[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
REGULATORY INJURY: HOW USDA'S PROPOSED GIPSA RULE HURTS AMERICA'S SMALL 
                               BUSINESSES

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

                                HEARING

                               before the

             SUBCOMMITTEE ON AGRICULTURE, ENERGY AND TRADE

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              JULY 7, 2011

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 112-026
           Available via the GPO Website: www.fdsys.gov/house




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

                           OPENING STATEMENTS

Tipton, Hon. Scott...............................................     1
Critz, Hon. Mark.................................................     2

                               WITNESSES

The Honorable Edward Avalos, Under Secretary, Marketing and 
  Regulatory Programs, United States Department of Agriculture, 
  Washington, DC.................................................     4
Ms. Robbie LeValley, LeValley Ranch, Hotchkiss, CO...............    22
Mr. Gary Malenke, Sioux-Preme Pork Products, Sioux City, IA......    20
Mr. Joel Brandenberger, President, National Turkey Federation, 
  Washington, DC.................................................    23
Mr. Bob Junk, Fay-Penn Economic Development Council, Uniontown, 
  PA.............................................................    25

                                APPENDIX

Prepared Statements:
    The Honorable Edward Avalos, Under Secretary, Marketing and 
      Regulatory Programs, United States Department of 
      Agriculture, Washington, DC................................    36
    Ms. Robbie LeValley, LeValley Ranch, Hotchkiss, CO...........    38
    Mr. Gary Malenke, Sioux-Preme Pork Products, Sioux City, IA..    42
    Mr. Joel Brandenberger, President, National Turkey 
      Federation, Washington, DC.................................    44
    Mr. Bob Junk, Fay-Penn Economic Development Council, 
      Uniontown, PA..............................................    49
Statements for the Record:
    Dan & Janet King, Owners/Operators, Zenda Poultry LLC and 
      Zenda View Farm LLC Rockingham County, Virginia............    58


REGULATORY INJURY: HOW USDA'S PROPOSED GIPSA RULE HURTS AMERICA'S SMALL 
                               BUSINESSES

                              ----------                              --
--------


                         THURSDAY, JULY 7, 2011

                  House of Representatives,
     Subcommittee on Agriculture, Energy and Trade,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
room 2360, Rayburn House Office Building. Hon. Scott Tipton 
(chairman of the subcommittee) presiding.
    Present: Representatives Tipton, Bartlett, King, Ellmers, 
Landry, Critz, Cicilline.
    Chairman Tipton. Well, good morning, everyone, and thank 
you for joining us. The hearing will now come to order.
    I would like to thank our witnesses for taking the time to 
be here today as well. We do look forward to your testimony.
    One of the greatest barriers that job creation has today is 
regulatory uncertainty. Small businesses already bear a heavy 
regulatory burden. Overreaching new proposed regulations are 
having a chilling effect, prolonging the economic downturn that 
we are experiencing in our country. Today we will examine the 
U.S. Department of Agriculture's Proposed Grain Inspection, 
Packers and Stockyards Administration or the GIPSA Rule and the 
potential ramifications it will have on America's small 
businesses.
    I would like to extend special thanks to each of our 
witnesses today for taking the time out of your busy schedules 
to be here. And I would like to especially thank the folks from 
the USDA and Under Secretary Avalos for being here. I also want 
to extend a warm welcome to Robbie LeValley, a constituent of 
mine from Hotchkiss, Colorado who we will hear testimony from 
later, along with other representatives for small businesses 
within the beef, pork, and poultry industries.
    Just over a year ago the USDA announced a proposed rule 
that would significantly alter livestock marketing practices 
and further inject the government into small businesses' 
marketing and business decisions. If implemented, as proposed, 
this overreaching new rule would hurt thousands of small 
businesses in the livestock industry and cost our country 
thousands of jobs. The GIPSA Rule would create uncertainty for 
livestock producers and open the door for frivolous lawsuits 
based on nothing more than accusations of competitive injury. 
Further, although the rule was prompted by the 2008 Farm Bill, 
I believe what was proposed by the USDA went far beyond the 
intent of Congress.
    The proposed rule has raised concerns for many in the 
agricultural community. During the public comment period, the 
USDA received more than 61,000 comments from stakeholders in 
the beef, pork, and poultry industries. Despite the proposed 
rule's potential for having far-reaching impacts on small 
businesses, no comprehensive cost-benefit analysis was 
performed.
    Chairman Graves and I found the USDA's disregard for the 
Regulatory Flexibility Act extremely troubling. As a result, 
last month we sent a letter to USDA Secretary Tom Vilsack, 
expressing our concerns and calling for, among other things, a 
revised regulatory flexibility analysis. To ensure that the 
USDA fully understands the private sector costs of regulations 
and its imposing these new rules on small businesses. 
Independent studies estimate that the proposed rule would deal 
a $1.5 billion blow to our nation's economy and directly cause 
the loss of 23,000 jobs. Clearly, our country cannot afford 
further economic injury of this magnitude.
    I look forward to hearing from our witnesses as they 
provide testimony and seek to prevent regulatory injuries that 
will likely result by the implementation of the existing 
proposed rule. I also look forward to hearing from Under 
Secretary Avalos on the current status of the proposed rule. It 
is my hope that if the USDA moves forward on the proposed rule 
it will do so only after significantly revising the rule to 
address concerns raised here today and to incorporate the 
suggestions from those who commented on the rule.
    I would also encourage the USDA to consider and include in 
the record the letter that Chairman Graves and I sent to 
Secretary Vilsack on June 13, addressing inadequacies of the 
Agency's initial regulatory flexibility analysis and the 
potential ramifications on small businesses.
    Again, I would like to thank all of you for taking the time 
to be here today and I will now yield to Ranking Member Critz 
for his opening statement.
    Mr. Critz. Thank you, Mr. Chairman. Mr. Secretary, Mr. 
Christian, thank you for being here.
    Over the past 60 years, technological improvements and 
scientific breakthroughs have enabled our farms to become the 
most productive in the world. However, the dramatic expansion 
of industrial agriculture has also made it increasingly 
challenging for small family farms to thrive. One area that has 
factored into this trend has been consolidation and vertical 
integration of the meat and poultry industry. Compared to 20 
years ago, the cattle industry is roughly 40 percent more 
concentrated. The modern poultry industry is 67 percent more 
concentrated than two decades ago. These trends have profoundly 
affected how small farms operate. As industry consolidation 
reduced the number of outlets for agricultural products, many 
family farms have shifted toward contract production.
    In addition, market forces have strained the bottom-line of 
many farmers. Congress recognized this and took steps to 
address these concerns in the 2008 Farm Bill. That measure 
contains provisions to improve marketing practices, including 
new rules for production contracts. The bill required the Grain 
Inspection Packers and Stockyards Administration (GIPSA) to 
define anti-competitive practices with the goal of improving 
oversighting compliance. Last June, GIPSA published its 
proposed rule intended to bring transparency to the industry 
and help small family farms compete.
    Today we will examine how effective this proposal is in 
restoring the competitive balance to the meat and poultry 
industries. This Subcommittee will also be investigating the 
economic costs on small- and medium-size farms. I look forward 
to any suggestions our witnesses may have for improving the 
regulation before the USDA issues its final rule.
    While the goal of the rulemaking is to help level the 
playing field, it is imperative that USDA properly weigh any 
adverse economic impact and explore less burdensome 
alternatives. I am confident after this hearing the USDA will 
continue to proceed in a transparent manner that allows public 
comments to the proposal, as well as the pending economic 
analysis. This input must be fully considered before a final 
rule is issued.
    Independent family farms play a vital role in rural 
economies. In addition to providing jobs, family farmers also 
help support small businesses by purchasing goods and services 
within their communities. Without them, rural areas are left 
with higher rates of unemployment and little opportunity for 
economic growth. It is vitally important that farms who will be 
directly impacted by the changes are heard.
    In advance of the testimony, I want to thank all of the 
witnesses who traveled here today, including Bob Junk from my 
Congressional District, for their participation and insights 
into this important topic.
    Thank you, Mr. Chairman. I yield back.
    Chairman Tipton. Thank you, Ranking Member Critz. And I 
would ask if Committee members have a statement that they 
submit it for the record.
    Gentlemen, you are probably familiar with it but if I may 
take a moment to explain our lighting system. You will have 
five minutes for your testimony. When the light turns yellow 
you have one minute left. If you exceed that a little bit, if 
you would wrap up your comments as quickly as possible and we 
can proceed on with questions from the Committee, we would 
appreciate it.
    Our first panel today, we will hear testimony from the 
Honorable Edward Avalos, Under Secretary for Marketing and 
Regulatory Programs for the USDA. Mr. Secretary, I want to 
certainly let you know that we do appreciate your having 
reached out to our office and I know the other members as well.
    Mr. Avalos provides leadership and oversight for the Animal 
and Plant Health Inspection Services which addresses animal and 
plant pests and diseases. The Agricultural Marketing Service, 
which provides standardization testing and marketing of 
commodities and specialty crops, and Grain Inspection Packers 
and Stockyards Administration, which promotes marketing of 
livestock, cereals, and meats, as well as fair trade practices. 
Mr. Avalos grew up in a family farm in Mesilla Valley of 
Southern New Mexico. Mr. Avalos is joined by Mr. Alan 
Christian, Deputy Administrator for Grain Inspection Packers 
and Stockyards Administration (GIPSA) and I would like to thank 
you gentlemen for taking the time to be here today.
    Mr. Avalos, if you would begin with your testimony. Thank 
you.

