that at this present time I represent numerous poultry
growers in litigation against poultry companies. Part of that
litigation involves the attack on mandatory arbitration clauses
contained in poultry growing contracts.
Many of these arbitration clauses require poultry growers
to waive any right to a jury trial and also contained cost
laden provision that make arbitration inaccessible. In other
words, the litigation forum is taken away by contract, and the
arbitration forum is taken away by economics, thereby leaving
the grower with no forum in which to bring his dispute.
These clauses are forced upon growers because they have no
other resource than to accept these provisions under duress.
They owe large sums of money on their farm and have no other
way to repay the loans but to receive chickens from the poultry
companies.
Therefore, I feel that the arbitration clauses are being
used as a weapon not as a dispute resolution device. This is
obviously contrary to the intent of the framers of the Federal
Arbitration Act as evidenced by section 2 which states that an
arbitration provision in any maritime transaction or
transaction involving commerce shall be valid, irrevocable, and
enforceable save upon such grounds as exist at law or inequity
for the revocation of any contract.
Surely citizens should not be required to waive their
constitutional right to a trial by jury while under such
duress. As you well know, the constitutional right of trial by
jury is as important as freedom of speech, religion, and other
rights that were granted by the framers of our Constitution.
I agree with many of my colleagues as well as the learned
justices O'Connor and Rehnquist that the Federal Arbitration
Act was not meant to apply in State courts. But was meant as a
procedural statute to apply in Federal court to certain
classifications of businesses as evidenced by the legislative
history provided in the dissenting opinion, Southland
Corporation v. Keating.
In Breman v. Zapata Off-Shore Oil Company, the Supreme
Court noted that contract fixing a particular forum for
resolution of all disputes was made in an arm's length
negotiation by experienced and sophisticated businessmen.
A poultry growing contract is not an arm's length
negotiated agreement. Quite to the contrary. As a contract of
adhesion presented to the grower on a take-it-or-leave-it
basis, poultry growers are not experienced and sophisticated
businessmen.
Therefore, my concern that I am presenting to this
committee is that the use of mandatory arbitration clauses
along with the waiver of any right to a trial by jury is, in
fact, counterproductive to the promotion of the arbitration
process.
The arbitration process, although meant to be expedient and
cost effective, has become extremely time consuming and
expensive under the wording of many of the mandatory clauses
now used in production contracts.
Do we want a dispute resolution device, or do we want a
cost controlling liability reduction device, and therefore an
income producing element used in the agricultural industry? Do
we want to preclude farmers from having any forum to air their
disputes, thereby reducing the cost of operations for large
companies and supposedly the cost of goods to consumers?
What price are we willing to pay for cheaper food? Clearly
any waiver of a right to a trial by jury must be clear and
voluntary. This right is given to criminals, why is it not
provided to law abiding hard working farmers?
Mandatory arbitration clauses are also having an extremely
detrimental effect to the reduction of litigation in that they
are creating a totally new area to be litigated which is in
direct conflict with the whole purpose of alternative dispute
resolution.
I think there are two simple answers to these complex
problems. The first is for the Federal Arbitration Act to be
amended to reflect exactly what courts and entities it applies
to.
The other is that the act can be amended or additional laws
passed to mandate that an individual or entity be allowed to
choose his forum, whether it be litigation or arbitration at
the time the claim is made.
This is the only time that a knowledgeable and voluntary
decision can be made. Just as a yacht is not usable on a five-
acre farm pond, a John boat is not usable in an ocean.
Decisions concerning proper forums have to be made after the
type, complexity, and amount of the claim is known.
We must look to history, for we can't see where we're going
unless we know where we've been. This level of concentration in
agriculture was experienced in the early 1900s, and arising
from those problems was the passage of the Packers and
Stockyard Act to protect farmers against corporation
concentration. Today we must move to do the same.
One move is the protection of producers against mandatory
waiver of trial by jury and mandatory arbitration clauses. I
remember early in law school a professor informed me that
justice and fairness are not the same thing. He was right.
Justice is based on the law, fairness is fueled by wisdom.
The American Bar Association, the American Medical
Association, and the American Arbitration Association on the
commission on healthcare dispute resolution used such wisdom
and found as follows: In disputes involving patients, binding
forms of dispute resolution should be used only where the
parties agree to do so after a dispute arises. This is the only
way to guarantee that the agreement to arbitrate is both
knowing and voluntary.
It is necessary to ensure that the parties' constitutional
and other legal rights are protected. I wholeheartedly agree
with that finding and believe that the only way to assure the
successful promotion of arbitration is to ensure that it is
voluntary.
I am concluding by citing to you from the book of Isaiah.
Isaiah was a great religious and political influence during the
reign of King Hezekiah and Juda, and he also served as his
chief advisor.
In chapter 10:12, ``Woe to those who make unjust laws, to
those who issue oppressive decrees to deprive the poor of their
rights and withhold justice from the oppressed of my people.''
Prepared statement
I agree that agriculture is evolving, and I think it's
paramount that the laws evolve with it to protect those that
are out there producing on the family farm.
I think it is going to develop into almost a national
security issue if we do not do something to protect our people
that are tilling the soil, raising chickens, raising hogs,
raising cattle, and other types of farm.
[The statement follows:]
Prepared Statement of Dudley Butler
Mr. Chairman and members of the committee, I appreciate the
opportunity you are giving me to testify. My name is Dudley Butler, I
am from Yazoo County, Mississippi where my family and I live on our
cattle ranch. I am a practicing trial lawyer, arbitrator and mediator,
as well as a cattleman. I serve as co-chairman of the ADR promotions
sub-committee for the Mississippi Bar Association and I am currently
acting as special assistant to the President of the National
Cattlemen's Beef Association.
I grew up in the small town of Batesville, Mississippi living in a
household with my Mother and Father, who was a union pipe fitter, and
my maternal Grandmother and Grandfather, who was a grocer for Kroger
Company. I think that you could say that my Father was a union man and
my Grandfather was a company man. My paternal Grandfather was a very
poor sharecropper in Humphrey County, Mississippi. I share this with
you because I think it has helped me throughout my life to envision
both sides of problems that are presented in any litigation or dispute.
I believe that arbitration is a valuable alternative dispute
resolution procedure if entered into knowingly and voluntarily. Under
the right circumstances it can be fair, cost effective and time saving.
Under the wrong circumstances it is unfair and totally inequitable.
Although I first became involved with the poultry industry while trying
to promote arbitration and mediation, I must tell you that at this time
I represent numerous poultry growers in litigation against poultry
companies. Part of that litigation involves the attack on the mandatory
arbitration clauses contained in poultry growing contracts. Many of
these arbitration clauses require poultry growers to waive any right to
a jury trial and also contain cost laden provisions that make
arbitration inaccessible. In other words, the litigation forum is taken
away by contract and the arbitration forum is taken away by economics,
thereby leaving the grower with no forum in which to bring his dispute.
These clauses are forced upon the growers because they have no other
recourse than to accept these provisions under duress. They owe large
sums of money on their farm and have no other way to repay the loans
but to receive chickens from the poultry companies. Therefore, I feel
that the arbitration clauses are being used as a weapon not a dispute
resolution device. This is obviously contrary to the intent of the
framers of the Federal Arbitration Act as evidenced by Section 2 which
states:
``A written provision in any maritime transaction or a contract
evidencing a transacting involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction, or
the refusal to perform the whole or any part thereof, or an agreement
in writing to submit to arbitration an existing controversy arising out
of such contract, transaction, or refusal shall be valid, irrevocable,
and enforceable, save upon such grounds as exists at law or in equity
for the revocation of any contract.'' (emphasis added )
Surely citizens should not be required to waive their
constitutional right to a trial by jury while under such duress. As you
well know, the constitutional right of trial by jury is as important as
is freedom of speech, religion and other inalienable rights that were
granted by the framers of our Constitution. I agree with many of my
colleagues, as well as the learned Justices O'Connor and Rehnquist,
that the Federal Arbitration Act was not meant to apply in state courts
but was meant as a procedural statute to apply in Federal court to
certain classifications of businesses as evidenced by the legislative
history provided in the dissenting opinion in Southland Corporation v.
Keating, 465 U.S.1(1984) which is as follows:
``Section 2 does not, on it's face, identify which judicial forums
are bound by its requirements or what procedures govern its
enforcement. The FAA deals with these matters in Sec. Sec. 3 and 4.
Section 3 provides:
`If any suit or proceeding be brought in any of the courts of the
United States upon any issue referable to arbitration . . . the court .
. . shall on application of one of the parties stay the trial of the
action until arbitration has been had in accordance with the terms of
the agreement . . . . '
Section 4 species that a party aggrieved by another's refusal to
arbitrate ``may petition any United states district court which, save
for such agreement, would have jurisdiction under title 28, in a civil
action or in admiralty of the subject matter . . . for an order
directing that such arbitration proceed in the manner provided for in
such agreement . . . .''
Today the Court takes the facial silence of Sec. 2 as a license to
declare that state as well as Federal courts must apply Sec. 2. In
addition, though this is not spelled out in the opinion, the Court
holds that in enforcing this newly discovered Federal right states
courts must follow procedures specified in Sec. 3. The Court's decision
is impelled by an understandable desire to encourage the use of
arbitration, but it utterly fails to recognized the clear congressional
intent underlaying the FAA. Congress intended to require Federal, not
State, courts to respect arbitration agreements.
The FAA was enacted in 1925. As demonstrated infra, at 24-29,
Congress thought it was exercising its power to dictate either
procedure or ``general Federal law'' in Federal courts. The issue
presented here is the result of three subsequent decisions of this
Court.
In 1938 this Court decided Erie R. Co. v. Tompkins, 304 U.S.64.
Erie denied the Federal Government the power to create substantive law
solely by virtue of the Art. III power to control Federal-court
jurisdiction. Eighteen years later the Court decided Bernhardt v.
Polygraphic Co., 350 U.S. 198 (1956). Bernhardt held that the duty to
arbitrate a contract dispute is outcome-determinative--i. e.
``substantive''--and therefore a matter normally governed by state law
in Federal diversity cases.
Bernhardt gave rise to concern that the FAA could thereafter
constitutionally be applied only in Federal-court cases arising under
Federal law, not in diversity cases.
In Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 U.S. 395, 404-
405 (1967), we addressed that concern, and held that the FAA may
constitutionally be applied to proceedings in a Federal diversity
court. The FAA covers only contracts involving interstate commerce or
maritime affairs, and Congress ``plainly has power to legislate'' in
that area.
Nevertheless, the Prima Paint decision ``carefully avoided any
explicit endorsement of the view that the Arbitration Act embodied
substantive policies that were to be applied to all contracts within
its scope, whether sued on in state or Federal courts.'' P. Bator, P.
Mishkin, D. Shapiro, & H. Wechsler, Hart and Wechsler's The Federal
Courts and the Federal System 731-732(2d ed. 1978). Today's case is the
first in which this Court has had occasion to determine whether the FAA
applies to state-court proceedings. One statement on the subject did
appear in Moses H. Cone Memorial Hospital v. Mercury Construction
Corp., 460 U.S. 1(1983), but that case involved a Federal, not a State,
court proceeding; its dictum concerning the law applicable in state
courts was wholly unnecessary to its holding.
The majority opinion decides three issues. First, it holds that
Sec. 2 creates Federal substantive rights that must be enforced by the
state courts. Second, though the issue is not raised in this case, the
Court states ante, at 15-16, n. 9, that Sec. 2 substantive rights may
not be the basis for invoking Federal-court jurisdiction under 28
U.S.C. Sec. 1331. Third, the Court reads Sec. 2 to require state courts
to enforce Sec. 2 rights using procedures that mimic those specified
for Federal courts by FAA Sec. Sec. 3 and 4. The first of these
conclusions is unquestionably wrong as a matter of statutory
construction; the second appears to be an attempt to limit the damage
done by the first; the third is unnecessary and unwise.
One rarely finds a legislative history as unambiguous as the FAA's.
That history establishes conclusively that the 1925 Congress viewed the
FAA as a procedural statute, applicable only in Federal courts,
derived, Congress believed, largely from the Federal power to control
the jurisdiction of the Federal courts.
In 1925 Congress emphatically believed arbitration to be a matter
of ``procedure.'' At hearings on the Act congressional Subcommittees
were told: ``The theory on which you do this is that you have the right
to tell the Federal courts how to proceed'' The House Report on the FAA
stated: ``Whether an agreement for arbitration shall be enforced or not
is a question of procedure . . .'' On the floor of the House
Congressman Graham assured his fellow Members that the FAA ``does not
involve any new principle of law except to provide a simple method . .
. in order to give enforcement . . . It creates no new legislation,
grants no new rights, except a remedy to enforce an agreement in
commercial contracts and in admiralty contracts.''
A month after the Act was signed into law the American Bar
Association Committee that had drafted and pressed for passage of the
Federal legislation wrote:
``The statute establishes a procedure in the Federal courts for the
enforcement of arbitration agreements . . . A Federal statute providing
for the enforcement of arbitration agreements does relate solely to
procedure of the Federal courts. . . . [W]hether or not an arbitration
agreement is to be enforced is a question of the law of procedure and
is determined by the law of the jurisdiction wherein the remedy is
sought. That the enforcement of arbitration contracts is within the law
of procedure as distinguished from substantive law is well settled by
the decisions of our courts.''
Since Bernhardt, a right to arbitration has been characterized as
``substantive,'' and that holding is not challenged here. But Congress
in 1925 did not characterize the FAA as this Court did in 1956.
Congress believed that the FAA established nothing more than a rule of
procedure, a rule therefore applicable only in the Federal courts.''
If characterizing the FAA as procedural was not enough, the
draftsman of the Act, the House Report, and the early commentators all
flatly stated that the Act was intended to affect only Federal court
proceedings. Mr. Cohen, the American Bar Association member who drafted
the bill, assured two congressional Subcommittees in joint hearings:
``Nor can it be said that the Congress of the United States,
directing its own courts . . ., would infringe upon'' the provinces or
prerogatives of the States . . . [T]he question of the enforcement
relates to the law of remedies and not to substantive law. The rule
must be changed for the jurisdiction in which the agreement is sought
to be enforced . . . There is no disposition therefore by means of the
Federal bludgeon to force an individual State into an unwilling
submission to arbitration enforcement.''
The House Report on FAA unambiguously stated: ``Before
[arbitration] contracts could be enforced in the Federal courts . . .
This law is essential. The bill declares that such agreements shall be
recognized and enforced by the courts of the United States.''
Yet another indication that Congress did not intend the FAA to
govern state-court proceedings is found in the powers Congress relied
on in passing the Act. The FAA might have been grounded on Congress'
powers to regulate interstate and maritime affairs, since the Act
extends only to contracts in those areas. There are, indeed, references
in the legislative history to the corresponding Federal powers. More
numerous, however, are the references to Congress' pre-Erie power to
prescribe ``general law'' applicable in all Federal courts. At the
congressional hearings, for example: ``Congress rests solely upon its
power to prescribe the jurisdiction and duties of the Federal Courts.''
And in the House Report:
``The matter is properly the subject of Federal action. Whether an
agreement for arbitration shall be enforced or not is a question of
procedure to be determined by the law court in which the proceeding is
brought and not one of substantive law to be determined by the law of
the forum in which the contract is made . . .''
Plainly, a power derived from Congress' Art. III control over
Federal-court jurisdiction would not by any flight of fancy permit
Congress to control proceedings in state courts.
The foregoing cannot be dismissed as ``ambiguities'' in the
legislative history. It is accurate to say that the entire history
contains only one ambiguity, and that appears in the single sentence of
the House Report cited by the Court ante, at 12-13. That ambiguity,
however, is definitively resolved elsewhere in the same House Report,
see supra, at 27, and throughout the rest of the legislative history.
The structure of the FAA itself runs directly contrary to the
reading the Court today gives to Sec. 2. Sections 3 and 4 are the
implementing provisions of the Act, and they expressly apply only to
Federal courts. Section 4 refers to the ``United States district
court[s],'' and provides that it can be invoked only in a court that
has jurisdiction under Title 28 of the United States Code. As
originally enacted, Sec. 3 referred, in the same terms as Sec. 4, to
``courts [or court] of the United States'' There has been a minor
amendment in Sec. 4's phrasing, but no substantive change in either
sections's limitation to Federal courts.
None of this Court's prior decisions has authoritatively construed
the Act otherwise. It bears repeating that both Prima Paint and Moses
H. Cone involved Federal-court litigation. The applicability of the FAA
to state-court proceedings was simply not before the Court in either
case. Justice Black would surely be surprised to find either the
majority opinion or his dissent in Prima Paint cited by the Court
today, as both are, ante, at 11, 12. His dissent took pains to point
out:
```The Court here does not hold . . . that the body of Federal
substantive law created by Federal judges under the Arbitration Act is
required to be applied by state courts. A holding to that effect-which
the Court seems to leave up in the air would flout the intention of the
framers of the Act.''
Nothing in the Prima Paint majority opinion contradicts this
statement.
The Prima Paint majority gave full but precise effect to the
original congressional intent it recognized that notwithstanding the
intervention of Erie the FAA's restrictive focus in maritime and
interstate contracts permits its application in Federal diversity
courts. Today's decision, in contrast, glosses over both the careful
crafting of Prima Paint and the historical reasons that made Prima
Paint necessary, and gives the FAA a reach far broader than Congress
intended.''
Section 2, like the rest of the FAA, should have no application
whatsoever in state courts. Assuming, to the contrary that Sec. 2 does
create a Federal right that state courts must enforce, state courts
should nonetheless be allowed, at least in the first instance, to
fashion their own procedures for enforcing the right. Unfortunately,
the Court seems to direct that the arbitration clause at issue here
must be specifically enforced; apparently no other means of enforcement
is permissible.
It is settled that a state court must honor federally created
rights and that it may not unreasonably undermine them by invoking
contrary local procedure. ``[T]he assertion of Federal rights, when
plainly and reasonably made, is not to be defeated under the name of
local practice.'' Brown v Western A. Co. of Alabama, 338 U.S. 294,299
(1949). But absent specific direction from Congress the state courts
have always been permitted to apply their own reasonable procedures
when enforcing Federal rights. Before we undertake to read a set of
complex and mandatory procedures into Sec. 2's brief and general
language, we should at a minimum allow state courts and legislatures a
chance to develop their own method for enforcing the new Federal
rights. Some might choose to award compensatory or punitive damages for
the violation of an arbitration agreement; some might award litigation
costs to the party who remained willing to arbitrate; some might affirm
the ``validity and enforceability'' of arbitration agreements in other
ways. Any of these approaches could vindicate Sec. 2 rights in a manner
fully consonant with the language and background of that provision.
