[Senate Hearing 110-569]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-569
 
   CONCENTRATION IN AGRICULTURE AND AN EXAMINATION OF THE JBS/SWIFT 
                              ACQUISITIONS

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 7, 2008

                               __________

                          Serial No. J-110-91

                               __________

         Printed for the use of the Committee on the Judiciary


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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
      Michael O'Neill, Republican Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                     Jeffrey Miller, Chief Counsel
                Peter Levitas, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     2
    prepared statement...........................................   186
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     4
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     1
    prepared statement...........................................   195

                               WITNESSES

Balto, David A., Senior Fellow, Center for American Progress, 
  Washington, D.C................................................    25
Batista, Wesley M., Chief Executive Officer, North America, JBS 
  Swift and Company, Greeley, Colorado...........................    17
Bullard, Bill, Chief Executive Officer, Ranchers-Cattlemen Action 
  Legal Fund, United Stockgrowers of America, Billings, Montana..    20
Carstensen, Peter C., Professor of Law, University of Wisconsin 
  Law School, Madison, Wisconsin.................................     6
Feuz, Dillon M., Professor, Department of Economics, Utah State 
  University, Logan, Utah........................................    22
Hunt, Steven D., Chief Executive Officer, Premium Beef, Ltd., 
  Kansas City, Missouri..........................................    19
Ross, Douglas, Special Counsel for Agriculture, Antitrust 
  Division, Department of Justice, Washington, D.C...............     5
Stumo, Michael, Legal Counsel, Organization for Competitive 
  Markets, Lincoln, Nebraska.....................................    24

                         QUESTIONS AND ANSWERS

Responses of David Balto to questions submitted by Senators Kohl 
  and Grassley...................................................    34
Responses of Wesley Batista to questions submitted by Senators 
  Kohl, Hatch, Grassley and Feingold.............................    39
Responses of Bill Bullard to questions submitted by Senators 
  Kohl, Grassley and Feingold....................................    57
Responses of Peter Carstensen to questions submitted by Senators 
  Kohl, Grassley and Feingold....................................    72
Responses of Dillon Feuz to questions submitted by Senators Kohl 
  and Hatch......................................................    78
Responses of Steve Hunt to questions submitted by Senators Kohl, 
  Hatch, Grassley and Feingold...................................    86
Responses of Douglas Ross to questions submitted by Senators 
  Kohl, Grassley and Feingold....................................    91
Responses of Michael Stumo to questions submitted by Senators 
  Kohl, Grassley and Feingold....................................   105

                       SUBMISSIONS FOR THE RECORD

Balto, David A., Senior Fellow, Center for American Progress, 
  Washington, D.C., statement....................................   115
Batista, Wesley M., Chief Executive Officer, North America, JBS 
  Swift and Company, Greeley, Colorado, statement................   128
Bullard, Bill, Chief Executive Officer, Ranchers-Cattlemen Action 
  Legal Fund, United Stockgrowers of America, Billings, Montana, 
  statement......................................................   131
Carstensen, Peter C., Professor of Law, University of Wisconsin 
  Law School, Madison, Wisconsin, statement......................   166
Feuz, Dillon M., Professor, Department of Economics, Utah State 
  University, Logan, Utah, statement.............................   177
Hunt, Steven D., Chief Executive Officer, Premium Beef, Ltd., 
  Kansas City, Missouri, statement...............................   191
Ross, Douglas, Special Counsel for Agriculture, Antitrust 
  Division, Department of Justice, Washington, D.C., statement...   197
Stumo, Michael, Legal Counsel, Organization for Competitive 
  Markets, Lincoln, Nebraska, statement and attachments..........   212
U.S. Senators, Washington, D.C., joint letter....................   227


   CONCENTRATION IN AGRICULTURE AND AN EXAMINATION OF THE JBS/SWIFT 
                              ACQUISITIONS

                              ----------                              


                         WEDNESDAY, MAY 7, 2008

                                               U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                                                    Rights,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 2:32 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Feingold, Hatch, and Grassley.

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

    Chairman Kohl. Good afternoon. We will call this hearing to 
order at this time. Today we meet to examine the rising tide of 
consolidation in agriculture. Recent years have witnessed an 
enormous transformation in the agriculture industry. Disparity 
in market power between family farmers and large agribusiness 
firms all too often leaves the individual farmer and rancher 
with little choice regarding who will buy their products and 
under what terms. In this hearing, we will focus on just the 
latest example of that trend: JBS/Swift's plans to acquire two 
other meatpacking firms, a transaction that would reduce the 
number of major competitors in this industry from five down to 
just three.
    In 1890, our Nation's fundamental antitrust law, the 
Sherman Act, was passed in large part as a response to the 
consolidation in the meatpacking industry. We now appear to 
have gone full circle as the JBS/Swift acquisitions will leave 
the meatpacking industry even more concentrated than it was a 
century ago. If approved, the JBS/Swift acquisitions will 
increase the market share of the top four firms to 91 percent. 
JBS/Swift will also acquire Five Rivers, the Nation's largest 
feedlot, marketing 2 million cattle annually. This threatens to 
give JBS/Swift a very strong lever over the Nation's cattle 
supply while leaving independent ranchers with little 
bargaining power. By reducing the number of major buyers for 
ranchers' cattle from five down to three, and in some regions 
even two, this deal will give the remaining beef processors 
enormous buying power. With little choice to whom to sell their 
cattle, ranchers will increasingly be left in a ``take it or 
leave it'' position.
    We should be equally concerned with effects on millions of 
beef consumers across the country in this era of rising food 
prices. Will only three major national sellers of beef be 
enough to ensure a competitive market for supermarkets, small 
grocery stores, and restaurants? Or will consumers need to go 
on a diet while the giant meatpacking firms grow ever fatter?
    And so I urge the Justice Department to undertake a close 
and serious examination of the effects of the JBS/Swift 
acquisitions on both ranchers and consumers. Unfortunately, it 
appears that the Justice Department's antitrust enforcement 
efforts, both in the ag sector and generally, have been much 
too weak and passive in recent years. In the opinion of many 
experts, the Justice Department has often failed to take 
effective action as merger after merger in the pork, milk, and 
seed markets have sharply increased concentration as well as 
reducing competition. Antitrust investigations in the dairy 
industry have languished, with no resolution. While the Justice 
Department sits largely on the sidelines, agriculture 
concentration rises, and food prices rise.
    Weak antitrust enforcement, of course, has not been limited 
to agriculture. Previously unthinkable mergers among direct 
competitors in many other highly concentrated industries 
affecting millions of consumers have been approved by the 
Justice Department, often over the reported objections of 
career staff. The most recent example was the Department's 
approval of the XM/Sirius merger, a merger to monopoly in the 
satellite radio industry. This is not the time for the 
Government to take a cramped or limited view of antitrust 
enforcement. In this era of rising prices and ever increasing 
consolidation, the need for vigorous enforcement of our 
antitrust laws has never been greater, in agriculture and in 
all other key sectors of our economy.
    Millions of consumers are depending on aggressive antitrust 
enforcement, and now is not the time for our antitrust 
enforcers to be asleep at the switch.
    [The prepared statement of Senator Kohl appears as a 
submission for the record.]
    I would like to call upon my colleague Senator Grassley now 
for his comments.

