[Senate Hearing 108-311]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-311

      AGRICULTURAL CONSOLIDATION AND THE SMITHFIELD/FARMLAND DEAL

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 23, 2003

                               __________

                          Serial No. J-108-29

                               __________

         Printed for the use of the Committee on the Judiciary




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                            WASHINGTON : 2003
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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia             JOHN EDWARDS, North Carolina
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................    71
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa, 
  prepared statement.............................................    72
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    88

                               WITNESSES

Bell, Patrick, Farmer, Kenansville, North Carolina...............    14
Hughes, Will, Administrator, Division of Agricultural 
  Development, Wisconsin Department of Agriculture, Trade and 
  Consumer Protection, Madison, Wisconsin........................     9
Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota.     4
Kremer, Russ, President, Missouri Farmers Union, Jefferson City, 
  Missouri, on behalf of the National Farmers Union..............    12
Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio..     7
Stumo, Michael C., General Counsel, Organization for Competitive 
  Markets, Winstead, Connecticut.................................    16
Tweeten, Luther, Agriculture Consultant, Columbus, Ohio..........    11

                         QUESTIONS AND ANSWERS

Responses of Robert Blackwell to questions submitted by Senators 
  DeWine and Kohl................................................    31
Responses of Russ Kremer to questions submitted by Senators 
  DeWine and Kohl................................................    40
Responses of Michael Stumo to questions submitted by Senators 
  DeWine and Kohl................................................    42
Responses of Luther Tweeten to questions submitted by Senators 
  DeWine and Kohl................................................    50

                       SUBMISSIONS FOR THE RECORD

Agri-Mark Dairy Cooperative, Robert D. Wellington, Senior Vice 
  President for Economics, Communiations and Legislative Affairs, 
  statement......................................................    53
Bell, Patrick, Farmer, Kenansville, North Carolina, prepared 
  statement......................................................    59
Boyle, J. Patrick, President and CEO, American Meat Institute, 
  Arlington, Virginia, prepared statement........................    61
Consumer Federation of America, Washington, D.C., statement......    65
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared 
  statement......................................................    74
Hughes, Will, Administrator, Division of Agricultural 
  Development, Wisconsin Department of Agriculture, Trade and 
  Consumer Protection, Madison, Wisconsin, prepared statement....    76
Kremer, Russ, President, Missouri Farmers Union, Jefferson City, 
  Missouri, on behalf of the National Farmers Union, prepared 
  statement......................................................    83
Public Citizen, Wenonah Hauter, Director, Critical Mass Energy 
  and Environment Program, Washington, D.C., letter..............    91
Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio, 
  prepared statement and attachments.............................    93
Sparks Companies, Inc., McLean, Virginia, study..................   109
Stumo, Michael C., General Counsel, Organization for Competitive 
  Markets, Winstead, Connecticut.................................   123
Tweeten, Luther, Agriculture Consultant, Columbus, Ohio..........   129

 
      AGRICULTURAL CONSOLIDATION AND THE SMITHFIELD/FARMLAND DEAL

                              ----------                              


                        WEDNESDAY, JULY 23, 2003

                              United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                 Rights, of the Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 4:03 p.m., in 
room SD-138, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine and Kohl.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Chairman DeWine. Good afternoon. Welcome to the Antitrust 
Subcommittee. Today's hearing will examine the Smithfield/
Farmland deal as well as horizontal consolidation and, perhaps 
more importantly, vertical integration in the agriculture 
industry.
    Horizontal consolidation has become a common sight in many 
industries in recent years as mergers among direct competitors 
have increased the size and scope of companies, even while 
decreasing the number of companies left to compete. The pros 
and cons of horizontal consolidation also have become well 
known as antitrust enforces and this Subcommittee have weighed 
and balanced claims of increased efficiencies versus concerns 
of market dominance and decreased innovation.
    The evaluation of vertical integration and its effects is 
often more difficult. Vertical integration within the 
agricultural sector, which we will examine today in this 
Committee, is, of course, no different. Increasingly over time, 
we have seen packers create arrangements where the own or 
control their sources of supply. This vertical integration 
often raises competitive concerns that packers will refuse to 
purchase from any non-integrated source, decimating the spot 
market and leaving independent farmers with ever decreasing 
opportunities to sell their products. The loss of these market 
opportunities may lead to the loss of more independent farmers 
and to greater horizontal consolidation at the producer level.
    Along with these potential harms comes a potential upside. 
It is clear that vertical integration may generate efficiencies 
and other benefits. For example, many farmers sell their hogs 
under the system of contract farming, which is a form of 
vertical integration. Specifically, the farmer agrees to raise 
the hogs in a certain manner and under certain conditions. In 
return, the package guarantees a set price. This provides the 
packer with a reliable source of product and allows the farmers 
to bank on the certainty that those contracts provide against 
volatile market price swings. In addition, many believe that 
vertical integration has increased the ability of the 
livestock-processing industry to meet the demands of their 
retain customers--demands for higher-quality products, reliable 
delivery, and national distribution--all of which also allow 
industry to compete more effectively in the international 
market.
    The specific deal before us today is somewhat unusual in 
that it may not raise all of the concerns that horizontal 
consolidation raises. As an initial matter, we have to note 
that the pork-processing market is less concentrated than other 
protein markets, such as beef, where the top four processors 
control 80 percent of the market. As a result, this deal does 
not automatically trigger the types of concerns that further 
horizontal consolidation in those markets might trigger.
    Of course, the deal still requires antitrust review, and 
there is some limited horizontal overlap in the areas where 
both Smithfield and Farmland buy hogs. Even in those areas of 
overlap, however, there may be enough remaining pork processors 
that no antitrust harm may result from this deal.
    This deal is also unusual because Farmland Industries is 
bankruptcy. Smithfield's purchase of Farmland's pork-processing 
operations means that those operations will go from being part 
of a company floundering in bankruptcy, with all of the 
uncertainty that accompanies bankruptcy, to being part of a 
strong stable company in Smithfield.
    Now, despite these unusual aspects, overall this deal and 
the trends of horizontal consolidation and vertical integration 
in agriculture give us a lot to discuss today. This 
Subcommittee has been and continues to be committed to 
achieving and maintaining an agriculture industry that is a 
highly competitive industry--an industry which can and should 
benefit all its participants, including producers, processors, 
and consumers. We look forward to hearing from our witnesses on 
all of these important issues today.
    Now let me turn to my friend and colleague and the Ranking 
Member of this Committee, Senator Kohl.

 STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF 
                           WISCONSIN

    Senator Kohl. Mr. Chairman, thank you for holding this 
important hearing today. Concentration and consolidation in the 
agricultural industry is a major concern for hard-working 
families and farmers across our country. Today we are examining 
the merger between Smithfield and Farmland, combining the 
Nation's number one and number five pork processors, but this 
deal represents just one of many that have occurred in recent 
years throughout our agricultural economy.
    The increased numbers of mergers and acquisitions among the 
Nation's top processing firms raises serious concerns about 
whether there is a competitive market that enables our farmers 
to have a fair chance to receive a fair price for their 
products. Our Nation's farmers, who comprise less than 2 
percent of the population, produce the most abundant, 
wholesome, and by the cheapest food on the face of the Earth.
    However, the way in which food is produced is rapidly 
changing, creating significant new challenges. We have seen a 
massive reorganization in our food chain due to the increasing 
numbers of mergers in industries such as livestock, grain, 
rail, and biotechnology.
    During this period of enormous transformation in the 
agriculture industry, disparity in market power between family 
farmers and large conglomerates all too often leaves the 
individual farmer with little choice regarding who will buy 
their products and under what terms.
    Many commodities, including pork, beef, poultry, and 
grains, have experienced significant degrees of concentration. 
In the pork industry, the top four processing firms control 
more than 60 percent of the total market, a number which will 
increase to more than 65 percent if the merger we are 
considering today is approved. On the beef side, the top four 
beef packers purchase about 80 percent of the Nation's cattle. 
Rather than buying on the open market, processors of farm 
commodities are relying more and more on contractual agreements 
with farmers, which bind the farmers to sell a specified amount 
of product for prices specified by the processors.
    In many cases, there is no longer a significant open market 
to which farmers and ranchers can turn. These contractual 
arrangements damage the independence of family farmers, leaving 
them little choice regarding what to grow and the terms on 
which to sell their products.
    For example, from 1993 to 2001, the share of total hogs 
sold through contractual arrangements increased from 10 percent 
to 72 percent. Consequently, sales and purchases through the 
traditional spot markets have dwindled to 28 percent total 
sales. We should be concerned that the same trend may occur in 
the dairy industry. Similar concentration in the dairy industry 
has already occurred to some extent, particularly in the fluid 
milk market in the Northeast. Thankfully, this is not yet the 
case in the Upper Midwest. Dairy producers in our region 
continue to enjoy a significant degree of competition for their 
milk supplies.
    But we must do all we can to make sure that it stays that 
way. It is only through proper and aggressive enforcement of 
current antitrust laws, both at the Department of Justice and 
the FTC, and also by vigilant enforcement of the Packers and 
Stockyards Act at the Department of Agriculture, that we can be 
certain that producers and consumers alike benefit from open 
and fair markets.
    We should also consider whether the Department of 
Agriculture should be given a greater role in advising the 
Justice Department and the FTC in evaluating the competitive 
effects of agriculture mergers. We must not allow abuse 
practices or disparities in bargaining power between farmers 
and agribusiness to disrupt farmers' equal access to the market 
or farmers' ability to receive fair prices for their products.
    I am pleased that we will hear today from this panel of 
experts. I would like particularly to thank Will Hughes of the 
Wisconsin Department of Agriculture, Trade and Consumer 
Protection, for being here this afternoon. We appreciate you 
making arrangements to testify under such a short time frame. 
And we welcome all our witnesses this afternoon and look 
forward to hearing your thoughts on this important and timely 
issue.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Kohl, thank you very much.
    We are delighted to have today as our first witness Hon. 
Tim Johnson, U.S. Senator from South Dakota. Senator Johnson, 
thank you for joining us, and go right ahead.