The unelaborated terms of Sec. 2 certainly invite flexible
enforcement. At common law many jurisdictions were hostile to
arbitration agreements. Kulukundis Shipping Co. v. Amtorg Trading
Corp., 126 F. 2d 978, 982-984 (CA2 1942). That hostility was reflected
in two different doctrines: ``revocability,'' which allowed parties to
repudiate arbitration agreements at any time before the arbitrator's
award was made and ``invalidity'' or ``enforceability,'' equivalent
rules that flatly denied any remedy for the failure to honor an
arbitration agreement. In contrast, common-law jurisdiction that
enforced arbitration agreements did so in at least three different ways
through actions for damages, actions for specific enforcement, or by
enforcing sanctions imposed by trade and commercial associations on
members who violated arbitration agreements. In 1925 a forum allowing
any one of these remedies would have been thought to recognize the
``validity and enforceability'' of arbitration clauses.
This Court has previously rejected the view that state courts can
adequately protect Federal rights only if ``such courts in enforcing
the Federal right are to be treated as Federal courts and subjected pro
hac vice to [federal] limitation . . . .'' Minneapolis & St. Louis R.
Co. v Bombolis, 241 U.S. 211, 221 (1916). As explained by Professor
Hart:
``The general rule, bottomed deeply in belief in the importance of
state control of state judicial procedure, is that Federal law takes
the state courts as it finds them. . . . Some differences in remedy and
procedure are inescapable if the different governments are to retain a
measure of independence in deciding how justice should be administered.
If the differences become so conspicuous as to affect advance
calculations of outcome, and so to induce an undesirable shopping
between forums, the remedy does not lie in the sacrifice of the
independence of either government. It lies rather in provision by the
Federal government, confident of the justice of its own procedures, of
a Federal forum equally accessible to both litigants.''
In summary, even were I to accept the majority's reading of Sec. 2,
I would disagree with the Court's disposition of this case. After
articulating the nature and scope of the Federal right it discerns in
Sec. 2, the Court should remand to the state court, which has acted,
heretofore, under a misapprehension of Federal law. The state court
should determine, at least in the first instance, what procedures it
will follow to vindicate the newly articulated Federal rights. Cf.
Missouri ex rel. Southern R. Co, v Mayfield, 340 U.S. 1,5 (1950).
The Court, ante, at 15-16, rejects the idea of requiring the FAA to
be applied only in Federal courts partly out of concern with the
problem of forum shopping. The concern is unfounded. Because the FAA
makes the Federal courts equally accessible to both parties to a
dispute, no forum shopping would be possible even if we gave the FAA a
construction faithful to the congressional intent. In controversies
involving incomplete diversity of citizenship there is simply no access
to Federal court and therefore no possibility of forum shopping. In
controversies with complete diversity of citizenship the FAA grants
Federal-court access equally to both parties; no party can gain any
advantage by forum shopping. Even when the party resisting arbitration
initiates an action in state court, the opposing party can invoke FAA
Sec. 4 and promptly secure a Federal-court order to compel arbitration.
See, e.g., Moses H. Cone Memorial Hospital v, Mercury Construction
Corp., 460 U.S. 1 (1983).
Ironically, the FAA was passed specifically to rectify forum
shopping problems created by this Court's decision in Swift v Tyson, 16
Pet. (1842). By 1925 several major commercial States had passed state
arbitration laws, but the Federal courts refused to enforce those laws
in diversity cases. The drafters of the FAA might have anticipated
Bernhardt by legislation and required Federal diversity courts to adopt
the arbitration law of the State in which they sat. But they
deliberately chose a different approach. As was pointed out at
congressional hearings, an additional goal of the Act was to make
arbitration agreements enforceable even in Federal courts located in a
States that had no arbitration law. The drafters' plan for maintaining
reasonable harmony between state and Federal practices was not to
bludgeon States into compliance, but rather to adopt a uniform Federal
law, patterned after New York's path-breaking state statue, and
simultaneously to press for passage of coordinated state legislation.
The key language of the Uniform Act for Commercial Arbitration was,
accordingly, identical to that in Sec. 2 of the FAA.
In Summary, forum shopping concerns in connection with the FAA are
a distraction that does not withstand scrutiny. The Court ignores the
drafters' carefully devised plan for dealing with those problems. V.
Today's decision adds yet another chapter to the FAA's already
colorful history. In 1842 this Court's ruling in Swift v. Tyson, supra,
set up a major obstacle to the enforcement of state arbitration laws in
Federal diversity courts. In 1925 Congress sought to rectify the
problem by enacting the FAA; the intent was to create uniform law
binding only in the Federal courts. In Erie R. Co. v. Thomkins, 304
U.S. 64 (1938), and then in Bernhart Polygraphic Co., 350 U.S. 198
(1956), this Court significantly curtailed Federal power. In 1967 our
decision in Prima Paint upheld the application of the FAA in a Federal-
court proceeding as a valid exercise of Congress' Commerce Clause and
admiralty powers. Today the Court discovers a Federal right in FAA
Sec. 2 that the state courts must enforce. Apparently confident that
state courts are not competent to devise their own procedures for
protecting the newly discovered Federal right, the Court summarily
prescribes a specific procedure, found nowhere in Sec. 2 or its common-
law origins, that the state courts are to follow.
Today's decision is unfaithful to congressional intent,
unnecessary, and, in light of the FAA's antecedents and the intervening
contraction of Federal power, inexplicable. Although arbitration is a
worthy alternative to litigation, today's exercise in judicial
revisionism goes to far. I respectfully dissent.
In The Breman v. Zapata Off-Shore Co., 407 U.S.1, 12 (1972), the
Supreme Court noted that the contract fixing a particular forum for
resolution of all disputes ``was made in arm's-length negotiations by
experienced and sophisticated businessmen, and absent some compelling
and countervailing reason it should be honored by the parties and
enforced by the courts.''
A Poultry Growing Contract is not an arm's-length negotiated
agreement, quite the contrary, it is a contract of adhesion presented
to the grower on a ``take it or leave it'' basis. Poultry growers are
not experienced and sophisticated businessmen.
Although this is true, we must currently recognize that the Supreme
Court, whose majority opinion in the Southland case hinged on the term
commerce, has spoken and therefore we must accept their decision based
on the present law, that arbitration clauses are enforceable in state
court actions against all types of business and individuals. Therefore
my concern that I am presenting to this committee is that the use of
mandatory arbitration clauses along with the waiver of any right to a
jury trial is in fact counterproductive to the promotion of the
arbitration process. The arbitration process although meant to be
expedient and cost effective has become extremely time consuming and
expensive under the wording of many of the mandatory clauses now used
in production contracts. Do we want a dispute resolution device or do
we want a cost controlling liability reduction device and therefore a
income producing element used in the agricultural industry? Do we want
to preclude farmers from having any forum to air their disputes,
thereby reducing the cost of operations for large companies and
supposedly the cost of goods to consumers? What price are we willing to
pay for cheaper food? Clearly any waiver of a right to trial by jury
must be clear and voluntary. This right is given to criminals, why is
it not provided to law abiding, hard working farmers.
Mandatory arbitration clauses are also having an extremely
detrimental effect to the reduction of litigation, in that they are
creating a totally new area to be litigated, which is in direct
conflict with the whole purpose of alternative dispute resolution.
I want to make it perfectly clear that I am not here trying to
attack the arbitration process, quite the contrary, I am here to
promote it. Although I do not agree that it should be as expansive as
our courts have ruled, I have accepted this proposition and will flow
with that change. A wise old man told me when I was somewhat younger
that change is not painful, resistance to change is painful. Therefore,
we must look to find ways to alleviate these problems. I think that
there are two simple answers to these complex problems.
--The Federal Arbitration Act can be amended to reflect exactly what
courts and entities it applies to.
--The act can also be amended or additional laws passed to mandate
that an individual or entity be allowed to choose his forum,
whether it be litigation or arbitration, at the time the claim
is made.
This is the only time that a knowledgeable and voluntary decision
can be made. Just as a yacht is not usable in a five acre farm pond, a
john boat is not usable in the ocean. Decisions concerning proper
forums have to made after the type, complexity and amount of the claim
is known.
We must look to history, for we can't see where we are going unless
we know where we have been. This level of concentration in agriculture
was experienced in the early 1900's and arising from those problems was
the passage of the Packers and Stockyard Act to protect farmers against
corporate concentration. Today we must move to do the same. One move is
the protection of producers against mandatory waiver of trial by jury
and mandatory arbitration clauses.
I remember, early in Law School, a professor informed me that
justice and fairness are not the same thing. He was right, justice is
based on the law, fairness is fueled by wisdom. The American Bar
Association, The American Medical Association, and The American
Arbitration Association on the Commission on Healthcare Dispute
Resolution used such wisdom and found as follows:
``In disputes involving patients, binding forms of dispute
resolutions should be used only where the parties agree to do so after
a dispute arises.'' This is ``the only way to guarantee that the
agreement to arbitrate is both knowing and voluntary,'' it is necessary
to ensure ``that the parties constitutional and other legal rights are
protected.''
I whole heartedly agree with this finding and believe that the only
way to assure the successful promotion of the arbitration process is to
ensure that it is voluntary.
I will conclude by citing to you from the Book of Isaiah. Isaiah
was a great religious and political influence during the reign of King
Hezekiah, King of Judah, whom he served as chief advisor. Chapter10: 1-
2 ``Woe to those who make unjust laws, to those who issue oppressive
decrees, to deprive the poor of their rights and withhold justice from
the oppressed of my people, making widows their prey and robbing the
fatherless.''
Senator Cochran. Thank you, Mr. Butler.
Mr. Carlson, President of the North Dakota's Farmers Union.
You may proceed.
Senator Dorgan. Mr. Chairman, let me welcome Mr. Carlson.
Mr. Carlson is not only president of the Farmers Union, but
it's a strong national voice for family farmers and active
nationally for a long, long while on these issues. And I
welcome him to the committee.
STATEMENT OF ROBERT CARLSON, PRESIDENT, NORTH DAKOTA
FARMERS UNION
Mr. Carlson. Thank you very much, Senator Dorgan, and I
thank you very much, Senator Cochran, for holding this hearing.
It's a pleasure to be here and a great opportunity to be here.
Mr. Chairman, I'm going to summarize my testimony rather
extensively. You have a written copy, and I will try to just
hit some of the high points.
As I understand it, the reason for this committee holding
this hearing was to help answer the question, and I may be
paraphrasing what you said earlier, Mr. Chairman, but to help
answer the question does the increased concentration in the
agricultural marketplace result in demands upon this committee
for greater appropriations in the field of sport and farmers?
Mr. Chairman, our members, and we are the largest farm
organization in the State, would answer that question yes by
simple logic. When you have more concentration, you have less
competition and farm income is reduced. Therefore our demands
on this committee and on this Congress for supplemental farm
income is increased.
Now, I grant you it is difficult to quantify that amount in
many cases. In one I think we do have some quantification of
the cost, and that's in the area of transportation. People have
talked to this committee about the food chain. Farmers are the
beginning of that food chain, and I would say in many cases in
terms of market power certainly they're the weakest link in
that food chain.
One of the most powerful links in that food chain is very
close to us as farmers, and that's transportation. In North
Dakota, more than 80 percent of the grain in our State is
shipped out by rail. Yet only three percent of our State's
elevators have access to more than one railroad.
In short, North Dakota farmers essentially are captive
shippers to either Burlington, Santa Fe Springs, or the other
alternative, the Canadian Pacific line to move their
commodities to domestic users in export terminals.
The North Dakota Public Service Commission and this is
where we have quantification estimates that North Dakota
farmers are overcharged $100 million annually due to lack of
competition. That is $100 million in today's pathetic grain
prices that is made up for, to some degree, by our loan
deficiency payments.
So that $100 million that is due to overcharging by
railroads in North Dakota is actually transferred from LDPs to
the railroads.
You have the Upper Great Plains Transportation Institute at
North Coast State University, a very well-respected academic
think tank also can quantify the cost to farmers of the lack of
competition in the rail business.
Just to illustrate, the Burlington Northern Santa Fe
transportation rate per car mile for 52-car unit train from
Marmarth, North Dakota, to Minneapolis, Minnesota, was $5.68.
The rate per car mile for the same type of train from
Creighton, Nebraska, to Minneapolis was $3.17, a 79 percent
difference.
Again, the train is similar, and the mileage is very
similar. What brings this comparison into focus is the fact
that the distance from Mina to Minneapolis is 472 miles on the
Burlington Northern line, versus 463 miles on the Creighton to
Minneapolis line. And such disparity in rates show up in unit
train great movements to the Pacific northwest in a very, very
similar manner.
Clearly the lack of competing railroads leads to higher
rates and poorer service to the grain shippers who are captive
to one railroad line. Whether there is not competition, there
must be regulation, and Congress needs to provide authority for
rail regulation in those types of instances.
A second area I'll briefly summarize, Mr. Chairman, is in
the identification of food chains. In 1999, Dr. William
Heffernan of the University of Missouri identified two food
chain businesses or conglomeration of businesses capable of
controlling food production from genetic engineering to the
grocery store shelf. One of those entities was Cargill
Monsanto, a second was ConAgra by itself, and a third Novartis/
ADM. Cooperatives which were formed to provide independent
alternatives have to compete with these vertically integrated
corporations.
Some co-ops have had to form alliances with those chains in
order to survive. More alarmingly, some cooperatives have been
out muscled by corporate giants, denying farmers a measure of
self-control and competition.
Earlier this month, Archer Daniels Midland and Farmland
industry completed a deal that gives ADM control of Farmland
Grain Elevators across the country. The agreement between ADM
and Farmland means ADM will take control of Farmland's 24 grain
elevators in a joint venture.
The join venture creates a company, ADM Farmland, Inc., to
lease and operate Farmland's grain assets. But despite being
called a joint venture, there is little doubt that ADM will be
in the operation driver seat when it comes to operations. So
the big get bigger and competition lessens.
A third and final area, Mr. Chairman, Mr. Heffernan
identified just this year in a study commissioned by the
National Farmer's Union rapid growth of concentration in the
retail food industry. And let me just pick a couple of
highlights from that excellent study.
Major players in food retailing in the United States are
Kroger, Albertson's, Wal-Mart, Safeway, and Ahold USA, a Dutch
firm. These five supermarket chains account for over 40 percent
of retail food sales in the United States. By comparison, the
top five retailers counted for only 20 percent of food sales in
1993.
What does that mean to farmers and to farm income? Well, it
means that as retailers grow larger through acquisitions and
mergers, they develop their own vertically integrated
distribution systems that tend to shut out wholesalers, small
processors, and smaller retailers.
And what that means is that those of us who have been
active in forming value-added cooperatives in North Dakota and
elsewhere face barriers to entering products into the
marketplace, into the food stores when we do form those, be it
a pasta cooperative or meat cooperatives. We need to get shelf
space, and when those corporations charge high slotting fees,
it's very difficult to do that.
Prepared statement
I will conclude, Mr. Chairman, by saying that our
organization supports the insertion of a concentration title
into the new farm bill. We have about a dozen recommendations
that we believe should be a part of that concentration title. I
will leave those for you to see in my written testimony and
conclude with my sincere thanks to you for holding this
hearing.
[The statement follows:]
Prepared Statement of Robert Carlson
Mr. Chairman: My name is Robert Carlson. I have a small grains and
bison farm near Glenburn, North Dakota. Also, I am president of North
Dakota Farmers Union, my state's largest general farm organization.
I appreciate this opportunity to share with you the impact to
farmers and ranchers that is occurring due to concentration among
agricultural businesses.
One fact is indisputable. There are fewer farmers today than there
were 20 years ago, and there are fewer businesses in control of the
transportation, processing, and marketing of family farm produced crops
and livestock. Big business has merged into fewer and larger companies
by choice. Sometimes they do so to gain efficiencies, often they do so
to more effectively dominate a market. On the other hand, family-sized
farms are not getting bigger by choice. While many food processing
businesses are recording record profits, many farmers and ranchers are
struggling to get by. Clearly, some measure of the healthy profits
being reaped by big business are coming at the expense of our nations'
small farms and ranches. The viability of our nation's rural
communities and infrastructure is closely linked to the relative
financial health of farms and ranches.
TRANSPORTATION
Farmers are the first link in our nation's food system. They
provide more than enough crops and livestock to feed our nation. The
balance is exported which reduces our nation's trade deficit. In North
Dakota, more than 80 percent of the grain is shipped out by rail. Yet
only three percent of my state's elevators have access to more than one
railroad. In short, North Dakota farmers essentially are captive
shippers to either Burlington Northern Sante Fe or Canadian Pacific Soo
Line to move their commodities to domestic users and export terminals.
The North Dakota Public Service Commission estimates that North Dakota
farmers are overcharged $100 million annually due to a lack of
competition. The Upper Great Plains Transportation Institute (UGPTI)
has studied numerous transportation issues that affect North Dakota
farmers. UGPTI found, for example, that BNSF's transportation rate per
car mile for a 52-car unit train from Minot, ND to Minneapolis, MN, was
$5.68. The rate per car mile for the same type of train from Crete, NE,
to Minneapolis was $3.17--a 79 percent difference. What brings this
comparison into focus is the fact that the distance from Minot to
Minneapolis is 472 miles on BNSF's main line versus 463 miles from
Crete to Minneapolis on BNSF's main line through Nebraska.
Such disparity in rates shows up in unit-train grain movements to
the Pacific Northwest (PNW). BNSF's rate for grain moving from Devils
Lake, ND, to an export terminal in Portland, OR, is considerably higher
than for grain shipped from Hastings, NE, to the same terminal even
though the distance from Devils Lake is 1,424 as compared to 1,788
miles.
In the 1970s, North Dakota was served by five Class I railroads
Northern Pacific, Great Northern, Soo Line, Milwaukee Road, and Chicago
Northwestern. One can reasonably assume that five carriers competed for
grain shipments. With only two Class I railroads today, farmers are
faced with trucking their grain a considerable distance to choose
between two railroads. In fact, Soo Line is now part of the larger
Canadian Pacific Railroad, while Burlington Northern Sante Fe's 35,000
route miles cover 28 western states and two Canadian provinces. It's
worth noting that in Nebraska, where BNSF's rates are lower, Union
Pacific operates a high density main line which runs parallel to BNSF.
Due to concentration in the rail industry, Union Pacific and BNSF have
emerged as the two dominate-- and only remaining Class I--western rail
giants. Both railroads serve many of the same export facilities,
manufacturing regions and transportation gateways, which creates keen
competition.
In effect, Burlington Northern Sante Fe is profiting at the expense
of North Dakota farmers. At the same time, farmers in my state are put
at a competitive disadvantage because lower shipping rates provide
Nebraska farmers with a ``built-in'' discount which can be used to
increase their share of the export market. Without strong competition,
railroads take full advantage of their captive shippers. The Surface
Transportation Board is set up to consider complaints regarding rates.
Often, small shippers and individual farmers are overwhelmed by the
expense, time, and resources required to initiate a case to prove a
railroad has market dominance. Just recently, BNSF was ready to merge
with Canadian National, a transcontinental railroad across Canada,
until the U.S. government put a moratorium on mergers. CN already has
merged one U.S. railroad--Illinois Central--into its map of route
miles. How few railroads will it take before one no longer has to make
a case for market dominance?
