Congressional Record, Volume 149 Issue 71 (Tuesday, May 13, 2003)

[Congressional Record Volume 149, Number 71 (Tuesday, May 13, 2003)]
[Senate]
[Pages S6078-S6081]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

By Mr. ENZI (for himself, Mr. Dorgan, Mr. Johnson, Mr. Daschle,
Mr. Thomas, and Mr. Conrad):
S. 1044. 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, we are having a crisis in the West.
Actually, we are having a crisis anywhere that there are people who
raise livestock. The crisis comes about as a result of neither fair
trade nor free trade--in fact, the elimination of both. This bill is
designed to make a correction in that. It is a clarification. I do not
think the clarification would be necessary if enforcement were done,
but this bill will clearly set out that a part of the problem can be
solved.
Part of the crisis that particularly the small farmers and ranchers
who raise livestock have is the drought we are having in the West. We
are in the fourth year of a drought right now. That is resulting in a
lot of for sale and auction signs going up on ranches. This is partly
because they are not getting the proper price for their product. It is
a controlled market; it is not a free market.
To bring it to a level that more people would understand, imagine
trying to sell a house where the U.S. tradition might have changed so
that everybody worked through a realtor, or at least 80 percent of the
people worked through a realtor, and the realtor did not really show
the house to other people. The realtor bought the house and then put it
on the market themselves. The realtor had the capability to set the
market price because of the other houses they owned.
That is what is happening with captive supply. There are a lot of
technicalities to it. I sincerely hope my colleagues will take a look
at it and understand it a little bit. It is very difficult. It is very
detailed. It is very complicated to understand, but it is very
important to understand. It is important to understand on behalf of the
ranchers and consumers.
Now, one would think that if the price were being driven down for the
rancher, those of us buying meat at the supermarket would get it for
less. But if one tracks the price the ranchers are getting and the
price the consumers are paying when the price goes down for the
rancher, everything stays level for the consumer. So where is the money
going? It is staying in the middle somewhere. We know where it is
staying, and we know why it is staying, and it is control of the
market. We do not usually allow that in the United States, but in this
instance we allow it.
So 80 percent of the market is controlled by four packers, and they
set the price. They set it in a way that the rancher has no control
over it whatsoever. So the ones suffering this drought and suffering
all the risk are the ones receiving the least money from the entire
process. We do not believe in that in America. My bill is designed to
change that.
Packers who practice price discrimination toward some producers and
provide undue preferences to other producers are clearly in violation
of the current law, but this law is not being enforced. What we are
left with is unenforced laws or no laws at all to protect the
independent producer. Since the Packers and Stockyards Act is not being
enforced, and the cost to enforcing the law on a case-by-case basis in
the courts is expensive and time consuming, today I propose the Senate
take action.
Most laws require enforcement. They are like speed limits on a
country road. No one pays attention to the sign unless the driver is
sharing the road with an agent of the law who will enforce it--like a
police car. This section of the Packers and Stockyards Act is like a
sign on the road of commerce that no one is paying any attention to
because the police are too busy doing something else.
The bill I am introducing today is not just another sign on the road,
it is a speed bump. It does not just warn cars to go slower, it makes
it more difficult for them to speed. Does it solve the whole problem?
No, but it is one speed bump on the way to solving the problem.
My bill does two things to create the speed bump. 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, forward contracts and marketing agreements must
contain a fixed base price on the day the contract is signed. Now, in
other businesses, that sounds like how we already operate. But it is
not the way the packer operates. Producers are only given a contract
that says they will get a certain dollar above the average at the time
of the slaughter. And then if the person who controls the market drives
the price down, the average can be well below what they ever
anticipated it would be.
Under this bill, forward contracts and marketing agreements must
contain a fixed base price on the day the contract is signed. This
prevents packers from manipulating the base price after the point of
sale. You may hear allegations that this bill ends quality-driven
production, but it does not prevent adjustments to the base price after
slaughter for quality grade or other factors outside packer control. It
prevents packers from changing the base price based on the factors they
do control.
Contracts that are based on the futures market are also exempted from
the bill's requirements. In an open market, buyers and sellers would
have the opportunity to bid against each other for contracts and could
witness bids that are made and accepted. That would be pretty unique if
they knew what the prices were on the products, particularly when it is
captive supply. Whether they take the opportunity to bid or not is
their choice. The key is they have the access to do so.
I have worked on a number of bills and we have had success getting
them through the Senate, and then the lobbying effort in conference
knocks them out. That has sincerely convinced me there is a controlled
market. Every attempt we make to provide a little speed bump is taken
out and it is usually in conference. It usually passes the House,
passes the Senate--not in identical form--but it has trouble in the
conference committee. That is because there are a lot more lobbyists
for the packers than there are for the small ranchers and livestock
producers.

