Packers and Stockyards Programs: Investigations of Competitive Practices
Need Improvements (Testimony, 09/25/2000, GAO/T-RCED-00-299).

Cattle and hog producers have raised concerns about changes in their
industries that affect competition, such as mergers among meatpacking
companies, increased marketing of livestock through contracts, and
greater control by meatpacking companies over livestock production and
marketing. Under the Packers and Stockyards Act, the U. S. Department of
Agriculture (USDA) is responsible for monitoring the cattle and hog
industries and halting unfair and anticompetitive practices. USDA has
assigned this responsibility to the Grain Inspection, Packers and
Stockyards Administration (GIPSA). Because of continued concerns about
whether GIPSA is adequately protecting competition in the livestock
markets, GAO reviewed USDA's efforts to implement the Packers and
Stockyards Act. This report discusses the number and status of
investigations conducted by GIPSA in response to complaints about
anticompetitive activity and factors that affect GIPSA's ability to
investigate concerns about anticompetitive practices. GAO recommends
several actions to improve GIPSA's investigations, including integrating
USDA attorneys into GIPSA's investigative teams and adopting more
systematic approaches to its investigative work. This testimony
summarizes the September report, GAO/RCED-00-242.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-299
     TITLE:  Packers and Stockyards Programs: Investigations of
	     Competitive Practices Need Improvements
      DATE:  09/25/2000
   SUBJECT:  Meat packing industry
	     Cattle
	     Competition
	     Livestock products
	     Investigations by federal agencies
	     Restrictive trade practices
	     Marketing
	     Law enforcement
	     Antitrust law

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GAO/T-RCED-00-299

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to testify on the work we have completed on
the U.S. Department of Agriculture's (USDA) efforts to investigate concerns
about competition in the marketing of cattle and hogs. Our testimony today
is based on our September 21, 2000, report entitled Packers and Stockyards
Programs: Actions Needed to Improve Investigations of Competitive Practices
(GAO-RCED-00-242), which you requested. As you know, within USDA, the Grain
Inspection, Packers and Stockyards Administration (GIPSA) is responsible for
investigating concerns about unfair and anticompetitive practices in the $43
billion cattle and hog market.

Our testimony today focuses on the three areas covered in our report: (1)
the number and status of investigations conducted by GIPSA in response to
complaints and concerns about anticompetitive activity involving the
marketing of cattle and hogs, (2) factors that affect GIPSA's ability to
investigate concerns about anticompetitive practices, and (3) GIPSA's
authority under the Packers and Stockyards Act to address concerns about
anticompetitive and unfair practices. In summary, we found the following:

   * From October 1, 1997, through December 31, 1999, GIPSA investigated 74
     allegations or concerns about anticompetitive activity involving cattle
     or hogs. At the end of March 2000, 57 of these investigations had been
     completed, and the remaining 17 were ongoing. GIPSA identified a total
     of five alleged violations of the Packers and Stockyards Act. These
     violations involved acts by one or a few companies in such areas as
     deceptive pricing.

   * GIPSA has strengthened its ability to address competition concerns
     since a highly critical report was issued by USDA's Inspector General
     in 1997. However, two principal factors continue to detract from
     GIPSA's ability to investigate concerns about anticompetitive practices
     in these markets. First, the agency's investigations are planned and
     conducted primarily by economists without the formal involvement of
     attorneys from USDA's Office of General Counsel (OGC). As a result, a
     legal perspective that focuses on assessing potential violations is
     generally absent when investigations are initiated and conducted.
     Second, GIPSA's investigative processes and practices are designed for
     the traditional trade practice and financial issues that the agency has
     emphasized for years and are not suited for the more complex
     competition-related concerns that it is also now addressing.

   * USDA has authority under the Packers and Stockyards Act, which has been
     delegated to GIPSA, to initiate actions to halt unfair and
     anticompetitive practices by meatpacking companies and by other parties
     involved in livestock marketing. Specifically, the agency can take
     action to stop companies from engaging in or using any unfair, unjustly
     discriminatory, or deceptive practice or device, or making or giving
     any undue or unreasonable preference or advantage to another party. In
     addition, the agency can take action to halt unlawful anticompetitive
     practices that are antitrust-type actions, such as a packer's
     activities that manipulate or control prices or restrain trade.