   STATEMENT OF UNDER SECRETARY EDWARD AVALOS, MARKETING AND 
      REGULATORY PROGRAMS, U.S. DEPARTMENT OF AGRICULTURE

                   STATEMENT OF EDWARD AVALOS

    Mr. Avalos. Chairman Tipton, Ranking Member Critz, members 
of the Subcommittee. Thank you for the opportunity to appear 
before you today to discuss the proposed rule issued by the 
Grain Inspection Packers and Stockyards Administration, better 
known as GIPSA, on June 22, 2010.
    While I am looking forward to getting to the important 
small business perspectives from members of this committee, I 
am limited by the Administrative Procedures Act and USDA's ex 
parte guidelines of what I can discuss at this stage of the 
rulemaking.
    Before we talk about the proposed rule, let me provide some 
context. It is very appropriate for the Small Business 
Committee to decide to focus on this hearing a small business 
in the livestock and poultry industries. The vast majority of 
farmers in general, and specifically livestock and poultry 
producers are small businesses. There are currently 70,000 hog 
producers in this country, almost a million cattle ranchers in 
the country, and nearly 20,000 poultry growers. The majority of 
these individuals are family-owned small businesses.
    I think the point that farmers, ranchers, livestock 
producers, and poultry growers are small businesses is 
important to note. And as you all know, small businesses are 
the lifeblood of our economy and where jobs are created and 
where new ideas are developed. The secretary and I have long 
recognized the importance of farmers, ranchers, and producers 
to rural communities. Our livestock and poultry producers 
benefit rural communities because they also support other small 
local businesses such as the local hardware store, the feed 
store, local restaurants, the local tractor and farm equipment 
dealers.
    The primary mission of GIPSA, and in particular the Packers 
and Stockyards program, is to make sure that the marketplace is 
fair and transparent, and ensuring small businesses get a fair 
shake. Decades before the Small Business Administration was 
formed and the importance of small business was really fully 
recognized, the predecessor of GIPSA was created by Congress 
through the Packers and Stockyards Act of 1921. This was 
largely done to protect small businesses in the form of 
livestock producers and ranchers, against abuses of market 
powered by large meat packers.
    The Packers and Stockyards Act, which is the basis for 
GIPSA's enforcement authority and the livestock and poultry 
industry is 90 years old this year. These industries have 
changed dramatically over this time. For example, stockyards 
are virtually non-existent today. This longevity means the 
regulations and the act itself need to be updated periodically. 
Congress realized this in the 2008 Farm Bill by making some 
changes in the Act and directing USDA to propose specific 
regulations. Combined with a handful of additional areas that 
USDA felt deserved closer attention and needed input from 
stakeholders, this was the genesis of the rulemaking that is 
the subject of this hearing today.
    The purpose of the proposed rule was to make the markets 
more fair and transparent, which was intended to benefit 
livestock producers and poultry growers, the vast majority 
which are family-owned businesses. This is in no way to 
minimize concerns about potential unintended consequences of 
the proposed rule, either generally or related to small 
businesses. For example, I know there are various concerns that 
have been raised about the rule hindering value-added and other 
market activities. I want to make clear to Mr. Chairman and the 
Committee that our intent and the intent of the secretary and 
myself, that we are very strong supporters of these marketing 
arrangements. These arrangements that often provide premiums to 
farmers and ranchers at the same time meet consumer demand.
    We received over 61,000 comments. These comments were 
comprehensive, thoughtful, and educational. We view these 
comments as tools that will guide us on our path to make the 
appropriate and needed reforms. It is important to us to have a 
workable and common sense rule. These comments will assist the 
Department to determine if all factors have been properly 
considered. The comments will also aid us to develop a more 
rigorous, cost-benefit analysis and other related analyses, 
such as a small business analysis.
    While it would not be appropriate to go into detail on 
specific modifications, I can assure you that the Department 
will take careful account with the public comments. We ask that 
everyone have patience as we carefully work through the 
comments and we ask that we not prejudge the outcome.
    Thank you again for the opportunity to appear before you 
today to talk about this proposed rule and share our support 
for small businesses in rural America. I welcome your questions 
and your comments.
    [The statement of Mr. Avalos follows on page 36.]
    Chairman Tipton. Thank you, Mr. Secretary. And we will now 
proceed with the questioning for Secretary Avalos. And I will 
begin.
    I think it is important to probably note, and I think you 
brought up a very important word in ``intent.'' You know, we 
have seen some good, cooperative work with the USDA, of course, 
and I am encouraged to hear that you are taking into 
consideration the 61,000 comments that came into play, 
particularly as it gets down to some of the cost-benefit 
analysis.
    Mr. Secretary, in recent testimony before the Senate 
Agricultural Committee, the USDA Chief Economist Joe Glauber 
stated that the Department's economic analysis of the rule is 
difficult given how the regulations could affect behavior by 
packers and interrogators in how they do business. Given that 
the Department has now admitted that the rule would have a 
significant economic impact, will the findings of the economic 
analysis result in the Department undertaking a new regulatory 
flexibility analysis?
    Mr. Avalos. Congressman, first I want to--I am sorry, Mr. 
Chairman. First, I want to say that this administration is 
strongly committed to helping small business and we strongly 
support transparency, fairness, and equity in the marketplace. 
This is really very important to us. The comments that we 
received on the proposed rule, they bring up some of these 
concerns that we just talked about on the small business 
analysis that Dr. Glauber was talking about.
    And I guess once again what I am asking is that we have 
patience to let the time tested rulemaking process continue. 
And I can assure you that we are going to listen to these 
comments, the comments on the cost analysis that was in the 
proposed rule, the comments that were on the small business 
analysis and I can assure you, Mr. Chairman and members of the 
Committee that Dr. Glauber, the chief economist, first of all, 
will lead the team to develop the cost benefit analysis because 
this is important. He will have considerable input on how this 
impacts small business.
    Chairman Tipton. One question I guess that I am curious 
about, Mr. Secretary, is once we have taken into consideration 
those 61,000 comments and we have that patience, before the 
rule goes final will there be a general review coming back to 
Congress?
    Mr. Avalos. Okay. Mr. Chairman, members of the Committee, 
this process has really been tedious and it is a new process 
for me. Coming from New Mexico, I have never been exposed to 
something like this and sometimes it can really try your 
patience. But we received all the comments, and then we 
summarized them. And now we put them in categories as to how 
they impact on specific provisions of the proposed rule. And 
having done all that, we are now looking at options, at 
alternatives. We are looking at possible modifications and I 
just do not want to prejudge the rulemaking process. So I 
cannot tell you what the end product is going to be. I cannot 
tell you, you know, what kind of form the end product will have 
and I cannot tell you if we are going to have additional 
comments or not.
    Chairman Tipton. You know, as mentioned in the comments 
from Chairman Graves and myself, the Department's information 
gathering on small businesses appeared to be inadequate. What 
procedures will the Department have in place to better measure, 
number one, the scope of small businesses potentially being 
impacted and how these businesses would be impacted compared to 
their larger rivals?
    Mr. Avalos. Mr. Chairman, once again, were you making 
reference to the letter that came into the secretary?
    Chairman Tipton. Yes, sir.
    Mr. Avalos. Well, Mr. Chairman, first of all I want to 
acknowledge and to appreciate the considerable thought and 
effort that was put into the letter. This is really important. 
But it did have some specific requests and recommendations that 
due to the Administrative Procedures Act I cannot discuss right 
now. But I can tell you this. Most of the requests that were in 
the letter also came up in the comments in the rule and are 
being considered. I can also tell you that these concerns, 
requests, are on my mind because of how they impact on small 
businesses, how they impact on growers and producers all over 
the country.
    And maybe I should share a story with you, Mr. Chairman. 
The reason it is on my mind, why it is important to me, in the 
past I worked a lot with the livestock industry, did a lot of 
work to export livestock in New Mexico, and I still have 
friends all over the United States. And in particular, I have 
an old friend from, of all places, from Tulia, Texas. They 
called me up about the proposed rule. I told him, I cannot talk 
about it but I told him one thing. He was concerned about his 
operation, how he was getting premium for his cattle. Small 
operator, 300 mother cows--but because of the quality of his 
cattle he got a premium and he was concerned about losing that 
premium. So I told him, just like I said in my statement, 
Secretary Vilsack and I strongly support value-added. We 
strongly support marketing arrangements. We strongly support 
premiums to producers that producers that produce high quality 
cattle.
    So anyway, going back to your question, Mr. Chairman, no 
option is being ruled out. We are really focused on the issues 
and concerns. We are taking these comments very serious. And I 
can assure you that at the end of the day we will fully comply 
with the provisions of the Farm Bill, the provisions of the 
Packers-Stockyards Act, the Administrative Procedures Act, and 
the Regulatory Flexibility Act.
    Chairman Tipton. Mr. Avalos, you and I are probably two of 
the only people in this room that know where Tulia, Texas 
actually is.
    Mr. Avalos. Probably.
    Chairman Tipton. We come from rural America. I am out of 
Colorado and we are actually pretty close neighbors. But during 
a recent Ag Committee Subcommittee meeting you had stated that 
you wanted to repopulate rural America as a result of the 
implementation of the proposed rule. And as I mentioned in my 
statement, independent studies estimate that the proposed rule 
would deal a $1.5 billion blow to our nation's economy and 
directly cause the loss of about 23,000 jobs. The majority of 
these job losses will be found, obviously, in rural America 
given the nature of this. How is this going to help really 
repopulate rural America?
    Mr. Avalos. Mr. Chairman, I appreciate those comments 
because rural America is very important, not only to me but to 
Secretary Vilsack and to the administration. This 
administration has made revitalizing rural America a priority, 
keeping farmers and ranchers on the farm and on the ranch a 
priority. The intent of this proposed rule was to maintain 
fairness, transparency, equity in the marketplace. The intent 
is not to hurt producers.
    Once again, I will refer back to the 60,000 plus comments 
that we received. A lot of these concerns were raised in the 
comments and again, we are taking these comments very serious. 
We are not leaving out any options, and as we move forward the 
comments will guide us.
    Chairman Tipton. You know, under the proposed rule it will 
be necessary for small packers to determine and document the 
benefits of contractual terms in order to satisfy the 
recordkeeping requirements that are mandated. Is that correct?
    Mr. Avalos. Mr. Chairman, I want to make sure we get a 
correct answer to you so I am going to defer to Mr. Christian.
    Mr. Christian. Thank you. Mr. Chairman, I think the intent 
of the rule was to provide a fair and transparent market for 
producers, and in particular, small producers, that over the 
years we have heard from do not feel that they have the same 
access to those markets as some of the larger producers. And so 
the intent of that provision and others, similar to it was to 
provide that level playing field, if you will, and some 
transparency so they know what type of mechanisms or marketing 
arrangements are available for them.
    Chairman Tipton. When we were talking about those 
calculations, to whom are the benefits to be calculated? The 
packers? Producers? Consumers? What is kind of the matrix?
    Mr. Christian. I beg your pardon, Mr. Chairman. The----
    Chairman Tipton. In terms of who are the benefits when we 
are talking about when those are going to be calculated out. 
Are the benefits going to be to the packers, the consumers, the 
producers?
    Mr. Christian. In the cost benefit analysis?
    Chairman Tipton. Yes.
    Mr. Christian. Well, I think that it varies depending on 
the particular provision. Dr. Glauber, with the Chief 
Economist's Office is, in fact, as we speak, undertaking the 
cost benefit analysis for the rule based on the comments that 
we received.
    Chairman Tipton. I just have one final question here. Has 
GIPSA considered the cost for a small packer to engage separate 
packer buyers for each auction barn with which it currently 
does business?
    Mr. Avalos. Mr. Chairman, I think that is probably getting 
into the specifics of the rule. But I do know that has been 
brought up in the comments. And once again, I am asking for 
your patience and the patience of the Committee and the 
stakeholders to let this rulemaking process continue. And let 
us focus on these issues and concerns that were brought up in 
the comments and let us address them. And I can assure you that 
at the end the final product, whatever form it is, will take 
into consideration all these very important comments that we 
received.
    Chairman Tipton. Thank you, gentlemen. I would like to now 
yield to Ranking Member Critz for his questions.
    Mr. Critz. Thank you, Mr. Chairman.
    Mr. Secretary, as you mentioned in your statement and as 
you have been detailing, there has been a consolidation in 
livestock, in pork and in poultry over the last 10 to 20 years. 
I am new to this process, just elected last year so I am trying 
to get up to speed as much as possible. I have written to 
Secretary Vilsack about the economic impact of the rule. Can 
you detail what initially prompted this analysis for GIPSA? And 
then tell me about a timeline going forward as well.
    Mr. Avalos. Okay. Congressman, Mr. Critz, your question was 
what prompted the cost benefit analysis?
    Mr. Critz. With the consolidation, and I guess going 
further, there is a lot of talk about loss of jobs resulting 
from this GIPSA rule. My concern is that in my part of the 
world, I have a lot of small farmers, so what has been the 
impact on them due to this consolidation over the years that 
prompted this revisiting of GIPSA?
    Mr. Avalos. Congressman, as I mentioned in the opening 
statement, the Packers and Stockyards Act is 90 years old.
    Mr. Critz. Right.
    Mr. Avalos. And I will go back to advice I received from my 
dad a long time ago when I was just a young man and we moved--
you will appreciate this, Mr. Chairman. We moved from the farm 
to town, to the city. And I was not very happy. And my dad sat 
me down and said, look, son. In this world everything is always 
changing. Nothing ever stays the same. You need to adjust to 
survive.
    I think this applies with the Packers and Stockyards Act. 
It is 90 years old. The industry has changed tremendously in 90 
years and we are having to make adjustments to the regulations 
to keep up with the industry, and to address the needs of the 
industry, whether it be the packer or the producer.
    So, this need for change, for modification, is really what 
prompted these changes to the Act. I am going to, just to make 
sure we answer your question, Congressman, I am going to defer 
to Mr. Christian. Maybe he can help me out a little bit.
    Mr. Christian. Yes. Congressman, I think if you look over 
the last, say, 20 years, you go back to the '90s, there has 
been, as you mentioned, a very significant decrease in the 
number of farmers. If you look at cattle, you are going from 
say 1.2 million to under a million. You had 250,000 hog 
