[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF THE MARKET STRUCTURE OF THE LIVESTOCK INDUSTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON LIVESTOCK, DAIRY, AND POULTRY
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 17, 2007
__________
Serial No. 110-10
Printed for the use of the Committee on Agriculture
www.agriculture.house.gov
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COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania BOB GOODLATTE, Virginia
Vice Chairman Ranking Minority Member
BOB ETHERIDGE, North Carolina TERRY EVERETT,Alabama
LEONARD L. BOSWELL, Iowa FRANK D. LUCAS, Oklahoma
JOE BACA, California JERRY MORAN, Kansas
DENNIS A. CARDOZA, California ROBIN HAYES, North Carolina
DAVID SCOTT, Georgia TIMOTHY V. JOHNSON, Illinois
JIM MARSHALL, Georgia SAM GRAVES, Missouri
STEPHANIE HERSETH, South Dakota JO BONNER, Alabama
HENRY CUELLAR, Texas MIKE ROGERS, Alabama
JIM COSTA, California STEVE KING, Iowa
JOHN T. SALAZAR, Colorado MARILYN N. MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana RANDY NEUGEBAUER, Texas
NANCY E. BOYDA, Kansas CHARLES W. BOUSTANY, Jr.,
ZACHARY T. SPACE, Ohio Louisiana
TIMOTHY J. WALZ, Minnesota JOHN R. ``Randy'' KUHL, Jr., New
KIRSTEN E. GILLIBRAND, New York York
STEVE KAGEN, Wisconsin VIRGINIA FOXX, North Carolina
EARL POMEROY, North Dakota K. MICHAEL CONAWAY, Texas
LINCOLN DAVIS, Tennessee JEFF FORTENBERRY, Nebraska
JOHN BARROW, Georgia JEAN SCHMIDT, Ohio
NICK LAMPSON, Texas ADRIAN SMITH, Nebraska
JOE DONNELLEY, Indiana KEVIN McCARTHY, California
TIM MAHONEY, Florida TIM WALBERG, Michigan
Professional Staff
Rob Larew, Chief of Staff
Andrew W. Baker, Chief Counsel
William E. O'Conner, Jr., Minority Staff Director
.........................................................
__________
Subcommittee on Livestock, Dairy, and Poultry
LEONARD L. BOSWELL, Iowa, Chairman
KIRSTEN E. GILLIBRAND, New York ROBIN HAYES, North Carolina
TIM HOLDEN, Pennsylvania Ranking Minority Member
JOE BACA, California MIKE ROGERS, Alabama
DENNIS A. CARDOZA, California STEVE KING, Iowa
NICK LAMPSON, Texas VIRGINIA FOXX, North Carolina
JOE DONNELLY, Indiana K. MICHAEL CONAWAY, Texas
JIM COSTA, California JEAN SCHMIDT, Ohio
TIM MAHONEY, Florida ADRIAN SMITH, Nebraska
TIM WALBERG, Michigan
Chandler Goule, Subcommittee Staff Director
.........................................................
(ii)
C O N T E N T S
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Page
Boswell, Hon. Leonard L., a Representative in Congress from the
State of Iowa, opening statement............................... 1
Prepared statement........................................... 48
Hayes, Hon. Robin, a Representative in Congress from the State of
North Carolina, opening statement.............................. 3
Prepared statement........................................... 51
Walz, Hon. Timothy J., a Representative in Congress from the
State of Minnesota, prepared statement......................... 53
Peterson, Hon. Collin C., a Representative in Congress from the
State of Minnesota, prepared statement......................... 55
Witnesses
Link, Administrator James E., Grain Inspection, Packers and
Stockyards Administration, United States Department of
Agriculture, Washington, D.C................................... 4
Prepared statement........................................... 59
Muth, Ms. Mary, Program Director for Food and Agricultural Policy
Research, RTI International, Research Triangle Park, North
Carolina....................................................... 6
Prepared statement........................................... 67
Doby, Ms. Kay, Poultry Grower, on behalf of Campaign for Contract
Agriculture Reform, Cameron, North Carolina.................... 14
Prepared statement........................................... 76
Crabtree, Mr. John, Development and Outreach Officer, Center for
Rural Affairs, Lyons, Nebraska................................. 16
Prepared statement........................................... 91
Buis, Mr. Tom, President, National Farmers Union, Washington,
D.C............................................................ 17
Prepared statement........................................... 95
Stallman, Mr. Bob, President, American Farm Bureau Federation,
Washington, D.C................................................ 19
Prepared statement........................................... 115
Taylor, Mr. Robert, Alfa Eminent Scholar, Auburn University,
Auburn, Alabama................................................ 21
Prepared statement........................................... 119
Philippi, Ms. Joy, Pork Producer, on behalf of National Pork
Producers Council, Bruning, Nebraska........................... 33
Prepared statement........................................... 129
Roenigk, Mr. William P., Senior Vice President, National Chicken
Council, Washington, D.C....................................... 35
Prepared statement........................................... 139
Queen, Mr. John, President, National Cattleman's Beef
Association, Waynesville, North Carolina....................... 36
Prepared statement........................................... 144
Boyle, Mr. J. Patrick, President and CEO, American Meat
Institute, Washington, D.C..................................... 38
Prepared statement........................................... 152
Submitted Material
Sents, Mr. Allan, Director, United States Cattlemen's
Association, Immediate Past President, Kansas Cattlemen's
Association.................................................... 165
Stevenson, Mr. Randy, Director, Ranchers-Cattlemen Action Legal
Fund (R-CALF USA), United Stockgrowers of America, Wheatland,
Wyoming........................................................ 168
National Association of State Deparments of Agriculture,
Washington, D.C................................................ 191
Buis, Mr. Tom, President, National Farmers Union, Washington,
D.C............................................................ 195
Muth, Ms. Mary, Program Director for Food and Agricultural Policy
Research, RTI International, Research Triangle Park, North
Carolina....................................................... 197
Boyle, Mr. J. Patrick, President and CEO, American Meat
Institute, Washington, D.C.............. Contained in Committee Files
HEARING TO REVIEW THE MARKET STRUCTURE OF THE LIVESTOCK INDUSTRY
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TUESDAY, APRIL 17, 2007
House of Representatives,
Subcommittee on Livestock, Dairy, and Poultry
Committee on Agriculture
Washington, DC.
The Subcommittee met, pursuant to call, at 11:00 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Leonard
Boswell [Chairman of the Subcommittee] presiding.
Members present: Representatives Boswell, Gillibrand,
Kagen, Baca, Costa, Hayes, Rogers, King, Smith, and Walberg.
Staff present: Chandler Goule, Scott Kuschmider, John
Riley, Sharon Rusnak, Debbie Smith, Kristin Sosanie, John
Goldberg, Alise Kowalski, Pam Miller, Pete Thomson, and Jamie
Weyer.
STATEMENT OF HON. LEONARD BOSWELL, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF IOWA
Mr. Boswell. We will call the meeting to order, and we
thank you for coming and the interest and the presence here
today. We appreciate you joining us, Mr. Hayes and myself. I
would like to give a special thanks to our witnesses for the
preparation you have made and for testifying before us today to
offer insight into the market structure of the livestock
industry. I appreciate this opportunity to hear what the
current issues facing the market structure of the livestock
industry are and how those issues are affecting producers
across our country. The overarching issues that I hope this
hearing does not forget is that we, as the agricultural
community, must ensure that we have a safe and plentiful food
supply. We need assurances that producers can make a living,
while the processors and packers have enough product available
to provide consumers in the United States with a reliable and
safe food supply.
With land prices at record numbers, the livestock industry
is one of the last sectors of the agricultural industry that
young, first-time farmers are able to get involved in. We need
to ensure that there is adequate market access for those
producers to make a living. The livestock industry has been
extremely beneficial to rural development. I see this all over
my home State of Iowa. We must ensure that the livestock
industry stays strong and continues to contribute to rural
communities.
Over the last 20 years, the livestock industry has become
more and more consolidated. A prime example is in the poultry
industry. This concentration in the livestock industry raises
many concerns on what the future may hold for independent
producers. Unfortunately, this is not a cut-and-dry issue.
There are many factors that contribute to the structure of the
livestock market, and today I hope this hearing will address
many of those. We will hear testimony today that the packing
industry not only influences the livestock market, but
dominates it with over 80 percent of beef, 60 percent of swine
and almost 60 percent of the poultry markets, dominated by four
packers. After reading through the testimony submitted today,
many argue that there is adequate competition in the livestock
industry. But when 60 to 80 percent of the respective livestock
industries are dominated by four packers, when is this
concentration cause for concern? Now or when it hits 90
percent?
Independent livestock producers often contend that the lack
of buyers of their livestock and the use of captive supplies
for packers has a negative impact on the price they ultimately
receive for their animals. Because packers can utilize their
own animals for daily slaughter needs, they purchase fewer
animals on the spot market. Some contend the reported price for
livestock does not accurately reflect prices paid to the
producers. A concern I hear over and over again from producers
in my district is that large packers can control market prices
using the packer ownership. Let us say a packer owns tens of
thousands of heads of cattle. That packer buys on the open
market for four days, but when the prices get too high, they go
and slaughter the cattle that they own, thus depressing market
prices. How is this not manipulation in the open market? And
how do we as an industry regulate this?
We also looked at study done by USDA to review the issue.
RTI International was contracted to study the market structure
of the livestock industry and recently published their
Livestock and Meat Marketing Study. I am interested to hear
what RTI has to say and was very interested in the results of
the study. I also look forward to hearing what our producer
panels have to say. I understand this is a difficult issue to
discuss, especially when the industry is extremely
concentrated, but I appreciate your willingness to share your
story and your candor.
After reading through the testimony for this hearing, two
issues grabbed my attention, animal identification and country
of origin labeling. There are various opinions out there about
both of those topics and some discussion has centered on
merging the two together. This is a new approach in attempting
to address these issues and we welcome discussion on this
issue. One thing that many of the witnesses focused on in their
written testimony was alternative marketing arrangements (AMA),
such as forward contracts, making alliances between packer
ownership. I have concern if these AMAs actually help the
market or suppress the market price. I welcome conversation
about these issues and their problems and concerns of, or lack
thereof, regarding these issues.
As we started this farm bill discussion, there has been
much talk if there will be a competition title in the farm
bill. I welcome the opportunity to further that discussion with
varying opinions. Thank you again for joining us here today. At
this time, I would like to turn it over to my friend and
colleague, Mr. Hayes, from North Carolina, for opening remarks
he would like to make.
STATEMENT OF HON. ROBIN HAYES, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NORTH CAROLINA
Mr. Hayes. Thank you very much, Mr. Chairman. We are
friends and it is a pleasure to work and serve with you,
particularly on behalf of agriculture and the livestock segment
that we are looking at this morning. Chairman Boswell has
called today's hearing to discuss the structure of the
livestock and poultry industry. We will hear from the US
Department of Agriculture's Grain Inspection, Packers and
Stockyards Administration, GIPSA, whose role is to regulate and
maintain fair competition among the livestock industry. Also
joining USDA is RTI International, based in Research Triangle
Park, North Carolina, who conducted an extensive study on
livestock and meat marketing. Our other two panels consist of
producer groups and various associations interested in the
economics of the livestock sector, who will share their
perspective on these issues.
Let me start off by assuring all of those present, and
listening today, that I support the full and rigorous
enforcement of all laws intended to ensure a fair, orderly and
transparent livestock market function. While we may differ
about the future shape of policy in the area of market
structure, I know of no disagreement about the fundamental need
for strict enforcement of the authority under the Packers and
Stockyard Act.
After resisting the temptation in the last farm bill to
further insert the Federal government into the structure of
livestock markets, Congress made a commitment in the conference
report to look into this matter further. For this reason, in
June of 2003, I took this subcommittee to Grand Island,
Nebraska to examine this topic. While most of the testimony
that day centered on the specific idea of banning packer-owned
livestock, discussions ranged across virtually all the ideas
regarding industry structure and we had a very informative
hearing. For me, the most important impression from that
hearing was a wide divergence of views held by the witnesses.
We had testimony from both producers and packers from Nebraska
and my home State of North Carolina, and while all witnesses
shared a common desire for a profitable livestock production
sector, with an orderly market operation, there was virtually
no consensus along any lines about whether the proposed changes
would improve conditions or harm those they were intended to
help. In 2003, Congress has recently appropriated $4.5 million
in funding to produce GIPSA's Livestock and Meat Marketing
Study, which was just published on February the 16th by RTI
International. We did not have the benefit of this report at
our hearing in Nebraska and I look forward to today's testimony
on the study's findings.
Mr. Chairman, as you and other members of the committee,
the industry structure issues invoke passion and long-held
beliefs from livestock producers across the country. What
producers in the 8th District of North Carolina want, and what
producers in the 3rd District of Iowa want, can be two
completely different things. I personally believe the
complexity and intricate details of marketing and competition
issues deserve more than one hearing before any decisions are
made. I do not believe these issues should be considered as
part of any farm bill discussion, as the laws governing the
industry structure are completely separate from that of the
farm bill and should be kept that way. These issues should be
considered in their form and given the proper attention they
deserve. And I appreciate all of the witnesses for here today
to discuss this important issue and I appreciate the chairman
calling the hearing.
Mr. Boswell. Thank you, Mr. Hayes. And I would request
that, I see we have Mr. Smith here, any statements you want to
be included for the record? We will proceed on to get on to our
testimony. So thank you very much. I would now turn to the
panel. I would like to remind our witnesses that you have five
minutes for your oral testimony, and due to the number of
witnesses and other time constraints, it will be important that
we try to stay within those guidelines. I think we have--down
there ready to take care of the timing, so we don't have to
worry about that, and then we want to get to our questions. So
we would like to welcome our first panel to the table.
Administrator James Link, Grain Inspection, Packers and
Stockyards Administration, the Department of Agriculture, along
with Ms. Mary Muth, Program Director for Food and Agricultural
Policy Research, RTI International, Research Triangle Park,
North Carolina. Administrator Link, we would be happy to hear
what you have got to share with us. Thank you for being here,
just hit your button there.
STATEMENT OF JAMES E. LINK, GRAIN INSPECTION, PACKERS AND
STOCKYARDS ADMINISTRATION, UNITED STATES DEPARTMENT OF
AGRICULTURE
Mr. Link. Mr. Chairman and members of the subcommittee,
good morning. My testimony will provide an overview of trends
in the critical components of the US livestock market and
changes that GIPSA has made. Although I am relatively new to
Washington, DC and the US Department of Agriculture, I am
certainly no stranger to the agriculture industry. Growing up
on a farm and devoting my entire professional career to
agriculture has given me a rich and diverse background from
which I speak to you today. Shortly after my arrival at GIPSA,
I was briefed on an ongoing audit from the Office of the
Inspector General. In response to that audit, over the past
year we have worked extensively to enhance GIPSA's ability to
regulate livestock marketing and procurement practices. Now I
would like to discuss the current market trends that we are
monitoring.
In the beef cattle, the four largest steer and heifer
slaughter firms have accounted for 82 percent of the total
annual slaughter in the year of 2006. In pork, the four largest
slaughter firms account for about 64 percent of the total
slaughter. Sheep and poultry are relatively constant at 70
percent and 53 percent, respectively. Let me share with you the
current marketing tools used in the livestock industry.
Producers and packers use multiple marketing methods to market
the livestock for slaughter, but the methods commonly fall
within two categories: cash sales or spot market, and committed
procurement or alternative marketing arrangements, which
include the variations of formula pricing, forward contracts
and packer ownership.
