U.S. GOVERNMENT PRINTING OFFICE

65–409 CC WASHINGTON : 2000

S. HRG. 106–663

GRAIN INSPECTION, PACKERS AND STOCKYARDS

ADMINISTRATION OVERSIGHT

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION

OVERSIGHT

February 1, 2000

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAUL COVERDELL, Georgia

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

(II)

(III)

C O N T E N T S

Page

HEARING:

Tuesday, February 1, 2000, Grain Inspection, Packers and Stockyards Administration Oversight ............................................................................................... 1

APPENDIX:

Tuesday, February 1, 2000 ..................................................................................... 75

Tuesday, February 1, 2000

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agricultural, Nutrition, and Forestry ........................................................... 1

Roberts, Hon. Pat, a U.S. Senator from Kansas ................................................... 20

Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois ....................................... 24

Conrad, Hon. Kent, a U.S. Senator from North Dakota ...................................... 26

Craig, Hon. Larry E., a U.S. Senator from Idaho ................................................. 17

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agricultural, Nutrition, and Forestry ........................................................... 17

Leahy, Hon. Patrick J., a U.S. Senator from Vermont ......................................... 23

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 5

Feingold, Hon. Russell D., a U.S. Senator from Wisconsin .................................. 2

WITNESSES

(PANEL I)

Baker, James R., Administrator, Grain Inspection, Packers and Stockyards

Administration, U.S. Department of Agriculture, accompanied by Mr. David

Shipman, Deputy Administrator, Federal Grain Inspection Program ............ 6

Dunn, Michael, Under Secretary for Marketing and Regulatory Programs,

U.S. Department of Agriculture .......................................................................... 10

(PANEL II)

Foster, Kenneth, Dr., Purdue University, West Lafayette, Indiana ................... 31

Paarlberg, Philip, Dr., Purdue University, West Lafayette, Indiana .................. 29

(PANEL III)

PACKERS AND STOCKYARDS ADMINISTRATION

Crabtree, John, Center for Rural Affairs, Walthill, Nebraska ............................. 49

McNutt, John, President, National Pork Producers Council, Iowa City, Iowa ... 39

Roenigk, William P., Senior Vice President, National Chicken Council, Washington, DC ............................................................................................................. 43

Sharma, Rita, National Cattlemen’s Beef Association, Williamsport, Indiana .. 41

Stumo, Michael, Organization for Competitive Markets Winsted, Connecticut . 46

Warfield, Ron, President, Illinois Farm Bureau, Gibson City, Illinois ............... 44

Page

IV

(PANEL IV)

GRAIN INSPECTION PROGRAM

Clark, Mike, National Corn Growers Association, representing the concerns

of the American Soybean Association and the National Association of Wheat

Growers Homer, Illinois ...................................................................................... 65

Farrish, Bert, President, Columbia Grain, representing the North American

Export Grain Association Portland, Oregon ...................................................... 61

Smigelski, Robert, The Anderson, Incorporated, representing the National

Grain and Feed Association, Maumee, Ohio ...................................................... 63

Wiese, Dennis, National Farmers Union, Flandraeu, South Dakota .................. 67

APPENDIX

PREPARED STATEMENTS:

Lugar, Hon. Richard G. .................................................................................... 78

Fitzgerald, Hon. Peter G. ................................................................................. 92

Hagel, Hon. Chuck ........................................................................................... 79

Gilchrest, Hon. Wayne T. ................................................................................. 76

Baker, James R. ................................................................................................ 80

Clark, Mike ....................................................................................................... 154

Crabtree, John .................................................................................................. 137

Farrish, Hubert O. ............................................................................................ 141

Foster, Ken ........................................................................................................ 99

McNutt, John .................................................................................................... 104

Paarlberg, Philip ............................................................................................... 94

Roenigk, William P. .......................................................................................... 116

Sharma, Rita ..................................................................................................... 111

Smigelski, Robert .............................................................................................. 151

Stumo, Michael ................................................................................................. 127

Warfield, Ron .................................................................................................... 119

Wiese, Dennis ................................................................................................... 159

DOCUMENTS SUBMITTED FOR THE RECORD:

The National Turkey Federation ..................................................................... 166

Structural Change and Market Performance in Agriculture: Critical

Issues and Concerns about Concentration in the Pork Industry, submitted by Philip Paarlberg, Michael Boehje, Kenneth Foster, Otto Doering,

Wallace Tyner ............................................................................................... 172

Nation Grain and Feed Association, statement on Grain Inspection, Packers and Stockyards Administration ............................................................. 184

(1)

PACKERS AND STOCKYARDS

ADMINISTRATION

TUESDAY, FEBRUARY 1, 2000

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Committee met, pursuant to notice, at 9:00 a.m., in room

328A, Russell Senate Office Building, Hon. Richard Lugar, (Chairman of the Committee), presiding.

Present or submitting a statement: Senators Lugar, Roberts,

Fitzgerald, Grassley, Craig, Harkin, Leahy, Conrad, Baucus, Feingold, and Hagel.

STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR

FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

The CHAIRMAN. This hearing of the Senate Agriculture Committee is called to order.

Let me point out that agriculture in the United States is experiencing a significant transformation. This evolution can be attributed to rapidly improving technologies, developments in biotechnology, changes in worldwide consumption, and concentration

in production agriculture and agribusiness. These developments

create opportunities but they also raise questions about concentration and antitrust. The developments also raise new challenges in

the regulation of unfair and deceptive business practices and identifying the best policies to address these issues.

This Committee has examined the concentration issues in previous hearings. The competitive implications of consolidation and

concentration in production agriculture and agribusiness are clearly numerous. Situations of monopoly or monopsony can result from

the reduction in the number of market participants or an increase

in the market share of the participants.

Unique among Federal statutes that are within the purview of

the Department of Agriculture are the Packers and Stockyards Act,

which provides the Secretary with the legal authority to take action against activities by packers in interstate commerce that have

the effect of restraining commerce or creating a monopoly in commerce. The USDA has restructured the Grain Inspection, Packers

and Stockyards Administration to strengthen enforcement of anticompetitive practices and to improve the Agency’s ability to enforce

the provisions of the Packers and Stockyards Act.

Today the Committee will examine the present structure and

functions of the Grain Inspection, Packers and Stockyards AdminisVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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tration. The marriage of two previously independent agencies occurred in 1994, intended to secure a production and competitive

global marketplace for U.S. agricultural products.

I will welcome in a moment Mr. Michael Dunn, Under Secretary

for Marketing and Regulatory Programs; Mr. James Baker, Administrator of the Grain Inspection, Packers and Stockyards Administration [GIPSA]. I have asked Mr. Baker to provide testimony addressing the challenges facing GIPSA and Under Secretary Dunn

may offer additional comments to our hearing.

I thank Mr. Baker in advance for coming to my home State of

Indiana in order to receive input from Hoosier farmers regarding

concentration and consolidation. It is a major issue in our state. I

also welcome Mr. David Shipman, Deputy Administrator of the

Federal Grain Inspection Program, who is present to respond to

questions the Committee may have regarding this program.

I am pleased that Dr. Philip Paarlberg and Dr. Kenneth Foster

from Purdue University are with us today. They will review findings in their recent paper entitled ‘‘Structural Change and Market

Performance in Agriculture: Critical Issues and Concerns about

Concentration in the Pork Industry.’’

Today’s third panel contains producer representatives who will

provide commentary on the functions performed by the Packers

and Stockyards Administration. And finally, the last panel consists

of members from producer groups and the business community who

will discuss the functions assigned to the Federal Grain Inspection

Program.

Senator Hagel’s statement will be made a part of the record.

It is my privilege, first of all, to welcome my distinguished colleague Senator Feingold of Wisconsin, who will offer testimony and

then be on his way, unless he wishes to participate in the hearing

further. Russ, it is good to have you this morning.

[The prepared statement of Senator Hagel can be found in the

appendix on page 79.]

[The prepared statement of Senator Lugar can be found in the

appendix on page 78.]

STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR

FROM WISCONSIN

Senator FEINGOLD. Thank you very much, Mr. Chairman, for

having the hearing and for letting me make some comments. As a

former member of this Committee, it is a great opportunity to discuss something of tremendous importance to people in my state.

I am pleased to be here this morning to briefly discuss the effects

of the increased consolidation and concentration rolling through

America’s agricultural industry, which is causing disruption for

many farmers and actual ruin for others. I am particularly concerned about these changes to the structure of the U.S. agriculture

industry because of the effect it is having on family farms.

Over the past 70-years, Mr. Chairman, we have certainly seen a

transformation of America’s agricultural sector. As U.S. farms have

consolidated, their numbers have declined from there being nearly

7 million farms in the 1930s to about 2.2 million in 1998. Many

farmers believe through bitter experience that consolidation in the

agriculture industry has put the economic opportunity that many

3

others are experiencing in this country out of reach for some of

America’s small family farmers.

I want to be clear, because this is far too complex a subject to

oversimplify, that I realize that consolidation of our agriculture industry is not the root of all of our farmers’ problems. I am not

blaming low commodity prices solely on the mergers in corporate

America on the increased consolidation of our nation’s farms. But

surely these trends are a big part of the problem for a small farm.

As I travel to each of Wisconsin’s 72 counties each year, I hear

again and again that increased market concentration means less

negotiating power for the men and women who actually produce

our dairy products, our grain and our livestock. And sometimes, as

I am sure you have experienced, Mr. Chairman and my colleague

from Montana, I am sure you have heard these stories from proud,

hard-working farmers who wonder if or fear that the loss of power

that they are experiencing will mean that they will be the last generation in their family who will be able to farm.

Farmers understand all too well that increased concentration in

the agriculture industry has led to inadequate market access for

small and medium-sized farmers and has also resulted in price discrimination against small, independent producers.

I am pleased that you, Mr. Chairman, have agreed to hold this

hearing on the subject of the Grain Inspection, Packers and Stockyards Administration. After all, the Packers and Stockyards Act is

one of the strongest antitrust laws ever written in this country and

certainly one of the most important to our nation’s agricultural industry. Its goal is to protect livestock producers and meat consumers from the potential use by packers of a monopoly power to unduly lower the prices paid to producers and to raise prices for consumers.

As many of you know, this legislation was originally passed to

break up the so-called Beef Trust, a group of five packing companies that controlled a large percentage of the beef and hog slaughter throughout the country. Ironically, the concentration levels in

the beef packing industry at the time that the Packers and Stockyards Act was enacted are roughly the same as they are today. A

1916 Federal Trade Commission report found that the Big Five

packers controlled 82.2-percent of the cattle slaughter. Today the

top five beef packers control as much as 83-percent of the beef

slaughter, and the same trend has occurred in the pork industry.

According to the 1916 report, the top five packing firms controlled

61-percent of the hog slaughter; today the top four packers control

57-percent and the top seven firms control 75-percent of the hog

slaughter.

This trend toward market concentration in these industries is

alarming and it must be addressed with the same vigor that our

predecessors in Congress brought to their effort to pass the Packers

and Stockyards Act nearly a century ago.

I further urge GIPSA to fully enforce its authority through Section 202 and other means to protect our farmers against price discrimination in the grain and livestock markets. Unless we protect

our independent producers against price discrimination, we will be

left with only a few giant firms that get to call the shots and ecoVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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nomic devastation in many rural communities throughout the

United States.

Independent producers, whether they are hog producers, cattlemen, dairy producers or soybean farmers, have a dwindling number

of markets available to them and face significant price discrimination. Last year alone the GAO reported that during an 18-month

period, slaughter capacity in the pork industry decreased by 9-percent. In my State of Wisconsin, many hog farmers have to ship

their animals as far as Iowa or Illinois. Even in these states there

are fewer and fewer slaughtering plants each year.

All indicators in the pork industry point to producers receiving

an increasingly smaller share of the retail dollar. Last year, for example, when producer prices went down over 60-percent, USDA reported that consumers were only paying 3-percent less. While that

money is going somewhere, it is certainly not going to the farmers.

Of particular concern in Wisconsin, Mr. Chairman, are the mergers of large dairy coops. In the last few years we have seen the

mergers of Mid-America Dairymen, the Associated Milk Producers,

Milk Marketing and the Western Dairymen Cooperative. These

coops were the first, second, third and twelfth largest in the country and they all joined together to form the Dairy Farmers of

America, now the largest coop in the country, and it handles over

26-percent of the country’s milk. Land o’Lakes recently acquired

Atlantic Dairy, then merged with Dairyman’s Creamer. Last week

Land o’Lakes bought Madison Dairy Produce, Inc., which turns

about 15-percent of the Nation’s butter.

However, the merger of these coops and their exemption from

antitrust laws under the Capper-olstead Act of 1922 may only be

a small part of the problem because we also have a tremendous

number of mergers in the retail grocery industry. Over the past 2-

years, Dean Foods has announced its acquisition of more than 11

smaller retailers. Based on USDA numbers, it seems that the bargaining power of large grocery chains represents a significant

threat to our dairy farmers’ profit margins. Retailers made 70 cents

per gallon in 1992 when the store price was $2.78. So the grocery

store was raking in 25.5-percent of the earnings in total per hundredweight.

These figures, Mr. Chairman, invite the question: are retail

prices affected by these mergers? How else can one explain that 10-

years ago, farmers were getting $1 more per hundredweight for

their milk than they are now but retail prices were actually $1 less

than today’s prices.

Again I am not here to blame the low commodity prices solely on

the coops and the retailers and mergers in corporate America.

However, we in Congress must take a hard look at the antitrust

laws to make sure that they effectively deal with the problems of

concentration that we are now seeing.

Until the Senate passes comprehensive agricultural antitrust reform legislation, I will continue to push for the Agribusiness Merger Moratorium Act of 1999, which places strict limits on market

concentration in the agricultural industry by preventing large agribusiness mergers.

This country, Mr. Chairman, is in grave danger of losing its independent producers—hog producers, cattlemen, dairy producers, soyVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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bean farmers and others. We are in danger of losing a rich tradition, of losing the capacity to honor and reward generations of hard

work and the love of the land.

Our nation’s farmers are a key pillar of the economy, both rural

and urban. In Wisconsin, the dairy industry alone generates

around $10 billion for the state’s economy.

I commend USDA for taking the initiative on small farms. I am

also pleased that the Department of Justice has brought on board

a senior enforcement attorney whose staff will deal solely with agricultural antitrust issues. However, our work is far from done because the level of market concentration in some key sectors is the

same, as I said, as it was when Congress passed the Packers and

Stockyards Act way back in 1921. We must enable all producers to

have a fair shot in the marketplace and we must be mindful of the

human consequences for our country if we fail to do that and do

it soon.

I am grateful for all the time and for the opportunity to testify,

Mr. Chairman.

The CHAIRMAN. Well, we are grateful for your testimony, your experience in this issue.

Senator Baucus, do you have a question for our witness?

STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM

MONTANA

Senator BAUCUS. I would just like to commend Senator Feingold

on his very thoughtful statement. He is finding in Wisconsin, as we

all are in all parts of the country, that producers are in deep trouble. It is a serious problem, as you know, Mr. Chairman, and you

outlined the key points, Senator, namely the concentration in the

packing industry and the cattle and dairy coops, the mergers of retailers.

And it is true that,that is not the sole cause of the problems.

There is no doubt about that. But it just kind of feels like, smells

like, seems like it is still a part of the problem, and it is a key part

of the problem. It is one that must be addressed.

And clearly we, as Americans, want to continue to have the most

prosperous agriculture industry in the world but we want our producers to be part of it. And it is very important that we look at

legislation like that suggested by Senator Feingold, Mr. Chairman,

as well as other legislation that I am sure is going to be offered

because we do not want unintended consequences, either. We have

to be smart about this. But being smart, to me, means recognizing

there is a serious problem and addressing it, and also addressing

it in a way that does not throw the baby out with the bathwater

or upset the applecart, not to mix metaphors here, but to do it in

a smart way.

But it is going to take time. It is going to take a lot of work for

us to try to figure out what legislation seems to make the most

sense here and has the greatest positive effect for the greatest

number of Americans.

But I very much compliment you, Senator, on your statement.

You have touched on the problem, hit the nail on the head here

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ly and in a solid, responsible way, but it has to be done. Thank you

very much.

Senator FEINGOLD. Thank you, Senator Baucus.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much for your testimony. I

would just follow through on the distinguished senator from Montana’s comments and I am certain he has read the back-up for this

hearing, as well as the testimony that we are about to hear, and

these issues are not necessarily of dazzling complexity but still the

thought of doing something that does not have unintended consequences is a good point. There will be legislative suggestions

today in some of the testimony and we welcome those, but it is an

invitation for all members to be very observant of all of the by-play.

There are counterthoughts for almost each of the suggestions we

are going to have.

Unfortunately, Congressman Gilchrest, who had hoped to come

to testify, will not be able to do so.

[The prepared statement of Congressman Gilchrest can be found

in the appendix on page 76.]

Therefore we will move on to our first panel, which includes Mr.

Michael Dunn, the Under Secretary for Marketing and Regulatory

Programs at the United States Department of Agriculture; and Mr.

James R. Baker, Administrator of the Grain Inspection, Packers

and Stockyards Administration of the United States Department of

Agriculture. They are accompanied by Mr. David Shipman, the

Deputy Administrator of the Federal Grain Inspection Program.

Gentlemen, we are very pleased to have you here this morning.

We appreciate the time you have given already in preparation of

testimony, as well as your experience in the issues before us.

I would like to call first upon Mr. Baker for his testimony, who

will be followed then by comments that Mr. Dunn may have, and

Mr. Shipman is available for questions that may arise or other expert points that need to be made.

Mr. Baker, would you please proceed?

STATEMENT OF JAMES R. BAKER, ADMINISTRATOR, GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION,

U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY

DAVID SHIPMAN, DEPUTY ADMINISTRATOR, FEDERAL

GRAIN INSPECTION PROGRAM

Mr. BAKER. Thank you, Mr. Chairman and members of the Committee. I am proud to come before you today and talk about the

Grain Inspection, Packers and Stockyards programs. A complete

written statement will be submitted for the record.

GIPSA was established under the authority of the Department of

Agriculture Reorganization Act of 1994. We are probably the

youngest agency in the Department of Agriculture. The agency’s

services and programs facilitate the marketing of livestock, poultry,

meat, cereals, oilseeds and related agricultural products for the

overall benefit of consumers of American agriculture. The agency

carries on a tradition of service, integrity and professionalism and

fairness that characterizes its component programs.

GIPSA’s Grain Inspection Program plays a critically important

role in facilitating the marketing of U.S. grain and related comVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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modities. We provide the U.S. grain market with Federal quality

standards and a uniform system to apply these standards. We partner with state, private agencies and laboratories to bring accurate

and affordable services to American agriculture from the producer

to the processor and the exporters.

By serving as an impartial third party, GIPSA assures that the

standards are applied and weights are recorded in a fair and accurate manner. We bring discipline and integrity to the marketplace.

Our presence, which directs through the use of the standards methods for the commercial industry, improves the marketing of U.S.

grain and oilseeds from our nation’s farms to the domestic and foreign buyers.