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

    Senator Grassley. Thank you very much, Chairman Kohl, for 
calling this hearing. I requested that you do this hearing and 
you responded within 24 hours, a very positive response, and 
this is the result of your response. I appreciate it very much. 
I also appreciate the opportunity to give my opening statement. 
At this very hour, 2:30, the Conference Committee on 
Agriculture is reconvening farm bill negotiations, and so I am 
going to have to go to that. It is my intent to come back, but 
if I do not get back, I will submit questions for an answer in 
writing. Unfortunately, you never know whether those meetings 
are going to take 5 minutes or 5 hours. So that is why I will 
have to go.
    I requested this hearing because of widespread concerns 
about increased competition in agriculture as well as concerns 
raised about the proposed acquisition of National Beef Packing, 
Smithfield Beef, and Five Rivers Ranch Cattle Feeding by JBS 
acquisitions. It is important that the Judiciary Committee 
review positive and constructive solutions to the agriculture 
competition concerns as well as potentially problematic 
mergers, such as this JBS transaction.
    For well over a decade, I have had serious concerns about 
increased consolidation in agriculture, and, of course, not 
just as it affects farmers, but the impact upon all of rural 
America. I share the concerns of many family farmers and 
independent producers that the agriculture industry has 
consolidated to the point where many of these smaller market 
participants do not have equal access to fair and competitive 
markets. I share the concern of many in the agriculture 
industry that large agribusinesses are in a better position to 
engage in anticompetitive and predatory business practices.
    Senator Kohl and I introduced S. 1759, the Agriculture 
Competition Enhancement Act, in response to concerns about 
excessive concentration in agriculture. I was disappointed that 
we were not able to include some version of this bill as part 
of the agriculture farm bill, but I hope that we will be able 
to discuss the legislation today and hear witnesses' views on 
it. I would like to see this bill move through this Committee, 
the Judiciary Committee, because I truly believe that it will 
address concerns about agriculture mergers.
    The JBS merger is a part of this growing ``bigger is 
better'' trend in agriculture. I wrote to the Justice 
Department Antitrust Division to urge a careful review of this 
transaction and to consider thoroughly the projected impacts on 
the beef industry. JBS is the world's largest beef packer and 
the third largest processor in the United States. National Beef 
Packing and Smithfield Beef Group are the fourth and fifth 
largest beef processors here. If this transaction were to be 
approved, JBS would control approximately 32 percent of the 
beef-processing market share, killing far more animals than 
Cargill Meats or Tyson Foods.
    I am concerned that the proposed JBS merger could severely 
reduce the already limited number of buyers for the commodities 
of small and independent beef producers. The transaction could 
leave producers minimal selling options throughout large 
geographic areas. It would allow JBS to control the largest 
share of the beef market and potentially decrease product 
choice and increase product prices for the consumers of 
America.
    I spent a lot of time focused on the independent producer, 
but with the rising costs of food worldwide, we all ought to be 
particularly interested in hearing the potential effects on our 
customers in the grocery aisle.
    I am not the only one that has this issue with this 
proposed merger. Small independent producers, family farmers, 
and other agriculture groups share my concerns about the 
proposed JBS transaction and increasing agribusiness 
consolidation. Expanded packer ownership, exclusive 
contracting, and captive supply are adversely impacting their 
ability to compete in the marketplace. They share my concerns 
about reduced market opportunities, anticompetitive and 
predatory business practices, and a result, fewer choices and 
higher costs for American consumers.
    So, Mr. Chairman, I am pleased that we will be able to have 
representatives from JBS and National Beef tell us what they 
believe will be the benefits to this transaction. I am also 
pleased that we have industry folks and agricultural antitrust 
experts here to give us their view, both on the transaction as 
well as what they see coming on in the future in the 
agriculture industry and how we will be impacted by less 
competition.
    I very much appreciate once again Chairman Kohl agreeing to 
hold this hearing. Thank you.
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Chairman Kohl. Thank you for being here, Senator Grassley.
    We now turn to the Committee's Ranking Member, Senator 
Orrin Hatch.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. It is always 
a pleasure to be with you here today, and I appreciate that you 
have called this hearing on agriculture consolidation in JBS/
Swift's proposed acquisitions.
    Agriculture consolidation has long been one of the most 
important questions that we face in antitrust law. In fact, one 
could say that our Nation's antitrust laws were born from the 
concerns of farmers and ranchers that improper market power was 
being employed by large agricultural processors and the 
railroads.
    The antitrust ramifications of agriculture consolidation 
are still a very important topic today. The meatpacking 
industry has had some very tough times over the past several 
years. Perhaps most dramatic was the 2003 BSE incident which 
led to an overreaction by many of our trading partners and the 
almost overnight collapse of our most important beef export 
markets.
    In addition, there has been enormous consolidation in the 
agriculture industry over the past 30 years, especially in 
livestock markets. For example, according to the Congressional 
Research Service, in 1985, the four largest meatpackers 
accounted for only 39 percent of the cattle- packing industry. 
By 2007, that number had grown to 71 percent. Similarly, in 
1985, the four largest swine packers represented 32 percent of 
the market. In 2005, that share had risen to 63 percent.
    The effects of this consolidation are not only being felt 
in the packing business. The number of American farms producing 
swine has fallen dramatically from 667,000 in 1980 to 67,000 in 
2005.
    Now, this consolidation has also had a major impact on 
theories of the proper enforcement of antitrust law. Currently, 
there is a disagreement between two groups of legal thought. 
The first group believes market consolidation and vertical 
integration undermine the smaller livestock producers by 
reducing their potential to use the cash or the spot market. 
The second group argues antitrust law is designed to maintain 
or create competitive markets for consumers. They believe it is 
improper to regulate an industry through antitrust law because 
one of the market's competitors is suffering due to otherwise 
legitimate competition and business practices. Articulating 
these different views will be one of the subjects of today's 
first panel.
    Our second panel will explore the specifics of 
consolidation with a discussion of JBS/Swift and Company's 
proposed acquisition of National Beef and Smithfield Beef. If 
the transaction is approved, only three major meatpackers will 
remain from the current five. Specifically, JBS/Swift will 
control 32 percent of the market, Tyson 24.8 percent, and 
Cargill 21.6 percent. It should also be noted that JBS/Swift is 
making these acquisitions when most experts agree that there is 
overcapacity in the packer market.
    So how does JBS/Swift intend to profit from its investment? 
I have been informed that JBS/Swift intends to promote the 
export of American beef vigorously. If so, the acquisition is 
well timed to exploit the Korean Government's recent decision 
to lift many of its remaining importation barriers imposed on 
American beef, something that I have been very concerned about 
for a long time. It remains to be seen if this business model 
will succeed. However, JBS/Swift has recently acquired 
meatpackers in Argentina, Australia, and Italy.
    After the company's acquisition of Swift, to its credit it 
did follow through on its promise to expand operations and to 
hire additional workers. However, many have antitrust concerns 
about this transaction. So I look forward to exploring these 
issues in greater detail during the hearing.
    Again, I want to thank you, Mr. Chairman, for calling this 
important hearing, and I look forward to paying attention to 
everything I can with regard to it. Thank you.
    Chairman Kohl. Thank you very much, Senator Hatch.
    We would now like to introduce the members of our first 
panel. Our first witness will be Douglas Ross. Mr. Ross is a 
Special Counsel for Agriculture in the Antitrust Division of 
the U.S. Department of Justice. Mr. Ross has also served in the 
Office of Policy Development at the Department of Justice.
    The next witness on this panel will be Peter Carstensen. 
Professor Carstensen teaches at the University of Wisconsin Law 
School, where he focuses on antitrust law and competition 
policy. Prior to his position at the University of Wisconsin, 
Professor Carstensen was an attorney at the Antitrust Division 
of the Department of Justice.
    We thank you both for appearing at our Subcommittee hearing 
today, and if you will rise and raise your right hand and 
repeat after me. Do you affirm that the testimony you are about 
to give will be the truth, the whole truth, and nothing but the 
truth, so help you God?
    Mr. Ross. I do.
    Mr. Carstensen. I do.
    Chairman Kohl. We thank you both for being here. At this 
time, Mr. Ross, we will take your testimony.

  STATEMENT OF DOUGLAS ROSS, SPECIAL COUNSEL FOR AGRICULTURE, 
  ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Ross. Thank you, Mr. Chairman. Thank you for the 
opportunity to discuss the Antitrust Division's antitrust 
enforcement record in the important agriculture sector of our 
economy. I have a longer written statement that I request be 
made a part of the record.
    Chairman Kohl. That will be done.
    Mr. Ross. But I would like to begin with a brief statement 
now.
    The Department of Justice is committed to maintaining an 
active involvement in the agricultural sector and to protecting 
competition there through aggressive antitrust enforcement, as 
warranted. The Department takes very seriously the concerns 
expressed by agricultural producers about competitive problems.
    In antitrust analysis and enforcement, the Department 
carefully considers market power issues, both on the sell side, 
which is often seen as monopoly, and on the buy side, described 
as monopsony. The Department hears and takes into account 
monopsony or buy-side market power as a particular concern in 
merger enforcement for agricultural producers who often sell 
their products to large agribusinesses. The Department has 
brought a number of enforcement actions in the agricultural 
sector in recent years and has undertaken special outreach to 
the agricultural community. We have for many years regularly 
consulted the Department of Agriculture to obtain the benefit 
of their expertise in our agriculture work.
    The Department's legal authority in this area is the 
antitrust law. Other agencies have other legal authority, and 
agriculture policy is far bigger than antitrust. In our area of 
authority, we are constantly on the lookout for possible 
antitrust violations and will not hesitate to take appropriate 
enforcement action when warranted.
    My statement demonstrates that we have been active in 
enforcing the antitrust laws in the agriculture sector, having 
filed several important cases to remedy anticompetitive effects 
that were likely to result from proposed mergers and 
acquisitions and to stop collusive, anticompetitive practices 
that adversely affected farmers and competition in this key 
sector of the economy.
    I look forward to your questions about our work. Thank you.
    [The prepared statement of Mr. Ross appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Mr. Ross.
    Mr. Carstensen?