My bill also limits the size of the contracts to the rough equivalent
of a load of livestock, meaning 40 cattle or

[[Page S6079]]

30 swine. It does not limit the number of contracts that will be
offered by any individual. This key portion prevents small- and medium-
sized livestock producers like those found in Wyoming from being shut
out of deals containing thousands of livestock per contract. The more
animals you have in the contract, the less likely it is that people can
freely participate in the bidding process. It eliminates people.
We are sticking a small number of animals in each contract, but lots
of contracts will help us to arrive at a more fair price for the
livestock. Requiring a firm base price and an open and transparent
market ends the potential for price discrimination, price manipulation,
and undue preferences, the things mentioned in that 1921 act.
These are not the only benefits in my bill. It also preserves the
very useful risk management tool that contracts provide to livestock
producers. Contracts help producers plan and prepare for the future. My
bill makes contracts and marketing agreements an even better risk
management tool because it solidifies the base price for the producer.
He is not guessing what he will sell it for; he has an exact price.
Once the agreement is made, a producer can have confidence on shipping
day in his ability to feed his family during the next year because he
will know in advance how much he can expect to receive for his
livestock.
This bill also encourages electronic trading. An open and public
market would function much like the stock market where insider trading
is prohibited. The stock market provides a solid example of how
electronic livestock trading can work to the benefit of everyone
involved. For example, price discovery in an open and electronic market
is automatic. We tried a number of things to get price discovery so
that the producers out there would have an idea what the true market
is, whether it is being bought from other producers or being bought out
of the captive supply. Every attempt we have made has been thwarted.
They have found ways to put little loopholes in regulations so they do
not have to report prices. That is not fair. It does not provide an
open market.
Captive supply is still weighing on the minds and hurting the
pocketbooks of ranchers in Wyoming and across the United States.
Wyoming ranchers encourage me to keep up the good fight on this issue
on every trip I make to my home State. I wish I had time to share some
of the heartrending stories of the way they have been taken to the
cleaners on these unique contracts they are forced to sign if they want
to be able to sell their product.
The economic soul of Wyoming is built on the foundation of small
towns and small businesses. All livestock producers, even small and
medium ones, should have a fair chance to compete in an honest game
that allows them to get the best price possible for their product. We
must do everything we can to keep our small producers in business and
protect the consumers. If there was a fluctuation out here on the other
end where the consumer is, we might not have quite the same concern,
but the consumer is not getting the benefit of this fixed market. So we
need to change the fixed market.
We need to change captive supply. My bill removes one of the largest
obstructions preventing livestock producers from competing, and that is
formula price contracts. I ask my colleagues to assist me in giving
their constituents and mine the chance to perform on a level playing
field. It will help the economy of the entire United States. I ask for
your help on this bill. We will be circulating some letters and further
explanations so that we can have cosponsors; and pass the bill
unanimously, I hope. I know that is a little difficult to obtain around
here, but this is a very important issue and every State has livestock
producers. It is time we took care of the livestock producers in a way
that did not cost us a lot through enforcement.
I would love to see improved enforcement. I know there are other
priority issues on enforcement, particularly since September 11, so I
have tried to bring a little speed bump to provide accurate pricing. I
ask for your help on the bill.
To reiterate:
Whenever there is a crisis the media has always served to focus the
Nation's attention on the problem and who has been affected by it. Then
it has been up to us, in the Congress, to review the problem and
determine whether or not there was anything we could do to ease the
suffering and repair the damage to someone's property and their
livelihood.
Most of the time, when the media spots a crisis it is of such a
magnitude that the pictures we see of the suffering are devastating and
powerful. The images clearly cry out to us to take action and do what
we can to restore, as much as possible, the lives of these people to
normalcy.
We have all seen in these past few days the pictures of the
devastating tornadoes that have wreaked havoc wherever they have
touched down. Story after story has appeared in print and on television
showing property destroyed, places of business torn in pieces, jobs in
jeopardy and lives forever changed by the fury of a few moments of
severe weather. Tornadoes do not last a long time, but they leave a
path of devastation in their wake that leaves those affected by it
forever changed.
Our thoughts and prayers go out to all of those who have been so
affected and our hopes that they will be able to put their lives back
together and go on as difficult as that will be to do.
As we view the devastation of those tornadoes, there are those in my
State who have seen their livelihoods drastically affected by weather
and unfair market policy, but they have not been so visible to us
because we have not seen their faces on the nightly news or read their
stories in the national newspapers. That is because not everyone who
has seen their livelihood so drastically affected can be portrayed with
quite the same kind of powerful images that depict those who have been
touched by the ravages of severe weather patterns. Some problems that
destroy livelihoods and weaken industries are far more subtle and more
difficult to track.
Instead of being destroyed by a single blow, the industry I am
referring to is being slowly put to death by the cruelest of methods--
thousands of small cuts brought on by the lethal combination of several
years of drought, ambiguous regulations that are too easily taken
advantage of and the lax enforcement of existing law which has allowed
for the manipulation of the system to one group's advantage.
Our Nation's ranching industry is in trouble, and, due to the slower
pace with which it has been affected, the only stark images we will see
of the intensity of the problem are the ``for sale'' or ``up for
auction'' signs that acknowledge the closing of a family owned ranch
and the end of a family's dream that lasted for generations as the land
and the business was handed down for many, many years.
Right now, as I speak, if you are a rancher in the West, you have two
major problems affecting your ability to earn a living and provide for
your family. The first is the continuing drought which has made it so
difficult for ranchers to tend their cattle and provide them with good,
affordable grazing.
The second is a regulatory nightmare that has held livestock
producers captive by the chains of unfair and manipulative contracts.
It is this regulatory nightmare that must be addressed, and which
brings me to the floor today as I offer legislation to break the chains
and require livestock contracts to contain a fixed base price and be
traded in open, public markets.