In 2006, the four largest firms that slaughter fed cattle
purchased 70 percent of their supply on the cash market and 30
percent through alternative marketing arrangements. In the same
time period, approximately 10 percent of hogs were sold on the
spot market, 20 percent was packer owned and 70 percent were
through forward contracts and alternative marketing
arrangements. In the poultry industry, the spot market is
virtually nonexistent. Now that you have had a brief summary of
the livestock industry, I want to give you an overview of the
improvements we have made to better ensure farmers and ranchers
are protected.
We have taken positive steps to change and improve our
organization. At headquarters, we have eliminated a complete
layer of management in the Packers and Stockyard Program by
dissolving the Regional Operations Division and having our
regional managers report directly to our deputy administrator.
We established a unit called Management Shared Services to
eliminate duplication and improve our efficiency. In the past
year, we have undertaken a top-to-bottom review of all of our
regulations and policies. As a result, several regulatory work
plans affecting the livestock and poultry industries have been
developed for public comment. We have also issued over 40
internal directives and policies, which provide instructions
and guidance to our employees. We are sending all of our
investigators to the Federal Law Enforcement Training Center
for basic investigative and interviewing training. We have made
this course available to several attorneys from the Office of
the General Counsel. We are also working on additional training
activities with the Department of Justice to be conducted later
this year.
We have developed a new business plan and we have laid out
four primary goals and 33 strategic activities with related
measurable outcomes to evaluate the results. An example of our
business plan includes inspecting scales and carcass evaluation
devices in all packing plants that kill over 1,000 head of
livestock per year. In April of this year, we implemented the
new standard operating procedures nationwide. Investigations
are our top priority. For example, in the year 2005, there were
37 cases referred to the Office of General Counsel. In 2006, we
referred 75 cases and in the first six months of this year, we
have referred 53 cases. As our efficiency is improved, I expect
the case numbers to continue to increase.
There are significant cases that we are working on
currently. Five open investigations are on manipulation of cash
prices and we are working with the Department of Justice on one
of the investigations. There are two open investigations
involving allegations from cattle sellers using formula or non-
cash market arrangements that were not paid properly. We have
three open investigations focusing on allegations of unfair and
discriminatory behavior. We will continue to adjust our
regulatory efforts to more efficiently and effectively monitor
the regulated industries as the industry changes.
I am proud to serve as the administrator for GIPSA in a
time where not only the industry, but also the organization, is
being evaluated, assessed and improved. It is exciting to be
part of these such fundamental changes. With the continued work
and efforts of individuals within GIPSA, we will look forward
to improving and becoming even better. Mr. Chairman, thank you
again for the opportunity to appear before you today, and I
will be happy to answer any questions that the members might
have.
Mr. Boswell. Thank you for your introduction and comments.
Before it comes to questions, we would first like to hear from
Ms. Muth.
STATEMENT OF MARY MUTH, PROGRAM DIRECTOR FOR FOOD AND
AGRICULTURAL POLICY RESEARCH, RTI INTERNATIONAL
Ms. Muth. Good morning, Chairman Boswell and members of the
subcommittee. My name is Mary Muth and I am Director of the
Food and Agricultural Policy Research Program at RTI
International, an independent, not-for-profit research
organization in North Carolina. I was the project manager for
the congressionally-funded GIPSA Livestock and Meat Marketing
Study that was completed earlier this year. I am an
agricultural economist and have a Ph.D. in economics from North
Carolina State University. I have been conducting analyses of
the livestock and meat industries for almost 15 years. In
addition, my husband's family owns a cow/calf operation in
western Kentucky. I am pleased to be here and thank you for the
opportunity to provide an overview of the findings of the
Livestock and Meat Marketing Study.
The study was conducted from July 2004 through January 2007
by a team of researchers at RTI International, Iowa State,
North Carolina State, Montana State and Colorado State
Universities and the Wharton School. The study addresses the
economic effects that alternative marketing arrangements have
on the livestock and meat industries. As you know, the cash for
spot market includes auctions, direct trade and use of dealers
and brokers. In contrast, alternative marketing arrangements
include all other marketing methods, such as marketing
agreements, marketing and production contracts, packer
ownership and forward contracts.
In the final report for the study, we analyzed the extent
of use and price differences of marketing arrangements and the
effects of using alternative marketing arrangements on cash
market prices, the costs and benefits of various marketing
arrangements, particularly as they relate to product quality,
cost of production and risk, and finally, the implications of
using marketing arrangements on livestock producers, meat
packers and meat consumers. We used state-of-the-art economic
modeling and statistical analysis methods to address the
requirements of the study, using industry survey data,
transactions data and profit and loss statements from packers,
industry interviews and publicly-reported USDA data, including
mandatory price reporting data.
In general, the study found that use of alternative
marketing arrangements provides benefits, not only to meat
packers, but also to livestock producers and meat consumers.
Therefore, restricting their use would have negative economic
consequences on most segments of the industry. However, the
cash market serves an important role in the industry,
particularly for smaller producers and packers. Next, I would
like to give a broad overview of the specific results of the
study.
First, regarding the volumes and prices of livestock under
different types of marketing arrangements. Based on the data
available for the study, we estimate that alternative marketing
arrangements represent 38 percent of the volume for fed cattle,
89 percent for finished hogs and 44 percent for fed lambs sold
to packers. Furthermore, we estimate that packer ownership
volumes represent less than five percent of fed cattle and fed
lamb volumes, and 20 to 30 percent for finished hogs. Based on
the industry surveys and interviews we conducted, we expect the
use of alternative marketing arrangements in the beef and pork
industries to remain similar to past use but to increase
somewhat in the lamb industry.
In the beef industry, prices for fed cattle are similar for
direct trade and marketing agreements, higher for the small
percentage of auction barn cattle and lower for the small
percentage of forward contract cattle. We found that a
reduction in the volume of spot market transactions, assuming
that volume is shifted into alternative marketing arrangements,
results in an extremely small decrease in the spot market
price. In the pork industry, prices for finished hogs are
higher for marketing contracts and lower for packer-owned hogs,
relative to the cash market, and we found that there would be a
relatively large effect of further increases in the use of
alternative marketing arrangements on cash market prices for
hogs.
Second, regarding the costs and benefits of alternative
marketing arrangements related to cost of production in the
beef industry, procurement of cattle through alternative
marketing arrangements is associated with lower production
costs per head than through cash markets, but this result does
not hold for all packing plants in the data set. In the pork
industry, procurement of hogs through alternative marketing
arrangements is associated with a small decrease in production
costs at the packer level. Related to quality of beef and pork
in the beef industry, we found that cattle sold through
marketing agreements were higher quality and had less variation
in quality than cattle sold through direct trade. Similarly in
the pork industry, we found that hogs sold through marketing
contracts were higher quality than hogs sold through direct
trade. Related to market access and price risk across all
species, we found that alternative marketing arrangements offer
some guaranteed market access for both livestock producers and
meat packers. And furthermore, the alternative marketing
arrangements generally reduce price or income risk for cattle
and hog producers.
Third and finally, regarding implications of the use
alternative marketing arrangements, we conduct simulations of
various hypothetical scenarios in which alternative marketing
arrangements were restricted. Across all species, the results
for economic modeling simulations indicate losses to livestock
producers, meat packers and consumers due to losses in
efficiencies in the market. These losses in efficiencies
translate into higher prices for consumers purchasing meat, and
lower prices for producers selling livestock.
Mr. Chairman, I would like to enter into the record Volume
I of the report for the Livestock and Meat Marketing Study.
This volume contains the executive summary and the overview for
the study. Thank you. I would be happy to answer any questions.
Mr. Boswell. Thank you for your testimony and your
submitted testimony that we received. With no objections, we
will enter it into the record. We will turn to our questions
now for a little bit. I will start off addressing you, Mr.
Link. Stated in your written testimony, you mentioned that
marketing agreements account for 24 percent of the total
procurement in 2006 by the four largest steer and heifer
slaughter firms. Do you know the number or percent of grid
cattle and Canadian cattle imported by packers?
Mr. Link. No, sir, I do not have a breakdown of that. I can
get that information for you and return it, but I don't have a
breakdown. We lumped all of the alternative marketing
arrangements into the one percentage figure and I don't have a
breakdown of it.
Mr. Boswell. Okay. Do you have any comments you would want
to make about it? Although, we will be happy to receive any
further information. Do you have any comments you want to make
on that issue?
Mr. Link. Well, it would be pretty dangerous for me to
speculate on it. I would assume that the larger volume would be
the livestock that are sold on some type of a formula basis,
but I would hate to venture a figure on to that.
Mr. Boswell. We will look forward to get that information.
You recognized the enforcement of the Packers and Stockyards
Administration. In your testimony, you briefly mention having
complaints from producers. What is currently going on to
address these things. Where are you at in that process?
Mr. Link. We have what we refer to as a rapid response team
that is available. Any time a producer calls in with a specific
complaint, we initiate a rapid response to that complaint to
look into it to see if it is valid and whether it warrants a
follow-up investigation.
Mr. Boswell. So you are satisfied with how it is working
out, or do you have any----
Mr. Link. As we develop more confidence in our producers,
we will probably have more complaints. Now, we have a 24-hour
hotline plus all of our regional field offices that operate on
normal hours and I am a little bit surprised that we don't have
more complaints come in directly to us that we can respond to.
Mr. Boswell. Okay. Thank you. I may come back to you in a
minute, but I would like to direct a question or two to Ms.
Muth. Thank you for your testimony. In my opening statement, I
mentioned a reoccurring concern I hear from producers, not only
in my State, but across the country. Large packers can control
market prices using packer ownership. Let us say a packer owns
tens of thousands of heads of cattle. The packer buys on the
open market for three days, but when prices go too high, they
go out and slaughter their own, the cattle that they own, which
of course would depress market prices. Is this not manipulation
of the open market? Is it in your opinion?
Ms. Muth. Well, based on what we looked at for our study,
we conducted statistical analyses to look at what the effects
are of use of alternative marketing arrangements on cash market
prices, and what we found in the beef industry is that the
packer ownership actually represents a fairly small percentage
of the volume of cattle that are purchased and that the effects
of that packer ownership is actually relatively small, in a
statistical sense, in the cash market.
Mr. Boswell. What percentage would that be?
Ms. Muth. Based on the data that we have for the study,
approximately a 10-percent increase, additional increase, in
the use of alternative marketing arrangements would depress
cash market prices by about 0.1 percent.
Mr. Boswell. Okay. I am just kind of hip shooting here, but
on your methodology, how you went out to get that data, is that
available for us to look at?
Ms. Muth. The data that we collected for the study was
collected under CIPC, which means that it is protected data,
that it can only be used for statistical purposes. And so we
have followed very strict data security protocols in using that
data.
Mr. Boswell. What percentage do you think of all the market
data out there did you actually look at then?
Ms. Muth. For the beef cattle industry, our estimate is
that the data represents probably around 90 percent of the
volume of transactions that occurred over the 2 1/2 year
period. For hogs, the data that we looked at represented about
75 percent of the volume of the transactions.
Mr. Boswell. I may come back to that. Well, I think I will
stop here and defer to Mr. Hayes, then I will come back. Mr.
Hayes.
Mr. Hayes. Mr. Link, in your statement, you suggest that
larger packers have lower operating income due to them paying a
higher average price for livestock. With the buying power they
have, why would these packers pay more for livestock?
Mr. Link. Well, basically, it gets down to being able to
better utilize their facilities. You have a set fixed cost on
any kind of a processing plant and the more they can run that
at its optimum operational standpoint, the less their
production cost is going to be overall and so they are able to
pay more for the livestock to make sure that they stay up at
that optimum level of production.
Mr. Hayes. Ms. Muth, as I understand your study, you
generally assert that alternative marketing arrangements, on
balance, benefit the livestock sector. What I want to clear up
is this. Do these benefits go solely to those who participate
in arrangements, or do others in the production sector benefit
as well?
Ms. Muth. Well, based on the analysis that we conducted, we
were looking at the aggregate effects of the use of these
alternative marketing arrangements, and because packers can
realize efficiencies in using alternative marketing
arrangements, that can benefit producers that also do not
participate, because it helps the functioning of the packing
plant itself.
Mr. Hayes. So it is across the board. How does one
reconcile the often-heard assertion that packers manipulate the
market with the fact that cattle and hog prices move up and
down?
Ms. Muth. I am sorry. Could you repeat that?
Mr. Hayes. Often you hear the assertion that packers are
manipulating the market. The fact that cattle and hog prices
move up and down, how do you reconcile----
Ms. Muth. Right. For the analyses that we conducted, we
were looking at the relationships in the data. We did not look
at the intent. There isn't a way for us to analyze what the
intention of people are when they are making their buying and
selling decisions. We assume that they are operating in an
economically efficient manner for their operations, whether
they are producers or packers. And so in terms of manipulation
and saying whether particular individuals were doing things to
manipulate the market, that goes beyond what we looked at in
our study, which focuses on the statistical and economic
relationships in the data.
Mr. Hayes. Thank you, Mr. Chairman. I have no further
questions for this panel.
Mr. Boswell. Okay, thank you. The chair at this time would
recognize the gentleman from Nebraska, Mr. Smith.
Mr. Smith. Thank you, Mr. Chairman. When I meet with
representatives from the livestock production sector,
specifically producers, we ask about the status of the
regulatory process to implement the reauthorization of
mandatory price reporting. Mr. Link, could you update the
subcommittee on that subject?
Mr. Link. I can just give you a ballpark update, because
that is really through the Agricultural Marketing Service. It
is in the process of going through the steps that it has to be
for reauthorization and I can't tell you exactly where they are
in it. I would assume that, you know, it is in the channel, but
I couldn't give you a date as to when that will be completed.
Mr. Smith. Okay, thank you. Let me see what hasn't been
covered already. I think that is good for now. Thank you.
Mr. Boswell. Thank you. The chair would recognize the
gentleman from Wisconsin, Mr. Kagen.
Mr. Kagen. Thank you. It is nice to be here in this
wonderful new room. Administrator Link, we are all familiar
with the decision in Pickett v. Tyson, which the jury ruled
that the packer was guilty of price manipulation and assessed a
fine of $1.2 billion. Even though it has been tossed out, how
has GIPSA responded to the price manipulation and prevented it
from occurring in the future?
Mr. Link. Well, as I mentioned earlier, we are monitoring
the market basically on a daily basis. We are utilizing
Agricultural Marketing Service price reporting data. We are
also monitoring the different prices that are available in
different regions and we look for any anomaly that may appear
from there. And of course, if there is any kind of complaint
that comes in, we instantly respond to that. But we are really
basing it by looking at economic analyses of the information
that we receive to see if there is any anomalies that would
warrant an investigation into it.
Mr. Kagen. So with the Pickett v. Tyson case being the only
antitrust case in the past 80 years, being that I am from Green
Bay Packerland and Packerland had a great deal to do with the
naming of our football team, how can our packers and our
producers have confidence that your bill will ensure a fair
marketplace for them? One case in 80 years?
Mr. Link. Well, sir, that wasn't a case that GIPSA brought
forth. That was a private individual case against a packer and
we really weren't involved in it.
Mr. Kagen. So you are monitoring the situation?
Mr. Link. Yes, sir.
Mr. Kagen. Do you feel that mandatory arbitration is an
equal arrangement for both the packer and the producer?
Mr. Link. I am not familiar with that, sir. I can't give
you an intelligent answer.