producers. Now you are down to around, under 70,000. And even 
with livestock markets, you are going from about 1,800 
livestock markets down to about 1,200 livestock markets. I am 
sure there are many factors that have contributed to that 
decline but one of the things that we hear all the time from 
small farmers, and really, the smallest of small businesses, is 
that they cannot compete in the marketplace. I mean, we have 
heard from small poultry growers that they have invested a 
substantial amount of money, $500,000 to a million dollars. And 
they have got a contract that they have entered into freely to 
raise poultry for a large integrator and then after a short 
period of time the integrator comes back and changes their 
contract. Maybe from a three year contract to a flock-to-flock 
contract. And the grower at that point really is under a 
contract of adhesion and has no ability to then bargain. We 
have heard those kind of issues from small growers.
    From small hog producers, we have heard that there are 
cost-plus contracts in the industry. There are ledger contracts 
in the industry. But a lot of these contracts that provide some 
type of financial protection are available to the large 
producers and are not available to small producers, even if the 
small producer can meet those terms.
    So we have taken those concerns into account as we have 
developed this proposed rule and the intent of the rule is then 
to provide at least a more transparent marketplace and a fairer 
marketplace where the small producers can at least see what is 
available and have an opportunity then to compete for those 
marketing arrangements.
    Mr. Critz. So we are looking to become more transparent to 
give the small producers a seat at the table. And I guess a 
fair chance to compete for contracts. And this comes back to, I 
think, the letter that the chairman and Chairman Graves had 
sent and that I talked about actually in a letter that I sent 
last year about the economic impact. And, you know, obviously 
in this country we like everything as cheap as possible. And I 
am assuming that with vertical integration it keeps the price 
compressed which dealing in the world of subcontracting I know 
that it is the guy at the bottom of the rung that usually feels 
the pinch the hardest.
    Now, I do not know from your seat if you have seen----you 
talked about the loss of farming--farms, small producers over 
the years. What is the time, I guess I am asking--I think we 
have all asked for an economic impact of what this rule change 
would do. Where in process are we with getting an answer on the 
economic impact?
    Mr. Avalos. Congressman, as we all know, the Secretary 
directed our chief economist, Dr. Glauber, to lead a team of 
economists at USDA to conduct a very thorough and comprehensive 
cost benefit analysis and economic analysis. I do not know 
exactly where we are in the process. I know the team has been 
working very hard on this and I know that it has taken 
considerable time because of the extent of the comments. The 
comments received on the proposal are being used as guidance in 
preparing this cost benefit analysis.
    So I cannot give you a timeline as to where we are but I 
can tell you that Dr. Glauber and the team are working very 
hard on this.
    Mr. Critz. Okay. That brings me to my next question. And 
obviously, those of us in Congress get a two-year contract 
every two years, so time is very important to us. From the 
testimony and from the information I received, the comment 
period ended on November 22nd, which was about 32 weeks ago. 
With sixty-one thousand comments, one person going through 400 
comments a week on a five-day work week could have covered 
that. So if you have got 10 people, that is only 40. So I am 
curious as to where we are in the process? You talked about 
putting these in silos or categorizing them. How close are we 
to coming up with some sort of guidance? For those of us on the 
Small Business Subcommittee on Agriculture, this is extremely 
important because we all represent small producers. But we also 
recognize the larger economy, and we have to figure out where 
the balance is.
    Mr. Avalos. Congressman, I wish I could just give you an 
answer. It is a hard question to answer because I do not know 
when we are going to have a final product. As I mentioned 
earlier, we have----
    Mr. Critz. Tell me how many people are working on it?
    Mr. Avalos. I cannot but I can defer to Mr. Christian. He 
might know how many folks are working on this.
    Mr. Christian. Yes. Thank you, Mr. Congressman.
    GIPSA is a very small organization. The Packers and 
Stockyards program is 160 people. The rules that we work on 
typically receive anywhere from, 20 to, a couple hundred 
comments. We have leveraged people from outside of the agency 
from the Animal and Plant Health Inspection Service to help us 
review these comments. We have been working as hard as we 
possibly can with the few amount of people that we have to get 
this completed. And I can assure you Dr. Glauber, the Chief 
Economist's Office, is working very diligently to get the cost 
benefit analysis completed. And I think, you know, that is a 
key piece. Once we get the cost benefit analysis then that 
gives us, a lot of information to look at the options that are 
available to move forward.
    Mr. Critz. It has been seven months, so are we looking at 
within a year of the close, November 22, 2011? Can you even 
ballpark it that we are close, or that we have several months 
to go? I do not mean to be pushy about this, but I think the 
chairman mentioned that it is the uncertainty that creates 
issues for a lot of people. At least if you know where you are, 
you know how you can compete or how you cannot compete. I think 
this is creating uncertainty within all levels of this 
marketplace.
    Mr. Avalos. Congressmen, Mr. Chairman, I appreciate that.
    I wanted to add a little something and I will try to give 
you a more direct answer. On the comments that we received, 
they were not just for the rule, against the rule. The 
stakeholders that took time and expense to submit the comments 
which we greatly, greatly appreciate, were very comprehensive. 
They gave alternatives, recommendations, options. Very, very 
thorough. So it is not just you read them, say this guy is for 
them, this guy is against them. It is really a very, very time 
consuming, thorough process. A very important process. So to 
answer your question on the timeline, fairly soon we should 
have a final product.
    Mr. Critz.. Fairly soon. Okay.
    Mr. Avalos. Fairly soon.
    Mr. Critz. Well, that is hopeful. It is summer. We will see 
where that takes us.
    One thing Mr. Christian just mentioned about the size of 
GIPSA; with this proposed rule you are talking about a more 
transparent process but you are also talking about more 
enforcement. What does that mean to your level of staffing? If 
you were already a small organization, how do you then find 
people to do enforcement of some of these issues? I think the 
chairman mentioned there is a worry about frivolous lawsuits. I 
think if you look at our legal system, anyone can find 
different areas where there are frivolous lawsuits. Hopefully, 
farming and livestock would be immune to it, but we are not 
that lucky. So how is this playing into the size of your 
operation?
    Mr. Christian. Well, I think, as you know, obviously 
implementing new regulations requires an extra effort. I have 
kind of a theory of--I have been working in regulatory 
enforcement for about my entire career. And I have a regulatory 
enforcement theory related to the 80/20 Rule, and how it 
applies to enforcement. If you let folks know what the 
requirements are, about 80 percent will voluntarily comply. 
About two percent will never comply. And so you focus your 
efforts first on education to get the industry up to that 80 
percent and then you focus your limited, resources on 
enforcement of that two percent so you can get the other 18 
percent to understand that it would be better to comply than to 
not comply.
    And so that is how GIPSA really--or the Packers and 
Stockyards program is implemented. I mean, we really just spot 
check. We make sure that people understand what the rules are 
in the industry the best we can by getting folks out there, 
working with industry, and then we identify the flagrant 
violators because we, cannot look over everybody's shoulder, 
and we try to take strong enforcement action against those 
flagrant violators to set up the deterrent to get that 
compliance rate up. And one of the areas that is of concern, 
because our overall goal, our measure, is compliance. If we can 
get 100 percent or 90-some percent compliance with the Packers 
and Stockyards Act and the regulations that were promulgated 
under it, and if it is a good law and if there are good 
regulations, then we will have done our job. We will have 
protected livestock producers, livestock sellers.
    What we found in poultry, with the limited regulations that 
cover poultry right now, our compliance rate is still down 
around 67 percent when we are looking at contract compliance. 
And what I think will happen if these rules are promulgated in 
a way that helps provide guidance to the industry as to what we 
consider compliance under an unfair practice or an unreasonable 
preference, that it will help the industry get that compliance 
rate up, to over 80 percent and help improve the protections 
for poultry growers and the small entities that are out there.
    Mr. Critz. Well, Mr. Chairman, I see you have a full slate 
of folks on your side, so I will yield back so that they can 
get to their questions. Thank you very much.
    Chairman Tipton. Thank you, Ed.
    Now I would like to recognize Mr. Bartlett for his 
questions.
    Mr. Bartlett. Thank you very much.
    Mr. Christian, would you tell us why our small businesses 
and our farmers think that they are going to be hurt by this 
proposed rule? And after you have done that then I would like 
the secretary to tell us why they are wrong.
    Mr. Christian. Congressman, you know, to look at the 
response that we have gotten to the proposed rule, the 61,000 
comments will give you an idea of how people feel about the 
rule and how they----
    Mr. Bartlett. And how do they think it is going to hurt 
them? What do they think it is going to do to them?
    Mr. Christian. Well, I mean, looking at the comments there 
is a wide range of issues that different entities of different 
sizes have----
    Mr. Bartlett. Tell us some of those if you would.
    Mr. Christian. Would you like me to reiterate what some of 
the comments have indicated?
    Mr. Bartlett. Yeah. I am sure you can categorize them, you 
know, just a few of the biggest plurality of hits.
    Mr. Christian. Well, in the rulemaking process, the number 
of comments are not necessarily as relevant as the substantive 
nature of the comment. And so, I mean, in terms of numbers we 
received a lot of postcards. We received a lot of e-mails. I 
mean, we received probably----
    Mr. Bartlett. Of the substantive comments, why do you think 
this rule is going to hurt them? What will it do to them?
    Mr. Christian. Well, in terms of cost, we have identified 
in the cost benefit analysis adjustment costs. We have 
identified analysis costs. And, you know, those were identified 
and expounded on in the comments that we received. In fact, we 
asked for in the comments, information on cost benefit and 
information on the effect on small business, a number of times 
in our preamble.
    Mr. Bartlett. This is, I gather, an unprecedented number of 
responses. Am I correct? Pretty much unprecedented?
    Mr. Christian. For GIPSA?
    Mr. Bartlett. Yes.
    Mr. Christian. For the Packers and Stockyards program.
    Mr. Bartlett. So there must be some real major concerns out 
there. I am still having some trouble understanding what those 
major concerns are. What do they think this rule is going to do 
to them? Why did 80,000 of them you say respond to you we think 
this is a bad idea? Give me just a couple of the reasons that 
they think this is going to hurt them. So far you have just 
given me very generic things that I cannot get my teeth into.
    Mr. Christian. Well, I mean, there were a little over 
60,000 comments and there were comments for the rule. There 
were comments opposed to the rule. There were comments 
suggesting modifications or changes to the rule. And we are 
considering every single one of those comments seriously as we 
move forward with the process.
    Mr. Bartlett. Mr. Secretary, can you tell us some of their 
major concerns and why you think they are wrong? Or they may be 
right and you are going to fix it.
    Mr. Avalos. Congressman, I appreciate your persistence and 
I really want to give you a direct answer but because of the ex 
parte I cannot get into the specifics of the proposed rule. But 
I can give you a perspective coming from the countryside, 
working with farmers and ranchers all my life. This is a 
proposed rule, something so different. We have not had a change 
in this law in 90 years at this magnitude. So there is concern.
    There is concern just because it is a new regulation coming 
from the government. They are concerned about the impact on 
their livelihood, on their farm and ranch operation, the future 
of their kids. So once again, I cannot give you the specifics 
that you can put your teeth in but I can assure you, 
Congressman, that these comments that we received, their 
concerns are expressed in those comments and we are taking 
those comments very serious.
    Mr. Bartlett. Thank you. I am still having trouble 
understanding what their major concerns with the--there must 
have been enough specifics in your announcement of this 
proposed rule that really stirred them up and I am having 
trouble understanding of what those specifics were that they 
became so agitated you got, what, more than 50,000 responses.
    Mr. Avalos. Congressman, I would not say they became 
agitated. Because I can tell you this from the comments, and I 
want to make sure that the Committee--Mr. Chairman and the 
Committee knows that I did take time to read some of these 
comments. I promised--there is a gentleman here from NCBA that 
I visited with earlier--I promised the then-president of NCBA 
that I would read their comments and I did. And very thorough, 
very comprehensive, and very--it is pretty tough reading. And I 
also read some comments from the other groups that came in and 
it is tough reading. But they are not agitated. It is just 
something that is so different, so new, and they want to make 
sure that they understand what is being proposed. So they are 
asking questions. They are supplying alternatives, options.
    Keep in mind also, Congressman, that not everyone was upset 
or agitated. A lot of people were really pleased that these 
changes were being proposed. So it is a group of stakeholders 
that submitted some very thorough comments and made some very 
good recommendations and I will leave it at that.
    Mr. Bartlett. Thank you. Thank you, Mr. Chairman.
    Chairman Tipton. Mr. King.
    Mr. King. Thank you, Mr. Chairman. I do thank the 
witnesses. And Mr. Secretary, I appreciate your demeanor here 
and a little about your background is interesting to me, 
growing up in the country and having to make that adjustment. I 
think that was an interesting narrative.
    Can you just give me a few seconds on what the family 
farmer ranch operation was like? Did you have a family there? 
Brothers and sisters also you grew up with and you all had to 
be relocated to the city?
    Mr. Avalos. Congressman, I can. You know, I have always 
said that I grew up on a family farm but I usually do not get 
the opportunity to explain the rest of the story. That family 
farm was not my family's farm. We were the labor on that farm. 
I had relatives who owned farms nearby but my dad was injured 
in an accident, a tractor accident on the farm and we had to 
relocate to the city. And it was really, really tough, 
Congressman, when you grow up as a little kid, you run around 
barefooted all day long on the farm--you run cattle around, and 
all the different crops. To then move to a city, it is a 
strange world. So it was a major adjustment. That is what my 
dad always told me, that it was so different for me having come 
from a farm.
    Mr. King. Do you have siblings also?
    Mr. Avalos. I do. The one thing that I wanted to emphasize 
to you, Congressman and the Committee, agriculture is so 
important to me. It did not matter that we were the labor on 
the farm. It was so important to me because it gave me a work 
ethic. I remember being in town. I was a big kid, pretty 
athletic. I was on the football team, the basketball team, and 
I used to run the hurdles. And I remember all the city kids, 
they go lift weights and go hang out at the swimming pool. I go 
back to the farm and harvest onions all summer.