STATEMENT OF PETER C. CARSTENSEN, PROFESSOR OF LAW, UNIVERSITY 
          OF WISCONSIN LAW SCHOOL, MADISON, WISCONSIN

    Mr. Carstensen. He was able to get through that in only 
2\1/2\ minutes. No professor is going to be able to top that 
performance.
    I am truly honored to be offered this opportunity to 
express my views on the state of antitrust enforcement in 
markets related to agriculture. I have a longer statement, 
which I hope will be included in the record.
    Chairman Kohl. We will do it.
    Mr. Carstensen. Thank you.
    In a nutshell, the Government agencies charged with 
enforcing antitrust law have repeatedly failed to challenge or 
to remedy competitive problems that confront American 
agriculture. The most conspicuous failure has come in merger 
enforcement where a series of decisions either not to challenge 
mergers or settle for weak, even anticompetitive, remedies has 
resulted in increased concentration on both the input and the 
output side of agriculture.
    The American farmer is being caught in an economic vise. 
When they seek to buy various inputs they need--seed, 
fertilizer, equipment, herbicides--they face an increasingly 
concentrated markets and exploitive strategies by producers. 
When they attempt to sell their products, especially, I think, 
in the dairy, meat, and grain areas, they have only a very 
limited number of buyers who use their buyer power to drive 
down the prices paid for these products.
    What I would like to do is to give you the highlights of 
several of the lessons that I think and examples that I think 
highlight this point. I want to start with the concerns that 
Senator Grassley expressed in particular about the pork 
industry. Doug Ross says on page 5 of his written statement 
that mergers that increase market power violate Section 7, and 
so I want to use the pork industry as an example where there 
has been a failure to do this.
    Smithfield bought Farmland in about 2002 or 2003, and has 
recently been allowed to buy Premium Standard Brands. First 
lesson: Buyer power already exists. The RTI's study of 
livestock markets done for GIPSA found that there was 
statistically significant buyer power in hogs in that period 
2002 to 2005, that is, during the period when the acquisition 
of Farmland occurred. But what is important is that the PSB 
merger, the acquisition of PSB necessarily increased buyer 
power to the detriment of farmers, yet the Department of 
Justice raised no objection, ignored the empirical analysis, 
and in its statement justifying its failure to sue, it made 
inaccurate factual statements.
    The second lesson--and it is a very important one--is that 
buyer power--and this comes from the RTI study. Buyer power 
arises from much lower levels of concentration when measured by 
the HHI index number than one would expect to predict seller 
power on the seller side of markets. That is, the concentration 
was in the 1,000 to 1,300 level in this period when the RTI 
study found the existence of buyer power. It is an important 
lesson that has been totally ignored by our law enforcers.
    As to milk, Mr. Ross's statement describes the theory of 
the Dean settlement, done without litigation, no--there is no 
consent decree. There is no opportunity to comment on this. The 
theory was when Suiza bought Dean that there would be a 
divestiture and no exclusive dealings. Since then, DFA, Dairy 
Farmers of America, has become associated with both the 
successor to the Dean-Suiza facilities, also has linked to 
Hood, and has managed to get exclusive dealing contracts. There 
is--and I think Senator Kohl referenced this in his comments--
an ongoing Justice Department investigation of many years' 
standing of a number of these bad business practices. 
Apparently, nobody has informed Mr. Ross of all the problems 
that came out of this consent decree.
    I have written some hostile comments about the Monsanto-
Delta and Pine Land settlement, which, again, results, it seems 
to me, in some very unfortunate results. There are several 
other comments about that. I will not elaborate further on 
that.
    We know that the next panel is going to deal a lot more 
with the beef industry. What I want to emphasize--and it is 
clear in Mr. Bullard's testimony--the Justice Department has 
known about a number of anticompetitive, apparently collusive 
or monopolistic practices in that industry for a number of 
years. They are well documented, and they have done nothing.
    So the bottom line here is that we have a passive and 
inactive antitrust enforcement process that has resulted in 
increased concentration, harms to producers of agricultural 
products, and, of course, harms then to consumers.
    What can Congress do? Because you, unfortunately, cannot 
bring the lawsuits, which I would love to have you do.
    First, I think hearings like this do deliver a message to 
Mr. Ross, and I hope he is going to take it back to the Justice 
Department.
    Second, I think your staff can do more to ask for 
confidential briefings on some of these decisions, and you 
yourselves can attend those briefings so that you are better 
able to understand why they are not doing the things that they 
ought to be doing.
    You could also get a GAO study of some of these key 
decisions in terms of what happened afterwards, because I think 
if you look at pork, if you look at dairy, you look at some of 
these other industries, you are going to see the actual harms.
    Finally, you know, Doug is my old sparring partner. We have 
done these kinds of shows across the country. He is a dedicated 
civil servant, and he comes down here and he tries his best to 
justify what his masters are doing. The problem is he was 
brought in to be a more focused person, really to engage the 
issues of agriculture, to make sure that the Department of 
Justice actually understood things. And, sadly, it is just 
clear that those who actually make the decisions have not 
gotten the message.
    Therefore, I think it is really time to change the 
institutional and legal framework for evaluating mergers and 
anticompetitive conduct in agricultural markets. I think the 
Grassley-Kohl bill, the Agricultural Competition Enhancement 
Act, S. 1759, is a really necessary step in that direction. I 
congratulate you, Senator Kohl, for being a sponsor of that 
legislation. It is a great contribution.
    Farmers need workably competitive markets. They need a kind 
of antitrust enforcement that will control both the structure 
of those markets and the conduct that is allowed to occur.
    [The prepared statement of Mr. Carstensen appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Professor Carstensen.
    Mr. Ross, we often hear from farmers and ranchers that they 
have little bargaining power in comparison to the largest 
agribusiness conglomerates. Many of them claim that the Justice 
Department has not fulfilled its responsibility to prevent 
anticompetitive mergers and practices in the agriculture sector 
of the economy.
    Do you believe that the farmers' concerns about increasing 
levels of consolidation among agribusiness firms are warranted? 
And if so, why has the Justice Department permitted these 
consolidations to take place?
    Mr. Ross. Senator, we hear the same concerns about market 
power, and we take them very seriously. In fact, they have been 
important parts of each of the investigations that we have 
done, and I point, for example, to the Cargill-Continental 
matter in which the issue of market power was the key one.
    We did an analysis and established that in nine regional 
markets, the buyer power of the merged firm would be 
anticompetitive. As a result, our relief required that ten 
divestitures of port and grain elevators be done in order to 
preserve competitive alternatives for farmers to sell their 
grain and soybeans.
    Chairman Kohl. Well, Professor, what is your view of what 
you have just heard? Are farmers and ranchers' concerns 
warranted? And in your opinion, has the Justice Department done 
enough to stop these consolidations, especially among food 
processors?
    Mr. Carstensen. I think the concerns are very much 
warranted, and as I referenced that RTI study in the pork 
industry, which is the most recent confirmation that we have 
very serious problems of buyer power that are being increased. 
And if you go back and look at the Justice Department's 
explanation for why they did not object to the Smithfield-
Premium Standard Brand merger, they announced that finished 
hogs could be hauled 400 miles from North Carolina to Kentucky 
for processing and, therefore, the farmers of North Carolina 
were at no risk of being exploited--this in the face of data 
that shows that they are at about a 10-percent discount in 
North Carolina whenever there is a full supply of hogs in the 
market because it is costly to haul your hogs anywhere.
    And I think the Continental-Cargill merger is another 
example of minimalist enforcement. It was a clearly bad merger. 
They did the least that they possibly could do. We have not 
seen a good followup on what the consequences of that merger 
are. Anecdotally, when I talk to grain farmers, what I hear is 
we went from having two or possibly three buyers to, at most, 
two buyers, and in many more areas we are seeing only one buyer 
for our corn, for our soybeans, et cetera.
    This is one of the things that has made ethanol really 
interesting because those plants do create a different kind of 
competition right now in corn markets. It does not do much for 
soybeans. It does not do much for wheat, but it does change the 
dynamic because there are competitive buyers in the 
marketplace.
    So we really need more focus on this, and, again, something 
I said earlier, the analysis of buyer power is different. 
Buyers are different from sellers in terms of when they get 
leverage in the market, what kinds of market shares give you 
leverage. As a buyer, you are the decider. You are the 
decisionmaker with respect to whether or not you buy. That 
creates power at much lower levels of concentration. We simply 
have not seen from the Justice Department any recognition of 
that inherent economic fact.
    Chairman Kohl. Professor Carstensen, at this time, as you 
know, millions of consumers all across the United States are 
suffering from rising food prices in many basic commodities. Do 
you believe that the increasing concentration we are witnessing 
in agriculture is a big cause of the higher food prices paid by 
consumers? And if that is true, do these higher prices find 
their way back into the farmers and ranchers' hands?
    Mr. Carstensen. The first part is, yes, the concentration 
has two levels. It has an effect downstream--or I should say 
upstream on the farmers, and it has an effect downstream on the 
consumers. That is, both ends of this process are subject to 
exploitation by lower prices to farmers, higher prices to 
consumers. The best documentation of that comes from Professor 
Cotterill, in a hearing I think before this Committee a few 
years ago, involving New England dairy products. And, again, 
Mr. Bullard's written statement for the Committee has a good 
deal of the documentation that shows that increasing spread 
between what is being paid at the farm gate, which is constant 
or declining, and what is being charged to consumers. So what 
we are seeing is, no, it is not coming back to the farm gate. 
It is not coming back to the farmer. But the price to the 
consumer is going up. It is getting caught in those two levels 
of concentration.
    One of the things I emphasized in my written statement is 
concentration at retail grocery markets, which is really where 
you get the leverage over the consumer, and then concentration 
at the production level.
    Chairman Kohl. Thank you.
    Mr. Ross, what is your view? Does reduced competition among 
agribusiness companies inevitably lead to higher prices? And 
isn't strong antitrust enforcement very important to prevent 
such loss of competition?
    Mr. Ross. Senator, the antitrust laws could not be more 
important to protecting consumer prices, and effective 
competition leads to all kinds of benefits, like better quality 
of products, greater innovation, and the ability of farmers as 
consumers as well as producers to benefit from a competitive 
economy.
    Chairman Kohl. Thank you.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Professor Carstensen, you have written, ``Strategic 
behavior by market-dominating firms has weakened or eliminated 
the open market process that in turn gave agricultural 
producers the freedom and flexibility to be genuinely 
independent entrepreneurs.'' Now, some think that may be 
nostalgia for a bygone era. Has not the Department of Justice 
merely been fulfilling its mandate by only taking action when 
it believes that a competitive market happens to be in 
jeopardy? Or, put another way, are you not advocating the 
Department become a regulator, ensuring survival of small 
producers, when the Department's responsibilities under the law 
will be to ensure competitive markets, not the competitors 
themselves?
    Mr. Carstensen. My father was a historian of agriculture, 
so maybe I have got some residual nostalgia genes.
    Let's be clear about this. Markets are going to change. 
What is an efficient level of production is going to change. 
The benefit of workably competitive markets is those changes 
are driven by economic fundamentals, not by strategic behavior.
    What I was concerned with in the passage you quoted was the 
kinds of strategic behavior that adversely affects the 
functioning of the market and favors some players in the market 
not based on their inherent efficiencies. The most recent USDA 
studies, for example, in pork show that small pork producers, 
hog producers, I guess I should say--have the same level of 
efficiency that very large ones do. The problem is going to be 
market access, finding fair rules. And if we are going to go to 
a contract world--I am not opposed to that, necessarily. If 
contracts are what we do, then we need proper rules for the 
contract market so that, again, it is fair, open, and 
efficient. And efficient is key here because we do want to have 
those markets be dynamic, to change with the changing 
technology.
    Senator Hatch. Well, on a related point, you wrote a Law 
Review article entitled ``Concentration and the Destruction of 
Competition in Agricultural Markets: The Case for Change in 
Public Policy.'' This article was described by the National 
Agricultural Law Center as arguing in favor of using antitrust 
law to protect independent farmers.
    Now, there has been a tremendous amount of consolidation in 
the livestock markets. However, according to the Congressional 
Research Service, ranchers and farmers that hold fewer than 100 
cows still control half of the market. Now, the top 30 feedlots 
only control 40 percent of the cattle on feed. In fact, the 
USDA believes that there are more than 88,000 lower-capacity 
feedlots in operation today.
    Now, my question would be: Why should the Government 
interfere in a marketplace where half of the cow/calf 
businesses appear to be held by smaller farms and there is more 
than an ample number of smaller feedlots?
    Mr. Carstensen. Well, if we were talking about a merger 
among feedlots, I would agree with you. I do not see an 
antitrust issue there. But we are talking about mergers among 
the buyers from those feedlots that are going to reduce the 
numbers from five to three and are going to create, I think--
and certainly this is consistent with all the other data that 
we have--going to create substantially more buyer power.
    As the next panel is going to focus, I think, much more on 
the specifics of the beef industry, the problem is access to 
the slaughter facility. The problem is the terms and conditions 
under which those feedlots get to sell.
    We have seen a cyclical long-term decline in the number of 
feedlots that exist and in the number of cattle that are being 
put on feed, and what that tells us generally is that we are 
looking at the kind of situation that looks a lot like there is 
exploitation of monopsony power or oligopsony power, that is, 
buyer power on these downstream--or, I am sorry, upstream 
suppliers.
    One of the important points that your data makes 
fundamentally is that you can be a 100-head feeder or a 10,000-
head feeder, and it looks like you can compete in the market as 
long as you have access to the meat processors, to the cattle 
slaughter facilities.
    What we are focused on here today is a merger at that 
buying level. That is the place where the problem will exist 
for all of the different feeders that you are identifying.
    Senator Hatch. OK. Mr. Ross, I will just ask a question of 
you. During the previous administration, Cargill acquired 
Continental in the already concentrated grain trader market. 
Specifically, the number of grain traders was reduced from four 
to three. However, the Department of Justice insisted that the 
combined Cargill- Continental sell 10 percent of its operations 
to a competitor. Why then in 2003 did the Department of Justice 
decline to take action on the Smithfield purchase of Farmland 
Food's pork-processing plants? Was this also not a highly 