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

    Senator Johnson. Well, thank you, Chairman DeWine and 
Senator Kohl. I appreciate you allowing me to testify at 
today's hearing on agricultural market concentration, 
Smithfield's proposed acquisition of Farmland's Pork Division, 
and legislation I have sponsored with my colleague, Senator 
Grassley, to ban packer ownership of livestock.
    On July 15, Smithfield Foods offered to purchase the Pork 
Division of the bankrupt cooperative, Farmland Industries. The 
purchase agreement is subject to court approval, and the 
Justice Department must ratify the acquisition as well.
    Today, I join Senators Grassley and Harkin to call for an 
immediate and comprehensive review of this deal by the 
Department of Justice. The Antitrust Division of DOJ needs to 
carefully examine the possible negative consequences this 
buyout could cause for pork producers and consumers.
    Smithfield made a host of promises in conjunction with the 
Farmland deal, including the pledge that the company will honor 
all production contracts with farmers and maintain slaughter 
capacity at all Farmland facilities.
    Previous actions demonstrate that Smithfield is an 
opportunistic company whose number one job is to increase 
financial returns for its shareholders, and South Dakota 
workers and farmers have suffered the consequences.
    On August 8 of 1997, Smithfield purchased the Dakota pork-
processing facility in Huron, South Dakota. The plant employed 
750 people, slaughtered around 7,000 hogs daily. It was Huron's 
largest employer and one of two South Dakota markets for 
slaughter-ready hogs. One day later, on August 9th, Smithfield 
shut down the Dakota pork plant, laid off the 750 South 
Dakotans who were employed there. The community of Huron has 
never fully recovered since.
    In the matter of a single day, nearly a thousand South 
Dakota workers were laid off, an important rural community in 
South Dakota suffered a devastating economic blow, and 
thousands of South Dakota pork producers were left with only 
one market for their slaughter hogs, another facility owned by 
Smithfield in Sioux Falls, South Dakota.
    Before Smithfield closed the Dakota pork plant in 1997, 
South Dakota had over 3,000 independent pork producers. Today 
there are about 1,600 pork producers remaining in my State. 
Market experts have forecast that if Smithfield is allowed to 
purchase Farmland, additional pork facilities could be subject 
to unilateral closure by the company.
    I believe the Department of Justice will conclude that this 
sale would boost Smithfield's already mighty market power in 
South Dakota, Iowa, Nebraska, and Minnesota, reducing or even 
eliminating competition in several critical regional and local 
markets. Since 1981, Smithfield has acquired nearly 20 
competitors, and the company is continually stalking others in 
hopes to expand market share and increase profits.
    As the world's largest pork producer, Smithfield currently 
owns one out of every four pigs in the United States, a total 
of about 760,000 hogs. The addition of Farmland's 36,000 sows 
would put Smithfield close to 800,000 sows. Smithfield is also 
in negotiations currently to purchase Alliance Farms, which has 
7,500 hogs in Illinois and 20,000 in Colorado. If the Alliance 
and Farmland purchases are approved, Smithfield's total 
ownership will be in the range of 825,000 hogs.
    As the world's largest pork processors, Smithfield produces 
60 percent of the pigs they slaughter. A merger with Farmland 
would give them direct control over 30 percent of the slaughter 
hog market in the entire United States. This market power would 
result in reduced competition and fewer independent pork 
producers.
    While the Department of Justice must approve this deal 
before Smithfield can completely acquire Farmland's Pork 
Division, Smithfield market aggression is just another reminder 
that the Johnson-Grassley packer ban legislation, Senate bill 
27, is, in fact, desperately needed. Congress and the 
administration both have a role to play in ensuring that we 
have more competition, not less, in agricultural markets. 
Indeed, current laws are often too antiquated to deal with the 
modern market tactics of meat packers and others. Additionally, 
Federal regulators have been slow to enforce the existing laws.
    Our packer ban legislation would amend an 80-year-old law, 
the Packers and Stockyards Act, under the jurisdiction of USDA. 
Three years ago, when I first introduced legislation to ban 
packers from owning livestock, we were able to pass the packer 
ban twice last year through the United States Senate during 
consideration of the farm bill. Unfortunately, it was killed by 
the House of Representatives in conference committee.
    The Johnson-Grassley bill gives independent producers a 
fair chance to compete. Our legislation would prevent packers, 
including Smithfield, from operating as a producer and result 
in a more competitive, open, and transparent market. In short, 
it is one modest step to ensure the free enterprise system 
still applies to livestock markets.
    USDA says that packer concentration has increased 45 
percent in the past 20 years. During this time, the food 
retailing and packing industries have amassed profits triple 
the rate of the general food inflation. In fact, cargo 
increased profits by 67 percent to 2001. Smithfield increased 
profits by 28 percent. And after Tyson bought out IBP, its 
profits tripled. As a result, we have a meat-food industry 
which is doing well at the expense of our farmers and ranchers 
because they have the economic power to influence markets in 
their favor. Independent livestock producers do not.
    The issues of packer ownership in agricultural market 
concentration go to the very heart of what agriculture will 
look like in the future. Will it be controlled by a handful of 
powerful firms where farmers and ranchers become, in effect, 
low-wage employees bearing all the risk but none of the gain 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, independent producers who have 
the leverage to demand a decent price for their animals? These 
problems demand a comprehensive approach which includes the 
attention of the Judiciary Committee, Agriculture Committee, 
Department of Justice, and USDA.
    Mr. Chairman, I close with the following recommendations:
    One, that the Antitrust Division of the Department of 
Justice should scrutinize Smithfield's proposed purchase of 
Farmland's Pork Division and consider preventing it;
    Two, Congress should enact the Johnson-Grassley packer ban 
legislation;
    Three, Congress should consider legislation sponsored by my 
colleague Senator Enzi and me to prohibit captive supplies of 
market livestock;
    Fourth, finally, Congress should consider legislation 
pushed by Senator Daschle to require USDA to review whether a 
proposed merger would have a negative effect on family farmers 
and rural communities and to increase penalties for antitrust 
violations.
    Thank you, Chairman DeWine, Senator Kohl, for this 
opportunity to share my thoughts with you today.
    Chairman DeWine. Senator Johnson, thank you very much for a 
very provocative statement, and it gives us something to think 
about as we hear the testimony from the other witnesses. We 
appreciate it very, very much.
    Senator Johnson. Thank you.
    Senator Kohl. Thank you very much, Senator Johnson.
    Chairman DeWine. I would ask our other witnesses to come 
up. Senator Grassley had to attend a meeting at the White 
House. He asked me to put a statement into the record, which I 
will, as well as two letters, one from the Consumer Federation 
of America and one from Public Citizen. In addition, we have a 
statement from Senator Leahy. Without objection, all of these 
will now be made a part of the record.
    I would ask all our witnesses now to please come up, and I 
will now introduce our witnesses.
    Joe Sebring is the CEO of John Morrell, a subsidiary of 
Smithfield Foods. John Morrell is the leader in the pork 
packaging industry and is based out of Cincinnati. It is 
considered to be the oldest, continuously operating meat 
processor in the United States.
    The next witness is Will Hughes, the administrator for the 
Division of Agricultural Development for the Wisconsin 
Department of Agriculture, Trade and Consumer Protection. His 
division has been given the task of assisting Wisconsin farmers 
in adapting to the growing demands of the agriculture 
marketplace.
    Dr. Luther Tweeten is a retired professor at Ohio State 
University. He has authored several publications in the area of 
agriculture consolidation and has testified before this 
Subcommittee in the past.
    Mr. Russ Kremer is the president of Missouri Farmers Union. 
He has been involved in pork production his entire life, and he 
brings to the Subcommittee his experience as an independent 
farmer.
    Mr. Patrick Bell is a hog farmer from Kenansville, North 
Carolina. After graduating from the University of North 
Carolina, he worked in the banking industry for several years 
before returning to his family farm.
    Finally, Mr. Michael Stumo is general counsel for the 
Organization for Competitive Markets, which is a nonprofit 
organization focusing on antitrust and competition issues in 
agriculture.
    We will start on my left with Mr. Sebring. Mr. Sebring, 
would you like to start? We are going to have a 5-minute rule. 
We are going to stick to the 5-minute rule so that we can have 
ample opportunity for questions. When you see the yellow light, 
that means you have a minute left.
    Mr. Sebring?

