[Senate Hearing 107-943]
[From the U.S. Government Publishing Office]
S. Hrg. 107-943
ENSURING COMPETITIVE AND OPEN AGRICULTURAL MARKETS: ARE MEAT PACKERS
ABUSING MARKET POWER?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
SIOUX FALLS, SOUTH DAKOTA
__________
AUGUST 23, 2002
__________
Serial No. J-107-100
__________
Printed for the use of the Committee on the Judiciary
87-865 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Dayton, Hon. Mark, a U.S. Senator from the State of Minnesota (ex
officio)....................................................... 5
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois....................................................... 1
Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota
(ex officio)................................................... 2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 96
WITNESSES
Bierman, Timothy, President, Iowa Pork Producers Association,
Larabee, Iowa.................................................. 32
Carstensen, Peter C., Young-Bascom Professor of Law, University
of Wisconsin Law School, Madison, Wisconsin.................... 24
Connelley, Tom, Rancher, Independent Order Buyer, and Cattle
Feeder, Belle Fourche, South Dakota............................ 25
Lilygren, Sara J., Senior Vice President, Legislative and Public
Affairs, American Meat Institute, Arlington, Virginia.......... 33
Mack, Bob, Farmer and Livestock Producer, Watertown, South Dakota 28
Ross, Douglas, Special Counsel for Agriculture, Antitrust
Division, Department of Justice, Washington, D.C............... 11
Thune, Hon. John, a Representative in Congress from the State of
South Dakota................................................... 6
Van Der Pol, James, Independent Hog Producer, Kerkhoven,
Minnesota...................................................... 30
SUBMISSIONS FOR THE RECORD
American Cowman's Association, Jim Strain, Executive Secretary,
statement...................................................... 43
Bierman, Timothy, President, Iowa Pork Producers Association,
Larabee, Iowa, prepared statement.............................. 47
Carstensen, Peter C., Young-Bascom Professor of Law, University
of Wisconsin Law School, Madison, Wisconsin, prepared statement 49
Center for Rural Affairs, Walthill, Nebraska, statement.......... 73
Connelley, Tom, Rancher, Independent Order Buyer, and Cattle
Feeder, Belle Fourche, South Dakota, prepared statement........ 80
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared
statement...................................................... 94
John Morrell & Co., Steve Crim, Vice President, General Manager,
Sioux Falls, South Dakota, letter.............................. 95
Lilygren, Sara J., Senior Vice President, Legislative and Public
Affairs, American Meat Institute, Arlington, Virginia, prepared
statement...................................................... 99
Mack, Bob, Farmer and Livestock Producer, Watertown, South
Dakota, prepared statement..................................... 102
National Association of Manufacturers, Michael E. Baroody,
Executive Vice President, Washington, D.C., letter............. 105
National Farmers Organization, Dick Gors, South Dakota NFO
President and Eugene Paul, NFO Policy Analyst, Ames, Iowa,
statement...................................................... 107
National Farmers Union, Dennis Wiese, South Dakota Farmers Union
President, Washington, D.C., statement......................... 111
Organization for Competitive Markets, Michael C. Stumo, Lincoln,
Nebraska, statement............................................ 114
Ranchers-Cattlemen Action Legal Fund, United Stock Growers of
America (R-CALF USA), Leo McDonnell, Jr., President, statement. 124
Ross, Douglas, Special Counsel for Agriculture, Antitrust
Division, Department of Justice, Washington, D.C., prepared
statement...................................................... 133
South Dakota Cattlemen's Association, Merrill Karlen, Jr.,
President, Kennebec, South Dakota, letter...................... 156
South Dakota Livestock Auction Markets Association, Jerry
Vogeler, Executive Director, Ft. Pierre, South Dakota, letter.. 158
South Dakota Pork Producers Council, Ric Morren, President, Sioux
Falls, South Dakota............................................ 159
South Dakota Sheep Growers Association, Jack Orwick, President,
statement...................................................... 161
South Dakota Stockgrowers Association, Rapid City, South Dakota,
statement...................................................... 163
Thune, Hon. John, a Representative in Congress from the State of
South Dakota, prepared statement............................... 168
Tyson Foods, Inc., Springdale, Arkansas, statement............... 171
Van Der Pol, James, Independent Hog Producer, Kerkhoven,
Minnesota, prepared statement.................................. 175
Wellstone, Hon. Paul D., a U.S. Senator from the State of
Minnesota, statement........................................... 177
Western Organization of Resource Councils, Shane Kolb, Meadow,
South Dakota, statement........................................ 179
ENSURING COMPETITIVE AND OPEN AGRICULTURAL MARKETS: ARE MEAT PACKERS
ABUSING MARKET POWER?
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FRIDAY, AUGUST 23, 2002
U.S. Senate,
Committee on the Judiciary,
Sioux Falls, SD.
The Committee met, pursuant to notice, at 1:30 P.m., at
Sioux Falls Convention Center, 1211 North West Avenue, Sioux
Falls, South Dakota, Hon. Richard J. Durbin, presiding.
Present: Senators Durbin, Dayton, and Johnson.
OPENING STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR
FROM THE STATE OF ILLINOIS
Senator Durbin. Good afternoon. Welcome to the Senate
Judiciary hearing on the effects of concentration in the
meatpacking industry and packer ownership of livestock. I'm
Senator Richard Durbin of Illinois, a member of the Senate
Judiciary Committee. And I am happy to be with you today and to
be joined by my colleagues in the United States Senate, Senator
Tim Johnson from the State of South Dakota, of course well
known I'm sure, and Senator Mark Dayton from the neighboring
State of Minnesota.
Although they are not members of the Judiciary Committee, I
have invited them to join me at the panel this afternoon to
consider the testimony which we are about to receive. They are
here because of their interest and leadership on this important
issue.
Let me assure you that although I come to this meeting as a
very strong Bears fan, that I do not come with a hatred of all
Packers. In fact, in my own callow youth, growing up in East
St. Louis, Illinois, I worked four summers at the Hunter
Packing Company pork processing facility owned by John Morrell.
And that's how I paid my way through college. So I know a
little bit about that part of the industry. But I readily
concede, as you can tell by the gray hair on my head, that it's
been many years since I have been personally involved in this
industry. And I've spent some time trying to catch up with the
progress and changes that have taken place.
I also understand that what we are here today to discuss is
an issue of great seriousness. It's an issue of economic
concentration in the beef and pork industry. This is not a
strange issue to federal government. At the turn of the last
century, concern over our nation's largest meatpackers and
their engaging in anti-competitive practices led President
Theodore Roosevelt to enact the Sherman Antitrust Act, to sign
that into law, along with the Clayton Act, and in part to the
creation of the Federal Trade Commission. So this issue was
well recognized over a hundred years ago.
In the 1920s, when it was found that the beef industry
needed even more specific protection, Congress passed the
Packer and Stockyards Act. At the same time, the U.S. Supreme
Court recognized the meat industry's vital importance to our
nation's overall economy and affirmed Congress's ability to
regulate under the United States Constitution commerce clause.
More recently, due to concerns over the expansion of the
nation's largest meatpackers, the Justice Department under the
Clinton administration created a special council to assist in
the oversight of merger and acquisition activities related to
the industry.
Today we hope to examine whether ownership of livestock by
the nation's larger meatpackers is harming the industry, its
members, and consumers, and if so, what we can do about it.
Because of wide scale consolidation and vertical
integration over the past 20 years, the major meatpackers are
in a convenient and tempting position to exert their economic
power in order to manipulate the prices paid to farmers. Recent
data suggests that the major packers account for approximately
80 percent of all U.S. beef slaughtered today; whereas the same
packers accounted for only 35 percent of U.S. beef slaughtered
20 years ago.
Consumers, as well as producers, have responsibility in
preventing, if not stopping, this trend. Rarely a day goes by
when we don't read about how market manipulation and unfair
practices have damaged consumers and market participants in our
overall economy in other corporations. Take the cases of Enron,
WorldCom as examples. The negative impact that market
manipulation can have is just as true for our livestock
industry and meat markets as it is for energy and the stock
market.
It's important to look how we can help the independent
producer gain more access to the market. The bottom line is
that our independent producers are being denied the value of
their livestock because they don't have market access. We are a
free market economy, but you cannot have a market where farmers
are locked out of the marketplace and there is little
competition and call it a free market. The purpose of this
hearing is to ask some hard questions about those issues. At
this point, let me turn to Senator Tim Johnson.
STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM THE STATE OF
SOUTH DAKOTA
Senator Johnson. Senator Durbin, welcome to South Dakota.
Thank you for chairing today's Judiciary Hearing on livestock
market and antitrust problems as well as my bill to ban packer
ownership of livestock. Senator Dayton, welcome, and thanks for
your participation as well. And we welcome Congressman Thune as
well who will testify shortly.
It's an honor to introduce two South Dakotans, Tom
Connelley of Belle Fourche and Bob Mack of Watertown, who will
testify later based on their experience as market participants.
Mr. Connelley is a rancher and cattle feeder. During the 1970s,
purchased cattle for meatpackers. His testimony will reveal the
changes that have occurred to the market which make it
difficult for independent producers to compete for a price.
Tom's wife Dorothy is here as well.
Mr. Mack is a five-generation farmer, livestock producer
and feeder. He has been active in supporting legislation to
restore competition to the livestock market and make
improvements to mandatory price reporting.
Thirteen other South Dakota agricultural groups have
provided me with testimony in advance of this hearing, and I
ask unanimous consent to add their testimony to the record.
Senator Durbin. Without objection.
Senator Johnson. Today we are here to discuss livestock
market problems and revenues. One solution, one part of the
solution, is my legislation which forbids packer ownership of
livestock. Three years ago I first introduced bipartisan packer
ban legislation. Senator Grassley, my Republican colleague of
Iowa, and I reintroduced this legislation in 2001. We were able
to pass the packer ban provision during consideration of the
Senate farm bill. Unfortunately it was killed by the House
conferees while the farm bill was pending in conference
committee earlier this year.
During debate of the farm bill, Senator Grassley and I were
disappointed that packers challenged the truth by claiming our
legislation would prohibit all forward contracting which gave
lawmakers without the courage to support our amendment a
convenient excuse to avoid taking a stand on the issue. Forward
contracts have never been prohibited by this legislation, not
three years ago, and not now. But the packers persisted in
trying to dilute the Johnson amendment into a study of packer
ownership.
Therefore, I worked with Chairman Harkin and Senator
Grassley to offer language in February to clarify without
question that forward contracts were permitted under our packer
ban farm bill amendment. We developed additional language which
clarified the intent of the word ``control'' in our amendment.
The Grassley-Harkin-Johnson change made it clear that the word
``control'' did not apply to forward contracts, but rather to
arrangements where the packer exercises control of livestock
production, not the mere contractual right to receive future
deliveries of livestock from a producer.
After we offered our clarifying language, on a vote of 53
to 46 our packer ban ownership--packer ownership ban remained
in the Senate farm bill. Once in conference, Chairman Harkin
and I developed a number of compromise alternatives to the
packer ban for the House to consider. First, we discussed
allowing packers up to four years to divest of their livestock
rather than 18 months. The House rejected that offer.
Second, we discussed a creative approach to require packers
to procure a certain percentage of their daily slaughter needs
from the cash market. This was Chairman Harkin's idea at the
time. This compromise offer was also rejected by the House.
Several months later some in Congress have now introduced
bills requiring 25 percent of packers' daily purchases come
from the cash market by 2008. I welcome the opportunity to
discuss this issue again, but fear that if the House wouldn't
accept a similar concept during the farm bill conference
committee, there is no reason to believe that they would accept
it now. Furthermore, a concern that the bills just now
introduced on this topic were drafted in a rush and overlooked
critical marketplace data.
According to USDA mandatory price reporting information
just last week, packers purchased 40 percent of their slaughter
needs from the cash market, and 60 percent were captive supply
or packer owned cattle. So it strikes me as ironic that someone
suggested making packers enter the spot market in just 25
percent of their slaughter needs. That may do significant harm
to independent producers because it would allow packers to
control up to 75 percent of the slaughter from captive supplies
and captive ownership.
Finally, Senator Harkin and I even suggested grandfathering
existing packer ownership levels and making our legislation
prospective rather than retroactive. Like all the rest, this
compromise was rejected by the House.
Today, 20 feedlots feed 50 percent of the cattle. And they
are directly connected to the largest four beef processors who
control 81 percent of the slaughter market. During this time,
agribusiness profits have inflated. In fact, Cargill increased
profits by 67 percent last year, Smithfield, the largest pork
producer in the world, increased profits by 28 percent.
Let's put it in context with the economic state of the U.S.
cattle and beef market. One, retail beef prices--retail beef
prices are at all time highs, so retailers are making money.
Two, demand for beef remains very strong. Consumers want to eat
beef. Three, U.S. cattle herd size has fallen to its lowest
level in 40 years. Supply and demand economics suggests that
that ought to be good news for cattle prices. Four, however,
live cattle prices are abnormally low with producers losing as
much as 250 dollars a head when they sell cattle. If this trend
continues, Mr. Chairman how many cow/calf ranchers and cattle
feeders will remain in business as independent entrepreneurs?
I'm also discouraged by the common threads between
corporate dishonesty on Wall Street and meatpacker influence
over livestock markets. On Wall Street, earnings are a key
indicator of success. Manipulative accounting strategies have
been employed to cook the books, leaving shareholders and
company employees feeling the economic pain.
In livestock markets, cash prices are key indicators of
success. Yet, when packers manipulate the marketplace,
producers lose out due to less competition and lower prices.
