Packers and Stockyards Programs: USDA's Response to Studies on
Concentration in the Livestock Industry (Letter Report, 04/23/97,
GAO/RCED-97-100).
Concentration in the meatpacking industry has been a matter of concern
since the turn of the century, when five firms controlled 55 percent of
the market. This situation led to the 1921 passage of the Packer and
Stockyards Act, which created a division within the Agriculture
Department (USDA) to ensure fair business practices, such as prompt and
accurate payment, and to detect and prevent anticompetitive behavior. An
October 1991 GAO report (GAO/RCED-92-36) found that the industry had
become even more concentrated than it was in 1921: four firms controlled
70 percent of the meatpacking industry. Since then, industry
concentration has intensified, with four firms controlling 81 percent of
the industry as of 1995. This report discusses (1) whether USDA's
February 1996 report on concentration in the meatpacking industry
identified the geographic boundaries of livestock procurement markets;
(2) whether the report provided guidance on how to monitor these
markets; (3) whether, as a result of the report, USDA had identified
additional data that the Grain Inspection, Packers, and Stockyards
Administration (GIPSA) could use to strengthen its monitoring of these
markets; and (4) the steps that GIPSA plans to take as a result of this
report. GAO also presents the views of the Justice Department on the
usefulness of GIPSA's data for conducting its regulatory
responsibilities in the livestock procurement markets.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-97-100
TITLE: Packers and Stockyards Programs: USDA's Response to Studies
on Concentration in the Livestock Industry
DATE: 04/23/97
SUBJECT: Meat packing industry
Competition
Interagency relations
Monitoring
Cattle
Monopolies
Price regulation
Commodity marketing
Livestock products
Collusion
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Cover
================================================================ COVER
Report to Congressional Requesters
April 1997
PACKERS AND STOCKYARDS PROGRAMS -
USDA'S RESPONSE TO STUDIES ON
CONCENTRATION IN THE LIVESTOCK
INDUSTRY
GAO/RCED-97-100
Concentration in the Livestock Industry
(150071)
Abbreviations
=============================================================== ABBREV
AMS - Agricultural Marketing Service
CFTC - Commodity Futures Trading Commission
CME - Chicago Mercantile Exchange
FTC - Federal Trade Commission
GIPSA - Grain Inspection, Packers and Stockyards
Administration
OIG - Office of the Inspector General
P&SA - Packers and Stockyards Administration
USDA - U.S. Department of Agriculture
Letter
=============================================================== LETTER
B-276420
April 23, 1997
The Honorable Jeff Bingaman
The Honorable Kent Conrad
The Honorable Byron L. Dorgan
The Honorable Bob Kerrey
The Honorable Paul Wellstone
United States Senate
The effects of concentration in the meatpacking industry have been a
subject of concern since the turn of the century. At that time, five
firms controlled 55 percent of the market. This concern eventually
led to the passage of the Packers and Stockyards Act in 1921. Among
other things, the 1921 act was intended to ensure fairness and
competitiveness in the meatpacking industry and created the Packers
and Stockyards Administration, now part of the Grain Inspection,
Packers and Stockyards Administration (GIPSA)\1
within the U.S. Department of Agriculture (USDA). The agency's
mission is to ensure fair business transactions, such as prompt and
accurate payment, and to detect and prevent anticompetitive
practices. In the latter case, the definition of market boundaries
is important to GIPSA for analyzing the effects of concentration on
prices and monitoring for anticompetitive behavior.
In 1991,\2 we reported that the industry had become more concentrated
than it was in 1921--four firms controlled 70 percent of the
meatpacking industry.\3 As we reported, greater concentration may
increase opportunities for buyers to use anticompetitive practices
that could lower the prices paid to producers to below the level that
would be set in a competitive market. We recommended that the
Secretary of Agriculture direct GIPSA to determine a feasible and
practical approach for monitoring the activity in regional livestock
procurement markets\4 to address the questions of anticompetitive
behavior. While generally national in nature, the livestock
procurement market is made up of many smaller, regional markets.
However, at the time of our 1991 report, relevant market boundaries
for monitoring anticompetitive behavior had not been defined.
In response to our report and congressional concerns about the
increased concentration in the livestock procurement market, the
Congress directed USDA to study this issue. As a result, GIPSA
commissioned seven research projects that resulted in a report
entitled Concentration in the Red Meat Packing Industry, issued in
February 1996.
Since our 1991 report, the industry has become even more
concentrated; four firms controlled 81 percent of the meatpacking
industry in 1995.\5 Consequently, you asked that we (1) determine
whether USDA's report on concentration in the red-meatpacking
industry identified the geographic boundaries of livestock
procurement markets; (2) determine whether the report provided
guidance on how to monitor these markets; (3) determine whether, as a
result of this report, USDA had identified additional data that GIPSA
could use to enhance its monitoring of these markets; and (4)
describe what actions GIPSA plans to take as a result of this report.