concentrated market? And why the difference in enforcement 
actions? Just so we understand better.
    Mr. Ross. Thank you, Senator. We welcome opportunities to 
be more transparent about the bases on which we decide to 
enforce or not, where appropriate.
    In the Cargill matter, we did extensive analysis of the 
market, including talking to many experts in the area, 
including farmers, and our analysis showed that there would be 
the kind of anticompetitive consequences, that is, a 
substantial lessening of competition in a market, in nine 
regional markets. And, therefore, we required relief of the 
sort that we have described.
    By contrast, in the pork matter involving Smithfield- 
Farmland, we did a similar kind of analysis, and the facts 
showed a different result. We looked at the procurement areas 
for each of Farmland's plants and how many packers would buy 
hogs in the same procurement areas and the slaughter capacity 
of each of the competing packers. Our conclusion was that 
neither Smithfield nor Cargill, which you will recall was one 
of the potential buyers there, would make as much as 30 percent 
of the live hog purchases if it had acquired Farmland's assets. 
And our conclusion was that there would still be at least six 
competing packers where the acquirer had competing plants. So 
we thought that was a basis on which not to take action because 
there was no anticompetitive result.
    Senator Hatch. Thank you, Mr. Chairman. My time is up.
    Chairman Kohl. Thank you, Senator Hatch.
    I would like to say that we are going to, as a result of 
our concern about these mergers and their impact on higher food 
prices, we are asking the GAO to make a study to look at 
whether or not there really is a correlation between these two 
critical factors.
    Professor Carstensen, Senator Grassley and I have written a 
bill that would shift the burden of proof so that merging 
parties in agriculture mergers have to justify that their 
mergers do not harm competition rather than the other way 
around, which is as it is now. Do you support this idea? And if 
you do, tell us why.
    Mr. Carstensen. I think it is a very good idea because it 
really requires not just the vague waving of hands in the 
Justice Department office saying that there are going to be no 
harms, but actual proof in a court of law where the defendant 
merging parties have to come in and genuinely justify the non-
anticompetitive implication of the merger, and especially as 
the court decisions have accumulated of late, courts have 
really been putting an extraordinary burden on the Justice 
Department and the Federal Trade Commission to establish that 
any particular merger will tomorrow result in serious harm.
    The statute actually only calls for evidence that the 
merger may substantially lessen competition or tend to create a 
monopoly. So that this restores in many respects the classic 
statement of what the standard should be, and I think it is a 
wonderful idea.
    Chairman Kohl. Mr. Ross, I assume you agree.
    Mr. Ross. Senator, surprisingly enough, Professor 
Carstensen has also referred to me as his ``punching bag,'' and 
here again we will disagree.
    The Antitrust Division is satisfied that the burden of 
proof in all merger enforcement actions should be the same, 
whether for agriculture or any other part of the economy, that 
it works effectively. And I am aware of no case in which we 
would decline to take a case to court because of the burden of 
proof.
    Chairman Kohl. Thank you.
    Senator Feingold?
    Senator Feingold. Thank you, Mr. Chairman. Before I get to 
my statement and questions, let me specifically welcome 
Professor Carstensen. I have know him and been friends for many 
years with him and his wife, Carol, who is a distinguished and 
long-serving school board member in Madison.
    Mr. Carstensen. Just finished.
    Senator Feingold. I am aware of that.
    Mr. Carstensen. After 18 years.
    Senator Feingold. I read the paper that comes to my door 
there, and she did a wonderful job. It is good to see you, and 
I thank you and all the other witnesses for appearing this 
afternoon.
    Mr. Chairman, thank you for holding the hearing to shed 
light on an important issue for farmers and consumers. Before I 
talk about agriculture specifically, I want to note the overall 
troubling state of concentration across multiple sectors of the 
economy. Over the past few years, consolidation and related 
competition concerns have increased in a variety of areas, 
including freight railroads, food retailers, and radio 
stations, just to mention a few.
    Just 2 weeks ago, this same Subcommittee chaired by my 
distinguished colleague from Wisconsin considered proposed mega 
mergers among airlines, and now we are turning to a merger that 
would reduce the number of major beef meatpackers from five to 
three. This growing concentration raises serious questions 
about the Department of Justice's enforcement of existing laws, 
as well as the adequacy of those laws to ensure fair, open, and 
equitable markets.
    Increased consolidation and market concentration are 
serious problems for agricultural producers throughout the 
Nation. As I travel around our home State of Wisconsin, and as 
the Chairman knows, these issues are consistently raised by 
farmers and growers.
    With respect to the proposed JBS/Swift acquisitions, it is 
important to my constituents that the facilities in Wisconsin 
remain operational and that there is no loss of jobs. I also 
have serious concerns that the combination of the third, 
fourth, and fifth largest beef meatpackers will significantly 
reduce the number of potential cattle buyers and as a result 
depress prices. While Wisconsin is not the leader in beef 
cattle production, the prices for these animals form the basis 
for the prices paid for culled dairy cows and could, therefore, 
have a significant impact on the bottom line of thousands of 
Wisconsin's family dairy farmers.
    Exacerbating this horizontal concern is the significant 
vertical integration that the post-merger company would enjoy 
from the major cattle-feeding operation of Five Rivers Ranch 
Cattle Feeding. Both the prepared testimony of Mr. Stumo and 
Mr. Bullard highlight how this captive supply will negatively 
impact competition and the prices paid to farmers and ranchers.
    Earlier this year, I signed a letter with several of my 
colleagues expressing some of these concerns to the Attorney 
General. Mr. Chairman, I would ask unanimous consent that it be 
included in the record.
    Chairman Kohl. It will be done.
    Senator Feingold. Mr. Chairman, I hope that the Justice 
Department will get serious about protecting consumers and 
agricultural producers from increased consolidation and market 
concentration.
    Mr. Ross, in Professor Carstensen's written testimony, he 
says, ``the Antitrust Division has an open investigation of the 
conduct of the milk industry, but the matter has been pending 
for years without any action.'' This statement goes on to 
describe the industry as ``rife'' with a ``panoply of 
anticompetitive practices'' that have resulted in ``serious 
losses of income and coercion of farmers.''
    Now, I have heard similar frustration directly from dairy 
farmers and others in the dairy industry in Wisconsin. What do 
you have to say with regard to the status of the investigation 
and Professor Carstensen's observation?
    Mr. Ross. Senator, we take concerns about the dairy 
industry, as well as any other part of the important 
agriculture economy, very seriously. Without confirming or 
denying a particular investigation, which would be 
inappropriate, we continue to monitor any anticompetitive 
practices that are brought to our attention, and we do an 
extensive analysis to determine whether an antitrust 
enforcement action is appropriate.
    As my statement indicates, we have been active in the dairy 
industry involving the Suiza-Dean merger and other dairy areas, 
so we continue to have active knowledge and monitoring of the 
important sector in agriculture that involves a key industry in 
your State.
    Senator Feingold. I look forward to following-up on that.
    Mr. Ross, Professor Carstensen described the controls that 
DOJ placed on the Dean-Suiza merger as ineffective. 
Specifically has written testimony says, ``in addition, the 
press release announcing approval implied that the new firm 
would not enter into a long-term exclusive dealing contract 
with Dairy Farmers of America, the largest dairy cooperative. 
However, Dean and DFA quickly found a way around that 
commitment.''
    Could you shed some light on the merger commitment? Did the 
Antitrust Division err in not making the provision broader to 
include partnerships and joint ventures in that prohibition?
    Mr. Ross. Senator, our analysis was a careful and thorough 
one, and the remedy we devised before allowing that merger to 
go forward was one that was based on extensive analysis of the 
market conditions on the ground. If there are concerns about 
what has happened subsequently, we welcome anybody bringing 
that to our attention, and we will examine it very seriously.
    Senator Feingold. Well, it does sound like a potentially 
troubling oversight to me.
    Professor, do you have anything to add?
    Mr. Carstensen. The investigation was completed. The staff 
recommended that there be litigation. It has been sitting, at 
least according to the information I have, in the Assistant 
Attorney General's office for more than a year. The key 
original attorney, I believe, has now reached retirement and 
retired.
    The Government--this alleged complaint--there was never a 
complaint in Dean-Suiza. It was what is called a ``fix it 
first.'' They bargained for about 9 months about the 
divestiture. More divestiture was made than originally 
proposed. It was settled with whatever confidential documents 
were exchanged between the parties, since there was no consent 
decree, there was no Tunny Act disclosure requirement, no 
opportunity for anybody to comment on this, and then all kinds 
of problems began to emerge for the dairy world because of this 
relationship not only with Dean, new Dean, but also NDH, 
National Dairy Holdings, that was owned in substantial part by 
DFA, and then it gets linked to Hood, so you have got one, two, 
and three all tied together.
    One credit to the Justice Department: They did go after a 
small dairy acquisition--and it is in Mr. Ross's statement--in 
Kentucky that DFA attempted to pull off. And one of the good 
things about that particular piece of litigation, because they 
actually went to trial on that, was that it did bring to light 
a good deal of the dubious transactions, the discriminatory 
transactions within the DFA empire. But for the Justice 
Department to claim that they are monitoring the situation is 
to say that they are doing nothing.
    Senator Feingold. And although Mr. Ross indicated a 
willingness to be open to any sort of things that have happened 
since, it sounds to me like this could have been prevented in 
the first place by proper drafting. Is that a correct 
statement?
    Mr. Carstensen. If they had gone the consent decree route, 
yes, they could have drafted that. The State Attorneys General 
are involved in these investigations. The Justice Department is 
the party that has not been heard from.
    Senator Feingold. Mr. Chairman, could I ask one more 
question?
    Chairman Kohl. Go right ahead.
    Senator Feingold. Thank you very much for the additional 
time.
    As the Chairman knows--and I am grateful for his support--I 
have worked with Senator Grassley for a number of years on 
legislation called the Fair Contracts for Growers Act that 
would make mandatory arbitration clauses in agricultural 
contracts unenforceable.
    The Judiciary Committee passed this bipartisan bill earlier 
this Congress by a wide margin, and the farm bill seems poised 
to at least take a step in the right direction by requiring 
that growers be given a specific option to opt in or out of any 
mandatory arbitration clause. But the Government needs to make 
sure that this provision has some teeth, and I will explain why 
by asking our witnesses to put themselves in the work boots of 
a poultry grower.
    So, first off, you have taken out a loan for several 
hundred thousands dollars to build poultry houses. There is 
only one poultry company contracting with growers in your 
region, and they supply you with chicks and feed and determine 
your payment based on the weight gain and condition of the 
animals at the end of each approximately 7-week, flock-to-flock 
contract.
    Your most recent contract has a new clause that commits you 
to mandatory binding arbitration with arbitration procedures 
dictated by the company. As required by the new farm bill 
language, you were told you have a choice whether to opt in or 
out of this provision. You have seen some information about 
large up-front fees required for arbitration and do not think 
you have enough cash to cover them if a dispute arises. So you 
want to decline the arbitration clause, knowing that you may 
have a chance to go to arbitration if a dispute arises and the 
company still wants to arbitrate after the fact.
    But what if one of your neighbors opted out earlier in the 
year and he has since been plummeting down the grower ranking 
for weight gain and is being threatened with termination as a 
``bad producer''? Does that make you think twice before opting 
out?
    Does it seem like law school here?
    Mr. Carstensen. Yes, yes, and I am on the wrong side of the 
table, Senator.
    [Laughter.]
    Senator Feingold. For once.
    Mr. Carstensen. Yes. That would be an enormous problem with 
an opt-in/opt-out legislation of this sort. You know, 
arbitration when agreed to by the parties at the time of the 
dispute is fine. It can be actually a very efficient dispute 
resolution mechanism when it is imposed on parties, and 
especially when there is unequal bargaining power as in the 
poultry example that you have, and that is a very real-world 
example.
    Opt-in/opt-out, do you want to continue to be my poultry 
raiser? In which case you are going to opt for whatever I want 
you to opt for because I as the contractor am going to have the 
power. So it is such a theoretically interesting step if you 
imagined equal bargaining power, but in real-world terms, it 
really does not solve the problem.
    Senator Feingold. Mr. Ross, do you want to comment at all?
    Mr. Ross. Certainly, Senator. This sounds like a provision 
in which there may be disagreement among farmers over whether 
they like it or they do not like it. Some may and some may not.
    In any event, contract provisions really fall outside the 
purview of antitrust enforcement action except when they are a 
part of a larger analysis in a merger context.
    Senator Feingold. Fair enough. And thank you for the 
additional time, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Feingold. And, 
gentlemen, we appreciate your being here today. You have 
brought to light many of the important issues that we are 
discussing and studying, and thanks for coming.
    We will turn now to the second panel. Our first witness on 
the second panel will be Wesley Batista. Mr. Batista is the 
President and the CEO of JBS/Swift and Company. Prior to 
becoming CEO of JBS/Swift, Mr. Batista was the chief operating 
officer of JBS's beef operations in Brazil and in Argentina.
    Our next witness will be Steve Hunt. Mr. Hunt is the CEO 
and co-founder of U.S. Premium Beef and Chairman of the Board 
of National Beef Packing Company. Prior to his involvement at 
U.S. Premium Beef, Mr. Hunt worked in various areas of 
commercial banking, including direct agricultural lending and 
credit training.
    Our next witness will be Bill Bullard. Mr. Bullard is the 
CEO of the Ranchers-Cattlemen Action Legal Fund, United 
Stockgrowers of America, or R-CALF USA. Prior to joining R-CALF 
USA, Mr. Bullard served as the Executive Director of the South 
Dakota Public Utilities Commission. He is also a former cow and 
calf rancher.
    Our next witness will be Dillon Feuz. Professor Feuz 
teaches agricultural economic at Utah State University. His 
primary research interests are livestock marketing as well as 
farm and ranch management.
    Next we will have Michael Stumo. Mr. Stumo serves as the 
general counsel for the Organization for Competitive Markets, 
which is a nonprofit research and advocacy organization with a 
focus on competition issues in agriculture.
    And, finally, we will have David Balto. Mr. Balto is a 
Senior Fellow at the Center for American Progress where he 
focuses on competition policy, intellectual property law, as 
well as health care. He has also worked as an antitrust 
attorney at the Antitrust Division of the Department of 
Justice, Federal Trade Commission, as well as in the private 
sector.
    We appreciate all of you being here today. If you will rise 
and raise your right hand, repeat after me. Do you affirm that 
the testimony you are about to give will be the truth, the 
whole truth, and nothing but, so help you God?
    Mr. Batista. I do.
    Mr. Hunt. I do.
    Mr. Bullard. I do.
    Mr. Feuz. I do.
    Mr. Stumo. I do.
    Mr. Balto. I do.
    Chairman Kohl. Mr. Batista, we will start with you.