When investors lose confidence in Wall Street, it can
result in panic selling of stocks. When producers lose
confidence in livestock markets, they may engage in panic
selling as well.
This issue goes to the heart of what agriculture will look
like in the future. Will it be controlled by a handful of
powerful firms where farmers and ranchers are low-wage
employees bearing all the risk but none of the gains in the
market, or will it be a future of independent family farmers
and ranchers contributing to rural communities that are diverse
and economically strong?
It's my hope, in addition to better enforcement of laws by
USDA, the Department of Justice and Federal Trade Commission,
Congress take the following steps:
First, enact my legislature forbidding packers from owning
livestock prior to slaughter. This time the House must act on
this bill rather than avoid the issue all together.
Second, enact legislation sponsored by Senators Harkin,
Lugar and I, bipartisan legislation, which would permanently
create a position within the Department of Justice to handle
agriculture antitrust issues.
And finally, I especially urge the committee to ensure
action on legislation. S20 sponsored by Senator Daschle and
myself requires USDA to review proposed mergers, calls on the
Attorney General to create a special council for agriculture,
increases penalties for antitrust violations, and creates a
farmer and rancher claims commission so fines levied for unfair
practices would be redirected back to the producers.
Thank you, Mr., Chairman for conducting this hearing today.
Senator Durbin. Thanks, Senator Johnson. Senator Dayton.
STATEMENT OF HON. MARK DAYTON, A U.S. SENATOR FROM THE STATE OF
MINNESOTA
Senator Dayton. Thank you, Senator Durbin. Very pleased to
be here. I'm a member of the Senate Agriculture Committee which
I joined when I took office a year and a half ago because in
Minnesota, as in South Dakota, as in Illinois, agriculture is
so vital to our state's economy. And we share--and I know there
are a number of Minnesotans who are part of this audience
today, being just a stone's throw away from South Dakota--more
with this state than just a common border. We share that
recognition that agriculture is the life blood of our economy,
that every business on main street Minnesota, as in South
Dakota, depends on a healthy agricultural economy.
And all I can say, Mr. Chairman, is Senator Johnson is a
hero to Minnesota producers and farmers, as he is in South
Dakota, because of the amendments that he has put forward and
because of the efforts he has made in the face--I think
heroically in the face of the kind of assaults and
misrepresentations and distortions which occurred by the--the
very powerful financial interests that opposed his amendments
to do what we have to do if we are going to survive in rural
Minnesota and elsewhere in this country, and that is put the
price and the profit back into agriculture in the marketplace.
I come from a business family. I was Commissioner of
Economic Development for Minnesota back in the 1970s and 80s,
and I traveled all over the state. And I learned my
agricultural economics from farmers, producers in this region
of Minnesota. And you can't make a price--if you can't get a
profit in the marketplace with what you are producing, you
can't survive. And that's what we have lost, whether it's the
grain commodities or in livestock.
And across southwestern Minnesota from Luverne to
Pipestone, Worthington, Fairmont, Jackson, Albert Lea, where
there used to be meatpacking operations, small size, medium
size, a few larger ones, now it's almost entirely gone, and
it's been taken over by the large processors, and the producers
themselves have--have nowhere to turn. They are stuck. They are
basically indentured to these firms that say it's our contract
or you're out, and literally out of business. And we have seen
the results of more and more producers have been squeezed out
of the business.
So, Senator Johnson, what you have done has been just to
say not only heroic, but it's exactly what we must do in
America to restore profitability in agriculture, to give
people--restore competition, give people a chance to negotiate
for prices, to keep farming in the hands of farmers and
producers as independent economic entities, not as assembly men
or women in a chain of corporate production and control and
profiting from our nation's food supply.
Mr. Chairman, I would like to also just request unanimous
consent to introduce the testimony of my senator colleague from
Minnesota, Senator Paul Wellstone, who has also worked with
Senator Johnson on these issue, strongly supportive. And,
unfortunately, he had commitments in Minnesota which prevented
him from being here today.
Senator Durbin. It's without objection. It's my
understanding Senator Harkin would like to have a statement
entered in the record which will done without objection.
Also, for the record, the committee extended invitations to
Smithfield, IBP, Tyson. However they declined the invitation to
join us today. I will include the committee's letter to them as
part of the record.
We will have three panels. The first panel will be
Congressman Thune, who I welcome to the stand. The second panel
will be Doug Ross, Special Counsel on Agriculture from the
Department of Justice. The third panel will be Profession Peter
Carstensen from the University of Wisconsin at Madison, as well
as two cattle producers from the State of South Dakota, two
independent pork producers from Iowa and Minnesota, and finally
on that panel a representative of the American Meat Institute
who will speak on behalf of the meat industry and their
perspective.
Congressman Thune, thank you for joining us today. We
welcome your testimony. Please proceed.
STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF SOUTH DAKOTA
Representative Thune. Thank you, Mr. Chairman, and I want
to welcome you and your committee to South Dakota. I appreciate
the opportunity to testify today on the lack of competitive and
open agricultural markets. As South Dakota's lone member of the
House of Representatives, I want to welcome you. I know the
farmers and ranchers of this state appreciate your willingness
to come to South Dakota and hear from them.
We have a series of challenges facing South Dakota farmers
and ranchers right now. Some are immediate, some are long-term.
One of the more immediate ones is a drought which I look
forward to working with my colleagues in the House, as well as
with you in the Senate, to addressing when Congress returns in
September. It's something that is creating enormous economic
impact and hardship for people, particularly in western South
Dakota, but all across our state. And so I hope that we are
able to address that with legislation that will provide direct
assistance to our farmers and ranchers.
A couple of other issues. I had the opportunity just
recently to host a meeting in Rapid City on the issue of some
of the environmental regulations. Prairie dogs have been
proposed as a threatened species. That is something that has
created also hardship for ranchers in the western part of our
state. And in response to that, I have introduced some
legislation that would reform the Endangered Species Act to
require that sound science be used before that sort of thing
can take place and, secondly, that landowners be given an
opportunity to comment, that there will be local input before a
decision like that is made.
I think that is critical as well in terms of putting in
place a framework that will allow independent, small family
farmers and ranchers to survive in an increasingly competitive
environment. But here today, I want to tell you that, as I have
listened to South Dakota producers, they tell me that they want
closer scrutiny of large agribusiness mergers. And I understand
why.
Farming, food processing and retailing industries are
moving toward fewer and larger operations. Vertical
integration, such as ownership or tight control of more than
one phase of production and marketing by a single firm, is more
common. Agribusinesses such as seed, chemical, transportation
and biotechnology companies are also consolidating.
The agricultural marketplace has changed rapidly in recent
years. As members of Congress, it's our job to protect those
who provide food for our country and the world. As I travel
South Dakota talking to producers, I hear the concerns about
the choke-hold that big business has on family farmers. In
conversations with lawmakers, I've proposed that Congress
thoroughly examine existing antitrust statues, and consider how
those statutes are being applied and whether agencies and
courts are following the laws according to congressional
intent.
There are laws on the books that prohibit monopolistic or
anti-competitive practices. The very purpose of our anti-
competitive statutes, namely the Sherman Act and Clayton Act,
is to protect our supplies from anti-competitive practices that
result from market dominance. Unfortunately, these laws are
failing our family farmers and are not preventing such
activities from occurring. Congress needs to do more to stop
anti-competitive practices.
South Dakota farmers and ranchers have been a catalyst for
legislative proposals to defend agricultural producers in this
changing marketplace. I have worked with them to develop a
four-point plan to foster more competition for South Dakota
farmers and ranchers through country of origin labeling,
banning packer ownership of livestock, modifying our antitrust
laws, increasing spot market purchases.
As you know, the 2002 farm bill included country of origin
meat labeling legislation. This is enormously important to
independent small farmers and ranchers in South Dakota and
something that throughout my tenure in Congress I have worked
toward. And I am happy that the Congress this year adopted that
as part of the farm bill. I think it's important that we get it
implemented in the quickest and most efficient way possible
because we want to make sure that our farmers and ranchers, who
raise the highest quality products in the world, that is
recognized with the ``Made in the USA'' label.
The second legislative solution to fostering competition
for producers is banning packer ownership. I submitted for the
record some testimony including tables. When you compare Tables
1 and 2 at the end of my testimony, you will see that the
largest producers of pork in this country are also the largest
packers. In my opinion, the independent farmers and ranchers
should be the producers of pork, beef and lamb.
If we ban packer ownership of livestock, while continuing
to allow forward contracting and other risk management tools,
we empower our farmers and ranchers in the marketplace. This
debate was ongoing through the course of the last several
months. I introduced legislation with Congress Jim Nussle from
Iowa that specifically exempted contracts from this ban, and in
hopes that we would enable our farmers and ranchers to have as
many competitive options available to them as possible.
The Agricultural Competition Enhancement Act is my third
proposal, and the most relevant to your committee. And I
appreciate very much, Mr. Chairman, the fact that you are here
today. This has also been referred to your counterparts in the
House Judiciary Committee.
The Agricultural Competition Enhancement Act, what I call
the ACE Act, would prevent large agribusiness entities from
merging with each other if it would reduce competition in the
agricultural marketplace. Additionally, the ACE Act would
require the Department of Agriculture, the department that
knows agriculture, to review proposed mergers to determine the
merger's effects on prices, and whether that merger would
result in significantly increased market power.
The USDA would also be assigned the task of determining
whether the merger would increase the potential for anti-
competitive actions or predatory pricing. Producers would be
allowed to comment on the merger, and USDA would incorporate
those comments in a report detailing its findings. The
Department of Justice, the agency ultimately responsible for
enforcing the antitrust laws, would then consider the report in
its review of the merger.
The legislation would also require the Department of
Justice have an Office of Special Counsel for Agriculture which
would be responsible for handling agriculture antitrust issues.
Our farmers and ranchers need someone at the Department of
Justice looking out for them.
When you look at Table in my testimony, you see the five
top producers have almost 65 percent of the market share. This
surely cannot be a competitive atmosphere for independent
producers. It's clear we need to make changes to our antitrust
laws to protect our farmers and ranchers and rural economies
and preserve the rural way of life we all hold so dear.
I would add, at a fundamental level, all the things we are
talking about doing are good, but I really believe that the
antitrust laws, that we need to strengthen and come up with a
new framework. It's, in my opinion, very antiquated and these
laws that were drafted a hundred years ago don't apply to the
modern marketplace.
Finally, right before the August recess, I introduced,
along with Congressmen Lantham and Ganske of Iowa, a new and
innovative approach to fostering competition for independent
farmers and ranchers. This idea originated with South Dakota
producers as well as with your colleague, Senator Grassley from
Iowa.
The Livestock Packer and Producer Fairness Act would
guarantee that independent producers have a share in the
marketplace while assisting the Mandatory Reporting Price
system. The proposal would require percent of a packer's daily
kill come from the spot market. As a result, the market would
have consistent, reliable information, improving the accuracy
and transparency of daily prices. In addition, independent
livestock producers would be guaranteed a competitive position
due to the packers need to fill the daily percent spot market
requirement.
The legislation is designed to complement banning packer
ownership of livestock and price reporting. The intent of this
proposal is to improve price transparency and hopefully the
accuracy of the daily Mandatory Price Reporting data.
Together these four proposals provide a comprehensive
approach to protecting agricultural competition for South
Dakota farmers and ranchers. The purpose of our current
antitrust laws is to guard competition for the benefit only of
consumers. Our antitrust laws are not intended to keep our
agricultural producers in the market. We need to take these
steps to ensure a marketplace for our independent producers.
In closing, Mr. Chairman, I want to thank you again for
bringing this hearing to South Dakota. My constituents and I
share a concern for the future of the agricultural marketplace
and our rural economy. I appreciate the opportunity to discuss
my plan, some of the other issues that are out there, and fight
an epidemic of growing concentration in agriculture.
[The prepared statement of Representative Thune appears as
a submission for the record.]
Senator Durbin. Thank you, Congressman. Your full statement
will be made part of the record. I would like to ask you just a
couple of questions, if I might.You have talked about several
pieces of legislation which you have introduced with other
colleagues and some Senate counterparts. Can you tell us the
status of any of these bills? Have they been brought to hearing
in committee or are they pending on the calendar on the floor?
Do you anticipate a vote on, for instance, any of the bills
relating to packer ownership in the House of Representatives
this year?
Representative Thune. My guess is that we are going to have
hearings. The House Agriculture Committee has agreed. Iin fact,
there is a survey that has been sent around to the leaders of
producer organizations asking for recommendations on the whole
issue of concentration. The House Agriculture Committee will
take this issue up. That is something that came out of
discussion in the farm bill here recently. So we will be
addressing packer ownership, we will be addressing the spot
market legislation, ACE legislation. I think I have testified
once on this in the 106th Congress. There has not been a
hearing in the 107th Congress.
But, frankly, again, I believe on a fundamental level that
this is where we need to start in terms of improving the
outlook for farmers and ranchers. Antitrust laws, in my
opinion, are statutes that are a hundred years old, need to be
updated and modernized, and I don't think are reflective of the
current agricultural marketplace.
Senator Durbin. If I could ask a follow-up question on
that. Both Senator Johnson and I previously served in the House
on the House Agricultural Committee, and so I am familiar a
little bit with the dynamics of that committee.
I really find this unusual in two instances here. When
Senator Johnson put the amendment on the farm bill for labeling
for meat, that survived in the conference committee. We were
happy it did. And then when he also added the amendment on
packer ownership, which he had 53 votes, that went into this
conference committee on the farm bill, and did not survive. And
he talked about some of his efforts there to try to hang onto
it and to work out a compromise.