We carry out the important program under the authority of the

Grain Standards Act for most grains and oilseeds and the Agricultural Marketing Act for rices and processed grain products. Under

separate correspondence, the department will be submitting for

consideration by the Congress a draft bill to amend the United

States Grain Standards Act to reauthorize Grain Inspection, Packers and Stockyards. The current authorization expires at the end

of this fiscal year.

Today’s grain markets handle a greater diversity of grain quality

than ever before. We must be efficient for American agriculture to

remain competitive in the global market. The service we provide

through the grain program helps make this happen. We are addressing the grain quality concerns of our international customers.

We are establishing a biotech reference lab to improve the accuracy

and consistency of the biotech detection methods. We are improving

the efficiency and the quality of inspection in our weighing services

through automation. Finally, we are working with our trading partners around the world as they develop their own grain standards

and grading systems.

Our Packers and Stockyards Program provides financial protection, promotes a fair business practices and competitive marketing

environment for livestock, meat and poultry. Our programs guard

against deceptive and fraudulent practices affecting the marketing

of meat animals. To carry out this task, the Packers and Stockyards Program administers the P&S Act of 1921 and also carries

out the Secretary’s responsibilities under the Food Security Act of

1985, which permits states to establish central filing systems.

Packers and Stockyards personnel work continuously to respond

to the adapting conditions and changes in the dynamic and complex industry. Our reorganization of P&S programs will allow us to

better address the structural changes in the industry and the concentration issues with increased expertise. This will allow us to reduce our Washington staff from 28-percent of our total personnel

down to 18-percent and put those resources in the field.

Today we have 83 different investigations going on in our P&S

program, plus all of the other requirements we perform. Since reorganization, we have shifted our focus to procurement, increasing

the frequency and sophistication of our investigation and surveillance efforts to ensure that slaughtering packers are actively competing for slaughter requirements and not engaged in illegal trade

practices.

8

In addition, the Agency is conducting a semi-annual investigation

of hog slaughtering firms that use electronic evaluation devices as

part of their purchasing program to ensure that these devices are

used in a fair and accurate manner in determining the value for

producers.

Over the past 5-years since I have been administrator, we have

conducted over 9,300 investigations. We have found about a third

of those investigations were violations of the P&S Act. The largest

number of these were resolved by our personnel and formal action

was only taken on approximately 200 cases, resolving these decisions and orders against 290 individuals and firms for violating the

P&S Act, resulting in civil penalties and cease and desist provisions involving unfair trade practices and anti-competitive activities. Small and medium-sized producers have been the big beneficiary of these actions.

Structural changes in the livestock industry have challenged the

job of the Packers and Stockyards. High concentration, forward

sales agreements, production contracts, vertical integration have

raised major concerns about competition and trade practices in the

livestock and procurement by meat packers and poultry processors.

Concentration in the meat packing industry is relatively high

and has been growing. The four leading packers in 1978 increased

their share to 81-percent of the steer and heifer slaughter. The hog

slaughter in 1998 increased to 56-percent. In addition, both slaughter and production of livestock have become more concentrated in

the geographical regions.

A few of the present initiatives that we are involved in—this past

year we developed a rapid response team. That team has responded

to South Dakota and Missouri in July and September, to respond

to producers’ concerns about ensuring adherence to the P&S Act.

A new price discrimination law was passed in these states. Packers

reacted in a manner advised by their counsels. We were there; we

interviewed producers. We still have some inadequacies we feel

that need to be addressed. Also, a small rapid response team was

on the scene last week handling a poultry trust case in Nebraska

and Iowa.

We also have an initiative to develop a hog contract library

through monthly contract use reporting. This library will be housed

in the Des Moines, Iowa office. It is called for by the Mandatory

Livestock Reporting Act of 1999. USDA is establishing this library

of contracts by hog packers to producers for the purchase of hogs.

The department will collect and summarize information on the

number of hogs committed to the contract, and release this information in a public manner.

USDA filed a formal complaint against Excel, alleging that the

firm violated the Packers and Stockyards Act by failing to disclose

to producers a change in the calculation of the lean percent for

hogs purchased on a carcass merit basis. As a result of this change

in formula, Excel paid producers a lower price for hogs. The hearing is scheduled for February 29.

USDA also filed a formal complaint against Farmland National

Beef Packing, alleging that the company violated the P&S Act by

failing to make bids or purchase cattle from a small feedyard in

Central Kansas after the feedyard had published an article critical

9

of marketing alliance procurement procedures used by Farmland.

Farmland, we felt, is subject to unreasonable prejudice, disadvantage and retaliation against this feedyard.

Now I would like to discuss two legislative initiatives that would

enhance GIPSA’s ability to protect producers and growers. The first

legislative initiative would be to amend the Packers and Stockyards Act to establish a statutory dealer trust for the benefit of

livestock producers. USDA has drafted and submitted to Congress

a bill for review.

As you know, Mr. Chairman, this provision was included in the

1996 farm bill by your initiative but was blocked in the House during the conference committee.

Dealer failures represent a significant amount of unrecovered

losses in the livestock marketing chain. For fiscal years 1994

through 1998, dealer failures averaged fourteen per year in this

country. Amounts owed to livestock sellers averaged a little over $3

million per year. Of this amount, only 25-percent was recovered.

During the same period under the packer trust, nine packer failures resulted in a pay-out of close to $2 million from the packer

trust program and approximately a 95-percent recovery rate. A

dealer trust for cash sellers of livestock would minimize the losses

suffered by livestock producers because of dealer failure to pay.

Our second legislative initiative would be to amend the Packers

and Stockyards Act to grant USDA enforcement authority over contract poultry production. This proposed legislation was introduced

last year in the House by Representatives Kaptur and Emerson.

Under Section 202 of the Act, packers and live poultry dealers

are prohibited from various unfair, deceptive and unjustly discriminatory practices. A live poultry dealer is defined as a person engaged in the business of obtaining live poultry by purchase or

under a growing agreement for the purpose of slaughter or for sale

to others for slaughter.

Enforcement of Section 202 against a packer is accomplished

through an administrative proceeding before an administrative law

judge. Enforcement against a live poultry dealer can only be accomplished by referral to the U.S. Attorney’s Office and filing in a Federal court.

Section 203 of the Act, which deals with administrative enforcement, specifically refers to packers and not live poultry dealers. We

believe this regulation of the activities of live poultry dealers would

be more efficient if the Act was amended to provide for administrative authority. It is difficult for us to do the task and have the responsibility without the authority.

We look at approximately three-hundred poultry complaints a

year.

Thank you, Mr. Chairman, for allowing me to provide this oral

testimony.

[The prepared statement of Mr. Baker can be found in the appendix on page 80.]

The CHAIRMAN. Well, thank you very much, Mr. Baker, and

thank you for your specific legislative suggestions, which are important and which will certainly be a part of this hearing.

Mr. Dunn, it is good to have you back at the Committee. Would

you please proceed?

10

STATEMENT OF MICHAEL DUNN, UNDER SECRETARY FOR

MARKETING AND REGULATORY PROGRAMS, U.S. DEPARTMENT OF AGRICULTURE

Mr. DUNN. Thank you, Mr. Chairman. It is good to be here and

I appreciate the opportunity to briefly address you on the concerns.

I think what Senator Feingold outlined, the dramatic changes

that are taking place in the livestock sector, actually all of agriculture, the marketing chain, really does put a tremendous burden

on producers, the administration and members of Congress. I know

Senator Grassley and I were in Iowa listening to concerns of producers on concentration issues.

As Mr. Baker outlined, Packers and Stockyards is designed to

look at unfair trade practices and in some ways a bit of the concentration area, but we share—the majority of that is in the Department of Justice. Mr. Joel Klein, who heads up that division,

the Antitrust Division of Justice, has recently named Mr. Doug

Ross as his new assistant for the agricultural sector. We look forward to working closely with Justice in this particular area.

Let me outline just two more areas that the department is working in this arena. Mr. Chairman, Congress passed last year the

Livestock Mandatory Reporting Act and has asked us to implement

that. Under the Agriculture Marketing Service, we have put together a multi-agency task force to implement that. We are well on

our way to doing that. We hope to have by this summer operational

those price reporting regulations out and operational that Congress

has mandated.

A second area that the Ag Marketing Service is working on,

again working across the board in the department, is putting together a group to look at contracting because we hear over and

over again concerns by producers about contracts that they have

gotten into and what has happened in those contracts. We are really calling this a right-to-know initiative and we think this is extremely important.

Mr. Chairman, we appreciate this Committee taking this overall

look at the tools that the department has and the need for changes

in both legislation and regulation. We look forward to working with

you and the Committee. Thank you.

The CHAIRMAN. Thank you very much.

We have been joined by the distinguished senator from Idaho,

Senator Craig.

Let me begin the questioning and then I will ask my colleagues

in turn to join me in that.

Mr. Baker, you have made suggestions for legislation. Tell me, is

this in draft form and what sort of consultation have you had with

staff of either a Senate committee or House committee with regard

to reauthorization or the extended authorities that you seek?

Mr. BAKER. The reauthorization will be coming forward to you

from the department. In other words, it has cleared the department

and is ready to come forward to you.

The two bills are in draft form and they have been submitted.

Livestock dealer trust has been submitted already this past year to

you. Also, the administrative authority over poultry companies has

been submitted; it has been introduced in the House by CongressVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
11

woman Kaptur. So those two bills have already been submitted.

The reauthorization will be forwarded to you real shortly.

The CHAIRMAN. Now, the Congress last year, as you have cited,

the Mandatory Price Reporting. How are the guidelines for that or

the administration of that proceeding at this point? What can we

anticipate as we have oversight of how that is working out?

Mr. BAKER. Let me talk just a minute about our part of it because I have tried my best to keep our folks out of it. We have the

part about the contract library for hogs and that is clearing the department as we speak. We want to have a library of all contracts

offered by packers to producers. They will be on file in Des Moines

and it will be open to the public. We will have confidential restraints that we will hold confidential in it but we will release

those types of contracts to the public so they can keep better informed, according to this law. It was mandated under the Mandatory Price Reporting Law. That is part of it.

We will also secure the numbers of hogs that are under contract

that are expected to be marketed in the next 6-months and within

the next year and we will release those as we get them to the public. The purpose of this is to keep the public better informed. I

would like to see it and we have an initiative to try to get it extended into poultry and also into cattle. If you are going to do contracting, you ought to have to file it with somebody. There ought

to be some checks and balances about the contracts. I will let Mr.

Dunn——

The CHAIRMAN. Mr. Dunn, can you give a broader overview of

the rest of the department, how it is proceeding?

Mr. DUNN. Yes, Mr. Chairman. As I said earlier, we have convened a group down at the department to address the various provisions and we have broken it out to nine different sections, in essence, and I will go through quickly for you where we are on those

nine sections.

The CHAIRMAN. Very good.

Mr. DUNN. On the Livestock Marketing Report, which is the

major sections, 211 to 256, those are the ones that $4.7 million

were appropriated last year from the appropriators most of the provisions and those are the ones that we will have out and operational by this summer.

Sections 257, which is the retail purchase price reporting, the

Economic Research Service is working on that. They unfortunately

did not get appropriations and are looking for appropriations to be

able to implement that section.

Section 913(b) is the Export Marketing Report. We are working

with Foreign Agricultural Service on that and they were appropriated $50,000 to do that this last appropriation period, so they

are working on getting those out. We expect to have final OMB

clearance by mid–April on those.

Section 922, which is the export certification for meat and food

products, food safety and inspection service [FSIS]. They requested

$2 million for appropriations in fiscal 2000 for that. They did not

get that so unfortunately, we do not have the appropriations to go

forward on that.

Section 923, beef and cattle import data, APHIS is working with

FSIS on that. Although we were not budgeted any money, we think

12

that we can begin to put that together a program with the current

budgets.

Section 932, which is the improvement of the Hogs and Pigs Inventory Report, National Agricultural Statistics Service [NASS] is

working on that. They requested $500,000 for appropriation, did

not get that, so we will probably be seeking appropriations on that.

Section 932(a), which is barrow and gilt slaughter, FSIS again

requested a little over a million dollars for fiscal 2000 and was not

appropriated that money. They are ready and willing to get started

on that as soon as appropriations are made.

And Section 933—this is number eight of the nine—average trim

loss correlation studies and reports, the Agricultural Research

Service and Animal and Plant Health Inspection Service [APHIS]

are coordinating on that study and will get started on that.

Then finally, Section 934, Swine Market Contract Library, the

Grain Inspection, Packers and Stockyards is working on that and

Mr. Baker answered where he is on that earlier.

The CHAIRMAN. Well, I appreciate your parceling all this into

these parts but obviously, as you have cited, in at least four instances or maybe five, appropriations did not happen or they are

deficient and as a result, the entire Act situation is being frustrated, I would guess. We had the best of intentions here in Congress but, on the other hand, somehow communication with the appropriators, with the administration, just has not made it.

I do not want to try to make a broad editorial comment because

I know this has already been a subject of some distress at the department, as well as with those on this Committee, including myself, who strongly favor this legislation and turned heaven and

earth to get a consensus to do it and I am just wondering how

much of it is going to get done under what you are describing.

Mr. DUNN. Mr. Chairman, I thank you and all members of this

Committee that worked very hard assisting the administration on

appropriations in this effort.

This whole aspect of transparency in the price reporting seems

to be one of fundamental need out in the marketplace.

The CHAIRMAN. Yes.

Mr. DUNN. The producers’ need more price information. We have

zeroed in on the Livestock Marketing Report, what used to be voluntary market news, making that mandatory so that producers

have the same type of information that packers have. That, in our

consultation with livestock producers, is what they said was their

number one priority.

We did get the $4.7 million for that and we are going forward

with that and we will have that operational this summer. I believe

that will take off a lot of the pressure that we are getting for information out there. That seems to be the section that producers have

told us that they wanted to get out.

The CHAIRMAN. Well, let me just say I appreciate the specifics

because we are going to ask staff to work with you and with the

department and see if we cannot find where the money can be

found. This has proceeded on for weeks with reports of lack of appropriation or lack of activity and I suspect my colleagues on this

Committee join me in saying that one of the values of these oversight hearings is simply to find out where the chinks in the armor

13

are. I think we have identified some of them and you have pointed

out the priorities certainly of the Act and that clearly is true, but

the checkerboard pattern of activity is disturbing—to you, as well

as to us. So we really need to zero in on how we can get on with

it and I welcome that opportunity.

Mr. DUNN. What we will do, Mr. Chairman, is proceed on with

drafting of regulations, even though we do not have the resources

to do the implementation.

The CHAIRMAN. That would be a good idea. Let’s at least get the

department’s work in terms of rulemaking, the regulations, done,

quite apart from then the application in the field which, of course,

is increasingly urgent. When do you suppose that in the case of the $4.7 million, that

area of your activity, there will be some reports that will be available to producers? The second quarter of this year or what sort of

timetable do you see happening?

Mr. DUNN. On an optimistic schedule, second quarter of this year

we should be able to begin getting some of those reports out, but

I would hope that we would have it fully functional by this summer.

The CHAIRMAN. I see. Let me just ask one final question.

Anticipating the testimony we are about to hear from Professor

Paarlberg and Foster, they have written a paper that I think is remarkable, trying to take a look at the concentration that we are

all talking about today, but suggesting a remedy; that is a much

larger degree of cooperation, at least in the hog industry, among

producers. They make a suggestion in their paper that if we had

enough cooperation and a large enough cooperative of 300,000 to

500,000 head of livestock could be aggregated to affect one or 2

days of the market, that this might begin to bring in a different

sort of balance in terms of price-finding in the situation.

Now that has been hard to come by in the pork industry, with

many independent producers and many not really wishing to get

all that cooperative and, as a matter of fact, wanting to be very

independent.

I come from a tradition—there is no way you would know this

but my dad and my grandfather were livestock commission people.

We were a commission company for 40-years at the stockyards. It

was our bread and butter and that stockyard is just gone. It is a

sort of part of the restructuring and the evolution we are talking

about.

So it is different but the dilemma is also different in both degree,

as well as the intensity, and that is what has brought a great deal

of interest to this issue.

I just wonder if you have any comment generally about the cooperative movement, at least the extent that the professors have suggested as one remedy to the bargaining situation. Do either one of

you have a thought about that?

Mr. BAKER. I haven’t read the paper, so I cannot comment on it.

The CHAIRMAN. Very well.

Mr. DUNN. Certainly, Mr. Chairman, this is an area that the department has always advocated—Under Secretary Jill Long–

Thompson has worked very hard in this area in developing from

your home state the cooperative group and has worked with the

14

Small Farms Commission at the department to develop a concept

of cooperative marketing.

Again what we have found is a lot of the producers are very, very

good at production but they seem to begin to need further information when it comes to the marketing side of it. That is again why

we have put together a task force in the department to look at contracting and, as I termed it earlier, a right-to-know initiative so

that producers will have the department or somebody else to fall

back on to look at how you would go about contracting, how they

can maximize their return. And in many cases putting together

some type of alliances or cooperative operation seems to make a lot

of sense, to be able to maximize the return to producers.

The CHAIRMAN. The distinguished ranking member has arrived.

While you are sorting through your papers, let me call upon Senator Baucus.

Senator HARKIN. That sounds like a good idea.

The CHAIRMAN. Then you will be all ready, up to top speed.

Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Mr. Secretary, the Paarlberg piece—I just glanced at it—is quite

interesting and one cannot leave it without feeling quite strongly

that those authors at least think that there is a significant problem

and that concentration probably is resulting in downward pressure

on prices to producers. I think this is a hog study but my guess

is that it would apply to other livestock industries. There is not

much doubt in their minds. I do not want to put words in their

mouths but I got the feeling that they think it is significant and

it should be addressed, the problem.

They do say there are two ways to address it, and that is basic

antitrust breaking up and second is, as the Chairman suggested,

a lot more marketing power in the hands of producers. And we all

know both options have unique difficulties.

I am just trying to get a sense of how much the department

thinks it is the problem and how aggressively the department is

really working on this. Can you give me a feel about first, the degree to which you think this concentration is a significant enough

problem to warrant significant action? That is, producers, as a consequence of concentration, are paid lower prices for their product?

Again it is not the sole reason but do you think it is a major reason, sufficient enough to warrant doing something significant about

it?

My concern, Mr. Secretary, is that this issue has been around a

while and here it is, several years since it has been around. I know

a lot of producers are getting kind of frustrated. It’s the old thing,

a lot of talk. And I must be candid with you in saying that so far,

I hear a lot of talk from all the way around, both Congress, frankly,

and the administration, but I do not see a lot of action. Do you

think the problem is great enough to warrant action, significant action?

Mr. DUNN. Senator, any time we get down to $8 hogs, we have

a significant problem in rural America. And yes, we need to take

action.

Now when Senator Feingold was up here, I think he outlined the

problem that you have in determining what caused that low price.

15

Is concentration the major cause or is it a consequence? The whole

aspect of causality is something that we have got to have empirical

data on.