STATEMENT OF WESLEY M. BATISTA, CHIEF EXECUTIVE OFFICER, NORTH 
       AMERICA, JBS SWIFT AND COMPANY, GREELEY, COLORADO

    Mr. Batista. Mr. Chairman and other members of the 
Committee, thank you for the opportunity to introduce JBS/Swift 
to the Committee and to discuss our commitment to invest in 
America's meatpacking industry. I am the CEO of JBS/Swift, and 
I want to share with you today JBS' vision.
    Our goal through these transactions is to invest our 
skills, energy, expertise, and money to grow the U.S. 
meatpacking industry. We want to expand U.S. sales of beef and 
pork, domestically and around the world. In the process, we 
will keep and create U.S. jobs.
    We are operators of beef, pork, and lamb processing plants, 
not financial investors. My father started our business in 1955 
when he slaughtered just one or two animals per day to supply 
restaurants in the new capital city of Brazil--Brasilia. We are 
still a family business. JBS now has global operation that we 
plan to use as a platform to expand the sales of U.S. beef and 
pork around the world.
    Our history is clear. When we acquired Swift last year, we 
expanded operations, we added additional shifts, we hired more 
employees, we improved operations, and we bought more cattle. 
With respect to the Smithfield and National facilities, we will 
do the same--buy more animals, expand operations, and hire more 
workers.
    As we are doing right now, we will continue to compete 
aggressively for the purchase of cattle and the sales of beef 
by all available commercial means. And we will increase our 
demand and sales over time. This will benefit ranchers and 
feedlots.
    We will keep plants open, make them more efficient, expand 
sales of U.S. beef. We also look forward to hire more workers 
consistent with changes in U.S. immigration law. We view the 
U.S. labor force as a great resource.
    A couple of questions have been raised that we would like 
to address. The first is our relationship with producers. We 
will continue to work with producers as we always have. I have 
had meetings with employees, cattle producers, and community 
leaders in Kansas, Colorado, and Texas, and feel we are being 
embraced. I will continue to do this.
    There is one major region in the Nation which contains the 
vast majority of all the major slaughtering plants for steer 
and heifers. That region is the beef belt. It includes northern 
Texas, Oklahoma, Iowa, Kansas, Nebraska, and eastern Colorado. 
None of the Smithfield plants are in the beef belt. Most of the 
Smithfield plants handle primarily Holstein steers and cows.
    Regarding the crucial beef belt, after this merger, JBS, 
Cargill, Tyson, and regional and local plants will continue to 
compete intensely for the purchase of cattle. With cattle 
moving on trucks, there will be many competing plants wanting 
to buy animals in the beef belt.
    In terms of consumer prices, beef products are sold 
throughout the Nation by numerous competitors of all sizes. 
JBS/Swift sells primarily commodity beef and some case-ready 
beef and pork. In contrast, National Beef sells very 
successful, branded beef products, and we plan to expand those 
operations. Swift and National will continue to sell into 
different, and competitive, national markets.
    In fact, when selling to large national retailers there 
will be intense competition among national, regional, and local 
players.
    I want to end with one final point. The JBS history in the 
U.S. is before you. Swift was floundering, had reduced its work 
force, shut down shifts, and sold plants before JBS purchased 
Swift. Then, after we bought Swift, we expanded operations, 
added additional shifts, and hired more workers. We kept local 
managers.
    We are investing billions of our company's money in the 
United States, with a goal to grow the industry, to hire more 
U.S. workers, and increase demand for U.S. beef and pork around 
the world.
    We are fully cooperating with the Department of Justice 
review and hope that review can conclude as swiftly as possible 
so that we can implement our growth strategy on beef and pork.
    We appreciate this opportunity to tell our story before 
this Committee and look forward to the answering your 
questions.
    On a personal note, my family and I greatly enjoy living in 
America in our home in Fort Collins. This is a great country.
    Mr. Chairman, thank you very much.
    [The prepared statement of Mr. Batista appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Batista.
    Mr. Hunt?

  STATEMENT OF STEVEN D. HUNT, CHIEF EXECUTIVE OFFICER, U.S. 
           PREMIUM BEEF, LTD., KANSAS CITY, MISSOURI

    Mr. Hunt. Chairman Kohl, I appreciate this opportunity to 
come before you today to talk about JBS' proposed transaction 
to acquire National Beef from U.S. Premium Beef. I am the CEO 
of U.S. Premium Beef and the Chairman of National Beef, but 
most importantly, I am a fifth-generation cattle producer. I 
speak to you today on behalf of U.S. Premium Beef owners and 
independent producers, which on March 14th overwhelmingly voted 
to favor proceeding with this transaction. They believe that 
the livelihood of all cattle producers is dependent upon the 
health and growth of the beef industry, and that is why we 
agree with JBS' vision.
    U.S. Premium Beef is a one of a kind producer-owned beef 
processing company, formed to link producers with consumers 
through ownership in processing. As a result, we have been able 
to design a supply of cattle specifically bred and managed to 
meet consumer preferences, which results in premiums back to 
the producer and the processing company.
    U.S. Premium Beef was formed in 1997. In addition to 
processing customer cattle throughout the United States, we 
have processed over 6 million cattle of U.S. Premium Beef 
members. In addition to that, we have paid out over $117 
million in cash premiums to our members since we began. We have 
also paid an additional $87 million in cash dividends. That was 
the result of our ownership in processing. In other words, our 
producer owners have become beef processors through U.S. 
Premium Beef. We have been able to realize the financial 
rewards from the ranch to the consumer's plate.
    Simply put, through value-based pricing, our company gives 
producers the economic incentive to deliver more valuable, 
consumer-preferred beef.
    Since our formation, we have been working to diversify our 
business geographically through expansion, acquisition of other 
protein businesses, and pursuit of businesses in markets 
outside the United States. This has been essential in managing 
the risk our owners take in ownership of processing. This is a 
strategy that producers pursue on the farm and that other 
businesses pursue as well.
    Since the discovery of BSE in the United States in 2003 and 
the subsequent loss of the export market, losses and prospects 
of the declining herd have left the beef industry in a position 
where few want to invest.
    In 2006, Hicks Muse announced that they were selling Swift. 
Smithfield Foods has also made the decision to exit the beef 
processing industry. Whereas prior to 2003, our company was 
routinely approached by willing investors and partners, today 
we witness very few, if any, parties willing to invest in the 
U.S. beef processing industry, except one.
    JBS, a family owned business based in Sao Paulo, Brazil--
you have just heard from Wesley Batista--with U.S. headquarters 
in Greeley, Colorado, is willing to invest over $3 billion in 
our U.S. meat processing industry. They believe that by putting 
our companies together, we can create more value and increase 
efficiencies, not only necessary to sustain our industry, but 
to begin growing it again.
    More importantly, JBS has the same vision for industry 
growth and success as we do. Since acquiring Swift last year, 
JBS has expanded production and purchased more cattle. They 
also have looked for ways to expand demand for U.S. beef by 
pushing into new international markets. They are able to use 
their unique perspective to introduce U.S. beef to foreign 
companies and new customers.
    For U.S. Premium Beef, this partnership with JBS is a 
natural decision that enables our producer owners to broaden 
our investment into a well-diversified, multi-protein world 
leader in value-added products, while at the same time we are 
able to maintain our founding principles of value-based pricing 
and dissemination of valuable carcass data to every single 
producer on every single animal.
    JBS respects what we have accomplished at U.S. Premium 
Beef/National Beef and wants to buildupon our value-added 
strategy to help bring more value to producers so we can expand 
production once again. After the completion of our proposed 
transaction with JBS, more producers will have the ability to 
market through our unique producer-owned company by delivering 
cattle to more plants, thus reducing freight costs and 
improving efficiencies for producers and the processing 
company. Our confidence in JBS' dedication to expanding demand 
for U.S. beef is a strategy that is exemplified by U.S. Premium 
Beef's agreement to become a substantial investor in JBS.
    The farmer and rancher owners of U.S. Premium Beef have a 
right and an obligation to pursue sound business strategies 
employed by our competitors, recommended by our universities, 
and applauded by Congress. These include value-added strategies 
through vertical integration from the bottom up, product 
diversification to lay off risk, and foreign investment to 
participate in the growing consumer global market.
    As you know, the Department of Justice is reviewing the 
proposed transaction. I am confident its review will be 
thorough and, when complete, will lead them to recognize the 
benefits of this transaction. The beef processing industry is 
highly competitive, with Cargill, Tyson, JBS, and a number of 
other processors remaining to compete fiercely for cattle and 
to sell beef to our sophisticated customer base. This 
transaction will enhance this competition by allowing the 
combined company to perform more efficiently and provide a 
platform for growth in the future.
    Mr. Chairman, thank you for this opportunity, and I look 
forward to answering questions later.
    [The prepared statement of Mr. Hunt appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Mr. Hunt.
    Mr. Bullard?

