[Senate Hearing 108-478]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 108-478
 
  MONOPSONY ISSUES IN AGRICULTURE: BUYING POWER OF PROCESSORS IN OUR 
                     NATION'S AGRICULTURAL MARKETS

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 30, 2003

                               __________

                          Serial No. J-108-51

                               __________

         Printed for the use of the Committee on the Judiciary



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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



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Craig, Hon. Larry E., a U.S. Senator from the State of Idaho.....     1
    prepared statement...........................................   116
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin......................................................     9
    prepared statement...........................................   123
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     2
    prepared statement...........................................   125
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, 
  prepared statement.............................................   138
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     6
    prepared statement...........................................   140
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     5
    prepared statement...........................................   142

                               WITNESSES

Bailey, DeeVon, Professor and Extension Economist, Department of 
  Economics, Utah State University, Logan, Utah..................    20
Carstensen, Peter C., George Young-Bascom Professor of Law, 
  University of Wisconsin Law School, Madison, Wisconsin.........    25
Cotterill, Ronald W., Professor of Agricultural and Resource 
  Economics, University of Connecticut, Storrs, Connecticut......    22
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa..........     8
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, 
  Department of Justice, Washington, D.C.........................    11

                         QUESTIONS AND ANSWERS

Responses of R. Hewitt Pate to questions submitted by Senators 
  Grassley and Leahy.............................................    34

                       SUBMISSIONS FOR THE RECORD

Alabama Contract Poultry Growers Association, American Farm 
  Bureau Federation, Campaign for Contract Agriculture, Consumer 
  Federation of America, Georgia Poultry Justice Alliance, Humane 
  Society of the United States, National Contract Poultry Growers 
  Association, National Farmers Union, North Carolina Contract 
  Poultry Growers Association, Organization for Competitive 
  Markets, Rural Advancement Foundation International-USA, 
  Sustainable Agriculture Coalition, United Poultry Growers 
  Association, joint letter......................................    43
Bailey, DeeVon, Professor and Extension Economist, Department of 
  Economics, Utah State University, Logan, Utah, prepared 
  statement......................................................    45
Butler, J. Dudley, Yazoo County, Mississippi, statement..........    50
Carrington, Paul D., Chadwick Professor of Law, Duke University, 
  statement......................................................    55
Carstensen, Peter C., George Young-Bascom Professor of Law, 
  University of Wisconsin Law School, Madison, Wisconsin, 
  prepared statement.............................................    58
Cotterill, Ronald W., Professor of Agricultural and Resource 
  Economics, University of Connecticut, Storrs, Connecticut, 
  prepared statement.............................................    84
Dobbs, Mabel, Western Organizationof Resource Councils, Billings, 
  Montana, statement.............................................   118
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared 
  statement......................................................   128
Harl, Neil, Professor, Iowa State University, Ames, Iowa, 
  statement......................................................   130
National Council of Farmer Cooperatives, Washington, D.C., 
  statement......................................................   145
Organization for Competitive Markets, Lincoln, Nebraska, 
  statement......................................................   148
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, 
  U.S. Department of Justice, Washington, D.C. prepared statement   154
Wellington, Robert D., Senior Vice-President for Economics, 
  Communications and Legislative Affairs, Agri-Mark Dairy 
  Cooperative, Lawrence, Massachusetts, statement................   169


  MONOPSONY ISSUES IN AGRICULTURE: BUYING POWER OF PROCESSORS IN OUR 
                     NATION'S AGRICULTURAL MARKETS

                              ----------                              


                       THURSDAY, OCTOBER 30, 2003

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:39 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Larry Craig 
presiding.
    Present: Senators Craig, Grassley, Specter, Leahy, Kohl, 
and Feingold.

OPENING STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR FROM THE 
                         STATE OF IDAHO

    Senator Craig. The Committee on the Judiciary will be in 
order.
    We tackle and interesting and fascinating topic today: 
Monopsony Issues in Agriculture: Buying Power of Processors in 
our Nation's Agricultural Markets. Let me start by welcoming 
our distinguished panel of witnesses here today to discuss an 
issue that is very significant in American agriculture. We are 
here to discuss the marketplace in which nearly 2 million U.S. 
agricultural producers operate.
    Those 2 million are directly responsible for feeding you, 
me, and this country, and in many instances people all around 
the world.
    First, I think it is important to recognize that enhanced 
and advanced communications systems and technologies have 
heavily contributed to a more integrated world. Our economy 
faces increasingly stronger global influences and market 
forces. New economic relationships and the United States' 
resources and leadership in building these relationships around 
the globe have set the stage for the opportunities and the 
challenges that our domestic industries now encounter.
    In the agricultural industry, this is particularly true. 
The agricultural sector is unique and involves very complex 
economic models and relationships when compared to others. I 
believe no other industry faces the same degree of uncertainty 
and risk that those roughly two million producers and their 
families encounter on a daily basis.
    It is this uniqueness and attention to risk in our 
agricultural industry that brings us here today. Agricultural 
producers are desperately trying to operate in a marketplace 
that demands low end-use prices, yet high quality through 
increased efficiencies, and how to increase producer 
profitability, although subjected to the status of a price 
taker, not a price maker.
    It is no secret that today's domestic market, especially in 
the livestock and value-added arenas, has witnessed a 
significant shift from supplying meat cuts for consumers 
through farmer markets in the local town square, to shipping 
livestock hundreds or even thousands miles away to the a large 
packing and processing plant whose products eventually reach 
millions.
    With this in mind, it is important to note that within the 
U.S., markets differ significantly by region. In the Northwest, 
our producers must shift their crops or livestock through 
limited means to markets that are few and far between. The 
traditional sales yard is still prevalent, yet becoming very 
rare. In contrast, areas such as the Midwest contain vastly 
larger herds that supply a much greater number of processors 
who may be just down the road from the farm.
    Just recently one of only a few remaining packing plants in 
my State closed; 272 people were immediately looking for new 
jobs. Although this may be deemed a small operation by some 
standards, it represents a larger issue that producers are 
becoming increasingly aware of the importance that risk 
mitigation plays in their operational plans.
    Contractual arrangements with buyers are proving more 
popular to combat risk, and I believe it is the responsibility 
of those in Congress and in regulatory positions to ensure that 
these arrangements are fair and not exploited.
    Today, we will receive testimony from our panel that will 
explore their actions and thoughts on this issue of fairness in 
today's agricultural markets, and how the terms ``monopsony'' 
and ``monopoly'' adhere to this vital sector of our economy.
    I hope the hearing will help shed some light on the 
frustration that I and my colleagues have experienced most 
recently in the 2002 farm bill, in sifting through all of these 
complicated issues. Again, we welcome you and we look forward 
to your testimony.
    Before I turn to our witnesses, let me recognize one of my 
colleagues on the Judiciary Committee, Senator Grassley.

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

    Senator Grassley. Thank you, Mr. Chairman. I appreciate 
your providing an opportunity for this important discussion of 
the negative impact of monopsonistic control and the impact it 
can have on family farmers and rural America.
    Monopsony is to buying as monopoly is to selling. When 
family farmers have limited options to market their 
commodities, they face potential monopsonistic conditions. For 
decades, the Government has aggressively protected America's 
consumers through the Sherman and Clayton Acts from 
monopolistic activities. Unfortunately, the concept of 
monopsonies has not seemingly drawn as much attention.
    Today, I hope that we take this opportunity to focus on how 
the Department of Justice attempts to identify monopsonistic 
practices. While I believe Justice attempts in good faith to 
remedy monopsonies when it finds a problem, I worry that the 
calf has not found the creep when it comes to this issue.
    I am concerned that the Department of Justice doesn't have 
the agricultural specialists on board who understand the unique 
marketing dynamics that farmers experience in their 
relationship with industry. The Department of Justice can't 
remedy the problem unless it understands the potential harm.
    To the Department of Justice's credit, it has challenged or 
limited agricultural and agribusiness mergers in the past due 
to monopsonistic concerns. I know that Assistant Attorney 
General Pate has laid out many examples in his testimony of the 
Department of Justice's interest in keeping markets 
competitive.
    One example of the Department's commitment that Mr. Pate 
did not describe is United States v. Rice Growers Association. 
Justice tried this case in 1986 and challenged the purchase of 
one milling firm buying another milling firm. The Department 
found that within the regional market, the new entity would 
control 60 percent of the rice purchased and that was found 
unacceptable to the Department.
    Clearly, DOJ has the authority to act. I am just not 
certain that this Department of Justice, or for that matter any 
Department of Justice in recent history has hired professionals 
with the expertise and background to identify the actual 
markets being affected.
    For instance, 87 percent of all hogs are contract or 
packer-owned pigs. That means that only 13 percent have the 
potential to be open or spot market pigs for slaughter. Over 90 
percent of the hog marketing contracts are based on the 
composite spot market price to establish the base value. Many 
hogs not bound to written contracts are sold under oral 
formulas. The value of these types of oral agreements does not 
necessarily track with spot market value. In addition, hogs 
sold outside the western corn belt don't contribute 
substantively to the mandatory price reporting data.
    I have seen estimates that of the 13 percent of the hogs 
deemed open market pigs for slaughter, only 3 to 5 percent 
traded daily are actually legitimate spot market pigs. The 3- 
to 5-percent figure sets the price daily for 90 percent of the 
pigs that packers have under marketing contracts.
    It should be easy to understand that as the actual spot 
market thins out, if packers choose not to participate in the 
spot market everyday, packers potentially will be able to 
manipulate the spot market price and influence the worth of 
marketing contracts. I feel strongly that we need to be on the 
look-out for this type of manipulation of the marketplace.
    Unfortunately, the potential for this type of manipulation 
grew considerably when Smithfield, the world's largest vertical 
integrator, acquired Farmland. Department of Justice staff 
informed my office that the Justice Department did not believe 
that this transaction met any threshold to justify challenging 
the acquisition. Justice explained that there would still be 
multiple purchasers in the western corn belt after this merger 
took place.
    I have tried to take a look at the packers participating in 
the southern Minnesota, all of Iowa, South Dakota, and the 
Nebraska region. Unless the Department of Justice believes that 
a family farmer which produces 2,000 hogs per year, selling 40 
per week, using a trailer pulled by a pickup can reasonably be 
expected to deliver hogs up to 300 miles away from his farm, we 
definitely have a problem.
    On a related topic, I would be remiss if I did not take 
this opportunity to voice concern not only for the spot 
market's impact on contracts, but for the construction of 
producer contracts. As the lead sponsor of the Fair Contracts 
for Growers Act, S. 91, I am very concerned about the abuse of 
arbitration clauses in take-it-or-leave-it non-negotiable 
contracts such as those that are typical in the livestock and 
poultry sectors.
    Certainly, arbitration, if agreed to voluntarily by both 
parties involved, can be a useful tool for resolving disputes. 
But what we are now seeing in the livestock and poultry sectors 
is that arbitration clauses are being forced on farmers not as 
a legitimate alternative dispute mechanism, but as a mechanism 
to prevent farmers from challenging the abusive actions of 
large packers or integrators.
    Farmers who are forced into arbitration proceedings are 
rarely, if ever, successful. In large part, this is because the 
process is stacked against them because arbitration does not 
allow for the right of discovery. If a farmer is attempting to 
prove that he has been treated unfairly or has been the victim 
of fraud, all the data that would allow him to argue his case 
is completely controlled by the company being accused of 
misdeeds. Without access to that data through the normal 
discovery process, it is impossible for a farmer or any grower 
to prove their case.
    Lastly, arbitration proceedings are not part of the public 
record. By forcing growers to sign away their rights to resolve 
disputes in court, livestock and poultry companies are able to 
limit public knowledge about any abusive practices.
    So it is easy to understand why large, vertically-
integrated livestock and poultry companies might see the 
benefits of including mandatory arbitration clauses in their 
contracts. Unfortunately, we understand that farmers are often 
put in a position that they either have to sign the contract 
presented to them or face bankruptcy.
    The Chairman of this Committee was the lead sponsor of a 
bill in the last Congress which addressed concerns about the 
abuse of mandatory arbitration clauses in contracts between 
auto manufacturers and car dealerships. That legislation, which 
is nearly identical in structure to the bill that Senator 
Feingold and I have introduced, is now law.
    Our legislation would simply specify that both parties in a 
livestock or poultry contract must agree in writing to pursue 
arbitration after the dispute arises to assure that farmers 
choose the arbitration voluntarily. It is my hope that we will 
be comfortable affording farmers the same protections against 
abusive contract terms that we have provided for the car 
dealers of America.
    In conclusion, I thank the Chairman for this hearing. I 
look forward to working with both the Committee and the 
Department of Justice to further explore this issue. I would 
also like to submit for the record the testimony of Dr. Neil 
Harl, from Iowa State University, whom we invited to testify 
today but had a conflict.
    Senator Craig. Thank you very much, Senator Grassley. Of 
course, that will become part of the record.
    Now, let me turn to the Ranking Member of the full 
Committee, Senator Leahy.