    Mr. King. Thank you, Mr. Secretary. I appreciate that. I 
know that the Chair has been a little lenient with the clock or 
I probably would have focused this a little bit more. As you 
talk about the tractor accident of your father I just happen to 
think that as we sit here now there is a funeral going on for 
one of my neighbors and friends that was killed in a tractor 
accident and I regret I am not able to be there today. Those 
things do happen on the farm. It is a dangerous place to work.
    I am interested in that background because it forms you and 
the job that you do. I normally do not ask those kind of 
questions either. But I noticed that in both your testimony and 
that of Mr. Christian, the word fairness comes up over and over 
again. I mean, the effort in this GIPSA rule is to provide 
fairness. And so could you provide for this Committee a 
definition of the word ``fairness''?
    Mr. Avalos. Well, I did not come prepared to give you a 
definition for fairness.
    Mr. King. But if that is a motivator for this rule there 
should be something that is pretty clear.
    Mr. Avalos. And I can give you my perspective, not an 
official definition. From my perspective it is in any type of 
transaction there are two sides. And I just feel that fairness 
is where both sides are treated fairly.
    Mr. King. Okay. But you grew up on a farm with parents and 
siblings and all of you working together. Did you ever hear any 
of them say that is not fair?
    Mr. Avalos. Absolutely not. You are right. Absolutely.
    Mr. King. And so does anyone that grew up in a family with 
two or more kids understand that there is no such thing as fair 
in a family like that?
    Mr. Avalos. Well, again, fairness from what perspective?
    Mr. King. Well, and that is right. And that is my point. 
And this is being driven--I do not know if the president is 
involved--being driven by the Secretary of Agriculture, 
Secretary of ILSAC. It is being driven by some interests out 
there that think they are not being treated fairly in 
contracts. And I have been involved in a lot of contracts over 
the years and I have heard people use that word ``fair'' but it 
never really got us to a resolution. I see it scattered 
throughout the legal language in this Congress. It is scattered 
throughout the code of the U.S. code and through the states. 
And I will tell you I can define the state fair. I can define a 
county fair. But I cannot define fair. And if fair is our 
guideline here, it is in the perspective of whoever is 
advocating. And I will say from this perspective that if you 
have someone that raises a premium line of hogs and they go 
negotiate a contract to be paid that premium and they are 
producing that high quality product for a niche market and the 
packer is anticipating that load a week or whatever it is that 
they have agreed to do coming in and they get paid a premium on 
the other end, it is not fair to say to that producer and that 
packer that the government is going to intervene. Intervene in 
that contract.
    Who can determine what is fair? Can government bureaucrats 
determine if a contract is fair? Or does it turn into the 
government deciding it is not fair that someone raises a 
premium product and the other person does not and they do not 
get paid the same amount. It is about the equivalent of 4-H 
giving participation ribbons instead of blue and red ribbons 
instead. We have got to have competition in this marketplace. 
And my argument would be that if people think it is not fair, 
why do they not get in and compete with those. What keeps them 
out of that market? If they believe they are locked out of the 
market start your own packing plant. Start your own business. 
Open your own niche market. Run the locker plant and expand it 
into a franchise. Come to this Congress and ask us to allow 
them to sell meat across state lines so that people can 
actually penetrate into this marketplace.
    I think we are on the wrong path here. I think we are on a 
path that sets up the government to be setting prices in the 
terms of approving or disapproving of contracts. If the 
variance goes outside of the government's variance, then 
government has to approve the contract? And what are they doing 
intervening themselves in between a producer and a packer who 
have two consenting adults have reached an agreement and now 
the government says well, it is not fair to somebody else.
    I can tell you that as a young man I delivered hogs to the 
packing plant for a fellow that I worked for and there might be 
a 300 pounder in there. There might be a 160 pounder in there 
and a 220 pounder in there in a pickup with a stock rack 
waiting in line with pot trailers where every hog was uniform 
size and weight and easy for the packer to handle. Now, do we 
not know that even if I had one hog in that pickup truck that 
was the same profile I will call it of all those hogs on that 
pot trailer, is that hog worth as much to the trailer as the 
whole pack load? As a whole truckload?
    Those were the kind of things that the government is 
seeking to interject themselves into. And if we are going to be 
a free market economy, then we have to let the market settle 
this. And I do not think government can determine fairness 
anymore than your father, whom I know that you respect and hold 
in high esteem and raised you, could broker that and have all 
of the siblings agree that he had come down in a fair decision. 
I do not want the government to be the nanny state. And I just 
give you an opportunity to respond to what I said and then I 
yield to the chairman. I have abused my privilege here. I am 
sorry about that.
    Mr. Avalos. Congressman, I appreciate your comments. They 
are good comments. But at the same token I cannot get into the 
detail of the proposed rule. But, those are good comments and I 
appreciate this and I have had similar conversations with 
producers throughout the country.
    But I just feel that we still need to let this process 
continue because we have to respect all those comments that 
came in. And there are comments similar to concerns that you 
just expressed and comments you just made. We are going to take 
those into consideration as we move forward.
    Now, I am going to ask if my partner here, Deputy 
Administrator Christian, would like to expand on this.
    Mr. Christian. Well, Congressman, I think the issue that 
you have raised is the question that a lot of people have asked 
us as well. The Packers and Stockyards Act has included the 
word ``unfair practices,'' since the beginning and a lot of 
people have asked what does that mean? I think one of the 
things that you saw in this proposed rule was to try to provide 
some clarity as to what an unfair practice is to help provide 
that guidance to the marketplace to determine, okay, what is 
unfair and what is not. So that was part of the intent of the 
proposed rule.
    Mr. King. Thank you, Mr. Chairman. I yield back.
    Chairman Tipton. Mrs. Ellmers?
    Ms. Ellmers. Thank you, Mr. Chairman.
    I have a couple of questions and thank you for coming 
today. And actually, I would like for both of you to weigh in 
on these. And I know that you have basically stated that you 
are not necessarily discussing some of the actual rule 
positions basically as it is. But I am curious again and I know 
this question has been asked already. I am just curious about 
the timeline. You know, I know you are still receiving comments 
now?
    Mr. Avalos. Congresswoman, no, the comment period is over.
    Ms. Ellmers. Okay. And the comments are being reviewed?
    Mr. Avalos. Absolutely. Congresswoman, the question that we 
receive all the time is when is this process going to end? When 
are we going to have a final product? And I appreciate that 
very much. And I was pleasantly surprised, or maybe not 
pleasantly surprised. When I came to work at USDA I never 
realized what everyone had to go through to go through the 
rulemaking process. This was really new to me. And it was a 
surprise to me.
    Ms. Ellmers. I think you may have--this question may have 
already been posed. I am not sure. But how many people are 
working on this? How many USDA staff are reviewing the comments 
and coming up with kind of a----
    Mr. Avalos. Congresswoman, I cannot tell you exactly how 
many but we have contracted outside the agency for assistance. 
But I am not sure if you were here when a similar question was 
asked. You know, we received these 60,000 plus comments and 
then we summarized them and we put them in a category based on 
how they address specific provisions of the proposed rule. And 
then now we are looking at alternatives and options that have 
been proposed. And it just takes a long time.
    Ms. Ellmers. Also, and there again, that gives me as much 
information as I need. I do want to ask about the economic 
analysis of the proposed rule. Will that information be 
released? My understanding is you have done an economic 
analysis.
    Mr. Avalos. Congresswoman, in the proposed rule there was 
an economic analysis, cost benefit analysis. We have received 
quite a few comments on the costs. And as I mentioned earlier, 
our chief economist is leading the team and is preparing a very 
thorough cost benefit analysis that will be in the final 
product. Right now it is really too early to prejudge what the 
final product is going to look like. And I want to emphasize to 
you, Congresswoman, and to the Committee that based on the 
comments, no option is going to be ignored. We are going to 
look at any possible option. And it is really too early right 
now in the process to, one, give you a timeline and to tell you 
what final product we are going to have----
    Ms. Ellmers. Will you allow for public comments on that? I 
mean, we have submitted a letter. Many of my colleagues, myself 
and 146 other members as per this.
    Mr. Avalos. Absolutely. I am real familiar with the letter. 
But on the comments, it is too early now to determine if we are 
going to have another comment period because we do not really 
know what the final product is going to look like.
    Ms. Ellmers. Okay. Have you spoken to stakeholders about 
how the rule may impact their businesses? And if so, have you 
spoken to those in North Carolina?
    Mr. Avalos. Congresswoman, we have not since the comment 
period opened and now that we are after the comment period 
trying to draft a final product, we cannot talk directly to 
stakeholders to tell them about what we might propose. However, 
I have spoken a lot with stakeholders. As part of my job I have 
been keynote speaker at different groups, cattle growers, and 
of course, the question always comes up on the proposed rule. 
And I cannot get into specifics with them but one thing that 
comes up all the time is premiums to producers and there is one 
thing I can say and I always tell them that the Secretary and I 
strongly support value-added. We strongly support marketing 
arrangements. We strongly support premiums being paid to 
producers.
    Ms. Ellmers. I have one more question and I ask the 
chairman if--I know I am about ready to run out of time here--
if that would be all right. And I will direct this to Mr. 
Christian. It is a specific question. In the proposed rule, 
GIPSA is attempting to overturn numerous judicial decisions by 
providing that a finding--and I am going to--this is a quote. 
``Finding that the challenged act or practice adversely affects 
or is likely to adversely affect competition is not necessary 
in all cases.''
    Basically, the way that I interpret that is that the 
plaintiff would now not necessarily have to show actual harm 
when challenging a packer activity. Is this correct? Is this 
basically the interpretation of that?
    Mr. Christian. That is somewhat correct. The Department's 
longstanding position is that to prove a violation of the two 
sections of the Packers and Stockyards Act that apply to 
packers and swine contractors, that would be 202A and 202B, the 
unfair practice section and the unreasonable preference 
section, that in some cases you do not need to show competitive 
harm to prove a violation. An example might be if someone is 
fraudulently weighing your livestock at the packing plant, you 
as an individual packer, as an individual producer, when GIPSA 
brings that case against the packer for weighing your livestock 
incorrectly, we bring that administratively for livestock and 
can assess a penalty and we do not have to show competitive 
injury.
    So that is the Department's longstanding position. There 
are some cases where you do have to show competitive injury. 
Some cases of unfair practices and that may be a situation 
where a packer is working also as a dealer. And there is a lack 
of competition in that practice. So that is the longstanding 
position. And then the intent of this rule was to clarify that 
longstanding position.
    Ms. Ellmers. Thank you. I yield back.
    Chairman Tipton. Thank you, Mrs. Ellmers. And we would like 
to thank the Secretary for taking the time to be here. You, as 
well, Mr. Christiansen [sic].
    If the Committee members have any other questions, if you 
would submit them I am sure the secretary will be happy to 
answer some of those.
    Mr. Avalos. Mr. Chairman, would I be allowed to just make a 
few closing remarks?
    Chairman Tipton. Yes, sir.
    Mr. Avalos. Mr. Chairman, members of the Committee, I just 
wanted to emphasize that this administration is committed to 
helping small businesses. We strongly support transparency, 
fairness, and equity in the marketplace.
    The proposed rule that we discussed today, it is a starting 
point. We received over 60,000 comments and I want everyone to 
know that we are listening. We are taking these comments very 
seriously. No option is being ruled out and we will let these 
comments guide us to develop the final product. And I want to 
emphasize to you, Mr. Chairman, and the Committee that I have 
spent a career working with small businesses. After leaving the 
farm I had the opportunity to work with many farmers, many 
ranchers, all family operations, to develop markets in Mexico 
for cattle and sheep. To develop markets in China for pecans. 
Develop domestic markets in 28 different states with chili 
peppers and onions. So I really, really feel connected to small 
businessmen and feel connected to farmers and ranchers.
    And I just want to thank you, Mr. Chairman, members of the 
Committee, for all the work that you do for small businesses, 
for your commitment to small businesses. And thank you for 
allowing us to be here today and present to you. Thank you very 
much.
    Chairman Tipton. Thank you, Mr. Secretary. And we will have 
our second panel start in just a moment. Thanks.
    [Recess.]
    Chairman Tipton. I would now like to yield to Congressman 
King for an introduction.
    Mr. King. Thank you, Mr. Chairman. I appreciate your 
deference. I have a markup going on in another Committee and I 
am afraid I have to slip out.
    But I wanted to have the opportunity to introduce Mr. Gary 
Malenke, who is a constituent of mine from Sioux Center, Iowa, 
and also the center of the number one pork producing 
congressional district in America. He is the CEO of Natural 
Food Holdings, which was formerly known as the Sioux-Preme 
Packing Company. And that is also located in Sioux Center, 
Iowa.
    Gary graduated from Northwest Iowa Technical College in 
1985 with an Associate degree in Agribusiness. After two years 
in a livestock and feed business and one year at Iowa Beef 
Packers, Gary joined the Sioux-Preme Packing Company. And while 
at the company he held positions starting with hog buyer, then 
head of livestock procurement and community sales. And in 2001, 
he became the president of the company and he is currently 
serving as chairman of the North American Meat Packers 
Association and his business is also an active member of the 
U.S. Meat Export Federation and the National Meat Association. 
Mr. Malenke's company is a prime example of a kind of a small 
packing plant that is so important to local communities and 
small businesses that we have been talking about in the earlier 
panel. And the overall industry competitiveness is reflected by 
his company.
    It is important that we think about these businesses, Mr. 
Chairman, especially because when they deal with specialty and 
niche markets, it is not just large companies. We evaluate 
rules and see how they affect the small companies as well.
    So I want to thank Mr. Malenke and the other witnesses for 
being here to testify today. And I think it is important we 
turn our ear to the interests of the industry and I point out 
also that Mr. Malenke's company is again from the number one 
pork producing congressional district in America. I could not 
leave that commercial out, Mr. Chairman. I welcome all the 
witnesses. I thank you for your indulgence and I yield back the 
balance of my time.
    Chairman Tipton. Mr. Malenke, if you would like to go 
ahead.

