[Congressional Record Volume 148, Number 30 (Friday, March 15, 2002)]
[Senate]
[Pages S1976-S1978]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ENZI:
  S. 2021. A bill to amend the Packers and Stockyards Act, 1921, to 
prohibit the use of certain anti-competitive forward contracts; to the 
Committee on Agriculture, Nutrition, and Forestry.
  Mr. ENZI. Mr. President, I appreciate this opportunity to speak this 
morning. I will speak on a favorite topic of our area of the country, 
the packer concentration. It is a huge problem for our ranchers in 
keeping them from getting what they should be getting for raising the 
livestock for this country. So I rise to introduce a bill that amends 
the Packers and Stockyards Act to reform livestock formula price 
contracts. This bill aims to rid the livestock industry of pricing 
schemes which take advantage of hard-working ranchers. It requires 
contracts to contain a fixed base price and to be traded in open public 
markets.
  Currently, there are four packers that slaughter 80 percent of the 
cattle in the United States. They hold the supply of livestock captive 
in a number of ways.
  Captive supply is when packers either own livestock or contract to 
purchase livestock more than 2 weeks before slaughter. Packers use 
captive supply to ensure their slaughter lines have consistent 
inventory. I will not argue with that original goal, for that goal. 
Captive supply makes good business sense. All businesses want to 
maintain a steady supply of inputs to ensure their production and 
control costs.
  But packers go beyond good organization and business performance to 
market manipulation. I have been working on this problem for 5 years 
and, so far, all we have been able to do is prove that there is a 
packer concentration.
  With captive supply, packers can purposefully drive down the market 
price by refusing to buy in the open market. This deflates all 
livestock prices and limits the market access of producers who have not 
aligned with specific packers.
  Most of us have not signed a formula price contract to sell a load of 
livestock, but many of us have sold a house. To illustrate the 
seriousness of this problem, and make it a little easier to understand, 
let's explore how you would sell a house with a formula price contract 
in a market structured like the current livestock market.
  It is March, and you know you will be selling your home in July. As a 
wise seller, you want to have a buyer for your home before that time. 
Now, what if it turns out that the other people do not really buy homes 
from each other anymore, and what if, in fact, you found out there were 
only four main companies that handled over 80 percent of all of the 
real estate transactions? You would have no choice but to deal with one 
of those companies.
  Now, one of them would offer you a contract stating that you will 
receive $10,000 over the average price of what other similar homes are 
selling for in your area in July. Sounds like a good deal, doesn't it?
  To manage your risk and ensure a buyer, you have been practically 
forced to sign a contract that does not specify how much you will 
receive. It says you will receive $10,000 over the average price at 
that time. There should be a tingle of fear in the pit of your stomach 
and it will mature to full-fledged panic when you close the deal in 
July. This is why. The four real estate companies have been planning. 
They decide to pull away from the market so all the home selling in 
July that is not contracted to these four companies floods the market 
and the price for homes in your area drops $12,000.
  What have you done? By trying to manage your risk in a limited 
market, you sold your home for $2,000 less than what the average price 
should have been, if there would have been a normal open market such as 
we have in the housing market.
  Livestock producers face that same problem. Yesterday there were 
91,906 head of cattle arriving at packing plants for slaughter. Forty-
four percent of those were bought by a formula price marketing 
arrangement. Now you know what that means.
  Just like the housing example, the money that producers lose in 
formula price contracts adds up over a year. When totaled, captive 
supply costs producers an estimated average of $1 billion per year, 
according to a study done by an Oregon State University professor.
  I am sure you didn't notice when you went to the grocery store to buy 
your beef that the price was lower because it is not. The packer 
concentration controls the price at that end, too.
  Another Senator from Wyoming faced the same concentration of market 
power in the packing industry 80 years ago. A predecessor to the Senate 
that held the seat I hold now, Senator John B. Kendrick, said:

       [The packing industry] has been brought to such a high 
     degree of concentration that it is dominated by a few men. 
     The packers, so-called, stand between hundreds of thousands 
     of producers on one hand and millions of consumers on the 
     other. They have their fingers on the pulse of both the 
     producing and consuming markets and are in such a position of 
     strategic advantage they have unrestrained power to 
     manipulate both markets to their own advantage and to the 
     disadvantage of over 99 percent of the people of this 
     country. Such power is too great, Mr. President, to repose in 
     the hands of any men.