In our report, we recommended several actions to improve GIPSA's
investigations. Specifically, we recommended that USDA integrate the
attorneys from OGC into GIPSA's investigative teams. The teamwork approach
used at the Department of Justice (DOJ) and the Federal Trade Commission
(FTC) to perform comparable investigations of anticompetitive practices
would benefit GIPSA's investigations. We also recommended that GIPSA adopt
more systematic approaches to its investigative work, including approaches
on how cases are selected and investigations conducted.

Mr. Chairman, we are encouraged by USDA's positive response to our draft
report. The Department concurred with our recommendations and spelled out
specific steps that it is considering in responding to the problems that we
identified.

Background

The Packers and Stockyards Act was passed in 1921 in response to concerns
that, among other things, the marketing of livestock presented special
problems that could not be adequately addressed by the federal antitrust
laws existing at that time. The act's provisions were based, in part, on
prior antitrust statutes, including the Sherman Act and the Federal Trade
Commission Act. GIPSA is responsible for implementing the Packers and
Stockyards Act. USDA's OGC also has a role in enforcing the act and, among
other activities, represents the Department in administrative and court
proceedings addressing alleged violations of the act.

In general, DOJ and FTC are responsible for enforcing federal antitrust laws
that protect the marketplace from practices that adversely affect
competition. DOJ is responsible for enforcing the Sherman Act, and FTC has
responsibility for the Federal Trade Commission Act. If GIPSA identifies an
activity that appears to be criminal or a violation of antitrust law, GIPSA
officials may consult with DOJ on whether the case should be forwarded to
DOJ for action. DOJ and FTC also share responsibility for reviewing proposed
mergers under the Clayton Act.

In 1996, GIPSA reported that dynamic changes had taken place in the cattle
and hog industries in recent years, including increasing concentration and
vertical integrationwhere packers own the animals. GIPSA stated that these
changes had reduced the role of public markets, where terms of a trade are
visible to all. GIPSA also reported that past studies were inconclusive
about whether the industry remained competitive. Also, in 1996, an advisory
committee to the Secretary of Agriculture reviewed the concerns of producers
and others about the changes in livestock markets and recommended, among
other things, a review of GIPSA's efforts to enforce the Packers and
Stockyards Act. The Secretary of Agriculture then asked USDA's Office of
Inspector General (OIG) to review GIPSA's program.

In 1997, USDA's OIG reported that GIPSA had a credible record of
investigating claims of fraud and unfair business dealings, such as false
weighing and failing to pay for livestock. However, the report stated that
GIPSA (1) did not have the capability to perform effective anticompetitive
practice investigations and (2) faced formidable obstacles to become
effective in performing such investigations because it had not been
organized, operated, or staffed for this purpose. The Inspector General
stated that GIPSA should employ an approach similar to that used by DOJ and
FTC, and integrate attorneys and economists from the beginning of the
investigative process.

In response, GIPSA completed a major restructuring of its headquarters and
field offices in 1999 and hired staff to strengthen its investigations of
alleged anticompetitive practices. GIPSA now has regional offices in Denver,
Colorado, for its work on the cattle industry; in Des Moines, Iowa, for
handling work on the hog industry; and in Atlanta, Georgia, for its work on
the poultry industry. During the reorganization, GIPSA experienced
substantial employee changes: Over 40 staff relocated, and 44 staff left the
agency. Also, the agency hired 67 new employees from April 1998 through July
2000, including economists and legal specialists to assist with its
investigations of competitive practices.

Recent GIPSA Investigations Has Found Little Anticompetitive Activity

Our review disclosed that GIPSA has found few instances of anticompetitive
activity in recent years. Specifically, GIPSA conducted 74 investigations
involving concerns about potential anticompetitive activity in the cattle
and hog markets from October 1, 1997, through December 31, 1999, and
identified alleged anticompetitive actions in only 5 cases. (See table 1.)
The alleged violations involved acts by specific meatpacking companies, such
as deceptive pricing, rather than industrywide practices. Thirty-six of
these investigations were in direct response to specific complaints about
anticompetitive actions; the other 38 cases were initiated by GIPSA.