  STATEMENTS OF GARY MALENKE, PRESIDENT AND CEO, NATURAL FOOD 
HOLDINGS; ROBBIE LEVALLEY, LEVALLEY RANCH; JOEL BRANDENBERGER, 
   PRESIDENT, NATIONAL TURKEY FEDERATION; BOB JUNK, FAY PENN 
                  ECONOMIC DEVELOPMENT COUNCIL

                   STATEMENT OF GARY MALENKE

    Mr. Malenke. Good morning, Chairman Tipton. Sorry. That is 
better. Good morning, Chairman Tipton and Ranking Member Critz. 
I appreciate this opportunity.
    As Congressman King said, we are up in Sioux Center, Iowa. 
Our firm is not large enough to be classified in the top 10 hog 
slaughters plants, but nevertheless, we have been in business 
for over 40 years and I have had the privilege of being in the 
meat industry for over 20 years myself.
    We are proud to have arrangements with a number of 
producers to bring us hogs that fit various niche markets with 
whom we have marketing agreements under various brands. And to 
do this we are looking for very specific hogs that require 
growers to follow very specific protocols. Our producers are 
then paid a premium for meeting these expectations, and these 
products are then sold into markets and restaurants, that 
differentiate our products to create an enhanced value. To 
accomplish this, we work with well over 500 growers, many of 
which are small family farmers. And we do this to really 
produce a consistent supply of product to our customers.
    I am sensitive to the feelings in the countryside that 
producers are not getting a fair deal. And I and my senior 
staff are involved in industry organizations to give a little 
and to gain a lot in terms of advice and resources to better 
help us as business leaders. And indeed, I happen to be the 
chairman of one of those associations at this time.
    At a recent meeting that I attended, I visited with a young 
man who inspired me to reach back to producers and to give back 
to the men and women, families, who produce hogs for a 
business. I want these producers to know as much about fixing a 
fair price for pork as they do about the business of raising 
hogs.
    A couple of suggestions I might have in the ways that we 
can work together.
    Meeting consumer expectations for pork, at retail and/or at 
the center of the plate is critical. I, and my organizations, 
can develop better programs to help producers better understand 
how we can work together. Working together every week of the 
year for the long haul and better share and communicate with 
each other what it takes for these programs to be successful in 
meeting consumer expectations.
    There is already a great deal of information in the 
marketplace about the price for hogs and for pig meat. And I 
will agree that this can be very complicated. It is not always 
as accessible and could perhaps use some improvement. But 
nevertheless, I am committed to working with the organizations 
I belong to to enhance transparency and information that would 
be useful to producers. I believe that the enhancement set 
forth in current legislation would also be helpful. I also know 
that one of the organizations in which we hold membership has 
been meeting with USDA's marketing officials to improve the 
information for specifically pork price reporting. I expect 
these efforts to be useful in improving the flow of 
information.
    I grew up on a small farm myself some 30 years ago and have 
witnessed firsthand the changes to rural America. There is no 
longer a hardware store and grocery store in small towns. 
Numerous school districts have merged and the economies of 
scale have been driven by the Wal-Marts of the world. This 
trend is not to fault the big business. It is driven by the 
changing consumer. Folks like Wal-Mart have done a great job of 
attracting customers. Face it. Thousands of people shop there 
every day because they choose to do so. As much as I desire to 
look back with nostalgia, the realities of the economic forces 
today are very strong. GIPSA's attempt to regulate the future 
by returning the way things used to be will be a bad economic 
decision and will not succeed.
    In the summer of 2009, our business was not very good and 
we were not profitable. Fortunately, this year we are doing 
much better. I know it is because of both domestic demand and 
improved exports. In 2009, the price of hogs were some 30 to 35 
percent lower than in 2010 and we lost money. In 2010, we had 
this improved demand and we did much better because of the 
market conditions. And even in light of the fact that the price 
of the livestock was higher.
    My point is really this. The primary influence of the price 
of livestock is the demand for the finished products we 
produce. It is customers coming in the door and buying the 
product.
    This is a tough business. It is a tough business for 
producers and for packers. Working together in partnership and 
cooperation will give us the opportunity to be successful 
together. I am not here to cry about the large firms. Their 
very largeness really denies them the flexibility that we enjoy 
at Natural Food Holdings. We do not need GIPSA, a government 
regulatory agency, in our business plan. Enhancing our 
partnerships with producers for the mutual benefit is a much 
better solution.
    I thank you for allowing me to testify. I would be happy to 
take any questions.
    [The statement of Mr. Malenke follows on page 42.]
    Chairman Tipton. Thank you, Mr. Malenke.
    As a reminder, just in terms of the lights that we have, 
you have five minutes for your testimony and when it gets down 
to the final minute the yellow light will come on and then the 
red light. And if you could summarize after that.
    I would also like to have the privilege of introducing one 
of my constituents, Ms. Robbie LeValley from Hotchkiss, 
Colorado. And I am sorry the secretary left because we could 
talk about Tulia and Hotchkiss. A lot of folks do not know 
where these communities are.
    But Ms. LeValley is a beef producer who is past president 
of the Colorado Cattlemen's Association and a board member of 
the National Cattlemen's Beef Association. She received her 
Bachelor's and Master of Science in animal science from 
Colorado State University. I would certainly like to thank you, 
Robbie, for being here and taking the time to be here. And I 
look forward to your testimony.