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

    Senator Leahy. Thank you very much, Mr. Chairman. I do want 
to thank the Committee for holding this hearing examining the 
buying power of processors in our Nation's agricultural 
markets.
    I am glad to see our witnesses here. Dr. Cotterill, I am 
glad to have you here. He is Professor of Agricultural and 
Resource Economics at the University of Connecticut. I have 
worked with him a lot on daily matters over the years.
    Monopsony is not an easy word to say, as we have all found, 
each one of us, as we have scrambled with that. What it means, 
though, is pretty easy to understand. It is the increasing 
power of large, concentrated agricultural processing firms and 
their ability to lower the prices received by farmers who 
supply them with milk and meat and grain. This trend is having 
a tremendous impact on the lives and livelihoods of American 
farmers in virtually every region of this country.
    In my own State of Vermont, agriculture is a vital 
industry, and dairy is the most significant part of that. It 
accounts for roughly three-quarters of our State's net farm 
income. For decades, dairy farmers seemed immune from the 
consequences of restructuring because, through their 
cooperatives, they also served as milk processors for the local 
or regional markets. National markets didn't exist.
    That has changed dramatically over the past few years. As a 
result, our farmers are not getting a fair share of the retail 
price of milk, but giant corporate processors are raking in 
anticompetitive profits at the same time they are raising 
prices to consumers. The price goes down to the producer, the 
price goes up to the consumers, and these conglomerates get the 
money.
    My major concern in New England relates to Dean Foods, 
Inc., which merged with Suiza Foods in 2001 and formed the 
large milk processing company, not in the region, but in the 
world. I was really surprised and disappointed when the Justice 
Department's Antitrust Division approved this merger because it 
meant that the new company would control almost 70 percent of 
all the milk supply throughout all of New England.
    They achieved this by buying up local dairies and then, of 
course, immediately closing them down. Actually, Dean Foods 
controls more than 30 percent of all milk production 
nationally, in addition to a lot of other alliances they have.
    I have been concerned about last year's proposed merger 
between H.B. Hood and National Dairy Holdings. I led a 
bipartisan group of 10 Senators in asking the Justice 
Department's Antitrust Division to investigate the merger. It 
would allow one company, Dairy Farmers of America, to control 
more than 90 percent of the New England fluid milk supply. 
Fortunately, because the Antitrust Division actually looked at 
it, H.B. Hood withdrew its original plan, in May, and it is now 
being restructured.
    The opportunity for dairy farmers to market their milk 
independently is practically gone. Today, two cooperatives 
control access to most of the Nation's processing facilities. 
They are using this access to expand further. It is not good 
for daily farmers, it is not good for other market 
participants, it is not good for consumers.
    In a competitive market, if input costs fall, competition 
tends to drive consumer prices lower, and that makes sure that 
manufacturers don't get windfall profits. But that doesn't work 
in the dairy industry. Retail prices for fluid milk are 
virtually unchanged this year, even though prices that farmers 
receive are off 50 cents per gallon.
    I think the Justice Department should still investigate why 
lower farm prices for milk have not been passed on to 
consumers. I have asked the General Accounting Office to 
investigate this disparity between farm and retail milk prices. 
It is not just important for Vermont; it is important for the 
daily industry country-wide to establish greater protections 
against market abuses by huge agribusinesses.
    I think the American people and the farmers who produce 
America's agricultural goods deserve strong watch-dogging by 
their Government. If we have strong watch dogs here, it works, 
and it is going to help the market opportunities for America's 
farmers and ranchers. It is also going to protect farmers and 
ranchers against those who have such enormous power to just 
overcome anything they might do.
    Mr. Chairman, I have a much longer statement and I would 
ask to put it in the record.
    Senator Craig. Without objection, your full statement will 
become a part of the record. Thank you very much for that.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Senator Craig. Let me turn to another member of our 
Committee, Senator Herb Kohl.

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

    Senator Kohl. Thank you, Mr. Chairman. Thank you for 
holding this hearing to examine the troubling trend of 
increased concentration in the agricultural industry.
    The alarming transformation of rural America continues. 
Increased concentration on the buyer side has dramatically 
shrunk the market for farmers and driven many out of business. 
It is clear that now more than ever, we need vigorous and 
aggressive enforcement of our antitrust laws to prevent 
concentration that harms competition in this marketplace.
    We need to seriously examine whether our antitrust laws are 
being properly enforced to prevent excessive agricultural 
consolidation. Antitrust enforcement should not permit the 
creation of dominant market power by a buyer of agricultural 
products any more than it would permit the creation of a 
monopoly by a seller. In addition, antitrust regulators should 
be sensitive to the effects of consolidation in regional 
markets, as many agricultural products are perishable.
    We must ensure that the Justice Department devotes 
sufficient resources and staff to the agricultural sector. Our 
farmers and ranchers, less than 2 percent of our population, 
produce the most abundant, wholesome, and by far the cheapest 
supply of food in the world. Yet, prices fall for farmers as 
they find fewer and fewer buyers for their products. And 
despite this, prices stagnate or even rise for our consumers.
    This trend is evident across commodities. From 1993 to 
2001, the share of hogs sold through contractual arrangements 
increased from 10 percent to 72 percent. In poultry, nearly 100 
percent of the market depends on contractual arrangements.
    Of greater concern to me, the dairy industry is 
experiencing the effects of processor concentration. Dairy 
producers in Wisconsin and around the country recently emerged 
from a 20-month period where milk prices hit a 25-year low. The 
U.S. fluid milk market is a $23 billion-a-year industry. The 
combination if Suiza and Dairy Farmers of America now controls 
approximately 70 percent of the fluid milk processing and 
distribution in 13 northeastern States.
    This concentration in buying power at the processor and 
retail level has not led to lower prices for consumers. In 
fact, 2 months also when the national average price paid to 
farmers for fluid milk declined by 13 percent, the average 
national retail price paid by consumers at the grocery store 
declined by only 5.5 percent.
    Rural America is in crisis. Their way of life and economy, 
countless communities, and too many farm families are 
struggling because there is a dwindling free market for 
American agriculture's superior product. We need to revisit the 
way our antitrust laws are being applied to agriculture. We 
need to discard the outmoded doctrine that buying power is 
treated with a lower degree of scrutiny than the aggregation of 
selling power.
    Dominant buying power among food processors ought not to be 
permitted any more than a monopoly among food retailers. 
Dominant regional market shares should be permitted no more 
than dominant shares in national markets.
    We need to ensure that the Justice Department enforcement 
tools are adequate to do their very important job. We were 
pleased several years ago when the Justice Department appointed 
at our request a special counsel responsible for competition in 
agriculture. However, serious questions have been raised as to 
whether the Justice Department has devoted sufficient resources 
to this task. We need to scrutinize the Antitrust Division to 
ensure that it is devoting sufficient resources and manpower to 
competition in agriculture.
    We are pleased to welcome our witnesses, and for me 
particularly Peter Carstensen, from the University of Wisconsin 
Law School. I have always been impressed with Mr. Carstensen's 
work on this issue, and so we all look forward to a productive 
hearing.
    Thank you, Mr. Chairman.
    Senator Craig. Senator, thank you very much.
    Now, let us turn to our first panel and our first panelist, 
Senator Tom Harkin, of course, Ranking Member of the full 
Senate Ag Committee. We know that these are issues awfully 
important in his home State.
    Senator please proceed.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM THE STATE OF 
                              IOWA