You also asked us to describe the views of the Department of Justice
on the usefulness of GIPSA's data for conducting its regulatory
responsibilities in the livestock procurement markets.
--------------------
\1 For purposes of this report, we use GIPSA to refer to the Packers
and Stockyards Administration.
\2 Packers and Stockyards Administration: Oversight of Livestock
Market Competitiveness Needs to Be Enhanced (GAO/RCED-92-36, Oct.
16, 1991).
\3 This level of control refers to steer and heifer cattle that were
grass-fed as well as grain-fed. The practice of fattening cattle
with grain did not become widespread until the 1960s. USDA began
collecting data on "fed cattle" in 1969. (App. I presents an
overview of the livestock and meatpacking industries.)
\4 In this report, the livestock procurement market refers to the
purchase of grain-fed cattle for slaughter and processing.
\5 This figure refers to concentration among firms that slaughter
steer and heifer cattle. The slaughter of steer and heifer cattle
represents nearly 81 percent of all cattle slaughtered for beef
consumption. In 1995, the four-firm concentration level for all
types of cattle--steer, heifer, cow, and bull--slaughtered was 67
percent.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The February 1996 concentration report commissioned by the Grain
Inspection, Packers and Stockyards Administration indicated that the
relevant boundaries of the livestock procurement market are not
fixed. Instead, these boundaries vary, depending on the economic
issue being considered. For example, when examining the basis for
pricing fed cattle, the relevant market boundaries are generally
national; when a proposed merger is being evaluated, the relevant
market boundaries are generally regional.
While the concentration report did not provide specific guidance for
monitoring markets, it did provide extensive data that can serve as a
baseline for future monitoring and analysis. These data, which are
for nearly all fed-cattle slaughter plants nationwide, include, among
other things, the types and volume of livestock slaughtered and the
prices paid to producers. Most of these data existed previously only
in aggregate form.
The concentration report did not identify the specific data that need
to be collected for better market monitoring. However, an advisory
committee, convened by the Secretary of Agriculture and established
prior to the publication of the concentration report, used the
report's results to examine market concentration. In its own report,
issued in June 1996, this committee recommended that additional
data--such as information on the number of cattle contracted for
future sale--be routinely collected on various elements of the
livestock procurement market to provide a better understanding of how
that market functions. The U.S. Department of Agriculture has begun
to collect and disseminate these data.
The concentration report was considered by the advisory committee in
its recommendation that the Department review its surveillance,
investigation, and enforcement practices within the livestock
procurement market. As a result of this review, the Department has
begun reallocating its resources to place more emphasis on detecting
anticompetitive violations. Because the Grain Inspection, Packers
and Stockyards Administration's resources are limited, this shift in
focus will come at the expense of its efforts to carry out other
responsibilities, such as ensuring that financial transactions among
market participants are conducted fairly and honestly.
Department of Justice officials told us that Justice collects its own
data when investigating issues that are under its regulatory purview.
According to these officials, the Department of Agriculture regularly
shares information with them on an informal basis. This information
is useful to Justice as a background for its own investigations.
BACKGROUND
------------------------------------------------------------ Letter :2
Livestock production can be divided into four principal stages
according to the growth phase of the cattle: (1) cow-calf
production, (2) stocker feeding, (3) cattle feeding, and (4)
fed-cattle slaughter, or beef packing. Cow-calf "operators" breed
cows for the production and sale of young steers and heifers.
Stocker/feeders nurture calves until they mature. Cattle-feeding
operators then take over the primary feeding (or fattening) of the
cattle for several months until they are ready for slaughter. Highly
specialized commercial feedlots with capacities of more than a
thousand head of cattle per year handle most of the cattle feeding.
Feedlot operators may either purchase the cattle they feed or
custom-feed the cattle for others, such as cow-calf producers or
beef-packing firms. Since the 1940s and 1950s, commercial cattle
feeding has evolved rapidly as producers have sought to increase the
output of their herds by increasing the weight of the cattle. At the
end of the feeding stage, the cattle owners sell the fed cattle
either directly to a beef-packing firm or to an agent acting on
behalf of the beef-packing firm. Most of the large firms both
slaughter the fed cattle and cut the carcasses into major sections,
which are then packaged into large boxes for shipping--known as boxed
beef.
For the livestock procurement market, GIPSA has two primary
responsibilities: (1) to monitor for anticompetitive practices, such
as colluding to manipulate prices, and (2) to ensure that sales
transactions are conducted fairly and honestly. GIPSA's authority is
limited to individuals and firms that buy and sell livestock and live
poultry as well as those processing or marketing meat and meat
products. GIPSA's authority generally does not extend to retailers
or to firms that market poultry products.
Two other federal agencies are also involved in regulating the
meatpacking industry. Justice's Antitrust Division is responsible
for reviewing all proposed mergers and acquisitions in the
meatpacking industry. Unlike GIPSA, which has significant regulatory
authority, Justice does not enforce the Packers and Stockyards Act,
nor does it enforce potential violations of that act. GIPSA may,
however, refer certain activity to Justice's Antitrust Division for
possible enforcement under the antitrust laws if it appears that a
violation has occurred. According to officials at GIPSA, several
suspected antitrust violations are forwarded to Justice each year.