  This great power Senator Kendrick talked about resides in the hands 
of the packers once again.
  My bill does two things to change the situation. It requires that 
livestock producers have a fixed base price in their contracts. It also 
puts these contracts up for bid in the open market where they belong. 
Under this bill, livestock contracts must contain a fixed base price on 
the day the contract is signed. This prevents packers from manipulating 
the base price at the point of sale and time of sale.
  You may hear allegations that this bill ends quality driven 
production, but this bill does not prevent adjustments to the base 
price for quality grade or other factors that are outside of the packer 
control. It prevents packers from changing the base price based on 
factors that they do control. You also may hear that this bill ends 
traditional forward contracting. However, contracts that are based on 
the futures market are also exempted from the bill's requirements 
because the futures market is not controlled by the packers.
  My bill also limits the size of contracts to the equivalent of a load 
of livestock, meaning 40 cattle or 30 swine. It doesn't limit the 
number of contracts that can be offered by an individual. This key 
portion prevents small and medium-sized livestock producers from being 
shut out of deals that contain thousands of livestock per contract.
  In the past I have tried to get some transparency of reporting. The 
packer concentration has influenced the rules so they didn't have to 
report on the prices they are paying. You go into a market blind. We 
thought we had the problem solved, and they helped to influence a 
little 3/60 rule so if less than three packers or contracts were sold 
in a day, or if more than 60 percent of the market was by one of them, 
they didn't have to report. It virtually wiped out reporting in the 
sheep industry. We have some changes in that, but some changes for 
transparency need to be made.
  There are a number of benefits accompanying this bill. It effectively 
increases buyer competition without resorting to increasing buyer 
numbers through a messy packer breakup. It gives fair access to all 
producers to compete for contracts on a level playing field with big 
producers. This bill encourages public and electronic trading of great 
numbers of livestock, providing greater price transparency. That is 
where we are trying to go on all of this.
  Simply put, this bill makes packers and livestock producers bid 
against

[[Page S1977]]

each other to win a contract--no more secret deals. We know the packers 
are engaging in secret deals.
  Mr. President, I ask unanimous consent to print in the Record this 
advertisement I have collected.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

           [From Argus Leader, Sioux Falls, SD, Feb. 3, 2002]

Senator Johnson's Farm Bill Amendment Imperils the Job Security of His 
     Own Constituents and Would Destroy the Pork and Beef Industry

       To The Argus Leader Editor and the People of Sioux Falls 
     and South Dakota: We want to call your attention to and 
     correct certain misleading and untrue statements that have 
     been made by or attributed to Senator Tim Johnson and 
     published in the Argus Leader on January 27, 2002 about 
     Smithfield Foods, John Morrell, and our plant in Sioux Falls.


             senator tim johnson false statement number one

       ``The bipartisan Johnson-Grassley Amendment does not 
     negatively affect the John Morrell pork slaughter and 
     processing plant in Sioux Falls.''