Table 1: Results of GIPSA's Investigations of Allegations of Anticompetitive
Actions From the Start of Fiscal Year 1998 Through the First Quarter of
Fiscal 2000

 Alleged
 violator and  Number of       Status of          Did GIPSA find
 type of       investigations  investigation      anticompetitive action?
 animal
               Open            Closed   Yes       No
 Meatpacking
 company
 Cattle        39              11       28        3            27
 Hogs          12              6        6         2            7
 Subtotala     51              17       34        5            34
 Otherb
 Cattle        21              0        21        0            21
 Hogs          2               0        2         0            2
 Subtotal      23              0        23        0            23
 Total
 Cattle        60              11       49        3            48
 Hogs          14              6        8         2            9
 Total         74              17       57        5            57

Note: The information on the status of investigations and whether GIPSA
found anticompetitive actions is as of the end of March 2000.

aThe total number of cases where GIPSA did or did not find anticompetitive
actions exceeds the total number of closed cases because three cases in
which anticompetitive actions were reported remained open for resolution at
the time of our review and two cases in which anticompetitive actions were
not found remained open for an informational review at the agency's
headquarters.

bIncludes livestock markets, dealers, and others who buy or sell livestock
on commission.

Source: GAO's analysis of information obtained from GIPSA's
complaint/investigation automated system, the agency's files and records,
and the agency's officials.

During this period, GIPSA also conducted various other examinations that
were designed primarily to develop information about the cattle and hog
markets, including how prices for animals are determined. Specifically, a
major examination of cattle buying in Texas was completed in 1999; another
involving the procurement of hogs in four states in the Western Cornbelt was
completed in 1998. Neither found violations of the Packers and Stockyards
Act.

Two Principal Factors Detract From GIPSA's Capability to Fully Investigate
Concerns About Competition

We identified two principal factors that detract from GIPSA's capability to
investigate anticompetitive practices. The first factor concerns the
composition of GIPSA's investigative teams. We found that attorneys from
USDA's OGC are not directly involved in GIPSA's investigative work and the
economists that GIPSA has hired since 1998 are inexperienced in
investigative work. The second factor we identified is that GIPSA does not
have investigative processes and practices appropriate for conducting
complex anticompetitive practice investigations.

Attorneys' Participation in Investigations

GIPSA relies on USDA's OGC attorneys for legal advice, and OGC reviews the
results of GIPSA's investigations to determine if violations of law might
have occurred. However, OGC attorneys usually do not participate at the
start or throughout the agency's investigations. OGC attorneys are not
assigned until GIPSA has performed an investigation and forwarded a
developed case file to them for review and action. The agency's
investigations are planned and conducted primarily by economists, most of
whom have limited investigative experience.

In contrast, DOJ and FTC have teams of attorneys and economists to perform
investigations of anticompetitive practices. Attorneys are assigned to lead
and conduct the investigations from the outset so that a legal perspective
is focused on assessing potential violations of law, and economists are
routinely assigned as an integral part of the investigation teams. These
agencies use this approach so that a legal perspective is brought to bear on
the interpretation of law, development of evidence, and preparation of cases
for presentation in administrative and judicial proceedings.

We also found that OGC officials have provided GIPSA with informal
assistance in the investigations, but this assistance has been limited and
has declined along with the number of OGC attorneys assigned to assist
GIPSA. Since 1998, the number of OGC attorneys assigned to GIPSA's cases has
decreased from eight to five because of budget constraints, according to
USDA's General Counsel. Also, these attorneys are not all assigned full-time
to GIPSA's financial, trade practice, and competition cases; some are
assigned to responsibilities in other USDA areas as well. OGC officials told
us that at least six full-time attorneys are needed for GIPSA's casework and
the agency's reorganization plan called for up to eight attorneys.