 STATEMENT OF BILL BULLARD, CHIEF EXECUTIVE OFFICER, RANCHERS-
 CATTLEMEN ACTION LEGAL FUND, UNITED STOCKGROWERS OF AMERICA, 
                       BILLINGS, MONTANA

    Mr. Bullard. Mr. Chairman, thank you for this opportunity. 
I represent the thousands of men and women who own and operate 
cattle operations all across this country as the CEO of R-CALF 
USA. Our organization endeavors to ensure that our independent 
cattle producers can remain profitable long into the future.
    I want to describe our industry to you. The United States 
cattle industry is the single largest segment of American 
agriculture. It produces $50 billion annually; 11 States 
produce over $1 billion a year. This industry is intrinsically 
important to the overall prosperity of rural America.
    It is important that the Subcommittee realize that while 
the four major packers do control the steer and heifer market, 
that steer and heifer market represents only 27 million of the 
45 million cattle that are sold every year. Our U.S. cattle 
industry is a dynamic industry, and in that industry, we have 
various value-added segments. So while we have 45 million 
cattle sold every year, 27 million are sold into this highly 
concentrated marketing structure consisting of just four firms. 
And it is this segment of the industry that serves as a portal 
to actually cause harm throughout the industry if there is any 
price distortion that occurs within this segment.
    Our industry can be viewed as a pyramid. At the base of the 
pyramid, you have the seed stock producers--the breeders. The 
breeders sell breeding animals to the cow/calf producers. The 
cow/calf producers produce a new calf every year. They will 
keep that calf for 4 to 6 months. That calf is then sold to a 
backgrounder. A backgrounder will grow that animal through what 
might be called its adolescent years. The backgrounder could 
then sell that animal to a stocker. The stocker would run that 
animal for about 4 months. So it takes about 18 months from the 
time that an animal is birthed until it is actually sold in the 
steer and heifer market to one of these four packers.
    Our industry in this pyramid, those segments that I 
described--the breeder, the cow/calf producer, the stocker, the 
feeder--we have about 970,000 of them left in the United 
States. And as you move up this pyramid, you get closer to the 
feeding sector. There are about 93,000 feeders left in the 
United States. But that industry is becoming increasingly 
consolidated as well because there are now fewer than 2,500 
feeders that actually sell approximately 23 million cattle to 
these four meatpackers.
    So what I have described is an industry, a dynamic industry 
that is intrinsically important to the prosperity of rural 
America, that is valuable in every State of the Union. But this 
industry has the price-making segment at the top of the 
pyramid, and any distortion in that price will reverberate all 
the way down through the industry. A 3-percent reduction in 
price, for example, which is about what they found in terms of 
detrimental impacts of further concentration in this industry, 
a 3-percent impact would reduce that $50 billion annual revenue 
generation by $1.5 billion, a loss of $1.5 billion. This would 
be damaging to the 970,000 independent producers as well as 
damaging to the rural communities that they support.
    This industry has been besieged by market power for quite 
some time, and we have ample evidence to demonstrate this, and 
I have provided that in my written testimony.
    For example, we have lost 40 percent of our producers just 
since 1980. We had 1.6 million cattle producers in 1980. We are 
down to about 970,000 today. Our size of the U.S. cattle herd 
has been reducing for many, many years. We have decreased the 
size of the herd today to about where it was back in the 1950s. 
And while we have reduced the size of our production capacity 
by reducing our herd size, we have also been experiencing a 
disruption of the historical cattle cycle. That cattle cycle 
has provided a bellwether indicator of the competitiveness of 
this industry. And recently, USDA acknowledged that the 
analogous hog industry that is also experiencing a loss in its 
hog cycle, that loss is attributed to a changing market 
structure, a market structure that is evidenced by further 
consolidation and concentration.
    I want to leave you with this. Our industry is in a state 
of emergency right now. We continue to experience contraction. 
This merger is going to exacerbate the current contraction of 
this industry, and like the hog industry, as already described, 
you had 667,000 producers in 1980, down to 67,000 today. You 
lost 90 percent of all the producers in that industry. We are 
going to see the same thing in the cattle industry unless the 
Department of Justice, and unless the U.S. Senate and the U.S. 
House, take specific action to reverse the present course. 
Because, like Congress was unaware of the tremendous exodus of 
hog producers, you will be unaware of the exodus of cattle 
producers, because it will happen one cattle operation at a 
time in one rural community at a time until we wake up one 
morning and say we have lost the critical mass within this 
industry to maintain a viable market.
    Thank you.
    [The prepared statement of Mr. Bullard appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Bullard.
    Mr. Feuz, Dr. Feuz?

     STATEMENT OF DILLON M. FEUZ, PROFESSOR, DEPARTMENT OF 
         ECONOMICS, UTAH STATE UNIVERSITY, LOGAN, UTAH

    Mr. Feuz. Thank you, Senator Kohl, for the opportunity to 
speak to the Committee.
    Chairman Kohl. I do not think your microphone is on.
    Mr. Feuz. Thank you, Senator Kohl. I want to begin my 
comments by just reiterating the change that has taken place in 
the packing industry over the last 20 years when you look at 
the major players--Tyson who acquired IBP, Smithfield who 
acquired Moyer Packing, and Packerland ConAgra who was a major 
player in 1987, exited the industry in 2002, and most recently, 
Swift who went out with the JBS acquisition of those.
    I point that out as a fact that this is not a static 
industry, but one where firms continue to enter and exit the 
industry. From a pure economic point of view, I would have much 
greater concern about the level of concentration and market 
power if I did not see firms entering and exiting the industry.
    Second, I point out that there likely is not excessive 
profits being generated in this industry due to the level of 
concentration, or you would likely see the players that are 
there remaining in that industry to capture those excessive 
profits. Certainly I do not think if IPB were strong enough 
they would have allowed Tyson to acquire them, nor would have 
ConAgra, a major agribusiness firm that continues to be 
involved in agriculture, divested themselves of both cattle 
feeding and beef packing had they been earning excessive 
profits due to concentration.
    As I look specifically at this merger, I see three 
potential benefits. First of all, as JBS/Swift has noted, they 
bring outside capital and new ideas into an industry that is 
probably needing both. As you look at the packing industry over 
the last couple of years, margins have been very small in that 
industry, and certainly some of the existing players are 
probably in a financial condition that they would not be able 
to continue operations without an addition of capital.
    Perhaps even more important is the addition of some new 
ideas, particularly, I think, in the export market area where 
JBS Company has shown a history of being very aggressive in the 
world export markets, and I think they can bring that level of 
expertise to the U.S. and increase our exports, particularly 
into some markets where we have previously not had access.
    Another benefit, I think, has been highlighted somewhat by 
Mr. Hunt from U.S. Premium Beef. They have had one of the 
premier pricing grids for fed cattle, particularly upper-
quality fed cattle that has been in the industry, that has 
allowed independent producers to receive a premium if they are 
producing a higher-quality animal. Unfortunately, in the 
present situation, transportation has restricted the producers 
that could really benefit from that because all those cattle 
had to be slaughtered basically in western Nebraska to national 
plants. With this merger, that will become much more 
geographically dispersed into the Northeast, the Wester 
markets, as well as throughout Iowa, Nebraska, Kansas, and 
Texas as there are greater plants that would have that grid 
available.
    And, last, I think on the market power issue alone, perhaps 
three strong players competing for a limited supply of cattle 
will be more aggressive in the marketplace than what I view as 
currently two strong majors and one weak major within two 
regional competitors, one of which itself was probably in some 
financial difficulty. As I talked with one feedlot operator in 
Utah, he mentioned to me that perhaps one strong player in the 
market would be better than a weak or no player.
    On a couple of cautionary notes, certainly the loss of a 
bidder in a marketplace is a concern. Going from four major 
players to three in the primary cattle feeding area will be of 
concern. However, if the plants stay open, you will still have 
the same competition for the number of cattle. Perhaps of 
greater concern would be in the culled cow and dairy market in 
the Southwest where you may be going from two independent 
firms--Smithfield and National--to one in those areas. That 
could be a concern.
    Last, I want to close. I have heard several comments today 
about a concern for the overall food price level and what this 
merger may do, and I would suggest that if the Senate is 
concerned about the price of food, it would be much more 
advantageous to look at what I view as an ill- advised corn 
ethanol policy that is doing far more damage in the livestock 
industry and will continue for the next few years than what 
this merger or others would do in that industry.
    Thank you.
    [The prepared statement of Mr. Feuz appears as a submission 
for the record.]
    Chairman Kohl. Thank you, Dr. Feuz.
    Mr. Stumo?

  STATEMENT OF MICHAEL STUMO, LEGAL COUNSEL, ORGANIZATION FOR 
             COMPETITIVE MARKETS, LINCOLN, NEBRASKA

    Mr. Stumo. Thank you, Senator Kohl. I would ask that my 
written comments be submitted to the record, please.
    Chairman Kohl. It will be done.
    Mr. Stumo. The Organization for Competitive Markets has 
members, including feeders--large, medium, and small--across 
the spectrum. They are not here speaking today because they are 
afraid. They are afraid of retaliation in the marketplace if 
they say their fears about the lack of competition when the 
packer buyers discipline them every week and every day in the 
market.
    When my members speak to DOJ, they insist on 
confidentiality agreements so nobody will find out, so they 
won't lose yet another buyer. They insist on it. They wish 
competition. They appreciate the packers. They appreciate 
Tyson, Cargill, Swift, National, and Smithfield, all of them. 
But they do not appreciate the chokehold on market access that 
public policy and the packers have combined to create. That 
chokehold is choking off the number of open negotiated market 
shackle space in these plants that is available for these 
fellows and feedlots to sell into.
    When you exert market power, you want to grab the 
bottleneck. In the oil market, in the oil merger of BP-Amoco, 
Cushing, Oklahoma, was the bottleneck pipeline where price was 
set. That is where you wanted to have your hands wrapped 
around. Here you want to have your hands wrapped around 
rationing shackle space.
    There is the Great Plains. You will see the overlap between 
JBS plants and National Beef plants. People will tell you that 
feeders in that area all have four buyers. They do not. They 
may have three, two, or the small guys may beg for someone to 
come look at their cattle. It didn't used to be. Through the 
consolidation, people say it makes no difference. They come up 
with happy theories as to why it will be happy for everybody. 
We have heard them today. They are untrue. The results are 
that: a declining number of cow operations and declining cow 
herd. We have 300 million people in this country today, 
increased from 200 million in 1967. They eat a lot of beef. We 
should produce more beef to feed them. We don't. Oligopsony 
power is predicted to be inefficient because it depresses 
prices, it depresses output. Oligopsony in this industry has 
met that prediction. As we concentrate, we depress price, we 
depress output. We hear vague claims of overcapacity, but yet 
we are going to expand capacity. Which one is it?
    If there is overcapacity, it is because of oligopsony 
depressing price and depressing production. And that is bad. We 
could produce more beef. We could produce more beef to feed the 
U.S. This is what public policy has wrought. It is poor 
performance. DOJ has failed.
    DOJ gets all wrapped up in competitive conduct. The judges 
have not treated them well. Structure matters. Just as 65 miles 
an hour is the speed we set on the highway, it is clear 
everybody knows you can drive safe over that, but it is highly 
likely to create more accidents than going the speed limit. 
Structure is the same. We can argue about whether it is going 
to be unreasonable practices or something, but it is highly 
likely we will have bad results like you see on the right. We 
have had. It is a poorly performing country when we eat more 
food, or ag sector.
    DOJ has failed in the Smithfield versus Premium standard 
merger because in a marginally competitive market they allowed 
merger to monopoly in the Southeast U.S. Ghastly result. One 
packer. They allowed it. Not an objection.
    Monsanto bought Delta and Pine Land Company. That merger 
was rejected in 2000, but they took another run at it and, by 
golly, this DOJ let it happen, with an insignificant 
divestiture of Stonefield. Thus, Monsanto has 50 percent of the 
cotton seed market in the U.S., 75 percent in some key regions. 
Prices go way up. They also choked off competing research by 
other competitors like Dupont, Syngenta, and others to kill the 
baby in the crib so there will not be competition in the future 
with future innovation.
    We like innovation and choice, and we like competition. We 
do not have it. All the arguments that say we do are based, as 
you heard, perhaps, may, this could happen--that sort of thing. 
There is no proof. That is why your bill 1759 shifts the burden 
of proof so they have to actually prove it. They cannot just 
think in utter happy thoughts so judges accept it and ignore 
all the proof of anticompetitive harm.
    Antitrust is out of balance. We could have a flourishing 
agriculture in dairy, beef, and pork. We could have lower seed 
prices, more choice and innovation in seed, corn, cotton, and 
soy. We do not because of failures at the Department of 
Justice. S. 1759 is a good start, and DOJ needs to stop 
allowing marginal competitive industries to become more 
noncompetitive.
    Thank you.
    [The prepared statement of Mr. Stumo appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Stumo.
    Mr. Balto?