       Fact: The Johnson Amendment (S. Amdt. 2534) to the Senate 
     Farm Bill (S. 1731) prohibiting meat packers from owning 
     livestock farms or controlling livestock for more than 14 
     days would have a huge negative impact on the future of the 
     Morrell plant in Sioux Falls and its 3,200 employees. Our 
     company is both a meatpacker and a producer and we have made 
     major investments in our system to provide a healthy product 
     to consumers at the lowest possible price and to assure them 
     of food safety, uniformity, and consistency in those 
     products. The Johnson Amendment, if it becomes law, would 
     have a major negative impact on our company and the red meat 
     industry as it exists today. A clear choice for packers that 
     own livestock or contract for livestock would be to sell or 
     close facilities. The Sioux Falls plant, which is nearly 100 
     years old, and the oldest hog processing plant in our system 
     by far, would head the list of candidates. Critical to this 
     plant's future and continued operation is an assured and 
     stable supply of high-quality hogs grown to our demanding 
     specifications as to care, quality and food safety. Hogs 
     represent the ``fuel'' that drives the plant. Without an 
     assured and stable quality livestock supply, we cannot meet 
     the demands and requirements of our customers.
       Restrictive laws such as the Johnson-Grassley-Wellstone 
     Amendment already have had a major negative impact on the 
     agri-business economy of South Dakota. As a result of the 
     state's restrictive farming practices (Amendment E), the hog 
     supply to our plant now comes 20% from South Dakota, 40% from 
     Minnesota, 20% from Canada, and the remaining 20% from other 
     midwestern states. As a result of unnecessary government 
     regulations such as Amendment E, hog production in South 
     Dakota declined 50% during the period 1995 to 2001.
       Senator Johnson and his staff have offered no study or 
     analysis of the impact that his Amendment would have on the 
     agri-business economy not only of South Dakota but also on 
     the entire country. On the other hand, eight leading agri-
     business economists from the country's leading land-grant 
     universities, led by Wayne Purcell (Alumni Distinguished 
     Professor of Agricultural and Applied Economics, Virginia 
     Tech University) and including Dillon Feuz (Professor of 
     Agricultural Economics, University of Nebraska), Glenn Grimes 
     (Emeritus Professor of Agricultural Economics, University of 
     Missouri), Marvin L. Hayenga (Professor of Economics, Iowa 
     State University), Stephen R. Koontz (Professor of 
     Agriculture and Resource Economics, Colorado State 
     University), John D. Lawrence (Professor of Economics and 
     Director ISU Beef Center, Iowa State University), Ted C. 
     Schroeder (Professor of Agricultural Economics, Kansas State 
     University), and Clement E. Ward (Professor of Agricultural 
     Economics, Oklahoma State University), have recently 
     published an independent study that concludes that the 
     Johnson Amendment would have disastrous effects on major 
     sectors of the agri-business economy.
       Their study says that the amendment would actually lower 
     hog prices because of the great glut of supply that would 
     result from divestiture; that it would give back the 
     advantage and gain that the U.S. industry has made over the 
     last 15 years to foreign countries such as Argentina, Brazil, 
     Canada and Australia; that it would cause companies like ours 
     to essentially forfeit billions of dollars of investments 
     that we have made to move the U.S. to the forefront of the 
     industry; that it would have a major negative impact on 
     credit availability of farmers who would no longer be able to 
     rely on firm contracts with packers to use as security with 
     their bank lenders; and that it would give the efficient, 
     vertically-integrated poultry industry an even greater 
     competitive advantage over the pork and beef industries than 
     it now currently enjoys.
       Had Senator Johnson bothered to conduct any study or 
     analysis, or reviewed any public USDA figures, he would have 
     found that in the last ten years, producers have been 
     profitable in 8 of those years, and the division of the pork 
     dollar shows retailers with the greatest share, producers 
     with the second greatest share, and the packers in a distant 
     third position.


            Senator Tim Johnson False Statement Number Two:

       ``Johnson said he has been assured by Morrell and its 
     parent company, Virginia-based Smithfield Foods Inc., that 
     the Sioux Falls plant operates within the restrictions of the 
     amendment.''