Mr. Kagen. All right, we can get back on that.
Mr. Link. Yes.
Mr. Kagen. Thank you very much, Mr. Chairman.
Mr. Boswell. Thank you. The chair would recognize Mr.
Walberg from Minnesota.
Mr. Walberg. Thank you, Mr. Chairman. I hail from Michigan
and I don't want to----
Mr. Boswell. Oh, excuse me.
Mr. Walberg. --put an aspiration on Minnesota because of
me.
Mr. Boswell. I stand corrected and we welcome the gentleman
from Michigan.
Mr. Walberg. Being a freshman, I expect those mistakes
occasionally, so no problem at all. Let me ask, Dr. Muth, a
two-point question. What impact has consumer demand had on the
usage of alternative marketing agreements? And secondly, what
potential impacts would the consumer face if alternative
marketing agreements were limited?
Ms. Muth. I guess, related to your second question, based
on the simulations that we conducted from our models, if
alternative marketing arrangements were restricted, consumers
would actually be faced with higher meat prices and probably
also reduced quality of meat products, that there would be much
more variability in the quality of products. And I am sorry,
what was your first question again?
Mr. Walberg. What impact has consumer demand had on the
usage of alternative marketing agreements?
Ms. Muth. Okay. In terms of the effect of consumer demand
on use of alternative marketing arrangements, it is our
understanding, based on looking at the relationships in the
data, that in order to supply sufficient quality of livestock
to meet consumer demand, that packers use alternative marketing
arrangements to ensure that they can supply the quality that
consumers would like to buy in their grocery store.
Mr. Walberg. Okay. So you say it is better for the consumer
all along the process?
Ms. Muth. Right, consumers do benefit. And when we
conducted simulations of our economic models, where you put a
hypothetical restriction on the use of alternative marketing
arrangements, we did find that consumers would lose under those
scenarios.
Mr. Walberg. Okay, okay. Again, customers frequently want
to buy meat that has a certain characteristic, such as grade or
antibiotic free or organically produced.
Ms. Muth. Right.
Mr. Walberg. Packers frequently use marketing agreements to
draw out the appropriate product from the producers. If these
methods are curtailed, how would a packer ensure that they have
a supply of cattle that meets their customers' specifications?
Ms. Muth. I guess, based on what we looked at for our
study, it would be much more difficult for packers to ensure
that they could go out into the cash market and buy the animals
of the specified quality that they need to meet those
requirements, if they could not have an agreement with the
producer that specifies those as requirements.
Mr. Walberg. So you contend that it leaves it up in the
air, that it is debatable whether there would be those
specialty opportunities for consumers, then?
Ms. Muth. Yes, it is my understanding, from what we looked
at in the study, that it would reduce those opportunities for
the packer.
Mr. Walberg. Okay. Okay, thank you. Mr. Link, based on your
experience and knowledge of this industry, what would be the
economic costs or benefits to cattle producers if Congress were
to prohibit packer ownership?
Mr. Link. Well, I will speak from the cattle industry more
than the pork because I am more familiar with that. With the
small percentage that packers actually own in the cattle
industry, I think it would be very insignificant. I think it
would be more harmful if the alternative marketing arrangements
were eliminated, because it would get more of a variability of
quality of livestock on to the market.
Mr. Walberg. Now that, again, is just based upon the
limited activity at present in the cattle industry, but you
can't use a crystal ball to infer what would be if it moved in
the future to more aggressive action with packers being
involved. I mean, it would just----
Mr. Link. Well, it would be a tremendous business
psychology change for most of them, because it would take a
tremendous capital investment that they currently are not
involved with to get to extend out very much into the actual
raw material purchasing and ownership of them, and that would
take a significant capital investment. You would have to ask
the packers whether they are willing to make that type of an
investment or not.
Mr. Walberg. Okay, okay. Thank you.
Mr. Boswell. Thank you, Mr. Walberg. And I think that
completes our first round. We will take you in a moment. I
don't want to be disrespectful to the second panel, but just a
couple things. Mr. Link, has the Department of Justice supplied
enough staff to take care of the cases that you have referred
to them? What is your status there?
Mr. Link. Well, sir, most of our cases go through the
Office of General Counsel. There are a few cases that get
forwarded up to the Department of Justice and then they
obviously have enough for our demand, because we don't have
that many that go before the Department of Justice. Most of our
active cases are handled by the Office of General Counsel.
Mr. Boswell. So you are getting all of the support from the
DOJ, then?
Mr. Link. Currently, yes, sir.
Mr. Boswell. Ms. Muth, maybe give us an estimate or an
evaluation, if you could, of the use and value of mandatory
price reporting. Who gains the most?
Ms. Muth. Well, I am not certain if I can respond to
exactly who gains the most, but I can tell you that mandatory
price reporting is pretty crucial for the industry, that it
increases the transparency of prices. A lot of the data that we
looked at, formula prices, under lots of different types of
marketing arrangements, including both cash marketing
arrangements and alternative marketing arrangements, depend on
mandatory price reporting as the base for the formula. So
mandatory price reporting is crucial for the functioning of the
market.
Mr. Boswell. So you evaluated that it is very important.
And your final question is, you found that putting restrictions
on alternative marketing arrangements of beef would affect the
producer, packer and consumer negatively. But in pork, it would
only affect the producer and the consumer, but it would cause a
slight increase in economic surplus for the pork packer. Why is
there such a difference and why would the packers see a slight
increase?
Ms. Muth. Right. Well, one of the things you have to
consider when you are looking at the pork industry is that the
volume of alternative marketing arrangements is already
extremely high. It is 89 percent. So when you look at further
increases beyond that point, the packer is already realizing
the benefits that they would receive from using alternative
marketing arrangements. So in the simulations that we
conducted, if you restrict alternative marketing arrangements
in the pork industry, the packers will gain in the short run,
but in the long run, we actually don't really see any advantage
to them one way or another. And that is looking at comparing it
from current levels. And so it is important to consider that
the structure of the market is very different for the pork
industry versus the beef industry and that is why you see
differences in those results.
Mr. Boswell. All right, thank you. We touched on this
earlier, but where would someone go to review the data and
statistical information used by the RTI study?
Ms. Muth. The data that we have will be turned over to
GIPSA by the end of May. The data is currently kept in a secure
room. It is encrypted data, data sets. We will be giving them
to GIPSA and at that point, then it is their determination of
how that data will be used.
Mr. Boswell. Mr. Hayes, do you have any further questions?
Mr. Hayes. No, sir.
Mr. Boswell. Any other members of the committee have any
other questions? Yes, Mr. Walberg.
Mr. Walberg. Thank you, Mr. Chairman. I would like to ask
Dr. Muth a final question here. As I am sure you know,
individual producers have different production practices and
market goals with respect to the animals they raise. Your
testimony talks about the price differences across marketing
arrangements. In your view, do these slight price differences
occur because of the given marketing arrangement itself, or
does it reflect the nature of the livestock that finds its way
to a particular marketing arrangement?
Ms. Muth. I think, in general, it does reflect differences
in the quality of the animals that are coming through different
types of marketing arrangements, but you do still see, even
after you make the adjustments for differences in quality, that
there are still slight differences, that prices for animals
that are purchased through marketing contracts in the hog
industry are through marketing agreements, and the beef
industry has slightly higher prices than cash market prices.
Mr. Walberg. Okay, okay. Thank you.
Mr. Boswell. Thank you. Well, thanks to Mr. Link and Ms.
Muth. Am I pronouncing it correctly?
Ms. Muth. Yes.
Mr. Boswell. Thank you. Thank you for coming and sharing
with us. There is a chance you will hear some more from us, so
we will be in contact with you and we appreciate your
presentation here today. We would like to excuse you at this
moment and we ask the second panel to take their place. We are
sorry for the delay. I thank you very much for your patience.
We appreciate your presence with us today and so we will just
take your testimonies and we will probably start with Kay and
start right down the line and hear what you have to say. Then
we will have some questions for you. So Ms. Doby, you have the
floor.
STATEMENT OF KAY DOBY, POULTRY GROWER, ON BEHALF OF CAMPAIGN
FOR CONTRACT AGRICULTURE REFORM, RAFI
Ms. Doby. Chairman Boswell, Ranking Member Hayes, Members
of the subcommittee, my name is Kay Doby and I am a poultry
grower from North Carolina, Cameron. Thank you for this
opportunity to present this testimony.
The structure of US agriculture is rapidly changing and the
focus of the farm bill should be broadened to keep pace with
that change. Unfortunately, farmers are rapidly losing their
independence, as one-sided contractual arrangements between
farmers and vertical integrators became more common. For
example, a potential grower must take out a loan of over
$200,000 per poultry house to have houses built to the
company's specifications, but the grower is the one that
borrows the money to build them. When a grower goes into the
debt to this extent, they must often put their farm up as
collateral for the loan. Poultry growers sign the first
contract thinking that it is good for the length of the loan,
until one day a new one is presented that must be signed before
the next flock is delivered. This contract can have a mandatory
arbitration clause added. Also, the length of the contract can
go from years to a flock-to-flock contract, which means no
guarantee beyond one week flock. Talk about job security.
As a grower, you get the message very quickly. With your
livelihood on the line and the future of your business
controlled completely by the company, it is not a surprise that
growers are reluctant to speak out about their circumstances.
Plain and simple, they fear retaliation. Growers are ranked
against each other for their pay. Basically, this means who can
grow the heaviest bird on the least amount of feed. This is
called your feed conversion. The company controls all the
inputs that determine your success in adding weight to the
bird, the quality of the chickens and the feed and the length
of time you keep your birds before they go to processing. The
difference in being at the top of the ranking versus the bottom
of the ranking for one flock is thousands of dollars. It puts
growers in a position not to want to rock the boat, because the
company can directly influence where you fall in this ranking.
The grower works for the day that he will have the loan paid
off, but the grower will never get to that day because the
company wants new or upgraded equipment in the houses or they
will cut you off. So the grower has two choices, go back even
deeper in debt or just sell your farm and salvage what you can.
Growers must upgrade or companies threaten to not bring them
any more birds.
Poultry houses are single-use structures and currently
there is nothing else that can generate the revenue to equal
poultry growing. You are completely at the company's demands. I
personally know growers that have been cut off. Others have
given in and borrowed the money to do the upgrades and are
struggling under the additional debt to the point of
bankruptcy. The small additional pay that the companies offer
you to convert these houses does not even pay for the interest
on the loans.
A question often asked is, if returns are so low, why are
people lined up to become contract producers? Well, there are
few other job opportunities in the areas where poultry
operations are located. Information presented to potential
producers by some integrators is deceptive, in that not all
costs are shown or they are underestimated. Many potential
producers feel that they can be above average and they will
never be below that, because they don't understand how little
control they have over their ranking. The growers don't want
anything that they are not entitled to, but they want things to
be fair. I have a few suggestions in that regard.
1) The Packers and Stockyards Act needs to be updated to
give USDA Grain Inspection, Packers and Stockyards Agency full
authority, like in the red meat sector, to crack down on
unfair, deceptive trade practices. Their authority is very
limited to poultry and excludes any authority to provide
protections for breeder hen and pullet growers.
2) Pass legislation to prohibit certain abusive contract
clauses. Arbitration should be voluntary for both parties, not
something forced on growers by the company. Companies should be
required to bargain in good faith with grower associations
instead of dealing with growers individually. This could be
done at the national level by changing the Agricultural Fair
Practice Act to require good-faith bargaining in contract
negotiations.
If large agribusinesses are allowed to control the terms of
these take-it-or-leave-it contracts, companies will continue to
shift the poultry model into other parts of agriculture, as we
have already seen in many other commodities, like hogs,
tobacco, identity-preserved grains and peanuts. In January of
this year, over 200 organizations wrote to the House
Agriculture Committee to support eight legislative initiatives
to help restore competition to agriculture markets, to benefit
of producers and consumers alike. A copy of that is attached to
my written testimony.
It is my hope that the committee will see fit to include a
broad competition title in its version of the 2007 Farm Bill. I
would like to thank you for your time and willingness to listen
to what is going on with today's poultry growers. The contract
producer has been transferred into a mere servant of a
corporation or, as some have said, contract producers are serfs
with a mortgage. Thank you.
Mr. Boswell. I appreciate your testimony. Mr. Crabtree, you
have five minutes.
STATEMENT OF JOHN CRABTREE, DEVELOPMENT AND OUTREACH OFFICER,
CENTER FOR RURAL AFFAIRS
Mr. Crabtree. Mr. Chairman, Ranking Member Hayes and
members of the committee, my name is John Crabtree. I represent
the Center for Rural Affairs in Lyons, Nebraska. Beginning in
1996, I led our work on livestock market structure and I just
want to thank you for holding this hearing on these really
important issues.
As a livestock sector has become increasingly concentrated
and integrated, packers and processors increasingly control
production at all stages. In many rural places where livestock
are raised, there are only a few or even just one packer or
processor for a given livestock species. At the same time,
there has been a dramatic increase in the use of production
marketing contracts to further diminish the bargaining power of
farmers and ranchers. Currently over 80 percent of hogs, for
example, are either owned outright by packers or tightly
controlled through various contracting devices, and many
farmers and ranchers face price discrimination and severely
limited market access as a result.
The USDA has demonstrated nearly complete inability to
enforce the Packers and Stockyards Act and other livestock
market competition laws. The audit of the Packers and
Stockyards Administration performed by USDA's Office of the
Inspector General that was released in February 2006, revealed
that the Packers and Stockyards Administration has utterly
failed to enforce the law, the very law that gives the agency a
reason to exist. Over 1800 so-called investigations were
documented between 1999 and 2005, and according to the
Inspector General's audit, 1739 of those so-called
investigations could not be traced to a specific complaint,
producer or packer. That is why Congress should act to define
the rules of livestock market competition and provide clear
direction for USDA's enforcement. Congress should not let
another farm bill go by without making changes in the Packers
and Stockyards Act and the Agricultural Fair Practices Act that
are necessary to breathe some life and competition back into
livestock markets.
Specifically, a couple provisions we would recommend. The
Packers and Stockyards Act should be amended to prohibit packer
ownership of livestock more than seven days prior to slaughter;
to prohibit the use of production contracts that do not fix
base prices with adjustments or quality, grade or other factors
outside of packer control at the point of sale; and to require
the Secretary to write regulations defining the statutory term
on reasonable preference or advantage, to ensure that small and
midsized farmers and ranchers are not forced to accepted
volume-based price discrimination.
Likewise, the Agricultural Fair Practices Act should be
amended to make it unlawful for any firm to refuse to deal with
a producer for belonging to a producers association or
cooperative, prohibit the use of binding mandatory arbitration
clauses, and expand prohibition on confidentiality clauses to
cover all agricultural marketing and production contracts, not
just those in livestock and poultry. And finally, an amendment
to the Ag Fair Practices Act that requires a contract to
include clear disclosure of producer risks.
Just to highlight a couple of these provisions, major meat
packers use packer-owned livestock as a major tool for exerting
market power over farmers and ranchers. This practices fosters
concentration in industrialized livestock production, and
packer-owned livestock artificially lowers farm gate prices to
farmers and ranchers while consumer food prices continue to
rise, as demonstrated repeatedly by USDA land grant and
nonprofit research analysis, most recently the GIPSA livestock
and meat marketing or RTI study. And despite their support for
vertical integration, the researchers that conducted that
report concluded that the use of captive supplies is associated
with lower cash market prices.
The packers and processors claim that vertical integration
increases production efficiency, but it is simply not true.