What is the problem in the House of Representatives? Why
are we running into such resistance to a measure that Senator
Johnson passed with bipartisan support in the Senate? What is
it about this packer ownership issue that makes it so difficult
for congressmen from ag states to carry the day in the House on
the farm bill?
Representative Thune. Well, I think that, Mr. Chairman,
having been experienced in the House and on the committee as
well, it is a challenging job indeed to try and put together
the votes not only in the House itself, but on the House
Agriculture Committee as the members of the House Conference
Committee and Senate Conference Committee meet. There was not
support on either side of the political aisle among House
members for a ban on packer ownership.
Senator Durbin. Is that right? For instance, on your bill,
do you have--you mentioned your own bill on packer ownership or
any other bills on the subject. Do you have a strong bipartisan
sponsorship in the House for the Johnson position or anything
like it? Have you seen--seen that so far?
Representative Thune. I drafted legislation along with
Congress Jim Nussle from Iowa. We took the Johnson/Grassley
language and ran it by a number of the producer organizations,
individual farmers and ranchers, got their input as to how we
might improve upon it. And one of the concerns that was raised
is whether or not in fact the question of contracts was being
adequately addressed in the Senate language. And so we drafted
legislation that would address that, specifically exempting
contracts. And then subsequent to that, brought it before a
number of the members of the committee, the conference
committee, as well as some of our other colleagues.
Senator Durbin. Do you have a majority of the members of
the Agriculture Committee supporting your bill or any bill on
packer ownership?
Representative Thune. There isn't at this point, I don't
believe, a majority of members of the Agriculture Committee who
have endorsed any specific position. I do, however, believe
that as a result of the hearings that we intend to hold in
front of the House Agriculture Committee coming up this fall,
that we will settle on a course of action. And I think it's
very encouraging to see that we are actually going to address
this issue. This is the first time in my experience in the
Congress, in my three terms, that we have had an opportunity to
examine in comprehensive detail the issue of concentration in
the agricultural marketplace.
I know there have been hearings prior to my arrival here on
the House Agricultural Committee, I think during your days. And
my understanding is at that time there was not a consensus as
well on which direction to move. The Livestock Subcommittee I
think held hearings back in the early 1990s on the subject.
But my hope is as we draw awareness to this issue, that we
will be able to put together consensus in the House. And I view
it as my responsibility, as well as others who represent states
in this region who care about the subject, to continue to push
the cause. And I believe that is what has led to the hearings
that are going to be held this fall.
Senator Durbin. Thank you. We will continue--the Senate
will continue to pass the Johnson measure and others like it,
and I hope we can persuade some of our colleagues in the House
to join us in this effort.
Senator Johnson.
Senator Johnson. I welcome Congressman Thune here and
appreciate his comments. They will be part of the committee
record. And I have no questions at this point.
Senator Durbin. Senator Dayton.
Senator Dayton. No questions.
Senator Durbin. Thank you for joining us.
Representative Thune. Thank you, Mr. Chairman.
Senator Durbin. Testifying at this point is Doug Ross who
is the Special Counsel on Agriculture for the U.S. Department
of Justice. Mr. Ross, thank you for joining us today. Your full
statement will be made part of the record. If you would like to
summarize it for us at this point, and then we will ask a few
questions.
STATEMENT OF DOUGLAS ROSS, SPECIAL COUNSEL ON AGRICULTURE,
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.
Mr. Ross. Good afternoon, Mr. Chairman and members of the
committee. I appreciate the opportunity to discuss the role of
antitrust enforcement in the agricultural marketplace, and in
particular in the livestock slaughter marketplace.
Antitrust enforcement benefits consumers, producers and the
economy by promoting better quality, increased innovation,
lower prices and healthy business incentives. I would like to
highlight a few points from my written statement. I understand
it will be included in the record. Thank you, Mr. Chairman, for
that.
We take very seriously the concern you and others have
spoken of, and we have been active in recent years in this
sector, bringing a number of enforcement actions. In addition,
we have met with numerous producers in Washington and traveled
to a number of places around the country as part of an ongoing
outreach effort. We are very much aware of the trends toward
increasing concentration in some agricultural markets,
including the steer, heifer, lamb and hog slaughter markets. We
are monitoring these markets carefully. High concentration in
the market is not in and of itself a violation of the antitrust
laws, but it increases the potential for antitrust scrutiny.
There are three basic antitrust violations. First,
collusion or conspiracy to suppress competition; second, the
use of predatory or exclusionary conduct to acquire or hold on
to a monopoly; third, mergers that are likely to substantially
lessen competition.
The first one, collusion, violates Section 1 of the Sherman
Act. Separate firms agree to cheat the competitive market
process by joining forces against their consumers or suppliers
to manipulate prices and deny choices such as by fixing prices,
allocating markets, and boycotting particular customers,
suppliers or competitors.
Proving collusion requires evidence of an agreement among
competitors. It is not enough to show merely that two
meatpackers bid a similar price or that some packers go to some
auction barns or feedlots and other packers go elsewhere.
In recent years, we have brought criminal prosecutions
against Archer Daniels Midland and others for fixing the price
of the feed additive lysine, against F. Hoffmann-La Roche and
others for fixing the price of vitamins used as animal feed
additives, and under Assistant Attorney General James'
leadership, against Akzo Nobel and others for fixing the price
of herbicide ingredients known as MCAA. Participaing firms have
paid stiff fines, including the largest fines in antitrust
history. Participating executives have been sentenced to serve
time in prison as well as pay fines.
On a smaller scale, a few years ago we successfully
prosecuted two cattle buyers in Nebraska for bid rigging after
an investigation conducted with help from the USDA, which was
investigating some of the same conduct under the Packers and
Stockyards Act. This case differed from others that I have
mentioned in that agricultural producers were victimized as
sellers rather than as consumers. The structure of the
agricultural marketplace presents more possibilities for this
to occur, and we keep a lookout for it and will prosecute when
the facts warrant.
The second type of antitrust violation, monopolization or
attempt to monopolize in violation of Section of the Sherman
Act, might involve, for example, a packer with a monopoly
attempting to drive rival packers out of business by illegally
interfering with their ability to engage in the business. I
should emphasize, however, how rarely we see a true case of
monopolization. First, the firm's market share has to be
extremely high. Even the lower threshold for attempt to
monopolize is upwards of 60 to 70 percent, combined with a
dangerous probability of going much higher. That is a single
firm's share, not the four-firm combined share often discussed
in agriculture.
And merely having a monopoly is not an antitrust violation.
There must also be illegal conduct to exclude competition, not
just to disadvantage rivals. It is quite rare that we encounter
monopolization, and I don't have any recent cases to cite you
on agriculture. But if we ever did find it in agriculture, we
would certainly take appropriate enforcement action as
warranted by the facts.
The third type of antitrust violation, a merger in
violation of Sectionof the Clayton Act, has a different kind of
legal standard. We are focusing not on whether the merging
parties have engaged in wrongful conduct, but whether the
merger would change the market structure to such a degree that
competition would likely be harmed. If so, we sue to stop the
merger or we insist that it be modified to remove the cause for
concern. We analyze mergers pursuant to the Horizontal Merger
Guidelines developed jointly by the Department of Justice and
Federal Trade Commission to determine whether the merger is
likely to create or increase market power or to facilitate the
exercise of market power in the market. Market power is the
ability of sellers to profitably maintain prices above
competitive levels or the ability of buyers to depress prices
below competitive levels and thereby depress output.
After we determine the scope of affected markets, a
complicated but necessary step explained more fully in my
written statement, we then determine the various firms' market
shares and predict how those markets would be affected. We look
at the markets from both the buyer's and the seller's
perspective.
There is no magic threshold of market concentration above
which the merger violates Section 7, but concentration is our
starting point because as a market becomes highly concentrated,
not only are price fixing and other collusion easier to
coordinate, there is also a dampening effect on competitive
rivalry even in the absence of collusion.
In the recent past, the Antitrust Division has carefully
reviewed a number of mergers in the agricultural sector,
including mergers among meatpackers. In 1994, we stopped one
meatpacker merger before it was even formally proposed. We
heard that Cargill's Excel Division was looking into acquiring
Beef America. Both packers were then in the top five. We opened
an investigation, aggressively questioned Excel and others, and
made clear our concern that it would harm competition.
According to a Cargill executive, this convinced them to
abandon the merger.
Other recent agricultural merger challenges include
Monsanto/DeKalb, Cargill/Continental, Case/New Holland,
Monsanto/Delta & Pine Land, and just last December, Suiza/Dean
Foods.
In Cargill/Continental we required divestiture of grain and
soybean facilities in several locations around the country to
preserve competitive market outlets for farmers in a number of
states, including South Dakota, Minnesota, and Illinois. In
Suiza/Dean, we required modification of a supply contract to
ensure that affected dairy processors would have the
competitive option to obtain their milk from independent
producers.
We have a long-standing cooperative relationship with USDA.
USDA has shared its wealth of information about agricultural
markets and has also provided insights and leads such as the
lead resulting in the Nebraska cattle buyer prosecution I
mentioned. This working relationship is reflected in an August
1999 memorandum of understanding, which was augmented last year
when Assistant Attorney General James designated a special
point of contact with the USDA for criminal matters.
Let me close with a few caveats about antitrust
enforcement. The responsibility entrusted to us as enforcers of
the antitrust laws is not to design the best possible market
structure for the marketplace. The antitrust laws are based on
the notion that competitive market forces should play the
primary role in determining the structure and functioning of
our economy. Our job is to stop specific kinds of private
sector conduct from interfering with those market forces.
We are law enforcers, not regulators. We don't have the
power to restructure any industry, any market, or any company,
or to stop any practice except in a precise and focused fashion
to prevent or remedy specific violations of the antitrust laws
that we can prove in court. The Court ultimately determines
whether there is a violation and whether the proposed remedy
fits the violation.
While the antitrust laws play an important role in helping
keeping markets competitive, they are not going to address all
the complex issues affecting American agriculture in this time
of change.
Mr. Chairman, we urge anyone who believes they have
information that could be relevant to our enforcement
activities to contact us. As a law enforcement agency, we treat
conversations with us in confidence. And if the information
leads us to conclude the antitrust laws have been violated, we
will take appropriate enforcement action. We remain committed
to protecting competition in this important sector.
Mr. Chairman, I would be happy to try to answer any
questions.
[The prepared statement of Mr. Ross appears as a submission
for the record.]
Senator Durbin. Thanks, Mr. Ross. Thanks again for being
here today. Let me ask you, how long have you been with the
Department of Justice?
Mr. Ross. Senator, I have been with the Antitrust Division
in two phases--I was there from 1975 to 1982, and this time
from January of 2000 to the present in the current position as
Special Counsel.
Senator Durbin. And could you give me an idea, in the--your
particular responsibility, agriculture, the antitrust division,
how many professional attorneys, investigators are involved in
that work in the Department of Justice?
Mr. Ross. In antitrust enforcement generally in the whole
division--
Senator Durbin. Agriculture.
Mr. Ross.--or agriculture? Senator, that is a difficult
question. It could be answered in the sense of taking a
photograph at any particular instant that this many are working
on agriculture, but it's important to understand that like with
other sectors of the economy, the Antitrust Division will put
the necessary resources behind agriculture-related
investigations as they come up.
And, for example, the Cargill/Continental merger was
pending at the same time as the Case/New Holland merger, so a
section within the Antitrust Division, which has the name
agriculture in it--Transportation, Energy and Agriculture--
handled one matter and a different section altogether handled
Case/New Holland. So it depends on the time.
Senator Durbin. I understand that the question may not be
as pointed as I wanted it to be, but what I'm trying to do is
focus on and determine whether the Department of Justice has
the resources in terms of appropriations and staffing to deal
with an issue of this magnitude. We know the industry that we
are overseeing is huge with great resources and great legal
talent. The question I'm asking is on the side of the
producers, livestock producers and consumers, how big is our
team? Can we with deal with this challenge and the complexity
of the economic issues that are involved?
Mr. Ross. Senator, I welcome your question. I would not
want the record to reflect when I get home to Washington that I
rejected additional appropriations for the Antitrust Division.
Senator Durbin. You would be the first.
Mr. Ross. However, we are comfortable that the budget
proposed by the administration is sufficient to address the
problems in this area of the economy as well as other sectors.
Senator Durbin. I'm going to ask a more specific question
and give you an opportunity when you get back home to answer it
with more detail. But in addition to resources, do you feel
that you have the authority in the Department of Justice to go
after what is clearly a very complicated situation in this
whole livestock processing industry?
Mr. Ross. Senator, we do. We think the antitrust laws,
although enacted as early as 1890 and added to in 1914 with the
Clayton Act, have accomplished the goals that they set out to
in protecting a competitive marketplace. And the administration
is not seeking any amendments at this time.
Senator Durbin. Then let me take you to the next question,
and this will not relate to your service in the Department of
Justice, but just your observations that may be similar to my
own.
In 30 or 40 years, we have seen a dramatic change when it
comes to meat and livestock processing in America. I've seen it
where I grew up in the midwest. I'm sure my colleagues have as
well. But there are clearly now fewer companies that are
involved in processing slaughter. We also know for a fact that
there are fewer livestock producers. The numbers are coming
down rather substantially; the numbers of larger producers
growing.
In my own state, hog production is larger than beef and
cattle. Twenty years ago we had 20,000 hog producers in
Illinois; ten years ago, 6,000; today, 1800. And the size of
these operations is just growing, what is left, expedientially.
So we can see what is happening to the input side of this. We
are losing more and more individual farmers and ranchers who
were feeding the livestock processing industry.
And we have also seen the processing facilities decline
dramatically. The numbers that used to be just around the St.