So, what is this regulation that is destroying the health of our
family ranchers? It's a practice called ``captive supply,'' a business
practice not well known to those outside of the industry, but a
practice that has had a tremendous impact on the ranchers of the West.
If you have not heard about the problem, I must point out that our
ranchers have tried to bring it to our attention, but we have not fully
focused on their needs. Whenever I travel to Wyoming, or hold a town
meeting, or go over the week's mail that I receive from my
constituents, I hear the cries for help from our ranchers in Wyoming,
and throughout the West. One by one, and without exception, they are
all clamoring for attention and relief so they can continue the work
that so many in their family have done for so many years.
I could bring a stack of letters that come from people all across my
State

[[Page S6080]]

about the problems they face. But, in the interest of time, I will read
a small excerpt from one that will give you an idea of how bad things
are in the ranching industry as our ranchers try to deal with captive
supply.
A letter I received from a rancher in Lingle said that the issue of
captive supply needed to be reviewed and addressed because it was
``slowly but surely putting small farmers/feeders out of business.'' He
then added:

Until the existing laws are enforced in this area of
illegal activities, all other plans or laws will be of very
little consequence.

So what is captive supply and how is it harming our Nation's ranchers
to such an extent? Simply put, captive supply refers to the ownership
by meat packers of cattle or the contracts they issue to purchase
livestock. It is done to ensure that packers will always have a
consistent supply of livestock for their slaughterlines.
The original goal of captive supply makes good business sense. All
businesses want to maintain a steady supply of animals to ensure a
constant stream of production and control costs.
But captive supply allows packers to go beyond good organization and
business performance--to market manipulation--and this is where the
problem lies.
The packing industry is highly concentrated. Four companies control
more than half of all U.S. hog slaughter and more than 80 percent of
U.S. fed cattle slaughter. Using captive supply and the market power of
concentration, packers can purposefully drive down the prices by
refusing to buy in the open market. This deflates all livestock prices
and limits the market access of producers that have not aligned with
specific packers.
We made an attempt to address the problem of captive supply on the
Senate floor, but the amendment to ban packer ownership of livestock
more than 14 days before slaughter did not survive the conference
committee on the farm bill. However, the problems caused by captive
supplies are alive and well, just as Wyoming producers have testified
to me in the phone calls, letters, faxes and emails I receive from
them. Although I supported the packer ban and still do, I do not think
that banning packer ownership of livestock will solve the entire
captive supply problem. Packers are using numerous methods beyond
direct ownership to control cattle and other livestock.
Currently, packers maintain captive supply through various means
including direct ownership, forward contracts, and marketing
agreements. The difference between the three is subtle, so let me take
a moment to describe how they differ. Direct ownership refers to
livestock owned by the packer. In forward contracts, producers agree to
the delivery of cattle one week or more before slaughter with the price
determined before slaughter. Forward contracts are typically fixed,
meaning the base price is set.
As with forward contracts, marketing agreements also call for the