Furthermore, GIPSA has had difficulty recruiting economists with specialties
that are particularly useful in anticompetitive practice investigations. The
grade levels that GIPSA has offered for these positions (up to GS-11) are
not competitive with the grade levels offered by other agencies such as DOJ
and FTC (up to GS-15). Also, the legal specialist position that GIPSA
developed appears to be more limited than anticipated. USDA's General
Counsel informed GIPSA that (1) its legal specialists can assist on
investigations but that they are not lawyers for GIPSA and cannot give legal
opinions even if they have law degrees and (2) only OGC's lawyers are
authorized to provide legal services in support of all USDA activities. In
addition, the legal specialists in GIPSA's field offices are not supervised
by attorneys.

In our report, we concluded that GIPSA's program has additional steps to
take to become more effective and efficient in performing investigations.
One step forward would be to integrate OGC's attorneys into GIPSA's
investigative teams. A teamwork approach has been used at DOJ and FTC and
would also be beneficial in GIPSA's investigations. In addition, the role of
GIPSA's legal specialists could be strengthened if they have the leadership
and supervision of OGC's attorneys, and GIPSA may also be able to improve
its recruitment of economic specialists. Therefore, we recommended that the
Secretary of Agriculture develop a teamwork approach for investigations with
GIPSA's economists and OGC's attorneys working together to identify
violations of the law. We also recommended that the Secretary (1) determine
the number of attorneys that are needed for USDA's OGC to participate in
GIPSA's investigations and, as needed, assign attorneys to lead or
participate in the investigations, (2) ensure that legal specialists are
used effectively by providing them with leadership and supervision by USDA's
OGC attorneys, and (3) ensure that GIPSA has the economic talents it
requires by considering whether to modify the GS grade structure for GIPSA's
economists.

Processes and Practices for Anticompetitive Practice Investigations

The second factor affecting GIPSA's capabilities is that its investigative
processes and practices were not designed for addressing complex
anticompetitive practice concernsthey were designed for the trade practice
and financial issues that the agency has emphasized for years. In
comparison, DOJ and FTC have processes and practices specifically designed
for guiding investigations of competition-related issues.

DOJ and FTC emphasize establishing the theory of each case and the elements
that will prove a case. At each stage of an investigation, including
selecting the case, planning, and conducting the investigation, there are
reviews by senior officialswho are attorneys and economiststhat focus on
developing sound cases. For example, DOJ and FTC require their attorneys,
assisted by economists, to establish a theory explaining how a company's (or
companies') behavior may be a violation of the law. The case theory and
evidence are reviewed by senior officials after a preliminary inquiry, prior
to approving an investigation, and then periodically as the factual
underpinnings of the case come into focus as the investigation proceeds. The
plan is to consider all the evidence that may be needed to determine if
there is a violation. The theory of the case and an outline of proof are
revised through the course of an investigation.

In contrast to DOJ and FTC, GIPSA does not require investigations to be (1)
planned and developed on the basis of how a company's actions may have
violated the law and (2) periodically reviewed as they progress by senior
officials with anticompetitive practice experience. GIPSA's investigation
work is led by regional staff with minimal oversight; headquarters officials
generally do not require reviews until investigation cases are developed. We
identified nine steps in the process for handling concerns about
anticompetitive practices; GIPSA's headquarters performs a review of the
case in the sixth step, and OGC is not involved until the eighth step, as
shown in figure 1.

Figure 1: GIPSA's Process for Handling Concerns About Anticompetitive
Practices

[0x01 graphic]

Legend: P&S Act = Packers and Stockyards Act

Note: There are no time criteria for completing any step in this process,
except for step six, in which the initial review by GIPSA's headquarters is
generally to be completed within 30 days.

aIn some instances, the field office sends a case file to GIPSA's
headquarters for review for informational purposes. When this happens, the
case remains open until the agency's headquarters completes its review.

bStep six is generally the first time that GIPSA's headquarters becomes
involved in a case, and step eight is generally the first time that OGC
becomes involved.

Source: GAO's analysis based on discussions with GIPSA officials.