Small and midsized farms and ranches have demonstrated, time
and again, they can match or beat the costs of production of
the packers industrial facilities. Prohibiting packer ownership
dramatically reduces the ability of packers to manipulate
livestock markets and helps secure increased market access for
small and midsized family farms and ranches. Access is often
severely limited today by the levels of vertical integration,
particularly in hog production.
In the end, it comes down to this: in a nation where
packers and processors own and control all of the livestock,
what need is there of farmers and ranchers? And what hope do we
have for revitalizing family farming and ranching in rural
communities if we have no hope of revitalizing family farm and
ranch livestock production? What hope if we cannot breathe some
life and competition back into the livestock markets? My father
always told me to say what you mean and mean what you say. If
we hope to create a farm bill that can be held up as a solution
to some of the challenges that family farmers face, then we
should all support a Federal ban on packer ownership of
livestock and a comprehensive competition title in this Farm
Bill. In other words, we should mean what we say. Thank you.
Mr. Boswell. Thank you, Mr. Crabtree. We would like now to
give five minutes to Mr. Buis of the National Farmers Union.
STATEMENT OF TOM BUIS, PRESIDENT, NATIONAL FARMERS UNION
Mr. Buis. Thank you, Chairman Boswell and Ranking Member
Hayes and members of the subcommittee. It is great to have the
opportunity to be here today. The National Farmers Union
represents family farmers, ranchers and family fishermen around
the country, with a mission of protecting and enhancing the
economic wellbeing and quality of life for rural America.
First, I would recommend, as you move into the new farm
bill, to keep the focus on creating a structure to help farmers
and ranchers receive a profit from the marketplace. It is the
key component that is often missing. Farm bills tend to focus
on the symptoms and not on the cause. The two most promising
economic opportunities in rural America that I hear about as I
travel the country are the production of renewable energy and
the second related to the food industry and that is the
increasing consumer demand for source-verified, direct-from-
the-farm fresh foods. The latter is something that I hope this
subcommittee will address as we debate the future structure of
our livestock industry.
Yesterday, the National Farmers Union released our updated
concentration tables for the top four firms in each sector.
This report continues to show an increase of consolidation in
most agriculture sectors. The top four beef packers dominate
almost 84 percent of the market. The four pork packers control
66 percent of hog processing. The top four poultry companies,
roughly 60 percent of the broiler industry. However, ethanol
production is the only agriculture sector in which
concentration has steadily decreased. Ten years ago, the top
four companies owned 73 percent of the ethanol market. Today,
the top four companies control 31 1/2 percent of the ethanol
produced. Farmer-owned ethanol plants account for the single
largest production of ethanol, 39 percent. That has been driven
by public policy, Federal policy. So for those who say
concentration is inevitable, we might as well get used to it,
everyone is going to get bigger, the market is more
concentrated, I think the renewable energy experience that we
have had in the country is clearly a win for rural America and
clearly shows that we can make a difference.
And if we also look at the farmers' share of the food
dollar, and I think I distributed both a chart on that and one
on the concentration levels of the livestock industry going up
and the ethanol industry coming down that you can look at, but
if we look at that farmers' share of the food dollar in each of
these concentrated sectors, it clearly shows farmers are
getting less of the food dollar in the concentrated markets,
and more of the total amount spent on food and feed and fiber
in the ethanol and renewable energy sector. Competition is
clearly the key to profitability for farmers and for rural
communities. Those profits are retained in those communities,
they are invested in those communities and it creates a tax
base and jobs, as well as it is the only communities in rural
America where you really see the storefronts, the boards coming
off the storefronts instead of going back up. So we need to
replicate this policy in the livestock industry.
This study that we have been funding since 1999,
unfortunately, will probably be our last, because the data and
the information from the companies involved is getting more
difficult to obtain. However, this information is important for
policymakers to know. It just shouldn't be retained with
private groups that do studies, it shouldn't be retained
outside of the policymaking arena, and we would urge that this
Congress, in the farm bill, direct USDA and the Department of
Justice to start obtaining this information so you can make
good policy decisions to ensure fair and open markets.
Second, we recommend that the farm bill include a new title
to help restore competition. A noncompetitive marketplace is
just another way of saying farmers and ranchers are not being
paid a fair price. Many cite the free market as a basis for not
taking action. Yet I ask, how can you have a free market when
there is little or no competition? How can we rely upon a free
market without recognizing when it needs fixing? We believe the
competition title should include most of the same items that
Mr. Crabtree just mentioned, but a couple others. I think we
have to immediately implement mandatory country of origin
labeling. We are opposed to merging country of origin labeling
with Animal ID, because I think Animal ID, certainly in the
countryside, farmers and ranchers aren't there yet. It is very
controversial, it is very confusing and it is very expensive.
There is a lot of fear. That is going to take quite some time
to ever fix.
We also believe that the Mandatory Price Reporting Act
should be reformed, and the enforcement and the oversight
suggested by the GAO should be implemented. And we feel that
you should end the ban on interstate shipment of meat to
increase competition in the economic marketing and trade
opportunities for rural America. And finally, I think the one
other thing in the competition that I would add to what Tom
mentioned is to prohibit forward contracting of dairy products,
within the Federal Milk Marketing Order system.
In summary, Mr. Chairman, I would again urge you to keep
the focus of the new farm bill on profitability for producers.
As we have seen with ethanol, competition leads to
profitability on the farm and economic opportunities in our
rural communities. Thank you, Mr. Chairman.
Mr. Boswell. Thank you, Mr. Buis. We would now like to
recognize Mr. Stallman from the Farm Bureau.
STATEMENT OF BOB STALLMAN, PRESIDENT, AMERICAN FARM BUREAU
FEDERATION
Mr. Stallman. Mr. Chairman and Ranking Member Hayes and
members of the committee, thank you. We appreciate the
opportunity to provide comments on the changing market
structure of the livestock industry. Our organization
represents over six million member families with many cow/calf
operators, hog farmers, sheep and goat producers and poultry
growers. I, myself, am a rice and cattle producer from Texas.
Increasing producer competitiveness and access to a
transparent marketplace is vital to sustaining domestic
production agriculture for farmers and ranchers. The landscape
has changed for both crop and livestock producers in recent
decades, both in purchasing inputs and in marketing finished
livestock, grain and fiber. I won't reiterate the concentration
figures that Administration Link provided, because ours are the
same numbers from USDA, but it does point out that the degree
of concentration that exists, particularly in the livestock
sector.
The story is really the same with input providers and I
will give you two quick examples. The three largest soybean
processors control more that 70 percent of the US market in
2003. The four largest ag chemical companies had 62 percent of
the total world market share, based on 2004 data. The Grain
Inspection, Packers and Stockyards Administration's recently
released Livestock and Meat Marketing Study revealed
significant information specific about the use of alternative
marketing arrangements in the beef and pork processing sectors.
During late 2002 through 2005, the use of AMAs were estimated
to cover 38 percent of fed cattle volume, 44 percent of the fed
lamb volume, and 89 percent of the finished hog market. Packer
ownership accounted for only five percent of fed cattle and
lamb volume, but between 20 and 30 percent of fed pork volume.
It is also important to recognize that, while AMAs are
voluntary, we question whether they are truly voluntary in
every region of the country, for every packer or for every
species. Our producers often strongly remind us that one cannot
just look at concentration in the aggregate for the entire
country. A region-by-region review of AMAs would likely yield
some different results.
AFBF supports the following changes to enhance competition
of the current livestock marketplace: we support enhancing
USDA's oversight of the Packers and Stockyards Act. GIPSA
investigations need to include more legal expertise within USDA
to enhance anticompetitive analysis on mergers. USDA, in
conjunction with the Department of Justice, should closely
investigate all mergers, ownership changes, or other trends in
the meat packing industry, for actions that limit the
availability of a competitive market for livestock producers.
We would also support establishing an office of special counsel
for competition at USDA. We support amending the Packers and
Stockyards Act to grant USDA jurisdiction and enforcement over
the marketing of poultry, meat and eggs, as already exists for
livestock. This includes breeder hen and pullet operations so
they are treated the same as broiler operations. We support
efforts to provide contract protections to ensure that the
production contract clearly spells out what is required of the
producer. In addition, we support prohibiting confidentiality
clauses in contracts so that producers are free to share the
contract with family members or an outside advisor, like a
lawyer or a lender. We support legislation to prohibit
mandatory arbitration clauses in contracts. Farmers and
ranchers should be able to choose between arbitration,
mediation or a civil trial in disputes. We support establishing
GIPSA as the lead authority over livestock contracts.
I want to note that we appreciate the work by the House Ag
Committee to reauthorize mandatory price reporting last fall.
This program has worked well for our producers in providing
increased price and market information. There are additional
issues that are indirectly related to competition and the
changing market structure. Farm Bureau has long supported
allowing meat and poultry inspected under State programs, which
are equal to Federal inspection and approved by USDA, to move
in interstate commerce. All other products, such as milk, dairy
products, fruit, vegetables, fish, shellfish and canned
projects, which are inspected under State jurisdiction, are
allowed to be marketed freely throughout the United States.
Movement of these products across State lines will increase
marketing opportunities and provide more of a competitive
marketplace for our farmers and ranchers.
Farm Bureau supports voluntary country of origin labeling.
The cost associated with implementing a mandatory program,
especially for meat products, would create a competitive
disadvantage for our producers. We also support the
establishment and implementation of a voluntary national Animal
ID system capable of providing support for animal disease
control and eradication. Any program put into place must
adequately address the cost, confidentiality and liability
concerns of our producers.
Thank you for the opportunity to discuss our views on these
issues and I look forward to answering questions.
Mr. Boswell. Thank you, Mr. Stallman. We would like to
recognize Dr. Taylor from Auburn. Mr. Taylor.
STATEMENT OF ROBERT TAYLOR, ALFA EMINENT SCHOLAR, AUBURN
UNIVERSITY
Mr. Taylor. Thank you, Mr. Chairman and members of the
committee. I am an agricultural economist at Auburn University
and today I am going to restrict my remarks to fed cattle
marketing alternatives.
I would like to identify four options for marketing: Option
one, AMAs, as they have been used and structured in the past 10
or 15 years; Option two, cash on the hoof, the old way of doing
business; Option three, require that all transactions be on a
cash basis and moreover, that there be a negotiated quality
grid; Option four, prohibit AMAs tied to a cash market or to
the futures market, but do not prohibit all AMAs.
The RTI study only compared Option one and two. They
compared eliminated AMAs to basically cash on the hoof, the old
way of doing business. To me, this is an inappropriate
comparison and it would be better to look eliminated AMAs, or
certain features of AMAs, as they are now done to Option three
or Option four. In the RTI study, ``beef quality is expected to
decline and decrease primary demand with AMA elimination.''
This assumption totally ignores significant cash transactions
that occur now with a quality grid. In fact, precisely the same
quality incentives can be achieved in the cash market if the
packers so choose. What is the net effect of eliminating AMAs?
Assuming they were replaced by cash transactions, with a
negotiated base price and a negotiated grid, all I can identify
is 40 cents per head. That is .04 percent, not four percent,
.04 percent of the value of a fed steer, not the four percent
to 16 percent negative effects identified in the RTI study.
Option four, let me emphasize again. Don't prohibit AMAs
all together, just prohibit tying a base contract price to
either the cash market or to the futures market. Such ties
distort buyer incentives in concentrated markets. If we had a
very large number of buyers, there wouldn't be a problem with a
contract tied to cash or to futures. But with concentrated
buyers, there is a problem. Theoretically in economics, this
leads to inefficiency. I repeat, aggregate inefficiency,
because these types of arrangements worsen the market power
effects of size. Economists agree on the need to eliminate
contract features that distort buyer incentives, such as the
marketing agreements tied to the cash market. Economists made
debate endlessly on whether the past effect has been big or
small, significant or insignificant, but they are in agreement
that such arrangements have the potential to distort markets
and therefore should be prohibited. In my opinion, Option four
would not destroy the cattle and beef industry, as suggested by
the RTI comparison. Combine Option four with pursuit of new
innovative ways of trading cattle, I think this option would
actually strengthen the industry and also eliminated the more
contentious features of AMAs. Thank you.
Mr. Boswell. Thank you, Dr. Taylor. I appreciate all of
your testimonies. We will move to our questions now and I will
start off with directing a question to Ms. Doby. In your
testimony, you mention that oftentimes your original contracts
are rewritten before they run out and when they do rewrite
them, they add a mandatory arbitration clause. Are there
currently any protections for the producers for that not to
happen?
Ms. Doby. No, sir, that happened in my contract. I did not
have arbitration when I started in the poultry business and it
changed. They brought the contract out. I had thousands of
dollars left on a loan. So to sign that contract to continue
getting birds, the arbitration was in there. The only thing in
that contract that says you get a two-week notice for
cancellation, but that is the only thing. They have nothing
else.
Mr. Boswell. I was going to follow up by asking you about
how it works with your poultry production, but I think you just
told us it doesn't. It puts a lot of stress on your operation.
Ms. Doby. Yes, sir, it certainly does.
Mr. Boswell. Okay. Well, thank you very much. Mr. Buis,
attached to your testimony, you attached some charts regarding
the concentration of agriculture markets. Can you walk through
how those numbers were formulated? And also, can you talk about
some of the trends that have been seen in the concentration of
the industry?
Mr. Buis. Yes. Thank you, Mr. Chairman. Since 1999, we have
been contracted this study and I think it was the first of its
kind done back in 1999 by Dr. William Heffernan and Dr. Mary
Hendrickson at the University of Missouri. We do so because
oftentimes we would get these anecdotal comments about how big
or who is controlling what and really to sort of set the plate
for how much competition really exists in the marketplace, and
that was a continuation of those numbers.
The second part is that trends clearly are going up in all
sectors of agriculture on concentration and I think the
complete CR-4 tables that we put in there are charts, I think,
pork, beef, broilers and ethanol, but that trend is throughout
the industry. As Mr. Stallman mentioned, it is in the grain
industry, the soybean processing industry, it is elsewhere,
except ethanol. That is the one exception. And two years ago
when we did this study, the ethanol number had dropped down to
40 percent and now it is down to 31 percent and it is all a
result, I think, of public policy, encouraging producers to get
together to own these plants. The local ownership is really key
because the profits stay there. They are retained in those
communities, reinvest it in those communities, and I think it
is just a perfect example that concentration is not inevitable
and that competition leads to a fair, profitable price on
farming. Ask any corn farmer today what is driving the increase
in corn production or corn prices and that has been the
increase in domestic demand, new domestic demand for corn and
that has been into ethanol. It is owned by local people. I
think it is a good thing, Mr. Chairman.
Mr. Boswell. Thank you. Maybe a moment later we can talk a
little bit about it. I have been very elated about the fact
that farmers have been able to participate and cooperate
together and start up the ethanol plants, but I know of a case
or two already where they are being bought out by, as they
refer to it, big money.
Mr. Buis. Yes.
Mr. Boswell. And it is distressing and I don't know what we
can do about that, because I would hope that we might respond.
I know, in my life, my father and my grandfather, we have
always lamented about not being part of the value-added and I
would guess that you and Mr. Stallman and all of us, we have
been there and here is one place where we can be part of the
value-added all the way up, if you will, and I just have a
concern that it may get away from the people, our farmers or
producers, and I don't want that to happen.