Louis area were a dozen or more major ones. And now people
travel great distances with their livestock in order to have
them processed.
What I'm trying to get to is this. As we watch this trend,
you said at one point it is not the Department of Justice's
role to define the optimum, perfect economy and what it should
look like, but to respond to changes as it goes along. What is
it the Department of Justice is looking at now, if you believe
that this trend is not good for us, that would stop it from
progressing even further?
Mr. Ross. Senator, as I said, the Division is hearing the
same kind of concerns you hear from your constituents. In fact,
I have met with a number of the people in the audience in
Washington, and heard many of these concerns. We are keenly
aware of how highly concentrated certain aspects of the
agricultural marketplace are, and as a result, we will be
watching extremely closely should there be any effort to change
that.
Senator Durbin. I guess specifically, will it take a
merger? Is that when the Department of Justice will step in and
say, now, that's where we play a role, as you mentioned here,
with the Cargill/Excel/Beef America? Will it take that or are
you reviewing the current situation and the current ownership
to see if there are any antitrust violations?
Mr. Ross. Well, Senator, as I note in my testimony, there
are three kinds of antitrust violations. We could look at any
one of those three. Mergers and acquisitions is certainly one
of the most straightforward ways where we would certainly take
a very close look were such a merger to be proposed. And as
evidenced by the last horizontal merger among the top five, we
acted very aggressively and stopped it in its tracks.
The other areas, monopolization, which is single firm
conduct as well as high market share, and the third area would
be the Section 1 of the Sherman Act or collusive behavior. We
are constantly looking for violations of the antitrust laws.
And we have an open door. I'm happy to share with anybody--I
brought plenty of cards--my phone number. The door is open. One
of the reasons I've been appointed and the functions I perform
is to be a public face and be available for people who want to
bring to our attention considerations that might lead to
uncovering a violation of the antitrust laws. And we welcome
that.
Senator Durbin. Thank you. My time has expired. Senator
Johnson.
Senator Johnson. Mr. Ross, welcome to South Dakota. Thank
you for your participation in this hearing. Does Department of
Justice policy agree that monopsony or buyer power is a
legitimate antitrust concern? If it is, how has the DOJ
addressed this issue specifically in the meatpacking industry?
Mr. Ross. Senator, thank you for welcoming me to South
Dakota. I'm pleased to be here, and I welcome your question.
As you know, monopsony is an important concern for the
antitrust laws, and is specifically mentioned in our horizontal
guidelines as being of equal weight and concern to us when we
investigate the anti-competitive potential effects of a merger
or acquisition. We also look at it in other contexts. I don't
have a specific meatpacking matter on which I can make
reference for you, but suffice it to say that Assistant
Attorney General James is committed to the importance of
applying monopsony concerns in his antitrust enforcement
efforts. And we will continue to do so.
The Cargill/Continental matter is the latest example where
we did actually apply that to protect the producers of grains
from the anti-competitive impacts of the buyer power that would
have been created through that merger if it had not been
changed as we required.
Senator Johnson. Well, if there was one buyer in a region,
and that region then suffered lower prices in relation to other
regions, would you recommend action be brought? Is that cause
enough for Department of Justice action if that were to occur?
Mr. Ross. Senator, you can appreciate that I would not want
to speculate on what set of facts might be sufficient to open
an investigation or to proceed. However, what I would say is if
any of your constituents have that kind of information
available, they should bring it to our attention and we will
pursue it and evaluate it in terms of what anti-competitive
violations there may be behind it.
Senator Johnson. If a packer was a long-time buyer from a
particular livestock producer, but the packer stopped buying at
the feedlot because the producer chose to sell to another
packer for a few weeks, does this amount to a boycott that
would cause you to recommend any antitrust action?
Mr. Ross. Again, Senator, that sounds like a hypothetical
situation that we would be happy to hear from anyone who knew
about it. But, again, a boycott in particular would probably
require an agreement, more than one actor, to be involved. And
so that's the kind of evidence, along with what I set forth in
my written statement, that we would be looking for. But, again,
I would welcome hearing from any producers who have information
such as you suggest in your hypothetical.
Senator Johnson. We know that the farm-to-wholesale spreads
in beef have increased by 50 percent in the last eight years in
inflation adjusted terms. These data have screened out value
added products, focusing on the same cuts. Have you performed
any investigation as to whether any or all of this increase in
spread is due to market power? And if not, why wouldn't DOJ be
investigating that issue?
Mr. Ross. Again, Senator, we would investigate in order to
develop sufficient evidence to take to court to establish one
of the three kinds of violations that I mentioned in my
testimony. The kind of concern that you mentioned is, again,
one that we have heard about frequently from individual
producers, and it would be relevant in many of the kinds of
investigations that we conduct. And we would take it into
account as one of many factors that would be evaluated in terms
of the ultimate question we have in antitrust enforcement, what
is the anti-competitive effect of the behavior or the merger
before us.
Senator Johnson. When you talk about mergers, not by
themselves, being violative of anything unless it causes a harm
to the competitive environment, are you talking about harm to
the consumers or harm to the producers or both?
Mr. Ross. Both, Senator, as the Cargill/Continental case
most recently illustrates, where we were concerned specifically
about the impact on producers. Ultimately, of course, the
concern under the antitrust laws is for consumer welfare, but
having effective antitrust enforcement means that both
producers and consumers will benefit.
Senator Johnson. Just in my small amount of time remaining,
let me ask one--one last question, Mr. Ross. There have been
reports indicating how packers can manipulate prices with
captive supplies, including packer-owned livestock. There is a
private suit, Pickett versus IBP, that focuses on that issue.
Have you performed any independent investigation as to the
motive or opportunity for packers to manipulate prices with
captive supply or have you performed any investigation as to
whether captive supplies have actually resulted in depressed
prices during specific time periods? I appreciate that this
falls somewhat in the province of Packers and Stockyards, but
it's my understanding that under Clayton and Sherman, the
Department of Justice does have jurisdiction over--over these
issues as well.
Mr. Ross. Senator, you are correct. The case you refer to
is brought under the Packers and Stockyards Act which is
enforced in the first instance by the Department of Agriculture
rather than the Department of Justice. And you are further
correct that the kinds of concerns that you mention in your
question are relevant to antitrust concerns. And we would
certainly be interested in specific information that we could
use as part of an investigation into the possibility that
antitrust laws are being violated. But, again, we are talking
about one of the three kinds of violations that I discuss in my
written statement, and the evidence that we would need to take
to court to prove that.
Senator Johnson. My time has expired, but thank you, Mr.
Ross.
Senator Durbin. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman. Thank you, Mr.
Ross, for the chance to visit with you here today. I appreciate
the instances you cited here, the intervention of your
department and the effects you've had. In gauging the scope,
it's a little hard, though, without knowing how much--what the
total number of possible interventions were to gauge the extent
of your activities. Sort of like baseball; if you say you got
hits at bats, that is 500. 12 hits at 100 bats, that is not so
good.
That is the part--I guess I would be interested to know how
many of these cases did you decide not to get involved in, but
particularly what, you know, the criteria are for one or the
other. But I guess my question here, given the limits of time,
is in terms of the industry, agricultural meatpacking process,
agricultural commodities, processing like in the mergers, as
you say, the Continentals, the Cargills, some very good
companies in their own right, is that merger activity over the
last ten years or so, in your experience, comparable to other
sectors of our economy? Is it more active in that arena than
elsewhere or less active?
Mr. Ross. Senator, that is a good question, and I am not
sure I have the facts to respond accurately to it. It's fair to
say, I think, that we have gone through a very significant
merger wave in the last few years, and agriculture has not been
excepted from that.
Senator Dayton. Maybe I will ask if you could go back and
review your facts, your information, and give me a reply or
give the committee a reply for the record, just in the future,
just for the record--how it does measure with others, if you
wouldn't mind.
Your testimony regarding the Cargill/Continental merger, I
was interested in this section here where you said, it goes to
this issue of monopsony, this relief is designed to ensure
that--you required some divestitures of Cargill/ Continental.
You said that relief you required was designed to ensure that
farmers in the affected market would continue to have
alternative buyers to whom to sell their grain and soybeans. In
this case the focus of the competitive problem was the so-
called monopsony concern, that is, that the merger would harm
producers as sellers.
And Senator Johnson probed into this area, but it interests
me as well what the criteria are to get to intervene for that
reason. That if farmers in an affected market would not
continue to have alternative buyers to whom to sell their
grain, their soybeans, their livestock, does that constitute
the basis then for antitrust action?
Mr. Ross. Well, Senator, you are right to focus on that
kind of analysis because that is exactly what we did in the
Cargill/Continental matter and what we do in any other
investigation. In that particular investigation, you may be
interested, and others in the audience as well, because we went
through what is called the Tunney Act proceeding, filing our
proposed final judgment, and the public had an opportunity to
comment. We were required to respond to those comments. There
were a number of comments that asked us did you look at this,
why didn't you look at that, and so forth.
And we laid out the scope of the investigation on what
kinds of things we looked at, and specifics--we literally got
maps out and drew circles around the grain elevators and the
ports to figure out which farmers were going to be affected if
this grain silo was no longer an option for other farmers. And
so the concern was exactly who is going to be affected and in
what markets, and that's--we determined that we needed relief
in specific markets to protect farmers who would try to sell
their grain, and they would have fewer options available. So
that is the monopsony concern, and that's the kind of analysis
we would do.
Senator Dayton. If that has hypothetically occurred in some
part of the country, such as South Dakota, such as Minnesota,
if farmers in that area only have one source of--which they can
sell their grain or their livestock, is that after the fact the
basis to come in and look at that situation from the monopsony
concern and take action accordingly?
Mr. Ross. Well, again, Senator, we are not a regulator, so
we can't just say, well, looks to us like South Dakota doesn't
have enough opportunities for producers to sell right now, so
let's do something about that. It would come instead in the
context most likely of a particular merger or acquisition. And
our ability to act in that context would be limited only to the
impact on the markets of that particular merger or acquisition.
Senator Dayton. So you can only do this at the time of a
proposed merger, and in advance of the effect it's going to
have, then evaluating what that effect would be. And if you
think that it's going to be--have too much of an effect and
this is a monopsony, you are going to stop it, you might
intervene, but once it has--the merger has occurred if that
same result occurs in terms of monopsony, it's too late. There
is no recourse.
Mr. Ross. Not necessarily, Senator. It would depend again
on the facts. Technically speaking, as you are going to hear
from another witness, there is no statute of limitations under
the Clayton Act, so it's technically possible for us to reopen
a matter that has been investigated before. However, I would
point out that there are a number of practical considerations
that would have to be taken into account before that kind of
step could be taken.
Senator Dayton. What was the trigger on the Cargill/
Continental situation there where you say the relief was
designed to ensure that farmers in affected markets would
continue to have alternative buyers to whom to sell their grain
and soybeans? Where--where in--I'm not a lawyer, so forgive me.
Where in, you know, law or regulations, whatever, is there the
basis for going in and saying, you know, we are mandated to
ensure that farmers in affected markets would continue to have
alternative buyers, and if they do, we are going to allow this
to go through, and if they don't, we are not. Where does that
authority come from or that discrimination occur?
Mr. Ross. If I understand your question correctly, Senator
it's in the first instance, the hook, if you will, the catalyst
that would get us involved in the first place, and in that
instance it was the proposed merger between the two companies.
We have under the statute the requirement to assess whether the
effect of the merger would be to substantially lessen
competition in any market or to tend to create a monopoly. As I
mention in my written statement, the Justice Department and FTC
have merger guidelines under which we analyze when we think
that standard is satisfied to the Court's requirement.
Senator Dayton. I'm sorry--we are running out of time. I'm
sorry to interrupt. I will rephrase my question. I didn't
phrase my question very well. If farmers only have one buyer of
their products, is that a--I mean is that a monopsony such that
you would act to prevent that?
Mr. Ross. Well, Senator, that's the kind of concern that we
are looking at when we do the kind of evaluation under the
merger guidelines and elsewhere for the monopsony issue.
Senator Dayton. If mergers have occurred in the past and
the result has been after the merger is concluded at some point
in time that that monopsony condition has occurred, your
farmers and producers only have one buyer which to sell their
product, then they should report that to you and you would look
into that situation?
Mr. Ross. Well, as I said, Senator, we would certainly want
to hear from producers who have concerns that they think might
establish a violation of the antitrust laws. And certainly, as
you have correctly understood our testimony, monopsony is a
concern that we--
Senator Dayton. So only having one buyer--only having one
available buyer is a violation of the antitrust laws?
Mr. Ross. No, I wouldn't quite go that far, Senator. Again,
antitrust enforcement is very fact-specific, and so it depends
on the facts and on the particular circumstances that we have
before us.
Senator Dayton. It's a potential violation?
Mr. Ross. It has the potential for raising concerns that we
would certainly want to look at. Again, in terms of reopening a
matter where several years later there is some concern about
anti-competitive effects from that merger, I would just say
that there are a number of practical concerns that would make
it more challenging to prove to a court that the merger should
be reopened and a change should occur. The passage of time
makes it very difficult to draw cause and effect relationships.
The Congress enacted the Hart- Scott-Rodino Act in order to
avoid just this kind of problem. The difficulty of unscrambling
the eggs is substantial, so for those reasons, I just suggest
it's practically challenging.
Senator Dayton. Thank you, Mr. Ross. My time has expired.
That you, Mr. Chairman. I would add, Mr. Chairman, I think this
is very fertile ground for some further inquiry and legislation
because if the intent of antitrust is to prevent what is
occurring here, which is the farmers are reduced down to one or
barely two buyers to whom to sell, and we can't--there is no
recourse, then it just means that the laws are no longer
sufficient to have the effect that they were originally
intended to have. (Applause.)