       Fact: This is a false statement and we are astonished that 
     Senator Johnson would place his name behind it. Senator 
     Johnson has never extended the courtesy or taken the time to 
     meet with senior officers of Smithfield Foods. In recent 
     years, I personally traveled to Washington, once with Richard 
     Poulson, another senior officer of Smithfield Foods, and on 
     another occasion with Patrick Boyle, president and chief 
     executive officer of the American Meat Institute, to meet 
     with Senator Johnson by prior scheduled appointment to 
     discuss issues in South Dakota. On both occasions, Senator 
     Johnson was ``too busy'' to meet with us and delegated a 
     junior staffer to attend the meeting in his stead.
       Despite the fact that Senator Johnson has had no interest 
     in meeting with Smithfield officials, his staff was fully 
     advised of the precarious nature of the Sioux Falls plant 
     prior to his introducing his Amendment to the Farm Bill. Our 
     Sioux Falls plant manager traveled to Washington on December 
     28, 2001 to meet with Senator Johnson and his aides and told 
     them that the greatest negative impact of his Amendment would 
     be on his own constituents and that the Amendment in the end 
     will benefit no one but the poultry industry. Smithfield 
     Foods wants to make it quite clear to Senator Johnson that he 
     can take full credit for putting 3,200 jobs at peril by 
     causing South Dakota's third-largest employer to reconsider 
     it's prior decision to pursue a major renovation, update, and 
     expansion of the Sioux Falls plant, or to build a new, more 
     modern plant in South Dakota to take advantage of the strong 
     local work force and rural ethic that is so important to our 
     business.
       Smithfield Foods will dedicate its resources and make its 
     future investments in states and countries where we are 
     welcomed by the elected and appointed state, federal or other 
     governmental officials. We consider Senator Johnson's actions 
     in pursuing his Amendment to be hostile to the survival of 
     the pork industry, Smithfield Foods, the Morrell plant, and 
     to our employees in Sioux Falls because he was made fully 
     aware of the consequences of his amendment before he 
     introduced it.
       It is unfortunate that Senator Johnson would sponsor such 
     an ill-conceived piece of legislation even after the Senate 
     Agriculture Committee had voted it down in December by a vote 
     of 12-9. He doesn't seem to understand that his state's anti-
     corporate farming laws have already delivered a near fatal 
     blow to South Dakota's hog growing industry and that his 
     current action is simply another nail in the coffin. One of 
     the more puzzling things about Senator Johnson's Amendment is 
     that he apparently seeks to destroy the red meat industry 
     while leaving the poultry industry untouched. For years the 
     poultry industry has taken major market share away from the 
     red meat industry because of its ability to own and control 
     by contract the quality of its livestock supply.
       Background: Smithfield Foods' involvement with John Morrell 
     and the Sioux Falls Plant.
       After all the other major industry players had for years 
     rejected the opportunity to buy John Morrell and to keep the 
     plants open, Smithfield Foods agreed to purchase the company 
     in 1995. The Sioux Falls plant was losing money at the time 
     Smithfield purchased it and would have closed had we not 
     purchased it. Today, the plant is profitable. It contributes 
     in excess of $1 billion a year to the South Dakota economy. 
     How did this transformation happen? The answer is quite 
     simple: Smithfield has invested over $65 million in the Sioux 
     Falls plant since 1995. Studies have shown that every new job 
     at John Morrell creates several additional new jobs in South 
     Dakota.
       While the plant today is stable and profitable, we are 
     faced with the reality that we need to make improvements to 
     the nearly 100-year-old facility or to build a new plant in 
     Sioux Falls or elsewhere. Prior to Senator Johnson's ill-
     conceived Amendment, our planning was focused on maintaining 
     the plant location in South Dakota. But we will not invest 
     our resources in states where we cannot have a responsible 
     relationship with elected and appointed officials.
       Conclusion: We are not certain whose interests Senator 
     Johnson thinks he represents with his Amendment to the Farm 
     Bill. He certainly does not represent the interests of the 
     3,200 workers at our John Morrell plant. He has taken no 
     steps to acquaint himself with the true facts, nor has he 
     commissioned any studies to determine the true impact and 
     cost of his Amendment, and he has totally ignored the 
     considered decision and vote (12 to 9) of the Senate 
     Agriculture Committee not to approve his Amendment.
       We want Senator Johnson to understand the true impact of 
     his ill-conceived Amendment and it is as follows:
       If the Johnson Amendment becomes law, Smithfield Foods will 
     neither rebuild the Sioux Falls plant, or build a new plant 
     in South Dakota, nor will we make any further investment in 
     South Dakota, or for that