  STATEMENT OF JOSEPH SEBRING, PRESIDENT, JOHN MORRELL, INC., 
                        CINCINNATI, OHIO

    Mr. Sebring. Thank you, Mr. Chairman. I would like to 
correct the record. The Dakota pork plant was closed before 
Smithfield took possession, and in South Dakota, there is 
already a ban on corporate farming. And in spite of that, the 
hog population has dwindled by 50 percent in the last about 5 
years.
    Thank you, Mr. Chairman, for the opportunity to share the 
view of Smithfield Foods about Federal policy for the meat-
packing industry and the pending acquisition of Farmland Foods 
by Smithfield Foods.
    I am Joe Sebring, president of John Morrell, an Ohio-based 
company that produces processed meats and fresh pork. Our 
industry is already subject to the Sherman Act, the Clayton 
Act, the Robinson-Patman Act, the Federal Trade Commission Act, 
State laws, the Uniform Commercial Code, and the Packers and 
Stockyards Act. There is no reason for more restrictions on our 
industry.
    Smithfield has made a bid for certain assets of Farmland 
Foods. Farmland's creditors and bondholders recognized that the 
Smithfield transaction would provide the greatest opportunity 
to generate the highest available value to creditors, 
bondholders, and the people of Farmland Foods.
    Over $1.4 billion in aggregate claims have been filed 
against Farmland Industries for more than 20,000 farmers and 
141,000 small businesses. For example, in South Dakota, 291 
bondholders have claims of nearly $28 million, and there are 
more than 2,200 creditors who are owed about $84 million. There 
are more than 4,200 Iowan bondholders with claims against 
Farmland exceeding $37 million. The 4,257 Iowan creditors of 
Farmland are owed more than $92 million. They have waited long 
enough.
    Smithfield will honor all current Farmland Foods hog 
production contracts, 6,100 employees of the Farmland Foods 
will keep their jobs, and the Farmland Foods facilities will 
remain open. The UFCW will continue to be recognized at the 
unionized plants, and Smithfield has offered to assume the 
Farmland Foods pension plan. Farmland Foods headquarters will 
remain in Kansas City, and Smithfield will preserve the 
Farmland brand.
    Our customers demand consistent meat quality, ready and 
predictable supplies, and a fair price. They want their meat to 
be consistently lean every time. Fast-food retailers and 
grocers have imposed strict requirements on packers. Vertical 
coordination is the best way to meet these requirements. It is 
a pull-through model. We are pulled along by the demands of our 
customers and have met those demands by maintaining some level 
of vertical coordination. The slightest interruption in supply 
is unacceptable to our customers. That means that forward 
contracting with hog producers must be balanced by company-
owned animals in order to assure consistent supplies.
    During the last 2 years, John Morrell has bought 33 to 45 
percent of the hogs available on the open market, and 
Smithfield itself sells 25 to 30 percent of the hogs sold on 
the open market.
    Consumers have demanded leaner pork, so we have developed 
our lean generation pork. We can provide this new leaner pork 
because we control the way that hogs are raised. Without some 
level of coordination among hog producers and meat packers, we 
will be out of the business of producing consistently lean 
pork.
    There are other benefits to a coordinated system of 
production. Our on-farm biosecurity procedures and data are 
completely within our control. A reasonable level of vertical 
coordination allows us to ensure delivery of safe meat products 
to comply with EPA standards and other regulations and to guard 
against tampering by terrorists. Our system enables us to keep 
our products traceable and limits the number of people who have 
access to the products all along the chain of supply. It is not 
just a matter of economics. It is also a matter of homeland 
security.
    Forward contracting allows farmers to plan for the future. 
Lenders now routinely demand that farmers produce contracts 
before providing them with financing. In our system, both 
company-owned farms and contract growers have the benefit of a 
predictable place to sell their animals, regardless of any 
spikes or downturns in the market prices.
    Family farmers are our fellow hog producers and our 
suppliers. John Morrell purchased more than half of its hogs 
from non-contract farmers in the last fiscal year. That is 
almost 4 million hogs. We don't agree that barring our company 
from raising hogs will help independent hog producers. It 
plainly will harm them.
    We have built our business model in response to the non-
negotiable demands of the consumer and the marketplace. With a 
flexibility achieved through a reasonable level of vertical 
coordination, we maintain low and stable prices for consumers 
by owning and contracting for hogs. We ask only that our 
company not be barred from owning or contracting for some of 
our hogs as we strive to stay competitive. We honor family 
farmers, and we ask you to keep in mind that the coordination 
of our system serves the food security effort and to look at 
the economic data and consider what a ban on packer ownership 
would do to our industry.
    Thank you very much.
    [The prepared statement of Mr. Sebring appears as a 
submission for the record.]
    Chairman DeWine. Mr. Hughes?

     STATEMENT OF WILL HUGHES, ADMINISTRATOR, DIVISION OF 
AGRICULTURAL DEVELOPMENT, WISCONSIN DEPARTMENT OF AGRICULTURE, 
       TRADE AND CONSUMER PROTECTION, MADISON, WISCONSIN

    Mr. Hughes. Thank you, Chairman DeWine and Senator Kohl, 
for the opportunity to share today some perspectives from a 
State government as it relates to concentration in food and 
agriculture. On behalf of the State and its 77,000 producers, I 
would especially like to thank Senator Kohl for his excellent 
leadership and representation of Wisconsin agriculture and for 
his invitation to us to speak about these issues related to 
concentration and its implications for producers.
    My testimony today is going to talk primarily about policy 
and make a few policy recommendations that we hope Congress 
would consider as it establishes both the national agricultural 
and antitrust policy that I agree with Senator Johnson needs to 
be comprehensive and coordinated.
    Let me first give you just a snippet of information about 
our agency and its uniqueness. We are called the Agriculture, 
Trade and Consumer Protection agency because we have what is 
called the ``Little FTC Act'' in Wisconsin, which gives us 
sweeping powers to protect consumers and competition in the 
areas of fair business trade practices. And I want to give you 
a few examples of where we have had some relevant activities 
that deal with concentration in markets and uneven market 
power.
    We have established rules in the vegetable processing 
industry in dealing with contracts between the producers and 
the processors. We have had major enforcement actions against 
price discrimination in milk procurement where one producer is 
treated differently in pricing relative to another producer 
without any basis in cost differences and so on. We have had a 
major investigation into the business practices associated with 
the National Cheese Exchange, using the power of that Little 
FTC Act.
    In each of these cases, Wisconsin had to act on its own, 
and we, quite frankly, did not get coordinating help from the 
Federal Government. And it is not only difficult for farmers to 
address these issues on their own or through their 
organizations, but it is also difficult for individual States. 
And as concentration increases rapidly from the retail sector 
back through the supply chain, the issues do not go away.
    We wanted to express to you the importance of what we think 
is evidence of having a competitive market in the dairy 
industry. Wisconsin is blessed with having a fairly high number 
or large number of buyers competing for milk produced by the 
16,500 Wisconsin dairy producers. We have a graph in our 
testimony that compares the Western region of the United States 
with the Upper Midwest region, and it is a mechanism of pricing 
that is reported by USDA that shows that, on average, over the 
last 5 years, that price difference has been $1.03 between the 
Midwest and the Western region. And we believe that that 
illustrates the value of preserving competition in agricultural 
markets.
    I can give you a specific example: A producer in Wisconsin 
at a meeting a few years ago laid out a chart for a very large 
audience to show that he had 13 competing buyers for his milk 
in an area of northeast Wisconsin, had every pay price pegged 
all the way down the line--open, transparent information that 
that producer had with choices. That is the value of preserving 
competition.
    Wisconsin Department of Ag's priority is to revitalize and 
grow the dairy industry with diverse farm production systems, 
and that includes, if we do that, attracting a good climate for 
producing milk as well as a good climate for buying milk. And 
included in that is an active and favorable climate for dairy 
producer cooperatives to thrive in the business environment.
    This process gets difficult as concentration increases, and 
we would like to bolster that heritage of producer-owned 
organizations, and to do that we think that there are a few 
recommendations, policy recommendations, that you should 
consider.
    One is to improve and tighten coordination on antitrust and 
concentration issues not only between the U.S. Department of 
Justice and USDA but also among States. An active working group 
in that area would be very important.
    We would also like to see, given the tremendous activity 
and issues surrounding concentration, that there be increased 
funding committed to support agricultural concentration 
research and antitrust issues, not only to have a better idea 
of what is going on and the impacts of what is going on, but 
also to help formulate new policy frameworks to address these 
issues. In the 1960's and 1970's, there was a lot of research 
in the industrial organization area concerning the food sector. 
Go back in the early part of the century, the same. There is a 
dearth of it now, and it needs, given what is going on, to be 
improved.
    We would like to see, because we believe innovation and new 
business formation creates a healthy marketplace for both 
producers and consumers, increased programs and funding for the 
development of producer-owned and value-added businesses.
    We would like to see strengthening the competition in the 
meat industry by removing the prohibition on interstate meat 
shipments from State-inspected--it is actually meat and poultry 
product plants. And we have 300 of those in Wisconsin, and 
there are some very innovative companies in that mix that the 
U.S. marketplace as well as the Wisconsin economy would enjoy 
the benefits of.
    We would like to see that producers have continued ability 
to bargain for fair prices and fair terms of trade and that the 
transparency of pricing for agricultural commodities continue 
to be emphasized and improved upon from what it is now.
    Again, our agency goes on the idea that putting our 
policies and rules, establishing standards that govern fair 
business practices, is what is needed, gets the public more 
involved, puts more light on the subject, and that should be 
part of the policy recommendations that you consider.
    Thank you for the opportunity to share these perspectives.
    [The prepared statement of Mr. Hughes appears as a 
submission for the record.]
    Chairman DeWine. Thank you, Mr. Hughes.
    Dr. Tweeten?