FOOD CLUSTERS
In the 1950s, there were hundreds of Class I railroads. Today there
are but a handful. The old adage that ``bigger is better'' doesn't
apply to increasing concentration in agricultural industries,
especially considering the impact to family farm agriculture and rural
economies--be it transportation or food clusters.
In 1999, Dr. William Heffernan of the University of Missouri-
Colombia, released findings of a study which illustrated how
consolidation in the food and agriculture industry had molded hundreds
of independent food companies into four or five ``food clusters.'' A
few business giants understand well how using their massive economic
muscle can squeeze higher rates of return for stockholders at the
expense of producers and consumers.
Concentration spawns numerous negative consequences that are felt
across rural America, including:
--Harming community development by taking profits back to corporate
headquarters instead of investing in the communities in which
the goods were produced.
--Eliminating independent producers and other independent businesses,
who will not be able to stay in business without agreeing to be
linked to ``the chains'' for access to inputs and marketing.
--Making it more difficult for new businesses to start.
Who are ``the chains'' in Heffernan's study? Three food chains are
capable of controlling food production from genetic engineering to the
grocery store shelf: Cargill-Monsanto, ConAgra, and Novartis-ADM. The
first two built chains through acquisitions, while Novartis-ADM relies
on marketing agreements.
Cooperatives, which were formed to provide independent
alternatives, have to compete with these vertically-integrated
corporations. Some co-ops have had to form alliances with the chains in
order to survive. More alarmingly, some cooperatives have been out-
muscled by corporate giants, denying farmers a measure of self control
and competition.
Earlier this month, Archer Daniels Midland Co. and Farmland
Industries completed a deal that gives ADM control of Farmland grain
elevators across the country. The agreement between ADM and Farmland,
the largest farmer-owned U.S. cooperative, means ADM will take control
of Farmland's 24 grain elevators. The joint venture creates a company,
ADM/Farmland Inc., to lease and operate Farmland's grain assets
throughout the United States. Despite being called a joint venture,
there's little doubt that ADM will be in the driver's seat when it
comes to operations. The big get bigger and competition lessens.
Heffernan's study reveals some alarming trends regarding the big
business of ownership and control of the. Food system. As the study
notes, ``The changes are the result of notoriously short-sighted market
forces and not the result of public dialogue.'' Think of the food
system as an hour glass with producers at the top and consumers at the
bottom. There are millions of producers and many millions of consumers
at either end, yet only a handful of chains control the processing
bottleneck middle. In the 1980s, economists shared a general agreement
that if four firms controlled 40 percent of the market, that market was
no longer competitive.
Current information on market control is much harder to come by.
Heffernan estimated that four firms control more than 40 percent of the
processing of major commodities produced in the Midwest. For example,
ConAgra is on the list of the top four processing firms for beef, pork,
turkeys and sheep (as well as seafood). At the time of the study,
ConAgra slipped to fifth place in broiler production and processing.
The data also suggested vertical integration in the food system.
Cargill ranks in the top four firms producing animal feed, feeding
cattle and processing cattle.
The information doesn't reveal the extent of vertical integration
in the food system in the U.S. or the complex web of interactions among
the top four firms. Nor does the study attempt to address the global
nature of the food system. Cargill has operations in 70 countries and
is a privately held firm. Difficulty in obtaining information about
such firms makes it equally difficult to formulate public policy
regarding concentration.
``The major concern about concentration in the food system focuses
on the control exercised by a handful of firms over decision-making
throughout the food system. The question is: Who is able to make
decisions about buying and selling products in a marketplace,''' stated
Heffernan's report.
In the past, most global grain firms were family-held operations
that operated in one or two stages of the food system in a few
commodities. Today's food clusters, however, are weaving economic webs
that trap farmers and ranchers. ConAgra Fertilizer Company may supply
the fertilizer for the crop in the field, then buy the grain through
ConAgra Grain Company and arrange for it to be to ConAgra Flour
Milling. Chun King, a subsidiary of ConAgra could then use the flour
for a product destined for a grocery store shelf. When a few companies
can wield such market dominance from one end of the food chain to the
other, it stands to reason that ConAgra will act to keep everything all
in the corporate family regardless of the impact to family farmers.
Today the system is much more complex, beginning with involvement
in biotechnology, extending through production and ending with highly
processed food. Through mergers, acquisitions, alliances, joint
ventures, contracts, partnerships and agreements, the major chains are
assembling ``clusters of firms'' that control the food system from the
gene to the supermarket. Within this emerging system, there will be no
markets. There will be no price discovery from the gene, fertilizer,
processing and production to the supermarket shelf. The only time the
public will know the price is when a product arrives in the
supermarket.
``As this system evolves, even the price of the livestock feed and
its ingredients, such as corn, will not be known to the public, because
like today's broilers the product will not be sold,'' Heffernan said.
In a food chain cluster, the food product is passed along from stage to
stage, but ownership never changes. The farmer becomes a grower,
providing labor and often some of the capital, but never owning the
product as it moves through the food system and never making the major
management decisions,'' according to the study.
Heffernan identified the following rapidly emerging food clusters:
Cargill/Monsanto; ConAgra; and Novartis/ADM.
Cargill/Monsanto is a leading biotechnology firm and an established
cluster. Cargill has the deep pockets needed to buy its way to the top.
In 1998, Cargill moved to acquire the grain merchandizing division of
Continental, which would give Cargill alone control of 40 percent of
all U.S. corn exports, more than 30 percent of soybean exports and at
least 20 percent of wheat exports. Cargill's corporate goal is to
double in size every five to seven years.
The goal of getting bigger is shared by ConAgra. Heffernan's study
found that it was one of the three largest flour millers in North
America, ranked fourth in dry corn milling and produced its own
livestock feed. ConAgra ranked third in cattle feeding, third in pork
processing and second in cattle slaughtering. ConAgra owns about 100
elevators, 1,000 barges and 2,000 rail cars.
A notable difference between ConAgra and Cargill or ADM is that
ConAgra follows the processing of food farther down the food chain,
ultimately selling labeled food items that most consumers recognize.
Armour, Swift, Butterball, Healthy Choice, Peter Pan Peanut Butter and
Hunt's are just a few of the ConAgra labels. ConAgra ranked second
behind Phillip Morris as the leading food processor in the U.S.
Novartis/ADM is another food cluster that already dominates the
industry. Novartis is a Swiss firm that has agribusiness operations in
50 countries around the world. Novartis focuses on crop protection,
chemicals, seed and animal health. Novartis entered a five year, $25
million research agreement with the University of California-Berkeley
to study gene-library construction, sequencing and mapping.
A primary reason for the Cenex Harvest States merger was the
viewpoint that co-ops need more financial muscle and resources to
compete in a world of giants. Such giants, however, have encircled the
world with their operations.
More worrisome is that independent farmers will have few options in
a global food system in which major management decisions are made by a
small core of executives. Heffernan says there is no price discovery
for chicken feed, chicks or live broilers, as the food product is owned
at these stages by the same food cluster. The same is true for turkeys.
Two recent technologies will speed up the process of vertical
integration in the crop sector. The first is biotechnology and the
terminator gene that keeps farmers locked into one source of seed. The
second is precision farming's global positioning system, which will
allow decisions about crop management to be made from a remote
location. Farmers face the prospect of becoming ``hired hands'' who
drive tractors for a paycheck. Farmers will still shoulder production
risks, but management decisions may be made at computers located in a
food chain's office hundreds of miles away.
Heffernan says a system of family farms are an economic engine that
fuels the prosperity of rural communities. Large non-local
corporations, however, see labor as an input cost to be purchased as
cheaply as possible while profits are siphoned from the community. As
mentioned earlier, large corporations are becoming larger and their
profits follow suit. Family farms and rural communities are
experiencing economic decline. There is a connection.
``Increasingly, the major decisions in the food system are being
made by an ever-declining number of firms. They are primarily concerned
with maximizing their profits,'' the Heffernan observed. But giving in
to food clusters is not inevitable. Consumers and government are asking
questions about the control and power of food clusters. More to the
point, Heffernan offers this challenge. ``The centralized food system
that continues to emerge was never voted on by the people of this
country, or for that matter, the people of this world. It is the
product of deliberate decisions made by a very few powerful human
actors. This is not the only system that could emerge. Is it not time
to ask some critical questions about our food system and about what is
in the best interest of this and future generation?''
RETAIL
Earlier this year, Dr. Heffernan issued the results of a new study
which looked carefully at concentration in the food retail industry.
Let me excerpt the more telling comments from his study.
``Over the last forty years, the agro/food system in the United
States, and in much of the rest of the world, has been in the process
of being restructured one commodity sector after another. For instance,
change came to the beef sector at the feedlot level. Today 20 feedlots
feed 50 percent of the cattle and are directly connected to the four
processing firms that control 81 percent of the beef processing either
by direct ownership or through formal contracts.
``Over the past couple of years, it has become increasingly clear
that the food chain clusters are being extended through the retail
stage with such new processing arrangements as ``case-ready'' products.
This final step in the alliance is so powerful that it is further
restructuring some of the commodity sectors that began horizontal and
vertical integration long before the dairy sector.
``The major players in food retailing in the United States are
Kroger, Albertson's, Wal-Mart, Safeway and Ahold USA, a subsidiary of
the Dutch firm Royal Ahold. Together these five supermarket chains
account for over 40 percent of food retail sales in the United States.
By comparison, the top five food retailers accounted for only 20
percent of food sales in 1993. Average market concentration of the four
top retailers in individual metropolitan areas around the U.S. stood at
73 percent just a few years ago and there is little indication that it
has decreased.''
The number one supermarket in US, Kroger Co. based in Ohio, is
estimated to receive 10 cents of every dollar spent in supermarkets in
this country. According to its 1999 Annual Report, Kroger's ``primary
financial goal is to increase annual earnings per share by 16-18
percent over the next three years.'' For the record, in 1997
Albertson's had a 22.2 percent return on equity, while Safeway enjoyed
36 percent return on equity.
North Dakota farmers would be tickled if they could look forward to
the same rate of return.
As many retailers are now doing, Kroger has ties back to the
production side of the food business. In March 1998, Kroger began to
sell case-ready beef and pork products under Kroger's own label, and
are processed by Excel, a subsidiary of Cargill. This type of
arrangement directly ties these retail stores to the Monsanto/Cargill
food chain cluster identified by Dr. Heffernan in 1999. As the study
explains, ``Wal-Mart, which had virtually non-existent food sales in
1993, is now the second largest food retailer in the US, and is on
track to become the largest, with surprisingly strong food sales at its
Supercenters. When Wal-Mart entered the supermarket business in the
mid-1990s, other stores were wary because of the incredible logistics
system and supplier pricing that Wal-Mart brought to the business. More
importantly, Wal-Mart's large size and market power causes concern as
it integrates backward in the food system by creating relationships
with dominant food chain clusters. Wal-Mart is one of the first
supermarkets to use case-ready meat in its stores. The first such
prepackaged beef came from IBP.
``Wal-Mart is a key player on the global level. In 1997, Wal-Mart
made a foray into Germany, buying Wertkauf and Spar Handels
hypermarkets, and then headed west in 1999 to purchase Asda, Britain's
third largest-supermarket. Wal-Mart also operates in Argentina, Brazil,
Canada, and Mexico, and is involved in joint ventures in China and
Korea. Some analysts predict there will be only six or so global food
retailers in the near future Wal-Mart and the European firms of
Carrefour, Ahold and Tesco (UK) are likely contenders.''
Dr. Heffernan has revealed how retailer dominance, or vertical
integration, in the food system presents challenges for farmers,
processors and distributors. As retailers grow larger through
acquisitions and mergers, they develop their own vertically integrated
distribution systems that tend to shut out wholesalers, small
processors and smaller retailers.
Another challenge for smaller food producers and processors is the
retailer fees that many large chains demand. It has been estimated that
between 50 and 75 percent of total net profit for large retailers comes
from ``slotting allowances, advertising fees,'' and other arrangements
which do not represent cash sales of food to consumers. There are a
whole range of ``trade promotions'' that manufacturers pay retailers,
including slotting allowances (which are supposed to be for new product
entry only), display fees, presentation fees, ``pay-to-stay'' fees and
failure fees.
THE IMPACT TO FARMER-OWNED COOPERATIVES
Farmers are at the mercy of large multinational businesses. One
solution is for farmers to vertically integrate farther ``up'' into the
food chain. Farmers have pooled their resources to create value-added
cooperatives. Two such cooperatives in North Dakota are process bison
and durum. In fact, the durum cooperative, Dakota Growers Pasta
Company, has become quite successful.
The power of concentration is moving ominously, but quietly, into
the food retail sector. Food retailers are using their massive access
to consumers to force suppliers to become lower-cost providers of
processed food. The bulk of products produced by Dakota Growers Pasta
is for the private label market. Small companies such as Dakota Growers
Pasta do not have the resources to buy shelf space in major food retail
outlets. Even as a value-added product, pasta and other processed foods
are becoming commodities themselves as food retail giants increase
their power in the food chain. Also, if such co-ops are bold enough to
fully promote their own label, they will no longer be in the business
of filling private label orders and without that business volume they
will no longer be in business. So even as value-added co-ops are moving
up into the food chain, retail market power is allowing a few giants to
squeeze more pennies out of the system. Farmers make the investment in
a cooperative processing plant, retailers use their immense leverage to
lock in the benefits.
Higher energy prices and extremely low corn prices have encouraged
farmers to explore forming ethanol manufacturing cooperatives. We all
applaud these ventures for creating new uses for agricultural products
and increasing farm income. But what happens if corn prices increase or
energy prices tumble? These co-op's won't have the deep pockets to
survive. It's happened before. The results will bankrupt ethanol co-ops
that the ADMs of the world will buy up for little investment. And once
again, the big will get bigger at the expense of farm families.
Cooperatives work for their farmer-members. They can't simply go
out and buy up the competition to become bigger. Cooperatives were
formed to create competition and to be answerable to farmers.
In fact, major food retailers are not concerned about the future
viability of American agriculture. They are focused on extracting the
maximum profit possible for the benefit of stockholders.
As Dr. Heffernan concluded in his study on retail concentration:
``The loss of U.S. farmers makes little difference to transnational
corporations, whether they are headquartered in the US as are many of
the dominant agro/food processors, or in other countries as are most of
the emerging retail firms. They travel the world to find where they can
`source' the product with the least cost and then move the product
where it can be sold for the highest price. In many of the poor
countries, workers in rural areas receive less than five dollars a day.
Health and environmental regulations, if they exist, are rarely
enforced so firms can operate with lower costs in these countries.
Transnational corporations are experts at reaping the economic benefits
of globalization while pushing the economic, social, environmental and
other costs onto the public. If regulations in this country are
implemented to prevent corporations from shifting costs to the public
sector, but nothing is done to prevent them from shifting the cost in
other countries, then farmers in this country automatically become high
cost producers.''
Our nation's consumers and farmers are on the outside looking in
when it comes to who really makes decisions about food in this nation.
Consumers are frustrated when they know the price of wheat has dropped
but a loaf of bread costs the same or more. Farmers shoulder higher
transportation costs to ship their grain to market. Just because rail
mergers have left them isolated from competition. (In virtually every
other business, from automobiles to Internet book sales, its the buyer
who has to pay the freight.) Food is far too valuable to leave its
future to a few. Food is life. We have seen what happens when a handful
of people control our nation's energy supplies. Imagine what will
happen if a few giants will ultimately control food from the field to
the checkout line.
RECOMMENDATIONS
The loss of family farms and other independently-owned businesses
is not inevitable. The accelerated march toward a totally vertically
integrated production system can be turned around with action to
strengthen the regulatory system and revitalize independently-owned
businesses. Here are a number of promising solutions worth your
consideration.
Put ag mergers on hold.--Congress should enact a moratorium on
agricultural mergers. Last fall the Senate rejected an amendment
calling for an 18-month moratorium on large agricultural mergers
involving companies with assets of $100 million acquiring companies
with assets of $10 million or more.
Prohibit packer ownership of livestock.--Ownership allows the
packer to control supply to manipulate the market so that farmers and
ranchers receive less money. Legislation in the last Congress would
have limited packer ownership to 14 days prior to slaughter.
Strengthen mandatory price reporting.--Congress should continue
oversight of mandatory price reporting legislation. The price reporting
bill passed in 1999 was promulgated by USDA this fall and is in effect
for 2001. However, questions remain regarding regional reporting.
Producers need area-specific information that more accurately reflects
regional and state prices.
Report concentration data.--Congress should require USDA to collect
concentration information. Currently, the University of Missouri
collects information to show the top four firms in many different
commodity areas. However, the some vital information is not readily
available to the university. USDA is in position to have the best
access to the information.
Disclose joint ventures.--The Justice Department (DOJ) and the
Federal Trade Commission (FTC) should require firms to submit
information on joint ventures and alliances that are between firms
above a certain size. In many cases, firms that are participating in
joint venture arrangements behave just like firms that have merged.
Yet, joint ventures and alliances have not been subject to any
scrutiny.
Establish permissible levels of concentration.--Congress should
consider enacting a level of concentration that triggers an automatic
antitrust violation to make it easier for the Justice Department and
the Federal Trade Commission to prevent high levels of concentration.
Disclose merger reasons.--Congress should require the Justice
Department and the Federal Trade Commission to detail why mergers
subject to antitrust review are okay, if the decision is made not to
oppose the merger. This would improve accountability.
Require economic impact statements.--Congress should require an
economic impact statement detailing the impact a merger or joint
venture will have on farmers and ranchers prior to approval.
Label for country-of-origin.--Congress should enact country-of-
origin labeling to allow consumers to know where their food supply is
being produced. Country-of-origin legislation was introduced in both
the House and Senate in the last Congress. Recent issues regarding
foot-and-mouth disease has consumer asking where their food comes from.
Focus research & development to family-sized farms.--Congress
should ensure that publicly-funded research benefits family-sized
agricultural businesses and their communities. Congress should prohibit
the use of rural development grants for the creation of factory farms.
Authorize producer bargaining.--The Senate should enact legislation
to authorize contract producers to form collective bargaining units to
negotiate with integrators.
Fund Local Market Development.--Congress should consider
prioritizing research on local and regional markets as well as research
on small business structure as part of the National Research Initiative
(NRI). By offering information, training and financial assistance in
the forms of grants and loans, communities could foster the formation
of food cooperatives and other key small businesses.
Prohibit slotting fees.--Congress should prohibit slotting fees,
i.e., the large fees charged to suppliers to put their product on the
store shelf. Slotting fees provide windfall profits to retailers and
create a barrier for new firms and products.
Authorize interstate shipment.--Allow interstate shipment of state-
inspected meat.
Provide Model Contract Legislation.--Enact legislation to enhance
fairness and provide producer protection in agricultural production
contracts.