                  STATEMENT OF ROBBIE LeVALLEY

    Ms. LeValley. Thank you, Mr. Chairman, Ranking Member 
Critz.
    My name is Robbie LeValley and I have been a beef producer 
all of my life and my two boys represent the fourth generation 
on our ranch. In addition to our ranch, my family and I are co-
owners of Homestead Meats, a direct beef marketing business 
that has been in operation since 1995. There are six ranching 
families who co-own this small business and we have 13 full-
time employees. To enhance our direct marketing beef business, 
Homestead Meats owns and operates a packing plant regulated by 
USDA. Therefore, we are producers, feeders, and packers.
    The proposed GIPSA rule will significantly hinder our small 
business model, cripple our ability to market our cattle the 
way we want, and limit consumer choices. As I said, I am a 
producer on the cow-calf side and our business is built on 
relationships and alliances. Throughout the beef chain, for 
years we have successfully marketed our calves through an 
alliance with a packer. That alliance has created a 
relationship that provides feedback from the packer on the 
quality of our cattle, quality for which we get paid a premium 
for. I strongly believe in the fundamental American business 
tenet of a willing seller and a willing buyer being able to 
enter into a private business transaction because it protects 
my pricing and marketing mechanism.
    Our cattle marketing contracts are the heart of our small 
business, the incentive to manage for the future, and the 
stability for our banking partner. And it does not warrant 
being posted on the Internet or receiving additional government 
intervention and oversight or being subject to potential 
litigation.
    When the proposed rule banks packer-to-packer sales, the 
six families and Homestead Meats may not be able to sell to 
other packers. This will substantially reduce the profitability 
for the rest of our cattle and compromises the alliance we have 
spent years building. This is a great example of how this rule 
truly harms producers and processors across the country. For 
years USDA has promoted exactly what we are doing--sell direct 
to the consumer, operate as a small processor in a strategic 
area of the country, being rewarded for adding value to the end 
product and producing local food. We responded to consumer 
demand. We followed USDA's lead. Now we are being punished. 
This is a slap in the face to innovative businessmen and women 
across the U.S.
    The proposed GIPSA rule offers neither clarity nor clear 
definition in terminology. Elimination of the competitive 
injury requirement will provide a disincentive for packer 
premiums and value-added contracts because of the fear of 
litigation. The vague definition such as unfair or reasonable 
person will open the door to an increased number of lawsuits 
because mere accusations without economic proof suffice for 
USDA or an individual to bring a lawsuit against a buyer. Who 
determines fairness? Does increased government intervention and 
litigation determine fairness? Arbitrary judgment by GIPSA will 
only increase paperwork and costs for small business owners 
like me. Who pays for this increased intervention and 
litigation? The beef cattle industry does.
    When cost increase for the packer, the trickle-down effect 
is to decrease the price paid to ranchers, this will be a trial 
lawyer's dream and will devastate small businesses such as 
mine. What will be the consequence when the cost to defending 
prices paid for my cattle and complying with this rule add to 
the operating cost? What happens to every other industry when 
litigation increases? No one takes a risk or sticks their neck 
out or pays a premium for fear of reprisal. This ends 
creativity, partnerships, and the desire to take a chance, 
which is the very basis of the entrepreneurial spirit of the 
American small business owner. Do we truly want that for the 
beef industry?
    The rule requires buyers of my cattle to justify paying a 
premium for my livestock. What will be the standard for that 
justification? Who will set it? One size does not fit all. The 
regulation seems to infer that it is the role of big 
government, and I strongly oppose the government setting or 
justifying the premiums paid. This will roll back the clock 30 
years and take us back to commodity beef which consumers have 
told us they do not want.
    Value-based marketing has given our family business the 
opportunity to compete for market share at the highest level. 
As a result, we have been able to build a small business that 
supports the local economy and provide consumers with the 
products they want. We do not need big government setting up 
shop on our farms and ranches, and government intrusion into 
the private marketplace is not the answer.
    I urge the Committee to help stop this rule from being 
finalized as it is detrimental to ranchers, consumers, and the 
entire U.S. economy. Thank you.
    [The statement of Ms. LeValley follows on page 38.]
    Chairman Tipton. Thank you.
    Next we have Mr. Joel Brandenberger, president of the 
National Turkey Federation. Mr. Brandenberger joined NTF in 
1991 as the Federation's director of public affairs and served 
in a variety of positions, most recently as senior vice 
president for legislative affairs, before being appointed to 
his current post in December of 2006. Thank you for being here 
today, Mr. Brandenberger.

                STATEMENT OF JOEL BRANDENBERGER

    Mr. Brandenberger. Thank you, Chairman Tipton, Ranking 
Member Critz, members of the Subcommittee.
    The National Turkey Federation represents all segments of 
the turkey industry, including growers, processors, breeders, 
hatchery owners, and allied industry. NTF appreciates the 
opportunity to testify because our members believe GIPSA's 
proposed marketing rule will harm the many small businesses 
that play a vital role in producing more than five billion 
pounds of ready to cook turkey meat in the United States.
    A decade ago, our leadership recognized the need to develop 
comprehensive policy on legislation and regulation that could 
affect the grower-processor relationship. We formed a special 
committee of growers and processers and spent six months 
developing policy that was unanimously approved by our board of 
directors. The policy calls on NTF to support legislation or 
regulation that helps all parties better understand the nature 
of the contract they are entering into. We supported the 2009 
GIPSA rule that enhanced transparency in contracts and 
permitted growers to discuss a proposed contract with financial 
and legal advisors, as well as business partners. But NTF 
strongly objects to any proposed law or rule that would insert 
the government into the negotiating process by dictating 
specific terms of compensation or excessively limiting the 
ability of either party to manage their financial risk. Our 
members believe this is exactly what the current GIPSA rule 
would do.
    The rule fails to grasp the diversity of today's turkey 
industry. Turkeys are processed by family-owned companies, 
grower-owned cooperatives, and large diversified international 
companies. Ten of the 25 turkey processors in the country meet 
SBA's definition of a small business, but small business plays 
a bigger role in the industry as well. A significant percentage 
of the more than 8,000 family farms that raise turkeys are, in 
fact, small businesses employing staffs in some cases as large 
as 250 people. Some of these family-owned small businesses are 
also part of the seven grower-owned cooperatives that produce 
turkey in this country. All of them understand the critical 
importance of maintaining a strong business relationship 
between growers and processers.
    About 80 percent of the turkeys today are produced under 
the traditional production contract where the company owns the 
turkeys, provides the feed, the veterinary care, and the grower 
provides the housing and their expertise. Another 10 percent 
are produced under marketing contracts where the grower owns 
the birds, provides the feed, the veterinary care, as well as 
the housing and expertise, and sells to the processor at a 
previously contracted price. In both of those cases, growers' 
compensation can vary according to specific terms in the 
contract. The remaining 10 percent of turkeys are raised on 
company-owned farms.
    I want to highlight three aspects of the rule that create 
an enormous potential problem for today's industry. The first 
is the competitive injury provision that has been talked about 
quite a bit here. The second is the provision that would 
require processors to virtually guarantee a grower can recoup 
80 percent of their capital investments, and the third is a 
series of provisions which the previous witness discussed that 
would discourage competitive contracts and reduce the premiums 
or deductions that growers can receive based on the performance 
of the birds in their care. Taken together these provisions 
create significant new legal and regulatory risk for turkey 
processors.
    And as processors seek to manage that risk there could be 
serious, unintended consequences. The most obvious is the 
contracts will become less competitive and compensation more 
uniform. Those farmers, large and small, who are doing an 
outstanding job in receiving premiums will justifiably feel 
cheated as the new regulation forces everyone to a lower common 
denominator.
    The bigger impact may come later. As processors seek to 
minimize their risk, one conceivable option would be to grow 
more turkeys on fewer farms, eliminating or reducing production 
on all but the best performing farms. Processors could also 
increase the number of turkeys grown on company-owned farms. An 
excellent example of unintended consequences comes from a 
grower-member who testified last week before the Senate 
Agriculture Committee. His family farm is one of 16 that owns a 
processing cooperative in the upper Midwest. This co-op is 
hoping to expand over the next few years. Some of the expansion 
can be covered by increasing the number of turkeys grown on the 
existing farms, but ultimately they believe that contracting 
with other farmers may be the only route they have to the 
expansion they envision. They have said if this rule takes 
effect they believe the risk will be too large and it will 
limit their expansion.
    So the irony in this is rich. We have growers who feel that 
a rule allegedly designed to empower them will, in fact, 
ultimately stifle their ability to grow and create new jobs. 
What is especially frustrating is what has been discussed here 
already at length. USDA proposed this rule without conducting 
an adequate assessment of its economic impact. A study funded 
by NTF found an economic impact of $360 million to our industry 
alone. Others have shown impacts in other industries as large 
as one billion dollars over five years and a $14 billion 
reduction in the gross domestic product.
    USDA now has agreed to conduct an economic assessment as we 
have heard, but as we have also heard, there is no commitment 
yet to open it for comment after it is completed. In order for 
there to be any level of confidence that this final rule really 
is going to promote the best interest of family farmers and 
their small businesses, it is essential that this economic 
analysis be submitted for public comment before the rule is 
finalized.
    Thank you again for the opportunity to be here. I look 
forward to answering your questions.
    Chairman Tipton. Thank you, sir.
    I would like to yield now to Ranking Member Critz to 
introduce our next witness.
    [The statement of Mr. Brandenberger follows on page 44.]
    Mr. Critz. Thank you, Mr. Chairman.
    It is my pleasure to introduce Mr. Bob Junk. Mr. Junk is a 
local economy manager for Fay Penn Economic Development 
Council, a nonprofit organization aimed at increasing jobs and 
quality of life in Fayette County, Pennsylvania, which ranks 
usually either the second or third, or first poorest county in 
Pennsylvania.
    As the local economy manager, he develops marketing plans 
to bring awareness to surrounding farms and build regional 
business networks. Bob has a degree in business agriculture 
from Penn State University and has extensive experience with 
farm operations. He once owned a 10-acre strawberry farm with 
15 employees and has managed a large dairy operation in 
Uniontown. Mr. Junk also has 40-plus years of working on 
sustainable farm policy at the state and federal level. He has 
served as the State President of the Pennsylvania Farmers Union 
for 10 years, and has served on numerous committees and boards 
representing the interests of small farmers.
    Welcome, Mr. Junk.