    Senator Harkin. Thank you very much, Mr. Chairman, and 
thank you for the opportunity to be here and for holding this 
hearing. I, first of all, want to associate myself with the 
statements I heard from Senator Grassley, Senator Leahy and 
Senator Kohl. I think they are right on the mark on this, and 
perhaps some of the things I will say will be repetition, but 
maybe just with a little different slant.
    The consolidation horizontally and vertically in the 
processing and retail sectors of our food industry is a real 
problem facing rural America. We sometimes forget that the goal 
of antitrust policy was to protect small firms, like 
independent farmers, that sell their goods. As Senator Kohl 
pointed out, it is not just the buyers, but also the sellers 
that need to be protected when they deal with an 
anticompetitive and consolidated market.
    As ranking member, as you point out, Mr. Chairman, of the 
Agriculture Committee, I am too familiar with the numbers. 
Eighty percent of steer and heifer slaughter is controlled by 
four firms. Soon, 64 percent of all hog slaughter will be 
controlled by 4 firms. You have heard a couple of people speak 
about the dairy industry and what is happening in certain parts 
of our country in the dairy industry.
    Well, just as these industries have become more 
horizontally consolidated, they have also increased the use of 
vertical arrangements. Hog packers now have 80 to 90 percent of 
their supply tied up in some type of a vertical arrangement. 
These are just a few examples of the increased horizontal 
consolidation and vertical integration in agriculture.
    The essential problem with consolidation and vertical 
integration, when taken too far, is that such trends reduce 
choice and efficiency in the marketplace. The lack of choice 
leads to unequal bargaining power in business relationships. 
With unequal market power, the more dominant firm will always 
take advantage of the more vulnerable party by squeezing price, 
shifting liabilities, or demanding certain terms without paying 
an associated price.
    Again, as Senator Kohl pointed out, Congress enacted the 
Sherman and Clayton Acts not only to protect consumers from 
sellers who have too much power, but also to protect sellers 
from buyers who have too much power.
    One of the most disturbing news that we have seen out our 
way is the recent acquisition of Farmland Foods by Smithfield--
again, just another example of what we are talking about here. 
Many of us wrote letters and signed on to letters to the 
Attorney General expressing grave reservations about Smithfield 
acquiring Farmland. But the Department seemed to ignore the 
concerns of independent producers and they let the deal go 
through untouched.
    Of course, Smithfield's acquisition of Farmland will 
strengthen its leverage over family pork producers and 
represents even more concentration and vertical integration in 
the already rapidly consolidated pork processing industry.
    Smithfield's version of hog production in which it owns all 
of the hogs and reaps all of the entrepreneurial profit does 
not bode well for the future of the rural Midwest. Smithfield 
has a history of shutting down plants that it buys. Yet, even 
if the plants remain open, the market would still lose a buyer 
and become even more concentrated. But despite Smithfield's 
past actions and the potential degree of control they would 
hold over the sector, the Department of Justice allowed the 
acquisition to go through untouched.
    As Ranking Member of the Ag Committee, I realize the job of 
addressing competition problems in agriculture does not lie 
solely with your Committee. The Ag Committee has jurisdiction 
over the Packers and Stockyards Act, the Agricultural Fair 
Practices Act, and the Perishable Agricultural Commodities Act.
    Again, all of these laws are designed to protect producers 
from unfair trade practices or help producers gain bargaining 
power through cooperatives. In fact, one of the reasons I 
wanted to testify today, Mr. Chairman, was to invite more 
cooperation between our two committees to work together to 
protect farmers against unfair and anticompetitive conduct.
    In conclusion, I want to thank you for convening this very 
important hearing. This may not make the front page of the New 
York Times. It may not be the headline on the CBS Evening News, 
but in terms of the number of people that are being affected by 
this horizontal consolidation and vertical integration in 
agriculture, it probably dwarfs anything the news is going to 
cover tonight, or tomorrow on the front page.
    Whether they realize it or not, this ripples through the 
food chain. It ripples through the food markets, through the 
grocery stores, and right down to the consumer level. So that 
is why the business you are about is important for the free 
market, and it is important for our producers as well as our 
consumers.
    Thank you very much, Mr. Chairman.
    Senator Craig. Senator Harkin, thank you very much for that 
statement.
    Senator Feingold, we have allowed opening statements by all 
of our colleagues today. So if you so have, please proceed.

  STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Senator Feingold. Thank you, Mr. Chairman. That is very 
kind of you.
    I appreciate your holding this hearing to shed light on an 
important issue for farmers and their families. I must say I am 
awfully pleased to be with this group of Senators, including 
Senator Harkin, all of whom have shown enormous leadership in 
this area.
    I appreciate the opportunity to briefly share my views on 
the power of buyers in our agricultural markets. Increased 
consolidation and market concentration are, without question, a 
very significant concern for producers throughout the Nation. 
As I travel throughout my home State of Wisconsin, these issues 
are raised constantly by farmers and growers.
    Monopsony power is a serious concern because this power can 
so easily be abused. When there is only one buyer of a 
commodity, farmers fear that the price that they receive and 
the terms of the transaction will be unfairly biased against 
them. Farmers are rightfully troubled by inadequate market 
access, price discrimination against the small independent 
producer, and, of course, the loss of negotiating power for the 
men and women who actually produce the product.
    I am pleased to be an original cosponsor of the Fair 
Contracts for Growers Act of 2003, and I have been delighted to 
work with Senator Grassley on this issue. It addresses one 
unfair result--monopsony power in this industry. It is designed 
to provide greater fairness in the arbitration process relating 
to livestock and poultry contracts.
    I believe that arbitration can be an effective and 
appropriate method to resolve disputes between farmers and 
those who purchase their products, but only when both parties 
voluntarily participate. Many farmers, however, due to their 
disadvantaged economic position, are forced to sign contracts 
presented to them by large processing firms that include 
mandatory arbitration clauses.
    There is no negotiation between the farmer and the 
processor in these instances. Farmers must accept the contract 
as written, waiving their constitutional right to have their 
disputes under the contract decided by a trial by jury.
    I would like to submit a letter for the record, Mr. 
Chairman, from numerous farm and consumer organizations, as 
well as advocates for animal protection in rural communities, 
expressing their support for the Fair Contracts for Growers 
Act.
    Senator Craig. Without objection.
    Senator Feingold. Thank you, Mr. Chairman.
    The Senate and this Committee have both demonstrated strong 
bipartisan support for rectifying the injustices of mandatory 
arbitration. During the debate on the farm bill in the last 
Congress, I offered an amendment with Senator Grassley to 
prohibit the use of mandatory arbitration clauses in livestock 
and poultry contracts. Our amendment passed the Senate by a 
vote of 63 to 31, but it was dropped in conference.
    This Committee has supported similar arbitration measures 
in the past, such as the auto dealer arbitration bill that the 
Chairman worked to enact in the 107th Congress. The Fair 
Contracts for Growers Act addresses only one piece of this 
complex business relationship in agricultural markets that are 
becoming increasingly concentrated. The growing concentration 
of agricultural buyers raises serious questions about the 
Department of Justice's enforcement of existing laws, as well 
as the adequacy of those laws to ensure a fair, open, and 
equitable market.
    Again, I thank the Chairman for letting me speak.
    Senator Craig. Thank you very much, Senator.
    Now, let us turn to our second panelist and ask him, if 
you, Mr. Pate, to please come to the table.
    Our second panelist today is R. Hewitt Pate, the Assistant 
Attorney General for Antitrust. Mr. Pate became the Assistant 
Attorney General for Antitrust this past June, but served as an 
Acting Assistant Attorney General from November 23, 2002, until 
his confirmation by the Senate.
    My guess is that some of our colleagues might be, and have 
already been a bit critical of actions by or failure to act by 
the Office of the Attorney General on certain issues. So we are 
anxious to hear from you, Hewitt, as it relates to the work 
that is underway in the Justice Department on these critical 
issues.