According to GIPSA's headquarters and OGC officials, regional staff
informally discuss some plans for investigations with them, but the agency
does not have specific requirements for approving an investigation or an
investigation plan. These conditions were reflected in the comments of
GIPSA's regional office managers and economists, who said that they often
have questions about how to interpret the law and how best to scope and
perform investigations. Also, OGC officials told us that the anticompetitive
practice cases that GIPSA had forwarded often had weaknesses that needed to
be addressed before they could determine whether a violation had occurred.
Both OGC and GIPSA officials said that OGC's reviews of GIPSA's cases have
led to disagreements about interpretation of the act and the sufficiency of
evidence.

We also found that GIPSA's investigative guidance manual was last revised in
1996, prior to the agency's reorganization to develop anticompetitive
practice investigation capabilities. The manual does not contain specific
guidance for anticompetitive practice investigations, such as the contents
of an investigative plan, the information needed for approval of an
investigation, or the frequency of reviews of the investigations.

In our report, we concluded that GIPSA needs to adopt a more systematic
approach to planning and performing investigations. An approach similar to
DOJ's and FTC's would start with a preliminary phase to develop a theory of
the alleged violation and a plan of investigation. At this stage, senior
officials within GIPSA and OGC would approve the initial theory of the case,
the plan, and the commitment of resources. Thereafter, periodic reviews
would be held at major decision points. If GIPSA and OGC officials consult
with DOJ and FTC officials, they may obtain suggestions about how to promote
teamwork on investigations and ideas about how to shape a program suited for
GIPSA's and OGC's workload and organizational structures. Therefore, we
recommended that the Secretary of Agriculture improve GIPSA's investigation
processes and practices by adopting methods and guidance similar to DOJ's
and FTC's for selecting, planning, conducting, and reviewing investigations.
In doing so, we recommended that the Secretary (1) provide for senior GIPSA
and OGC officials to review the progress of investigations at main decision
points and provide feedback, guidance, and approval of investigations as
they progress, and (2) consult with the Attorney General and the Chairman of
the Federal Trade Commission on investigation management, operations, and
case development processes.

GIPSA's Authority Under the Packers and Stockyards Act

The Packers and Stockyards Act prohibits packers from engaging in or using
any unfair, unjustly discriminatory, or deceptive practice or device, or
making or giving any undue or unreasonable preference or advantage to
another party. The act does not define unfair practices and consequently
what is unfair must be determined by regulation or on a case-by-case basis
by applying a rule of reason. To prove that a practice is unfair, GIPSA must
show that the packer intended to injure another party (predatory intent) or
that its action caused injury (e.g., injury to competitors) or is likely to
do so.

In addition, the Packers and Stockyards Act specifically makes unlawful
packer anticompetitive practices that are antitrust-type actions, including
a packer's activities that manipulate or control prices or restrain trade.
To prove that such an activity has occurred under the act, GIPSA, in most
instances, must show that the purpose of the packer's action or its actual
effect was to carry out the prohibited activity. GIPSA may also choose to
treat such activity as an unfair practice, which may be easier to prove than
a violation of the act's antitrust-type provisions. Also, while mergers are
a concern because they can reduce competition, the act does not provide USDA
with premerger review authority.

The act allows GIPSA to start investigations and administrative actions to
halt packer practices that it deems to be unfair or anticompetitive. When an
investigation finds and develops evidence to show that a packer may have
engaged in an anticompetitive or unfair practice, GIPSA may file a complaint
against the packer. The packer has a right to a hearing, which is held
before a USDA administrative law judge. If, after reviewing the evidence
presented by GIPSA and the packer, the administrative law judge decides that
there has been a violation of the act, a cease and desist order may be
issued, and a civil fine may be levied. An administrative law judge's
decision can be appealed to USDA's Judicial Officer, who acts on behalf of
the Secretary of Agriculture. The packer, but not USDA, may file a further
appeal to a Federal Circuit Court of Appeals.

- - - - -

In our report, we concluded that GIPSA has strengthened its program since
1997 by reorganizing to focus on specific livestock industries. Also,
GIPSA's economists, with some experience and guidance, will enable the
agency to be more effective in its investigations of complicated market
issues. Presently, however, GIPSA is better positioned for performing
economic analyses than fully developing the complete cases needed to prove
that anticompetitive practices have occurred. We also noted that DOJ, FTC,
and GIPSA have been involved in monitoring the industry and have taken
producers' concerns into account. We believe, however, that GIPSA and USDA's
OGC need to continue improving their investigative capabilities and
processes.