The Federal Trade Commission (FTC) also has enforcement authority for
antitrust laws as they apply to the livestock industry. However,
according to FTC officials, the Commission's jurisdiction is limited
to the retail segment of the meat industry in most situations. While
both FTC and Justice are responsible for reviewing mergers, Justice
has taken the lead on livestock mergers in recent years. According
to officials at both agencies, this situation is a result of the fact
that Justice has more experience and institutional knowledge on
livestock issues. FTC maintains a cooperative working relationship
with USDA through a liaison agreement, dating back to 1963, that is
intended to resolve any jurisdictional questions between the two
agencies. FTC officials stated, however, that there is very little
need for the sharing of information between USDA and FTC.
In describing concentration in the meatpacking industry, we concluded
in our 1991 report that the industry had become more
concentrated--four firms controlled 70 percent of the fed-cattle
market--than it was when the Packers and Stockyards Act was enacted.
We concluded that GIPSA had not (1) adequately modified its
monitoring process to keep pace with the changes in the industry and
(2) defined regional livestock procurement markets, which in turn
hindered its ability to monitor those markets for anticompetitive
behavior. In response to our report and to congressional concerns
about the increased concentration in the livestock procurement
market, the Congress appropriated funds to USDA for further study of
this issue.
To respond to the Congress's directive, GIPSA commissioned seven
research projects; six were contracted out to teams of researchers,
while USDA's Economic Research Service conducted the seventh. The
projects selected address concerns identified by the Congress as well
as topics identified in our 1991 report. One of these projects
examined livestock procurement markets within the continental United
States. This project consisted of three separate studies. Our work
focuses on the information found in these three studies--each seeking
to define relevant markets for livestock procurement.
In addition to the work conducted at the Congress's direction,
several weeks before the concentration report was made public, the
Secretary of Agriculture announced the formation of an Advisory
Committee on Agricultural Concentration. While the committee was
charged with investigating concentration in virtually all segments of
the agricultural economy, it focused its efforts on the meatpacking
industry. The committee based its subsequent findings and
recommendations on the concentration report commissioned by GIPSA,
information from trade associations and other industry experts, and
the advice of farmers and others who testified in a public hearing.
This committee's findings and recommendations were summarized in a
June 1996 report to the Secretary of Agriculture.\6
--------------------
\6 Concentration in Agriculture: A Report of the USDA Advisory
Committee on Agricultural Concentration (June 1996).
STUDIES INDICATED THAT RELEVANT
MARKET BOUNDARIES DIFFER
DEPENDING ON THE ISSUES
ANALYZED
------------------------------------------------------------ Letter :3
The three studies contained in the GIPSA-commissioned concentration
report that attempt to define livestock procurement markets did not
explicitly state whether geographic boundaries for the markets were
distinctly regional or national in nature. Nevertheless, the
economists we spoke with generally agreed that these studies provided
new insights into the nature of market boundaries. In particular,
the studies showed that boundaries are not fixed and that their
precise delineation varies depending upon the aspect of the market
under analysis. For example, these economists told us that when
monitoring pricing information for potential anticompetitive
behavior, it may be essential to examine the data presented on a
national basis because the study results indicate that the prices
paid for livestock are integrated nationwide. In other cases, such
as assessing the impact of a proposed merger, more specific data from
the regions affected by the potential merger may be more appropriate.
STUDIES PROVIDED BASELINE
INFORMATION FOR FUTURE
MONITORING
------------------------------------------------------------ Letter :4
The three studies did not provide specific guidance to GIPSA on
monitoring markets. However, they did provide extensive data that
can serve as a baseline for future monitoring and analysis. These
data, which cover nearly all fed-cattle slaughter plants nationwide,
include, among other things, the types and volume of livestock
slaughtered and the prices paid to producers. According to GIPSA
officials, these data are not standardized among packing plants and
are voluminous. As a result, routinely collecting such data would be
extremely resource-intensive and costly to both GIPSA and
meatpackers. GIPSA officials told us that while the meatpacking
firms voluntarily supplied the data for the concentration report,
they would be less willing to do so on a regular basis. Most of
these data existed previously only in aggregate form.
USDA HAS IDENTIFIED ADDITIONAL
MARKET DATA TO ENHANCE GIPSA'S
MONITORING AND PROVIDE
INFORMATION TO MARKET
PARTICIPANTS
------------------------------------------------------------ Letter :5
The three studies did not identify the specific data that need to be
collected for better monitoring of the market. However, the Advisory
Committee on Agricultural Concentration recommended to the Secretary
of Agriculture, among other things, a policy to support and improve
market information as a vital component of a competitive marketplace.