Senator Cochran. Thank you for your contribution to the
hearing and for being here and for the insertions that we will
have in the record because of your participation.
We'll now hear from Mr. Peter Carstensen, Associate Dean
for Research and Faculty Development at the University of
Wisconsin, Madison Law School.
STATEMENT OF PETER C. CARSTENSEN, ASSOCIATE DEAN FOR RESEARCH AND
FACULITY DEVELOPMENT, UNIVERSITY OF WISCONSIN-MADISION LAW SCHOOL
Mr. Carstensen. Thank you very much, Mr. Chairman. It's a
great honor to be invited to participate in this hearing. I
especially appreciate the very kind words of Senator Kohl at
the beginning.
I think of myself as a competition law and policy
generalist, although in the last 3 years I have become
increasingly focused on a number of the problems that we have
in agriculture and how competition policy plays out there.
My particular focus today in the statement that I submitted
was on the role of the GIPSA, and of regulation given
concentration in various agricultural markets.
And earlier testimony last year before both the Senate Ag
Committee and the Antitrust Subcommittee, the Judiciary
Committee, I've made more general statements about
concentration and competition policy.
My full statement proceeds in kind of four steps in
recommendations. The first step which you've heard a lot about
already has to do with the existence of concentrated markets
and the kind of buyer conduct that is taking place within the
context of those markets. And I don't need to reiterate the
kind of data that you've already heard today.
And the additional examples, Farmland being one, another
that concerns me deeply in the dairy area Swiza and Dean are
proposing to merge, according to media reports. That would give
those two firms combined 30 percent of the fluid milk market in
America.
So concentration is spreading out into additional
agricultural markets. We've heard some suggestion that
concentration is necessary for efficiency. It seems to me it is
very, very unlikely that in any of these markets the levels of
concentration that we see have any relationship to efficiency
in production of goods and services. And so I don't think that
the efficiency needs are what drives these kinds of
organizations.
We also have changes in conduct, the growth of contracting.
I don't want anybody to think that we should be opposed to
longer term contracting to other forms of marketing in
agriculture, but we do need to have a legal structure then that
avoids the new and different risks that are created in the
context of those kinds of marketing arrangements.
And, again, you've heard a lot already about the problems
of differential pricing, of lack of access, of other contract
terms. Some of these terms in the arbitration clauses, et
cetera. They're extremely questionable. Confidentiality clauses
that keep farmers from sharing information with each other. If
we want open and transparent markets, we've got to deal with
this.
Right now the context is one which I think of as lawless.
We do not have a good legal structure to oversee how these
newly emerging and developing markets are created, are managed
and supervised.
Here again my particular suggestion to you, typical for a
law professor, I suppose, is that law plays a very important
role in facilitating fair, efficient, competitive, accessible
markets, and that--and I wrote at some length about that. How
that, in fairness, especially in concentrated markets can
arise. How markets can be exploited, manipulated by strategic
conduct.
And the role of law both enforcing competition policy but
also in providing other kinds of regulation to achieve fair and
equitable treatment of individual participants as well as
facilitating the efficient operation of those markets.
The Packers and Stockyards Act is an early example of that
kind of legislation. 1921 Congress recognized that disputed
antitrust interventions in meat markets there were serious
problems. And adopted the PSA with a combined interest in
facilitating improved competition, addressing anticompetitive
issues as well as the fairness of contracts and the access to
the market.
And so we have a congressional policy here, which is my
third point, GIPSA has simply failed, and the Department of
Agriculture has failed to provide the necessary regulation for
the modern contract terms and the essential enforcement of
access, fairness, and competition.
I was pleased to hear that they are finally going to do
something about hog contracts. I'm personally pretty miffed
that a year ago almost last September in Denver, a panel of
experts of a variety of different points of view on contracting
all agreed that there were at least a few things that could be
forbidden by rule because there was no possible justification
in terms of market for those.
And Mr. Keith Collins was there and heard us all agree, and
I think he was a little surprised. They haven't done a thing to
even adopt those basic regulations. And that's, to me, a very
serious problem. They have the authority, and they are simply
not using it to create the rules that will facilitate the fair
market practices, the accessible market practices.
Secondly and closely related, there's a serious problem of
lack of enforcement capacity organization and just plain staff.
And I think that's pointed out in the GAO study. And it's
something that needs to be addressed.
It is something which this subcommittee can address if you
can find some resources, and then make sure that they are
appropriately used by GIPSA and the Department of Agriculture.
Fourth and something that you've heard raised here already,
there are a variety of provisions in agricultural law for
fairness in a variety of markets. The PSA doesn't address
dairy, doesn't address some of the problems in grain
contracting. There are other provisions in the laws that
address some of these issues in slightly different ways. I
think and you've heard this suggested, using the upcoming farm
bill, to create a competition title to focus on reconciling,
making more general the rules of competition, facilitating the
markets to create better rules of access, better rules of
fairness is a wonderful opportunity to kind of restate the law
of agricultural markets.
My statement concludes with some suggestions of where we
might go. Basically GIPSA needs better organization so that it
can adopt and enforce its rules. It needs more adequate
resources. I think you need to facilitate those, the work of
developing a competition section of your new upcoming statute.
Prepared statement
And I got to say to you, gentlemen, in particular this
isn't going to be cheap. It's going to cost money to do it. But
it's also going to cost you and your staffs time and attention
to pursue and make sure the Department of Agriculture follows
up and carries out. Because you guys control the purse strings.
You're in a position where I hope that you will invest a little
time and effort at that part of it. Thank you very much.
[The statement follows:]
Prepared Statement of Peter C. Carstensen
PREFACE
I am a generalist with respect to competition law and policy,
having studied a variety of industries and legal issues in the course
of my career. This background allows me to place many of the issues
concerning competition in agriculture in the broader context of
recurring competition policy issues that confront our economy, with its
reliance on the marketplace as the primary institution for allocating
goods and services.
For the last three years, I have focused a significant part of my
attention on the specific competitive issues that confront agricultural
markets on both the input and output side.\1\ As a result, I have been
reading a great deal about these issues from a variety of perspectives
as well as learning from many experts in the field. I also bring a
modest background in some aspects of these issues. As a government
lawyer some 30 years ago, I reviewed the old meat packing consent
decree and in the process came to appreciate the context within which
Congress crafted the Packers and Stockyards Act. In 1995, I served in
Wisconsin on a committee that reviewed and proposed modifications for
the regulations governing contracts for vegetables being purchased for
canning. I have also done an extensive examination of the grain
marketing industry in connection with a study of the famous Chicago
Board of Trade decision which is a landmark antitrust case.\2\ In
addition, my work on the competitive implications of other kinds of
vertical distribution arrangements has provided me with relevant
background on some of the key issues being considered today.\3\ Last
September, I was one of six invited academic experts in the U.S.
Department of Agriculture's Public Forum on Captive Supplies held in
Denver, Colorado.\4\ We were asked to evaluate the need to adopt
regulations under the Packers and Stockyards Act to deal with concerns
about anticompetitive and inequitable treatment of farmers and ranchers
who raise beef cattle. In addition, in the past year, I have been an
invited witness in hearings before the Senate Agriculture Committee and
the Senate Subcommittee on Antitrust, Business Rights and Competition
on agricultural competition issues.
---------------------------------------------------------------------------
\1\ Carstensen, ``Concentration and the Destruction of Competition
in Agricultural Markets: The Case for Change in Public Policy,'' 2000
Wis. L. Rev. 531.
\2\ Carstensen, ``The Content of the Hollow Core of Antitrust: The
Chicago Board of Trade Case and the Meaning of the Rule of Reason' in
Restraint of Trade Analysis,'' 15 Research in Law and Economics 1
(1992).
\3\ E.g., Carstensen & Dahlson, ``Vertical Restraints in Beer
Distribution: A Study of the Business and Legal Justifications for
Restricting Competition,'' 1986 Wisconsin Law Review 1; Carstensen,
``Legal and Economic Analysis of Vertical Restraints: A Search for
Reality or Myth Making,'' in Issues After A Century of Federal
Competition Policy, Wills, Culbertson, Caswell, ed., 95 (1987).
\4\ The written statements made at that forum are available at the
U.S. Department of Agriculture website: www.usda.gov/gipsa/forum/
forumprogram.htm
---------------------------------------------------------------------------
OVERVIEW
I appreciate the opportunity to testify at this hearing. Congress
should be deeply concerned about the implications of the existing
concentrated structure and continuing patterns of consolidation in the
meat packing industry for the survival and economic well being of the
farmers and ranchers who raise livestock. The same issues exist in many
other areas of agriculture especially in milk production and processing
where there is even less effective regulation despite a number of
statutes that seek to establish rights and protections for farmers and
ranchers. The focus of this hearing is on the Grain Inspection and
Packers and Stockyards Administration (GIPSA) which Congress intended
to play a central role in ensuring efficiency, fairness and equal
access in meat and grain markets. Yet today, livestock growers face
serious problems in marketing their animals as a result of the failure
of GIPSA to respond appropriately to the dramatic changes in the
structure and buying practices in the industries it oversees.
In 1921, Congress adopted the Packers and Stockyards Act (PSA) to
provide a legal structure to govern the relationships between farmers
and ranchers raising livestock--especially cattle and hogs--and the
stockyards and slaughter houses. At that time, and again today, the
buyers were highly concentrated nationally and there were, then and
now, even fewer buyers in any specific locality. Congress had three
goals in adopting the PSA-eliminating anticompetitive practices in the
marketplace, ensuring access to all producers, and providing for
fairness in transactions. Congress also recognized that it could not
revisit the specifics of conduct on a regular basis and so it
authorized the Secretary of Agriculture to adopt rules to implement the
broad policy goals of the PSA. GIPSA is the agency within the
Department of Agriculture that has the assignment of enforcing the PSA
by developing rules and regulations that will further the goals of the
statute and then enforcing those regulations through administrative
proceedings. Further Congress authorized farmers and ranchers who were
victims of violations of the law to bring suits and collect damages.
For very important reasons, both competition and equitable
treatment were and are equally important elements of public policy
toward market contexts in which there is a great disparity of economic
power among the participants. In the long run there is strong
connection between equitable treatment of market participants and the
overall growth and vitality of the economy. But at any point in time,
plausible arguments can be made that the concerns are discrete. As a
precursor of this more modern dichotomy, the PSA is striking in its
explicit combination of both competition and equity concerns within a
single statute.
Some of this country's greatest economic successes come from its
effective enforcement of equal economic opportunity without regard to
whether there is a clear and immediate relationship to conventional
notions of competition. For example, our public capital markets are at
the center of the growing global economy, exactly because our law and
policy provides real protection for the economic interests of the
individual investor.
The present situation for the marketing of livestock involves a
substantial proportion of transactions occurring outside the
traditional spot market. At the same time, the spot market remains a
central price-making mechanism. The resulting interaction between spot
and captive sales has produced significant and persistent price
differentials for similar grades and quality based on the method of
sale and unequal treatment of potential sellers. Such outcomes may,
arguably, not involve immediate, obvious anticompetitive consequences
for the overall market, but they certainly raise serious questions of
fairness and equity among producers. Moreover, data on market
transactions reveal a very large disparity in prices paid for similar
livestock. This too suggests that the present system is not functioning
in an efficient or fair manner.
In the longer term inequitable market conditions can and usually do
create additional barriers to the growth and development of
economically and socially desirable competition. Concentration both
increases the incentives to engage in discriminatory conduct and makes
it more likely to have adverse consequences on the competitiveness of
the affected markets. Risk and uncertainty are two of the greatest
barriers to entry into any market. When there are a few dominant
players with the capacity to engage in significant strategic conduct
with respect to pricing or access, those firms have a clear incentive
to employ that power to enhance uncertainty in order to deter new entry
or growth by marginal firms.
As a country we have a long and dishonorable history of market
manipulation and exploitation in a range of contexts from cheese, grain
and meat to gas, automobiles and securities. An essential role for law
and regulation is to constitute the operation of markets so that they
function in efficient and neutral ways. Law must police the conduct of
such markets because self-interested parties, especially when power is
disproportionately allocated and markets are concentrated, have an
inherent conflict of interest.
Sadly, GIPSA and the Department of Agriculture have persistently
failed to make effective use of their powers. There are neither
appropriate regulations nor effective enforce of the law. As a result,
livestock sales have increasingly become lawless. Raw economic power
determines who gets access to favorable prices and contract terms. In
the long run, the failure to facilitate efficient, accessible and fair
markets for livestock will only harm both producers and domestic
slaughterhouses. It is also likely to result in higher prices for
consumers.
Similar issues increasingly exist in other agricultural businesses.
Over the years, Congress has sought to address specific problems by
focused legislation. Unfortunately, only a few of these statutes have
proven even marginally effective in responding to strategic conduct by
buyers of agricultural products. It is time for Congress and the
Department of Agriculture to take a broader view of the problems that
America's farmers and ranchers face in the modern marketplace. The
upcoming revisions of the farm bill provide an opportunity to revise,
consolidate, and expand the various statutes intended to provide
efficient, fair and accessible markets for agricultural products. Such
a project is essential to the maintaining workable, competitive markets
for agricultural products of all kinds.
In other contexts from airlines to railroads to electric power to
telecommunications, we face similar issues. How to make an effective
transition from an old market structure and regulatory system to a
workable, competitive market? The predictable and recurrent failures in
this process result directly from the failure to recognize that lawless
markets are inefficient and unreliable. Markets require carefully
planned rules to achieve desirable, efficient performance. Such rules
do not replace the market with direct commands rather they facilitate
its efficient, fair, and equitable operation. The failures and
successes of the past can provide important lessons on how to develop
appropriate rules and regulations that reduce or eliminate the harms
that come from lawless opportunism.
The goals of fairness, access and efficiency can be achieved in
livestock markets. But GIPSA and the Department of Agriculture must be
committed to this process. In the past, regrettably, these agencies
have lacked the will to protect farmers and ranchers. The
appropriations process provides a means for Congress to insist that the
agency propose, adopt and enforce effective regulations in a timely
manner.
The rest of this statement elaborates on these issues. It first
discusses the changes in both the structure and conduct of livestock
markets as well as the consequences for producers that result from
these changes in a lawless market. Second, it is important to
appreciate the significant positive role that law and regulation play
in creating and maintaining efficient, competitive, fair and accessible
markets. In light of this framework and background, there is a
discussion of the failures of GIPSA both to initiate appropriate rule
making necessary to achieve the kind of market relationships that
Congress had sought and to enforce the existing rules in a meaningful
and effective way. Fourth, the Department of Agriculture has a number
of other obligations to enforce market facilitation legislation that
has not been integrated into an effective overall mission by Congress
or within the agency. Finally, there are some recommendations including
the suggestion that GIPSA get appropriate funding only if it
significantly changes its methods of operation so that it can
effectively carry out its obligations of rule making and enforcement.
MARKET STRUCTURE AND THE CHANGING NATURE OF BUYER CONDUCT
National and Regional Concentration is Very Substantial
Studies show that the slaughter industry is highly concentrated and
that concentration is substantially greater than it was in 1980. The
latest statistics that I have found show that the four largest firms in
steer and heifer slaughter did more than 80 percent of that business
nationally in 2000.\5\ Moreover, one firm, IBP alone did more than 32
percent. In hogs the concentration is lower with the four largest firms
account for 56 percent of that business nationally.\6\ This data
understates concentration from the perspective of livestock raisers.
Regionally, it is rarely the case that more than two or three of these
firms compete as buyers and in many areas effectively only one major
firm is buying. Thus, effective concentration in the regional buying
markets is much higher. I should also note that the dominant firms in
beef are also leaders in pork.
---------------------------------------------------------------------------
\5\ Cattle Buyers Weekly, September 18, 2000.
\6\ Id.
---------------------------------------------------------------------------
In 1980, by way of contrast, nationally the four largest firms in
steers and heifers had 36 percent while the four largest in hogs had a
34 percent share. A significant factor in this structural change was a
series of mergers that took place in the mid and late 1980s. At the
time of those mergers, the prevailing theory was that if the
downstream, consumer markets remained competitive that competition
would protect the upstream producers from discriminatory and
exploitative pricing by the meat packers. This prediction has proven
false. Regardless of the level of downstream competition, a dominant
buyer can force down the prices it pays below a competitive price and
so extract monopoly rents even though it sells its products in a more
competitive market. Recent data on margins in meat packing show that
the margin retained by the slaughter houses has increased
substantially. This suggests that the slaughter houses are exploiting
more vigorously their monopsonistic or oligopsonistic power to depress
farm prices relative to the prices they are getting from the grocery
stores.
Some have argued that high concentration is necessary for
significant efficiency gains. The fact is that high concentration is
not related to efficiency. The optimal plants for hog or beef
processing require only 2 to 4 percent of the total national volume. If
there were some further efficiency from multi-plant operation,
something which even industry representatives declined to claim last
year in Denver, the market could easily sustain 7 to 10 separate
processors in both pork and beef and each could have 2 or 3 plants.
This in turn would create a much more competitive buying structure for
cattle and hogs.
Because of bad theory in the 1980s we have excessive concentration
in meat processing markets today. This means that the packers have both
the capacity and the incentive to engage in strategic conduct whose
primary function is either to exploit their buyer power or entrench
that power against potential competition. This set of factors in turn
creates the need for effective regulation of market conduct to reduce
the negative impacts of such strategic conduct.
The problems of concentration exist in other important processor
markets as well. A handful of firms lead by Kraft dominant cheese
making. Today the country faces the threat of similar concentration in
fluid milk. The two largest processors, Dean and Suiza, propose to
merge. The media reports indicate that between them they may process
more than 30 percent of the milk sold in this country. Moreover, these
are the only two firms with nearly national processing capacity. As the
grocery business consolidates into fewer and fewer national chains,
those chains are looking for single suppliers to all or most of their
stores. The pending merger will eliminate the potential for vigorous
competition in supplying this need which in turn is very likely to harm
both milk producers and consumers.\7\
---------------------------------------------------------------------------
\7\A recent study of milk pricing in New England suggests that
after Suiza acquired dominance in that region it played a leading role
in increasing the margins between the farmer and consumer. Cotterill,
R.W., and A. W. Franklin. ``The Public Interest and Private Economic
Power: A Case Study of the Northeast Dairy Compact,'' May 3, 2001.
---------------------------------------------------------------------------
Changes in the Methods of Buying Livestock
Historically, cattle were sold in stockyards in which buyers and
sellers met. The livestock were then sent onto nearby slaughter houses.
The stockyard provided the advantage of an open auction market.
Unfortunately, because of the limits imposed by geography, only a few
slaughter houses could operate in close proximity to any specific
stockyard. The result was rampant market manipulation. This experience
is an important background to the PSA which sought to regulate the
conduct of stockyards to ensure, insofar as law could, that they
operated in an open and fair way, accessible to all.
