[Congressional Record Volume 151, Number 54 (Thursday, April 28, 2005)]
[Senate]
[Pages S4572-S4573]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ENZI (for himself, Mr. Dorgan, Mr. Johnson, and Mr. 
        Thomas):
  S. 960. 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, 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 the pictures of the devastating tornadoes or other 
natural disasters that have wreaked havoc wherever they have touched. 
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 don't last a long time, but they leave a path of 
devastation in their wake that leaves those affected by it forever 
changed.
  Even as we consider the devastation of tornadoes, earthquakes, or 
other natural disasters, there are those in my state who have seen 
their livelihoods drastically affected by weather and federal 
regulation, but they haven't been so visible to us because we haven't 
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.
  Right now as I speak to you on the floor of the Senate, 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 haven't heard about the problem, I must point out that our 
ranchers have tried to bring it to our attention, but we haven't 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 to the Floor that come from people 
all across my State about the problems they face. But, in the interests 
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 
approximately 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 haven't aligned with specific packers.
  We made an attempt to address the problem of captive supply on the 
Senate floor during the Farm Bill debate, 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 
have cosponsored it again this Congress, 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

[[Page S4573]]

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.

  I realize it may be difficult to grasp the seriousness of the 
situation if you aren't familiar with the cattle market. Most of us 
haven't 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 don't 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 aren't 
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 that 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 
doesn't 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 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 doesn't 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.
                                 ______