Specifically, it recommended that USDA more frequently collect data
on the volume and types of cattle committed for sale at future
dates--known as forward contracting--within the livestock procurement
market. These data include information on the formula used to arrive
at a price--including any premiums or discounts--specified in the
contract between the buyer and seller. Other data that the advisory
committee recommended be collected include information on the volume
of cattle exported and imported and a report showing the distribution
of cattle for slaughter by grade and by yield. The advisory
committee recommended that these data be made available to market
participants to improve competition within the marketplace. (App.
II contains further details on the recommendations and their current
status.)
USDA has begun to implement the advisory committee's recommendations.
For example, USDA's Agricultural Marketing Service (AMS) began
collecting and reporting more comprehensive data on boxed beef in
September 1996. The following month, AMS began collecting and
reporting data on premiums and discounts, and partial data on forward
contracts. In February 1997, AMS began collecting and reporting
additional data--specifically, the regional distribution of cattle by
grade and by yield. Even more data, such as information on the
volume of cattle imported into the United States, require additional
coordination with other USDA agencies. The procedures for collecting
and reporting this information have only recently been worked out
among the contributing agencies--reporting began on March 31, 1997.
GIPSA officials stated that the new data being collected would be
particularly useful in conducting detailed investigations of market
competition. In addition, they said that these data could better
inform market participants about activities within the livestock
procurement market, thus creating a level playing field. They said
that these aggregate data can be used to provide a snapshot of the
livestock procurement market for a specific day or week.
The chairman of the Secretary's advisory committee said that the new
data being collected and disseminated will help to ensure fair
competition in the marketplace because all participants in the
livestock procurement industry will have the same information. He
added, however, that the information deemed most important by the
committee--information on the profits made by individual packing
firms and individual feedlots and the costs incurred by packers and
feedlots--is not being collected by USDA. GIPSA officials said that
these more detailed data are not publicly available and would be
extremely difficult for USDA to report.
GIPSA PLANS TO PLACE GREATER
EMPHASIS ON MONITORING FOR
ANTICOMPETITIVE ACTIVITIES
------------------------------------------------------------ Letter :6
Relying in part on the concentration report, the advisory committee
recommended that the Secretary of Agriculture review GIPSA's current
practices to enforce the Packers and Stockyards Act. At the request
of the Secretary of Agriculture, USDA's Office of the Inspector
General (OIG) recently completed a review of GIPSA's surveillance,
investigation, and enforcement practices.\7 As a result of this
review, GIPSA has begun drafting plans to restructure its
organization within the constraints of its current resources. At the
time we completed our report, GIPSA had under way four intensive
regional investigations to monitor for potential anticompetitive
practices and a fifth one planned for later in the year. However,
GIPSA officials told us that this change in focus has curtailed the
agency's efforts to ensure that sales transactions are conducted
fairly and honestly. As a result, they said, sellers would receive
less financial protection.
The OIG review concluded that GIPSA's resources are not adequate to
ensure proper monitoring of the livestock procurement market for
anticompetitive behavior. As a result of this review, several
recommendations were made to GIPSA suggesting ways to allocate its
current resources to better monitor the market for anticompetitive
behavior. These included (1) reorganizing the agency's national and
regional offices, (2) integrating its economics staff into the
investigations of anticompetitive practices, and (3) developing
procedures to consult with USDA's Office of General Counsel prior to
initiating and during investigations of anticompetitive practices.
Further recommendations included that the Congress consider
transferring USDA's responsibilities for performing anticompetitive
practices investigations to the Department of Justice.
GIPSA officials told us that with the exception of the recommendation
to transfer investigative authority to Justice, the OIG
recommendations provide GIPSA with a framework for how the agency
should be structured and where the agency should direct its resources
in the future. GIPSA officials have begun to formulate a plan that
will address these recommendations.
At the time of our review, GIPSA's plans included a restructured
organization that will emphasize monitoring for anticompetitive
practices. This emphasis will come at the expense of GIPSA's efforts
to ensure fair business transactions within the livestock procurement
market. As required under the Packers and Stockyards Act, these
efforts include checking for compliance with the requirements for
prompt payment and solvency, bonding, maintaining certain bank
accounts known as custodial accounts, holding livestock purchases by
meatpackers in trust to protect against their failure to pay, and
accurately weighing livestock. GIPSA's Packers and Stockyards
Program currently has 180 employees.\8
Most of these employees--135--are located in its 11 field offices.
Until 1997, when GIPSA began focusing on intensive regional
investigations, most of its employees monitored the livestock
procurement market for potential unfair business transactions rather
than for market competitiveness.
During fiscal year 1996, GIPSA conducted 2,265 investigations of
alleged unfair business practices and identified over 800 violations
of the Packers and Stockyards Act. These included, for example,
payment or price manipulation, the manipulation of the weights of
livestock or carcasses, the manipulation of grades on carcasses, and
commercial bribery. GIPSA requested formal actions, alleging
deceptive and unfair practices, in 84 cases and issued 62 complaints
to bring firms into compliance with the act. Administrative
decisions and orders were issued in 49 cases; however, most
violations were corrected on a voluntary basis, and several resulted
in livestock and poultry producers' receiving additional funds from
purchasers for the sale of their product.