                     STATEMENT OF BOB JUNK

    Mr. Junk. Thank you very much, Congressman Critz. It is my 
honor to be here today and I thank you for the opportunity to 
bring testimony here in support of GIPSA's proposed rules.
    Chairman Tipton, Ranking Member Critz, and Subcommittee 
members, my name is Bob Junk. As the congressman mentioned, I 
am the local economy manager for Fay Penn Economic Development 
Council.
    I am going to summarize my testimony in lieu of time 
because there is no way I know because of all the issues that 
we are supporting and that these proposed rules are addressing. 
I would like to start out though by stating that our mission at 
Fay Penn is to maintain and increase employment opportunities/
jobs in Fayette County in an effort to improve the quality of 
life for all of its residents. And again, it is all of our 
residents that we are focused on. And agriculture is a main 
part of our local economy.
    So with that, today we have heard a lot of information and 
a lot of numbers thrown around. And I would really like to 
start out with the fact that to date we have lost 1.5 million 
beef and hog producers over the last 30 years. So I think we 
have a problem when we are looking at losing that many 
producers that are small business owners out of our local 
economy. They are reinvesting those dollars locally. They are 
creating the opportunity for small business entrepreneurs. They 
are also creating the opportunity for local reinvestment into 
the neighborhoods, communities, and also into our public 
schools and so on.
    So with that, you know, we talk a lot about regulation, 
government. You know, we do not want big government. But when 
we take a look at really what the GIPSA rules are geared to, 
and we can go right back to the Farm Bill, and it was a 
directive through the Farm Bill and we all had an opportunity 
to debate and negotiate and vote on the Farm Bill which was 
approved three years ago, that this regulation is to be looked 
at to look how we can bring balance to the market for the 
producers. For many, many years, producers have been faced with 
a number of challenges. Being a producer a number of years ago, 
those challenges have not changed much. I am from a small rural 
community. We have lost a lot of our stockyards, our local 
packers because of consolidation and mergers and it has created 
even more of a hindrance to get access.
    But what I am going to talk about a little bit now at this 
point in time is the fact that a lot of our producers today are 
being forced to do certain upgrades to their operations to be 
able to receive contracts. And a lot of times these contracts, 
and especially in poultry, are only six to eight weeks long. 
But at the same time they are forced into taking a 30-year 
mortgage to be able to do these upgrades. Knowing that, again, 
farmers have limited ability to access credit and they are not 
usually able to access the same type of credit that normal 
small business operations have, they are sometimes forced into 
taking alternative credit measures. And it forces them to be 
then relying on hopefully getting new contracts. This proposal 
will actually give the producers some compensation as long as 
they continue to meet those obligations with the processors.
    Contract terminations, we have a serious problem with 
processors being able to just eliminate contracts with 
producers. This proposal would give the opportunity for those 
producers to capture at least 80 percent of their investment 
from those individuals and those processors.
    The other issue I would like to talk about, and it is 
really key, is the issue of the ranking payment system and base 
assumption that all growers are provided comparable inputs in 
varieties of performance as a result in farm management. A lot 
of times what will happen today is farmers are just there for 
the management and the building as you heard from a previous 
witness and they are carrying the risk and there is really no 
way of them being able to make that relationship to what they 
are being paid and how they can truly balance the price that 
they are actually being paid by those companies.
    And then the other issue I would like to also bring up is, 
in relationship to that, the company can still pay bonuses on 
top of what they pay to the producers. This does not restrict 
them from being able to pay premiums to performance. This is 
not in any way restricting niche markets to be able to pay a 
farmer for any of the added premiums that then could be passed 
on or that the consumers are requesting from the marketplace. I 
want to make that perfectly clear that there is no restriction 
from that.
    With that I want to thank you for the opportunity to 
testify here and I will be ready for any questions. Thank you.
    [The statement of Mr. Junk followson page 49.]
    Chairman Tipton. Thank you, sir. We will now begin our 
questioning. I would like to start with Ms. LeValley.
    Under the proposed rule with packer-to-packer affiliates 
there would be a ban in terms of selling. In your case that 
would be very problematic obviously since you have a producer-
owned packaging plant and also produce livestock. Therefore, 
you would not be able to sell livestock to your own packing 
plant. What would that mean for your business?
    Ms. LeValley. Well, we could continue to sell to our own 
packing plant. We just are six families and market about a 
third of the cattle through the Homestead Meats, through the 
packing plant that we own. But what it would hinder is our 
ability to sell to another packer. That is what it would 
hinder. So our other two-thirds of all the families of the six 
families would then be restricted in who they could market 
their cattle to. It takes buyers out of the market. And again, 
that would be a detriment to producers across the economy, 
especially us and other packing cooperatives. Premium beef, 
Oregon country beef, all of those that are in a similar 
situation.
    Chairman Tipton. You know, you mentioned in your testimony 
that this is going to create new paperwork and increase costs. 
Do you have any idea how much this is going to increase your 
costs?
    Ms. LeValley. When we have looked at the proposed 
regulation, again, we have 13 employees. Now, that does not 
consider the six families. Certainly, that is a great question. 
We have not done an in-depth analysis to say that it is going 
to cost us another $2 a hundredweight or anything like that. We 
do know that it would take another half-time person to comply 
with this regulation. That is approximately, you know, $30,000 
to $40,000 additional to our operating cost for our packing 
plant. And we only, again, have 13 employees to begin with.
    Chairman Tipton. So you are a wealthy small business. You 
can afford that, surely.
    Ms. LeValley. We operate on a pretty slim margin.
    Chairman Tipton. I know you do.
    You know, as you pointed out in your testimony, Ms. 
LeValley, for years the Federal government has pushed farmers 
and livestock operators to become more actively involved in 
value-added downstream economic activities as a means of being 
extremely--it seems to be problematic since you are a producer-
owned packing plant and also produce livestock. Really when--
sorry. I got lost in my paper here. In terms of going 
downstream, are you going to be able to maximize the value of 
your business? Is this going to be hitting you in the 
pocketbook and possibly creating job loss for you if this rule 
goes through?
    Ms. LeValley. Again, when I look at the in-depth analysis 
of this proposed regulation, and Mr. Chairman, I look at the 
unintended consequences. And yes, it has an impact on our 
business. Yes, it has an impact on our six families and our six 
ranches. But it also has a huge impact on the beef industry 
across--whether just our area or across the country. Again, 
increased government intervention, increased potential 
litigation. All of these factors have a trickle-down effect to 
where there is a reduction in the price and an increase in the 
operating cost. And again, in this era of very slim margin, 
increased cost and decreased revenue is never good for any 
producer of any size, whether it is small, medium, or large.
    Chairman Tipton. Great. Thank you.
    Mr. Malenke, you mentioned in your testimony that you have 
arrangements with a number of producers that raise hogs for 
niche markets which requires producers to follow a very 
specific growing protocol. If the GIPSA rule is implemented as 
written, do you feel that an incentive exists for these 
producers to undertake the added expense in following these 
protocols and if they are not guaranteed a premium or the added 
value?
    Mr. Malenke. Clearly, these growers are not going to raise 
pigs with the protocol that really ultimately these consumers 
have set forth. In other words, it is the consumer saying, hey, 
this is what we want and this is why we want it. So it is 
flowing backwards. And if they are not assured of a premium, 
they simply will not do it.
    Chairman Tipton. Do you feel that by guaranteeing every 
producer base pay that the quality of livestock available to 
consumers, that will decrease? Is that what I am hearing?
    Mr. Malenke. I believe it would be that case, definitely.
    Chairman Tipton. Great.
    Mr. Brandenberger, you mentioned in your testimony a 
provision in the proposed rule that would allow a grower to 
recover 80 percent of the cost of the required capital 
investment. Do you think given the margin small integrators may 
find it difficult to make such assurances?
    Mr. Brandenberger. I think that is a potential problem. In 
reality, in the overwhelming majority of the cases, that 
investment in our industry at least is going to be recouped and 
then some. It is going to happen. Usually for new growers, 
fairly long-term contracts are offered. We have relatively 
small turnover rates among our growers. It is the problem of 
once you put that risk in writing, you know, on the line. You 
assume that risk by guaranteeing it in essence. That is part of 
your contracts. How do the lenders, you know, how do the people 
that help finance the companies in our industry--how are they 
going to look at that? How is that going to affect their 
ability, their willingness to make some investments that are 
going to be important? And for our companies at that point if 
you are going to offer these guarantees in writing, that is 
part of our business obligation, which growers are you going to 
choose to do that with? And do you start making some very hard 
decisions that may affect some growers whose performance is far 
from poor but who may not meet the criteria necessary to 
survive in this new, higher risk world.
    Chairman Tipton. So it will impact smaller growers?
    Mr. Brandenberger. Smaller growers or, yeah, and growers 
that, you know, for whom the investment might be a bigger 
stretch it may have a little bit larger risk because of a 
variety of factors. Yes. That is what concerns growers a little 
bit is what is going to happen when my contract is renewed. 
They want to make this investment. If this is a guarantee, 
where am I going to fall in that new world?
    Chairman Tipton. And Mr. Junk, in your testimony it 
indicates that you agree with GIPSA in their proposal to remove 
the tournament pay system for poultry contractors. Smaller 
growers raise their flocks to meet certain requirements using 
different diet formulas and creating a niche market for their 
unique birds. If the growers know that they are going to be 
receiving the same base pay as another grower that does not 
follow the same requirements, these birds could be of a lesser 
quality. Where is the incentive for growers to continue to grow 
and produce these consumer-driven birds?
    Mr. Junk. Well, like I was saying, number one, they can 
be--well, first off, the contractors can still pay premiums for 
better quality or better performing animals. I am sorry. I just 
lost my train of thought. Could you repeat the last part of 
that question that you asked?
    Chairman Tipton. Yes. What it is, where is the incentive 
for growers to continue to produce consumer-driven birds?
    Mr. Junk. Well, right now as far as the small producer, 
because I think you were making a relationship to the smaller 
producers at the same time, right now the smaller producer does 
not have a lot of options in the first place because he is 
already being penalized. Secondly, in the poultry industry, 
most of the birds and the feed is already owned by the 
contractor. The farmer is basically providing the building 
which the birds are housed in.
    Chairman Tipton. But they are all receiving the same base 
pay.
    Mr. Junk. Yes. And so what I am trying to do is defend or 
define why we are supporting a base pay structure versus, you 
know, whatever the contractor wants to pay. I mean, the bottom-
line right now is it is a take it or leave it contract. If you, 
as the poultry grower, are sitting there with a 30-year 
mortgage after you made the improvements and then all of a 
sudden you are sitting there saying okay, it is time to renew 
the contract and here is what we are going to pay for the birds 
or for your production on the birds but you do not have the 
opportunity to negotiate the price, who is setting the market 
then? And that comes back to, you know, what is the real value 
of that bird? And how does the producer have the opportunity to 
determine that without being able to negotiate with that 
contractor in a good, faithful way. Any other contracts, we 
have the opportunities to, if we feel that we have been unduly 
judged as far as fairness or whatnot, the ability to negotiate.
    Chairman Tipton. Do you see? I guess the point I am trying 
to get at is where you have the same base pay that is going to 
be put into place, I am having a hard time really understanding 
that distinction. Should there not be----
    Mr. Junk. There is still value to that bird. I mean, just 
like in the cattle industry. I may have a different size hog or 
a heavier hog versus an ideal hog. I could have a steer that is 
the ideal weight and the ideal size and it might be the ideal 
breed that does not have the big bone where you are going to 
have a lot of waste. But that animal is still valued at the 
same base price. It is at the same starting number. It is still 
there. It still has that value. That is what we are trying to 
say. Make it more balanced on that base price. If it is a 
higher quality animal, pay the premium. Nobody is saying that 
they cannot but we want to know as a grower what is that base 
price going to be when we are starting to enter into these 
contracts. You know, and it should not be pinning one producer 
against another producer.
    Chairman Tipton. Okay. Mr. Brandenberger, do you have some 
comments maybe?
    Mr. Brandenberger. Well, there is one thing that is 
mentioned a lot and I know Mr. Junk hears it a lot from the 
people he talks to, is the question of inputs. And you 
sometimes hear talk about the poults which are baby turkeys or 
chicks that they receive of varying qualities. Now, a live 
animal is not something you can rubberstamp, but in the turkey 
industry at least an important thing to know is that the 
genetic lines are managed almost entirely by two primary 
breeders that operate in the United States. They are the ones 
that produce the genetic lines that the processors use. They 
spend tens of millions of dollars to create as much uniformity 
between each poult that is delivered as through the hatchery 
owners who hatch the poults and get them out there. Their 
businesses suffer if the processors start seeing that any 
percentage of these poults are substandard, are not performing. 
And there is no percentage in sending substandard poults on to 
any farm because with the high feed costs we have today--we 
could talk about other government policies but we will let it 
go for this point--with the high feed costs we have today, you 
know, no processor is going to continue buying and sourcing 
poults and sending them to growers if they are not getting 
maximum feed efficiency off of that bird. So there is already 
an enormous economic disincentive for any substandard poult to 
be delivered to any farm with any degree of regularity.
    Chairman Tipton. Great. Just follow up one other question 
there, Mr. Junk. In terms of your organization, do you have any 