Mr. Stallman, I think you know distinguished Professor Neil
Harl. You have heard of him before. But a fundamental concern
that he termed ``towering concentration on the input side and
towering concentration on the output or product side in the
agricultural sector, with producers in between, in perfect or
nearly perfect competition. The result is vulnerability of
producers as buyers, with regional dominance exercised their
market power to reduce the price paid to the producers
indifferent between selling to the local buyer, with regional
dominance for shipping to the next available competitive
outlet. Thus, producers become almost captive suppliers or
their regionally dominant purchaser of products.'' What would
you say about that? Would you say that assertion is correct?
Why or why not? Would you comment on that? You come from a lot
background experience, as Mr. Harl did, so what would you say
to that?
Mr. Stallman. Well, I do have a lot of background and
experience, Mr. Chairman, but I do not have a degree in
economics. I would observe that, you know, when you look at
what is happening, not with just the agriculture industry, but
with all industries, you have concentration and consolidation
occurring. That, in and of itself, is not necessarily bad. The
question is, do you still have competition? And there again,
that is where our proposals focus for agriculture specifically,
on greater oversight of mergers and acquisitions, particularly
within USDA and in conjunction with the Department of Justice.
Now, farmers are their own worst enemies. You know, you talk
about the middle where the producers are. I have told many
farmers who are complaining about the market structure, well,
all you have to do is get together and you have all the market
power you want. The problem is producers are reluctant to get
together and that is an inherent nature, I guess. Maybe it is
in the genetic pool for farmers and ranchers, that we want to
be independent. We don't want to work with somebody else to
accomplish a greater goal. And if we have any challenge or
struggle as agriculture producers, it is that we are
independent and we don't want to come together into the kind of
structures that we could come together in to gain that market
power which we do not have, given the concentration that is
occurring on the input side and the processing side, currently.
Mr. Boswell. Thank you. I violated my own rule here by the
time, so I am going to stop now, but Dr. Taylor, I will get
back to you in a little bit. At this time, I would like to
recognize my colleague, Mr. Hayes.
Mr. Hayes. Thank you, Mr. Chairman. Dr. Taylor, you stated
a number of times in your prepared testimony that economists
generally agree about one point or another. In other areas, you
criticized the work of the RTI report and the investigations
and studies conducted by USDA regulators and market experts. Do
you believe there is anything like a consensus among
economists, livestock interest groups, or market experts, about
whether or how Congress should intervene in the livestock
market structure?
Mr. Taylor. Two ways to answer that question. One is
empirical, based on the studies and whether the effect is big
or small, significant or not. A second way is theoretical.
Economists do generally agree that with concentrated markets,
tying AMAs to a cash price distort buyer incentives and should
be prohibited. In my written testimony, I have cited several
livestock economists who have gone on the record with a similar
statement, going back to the mid 1990s.
Mr. Hayes. But in answer to the simpler question, is there
a broad consensus either among the economists or the producers?
I think I heard you say no.
Mr. Taylor. There is a broad consensus among economists
that tying AMAs to a cash price has the potential to distort
the market and should be prohibited.
Mr. Hayes. Okay. So I think I heard you say this time there
is some consensus among economists, but you haven't spoken to
the livestock community. Is there consensus there, in your
opinion? If you don't want to get into that, that is fine. All
right, let me back up to Mr. Stallman. Does the American Farm
Bureau Federation support legislative efforts to prohibit
packer ownership for beef, pork and lamb?
Mr. Stallman. No, sir, we do not. We have had that policy
discussion and have come down on the side of not supporting
that prohibition.
Mr. Hayes. Okay. One of the alternatives to a complete ban
on packer ownership has been discussed, and perhaps
compromised, is a requirement that packers purchase 25 percent
of their daily slaughter from the cash market. What is the Farm
Bureau's position on that?
Mr. Stallman. I do not think we have a specific policy
position on that. We talked about the benefits of having more
the cash, more product purchased in the cash market to help
support that market.
Mr. Hayes. Okay. All right. Mr. Buis, as I understand the
National Farmers Union position, you support mandatory country
of origin labeling and oppose mandatory Animal ID unless the
government pays the entire cost. Can you reconcile how imposing
the cost of mandatory COOL on livestock is acceptable to your
members, but imposing the cost of mandatory Animal ID is not?
Mr. Buis. Well, we support mandatory country of origin
labeling and we feel that the shift in consumer preference,
which if you even used USDA's more exaggerated cost, which we
they had to revise when they first came out with the rule, it
was around $4 billion, to implement COOL. If you had a one
percent shift, and their OMB analysis said this, one percent
shift in consumer preference towards US products, it would more
than offset that $4 billion, so I think the market could absorb
it. As far as mandatory animal ID, this was suggested and
encouraged by the Secretary of Homeland Security, worried about
terrorists distorting our food production or risking our food
production, and if you are going to impose that cost on the two
percent of society that produces the food to benefit the other
98 percent, I think it is a government cost. I do not think----
Mr. Hayes. Okay. Let me stop you. I have just got 30
seconds left. I don't necessarily agree with you. Ms. Doby, in
your testimony, you talk about the poultry companies, that
there is a large waiting list of farmers who are interested in
adding their grow-out capacity and the question that comes to
that, if the current system were not favorable, would the
waiting list exist year after year and decade after decade?
Ms. Doby. Well, I am not sure there is a long waiting list,
but I have heard people to say there is a waiting list of
people to build poultry houses and that is one of the things
that I pointed out. A lot of people don't understand the
business when they are getting into it. They may be somebody
that is up north and they come down and buy some land and they
want to be a farmer. Sometimes they think, okay, all I have got
to do is do these chicken houses and they don't understand that
I have got to buy a tractor with a front-end loader. I have got
to have a spreader truck. I have got to have the land to put
the litter on. They don't understand all of these things until
they get so far deep in debt that, I have got to get out of
this somehow or another.
Mr. Hayes. Thank you, ma'am. Is that the doctors or lawyers
that do that? Excuse me. I couldn't resist, Mr. Chairman. I
yield back.
Mr. Boswell. You are forgiven.
Mr. Hayes. I will be back in just a minute.
Mr. Boswell. The chair recognizes the gentleman from
Wisconsin, Mr. Kagen.
Mr. Kagen. Thank you, Mr. Chairman. And since you brought
up the reference to doctors, being one myself, I have to say
this session has been a bit distressing to hear the reference
to the AMA that way, Dr. Taylor. Do you want to get rid of the
AMA? That is a different committee. You are in the wrong place.
Well, I am not a farmer but I know how to listen and it seems
to me that there is a tremendous amount of concentration and
vertical integration in the agriculture business, and I guess
the question has to do with how can we in Congress, in the 2007
Farm Bill, reduce vertical integration without increasing costs
to consumers for the price of food? And I will throw that
straightway to Mr. Buis.
Mr. Buis. Thank you, Congressman. I think you can take a
number of positive steps. One is the competition title to
address some of these structural barriers to having fair, open,
competitive markets. But the other thing, sort of on the
positive front, that I think this committee could really serve
a huge role in helping rural America is the consumer demand for
fresh, source-verified, direct, natural organic products
straight from farmers. It has a long way in improving the
income of farmers and ranchers, because their then allowed to
price their product based on quality, not walk in there on a
wounded knew to a concentrated market and say, what will you
give me for this commodity? And I think addressing some of
those structural barriers to distribution and marketing, that
it is not reinventing the wheel, it is kind of going back to
the way food used to be distributed before we insisted on
everything looking the same, tasting the same, costing the same
and lasting for a lifetime on the shelf. But consumers are
willing to pay for that freshness and that quality and I think
that is a home run waiting to happen.
Mr. Kagen. Along those same lines, I am very interested in
your opinion about a meat packer locally in the State of
Wisconsin being allowed to ship his or her product across the
State line. Don't you think it is time that if a local producer
could put together some salami and bologna that meets Federal
standards, is State inspected, shouldn't that small company be
allowed to transport something across the State line?
Mr. Buis. Absolutely. We have supported that for a number
of years. I think it increases competition with the big
concentrated markets that currently control it. And you know,
the products are safe. They are inspected under the same
standards. It is just this sort of carved-out market and some
are refusing to want to compete with those people and I think
it would be a great thing.
Mr. Kagen. Since your microphone is on, you mentioned that
your organization is opposed to forward contracting, but isn't
that a way for a local farmer to guarantee a steady stream of
revenue, that he has some security, he is going to get paid
some money to pay for his cost of living?
Mr. Buis. We are opposed to adding forward contracting for
dairy and part of the reason is some of the experiences in the
past and allowing those markets to become further concentrated,
and I think rather than just piecemealing in this dairy
provision or that dairy provision, we need to take a total
holistic look at all of dairy and how we can help this hard-
working people receive a profit from the marketplace.
Mr. Kagen. Thank you very much. Now about mandatory
arbitration, a few moments ago, maybe a half-hour ago, the
Administrator really failed to give me an adequate answer about
the concept of mandatory arbitration. Would anybody at the
panel like to comment about those clauses and contracts?
Mr. Buis. Congressman, I would just say that mandatory
arbitration, I am originally from Indiana. That is where I grew
up and on basketball, we always wanted the home court
advantage, and a mandatory arbitration clause is like giving
the company a home court advantage because they write the
arbitration clauses and stick them in there. I don't see how
that benefits producers at all.
Mr. Kagen. Thank you very much and I yield back my time.
Thank you, Chairman.
Mr. Boswell. Thanks, Mr. Kagen. The chair would now
recognize the gentleman from Nebraska, Mr. Smith. He stepped
out. Let us see who we got in the next order here. It would be
Mr. Walberg from Michigan.
Mr. Walberg. Thank you, Mr. Chairman. Mr. Crabtree, in your
testimony, I read a statement here that says the Packers and
Stockyards Administration has become anything but an enforcer
of competition in livestock markets. Later, you state that USDA
has proven, again, that they lack the wherewithal, courage and
political will to effectively enforce the Packers and
Stockyards Act, and they certainly cannot be trusted to use the
considerable authority vested in the Packers and Stockyards.
With these two statements, you yet recommend expanding their
statutory authority. If you believe this agency cannot perform
its mission, then why do you want them to have more
responsibility?
Mr. Crabtree. Thank you for the question. Actually, I would
argue that what we recommended is that we help them define
their statutory authority. The Packers and Stockyards Act
provides the agency a rather expansive authority, which they
have not used, and this is not a current thing. I mean, we have
seen studies, USDA studies that go back to the red meat study
in the early 1990s, the National Commission on Small Farms, two
GAO studies, the recent Inspector General's audit, which have
all said that the Packers and Stockyards Administration is not
fully utilizing their authority. So what we have suggested is
to help them define and clarify and to have a little better
record in the courts, where they have not done well, and that
is certainly not their fault, either. Very specifically,
clarifying what is meant, the statutory language, by undue
preference is, I think, crucial. Packers use unjustified
preferential deals. To really gain a lot of economic power,
they give sweetheart deals to very large producers and it gives
them a lot of market power over small and midsized family farms
and ranches. What we have suggested here is that those
preferential pricing structures should be based only on real
differences in product value or actual and quantifiable
differences in transaction costs and not just based on a volume
premium. So I think what my testimony is to you and my
suggestion to the committee is that let us help them do their
job better by clarifying and defining the statutory authority
that they have and help the Administrator move forward in
better enforcing the Act.
Mr. Walberg. Okay. Thank you for clarifying. Mr. Taylor, it
is all well and good to assert that Congress could legislate
solutions to the problems you cite. Specifically, how would
Congress dictate the law in three different ways, one, an index
that is superior to cash prices for use in alternative
marketing arrangements, or two, the provision of perfect market
knowledge for buyers and sellers, and three, a mechanism for
managing the duration of the market's open trading window?
Mr. Taylor. Well, I am not sure if this should be done
through legislation or under Packers and Stockyards Act,
through regulatory action. But to me, it would be to simply
prohibit tying any AMA to a cash market or to the futures
market. On the second point, there are 2 broad sources of
market power and one of those is based on size alone. There is
no--that 81 percent concentration is too much and 79 is okay. A
second broad category of market power deals with deception,
asymmetric information and market failure. The asymmetric or
one-sided information is the second point and MPR, mandatory
price reporting, has, in my opinion, partially leveled up the
information that both sides have. But under the 70/30 rule,
large transactions are not required to be reported. It is large
transactions that move market cash or future and in cattle
markets, it is akin to insider trading not being reported, and
insider trading must be reported for stock market transactions
and the legislation there might be a model to apply to cattle
markets.
Mr. Walberg. Thank you. I see my time has ended.
Mr. Boswell. Thank you. The chair would recognize the
gentleman from California.
Mr. Costa. Thank you very much, Mr. Chairman. To Mr. Buis.
In your testimony, you spoke of public support for COOL, for
the country of origin labeling efforts and this has been
something that I think is much discussed about in the
agriculture community and obviously there are different schools
of thought on this. The opponents have noted that there
currently is not restriction on labeling food products and
there is therefore no need for the USDA to implement the
legislation that was passed, so I would like to get your
response on that, please.
Mr. Buis. Well, if you just look at who has the market
controlled and concentrated, and then if you look at what kind
of products come into the country and who is bringing them in
and the benefits that are derived by bringing these products
into the country and putting the USDA inspection sticker and a
USDA grade stamp on it so that the consumer assumes it is a US
product, it is more like following the money. They are probably
not going to do it because they are not going to make the
revenues they could off of bringing in less expensive product,
and duping the consumer into believing that it is a US product.
Mr. Costa. The grocers have often argued that it is time
consuming and costly. My experience has been that these kind of
things, the costs have a way of being passed on. Some of us
have visited Europe and other places where labeling is not only
required but it is a value-added because consumers want to
know. Your reaction?
Mr. Buis. It doesn't need to be that way. I mean,
obviously, in my opinion, the Department of Agriculture wanted
to do everything they could to make this as ugly a program and
distasteful as possible when they rolled out the rule.
Mr. Costa. Do you think they succeeded?
Mr. Buis. And they succeeded. But we can work out the
problems with the retailers, and the State of Florida has a
good program. The sky didn't fall there. Forty-eight other
developed countries have labeling.
Mr. Costa. Do you think there should be an exception for
hamburger?
Mr. Buis. Pardon me?
Mr. Costa. Do you think there should be an exception for
hamburger? They have talked about blending meats.
Mr. Buis. There should not be an exception.
Mr. Costa. There should not be any exception?
Mr. Buis. No.
Mr. Costa. Okay. Mr. Stallman, you have heard the response
by the gentleman sitting next to you. You take on the mandatory
efforts. I think it is a significant part of the marketing
issues. I thought I understood, and maybe I was incorrect, you
had indicated that it should be voluntary? I would like you to
elaborate. I mean, it just seems to me, and we have had
experiences in California, that if it is voluntary, you have no
program, per se, outside of those who are maybe using it as a
marketing tool for higher-end products for niche consumers. And
please elaborate.
Mr. Stallman. This is one of the most debated issues we
have had internally, probably throughout the history of the
organization.
Mr. Costa. I expect you have heard a lot about it within
your house of delegates and so forth.
Mr. Stallman. But our producers come back to determining
our position based on does it provide more income back to the
producer. There are three criteria and all three have to be met
before that can happen with a mandatory country of origin
labeling program. The first criteria is, is that a consumer,
for an equal-quality product, has to be willing to pay more
just because of the label that is on it. The second criteria
that has to be met is that that extra price paid for by the
consumer has to be greater than the cost of implementation.
Now, we can argue about what those costs are, but there will be
some cost. Then the third thing that has to happen, if there is
a net return from the difference between what the consumer is
willing to pay and the cost of implementation, then that has to
get all the way back to the producer. So all three of those
criteria have to be met.