In keeping with its new efforts to emphasize monitoring for
anticompetitive practices, GIPSA has recently undertaken several
initiatives to increase enforcement against potential anticompetitive
activities among the nation's largest meatpackers. In 1996, GIPSA
completed a major investigation of fed-cattle procurement practices
in Kansas. The investigation examined over 15,000 purchase
transactions and 2 million head of cattle. According to GIPSA, the
results did not indicate any anticompetitive practices. Rather,
supply and demand factors appear to have been the primary causes of
price declines during 1995. In addition, an investigation currently
under way will examine over 37,000 purchase transactions in Texas and
over 6 million head of cattle sold during 1995 and 1996. GIPSA also
plans several additional investigations into market competition,
including a third investigation of potential anticompetitive
practices in the Nebraska beef procurement market later in the year.
--------------------
\7 Grain Inspection, Packers and Stockyards Administration:
Evaluation of Agency Efforts to Monitor and Investigate
Anticompetitive Practices in the Meatpacking Industry (Evaluation
Report No. 30801-0001-Ch, Feb. 1997).
\8 The proposed fiscal year 1998 budget gives GIPSA's Packers and
Stockyards programs an additional 30 staff.
DEPARTMENT OF JUSTICE DOES NOT
RELY ON GIPSA'S DATA TO CARRY
OUT ITS REGULATORY
RESPONSIBILITIES
------------------------------------------------------------ Letter :7
Department of Justice officials told us that they rely primarily on
their own data, rather than on GIPSA's data, to carry out most of
their responsibilities for evaluating proposed mergers and the extent
of anticompetitive behavior. Justice and GIPSA officials told us
that, on occasion, Justice requests and receives data from GIPSA as a
starting point for its own investigations. They stated that the data
available from GIPSA, such as aggregate data on the number of cattle
slaughtered each year, are useful in providing background
information. However, they collect much more detailed data, such as
proprietary data specific to the individual firms being examined, in
conducting their investigations.
AGENCY COMMENTS
------------------------------------------------------------ Letter :8
We provided USDA with a draft copy of this report for review and
comment. We met with USDA officials, including the Administrator for
GIPSA and the acting Deputy Administrator for Packers and Stockyards
Programs, who agreed with the facts presented and provided technical
comments that we incorporated into the report where appropriate.
We performed our work from October 1996 through March 1997 in
accordance with generally accepted government auditing standards.
Appendix III contains detailed information on our objectives, scope,
and methodology.
---------------------------------------------------------- Letter :8.1
As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 15 days from the date of this letter. At that time, we will
send copies of this report to the House and Senate Committees on
Agriculture, other interested congressional committees, the Secretary
of Agriculture, and other interested parties. We will also make
copies available upon request.
If you have any questions about this report, I can be reached at
(202) 512-5138. Major contributors to this report are listed in
appendix IV.
Robert A. Robinson
Director, Food and
Agriculture Issues
OVERVIEW OF THE LIVESTOCK AND
MEATPACKING INDUSTRIES
=========================================================== Appendix I
This appendix describes changes in the livestock and meatpacking
industries and concerns about concentration in the red-meatpacking
industry.
THE LIVESTOCK INDUSTRY
--------------------------------------------------------- Appendix I:1
Livestock production consists of four stages--breeding,
stocker/feeding, feeding (or fattening), and slaughtering (packing).
Livestock may be marketed before slaughter through a variety of
channels. Breeders/producers (also known as cow/calf producers) may
sell to stocker/feeders where the calves mature before they are sold
to feeding operations (feedlots) that fatten the cattle for
slaughter; in turn, feedlots may sell directly to packers; breeders
who fatten their livestock may also sell their animals directly to
packers. In addition, individuals referred to as market agencies and
livestock dealers may serve as intermediaries in the marketing of
livestock between the breeding, feeding, and slaughtering stages.
Market agencies, which chiefly include public auction facilities that
buy and sell livestock on a commission basis, and livestock dealers
may purchase animals from either breeders or feeding operations.
Market agencies and dealers may also buy and sell livestock among
themselves prior to the eventual sale. Figure I.1 illustrates the
livestock production stages and various marketing channels.
Figure I.1: Stages of
Livestock Production and
Marketing Channels
(See figure in printed
edition.)
LOCATION OF LIVESTOCK
PROCUREMENT MARKETS HAS CHANGED
OVER TIME
--------------------------------------------------------- Appendix I:2
The meatpacking industry in the United States has evolved over the
last 150 years in response to technological changes--moving from
small, local butchers to central terminal stockyards to
slaughterhouses located far from the nation's urban areas. Prior to
the 1880s, the meatpacking industry primarily slaughtered pork
because beef tended to spoil before it could be transported to
consumers and retailers, even with the advent of the railroad. As a
result, packing houses were situated close to consumers in small
towns and cities throughout the eastern United States. With the
advent of the refrigerated railcar, cattle carcasses could be
slaughtered centrally and shipped to the consumer. By the 1880s,
meatpacking had shifted from the East to central terminal markets in
the Midwest, most notably the Chicago Stockyards. At this time,
concentration in the meatpacking industry first gained national
attention.