   STATEMENT OF R. HEWITT PATE, ASSISTANT ATTORNEY GENERAL, 
  ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Pate. Thank you very much, Mr. Chairman and members of 
the Committee. I would start by saying that I welcome the 
scrutiny. In our system of Government, that is how we improve 
our public institutions, and so I appreciate the opportunity to 
appear before this Committee today.
    I have a longer written statement, but I would like to 
begin with a briefer statement, if I may.
    Senator Craig. Your full statement will be a part of the 
record. Thank you.
    Mr. Pate. Thank you, Mr. Chairman.
    The agricultural marketplace, as many of you have 
mentioned, is undergoing significant change--international 
challenges, technological innovation, and new forms of business 
relationships. In the midst of these changes, farmers are 
rightly concerned about whether agricultural markets are 
remaining competitive. We take these concerns very seriously. 
We know that competition at all levels in the production 
process leads to better quality, more innovation, and 
competitive prices. Enforcement of the antitrust laws can 
benefit farmers as purchasers of goods and services that allow 
them to grow crops and raise livestock, just as it also 
protects consumers of the crops that they raise and sell.
    We have been very active in enforcing the antitrust laws in 
the agricultural sector. We have also undertaken a special 
outreach effort, meeting with producers and producer groups in 
Washington and around the country to listen to their concerns 
and to improve everyone's understanding of the role of the 
antitrust laws.
    This afternoon's hearing focuses on monopsony, and I think 
it is fair to say that, more than some other industries, 
agriculture has a structure that makes so-called monopsony 
concerns more likely to arise. That is because the industry is 
characterized by many smaller producers selling to fewer and 
larger processors.
    We are sensitive to this and we look closely at so-called 
monopsony concerns in enforcement. Monopsony is the mirror 
image of monopoly, but, of course, on the buying side rather 
than the selling side. This is an antitrust concern because if 
market power is created that enables a buyer to reduce the 
quantity it buys in order to force down the per-unit price it 
pays, and if that depresses producer incentives and brings 
output down below the competitive level, then society is 
deprived of the benefits of the full amount of production that 
should take place in a competitive economy.
    The competitive harm to suppliers thus can lead directly to 
competitive harm for consumers. So focusing on promoting 
competition goes hand in hand with our taking enforcement 
action in a monopsony case when the facts warrant.
    As you all well know, we bring three types of antitrust 
enforcement actions typically. Under Section 1, we both 
criminally and civilly prevent combinations and collusion that 
damage competition. We bring actions under our monopolization 
statute, Section 2. And finally, of course, under Section 7 of 
the Clayton Act, we are responsible for merger enforcement and 
for preventing mergers that substantially lessen competition.
    We have been active under each of these headings. In our 
criminal enforcement program, we have taken action in a number 
of cases that have resulted in savings to farmers in the case 
of feed additives, herbicides, and otherwise, where they have 
been the victim of price-fixing and illegal cartel activity. 
Likewise, on the criminal side, a few years back we have 
prosecuted cattle buyers, where they have been guilty of bid-
rigging in the purchase of cattle.
    In terms of merger enforcement, we have active now a case 
called Southern Belle, in Kentucky, in the milk industry. This 
was a case which actually fell below the Hart-Scott-Rodino 
thresholds and has closed, but nonetheless we are engaged in 
litigation there.
    As has been mentioned in previous remarks this afternoon, 
the NDH/Hood dairy merger was withdrawn during the Department's 
scrutiny of that merger. We have taken efforts to be more 
transparent with parties about our concerns as we go through 
the course of an investigation. In that case, that appeared to 
result in a transaction being withdrawn. It has been modified 
and a different transaction is under review now. That process 
is ongoing.
    Likewise, the Cargill/Continental case and the Suiza/Dean 
case were mentioned earlier. In Cargill/Continental, we 
explicitly recognized the need to protect producers from 
monopsony concerns. And in Suiza/Dean, while the transaction 
was not stopped outright, we demanded significant divestitures 
in that transaction to protect competition.
    So we have been active throughout this market, throughout 
the tools at our disposal to try to protect competition, and I 
look forward to answering your questions about our work this 
afternoon.
    Thank you.
    Senator Craig. Hewitt, thank you very much for your 
testimony and for being here.
    Let me now turn to my colleague, Senator Grassley, for an 
opening round.
    Senator Grassley. Mr. Pate, I would like to start by 
stating once again that I think that you have statutory 
authority to pursue monopsonistic activities. My concern is 
that the Department of Justice has not established specific 
guidelines or brought on enough expertise to properly address 
that issue.
    This isn't to say that the Department of Justice is doing a 
worse job than any past Department of Justice. So, in fairness, 
I haven't been happy with Departments of Justice on this issue 
of agribusiness through several administrations.
    Does the Department of Justice have specific authority to 
determine the competitive impact of vertical integration in 
agriculture on farmers?
    Mr. Pate. There is no question that we have the ability, 
and we do in specific mergers look at vertical concerns. There 
is no question that we have authority to look at monopsony, as 
well as monopoly. We did that explicitly in the Cargill/
Continental case. That was part of the Suiza/Dean inquiry I 
mentioned. It was part of what we were looking at in NDH/Hood. 
So the answer to both of those is yes.
    Senator Grassley. Do you follow specific guidelines that 
you have in writing to measure?
    Mr. Pate. Our horizontal merger guidelines, for example, 
are constructed around the more typical situation of seller 
side power and monopoly. Monopsony is the mirror image of that. 
So the same considerations that would apply on the monopoly 
side apply in analyzing monopsony.
    That is not to say the cases are in every event the same. 
As I have discussed, I agree with some of the comments made 
earlier that agricultural markets can be different than other 
markets. We look case by case at every transaction, but 
consistent with the guidelines we have on the monopoly side, 
when we look at monopsony questions.
    Senator Grassley. You referred to Cargill/Continental. In 
that merger, the Department of Justice required partial 
divestiture. Has the Department of Justice performed any 
analysis to determine whether that divestiture has preserved 
competition?
    Mr. Pate. Typically, we do not do retrospective 
examinations of markets, except that when we face future 
transactions or enforcement actions, then we get the 
opportunity to look back in that context. But it is not 
generally part of what we do to conduct studies.
    We do have two sections within the Department who stay 
abreast of agricultural issues and are specifically responsible 
for them, and they do keep up in date in terms of market trends 
in those areas. So I am sure that attorneys within those 
sections have some of the information of the type you are 
talking about.
    Senator Grassley. Did the Department of Justice study hog-
buying practices by packers and the impact of those practices 
on competition before approving the largest pork integrator 
merger in U.S. history?
    Mr. Pate. If you are referring to the Smithfield/Farmland 
merger--
    Senator Grassley. Yes.
    Mr. Pate. --I was recused from that case. I did not 
participate in it, so I can't tell you directly about the 
nature of that investigation. Before coming to the hearing 
today, I learned that the Department sent to Attorney General 
Miller, in Iowa, describing its activities.
    On that basis, I can tell you that certainly the answer is 
yes, and that as would be the case in any case that we examine, 
we would look at producers, consumers, the companies that 
operate in that market, and determine what the market facts 
were in the case.
    Senator Grassley. Eighty-seven percent of all hogs are 
contracted or packer-owned; 13 percent are deemed open-market. 
Those are statistics I used in my opening remarks. In practice, 
then, as I have previously said, 3 to 5 percent of the hogs 
traded set the national price, and that surely happens in the 
Midwest.
    Ninety percent of the hog marketing contracts are tied to a 
composite average of the spot market for compensation. Many 
spot-market hogs are sold under oral formulas, and open-market 
hogs sold outside the western corn belt don't contribute to 
price-setting. This leaves the remaining pool of spot-market 
hogs very limited. Yet, those pigs set the price for all hogs 
tied to marketing contracts throughout the country.
    The western corn belt market is at its core made in Iowa, 
Minnesota, South Dakota, and Nebraska. This is where those 3 to 
5 percent of the true spot market hogs are located. When the 
Department of Justice allows dominant integrators to command 
the southern Minnesota-northern Iowa markets, you give 
integrators the opportunity to limit spot market purchasing and 
prices. Spot markets are easier to manipulate than higher-
volume markets. That is just the plain fact.
    So my question is does the Department of Justice recognize 
the power integrators have in thin spot markets and that the 
western corn belt is the dominant price-setting region for hogs 
in the United States?
    Mr. Pate. I read with interest some of the testimony on 
these points that Professor Carstensen submitted. There is no 
question that it is correct to observe that a more thinly 
traded market is less likely to establish a competitive market 
price than one in which there are more participants.
    The antitrust laws in our reviews don't go generally to the 
question of whether an auction or an open sale process, on the 
one hand, or contracting on the other is to be, as a general 
matter, as preferred form of contracting. When we do a merger 
analysis, the question we are asking is whether the merger 
itself is likely to lead to a decrease in competition. But we 
would look at the question of the effect on both auction 
markets and contracted purchasers when we do that.
    Senator Grassley. I would have two questions in writing, 
two questions to follow up on my first two questions, and then 
I have one question I did not ask. So I will submit those.
    Senator Craig. Senator, thank you. We will submit questions 
in writing. Senator Leahy also has questions that he will 
submit in writing to all of our panelists.
    We have a vote on. I am going to turn to Senator Specter to 
make any opening comments and offer any questions he might 
have. I am going to leave for the vote. If you would recess the 
Committee at the conclusion of your thoughts and questions, 
that way we can be back and keep it going, and honor some 
reasonable time to our third panelists, also.
    Thank you.
    Senator Specter [presiding.] Well, thank you very much, Mr. 
Chairman, and thank you, Mr. Pate, for the job which you are 
doing.
    Senator Grassley made a comment about his evaluation of the 
Department of Justice. He has been active in evaluating the 
Department of Justice for many years. I recall the first 
Attorney General that Senator Grassley worked with was William 
French Smith, and Senator Grassley had some substantial 
disagreements with Attorney General William French Smith.
    One day at a social event at the Department, the Attorney 
General turned to me and said, why are you so critical of me?
    Senator Grassley. He was obviously getting us mixed up.
    Senator Specter. What did you say?
    Senator Grassley. He was obviously getting us mixed up.
    Senator Specter. Can you imagine such a blight on Senator 
Grassley to be confused with me?
    [Laughter.]
    Senator Specter. After the hearings on Justice Thomas, I 
heard many reports.
    What were those, Senator Grassley?
    Senator Grassley. Those reports were why was I so mean to 
Anita Hill, and I never asked her one question. They were 
getting me mixed up with you.
    Senator Specter. You can see what a terrible situation he 
has had for 23 years to have to sit next to me on the Judiciary 
Committee.
    Senator Grassley. That is why I am leaving now.
    [Laughter.]
    Senator Specter. So I advise you, Mr. Pate, to be very 
wary, very wary of Senator Grassley even when he is gone.
    Mr. Pate, I am glad that we are having this hearing on 
monopsony. That is a subject matter which is a word almost 
never, never used, but one of great importance. I am very much 
concerned about the impact on dairy farmers. As we have seen in 
Pennsylvania, the price of milk at the store goes up and the 
price of milk to the farmer goes down. The fluctuations have 
been very extensive, sometimes more than $16 a hundredweight, 
and then in a short period of time, less than $10 a 
hundredweight.
    We have had a series of hearings on trying to understand 
why it is that the farmer gets a lower price and the grocer 
gets a higher price simultaneously. It may be that monopsony is 
the answer, that a single buyer or a limited number of buyers 
are able to deal with many purchasers to exert, in effect, 
monopoly power which drives down the price to the producers.
    Do you have any thoughts on that subject?
    Mr. Pate. Well, again, it varies from case to case. It 
could be the case that there is a monopsony problem on the 
purchase of raw materials side, but no problem on the consumer 