STATEMENT OF LUTHER TWEETEN, AGRICULTURE CONSULTANT, COLUMBUS, 
                              OHIO

    Mr. Tweeten. First of all, I wish to thank Chairman DeWine 
and Senator Kohl for the opportunity to be here.
    I regard the Smithfield Foods acquisition of Farmland Foods 
to be a positive development for the food industry, including 
for producers and consumers. There will be short-and long-run 
effects. As has already been pointed out here, the short-run 
effect is pretty much status quo. Smithfield has agreed to even 
retain the labor union, the workers, the pay rates, the brand 
name of Farmland, the management, and so forth. So it will be a 
kind of status quo in the short term. However, knowing 
Smithfield, they don't let the grass grow under their feet. 
They change in response to changing conditions.
    Over time, there is likely to be larger plants serving 
larger areas. There is likely to be an expansion of production 
and marketing contracts. And, of course, there is going to be 
concentration.
    Now, the share of the market held by Smithfield, according 
to the data I have, is about 20 percent. That will go up to 27 
percent. The principal benefit of this merger is that you are 
absorbing Farmland, which is a small, not financially viable 
company that does not do a lot of service for farmers, for 
consumers, for competition, absorbing it by a company that is 
financially viable, dynamic, innovative. That is going to help 
competition. It is going to be better for the parties involved, 
including the creditors.
    One of the concerns is about concentration. This is not 
going to do a lot to concentration. But what is the impact of 
concentration on producers and consumers? We have looked at 
this at Ohio State in terms of marketing margins. There are two 
effects here of concern. One of those is with concentration, 
larger firms, economies of size. That reduces cost of 
production. If they are passed on to farmers and consumers, it 
means lower marketing margins.
    On the other hand, you have increasing market power. If 
that effect dominates, then you are going to have larger 
marketing margins in either higher prices to consumers, lower 
prices to farmers, or both.
    What we find for the hog industry, the beef industry, and 
the turkey industry is that the net effect of concentration is 
lower marketing margins. Now, that is the good news.
    The bad news is that the benefits are passed to consumers, 
not to producers. That is exactly what economic theory would 
tell you. Economic theory tells you and empirical data indicate 
that processors pay farmers what it takes to get the product 
delivered. In the longer term, this means covering the full 
cost of production on adequate size, commercial, well-managed 
farms. We find empirical evidence for that. And it does not 
matter whether you are dealing with a monopolist, a 
monopsonist, a competitive firm, a cooperative, or whatever. 
Nobody is going to give farmers gifts in terms of prices. They 
are going to have to earn it. They are going to have to 
compete. And so they are all going to operate on the supply 
curve.
    Now, the question is: Where on the supply curve? The 
conventional wisdom is that because of imperfect competition, 
the imperfect firm will pay less, operate lower on the curve, 
take lesser quantity at a lower price. However, that is not the 
right thinking. What, in fact, happens is that oligopolistic 
firms, which dominate the food processing and marketing 
industry, advertise and innovative massively. A consequence of 
that is that we sell an awful lot of food. In fact, they are so 
good at selling food that nearly two-thirds of Americans are 
overweight, and about half of those overweight people are 
obese.
    So what I am saying is that farmers operate higher on their 
supply curve, higher price, higher quantity, because of 
imperfect competition in the agribusiness sector.
    All right. My time is running out here, so let me close 
with a couple of recommendations.
    First of all, I do find merit in this acquisition. There is 
certainly a basis for moving forward with it.
    The second thing I want to point out is that it would be 
highly desirable to have greater transparency in markets, in 
the hog as well as other enterprises in agriculture. I know 
that is not easy to do in the case of marketing and production 
contracts because those contracts often differ from one case to 
another. But I think what we need to do is have the people from 
the processing industries, producers, academics, sit down and 
try to work out some templates that will allow them to report 
better and give people a greater opportunity to compare 
outcomes, to compare returns among farmers, States, industries, 
and so forth.
    Thank you.
    [The prepared statement of Mr. Tweeten appears as a 
submission for the record.]
    Chairman DeWine. Doctor, thank you very much.
    Mr. Kremer?

 STATEMENT OF RUSS KREMER, PRESIDENT, MISSOURI FARMERS UNION, 
  JEFFERSON CITY, MISSOURI, ON BEHALF OF THE NATIONAL FARMERS 
                             UNION

    Mr. Kremer. Yes, thank you, Chairman DeWine and Ranking 
Member Kohl, for the opportunity to testify before the 
Subcommittee on agricultural concentration and the proposed 
sale of Farmland Foods pork division to Smithfield Foods. I ask 
that my full statement be submitted into the record.
    Chairman DeWine. It will be made a part of the record. 
Thank you very much.
    Mr. Kremer. I am Russ Kremer, president of the Missouri 
Farmers Union, and I am here today to testify on behalf of the 
National Farmers Union.
    I have been involved in independent pork production since I 
was a child in a count that, for many years, led our State in 
the number of independent pork operations. However, during the 
past year, we have seen our marketing opportunities and, 
therefore, our profit opportunities dwindle dramatically. 
Market choices during that time in my area have declined from 
five to two. The potential acquisition of Farmland by 
Smithfield Foods threatens to reduce that number to one. 
Without competitive bids and fair market prices, another large 
exodus of family farmers from the pork industry is likely to 
occur. Many of our local communities that once enjoyed a 
sustained economy due to the circulation of revenue from 
independent pork farms and community-based businesses will 
continue to experience serious decimation.
    The trend toward horizontal and vertical integration in the 
agriculture and food sectors does not allow independent 
producers to succeed without protection from unfair and anti-
competitive practices. The loss of our Nation's largest farmer-
owned cooperative is not only devastating to America's 
independent agricultural producers, but also furthers the goal 
of Smithfield Foods to gain greater control of the pork 
production and processing sector. If this sale is approved by 
the U.S. Bankruptcy Court and the Department of Justice, 
Smithfield Foods will control 27 percent of the pork processing 
industry. The top four processing firms--Smithfield, ConAgra, 
Tyson/IBP, and Cargill--will now control 60 percent of the 
market, up from the 37-percent level in 1987.
    Currently, Smithfield raises 12 million of the 20 million 
hogs slaughtered in their processing plants on a yearly basis. 
The addition of Farmland's 36,000 sows will increase the 
Smithfield's sow inventory to approximately 800,000. This is 3 
times the number of sows owned by the next largest pork 
producer--Premium Standard Farms.
    In 1994, the Smithfield sow inventory totaled approximately 
65,000. In less than 10 years, this single company has managed 
to increase its ownership of sows 12-fold through acquisitions 
and mergers such as the one being discussed today. To allow 
this proposal to be approved prior to Congress conducting a 
thorough review to ensure antitrust laws are adequate would be 
like shutting the gate after all the pigs get out.
    I believe producers in my State and across the country will 
be further faced with lack of buyers and a competitive price 
for their hogs as a result of this proposed acquisition. 
Smithfield officials have indicated that if the proposal is 
approved, they would continue to operate and maintain 
production levels at all Farmland plants. What has been left 
unsaid is the fate of the other plants purchased by Smithfield 
through previous acquisitions and mergers that may now be 
determined inefficient. Employees of these plants will be put 
out of jobs, local producers will be left with fewer marketing 
opportunities, and the communities will be responsible to clean 
up the mess left behind.
    Although contract production is often touted as a viable 
opportunity and risk management tool for farmers, without 
contractor competition in the region the contractee has little 
bargaining power when it is time to renew that 5- or 7-year 
contract. That farmer often finds himself in a ``take it or 
leave it'' position.
    Concentration of the agriculture and retail food sectors 
has, in many instances, discouraged the growth and development 
of smaller, farmer-owned, value-added cooperatives. As 
president of the Ozark Mountain Pork Cooperative, a new-
generation cooperative that processes and markets pork from 
member-owned hogs, I myself have witnessed many challenges to 
accessing the marketplace because of this huge market 
concentration and power. Large conglomerates often have tight 
control of brokers and retail distributors.
    The loss of family farms and other independently owned 
businesses is not inevitable. The National Farmers Union 
believes there are a number of reforms that can originate 
within this Subcommittee to ensure fairness, transparency, 
protection, and bargaining rights for producers, which would 
restore and enhance competition for agricultural markets. A few 
of these I may list at this time:
    Number one, we feel that Congress should expand the role of 
USDA to initiate the review of proposed mergers in the 
agricultural sector and require an economic impact statement be 
provided, detailing the impact of a proposed merger on farmers 
and ranchers prior to approval.
    We feel that Congress should require USDA to collect and 
publish concentration information.
    We support the implementation of a temporary moratorium on 
large agricultural mergers. The moratorium is necessary to 
provide Congress with time to review current law and strengthen 
its appropriate time to restore market competition for 
producers and consumers.
    We also believe a specific level of concentration should be 
established, a so-called threshold level, that triggers a 
presumption of a violation of antitrust law.
    I have also highlighted more of these reforms in my written 
testimony for the record.
    Thank you, Mr. Chairman, for the opportunity to testify 
today and for holding this important hearing. We look forward 
to working with you in this Subcommittee and the entire 
Congress to strengthen antitrust laws and foster a transparency 
and fair marketplace for all producers. I welcome the 
opportunity to answer any questions the Subcommittee members 
may have.
    [The prepared statement of Mr. Kremer appears as a 
submission for the record.]
    Chairman DeWine. Mr. Kremer, thank you very much.
    Mr. Bell?

