[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.
                                 ______