delivery of livestock more than one week before slaughter, but the
price is determined at or after slaughter. A formula pricing method is
commonly used for cattle sold under marketing agreements. In formula
pricing, instead of a fixed base price, an external reference price,
such as the average price paid for cattle at a certain packing plant
during one week, is used to determine the base price of the cattle. I
find this very disturbing because the packer has the ability to
manipulate the weekly average at a packing plant by refusing to buy in
the open market. Unfortunately, marketing agreements and formula
pricing are much more common than forward contracts.
In fact, the data published by USDA's Agricultural Marketing Service
indicates that in the first week of May 2003, 39,149 of the cattle
slaughtered were sold through a forward contract. By comparison,
207,955 of the cattle slaughtered were marketed through formula pricing
marketing agreements. Packers were using five times as many formula
pricing marketing agreements as forward contracts to purchase their
slaughter cattle. As we can see, packers use more marketing agreements
because of the advantages those ambiguous contracts give them over
producers.
In the same week, 36,899 of the cattle slaughtered were directly
owned by packers. These numbers demonstrate that the problem of captive
supply is far more extensive than just packer ownership. In the first
week of May, packer owned cattle only comprised 13 percent of captive
cattle slaughtered. This is why we must act to solve the entire captive
supply problem.
I realize it may be difficult to grasp the seriousness of the
situation if you are not familiar with the cattle market. Most of us
have not signed a contract to sell a load of livestock, but many of us
have sold a house. To illustrate the seriousness of the problem, let's
explore how you would sell a house using a formula-priced contract in a
market structured like the current livestock market.
It is May, and you know you will be selling your home in September.
As a wise seller, you want to find a buyer for your home before that
time. It turns out that other people do not really buy homes from each
other anymore. In fact, four main companies have taken over 80 percent
of all real estate transactions. You really have no choice but to deal
with one of these companies.
One of them offers you a contract, stating you will receive $10,000
over the average price of what other, similar homes are selling for in
your area in September. To manage your risk and ensure a buyer, you
have just been practically forced to sign a contract that doesn't
specify how much you will receive for your house.
That tingle of fear in the pit of your stomach becomes full-fledged
panic when you close the deal in September. You see, the four real
estate companies have been planning ahead. They decide to pull away
from the market. All the homes selling in September that are not
contracted to the companies flood the market and the price for homes in
your area drops $12,000. By trying to manage your risk, you sold your
home for $2,000 below average.
As a homeowner, you would be outraged, wouldn't you? You would want
to know why anyone had the ability to legally take advantage of you.
Livestock producers have the same questions when they lose to the
market pressures applied by captive supply. Captive supply gives
packers the ability to discriminate against some producers. And those
producers pay for it with their bottom line. At the same time, packers
use contracts and marketing agreements to give privileged access and
premiums to other producers regardless of the quality of their product.
These uses of captive supply should be illegal. In fact, they are.
Section 202 of the Packers and Stockyards Act states in (3) (a) and
(b):