Senator Durbin. Thank you, Senator Dayton.
Mr. Ross, I guess my frustration here is as follows: What I
hear you saying is that if someone suggested a merger, change
in the players on the bench, so that there are fewer, the
Department of Justice is going to take a hard look at this
because it can clearly have antitrust implications. But we know
from the facts that over the lastyears, a lot of the changes
have taken place.
Apparently this doesn't fall on your doorstep because you
haven't been at the Department of Justice for that entire a
period of time. I'm not pointing to you specifically, but just
to the government in general. We have acquiesced in the
creation of, Senator Dayton's description, monopsony or
monopoly situations in this country to the detriment of many
people who are gathered in this room. We now have fewer
processors, we now have fewer bids being offered for the
livestock. And from where these men and women are sitting, it
appears that the government, which was supposed to be
protecting them from this sort of monopoly situation creating,
didn't do its job. Somewhere along the job we didn't step up.
(Applause.)
And I suppose what it comes down to is this. When we are
proactively looking at the situation today and the bottom line,
if we have seen a situation--and I think that that is correct,
that the major meatpackers account for 80 percent of the beef
slaughter, and years ago it was 35 percent, on its face there
is a concentration of ownership here, and a negative impact on
livestock producers who are trying to find markets and who are
being closed out. They are given a price, take it or leave it.
And that means no competition from their side, no free market
from their side.
So my question to you goes back to an earlier one. What are
we doing proactively to look at the current market and saying--
don't give me an idea of a new merger, but take a look at what
it is today and saying is this fair, should the government be
stepping in to the current situation, changing the current
ownership situation so that we can provide more competition and
more opportunity for these livestock producers? Do you feel we
have an obligation to do that, and if we do, are we doing it?
Mr. Ross. Senator, let me start again by reiterating what I
said in my testimony which is that concentration in and of
itself, a high concentration level, is not a violation of the
antitrust laws. There are three kinds of antitrust violations,
and certainly concentration is an important factor that we look
at. But, again, as law enforcers rather than regulators, we are
not free to just decide we don't like the way a particular
market looks, and therefore let's go change it. We have to
operate within the confines of the antitrust laws. So there
either has to be collusive behavior under Section 1 of the
Sherman Act, single firm monopolization or attempt to
monopolize, or a merger or acquisition.
Senator Durbin. That doesn't give much comfort to the
people who are gathered here today that what is currently
existing, the status quo, has evolved into a position where it
can't be challenged by our government if that is what you are
saying.
Mr. Ross. No, I'm not saying it can't be challenged. And I
would encourage, again, anyone who is here who has an
understanding of what the elements are the courts have required
that we prove to make out a violation of the antitrust laws,
who has information that might help us get to that point, to
bring it on. We want to have it. We want to hear it. We want to
look at it. But without evidence, we can't go to court and say
there is a violation of antitrust laws here, we think the
remedy is we have to divest the plant or break up this
particular situation. We have to prove a violation of the law,
and the remedy that the court structures has to fit that
violation.
Senator Durbin. I bet Senator Johnson can find quite a few
ranchers and livestock producers in this state who can tell you
about what has happened to their lives over the last years, if
that is the evidence you are looking for, if that's the
encouragement you need. Senator Johnson.
Senator Johnson. Well, the Chairman is correct. I've
listened to too many stories from people telling me how there
was a time when there were multiple buyers at repeated times
during the course of a week in which to negotiate a price for
the sale of their livestock. That it increasingly has become
fewer and fewer, now sometimes only one, and then only for a
very select, small period of time, and there is no negotiation
opportunity. It's simply take it or leave it. There is no
negotiation, there is no leverage. And that is what has
transpired over a relatively, in the larger scheme of things,
short period of time.
And it is distressing, I think to me and to a lot of people
in my state, when we say the concentration is not in itself a
antitrust violation, so there is really not very much we can do
except wait for specific instances of tough-to-prove collusion
or very rare instances where a single party has a complete
monopolization. It doesn't take a rocket scientist to figure
out if you havebuyers out there, that the seller has
opportunities then to negotiate a better price, and pick and
choose.
And what we are talking about is trying to reinvigorate
free enterprise in rural America. I think most South Dakotans
would agree free enterprise is the best economic system in the
world, bar none. The whole world wants more of it. But it only
works if there is competition. So while there are those in
Washington that say, well, if you act proactively that is
interference in the market, the fact is, as we discovered with
our--with Enron and with others in--WorldCom and so on, unless
there is a cop on the beat for--to impose fair rules, the free
enterprise system isn't going to work at all.
And so if we find ourselves down to one buyer, take it or
leave it kind of attitude, and then are told that that is not
an antitrust violation, it seems to me that that is a real
indictment of Congress and the administration both for not
getting its act together and strengthening these laws because
the status quo is wildly unacceptable. I believe in terms of--
(applause).
So your testimony today I think is helpful. Unfortunately
it's helpful in pointing out the inadequacy of current law and
the necessity of Congress not simply saying we need to be more
aggressive with enforcing existing laws, we need to do that,
but frankly the law has got to be strengthened. The laws that
were effective for Teddy Roosevelt no longer are getting the
job done. And Congress is going to have to strengthen the law
(applause) to give you the tools and the regulators the tools
to proactively get involved in this.
Otherwise it is not just a matter of the decline of farmers
and ranchers; it is the decline of our free enterprise economy.
The genius that has made America the wealthiest nation in the
world is going to lose if we continue to have this
concentration in sector after sector of the economy. And I
think the agricultural sector is the canary that ought to be a
warning to the rest of the world what is going to happen to
them if we don't change our ways and significantly strengthen
these antitrust laws.
Thank you, Mr. Ross, for your testimony. (Applause.)
Senator Durbin. Senator Dayton.
Senator Dayton. Just one last observation, Mr. Chairman. We
talk about the market concentration and the percentage of the
market that one--or a handful of packers, processors, whatever,
a sector they have, but that really overlooks the other side of
this issue which I was really struck by today, the monopsony. I
mean if we have a utility, electric utility, they don't have to
be a monopoly in the larger scheme of the national utility
market to have a monopoly by virtue of the fact that there is
no where else that people can buy their electricity from except
from that entity. We treat that as a regulated monopoly.
In this case, you can have a meatpacker of any size--and
what share of the national rural market it has when it sells,
is one thing--but if it's the only one in that area, that
region, that anyone can sell to, then it is a monopoly. It
doesn't matter what its percent is. It has a monopoly. And
given the costs of transportation and the time of delivery in
many of these areas in Minnesota, and I assume South Dakota,
there is only one place you can go, and you don't have a
practical option to go anywhere else. And that is de facto a
monopoly.
And we need--as Senator Johnson said, as you pointed out to
Mr. Durbin, we need to have some regulations with some teeth.
Not just once in a lifetime when two entities merge, but every
month, every year, ongoing to make sure that this does not
occur, and break it up when it does.
Senator Durbin. Thank you very much, Senator. Mr. Ross,
thank you for joining us.
The next panel is a large one, but we want to bring them
all up at one time so we can ask questions and keep this
moving.
Professor Peter Carstensen is a law professor at the
University of Wisconsin at Madison. Professor Carstensen was
formerly an attorney at the Department of Justice Antitrust
Division.
Also on the panel we have two cattle producers, Tom
Connelley and Bob Mack, both from Senator Johnson's home state
of South Dakota. In addition we have two independent pork
producers, Tim Bierman from Iowa and Jim Van Der Pol from
Minnesota.
Finally on the panel is Sara Lilygren. Did I pronounce that
correct, Sara? Thank you. Sara Lilygren, vice-president of the
American Meat Institute.
We will start the panel with Professor Carstensen. If you
would be kind enough--I've read your statement. It's good, and
it's going to be included in the record in its entirety. And if
you would be kind enough to summarize--for my benefit, if you
would kind of react to what we just heard, I think you might be
a good person to reflect on what Mr. Ross has said about the
current state of antitrust laws.
STATEMENT OF PETER CARSTENSEN, GEORGE H. YOUNG-BASCOM PROFESSOR
OF LAW, WISCONSIN LAW SCHOOL, MADISON, WISCONSIN
Mr. Carstensen. Thank you very much, Senator. And I
appreciate the opportunitY to be here. For a guy that is used
to 55 minute lectures, this is going to be a challenge because
they whispered in my ear we are down to 45 minutes for the
whole panel.
So markets are important. We all agree about that. We have
got problems of market manipulation. I think it's very
important to look at the Enron experience, the WorldCom
experience, where we had regulators on the beat. They missed
there because the regulations weren't well thought out in
energy, they were not properly implemented in securities
markets. In both cases we now have to go to the next level of
doing important changes in the law and ratcheting up the level
of enforcement.
In livestock markets, we start with the serious problem of
concentration that everybody has referred to. Concentration is
much worse. Those 80 percent and 65 percent figures are on the
selling side into the retail market. As you have all pointed
out, on the buying side we have got monopsony or another word I
love, oligopsony, a handful of buyers. And buyer power is a
serious problem. It leads to many of the issues that we have in
livestock markets today.
My cousins who farm in eastern Iowa, when I used to go back
there to visit, family picnics, would be talking about having
four or five, six buyers coming out to their farms to look at
their hogs or their cattle. We don't have that anymore. We
don't have the benefits of--of competition.
I'm not going to go through the various particular kinds of
problems that exist--I've laid them out in my written
presentation--other than to point out one very major problem as
we move towards a world in which we are going to be using
contracts more and more for the sale of livestock, and that is
discriminatory access to contractual opportunities. If we are
going to use contracts, then all feedlot operators, all feeders
of hogs, need to have access to those contracts. That's a
(applause)--that's a market organization requirement to make
these markets achieve the benefits of the market economy.
Since my--my good friend and sparring partner, Doug Ross,
has talked to you a little bit about antitrust, and referenced
the fact that, yes, indeed as I point out in my paper, mergers
law has no statute of limitation, those mergers back in the
1980s could be reopened. The IBP/Tyson merger could also be
looked at. Again, there is no legal limit. Even I, moderate
bomb thrower that I am, have many reservations about reopening
closed matters. It's not something you do lightly.
The interesting point here is that the administration at
the Federal Trade Commission, Tim Muris, has at least suggested
that he wants to revisit a bunch of hospital mergers which seem
to have greatly inflated health care costs. If we are going to
do it in hospitals, let's do it in meatpacking as well.
Other good news, you have been concerned about whether
oligopsony and monopsony are recognized as antitrust problems.
In addition to Assistant Attorney General James' commitment, we
have had three recent opinions from courts of appeal around the
country, all recognizing this problem and highlighting--
something that I disagree with Mr. Ross about--highlighting
that market share analysis when you are looking at buyer power
is different. The kind of leverage you get even with fairly
modest market shares can be sigificant. In one case--Toys R Us,
it only had a percent market share, but they were directly able
to influence their suppliers' willingness to sell toys to Toys
R Us competitors in the marketplace.
So one of the problems that we have right now is to get the
antitrust enforcers to rethink the measure of buyer power as
they look at and analyze various kinds of situations.
Another piece of pretty good news, I think, the Microsoft
opinion in the D.C. Circuit is a pretty good antitrust decision
forcing us to think about how to approach abuse of market
power. There are some other decisions that reinforce that, and
would make it easier if the antitrust division wants to be
vigorous, as you have all been suggesting. There are more ways
of looking at what is going on, many of these kinds of problems
that we have can be addressed.
That said, again, as Doug Ross pointed out, antitrust is
very case specific. It's very much focused on particular
offenses. For the problems that face agriculture today, we need
market constituting, market facilitating, regulation. That is
law that helps the market work better, more efficiently.
Fairness, access, equity, transparency. Those are the kinds of
goals. And so there is, I think, a real need today for more
legislation and its effective enforcement in addition to
keeping Doug Ross and company under the gun to enforce the
antitrust laws.
[The prepared statement of Mr. Carstensen appears as a
submission for the record.]
Senator Durbin. Thank you very much, Professor.
Tom Connelley is an independent order buyer, rancher,
cattle feeder, and has a statement which will be made part of
the record in its entirety. And if you would be kind enough to
summarize a few thoughts for us, we would appreciate it.
STATEMENT OF TOM CONNELLEY, INDEPENDENT CATTLE PRODUCER,
DEALER, AND FEEDER, BELLE FOURCHE, SOUTH DAKOTA
Mr. Connelley. Thank you, sir. I appreciate this
opportunity.
In the 1970s, I was a cattle buyer for American Beef
Packers. At that point in time, they were a packer that would
probably kill from seven to nine thousand head a week, and we
were one of the larger packers at that time. Later on I went to
work for Flavorland, a smaller plant in Denver, Colorado. We
didn't kill but about seven, eight hundred head a day in that
plant. But at the time that I was buying cattle for these
packers, I was actively competing against other companies in my
weekly rounds at feed yards. We bought cattle every day, we had
a beef order every day, we had a hot beef--what we call a hot
beef order.
Any of the phrases, if you don't understand, please ask me
later because I will explain it to you. I want you to know
exactly what I'm talking about.
Anyway, as I was traveling around in the feed yards or
farmers' places, my job was to evaluate these live cattle,
estimate the weight, estimate the grade of select, choice,
estimate the percentage of yield, and deliver them to that
packing house at a hot weight hanging in the cooler. For
instance, if I had a hot beef order of a dollar. and the cattle
would yield 63 percent, I had to deliver them to the packing
house for 63 dollars cwt. That was the equivalent, into the
cooler, of a dollar.