With the development of refrigerator trucks and the interstate
highway system, slaughter houses moved into the country to be closer to
the sources of supply. This produced a different context in which
buyers from the various slaughter houses visited farmers and made bids
on livestock. As a youth and young man I recall hearing my beef raising
cousins in Iowa discuss the pros and cons of different pricing methods
and the qualities of the buyers for the four or five different
slaughter houses that were regular bidders for their steers.
As the packing industry consolidated in the 1980s and 1990s the
number of bidders declined to one or two. Increasingly, favored feedlot
operators were offered contracts of one kind or another to supply
cattle or hogs to specific buyers. Today, most livestock is sold under
some kind of a longer term contract arrangement usually with the price
based on a reported market price at the time of actual delivery. This
creates a strong incentive for price manipulation. If a buyer can lower
the public price, that will lower its costs over a much larger number
of purchases. Moreover, because contracts require delivery within set
time periods and the packer has a greater ability to manage its public
auction demand to control the prices it pays on contract.
Interestingly, in the cattle business, despite these incentives the
contract producer gets the advantage of persistently higher prices in
comparison to direct sale prices. This is the repeated finding of major
studies sponsored by GIPSA. This does not disprove the claim that
prices are manipulated to achieve, on average, lower prices than a
robustly competitive market would have produced. It only establishes
that the packers as buyers have persistently favored some producers
over others.
The point here is that there are persistent price differences for
similar grade and quality livestock based on the method of purchase.
Moreover, and equally important, the packers determine which producers
get the benefit of the higher contract prices. The implication is
twofold. First, the favored operator has an incentive to serve its
economic master because its next best option involves a substantial
loss of revenue. Such an operator is not well positioned to bargain
effectively on the terms of the transaction. Second, the fact that the
buyers are under no obligation to deal with all comers on equal terms
means that they can refuse to deal with operator. The fact of high
concentration on the packers side means that such refusals will often
deny access to the more lucrative contract market. Indeed, by refusing
even to bid for livestock for immediate sale the packer can eliminate a
disfavored operator from the business entirely.
Such bargaining power with its capacity to force terms on the
seller or even destroy a farmer's business by refusing to deal entirely
is exactly the kind of discretion that the PSA was supposed to regulate
to ensure both fairness and equal access for farmers and ranchers.
As the more comprehensive price reporting of sales has become
available, a further and equally significant fact is emerging. On sales
of similar livestock prices vary quite substantially. This again
suggests that the markets are working very imperfectly. Why such price
differences exist and persist should be source of great concern to
those charged with ensuring the fairness and openness of these markets.
The most extreme example of what can happen is found in poultry.
Once there was an open market in which growers could sell their
chickens and turkeys. Today, there is no longer a spot or public market
for general production. All supplies are captive under contracts that
impose a wide variety of unfair conditions on the growers. Recently,
the attorney general of Oklahoma has offered the opinion that many
contracts for production of crops and livestock are now contracts of
adhesion which may in fact reduce independent farmers to the position
of employees.\8\
---------------------------------------------------------------------------
\8\ Oklahoma Attorney General Opinions 01-17 (April 11, 2001).
---------------------------------------------------------------------------
Without regulation, the risk is that the public markets will either
disappear entirely or that they will become very vulnerable to
manipulation. These risks impose burdens and costs on farmers and
ranchers as well as consumers. In the long run, such market contexts
are inefficient, anticompetitive and undesirable for all those who rely
on such markets to move food and fiber from the farm to the consumer.
THE CONSEQUENCES OF A LAWLESS MARKET: STRATEGIC CONDUCT, DENIAL OF
ACCESS, UNFAIR CONTRACTS
Among the earliest antitrust cases were ones that challenged the
legality of regulations governing stock yards.\9\ In the two initial
cases, the Supreme Court upheld the restrictions because it interpreted
them as designed to avoid conflicts and opportunistic behavior that
undermine the creditability and viability of the stockyards in
question. Thus, from the earliest judicial review, the courts have
recognized that restrictions on some kinds of conduct are essential to
the fair and efficient operation of trading markets. Thus some
restraint on conduct by market participants would be acceptable in the
face of the Sherman Act's condemnation of contracts in restraint of
trade.
---------------------------------------------------------------------------
\9\ Anderson v. U.S., 171 U.S. 604 (1898); Hopkins v. U.S., 171
U.S. 678 (1898).
---------------------------------------------------------------------------
On the other side of the leger, in 1912, the Court upheld a
criminal complaint against an individual who sought to manipulate a
commodity exchange.\10\ In that same era, the government sued both the
egg and butter exchanges because in each case dominant buyers were
manipulating the pricing process in order to influence the prices of
off-exchange transactions.\11\ These three cases underscored the
inherent risks to the market that arise when thin spot markets play a
central role in the process of bringing goods, especially agricultural
products, to consumers. The management of public price making has
remained a continuing source of concern to antitrust law in a wide
range of fields exactly because of its potential to be used in a
variety of anticompetitive ways.
---------------------------------------------------------------------------
\10\ U.S. v. Patten, 226 U.S. 525 (1912) (the case involved the
cotton exchange, but Patten was also a major grain trader).
\11\ U.S. v. Chicago Butter & Egg Board, (Civil 30042, N.D. Ill.
1910); U.S. v. Elgin Board of Trade (Eq. 31051, N.D. Ill. 1912).
---------------------------------------------------------------------------
In 1913, the government challenged the over-night pricing rules for
grain to arrive of the Chicago Board of Trade. The Board of Trade
ultimately won in the Supreme Court in 1918 despite the undisputed fact
that these rules operated to establish rigid overnight prices that all
members had to pay.\12\ The record showed that this rule was necessary
so that the Board could provide an efficient, open, and non-
discriminatory market for grain. Prior to the rules, large integrated
firms were able to manipulate the market at various times by bidding
off the exchange at night at higher prices than they were paying on the
exchange. In addition, the Board of Trade changed its rules for bidding
to rural elevators so that the integrated firms were no long able to
discriminate among sellers of similar grades of grain. The impact of
these rules was to make the commodity exchange a more efficient and
effective market for grain despite the constraints imposed on some of
its members freedom of action.\13\ Such constraints are essential in
any organized exchange market. Participants, particularly those who are
fully or partially integrated, have a strong incentive to behave in
opportunistic ways with respect to their participation in the organized
market. Such conduct must be restricted if organized exchanges are to
provide effective and reliable price making mechanisms.
---------------------------------------------------------------------------
\12\ Bd. of Trade of the City of Chicago v. U.S., 296 U.S. 231
(1918). This decision is the leading decision applying the rule of
reason to a restraint of trade and upholding it.
\13\ For a fuller discussion of the business and economic factors
in the board of trade case see Carstensen, supra note 2.
---------------------------------------------------------------------------
Two other leading Supreme Court cases also involved market
manipulation activities that bear some relationship to the current
situation in livestock and agriculture generally. In the Socony
case,\14\ the major oil refiners conspired, unlawfully, to buy up
surplus gas to affect the spot market price and manipulated the
reporting of prices in order to ensure higher prices to themselves
under their long term supply contracts with wholesalers and
distributors. These long term contracts used the spot market price to
price specific deliveries. Lastly in American Tobacco the dominant
cigarette makers were found to have violated the Sherman Act by
collectively biding up the price for tobacco that was useful to their
competitors but not to themselves.\15\ By manipulating the tobacco
auctions, they caused their competitors to have higher input costs
which disabled their competition. Thus, in the latter case, the goal
was to harm competitors while in the first case it was to impose higher
costs on customers. The most relevant point for present purposes is
that in both cases auction or spot market manipulation advanced
anticompetitive goals. The highly concentrated character of the
gasoline refining and cigarette production markets meant that those
firms had both the incentive and the capacity to engage in market
manipulation to advance their anticompetitive interests.
---------------------------------------------------------------------------
\14\ U.S. v. Socony Oil Co., 310 U.S. 50 (1940).
\15\ U.S. v. American Tobacco, 328 U.S. 781 (1946).
---------------------------------------------------------------------------
In two decisions in the course of the 1990s the Supreme Court has
reiterated its recognition of the risks to competition and economic
welfare arising from vertical restraints.\16\ These cases involved
distribution restraints and the Court's concern was with the power
created in retailers by exclusive territories and similar restrictions
on intra-brand competition to over charge their customers. Nonetheless,
these decisions recognize the broader truth that vertical restrictions
of every kind, however laudable their initial intent, can have adverse
competitive effects. In another important decision the Court recognized
that a refusal to deal with a supplier based on an understanding with
another supplier can constitute an unreasonable restraint of trade.\17\
The lesson once again is that upstream vertical agreements can also
result in serious harm to the competitive viability of the market
system.
---------------------------------------------------------------------------
\16\ Atlantic Richfield Co. v. USA Petroleum, 495 U.S. 328 (1990);
State Oil v. Khan, 522 U.S. 53 (1997).
\17\ NYNEX v. Discon, 525 U.S. 128 (1998).
---------------------------------------------------------------------------
Recently, the Seventh Circuit Court of Appeals, following up on
this theme, upheld the Federal Trade Commission's challenge to Toys R
Us (TRU), a major toy retailer, efforts to restrict its suppliers sale
of toys to TRU's competitors.\18\ TRU is the largest retailer of toys
in the country--selling about 20 percent. It induced its major
suppliers to refuse to provide comparable toys to its lowest price
competitors in order to protect its profit margins. There is a somewhat
similar case in the European Union involving retailer buying power.\19\
These cases re-emphasize the dangers of buying power to the overall
competitive operation of the market. They also show that lower market
shares may create serious competitive issues than are normally seen on
the selling side. Congressional hearings on the effect of slotting
allowances have highlighted comparable harms to competition in the food
distribution system.
---------------------------------------------------------------------------
\18\ Toys R Us v. FTC, 221 F3rd 1334 (7th Cir., 2000)
\19\ Kesko/Tuko, Case T-134197, European Commission; see, Curtin,
Goldberg, Savrin, ``The EC's Rejection of the Kesko/Tuko Merger:
Leading the Way to the Application of a ``Gatekeeper'' Analysis of
Retailer Market Power Under U.S. Antitrust Law,'' 40 Boston College L.
Rev. 537 (1999).
---------------------------------------------------------------------------
Outside the courts, Professor Willard Mueller and associates have
examined the operation of the Wisconsin cheese exchange and found that
it was manipulated under certain conditions to the advantage of the
major buyers. The underlying facts are similar to the manipulation of
cheese exchanges by the meat packers at the turn of the century.
Moreover, this study shows how major buyers have the incentive to seek
to use commodity trading to protect their long run economic interests
in controlling price. Recently, the 9th Circuit has upheld the right of
dairy farmers in California to sue the cheese makers for the reduced
milk prices that resulted from this conduct.\20\ As I discussed earlier
the pending Suiza-Dean merger will move fluid milk markets toward the
structure of beef and cheese markets to the detriment of producers and
consumers alike.
---------------------------------------------------------------------------
\20\ Knevelbaard Dairies v. Kraft Foods, 232 F3d 979 (9th cir.
2000).
---------------------------------------------------------------------------
The upshot of this record is that when markets are concentrated,
dominant firms have great incentives to engage in anticompetitive
discriminatory conduct whose purpose is both to entrench and exploit
their position.
LAW AND REGULATION AS A POSITIVE FORCE IN FACILITATING EFFICIENT,
COMPETITIVE, FAIR AND ACCESSIBLE MARKETS
Public policy in this country employs two strategies to accomplish
the goals of fair, efficient and accessible competitive markets. First,
antitrust law exists to maintain competitive market structures and
forbid anticompetitive conduct. Second, industry and topic specific
legislation seeks to provide a balance between the interests of
contending groups of economic actors. Such legislation seeks fairness
and equity in the market place.
Competition and fairness tend to yield similar results. In the case
of regulating concentrated markets, however, there is some tension. To
induce competitive efforts among existing dominant firms, it is
sometimes the case that concealing information and creating opaque
market situations will induce such firms to behave in a more
competitive way. Conversely, creating greater price transparency is
likely to facilitate tacit coordination among dominate firms provided
substantial barriers to entry remain. On the other hand, reducing the
capacity of dominant firms to engage in opportunistic, strategic
behavior with respect to key inputs through regulating the manner in
which the market for inputs operates provides the kind of assurance
that new entrants or marginal firms seeking to expand need to encourage
more active competition on the merits.
I reference these tensions to underscore the complexity of the
choices that must be made and necessity that there be a reasonable
comprehension of the dynamics of the specific markets including the
potential for effective entry and expansion.
Because antitrust law is concerned with competition and not the
specific interest of traders in equitable treatment, Congress and the
states have created a number of specific statutory systems to protect
the less powerful parties in their relationships with powerful
customers or suppliers. At the national level there is specific
legislation to protect the interests of automobile dealers,\21\ gas
station operators,\22\ as well as investors in the stock market.\23\
State law provides protection for independent dealers serving major
enterprises.\24\ The central theme of all of these regulations is the
need to ensure equitable treatment of all those who participate in an
economic process. Because there are substantial disparities in economic
size and power in a wide range of markets, government has necessarily
had to play an important role in ensuring the equitable treatment of
participants.
---------------------------------------------------------------------------
\21\ Automobile Dealers Day in Court Act, 15 U.S.C. 1221 et seq.
\22\ Petroleum Marketing Practices Act, as amended, 15 U.S.C. 2801
et seq.
\23\ Securities and Exchange Act of 1934, as amended, 15 U.S.C. 78a
et seq.
\24\ See, e.g., Wisconsin Fair Dealership Law, Wisc. Stat. chap.
135.
---------------------------------------------------------------------------
In agricultural markets in particular there is a long history,
dating back to the earliest days of the English common law, of concern
for the equitable treatment of producers and consumers. That history
shows that there have been frequent abuses of temporary market
dominance and unacceptable efforts to exploit informational or
strategic advantage. Some of the remedies attempted in the past proved
equally unattractive. Hence, the lesson is that there is a long
standing and significant concern for the fairness and equity of markets
in agricultural products. This concern is also evidence that over the
long sweep of history there have been recurrent examples of strategic
behavior causing serious social dislocation and requiring legislative
or administrative intervention.
Modern regulation of market equity involves two general kinds of
concerns both of which are manifest in the present problems facing
American agriculture. One concern is for the integrity of the
transactional market when it plays a central role in defining the price
of transactions as well as equal treatment of participants in terms of
access to favorable opportunities to buy or sell. This is most evident
in the rules governing access to public securities markets in which all
traders are to receive as equal treatment as possible. In addition, the
law demands extensive and continuous disclosure of detailed business
information so that investors and their advisors can make informed
judgements.
A second recurring concern in the law is for equitable terms with
respect to long term contractual arrangements. The petroleum marketing
act, for example, gives the lessee of a gas station the right, under
certain circumstances, to buy the station if the refiner proposes to
sell it to a third party. The fundamental concept here is that the law
must protect the interests of powerless actors in the market in the
interest of both equity and efficient market operation.
The present situation with respect to captive supplies of livestock
and their impact on the spot market as well as the implication of
foreclosing substantial numbers of growers from access to longer term
contracts illustrates the combined problem of equity and access. If
foreclosing certain forms of transaction creates any real economic
problems for the packers, then the question is how can any legitimate
needs be satisfied in a way that is consistent with the fundamental
goals of equal access and equitable treatment. A useful starting point
might be the suggestions of Professor Stephan Koontz (Colorado State)
to the Senate Agriculture Committee last year concerning livestock
markets. Professor Koontz suggested that the Department of Agriculture
needs to be much more pro-active in developing new grading standards
and certification systems so that the transactional market could
provide a place in which buyers could readily find the kind and quality
of animal that they sought.\25\ It is not enough he points out to be
concerned with bad practices, the government must be take the
initiative to modernize the spot market and related market transactions
to facilitate the desired transactions. This point applies generally.
Government must take the initiative to facilitate workably competitive,
efficient market contexts. Public markets do not happen on their own in
equitable and fair ways. The strength of the economic interests at
stake in the market will shape them to serve their own interests. The
role of government is to restore the balance and facilitate the
equitable development of the market.
---------------------------------------------------------------------------
\25\ See statement of Professor Koontz to the Senate Agriculture
Committee at its hearing on April 27, 2000.
---------------------------------------------------------------------------
As one who has looked askance generally at conduct oriented
regulation, I would say that my own first preference would be to see a
large scale restructuring of the meat packing industry. The number of
plants of the largest scale substantially exceed the number of firms;
yet such levels of multi-plant operation are extremely unlikely to
achieve any notable economies.\26\ Indeed, the coordination costs are
likely to result in slightly higher overall costs for such extended
networks. If the industry were reorganized to make it more workably
competitive, e.g., limiting firms to no more than 3 or 4 plants in
dispersed parts of the country, there would be much more reason to have
confidence that observed market behavior was efficiency oriented and
not infected with anticompetitive or strategic considerations. In such
a world, specific conduct regulations would be less necessary except,
perhaps, for a requirement of open access to long term contracts. In
fact, in my view, as I have written in connection with the somewhat
analogous language of the FTC act, sections 202(a) and 202(e) give the
secretary the authority to impose such requirements on the
industry.\27\ However, in the case of the PSA, the secretary would have
to find that purely conduct oriented rules would not be effective.
There are a few antitrust cases involving restraints of trade where
structural relief was imposed that would provide further support for
such an approach.\28\
---------------------------------------------------------------------------
\26\ This point was made recently by James MacDonald, a senior USDA
economist. MacDonald, ``Concentration in Agriculture,'' paper presented
at the Agriculture Outlook Forum, Feb. 24, 2000, at p.3.
\27\ Carstensen & Questal, The Use of Section 5 of the Federal
Trade Commission Act to Attack Large Conglomerate Mergers,'' 63 Cornell
Law Review 841 (1978).
\28\ U.S. v. Paramount Pictures, 334 U.S. 131 (1948); see also
U.S. v. American Can Co., 87 F. Supp. 18 (N.D. Cal. 1949).
---------------------------------------------------------------------------
Realistically, of course, it is unlikely that the secretary would
at this time adopt regulations that required large scale reorganization
of the meat packing industry, however desirable that might be. Hence,
the focus has to be on the role of law to minimize or eliminate the
unfair, strategic, inefficient conduct of powerful buyers. In a lawless
market, economic power is unchecked. That which is rational for
individual, powerful economic actors is not necessarily fair to the
parties on the other side of the transaction or, more importantly, in
the best long run interest of economic efficiency.
The commands of the Packers and Stockyards Act (PSA) are as
concerned with controlling the unfair conduct of packers as they are
with the elimination of purely anticompetitive conduct in the market.
As such, the PSA is the precursor of a number of statutes at both the
national and state levels that seek to redress the balance between
small business operators and their large customers or suppliers. Thus,
section 202(a) of the PSA forbids packers from using ``any unfair,
unjustly discriminatory, or deceptive practice or device'' without
requiring that such practice or device also have an anticompetitive
effect or intention. Similarly, section 202(e) condemns ``any course of
business'' which has ``the purpose'' or ``effect of manipulating or
controlling prices'' as well as such acts when they cause monopoly or
restrain competition in the market. Other provisions, e.g., sec.