It shall be unlawful for any packer with respect to
livestock . . . to:
(a) Engage in or use any unfair, unjustly discriminatory,
or deceptive practice or device; or
(b) Make or give any undue or unreasonable preference or
advantage to any particular person or locality in any
respect, or subject any particular person or locality to any
undue or unreasonable prejudice or disadvantage in any
respect.

Packers who practice price discrimination toward some producers and
provide undue preferences to other producers are clearly in violation
of the law. But this law is not being enforced. So what we are left
with are unenforced laws or no laws at all to protect the independent
producer. Since the Packers and Stockyards Act is not being enforced
and the cost of enforcing the law on a case-by-case basis in the courts
is expensive and time-consuming, today I propose that the Senate take
action.
Most laws require enforcement. They are like speed limits on a
country road. No one pays the sign any attention unless the driver is
sharing the road with an agent of the law who will enforce it--like a
police car. This section of the Packers and Stockyards Act is like a
sign on the road of commerce that no one is paying attention to because
the police are busy doing something else. The bill I am introducing
today is not just another sign on the road. It is a speed bump. It does
not just warn cars to go slower, it makes it much more difficult for
them to speed.
My bill does two things to create the speed bump. 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, forward contracts and marketing agreements must
contain a fixed, base price on the day the contract is signed. This
prevents packers from manipulating the base price

[[Page S6081]]

after the point of sale. You may hear allegations that this bill ends
quality-driven production, but it does not prevent adjustments to the
base price after slaughter for quality, grade or other factors outside
packer control. It prevents packers from changing the base price based
on factors that they do control. Contracts that are based on the
futures market are also exempted from the bill's requirements.
In an open market, buyers and sellers would have the opportunity to
bid against each other for contracts and could witness bids that are
made and accepted. Whether they take the opportunity to bid or not is
their choice, the key here is that they have access to do so.
My bill also limits the size of contracts to the rough equivalent of
a load of livestock, meaning 40 cattle or 30 swine. It does not limit
the number of contracts that can be offered by an individual. This key
portion prevents small and medium-sized livestock producers, like those
found in Wyoming, from being shut out of deals that contain thousands
of livestock per contract.
Requiring a firm base price and an open and transparent market ends
the potential for price discrimination, price manipulation and undue
preferences. These are not the only benefits of my bill. It also
preserves the very useful risk management tool that contracts provide
to livestock producers. Contracts help producers plan and prepare for
the future. My bill makes contracts and marketing agreements an even
better risk management tool because it solidifies the base price for
the producer. Once the agreement is made, a producer can have
confidence on shipping day in his ability to feed his family during the
next year because he will know in advance how much he can expect to
receive for his livestock.
This bill also encourages electronic trading. An open and public
market would function much like the stock market, where insider trading
is prohibited. The stock market provides a solid example of how
electronic livestock trading can work to the benefit of everyone
involved. For example, price discovery in an open and electronic market
is automatic.
Captive supply is still weighing on the minds and hurting the
pocketbooks of ranchers in Wyoming and across the United States.
Wyoming ranchers encourage me to keep up the good fight on this issue
on every trip I make to my home State. The economic soul of Wyoming is
built on the foundation of small towns and small businesses. All
livestock producers, even small and medium-sized ones, should have a
fair chance to compete in an honest game that allows them to get the
best price possible for their product. We must do everything we can to
keep our small producers in business.
My bill removes one of the largest obstructions preventing livestock
producers from competing--formula-priced contracts. I ask my colleagues
to assist me in giving their constituents and mine the chance to
perform on a level playing field.
I yield the floor.
______