Mr. Costa. Before my time runs out, where do the grocers
mix in all of this?
Mr. Stallman. Well, they would be in the position of having
to work at implementation, but not just the grocers, the whole
chain.
Mr. Costa. Obviously. Clearly. You don't think the costs
ultimately get passed on to the consumer?
Mr. Stallman. In my experience, the cost will ultimately be
pushed down to the producer, one way or the other.
Mr. Costa. Up and down?
Mr. Stallman. Probably down more than up.
Mr. Costa. I don't think the grocers will absorb those
costs.
Mr. Stallman. No, I don't think they will, either.
Mr. Costa. My time has run out. Thank you very much, Mr.
Chairman.
Mr. Boswell. Thank you. The chair now recognizes Mr. Rogers
from Alabama.
Mr. Rogers. Thank you, Mr. Chairman. I want to start with
Mr. Buis. You made a reference a little while ago that an
arbitration clause would give one party a home field advantage
or a home court advantage. Tell me how.
Mr. Buis. Often, they are written into the contracts and if
the person offering the contract writes the arbitration clause,
obviously, they have the advantage. I call it the home court
advantage. But if the clause is being written by the person you
are signing the contract with----
Mr. Rogers. By clause you mean the requirement that a
dispute has to be resolved by arbitration?
Mr. Buis. The dispute has to be resolved and what the
parameters of that resolution can entail. When you take away
the person's right to seek legal recourse, then I think you are
putting all your faith in that company.
Mr. Rogers. Well, as a plaintiff's attorney in my former
life, it has been my experience, and my colleagues would
probably consider this heresy, but it has been a pretty
equitable means of dispute resolution and usually results in
lower litigation expenses and more timely dispute resolution,
and I have yet to see an arbitration clause that outlined the
rules in favor of one party or the other. But in any event, Ms.
Doby, I have a got large poultry production in my congressional
district. I am from Alabama and it is big in my State and in my
district and I am curious. You talked about subtle retaliation
methods that the company might impose on growers. Tell me more
about that. What do you mean?
Ms. Doby. Well, if a grower speaks out and in some
instances just like with GIPSA, with the hotline, when you call
that hotline, it will say, automatically, you don't have to
leave your name. Well, if there has not been passed down that
there is retaliation somewhere or a threat of it or the thought
of it, why do they even suggest you don't have to leave your
name? And it is because--and some growers have called me and
they have said, I even went to speak to my representative about
this to see what he would say and left this paper. And then my
service person came out and said, what do you mean? You went
and complained to your representative about this and so on and
so forth? They are in shock. I went to speak to someone about
my problem and then the company says, why do you do this?
Mr. Rogers. Yes.
Ms. Doby. And they hold that retaliation. They can hold you
out of birds, which, personally, I have had that done to me.
The service person made the mistake of telling me. I said, why
am I being held out of birds? If you are held out of birds, you
are not making any income. It is just like you being sick from
your job.
Mr. Rogers. Yes.
Ms. Doby. You are not getting any money out of it and you
still have your loan payment. The bank is still saying, okay, I
don't care if you were out of birds a month. This loan payment
is due. Well, that person with the company said, yes, that is
probably why you are being held out, because you won't have
your houses upgraded or something. And I said, isn't that an
unfair trade practice? She said, it might be, but that is the
way it is. That is retaliation.
Mr. Rogers. Okay. Also, you said earlier today, you said
that if growers aren't able to continue to make a profit, that
this poultry production is going to go elsewhere. Where else
did you mean? You said elsewhere in the agricultural sector. I
didn't understand what you were talking about. Assuming growers
like you ultimately say, enough. I am not signing that contract
with that arbitration clause in it, or whatever provision that
you don't like. Where would that growing capacity gravitate to,
in your view?
Ms. Doby. Do you mean the companies would go somewhere
else?
Mr. Rogers. What you do. No, no, no. Assuming growers like
you just stopped all over the country and just said, we are not
doing this anymore, what would happen? Who would start growing?
Ms. Doby. I don't know, but I don't think that will ever
happen because people are so far deep in debt. You got your
farm that belonged to your grand dad.
Mr. Rogers. Well, you made the reference earlier, that if
we can't work this out and we can't renew these contracts and
be profitable, this production is going to go elsewhere in the
agricultural sector, and I didn't know where else you were
talking about it would go.
Ms. Doby. I am not exactly sure.
Mr. Rogers. But also Mr. Hayes made the point earlier about
waiting lists. I do have some of those folks that are on a
waiting list, but I will tell you who mostly is on the waiting
list, are other growers, people who are already in the sector
who are wanting to get more chicken houses authorized and the
companies won't let them. Now, if they are so bad, and they
have been in the business for years, why do they want more
houses?
Ms. Doby. Well, one thing the company will--they will tell
you and most companies, it used to you could build, two houses.
Well, they are saying now, we don't offer a contract to anyone
unless you build four or more houses, because they are not cash
flowing.
Mr. Rogers. Right.
Ms. Doby. And that is one reason I think growers, they
have, maybe two houses and they build more houses so that the
cash flow will be better. If I can put in----
Mr. Rogers. But my point is I have got growers who may have
4 or 6 houses and they are wanting to get 8 or 10 and the
companies won't let them.
Ms. Doby. Yes.
Mr. Rogers. So it just seems to me incongruent with what
you are talking about, to say that only naive folks who don't
know what they are doing get into this business, when I have
got established successful farmers who are willing to expand
their operations and they are aggravated because the companies
won't let them have or authorize them to have additional
houses.
Ms. Doby. Well, not necessarily, but I think if you also
talk to those growers, I feel like they would agree with these
things that I have brought out.
Mr. Rogers. Several things you said I have heard from them.
I agree.
Ms. Doby. Yes. They would like to have those. I am not
saying----
Mr. Rogers. But I have never heard anybody talk about
organizing the chicken growers in my district. I have never
heard about that. I am sorry, Mr. Chairman.
Mr. Boswell. Thank you. Well, it is the first round. I
guess there is not too many of us left, so we may do another
little round here very shortly. But Mr. Taylor, I noticed in
your testimony, your footnotes, you made a reference to
Peterson.
Mr. Taylor. Yes, sir.
Mr. Boswell. Does that reference the late Bob Peterson of
IBP?
Mr. Taylor. Yes.
Mr. Boswell. Can you explain the quotation in more detail?
Mr. Taylor. There are transcripts available of three talks
he gave to Kansas cattlemen, one in 1988, before IBP got
involved in captive supply, and then two in 1994, after IBP did
some AMA arrangements. And he basically outlined how AMAs gave
the buyer leverage in the marketplace and went on to say, do
you think this will have an impact on the cash price? And he
said you bet.
Mr. Boswell. It kind of follows the money.
Mr. Taylor. Yes.
Mr. Boswell. Okay. I was curious about what you meant by
that, so thank you for elaborating on that. I guess you were
making a point that is clear. I think you said in the RTI
report, you said it contains fundamental flaws because the
study ignores about 20 percent of cash transactions, ignores
about 20 percent cash transaction that occur with a negotiated
grid. So first, do you agree with this statement, and if so,
can you elaborate on what it means and how it would affect the
RTI's data?
Mr. Taylor. MPR has several categories for reporting cash
transactions. One of those is on a negotiated grid, and in the
last year or so, that has fluctuated some but been on the order
of 10 to 20 percent. In looking through the RTI study, I did
not see where they had recognized those cash transactions with
a negotiated grid; that they lumped all cash together.
Mr. Boswell. Thank you. Mr. Walberg, do you have any other
questions?
Mr. Walberg. I do, Mr. Chairman. A couple more if I could.
I am aware of arguments that packers have disproportionate
market power and therefore they are able to manipulate prices,
though I am not aware of any study or investigations that have
ever shown that to occur. Perhaps maybe some of our witnesses
could provide the subcommittee with that information. But Mr.
Stallman, I guess my question is, what prevents producers from
banding together in cooperative arrangements and agreements to
exert market power over packers?
Mr. Stallman. Nothing. It is a matter of will and desire.
You know, the laws regarding cooperative structures were put in
place to help assist the producers to do that and there have
been examples of producers successfully getting together in
cooperative structures and they have more market power. But
there are stories that were not quite so successful and there
is a reluctance of producers to do what it takes to put their
producing power together to get more market power, but there is
nothing to prevent them from doing it.
Mr. Walberg. It is their choice and it is a struggle. They
can join it or let it go.
Mr. Stallman. That is correct.
Mr. Walberg. Okay, thank you. Mr. Taylor, you stated that
there has been a lack of innovative effort by the USDA to
identify new ways of doing business that are economically
efficient.
Mr. Taylor. Yes.
Mr. Walberg. Fair to both sides of the transaction and do
not distort buyer or seller incentives and would result in beef
with the quality attributes that the consumers desire. Let me
ask you, are you suggesting that the government is responsible
for how livestock in this country should be bought and sold?
Mr. Taylor. No.
Mr. Walberg. That is what it sounds like.
Mr. Taylor. The point I want to make is, over the years,
there has been a bipolar debate, AMAs versus the cash market.
Mr. Walberg. Don't get back into medicine with me or
anything.
Mr. Taylor. Okay.
Mr. Walberg. The doctor has left.
Mr. Taylor. And what I am suggesting is that we need to
think of innovative ways of handling these transactions that do
not have objectionable features like being tied to a cash
market. And there are some electronic possibilities, I think,
that have not been investigated, but if we get into full
electronic marketing, there could be antitrust issues. So I am
just suggesting that all of us need to give more thought to
innovation rather than sticking with this bipolar debate.
Mr. Walberg. Well, I am not sure it is a bipolar debate.
Philosophically, there is some significance to those that would
say that the government is expanding their power and taking
control, what it sounds like, I don't know if there is a
mechanism without expanding it if you are going to walk away
from the market. So well, we will agree to disagree at this
point, but thank you.
Mr. Boswell. I see no further questions. I want to thank
the panel for your spending the time with us today. We
appreciate it very much and we will look forward to talking to
you in the future. Thank you very much. We will take a short
moment here and let the third panel take their position. Well,
I thank the panel for arriving. I see that Ms. Philippi, that
you are back and it is good to see you again, my neighbor to
the west. And we appreciate the time of day it is, so we will
get right to business and thank you for your patience, being
willing to come and share with us. As you see, these are
discussion points on a lot of people's minds, so I think it is
good that we talk about it. So that is what we are trying to do
and listen carefully and that is what this is, a listening
session for us. So I would like to welcome the third panel, all
of you, and we will get right down to business and we will
start of with Ms. Philippi. Help me pronounce. I want you to
pronounce your name, Joy.
Ms. Philippi. Philippi.
Mr. Boswell. Philippi. I got it. Philippi. Okay. So we will
start off with you for five minutes and we are happy to have
you here.
STATEMENT OF JOY PHILIPPI, PORK PRODUCER, ON BEHALF OF NATIONAL
PORK PRODUCERS COUNCIL
Ms. Philippi. Okay, thank you. Chairman Boswell and Ranking
Member Hayes and members of the subcommittee, I am Joy
Philippi, a pork producer and row crop farmer from Bruning,
Nebraska, and I am the immediate Past President of the National
Pork Producers Council. NPPC is an association of 43 State pork
producer organizations and represents the interests of
America's 67,000 pork producers.
The US pork industry has enjoyed unparalleled prosperity
over the past three years. Average farrow-to-finish producers
completed their 35th consecutive profitable month in December
and made an average profit of $22.17 over that time period. New
data indicates that the industry will remain profitable through
March of this year, despite of near record feed costs. It is
against this backdrop of financial success that we offer our
views on market structure.
First, we would ask, is legislation that would limit
producers market access options a solution in search of a
problem? There is no doubt that the structures of the US pork
industry and the pork and hog markets have changed over the
past 10 years. We urge Congress to focus, not on structural
issues, but on the more important market efficiency measures of
conduct and performance as you deliberate the wisdom of
government intervention. Congress has invested significant
taxpayer resources in researching the current livestock
markets. Much of that research, including the $4.5 million
GIPSA Livestock and Meat Marketing Study, is relatively new. We
have had little time to consider what it tells us, so we urge
Congress to move slowly, as USDA and the industry digest and
consider those findings.
We also would like to know the status of GIPSA's report to
the 2005 audit conducted by USDA's Office of Inspector General.
We believe GIPSA Administrator James Link has made substantial
changes in the way GIPSA performs its duties. However, we do
believe Congress should know specifically what has been done
and how that is going to change GIPSA's future efforts to
enforce the Packers and Stockyards Act. The Federal government
sought to approve livestock price reporting and enhanced the
transparency of the markets by implementing the Livestock
Mandatory Reporting Act. We believe that system has made
markets more transparent and that refinements enacted in 2006,
including new swine reporting enhancements, will further that
cause. Let us work to make the system better before we proceed
with other actions.
The focus of most debates regarding the competition has
been in the number and market shares of various participants.
The key is whether sufficient competitive pressure exists to
make packers and producers behave in a way that approaches
competitive norms and yields competitive prices and quantities.
This can only be measured by looking at actual transactions to
determine how firms act and what the results of those actions
are. The new GIPSA study did just that. Instead of looking at
changes in ownership and market shares, it examined
transactions and looked at conduct and performance. We now need
to step back and consider the methods and results of that
research, perhaps even ask and answer, there is no question on
the results.
Now there are always unintended consequences to virtually
all public policies and part of the art of public policymaking
is balancing the costs and the benefits of any proposal. In the
areas for competition and industry structure, there are a
number of pending proposals that will have an adverse effect on
the pork producers and will give little benefit to anyone. As
an example, consider the idea of requiring packers to buy at
least 25 percent of their hogs on the spot market or through
negotiated sales. The new GIPSA study found that such
requirements would make producers and consumers worse off and
would not leave packers better off. Additionally, the practical
implications of such a requirement are challenging, to say the
very least. Would the 25 percent be measured daily, weekly?
Would producers be required to sell 25 percent of their hogs
through negotiated trades to provide the 25 percent that
packers are required to buy through negotiated trades? If not
and since only 11 percent of all hogs are sold through
negotiated trades now, which producers would have their
contracts terminated to force their hogs into the negotiated
trades? And what happens when those contracts are terminated?
Would the financing that was contingent on those contracts be
withdrawn by risk-adverse lenders?
Pork producers face many challenges today and those include
the rising corn prices driven by ethanol production, impending
mandatory country of origin labeling costs, the specter of
animal rights-driven legislation dictating on-farm production
practices, and increasingly stringent and costly environmental
regulations that are almost universally better handled by large
operations. I urge you not to add to these challenges by
limiting the options we have available to market our hogs.
Punitive actions against packers do not necessarily benefit
pork producers in the long run, unless the packers are clearly
in the wrong and we have not seen any evidence of this, and
Congress must proceed with caution, weighing the costs and
benefits of such important public policy.
We thank you for the opportunity to be here today to
represent the Nation's pork producers, and I will be glad to
answer questions at the appropriate time.
Mr. Boswell. Thank you. Mr. Roenigk.
STATEMENT OF WILLIAM P. ROENIGK, SENIOR VICE PRESIDENT,
NATIONAL CHICKEN COUNCIL
Mr. Roenigk. Thank you and good afternoon, Chairman
Boswell. We appreciate the opportunity to participate in this
important hearing regarding the issue of market structure for
the livestock and poultry industry. On behalf of the National
Chicken Council, I appreciate your invitation to provide
comments on the market structure of the US chicken industry. My
name is Bill Roenigk and I am Senior Vice President of the
National Chicken Council. Companies that produce and process
more than 95 percent of the young meat chicken broilers in the
United States are members of the National Chicken Council. I am
pleased to have the opportunity to share with you information
about the market structure of the US chicken industry.