202(c), explicitly require adverse competitive effect before there is a
violation. Thus, the PSA is a blend of provisions controlling conduct
based on considerations of fairness and equity and ones focused on
avoiding broader anticompetitive effects.
The PSA has a clear point of view--it instructs the Secretary to
regulate the conduct of packers and stockyards to protect producers and
buyers from unfair and discriminatory conduct. PSA 202(a) and 202(e)
are clear that equity and fairness concerns in addition to overall
competitive analysis are relevant to evaluating such conduct. Moreover,
the PSA recognizes that harmful results can be either intended or the
consequences of the decisions made by packers. Thus, that the packer
did not intend to discriminate or be ``unfair'' and indeed did not gain
by its conduct is no defense. If the effect of particular market
conduct is to discriminate, then there is a violation. This aspect of
the PSA necessarily includes a concern for the equitable distribution
of wealth as between the various participants in the process of
production. This is an important theme in public regulation of market
activity.\29\
---------------------------------------------------------------------------
\29\ See Calabarsi & Melamed, ``Property Rules, Liability Rules and
Inalienability: One View of the Cathedral,'' 85 Harv. L. Rev. 1089
(1972) (analysis of economic regulation stressing the role and effect
of law in creating and assigning rights to wealth).
---------------------------------------------------------------------------
The PSA does not confer price regulatory power on the Secretary.
Rather the Secretary's role is to ensure equal and fair treatment of
those who supply and buy from meat packers as well as to enforce
competitive market requirements on the conduct of the packers. Legal
regulation is essential to the creditability of any public market
because of the incentives of powerful firms engaged in the market to
exploit their strategic advantage to the detriment of the public users
of the market. Federal securities law which strictly regulates the
operation of our public capital markets is a good example of this
strategy. American investor protection laws are so valuable that
foreign corporations voluntarily list on our stock exchanges so that
their shareholders will get the benefit of American securities law
including full disclosure of corporate information. This strategy in
turn permits easier and cheaper access to the public capital market
because investors have the protections of a strong regulatory system
ensuring equitable treatment.
Unfortunately the authority of the secretary to police the fairness
and equity of treatment in agricultural markets is limited. The PSA
addresses only the business of meat packing. No comparable direct
authority exists to policy grain or dairy contracts. As market
structure and conduct akin to that in livestock and poultry markets
come to dominate other sectors, it will be increasingly important that
the law authorize the Secretary to provide rules and regulations to
ensure fairness in pricing and equal access to market opportunities for
all farmers and ranchers.
THE CURRENT PROBLEMS WITH GIPSA
There is a manifest need for effective regulation of the livestock
markets to ensure efficiency, fairness and equity in light of the high
concentration and resulting incentives to engage in strategic conduct.
The public record fully documents the existence of serious problems
concerning both fairness and equity in these markets. To remedy these
problems, two elements are essential. First, there need to be rules to
define the scope of bargains and provide rights of access to the market
place. Second, those rules need to be enforced effectively by a
combination of agency action and private claims when necessary.
Given the dramatic changes in the ways in which livestock are sold,
it is striking that the Department and GIPSA have totally failed to
exercise the rule making authority that they possess to craft
appropriate, market facilitating regulations to govern the new methods
of buying and selling livestock. The previous administration failed for
years to act on a petition from the Western Organization of Resources
Councils (WORC) that requested new regulation of contract buying of
livestock. I am not here endorsing the WORC proposal in its entirety.
It did point to central issues in the emerging market for cattle and
the record showed beyond any reasonable dispute that there were and are
problems with the present operation of that market. What is intensely
frustrating is that the previous administration never acted one way or
the other on any element of the proposal even those as to which there
was nearly unanimous consensus.
Specifically, at the USDA's forum last September in Denver on the
WORC proposal, the panel of experts who did not agree on much else were
in agreement that packers should never be permitted to use as the basis
for pricing a future delivery their own price for cattle on the day of
delivery. Such a method of pricing was unduly vulnerable to
manipulation and was unnecessary for any legitimate pricing need. Yet
the Department of Agriculture and GIPSA could not bring themselves to
adopt even such a basic prophylactic rule!
In sum, the first serious failure of GIPSA under the past
administration was its complete failure to develop rules and
regulations to govern the emerging market situations. Left to their own
devices, the large buyers will, as the Attorney General of Oklahoma has
opined, force contracts of adhesion onto farmers and ranchers. For
example, such contracts often deny the producer access to the courts
and at the same impose unfair and inequitable arbitration terms that
effectively deny the producer all recourse. Confidentially clauses keep
farmers and ranchers from sharing information that would make them more
sophisticated decision makers. Even price reporting is unavailable
where buyers are very highly concentrated. This fact would seem to
require special regulations to ensure equitable treatment of sellers in
such markets. Yet GIPSA has done and is apparently doing nothing to
provide basic regulation for any market.
Market facilitating regulation is long over due and this committee
should insist that GIPSA get on with the task. The courts have had and
will continue to have a very hard time interpreting the general terms
of the PSA. They can not protect farmers and provide appropriate
balance without regulations that better define the rights and duties of
the parties.
The second failure of the Department of Agriculture is its refusal
to staff GIPSA in a way that would permit effective enforcement of
current regulations let alone the ones that ought to be adopted. In
September 2000, the GAO reported on GIPSA to Congress.\30\ That report
highlighted the continued failure of GIPSA to enforce effectively the
existing regulations. The report highlighted the very poor structure
and staffing of investigations. GIPSA itself lacks the staff and
authority to pursue the cases it investigates. Indeed, it appears the
staff must investigate without the support and involvement of those who
will litigate the case if it is filed. Moreover, the number of
attorneys available in the general counsel's office to conduct
litigation has declined in recent years to a pitiful five--not all of
whom are assigned full-time to GIPSA.\31\ The report further indicates
that GIPSA did not have appropriate methods for investigating ``complex
anticompetitive practice[s]''.\32\
---------------------------------------------------------------------------
\30\ GAO, Report to Congressional Committees: Packers and
Stockyards Programs Actions Needed to Improve Investigations of
Competitive Practices (2000).
\31\ Id. 15.
\32\ Id. 6.
---------------------------------------------------------------------------
Regulations, however good, have little effect if there is no
enforcement. While farmers and ranchers can bring individual cases or
class actions, such efforts are very time consuming and may focus more
on specific private concerns and less on the broad public interest in
ensuring open and fair markets. Thus, effective public law enforcement
is essential to the creation and maintenance of fair and open markets.
This is the lesson of antitrust law and securities law to name but two
examples.
THE BROADER MARKET FACILITATION OBLIGATIONS OF THE DEPARTMENT OF
AGRICULTURE
The PSA is not the only statute that addresses issues of
competition and access in agricultural markets. The Agricultural Fair
Practices Act deals with specific kinds of unfair trade practices
involving coercion of producers into joining or not joining
associations.\33\ The Capper Volstead Act not only exempts agricultural
cooperatives from antitrust law in some significant degree but also
requires the Secretary to police market conduct to ensure that
cooperatives do not unduly restrain competition.\34\ There are a number
of other examples. The common theme is that Congress has identified
specific failures of these markets to operate in fair, accessible and
efficient ways and has adopted specific statutory rules. The result is
a patchwork of responses to particular issues and problems that has not
been revised and made systematic to define a workable legal context for
agricultural markets.
---------------------------------------------------------------------------
\33\ 7 USC sec. 2301 et seq.
\34\ 7 USC sec. 291, 292.
---------------------------------------------------------------------------
As Congress has come to rely more on the market place to set prices
and allocate demand for supplies in these markets, there is an
increased need to review this legislative thicket and identify a
systematic set of rules to govern the market process in agriculture.
The elements of this system recur in various legislative context and
are entirely consistent with the PSA. The goals are efficient,
competitive, fair and accessible markets.
I reference this broader context here because Congress is embarking
on a major review of agricultural policy as it is considering new
general farm legislation. I understand that there is discussion of
including a title on competition issues. It seems to me that an
important element of that review should be an effort to access the
scope, consistency, and operation of the existing complex of laws
regulating agricultural markets. It is likely that this would lead to
an effort to revise and restate this law in ways that are more
applicable to modern conditions and provide for more general coverage
for the basic principles found in those laws. Such an effort would also
require a focused effort to identify the means for effective
enforcement of these regulations through an appropriate combination of
public and private mechanisms.
Related to the legislative patchwork governing agricultural markets
is the disjointed structure of the Department of Agriculture's own
enforcement efforts. GIPSA deals with meat and grain. Another part of
the Department deals with cooperatives and still others focus on market
information. It appears to me that a full review of the organization of
responsibilities for administering the market facilitation aspects of
the Department's mission would be an important contribution to
modernizing and making effective the implementation of competitive,
fair, efficient and accessible agricultural markets.
RECOMMENDATIONS FOR CREATING OR RESTORING A WORKABLE MARKETPLACE
Several matters seem to me to be central to dealing effectively
with the need for an efficient, fair, competitive and accessible
agricultural marketplace. I have the following recommendations:
--GIPSA and the Department of Agriculture need to address the
organizational problems inherent in the present structure of
the department. It is not organized in a way that permits it to
carry out its obligations to facilitate the working of
agricultural markets. This means that both GIPSA's internal
operations and its relationship to other market facilitating
elements of the department need to be carefully examined and a
better system of coordination needs to emerge.
--There is a very specific need to deal with lawless markets in
livestock by effective rule making in light of three goals for
PSA. Good, market facilitating regulation makes strategic
behavior less feasible and serves the long best interest of all
participants in an open, accessible, competitive and efficient
market. As the nature of market relationships have changed, it
is especially important to develop rules and regulations that
guide all parties as to their rights and duties. The risks of
disruption and distortion in agricultural markets are real and
substantial if such rule making is not undertaken in a timely
fashion.
--Regulation without effective enforcement of the rules will not
resolve the inherent problems of the marketplace. It is
essential to implement recommendations on reorganization of
staffing of GIPSA so that it can become an effective law
enforcement agency.
--More generally, as Congress approaches the process of revising the
overall statutory regime governing American agriculture, it is
very important to initiate a review of the various statutes
that regulate these markets and to develop a comprehensive
statutory scheme to facilitate all agricultural markets. The
fundamental goals for this system are well established; the
challenge is to create a more systematic and workable set of
rules that provide structure for the wide range of markets and
market contexts in which farmers and ranchers sell their
produce.
--Lastly, reform is not cheap. To have agricultural markets that are
competitive, efficient, fair and accessible, there are costs.
One part is to make sure that the Department of Agriculture has
the financial resources to hire the necessary staff. The other
and perhaps less visible cost is for Senators and Members of
Congress to monitor the progress of the Department to make sure
that it in fact carries out its obligations. These costs should
be incurred. The alternative is the gradual erosion of our
entire agricultural economy.
CONCLUSION
American agriculture in general and in the livestock segment of
that industry is at a cross roads. The persistent concentration and
radical changes in the methods of buying livestock have created serious
problems which are likely to become worse in the absence of necessary
market facilitating regulations and effective enforcement of those
rules. Not all the problems facing agriculture are going to be solvable
by reliance on market. But Congress has wisely elected to seek to rely
as much as possible on the market as the best mechanism to organize the
movement of food and fiber from the farmer and rancher to the final
consumer. Given that fundamental choice, the Department and GIPSA must
perform better their assigned tasks of facilitating a competitive and
efficient marketplace while also ensuring access and fair terms to
producers.
Senator Cochran. Thank you, Mr. Carstensen.
Mr. Dan Kelley.
STATEMENT OF DAN KELLEY, FARMER, STATE OF ILLINOIS
Mr. Kelley. Thank you, Mr. Chairman, Mr. Dorgan. It's a
pleasure to be here and an honor to be here. I'm a farmer from
Normal, Illinois, where I'm actively engaged in a farming
partnership with my two brothers.
In the interest of time and the fact that I still have
soybeans to plant, we'll move through this rather quickly. My
brothers and I operate a couple of thousand acres of land in
central Illinois and also serve as chairman of the board and
president of GROWMARK Federated Regional Cooperative located in
Bloomington, Illinois.
As a federated cooperative GROWMARK is owned and controlled
by some 250,000 independent family farmers, and there are
approximately 320 local cooperatives with their total sales
being about $1.4 billion.
The farmer owners that make up GROWMARK range in size from
part-time hobby farm operators to full-time producers,
commercial operations. But the average size is about 300 acres.
The mission of GROWMARK when it was started 75 years ago was to
improve the long-term profitability of its farmer owners. That
purpose still exists today.
As an independent family farmer, I cannot stress just how
important that continues to be, especially in today's business
environment. Like all farmer cooperatives, GROWMARK has unique
accountability and focus because of the fact that it is farmer
owned and farmer controlled.
GROWMARK over the last 5 years has returned $140 million in
additional income to its members as a result of value added
activities in the form of patronage. Farmers today continue to
operate in a very challenging business environment. I think
that's been addressed by other panelists.
Globalization continues to derive changes throughout every
sector of our economy. We're seeing across the board
consolidation in energy, chemical, banking, financial services
and especially in the food processing retailing sectors.
The National Council for Farmer Cooperatives, the national
trade organization representing America's farmer-owned
cooperatives which GROWMARK is one recently did an analysis of
the relative position of farmer cooperatives in the food and
agriculture system.
Some of the items that it highlighted were that while
cooperatives continue to play a significant role in the farm
economy accounting for 28 percent for all farm supply sales and
29 percent of all commodities marketed by farmers, they must
increasingly compete with firms much larger in size and that
are better capitalized.
In addition, the businesses that farmer cooperatives buy
from and sell to continue to grow in size. The top 10 firms in
the farm supply food supply and food processing retailing
sectors, for example, have average total sales of approximately
$25 billion, more than six times greater than the average in
the top 10 farmer-owned cooperatives.
Most significantly, no individual farmer cooperative has
sufficient sales in any of these aggregate industry segments to
be among the top 10 firms in the United States.
As was pointed out earlier in the chart, the farmer's share
of consumer food dollars has now declined to where it just
represents 20 cents, its lowest level ever. Reversing this
decline would substantially improve the farmer's economic well-
being and possibly reduce the impact of the budget on LDPs and
other forms of direct payments to farmers.
If we could increase the share of the consumer dollar by
just 1 cent from 20 to 21 cents, we would generate an
additional $6 billion of income. The challenge, of course, is
how do we, given the current business environment and ongoing
trends, achieve this?
My view, the best way is to maintain and strengthen the
ability of farmers to join together in cooperative self-help
efforts. To be successful, however, we must make sure that we,
as farmers, in our cooperative businesses are strategically
positioned to be able to compete in what clearly is a rapidly
changing global marketplace.
As was mentioned, our competitors and customers have grown
in size, and we must challenge ourselves to be able to exist to
survive and to this rife using similar strategies.
For this reason, I, as a farmer, am very concerned over
various proposals to address the issue of ag concentration,
however well intended they may be. That would make it more
costly and difficult for farmers and our cooperatives to
strategically position ourselves to compete in a changing
global economy.
The practical effect may very well be to simply lock
farmers such as myself and our cooperatives into a permanent
disadvantage relative to our competitors.
And in business, if you don't meet the competition, you
won't be in business very long.
There are, however, a number of actions that Congress and
the Administration can and should take, based upon the
recommendations of a special task force ag concentration
established by the National Council Farmer Cooperatives.
These include maintaining and strengthen the ability of
farmers to join together in cooperative self-help efforts,
making sure our existing antitrust laws are fully enforced.
That's been addressed today.
Maintaining the position of special counsel for agriculture
within the U.S. Department of Justice along with needed
funding. Support continuation of the existing memorandum of
understanding involving USDA and Justice along with Federal
Trade Commission to encourage cooperation on antitrust issues
involving agriculture, and conducting a review of the Packer
and Stockyards Act of 1921, as well as the programs and
responsibilities of USDA's grain inspection packer and
stockyards administration to determine what additional
authorities may be needed, if any.
Most important, I believe it is the need for public
policies and programs to help maintain and strengthen the
ability of farmers to join together in cooperative self-help
efforts. I served as a cochairman of a task force with national
counsel, and we identified several areas where we think some
minimal changes in government policy would help farmers to help
themselves.
By providing farmers and their cooperatives with improved
access to capital to help gain ownership in value-added
activities beyond the farm gate to invest in new equipment to
modernize and expand and meet costly environmental and other
regulatory requirements, additional capital is needed. Without
access to capital, which is our greatest challenge, we will not
succeed.
We can do this by increasing USDA's business and loan
guarantee program for farmer cooperatives up to $10 million,
and making it more consistent with similar programs for other
cooperatives, such as rural electrics.
Clarifying existing authority for guaranteed loan programs
for farmers to purchase stock in new value-added businesses to
include both new and existing farmer-owned cooperatives,
providing tax incentives to help attract capital, and encourage
investment of farmer-owned cooperatives.
Enactment of the cooperative tax provisions included in
Senate bill 312, as introduced by Senators Grassley, Baucus,
and among others. Establishment of an equity capital fund as
proposed previously by Senators Harkin and Craig to help
farmers attract capital and investment.
In addition, a task force strongly recommended USDA and
other Federal programs aimed at encouraging self-help by
farmers be revitalized and given higher priority.
This would include establishing a separate USDA agency
totally dedicated and focused on encouraging cooperative self-
help, include research, technical, and education.
Six million, the new agency would be called the Farm
Cooperative Business Service, and $6 million for the new agency
to be called the Farm Cooperative Business Service, and $6
million for research, education, and technical assistance
grant.
We also recommend that funding for value-added technical
assistance grants authorized under the Ag Risk Protection Act
of 2000 be increased from $15 to $25 million annually to
enhance the ability of farmers to become more involved in
value-added activities beyond the farm gate.
Together we believe these recommendations will provide
farmers with greater opportunity to improve their income from
marketplace to cooperative self-help efforts and promote
competition.
Prepared statement
Mr. Chairman, it has been said that a man with a full
stomach has many problems, while a starving man has only one.
So does it with our nation. Isn't it fantastic, thanks to the
American farmer and American agribusiness, that we have a
multitude of problems for you to deal with. I close my
testimony. Thank you.
[The statement follows:]
Prepared Statement of Dan Kelley
Thank you, Mr. Chairman. My name is Dan Kelley and I am a producer
from Normal, Illinois, where I am actively engaged in a farming
partnership with my two brothers. Together, we operate a 2,080 acre
diversified grain farm. I also serve as chairman of the board and
president of GROWMARK, a federated regional farmer-owned farm supply
and grain cooperative headquartered in Bloomington, Illinois.
Mr. Chairman, I want to commend you for this hearing. I also want
to express appreciation to you and the Congress for the actions taken
to help meet the near term challenges facing farmers. It appears that
similar economic assistance will again be needed this year. At the same
time, I am hopeful that we can begin to look at a more long term
strategy to help farmers compete more effectively in a rapidly changing
global economy and to generate more of their income from the
marketplace.