side of the market because there is vigorous competition on the 
selling side.
    The reverse could be true, or there could be problems of 
market power on both sides of the transaction. That could be 
true in the dairy or other industries. So that would be 
something we would evaluate case by case when we are reviewing 
a transaction.
    Senator Specter. There is substantial competition in the 
marketplace for sellers of milk. There may not be for buyers of 
milk. I am glad to hear your agreement that the Department of 
Justice has full power to deal with monopsony, and I think 
there really needs to be a very, very vigorous pursuit of that 
line.
    We are still struggling with the problem of what is 
happening in Pennsylvania and we are in the process of 
preparing legislation which would tie the price of milk to the 
cost of production. We face a very serious problem about having 
the small milk producer going out of business, and at the 
current rate we may have an greater problem with the small 
dairy producers. So the activities of the Department of Justice 
could be very, very helpful.
    I recollect your Department's intervention with the matter 
of a small company in St. Mary's. It wasn't milk; it was a 
manufacturer. But the Department of Justice can have a 
tremendous impact. Just to show an interest and to seek an 
inquiry in an investigation can be very, very helpful.
    As Senator Craig said, we are in the middle of a vote and I 
am going to have to depart momentarily to make the vote. We 
have 15 minutes and a 5-minute overlap. We have a very, very 
busy schedule today trying to finish up the business of the 
Senate and I am going to try to return, but I am not sure that 
I can. Mike Oscar, my deputy, is here and we will be paying 
very close attention to what your Department does on this 
important subject.
    I have been advised that Senator Kohl has some questions 
for you, Mr. Pate. So we would appreciate it if you would 
remain. Senator Kohl should not be too long in returning.
    Mr. Pate. Thank you, Senator.
    Senator Specter. The Committee will stand in recess for a 
few moments.
    [The Committee stood in recess from 3:29 p.m. to 3:39 p.m.]
    Senator Craig [presiding.] The Committee will reconvene. 
Thank you all very much for your patience.
    Let me turn to my colleague, Senator Kohl.
    Senator Kohl. Thank you, Senator Craig.
    Mr. Pate, as we have been saying, traditional antitrust 
doctrine gives less scrutiny to buyers gaining dominant market 
positions than to sellers gaining dominant positions via 
monopolies. This is because monopsonies have the potential to 
result in lower prices to consumers.
    In the agricultural sector, we have seen in recent years 
tremendous buying power gained by food processors, resulting in 
depressed prices and substantial economic losses to farmers. In 
fact, as we have said, the top 4 beef packers now control 81 
percent of the market, the top 4 pork processors control 59 
percent 9of the market, and the top 4 poultry processors 
control 50 percent of the market. All of these percentages are 
going up considerably.
    In light of this consolidation, shouldn't we now treat 
monopsony in agriculture with the same scrutiny that we give to 
monopolies? Shouldn't we be particularly concerned about buyers 
gaining dominant market positions with respect to agricultural 
goods, Mr. Pate?
    Mr. Pate. We are particularly concerned about it. I think 
it is not fair to say that the law has established that there 
should be less scrutiny, but simply that there have been fewer 
cases where this comes up. We are more used to dealing with 
cases where the alleged harm is on the side of sales, but we 
equally do look for monopsony problems.
    I think there is some comment today that is repeated that 
it has been established that monopsony can produce 
anticompetitive harms at lower levels of concentration than 
monopoly. While I think that is a claim that is asserted, it is 
not one that has been studied by economists and backed up, but 
is one that should be looked at. And if it could be proven that 
that is true--I know, for example, Senator Kohl, you have been 
interested in this possibility in the group purchasing area in 
the health care field.
    This is something that I think we need to look at and 
determine whether it is the case and then tailor our 
enforcement efforts accordingly. But we do look at monopsony 
concerns. As you say, we do have to be concerned that we not 
act in situations where we are preventing lower prices and 
better products to consumers. But the concerns I am hearing 
here today are about situations where the monopsony side is 
causing losses to the producers, but yet that isn't passed 
through.
    Senator Kohl. Well, it has been pretty well demonstrated 
now that over the course of many, many months, for example, 
milk prices have been at record lows, or world-record lows, and 
there was nothing even comparable reflected at the retail level 
in prices to consumers. I don't think there is any question 
about that occurring and with respect to what has obviously 
become a demonstrated consolidation of cooperatives and 
providing farmers with virtually no one to sell to except a 
single co-op.
    How much more studying do you need to do before you--I am 
not trying to be disrespectful, but when do you make a 
conclusion that this is not the right way in which we should be 
going and then try and find a remedy, which I would be the 
first to agree is not easy?
    Mr. Pate. Well, in particular cases we don't find that hard 
at all. That is why, while there may be disagreement as to 
whether our divestiture was the correct solution, in Suiza/Dean 
we took aggressive action to require divestiture, why in the 
face of divestiture the NDH/Hood transaction was withdrawn. 
That is why we are taking action in the Southern Belle case. 
That is why we took action in Cargill/Continental.
    As to generally solving that problem--and I know reference 
was made to legislation that would peg retail prices to 
percentages or to multiples of the raw milk price. That is 
something that is mentioned in Mr. Cotterill's statement as New 
York legislation that has proposed that. That type of direct 
price regulation and market outcome-dictating solution is not 
one that the antitrust laws are involved with.
    So case by case, we are going to be there enforcing. Can 
antitrust law address every non-antitrust structuring of the 
market that some policymakers might think is appropriate? No, 
that is not what it is intended to do.
    Senator Kohl. I must say I still have this concern that 
when all is said and done and another year goes by or 2 years 
go by, in spite of this tremendous consolidation that is 
occurring and continues to occur in, for instance, the beef 
packing industry and milk processing, and hogs and poultry, 
there will not be--and I hope I am wrong--sufficient action on 
the part of your Department.
    We were pleased when several years ago the Antitrust 
Division appointed a special counsel for agriculture that we 
had requested. It is important that a senior staff member be 
responsible for supervising and directing the division's 
enforcement efforts, but aggressive enforcement in this sector 
requires much more than just the supervision of one senior 
official. What is important is that the Antitrust Division 
devote sufficient resources and manpower to monitor and 
investigate competition in the agricultural sector.
    Could you please tell us the amount of current resources 
both in terms of funds expended and staff employed on 
competition in the agricultural sector, and has this changed 
significantly over, say, the last 5 years?
    Mr. Pate. I can give you a sense of that. In terms of 
budget breakdown, I don't have a dollar figure in terms of 
hours spent. I can tell you that we have two sections in which 
we have substantial attorneys devoted to agricultural 
enforcement.
    We have a transportation, energy, and agriculture section 
that deals with agriculture matters. In our Lit I section, we 
have a number of attorneys who are specifically focused on the 
dairy industry. These cases often are pretty intense. In Suiza/
Dean, for example, in addition, we had 8 economists and 13 
lawyers working on that case while it was open. So at any given 
time, we may have many tens of attorneys and economists working 
on agricultural matters. It depends on what is active at the 
division.
    Mr. Ross, as you mentioned, coordinates that. Agriculture 
is the only area that has a specific special counsel assigned 
to it at the division. I do not think, based on what I know, 
that there has been a significant change in resources over a 5-
year period. I would say that there has been an increase in the 
attention paid to it. I think Mr. Ross' presence there is a 
part of that that is constructive.
    I hope that is helpful in answering your question.
    Senator Kohl. Some in the agricultural industry have argued 
that the Department of Agriculture should have a greater role 
with respect to examining consolidation in the agriculture 
industry. In other industries, the Justice Department sometimes 
gives advice to the department that regulates that industry.
    For example, when the FCC is considering whether to allow a 
local phone company to offer long-distance service, the Justice 
Department gives the FCC advice on whether the local phone 
company has opened its facilities to competition.
    Mr. Pate, how does the Justice Department make use of the 
Department of Agriculture's expertise when considering 
agricultural mergers? Are there more steps that you might take 
to ensure that USDA has a role in providing Justice with its 
expertise and views regarding your review of transactions in 
agriculture?
    Mr. Pate. Senator, that is a good question. We have a 
memorandum of understanding between the Justice Department and 
the USDA in terms of our need to cooperate on mergers and other 
matters. We make use of that in every case.
    I know even in the Smithfield matter, on which I know there 
is a good deal of concern, I noticed that the letter to 
Attorney General Miller specifically notes that we consulted 
and got input from the Agriculture Department there.
    I think comparing it to the telecom industry or others, I 
am not sure that the situation calls for any sort of specific 
statutory assignment. I think it is something we should pay 
attention to. Since I came on board, we have scheduled and put 
in place a meeting with the front offices of USDA and the 
Antitrust Division to try to share information on competition 
issues in agriculture, agricultural issues that affect 
competition and our mission. So that is something we do readily 
and I think need to continue to do and do more of.
    Senator Kohl. Thank you, Mr. Chairman.
    Senator Craig. Herb, thank you very much for those very 
thoughtful questions.
    I have one question only. There are others I will submit 
for the record for the sake of time so we can get our third 
panel up. We are in active business over on the floor at the 
moment and I think the plan a series of additional amendments. 
So we will try to expedite as much as possible.
    Attorney General Pate, I have to admit that the very word 
``monopsony'' threatens to give me a headache, in at least 
attempting to understand it. I think that Senator Kohl was 
pursuing this in a variety of ways through his questions, but 
how difficult, or easy for that matter, is it for you and your 
staff to assess the threat that monopsony behavior possesses in 
the marketplace? Is there a relatively easy formula that the 
myriad of your economists and attorneys look at?
    Mr. Pate. I think there is not an easy formula. As some 
have mentioned here this afternoon, we have somewhat less 
experience with it. I have got a Webster's unabridged 
dictionary in my office and I looked up ``monopsony'' before 
coming over to the hearing and it wasn't in there--the first 
word I have ever failed to find. Now, this isn't a new 
dictionary, but the point I am making is that we have had less 
experience with it. It is something that our economists have 
less experience with.
    As I said, though, in many cases it would be the mirror 
image of monopoly, to which we have written guidelines and more 
experience. But even in those cases, we don't have ready-fit 
guidelines. We have to take each case on its own bottom and 
look at the market facts.
    Even in the context of something such as our HHI numbers, 
they are not a cut-out formula that decides cases. So I don't 
think it is necessarily something that is more difficult. It is 
something we do have less experience with over time.
    Senator Craig. Well, we thank you very much for your 
presence here today. As I say, there will be a series of 
questions coming your way so that we can have a complete and 
full record and we will appreciate your responding to them, and 
your staff. Thank you very much.
    Mr. Pate. Thank you, Senator.
    [The prepared statement of Mr. Pate appears as a submission 
for the record.]
    Senator Craig. Now, let us turn to our third panel today, 
consisting of three distinguished professors, and maybe they 
will be able to shed light on the why Webster's failed to put 
this in at least the edition of the dictionary that Mr. Pate 
has.
    We will hear from Dr. DeeVon Bailey, who is a professor and 
extension economist at Utah State University. I understand, Dr. 
Bailey, you live in the Cash Valley, which is a greater 
extension of southern Idaho.
    Mr. Bailey. Well, we don't look at it that way.
    Senator Craig. We will let you respond to that in your 
testimony.
    Also, we have with us Dr. Ron Cotterill, who is a Professor 
of Agricultural and Resource Economics at the University of 
Connecticut. Last, but certainly not least, we will hear from 
Professor Peter Carstensen, who is George H. Young-Bascom 
Professor of Law at the University of Wisconsin, in Madison.
    Gentlemen, again, thank you. Dr. Bailey, please proceed.