More than a half a century ago, as farmers moved more and
more away from dual-purpose chickens, those were chickens that
produced both eggs and meat, and move more and more towards
specialized breeds, those that laid eggs and those that were
better at producing meat, a new industry and a new market
structure began to emerge in poultry farming. These farmers
sought greater stability and predictability in their incomes
and return on their investments. With access to only limited
capital, it was very important to lessen market risk by sharing
those risks with others in the production process.
Although the vertical integration happened several
different ways, the primary way it happened was with feed mills
who provided the feed to the farmers growing the broilers, and
they learned the best way to get paid for the feed they had in
those chickens was to work with the grower and a processing
plant to make sure that when the birds reached market weight,
that they had a place to be processed. Because a chicken grows
so quickly, the economics of feeding broilers requires prompt
movement to market when they reach market weight, and a broiler
grower is at a very distinct disadvantage if the processing
plant is at capacity or the wholesale market for dressed
chicken is depressed. By coordinating growing and processing
and marketing, the surge in gaps in live production could be
minimized. The chicken industry, as it began to use vertical
integration to coordinate production, processing and marketing
50 years ago, was participating in a concept called just in
time. At the time, we didn't know it was called just in time.
The Japanese carmakers later labeled that and took credit for
it. We invented it or at least we think we did, but we forgot
to label it, so we don't get credit for it.
Contracts with growers offer many important benefits. These
benefits and advantages include substantially reduced market
risk, quicker and a more thorough understanding of production
requirements, better access to capital, more reliable and
predictable income flows to labor, management and investment,
and better opportunity to leverage success to expand or
diversify farm operations.
Family farms who contract with chicken companies have
benefited in good measure over the past six decades. More than
25,000 family farms currently contract with companies to raise
broilers and can do so more confidently because, to a very
large degree, they are insulated from the risks of the chicken
marketplace. Contract growers are basically guaranteed a fixed
payment with a bonus for above-average performance. University
studies have found that returns to growers and companies are
very comparable.
As was mentioned earlier, companies, not every company, but
most companies, have a list of farmers who would like to begin
to grow chickens. They also have a list of growers who are
currently growing chickens and would like to add additional
housing capacity to their operations. And as was asked before,
if this is not a good system, why has it existed for more than
50 years and why do we have these waiting lists? Vertical
integration has stood the test of time very well.
As I noted in my statement, the consumption has gone up to
where chicken is the most consumed meat in the United States,
and the cost to consumers has come down dramatically. It takes
only four minutes for the average worker to be able to earn
enough wages to buy a pound of chicken. Consumption of chicken
has doubled from more than 30 years ago. And until the ethanol
issue came, I would predict that we were going to continue to
increase that consumption, but that remains to be seen.
Chairman Boswell, the National Chicken Council appreciates
the opportunity to share the broiler industry's story with you.
As you begin to deliberate the various issues involving the
upcoming farm bill, I respectfully suggest that trying to
improve the market structure for the chicken industry should
not be a high priority for the subcommittee nor for Congress.
The National Chicken Council does not see the need for new or
additional laws nor USDA regulations that would involve
government further in the grower/company business relationship.
Nonetheless, if you have concerns or questions about the
chicken industry, with respect to this issue, the National
Chicken Council would very much appreciate the opportunity to
work with you to appropriately and adequately address those
issues or concerns. Thank you.
Mr. Boswell. Fair enough. Mr. Queen, please.
STATEMENT OF JOHN QUEEN, PRESIDENT, NATIONAL CATTLEMEN'S BEEF
ASSOCIATION
Mr. Queen. Mr. Chairman, my name is John Queen and I am a
fourth-generation cattle producer and livestock market operator
from Waynesville, North Carolina. I am President of the
National Cattlemen's Beef Association and I am pleased to be
with you to discuss our policy on market structure issues,
policy which was brought forward by, debated by and voted on by
our rancher members. This is grassroots policy where one
member/one vote has always been the standard.
When it comes to market structure and competition issues,
NCBA's position is simple: we ask that the government not tell
us how we can or cannot market our cattle. The way we market
our cattle has changed significantly over the years and it has
come from the recognition within our industry that we are not
just cattle producers, but beef producers and must be
responsive to the consumers' demands. This consumer focus has
led to many innovative marketing programs that have improved
the quality of beef, given the consumer, what they are asking
for, and allowed ranchers to get paid for the value that they
add to their animal.
In addition to being responsive to our consumers,
participation in these marketing arrangements provides a
rancher with several tools that help improve their operations
and herd management. The ability to manage price risk is one of
the most valuable of these tools. Taking advantage of marketing
arrangements, such as forward contracting, allows producers to
make a price that allows them to be profitable. If the price
doesn't fit their needs, they can walk away and find another
buyer. Being a price maker rather than a price taker, puts
ranchers in control of their business. Many ranchers who
participate in these programs get information back from the
feedlots, telling them how their cattle performed. Information
also comes back from the packer, in the form of yield and
quality grades. This information is critical in managing our
herds and focusing on the trades which produce the highest
quality animals.
The benefits of AMAs were recently supported by the results
of the GIPSA Livestock and Meat Marketing Study conducted by
RTI. This 3 1/2 year study was funded by 4 1/2 million taxpayer
dollars and was billed as the definitive answer on these
issues. The study supports what many ranchers across our
country have known all along: a market-driven system works. The
overwhelming conclusion of this study is that, overall,
alternative marketing arrangements help all sectors of the
industry, not just those that participate.
The report states that the leading reasons ranchers
participate in AMAs are the ability to buy and sell higher
quality cattle, improve supply chain management and obtain
better prices. When talking about improved supply management,
we have to once again go back to the consumer. The consumer
does not come into their local Safeway looking for ranchers
reserve beef only on Tuesdays. The consumer demands the
convenience of picking up a package of ranchers reserve beef
any day of the week. To meet that demand, the retailer and
packer need a steady and constant supply of cattle that meet
the qualifications of the store-branded program. If the packer
is limited in its ability to source those cattle, the branded
programs go away. The consumer chooses other products and cow/
calf producers get less money.
So far, I have only talked about AMAs, but approximately 62
percent of cattle marketing is done through the cash or spot
market. Spot markets such as auction barns are critically
important to the US cattle industry. Ranchers who market this
way cite several reasons for their choice. One reason is
independence. Flexibility is also important to these producers.
Selling on a spot market give ranchers the opportunity to
participate in market rallies. We must remember, however, that
this only gives them the opportunity to catch the rally. Timing
the market is always a difficult task and adds to your price
risk.
Even with traditional means of marketing, we have seen
innovations that have been market driven. One of these
innovations is video livestock auctions. With this method,
ranchers can auction their animals by video and reach customers
all across the country. The results of these innovations are
telling. Demand for beef has grown over 20 percent since 1998.
Consumers spent a record $71 billion on beef in 2006 and
consumer confidence in our product is at 91 percent, greater
than it was before the 2003 BSE case in Washington State.
The study concludes that restrictions on AMAs would cause a
decrease in the supply of cattle, quality of beef and feeder
cattle prices. These results would set our industry back and
place the burden on the individual cow/calf producer. In a time
where we continue to see an increase in feed costs due to
competition with ethanol for corn, as well as an increase in
fuel costs, the last thing we need to do is to add more burdens
to our ranchers. Keep in mind that, for every agreement made by
a packer, there is an individual rancher on the other side of
that transaction who had decided that that agreement is in
their best interest and they should be allowed to conduct that
business privately, just like any other industry. Restrictions
or bans on AMAs will eliminate or significantly reduce these
programs and hamper the progress we made in keeping ranching a
viable industry. In the end, we must have a government that
works to help our industry, not one that limits or removes
choices for cattlemen in the marketing of their cattle. Thank
you.
Mr. Boswell. Thank you very much. Mr. Boyle.
STATEMENT OF J. PATRICK BOYLE, PRESIDENT & CEO, AMERICAN MEAT
INSTITUTE
Mr. Boyle. Good afternoon, Chairman Boswell, Ranking Member
Hayes and Congressman Kagen. Thank you very much for the
opportunity to represent the American Meat Institute here
today. AMI represents 250 of the Nation's meat and poultry food
manufacturers. Collectively, they produce 90 percent of the
beef, pork, lamb, veal, and 75 percent of the turkey processed
in the United States. These companies operate, compete,
sometimes struggle but mostly thrive in one of the toughest,
most competitive and certainly amongst the most scrutinized
sectors of our economy.
Members AMI have concerns about legislative efforts to
apply State-directed controls on an industry that competes
intensely with each other and for a greater share of the
consumers' food dollar from other segments of agriculture which
would be free from such controls. Specifically, these concerns
relate to proposals that would, first, prohibit the ownership
of livestock by a packer and unduly regulate investment;
second, prohibit or restrict contracting and livestock
marketing arrangements upon which producers and packers freely
agree and routinely utilize; and three, mandate an arbitrary
cash or spot market purchase requirement. If enacted, these
proposals would involuntarily expose producers and packers to
the volatility of the cash markets, expose packers to the
inconsistencies of raw materials, and subject consumers to
fewer product choices at higher prices.
We believe the strength of the livestock marketing system
in the United States is in the flexibility it provides to
producers, packers, processors and retailers, in responding to
market signals. Meat and poultry consumers continue to benefit
from a wide array of value-added products at very reasonable
prices. The amount of discretionary income that American
consumers spend on food has fallen to a historic low of just
four percent, of which meat and poultry products account for
less than two percent of our disposal income each year. We
believe that most appropriate government role in today's
livestock marketing system is to enforce the numerous existing
laws and regulations that ensure a fair and nondiscriminatory
business practices amongst producers and packers, while
allowing producers the freedom of choice on how best to market
their livestock.
Two recently released studies agree with AMI's assessment
of the competitive and rational nature of the livestock and
meat markets, as well as the resulting benefits to American
consumers. The first panel earlier today reported on the
investigation and enforcement activities of GIPSA's and RTI's
Livestock and Meat Marketing Study. I would like to emphasize
two findings. First, the report found that contractual
marketing arrangements between livestock producers and meat
packers have numerous mutual benefits. They increase the
economic efficiency of the cattle, hog and lamb markets, and
these economic benefits are distributed forward to consumers,
as well as shared between producers and packers. And secondly,
the study concluded that restrictions on the use of these
contractual arrangements, such as the legislative proposals
that I have previously discussed and which AMI opposes, would
have negative economic effects on livestock producers, meat
packers and American consumers.
A second multi-year congressional-mandated report from the
bipartisan Antitrust Modernization Commission was submitted to
the Justice Department earlier this month. It concludes that
``the government should not displace free-market competition,
absent extensive, careful analysis and strong evidence that a
market failure requires the regulation of prices, costs and the
entry in place of competition.'' Clearly, the extensive,
careful analysis of the 4-year, $4 1/2 million RTI study
documents that we have nothing approaching market failure in
the livestock sector of our agriculture economy. The RTI study
is only the most recent in a long line of similar studies over
nearly the past 20 years that have reached the same conclusions
about the legality and vibrancy of our Nation's livestock
marketing system. Many of these studies were either mandated by
Congress or initiated by Federal regulatory agencies with
oversight responsibility for the livestock and meat packing
sectors. Others were funded by universities, and by private
entities, to assess the health and competitiveness of this
industry. And they have, every one them, all 34, without
exception, reached the same conclusions as the most recent RTI
study; that the livestock and meat packing market is
competitive and that current oversight and enforcement are
effective.
Congressman Hayes, you asked the last panel whether
anything approaching an economic consensus exists on that
conclusion. I would suggest that these 34 studies, representing
nearly two decades of regulatory oversight and academic
analysis, comes pretty darn close to representing that
consensus about the health and vibrancy of this sector. I thank
you for the time today. I ask that these be submitted for the
record, and I look forward to your comments and observations
and questions.
Mr. Boswell. The additional materials will be incorporated
in the record, and thank you for that and we will start our
question time now and I will just start off with Ms. Philippi.
In the testimony today, you heard that somewhere between 60 and
80 percent of the hogs are either owned outright by packers or
are tightly controlled by various contracts. At what point does
packer control become an issue?
Ms. Philippi. Well, to this point, we haven't seen that has
been proven yet, what that level is going to be and we do
believe that we need to continually look at that. And if you
would like to have even more in-depth numbers, we could be able
to probably look for those.
Mr. Boswell. I will appreciate that, but is there some
point where you become alarmed?
Ms. Philippi. We haven't been at this point.
Mr. Boswell. So where would it cause the yellow flag to go
up in your mind?
Ms. Philippi. Well, in my mind, I don't have any problems
with the packers owning hogs.
Mr. Boswell. Okay. So if they have 90 percent of the hogs,
there is no problem with you?
Ms. Philippi. It is not with me personally, but we will get
you information, if we can get that to you.
Mr. Boswell. All right. Thank you very much. Just to move
along here, Mr. Roenigk, in Ms. Doby's testimony today, we
heard of multi-year contracts being redrawn before the contract
runs out and the terms are changed. We also heard about
mandatory arbitration clauses being added to the contracts. You
state in your written testimony that a measure of successful
relationship between companies and contract growers is that the
majority of the companies have a waiting list for growers who
are requesting to add to existing grow-out housing, and I think
you make the connection that, since this is the case, it must
be a good relationship. Could it not also be the case that the
industry is so integrated that this is the only option
available for the poultry producers?
Mr. Rogers. Permit me to----
Mr. Boswell. I will give you a minute.
Mr. Rogers. To phrase the question, the question is, is
there a better way to operate contracts with growers?
Mr. Boswell. Well, is there any other option for the
producer?
Mr. Roenigk. Given the current market forces, both in terms
of inputs and in the consumer demand, I don't know of one, Mr.
Chairman.
Mr. Boswell. That is my point there. Okay. Well, that is a
concern that I hear people talking to me once in a while. Mr.
Queen, if I could, what would be the result of prohibiting
packer ownership for livestock for more than a couple weeks?
Mr. Queen. I am sorry, I didn't hear you.
Mr. Boswell. What would be the result of prohibiting packer
ownership for livestock for more than 7 to 14 days before
slaughter?
Mr. Queen. Because I think a lot of the value-added markets
that we have, have to go through a chain of events and that
packer is one of those links in that chain, going from the
producer to the feeder to the packer to the retailer to the
consumer, and if we don't let him fulfill that continuously,
then we are going to lose that added value that we have in our
commodities.
Mr. Boswell. Continuing that, could it be said that if a
producer wanted to take advantage of high future prices, they
could sell a CME contract? And could it also be said that if a
processor wanted to take advantage of low prices and a short
supply, could he not buy on the CME? Isn't that why live animal
contract trading was started in the 1970s?
Mr. Queen. Yes, sir.
Mr. Boswell. So what are your comments? Why did you say
yes?
Mr. Queen. Well, certainly the producer has that
opportunity to sell that contract to protect himself in that
risk, if he has monetary means of doing so. The producers in
America today are so small, the average herd size is just 38,
so very few producers in America have the ability to hedge
those contracts the way the market was set up.