STATEMENT OF DAVID A. BALTO, SENIOR FELLOW, CENTER FOR AMERICAN 
                   PROGRESS, WASHINGTON, D.C.

    Mr. Balto. Thank you, Mr. Chairman, and thank you for the 
opportunity to testify on behalf of the Center for American 
Progress and the Consumer Federation of America. I speak from 
the experience of over a quarter century as an antitrust 
lawyer, the vast majority of which as an antitrust enforcer.
    I frequently represent parties before the DOJ and the FTC, 
and there is something different when you represent farmers 
before DOJ. The standards that are effectively applied are 
different. The level of attention is not as great.
    I represented the hog producers in Premium Standard/
Smithfield merger, and DOJ permitted the merger concluding that 
you could truck a hog 400 miles. There was just simply no 
evidence of that. They made a mistake.
    I have a simple message today. This merger poses a serious 
threat to competition to both consumers and to producers. 
Increasing concentration in agricultural processing, leads to 
less compensation to the farmer and higher prices to the 
consumers. Somehow both lose.
    This merger, by combining three firms and reducing the 
number of beef processors from five to three, will lead to a 
level of concentration that the founders of the beef trust, the 
people who the Sherman Act was passed to stop, the founders of 
the beef trust could not imagine in their wildest dreams.
    Now, I have never listened to a more persuasive case about 
the vulnerability of a market than that presented in the 
testimony of Mr. Stumo and Mr. Bullard. They demonstrated in 
their testimony how weak the position of the producers are, how 
they are increasingly subject to manipulation because of 
vertical integration and the short window they have to sell. 
With that as the foundation, if you look at the traditional 
approach under the law or the Merger Guidelines, even going 
past concentration, this merger poses a substantial unilateral, 
anticompetitive effect. JBS and National compete head to head 
for producers. Taking one out of the market is going to lower 
compensation.
    This is an environment ripe for coordination, tacit 
collusion. There are lots of cases involving tacit collusion. 
They are noted in my testimony. And it is a lot easier to 
collude when you have only got three firms around the table 
instead of five. I am not suggesting that these firms collude 
explicitly. No, there is no need to. In a market like this one 
where the information is so public, where it is so easy to know 
what each firm is doing, they do not need to meet in a smoke-
filled room.
    Do we have hope? No, I am skeptical. This is a time of 
incredibly lax merger enforcement. Our friends at the Justice 
Department have not gone to Federal court to challenge a merger 
in 5 years. They say in their testimony, Mr. Chairman, they 
bring agriculture cases. None of those cases involve monopsony 
power. None of them involve protecting producers from buyer 
power. None. No case have they brought protecting producers 
against buyer power for 9 years.
    Now, 9 years ago, the Deputy Assistant Attorney General 
testified before the Senate, and he said no--no to mergers in 
this processing segment. And so what happened? People found 
other ways of doing efficient transactions that Dr. Feuz has 
noted.
    What is the problem here? DOJ is allowing the perfect 
become the enemy of the good. They are looking for the perfect 
case. They use econometric tools that they know at best are 
imperfect at best, and based on that, they simply are 
permitting a wide range of mergers to occur.
    Now, I am not in any fashion criticizing the dedicated 
staff. What I am concerned about is the leadership that is 
applied to the Division. What can we do? There have been no 
other industries with as many hearings on competition issues as 
agriculture and antitrust.
    First, DOJ must carefully scrutinize this merger. My 
testimony is explicit. They need to engage the opponents in an 
open dialogue. Mr. Ross testified here today that he hears the 
concerns of the producers. Well, Mr. Ross and his supervisors 
are not in this hearing room right now. They walked out of this 
hearing as soon as they finished testifying. Whether they hear 
it, that is not the point. They need to engage the producers in 
an active fashion. Mr. Bullard and Mr. Stumo, traveling here on 
their own expense, have gone and provided tremendous 
documentation of a severe competitive problem.
    Second, I hope the Committee exercises its oversight power. 
It sounds like you are moving in that direction.
    Third, the FTC and DOJ to their credit have conducted a 
series of policy hearings over the past several years. They 
held hearings on the Merger Guidelines. Professor Carstensen 
testified and said you need special standards for monopsony. 
Was that issue ever addressed in their report on the Merger 
Guidelines? No. Did they address agricultural issues in that 
report? No. Did they address monopsony issues in that report? 
No. They have to do a better job of addressing these issues in 
a more concrete fashion and taking these issues seriously.
    Finally, passage of the proposed Grassley-Kohl bill is 
absolutely necessary to redressing the imbalance here, to 
protect the interests of not only family farmers but consumers, 
because both parties ultimately benefit if the marketplace is 
truly competitive.
    Thank you.
    [The prepared statement of Mr. Balto appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. Balto.
    Mr. Batista, many independent ranchers are concerned that 
once this merger, if it is approved, occurs, they will have 
little leverage with respect to the enormous buying power of 
the three remaining large meatpackers and that the prices they 
receive will decline. Why are they correct to be saying that?
    Mr. Batista. Mr. Chairman, basically our view about this, 
who defines the market, the consumers do. This industry needs 
to work to expand demand here in the U.S. and outside the U.S. 
For us, the most important thing this industry needs is to 
expand demand for U.S. beef. U.S. beef in 2003 had the BSE 
problem. We need to reopen all these markets and to sell U.S. 
beef to different markets and to have more options to aggregate 
value for U.S. beef.
    Chairman Kohl. Mr. Bullard, what is your thought?
    Mr. Bullard. Well, Mr. Chairman, the alarming irony behind 
the fact that during the period when our industry was 
contracting, both in terms of the number of cattle operations 
and the size of our cattle herd and the loss of our cattle 
cycle, that was happening at the same time that domestic 
consumption of beef was increasing dramatically. After 1993, we 
saw a significant increase in the demand--domestic consumption, 
and yet our industry was contracting. That is counterintuitive 
to competitive market signals. That counters Mr. Batista's 
claim that all they need to do is increase more demand and that 
will improve conditions for cattle producers.
    As was discussed earlier, the increased income does not 
fall back through to the cattle producers. It is captured by 
this highly concentrated marketing structure. Until we can 
explain why in the past 4 years we have had the widest spread 
between U.S. production and U.S. consumption, these arguments 
are baseless.
    Chairman Kohl. Mr. Stumo?
    Mr. Stumo. We hear and have heard justifications all the 
time--and I characterize them as ``happy thoughts without 
proof,'' and for some reason people in decisionmaking positions 
have just accepted them. We heard about the quality, the 
vertical integration, the quality. We have seed producer 
members, seed stock producer members, that is. They produce 
Angus beef. They produce natural beef. They produce lean beef. 
There is no sign on their farms or ranches that say these 
cattle must go to only this packer or to this type of a 
contract arrangement. Everyone sells--every one of the benefits 
that have been mentioned today could be achieved through ways 
that are not anticompetitive, through better management, 
through better marketing, through genetics that are not 
exclusive to any marketing method or any plant. Swift, JBS/
Swift, has a plant sitting now in Grand Island, Kansas, with a 
good shell that burnt--part of it burnt down a couple years 
ago, but I know they have told livestock associations that it 
is a good plant, they could put it back into operation. That is 
a way they could expand in Grand Island, Kansas, right over 
there, for cheaper than paying triple the value of U.S. Premium 
Beef shares, which is basically buying market power to shut out 
a competitor.
    We are going to have no change in capacity, no change in 
plants, no change in plant size, no change in genetics, no 
change in consumer demand, but a decrease in competition and a 
market closure for many producers.
    Chairman Kohl. OK. Mr. Bullard, JBS/Swift will also 
acquire, as we discussed, Five Rivers, the Nation's largest 
feedlot. This one feedlot feeds and markets 2 million cattle 
annually. Why does JBS's acquisition of Five Rivers concern 
you, Mr. Bullard?
    Mr. Bullard. Right now, Five Rivers feedlots is owned by 
Smithfield, and as Mr. Batista explained, Smithfield's 
slaughtering operations are far removed from the feeding area 
where the feedlots exist. In other words, Smithfield is not 
presently able to use the cattle produced in Five Rivers in 
order to satisfy their demand needs--their slaughter capacity 
of their plants.
    Instead, we believe Smithfield operates that Five Rivers 
feedlot presently as an independent feeder, probably selling to 
Cargill, Tyson, and National.
    However, under this merger, JBS will be in close proximity 
to all of those feedlots. Those feedlots produce about 2 
million cattle a year, which is about 7 percent of the steer 
and heifer slaughter every year. So JBS is going to be able to 
capture 2 million head and to use those animals strategically 
to keep from entering the competitive marketplace to purchase 
cattle from other producers.
    In addition to that, with that level of vertical 
integration that will occur within our industry, JBS is going 
to have a distinct advantage because it is going to have what 
would essentially be insider information. It is going to know 
the future orders for beef when it is out competing in the 
market for feeder cattle--lighter cattle from the independent 
cow/calf producers and stockers and backgrounders.
    So JBS is going to have information about the value of 
those animals long before independent producers will have, and 
as a result of that, producers will be disadvantaged, again, by 
the exploitation of market power by the major packers.
    Thank you.
    Chairman Kohl. Thank you.
    Mr. Stumo and then Mr. Balto, what is your response and 
reaction?
    Mr. Stumo. The post-merger company, if this yet another 
anticompetitive merger is allowed, will have 43,500 head per 
day capacity. If you multiply that times 250 kill days per 
year, you are at 10.6 million head.
    Smithfield's website advertises Five Rivers as 2 million 
per year capacity. If you figure each animal has a $1,000 value 
as a thumb rule, that is $2 billion. Smithfield right now has 
an incentive to maximize value, has an incentive that the 
market be a proper market. Those cattle are relatively free 
agents, though they may be contracted and partially a problem 
in some areas.
    If they become part of this final JBS/Swift, they become 
nearly 20 percent of their full capacity, but as far as their 
fed cattle subset of capacity, excluding the Holsteins and the 
culled cows, which are directly tied to the fed cattle market 
but yet a different market--they are sort of a basis spread 
there--we are basically taking one- and-a-half plant 
equivalence offline in the Midwest.
    So not only do you lose one buyer in the Great Plains fed 
cattle base price setting region, you are not only losing 25 
percent of the buyers in the region, you are also taking 
another plant and a half out of the market, so you are almost 