Okay. This has all changed. I wish it was still that way.
But since then, the market for slaughter cattle has totally
changed. Monday and Tuesday by noon the grid and the formula
cattle are committed to the packers. And from--from Tuesday
noon the packer, having these grid and formula cattle
committed, he knows exactly how many cattle he has got for the
week's kill. There is no question about it. He also knows how
many cattle he has available in his own feed yards that he is
feeding.
There is one question left. How many cattle will he have to
buy Thursday or Friday to finish his kill. If he hasn't got
enough cattle coming in, he is going to have to buy a few. But
for some reason, he will wait until Thursday afternoon at the
earliest, after the futures closes, in order to procure the
cattle for the rest of that week. And if he doesn't need them
by Thursday, he will probably wait until Friday.
And if you'll look at the longer statement that I gave you,
you will see where I've showed you a typical week in the
futures market of the way the thing acts, and as the week goes
on, how the packer uses the market to depress the feed yard
optimism to buy cattle cheaper. And when you read what I said
there, you will find that if they don't buy them on Thursday,
the market will be down on Friday, the futures market.
Well, about a half hour before the close today, it was down
a dollar. So we will get some cattle traded this afternoon, and
we will probably get them traded at no better than steady
money. And today they were buying cattle at a dollar two in
Nebraska, where the cut out value for a 50 percent choice steer
as of last night was a dollar nine. We are buying--they are
buying cattle at a dollar two today, and the cut out value is a
dollar nine. That's on a steer that is 50 percent choice.
Okay. Today there is a lot of cattle priced on the basis
contract, and there has been for the last, I don't know, seven,
eight years. Basis contract has been pretty popular. Those are
contracts basis the board that a producer can sign up his
cattle to a packer four, five, six month ahead of time, and
they agree on a basis to board contract which means whatever
the futures board is trading at, they can sell them at. Maybe
he will give two dollars over the board at sometimes, maybe he
is offering two dollars under the board.
The producer has the opportunity to price his cattle at any
time prior to that delivery month. So while the futures trade
is operating, the board is open. If I was a cattle feeder and I
had a contract like that, I could call up this packer and say,
okay, price my cattle today, I will sell them at whatever the
board price is. That is how a basis the board contract works.
But too many times, especially into a downtrending market--
and if you'll look at the addition that I have put on there of
the charts, it showed that well. In a downtrending market, many
times the futures is driven down right into that contract
pricing period to a low. And as soon as we get those cattle all
priced, you will normally see in the first two weeks of this
delivery month, you will see a three or four dollar rally up.
Now, that looks pretty much like there is some huge control
being exercised over our market through whoever is trading
those futures, and I suppose packers got a lot to do with it.
But they are driving that thing right down into where producers
have got to price those cattle, and then we see the rally.
A little example that I've given is if--if for some reason
a packer or three or four packers can hold that price down by
just three dollars a hundred going into this pricing period, if
they have got 50,000 cattle committed to them--and these are I
think very low numbers, I think the numbers are much greater
than this--but a three dollar per hundred weight depression in
prices is 36 dollars a head. 50,000 cattle amounts to 1.8
million in gross proceeds that they could obtain by just
controlling this market a little bit. So, gentlemen, I think
you can see how a little bit of leverage can make a lot of
money for a few big corporate entities.
Today, if I have got cattle on the show list in a
commercial feed yard, that show list would be put out on Monday
morning, there may be three, maybe four packers come pick it up
if I am in an area where the big three are and maybe one little
one. By late Thursday or Friday, maybe I'll get a bid on those
cattle, and maybe I won't. And if I do get a bid, it could be a
take it or leave it. You are telling me now, you sell them. If
you don't, we will pass and go to next week. Or I may have an
hour to make up my mind. But what good is an hour to make up my
mind when there is only two or three big packers that is going
to bid me anyway because they are all going to bid the same
money.
And if--when you watch your market reports, you will find
if 62 dollars is buying the cattle in Kansas and Texas today,
that is the price. I don't care how good they are or how--if
they are extremely inferior, they will bring less, but the
average cattle is going to bring 62 dollars. You are not going
to pry 62 and a half out of them as I did back in the days we
had competition. But the average price is where they will sell.
I have had to resort to selling most of my cattle on the
grid, and I do that because I feel I get a little better than
the average Kansas, Texas, Nebraska price if I do that because
my cattle are mostly all northern cattle. The genetics are
good. I keep them hormone and implant free. And those cattle
out-grade the implanted cattle by approximately 30 percent.
When I say the grid market, they are price--a base price
that is set on the average prices for the week. If the Kansas
high is 64 dollars, that's the base. I get a premium for prime
and a premium for choice. If you have grades one and two, if
they are three, it's the base price. But I get premiums and/or
deductions from that grid price. And if there is anything you
don't understand about a grid price, please ask me.
[The prepared statement of Mr. Connelley appears as a
submission for the record.]
Senator Durbin. Mr. Connelley, I will ask you if you'd
please wrap up at this point. We want to make sure everybody
gets a chance here.
Mr. Connelley. It won't be but a second. What I want--what
I want to stress to you is this. Through all these ways that
I've told you about, the packers learn to reduce competition.
He gets commitments early in the week to keep a large inventory
of packer-owned cattle, and he forward contracts basis to the
board. Depressed futures forces feeders to sell lower, which
probably happened today. Line up grid cattle early in the week,
set the base price late in the week. When I sell my cattle on
the grid, I don't know what they are going to bring until that
basis price is set late in the week. That is not the way to
sell cattle, but I have no better alternative.
Senator Durbin. Thank you very much.
Mr. Connelley. I appreciate it.
Senator Durbin. Mr. Mack, Bob Mack from Watertown, South
Dakota.
STATEMENT OF BOB MACK, INDEPENDENT CATTLE PRODUCER AND FEEDER,
WATERTOWN, SOUTH DAKOTA
Mr. Mack. Thank you, Senator Durbin, and also thanks to
Senators Johnson and Dayton for this opportunity to address
competition in the livestock industry and how it affects myself
and my friends and neighbors.
I operate my family's farms and have spent most of my life
raising crops and livestock. Our farrow to finish hog
operation, cow herd and feedlot allows us to add value to our
pasture, grain and hay, and to more fully utilize our equipment
and labor.
When faced with the loss of the largest hog packing plant
in the State of South Dakota, Smithfield was convinced to
purchase the plant after the State of South Dakota contributed
millions of dollars in incentives. Not long after this
purchase, Smithfield bought the only other pork processing
plant in the state and shut them down. This eliminated the only
competition we had locally, and took at least five dollars off
the value of every hog we sold. The rapid consolidation and
subsequent collapse of the hog market nationwide forced nine
out of ten hog producers in my area out of business and led us
to focus more on our cow herd and feedlot operation.
At one time by working with several other feedlots we could
receive bids on a regular basis from three or four packers, and
could usually get--or occasionally get bids from a couple of
other packers, depending on the type of cattle we had for sale
and if they were in the market. Today we can usually get
regular bids from a couple of packers with occasional bids from
a couple of more. It also means shipping cattle as far as 700
miles to get them slaughtered. Many farmer feeders are lucky if
they have one packer they can get a bid from. One bid from a
packer--from one packer isn't competition.
Part of the problem, in addition to having less buyers
available, the rules keep changing. The buyers used to buy
hanging, now want us to sell on a grid. One packer that we sold
cattle to on a negotiated grid for years now refuses to buy
cattle on that same grid unless we contract the cattle to them
months in advance. When you figure out what the rules are, they
change them. Most cows that are standing out there with the
bulls right now will not--their offspring will not go and get
to market for two or three years. We are always aiming at a
moving target, a long ways out.
What can be done to ensure competitive and open markets in
the livestock industry? Forbid large packers from owning and
feeding their own livestock. The livestock they feed are used
to leverage influence over feedlots and to leverage control
over cattle they don't even own. I would like to commend
Senators Johnson and Grassley for taking the lead in addressing
this issue in the Senate.
Restrict capital supplies by requiring forward contract,
formula and marketing agreement cattle to have a base price
established at the time they are committed to the packer. In
addition, require that forward contracts are offered in an open
public manner to any producers that choose to take advantage of
them. I believe Senator Enzi addresses this with his recently
introduced Senate Bill 2021.
Revise the confidentiality provisions of mandatory price
reporting to provide additional information and investigate the
information that has already been collected by the program, but
never made public, for competition and antitrust violations.
Tougher restrictions on future agribusiness mergers. The
packing industry is one of the most concentrated industries in
the country. Because they purchase a perishable commodity (fed
livestock), they are able to exert a higher degree of influence
than concentrated industries dealing in non-perishable
commodities. Give equal weight to the effect mergers will have
on suppliers to the industry instead of just the effect on the
consumers of the industry.
When Packers and Stockyards violations occur, involve the
injured party in any negotiations or plea bargains and require
that injured parties are compensated for the damages caused by
the violation.
Require that investigations of the industry are done by
economists and investigators who do not have a history of
working for the same companies they are supposed to be
investigating.
Review what effect the rapid consolidation of the food
retailing sector is having on prices paid to producers and
charged to consumers. Are slotting fees and other methods being
used to prevent smaller packers and producer-owned alliances
from getting access to consumers? Why aren't retail prices
reflecting the prices being paid to producers? Producers have
always relied on lower retail prices to help clear out surplus
production. This no know longer seems to be happening.
We talk about packer profits. I would just like to quickly
put this into a little perspective. And it's using figures
quoted by Wayne Purcell in an article he wrote for the American
Meat Institute. An industry analyst went and figured that the
average cattle packer's profit during the 1990s wasdollars and
38 cents a head profit which seems to be a fairly modest
profit. But now I want to put this in perspective. At that
rate, they have got that animal for five days, and the meat is
gone. Well, I sell fat cattle. I'm happy if I see a check
within a week, so I guess I go and finance the raw material.
Let's look at a cow/calf guy that goes and runs his calf
seven months. Just the time he has that calf on the ground, at
a dollar seven cents per head per day, he should be averaging a
profit of 225 dollars a head. A background or a stocker running
them five months should be realizing a profit, an average
profit, of 160 dollars a head. A cattle feeder feeding for 180
days should be realizing a profit of 190 some dollars a day.
The cow/calf producer who feeds his cattle all the way out,
retains ownership for 428 days, should be realizing an average
450 dollar profit to be receiving the same modest profit that
the packer industry says they are earning.
Let's put this in a little more perspective though.
Producers out here control, maintain, finance and pay the taxes
on 85 percent of the assets needed to get that steak from the
pasture to the plate. So at that rate--and the packers and the
retailers, they support 50 percent of the assets. You know,
maybe we need to go and adjust those numbers a little further.
Cattlemen have an innate ability to look at an animal that
appears healthy to a layman and know that animal is off feed,
sick or has some other problem. The ability is part intuition,
part experience. It's something they feel in their gut. They
know if they don't correct the problem, the animal will
probably die.
They have this same feeling in their gut when looking at
what is happening in the packing industry. Without strong
enforcement of the laws already on the books and steps to
assure that the livestock industry maintains open, competitive
markets, they know the livestock industry for independent
producers will die. Thank you, Senators.
Senator Durbin. Thank you, Mr. Mack. (Applause.)
[The prepared statement of Mr. Mack appears as a submission
for the record.]
Senator Durbin. Jim Van Der Pol from Minnesota.
STATEMENT OF JAMES VAN DER POL, INDEPENDENT HOG PRODUCER,
KERKHOVEN, MINNESOTA
Mr. Van Der Pol. That is going to be a hard statement to
follow. I am going to tell you, though, a little bit about my
farm today. I made the majority of my livelihood since I begin
farming in 1977 with hog production. For the first years, I
never lost money on hogs, though sometimes it was close. But
things changed. In the mid 1990s, Dakota Pork of Huron, South
Dakota, which was buying most of my production, was bought by
Smithfield Foods which immediately closed it when there was
talk of state ownership and keeping the processor open for
small farmers.
My son and daughter-in-law joined us on the farm in 1997.
Consequently, we built two hoop houses for hog finishing and
tripled the hog production from 60 litters per year to 180.
Most production was done in pastures seasonally, while the
hoops enabled us to produce a certain number of hogs year
round. Our first full year of production was 1998.
In the fall of 1998, when most of our first year of
expanded production was ready, hog prices dropped to eight
cents a pound. Now, it takescents worth of feed, even at corn
prices we have now, to produce a pound of pork. Every pound
those pigs put on was costing us seven cents out-of-pocket just
on feed. We were hemorrhaging money.
We started calling everyone we knew or ever heard of that
bought pigs to try to get rid of them. We finally found a Hmong
butcher in South St. Paul interested in light weight hogs who
bought most of what we had left, market price, eight cents.
And what did the industry have to say? It's not us, they
said. We are innocent, they said. It's the shortage of shackle
space, they said. That's what drives the price down. As long as
I live, I will remember that series of excuses out of the
industry in 1998 in the light of what they had done to my hog
buyer a few years earlier. We should have seen the handwriting
on the wall when Dakota Pork closed.
We now operate under the assumption that the commodity
market is the enemy. We do whatever we can to minimize that
commodity market's access to our farm's production. In 1999, we
started direct marketing our hogs, purchasing a trailer and
freezers with which to run a monthly delivery route into the
Twin Cities, 130 miles distance. In 2000 we started moving into
a few small grocery stores with our own pork label. We have
built this meat business to the point where it uses about 40
percent of the hogs, of the farm's hog production. The
remaining 60 percent is sold to a specialty company which pays
a premium for our husbandry methods and the meat quality of our
animals. Only the cull sows are exposed to the commodity market
now, and we are working to fix that.