Around World War II, improvements in the trucking industry, the
creation of a national highway system, and the widespread use of the
radio made central terminal markets obsolete. The truck and the
paved highway made decentralization of the handling of carcass meat
physically possible, and the increased use of the radio made that
decentralization economically feasible by widely disseminating market
news. In step with this decentralization, USDA expanded its news
reporting system, using the press, the telegraph, the telephone, the
radio, and most recently, the Internet. By 1970, the Chicago
Stockyards had closed and slaughterhouses had relocated near the
feedlots in the western High Plains.
LIVESTOCK PROCUREMENT PRACTICES
HAVE CHANGED
--------------------------------------------------------- Appendix I:3
In obtaining fed cattle for slaughter, packers choose among several
alternative methods of procurement and pricing. The most common
methods used are buying cattle on the open or spot (cash) market;
establishing marketing agreements--that is, long-term purchasing
agreements in which the packer agrees to purchase a specified number
of cattle in a specified time period; forward contracting with
individual feedlots; and buying directly from cow/calf operators and
putting the cattle in packer-owned feedlots. The most common pricing
methods are pricing based on the animal's live weight; pricing based
on the animal's carcass weight; and formula pricing based on the
packer's weekly averaged prices paid, or on an average of two or more
publicized price reports.
Forward contracting and futures trading began in the mid- to late
1960s by the Chicago Mercantile Exchange (CME). Futures contracts on
live cattle provide a way for producers to hedge their production and
feeding operations and thereby remove some of the price uncertainty
that normally exists. Historically, futures markets have been used
by dealers and processors rather than farmers. These markets
typically have been used to provide price protection on purchases of
products for shipment, storage, or processing. They offer a way of
removing much of the uncertainty resulting from price changes during
production--the feeding period for cattle.
The decentralization of the cattle procurement market required the
standardization of grading and weighing and caused the
centralization, or nationalization, of selling and buying over the
telephone. It required the standardization of grades so that buyers
and sellers could accurately describe the lots of cattle. It also
required the centralization of price and demand and supply
information, since it is the supply and demand over the country that
determines the price.
USDA'S ROLE IN MONITORING FOR
ANTICOMPETITIVE PRACTICES IN
THE LIVESTOCK INDUSTRY
--------------------------------------------------------- Appendix I:4
Competition in the livestock procurement market has been a source of
public concern since it became technologically viable to transport
cattle across the country. Figure I.2 depicts the rise of
concentration in the red-meatpacking industry since the turn of the
century.
Figure I.2: Concentration in
the Cattle Slaughter Industry
Since 1910
(See figure in printed
edition.)
Notes: 1910 represents the percent controlled by the five largest
meatpackers. "Fed cattle" are steers and heifers fattened with grain
prior to slaughter--a practice that became widespread in the 1960s.
"Cattle" include grass-fed and grain-fed cattle. USDA began
collecting data on fed cattle 1969.
As early as 1888, the federal government authorized an investigation
into the business practices of the largest meatpacking firms, which
were accused of colluding to (1) fix beef prices to consumers and (2)
apportion territories for livestock purchases and meat sales. The
results of the investigation were partly responsible for the
enactment of the Sherman Antitrust Act of 1890, which made any such
agreements or combination in restraint of trade illegal. To
circumvent the Sherman Antitrust Act, several packers formed a
nationwide holding company in 1903--the "Beef Trust"--that expanded
their interests to affiliated businesses, such as those engaged in
transporting and retailing meat, groceries, and livestock
by-products. Further investigations ensued, culminating in the
passage of the Packers and Stockyards Act of 1921.
The Packers and Stockyards Act was enacted to ensure fairness and
competitiveness in the livestock, meatpacking, and poultry industries
by preventing fraudulent, discriminatory, or monopolistic practices.
Although antitrust laws, including the Sherman Antitrust Act, already
prohibited monopolistic practices, the Congress provided the
Secretary of Agriculture with the authority to more closely regulate
the livestock and meatpacking industries. The Packers and Stockyards
Act has been amended several times since 1921 in an effort to enhance
the Packers and Stockyards Administration's (P&SA) ability to
regulate the changing structure and nature of these industries. For
example, amendments increased the agency's authority to protect
livestock producers financially by requiring that buyers pay promptly
and that they be adequately bonded.
In 1994, P&SA was merged with the Federal Grain Inspection Service to
form the Grain Inspection, Packers and Stockyards Administration
(GIPSA). Packers and Stockyards programs within GIPSA have an annual
budget of over $12 million and a staff of approximately 180 full-time
employees.