Senator BAUCUS. But we have had 3-years on this. You have

been looking at this question for 3-years. What is your gut guess?

Mr. DUNN. My gut guess?

Senator BAUCUS. Your gut guess.

Mr. DUNN. As Mike Dunn?

Senator BAUCUS. Mike Dunn.

Mr. DUNN. I think it contributes to it.

Senator BAUCUS. But is it a significant contribution, significant

enough to warrant significant action?

Mr. DUNN. I think it is significant enough that the Congress and

the administration need to work together to find out how can we

address this problem. So yes, it is significant.

Senator BAUCUS. Now, what about this study I just learned of?

It is by the Western Organization of Resource Councils. They submitted a petition asking GIPSA to participate in a rulemaking. The

comment period has run. As you know, the comments were fifteen

to one in favor of a petition for rulemaking to the Secretary, asking

that USDA use its authority under GIPSA to restrict the way packers use captive supplies. You know this is also peer-reviewed and

my understanding is the peer review agreed with the conclusion.

Now I hear that attorneys and economists at USDA are not convinced yet that the cause has been established. To be quite candid,

it sounds to me like a lot of timid, tepid, fearful people are afraid

they might make a decision, might be held accountable.

What standard of causality is the department asking for? Is it

the criminal standard of beyond a reasonable doubt? Is it the civil

standard of the preponderance of evidence? And I must ask a deeper question: why do you even have to prove cause? If it is your

judgment, as you just said, that it is a factor and it is a significant

factor, why not just proceed and perhaps proceed on a pilot basis

project if you are a little nervous about this. See what works; see

what does not work.

We have to do something here. When I saw this hearing scheduled I almost decided not to come. I thought it would be a waste

of time because there has been so much talk on this issue. But I

have a responsibility to keep on plugging away, keep trying. We

have two choices in life: try or do nothing, and I am still going to

keep trying to do something about this responsibly.

I did mean what I said about unintended consequences, but we

have to move, Mr. Secretary. We have to move and I am just asking you what we are going to do to move.

Mr. DUNN. Senator, let me address the Western Organization of

Research Council’s petition. What they have petitioned us to do is

change the way people can do marketing. It is a fundamental

change, saying that certain people would not have marketing rights

that they had before.

So this is really a major step and something that we felt we

needed to get a lot of comments on, we had to have good, strong

and careful data before we could go forward with that. We published that proposed regulation, that request for proposed regulation, and got comments on it. We had a peer review on a study and

16

the Secretary pledged to the Western Organization of Research

Council that he would not make a decision on that until he had

that peer review and then he had an opportunity to sit down with

them and go over that peer review.

We have contacted them even this last week to try to set up that

meeting, to sit down with them so that the Secretary can go over

that peer review with them and see what direction to go.

Senator BAUCUS. But do you feel you have enough authority

through the department to take sufficient action currently?

Mr. DUNN. With respect to——

Senator BAUCUS. With respect to the general question of concentration.

Mr. DUNN. On the area of concentration, Packers and Stockyards

is a very, very powerful law but it is not the Clayton Act and it

is not the Sherman Act.

Senator BAUCUS. We are told that neither the Clayton Act nor

the Sherman Act, as currently written, allow Justice to take any

action.

Mr. DUNN. I would have to defer to Justice.

Senator BAUCUS. No, they cannot prove collusion. Bigness itself

is not a sufficient reason for action under either act, according to

Justice. So they say they do not have the authority. And you are

saying what?

Mr. DUNN. We do not have the authority to act on concentration

issues. Justice has that authority.

Senator BAUCUS. They say they do not have it. Current law does

not allow them to proceed because they cannot ‘‘prove collusion.’’

They have not investigated as to whether they can prove it or not

but on surface examination, they feel they cannot prove it.

Mr. DUNN. I think that is one of the reasons why Mr. Klein proceeded the way he has, appointing an Assistant Attorney General

to assist him in that arena. We do have—we have signed just this

last year a memorandum of understanding with Justice so that we

can bring to bear all the resources that we have at the department

to assist them on doing that investigation. But at this time, if you

cannot prove the collusion is there, they cannot go forward.

If the Congress feels that we need to do some type of breaking

up, certainly you can mandate that we do that.

Senator BAUCUS. All I am saying is there has been a lot of talk

all the way around this thing and my gut feeling is that concentration is a very significant reason why, at least in some industries,

say in livestock, prices are low to producers—not the sole reason,

but a significant reason, and significant enough to warrant very

definite action. I just want you to keep working on this until we

find a way to do this in a fair way, responsibly.

There are a lot of values here, too. It is not just economics. It is

the values of open space, keeping farms in the family, the values

of small farms. And I think, frankly, it is in the interest of a lot

of packers to want to make sure that more producers are around,

ultimately. Maybe at this point, 2000, February 1, it might make

sense for them to keep squeezing more out of the producers but

pretty soon there is not going to be much left and I would urge

packers to work with producers to find some ultimate way to help

producers get more out of their efforts.

17

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Baucus.

Let me just say I did not want to interrupt——

Senator BAUCUS. I apologize for taking so long.

The CHAIRMAN. Well, they were good questions.

Let me say in fairness now to all senators, we have a five-minute

limit on the question round and that is going to be true for witnesses, so that we are able to hear from everybody and have the

proper questioning.

I am going to call now on Senator Craig, who arrived a while

back and has not had an opportunity to speak. Senator Craig?

STATEMENT OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM

IDAHO

Senator CRAIG. Mr. Chairman, I was here to listen and not to

speak. I think this is an issue that all of us are growing increasingly concerned about. I have been frustrated, as I think Senator

Baucus has expressed his opinions.

I come from a ranching background and when you see numbers

drop, historically you see the pattern of prices increase, and that

simply has not occurred out there, while it appears that packers

have made exceptionally large profits.

There is a concentration. I am not quite sure that the models

that we are using to look at the concentration give us a fair image

of what is current in the market. Those are old models and the

market is a new market. And that is going to be some of the responsibility of Congress, Mr. Chairman, and I must say I appreciate these kinds of hearings. I hope that they become increasingly

probative.

While certainly the marketplace can respond and I am going to

read the effort of these professors that are before us who analyze

and are making recommendations, that there are ways that the

market can respond, but they may need some assistance, and that

assistance probably has to come from the Congress of the United

States. So I thank you very much.

The CHAIRMAN. I thank the senator.

I will call now on Senator Harkin for his comments and questions.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, RANKING MEMBER, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

Senator HARKIN. Thank you, Mr. Chairman.

Well, count me among the previous two that are frustrated. I

must say, Mr. Chairman, I commend you for holding this hearing,

these comprehensive hearings on the Packers and Stockyards Administration and on GIPSA.

I sense the same kind of frustration among Iowa farmers, that

Senator Baucus and Senator Craig have just related. During the

recess period I spent a lot of time obviously out in Iowa, in the

Midwest, and this is an issue of tremendous concern. That is all

I hear, about the concentration that is happening in the livestock

industry.

18

Now having said that, I would say to my friend Senator Baucus,

George Bernard Shaw once left England and he spent the better

part of a year in New Zealand. He came back to England and someone asked the great playwright, ‘‘How did you like New Zealand?’’

He thought for a second and he said, ‘‘Well, all together, too many

sheep.’’

Senator BAUCUS. Why are you asking me that?

Senator HARKIN. The reason I say it is because——

Senator LEAHY. We are all waiting, Tom. We are all waiting.

Senator HARKIN. We just had too much of a supply, too many

hogs, and we had too many cattle and stuff like that. But the point

is we expect that to happen but while it is happening, when the

supply as big and the packers had the contracts out there, you see

this big shift in the structure.

So when we get back to a more even keel, we are going to find

ourselves in a whole different lay of the land than we ever had before, and that is what really bothers me, is that during a period

of time when we had low prices because of oversupply, we found

the industry moving to consolidate very rapidly in all parts of the

country.

I was just looking at some of the data there about how much we

have concentrated just since 1981. I think you find, I think in cattle it has gone up to about 80- some percent now and I think in

hogs it is about 56- or 60-percent, somewhere in that range right

now. It is not quite as bad in hogs as in cattle.

I guess you have to ask the question: is that per se bad? Well,

I think economic concentration per se is bad. It is just bad for the

economy. It is bad for any kind of competitive structures out there.

And it destroys any kind of initiative out there for younger people

to perhaps try innovation and try to do different things to become

even more efficient.

Again we have been talking about this. I have been on the Ag

Committee for twenty some years. We have been talking about

this—we talked about this in the 1980s and talked about it in the

early 1990s and we just keep talking about it, as Senator Baucus

said. We just keep talking about it and I just wonder if we are not

at a point here where it will be too late to do anything about it.

It will be a fact, a fait accompli, it will be done and there is not

anything that we are going to be able to do about restructuring at

that point in time.

Change is inevitable, in all facets of life and certainly in agriculture, and I do not mind changes, but changes that lead to lack

of competition and a structure of monopoly practices is not change

for the better. I just do not see in any that is going to be any kind

of change that helps our farmers and ranchers at all and helps us

in any way to be even competitive overseas.

So again, I am hopeful that we can think about changes that we

might make in the Packers and Stockyards Act, for example, to define what anti-competitive practices are under Packers and Stockyards. Do we know? Jim, I do not know. I understand that we do

not really have rules that really define what anti-competitive practices are under Packers and Stockyards Act.

Mr. BAKER. The way we define it is when it brings harm to other

people. In other words, when people have been harmed, it is antiVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
19

competitive. In other words, it has harm, a direct effect in the marketplace. That is how we define it.

Now I think most of the talk has been on antitrust up till now

and P&S—we yield to Justice on antitrust matters. We look at the

anti-competitive measures and Senator Harkin, we bring several

cases on anti-competitive matters. You know, turn-taking, this type

of thing is a violation that we bring. Failure to compete.

Senator HARKIN. Well, I will say one thing has happened. I guess

Mr. Klein has put someone in the Department of Justice that is focussed just on agriculture. Is that person in place yet?

Mr. BAKER. Yes. He is here now.

Senator HARKIN. That is good. Is he coming up here?

The CHAIRMAN. Not today.

Senator HARKIN. We have to ask him what he is doing.

Lastly, I understand that there was a proposal put forward,

shifting from livestock now to grain, there was a proposal put forward last year by USDA that would offer interest subsidies to export elevators desiring to install cleaning equipment as an effort to

encourage shipment of cleaner grain overseas.

I want to know more about that proposal. Mr. Chairman, I think

that is something we ought to look at. Obviously, one of the things

that can affect the price of an export is to convince buyers that our

product is higher in quality than our competition. So I think we

ought to look at this very carefully and I think it has a lot of merit

to it. Are you still pushing that idea?

Mr. BAKER. Yes, Sir, but Dave Shipman is with me and he addressed the industry last week. Let him tell you where the industry

is coming from and a little bit about the grain cleaning, what our

update is briefly.

Mr. SHIPMAN. On November 29 the department published in the

Federal Register a proposal to use some Commodity Credit Corporation [CCC] funds to help fund cleaning at export facilities. And

just last Friday, on January 28, we had a public hearing at the department where we had importers from Latin America and Africa

come and talk to us. We had producer groups come and talk and

present their opinions on it and we also had a number of exporters,

those from the Pacific Northwest that have already invested in

cleaners and some representing the Gulf Coast area where they

have not.

There was really a great deal of contradiction in the statements

that were made and we are now kind of filtering through all of

that. We will be meeting with Tim Galvin in Foreign Agricultural

Service [FAS] later this week to further talk about the issue.

In general, I think the exporters and the grain industry at large

expressed concern about government intervention, that the market

economics should drive the installation of cleaners. That is what occurred out in the Pacific Northwest. There was a large enough demand coming from the Pacific Rim for cleaner product and the

market responded and made those investments.

They do not feel they have seen that large enough demand yet

in the Gulf Coast, so there was concern expressed about letting the

market——

Senator HARKIN. I see that they do not complain when we promote Public Law 480. They do not complain about that. They do

20

not complain about the Market Assistance Program. I mean why

would they be complaining about this as some interference in the

market? That went right by me. I do not understand that one at

all.

Mr. SHIPMAN. And then the producer groups expressed other concerns.

Senator HARKIN. If they do not want to install the cleaning devices, the heck with them. We ought to look at offering them some

interest subsidies or something and if they want to do it, fine. If

they do not, let them go.

Mr. SHIPMAN. There is going to be further discussion in the department on it. One suggestion was made that we should be looking at changing the standards rather than offering financial incentives to make the change. So there is going to be further discussion

in the department later this week.

Senator HARKIN. Well, I do not know enough about it to comment

on that. I mean maybe that is the better way to go. I do not know,

but I think it is something we ought to take a look at.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Harkin.

Mr. Shipman, I read some of the testimony of that hearing and

you are correct that people were all over the place. Although I

would suggest Tim Galvin and others, I thought, conducted the

hearing in a very civil and temperate way, as is their custom, but

to say the least, that is one that will require a lot of resolution of

very interesting points of view.

Let me call now upon Senator Roberts, who has patiently waited

for an opportunity to intervene this morning.

STATEMENT OF HON. PAT ROBERTS, A U.S. SENATOR FROM

KANSAS

Senator ROBERTS. I do not know about intervening, Mr. Chairman. I want to thank you again for your leadership in holding this

hearing. We have heard a great deal of frustration. This might be

described, as opposed to an Ag Committee hearing, as a Frustration Caucus on this issue.

I apologize for being late. I apologize to the witnesses. As a matter of fact, I was meeting with the Kansas Hospital Association and

one of their comments was that we have to really worry about the

issue of concentration and closing down rural hospitals in regard

to regional hospitals. I said, ‘‘It is really ironic; I am going to a

hearing on concentration on agriculture and we have it all across

the economy in our society.’’

And thank you for holding the hearing, Mr. Chairman. You are

right on top of it, as usual.

I think rather than simply read my statement, there are just a

couple of highlights here.

Obviously people are extremely fearful and very frustrated. We

have extremely low prices, a strong dollar, a collapsed foreign market due to what we call the Asian flu, but that is true in a lot of

areas of the country. So we should expect, when we are going

through this, that this long-time problem that has been described

by Senator Harkin would become a matter of real concern and fear.

21

I know the Clinton administration has announced that a special

position has been created within the Department of Justice to deal

with mergers and anti-trust issues. I apologize for not doing my

homework. Who is that?

Mr. DUNN. Doug Ross is his name.

Senator ROBERTS. I am sorry?

Mr. DUNN. Mr. Ross.

Senator ROBERTS. Is Mr. Ross here?

Mr. ROSS. Yes, Senator. I am Douglas Ross.

Senator ROBERTS. So you are the guy. Welcome.

Mr. ROSS. Thank you, Sir.

Senator ROBERTS. I guess condolences or something. I think that

is a very important move and we look forward to working with you.

I would like to make just a couple of points, Mr. Chairman, and

that is that we are going to have to work with the Judiciary Committee. The Ag Committee really does not have the primary jurisdiction but we have the keen interest, it is our people involved, but

it seems to me we have a lot of frustration but not much expertise.

We all know we want to do something but we are not quite sure

what it is and you do not want to make it counterproductive. You

know, beware of the law of unintended effects. I am sure that Senator Baucus did address that.

Just a couple of questions. Do mergers actually reduce the producers’ marketing options and reduce their ability to obtain a fair

price? You ask that question out in Kansas and the answer is going

to be what—80, 85, 90, maybe 100-percent yes.

If we block or place a moratorium on mergers, will it hinder or

eliminate, however, the ability of U.S. companies to compete in the

world marketplace? Is this beneficial to our producers? If we block

all mergers, are we actually limiting the producers’ ability to compete in the marketplace?

Everybody on this Committee as long as I can remember has told

producers they need to participate in value-added agriculture. Will

moratoriums keep this from taking place? Or can you devise a law

that would exempt those kinds of things? I do not know.

Four Western Kansas farmer-owned cooperatives joined with

Cargill late last week to announce they have come together to form

a joint company that would allow them to ship their grain more efficiently and return higher profits to producers. How will legislation affect that?

Same thing in regard to livestock with U.S. premium beef in

Kansas.

You know, these are questions that we should not take lightly.

And then this is not only in agriculture. We have it in banking,

energy, and technology, as well, so I think we have to take that

into consideration.

Now I have publicly stated several times that if the administration, the Department of Justice and the Department of Agriculture

and the Congress really believe that new legislation is needed or

certain areas need to be addressed, that the administration and the

Department of Justice and the USDA should put us on notice and

provide us with the necessary input and guidance, put something

on the table, and I know you are trying to do that and I know you

discussed that with your testimony.

22

But Mr. Chairman, like Senator Harkin has indicated, this is a

very big problem and if we do not act, states will. The state legislature of Kansas is considering a package of bills determined as a result of independent and bipartisan hearings of people who went

around themselves, members of the state legislature, on the merger

question and the concentration question. And Kansas could act. I

am not sure what they are going to do.

But we have a lot of laws on the books here that deal with national issues and state issues and I remember all of our efforts to

provide uniform tolerance in the food safety arena. Otherwise, you

end up with a hodgepodge. You know, Iowa is going to pass a bill

and Kansas is going to pass a bill, South Dakota is going to pass

a bill. Illinois may not pass a bill. That is going to be terribly counterproductive.

So it seems to me that we ought to get some degree of cooperation and understanding on where we are going to go. And with all

due respect, I do think that first starts with the administration in

regard to what you would like to see in terms of legislation, and

I will stop at that point. My time has run out. Thank you for the

hearing. I am interested in the testimony.

The CHAIRMAN. Thank you very much, Senator Roberts. You

make a good point with regard to state activity. Kansas is not

unique in that respect and clearly our need for a colloquy with the

administration on its organizational attempts is imperative.

Do you have a further comment on that?

Mr. DUNN. Yes, Mr. Chairman, because I, too, am concerned

about this hodgepodge that is going on. We at the department have

contacted the National Association of State Directors of Agriculture

and have talked to attorneys general and we are going to commence having a series of meetings with them. These will be working sessions designed to discuss what state legislation exists versus

Federal legislation—where we are, where we see cracks and where

is the safety net not buoyed up.

So I think you have hit on a major concern of ours, that we are

getting these hodgepodges of state legislation and it is going to be

very, very hard to coordinate commerce with that type of quilt

blanket throughout the Nation. So we will be working very closely

on that, Senator Roberts. That is a good something.

The CHAIRMAN. Thank you very much.

Introducing our next questioner I would comment, as a point of

history, this is the first hearing of the Committee in the year 2000

and it is appropriate that the gentleman whose picture appears on

the wall in the corner is here. Many of you have not attended a

hearing before should note that this is one and the same with the

senator who is here. It is, in fact, still a very good likeness, Senator

Leahy. It is intimidating. Senators should look at that portrait. We

are grateful you are here, as always, Pat.

Senator CONRAD. Mr. Chairman, might I just inquire, is there

any chance we could have a vote in the Committee on whether that

picture continues to hang there?