We didn't stop there. We are converting the farm from row
crops--the farm, by the way, is 300 acres. We are converting
the farm from row crops to grass for our replacement heifer
grazing business, replacement dairy heifer business. We are not
interested in selling commodity corn anymore than commodity
pork.
1998 was a very expensive lesson for us. At age 50, my wife
and I lost at least ten years of worth of equity and work in
several weeks' time. Any hope of a conventional retirement is
gone for us at this point. My son and daughter-in-law had a
very rocky start to their farming careers and are angry and
suspicious of everything and everyone connected with farming.
We are all exhausted, having worked seven day weeks for four
years now to try to build our meat company's sales in a very
adverse environment.
Even though our dependence upon commodity production is not
what it was, we know very well that if the meat industry is not
brought under some kind of control, they will do to our meat
licensing and our meat business just what they are doing to
commodity producers. We are pleased with our two senators, Mr.
Dayton and Mr. Wellstone, as well as very pleased with our
senator from South Dakota, Mr. Johnson, for their moving
against packer ownership of livestock. This bill needs to pass.
I appear before you today a very angry man. I am angry
because my government fails in what should be a central task
for a democratic government in a market economy. It has failed
and it is failing to restrain the power so that others might
survive. It is this failure that is decimating rural America.
We should not have to think in rural America of our own
government as an enemy. You folks have the power to do
something about that. Please use it. Thank you for your time.
(Applause.)
[The prepared statement of Mr. Van Der Pol appears as a
submission for the record.]
Senator Durbin. Tim Bierman from Iowa.
STATEMENT OF TIMOTHY BIERMAN, INDEPENDENT PORK PRODUCER,
LARRABEE, IOWA
Mr. Bierman. Good afternoon. I am a pork producer from
Larabee, Iowa. I am the president of the Iowa Pork Producers
Association. I am an owner/operator of a hog farm that markets
over 10,000 hogs a year. I also farm nearly 500 acres of corn
and soybeans. I appreciate this opportunity to present our
views on competitive and open markets.
The Iowa Pork Producers Association is the oldest and the
largest state pork producer group in the country. IPPA
represents over 6500 pork producer-leaders proactively on
issues ranging from international trade missions, pseudorabies
eradication, ag policy and environmental regulation. In Iowa,
the pork industry accounts for over 86,000 jobs, contributing
nearly three billion dollars in payroll to our state's
residents. If you look at the total economic impact to the
State of Iowa, our pork production affectsbillion dollars in
the state.
Our organization has previously testified on the issue from
a different perspective, specifically on the proposed ban on
packer ownership. While we strongly support this concept, today
I would rather focus on a new proposal to require a percentage
of the livestock to be purchased on the spot or cash market.
This new concept was apparently discussed during the
conference deliberations of the farm bill which was sidelined
until further review. This approach appears to be--appears to
have bipartisan support, including South Dakota Senator Johnson
and Representative Thune. The proposal has been introduced by
Senator Grassley in the Senate and in the House by a number of
co-sponsors.
Just this week our board of directors voted to endorse the
legislation and to devote resources toward its passage. Our
board took this action because farm--livestock farmers are
concerned about the availability of competitive livestock
markets. This approach would guarantee that independent pork
producers have a share in the marketplace while assisting the
mandatory price reporting system. Requiring negotiated sales
ensures that processors will provide for public shackle space
for all hog farmers.
Available shackle space has become critical for independent
farmers because promises of new slaughtering plants will not
benefit farmers if the slaughter is only for packer-owned hogs
and the new plant results in the closing of another plant. The
legislation would improve the accuracy and the transparency of
all livestock markets. As our national organization correctly
stated in a 1999 press release, more negotiated sales would
help ensure prices reported for the spot market reflect the
current value of hogs.
Furthermore, we think that this approach makes sense for a
number of specific reasons, including both packers and
producers need accurate market information from negotiated
livestock sales. While the information will be used to
determine daily cash purchases, this approach will also impact
animals purchased on the contract and formula basis because
most of the marketing contracts are tied directly to the cash
market.
The legislation phases in the required spot purchases and
is not fully implemented for six years. This will allow farmers
and packers time to fully implement and adjust to the
legislation.
Smaller packers and single plant entities are exempt from
the law.
Most, if not all, packers are currently in compliance with
the five percent purchase requirement.
Farmers who form and operate cooperative packers would also
be required to purchase spot and cash markets--market animals,
but at half the percentage compared to the traditional packer.
These are a few reasons to support legislation, and I'm
sure there are many more. Pork producers throughout the country
need more competitive markets. We urge Congress to give the
producers an opportunity for success by enacting this
legislation.
And another market issue facing farmers is the full
implementation of the federal Mandatory Price Reporting law.
USDA started in the right direction, but continued market
oversight is now crucial.
In closing, IPPA is committed to a fair, transparent and a
non-competitive marketplace. Our producer members constantly
remind us of our duty. Mr. Chairman, thank you for holding this
important hearing, and giving me the opportunity to address the
committee.
Senator Durbin. Thank you.
Mr. Bierman. The Iowa Pork Producers Association stands
ready to assist you in the work you are facing.
[The prepared statement of Mr. Bierman appears as a
submission for the record.]
Senator Durbin. Thank you very much, Mr. Bierman.
Our last witness on this panel is Miss Sara Lilygren with
the American Meat Institute. Miss Lilygren.
STATEMENT OF SARA J. LILYGREN, VICE PRESIDENT FOR LEGISLATIVE
AND PUBLIC AFFAIRS, AMERICAN MEAT INSTITUTE, ARLINGTON,
VIRGINIA
Ms. Lilygren. Thank you, Senator Durbin. AMI is the
nation's oldest and largest organization representing
meatpackers and processors whose business practices, as we 80
have noted today, are governed not only by the Sherman Act, the
Clayton Act, the Robinson-Patman Act and the Uniform Commercial
Code, but also by the Packers and Stockyards Act, a statute
that is unique to our industry alone and clearly prohibits
meatpackers from engaging in unfair or deceptive business
practices. To my knowledge, there is no other sector of the
U.S. economy in which the federal government plays such a watch
dog role with respect to raw material suppliers.
And yet, ironically, we are here today to discuss whether
meatpackers should receive yet additional scrutiny, enforcement
or business restrictions in order to protect or benefit
livestock producers.
While some suggest our laws and the enforcement of them are
inadequate, I would suggest another theory, which is perhaps we
have not done a good job of pinpointing the real problems and
coming up with effective and constructive solutions.
You know, it's interesting we have spent about 95 percent
of our time today talking about the supply side of the chain
with very little mention of what is equally, if not more,
important which is the demand side of the chain. Someone asked
earlier who is going to control agriculture in the future. And
I would say that the consumer, who hasn't gotten a lot of
attention here today, plays a very large role in that.
AMI's members have one common objective; to make things
consumers will buy. We know that U.S. consumers have diverse
tastes, and 95 percent of them eat meat and poultry regularly,
so there is ample room in the marketplace for many different
kinds of products with different attributes. And we also know
there is a robust global appetite for our meat and poultry
products. We now export about percent of our beef, about
percent of our pork products, principally to Japan, Mexico and
Canada.
In fact, livestock producers, many of you in this room,
have raised and spent hundreds of millions of dollars in the
past decade to build consumer demand through check off
programs, both domestic and international consumer demand. All
of these efforts have had many benefits, including improved
communications throughout the meat chain, among retailers,
packers and producers. This has led to increased vertical
integration.
AMI's own members have increased their coordination with
both livestock producers and retailers to try to produce the
products consumers want to buy. In fact, sometimes AMI's
members have changed their management or operations in order to
meet their customers' needs.
Now, this vertical cooperation has some positive benefits
you are all familiar with. One I would cite is the reduction in
fat content in the average serving of beef and pork. That was
clearly the result of working together with the retail, packer
and producer elements of the chain.
Another is improved risk management options for producers.
And I would just cite contracting, as others on the panel have
cited, as one of the risk management tools that helped some hog
producers when the bottom fell out of the hog market in 1998.
Those hog farmers who had contracts are doing a lot better than
those who did not. At the same time, packers were obviously--
who had the contracts were obviously paying far over the market
value for hogs, but both parties ultimately benefit from the
certainty provided by a steady, consistently priced, contracted
supply of hogs.
Before I leave the topic of benefits of coordination and
integration, I just want to mention that this is a trend
throughout the manufacturing and service economy, and it's
driven largely by consumers who are demanding consistent
product quality at the lowest possible price. This demand for
low prices has led to fewer and larger retail chains in every
arena. The consolidation at the retail level has driven
consolidations at the manufacturer level, not just for
agricultural products, but for tools, appliances, and other
consumer goods. The demand for consistent product quality has
led many firms to exert greater control over their supply
chain.
Just ask anyone who supplies products to Wal-Mart or
McDonald's what that means. It means you must meet their
standards or you can't sell to them. It often means you must
subject your products and your plants to periodic customer
audits. That's the way business is done today, and the meat
industry should be no exception.
Against this backdrop, I hope you can understand why AMI
strongly opposes efforts that would make it illegal for meat
manufacturers to do what the rest of the global business
community is doing, which is to form relationships with
suppliers of raw materials in order to produce consistent
quality, lowest priced products that consumers will buy. In our
view, the proposed ban on packer ownership, control or feeding
of livestock would do just that. Further, we will oppose any
effort to restrict meatpackers who comply with existing
antitrust and fair business practice laws from sourcing their
raw materials in anyway.
If there is a consensus that the livestock market is not
working properly, then we would advocate a thoughtful,
reasoned, fact-based approach that will help all businesses--
farms, ranches, processors and retailers--pinpoint problems,
and develop targeted and effective solutions.
Thank you.
[The prepared statement of Ms. Lilygren appears as a
submission for the record.]
Senator Durbin. Thank you for your testimony. Let me ask
the first question of you then. What is the American Meat
Institute's position in terms of the traditional source of
meat, the independent owner, operator and producer, do you feel
that that is just a thing of the past like the shops on the
downtown square that went away when Wal-Mart showed up on the
outskirts of town? Is that a vanishing phenomenon?
Ms. Lilygren. It appears to be a shrinking part of the
market. Are you asking me if it's a dying source that is going
to become extinct, I don't think we can predict that. We don't
have a point of view advocating for that or not.
Senator Durbin. Would you not say that the policies of your
members are moving that extinction along faster by your own
ownership of production and by the lack of competition
available for prices for these producers?
Ms. Lilygren. What I would say is that the policies of the
federal government have made it more and more difficult for the
independent meatpacker to stay in business. Many of the packers
that have sold to larger packers in recent years, who may or
may not have chosen to continue those plants' operations, have
done so because they cannot tolerate the risk associated with
meeting federal food safety and other requirements on a day in,
day out basis, particularly single plant operations.I21Senator
Durbin. So you are saying that we have got to make a choice
here, whether we want to have safe food--
Ms. Lilygren. No.
Senator Durbin.--or we want to have these ranchers and
livestock producers?
Ms. Lilygren. No. I'm saying that one of the motivating
factors for much of the consolidation in the packing sector
that has occurred over the last ten years, one of the strongest
motivations for that, has been tougher federal regulations that
make it difficult for the small independent packer to comply.
Senator Durbin. Let me go to particular points you raise
here. You were arguing that in order to get quality control you
have to control much more than you did in the past, and perhaps
the conclusion is you have to own a lot more than you did in
the past. So you are suggesting that if you went to a pork
producer or beef or cattle producer and said to them this is
what we are looking for in terms of leanness and fat content,
that they would ignore you?
Ms. Lilygren. No.
Senator Durbin. Well, then, why do you need to own so much
more on the front end of the process to get the quality that
you are looking for? If you establish a standard, don't you
believe that men and women in South Dakota and Minnesota will
be producing cattle and hogs to meet that standard?
Ms. Lilygren. And that's why--I'm sorry, I may have
misunderstood your original question, Senator. The need for the
food manufacturer to have some degree of control, or let's call
them product specifications for their raw materials, drives
them to enter into some sort of arrangement, whether it's
contracts, forward contracting, a marketing agreement, or
outright ownership of the supply. That is quite--that is quite
a spectrum of different arrangements whereby the manufacturer
and the raw material are in some way connected.
So, now, your question is do I think an independent
producer can't for some reason meet the requirements of a
packer who wants to control certain attributes. The answer is
no.
Senator Durbin. I don't believe it either. In fact, I think
history says otherwise. I think that these gentlemen here with
us today can tell you what has happened in pork and beef
production over the years in terms of standards that they are
meeting and that the industry is demanding, and they are doing
it. And they don't have to be paid employees of any major
packing company in order to produce the hogs and cattle that
are going to meet those standards.
I also think that the fact that you are eliminating risk,
as you say it here, you can eliminate risk by giving them a
price that they are going to go out of business on. That is
quite an elimination of risk. It's also an elimination of their
livelihood.
Senator Johnson.
Senator Johnson. I want to thank this panel. In the limited
time we have here, I want to say, Professor Carstensen, I want
to thank you for your--a lot you did in your testimony here, in
your statement. I can't agree with you more that--when you note
that restoring greater balance in the market, the government
taking an aggressive role to make that happen, is not some sort
of radical interference with the market. In fact, it is
consistent with what we do in many areas, including the
regulation of credit, insurance, product safety, job safety,
franchising energy and securities markets. So that we have
numerous examples of where we have in fact stepped in to our
free market economy to ensure that it in fact remains a free
market and free enterprise type of economy. And I think it's a
very important observation that you have made.