[[Page S1978]]

     matter in any other state whose public officials are hostile 
     to our ongoing operations and our industry.
           Very Truly Yours,

                                          Joseph W. Luter III,

                             Chairman and Chief Executive Officer,
                                            Smithfield Foods, Inc.

  Mr. ENZI. This ad was run on February 3, 2002, in the Sioux Falls, 
SD, newspaper, the Argus Leader, in response to an amendment banning 
packer ownership of livestock that we did on the farm bill recently. It 
was paid for by Smithfield Foods, Inc., a large hog producing and pork 
processing company. The advertisement claims that the company wants 
Senator Johnson to understand the true impact of his ill-conceived 
amendment. I also supported his amendment and was a cosponsor, and I 
voted for it along with 50 of my colleagues. The advertisement, as you 
can see, from the Argus Leader, states:

       If the Johnson amendment becomes law, Smithfield Foods will 
     neither rebuild the Sioux Falls plant, or build a new plant 
     in South Dakota, nor will we make any further investment in 
     South Dakota, or for that matter in any other state whose 
     public officials are hostile to our ongoing operations and 
     our industry.

  If the packers are dealing fairly, why would they resort to scare 
tactics such as this? Does this mean my State will be blacklisted, too? 
Let me tell you what has happened in Wyoming. When we were doing this 
amendment, people who had contracts were being called, saying, you are 
going to lose 3 cents per pound on your beef if this goes through. They 
are buying all the beef. They are paying the prices, and they are 
setting them.
  Packer ownership of livestock is only a small portion of the packer 
captive supply problem. My bill would put an end to the rest of the 
packers' manipulative power. What they are referring to there takes 
care of 5 percent of the problem. It is the best we have been able to 
do against the packers. What I am proposing will only take care of 
another 35 percent of the problem. There is a long way to go. 
Eventually the consumer should get the best prices and the people 
taking the most risk ought to get a fair price.
  It is important to remember why we are doing this. All producers 
should have a fair chance to compete against each other in an honest 
opportunity to get the highest price for their product. Cattle grown on 
family ranches in Wyoming help to feed the entire United States. I 
value the small and medium-sized producers' ability to provide quality 
products for consumers. Big business may be more efficient, but it 
lacks the loyalty to a locale that our small producers have. We can see 
this in the advertisement I have just added to the Record.
  The packers are threatening to leave an area that has been 
economically dependent upon them for over 90 years. That isn't loyalty 
to a community. That is the behavior of a bully. In Wyoming, we must 
encourage our small producers to remain in business and compete. The 
loyalty to small communities that our small and medium-sized businesses 
have ensures they will continue to enrich our main streets.
  Some of my colleagues may be wondering why this bill is needed after 
we passed the amendment banning packer ownership of livestock. The ban 
on packer ownership of livestock would address one small portion of the 
captive supply problem--about 5 years--but it would not address the 
large number of contracts based on the formula prices that I explained 
using the housing market example. Formula contracts provide the packers 
with monopolistic power over the livestock market.
  I ask my colleagues to rid the livestock industry of pricing schemes 
which take advantage of hard-working ranchers and farmers. I mentioned 
that this amendment only affects 5 percent of the market. It is a very 
important 5 percent of the market. It is a very important start. I am 
hoping the people on the conference committee will make sure this 
provision remains in the bill and makes a start toward fairness in the 
livestock industry--fairness for the small producer versus the packing 
concentration.
  We need to end the secret deals and the unfair contracts. I ask my 
colleagues to give your constituents the opportunity to compete on a 
level playing field.
                                 ______