Senator LEAHY. No, no, no. It would require unanimous consent.

The CHAIRMAN. No vote.

23

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR

FROM VERMONT

Senator LEAHY. That is called the Dorian Gray memorial picture.

Mr. Chairman, I want to thank you. I have said before that one

of the great joys of being in the Senate is the friendship you have

always shown me from the day you came here to the Senate and

working together with you. The greatest honor I got was when you

took over as Chairman of the Committee and rammed through the

resolution to put that picture up there and to fend off the amendment to put numbers or a ‘‘Wanted’’ sign across the front.

When my daughter saw it she said, ‘‘Dad, looks good; who is it?’’

I said this is something that Senator Roberts and I were so happy

to finally have a portrait of somebody who knew how to comb their

hair around this place.

Senator ROBERTS. If the senator would yield——

Senator LEAHY. I knew that was a mistake right there when I

said it.

Senator ROBERTS. All of us in the follically challenged caucus do

appreciate the honor that has been bestowed upon you and if you

would care to go over to 1302 in the sometimes powerful House Agriculture Committee, you will see that they hang people over there,

as well.

Senator LEAHY. Not only have I been there but I have a copy of

a beautiful program they had of that in my daily journal archives,

with your portrait.

Senator ROBERTS. Bless your heart, Sir.

Senator LEAHY. I could use it.

I will just be very brief, Mr. Chairman. I said last year that I

worry that our farmers and ranchers are too often at the mercy of

a new kind of robber baron, the agricultural conglomerates who can

do a sort of take-it-or-leave it offer to most producers. I said I really

want to have more competition or the ability of more competition

if we are going to have a healthy farm economy.

And I want to work with you, Mr. Chairman, and with Senator

Harkin to see if we can get a comprehensive bill to increase competition to protect these family-sized farmers and ranchers from

unfair competition from conglomerates.

I am sorry that another committee takes me out of here but not

only will my staff be here but I will be looking at this transcript

and I will submit questions for the record because we have this

case where the agribusinesses are enjoying record profits as they

become more concentrated, but agricultural producers in most

states are suffering severe economic depression with no end in

sight.

When we met last year I said it was the agricultural movement

in the late 1800s that played a pivotal role in the passage of the

Sherman Anti–Trust Act and many farmers today face the problems of these gigantic conglomerates.

I remember reading in law school when I went back what Judge

Learned Hand said in the Alcoa case. ‘‘It is possible because of its

indirect social and moral effect to prefer a system of small producers, each dependent for success upon his own skill and character,

to one in which a great mass of those engaged must accept the direction of the few.’’

24

So Mr. Secretary, we may want to be looking at ways to get more

power to you to act against unfair or unjust or deceptive business

practices.

We have had agricultural trusts before. In the 1800s American

Sugar controlled 85-percent of America’s sugar refinery. Standard

Oil, of course, had 90-percent of our oil production. There were cotton oil trusts, sugar trusts, linseed oil trusts. There was even a

whiskey trust. I am not sure, but then the Irish showed they could

produce better whiskey in Ireland.

And I would leave this question for you, Secretary Dunn. Suissa

Foods of Texas, I understand, has bought about 70-percent of the

formerly independent dairies in New England and had a buying

spree in other parts of the country. And I know that the Justice

Department was worried about the problem that might cause, especially such things as the School Lunch Program, which affects us

in all parts of the country.

Would you have your office put together a report on the Suissa

acquisitions in the last 5-years, the markets affected, the volume

of milk affected? I am concerned about what that might do to

school lunches and just regular consumer costs, and if you could do

that, Mr. Dunn, and get it to me, I would appreciate it.

Mr. DUNN. Yes, Senator, we will do that for you.

Senator LEAHY. And thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Leahy.

Senator Fitzgerald.

STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR

FROM ILLINOIS

Senator FITZGERALD. Thank you, Mr. Chairman. If I could ask

for unanimous consent to submit my statement for the record, I

would appreciate it.

The CHAIRMAN. So ordered.

Senator FITZGERALD. Thank you.

I have long felt that cooperatives were a great way for farmers

to try and retain more of the value of their products at the farm

level. I am wondering, do you have any statistics on, say, what percentage of farmers in this country would be involved in a cooperative? Would anybody on the panel know that?

Mr. DUNN. Earlier Senator Feingold talked a little bit about the

number that the Dairy Farmers of America dairy coop had, but we

can get that for you, Senator Fitzgerald, and we will supply that

information of how much goes through coops.

Senator FITZGERALD. I would be interested in that.

The other question I guess I would have is does the USDA have

programs in place that would foster more use of the cooperatives

or help cooperatives along? Are there any policies in place along

that line?

Mr. DUNN. Yes, Senator. Under rural development, Under Secretary Jill–Long Thompson has a division, Cooperative Development Division, that works in that arena. It works very closely with

the rural business development group and they work very closely

throughout the department with Ag Marketing Service that is

under marketing and regulatory programs, as well.

25

Senator FITZGERALD. On a slightly different topic, has the department undertaken any activities to prepare for the challenges

that are going to be arising with the new biotech crop marketing

now that the farmers are being called in some cases to separate

their crops and the like?

Mr. DUNN. Yes, Sir. We had requested in our appropriation this

year appropriations to set up a reference lab in both Ag Marketing

Service and a reference lab in Grain Inspection, Packers and Stockyards, and I will ask Mr. Shipman to answer specifically. We did

get the funding for Grain Inspection, Packers and Stockyards; we

did not get it for Ag Marketing Service, which would primarily look

at fruits, vegetables, tomatoes and those things. But we did get it

in the grain sector and I will ask Mr. Shipman to address that for

you.

Mr. SHIPMAN. What we see in the marketplace is that we are

starting to see more and more testing occurring to differentiate between conventional crop and biotechnology crop. So there was concerns about the accuracy and consistency of some of those results.

We have decided that we are going to establish a reference lab

at our Kansas City facility. We are in the process of doing that

right now. We hope to have that operational—our plans are to have

it operational before the next corn and soybean crop. So we hope

to have it operational in July-August time frame.

The idea there is to be able to verify and validate the testing

technologies that are being used in the commercial market right

now to distinguish conventional from biotech crops.

That is our initial phase. We are working very closely with the

life science companies. We actually have a workshop February 24

in Kansas City where we have folks from Europe coming over, as

well as all the life science companies and the producer groups, to

talk about how we will go about actually verifying the performance

of these technologies and how best that we do it so that there is

confidence in that lab.

Senator FITZGERALD. Thank you.

Thank you, Mr. Chairman.

[The prepared statement of Senator Fitzgerald can be found in

the appendix on page 92.]

The CHAIRMAN. Thank you very much, Senator Fitzgerald.

Let me just follow up quickly on that. Does GIPSA have enough

authority to handle the standards problems here? You may and you

are obviously heading into laboratories that are very constructive

but as we are thinking through the authority problem and authorization, is this a new ball game and is there some additional authority that is required? Does anybody have a feeling about that?

Mr. SHIPMAN. We currently have the authority to do what we believe is necessary at this time. One of the biggest challenges we see

facing us is that through biotechnology, you are going to see so

many more crops with high value attributes and we need to be

ready to prepare and provide the testing and standardization for

those new attributes, so when farmers bring them to market, they

can have true transparent value assessed on that.

So yes, we have the current authority to carry out what we think

is needed.

26

The CHAIRMAN. Is there some likewise cooperation, say with the

Food and Drug Administration and maybe others? For example,

claims are going to be made that certain products have Vitamin A

or Vitamin C or various other vitamins. In other words, up to this

point, as we have heard in testimony, we have been looking at it

from the producer’s standpoint, whether the genetic change killed

the weeds and not the corn. But now, in a confirmative way, a consumer product offensive is moving that way.

Now obviously your tests are not in that area, I suspect, as to

the efficacy of whether the claims are true or whether the genetic

change led to the additional nutrients, for example, but how does

this work with what you are taking a look at in your laboratories,

as opposed to what FDA or someone else may day?

Mr. SHIPMAN. We have not been talking directly with FDA on

that, where that goes, but in terms of whether it is a certain type

of oil product, oil constituent within the soybeans, or whether it is

the Vitamin A in the rice or something of that nature, we do expect

to be moving down the road where we would be able to identify

whether that particular attribute exists in the product.

The CHAIRMAN. You would be able to do that?

Mr. SHIPMAN. Yes.

The CHAIRMAN. I see. Well, that is very important.

Mr. DUNN. Mr. Chairman, I think in the future the nutriceutical

and pharmaceutical properties of these events that take place are

going to become more and more important. As you are aware, the

Secretary is just in the process of naming an advisory committee,

Biotech Advisory Committee, to assist him to look at all of these

questions and try to crystal ball-gaze a little bit to see what is coming down the road and how do we have prepare for that for the future because frankly, we are not there yet.

The CHAIRMAN. No, and we are being overwhelmed. The war is

on and we are just gearing up for it. So I stress the urgency and

applaud what the Secretary is doing.

Senator Conrad?

STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM

NORTH DAKOTA

Senator CONRAD. Thank you, Mr. Chairman, and thank you for

having this hearing and thanks to the witnesses.

Sunday afternoon I was in Manville, North Dakota for a meeting

with farm families and I think it is fair to describe them as dispirited, disheartened, very anxious about what the future holds,

and wondering when there is going to be a response to change longterm farm policy because I can tell you, they believe that this policy is not working.

We continue to be hit by what I call the triple whammy of bad

prices, bad weather and bad policy. We cannot do much about the

weather but we can sure do something about the policy.

I notice this morning, Chairman Lugar, that you urged President

Clinton to push Europe on agricultural products in the National

Journal’s Congress Daily and that you had mentioned my bill and

indicated that I had introduced a bill to require the United States

to match EU agricultural export subsidies. It says here ‘‘Lugar said

he thinks the issue of U.S.–European agricultural relations should

27

be dealt with ’more in terms of NATO.’’’ I think that is pretty close

to an endorsement of my bill.

The CHAIRMAN. Not necessarily. That may be a little bit of a

stretch.

Senator CONRAD. That is the way I read it.

Senator ROBERTS. Senator, does that mean we bomb Brussels?

Senator CONRAD. I do not know exactly what Senator Lugar had

in mind.

The CHAIRMAN. We’ll have another hearing on that.

Senator CONRAD. I tell you, my own conclusion, after being in Seattle, is that it is very clear to me we have to have leverage to be

successful in negotiations. We do not have any leverage with our

current farm program.

I asked this group yesterday if the Russians had fifty-thousand

tanks and we had ten-thousand tanks, would the first move of the

United States Congress be to cut our tanks in half? Would we go

to five-thousand tanks? Because that is exactly what we did in agriculture policy in the last farm bill. They are spending $50 billion

a year to support their producers; we are spending $10 billion. And

under that budget part of the farm bill, we cut our support in half

on the interesting notion that if we just set a good example, the

Europeans would follow suit.

Well, they have not followed suit. They are not going to follow

suit. And I believe it is time for a vigorous response by the United

States. I think we have to rearm if we expect to be successful.

So I wanted to say that to you and this whole question that is

before us in this hearing on concentration is very much on the

minds of the people that I represent in this meeting yesterday.

We have talked before about concentration in the livestock sector, that under the HHI index, which rates concentration, in livestock in 1996, the last year that we have full figures, was one-thousand-nine-hundred-thirty-five on the HHI index and eighteen-thousand is highly concentrated. So we see very serious concentration

in the livestock industry.

But we do not only see it in livestock. We also see it in grains,

and I want to just bring to the attention of my colleagues this chart

that looks at flour milling. This goes from 1973 to 1990 and you

can see the red represents the four largest companies and their

share. We have gone from the four companies, the four largest companies controlling 33-percent of the market to 58-percent in 1998,

and that is doing nothing but increase.

On this note I would like to say that from the viewpoint of agricultural producers, we are talking about the problem of monopsony,

in which there are few buyers, rather than monopolies, in which

there are few sellers, and we see a very clear and disturbing example of monopsony power in the grain industry from the testimony

of the chief economist of USDA last year. And this chart shows

what he reported to us, that farm exports controlled by four

firms—we see in corn, 70-percent is controlled by the top four; in

soybeans, 62-percent; in wheat, 47-percent.

And control of regional export markets is even more concentrated, with these same four firms controlling 100-percent of

some commodities through specific ports. In the case of wheat, the

28

level is 86-percent through the Pacific Northwest and 81-percent

through the Great Lakes.

That leads me to my question very quickly. My understanding is

that the Secretary, the mandate in this area can be interpreted as

proactive, even preemptive, that the USDA has the power to intercede before damage occurs. I would be interested if you agree with

that interpretation and second, if you do, if you could describe for

the Committee any recent examples of this type of proactive and

preemptive action on the part of the Secretary and USDA.

Mr. BAKER. I am not aware of that with the P&S Act. We have

to prove—we have to have the fact that a harm was committed before we can take action. Now we guard against it and all but as

far as taking an action ahead of time, I am not aware of that.

Mr. DUNN. Senator, I think as you read Section 202 of Packers

and Stockyards, it does allude to any potential problems. However,

there has not been any case built up over the years, the 75-years

plus of this Act, where USDA has gone to court and said, ‘‘We are

going to take that proactive strike.’’

And, as a result of that, it is extremely difficult—it is impossible

for us to be able to go in and make a case that we are going to

do this because we think this is going to happen and we think that

this is going to be the result. There is no case study to be built

upon there.

In fact, we have had rulings from the court saying that we have

to show causality on things.

Let me just say that as I read the language, it does have a broad

mandate to the Secretary to take action. And I can understand

when it has not been done before, but I will tell you, as I look at

the concentration that is occurring, it is very clear to me that

harmful effects flow from this kind of concentration, that when you

have many sellers and few buyers, the ability to affect markets

grows exponentially with greater and greater concentration.

And I would just say I hope it is communicated back to the Secretary that I think you have a situation in which we ought to test

the envelope. We ought to go out there and take preemptive action

and let courts wrestle with this question as to whether or not there

has been this kind of grant of authority by the Congress of the

United States through the Secretary.

Obviously you would want to have very carefully made the case

that there is danger developing and that is occurring, but I really

think the Secretary, and I know that you do not have precedent for

this, but that the Secretary has substantial authority here that has

not been exercised.

The CHAIRMAN. Thank you very much, Senator Conrad.

Senator Roberts, I understand you have a couple of questions.

Senator ROBERTS. Yes. And if these questions have been asked

before, I apologize. I was late for the hearing.

Mike, can you tell me? We had an 18-month moratorium amendment introduced by Senator Wellstone in this session, or in the last

session. Did the administration take a position on that?

Mr. DUNN. No, we did not take a position. I do not believe we

were asked to.

Senator ROBERTS. Does the administration have a position on a

moratorium of that nature?

29

Mr. DUNN. Not at this time.

Senator ROBERTS. Do you plan to have one?

Mr. DUNN. If we are requested, we will.

Senator ROBERTS. Why don’t you do that? I am not sure that I

have the authority to request it but I think it would be helpful.

That amendment was defeated by a large margin but did not—I do

not mean to portend that, that would be the case if people could

be convinced that we would have the answer to the problem. That

is what I am saying.

What about the administration’s position?

Senator Daschle has a packer ownership bill and we have several

bills introduced on both sides of the aisle in regard to packer ownership. Has the administration taken a position on that?

Mr. DUNN. Not at this time. We have not.

Senator ROBERTS. I think that would be helpful if you could address—I am not saying you have to address that specific bill but

at least I think generically it would be helpful.

Are you thinking of proposing legislation in regard to mergers

and ownership from the standpoint of the administration, so we

would have something to work with, as well as some funding?

Mr. DUNN. That would be something that would come under the

jurisdiction of Justice. We would have to consult with them on that.

Senator ROBERTS. And then with Doug, you are going to be doing

that?

Mr. DUNN. That is correct.

Senator ROBERTS. OK, thank you, Mr. Chairman.

The CHAIRMAN. Let me just underline and ask on behalf of the

Committee, Secretary Dunn, that the administration give us a formal viewpoint on Senator Wellstone’s legislation and on Senator

Daschle’s legislation. These are both fairly well known legislative

vehicles and they have been mentioned in our hearing this morning

and it would be very helpful to have informed comment from the

administration on both of those bills.

I thank all three of you for helping us this morning, coming in

with your testimony and your responses.

The CHAIRMAN. At this point I would like to call upon our next

panel to come to the desk. That would include Dr. Philip Paarlberg

of Purdue University, West Lafayette, and Dr. Kenneth Foster of

Purdue University, West Lafayette, Indiana.

Would the Committee come to order so that we will all be able

to hear clearly the next witnesses?

Dr. PAARLBERG AND DR. Foster, it is a personal privilege to have

both of you here. You know of my admiration for your work. We

have cited it on other occasions prior to today. We are looking forward to hearing from you directly. Please proceed.

STATEMENT OF PHILIP PAARLBERG, PURDUE UNIVERSITY,

WEST LAFAYETTE, INDIANA

Dr. PAARLBERG. Thank you, Senator Lugar, members of the Committee. I would like to report with Dr. Foster, my colleague, on the

results of the staff paper done at Purdue University by a number

of us and I will report on the part that I did and Dr. Foster will

cover his area.

30

We have already heard this morning about the level of concentration in the industry, so I will not go back through that material.

You have heard the numbers. We mentioned the Herfindahl Index.

One of the advantages of a Herfindahl Index is that it can be used

to estimate the number of symmetric firms in an industry, and

what I mean by that is if all the firms are the same size, how many

would there be in that industry?

In the case of the hog slaughter industry, the symmetric firm

number for 1985 would be twenty-two, which is sufficiently large

to avoid distortions in pricing. By 1997, the last data that I have

for the hog packing industry, that had fallen to ten. Now, there is

no specific value with this index that says okay, now we have serious pricing problems, but once an industry gets down to about ten,

you begin to become concerned.

So what we did is we tried to construct a model that would illustrate how concentration might affect the hog price as the number

of packing firms increases and decreases, starting at the base value

of ten.

Now, because so much information that we needed to construct

this thing accurately was not available, we made a number of assumptions. What we did is we assumed that we had identical packing firms and varied these from one to twenty. The model then calculates how the markdown or price gap from a perfectly competitive hog price changes in response to changes in firm numbers.

This markdown represents the potential market power of packers

to pay less for the hog input than would have been the case under

perfect competition.

If there are twenty firms, which is a situation similar to the late

1980s, the price paid to producers for hogs is 95-percent of the perfectly competitive level. As the number of packers falls, the gap on

the price to farmers increases. At first that gap will remain small.

Starting from twenty firms, this firm number does not initially lead

to much larger markdowns. When you start at twenty and go to

fourteen instead, then the hog price is 90-percent of the competitive

level, instead of ninety-five at twenty.

When you go from fourteen to eight firms, the markdown goes

from 10-percent to 18-percent. Once the firm numbers drop below

about 5 in this type of model, the markdown increases sharply.