fears that the competitive injury provisions in the rule, along 
with provisions banning the use of tournament systems to rank 
growers and the requirements that growers recoup their 
investment in new barns and housing will lead to some 
processors restricting all their future contract buying only to 
the most successful growers or even doing all of their own 
growing in-house, reducing the number of opportunities for 
other growers, including beginning growers?
    Mr. Junk. Were you saying fares?
    Chairman Tipton. Yeah. No, when we are talking about the 
competitive injury provisions in the rule, is this going to be 
restricting some of these opportunities for growers to be able 
to develop and actually closing down the market?
    Mr. Junk. Myself personally? No. I do not think it will. If 
anything, it gives, again, the producers the opportunity to 
have an opportunity to identify and be able to access justice 
for their probable cause. And so, no, I do not see this causing 
any problems within the industry.
    As far as the producers, again, for the last, you know, I 
was president of Pennsylvania Farmers Union back in the late 
'80s and '90s, and these are some of the same problems that we 
had back then that we have been trying to address and bring 
concerns to. The consolidation of the industry today has been 
growing bigger and bigger, and our concern is no different than 
any other industry's concern. When does it get too big to fail? 
And right now what we are looking at is make sure we have a 
fair balance opportunity to access the market and provide 
competitive pricing.
    Chairman Tipton. Okay. Thank you.
    I would like now to yield to Ranking Member Critz for his 
questions.
    Mr. Critz. Thank you, Mr. Chairman. Because time is running 
short I only have one question, but now I have a second 
question because you, Mr. Malenke, or you, Mrs. LeValley, 
talked about one size fits all. At the federal level, we do two 
things very well. One size fits all, and two, mandate. We do a 
lot of mandating, and push it down to states which then have to 
figure out how to pay for it.
    You talked about the packer-to-backer sales. I understand 
in reading that there is a possibility that packer-to-packer 
sales are being used to effect prices. That is why they are 
talking about it. I am curious if there is a solution to 
protect against using packer-to-packer sales to influence 
pricing and not impact what you are doing at a smaller level? 
Is there a way to exempt smaller packers from this rule, or is 
there something that you see as a possible solution? Both of 
either one of you can answer.
    Mr. Malenke. Just from the pork side, today the pork 
industry operates under mandatory reporting of live animals. 
And packer-to-packer sales are reported there but they are in a 
separate bucket. In other words, they are clearly defined 
separate from other livestock.
    Mr. Critz. Okay.
    Mr. Malenke. And, you know, my experience as a packer, 
buying hogs from another packer is, hey, the only reason I 
bought them was because it was the most attractive deal I could 
get. Purely a pure business decision.
    Ms. LeValley. And again, similar for beef. One size fits 
all again does not take into account the inherent variation 
across whether you are Utah or Colorado or the East. It does 
not take in that inherent variation or the significant 
difference, the significant miles between markets. All of that. 
The weight variation, the different environments, the 
operating, all of that. So to say that we could make a size 
threshold and again try to put that on industry will have the 
same trickle-down effect of decreasing the actual price paid to 
the rancher as you have mentioned earlier that is the person at 
the bottom of the ladder and all the way up through the beef 
chain. So, similar to the pork as far as the reporting. Size 
threshold would have a similar impact of ratcheting down the 
price paid.
    Mr. Critz. I lack knowledge about your industries and I am 
trying to learn this so we can work together to come up with a 
stand when we are talking to USDA about what is the best way 
forward.
    Mr. Malenke, you made a comment about Wal-Mart being 
successful. So you know where I stand, I do not buy into the 
Wal-Mart model--and I am going to give you a very specific 
example of why not. There have been several times when my wife 
has gone to Wal-Mart, because I live in a rural part of 
Pennsylvania and there are no other stores left. They have 
driven pretty much everyone else out of business, so you go to 
Wal-Mart. My wife goes to buy the thing that she wants and Wal-
Mart does not carry it anymore because they demanded a price 
from the producer and the producer cannot meet that price, so 
they drop them from their shelves. So I have just a little bit 
of heartburn about how that operates; I think you are limiting 
your choices.
    The other hat I wear in this Congress is I am on the Armed 
Services Committee, and we have seen a consolidation of 
industry. Consolidation is not always good because if you have 
a problem, and you only have one company, or two companies 
which can handle it, you have got some issues. So you know 
where I stand, many times people come into our Congressional 
offices and say they have a problem; you need to fix it. So 
then we push back, and that is what happened with this Farm 
Bill and with GIPSA; people were coming in saying there is a 
problem. So I am going to ask every one of you to answer this 
question and we will go right--your left to right, my right to 
left. What do you think drove this ruling, this revisiting of 
the GIPSA rule; what do you think caused that? Is it just 
bellyaching by some small farmers and that people are letting 
off some steam? Is there a real issue out there? Is this 
revision not the answer? Do you have any ideas? I am sure your 
industries have sent comments. At 60,000 comments, obviously, 
producers and the industries have commented; what do you think 
the solution might be? Or do you think there really is not a 
problem and that we should just leave it as is? That is my only 
question, Mr. Chairman.
    So Mrs. LeValley, if you would start and then we will just 
work across.
    Ms. LeValley. Thank you, Mr. Critz.
    You bring up an interesting question, and it is a question 
that we have thought about. You heard over and over the age on 
this rule and that the industry has evolved. When you look at 
the proposed regulation though and you look back at what you 
put forward in the 2008 Farm Bill, this regulation has 
overreach and it went beyond the 2008 Farm Bill. And so, again, 
the unintended consequences, the not having the clear economic 
analysis that has been fully vetted and looked at by USDA, and 
I know that they said they are continuing to work on it----
    Mr. Critz. I am going to interrupt you for one second. I do 
not want to know what you think about what USDA is doing. What 
I want to know is do you think there is an issue, and is there 
something that USDA should be doing to address it?
    Ms. LeValley. Again, as I was starting to say, when you 
look at the unintended consequences of this proposed 
regulation, this does not address--this does not put more 
ranchers back in rural America. This does not put more sale 
barns back in small towns. So, no, this regulation, this 
proposed regulation does not take us where they want us to be. 
And no, this regulation should be shelved. Go back to the 2008. 
But this regulation should be shelved.
    Mr. Malenke. No, I do not believe that--the issue comes 
down to economics. You know, as I mentioned in my testimony, I 
mean, I grew up on a small farm. I love the small farm 
atmosphere, et cetera. But the forces of economics are simply 
against smallness. You know, smallness, you literally have to 
differentiate yourself in order to be competitive because, you 
know, like I say, those economic forces are huge. Face it, that 
is the way the world has become. You know, and I used Wal-Mart 
as that example. You know, is there anything USDA can really do 
about it? I do not know. I do not know what it would be. You 
know, encouraging producers to differentiate themselves, get 
into different markets or, you know, you have to, you know, 
what is the old saying? If you cannot beat them you have got to 
join them. Not great choices in some cases. I fully understand 
and I sympathize for those that are faced with those decisions 
but that is the world we are in.
    Mr. Brandenberger. It is a very good question. And I would 
say a couple of things. One, in any business relationship, you 
know, it is not always going to be smooth sailing. You know, I 
have got three people who work for me in here and they might 
not always say the best things about me. You know, there are 
concerns. There are grumbles that occur from time to time. But 
in our industry it would be hard to see how the growers would 
feel that they do not have an opportunity for empowerment. Four 
of the last five new business entities to enter the processing 
in the turkey industry have been grower-owned cooperatives. 
They have been able to empower themselves. In fact, two of them 
would tell you the biggest problem they had was the paperwork 
at USDA to get a loan guarantee that they needed for their 
financing.
    Another situation in your home state, about five or six 
years ago a group of growers were not happy with the deal they 
had from the processor closest to them. They formed a 
cooperative. They decided not to go into the processing end of 
the business but with this cooperative they went to a processor 
in another state which was still close enough for the 
transportation to make sense and cut a better deal for 
themselves. I think they felt very empowered by what they were 
able to do for themselves as a group. So, you know, in terms of 
what we would recommend about will the rule have reach, I think 
if GIPSA started just by going back and adhering more closely 
to what was in the last Farm Bill that would probably be, you 
know, an important step forward.
    Mr. Junk. Of course, you know, I support the proposed 
rules. And I support moving forward into the process. We all 
know that there have been over 60-some thousand comments being 
made and we do not know what all those comments mean and how 
USDA is going to respond to it. So right now we are to comment 
on a proposed rule that is not a final rule and we believe that 
in order to really see what USDA is really going to implement, 
without going to the final rule part of that procedure, we do 
not know.
    When I say we, we are members of NSAC, have developed a 
letter and sent it to each of the members and it is attached to 
my testimony of an additional 143 other organizations from all 
over the country supporting moving this into the next level. 
Because we do not know what the actual outcome is going to be 
here. Yeah, we had comments. We submitted comments also. So we 
do not know what those comments--what comments are going to get 
picked up, what is not going to be picked up.
    Also, American Farm Bureau, National Farmers Union both 
have submitted letters saying let us take it to the final 
rulemaking. Let us see what, you know, just to throw the baby 
out with the bathwater at this point in time, the Farm Bill 
directed both the president, the Senate, and the House, all of 
those chambers approved the Farm Bill. It is in the Farm Bill. 
And this was approved under the Bush administration. So let us 
finish it out. Let us get the final rule out and let us see 
what actually is going to be the end result. A lot of these 
comments, 60,000 comments are coming from producers. It is 
coming from producer groups. It is coming from producer groups. 
It is coming from co-ops. It is coming from general farm 
organizations. It is coming from processors. So let us take it 
to the next level. Let us continue to process and let us see 
what the final rules are going to be like.
    Mr. Critz. Thank you very much. I appreciate that this is 
all about perspective, and I appreciate you offering that. And 
with that I yield back.
    Chairman Tipton. Thank you. I would now like to recognize 
Mrs. Ellmers.
    Ms. Ellmers. Thank you, Mr. Chairman. And thank our 
panelists for being here today and discussing this very 
important issue.
    Mr. Malenke, I have a question for you in regard to the 
USDA, the rule basically, and the approval of the contract 
terms after a sale has actually been completed. And I am 
wondering if you have concerns in relation to that. Obviously, 
that puts a little more cost and difficulty to you because you 
are having to deal with that upfront. Do you think that there 
may be a chance that packers will withhold part of their 
contract payment until they get the contract approved by USDA? 
Is that a possibility? Or what are your thoughts on that?
    Mr. Malenke. We are regulated under Packers and Stockyards 
today to make payments within 24 hours or the next business 
day. Okay? You know, how packers may look at those contracts in 
the future, you know, it is a little hard to tell. Face it, I 
can only assume that they are not going to want to take on 
extra burden or feel as if, gee, you know, I had this potential 
bull's-eye after me because I know I am in this contract. So 
there may likely be incentive to do less contracting.
    Ms. Ellmers. If some of the portion of the payment was 
withheld, what would that do to your business and your cash 
flow?
    Mr. Malenke. Well, obviously, I do not own the livestock. I 
am paying for the livestock. And, you know, face it. Paying for 
it within 24 hours from the time of delivery or from the time 
of processing, my money turns really fast. So----
    Ms. Ellmers. It would just extend everything out?
    Mr. Malenke. Well, basically, I would get to use someone 
else's cash, which I do not think that is--I do not really 
think that is the intent.
    Ms. Ellmers. Okay. Well, thank you. And Mr. Junk, I have a 
question for you, too. You state in your testimony that the 
GIPSA proposed rule will also help hog producers. Can you 
elaborate on that further? How do you feel in particular that 
this will help our hog farmers?
    Mr. Junk. Part of it is under the ranking. It will give 
them also the opportunity to be able to get a base price off of 
the--sorry, out of the contractor. The other issue, it would 
also give them the opportunity to be able to, if they feel that 
they have not been treated right within the contract, the 
ability to go to litigation and be able to have an opportunity 
to have a trial by jury hearing if so desired.
    Ms. Ellmers. Do you feel that the hog producers will 
benefit from every provision that is being put forward in the 
proposed rule that has the effects on all of the swine 
industry?
    Mr. Junk. I do not think--across the board different 
provisions will have different impacts in different livestock 
segments. So all the provisions that are being proposed, will 
they have an impact in hog production or hog producer? No. But 
will there be some benefits? Yes.
    Ms. Ellmers. What would you say in your assessment would be 
some of the negative effects that might occur?
    Mr. Junk. Negative? I could not honestly tell you at this 
point in time.
    Ms. Ellmers. Thank you, Mr. Chairman. I yield back the rest 
of my time.
    Chairman Tipton. Thank you, Congresswoman Ellmers. And I 
would like to thank all of you for taking the time to be able 
to participate today.
    As this Subcommittee continues to focus on burdensome 
regulations that affect small businesses, I would like to once 
again encourage the USDA to take into consideration all of the 
testimony and questions that we have heard here today as they 
work through their economic analysis. I would also like to 
encourage the USDA to revise their analysis on small businesses 
as part of the more detailed economic analysis currently 
underway. After that, the USDA should publish the new 
regulatory flexibility analysis for comment to ensure small 
businesses that they can have input and can inform the agency 
on its effects on their businesses.
    Again, thanks to all of our witnesses for being here today, 
and I ask unanimous consent that members have five legislative 
days to submit statements and supporting materials for the 
record.
    Without objection, so ordered. This hearing is now 
adjourned.
    [Whereupon, at 12:09 p.m., the Subcommittee hearing was 
adjourned.]

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