 STATEMENT OF PATRICK BELL, FARMER, KENANSVILLE, NORTH CAROLINA

    Mr. Bell. Thank you, Mr. Chairman. I appreciate the 
opportunity to come talk with your Committee today.
    My name is Patrick Bell, and I am a contract hog farmer 
from North Carolina. I came to give you my perspective as 
someone who is on the farm every day because I think it is 
important for this Committee to hear from someone who is 
actually out there every day doing the job.
    I have a hog farm that is under contract with Murphy Farms, 
which is part of Smithfield Foods. I would like to begin my 
testimony by telling the Committee a little about my 
background. I grew up in a small town named Kenansville, in 
eastern North Carolina, a lot like Mayberry. It is a small, 
tight-knit community of about 900 people, where agriculture was 
the most important industry and basically the only industry.
    I came from a farming family, but when I was ready to begin 
my working life, it really was not an option for me to work 
full-time on my family farm, and certainly not an opportunity 
for me to get my own farm. I went to college and graduated from 
the University of North Carolina in Chapel Hill. I went into 
the banking industry, worked for banks for about 10 years as a 
branch manager and commercial loan officer.
    In 1992, I turned 30 years old, and my father celebrated 
his 60th birthday that same year. He sat me down and he gave me 
a choice. He said, ``Son, you are the only child. You have got 
a choice. You can continue in banking and commit yourself to a 
life outside of farming, or you can return home to your small 
town. We have very little industry or opportunity beyond the 
farm gate, but if you will come back home, you can take over 
our contract hog farming operation.''
    It was a tough decision for me to make, but I decided to 
return home and go into business with my father. That was 9 
years ago, and we have had a few struggles. But since then, we 
have expanded our operation to almost twice its original size. 
Now our farm earns enough money for me to support my family, 
myself, my mother and father, and that gives me a lot of 
satisfaction.
    In hindsight, the decision to return home was one of the 
best decisions I ever made because it allowed me to live in the 
small town I grew up in and that I loved; it allowed me to be 
in business with my father, who I am very close to and that I 
love; and it allowed me to provide for my family--we just had a 
set of twins that are 4 months old--and build some long-term 
security.
    My family and I have a deep, emotional attachment to 
farming. But when I made the decision to come back home and 
leave banking, I always knew it was a business decision. When I 
decided to return home to look at the contract agreement that 
was with Murphy Farms at the time, I had three main questions:
    Number one, if I invest my savings in this farm, will it be 
a good investment that has good, solid, consistent cash flow?
    Number two, does the company that I will contract with have 
the ability to pay my contract, and can I count on them to pay 
the contract?
    And, number three, will this investment provide a stable 
income and reliable profit for me and my family over the long 
term?
    Well, after being in the hog business for 15 years under 
contract, first with my father and then with me and my father, 
I am happy to say the answer to all three questions is 
absolutely yes.
    Finally, I think it is important for this Committee to 
understand that the North Carolina hog business is not owned by 
some nameless, faceless, monolithic corporation or group of 
people. In my State, and in most other hog-producing States 
they operate in, the hog business is composed of a lot of small 
family farmers like me. In fact, small farmers like me grow 80 
percent of Smithfield Foods hogs in North Carolina. The 
contracts we have make it possible for us to stay on our family 
farm or come back home, as I did, and provide a living for our 
family by growing these hogs under contract with Smithfield.
    When I signed that contract, I not only knew that I was 
going to get a fair price, but I knew what the future was going 
to hold for my family. I would not have to be worried about 
market ups and downs. I know that Smithfield bears the costs 
and supplies the expertise for my veterinary services, provides 
technical assistance for compliance with environmental and 
safety regulations, all of which they fully expect me to comply 
with. In return, I get--and this is an important thing as an 
ex-banker. I get to tell the people I do business with in my 
small town that I have a stable business. I get to tell the 
local banker, which is very important, the local hardware 
store, and everyone else, they can extend me credit because I 
will be able to pay it because of this contract.
    When I was a banker, I had the unhappy duty of turning down 
some good farmers for loans--they were good people and good 
farmers--because they did not have contracts for their hogs. 
They were independents. The price of hogs went to 8 and 10 
cents a pound at one time. Not sustainable as an independent. 
It was a hard thing to do, but I am just grateful that my 
business is not subject to that kind of uncertainty.
    One of the things that is not in my written testimony that 
I would like to interject here quickly, Mr. Chairman, if you 
will, I have heard some conversation about the packer ban as I 
came in here today, and I am not privy to all the details of 
the packer ban. I do not know much about it except what I have 
read. But I do know this: In North Carolina, we farm under 
contract, mostly contract farming, and without the packer being 
able to own the hogs in North Carolina, I would be out of 
business. And most of the people I know, the 2,300 contract 
growers in our State are not going to run down to the local 
bank and borrow money to put pigs in the houses and buy feed, 
number one, because they are not willing to take that risk; 
and, number two, the bank is not going to loan them the money, 
not in North Carolina.
    The legislation I assume is national legislation. The last 
thing is I do not know the details of the Smithfield/Farmland 
acquisition. I know nothing about it, never really even heard 
of Farmland. But I am sure of one thing. Hog farmers who have 
contracts with Farmland should be very glad that Smithfield 
will honor those contracts. I know from experience they are 
dealing with honorable people. They will get a fair price. They 
will be able to enjoy stability in their business, and it will 
help be able to keep their family farms alive and thriving.
    Thank you for the opportunity to address your Committee.
    [The prepared statement of Mr. Bell appears as a submission 
for the record.]
    Chairman DeWine. Mr. Bell, thank you very much.
    Mr. Stumo?