Now, as I said, the 1997 Herfindahl Index indicates an industry

of about 10 symmetric firms. The illustrative results show that in

a range of 8 to 10 equal sized firms, a critical transition between

the magnitude of the markdowns occurs. Below 8 firms, the

markdowns accelerate. Above 10 firms, the change in firm numbers

does not really affect the markdown very much.

In the case of the model used here, if the industry is presently

at eight to 10 firms, a policy designed to increase firm numbers

may be less critical than a policy designed to maintain firm numbers. In other words, it may be the concentration which has already

occurred has not pushed us very far below the competitive price,

but further concentration could have serious adverse consequences

for producers.

Now, one of the things that you need in this is to know the precise shape and location of this relationship. Unfortunately, the one

we have can only serve as an illustration because critical pieces of

31

the puzzle are missing. We made assumptions which may incompletely reflect the hog and pork sector, and these pieces have to be

inserted into the analysis to accurately analyze the consequences

of increased or decreased packer concentration. With additional

data, it will be possible to narrow the uncertainty of what is occurring and providing that analysis should be a high priority.

In summary, we are witnessing the industrialization of agriculture. These structural changes have been pronounced in the

pork sector and raise important questions about the competitiveness of both the product and input markets.

There is evidence of increased concentration to the point where

public vigilance is warranted. Concentration indexes are high and

may be reaching a point where markdown pricing on hogs could be

significant. It is important for us to have the required information

to do this analysis as soon as possible to properly assess where we

are in this respect. Thank you.

[The prepared statement of Dr. Paarlberg can be found in the appendix on page 94.]

The CHAIRMAN. Thank you very much, Dr. Paarlberg.

Dr. Foster?

STATEMENT OF KENNETH FOSTER, PURDUE UNIVERSITY,

WEST LAFAYETTE, INDIANA

Dr. FOSTER. Chairman Lugar and members of the Committee,

Dr. Paarlberg has shown that greater consolidation in the

meatpacking industry could lead to lower live animal prices paid

to farmers. Likewise, increased captured supplies, via vertical integration and/or contracting, have the potential to lower prices on average and increase the variability of prices.

This is especially true for those producers who are not a part of

the captured supply chain.

Packers are motivated to coordinate their supply of live animals

by the large fixed costs associated with slaughter plants and the

large transactions cost of purchasing large numbers of animals on

a daily basis. In order to reduce their cost per unit of wholesale

meat, packers need to slaughter as many animals as possible. For

modern plants, this means thousands of animals each day. The risk

of coming up short motivates the use of company-owned animals

and contracted purchases to ensure that the appropriate quantity

and quality of animals arrive as needed. With captured supplies,

transaction costs are also reduced by not having to haggle over the

price of each individual load of animals.

Logically, packers attempt to capture the highest quality animals

via contracts and vertical integration. This leaves the lower-quality

animals to establish prices in the open market. Because payment

schemes for most of the packer contracted animals are based either

on a market price, a spot market price, or the Chicago Mercantile

Futures price, substantial vertical coordination may create a downward bias in the prices received by many livestock producers.

Mitigating these downward biases in live animal prices will not

be an easy task. The strongest public policy instrument is antitrust. Clearly, breaking up the larger packers would help mitigate

markdown pricing due to concentration if it exists. However, sound

economic rationale, unassociated with market power, could be motiVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
32

vating contracting, vertical integration, and concentration. If the

societal benefits of these rationale exceed the costs of markdown

pricing, then the antitrust approach would not be justified.

It is my opinion that alternative public policies do exist that

could offset the price impacts of these business structures without

completely foregoing their benefits. The focus of these policies

would be on increasing the bargaining power of pork producers.

Unfortunately, the livestock producing community has little experience and expertise in using these alternatives and will likely need

public policies and assistance to get them functioning.

Cooperative production and marketing appear to be possible

ways to offset the impacts of consolidation and integration in today’s pork industry. Any strategy that places livestock producers in

a more symmetric bargaining position with packers will make it

more difficult for packers to exploit prices or contract terms. It

should be also more difficult for a packer to terminate a contract

or to force less favorable terms on the producer community. The

packer, in need of animals to fill a daily kill, will be compelled to

negotiate a more competitive price if producer power is increased.

A competitive cooperative scheme would require a sizable network of today’s large, independent producers. Forming such networks or cooperatives must be nurtured by public policy. Our research at Purdue has demonstrated that there are a variety of

ways to structure these entities that may also allow the producers

to capture cost reductions and gain access to new and possibly proprietary technologies.

Tax incentives or deductions for members of these production

and marketing networks could provide incentives not only for producers to enter such arrangements, but such policies could also be

fashioned to provide disincentives for producers to break away from

the group in an effort to capture short-term gains. Current exemption from antitrust constraints provides some benefit for cooperative formation. However, undercapitalization is the most common

cause of failure among new cooperative ventures.

The approach needed by such groups is fundamentally different

from the traditional livestock marketing cooperatives of the past.

In the past, farmers independently produced the animal type of

their choice and marketed them on the day of their choice to various markets.

If the cooperative alliances of the future are to increase the bargaining power of producers, then the production systems of the cooperating farmers must be coordinated. Coordinated production

will allow the group to provide a steady supply of hogs of a uniform

quality to a single packer. This supply chain must be closely managed to deliver a large number of animals on a daily basis because

fluctuation in supply is not attractive to packers and reduces producer leverage.

Marketing orders provide another possible avenue. I will not go

into great detail about those. In my written testimony there is

some more detail. Marketing orders have been used in several agricultural commodities where producer bargaining power is or has

been a concern.

In summary, two major policy options are antitrust activity on

the one hand and nurturing increased market power of pork proVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
33

ducers on the other hand. With current knowledge, we cannot recommend breaking up existing packer concentration. Such actions

can be extremely contentious and may be contrary to society’s best

interest. However, public policy can assist producers in gaining

countervailing market power.

Finally, caution should be exercised against blanket condemnation of strategies adopted by packers or producers that enable them

to compete successfully in an increasingly international marketplace.

I would like to thank the Chairman and the Committee for inviting us here to give our opinion.

[The prepared statement of Dr. Foster can be found in the appendix on page 99.]

The CHAIRMAN. Well, we thank both of you for your paper and

for your testimony.

First of all, Dr. Paarlberg, in the model you have established, you

pointed out that you had a lot of data, but some information was

not available to you. Is this still a work in process? In other words,

as you take a look at this concentration, what you are saying is

very specific, as I understand it. If you get to fourteen symmetric

firms, the producer might get 90-percent of the price that he would

have gotten in the old days when you had a whole galaxy of them.

So already you have some reduction of the prospect for producers, even at the level of fourteen, but now you are pointing out that

we have progressed to a level roughly of 10 on your model, which

is above 8, where the discount is 18-percent and falls abruptly after

that. But, of course, although it is lower than ninety, somewhere

between an eighty-two and a 90-percent of the regular price or

what it used to be may be a 10 to 15-percent discount or so already.

This is the first time that I have heard theoretical economics try

to quantify this. In other words, in the past, people have come to

our Committee and they talk justifiably about the hurt that is involved, but the ability to put a percentage on it and to identify this

with a specific amount of concentration is quite a contribution. This

is why I am wondering whether your model continues to grow with

more nourishment of fact and data or how would you describe this

process?

Dr. PAARLBERG. This was just an early, a first, quick pass at the

question. What we have done now is to go back and do a number

of things. One is we have tried to—this held the price of pork constant. So it implicitly assumed there was no cost to consumers one

way or the other. So we have now introduced some price responsiveness.

We have tried to look at the economies of scale question. Someone says you know, you could benefit because as these packers get

large, they are able to drive unit costs down, so that could be a

positive sign, and we are attempting to integrate that into the process.

This simple little model did not look at the contracting issue, vertical linkages, so consequently, we have tried to introduce to markets two types of hogs. Basically, one would be an integrated hog,

coordinated hog, and one would be an independent. We are also

34

trying to do this over time and look at a sequence of twenty quarters and how the model evolves.

So it is an ongoing process and at this point it just needs more

validation to make sure that it is reasonable.

But again what I find is we do not really know a whole lot about

economies of scale for the packing industry. We suspect they are

there, but we do not have a lot of hard information. The computer

requires a number, so that is where we are going with this.

The CHAIRMAN. Will you be making periodic reports to the rest

of the world to bring us up to speed?

Dr. PAARLBERG. I think our department has that plan, yes.

The CHAIRMAN. Great. Well now, you have demonstrated, even if

inexactly, that concentration probably has an effect upon producers. As you say, in one new recent part of the model, you hold the

consumer situation constant.

Dr. PAARLBERG. Right.

The CHAIRMAN. So that implies that you are now talking about

how the pie is divided between, say, the packers and the hog farmer out there if the consumer is sort of held harmless in this process

and you are finding that the returns for the producer are lower.

Dr. PAARLBERG. Yes.

The CHAIRMAN. Now then the question that Dr. Foster addresses—well, both of you do in your paper—is what do you do about

it? You know, the data that you are presenting are very important

so that this idea of unintended consequences does not jeopardize

the exercise. This is why, as I gather, you say if you come to a certain point, antitrust may not be the best tool. You do not rule it

out but given the level of concentration in the hog industry, at

least, it may be more of a bargaining position by these producers

if they could cooperate with each other.

And, as you have pointed out in your paper, in the past they

have not cooperated all that well, so you are suggesting maybe

public policy, tax incentives to get people together, or even disincentives if they fall apart, which is another question altogether,

I suspect. But if they do get together, then somehow they enter into

this arena of bargaining with the packers and they do better on behalf of hog farmers generally because they have that much control

over supply and so forth.

What sort of reaction have you had from hog farmers to that?

Have you tested this out with people who are in the field and what

do they think about it? Do they want to cooperate? Do they understand why they might be advantaged by doing that? What sort of

feedback do you have?

Dr. FOSTER. I guess that is pretty much directed at myself.

Frankly, my interest in this arose from the pork producers, not

from myself. I was motivated by individuals calling me, requesting

what sort of information that Purdue University or the land grant

universities might have about developing cooperative structures for

production systems and marketing.

We got involved in this originally a number of years ago when

we were examining the effects of various new technologies that

were arising in the pork industry and looking at efforts for small,

independent farms to gain access to those technologies from the

production point of view.

35

That work we have finished. It sat on the shelf for a number of

years and a year ago or so when prices became so low, the interested farmers and this sort of thing, from a marketing perspective,

started to creep back up, so we began to get interest.

I have worked with two different groups of producers in Indiana.

We are already forming cooperatives or limited liability corporations for group marketing and they seem to have very strong

groups, a large number of producers, what we would consider in Indiana medium to large-size operations, traditionally family farms.

So the mentality of the producer is changing a bit, or at least it

was changing. Now perhaps with higher prices, the concern will go

away and we will go back to the status quo. That is yet to be seen.

And that is one of the concerns that we tried to address in the

paper, is that there has to be some mechanism, when prices do rise

and individuals might be able, for the short term, to gain higher

prices marketing independently, that they do not abandon the network because the ability of the network to supply on a regular

basis is the crux of the matter. If they cannot do that, then their

bargaining power is limited.

The CHAIRMAN. Senator Roberts?

Senator ROBERTS. Pill, are you any relation to Don?

Dr. PAARLBERG. Yes, that is my uncle.

Senator ROBERTS. I could see some of the expertise that the family seems to have in giving us advice and counsel as we wade

through all of the challenges that we have.

Well, thank you for coming and thank you, Ken, as well.

Mr. Chairman, I feel compelled to say that if Dishot Carter had

not turned the wrong way, that Drew Breese would not have completed the pass on behalf of Purdue in the Alamo Bowl, but then

that is past history.

Dr. PAARLBERG. It was a good game, though.

Senator ROBERTS. It was a good game. We look forward to a rematch one of these days.

I think the Chairman has indicated something very important. If

you can somehow quantify the hurt or give us—I do not know if

it is possible to give us a formula or a set of figures that would help

trigger some alternatives, but you are certainly on the right track

and I give you a lot of credit in that regard.

Let me just ask you some pointed questions. If Indiana, and I am

not sure that this is the case but we have different farm groups in

Kansas and, for that matter, all around the country discussing the

possibility of both moratoriums on mergers and a ban on packer

ownership.

What would you advise if the Indiana legislature were to suggest

that or, for that matter, what would you advise the Congress? First

on the moratorium, on an 18-month moratorium on mergers, what

would be your response?

Dr. PAARLBERG. I think to some extent I would first want to

know what we mean by the merger. There is a difference here.

What we are talking about is horizontal, packers buying packers,

not necessarily packers vertically integrating, because that is not

in the paper.

So what I would say is our work is suggesting that you are at

a critical point here where if you go down and have fewer and

36

fewer firms, fewer and fewer packers, that markdown is going to

increase and it is going to do so at an increasing rate.

So what we are saying in the paper is we think it is prudent to

evaluate where we are on holding the line at existing numbers.

Dr. FOSTER. Can I just interject?

Senator ROBERTS. You certainly can.

Dr. FOSTER. From the point of view of Indiana, we just finished

a statewide committee that looked into contracting issues for the

state. Basically our recommendation was for continued diligence

and education.

I think what we discovered was that anything that was done on

a state level could only harm our industry for the state, and experience in other states has borne that out. South Dakota implemented

a mandatory price reporting act. The day after that went into effect, essentially the spot market for cattle in the State of South Dakota disappeared because it required things like objective pricing

mechanisms.

So the individual who came to a fellow’s farm and evaluated on

visual appraisal the quality of a set of cattle and quoted a price,

that was no longer allowed. So at that point, individuals had to

load their animals up on trucks, haul them to market with basically no price discovery.

Senator ROBERTS. I think that is extremely important, Mr.

Chairman.

You mentioned tax incentives. I will find the paragraph here.

‘‘Tax incentives or deductions for members of production and marketing networks, corporations, cooperatives and alliances could provide incentives not only for producers to enter such arrangements,

but such policies could also be fashioned to provide disincentives

for producers to break away from the group in an effort to capture

short-term gains as a ’’free rider,‘‘ etc., etc..’’

We have an outfit in Kansas called U.S. Premium Beef. Your

comments in regard to group marketing I think were especially

pertinent.

I am not sure if I understand how these tax incentives would

work. I am not asking for a complete report here but could you sort

of help me out in this regard?

Dr. FOSTER. I am not sure I know exactly how they would work

either, Senator, but what we do know is that undercapitalization

is a primary problem that faces cooperatives approaches.

Senator ROBERTS. That is the key that I was getting at. But you

say that we should be considering some form of tax incentives to

answer that kind of a serious problem?

Dr. FOSTER. Ideally, that capitalization would come from producers. We might consider outside investors but after the past 24-

months in the hog industry, there are not many outside investors

interested in investing there.

So we have to do something to encourage—if, in fact, this is the

solution, somehow we have to encourage a large number of members because we are talking about huge numbers of animals really

to be able to affect any sort of symmetric bargaining power for producers. And to get those large numbers of individuals to align with

one another and stay aligned, it will probably take some sort of

economic incentive up front.

37

Senator ROBERTS. The other thing that you suggested was marketing orders, and I must say, Mr. Chairman, these are some innovative suggestions, as opposed to the ban on mergers and the ban

on owning livestock.

You say marketing orders are used in several agriculture markets where lack of producer bargaining power is a concern. We are

all familiar with out West in regard to the fruits and the vegetables and, more especially, with dairy. I am not too sure I want to

go down that road in regard to following the example of dairy.

Dr. FOSTER. I am not sure that I would, either. And realize that

when we put this paper together, we were trying to cover the bases

of policy alternatives, and that is why I think if you read the paper,

substantially less time and space is devoted to marketing orders.

Clearly there are some serious problems with marketing

orders——

Senator ROBERTS. Yes, there are 11 lines here. There are a number of lines more in your other suggestions.

Dr. FOSTER. That’s right.

Also realize that the Ag Marketing Act that allows for marketing

orders does not include pork, so it would take some significant

legislation——

Senator ROBERTS. Mr. Chairman, my time has expired. I really

want to thank these witnesses for maybe getting us beyond some

of the easier things to say in regard to this issue. And the thing

that I would like to underscore in regard to Ken’s testimony is he

says, ‘‘However, public policy can assist the producer in gaining

countervailing market power,’’ and that is a whole area that I

think we should explore as best we can and I thank the witnesses.

The CHAIRMAN. Well, I agree with the senator and that is why

I have encouraged updates as the model rolls on because more

data, more information may be available to us.

Senator Fitzgerald?

Senator FITZGERALD. Thank you, Mr. Chairman.

Dr. Foster, I was intrigued by what you said about encouraging

cooperatives, too, and I did want to follow up with some of the

questions Senator Roberts had. You said that undercapitalization

is the biggest problem for new coops.

Were you thinking when you mentioned the possibility of tax incentives to encourage the participation in coops, were you thinking

perhaps of somehow providing a tax deduction for the capital contribution?

Dr. FOSTER. Ideally, some sort of tax deduction or credit, yes, for

these individuals. We really had not thought that through in any

sort of detail, but some sort of economic incentive.

Senator FITZGERALD. It seems to me that there must be some

barrier that farmers are deterred by the large capital contribution

they have to make to join the coop, to buy their membership in the

coop. They may make it up in a few years but it is that up-front

cost that is deterring them.

Are there studies that show that after they are members of the

coop, that they are liable to do better, to get better prices and to

retain more of the value at their farm level?

Dr. FOSTER. I am not aware of any specific studies, but I think

in terms of individuals’ willingness to invest in these ventures,

38

there is a fair amount of uncertainty in terms of the success of

those ventures. So it becomes a capital investment decision under

uncertainty, which gets us into the issue that we do have the option to wait and invest later, and that option becomes quite valuable when there is significant uncertainty.

So I think basically we could price the option to invest in the

coop and that would give us some idea of what sort of tax incentive

would be required to get the typical individual to do that.

Senator FITZGERALD. What about the potential for maybe a loan

program to help people make their capital contribution to a coop?

Are there any such loan programs available now?

Dr. FOSTER. I would have to defer to the people from the Department of Agriculture.

Senator FITZGERALD. It was mentioned earlier, the Cooperative

Extension Service that the previous panel mentioned. What role do

you think that Cooperative Extension Service could play in providing technical assistance to farmers who are involved in cooperatives?

Dr. FOSTER. Let me clarify. I think what the previous witnesses

were referring to was the Coop Service within USDA, not the Cooperative Extension Service. So let me address both of those because

I think both play a role.

Senator FITZGERALD. OK.

Dr. FOSTER. The Coop Service at USDA currently is funding a cooperative agreement with myself and Dr. Joan Fulton at Purdue to

do research on the effectiveness or potential effectiveness of pork

producer coops, both from the production and the marketing perspective. So I think that they have a role in regard to funding research.

They have some excellent people in the field. I was at a meeting

with one of the groups that I have been working with in Indiana

and one of the field staff from USDA Coop Service was at that

meeting he is anincredibly skilled, experience individual with a lot

of potential to provide assistance, technical assistance to people

who are developing cooperatives.

Not all of those groups are interested in developing as cooperatives and I am not sure when we go beyond that business structure

that the Government provides sufficient assistance.