STATEMENT OF DEEVON BAILEY, PROFESSOR AND EXTENSION ECONOMIST, 
  DEPARTMENT OF ECONOMICS, UTAH STATE UNIVERSITY, LOGAN, UTAH

    Mr. Bailey. Thank you, Mr. Chairman. If you think 
``monopsony'' is a difficult word, actually the correct term is 
more ``oligopsony,'' which indicates that there are a few 
buyers, not just one.
    Senator Craig. I just learned ``monopsony.'' Let's stay 
with that, all right?
    Mr. Bailey. Indeed, I am from Utah and I am a professor and 
extension economist in the Department of Economics at Utah 
State University. I grew up in the small farming community of 
Paradise, Utah, which is in the Cash Valley, certainly one of 
the most beautiful places on Earth.
    Senator Craig. We judge that by the flow of the Bear River.
    Mr. Bailey. Yes.
    Senator Craig. It flows out of Idaho, through the Cash 
Valley, into the Great Salt Lake. So we do expect and 
understand that it is an extension of the greater State of 
Idaho. Thank you.
    Mr. Bailey. I will not argue with you on that point, 
Senator.
    I did grow up working on my family's farm and ranch, and I 
managed our family's cattle ranch for 2 years following my 
uncle's death in a farming accident. I love the cattle 
business, but I also know firsthand the inherent business risk 
associated with working in that business. I believe I also 
understand the concerns producers have about the changing 
structure of U.S. agriculture, especially in regard to packer 
concentration.
    In 1999, a colleague, Lynn Hunnicutt, and I entered into a 
cooperative research agreement with USDA, GIPSA. This agreement 
gave us access to a confidential data set which reported all of 
the individual transactions for 4 beef packers in a single 
major beef production area of the country over a 15-month 
period during the mid-1990's. The data included information on 
packer purchases from over 300 feedlots during the study 
period. The purpose of our research was to examine the effect 
of transactions costs on the stability of packer-feedlot 
relationships.
    In a competitive cash market, both packers and feedlot 
operators should theoretically have choices about when and with 
whom transactions take place. If relationships within cash 
markets are found to be rigid--that is that market participants 
tend to have exclusive relationships with each other over 
time--then several possible economic reasons might explain this 
behavior.
    One possible explanation for rigid exclusive business 
relationships might be that packers simply exercise control 
over feedlots by somehow dictating the terms under which 
transactions take place. Another possible explanation for 
exclusivity is that all feedlots offer about the same price for 
cattle of the same quality, but that some feedlots and packers 
simply are able to conduct business at a lower cost than they 
would if they dealt with other feedlots and packers. In other 
words, exclusivity may benefit both packers and feedlot 
operators because transactions costs are minimized by doing so.
    The final possibility is that exclusivity expresses itself 
because one packer simply consistently offers a higher price to 
a feedlot operator for his or her cattle, and as a result the 
feedlot consistently sells to that packer. Economic theory 
suggests, however, that if large firms compete vigorously with 
each other that their market shares will be unstable.
    We used a spatial statistic in our research and we 
conducted two tests. Our first test was less restrictive than 
the second and found that, depending on the definition for our 
spatial statistic, the majority of feedlots, between 59 to 86 
percent, sold primarily to just one packer or primary buyer.
    A few feedlots had two primary buyers, but almost none of 
the feedlots had three primary buyers.
    Our second test determined if feedlots tended to sell all 
of their cattle only to primary buyers. We broke the data into 
two-week time periods, which is a typical planning horizon 
between when cattle are purchased and eventually processed, to 
determine if feedlot operators tended to switch between packers 
from time to time.
    We found that when feedlot operators sold cattle, they 
almost always sold all of their cattle to their primary buyers. 
For example, for all transactions both cash and contract during 
the study period, feedlots sold only to their primary buyers 80 
percent of the time. This means that if the feedlot operator 
offered cattle for sale during 10 of the two-week periods, he 
or she sold cattle on the average to the primary buyer or their 
primary buyers in 8 of those 10 periods.
    Most feedlots sold only to their primary buyers in all 
cases, since the median percentage of periods when transactions 
were only with the primary customers was 100 percent. This 
suggests that feedlots did little switching from their primary 
buyers during the study period, and indicates that exclusive 
and very stable relationships existed between feedlots and 
packers during this 15-month period.
    We tested the reasons for why exclusive, stable 
relationships existed between these feedlots and packers using 
regression analysis. We found that the level of previous 
dealings between a feedlot and a packer significantly 
influenced the proportion of cattle the feedlot operators sold 
to that same packer in the current time period.
    Also, downward adjustments in the proportion of cattle sold 
by a feedlot to an individual packer were larger than upward 
adjustments, but were done only infrequently, actually in only 
about 5 percent of the possible cases. This suggests that once 
a business relationship has been established between a feedlot 
and a packer that that relationship is more likely to continue 
in the future than it would if no previous relationship 
existed.
    It also suggests that feedlots frequently make incremental 
upward adjustments in the proportion of cattle they sell to a 
primary buyer, but that downward adjustments are made 
infrequently. Our results indicate that previous proportions 
used as a proxy for all transactions costs and the presence of 
a contracting relationship between feedlot and packer all 
influence the proportion of sales between the feedlot and 
packer.
    Other proxies for transactions costs, such as feedlot size 
and market volume, were not shown to have a statistically 
significant influence on the proportion of sales from a feedlot 
to a packer. Unfortunately, we had only information about 
successful bids for cattle and not all the bids that were 
placed on cattle. As a result, we could test for adjustments in 
the proportion sold only by using the average price packers 
paid for a base type of cattle, and the base was choice yield 
grade 3 steers.
    Although the sign for the test was positive, as expected, 
indicating that as a packer with a higher price was present 
that some adjustment was made, the test could not yield a 
reliable conclusion, since the parameter estimate was not 
statistically significant.
    The results of our analysis suggest that relationships 
between packers and feedlots can be understood at least in part 
through transaction costs. Consequently, these relationships 
may be mutually beneficial to both packers and feedlots. 
Perhaps the most important finding of our research is the fact 
that it is necessary to incorporate transaction costs into 
economic models that are looking at this industry.
    Thank you.
    [The prepared statement of Mr. Bailey appears as a 
submission for the record.]
    Senator Craig. Doctor, thank you very much.
    Now, let us turn to Dr. Cotterill.

STATEMENT OF RONALD W. COTTERILL, PROFESSOR OF AGRICULTURAL AND 
    RESOURCE ECONOMICS, UNIVERSITY OF CONNECTICUT, STORRS, 
                          CONNECTICUT

    Mr. Cotterill. Well, Mr. Chairman, my coauthors, Adam 
Rabinowitz and Li Tian, who are with me here in the room, and I 
would like to thank the Committee for the opportunity to share 
our research with you today.
    Milk prices are cyclical, but recently we have seen an 
extended 20-month milk price depression. Moreover, dairy 
farmers in the Northeast have been the victims of what I will 
term a pincer movement in policy during that period.
    The first pincer is that Federal milk market orders have 
been relaxed to allow competitive market forces to set fluid 
milk prices. On the face of it, this sounds positive. But the 
second pincer has been that mergers have transformed the 
region's processing and retailing markets so that we no longer 
have competitive market forces. Stop and Shop, the region's 
leading supermarket chain, is now a dominant firm in most local 
retail markets in southern New England. Dean Foods is now our 
dominant fluid milk processor.
    Antitrust enforcement has been active, as we have heard 
today. However, it has clearly been inadequate. I know the 
track record on a firsthand basis because I have been involved 
as economic expert for the region's State attorneys general in 
two of these key enforcement actions and several others in the 
greater Northeast. We have tried, and failed, to stem the rise 
to dominance in both sectors. Subsequently, there has been an 
increase in market power, a subject that I now turn to.
    Figure 5 in our written testimony summarizes our findings 
on milk channel pricing in New England. In June 2003, farmers 
received $1.03 per gallon for raw milk bottled. Processors 
collected an additional $.60 for the wholesale price of milk. 
So the wholesale price for milk delivered into supermarket 
coolers was $1.63 per gallon.
    Now, the region's top four retailers charge more than $3.07 
for that milk. This means they captured $1.45 per gallon for 
in-store cost and profits. Our research at Pennsylvania State 
and the University of Maine indicate that store handling costs 
are, at most, $.40 per gallon in these large supermarkets. So 
that means their bottom-line profits are $1.00 per gallon or 
more. That is after all costs are accounted for.
    Based on similar repeated surveys, we conclude that during 
the farm milk price depression, New England supermarket chains' 
bottom-line profits per gallon were equal to or higher than the 
price that farmers actually received for that very same milk.
    Now, think about that for a moment. The bottom-line net 
profits at the supermarket level are higher than the price that 
the farmer receives for his labor and all his inputs and his 
effort to sell that milk to the processor. We submit that this 
is economically inefficient milk pricing, as well as unfair 
milk pricing by almost any standard of fairness.
    The source of this excessive retail margin during the milk 
price depression in the Northeast was primarily low farm milk 
prices, not higher retail prices, and I will have more to say 
on that in a moment. Large supermarket chains now deal from a 
position of power when negotiating wholesale milk prices. 
Processors thus have to deal in a similar fashion with farmers 
and their cooperatives. Consequently, farm milk prices in the 
Northeast are lower than they would be in a competitive market 
channel.
    How low? Well, if you look at July, Northeast dairy farmers 
received at the mailbox $11.63 per hundredweight. In Wisconsin, 
which by the admission of the economists at the University of 
Wisconsin is an effectively competitive raw milk market, 
farmers received $12.26 per hundredweight in July.
    Now, let's think of spatial markets in milk for a moment. 
If, in fact, the Northeast milk market were competitive, milk 
prices there would be higher, not lower, than those in 
Wisconsin. They should be higher by at least the amount of the 
cost to transport milk or milk products from Wisconsin to the 
Northeast. And I repeat milk prices in the Northeast were 
lower, not higher, than in the supply basin of the upper 
Midwest.
    Milk prices in the Northeast, absent the exercise of market 
power against the region's farmers, could very well be $14 per 
hundredweight or higher at the farm level. Our analysis also 
suggests that if the Northeast becomes milk-deficient and must 
haul milk from the Midwest, Northeast consumers will pay higher 
prices than they would from an indigenous milk industry.
    But what can we do about this? Policy options include the 
following. I will give the standard shibboleth of more vigorous 
antitrust enforcement, especially against the currently active 
Hood/NDH merger. That is a horizontal merger with the Crowley 
plants in Albany, New York, and Concord, New Hampshire. These 
plants compete with Hood and others in New England. It should 
simply be stopped. End of case. Simply don't allow it.
    A second approach would be a strengthening of the Federal 
milk market orders by elevating the Class I differential in 
monopsonistic markets to protect farmers from low prices. After 
all, one of the original reasons for establishing milk market 
orders was to protect farmers from monopsonistic pricing by 
channel firms. I think we have forgotten that over the last 10 
years in our agricultural policy area.
    Alternatively, States in the Northeast must consider 
policies that address monopsonistic pricing. Effectively, we 
are beginning to give up on the Federal solution. At the 
University of Connecticut, we have developed a price collar 
policy that can lower consumer prices and elevate farm prices 
without imposing price ceilings or explicit price controls.
    Price collars change the incentive structure of the market 
channel. Profit-maximizing behavior leads to prices that 
eliminate most of the excessive channel profit margin. However, 
firms still earn profits. It is not confiscatory of basic 
profitability.
    Price collars also raise farm prices and lower consumer 
prices during milk price depressions such as the one we have 
recently experienced. In the current environment where farm 
prices are relatively high, they really would not be binding on 
the farm side, but they would be binding, as the New York price 
gouging law is on the consumer side.
    Finally, I would suggest a couple of more general 
observations on this area. Public empirical research by 
university economists is shrinking up because we simply do not 
have access to the relevant economic data. The Justice 
Department gets such data in merger investigations, but often 
it is confidential and they can't reveal it and they can't 
publish research on what they see.
    At the University of Connecticut, over the last 10 years we 
have spent over $200,000 buying scanner data by hook and crook 
from the Information Resources, Inc. company. I have quietly 
talked with one person or another over those years and 
basically bought the data with no constraints.
    Recently, IRI has finally shut the door on me, after being 
burned three times, and now they have negotiated a very 
explicit policy toward universities. The University of 
Wisconsin recently bought scanner data. They can't reveal the 
name of the market that the data is for, they can't reveal the 
name of the firm that the data is for, and they can't even 
reveal the name of the brand that the data are for. They also 
have to get approval from IRI for the publishing of their 
research results. I would submit that this constraint on access 
to data by public economists, in fact, is a serious problem.
    Finally, I would say that in antitrust policy there is a 
serious gap between merger enforcement and Sherman Act 
enforcement. Any merger that raises prices is illegal, 
basically, if we are talking about a monopoly, or if it lowers 
prices if it is a monopsony. And we often apply that, but 
people get through the slats.
    The Sherman Act monopolization standard is so far removed 
from what we see in this consciously parallel pricing by 
oligopolists and oligopsonists that, in fact, we really can't 
get at these companies with the current antitrust laws. So we 
need to address either tighter merger enforcement or a 
rethinking of the underlying laws, or we have to go to external 
regulation rather than antitrust in some of these market areas.
    That concludes my testimony.
    [The prepared statement of Mr. Cotterill appears as a 
submission for the record.]
    Senator Craig. Doctor, thank you very much.
    We have about 5 minutes left in a vote, so I am going to 
once again--I am sorry, Professor--recess the Committee. I will 
hustle, vote, and be right back.
    Mr. Carstensen. I picked a late plane to go home on 
tonight.
    Senator Craig. You are very fortunate.
    Thank you.
    [The Committee stood in recess from 4:10 p.m. to 4:27 p.m.]
    Senator Craig. The Committee will reconvene. Thank you all 
again for your patience.
    Let us turn to Professor Peter Carstensen, from the 
University of Wisconsin at Madison. Thank you.