As a federated regional cooperative, GROWMARK is owned and
controlled by some 250,000 independent family farmers and their
approximately 320 local cooperatives with total sales of nearly $1.4
billion. The majority of our members are in Illinois, Iowa and
Wisconsin, but we are also experiencing growing membership in Indiana,
Michigan and Ohio. The farmer owners that make up GROWMARK range in
size from part-time ``hobby farm'' operators to full-time, family-
owned, commercial operations with the average farm size being
approximately 300 acres.
The mission of GROWMARK is to improve the long-term profitability
of its farmer owners. Farmers joined together to form what is now
GROWMARK to help ensure a dependable supply of critically needed farm-
related inputs and enhanced opportunities to market their grain on a
competitive basis. That purpose still exists today. As an independent
family farmer, I can not stress just how important that continues to
be, especially in today's business environment. Like all farmer
cooperatives, GROWMARK has a unique accountability and focus because of
the fact that it is farmer owned and farmer controlled.
Through its system of 320 local cooperatives, GROWMARK provides
crop and livestock production inputs, petroleum products, consumer
goods and grain marketing services to its farmer owners on a cost-
effective and competitive basis. It also provides manufacturing,
processing, quality control, product procurement and a range of other
services to its local cooperatives for the benefit of their farmer
owners.
As a cooperative, earnings from these activities are returned to
GROWMARK's member owners on a patronage basis. Over the last 5 years,
GROWMARK has returned more than $140 million in additional income to
its members as a result of such ``value-added'' activities. This is
significant given the business environment of the past 5 years.
Farmers today continue to operate in a very challenging business
environment. Farm income continues to be highly variable due to the
inherent risks involving production agriculture and the volatile nature
of commodity markets. Commodity prices remain depressed. Production
costs continue to increase. The global marketplace continues to be
characterized by subsidized foreign competition and artificial trade
barriers.
Globalization continues to drive changes throughout every sector of
the economy. This has led to increasing consolidation at every level as
businesses attempt to gain the size, scale and efficiencies needed to
remain viable and competitive long term. This is underscored by recent
mergers in the energy, chemical, insurance, banking, financial
services, manufacturing, and transportation industries, as well as in
agriculture, especially in the food processing and retailing sectors.
The National Council of Farmer Cooperatives (NCFC), a national
trade association representing America's farmer owned cooperatives of
which GROWMARK is a member, recently did an analysis of the relative
position of farmer cooperatives in the food and agriculture system.
Among the highlights, it found that--
While farmer cooperatives continue to play a significant role in
the farm economy, accounting for 28 percent of all farm supply sales
and 29 percent of all commodities marketed by farmers, they must
increasingly compete with firms much larger in size and better
capitalized.
In addition, the businesses that farmer cooperatives buy from or
sell to continue to grow in size and market share.
The Top 10 firms in the farm supply, food processing and food
retailing sectors, for example, have average total sales of
approximately $25 billion--more than six times greater than the average
for the Top 10 farmer owned cooperatives ($4 billion).
The Top 10 firms in the farm supply, food processing and food
retailing sectors have increased their market share above 40 percent in
each sector.
Most significantly, no individual farmer cooperative has sufficient
sales in any of these aggregate industry segments to be among the Top
10 firms.
The farmer's share of the consumer food dollar has now declined to
where it now represents just 20 cents--its lowest level ever. Reversing
this decline would substantially improve the farmer's economic well
being. For example, increasing the farmer's share of the consumer food
dollar by just one cent to 21 cents would generate an additional $6
billion in income. The challenge of course is how, given the current
business environment and ongoing trends.
In my view, the best way to help achieve this is to maintain and
strengthen the ability of farmers to join together in cooperative self-
help efforts. To be successful, however, we have to make sure we as
farmers and our cooperative businesses are strategically positioned to
be able to compete in what clearly is a rapidly changing global
marketplace.
As our major competitors and customers have grown or consolidated
to gain the size and scale needed to compete on a global basis, we have
had to look at similar strategies. These have involved merging with
other farmer cooperatives as well as entering into joint ventures and
strategic alliances--to help reduce costs, be more competitive, and
better meet customer demands in an effort to ensure that farmers like
me continue to have access to competitively priced products as well as
more competitive markets, and the opportunity to capture a greater
share of the earnings related to such activities.
For this reason, as a farmer, I am very concerned over various
proposals to address the issues of agriculture concentration, however
well intended, that would make it more costly and difficult for farmers
and their cooperatives to strategically position themselves to compete
in a changing global economy. The practical effect would be simply to
lock farmers and their cooperatives into a permanent disadvantage
relative to their competitors. And, in business if you don't meet the
competition, you won't be in business very long.
Again, it is important to emphasize that farmer cooperatives are
farmer owned and farmer controlled. They operate on a democratic basis.
When it comes to mergers and consolidations, not only must the board of
directors, which is elected by the farmer owners from among themselves,
approve the decision, but in most cases so must a majority of the
cooperative's members. Many states (including Iowa, Minnesota, North
and South Dakota, and Wisconsin) even require a two-thirds majority
vote of a cooperative's members before a merger can be approved. For
this reason, any proposal that would limit or restrict the ability of
farmers like myself to determine what is in our mutual best interest,
make it more costly, or make it more difficult to make timely business
decisions should be opposed.
There are, however, a number of actions that Congress and the
Administration can and should take based upon the recommendations of a
special task force on agriculture concentration established by the
National Council of Farmer Cooperatives. These include:
--Maintaining and strengthening the ability of farmers to join
together in cooperative self-help efforts.
--Making sure existing antitrust laws are fully enforced. Currently,
two Federal agencies--the U.S. Department of Justice (DOJ) and
Federal Trade Commission (FTC)--and the state Attorneys General
have enforcement power over agricultural mergers and
acquisitions. The U.S. Department of Agriculture also plays a
role and is consulted by DOJ and FTC under existing protocol.
--Maintaining the position of the Special Counsel for Agriculture
within the U.S. Department of Justice, along with needed
funding, to provide continued review and oversight with regard
to agriculture antitrust issues.
--Supporting continuation of the existing memorandum of understanding
(MOU) involving the U.S. Departments of Agriculture and
Justice, along with the Federal Trade Commission, to encourage
cooperation on antitrust issues involving agriculture.
--Conducting a review of the Packers and Stockyards Act of 1921, as
well as the programs and responsibilities of USDA's Grain
Inspection, Packers and Stockyards Administration (GIPSA) to
determine what additional authorities may be needed, if any.
Most important, I believe, is the need to maintain and strengthen
the ability of farmers to join together in cooperative self-help
efforts. Such action--on a sustained basis--would help promote
competition and maintain the independence of the family farmer. It
would also provide farmers a greater opportunity to generate more of
their income from the marketplace, capitalize on potential market
opportunities, better manage their risk, and compete more effectively
in a rapidly changing global economy.
Again, it can not be overly emphasized, farmer cooperatives are
farmer owned and controlled. They exist for the mutual benefit of their
farmer members. There are nearly 3,500 local and regional farmer owned
cooperatives across the U.S. whose member owners include a majority of
the nation's nearly 2 million individual farmers. With nearly 300,000
full time and seasonal employees, they also provide a significant
source of employment in many rural communities.
Joining together in cooperative self-help efforts provides farmers
with the advantages of economies of scale and bargaining power, and the
opportunity to participate in value-added activities beyond the farm
gate. Earnings derived from related business activities are returned to
the cooperative's farmer owners on a patronage basis.
A separate NCFC task force, on which I serve as co-chairman, has
identified a number of actions that would help encourage and promote
such cooperative self-help efforts. These include:
--Providing farmers and their cooperatives with improved access to
capital to help gain ownership in value-added activities beyond
the farm gate, to invest in new equipment, to modernize and
expand, and meet costly environmental and other regulatory
requirements. Without question, access to capital is one of the
greatest challenges facing farmer cooperatives. To help meet
this challenge, the task force recommended several options,
including:
--Increasing USDA's Business and Industry Loan Guarantee Program for
farmer cooperatives up to $10 billion and making it more
consistent with similar programs for other types of
cooperatives (such as rural electric cooperatives);
--Clarifying existing authority providing guaranteed loans to farmers
for the purchase of stock in a new, value-added business, to
include both new and existing farmer owned cooperative
businesses for the same purpose;
--Providing tax incentives to help attract capital and encourage
investment in farmer owned cooperative businesses;
--Enactment of the cooperative tax provisions included in S. 312 as
introduced by Senators Grassley and Baucus, among others. Such
legislation includes modification of the dividend allocation
rule, which results in a triple tax on cooperative dividends on
preferred stock, unfairly reduces the amount of patronage
earnings that a cooperative may distribute to its members, and
limits its use as a means of raising equity capital; and
Establishment of an equity capital fund such as that proposed
previously by Senators Harkin and Craig, among others, that would help
further provide farmer owned cooperatives and related businesses with
improved access to capital.
In addition, the task force strongly recommended that existing
Federal programs aimed at encouraging cooperative self-help efforts by
farmers should be revitalized and given a high priority. To help
achieve this, it was strongly recommended that Congress approve the
establishment of a separate agency within USDA to be called the Farmer
Cooperative Business Service and provide not less than $6 million
annually for the purpose of carrying out and administering related
research, education and technical assistance programs.
It also recommended that an additional $6 million be provided for
cooperative research, education and technical assistance grants to be
carried out through public-private partnerships involving associations,
cooperatives, land grant colleges and universities, to further assist
farmers, including limited resource farmers, in making the most
effective use of the cooperative business model to improve their
economic well being.
Finally, the task force recommended that funding for Value-Added
Technical Assistance Grants authorized under the Agricultural Risk
Protection Act of 2000 be increased from $15 million to $25 million
annually to further enhance the ability of farmers to become more
involved in value added activities beyond the farm gate.
Together, we believe these recommendations will provide farmers
with a greater opportunity to improve their income from the
marketplace, manage their risk, capitalize on potential market
opportunities, compete more effectively in a rapidly changing global
economy, and enhance their economic well being and profitability long
term.
Mr. Chairman, this concludes my testimony. Again, I want to thank
you for allowing me as an independent farmer to appear before you to
discuss this important issue. I will be happy to answer any questions
you or members of the Subcommittee may have.
Senator Cochran. Thank you, Mr. Kelley, for your
interesting and provocative statement.
The Honorable Tom Miller is Attorney General of the State
of Iowa. We'll hear from you now. Welcome.
STATEMENT OF TOM MILLER, ATTORNEY GENERAL, STATE OF IOWA
Mr. Miller. Thank you very much, and I'll be brief, so
brief I'll make one point, and then give an example to support
the point.
The point I want to make, it's in my testimony, but I think
it's very important, and that is that these issues that we're
dealing with, concentration-related issues, antitrust and
antitrust enforcement plays an important role in dealing with
them, but far from an exclusive role. That what we need here is
a comprehensive set of public policy principles and programs to
deal with the issue.
And the example I give is this in contracting. In Iowa,
we're probably seeing as much contracting as any State because
contracting is moving forward in pork, probably more than in
other parts of agriculture, and Iowa has about 25 percent of
the PGGs in this country.
The concern is that we not let farmers become, because of
imbalance in negotiating power, virtual serfs on their land.
Like any situation, there are extreme positions to be avoided.
We do not take the position that these contracts should be
outlawed or prohibited in their entirety. They can be an
important economic form.
Nor do we think that there should be no regulation at all
so that we spiral into this sort of potential serfdom
situation.
So what we did as attorney generals, as we often do, we
work together. Sixteen States formed what we thought and
believe are model producer protection legislation.
Incidentally, Senator Dorgan, then Attorney General Heidi
Heicamp, were cochair of that group last year when we worked on
it among the 16 States, and we've sent you an outline of that
legislation. It has to do with a ban on confidentiality, that
it be transparent.
Now, the farmer makes the choice on whether it's disclosed
or not. It's not automatically disclosed to everyone. The
farmer or the contractor alone makes that call that certain
unfair practices are dealt with in terms of retaliation for
forming any kind of group activity, whistle blower, et cetera.
Disclosure of risk is required.
There's a producer lien too that the farmer has the first
lien on the animals. And there's restrictions on unfair cutting
off the contracts, given the capital investments that the
farmers have made.
We think these are realistic, fair provisions that give the
farmer, who otherwise is in a very unequal negotiating
position, some realistic ability to negotiate a fair contract
that ultimately is in his interest, society's, and I would
argue the contract owner's as well.
Senator Harkin, Senator Daschle, and others have introduced
this legislation at the national level at the Senate, of
course. We urge your consideration of that.
There are two real important parts of that legislation. One
allows voluntary producer associations so that farmers can get
together and negotiate or work with the contract owners on some
group basis and requires good faith bargaining.
The other is a provision that allows the States to
experiment and doesn't preempt the States. This, I think, is an
important area for the laboratories of democracy in the States
to work.
Prepared statement
So I would ask you to take the middle ground here, not to
stop these contracts but not to allow them to be totally one
sided either, but to put some form of law in there that the
farmer is given some meaningful position, some meaningful
bargaining position so that this industry can flourish rather
than having a situation where there are serfs on the land.
Thank you both, Senators.
[The statement follows:]
Prepared Statement of Tom Miller
I want to thank the committee for this opportunity to testify on an
issue of great concern to agricultural producers and consumers in my
home state of Iowa and across the country--concentration in
agriculture.
I, like many other state attorneys general, have become concerned
about the rapid trend toward consolidation in agriculture at both
horizontal and vertical levels. Through mergers, acquisitions,
alliances, and other arrangements, fewer and fewer firms control the
production, processing, preparation, and retailing of agricultural
commodities and food. My worry is that this conglomeration of economic
power may lead to anti-competitive practices and adversely affect the
prices paid to farmers for commodities and the prices paid by consumers
for food.
ANTITRUST ROLE OF STATE ATTORNEYS GENERAL IN AGRICULTURE
State attorneys general play a significant role in fostering full
and free competition in the United States economy through the
enforcement of Federal and State antitrust laws. We work in a
multistate process to investigate and prosecute alleged anti-
competitive activities in all sectors of the economy, including
agriculture. We collaborate closely on these issues with the United
States Department of Justice (USDOJ), the Federal Trade Commission, and
the Packers and Stockyards Administration of the United States
Department of Agriculture (USDA).
Examples of agricultural antitrust matters in which the states have
been involved include a multimillion dollar settlement with major farm
chemical manufacturers for alleged retail price maintenance, the
Cargill/Continental merger, Smithfield Foods' acquisition of Murphy
Family Farms, the Case/New Holland merger, and Tyson Foods' aborted
acquisition of IBP. State attorneys general will continue to be
vigilant in investigating allegations of anti-competitive behavior in
agriculture and will vigorously enforce antitrust laws where
appropriate. We particularly want to cooperate and share information
with USDOJ and USDA.
However, in dealing with agricultural concentration and related
issues, antitrust law is only one part of a possible solution to the
problems farmers face today. For the antitrust law is a limited law as
enacted and interpreted during the last century. Furthermore, the
Federal courts in the last two decades have been restrictive in their
interpretations of the antitrust law. The antitrust enforcers,
including state attorney generals, must aggressively bring cases that
fit within the antitrust law or arguably are within the prohibitions of
the acts. But that will not solve all the problems that brought us here
today. Antitrust is only part of the public policy approach to these
issues.
OTHER ACTIVITIES OF STATE ATTORNEYS GENERAL
In addition to antitrust enforcement, state attorneys general have
undertaken several other types of activities which we believe will help
producers and others deal with the impacts of concentration in
agriculture.
Agricultural Contracting
The use of production contracts and marketing contracts by firms
with ever-growing market shares has dramatically increased vertical
integration in American agriculture. Dr. Neil Harl, the noted
agricultural economist and attorney from Iowa State University, has
called this the ``rising tide in contract agriculture.''
There are important reasons why contractors (most often processors)
and farmers utilize, and can benefit from, contracts. Indeed, some
argue that contracting may greatly increase economic efficiency in
agriculture. However, contracting poses serious risks for producers
and, ultimately, for consumers. This is particularly true in some
agricultural sectors where there is a high level of horizontal
concentration combined with vertical linkages through contracts. In
this situation, producers are, as Dr. Harl puts it, ``contracting with
near monopolists.'' He calls this a ``deadly combination.''
Risks of Contracting
In general, contracting can pose several risks for producers,
including the following:
Disparity in Bargaining Power
There is greater and greater disparity between processors and
farmers with respect to market information and bargaining power. Large
companies often offer contracts to producers on a ``take it or leave
it'' basis. The contractual risks to producers are buried in pages of
legalese and producers are stuck with unfair contract terms. In the
poultry industry, which has been vertically integrated for decades
through the extensive use of contracts, we hear repeated allegations of
unfair treatment of producers.
Unfair Shifting of Risk
Contracting can result in the unfair shifting of economic risks to
farmers. This is common in production contracts that require producers
to make substantial capital investments. For example, in the poultry
industry, some producers are contractually required to make long term
capital investments in buildings and equipment, but are only offered a
contract that covers one flock of birds.
Loss of Market Transparency
The first lesson of ``Economics 101'' is that economic efficiency
can only be attained in a free market if market participants have
adequate information to make economic decisions. The importance of
market transparency and price discovery is so fundamental that it is
academic dogma.
Traditionally, a hallmark of American agriculture was the free flow
of market information available through auctions, terminals, and
futures trading. Sadly, that situation has changed dramatically. Today,
agricultural production and marketing contracts routinely contain
strict confidentiality clauses. (As discussed below, this is not true
in Iowa where confidentiality clauses are prohibited.) Some
confidentiality clauses are so restrictive that farmers are reluctant
to consult with their lawyers and financial advisors. As a result, most
agricultural contracting is conducted in virtual secrecy, which
severely limits the ability of farmers to compare contracts and
negotiate the best, or even a fair, deal.
State Legislation--the ``Producer Protection Act.''
States have an opportunity and indeed a responsibility to consider
reasonable oversight of agricultural contracting that will lessen the
risks of contracting and promote meaningful competition in agriculture.
Our work in production contracting began with educational efforts
for producers. In 1995, I formed the ``Attorney General's Task Force on
Production Contracts'' that developed grain and livestock production
contract checklists to help farmers negotiate production contracts. The
checklists have been widely distributed throughout the country via the
Internet.
Producer education is important. However, as the number of
complaints about contracting filed with my Farm Division increased, I
became convinced legislation was necessary. Last year, I led a group of
state attorneys general in an effort to develop model state legislation
on contracting. The goal was to draft provisions that would provide
needed protections for farmers without overly burdening processors. The
product was model state legislation entitled the ``Producer Protection
Act.'' The legislation was endorsed in principle by the Attorneys
General of Colorado, Indiana, Kentucky, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Vermont,
West Virginia, Wisconsin, and Wyoming.