The Cooperative Extension Service, of course, is there but extremely overworked at the local level, so whether or not they have

the individual time to devote to this, I have my doubts.

Senator FITZGERALD. You are already researching this area.

Have you come across any statistics on what percentage of, say,

livestock producers would be involved in coops nationwide?

Dr. FOSTER. I do not have those statistics with me. Of course, it

varies greatly by industry. If you went to the dairy industry, it is

much higher.

Senator FITZGERALD. Eighty-four, 85-percent.

Dr. FOSTER. That is right. And if you go to the pork or beef industry, it is very near zero.

Senator FITZGERALD. Well, what has encouraged the formation of

the cooperatives in the dairy industry?

Dr. FOSTER. Well, quite a bit of it was favored by the marketing

order.

39

Senator FITZGERALD. Back in the 1930s.

Dr. FOSTER. Yes.

Senator FITZGERALD. OK. Well, that is very interesting.

And I am going to have another commitment shortly and Mr.

Chairman, I just wanted to welcome, at this opportunity, to welcome a couple of my constituents who are going to be on subsequent panels.

The CHAIRMAN. Great.

Senator FITZGERALD. Ron Warfield, the president and recently

reelected president of the Illinois Farm Bureau from Gibson City,

Illinois is here. And on the panel after him, on the fourth panel,

Mike Clark from the National Corn Growers Association. Mike,

welcome. Mike is from Homer, Illinois and also involved with the

American Soybean Association, as well as the National Association

of Wheat Growers. Is that correct? All those organizations. I want

to welcome you here to Washington. Thank you for coming.

And thank you to the panel here. Thank you.

The CHAIRMAN. Well, thank you very much, Senator Fitzgerald.

Let me mention that supporting the Purdue professors here today

are Mayor Bill Graham from Scottsburg, Indiana, who is here, and

out in the audience, Mr. and Mrs. Robert Fear of Montpelier. We

appreciate their coming very much. Let me thank both of you.

And welcome, then, our third panel. Senator Fitzgerald has mentioned we will be hearing additional witnesses and that moment

has come. Those witnesses include Mr. John McNutt, president of

the National Pork Producers Council from Iowa City, Iowa; Mrs.

Rita Sharma, National Cattlemen’s Beef Association from Williamsport, Indiana; Mr. William Roenigk, Senior Vice President of

the National Chicken Council of Washington, D.C.; Mr. Ron Warfield, President of the Illinois Farm Bureau, representing the

American Farm Bureau Federation, from Gibson City, Illinois; Mr.

Michael Stumo, Organization for Competitive Markets, Winsted,

Connecticut; and Mr. John Crabtree, Center for Rural Affairs,

Walthill, Nebraska.

I will ask each of you to limit your testimony to 5 minutes, if

that is possible, and the Committee will then conduct a round of

questioning following the presentations of the panel.

I will call upon you in the order I introduced you, which, first of

all, would be Mr. McNutt. And Mr. McNutt, Senator Grassley has

been called to the floor to manage the Bankruptcy Bill and before

he left, he asked me to greet you, which I will do. It is good to have

you again. You are a regular here in our Committee and we appreciate your lead-off today. If you would testify, we would appreciate

it.

STATEMENT OF JOHN McNUTT, PRESIDENT, NATIONAL PORK

PRODUCERS COUNCIL, IOWA CITY, IOWA

Mr. MCNUTT. Thank you, Chairman Lugar.

As you said, my name is John McNutt. I am president of the National Pork Producers Council. I am a pork producer from Iowa

City, Iowa.

Let me be perfectly clear that America’s pork producers expect

nothing less than a fair, transparent and competitive marketplace.

40

Nothing less will suffice to provide us and those who follow an opportunity to earn a livelihood.

For pork producers, GIPSA is the only policeman on the beat and

we are determined to give this policeman the resources it needs.

We would not be here today if there were not some who have

strong sentiments that GIPSA has not met all of its responsibilities.

The pork industry is changing at a very accelerated pace. These

changes raise some serious questions about the effectiveness and

efficiency of price discovery and the potential for manipulation of

markets.

NPPC is dedicated to enhancing market competitiveness for pork

producers. In the past few years we have launched a number of

new initiatives toward this goal. They include the passage of the

Mandatory Livestock Price Reporting Act. We got that legislation

and we have to make sure it is funded sufficiently so it can get its

job done.

I have named a Price Discovery Task Force that is surfacing

issues of concern for pork producers and possible solutions. One of

those solutions is what we call negotiating report, producers reporting prices to the Agricultural Marketing Service [AMS] so that they

get part of the mix.

We also have the publication of a guide to marketing contracts

to help producers in the negotiation between producers and packers, and I would like to submit that for the record.

And we have created, following some conversations here, a new

producer-owned cooperative called Pork America, which has been

incorporated here in January. It is designed to give producers a

tool to change their position in the marketplace.

NPPC realizes that guaranteeing U.S. agricultural markets are

competitive and fair is a huge challenge. We believe the attention

of both Congress and the administration should focus on four general areas.

GIPSA and the USDA must do a better job of educating the public about the provisions of the Packers and Stockyards Act and

what it empowers GIPSA to do. Furthermore, they must help delineate GIPSA’s market and regulatory responsibility from the market

concentration responsibility of the Department of Justice.

Also, the Federal Government must develop a comprehensive

strategy to address the problems of agricultural markets in general

and livestock markets in particular.

Today’s hog market is enormously complex and technical. Information and data that were once easily gathered is now proprietary

and frequently only available upon subpoena. Many hogs are priced

beyond the scope of negotiation through contractual relationships

whose effect on the entire market is not very well understood.

GIPSA must be able to recruit, train and retain people with specialized skills. Given this job market that we are currently in, this

is becoming more and more difficult. We urge Congress to help

GIPSA overcome this problem immediately and give GIPSA’s management the flexibility it needs to hire the best people.

Remember GIPSA must simultaneously reassure producers and

deter potential opportunists. GIPSA cannot have a constant presence in the field without an adequate number of personnel.

41

The analytical tools and economic theories being used today,

many were developed more than 50-years ago and yet the industries which GIPSA and DOJ regulate have changed dramatically.

Do the four-firm and eight-firm concentration ratios and the

Herfindahl-Hirschman Index mean the same things that they used

to mean? The future of thousands of pork producers could hinge

upon those answers, yet very little research is ongoing in that area.

We believe a competitive grants and research fellowship program

in industrial organization and antitrust economics would serve a

multitude of purposes and should be established now. We also need

specific research to determine relevant markets for hogs, determine

the effect of contract hogs and other captive supplies and estimate

the impact of vertical acquisitions.

Also, ongoing research and investigative results should be delivered in a much more timely manner than in the past. Past delays

of GIPSA investigations and reports have clouded the results and

invited criticism.

There appear to be several areas in which GIPSA and DOJ have

insufficient authority or which current law is unclear. One example

is the focus of antitrust legislation on monopoly power by sellers

and its relative silence regarding monopsony power by buyers.

Aren’t there some specific requirements which GIPSA can employ

to clearly delineate what packers must and must not do on subjects

such as lean prediction equations, payment matrixes and the relationship between the two? Can’t basic requirements be established

to ensure that carcass information or kill sheet information is understandable and reproducible by a producer with some reasonable

level of math skills?

In closing, National Pork Producers Council [NPPC] is committed

to a fair, transparent and competitive marketplace. We also recognize that GIPSA must play a significant role in providing market

information and oversight that pork producers need.

Mr. Chairman, thank you.

[The prepared statement of Mr. McNutt can be found in the appendix on page 104.]

The CHAIRMAN. Thank you very much, Mr. McNutt.

It is a pleasure to have Mrs. Rita Sharma here. She has been a

regular attender of our Agriculture Committee meetings; likewise,

a distinguished citizen of my state and we appreciate your coming

today. We look forward to your testimony.

STATEMENT OF RITA SHARMA, NATIONAL CATTLEMEN’S BEEF

ASSOCIATION, WILLIAMSPORT, INDIANA

Mrs. SHARMA. It is always a privilege to be in the same room

with you, Sir.

We thank you, Chairman Lugar and the Committee, for holding

hearings regarding oversight of the Packers and Stockyards Administration and other market regulatory issues. I am Rita Sharma, a

feedstock producer from Williamsport, Indiana and a member of

the National Cattlemen’s Beef Association.

Factors affecting livestock prices are a puzzle to many outside

our industry. Recent structural changes in the beef industry have

unfortunately coincided with various international economic crises,

42

strengthening of the U.S. dollar, supply shifts, and weather-induced volatility in costs.

NCBA has long supported strong oversight and enforcement of

existing antitrust and market protection laws. However, repeated

antitrust investigation by Packers and Stockyards and the Justice

Department have not uncovered broad industrywide illegal activities.

Part of the frustration in the country has been that many marketing practices and industry concentration levels that are perceived as illegal are not, in fact, illegal. National Cattlemen’s Beef

Association [NCBA] supports timely and complete USDA implementation of mandatory price reporting legislation initiated last

session by this Committee and approved and funded by Congress.

NCBA urges that USDA be involved in premerger evaluation of

proposed packer mergers, in coordination with the Justice Department and supports adequate funding for these agencies to accomplish their investigative functions.

NCBA further supports a premarket system and we trust the

skills of U.S. cattlemen to allow them to prosper in a relatively unregulated marketplace. We rely on Federal regulators to ensure

that the marketplace is free from antitrust collusion, price-fixing

and other illegal activities that interfere with competitive market

signals. If allowed to work, the market will recover with a minimum of government intervention and regulatory activity. For the

U.S. beef industry to be globally competitive, this is an absolute necessity.

NCBA is specific regarding emerging business relationships.

NCBA does not support limitation of any method of marketing fed

cattle. NCBA supports a free market system. No action should be

taken to alter or halt private business arrangements among operators in the beef industry. NCBA encourages producers to take advantage of opportunities to increase profits through new marketing

strategies, coordination, risk management and retained ownership.

Many producers are finding innovative ways to compete in this

changing cattle industry. For instance, the Five–State Beef Initiative was formed in response to strengthen economic opportunities

for Eastern corn belt by providing added value to the producer and

consumer through a responsive production and marketing system.

The five states involved—Illinois, Indiana, Kentucky, Michigan and

Ohio—are hopeful of success. A multi-state proposal from the group

is available upon request.

Funding members and current shareholders of these and many

other beef marketing systems are long-term professional cattlemen

proactively addressing the concerns of the beef industry through

bold new marketing strategies. Their efforts are focussed on improving beef demand and producing a better beef product, marketed through their own companies.

The beef industry is in many ways a bright spot among depressed agricultural commodities. Declining numbers of calves and

feeder cattle, improving beef demand after a 20-year decline, improvements in Asian financial conditions and growth of other export markets are all resulting in generally higher prices. Projections are for these conditions to continue.

43

In part, the beef industry has recovered from the difficult times

experienced in the mid 1990s because we have never relied on government to fix industry conditions caused by market forces.

We believe in free and fair private sector market forces, not government hand-outs, to manage our industry. Cattlemen have always had the freedom to farm and the freedom to fail. The historical information may make it easier for the Committee to understand why there is a great deal of caution and reluctance by the

beef industry to call for dramatic expansion of government intervention in the beef marketplace. Yet we remain committed to

strong oversight and enforcement of existing laws and regulations

to keep the field of play level.

Mr. Chairman, the National Cattlemen’s Beef Association is not

naive. Its members are fully aware of the dilemmas faced by hogs,

grains and poultry. We empathize, but the National Cattlemen’s

Beef Association wishes to deal with these issues by participating

with the Congress and their agencies in evaluating current market

issues and providing input as new issues arise.

Thank you, Mr. Chairman and the Committee, for the opportunity to present this information.

[The prepared statement of Mrs. Sharma can be found in the appendix on page 111.]

The CHAIRMAN. Thank you very much, Mrs. Sharma.

Mr. Roenigk?

STATEMENT OF WILLIAM P. ROENIGK, SENIOR VICE PRESIDENT, NATIONAL CHICKEN COUNCIL, WASHINGTON, D.C.

Mr. ROENIGK. Good morning and thank you, Mr. Chairman, for

the opportunity to present our views on this important topic.

My name is Bill Roenigk. I am senior vice president with the National Chicken Council. We used to be called the National Broiler

Council but we changed our name because chicken has taken over

the world, so we want to let people know what a broiler is, so we

finally have told them.

The CHAIRMAN. Good.

Mr. ROENIGK. In the interest of time, I will be very brief but I

request that my written statement be entered in the record.

The CHAIRMAN. It will be placed in full.

Mr. ROENIGK. Thank you.

The National Chicken Council, as we are now called, represents

companies that produce and process about 95-percent of the young

meat chicken or broilers in the United States. These vertically integrated firms contract with growers to raise live birds for processing

and contract with breeder farms to produce a supply of fertile eggs

for hatching.

The system of production, processing and marketing is highly coordinated and operates very much in a just-in-time method. Contract growers and processors are mutually dependent upon each

other. It is in neither party’s interest to jeopardize the economic viability of the other party. Most growers have a relatively long and

stable relationship with their processor.

With respect to one of the specific issues being addressed today,

the National Chicken Council is opposed to USDA having expanded

regulatory authority over poultry production because such power is

44

unnecessary. Adequate authority and remedies already exist. In

1987 Congress fully and carefully considered the proper scope of

GIPSA’s administrative enforcement authority, including civil

money penalty authority, with respect to the transactions involving

live poultry and poultry products. Congress at that time declined

to provide such authority to GIPSA for any violations of the Packers and Stockyards Act other than those related to prompt payment

and the statutory trust for live poultry dealers. The National

Chicken Council is not aware of any conditions that have changed

nor developments that would require Congress to reverse its decision that it made in 1987.

As I noted, GIPSA does have the authority to issue cease and desist orders, level civil penalties for violations of the Packers and

Stockyards Act, protections regarding prompt payment and statutory trust. Further, GIPSA can investigate and refer to the Department of Justice for enforcement to Federal courts other violations

of the Packers and Stockyards Act involving live poultry; for example, weighing practices and contract compliance.

And two, Packers and Stockyards gives the Federal Trade Commission jurisdiction over our marketing practices involving poultry

products. As you can see, there exists ample oversight and authority for poultry.

One other important point that should be made is unlike the red

meat industry, private actions for breach of contract under common

law contract principles, as well as under statutory provisions protecting growers, are available to police the relationships among

poultry growers, dealers and processors, thereby going a long way

to ensure fair dealing for all. This legal point about contractual obligations is very important but often overlooked in the discussion

of a broader issue.

Poultry is produced, processed and marketed in a very coordinated, vertically integrated system. This business model’s structure

is distinctly different from the methods used in red meat. For the

reasons presented here and because chicken is produced, processed

and marketed in a distinctly different system and because the vertically integrated firms have successful ongoing contractual relationships with the growers, it is unnecessary to burden the poultry

industry with additional government regulations.

Mr. Chairman, we appreciate the opportunity to share our views

with the Committee.

[The prepared statement of Mr. Roenigk can be found in the appendix on page 116.]

The CHAIRMAN. Thank you very much, Mr. Roenigk.

Mr. Warfield?

STATEMENT OF RON WARFIELD, PRESIDENT, ILLINOIS FARM

BUREAU, REPRESENTING THE AMERICAN FARM BUREAU

FEDERATION, GIBSON CITY, ILLINOIS

Mr. WARFIELD. Thank you, Mr. Chairman and members of the

Senate Ag Committee and thank you for holding this hearing.

My name is Ron Warfield. I am president of the Illinois Farm

Bureau and member of the Executive Committee of the American

Farm Bureau. I am a corn and soybean farmer in Gibson City, IlliVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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nois and previously, for about 25-years, fed cattle, so I am interested in that, as well.

Today I am testifying on behalf of the American Farm Bureau

Federation, which is the largest general farm organization in the

U.S., representing farmers in all fifty states and Puerto Rico.

We appreciate the opportunity to testify at this hearing on concentration and consolidation in agriculture. Obviously the structure

of agriculture is changing rapidly. The accelerated pace of consolidations, mergers and acquisitions is one of the most hotly debated

issues among farmers across the country, and I am sure you have

heard that, as well.

Today I would like to reveiw the basis for the concern farmers

have over concentration and consolidation in agriculture, actions

that we can take to address our concerns, and improvements to

policies to assist farmers in dealing with the rapidly changing agriculture.

Farm Bureau has a long history of supporting market-oriented

agriculture, but farmers and ranchers need assurance that markets

are free and open, that they are competitive, that they are transparent, that they send clear price signals and they are based on

good information. Particularly when I hear the last panel, good information is necessary for markets to work but good information is

also necessary to know that they are free and open and how do we

determine if there are really monopolistic opportunities that exist?

And I think there is certainly a void in information in a lot of

areas.

Are markets really working the way they are supposed to?

Among farmers, the frequent perception is they are not. For instance, is there competition when mergers and acquisitions have

reduced the number of companies selling production inputs, causing farmers to frequently ask are the prices they pay for these inputs based upon good competition?

Is there competition when the growing use of patents on biotech

seeds means private companies own and have tight control over

specific seeds?

Is there competition when railroad mergers have disrupted the

orderly flow of crops to export because there are fewer cars to haul

corn and soybeans across the country?

Is there competition when live hog prices fall to Depression-era

levels and retail prices are not similarly reduced? Researchers find

it impossible to explain the spread between live hog prices and retail pork prices over the last 3-years.

Much of farmers’ concerns stem from the farm-to-retail price

spread I just mentioned and other events which have transpired in

the meatpacking industry. Farmers and ranchers have also questioned why some packers have purchased plants, only to seemingly

shut them down.

This information is provided to paint a picture of the rapid consolidation of the ag industry. Farmers and ranchers realize that

the world is changing and the market system is evolving, but that

said, we must also ask, is it time for our market rules and policies

to evolve, as well?

Last year Farm Bureau worked with Congress to address some

of these concerns. Farm Bureau has worked diligently to seek addiVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
46

tional appropriations for GIPSA so that it may fully enforce the

Packers and Stockyards Act. Also a step in the right direction was

the passage of the Mandatory Price Reporting legislation last year.

This legislation is designed to provide producers more market information on livestock transactions, including contractual arrangements.

Farm Bureau has assembled an action plan designed to ensure

competition in agriculture and 10 specific points of that could be

taken by Congress and the administration are included in the written testimony. We would hope that members of this Committee will

find that these are worthy of pursuit. We would also be interested

in pursuing the private sector because we are interested in pursuing that, as well, if we would want to discuss that in the question

period.

The actions suggested in our written testimony address just a

few of the pieces of the concentration puzzle. Farm Bureau delegates just last month approved new policy on an expanded and

more active USDA role in mergers and acquisitions. They would

broaden the USDA responsibility in official consultation with the

Department of Justice and should bolster farmers’ confidence that

a thorough review of concentration of agribusiness is taking place

before it is approved.