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

    Mr. Carstensen. Thank you, Senator. The advantage of the 
break was that my name tag has now been correctly spelled, so 
there was some benefit from that.
    I am honored to be asked to offer my views on the problems 
confronting farmers and ranchers in selling their products. The 
focus of this hearing is on the monopsonistic character of 
those markets and the potential for law, both antitrust law and 
market-specific regulation, to restore open and competitive 
markets. I would like to summarize my fairly extensive written 
statement in about six points, if I may.
    First, farmers are poorly served by the existing market 
structures and practices. They confront excessive concentration 
in agricultural product markets that create strong inducements 
to engage in unfair and discriminatory practices.
    Second, there is clear evidence of abuse of the resulting 
buying power, manipulation of public market prices to drive 
down the private transactional prices, direct exploitation of 
sellers by low prices, discrimination that denies equal access 
to the market, and imposition of other unfair and exploitative 
conditions such as compulsory arbitration.
    Third, I think the harder problem which we have been 
talking about today is how to restore fair, open, equitable, 
and accessible markets. If there are unconcentrated markets, 
there is a strong tendency to achieve those kinds of methods 
naturally through the market process. Where they lack those 
inherent tendencies, where there is concentration, where there 
is unequal informational power, then we have the problem in the 
market. But law can play a very important role in reducing the 
capacity to engage in strategic conduct and restore the balance 
between the parties. This is market facilitation; it is not 
replacement of the market. We have two legal systems that are 
relevant here--antitrust law and market facilitation-type 
regulation.
    My fourth point: Antitrust law should and can make an 
important contribution. However, I think antitrust enforcers 
have failed in two respects. First, and most importantly, they 
do not appreciate the differences between monopsonistic buying 
power issues and more familiar seller power issues.
    We heard the Assistant Attorney General start off by saying 
that monopsony is the mirror image of monopoly. You will notice 
that after the first recess when he came back, he began to 
qualify that statement and acknowledged that maybe there were 
some differences and they needed to be studied more. It is an 
important recognition on his part.
    Secondly, they need to develop relevant enforcement 
policies that focus on the problems of monopsonistic power. The 
failure to do this, I think, has resulted in a great weakening 
of the potential for antitrust enforcement.
    I suggest that there are four things that this Committee 
should focus on in terms of antitrust enforcement policy and 
law: first, the need to develop express buyer power guidelines 
for both merger and restraint of trade analysis. I have 
elaborated on some of the theoretical bases for that kind of 
separate focus, separate analysis, because it is not a mirror 
image.
    Secondly, as a number of you have emphasized, we need more 
active enforcement of our current law against mergers and 
conduct creating anticompetitive risks--the Farmland/Smithfield 
transaction. We have got areas of recurring collusion. We have 
got areas of monopoly power that are known to the Justice 
Department. My reaction to some of the Assistant Attorney 
General's comments is, in summary, listening is not enough. 
They have the resources, they have the capacity. They need to 
be out doing active investigation.
    Third, we need greater transparency concerning the 
decisions to enforce or not to enforce. Today, I learned a 
little bit more about why they might not have taken action in 
Farmland. They have never made a public statement about that. A 
little bit more about what they were trying to do in Suiza-
Dean--they have never made anything more than the most 
generalized kinds of statements about that transaction.
    I am very pleased with what I understand to be the proposal 
from Senator Kohl and Senator DeWine on various antitrust 
reforms that focus in on strengthening the Tunney Act, another 
place which will compel some greater transparency and 
disclosure. I think that is a very important proposal.
    Finally, I think that we really need to reconsider the 
judicially imposed limit on those who indirectly are injured by 
antitrust violations having the ability to bring lawsuits. 
Specifically, Wisconsin farmers were the victims of price 
manipulation in the cheese market, but they were only 
indirectly injured. They had no remedy under Federal law and 
they were unable to get remedy under State law.
    Nonetheless, all this said, antitrust law has inherent 
limits. I think that is the best way to put it. We need to have 
other sources of legal control. We have some now in the Packers 
and Stockyards Act and the Agricultural Fair Practices Act. 
These are not very well-developed areas of law. Worse, the 
Secretary of Agriculture under both political parties, I must 
say, has failed to use the power to make rules and regulations 
that could have facilitated fair and open practices at least in 
some markets, especially livestock markets.
    In my paper, I have suggested that there is an idealized 
kind of elaborate statutory system that ought to facilitate 
agricultural markets. Realistically, I think there are two 
presently pending proposals that deserve your attention and 
support.
    Senators Grassley and Feingold--and they have already 
referenced this in their statements--have S. 91 that would 
prohibit arbitration clauses in livestock supply contracts. The 
biggest problem is it (S. 91) doesn't apply in any other 
agricultural contract.
    Senator Enzi and others have proposed S. 1044 that would 
impose market-facilitating regulation on the use of supply 
contracts, again limited to livestock markets. It should be 
much more general. If we are going to have forward-looking 
contracts, they need to be subject to a legal regime.
    In sum, monopsony power in agriculture is a growing threat 
to the operation of agricultural product markets. It is vital 
that the law be used both to limit the growth of this power and 
to regulate its use. Both consumers and producers will be 
better off if both antitrust law and market-specific regulation 
are directed at the problems that have arisen in this area.
    It is my hope that members of this Committee will use their 
influence both to bring about legislative change and to insist 
on more active and effective enforcement of the existing laws 
that address these problems.
    Thank you.
    [The prepared statement of Mr. Carstensen appears as a 
submission for the record.]
    Senator Craig. Professor, thank you very much for that 
testimony.
    Senator Kohl, questions of the panel?
    Senator Kohl. I think your testimony in all three cases has 
been really good and informative and enlightening. My 
conclusion, listening to you all, particularly you, Mr. 
Carstensen, is that if we are going to do something effective 
about monopsony, it takes the Federal Government, whether it is 
the Justice Department or the Congress, to step in and take a 
look at it all and come up with new ideas, new thoughts, new 
rules, new regulations, new oversight, new legal action or 
additional legal action to correct what I believe you are all 
saying is a situation that is not good either for the producers 
or for consumers and needs to be improved, as I said, at the 
hand of the Government, as it is expressed through the Justice 
Department and through the legislature.
    Mr. Carstensen, are you saying that?
    Mr. Carstensen. Yes, very much so. Professor Cotterill made 
the point about the need for better data. There is a lot of 
information that exists which unfortunately scholars can't get 
access to, so that it makes it much harder to develop and to 
prove the kinds of intuitions that we have about how 
competition is harmed in the markets.
    Again, the Federal Government through the power of the 
Federal Trade Commission and the Department of Agriculture to 
collect data can be very helpful as part of that process of 
developing better theories and then employing them effectively 
through legislation and through enforcement.
    Senator Kohl. Mr. Cotterill, what is your observation with 
respect to what I said?
    Mr. Cotterill. I think that you are entirely accurate, sir. 
I applaud your idea that the Federal Government has a role to 
play in our agricultural markets. It is something I learned at 
the University of Wisconsin as a student 30 years ago.
    The University of Wisconsin has been a strong player over 
the last 100 years in defining markets, defining the rules that 
create markets, and defining antitrust policies. I applaud all 
of that.
    However, I am also to the point where I am beginning to 
think that it is difficult at the Federal level to make that 
progress, and I am almost becoming a fan of Antonin Scalia, of 
the Supreme Court, that the States also should be empowered to 
deal with industrial policy questions that affect their 
citizens. I know that is a very difficult area, as you are well 
aware of as well. So I think we will see progress in both 
areas, hopefully.
    Senator Kohl. Dr. DeeVon Bailey?
    Mr. Bailey. Yes, Senator. I believe my feelings are 
somewhat less pronounced, I guess would be the way that I would 
state that. I believe, for one thing, that the food system has 
been a great success story in the United States, that we have 
all types of different food and many, many different varieties 
that actually in real terms is less in price for consumers 
today than it was 10 or 15 years ago.
    So I am not as strong in my opinions as far as whether 
consumers have been injured in some way. That doesn't mean that 
they haven't been for sure. The possibility exists that perhaps 
some market power has injured consumers. But if you look just 
on the surface of things, you have to applaud what agribusiness 
has been able to accomplish in this country.
    On the producer side, there have been questions for many, 
many years. Actually, these same kinds of discussions were 
taking place at the turn of the 20th century, too, within 
Congress and also out in the country. People were concerned 
about the power exercised by processors. So I think it has been 
a topic that we have discussed for a long time.
    It maybe is a more important topic than usual at this point 
because of the increased influence of the retailers and the 
power that they are exerting on the market, or potential power 
that they are exerting on the market right now. So I agree that 
it is an important issue.
    I also agree with the other two panelists that data really 
is the issue. Without cost data, for instance, it is very, very 
difficult to come up with a definitive answer regarding whether 
market power exists or monopsony power exists in these markets.
    Senator Kohl. Mr. Chairman.
    Senator Craig. Herb, thank you.
    Gentlemen, thank you for your response to those questions. 
Both Senator Kohl and I were visiting on the way over from that 
vote talking about the dynamics of that market out there and 
what we might do about it in a way that continues to keep a 
viable market, and certainly a market that the consumer and 
producer benefit from.
    I think you are right, Dr. Bailey. There is no question 
that if you walk into any supermarket today in this country 
versus the rest of the world, that demonstration of supply and 
variety of supply and cost has to be an amazing success story.
    On the other side are my producers in Idaho and in the Cash 
Valley who have not recognized true return on investment of any 
magnitude that justifies reinvestment in a long while. I grow 
increasingly concerned about the ability of the producer side 
of agriculture to capitalize itself unless they enter into 
contracts with processor distributors that may not be in their 
best interest in the long run, and yet that appears to be the 
situation.
    Gentlemen, you watch these markets closely. All of you peer 
into your crystal ball in a moment and tell me what you see as 
the trend line and the effect. I can look backward. I probably 
have a more difficult time looking forward.
    Dr. Bailey, would you start?
    Mr. Bailey. I believe without question that the trend line 
is toward more contracting, closer relationships in these 
markets. What we have seen prior to the last few years is 
closer relationships between farmers and packers, mostly 
through contracting, and that trend continues.
    But perhaps even the more important phenomenon that is 
occurring in the market now is closer relationships between 
retailers and processors to the farmer. I think that if I had 
to choose one trend that I see in food markets during the next 
decade, it is more closely specified types of food products 
beginning at the retail down to the farm level.
    So that would suggest an even greater pressure to perform 
on the part of farmers to specifications that are dictated at 
some place above them in the channel. Probably the only way to 
avoid that is some sort of intervention, but one also has to 
ask the question, is that the right choice; would consumers 
actually support that kind of intervention, because they are 
likely the ones that will end up paying higher prices for food 
as a result.