going--instead of four to three in that region, you are almost 
going four to two in many ways. And that is assuming--which 
please do not assume that there are buyers from every one of 
those plants in every feedlot when there are feedlots begging 
for one buy.
    So it is a major, major problem and a major additional 
shift beyond a mere horizontal merger.
    Chairman Kohl. OK. Mr. Balto?
    Mr. Balto. Well, Mr. Bullard and Mr. Stumo, as always, hit 
the nail on the head. Vertical mergers can facilitate 
collusion. Let me just give you a real-world example in another 
industry. The market of paper label stock.
    Several years ago, UPM, a Finish company, wanted to acquire 
an American paper label stock manufacturer. There was another 
competitor Avery that was vertically integrated. Because Avery 
was a large supplier of paper label stock and also a competitor 
of those firms, it was able to facilitate collusion that 
eventually was attacked by the European Commission.
    In other words, the agencies--Senator Hatch's question 
suggested whether or not vertical integration was generally 
innocuous. No, in this setting and many other settings, it is 
not. It provides a very useful tool to facilitate either tacit 
or explicit collusion, and that should be a serious concern 
investigated by the Justice Department.
    Chairman Kohl. All right. Mr. Batista, if the Department of 
Justice ordered you to divest the Five Rivers feedlot as a 
condition of approving the deal, would you agree to do that, 
the divestiture as a condition of approving the deal?
    Mr. Batista. Senator, this is not our intention because we 
have this deal with Smithfield which includes Five Rivers and 
the Smithfield beef plants. Only I would like to comment some 
about Five Rivers here.
    The annual turnover in Five Rivers is around 1.4 to 1.6 
million head per year. It is not 2 million head per year. Five 
Rivers represents around 5 percent of the total U.S. cattle 
slaughter. When Five Rivers is running around this number, it 
will represent around 10 percent of our slaughter per year. 
Five Rivers today runs independently--it will continue running 
the same way it runs today. Five Rivers does not sell a lot of 
cattle in the spot market, but through contracts. In our view, 
sincerely, Five Rivers is part of the deal with Smithfield.
    Chairman Kohl. What about you, Mr. Balto? Do you think we 
ought to place that as a minimum condition on a deal?
    Mr. Balto. I think if you really carefully study the 
testimony of Mr. Bullard and Mr. Stumo, you see this is a 
fragile market that any kind of acquisition should receive 
extremely serious scrutiny. And I doubt that a divestiture of 
Five Rivers and all of National's plants in the Plains States 
would be sufficient to remedy all those competitive concerns.
    Chairman Kohl. Mr. Bullard, if the meatpacking firms gain 
lower prices for cattle because of their increased buying 
power, do you think it is likely that these price savings will 
be passed on to consumers?
    Mr. Bullard. We, in fact, see evidence to the contrary. In 
my written testimony--and if I need to, I would ask that it be 
submitted into the official record as well.
    Chairman Kohl. It will be.
    Mr. Bullard. But in that testimony, you will find a chart 
that shows, for example, the hog industry. It shows the price 
spread between the price that producers receive for hogs versus 
what consumers are paying for pork in an industry that is even 
more vertically integrated than is the U.S. cattle industry. 
There we see an inverse relationship--an ever increasing cost 
to consumers for pork and a decreasing price paid to U.S. hog 
producers.
    The cattle industry at this point in time and the chart in 
my written comments show that U.S. consumers are paying more 
for beef, and that while live cattle prices have indeed 
increased since 2003, the spread between what the producer 
receives and what the consumer pays is ever widening, 
indicating in economic terms that the market is becoming 
inefficient and inequitable for both consumers and producers.
    So the answer to the question is no. If the meatpacker pays 
less for cattle, as we have seen over time, U.S. consumers will 
continue to pay whatever the retailer can charge and is 
accepted by consumers, and prices will continue to increase. We 
have lost the relationship, the direct relationship between the 
price of the raw commodity and the price of the commodity 
eventually sold to the consumer.
    Chairman Kohl. Mr. Batista, do you agree with Mr. Bullard?
    Mr. Batista. Basically, Senator, this market is very 
dynamic. This market is driven by supply and demand. When the 
price hits cycle, we have seasonal influences here in the U.S. 
in this time, the demand is better. In our view, the market is 
following the cattle price and the beef price, following the 
same structure, following supply and demand.
    Chairman Kohl. Anybody want to comment on his statement? 
Dr. Feuz?
    Mr. Feuz. A comment on a couple of things that have been 
discussed. One, the chart here on the right only shows half the 
picture in terms of we have had declining cattle numbers, but 
pounds of beef have actually -was at a record level in 2006. So 
when you look at the consumer market, they have seen more 
product.
    In my opinion, the price level is not established at the 
packer level. The price level is established at the retail 
level. We can increase cattle numbers. We can increase beef 
production. We can force consumers to eat more. But it will be 
at a lower price. The packers work on a margin. They pass it 
down. Certainly that margin has widened because the costs have 
increased as well as what we have asked packers to do with that 
product has changed drastically in the last several years from 
going to producing--simply harvesting the animal and leaving 
the plant with carcass beef to all the value-added processes. 
Even if you look at how we sell hamburger in the retail 
industry today, a lot of that is in patty form, not in bulk. We 
already have the seasoning put in for taco meat, fajitas, et 
cetera. All those processes have been aimed at hitting consumer 
demand, increasing consumer demand, but one of the results of 
those will be a wide spread between the retail price and the 
farm-level price.
    Certainly that can happen without packers or the retailers 
extracting an excessive margin due to market power.
    Chairman Kohl. Thank you.
    Mr. Stumo. Sir?
    Chairman Kohl. Yes, sir, Mr. Stumo.
    Mr. Stumo. Sir, that is untrue, what was just said. The 
data series excludes the further processing. We have heard for 
years that all this consolidation is necessary to become more 
efficient. If it has been so, we would have seen less in the 
margins with the same data series excluding adding seasonings 
to fajita meat. That is not part of it. We have seen widening 
margins because of market power. It is a poorly performing 
sector, and the consolidation apologists were wrong.
    Mr. Bullard. Mr. Chairman, if you would look at Figure 3 in 
my written comments, you would find that his depiction of the 
production in the U.S. is wrong as well; that, in fact, in the 
last few years the production of domestic beef produced from 
domestic cattle is about the same as it was back in the early 
1980's, mid-1980's.
    We have not seen a consummate increase in the production of 
beef while we have witnessed an alarming contraction in the 
number of cattle producers and the loss of our herd.
    It simply is not true, and the chart is documented with 
USDA data to show it.
    Thank you.
    Mr. Balto. Just to tie the loop on one other thing, just so 
nobody in this room is mistaken, these prices are not set. I 
mean, retailers do not exercise some kind of market power. That 
is not where the margin is coming in. As you well know and 
everybody knows, supermarket retailers are an intensely 
competitive market where they have extremely small margins, and 
if there are increases in price, it is not substantially on the 
retail level.
    Mr. Hunt. Mr. Chairman?
    Chairman Kohl. Yes, sir, Mr. Hunt.
    Mr. Hunt. I frankly do not know where to start, but I am 
not a practicing economist, but my family still is in the 
business, whether they be cow/calf producers, farmer feeders, 
they run feedlots, and certainly we are involved in processing. 
But I have a problem with the assumption--of leaving out the 
assumption that drought had anything to do with our supply of 
cattle within the United States.
    In addition to that, we have seen record cow/calf prices in 
the last 5 to 10 years. You know what? I am happy for that. 
That is good for my family. That is good for our industry. Our 
goal is to add value to the top line.
    We also know that our costs are going up dramatically, the 
costs of our inputs, the costs of our transportation. The only 
way that we as an industry can grow back is to add dollars to 
the top line.
    Additionally, I am not--I may have misunderstood the 
answer, but what I thought I heard was the retailer was not 
taking the margin with the assumption the packer was. It is 
very documented that we have seen the worst packer margins in 
probably the last 30 years, in the last 3 years since BSE was 
discovered.
    Chairman Kohl. All right. Mr. Batista, is it true that the 
Brazilian Government has subsidized your acquisitions of 
National and Smithfield--or Swift?
    Mr. Batista. No, Senator, to my knowledge that is not the 
case. JBS today is a public company. We have had investments 
from BNDES, a federal development bank, in Brazil. BNDES, a 
federal public company, has normal investments in JBS stock and 
has also extended JBS modest loans at competitive rates. JBS is 
a public company, and BNDES has some participation, but there 
was a public offer and there are a lot of JBS shares traded on 
the Sao Paulo stock exchange in Brazil. I believe that a lot of 
U.S. investors have JBS shares.
    Chairman Kohl. Mr. Stumo, Mr. Hunt in his testimony made 
the point that investment is needed in beef processing, and 
only JBS is willing to make that investment. Do you believe 
that there is merit in that argument?
    Mr. Stumo. If this were a mere asset purchase of a company 
that was in trouble, it would be asset value plus maybe a 
premium, which is the opportunity cost, the investment. My 
understanding is--and I am not going to die on this sword, but 
my understanding is that the premiums--USPB shares were trading 
at 110, 120 among producers. It was nearly, you know, 2\1/2\ to 
3 times the price. It is a typical premium you would see when 
you are procuring market power, not merely buying assets of a 
firm that is in trouble.
    You see this causation argument between, well, firms are 
changing hands with other companies, thus the market is 
competitive. I do not know where that comes from. There is no 
economic text that would even support such a theory. You have 
firms changing hands if they are doing well, if they are doing 
worse.
    If you have a new firm coming in, they will buy at an asset 
price plus a little bit of premium. But if they are buying 
market power, it is worth a lot more because you are closing 
down a competitor. And that is what is happening here in my 
view.
    Chairman Kohl. Well, thank you, gentlemen. It has been a 
good hearing. We will leave the record open for a week.
    After hearing all the testimony, I remain concerned about 
the sharp consolidation in the meatpacking industry caused by 
this acquisition. I believe that these deals run the risk of 
substantially harming the cattle market. I hope very much that 
the Department of Justice continues to look at this and decides 
in a manner unlike what I believe that they are heading in the 
direction of.
    But, at any rate, it has been good to have you. I think you 
have shed a lot of light, and we will do all we can to see that 
justice is served.
    Thank you all for being here.
    [Whereupon, at 4:22 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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