This USDA review would take into account such factors as the

effect of the acquisitions and mergers on prices paid to producers

who sell to or buy from or bargain with one or more of the parties

involved in the merger; the likelihood that the acquisition or merger would result in significantly increased market power for the new

or surviving entity, and obviously in the pork industry, as we just

heard, more concentration would be extremely detrimental; the

likelihood that the acquisition or merger will increase the potential

for anti-competitive or predatory conduct by the new or surviving

entity; whether the acquisition or merger will adversely affect producers in a particular regional area, which could be an area as

small as a single state.

We have outlined a number of requests today. We hope these

comments will be viewed as an indication of the degree of thought

that farmers have put forward on how concentration is impacting

their farming operations. Thank you for the opportunity to testify.

[The prepared statement of Mr. Warfield can be found in the appendix on page 119.]

The CHAIRMAN. Well, thank you, Mr. Warfield. Congratulations

on your reelection in Illinois and your service on the Executive

Council here in Washington.

Mr. Stumo?

STATEMENT OF MICHAEL STUMO, ORGANIZATION FOR

COMPETITIVE MARKETS, WINSTED, CONNECTICUT

Mr. STUMO. Thank you, Chairman Lugar and the rest of the

Committee on Agriculture, Nutrition and Forestry for the opportunity to speak here today.

My name is Michael Stumo. I am general counsel for the Organization for Competitive Markets. The Organization for Competitive

Markets is a multi-disciplinary group of farmers, ranchers, academic, attorneys and businessmen who focus exclusively on comVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
47

petition policy in agriculture. I am also a hog farmer from Massachusetts and I am formerly an Iowa hog and cattle buyer and I

work with farmers, also, to set up cooperatives.

I come before you today with a sense of urgency, Chairman

Lugar. This is not just another farm crisis. This is the end game

of independent family farm agriculture. The crux of the issue is industry structure. There are tremendous amounts of money being

made in the food industry, but the farm sector, the farm production

sector, does not receive that money because the oligopsonistic

meatpackers and the oligopsonistic retailers have positioned themselves to capture the bulk of that profit. Thus, high packer margins, high retail food margins and the end of the family farm. This

is not a future. This is very quick. Five-years, we will not have an

open spot market in hogs.

Feedstuffs Magazine, the number one agribusiness weekly in the

country, editorialized last September that, and I quote, ‘‘American

agriculture must now quickly consolidate all farmers and livestock

producers into about 50 production systems.’’ This is not just an

editorial; it reflects the long-range strategy of agribusiness. It cuts

through the euphemistically rhetoric of alliances and coordinated

system. It is mercantilistic win-lose. Agribusiness wins; farmers

lose.

How did we get here? First in the livestock sector, meatpackers

consolidated horizontally; now they are appropriating the food

chain vertically. For the farm production sector, that means that

IBP, ConAgra’s Monford, Cargill’s Excel and Smithfield Foods are

soaking up the productive assets of family farmers either through

contracts or outright ownership.

If packers own or control the livestock, there is no independent

livestock agriculture, period. Thus we have not only the open market problems of the oligopsony on the general market level and the

competition, specific competition practices; we have the closure of

the market through contracting. Why is contracting bad at the

macro level? Why is it not merely free enterprise working at the

macro level?

First, the contracts take the production off the open market, pricing becomes secret, and the open markets wither away.

Second, packers can more consciously than ever before pick the

winners and the losers. In October 1998 the buyers for Hormel and

Excel were talking to veterinarians in a conference call and they

were talking about the production contracts that they use. The

Excel buyer—they both admitted that they pick the producers that

they feel will succeed to contract with. That leaves everyone else

out. The Excel buyer admitted that he had zero people, zero small

producers under contract.

Third, a long-term contract fundamentally transforms a farmer

from a profit center into a cost center. The producer becomes a

locked-in cost from the perspective of the packer, which the packer

now has not only the incentives but the control necessary to reduce

that cost with unilateral will. Once under contract, the packer imposes terms and conditions which reduce producer profit and management discretion and, in some cases under some contracts, increases the producer debt to the packer. It is the company store

problem.

48

With widespread contracting, the open market withers away and

producers increasingly have no choice at the micro level but to contract, because of the open market problems.

The Packers and Stockyards Act is the strongest trade regulation

statute in the country. It was designed to prevent problems in their

incipiency, and this is a very important distinction, Mr. Chairman,

the incipiency theory rather than the past proof of harm theory.

The Office of General Counsel and Mike Dunn, as you heard today,

have taken the latter position—proof of harm. Thus, we have all

the Economic Research Service [ERS] studies trying to analyze

whether there has been harm in the past, three, four, 5-years ago

or not. They use voluntarily disclosed packer data. The packers do

not disclose the stuff, if it exists, that may be incriminating. It is

voluntary. And they do not use the proper models, as Mr. McNutt

mentioned earlier. And Mr. Dunn and Mr. Baker fail to do anything to correct these problems. It is a legal standard problem. It

is a big problem.

So the Office of General Counsel [OGC], when GIPSA comes to

OGC, the Office of General Counsel, with their investigation, OGC

says it is not enough. Or if private parties come, OGC says it is

not enough. But they have never said what is enough.

Now, we also have to distinguish between regulation and enforcement. Regulation has the whole formal process of proving and establishing a substantial basis for whether this particular practice

is an unfair trade practice under the Act. And the regulator has

much more power to, in fact, define that and much more discretion

to do so.

In 70- or 80-years they have failed to do it. There is nothing. Nobody knows what this thing means. They just keep saying that it

is very powerful authority. They have not regulated. So then they

go to enforce on a case-by-case basis. They are another plaintiff in

Federal court. They are trying to create meaning out of the law and

then the defendants are defending with much more resources,

much more expertise than OGC has, and they end up with

unhelpful court dicta, without the back-up of regulatory definitions

of what unfair practices are in the packing industry. So there has

been failure on that end of it. And the current administration and

past ones have done nothing to do anything about that.

So OGC’s enforcement expertise—not only have they barred regulation but their enforcement expertise is lacking. They bring ERS

into the picture with old data and old methodology. And then

GIPSA just does not have the enforcement tradition, the professional tradition, the expertise that Justice has in going in and analyzing an industry. Justice has much more of all those factors—tradition, professionalism—to do that and I am very pessimistic that

GIPSA will ever get up to that speed, and this Committee may

want to seriously consider transferring anti-competitive practices

authority over to Justice.

Thus, I propose and the Organization for Competitive Markets

proposes a few things Congress may want to look at. Number one

is making clear legislatively that incipiency theory is the proper

standard to view harm rather than past proof of harm.

49

Second, ban packer ownership of livestock. If the packers own it,

independent producers are gone, period. It is not going any further.

Iowa lost one out of five hog farmers last year.

Next, open the contract packer market to the open market process, not secret negotiations, limit how much they can procure under

the contracts and those contracts require to be open bidding; anybody can bid.

And lastly, enable the private sector to enforce the Act, as well,

with attorneys’ fees for lawyers because farmers cannot get lawyers

if they want to get enforcement under the Act. They cannot afford

lawyers. Attorneys’ fees would go a long way.

And I apologize for going over but I appreciate the opportunity

of being here, my first time ever at a hearing.

[The prepared statement of Mr. Stumo can be found in the appendix on page 127.]

The CHAIRMAN. Well, thank you very much for your analysis and

for your very constructive suggestions.

Mr. Crabtree?

STATEMENT OF JOHN CRABTREE, CENTER FOR RURAL

AFFAIRS, WALTHILL, NEBRASKA

Mr. CRABTREE. Mr. Chairman, senators, thank you for inviting

me here today. My name is John Crabtree and I lead the Market

Structure Project at the Center for Rural Affairs in Walthill, Nebraska.

In December 1998 and January 1999 prices paid to farmers for

their market hogs dropped to unprecedented lows, something we all

remember very well. Over the last year prices have risen to barely

profitable levels and family farmers have left or been forced out of

hog production in droves.

Livestock production in the Midwest and Great Plains has always been a family farm and ranch enterprise. Today we are replacing those sustainable and efficient—yes, efficient—family farms

with a virtual handful of industrial, vertically integrated operations. We are only at the beginning of the economic debacle that

we face if we allow family farm livestock production to become a

thing of the past. In a recent Des Moines Register editorial, Chris

Petersen, a pork producers from Clear Lake, Iowa and a personal

friend of mine, lamented that ‘‘You’ll miss us when we’re gone.’’ He

was, of course, right in more ways than most of us care to imagine.

Why should we accept the destruction of family farm livestock

production? Many tell us that it is inevitable. The truth is another

matter. We have been told time and again that large-scale vertically integrated livestock production facilities can do a better, more

efficient job of raising livestock, but research tells us a different

story. Iowa State University economist Mike Duffy’s research analysis of Iowa farm records demonstrates that economies of size run

out at about one-hundred-fifty sows farrow-to-finish. The most efficient one-third of hog producers in the University of Nebraska

Swine Records Program sold two-thousand-six-hundred-seventyeight pigs and as pork producer friends will tell you, that is not a

very large hog farmer anymore.

The destruction of family farm livestock production is not inevitable. It is the result of choices—policy choices, administrative

50

choices, and enforcement choices, choices made by people, and we

can choose another path. Farmers and ranchers over the last year

have fought furiously to create the kind of future in livestock production that they want. They ask for nothing more than access to

a marketplace and the chance to compete on a level playing field,

something that has been consistently denied them of late.

For years, the Center for Rural Affairs, other farm organizations

and the farmers and ranchers who support our work were told that

mandatory price reporting legislation was out of the political reality. Then, in 1999, something rather amazing happened. Farmers

and ranchers from throughout rural America started coming together to change that political reality. They found some state legislators who agreed with them and they passed price reporting legislation in five states.

And they did not stop there. They changed long and closely held

positions of key commodity groups, they lobbied Congress and they

kept the pressure on until mandatory price reporting had changed

from the impossible to a political imperative. And then this Committee responded by working diligently to create good, sound,

strong price reporting legislation, which became the law of the

land. That is how things are supposed to happen in this society,

thankfully.

However, the same farmers and ranchers that challenged the

status quo and won note the job is not done. If we are to create

a future for family farm and ranch livestock production, there are

more issues that need to be addressed, that must be addressed, and

two needed reforms stand out.

The first, which is the focus of my testimony today, is prohibiting

price discrimination in the livestock markets. When family farmers

sell hogs, they get significantly less than large-scale pork production companies just because they lack the economic power to demand volume premiums. USDA’s 1996 Western Corn Belt Procurement Investigation demonstrated that prices paid to producers

clearly increased with seller size. That was in 1996 when the negotiated spot market demand for hogs was about triple what it is

today. Volume-based premiums are undoubtedly far more prevalent

today than they were 4-years ago.

Now an effective price reporting program will provide important

information for the Packers and Stockyards Administration to spot

this routine price discrimination that occurs in livestock markets

today. However, the information alone will not suffice.

The Packers and Stockyards Act prohibits undue price preferences and grants USDA broad authority to stop unfair trade

practices in their incipiency. That authority is unused. Secretary of

Agriculture Dan Glickman recently that USDA would ‘‘not allow

farmers to become serfs on their own land’’ in reference to concerns

about concentration and consolidation in the seed industry. This

statement rings hollow when one considers that the Secretary and

Packers and Stockyards have done little to stop the same thing

from happening with pork producers in this country.

The Secretary should start to rectify this inaction by issuing administrative rules that clearly define and aggressively prohibit

undue price preferences in livestock markets. The reasons for

51

USDA’s inaction on this issue are unknown to me and that inaction

is, to say the least, confounding.

I have attached to my testimony language that the Center for

Rural Affairs has proposed as a starting point this afternoon. In

this proposal we recognize that packers should be able to pay premiums for measurable and definable differences in carcass quality

and transactional costs but that volume-based premiums that simply reward economic power over hard work and efficiency reduce

competition and diminish the marketplace and should be prohibited. Every farmer that I know would be more than happy to put

their hard work and skilled management up against the largest

corporate hog producer in the country if they knew that they had

a marketplace that would judge their livestock on a level playing

field and price them accordingly.

Issuing rules on undue price preferences is not only something

USDA can do but must do if they are serious about restoring competition in the livestock markets. USDA officials in the Office of

General Counsel have argued to me and others that by defining

undue price preferences, the authority under the Packers and

Stockyards Act will be narrowed and therefore diminished. However, since that authority is virtually unused currently, what we

have today is a livestock market that has essentially no rules whatsoever regarding price discrimination.

The Center for Rural Affairs sought the legal opinion of Professor

Neil Harl of Iowa State University in this regard. I have attached

to my testimony his letter in response and I hope that will be put

into the record. In this letter Professor Harl clearly points out that

USDA has not fully exercised the authority granted under the

Packers and Stockyards Act to promulgate rules, especially in the

area of price discrimination in livestock pricing.

USDA seems to have adopted the stance that volume premiums

that reward economic power over hard work and efficiency are ‘‘the

American way.’’ But in truth, the American way has always been

the belief that hard work and efficiency should be rewarded and

that competition enhances the marketplace.

Finally, the second much-needed livestock market reform is a

prohibition on packer ownership of livestock. Senators Grassley,

Kerrey, Johnson, Senator Daschle and a number of other people

have introduced legislation or will introduce legislation to ban

packer ownership of livestock. I would like to take this opportunity

to thank these senators and others who have voiced support for it.

Clearly, the transparency that we will achieve through mandatory

price reporting and a prohibition of price discrimination will not

alone create a future for family farmers in livestock production if

the doors to the marketplace are barred to them because

meatpackers own all the livestock that they kill from birth to

slaughter, as is rapidly becoming the case in the pork sector.

Legislation that prohibits or dramatically limits packer ownership of livestock is needed to keep the door to the marketplace open

for family farmers and ranches.

Thank you for your time and consideration. I would be more than

happy to answer any questions.

[The prepared statement of Mr. Crabtree can be found in the appendix on page 137.]

52

The CHAIRMAN. Let me start the questions picking up where you

left off, Mr. Crabtree.

Mrs. Sharma and Mr. Roenigk, in the cattle and in the poultry

industries you take the position that the packers or producers at

the packer level in your industries ought not to own birds in one

case or cattle in another. In other words, is the situation as you

perceive it identical as that which is being described in the hog

market?

Mrs. SHARMA. NCBA does not oppose captive supplies of livestock for packers. They have no prohibition against any type of

ownership or any type of contractual agreement wherever it is in

the cow production chain. Our belief is that part of what insulates

us is our basic structure.

If you take the cow calf, the large amount of capital input, the

low amount of return and the long return on capital is something

that does not interest the packer. Couple that with the fact that

the majority of cattle producers across the United States still are

in the range of twenty, twenty-five head of brood cows. The average

size brood cow herd in the State of Texas is fifteen brood cows. So

we are still primarily composed of small producers who control the

beginning product. The beginning product is not suited to ownership by a packer and we believe will help to insulate us from other

actions.

The CHAIRMAN. How about the chicken industry?

Mr. ROENIGK. In the chicken market, the market requirements

and specifications often are very, very precise. They may say 2-

pounds, twelve-ounces, plus or minus two ounces. So 1-day or even

a half a day on feed longer or shorter would affect that bell curve

and how many would be there.

At the same time, we are seeing a growth in very specific niche

markets and the barriers to entry for those companies are very

small. We are talking organic, free-range, those types of chickens.

And, of course, those chickens have to be very, very specifically

grown to meet the market demands.

So unless you own those chickens or have a contract to produce

that specific type of bird requirements, you are not going to get exactly what the market wants and therefore, you are not going to

be able to participate in the market.

The CHAIRMAN. So you have contracts to specify this, essentially?

Mr. ROENIGK. Exactly, and we have in the contract rewards for

doing a better job.

Mrs. SHARMA. Mr. Chairman, if I may add, the basic control we

have over what type of livestock we raise is the spot market and

such, as well as the packer market and what they are willing to

pay for specific types of livestock. They are moving very rapidly to

control the type of livestock that are raised and offered for sale by

oftentimes reducing prices by 50- or 60-percent if those livestock do

not meet their requirements.

The CHAIRMAN. Mr. McNutt, what is the position of the pork producers on this packer ownership of livestock?

Mr. MCNUTT. We went through an extensive process last year

after delegate action to look at this whole issue and at that time,

the producers decided through our Federation Council that we were

not in favor of moving against packer ownership restrictions last

53

fall, but a lot has happened since last fall. We are listening to what

our delegates have to say. We have an annual meeting coming up

here in March.

Our sense, though—is as an individual producer, my sense is

with what has happened to my industry, yes, it sounds like a very

appealing thought to have packer ownership restriction but when

I have to put the hat on that I wear here and have to look at what

is the effect on the industry at large, what are those unintended

consequences that are out there, are there better ways to do things

to address this issue other than that very heavy hand of a complete

ownership restriction? I am not very comfortable with a social control of that measure.

I think that if we are smart about looking at things that we are

talking about today, fixing Packers and Stockyards, making sure

that it has the authority and the responsibilities and the funding

that it needs, looking for the creation and the development of new

methodology for producers to empower themselves in the system

through the use of cooperatives, that there might be able to be

other ways to address this.

The CHAIRMAN. Well, while you have the floor, Mr. McNutt, let

me just follow up because the question has been raised or at least

this sort of theme floats through that these very severe conditions

with regard to hog prices last year, the predictions then were that

thousands of hog farmers all over the country would clearly be out

of the business.

Now the census figures always follow and trail, so they are more

than anecdotal but not precise. But at least as I recall, the number

of hog farmers in the country is somewhere around 106,000 and

perhaps five-thousand or six-thousand had been lost during the

course of the year. In Indiana it was something like six-thousandtwo-hundred that we used to have and six-thousand that we still

have, which is still two-hundred farmers fewer, but remarkable resiliency, given the hit.

Now, what happened? Was there enough reserve or did things

turn around sufficiently? Are people still hopeful? If you take a look

at the time line of normal attrition of hog farmers over the course

of this century, we have been losing many more than that in most

years that were not visited with such a devastating price.

Mr. MCNUTT. Mr. Chairman, we have taken in excess of $4 billion out of our industry. What has probably sustained the numbers

to some degree is the sense that even with that huge loss, the U.S.

pork industry has still been the most profitable sector of U.S. agriculture in the last 14-years.

So bankers and so forth know that they have had a very strong

track record. What it has done, though, is that now producers that

are still remaining—and we have lost quite a number—their

amount of options available to them are less and less. When the

bank tells them, ‘‘You must contract or you don’t have another line

of credit,’’ they do not have the choice that they had a few years

ago when they said, ‘‘No, I want to stay on the open market.’’

So there has been a profound effect, even though we have not

seen quite as many losses of people.

The CHAIRMAN. Let me ask briefly for Mr. Warfield, Mr. Stumo

and Mr. Crabtree to add whatever they want to this dialogue and

54

then I will turn to my colleague Senator Roberts for his questions.

Mr. Warfield?

Mr. WARFIELD. I would just comment that in Illinois, of course

we do not have the up-to-date numbers but we probably did lose

close to 25-percent of our producers.

The CHAIRMAN. Twenty-five percent?