 STATEMENT OF MICHAEL C. STUMO, GENERAL COUNSEL, ORGANIZATION 
         FOR COMPETITIVE MARKETS, WINSTEAD, CONNECTICUT

    Mr. Stumo. Thank you, Chairman DeWine, Senator Kohl, for 
allowing me to testify. As well as being general counsel for 
Organization for Competitive Markets, I am a former hog 
producer and hog buyer from Iowa.
    The reason that we do not want--that we want to intervene 
and allow the market to work and keep the market working at 
this point is so that we do not have the lack of choices that 
are in North Carolina where the farmers in Iowa, Minnesota, 
South Dakota, Nebraska, and Wisconsin have to ask Smithfield 
whether they want to produce or there is no other option. This 
merger--this acquisition, rather, of two of the top--the top 
pork processing company in the country of another top-tier 
processor is bad for not only producers but consumers. That is 
why Consumer Federation of America opposes it, that is why 
Public Citizen opposes it, because we have seen in recent years 
not only the downward trend for hogs and hog prices and hog 
farm profitability, which everyone agrees to, but also in the 
last 10 years increasing gross profit margins by packers and 
retailers, which is showing us that they are less efficient or 
they are exercising market power to the detriment of producers 
and consumers. That is why producers and consumers are united 
on this issue.
    The big problem with this merger is that Smithfield--or 
acquisition, excuse me, is Smithfield is gaining increased 
power in the price-setting region of the U.S. hog market. The 
Iowa-southern Minnesota price is the gold standard. It sets the 
price for the country. This is different than a merger 
occurring in another area of the country and increased 
concentration there, because the Iowa-southern Minnesota prices 
establish first the transitions to the Western corn belt market 
price, which is Iowa, southern Minnesota, Nebraska, and South 
Dakota, primarily. And all the contracts that are formulated 
from an open market price as well as other open market 
transactions elsewhere in the country are derived from the 
first determined Iowa-southern Minnesota price. So this is like 
BP acquiring ARCO and the concern about the price-setting 
mechanism in oil and gas of Cushing, Oklahoma, that they would 
be able to control and affect that price-setting mechanism 
which affects oil and gas prices elsewhere in the industry. 
This is the same thing.
    So we have Smithfield Sioux Falls and Sioux City plants, 
and we have Farmland's Crete, Nebraska, and Denison, Iowa, 
plants. We have about a 250-mile draw or procurement area, 
significant overlaps here. So what we are doing is taking out a 
major buyer in the price-setting region of the country with 
these significant overlap areas.
    Now, the recent estimates by folks like Glenn Grimes and 
Ron Planey, University of Missouri, that follow the hog 
industry are that 87 percent of the hog industry is vertically 
integrated. That includes packer-owned and contracted, non-
packer-owned contracts. Ninety percent of the contracts that 
are not packer-owned pigs are a formula market based in some 
way off the open market price. So there is not only a 
tremendous incentive always for the packer to reduce open 
market price to save money on the hogs he is actually 
purchasing, but now, with 90 percent of the contracts 
formulated on this open market, if the price goes up because of 
supply and demand conditions by a couple of bucks, all of a 
sudden that telescopes and directly affects and makes far more 
expensive all those hogs that are pegged to the open market. So 
it is a different scenario, tremendous incentive to push price 
down.
    There is no reasonable argument that hog prices will go up 
as a result of this transaction. The reasonable argument is 
that hog prices will go down. If we assume a $1 decrease in 
live hog price on 270-pound hogs, 375,000 pigs per day, that is 
$1 million per day lost to the U.S. hog production industry; 
250 kill days, that is $250 million per year lost to U.S. 
producers, gains to Smithfield and the other packers. Consumers 
do not see it because there is no relationship between farm 
gate price and consumer price. Pure market power scenario. 
There is no evidence to the contrary.
    Further, Farmland is not a failing firm in the pork 
business. This is a Chapter 11 reorganization. They sold off a 
fertilizer business, grains, and beef. The pork business is a 
profitable business. Third-quarter results released a week ago 
Monday, $9 million profit. Annualized, that is $36 million. 
That is the seventh consecutive quarter in which Farmland pork 
profits have been greater than year prior. Everyone assumed 
that Farmland would reorganize around pork, but we have 
Smithfield desiring more market power, the creditors Committee 
desiring more payoff, but it is contrary to the public interest 
and fair open markets. So producers can make money, not go on a 
taxpayer dole, and they can stay in business.
    We need competitive markets for this entrepreneurial 
industry. Thus, I urge the Congress and the DOJ to scrutinize 
and block this merger. We cannot have one buyer and begging 
Smithfield to get into business all over the country.
    Thank you.
    [The prepared statement of Mr. Stumo appears as a 
submission for the record.]
    Chairman DeWine. Well, let me thank our panel. We will 
start with questions. We are scheduled to have two votes at 5 
o'clock, and the Senate is rather unpredictable. So we will see 
if that actually happens or not. If it does happen, we will 
have to stop, and because there are two votes it will take a 
while. But we will proceed with questions until that happens.
    Let me ask any member of the panel who would like to 
respond. The spot market or cash market has now been 
decreasing. I do not know what the number is. I have heard it 
is down to possibly 10, 12, 13 percent of the market. What 
implication does that have if that continues to decrease? What 
significance does that have? Does that matter?
    Mr. Tweeten. I would like to respond.
    Chairman DeWine. Dr. Tweeten has already indicated in his 
written testimony that maybe it is not that important, but go 
ahead, Doctor. We will start with you, and then we will see if 
anybody else disagrees.
    Mr. Tweeten. Well, I think one of the myths about markets 
is that you have to have a cash market to have competitive 
pricing and output. Contracts also have to recognize markets. 
Again, I go back to what I said before, and that is, if you do 
not pay farmers enough to cover their costs over the long 
period of time, they are not going to produce. And that means 
that if you are under a contract system or a cash system, you 
are still going to have to respect supply and demand.
    Agriculture is unique in that it has a lot of cash markets. 
There are lot of industries in this country, such as 
automobiles and so forth, that have almost no cash market. 
Parts suppliers, for example, there is very little cash market. 
It is almost all in a contract basis. But supply and demand 
still rule in those industries.
    Mr. Bell. Mr. Chairman, if I may interject something?
    Chairman DeWine. Mr. Bell, go ahead.
    Mr. Bell. As a contract grower, we have been in the pig 
business under contract for 15 years, and over that period of 
time, in the last 5 years we have gotten, I think, four or five 
increases in what we are paid.
    During the worst hog market, I guess in U.S. history, when 
the price was 8 cents per pound a few years ago, a lot of 
people used up the equity they built up over generations in 
their farm trying to stay afloat through independents, that is 
the best year I had in the hog business. Best year I ever had 
because I always get paid a consistent, steady price.
    Chairman DeWine. Mr. Kremer?
    Mr. Kremer. Yes, as a participant in the spot market 
system, it has a devastating effect. It is interesting to note 
that as these large vertical integrators talk about building 
plants, they talk about buying from 13 to 20 percent off the 
open market. We are the residual suppliers, and it is kind of 
like if they need our hogs, they will bid them up somewhat. But 
most of the time they do not need our hogs and so the market 
has continued to go down, and so it certainly puts strain on 
us.
    But the other thing, too, is that the spot market does, you 
know, drive the prices, for instance, when it comes time for 
contract deals, et cetera. And so as larger integrators 
concentrate more and the spot market becomes less, it shoves 
the price down and, therefore, it affects everyone across the 
board in a negative way as far as producers.
    Chairman DeWine. Mr. Stumo?
    Mr. Stumo. The 87-percent vertical, of course, leaves 13-
percent theoretical open market. The experts that advise us, 
the ag economists, industrial organization specialists, believe 
that 3 to 5 percent of the actual hogs traded, those in the 
Iowa-southern Minnesota market, actually set the price for 
virtually all the other hogs.
    It is a fundamental tenet of industrial organization that 
when you have a few dominant firms interacting in a high-volume 
market, that is a problem because there are only a few dominant 
firms. However, if they interact in a very thin market, the 
ability for them to push price down or manipulate price 
downward is exponentially increased.
    Chairman DeWine. Mr. Sebring?
    Mr. Sebring. Senator, in the morning, we look and see what 
the demand is for pork for our business. What do our customers 
need? How many hogs do we need to run the plant efficiently? 
And if we need hogs that day, if there is a demand for pork, we 
go out and we buy the hogs that we need to fill our kill and to 
fill orders. And if there is a demand for that product, we bid 
up for those hogs and we bid up for those hogs and we bid up 
for those hogs until we get the number we need.
    If, however, our customers slow down on the sale of pork 
and sell beef or sell chicken and they back off on the demand, 
yes, the market can go down. But that is the dynamics of the 
free market. And I do not know what percentage is bought every 
day, but I can tell you that is how we operate. When we need 
pork, we bid the price up. There is no other packer on earth 
that wants pork prices higher than Smithfield Foods.
    Chairman DeWine. Mr. Sebring, how much of your business do 
you want to be on long-term contract?
    Mr. Sebring. We are comfortable right now with--right now 
our contracts in corporate hogs are less than 50 percent. We do 
not have a problem buying hogs on the open market at 50 percent 
or more, as long as they are available.
    Chairman DeWine. But I would assume that there is some 
point that you do not want a contract above, isn't there?
    Mr. Sebring. I am sorry?
    Chairman DeWine. I would assume that there is some point 
you do not want a contract above. I mean, you would not want to 
lock yourself in--I do not know your business, but I would 
assume you would not want to lock yourself in at 100 percent 
of--
    Mr. Sebring. No, we do not.
    Chairman DeWine. You have got to have some flexibility in 
there. You cannot guess the market.
    Mr. Sebring. Absolutely. We want to be able to go to the 
open market every day.
    Chairman DeWine. Yes.
    Mr. Sebring. But if that open market continues to shrink--
and I am not talking about how many people are buying on the 
market, but just literally hogs being available, then that is 
when we turn to contractors and to our own farms to try and 
produce and have enough hogs to fill our plants. Our plants 
will not run without the hogs.
    Chairman DeWine. Okay. We are going to stop at this point. 
We are into a roll call vote, and we will be back when we can 
get back. You can go right ahead.
    Senator Kohl is going to ask a question. When Senator Kohl 
is done asking questions, we will stop. I am going to leave and 
go vote.
    Senator Kohl. Thank you, Mr. Chairman.
    Mr. Hughes, during much of the year 2003, Wisconsin dairy 
producers suffered through extremely low milk prices. Congress 
created a new dairy income assistance program during this time 
as part of the farm bill to help producers during periods of 
depressed prices. This program has been helpful, but obviously 
it is not the entire solution to the problems.
    Mr. Hughes, can you give the Subcommittee your impression 
on the status of the dairy industry in Wisconsin? Specifically, 
how do issues related to concentration and consolidation affect 
the dairy industry? What impact does increased concentration 
among dairy cooperatives have on the ability of Wisconsin dairy 
producers to make a living? And, in your opinion, what are some 
of the things that we can do about this problem?
    Mr. Hughes. Okay. Thank you, Senator Kohl.
    The situation in the dairy industry in Wisconsin is it is 
very challenged, as you know. We liken it to somewhat like in 
the automobile industry in the 1970's in Detroit. But the 
recent 20-month or so down cycle is more of a problem of supply 
and demand imbalance caused somewhat by import increases, 
particularly in cheese and milk protein concentrate. Also, the 
softness in the economy has really affected demand for dairy 
products. And the milk payments, the milk income loss payments 
have been the life saver in many respects in the dairy industry 
in Wisconsin.
    The concentration issue has a long-term effect in dairy. It 
is hard to measure it day by day, but every year we see in 
recent years a major acceleration in consolidation both within 
the retail--excuse me, the fluid milk processing area as well 
as in the dairy cooperative arena. And as I stated earlier in 
my testimony, the best thing that a farmer in Wisconsin or any 
dairy farmer anywhere or any producer can have is a number of 
competing buyers for their product.
    I like to say that once I see in a market less than four 
competing buyers for a product, I get very concerned. And I 
think it is fair to say that the movers and shakers in the 
dairy industry do not--and it is a different industry. You 
cannot liken it to vegetable processing or meat processing, but 