Mr. Boswell. In your testimony, you emphasize that the
National Cattlemen's Association wishes the government to stay
out of cattle marketing issues. A little later in your
comments, you say how much you rely on Federal regulations to
keep the playing field level for producers. Would everyone be
better off if there were no AMAs or packer ownership and let
contracts on the Chicago Mercantile Exchange manage the risk?
Mr. Queen. No, sir, I don't think so. I think we are trying
to take away the American way, what our country was founded on,
and that being the ability of every producer in this country to
choose his own business model, that being the ability to sell
his commodity to whom he wants to sell it to, when he wants to
sell and for what price he wants to sell and to be delivered
what day he wants to do that. That is the American way. That is
what our country was founded on and I think we are trying to
take that away from the livestock producers in America.
Mr. Boswell. Okay, I am going to stop now and come back to
you in a little bit, Mr. Boyle. I would like to recognize Mr.
Hayes.
Mr. Hayes. Thank you, Mr. Chairman. Mr. Roenigk, one of the
legislative proposals we heard discussed today is the
prohibition of mandatory arbitration clauses in poultry
production contracts. Could you take a a minute to outline the
use of these clauses and why your industry opposes the proposal
to eliminate them?
Mr. Roenigk. Well, mandatory arbitration is in many
clauses. I don't think it is in all the clauses. But
differences arise in any business relationship, contractual
relationship. You need an efficient and timely way to resolve
their differences. Mandatory arbitration does that. If someone
can propose a better mechanism, I think we would be willing to
consider it, but we are not aware of one. And the arbitration
system, as I understand it, does not give someone a home field
advantage or a home court advantage. You choose arbitrators who
are fair and just to hear both sides and make a decision. To
me, that sounds somewhat fair.
Mr. Hayes. Okay. Joy, the poultry contract grower on the
previous panel made three specific legislative recommendations:
prohibit mandatory arbitration, expand coverage under Packers
and Stockyards Act over production contracts, and authorize
collective bargaining power for contract growers. What is your
thinking on each of these three?
Mr. Roenigk. As my statement----
Mr. Hayes. Joy Philippi.
Mr. Roenigk. I am sorry.
Mr. Hayes. I was asking Joy.
Ms. Philippi. Those are three areas that we discussed. We
also believe that the regulation of a contract like that
doesn't need to be mandated. We believe that there are some
agreements that can be made that producers can enter into. They
can review them to know if they are good for their business
model. I am a contract producer, so I was walking that right
through my head as well, and we just don't believe that there
is any need to have any further regulation on those things.
Mr. Hayes. Mr. Roenigk, do you want to comment on that?
Mr. Roenigk. As my statement indicated, we believe, for
further government intervention, whether it is congressional or
USDA, it probably is not needed at this time. We think the
system works well. Companies have grower relations committees
where they meet periodically with growers. The State poultry
associations include both growers and companies in there. There
are a lot of opportunities to work out the differences and I
think we should try and make that system work better before we
have more government intervention.
Mr. Hayes. Okay, I am going to come back with another
question. Mr. Boyle, talk about GIPSA's enforcement activities.
Are they doing enough, not enough? Are we balanced here?
Mr. Boyle. Well, my impression from the Administrator's
update on steps that he has taken since he arrived to run that
agency, suggests that it is a revamped, reorganized agency with
a lot of investigations underway in the last few years. At AMI,
we have been always supportive of a strong and effective GIPSA,
as well as strong enforcement of our antitrust laws. I will
point out for the record that, unlike all other segments of
American business who have the pleasure of interacting on
occasion with the antitrust division of the Department of
Justice and the Federal Trade Commission, in the meat packing
sector, we also have the opportunity to interact with the
Packers and Stockyards, a unique agency with oversight of
competitive practices and fair trading practices in the meat
packing sector. So it is an additional layer of antitrust
enforcement and review. We have always been supportive of it.
We interact with them when necessary and I believe that the
Administrator gave a fairly positive update of changes he has
implemented since he arrived.
Mr. Hayes. Back to Mr. Roenigk for a minute. Interestingly,
I was at the opening of a new poultry plant last week and this
is based on rejuvenating older, smaller poultry houses,
contracting with those folks for a different way of raising,
air-chilled rather than--so there are a lot of organic, free
range. A lot of different alternative markets are springing up.
So I think, even though the integrators have a big impact on
the market, there are a lot of alternatives that are being used
out there. Mr. Chairman, time is running out here. With Mr.
Queen, we will ask about animal ID on the next round.
Mr. Boswell. Thank you, Mr. Hayes. The chair recognizes my
colleague from Iowa, Mr. King.
Mr. King. Thank you, Mr. Chairman, and I want to thank the
witnesses that are here. I am listening to this testimony and
reading through it at the same time and I looked back on Joy
Philippi. In your testimony, you mention a number of challenges
facing the livestock industry, high feed prices, mandatory
COOL, animal rights initiatives, and keep this list for me,
because I am going to ask you a prioritized question. So high
feed prices and mandatory COOL, environmental regulation. What
else do I have? Let us see, packer ownership, lack of a
livestock ID program. And out of those--no, I will go down
through the list again. I have got them in order. High feed
prices, mandatory COOL, animal rights initiatives,
environmental regulation, packer ownership, and then I added
the livestock ID, lacking a livestock ID program. Out of those,
what would you say would be the greatest risk to the livestock
industry? And if you would like to prioritize them, if you can
do that on the spot, that would be wonderful.
Ms. Philippi. That is pretty hard to do without reflecting
my personal opinion as well. But we have treated the issues of
the corn availability and corn price, the issue of mandatory
country of origin labeling. All of those first that we
identified, we were trying to address in an equal fashion,
because we believe they are all going to have a cost effect,
costs that our producers are going to have to somehow recover
in the marketplace. But when we get to the issue of the way
that--asking us to change our production practices, those costs
are still very much unknown. So you know, we look at those
things equally and that is why we hope that we don't have to
have regulation on the way we do our business today.
Mr. King. If I could then, you want us to fix them all at
once.
Ms. Philippi. That would be wonderful. And we will help
you.
Mr. King. And I appreciate that. Given the track record of
Congress, though, we may want to be focusing on some
priorities. I am going to ask Mr. Roenigk. Would you like to
take a stab at that, please?
Mr. Roenigk. Yes, thank you very much. And if I could just
maybe add a couple, I think the Number one priority, and I
don't know if they would change market structure, I think it
would create greater concentration, and that is that we have to
have a super-abundant corn crop, not just this year and not
just next year, but until we get this breakthrough in yields,
because the only way you get more corn right now is more acres.
I am agreeing with the corn geneticists, some day we will get
that breakthrough, but we have got to have more acres, we have
got to have more corn and we have got to satisfy that. If we
have a hiccup in our corn crop, I am sure there will be more
than one hearing of this subcommittee about the impact of that.
So that is Number one, not just this year, but I think for the
next few years. I will try to stay in my one minute. But if you
look at my graph on Page four, from 1970 to 1975, broiler
production was flat. I hope I am wrong, but that is what I see
for the next five years, flat, and I hope it is not down. We
talk about contract growers and their opportunities. The way to
get more opportunities is to keep that trend up and not flat.
So I hope I am wrong, but that is my concern.
Number two, the likelihood of avian influenza, commercially
a high pathogenic, avian influenza breaking out in the
commercial flocks in this country is very, very small. USDA and
the other agencies have done a beautiful job of putting up the
biosecurity firewall, safeguards and so on and we have to keep
that up. But if it was to happen, I suggest that, not just the
companies, but the growers would not be thinking about whether
mandatory arbitration was the most important thing in their
life. They would be saying, how can I save my livelihood and my
farm? If the system shuts down, we can't. The consumer
confidence is a problem both in this country and other
countries. We have already seen it. A truck drives through West
Virginia with its doors shut. It can't ship to Japan because it
went through West Virginia and because they had an outbreak.
The turkeys were in the ground before the headlines were in the
newspaper, but Japan cuts West Virginia off.
The third thing I would say is that there is an increasing
likelihood of poultry inputs coming into this country from
countries who can undercut our prices, and these are from
countries who have--at least one country has been in the news
recently, not about human food, but some other type of food.
Mr. King. Thank you. If you don't mind, please, I would
like to move over to Mr. Queen. I am running out of time. But
your priorities on the greatest risks to the livestock
industry? Yes, I read through most of them. High feed prices,
mandatory COOL, animal rights activist initiatives,
environmental regulation, packer ownership, lack of a livestock
ID program. What puts the livestock industry at the greatest
risk, Mr. Queen?
Mr. Queen. Well, I think that the greatest risk, as we have
talked here, is doing away with their ability to market their
cattle as they see fit, taking away that right from the citizen
of America, the rancher.
Mr. King. Thank you. And I am running out of time, so I
will have to pass on Mr. Boyle and I will yield back the
balance of my time then Mr. Chairman.
Mr. Boswell. We have been joined by Mr. Baca. The chair
recognizes Mr. Baca from California.
Mr. Baca. Thank you very much, Mr. Chairman, and thank you
very much for having this hearing. Let me ask this question to
Mr. William R. Just like with the pork producers, you have seen
some prosperous times recently. You say that the conditions
currently placed are the ones that the market itself has
indicated and decided work best. Is anyone being left out?
Mr. Roenigk. I am not sure I understand that question. Are
you asking, as vertical integration of the industry moves
forward, have any parts of the farmers been left out?
Mr. Baca. Left out.
Mr. Roenigk. I don't think so and in fact, as was mentioned
by Congressman Hayes, we have a very dynamic industry and
business and we are seeing the smaller producers produce the
organic, free-range, exotic breeds, being able to go to live
bird markets. So yes, there are large companies, but there is
also this growing specialty market and in that sense, I don't
think they are left out. In fact, I think, in today's market,
they have much greater opportunity than ever before.
Mr. Baca. Okay. Then to John Queen. The marketing agreement
and contracts you described in your testimony have clearly
provided great benefit to many producers and consumers, but
what about those that don't participate in contracts? Are
producers who do not have the same advantages, are they being
left behind or not?
Mr. Queen. No, sir, every producer has the same ability or
the same chance to enter into these alternative marketing
arrangements, and we have proven that in the southeast. We have
very small producers there and the opportunity for those
producers to come together whith their cattle--market them
through an alternative marketing program to a feed lot or a
packer, that certainly has been a great advantage to us there
in the southeast.
Mr. Baca. And how are we reaching out to them to make sure
that they are not left out?
Mr. Queen. Well----
Mr. Boswell. Mr. Baca, would you yield?
Mr. Queen. --it is just common knowledge that they have
the----
Mr. Baca. I yield to the Chairman----
Mr. Boswell. So you are saying that a cooperative system or
some kind of way that these small producers are banding
together to provide a market that would interest an AMA-type
operation?
Mr. Queen. Yes, sir. I run a video sale. We had 39 semi
loads of cattle, and we could go today, that we sold there in
western North Carolina. Those cattle, if you will look at the
different opportunities from each individual load on there and
how they were either age and source verified or----
Mr. Boswell. Okay, I understand what you are saying and I
appreciate that. So give me some, if you can remember it,
because I won't expect you have, but what size operators come
together, bringing drafts of----
Mr. Queen. They can come from 10 head to 10,000 head. It
makes no difference to commingle those calves to create those
trailer-load lots, and each one of those trailer-load lots has
a different----
Mr. Boswell. It almost sounds like an NFO operation. I am
not being facetious. It does kind of sound like it.
Mr. Queen. No, sir. But in the past, in the south, we have
had a terrible reputation for our cattle down there, so the
producers are coming together to create better opportunities
for the cattle in the south, and we are the largest cattle----
Mr. Boswell. I won't take up any more time and I might want
to pursue this, to visit with you some on that. I appreciate
you saying that. I yield back to you, Mr. Baca.
Mr. Baca. I think he has completed the answer and I think
we still need to do a little bit more of the outreach to make
sure that no one is left behind. So I think that was part of
your additional question, too.
Mr. Boswell. It is but I am giving you back your time.
Mr. Baca. Yes, okay. No further questions. Thank you. I
yield back the balance of my time.
Mr. Boswell. Well, thank you. Mr. Hayes.
Mr. Hayes. Mr. Queen, you have been extremely active and
helpful, along with many others, on the voluntary animal ID
situation. We have got the consent and agreement of USDA to do
this, but had a little trouble winnowing down the requirements
for them to certify. Just give us a quick update. That is still
the way to go?
Mr. Queen. Yes, sir. We are strictly for a voluntary
market-driven, cost-efficient animal ID system in America
today. And it will work and it shows that through the
alternative marketing agreements that we have, how that does
add value. So it is ongoing and we have a lot of producers
today.
Mr. Hayes. Thank you, Mr. Chairman. That is my question.
Mr. Boswell. Thank you, Mr. Hayes. Mr. Boyle, based on
conversation with Mr. Queen, do you agree that the small
operators out there across the country got that opportunity? It
sounded like they are very organized in that part, but what
about some of the other places?
Mr. Boyle. That is true throughout the Nation, not only for
small producers, but for the midsize and smaller packers that
we represent. The arrangements that you have with one's
livestock suppliers are not the size of the operation.
Mr. Boswell. Let us just say a small producer in the State
of Nebraska, Missouri, Iowa or Minnesota got a 100 to 200 cow
herd that they feed out. Can they take advantage? Will there be
a market for them?
Mr. Boyle. Absolutely. If they want to market their
livestock in partnership with a feeder and a packer,
absolutely. That is available to them.
Mr. Boswell. So you think there is an adequate market?
Mr. Boyle. I do. And you have seen it grow dramatically on
the hog side in the last five or six years. And there are
fundamental marketplace reasons for the growth in those
marketing arrangements on the hog side. The red meat retail
case has become revolutionized in the last five or six years.
Mr. Boswell. Well, I hear a lot of different producers say
that they just don't have access. Is it because they don't know
how to get the access, these small operations that are
scattered across parts of the country? Mr. Queen has talked
about their solution. But do they have access, the person that
is sitting out there in Missouri that wants to run a 100 to 200
head cow herd and find a market?
Mr. Boyle. Sure. The economics and the marketplace
rationale are different amongst various species. Ninety percent
of the hogs, as RTI has indicated in its report, and it is not
a surprising conclusion, are marketed through some sort of
marketing arrangement or a vertically integrated company on the
hog production import processing side. That leaves a very small
percentage of producers outside of that option, but I suspect
they remain outside of that option through their own business
decisions.
Mr. Boswell. Would it surprise you that I have farmers come
up to me pretty regularly and say there are days I cannot find
a market?
Mr. Boyle. Well, there may be days when they go to market
and in their particular geographic region, there may not be a
broad-based market to acquire their cattle. But aside from that
observation from producers that you have in your district, Mr.
Chairman, that perception has been studied in great detail, in
terms of whether or not there is anything nefarious about it,
anticompetitive about it, conspiratorial about it, and under
each of those investigations, the regulators have come away
saying it is the normal functioning of a vibrant and
competitive marketplace.
Mr. Boswell. Okay. Well, Mr. Hayes, if you are finished, I
think I might as well speak, too. We do want to close by
thanking you for your coming today and giving us your time,
your willingness to testify, your frankness, and I think we
have gained some knowledge today on both sides of the issue and
it was good for us to have this time together, so I appreciate
it. With that, we will adjourn. Under the rules of the
committee, the record of today's hearing will remain open for
10 days to receive additional material and supplementary
written responses from witnesses to any questions posed by
members of the panel. The hearing of the Subcommittee on
Livestock, Dairy and Poultry is adjourned.
[Whereupon, at 1:30 p.m., the Subcommittee was adjourned.]
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