USDA'S ACTIONS TAKEN IN RESPONSE
TO ADVISORY COMMITTEE'S
RECOMMENDATIONS ON IMPROVEMENTS TO
FED-CATTLE DATA
========================================================== Appendix II
Agency Geographic
Report issued/action Frequency responsibl basis
Recommended action taken of report e of report
----------------------- ------------------------ ---------- ---------- --------------
Forward contracting
-----------------------------------------------------------------------------------------
Improve forward- New report, Forward Weekly AMS National
contracting price Contract Slaughter
reporting to include Cattle Summary, first
formula trading issued in October 1996.
information collected Includes price
for regional markets. information on cattle
traded on the basis of
the futures market.
Provide timely, New report, Forward Weekly AMS National
accurate information on Contract Slaughter
the numbers (volume) of Cattle Summary, first
forward-contracted issued in October 1996.
cattle committed for Includes information on
delivery in all out the volume of cattle
months. traded on the futures
market.
Provide timely, AMS has stated that it
accurate information on cannot collect this
all captive supplies information from packers
committed for delivery and suggests using
at the start of each Forward Contract
week to assist Slaughter Cattle Summary
producers in estimating instead.
demand.
Encourage the The Chicago Mercantile 2 times CFTC/CME National
development of a close- Exchange (CME) has daily (proposed)
trimmed boxed beef submitted a proposal for (proposed)
futures contract as an a Boneless Beef Futures
additional means of Contract report to the
price discovery. Commodity Futures
Trading Commission (CFTC
) for approval, with
planned issuance date of
June 1997.
Premiums and discounts
-----------------------------------------------------------------------------------------
Improve premiums and New report, National Weekly AMS National
discounts price Carcass Premiums and
reporting to reflect Discounts for Slaughter
quality factors based Steers and Heifers,
on carcass merit. first issued in October
1996. Includes quality
factors on yield grade,
weight discounts, and
dark cutters.
Develop a standardized New report, National Weekly AMS National
list of premium or Carcass Premiums and
discount categories for Discounts for Slaughter
carcass merit Steers and Heifers,
purchasing and an first issued in October
additional list of 1996. Includes range as
premium or discount well as averages for
categories based on premium/discount
marketing agreements categories for
and forward contracts. livestock. AMS has
Consider reporting stated that it cannot
range as well as standardize because of
averages for each variations in quality,
appropriate premium/ nor can it report on the
discount category for additional lists of
livestock. marketing agreements or
contracts. There is no
standard marketing
agreement or contract.
Create a computerized AMS states that it
value matrix grid for cannot develop a value
pricing to help matrix because the base
producers compare price price is different for
bids among packers in each feedlot. Suggests
different geographic using National Carcass
regions. Premiums and Discounts
for Slaughter Steers and
Heifers.
Cash market
-----------------------------------------------------------------------------------------
Provide timely, Direct Slaughter Cattle 1-3 times AMS Regional/
accurate information on Report revised by AMS in daily state
the number of cattle October 1996 by
purchased in the cash expanding their
market on a daily collection and reporting
basis. efforts to include
additional packers.
Improve reporting of New report, National Weekly AMS National and
the numbers and prices Summary of Meats Graded, regional
of cattle slaughtered first issued in February
on a daily basis to 1997. Provides grading
better reflect actual percentages of cattle
grades. slaughtered by quality
and yield.
Increase volume of USDA Central U.S. Boxed 1-2 times AMS National
boxed beef reporting Beef Report revised daily
beyond the current 36% September 1996 to
of total steer and include 45% of boxed
heifer boxed beef beef volume, extended
reported by AMS in delivery period to 15
1995. Include reporting days. Includes
of forward sales beyond information on branded
the 10-day delivery products and sales of
period already less than car-lot value.
reported, branded AMS stated that it
products, sales cannot obtain
delivered as price information on
basis to a futures formulated sales or
contract, sales of less price basis to futures
than car-lot volume, contracts.
and formulated sales.
Report differential for AMS has stated that
USDA Prime and upper these data are not
two-thirds of USDA obtainable from packers
Choice because much of the
high-quality product
goes to export and
exporters are unwilling
to share proprietary
information. In
addition, AMS states
that Prime represents
less than 2 percent of
cattle carcasses in a
given week.
Exports and imports
-----------------------------------------------------------------------------------------
Provide timely, AMS has stated that it
accurate information at cannot collect this
the start of each week information from
on the prices and packers.
volume of Canadian or
Mexican cattle
contracted for delivery
for that week.
Provide broad access to USDA is in the process
current export sales of determining if such a
data on packer meat report is feasible given
exports on a weekly the current available
basis. data.
Improve timeliness and Foreign Agricultural Weekly Foreign Global
accuracy of information Service developed report (proposed) Agricultur (proposed)
on exports of meat and to provide information al Service
products thereof, on export commitments of
similar to the daily meat and products
reports on grain export thereof. The agency
sales. submitted proposal to
Secretary of Agriculture
for approval.