    Certainly, from the argument of fairness, there are 
concerns. As I said, I grew up on a farm. I know the struggles 
that farmers face, but we are on the horns of a dilemma in many 
ways in this regard. How do we keep food costs low, provide 
high-quality food products to consumers, but yet make sure that 
farmers can make a decent living?
    Senator Craig. If I go to Safeway today, I am going to buy 
only Angus beef, or at least be led to buy only Angus beef. So 
some of that type of quality or consolidation for the retail 
purpose, the shaping of a product, is very much at hand.
    Dr. Cotterill, would you respond to my broader question 
that relates to trend lines and impact on both consumer and 
producer?
    Mr. Cotterill. Well, Professor Bailey has given the stock 
answer from the agricultural economics profession. I mean, it 
is the consensus view. The St. Louis Fed program and others all 
see this increasing integration.
    I am going to give you a different view. I think that 
unless something is done either through policies at the Federal 
or the State level--and it starts with data, it starts with 
supporting research on the externalities of these systems--
Professor Bailey's prediction will be the winner. But there are 
substantial externalities in this system the way it is 
currently put together.
    There was a recent article in the New York Times Sunday 
Magazine on the amount of fat on Americans today, and 
attempting to link it perhaps in an unscientific fashion to the 
structure of our food system and the nature of the way we 
deliver products to people.
    I think there is a link. It may not be proved perfectly 
well, although 25 years ago at the University of Wisconsin 
Professor Bruce Marion did a study that correlated the amount 
of fat on people to the kind of diet and concentration in 
certain industries. So it has been done. I think that is an 
externality that we need to deal with.
    Another externality is the environmental and the cultural 
and the social aspects of rural America. I was skiing in 
Switzerland this winter and within 150 yards of the condo in 
the Swiss Alps were three dairy farmers, each with about 25 
brown Swiss cows. The machinery that they used to cut the hay 
on the Alps looked like gators that you see on golf courses, 
these tiny little machines that they run around up there. I 
said how in the world can you justify that kind of a dairy 
industry in Switzerland? Well, the spillovers to keeping the 
Alps brush-free, to keep the mountain meadows the way they are, 
are there.
    This summer, I drove through northern Vermont on my way to 
the Montreal ag econ meetings and I took a swing out through 
Fairfax, Vermont, and others, and stopped at some of the rural 
communities with churches and some of the events that were 
going on. Just for me personally, to have those kinds of 
communities--it is like Richland Center, Wisconsin. That is a 
treasure; that is an asset for this country, in general.
    So I think that you have to come to ways to recognize that, 
and I think the Europeans--we malign them for many of their 
programs, but with all due respect, I think that if we want a 
particular kind of rural America, we are going to have to do 
something like that. So that is the other side of what 
Professor Bailey gave you.
    Senator Craig. Well, I don't dispute there is another side. 
My biases are clear. My wife just retired as a dietician with 
the National Dairy Council. When we begin to talk about fat and 
food, we have also got to talk about reinstating mandatory 
recreation and mandatory exercise with our grade school kids at 
the school level, which they don't like today, and a rather, 
shall I say, sit-on-your-backside society.
    So there is a combination of things that have to occur, I 
think, if we are going to look at regulations that determine 
how much fat you can consume in a day or standards in that 
area. ``Buyer Beware'' is a significant approach, I do believe, 
in the marketplace if, in fact, it is a balanced one and it 
balances out.
    Dr. Carstensen?
    Mr. Carstensen. Professor; I am not a doctor.
    Senator Craig. All right, professor, thank you.
    Mr. Carstensen. My daughter has just gotten her M.D. 
degree, so she is the Dr. Carstensen in our family.
    Senator Craig. Well, in that relationship, then, you had 
better maintain it.
    Mr. Carstensen. Right, right.
    I think one of the things to bear in mind is that there is 
usually more than one road to accomplishing desirable economic 
and social objectives. If we don't do things to structure the 
fundamentals of how agricultural markets operate, then the 
contracting, that which I have characterized as the serf-like 
status for farmers is very likely to emerge because there won't 
be any other legal structure in hand.
    We had a hearing back about a year ago before the Senate Ag 
Committee where Professor Koontz from Colorado State talked 
about the things the Department of Agriculture could do much 
more proactively to develop standards, to develop criteria, 
certification systems, that would facilitate providing a 
greater variety and specification of agricultural products 
without having to go through the contractual system.
    Contract is the default system. It requires--and this goes 
back to something that Senator Kohl said--it requires positive 
government action to construct a workable transactional market. 
That isn't going to happen naturally because it is not in the 
interests of many of the economic players.
    So it seems to me again this is where one really needs to 
stand back and say here is the path that we are going to go 
down if we don't do anything. Are there ways to redefine that 
path, to preserve a number of the things that Ron Cotterill has 
spoken about, while still maintaining efficiency in the system?
    Again, my view is there are, and we know from past 
experience there are, many ways to achieve efficient, desirable 
consequences in terms of the end product, the inexpensive food 
in the store. Let's look for ways that are going to preserve 
farms, that are going to preserve freedom of choice for 
farmers, because otherwise you are going to wind up with, as I 
say, a serf-like situation where those contracts are going to 
require an enormous regulatory system of their own.
    It is not going to be transaction cost-free. Again, the 
externalities will be there. The kinds of problems in the rural 
countryside, the kinds of environmental problems that will 
result from the restructuring of agriculture will be there. You 
are going to have to deal with them and you are going to look 
at them as costs of welfare or costs of pollution. They are 
costs to the food system and I think better designed 
relationships are going to avoid a lot of those costs so that 
the net social cost will be lower even if the price of the food 
may be a penny or two higher because we use a system that is 
more farmer-friendly.
    Senator Craig. Well, gentlemen, you challenge us and we are 
glad you did.
    Senator Kohl. Mr. Chairman?
    Senator Craig. Yes, Senator Kohl.
    Senator Kohl. We have not injected into this conversation, 
and perhaps we won't today, but the Federal Government is 
providing enormous assistance to farmers in our country. I 
think the stats are that about half of farm income today comes 
from the Federal Government, and that is because what the 
farmers are getting from their buyers is insufficient.
    So we are giving them back tax dollars to keep them in 
business because we want to keep the rural economy there and we 
want to keep our farming sector alive. If we pull the plug, 
that would be a disaster. You know, we would have to have 
hearing upon hearing and laws upon laws, and redo the whole 
terrain of our rural areas in America if we pulled the Federal 
plug on assistance. Half of them would go out of business 
within a month or two.
    So there is that that we need to understand, that it is not 
a self-regulating mechanism that is going on right now. It is a 
Government subsidization system, which I have voted for. I am 
not suggesting we should pull the plug, but we haven't figured 
out what to do.
    Dr. Bailey, do you have a thought on that?
    Mr. Bailey. Actually, I think my colleagues were being a 
little bit hard on me.
    Mr. Cotterill. Oh, no. You represent the whole profession, 
sir.
    Senator Kohl. Would you suggest that perhaps we should pull 
the plug?
    Mr. Bailey. No, no, absolutely not. I think that there are 
externalities associated with having a viable farming community 
in rural areas in virtually every State. Farms maintain open 
space. They are stewards to the land. There are many, many 
positive externalities that are occurring as a result of 
farming.
    I also believe that much of the innovation especially in 
the meat industry is not coming at this point from the large 
processors. It is coming from small firms that are trying to 
find niches and trying to develop products that address 
consumer needs which the processors in many respects have not 
done as good a job as they could have in the past.
    So I think that the Government does need to view farming 
beyond simply the food that is produced by farming, that there 
are other very positive things that occur because of farming. 
But also it is important, I think, to maintain an environment 
where innovation can occur in these industries.
    Actually, there are a lot of innovative things that are 
taking place in small-scale farming now. We should not ignore 
that and should try to foster it, and I think that that is one 
way, along with the money that is going into commodity 
programs, that possibly we can help to revitalize some of the 
farming activities that are occurring in the country.
    Mr. Cotterill. I am fascinated that you bring up the issue 
of subsidies because that is something that has concerned me, 
because I think that with the Freedom to Farm Act back in 1995 
or 1996, it was actually a victory for agribusiness rather than 
farmers.
    Farmers were sold a bill of goods on that one because, yes, 
we are spending billions of dollars to keep our farmers in 
business. But having said that, they really are constrained by 
the Government just as they were constrained by the supply 
control that they didn't like prior to this; as a matter of 
fact, maybe more so now than then.
    The real benefits of those low prices haven't always been 
passed on to consumers. In a non-competitive market channel, 
the market power does mean that some of those lower raw prices 
stay with the agribusiness firms. In a competitive channel, you 
get it passed on. In non-competitive, you don't.
    So you have a whole new lobbying game here in Washington 
where you have the agribusiness processors and the retailers. 
They like this program. I am not so sure it benefits farmers, 
but there is a complication to it as well because this program 
in many ways is driven by the idea of global trade and the idea 
that, in fact, America's farmers are going to compete in a 
global market. Therefore, we can't go back to the old supply 
control programs and the higher market prices that we had.
    I am not so sure that is true. If you look in some of our 
industries like dairy. I am not so sure that you couldn't go 
back to some of the supply control, get some of these market 
prices a little higher and save the Government billions of 
dollars. I think we have to reconsider supply control in our 
agricultural markets, like we had for about 50 years before 
1995. But I am not an agricultural policy economist, so you 
probably might get a stronger answer on the other side from 
some of them. But that is my perspective on it.
    Mr. Carstensen. I will just chime in that the subsidy issue 
creates again a set of distorted incentives in the market 
process and it requires, as you start fiddling with this 
system, thinking through fairly carefully how the subsidy 
incentives play off against the contracting incentives, the 
other ways that we can interfere in the market. It doesn't make 
your jobs any easier, I am sorry to say.
    Senator Kohl. Thank you, Mr. Chairman.
    Senator Craig. Well, gentlemen, we wish we could continue 
this. I have enjoyed not only your testimony, but the 
conversation. I think it is increasingly valuable. I think that 
one of the reasons this hearing is being held is the 
frustration that we are all sensing on our own part as it 
relates to policy and how that contains and retains a balance 
that allows profitability at the production level and the pass-
through and reasonable prices and high quality to the consumer.
    Certainly, in my State there is really no segment of my 
agriculture that hasn't gone untouched by fairly extensive 
periods of less than profitability. I have looked at the 
staying power of that industry and its equities versus its debt 
structure. If you look at and parallel that, you see a 
substantial problem growing out there today that at some point 
is going to get spoken to.
    Gentlemen, we thank you. I will say in closing this hearing 
that the record will remain open for 7 days for any written 
submissions, and there will be some questions coming your way 
and we will thank you for your response to those. Again, we 
thank you all for being here.
    The Committee will stand adjourned.
    [Whereupon, at 4:59 p.m., the Committee was adjourned.]
    [Question and answers and submissions for the record 
follow.]
    [Additional material is being retained in the Committee 
files.]
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