they do not want to see the kind of vertical integration and 
concentration that is occurring in poultry, hogs, and so on.
    But the tendencies are there, and it does not have to go 
that way, but it well could. And I think the thing that is 
important to do about this--and in Wisconsin, it is somewhat of 
a structural problem because of the competition from the West 
Coast. But I think we need to do whatever we can in State and 
Federal programs to keep encouraging producer ownership and 
vital dairy producer cooperatives and have multiple buyers 
acting in the marketplace for producer milk. I think that 
creates innovation and strengthens the industry and gives 
consumers better results.
    I am not sure that you can legislate or regulate the farm 
share of the retail dollar which gets discussed in lots of 
sessions. It is a very complicated subject why the retail 
margins have increased. There is lots of value-adding, ranging 
from advertising and promotion merchandising activities to just 
the degree of product diversity that is adding to that market 
basket cost. And the key thing there is to make sure that the 
farm level prices are not being depressed by that concentrating 
nature in the industry.
    And I think we need to have a strong proactive antitrust 
approach that ensures that that does not happen, and that needs 
to be coordinated with ag policy.
    Senator Kohl. I thank you, Mr. Hughes.
    We will stand in recess now until Chairman DeWine returns. 
We will be in recess.
    [Recess 5:12 p.m. to 5:49 p.m.]
    Chairman DeWine. Well, thank you very much. We will see how 
long we can go here go here without the Senate having its next 
vote.
    Mr. Sebring and other processors seem to argue, I guess do 
argue that one of the reasons to have these contracts is to 
have the uniformity and higher-quality product. 
``Consistency,'' I guess, is one of the ways that they describe 
that.
    Mr. Kremer, as an independent farmer, how do you respond to 
that? Do you think your product is an inferior product?
    Mr. Kremer. Well, we are also, as I mentioned in my 
testimony, we have organized a value-added pork cooperative and 
have done a lot of studies and a lot of focus work and realize 
what consumers want are choices and they want competitive 
choices. And, of course, I also mentioned that it is very hard 
to break those types of barriers.
    You know, I do not think it is as much--I mean, we can 
provide uniformity. In fact, the standards that the packers 
that are buying from us, you know, they have dictated that we 
have the lean kind of hogs, et cetera. And so I do disagree 
with that. I do say what the system is turning into, especially 
in the consolidation of the retail industry, is locking out 
some diversity. And that is what we face as we try to enter 
into some of the major retails systems, you know, the brokerage 
firms are basically consolidated, and it is hard to break that 
system. We cannot afford the $10,000 per product per year 
slotting fees that are required, and what happens, what we have 
seen in some of the largest retail settings, is that because 
the supply source is dominated by the larger conglomerates, 
actually the choices go down. They say this is our standard 
line of products.
    And so I think that is an issue, and we know that consumers 
want choices, and we feel that smaller, more community-based 
entities such as ours are what consumers desire.
    Mr. Bell. Mr. Chairman, can I add something to that, 
please?
    Chairman DeWine. Sure, Mr. Bell.
    Mr. Bell. One of the advantages of being a contract farmer 
is that I would like to be concerned about genetics, about what 
needs to come to my farm and what does not need to come to my 
farm. I do not know a thing about genetics. We are really not 
concerned about genetics. All I am interested in is that I get 
paid per head per pig on my farm. And to me, that is the real 
advantage. I am not a genetics expert. I am not a feed mixture 
or nutritionist expert. All I know how to do is raise the pigs, 
and that is all I have to worry about. So, to me, under 
contract that is an advantage.
    One thing that is sort of--I have been in a few meetings in 
the Midwest, pork meetings out there, and have met some people 
in the Midwest. And one thing that bothers me a little that I 
would like to say is that I have gotten comments such as, well, 
we are a family farm out here and you are not in North 
Carolina. My dad and I are the only ones who run our farm. I 
don't see how much more family we can get than that.
    It is a matter of perception, in my mind. In North 
Carolina, the typical size farm is maybe 200 acres. That is a 
big farm in North Carolina. I went to the Midwest, and I was 
talking to this guy who was a farmer. I said, ``Well, how big 
is your corn farm?'' He was a corn farmer. He said, ``We have 
got about 12,000 acres.'' That is a county in North Carolina. 
That is huge.
    You know, when I was there, they said, ``Well, you guys are 
nothing but tenant farmers in North Carolina.'' Well, calling a 
contract farmer a tenant farmer assumes two things:
    Number one, that you do not understand the contract you 
have entered into, and I graduate from one of the top ten 
universities in this country in business school, and I 
guarantee you, I understand a contract. And the contract was a 
good choice for me to come home to do.
    Number two, it assumes you were forced into that contract. 
And I would not have left the job I had, which was a pretty 
good job, to come home to a small town and enter into this 
contract situation. As a matter of fact, if it was a tenant 
farmer situation, it would be Smithfield that is a tenant on my 
farm because I own the building and the land and they just have 
their pigs and feed out there.
    If it was a tenant farmer situation and I am being forced 
into this and I am not intelligent enough to understand the 
contract I have entered, I would not be trying to buy a farm 
from my neighbor who is just down the road. As a matter of 
fact, we are going to meet about it Friday. He passed away and 
I am buying it from his wife.
    So, to me, that argument does not hold much weight, but 
that is just my perspective.
    Chairman DeWine. Mr. Stumo?
    Mr. Stumo. The contracts that I see in the Upper Midwest 
and the formula arrangements, the grade and yield premiums are 
the same as the open market transactions; thus, the incentive 
structure for quality is the same for both the contract and the 
open market. There is no distinction. And we are aware of no 
studies that have shown that there is some inherent quality 
benefit in the contracts or that there is one in practice 
versus the open market. So we see the same quality incentive 
structure both ways.
    Chairman DeWine. Mr. Sebring, you buy from the open market. 
You buy on contract. You buy both, correct?
    Mr. Sebring. Yes.
    Chairman DeWine. Difference in quality?
    Mr. Sebring. Yes.
    Chairman DeWine. But yet you are buying both?
    Mr. Sebring. Yes. Well, the contracted hogs have to meet 
certain quality standards, irrespective of, you know, the 
market conditions. And so those hogs are--we enter into 
contracts with the higher-quality hog producers, producers that 
have the genetics that we are interested in. Yes, they do get 
penalized if they bring us bad hogs, or they can get a premium 
if they bring us good hogs. But our goal is for them to bring 
us good hogs, and we expect them to earn some premiums.
    But we also pay premiums for scheduling, having the hogs at 
our barns when we need them, and we pay different premiums for 
the type of feed and quality of the hogs up front. And then, 
yes, we pay them on a grade and yield basis also.
    Chairman DeWine. Does it matter to me as a consumer when I 
walk in the grocery store if I get a contract slice of one of 
your hogs or if I get a spot market hog? I am being a little 
sarcastic here, a little funny. But does it?
    Mr. Sebring. Today, more and more retailers and packers are 
trying to specialize, have various types of pork: the lean 
generation product we talked about, that is a very lean 
product; intramuscular lean and fat trim. But there is also the 
other side of that. We are developing prime pork programs that 
have marbling in the pork and the pork is literally fatter than 
it has been in many years. And there is a demand for that.
    But, you know, for the most part, the consumer would not 
know on the average--today our hogs are all pretty good. They 
are all pretty lean. Our average lean-to-fat ratio is 54 today. 
Ten years ago it was 47, 48 percent lean, today 54 percent 
lean. So most of the hogs that are grown today are higher-
quality hogs.
    The contract is there so we know we are going to have 
enough hogs to run the plants.
    Chairman DeWine. You are getting your average up.
    Mr. Sebring. Yes. The quality, the average of the quality 
is getting better. And if you do not do that as a producer, you 
are not going to make it.
    Chairman DeWine. Mr. Stumo, Mr. Sebring wrote in his 
testimony that Smithfield and Farmland do not compete for the 
same hogs, but you have told us that there is overlaps between 
Smithfield and Farmland. Do you two want to explain the 
discrepancy in your--
    Mr. Stumo. I disagree with Mr. Sebring. We have producers 
in our organization that sell to both, have them both bid on 
their hogs in Iowa and Nebraska.
    Chairman DeWine. Mr. Sebring?
    Mr. Sebring. There probably is some limited overlap, but 
for the most part, they are getting their hogs to fill their 
kill every day, and we are. So I would say there is enough hogs 
to go around between us.
    Chairman DeWine. As I listen to the testimony, it is not 
surprising I guess, I seem to get sort of two visions of 
farming, Mr. Kramer and Mr. Bell, of what farming should be, 
one contract farming--maybe that is the vision of the future--
the other is independent farming. One is the vision of the 
future. You two want to comment on that? It just seems like I 
am looking at different worlds here.
    Mr. Bell. I will be glad to comment on that, Mr. Chairman.
    Chairman DeWine. I get the impression, Mr. Bell, you did 
not think you could make it the other way.
    Mr. Bell. It is not an impression. In North Carolina it is 
reality. In North Carolina, as a former banker, I saw 
situations where people would come into my bank, having used up 
their life savings and all the equity they build up over two 
generations to make it through a down market. The bank 
foreclosed on a lot of hog farms when prices are low. And I had 
seen that. I do not know if that is isolated to North Carolina 
or if that happens in the Midwest. They may not have any 
farmers go under if they are independent, but in North Carolina 
it happens.
    As a banker looking at that, I was not willing to take that 
risk. I saw that happen to too many people I was also not 
willing to do what needed to be done nutrition wise, to be a 
nutritionist, to be a breeder, to be everything that I needed 
to be to be an independent, and a marketer for myself. Because 
of the contract, I was given all those things as part of my 
contract. Realistically, it is a matter of perception, Mr. 
Chairman, the perception that a family farm is 300 pigs or 200 
pigs or 500 pigs, to me is--I grown more pigs than that, but by 
the same token a perception from someone in Iowa who has 12,000 
acres of corn, to me that is not a family farm, that is a 
corporation.
    Mr. Kremer. I have a different perspective, and I am not 
here to--I am not against contracting. People have the right to 
contract. But I have experiences with contract, most of them 
very, very bad experiences. As a young farmer advisor for 12 
years, running a vocational agriculture program in an adult 
education program, it was my job to oversee 300 farm families, 
and we always looked into the contract farming as an option, as 
a possible risk management tool, but we used it limited on 
account of the experiences we had.
    For instances, we have 28 turkey producers that raise for a 
company, and 15, 20 years ago they had a great honeymoon. They 
started out with 7-year contracts, and renewed for 5 years, and 
then it became one and now they are on a flock-to-flock 
contract with no other competition around. That is what it is. 
So you tell me what kind of inter-generational opportunity 
there is as the prices went down. We have seen some poultry 
people, poultry contractors and even some hog contracts, 
basically had their 3-year contract and then were not renewed.
    In some instances, a person came up to me one time and 
said, you know, people keep saying that investment of a half a 
million dollars into a contract operation is a great 
investment, a great opportunity, however they said, if I would 
have done that, invested in that particular company as a 
corporate stockholder 20 years ago instead of having just worn 
out poultry buildings at the time, I would have had $6.5 
million.
    I think the other point too is the danger of vertically 
integrated contract operators for rural communities is the fact 
that they normally do not utilize local resources, buying feed 
from the local company, support the local hardware store. Most 
of the time they come, actually suck out the resources and suck 
it out of the communities.
    Mr. Bell. Could I respond to that, Mr. Chairman?
    Chairman DeWine. Sure.
    Mr. Bell. My intake on that is completely 180 degrees in 
opposition.
    Chairman DeWine. Where do you buy your stuff?
    Mr. Bell. Sir?
    Chairman DeWine. Where do you buy your products?
    Mr. Bell. Well, in Kenansville, there is not many choices. 
We have got one hardware store. It is called Brown's Service 
Center. It is like the Wal-Mart of Duplin County. We can find 
everything we need there, from boots to whatever. I spend 
probably 4 to $5,000 a month there. I have about a 3 to $400 a 
month gas bill at the local gas station. The perception is--
what he is talking about is a corporate business, the 
integrator--
    Chairman DeWine. Where does your feed come from?
    Mr. Bell. I have absolutely no idea. It comes from a feed 