USDA should report on Report on the volume of Weekly AMS/ National
price and volume of imports and exports of (proposed) Animal and (proposed)
imports and exports of livestock first issued Plant
livestock. March 31, 1997. AMS has Health
stated that it cannot Inspection
report on prices. Service
Other
-----------------------------------------------------------------------------------------
USDA should report on USDA is issuing a No report USDA
line-of-business request for proposal for planned
profits for packers and a research project on
feedyards. the implications of
collecting line-of-
business cost and profit
data.
USDA should develop Economic Research Monthly Economic National
better retail price Service stated that it (proposed) Research (proposed)
reporting in order to is working with Bureau Service/
more accurately reflect of Labor Statistics to Bureau of
the farm-to-retail develop an average Labor
price spread. retail price of meat Statistics
based on retail sales
weight and plans to
include the new data in
its Livestock, Dairy,
and Poultry Monthly
report around January
1998.
-----------------------------------------------------------------------------------------
OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III
On October 3, 1996, five Senators requested that we follow up on a
recommendation we made in a 1991 report.\9 After discussions with the
requesters' offices, we agreed to (1) determine whether the U.S.
Department of Agriculture's (USDA) February 1996 report on
concentration in the red-meatpacking industry identified the
geographic boundaries of livestock procurement markets; (2) determine
whether the report provided guidance on how to monitor these markets;
(3) determine whether, as a result of this report, USDA has
identified additional data that GIPSA could use to enhance its
monitoring of these markets; and (4) describe what actions GIPSA
plans to take as a result of this report. We also agreed to describe
the views of the Department of Justice on the usefulness of GIPSA's
data in carrying out its regulatory responsibilities in the livestock
procurement markets.
To respond to this request, we met with staff from GIPSA to obtain an
overall perspective on the steps that agency has taken to respond to
our 1991 recommendation. We reviewed the congressionally requested
report entitled Concentration in the Red Meat Packing Industry as
well as the report prepared by the Secretary of Agriculture's
Advisory Committee on Concentration in Agriculture. In addition, we
met with economists from USDA's Economic Research Service, the
Commodity Futures Trading Commission, and the National Cattleman's
Beef Association. We also met with representatives from the
Department of Justice's Antitrust Division and the Federal Trade
Commission. Finally, we interviewed the authors of the three studies
on regional market definition and seven of the reviewers from the
Interagency Working group charged with providing technical support
and comments to USDA on those studies.
To address the first and second objectives, we reviewed the three
studies from the Concentration in the Red Meat Packing Industry
report that were to define the regional cattle procurement markets in
order to determine if they were conclusive on the delineation of
market boundaries and if they provided any guidance to GIPSA for
monitoring. We also met with GIPSA officials to obtain their
interpretations of the studies' results. In addition, we reviewed
written comments provided to GIPSA by members of a committee formed
to review the objective, methodology, and results of all the studies
contained in report. Finally, we interviewed the authors of the
three studies as well as seven of the reviewers.
To determine whether USDA has identified additional data that GIPSA
could use to enhance its monitoring of these markets, we reviewed the
report prepared by the Secretary of Agriculture's Advisory Committee
on Concentration in Agriculture to identify recommended data. In
addition, we met with representatives of the response team--including
USDA's Chief Economist and Deputy Assistant Secretary for Marketing
and Regulatory Programs--established by the Secretary to implement
the recommendations of the advisory committee. We also met with
officials from USDA's Agricultural Marketing Service, National
Agricultural Statistical Service, and Economic Research Service to
obtain details on the types of data each of these organizations
gathers and disseminates and to discuss new efforts to collect and
report additional data on livestock procurement practices. Finally,
we met with GIPSA officials to determine if and how these new data
would be used in its monitoring of the livestock procurement
industry.
To describe what actions GIPSA plans to take as a result of this
report, we met with GIPSA officials and members of the response team.
In addition, we met with staff from USDA's Office of the Inspector
General to discuss that office's recent review of GIPSA's
investigative, surveillance, and enforcement activities.
Finally, to describe the views of Department of Justice officials on
the usefulness of GIPSA's data in carrying out Justice's regulatory
responsibilities in the livestock procurement markets, we interviewed
staff from Justice's Antitrust Division. In addition, we met with an
attorney from USDA's Office of General Counsel to obtain information
on how cases are coordinated between USDA and Justice. We also met
with officials from the Federal Trade Commission to discuss how they
coordinate data and antitrust enforcement activities with Justice and
USDA.
--------------------
\9 Packers and Stockyards Administration: Oversight of Livestock
Market Competitiveness Needs to Be Enhanced (GAO/RCED-92-36, Oct.
16, 1991).
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
Jerilynn B. Hoy, Assistant Director
Tracy Kelly Solheim, Project Leader
Mary C. Kenney
Carol Herrnstadt Shulman
Michelle Knox-Zaloom
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