GIPSA also has an important role in periodically keeping the industry and
the Congress informed about its monitoring of livestock markets. Since
GIPSA's last major report in 1996, there have been further dynamic changes
in the cattle and hog markets. These changes involve integration within the
industry and changes in market operations and production margins. GIPSA
could further help shape the understanding and views of industry
participants by reporting again on such changes and by providing its
perspective on issues involving competition. Therefore, we also recommended
in our report that the Administrator, GIPSA, provide industry participants
and the Congress with clarifications of GIPSA's views on competitive
activities by reporting publicly on changing business practices in the
cattle and hog industries and identifying market operations or activities
that appear to raise concerns under the Packers and Stockyards Act.

USDA reviewed a draft of our report before it was issued and concurred with
our report and recommendations. USDA's written comments discussed actions
that GIPSA and OGC are taking or planning to take to improve investigations
of anticompetitive practices. Specifically, USDA said, among other things,
that it (1) will seek to formalize consultations between GIPSA and OGC on
complex investigations of anticompetitive practices, and integrate OGC's
attorneys into GIPSA's investigative teams early in the investigative
process; (2) will adopt relevant portions of the procedures used by DOJ and
FTC for planning, developing, implementing, and reviewing investigations;
and (3) anticipates developing a tiered review process for investigations in
which routine investigations are subject to oversight by GIPSA's
headquarters and complex investigations are subject to review and approval
by GIPSA's headquarters and OGC. In addition, USDA also agreed that GIPSA
could report on how the Packers and Stockyards Act applies to market
activities and identify those activities that raise concerns about fairness
and competition.

Mr. Chairman, we believe that the implementation of our recommendations will
improve GIPSA's capabilities, processes, and practices for investigating
alleged anticompetitive practices. These improvements will reflect a more
vigilant and skillful federal presence and instill greater confidence that
industry's concerns will be investigated fairly and diligently.

- - - - -

Mr. Chairman, this concludes our formal statement. If you or other Members
of the Subcommittee have any questions, we will be pleased to respond to
them.

Contact and Acknowledgment

For future contacts regarding this testimony, please contact Lawrence J.
Dyckman on (202) 512-5138. Individuals making key contributions to this
testimony and/or to the report on which it was based include Charles M.
Adams, Patrick J. Sweeney, Alan R. Kasdan, Gary T. Brown, Larry D. Van
Sickle, Fredrick C. Light, and Mary C. Kenney.

(150297)

FTC has a specific responsibility under the Packers and Stockyards Act to
address anticompetitive and unfair practices in retail sales of meat and
meat products.

The Packers and Stockyards Act does not provide USDA with premerger review
authority. However, GIPSA may initiate administrative actions to halt unfair
and anticompetitive practices of a company formed by a merger.

We did not evaluate the effectiveness of GIPSA's efforts and findings in
these cases.

GIPSA published the results of these examinations in papers entitled
Investigation of Fed Cattle Procurement in the Texas Panhandle (Dec. 28,
1999) and Western Cornbelt Hog Procurement Investigation (Oct. 8, 1998).

A more detailed discussion of GIPSA's authority under the act, including
references to statutory and regulatory provisions and court decisions is
contained in appendix I of our September 21, 2000, report.

The act defines the term packer to include any person who in commerce (1)
buys livestock for slaughter; (2) manufactures or prepares meat products for
sale or shipment; or (3) markets meat, meat products, or livestock products
in an unmanufactured form as a wholesale broker, dealer, or distributor.

It is also unlawful under the act for any stockyard owner, market agency, or
dealer to engage in any unfair, unjustly discriminatory, or deceptive
practice in connection with, among other things, the marketing, buying, or
selling of livestock on a commission basis. The Secretary of Agriculture
may, pursuant to a complaint or on his own initiative, bring an
administrative action to halt such practices.

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