In brief, the Act has several noteworthy provisions:
Bans on Confidentiality
Based on an Iowa statute passed in 1999, the Act prohibits the
inclusion of confidentiality provisions in agricultural production and
marketing contracts. This prohibition would allow producers to freely
share their contracts with lawyers, bankers, other producers, and
government officials.
Utilizing the protections of Iowa's law, my Farm Division has taken
about 70 different types of contracts provided by producers and put
them on our website (with producers' names deleted). This website
(www.iowaattorneygeneral.org) is one of the few places in the nation
where producers can obtain information needed to compare price and
other terms and conditions of contracts. We believe this information
will enable farmers to negotiate better deals.
Unfair Practices
The model Act makes it an unfair practice for processors to
retaliate or discriminate against producers who exercise certain
rights, including the right to join producer organizations, to freely
contract with others, and to be a ``whisteblower.'' In Iowa, we have
received an increasing number of reports that contractors have made
threats to retaliate if producers file complaints about contractual
problems with our Farm Division or exercise statutory rights (e.g.,
filing a contract producer lien). The threats have included threats to
provide substandard animals and threats to terminate or not renew
contracts.
Disclosure of Risks
The model Act requires contracts to include a cover page which must
contain a disclosure of material risks written in plain language. This
is based on a Minnesota law passed in 2000 that has proven to be quite
helpful to producers.
Right to Review
Similar to protections found in consumer law (e.g., door-to-door
sales rules), the model Act provides contract producers with a three-
day right to review production contracts.
Contract Producer Lien
Based on a 1999 Iowa statute, the model Act provides producers with
a first priority lien for payments due under a production contract.
This alleviates one of the real risks faced by producers in production
contracting--getting paid.
Capital Investments
The model Act makes it harder for processors to terminate
production contracts capriciously or as a form of retribution if
farmers have already made sizable capital investments pursuant to
requirements in the contracts.
Since the Producer Protection Act was announced in September of
2000, state attorneys general have worked with various farm groups,
agribusinesses, governors, state agriculture commissioners, and
legislators to revise and improve the legislation as needed in their
respective states. Eighteen state legislatures considered various
versions of the Act. No state has passed all parts of the Act
(although, as mentioned, segments of it are already law in Iowa and
other states). We will continue to cooperate with interested parties
and decision makers in the coming years to see effective and reasonable
state legislation enacted.
Federal Legislation on Contracting
Federal legislation has been introduced that closely resembles the
states' Producer Protection Act. I strongly support the concept of
enacting Federal protections which mirror the states' proposals. One of
the goals of the model state legislation was to encourage a similar
state framework for the regulation of contracting. The idea was to
avoid a patchwork of divergent state laws and the regulatory burden it
would place on agribusinesses. Obviously, Federal legislation would
accomplish this goal.
However, if Federal legislation is enacted, it is crucial that
states are not preempted in their ability to grant producers additional
protections based on the specific needs existing in a state.
AGRICULTURAL FAIR PRACTICES AND PRODUCER ASSOCIATIONS
There is no question that farmers and ranchers now more than ever
need to join together to bargain for better contractual terms with
large agribusinesses. Many believe that the lopsided disparity in
bargaining power between producers and processors can only be corrected
if producers forge alliances. As Dr. Neil Harl states, ``Historically,
farmers have been unwilling to accept such a disciplined approach to
achieving bargaining power. However, the time may be near when that
will be the only practical alternative to vulnerability and serfdom.''
States are currently limited in their ability to enact legislation
in the area of collective bargaining for agricultural producers due to
preemption language in the Agricultural Fair Practices Act of 1967
(AFPA). Fortunately, Federal legislation has been introduced in this
area which contains two important components:
Producers' Ability to Bargain Strengthened
The proposed Federal legislation establishes a process by which
voluntary producer associations can receive accreditation from USDA. In
turn, these accredited associations are authorized to bargain with
large processors, contractors, and cooperatives (defined as
``designated handlers'' in the legislation). Mutual obligations of good
faith bargaining are imposed on both the accredited associations and
the designated handlers.
Additionally, the Federal legislation strengthens the ability of
producers to organize associations without fearing coercion,
intimidation, or discrimination by large agribusinesses as a result.
State Laws Not Preempted
Significantly, the Federal legislation makes clear that state laws
dealing with producer bargaining are not invalidated by Federal law
(i.e., the AFPA).
I would strongly encourage the enactment of this Federal
legislation. Farmers across the country would then have the tools
needed to band together and negotiate agreements which, hopefully,
would give them their fair share of the profits available in production
agriculture.
In summary, state attorneys general will continue to aggressively
enforce antitrust laws, but will also press for state and Federal
legislation which we believe will be more effective in dealing with the
negative impacts of consolidation in agriculture.
Again, I thank the committee for the opportunity to discuss this
serious problem.
Senator Cochran. Thank you, Mr. Miller.
Mr. David Reis, President-Elect Illinois Pork Producers.
Welcome.
STATEMENT OF DAVID REIS, PRESIDENT-ELECT, ILLINOIS PORK
PRODUCERS
Mr. Reis. Thank you, Chairman Cochran, and members of the
committee. As you said, my name is David Reis. I'm a pork
producer in Illinois, St. Real, Illinois. I'm currently serving
as President-Elect of Illinois Pork Producers Association and
also as a volunteer consultant to and a member of the American
Premium Foods Cooperative.
It is truly an honor to be here before this subcommittee on
behalf of the over 240 members of the independent pork
producers of our co-op to set a different angle on what we're
trying to do to deal with the changing agricultural industry.
We've heard a lot of testimony today about the fact that
agriculture is going through a period of change and transition
and consolidation. The result is the traditional family farm is
giving way to a system of contracted and integrated corporate
operations.
And in some of the producer groups and producers themselves
have resorted to spending a lot of their time and resources on
trying to figure out how they can stop this trend, whether it's
price control measures or moratoriums on mergers and
acquisitions or whatever it might be.
But a couple of years ago we at American Premium Foods took
another approach, and we wanted to be proactive and engage in
activities that would allow us to not only to control our own
destinies but also to create more jobs in the communities in
which we live and offer economic stimulus to that area.
We wanted to provide or establish a correlation between the
prices that consumers are paying for their products and what
farmers are receiving for their commodities.
American Premium Foods was organized in late 1999 after
almost a year of business plan development and membership
recruitment by its founding leadership. It's comprised of
independent pork producers from throughout Illinois. We plan to
construct a pork packing and fresh processing facility that is
capable of handling 2,800 head per day.
The plant will be one of the most automated and sanitary in
the United States. In our facility, even with the equipment and
stringent homework that we're going into, it will even meet the
tough European Union standards so we'll be able to export our
meat to other countries. No other plant in the United States
will have that.
We'll market our meat under the newly formed Meadow Brook
Farms label in which American Premium Foods owns a 51 percent
majority of. The farmers also own the brand name label that
we're going to establish after that.
Each carcass going through this plant will be individually
tracked. The producer members will be paid for, the wholesale
value of the primal cuts from their hogs. Profits from
additional processing as they come in will be paid out
according to the producer's percentage ownership in the plant.
Our $30 million-dollar facility will employ 210 people and
will have an annual payroll of approximately $6 million.
Because of its smaller size, the plant is designed to be an
environmentally friendly asset to the community in which we
choose to put it.
You hear so many stories about these large plants moving
into town, and they're 10,000 12,000, 16,000 head a day, and
they run into opposition. We feel that the site will be
friendly to that community in which we choose.
Our project, as smooth as it may sound, hasn't been without
its share of problems and attack from critics and non-
supporters. Because this venture of this size is the first one
in the country, we don't have a business model to follow.
It was deemed high risk start up from banks and not only
the banks that are going to be loaning the money to the
cooperative, but the banks would be loaning the money to the
individual producers that are buying their shares and providing
their part of the equity.
We are advised to be aware of snake oil salesmen, that this
is a concept that couldn't work in getting back to the equity
part of the producer's equity was lost in the low hog prices in
1998. Here they were, they lost their equity, we knew we had a
problem. Now they're wanting to invest in something that might
help them get out of that.
So all of those things, as you can tell, is real easy for
the critics to sit back and say this can't be done. But I'm
proud of the group. It's held its course, and it's continued to
believe that what we're doing is worth fighting for. Because
truly what's at stake is the existence of the independent pork
producer, the ones that are left.
We've been, as I said, working on this project for 2 years
now. But each day that passes, the consolidation that everyone
has talked here about today continues. We need to move projects
like this forward.
Just a few weeks ago it was announced that Seaport
Corporation has scrapped its plans to build a new processing
plant in Kansas. This gives proof that and confirms that most
of the growth incurred by these large packing plants is through
acquisitions and mergers. They're not investing in new
facilities.
And the talk of the news now is that high fuel costs are a
result of an industry that hasn't continued to reinvest in
itself. There is some correlation there with that industry.
So what can the Senate Appropriations Committee do to help?
We need common sense solutions and assistance if more projects
such as ours are going to successfully move through the
critical period of planning and start up. Whether it's beef or
pork packing plants, soybean crushing plants, ethanol
production, aquaculture, or many other value-added consents are
being discussed. Oftentimes the difference between success and
failure is the amount of time spent doing the preliminary work.
And this all takes a lot of time and a lot of money.
These ventures need assistance in hiring the best firms to
do the feasibility studies, the business plan development, the
market plan development. We know how to raise pork in a pork
industry. We know how to do it better than anyone else in the
world. We need a little boost here in terms of not only
assistance in paying for consultation but maybe centers that
could help us do with that research to help us in a broader
sense with ventures as large as this. So as we spread out, we
need a little help getting there.
So that we offer these suggestions, allow and encourage all
agencies and their employees associated with value-added co-op
development to instill a positive attitude and to look for
solutions, not obstacles, when consulting projects like ours.
Right now there seems to be incentives only for writing
good loans and not all loans are good. So let's take a look at
this operation and what can we do to help you folks.
Dramatically streamline the grant and loan application
process and fund these programs at a higher level. We talked
about the Grassley value-added grant application. That's one
thing. I think the rules there can be streamlined a little bit.
And with the USDA-backed loans, it shouldn't take 15 to 16
months to get through a process. I don't know if the States
vary in their level that they can go up to, but in Illinois
it's $10 million.
You go through several months of going through the process
and they say, well, we need to refer you to the USDA in
Washington. So then you go through all of this process again
and this all takes time.
I really didn't say about the time, but all the time we're
spending on this we still have to run our farms. We're short of
labor, we're short of cash to pay the labor. Our wives work in
town. And being gone 2 or 3 days a week for 2 years, it starts
taking a toll on us. I wanted to reemphasize it on the time.
Another option is introduce and pass legislation that
offers tax incentives to members who invest in new generation
co-ops. And, lastly, an example that was talked about, several
States have value-added bills and rules that they are currently
working with. Maybe a block grant to those States that maybe
matches their funds if they put in $5 million and another 5
million would come from the Federal Government.
In closing, Mr. Chairman, members of the committee, the
producers in our group have pretty much laid their operations
on the line. They've invested a lot of sweat equity and time
and money and are going to be investing a lot of money when we
make the capital call on this operation. They feel that the
future of independent pork producers relies on this, the key
ingredient in our rural economy.
And we hope that through the testimony from all of these
people that we can work together to find common sense ways to
help operations such as or projects such as ours get up and get
going. So I want to thank you for your invitation and be happy
to answer any questions.
Senator Cochran. Thank you, Mr. Reis. We appreciate your
contribution to this hearing and all of the members of this
panel. We're grateful to you for the time you took to prepare
statements and think about the subject we had under review
today. And to add to our understanding of some of the
challenges that we face. And also to open our minds to new
ideas and suggestions for ways to improve the opportunities for
farmers and production agriculture to operate their enterprises
profitably.
And some new suggestions about how to get out of the
problem of concentration and ensure that we do have the
opportunity that results in fair chances to sell at fair prices
the products that are produced.
Mr. Miller. Senator, we appreciate you sitting through 2\1/
2\ hours so we could all have our say here. Thank you.
Senator Cochran. I am interested in the suggestions. I
thought Mr. Butler's comments about the arbitration clauses
were provoking. We need to be sure that there is a fair
opportunity to have disagreements dealt with. And we shouldn't
prefer one side over the other in these arrangements.
And so we need to look at that again to see what we can do
at the Federal level. Whether or not the State legislatures
have more of a role to play in some of the local laws and
practices as well.
But I'm hopeful that we will all benefit from this, and as
we go through our appropriations bill this year and look at the
requests we have from the different agencies at the Department
of Agriculture for funding, we'll look at some of the
suggestions we got today and consider them very seriously. I
know you had some specific suggestions, and we appreciate that.
Other witnesses did as well.
Conclusion of hearing
Senator Cochran. We appreciate your attendance, and the
hearing is recessed.
[Whereupon, at 12:40 p.m., Thursday, May 17, the hearing
was concluded and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
Material Submitted Subsequent to Conclusion of Hearing
[Clerk's note.--The following statement was received by the
subcommittee subsequent to the conclusion of the hearing. The
statement will be inserted in the record at this point.]
[The statement follows:]
Prepared Statement of the American Cotton Shippers Association
The American Cotton Shippers Association is opposed to the
enactment of the legislation that would impose on the cotton industry
and its highly competitive marketing system the oversight of the
Federal Government.
interest of acsa
ACSA was founded in 1924 and is composed of primary buyers, mill
service agents, merchants, shippers, and exporters of raw cotton who
are members of four federated associations located in sixteen states
throughout the cotton belt:
Atlantic Cotton Association (AL, FL, GA, NC, SC, & VA) Southern
Cotton Association (AR, LA, MS, MO, & TN) Texas Cotton Association (OK
& TX) Western Cotton Shippers Association (AZ, CA, & NM)
ACSA member firms handle over 80 percent of the U.S. cotton sold in
domestic and export markets. In 2000-2001, domestic mills will consume
10.25 million bales and 6.75 million bales will be shipped to foreign
mills. Because of their involvement in the sale and shipment of cotton,
ACSA members are directly impacted by any action of the Congress that
impedes their ability to purchase the product of America's cotton
producers at competitive prices. Therefore, our interest is manifest in
the proposal before the Subcommittee since the pricing and marketing of
US cotton is a sound and effective example of a highly competitive
deregulated system that functions in the best interests of our
producer, domestic mill, and export customers.
Proposed Legislation Restricts Competitive Marketing of Cotton
Legislation introduced in the 106th Congress, S. 2252, The Agriculture
Competition Enhancement Act, and S. 2411, The Farmers and Ranchers Fair
Competition Act of 2000 and pending legislation S. 20, Securing a
Future for Independent Agriculture Act of 2001, in the 107th Congress
would have an adverse impact on the marketing of cotton.
At the heart of each measure is a section which will result in USDA
regulation of cotton purchases and sales by making it unlawful for any
dealer, processor, commission merchant, or broker to make or give any
undue or unreasonable preference or advantage to any particular person
or locality or subject any particular person or locality to any undue
or unreasonable disadvantage in connection with any transaction
involving any agricultural commodity.
The concerns over market concentration in sectors of the livestock
industry will have the effect of regulating cotton sales and threatens
a marketing structure, which over the years has provided cotton
producers with an active and competitive market for the sale of cotton.
This provision will preclude the offering of price premiums to
areas of the cotton belt that produce high quality fiber with strong
market demand and the establishment of discounts for poor fiber
qualities in other areas. In instances of a short world supply of
poorer quality fibers this could result in a premium for the lower
qualities, given its world demand, over that of finer qualities
produced in that or other regions of the United States. Would such
market circumstances be subject to the review of USDA?
Further, this unnecessary and restrictive language precludes
discounts for cotton produced and stored in areas where warehouse
service is poor and delays are frequently encountered and prohibits the
payment of premiums in areas where the warehouses provide timely or
even immediate shipment.
This provision would also create havoc with forward contracts
entered into with producers from the same region at different points in
time at different fixed prices or prices determined by futures market
prices. Those who contract at different times or fix the futures price
in different months could be deemed to have ``an unreasonable
preference or advantage.'' The same is true for those who sell in the
spot market at different points in time. All of these situations
establish prices and the last thing our industry needs is a USDA bureau
determining that marketing factors ``subject any particular person or
locality to any undue or unreasonable prejudice or disadvantage.''
We also have concerns with the restrictions on the sale or
acquisition of relatively small merchant businesses, warehouses, and
cotton gins with annual net sales of more than $10 million, which is
equivalent to handling approximately 25,000 bales of cotton.
INTERFERENCE WITH CONTRACTING PROCESS IS A GRIEVOUS & UNNECESSARY
OVERREACHING BY FEDERAL GOVERNMENT
The premise of S. 20 in Subtitle C, Contract Fairness, Section 121
is that agricultural contracts are not entered into in good faith with
respect to performance and enforcement and that producers are
unsophisticated and unfamiliar with their contractual rights in a
competitive marketplace. This erroneous premise ignores the Common Law
contract rights of the parties to agricultural contracts, which are
incorporated in the Uniform Commercial Code and continually updated by
the National Conference of Commissioners on Uniform State Laws and the
American Law Institute to reflect patterns of trade, customs and usages
and court decisions. It ignores the educational programs of producer
and trade organizations on the contracting process, and the transparent
process of the cotton industry, which has utilized fully explained
uniform contracts for over 25 years. Additionally, to subject contract
provisions to the approval of the Secretary of Agriculture is a
grievous and unnecessary overreaching of the independent rights of
contracting parties, as is the right of parties for mutually desirable
and agreeable reasons to maintain the confidential nature of their
lawful contract terms and conditions. Further, establishing a Central
Filing System for the purposes of perfecting liens was recently
considered and rejected by the Congress in its recent review and
updating of the Federal Warehouse Act. Most disturbing is the proposal
to void the long established policy of the US Congress to foster the
use of arbitration when contractual disputes cannot be amicably
resolved. Arbitration is available to cotton, wheat, feed grain and oil
seed producers throughout the United States and provides a fair,
efficient, and inexpensive recourse to dispute resolution. To suggest
otherwise would contravene the numerous favorable decisions of the
state and Federal judiciary and repudiate a sound public policy and
well established and accepted industry practice.
NO COMPELLING NEED & NO DEMAND FOR REGULATION OF COTTON INDUSTRY
This one-size-fits-all regulatory reaction to the transitional
nature of the livestock production and processing sector and the
current oversupplied US and world farm economies will do nothing more
than worsen the situation. In our view there is no real or government
fabricated substitute for competition.
The cotton marketing system is a proven success and a competitive
model well suited for the US cotton industry. In no other sector of the
farm economy is the factor of competition more prevalent than in the
cotton industry. There is no justification for its regulation and the
producer segment of our industry has not expressed a desire that cotton
be subjected to the provisions of S. 20, S. 2252 or S. 2411. In fact
the National Cotton Council of America has an express policies in
opposition to such legislation. Therefore, we respectfully request that
any consideration exempt cotton and the other price supported
commodities from inclusion in the proposed legislation.