truck that comes to my farm. I have absolutely no idea.
    Chairman DeWine. I mean who do you buy it from though?
    Mr. Bell. I do not buy any feed. I have no idea.
    Chairman DeWine. I am sorry?
    Mr. Bell. I do not buy any feed. I have no idea. I do not 
own the feed or the pigs. I just own the buildings and the 
land.
    Chairman DeWine. But the feed is supplied by?
    Mr. Bell. --Smithfield.
    Mr. Tweeten. Probably it comes from Cincinnati, Ohio.
    Mr. Bell. But to respond to something he said a minute ago 
that I could not disagree with him more as a banker and as a 
common sense--
    Chairman DeWine. That would be nice if it did. It very well 
could be, but that was an interesting comment.
    Mr. Bell. Mr. Chairman, one thing that I could not disagree 
with more that he said a minute ago, I understand what he is 
talking about, in the poultry business I have heard of that, 
you know, people wish they had not built the buildings, 20 
years later they have a worn-out poultry house. The poultry 
business is a lot different than the hog business. They are 
completely different animals. I have got hog houses that I know 
in Duplin County where we are that are 30-years-old, still 
producing pigs every day, still on contract, getting raises on 
a contract, and I can assure if you are had gone to your local 
banker 20 years ago and said, hey, I want to borrow a half 
million dollars to buy some Tyson Food stock, he would have 
laughed you out of the bank. Now, they will lend you a half 
million dollars to build a poultry operation or a hog farm 
because you have consistent, steady cash flow. He is not going 
to lend you a half million dollars to buy some stock.
    Chairman DeWine. Dr. Tweeten?
    Mr. Tweeten. I think it is important to remember that this 
is not your father's Oldsmobile. This is a different kind of 
industry than we had two decades ago, three decades ago. 
Consumers have become much more affluent. They are demanding 
much more from the foods that they buy in the supermarket. My 
wife complains a great deal about her inability to buy the kind 
of bacon she is looking for.
    What worked in the past in terms of meeting the needs of 
consumers does not work anymore; that is, you now need to have 
a system that tailors the production to the needs of consumers. 
That means lean pork. It means the right breeding program, the 
right feeding program, the right time and place of delivery, 
all these specifications. In the old days, we coordinated this 
whole system by the market at each stage of the food production 
and marketing process. That is getting much more difficult to 
do. It is now cheaper in many cases to use a managed system. 
That is where these production contracts come in.
    There is a great deal to be said for the flexibility for 
firms to make their own decisions as to what best serves their 
need, and they cannot help but respond to the demands of the 
consumer.
    Chairman DeWine. Dr. Tweeten, in his testimony Mr. Kremer 
states that, and I quote, ``Agribusiness firms are showing 
record profits while at the same time farmers and ranchers are 
struggling to survive and consumer food costs continue to 
rise.''
    This would seem to contradict your testimony, especially 
regarding food costs and the profitability of the processors. 
Do you want to respond to that?
    Mr. Tweeten. Well, yes. The profit margins in agribusiness 
are very modest, and they are very modest relative to other 
industries in this country. And as I say, in a recent paper I 
looked at ten different types of farms, and what we find is 
that commercial farms--and it turned out on average it took 
about $400,000 worth of sales. But farms with over $400,000 
sales per year more than covered all their costs. They got 
rates of return comparable to what you see in other industries. 
In other words, this idea that markets do not work is simply a 
myth.
    Now, you say the small farm, the inefficient farm should 
have a decent reward for its activities. Well, at Ohio State 
University, we do not pay quarter-time teachers who are 
incompetent very well. So if a farmer is small--
    Chairman DeWine. I missed that. You do not do what?
    Mr. Tweeten. We do not pay teachers teaching one-tenth time 
and they are incompetent, we do not pay them very well. In 
fact, we dismiss them. They never get tenure.
    The point is that if you are a small farmer who is 
inefficient, do not expect a very good return on your 
investment.
    Now, we have an awful lot of small farms, and they have 
been holding their own pretty well. But they do it through off-
farm income and it is a hobby farm and they are going to stay 
in business because they are supporting their hobby with their 
off-farm income. But the majority of production is produced by 
commercial farms that make a very favorable return on their 
investment. The majority of farmers, because they are too small 
or inefficient, lose money.
    Mr. Bell. Mr. Chairman, if I could interject one more thing 
to what he said? And I am not an economist, and I am not from 
the Midwest so I do not understand some of the arguments being 
made or the mentality. But I will tell you this: It surprises 
me that when you look at economies of scale--
    Chairman DeWine. We have about the same mentality in the 
Midwest, Mr. Bell, as I am sure you do down South.
    Mr. Bell. Well, we are little different down South. But 
what I do not understand, I guess, about the perception is that 
economies of scale work in other businesses, and it works in 
the row crop business. But in the hog business it does not seem 
to be something they want to consider.
    Mr. Sebring. Mr. Chairman?
    Chairman DeWine. Mr. Sebring?
    Mr. Sebring. Yes, I would like to respond, too. We have 
introduced some statistics to the Committee that show packer 
margins versus producer margins for the last 10, 12 years. And, 
historically, the producers have made more money per head than 
the packers, and very seldom does that reverse where the 
packing plants makes more money per head than the producer.
    Chairman DeWine. Mr. Hughes, what is your opinion about 
this?
    Mr. Hughes. Well, I think the--
    Chairman DeWine. You are a State enforcement officer. You 
can give us some insight on this.
    Mr. Hughes. Instead of talking about contracting per se, I 
think if you step out a little broader and look at 
concentration--I was just on the way out reading a magazine 
called Dairy Field that showed that last year the only growing 
aspect of the dairy industry where margins were healthy was in 
the fluid milk business. And it was because there is enough 
competitors left in that field that they are really trying to 
grow business volume, market share, and they are doing that 
through product innovation, and the fluid milk sales was the 
healthy part of the dairy business last year. I do not think 
that would occur if you got a more highly concentrated 
industry, and when you come to contracting in the dairy 
business at the producer level, they very much warn against 
trying to forward contract your milk for more than 50 percent 
of your milk volume. Now, it is not the same business as grain 
or vegetables or hogs. And I think if you stuck the dairy 
industry into a strict contractual environment, you would have 
disincentives in that environment for some of the innovation 
that you would see otherwise where there is more choices for 
the producer to sell their product and meet different and 
varying specifications. That is where you are going to get the 
innovation all the way through the market chain.
    Chairman DeWine. Mr. Stumo?
    Mr. Stumo. Chairman DeWine, I think we have been talking 
about the vertical system versus the open market system as if 
they are black and white in that they cannot co-exist, we 
either have one or the other.
    I think in my perspective, in OCM's perspective, we need a 
sufficient open market that is resistant to manipulation, that 
is resistant to artificial depression of price, to discipline 
the contract side. If we go 100 percent vertical, as in 
poultry, with no market to discipline the returns to determine 
price, to have price discovery, everything is unilateral, 
packer-down, and contract modifications for every renewal.
    Thus, we see gross profit margins increase 190 percent over 
20 years for the poultry companies, and the poultry producers 
on average having zero return on investment, zero return on 
management, minimum wage, and a mortgage.
    In the pork industry, we still do have a thin but it is an 
open market, and that disciplines the contracts. If we lose the 
open market, or if it becomes even more susceptible to 
manipulation, that does not discipline the contracts because 
people do not have an option to opt back into the open market. 
That is why it is important to have something like, for 
example, Senator Grassley and others have proposed a bill for 
25-percent spot market each day, so that preserves an open 
market, allows the contracts, the open market is sufficient 
volume to be more resistant to manipulation, and that is one 
way to look at it. That is the way I look at it.
    Chairman DeWine. Well, I have heard from some of the other 
panelists who seem to imply you do not need any spot market. 
You obviously disagree with that.
    Mr. Stumo. Yes, if you do not have that auction interface 
to determine price, to determine quality, with the quality 
specs and an open negotiating, negotiated haggling style bid 
going on all the time, then you have strictly a contract 
relationship where the power of the dominant firm in a contract 
relationship is exponentially greater than the power of a 
dominant firm in some sort of an auction or open market 
interface.
    Chairman DeWine. Dr. Tweeten, how far down can you get with 
percentage, spot market?
    Mr. Tweeten. I would say--
    Chairman DeWine. And still be viable.
    Mr. Tweeten. Zero.
    Chairman DeWine. You do not need a spot market?
    Mr. Tweeten. No. As I say, demand and supply--demand and 
supply operate whether you have a spot market or not. 
Furthermore, my experience is--and we have done some surveys on 
this--that the independents who are operating in the spot 
market are far unhappier with their economic situation than the 
farmers who are contracting.
    Chairman DeWine. Where, Dr. Tweeten, I am just trying to 
think in agriculture, where in agriculture has that happened so 
far?
    Mr. Tweeten. That there is on--
    Chairman DeWine. That there is no spot market.
    Mr. Tweeten. In a number of fruits and vegetables it is 
essentially all contract.
    Chairman DeWine. What would those be?
    Mr. Tweeten. I think of sweet corn, for example, in my area 
of the country. Many other fruits and vegetables I think follow 
pretty much the same pattern.
    Chairman DeWine. All contracted?
    Mr. Tweeten. All contracted.
    Chairman DeWine. And what has happened in those industries?
    Mr. Tweeten. They function very well. Function very well. 
And it is pointed out, too, by Mr. Sebring that in many cases 
companies like to have a bit of a spot market because if the 
contract production does not fit all their needs, they can 
always go into the cash market. The problem is that there is a 
great deal of instability in that cash market because it 
handles--it is a residual claimant on demand, and that means 
there is going to be a lot of volatility because some years 
they will come in and need a lot, in some years not so much. So 
it is highly volatile. And I cannot imagine that those spot 
market suppliers are going to be very happy with that 
arrangement.
    Chairman DeWine. Mr. Hughes?
    Mr. Hughes. I would just like to add, I think that although 
contracts, of course, have to respond to some kind of supply 
and demand condition, the idea that there needs to be--to make 
supply and demand work optimally, there needs to be very good 
information that is level on both sides of the bargaining 
table. And in the vegetable industry in Wisconsin, the only way 
that that mechanism is working is sort of twofold: one is that 
the processors know what the opportunity cost for a grower is 
to grow soybeans or corn or potatoes versus contract 
vegetables. But for the producers who may only have one or two 
choices in the marketplace, in order for them to make an 
informed decision, their association provides a function to 
provide a reporting mechanism because in this case the 
Government does not have a price reporting mechanism to make 
sure that the offered contract prices are transparent and, 
therefore, Producer A knows what Producers B, C, and D may be 
having as an option so that they have a little more information 
to make their decisions on. And I think that is a vital piece 
of the equation--transparency.
    Chairman DeWine. All right. Last statement, Mr. Sebring.
    Mr. Sebring. Two things, Mr. Chairman. Number one, that 
rule or law was passed not too long ago where we do report all 
of our spot buys every day. That is required by all of our 
competitors and by every packer.
    I do not know of many industries where--for instance, 
General Motors does not tell Ford what it costs to build a car.
    What we are saying today is we just do not want the 
Government to impose a ban on packer ownership and packer 
management for hog supply. The spot market works. We think the 
system today is working. But we have huge amounts of dollars 
invested in packing houses, and we need to have a steady supply 
of high-quality hogs to keep those plants running, to keep 
people employed, and to keep our industry moving along and 
profitable for both sides. And we do think it is working, and 
that is all we are asking for.
    Thank you.
    Chairman DeWine. Well, good. I want to thank you all very 
much. I know several of you have planes to catch. I appreciate 
it. Starting a hearing at 4 o'clock is not easy, and being 
interrupted by votes is not easy. Your testimony has been very 
helpful to the Subcommittee.
    Thank you very much.
    [Whereupon, at 6:20 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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