Let me ask Tom Connelley, again, just observe--what you are
telling us that the packers schedule blocks of captive supply
livestock for slaughter over a period of time, then they pull
out of the market during that time, and watch the open cash
price for livestock fall, then they can take advantage of
that--of that fall. Is that--is that the process that you were
driving at?
Mr. Connelley. Yes, sir. When they have a large captive
supply, whether it be through contracts or through their own
feedlot-owned cattle, maybe through one of the big feeders that
is packer-oriented or packer-tied, where they go in there and
have access to those cattle at any point in time, and they can
stay out of the cash market until the individual independent
cattle feeder or the independent feed yard, until he finally
comes down to their price. That price is sometimes determined
by the way that the commodity futures board acts. A big sell
off on the board, you will definitely buy cattle cheaper. In an
uptrending market, they will be trying to buy them at steady
prices or less, depending on how many of their own cattle they
have got to kill.
Does that answer your question?
Senator Johnson. I think that does, Tom. I think that is a
valuable contribution here.
Let me ask Mr. Mack, it seems to me that market power is
often mistaken for efficiency in livestock markets. In your
opinion, if a meatpacking firm generates more profit, is it
because that packer is efficient or is it because the packer
has exercised market power to increase its profit margins,
doing that by driving commodity prices below what would
otherwise be competitive levels?
Mr. Mack. I would say in many cases it is a matter of
market power. I think that many of our smaller packers were not
driven out of business due to lack of efficiency. It was just
that they did not have equal market power to their competitors.
It's much the same thing in livestock production.
A farmer feeds, whether you are a hog producer or you're a
cattle producer--and I'll just try to put some round numbers on
it--but it would cost that producer cents a bushel to haul the
corn to market. If he was going to buy it out again to use it
as a feeder, it would cost another cents a bushel mark-up for
handling. You got cents a bushel to haul it back to the farm.
You add that up, that's 32 cents a bushel. Well, much of the
time in the last few years, we have had corn at a dollar and a
half or less. That farmer feeder already increased his
efficiency on the price he got on the grain by percent just by
utilizing it on the farm. At the same time they utilize
equipment and labor that they utilize in other production
practices, those costs spread out greater.
There is significant research out there showing that once
you would get over about a 150 farrow to finish unit, and even
on cattle feedlots and things like this, that you can be as
efficient as the largest lots in the country. No one can get
beat on efficiency.
The thing is, I'll go up against any feedlot or any other
production, I don't care what size they are, on efficiency. But
I have got to go and have access to the same comparable market
for the same quality of livestock that they have got. And if
I'm squeezed out just because I only market one or two pot
loads of cattle at a time instead of, you know, having control
over an entire lot, then I'm in trouble.
Too much of the packer ownership in livestock, when it
comes to cattle feedlots and things, is going in and putting--
agreeing to put a few head of livestock into a lot, and then
using those few head to leverage control over cattle that they
may not even own. Maybe some rancher, they were his cattle. But
that feedlot operator, the only way he goes and makes money is
to keep his. And if you don't think a packer in there with ten
percent of the cattle in there, and at the same time one
providing you a market, doesn't have a lot of influence over
his choices and his recommendations to his customer, you have
got another thing coming.
Senator Johnson. Thank you. My time has expired. The
Chairman.
Senator Durbin. Senator Dayton, I know you have to catch a
plane.
Senator Dayton. One last stop. I appreciate that. Miss
Lilygren, you mentioned, if I heard you right, the consumer is
going to control the food markets of this country when your
industry and others in the food industry have done everything
possible, it seems to me, to prevent that from happening.
Irradiation of meat is not something consumers have control
over that has been pressed, to ferment opposition to the
country of origin labeling, opposition to content labeling, you
know, pushing for higher retail prices that are unrelated to
lower prices for producers.
I see just the opposite. I see consumers being kept away
from having the kind of control that they ought to have, the
kind of choices, the kind of information to make those choices
and decisions. And I think that is the whole reason we are
talking here, is because the economic power is being
concentrated in the hands of those who are in between the
producers, the farmers, the growers, and the consumers. And
that's--not to put people out of business, but just to restore
a balance so that people are getting better quality, they are
getting--know what they are getting and they have choices, and
they are reasonably priced and farmers and producers get paid
enough to survive. And that means, you know, that people--
everyone else takes something less in order for that to be
possible. I just don't see that that is the way it's unfolded
in this country or is even headed in that direction.
I would like to go to your testimony here where you talk
about that American Meat Institute strongly opposes efforts
that would make it illegal for meat manufacturers to do what
the rest of the global business community is doing which is to
form relationships with suppliers of raw materials in order to
produce consistent quality, lowest priced products that
consumers will buy. What are you talking about here?
Ms. Lilygren. Senator Dayton, our view is that a ban, in
other words, making it illegal for a meatpacker to own or have
substantial managerial supervisory or operational control over
or to feed his or her livestock supply, would be tantamount to
making it illegal for that manufacturer to have supply chain
management which is a term people use in manufacturing, and you
see it in the retail sector. I mentioned McDonald's and Wal-
Mart as just two blatant examples of others further down the
chain that want to have some control over their supply.
Senator Dayton. Illegal for manufacturers to form
relationships with suppliers of raw materials. That presumes
that the suppliers are entities which produce that product and
supply that product. I mean that's--and you are saying that is
going to be made illegal?
Ms. Lilygren. It would be illegal.
Senator Dayton. To do what?
Ms. Lilygren. For a manufacturer to have substantial
managerial, supervisory or operational control. Now, there is
some debate about what exactly that ends up meaning. Our
interpretation and our attorney's interpretation of that is
that it would make contracting which you stipulate--
Senator Dayton. You must pay your attorney a lot of money
to misunderstand the legislation. We went through in
Washington--really. No, I mean the kind of obfuscation that
your institute put forward and, you know, just fundamentally
misrepresenting what the language stated. And then we even went
back and restated it again, Grassley and Johnson went back,
restated. You don't want to understand what it really is
because you don't want what it does.
Ms. Lilygren. With all due respect--
Senator Dayton. I'm not done yet. (Applause.)
Ms. Lilygren. With all due respect, Senator Dayton, neither
you or I are attorneys, so we can blame the attorneys maybe for
the obfuscation.
Senator Dayton. I'm not blaming the attorneys. I am blaming
the institute. I think you are the ones whose obfuscating
because you wanted to try to muddy the waters. And you were
actually fairly effective for a while doing so. Now you are
trying the same thing here; to say it would be illegal for you
to do what the rest of the global business community is doing
which is to form relationships with suppliers.
The legislation is intended to preserve suppliers so there
will be suppliers. It's saying you can't become the suppliers,
you can't take over the suppliers, you can't run the whole
show, become the whole show. It's exactly the opposite of what
you are saying.
Ms. Lilygren. Let me ask you a question. Under this law if
you were the--if you were the livestock producer and I'm the
packer, and I want to buy your cattle, but I want--I only sell
to the consumer hormone-free cattle raised having listened to
Beethoven their entire lives and fed on clover flowers, and I
put that into my specifications, our attorneys have said--my
purchase specifications--let's say I have a contract with you,
I need to market that, I have Sara's Special Beef. My attorneys
say that under the packer ownership ban, the latest version of
it, that it would illegal, that that would constitute
substantial operational, managerial or supervisory control
because I'm telling you what I need you to do to the animals
before I buy them.
Senator Dayton. I have to disagree with your attorneys.
Ms. Lilygren. You disagree.
Senator Dayton. I don't know. I honest--I honestly don't
know.
Senator Johnson. Will the gentleman yield?
Senator Dayton. I'm not going to yield so much as I'm going
to leave the room.
Senator Johnson. I would observe for the gentleman from
Minnesota that your position and my position relative to this
legislation not forbidding contracting was agreed to by three
of the leading economists, analysts in America, including Mr.
Neil Harl of Iowa State University. So it isn't just a matter
of you and I arguing about what this language means. It seems
that we have had some of the best agriculture and legal minds
in the world examining this and agreeing that the meat
institute is wrong, we are right; the legislation does not
prohibit--forbid contracting. (Applause.)
Senator Dayton. One last question. Mr. Van Der Pol, when
you talk about the 130 miles to market, what is the cost factor
of that? Was this round trip? What does that add to your costs
of production?
Mr. Van Der Pol. It's a little difficult to say since it's
not our entire production. I will say that our transportation
costs are by far the largest cost involved in our meat
marketing. And on the order of, in terms of gross meat sales,
to percent.
Senator Dayton.15 to 18 percent. So we are talking about
monopsony being a monopoly in a region where you only have one
buyer to sell to. I mean the transportation costs really are
limited in terms of where else you can transport a product,
especially an animal, to be--to have another place to sell it.
Mr. Van Der Pol. Oh, absolutely. We--on the other side of
my testimony, which is the specialty market, I would like to
point out to the committee that I spent the first years of my
hog production delivering my hogs miles to one packer or buyer,
or miles to another buyer, or miles to a third buyer. And then
there was another one at 20, which I never used. I am now
transporting that specialty production 170 miles into Iowa, and
it's up to me to arrange the trucking. And I think--any farmer
in the audience, and we have got a few by the sounds of it,
knows what that means, especially at my level of production.
Senator Dayton. I have got to go catch a plane.
Senator Durbin. Thank you. I would like to ask a couple
more questions. I thank Senator Dayton for joining us.
Miss Lilygren, one of the points you made at the outset of
your testimony is you have to listen to your customer, the
American Meat Institute has to listen to the customers. I would
like to make a proposal to you. I would like to ask your
customers--and let's agree on the pollster who is going to ask
this question so we both understand that it's someone
reputable--whether or not they agree or disagree with Senator
Johnson's proposal for labeling country of origin of meat. And
if it comes back that your customers agree with Senator Johnson
for labeling the country of origin so that people know when
they are buying American beef or American pork as opposed to
other countries, will the American Meat Institute then support
Senator Johnson's amendment?
Ms. Lilygren. Are you going to ask retail and our food
service customers--
Senator Durbin. No, the people, the consumers.
Ms. Lilygren. The consumers, oh. That--we use the term
``customer'' to mean our accounts. Yeah, we should talk about
that. I thought--let me just--I'm not dismissing it. I'm saying
we should talk about that.
But let me ask you another question. Could we agree that in
future discussions about the marketplace and the prices that
producers and packers receive for the sale of meat products,
that we include the retail and food service customers in the
discussion because they are an important piece of the economic
chain here.
Senator Durbin. I'm sure there is no objection to that. We
tried to invite a number of your members and they decided they
didn't want to come and testify.
Ms. Lilygren. But no one from the retail or food service
sector, which is an important piece of this, has been involved
in these discussions, and I think it would add information that
would be useful to all.
Senator Durbin. We are going to send a little letter along
to the American Meat Institute and ask them--in fact, I think
we can probably find some people to ask this question about
country of origin, which I believe the American Meat Institute
has been opposed to.
Ms. Lilygren. Yeah.
Senator Durbin. I think that the consumers across America,
I think your consumers that drive your decisions, want you to
change your policy, so let's find out. (Applause.)
Ms. Lilygren. I think our customers in the middle would
disagree.
Senator Johnson. Let me just close this session here. It's
an honor for me to have an opportunity to serve with Senator
Durbin on the Judiciary Committee. The Senate Judiciary
Committee is not normally a committee on which I serve. And I
am very appreciative of Senator Durbin coming to South Dakota,
appreciative of Senator Dayton for his participation as well,
and appreciative of all the panel members, of the diverse
points of view. I think this has been a very positive
interchange that we have had here today for the Judicial
Committee, also for me, and it's something that we are going to
take back to Washington with us.
Clearly we are dealing with an issue that is of absolute
fundamental importance to the South Dakota economy, but I think
to the economy of the nation as well, to the interests of
consumers all across this country. It seems to me that--that
from what I can hear now, and what I have been listening to has
confirmed what I have always felt, and that is the consumers
ultimately are best served by a broad network of independent
livestock producers, that the free enterprise system requires
competition, and that we have fallen down on the job in
Washington in terms of assuring the fact that a high level of
competition exists.
And what has happened is that the benefits of free
enterprise have in too many instances been lost, and
independent producers find themselves with fewer and fewer
options, find themselves in a take it or leave it circumstance.
And as has been the case in other countries, whether it's the
former Soviet Union or otherwise, where they have chased
independent private agricultural producers off the land and
replaced them with corporate employees, collectivized employees
and then found out they couldn't feed their people and they
want to come back and restore private agriculture and family
farmers, and found that once they have been pulled up by the
roots, they can't be brought back.
Well, that is what this county is going to learn if we
continue to stay on the current track, chasing independent
family producers off the land. We are going to wind up
ultimately damaging not only them and the economies of these
rural areas, but the consumers themself. So it's in the
interest I think of all of us that we continue to create a
situation where decent competition exists, where a fair price
for the product exists, rather than having this race to the
bottom to see which country in the planet--on this planet can
impoverish its farmers and ranchers the fastest. That is what
we are doing right now. That has got to change.
Thank you, Senator Durbin. (Applause.)
Senator Durbin. As is our custom on the Judiciary
Committee, we will keep the record open for one week for
senators to submit questions and statements to the witnesses.
I want to thank all the witnesses for participating today.
I especially want to thank Ms, Lilygren for coming under
adverse circumstances. Your employer owes you a steak dinner.
Let's hope it's from an independent producer. (Applause.) I
also want to thank Senator Dayton, and a special thanks to
Senator Johnson who has really been the leader in the Senate on
this issue.
Assuming there is no further business before the committee,
the Judiciary Committee stands adjourned. (End of proceedings
at 3:50 p.m.)
[Submissions for the record follow.]
[Additional material is being retained in the Committee
files.]
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