Mr. WARFIELD. Yes. Now, that is based on looking at numbers.

We do not have exact numbers. That is just looking at the sow

numbers relative to extrapolate what happened to the numbers of

producers. So we did take a significant hit and, as it was indicated,

they certainly have had a lot less opportunities in terms of—and

there could be some other factors——

Senator ROBERTS. Is that all producers or just hog producers?

Mr. MCNUTT. Hog producers.

The CHAIRMAN. Does it mean that farmers who had hogs as a

part of their program dropped the hogs but maybe stayed with corn

and beans?

Mr. MCNUTT. Yes, yes, absolutely.

The CHAIRMAN. So they are still in the market, although maybe

not in the hog market.

Mr. MCNUTT. That is correct. And what we are seeing is an acceleration, a dramatic acceleration in the change that is taking

place. Illinois has gone from the number two hog-producing state

in the country down to number four and we have been under a

very dramatic decline during this hardship time.

The CHAIRMAN. Mr. Stumo?

Mr. STUMO. Thank you, Chairman Lugar. I would like to bring

your focus to the perspective of a packer buyer in a competitive

market or a closed market. Imagine being a buyer that has to fill

up a 10,000-head kill line every day and imagine being that buyer

20-years ago and you have to go out and compete with more firms

and you have to bid openly and negotiate to fill every one of those

shackles.

With the advent of concentration horizontally, you take the factor

out that you are actually competing with more firms. You have less

firms. In fact, I would argue that national concentration levels are

irrelevant because transportation makes it unfeasible, of course, to

send an Iowa pig to Washington. So I do not think we should even

maybe talk about the national, look at the geographic, and that has

never been done within USDA.

So we have less firms to compete against and then you take the

next step of the packer owning hogs or cattle. So you see in the

Northwest where there is between 60- and 80-percent captive supply and part of that is packer ownership or in other parts of the

country where maybe it is thirty to fifty in beef.

So you take three-thousand to five-thousand hogs or cattle,

whichever way you want to look at it; those shackles are clearly

going to be filled because you have that under control. Thus, you

only have to bid for maybe five-thousand to eight-thousand, but

you have part of those under contract for your best guys and picked

out who you think is going to succeed or who you like or for whatever reason, you have picked those. So maybe you have another

three-thousand to five-thousand or three-thousand that are filled.

55

So you only have, say, two-thousand or three-thousand left to bid

on the open market.

So number one, you have those three steps: less competition with

other packers; you have locked up through packer ownership and

you have locked up through contracting. Thus you only have twothousand head to procure, going out in the market and bidding and

negotiating with people every time. So those three steps.

And that is what I think this Committee maybe should look at,

is how do we look at the buyer mentality here and require more

competition, and part of that is to limit—to ban the packer ownership or severely reduce it. And the contracting—allow contracting

and allow the benefits of contracting but open it up to bidding so

there is less potential for intentional exclusion, especially of small

producers or unfavored producers. And limit that security on the

buyer side, not eliminate it but limit it in the interest of preserving

family farm agriculture and competition. Thank you.

The CHAIRMAN. Thank you. Mr. Crabtree?

Mr. CRABTREE. Thank you, Mr. Chairman. Just a couple of

things on your questions.

If my memory serves me, Iowa lost, I think, 17- or 18-percent of

their pork producers last year. Nebraska, my state, about 15-percent.

The CHAIRMAN. Well, how does that reconcile with the overall

figure of 5 or 6 in the Nation, with these huge losses? The counting

must be very different in some areas.

Mr. CRABTREE. I think the thing that is interesting is when you

look at the census, the numbers that were lost were, of course, not

lost across the board but typically from the smaller producers, the

numbers of smaller producers, where there still are a lot more.

These are producers that simply have not had access to contracts,

that bore the brunt of that $8 hog market.

The reality was when hogs were $8 on the spot market, the average hog was not on the kill floor at $8. It was probably hitting the

kill floor at more like $25 a hundredweight for procurement. There

was an extraordinary level of price spread in production that point

in time. So certain producers got the worst witness on them and

I think certain areas that have more of those smaller producers

took a bigger hit.

I just wanted to mention support for packer ownership. I believe

the Iowa Pork Producers Association just recently voted their support to ban packer ownership of livestock and Nebraska has continued their support for that. The Iowa Farm Bureau had a heated

debate about it and I believe put some rather forceful language forward on it, as well. This is a debate that is really ongoing in a lot

of farm organizations and commodity groups.

The last thing, just to mention rulemaking on discriminatory

practices as it applies to contracting and captive supplies, once

again those producers that were destroyed last year, or at least had

their hog operations destroyed last year, one of the most significant

things that they faced was not only an inability to get a fair price

in the spot market but also an inability to get access to contracts.

That is a discriminatory practice just as much as paying less for

a hog, paying less just because you are small.

56

In the absence of the Packers and Stockyards Administration

promulgating rules which define what these discriminatory practices are, including the extension of contracts, we are simply never

going to have family farm producers, whether it be through contracting measures or through an open market, that will be able to

survive.

And once again, to go back to USDA has simply been unwilling

to do that rulemaking and needs to step up to the plate and do it.

The CHAIRMAN. Fine. Mr. Warfield, quickly, because I need to let

Senator Roberts have a chance.

Mr. WARFIELD. The one comment on packer ownership of livestock, I should say that at the American Farm Bureau Federation

(Farm Bureau) [AFBF] level, we do not oppose packer ownership

of livestock but it does indicate a lot of differences among states

and I have to say in Illinois, our delegates in December did pass

a provision saying we would ban ownership of livestock by packers.

And I think this is indicative of the atmosphere we are in and

I think it exhibits a frustration. And by states, we are doing what

I think Senator Roberts said earlier. State by state, we are doing

different things because of the concern that the action is not being

taken at the national level.

The CHAIRMAN. I think your testimony helps us a lot. And just

to complete the record, I am going to ask our staffs to first of all,

try to give us an up-to-date census on who is still in the business,

state by state and generally, so we agree on that and likewise, how

many packers there are out there. There is pretty good information

today about the percentage of capturing of these markets but we

need to get up to date as to where the mergers are, who the people

are and so forth.

Finally, we need a pretty good inventory of state action—legislative proposals, but also action by our major farm groups. As you

say, a significant debate is going on in Iowa and Nebraska and

elsewhere and as Senator Roberts commented earlier, this is important and some of our testimony is because if we have a checkerboard pattern ultimately, not just of opinions but actually of laws,

sometimes that may opt against states that are passing these laws.

We heard that a little bit with regard to price reporting in South

Dakota, that the market dried up for a while, whatever may have

been the merits of this in terms of a general policy.

Senator Roberts, will you please proceed?

Senator ROBERTS. Thank you, Mr. Chairman.

I want to thank all the witnesses for their excellent testimony.

I think we are getting into this debate to the level that we should,

as opposed to maybe the capsule comments that we see all the time

in the press about this issue. I think all the witnesses have been

very helpful.

I think the thing that is obvious to me is that as we go through

this debate with our farm organizations and state by state, you

have very strong opinions about this—it is the what-if—and I am

really interested to see what could be done administratively, if it

possibly can. You know, we are a very reactionary outfit back here

and to propose legislation is certainly salutary but it takes a long

time. You go through all the debates and then you have to dot all

57

the i’s and cross the t’s and hope that the administrative implementation works and it goes on and on and on.

I would really like to see what we could do from an administrative standpoint, so that is my two cents worth on that score.

John—pardon me—Mr. McNutt, you had indicated, I think on

page 7 of your testimony, ‘‘Might there be a way of spelling out a

few acts which constitute per se violations of the Act and thus save

time and money and ensuring fair and competitive markets?’’ And

you refer to a GAO study of the Secretary’s authorities, duties and

responsibilities which will address this topic.

I am aware of that study. I lost track of it. Where is that right

now? What is the timing of it?

Mr. MCNUTT. September.

Senator ROBERTS. September. Is it going to be a one-armed GAO

study so they cannot say, ‘‘On the other hand,’’ like they normally

do?

Mr. MCNUTT. Well, we will see, I guess.

Senator ROBERTS. That is a facetious question. I should not even

have asked that. Thank you for your testimony.

Let me move on. Mrs. Sharma, I think your statement is very,

very clear and it indicates the tremendous—what?—I guess the parameters of the debate. Do you think you and John Crabtree could

sit down with a cup of coffee and figure this out? I think it does

have some application here and I am not trying to perjure either

one of you in terms of your statement. I think they are both very

helpful.

But in Kansas we have the Kansas Livestock Association who

has one position and the Farm Bureau is evolving. We have all

sorts of other groups who recommend what John wants and then

obviously you have some strong opinions, and that is why I think

as we go through this debate if we could find out what we could

do administratively, again, Mr. Chairman, from the standpoint of

the administration, where they are and how we can help them,

that would be better.

I do not have any specific questions, other than to thank you for

your longstanding partnership in government.

Let me go to Mr. Roenigk and the chicken folks. You say on page

2, ‘‘With respect to one of the specific issues being addressed today,

the National Chicken Council is opposed to the U.S. Department of

Agriculture having expanded regulatory authority over poultry production because such additional power is unnecessary.’’

So red meat one way and leave our chickens alone? Is that about

where you are on that?

Mr. ROENIGK. Thank you, Senator. As I noted in my testimony,

there are a number of authorities that Packers and Stockyards

has—the statutory trust, prompt payment provisions. Also, other

government agencies such as the Federal Trade Commission and

Justice Department have interest in our industry. And I also pointed out that our industry is somewhat different in structure with

the contracts and there is contractual law that governs that.

So we believe we are somewhat different and we believe that our

performance does not require additional regulatory authority.

Senator ROBERTS. Well, here we go again, Mr. Chairman. We

have an all-encompassing problem and we have different segments

58

of agriculture saying, ‘‘Thanks but no thanks; we are getting along

at least to the extent that we should.’’ I think that is very noteworthy.

Let me go on to Ron, if I might, and I am going to try to hurry

up because I know my time is fleeting.

You mention, Ron, in regard to page 2, ‘‘The Packers and Stockyards Act should be amended to’’ and you list five things that you

think we should be doing. Oh, here is my answer. I was going to

ask if that is the American Farm Bureau’s position and you indicate that is the case.

Mr. WARFIELD. That is correct.

Senator ROBERTS. OK, thank you.

On page 4 you have indicated here that the ‘‘Farm Bureau would

like to see an expanded role for the Department of Agriculture in

evaluating agribusiness mergers and acquisitions currently required to be evaluated by the Justice Department. Broadened

USDA responsibility and official consultation with the Department

of Justice will ease much of the concern.’’

Mr. Stumo, on the other hand, has indicated in his testimony, if

I can find it here real quick—I think it is on the last page of Mike’s

testimony, on page 9, I think; I numbered your pages for you,

Mike—that you indicate we should transfer the anti-competitive—

not should but could; I am misspeaking. What can Congress do?

Congress could modify the Act to transfer the anti-competitive

practices enforcement jurisdiction under the Act from the Department to the Department of Justice; consider the transfer of regulatory jurisdiction under the Act to another agency, such as the

Federal Trade Commission.

Would both of you comment on that?

Mr. WARFIELD. I think I can comment. We had a meeting with

the Department of Justice, Packers and Stockyards and USDA people back in September and what I saw reflected was when the specific concerns were presented by producers, we had a producer

there who said, ‘‘I have a quality of hogs that meet the genetic requirement of a packer; the volume is not sufficient. I tried pooling

with others, tried the pooling and networking concept and the

packer would not accept it.’’

When we met with these groups, the Packers and Stockyards

said, ‘‘That is Justice Department’s problem.’’ We went to the Justice Department and they said, ‘‘Well, that is over here.’’ And we

went on a ring-around all day, never knowing where we went for

an answer.

So part of it comes back to a comfort zone of saying at least the

USDA, we can go in and—and we want somebody we can point to

and say, ‘‘OK, you are the ones responsible, you are the one that

is accountable, we want an answer.’’ And we feel like because of

an understanding of the agricultural industry that the USDA having that involvement would be very, very helpful.

And I think that we are encouraged by the fact that the Justice

Department now has put somebody that has dealing with agriculture, but on that day, as we went around, we could not find the

person who we needed to talk to say, ‘‘Where do we get an answer?’’ And all they did was point to another agency, and the Federal Trade Commission was one of them that we got to. And we,

59

today, do not know—when we tried to evaluate what a live hog is

worth and the retail pork prices and trying to say what is going

on here, we cannot find out information to get the answers; we cannot find the Agency that is supposed to be responsible to get it

done.

So if I had to come back and answer most simply, let’s very clearly identify authority and responsibility, where we go to, and say we

have to have the answer, and quit the finger-pointing between the

different agencies.

Senator ROBERTS. Michael?

Mr. STUMO. Senator Roberts, Mr. Warfield and I start in the

same place and the reason I think we go in different places is my

view of the issue is that who does what best. USDA has, as a cultural matter, they have a conflict of interest in that they promote

agriculture and they regulate it.

Now, let’s look at the specific task at hand, which is anti-competitive practices, which is not necessarily antitrust. It is rules of

competition. And we have, as we saw today and as Mr. Warfield

said, we have Justice and USDA pointing their fingers at each

other. So what do we do?

Justice works with anti-competitive practices cases or antitrust

cases all the time. They have a methodology. They have developed

internal guidelines to determine when they collect information.

They know what a dog is when they see it. They have the guidelines to do that. P&S does not. OGC does not.

This Committee has been frustrated by inaction. The producers

in the field have been frustrated by inaction. Mr. Dunn has mentioned the rapid reaction team that runs around in pursuit of rapid

responses to problems identified. I have talked to the producers

who talk to these rapid reaction folks. The message they get is we

cannot do anything. We do not know whether this is a violation.

It is too big. Just do something else. It will take years to do something about.

They are met with obstruction at every step of the way and the

fact is that GIPSA cannot handle it. The people in government who

are good at this sort of thing do not go to GIPSA. They go to FTC

or they go to Justice. And the legal counsel that are good at this

sort of thing do not go to USDA OGC. Other people go to USDA

OGC. But for competition policy, the good people go to Justice, and

that is why I would consolidate this type of authority in Justice.

Thank you.

Senator ROBERTS. Mr. Chairman, I am going to ask John my last

question here and then we can—I know we are running out of

time.

Mr. Crabtree has indicated a vision of the future of rural America dotted only with packer-owned industrial hog operations is untenable and I certainly agree with that. He cites the work of the

Center for Rural Affairs in the past, being a catalyst for legislation

in states, and this gets back to the original statement that I made

when the hearing started that if the Federal Government does not

respond, states do. Then you get into a situation, as described by

the previous witness, I think from Indiana, that if you get an isolated situation, you do not know what is going to happen in regard

to the next state over and it gets to be a real hodgepodge.

60

John also pointed out, and I am not trying to give your testimony

again here, John, but he cites the letter from Professor Neil Harl

of Iowa State, who is a renowned authority on agriculture policy,

that ‘‘The USDA has not fully exercised the authority granted

under the Packers and Stockyards Act to promulgate rules, especially in the area of discrimination in livestock pricing. Professor

Harl has also pointed out in the past that courts will give an administrative agency leeway in enforcing market regulations if they

promulgate the rules.’’

And I think Mr. Crabtree is pointing out once again that if we

can get some action here, I know the GAO report is due in September and I know that the gentleman who came down from the department will respond back to the Chairman but in the meantime,

if we can get some kind of a policy here where we can take action

from an administrative standpoint, that might relieve the pressure

just a bit.

I have made a speech, John. I do not know if you want to respond to that or not but I will certainly give you the opportunity.

Mr. CRABTREE. I think that is absolutely right. Two years ago

Secretary Glickman’s own Commission on Small Farms asked him

to take action on price discrimination. We put the same issue before him last year, in August. We talked about this time and again

and I think you are absolutely right. This is something the administration can do now, the Secretary should do now. They can issue

these rules and move, move forward to making this market more

competitive.

I want to say one thing about the unintended consequences of

states versus states. Nebraska has had probably the toughest prohibition on packer ownership of livestock in corporate form for 17-

years. We are also still the number one producer and processor of

red meat in this country.

So I think the connection of losing packing or losing production

does not always have to follow on with where vertical integration

goes. I think you can prohibit packer ownership and still have a

healthy livestock industry, as we do in Nebraska.

Senator ROBERTS. I would like to compliment Mr. Stumo. This is

his first opportunity to testify, as he has indicated. He was very

specific, Mr. Chairman. He lists probably 10 or fifteen things that

we could do. Most witnesses will testify and offer some very important information but he actually gets very specific. I am not saying

I am for each and everything that he is recommending but I want

to thank him for that.

And the only thing that I would warn is that I have a bias, Mr.

Chairman. Obviously, I think I am biased, since I am a piece of old

furniture around here, but I would like for the Department of Agriculture, once you give up jurisdiction in behalf of agriculture and

farmers and ranchers to other agencies, I think you leave the dock

and you are into uncharted water.

And whether it is global warming and EPA and the USDA,

where we are trying to get the USDA to step up to the issue or

whether it is trade that the distinguished Chairman is such an eloquent spokesman of and a leader for in regard to the National Security Council and the State Department making decisions on socalled sanctions reform that are not sanction reforms because we

61

cannot use the export programs that we need to use, or whether

it is this issue, it seems to me that the department should take a

much more aggressive role and get that jurisdiction within the Department of Agriculture so it would not be necessary to follow the

advice that Mr. Stumo feels is necessary.

I thank you for your leadership again, Mr. Chairman. It has been

an excellent hearing.

The CHAIRMAN. Well, I second the motion, Senator Roberts. I just

seems to me clear that so much could be done through administrative action and we know whatever our role as legislators may be,

it is a two-house procedure, signature by the president, endless

amendment.

To the extent that we really are able to do some rule-making to

move ahead, I voiced at least some of my frustration over that we

have been commended for our Price Reporting Act last year but we

find that all sorts of pieces are not happening because an appropriation did not occur here, $500,000 missing here.

In essence, this is a frustrating business. You can pass an act.

You can get bipartisan support. You can work it all out and it does

not necessarily happen.

So it has to happen. I feel very strongly about that. I want USDA

to find out why it is not happening and where the money can come

from. We may have to mandate a transfer within USDA to get it

done but we really are determined finally, that the people’s will be

heard.

Now, you have been most constructive and helpful and I commend you for your patience; likewise the audience, who has stayed

with you and are deeply interested. But at this point I will ask you

to retire and we will have the fourth panel, who are Mr. Bert

Farrish representing the North American Export Grain Association

from Portland, Oregon; Mr. Robert Smigelski representing the National Grain and Feed Association from Maumee, Ohio; Mr. Mike

Clark, National Corn Growers Association; and Mr. Dennis Wiese,

National Farmers Union.

May we have order in the Committee room so that we can proceed with these witnesses?

I will ask that each of you limit your testimony, if possible, to

5 minutes so that we can proceed with a colloquy with the Committee and everyone can be heard. I will ask you to testify in the order

that I introduced you; first of all, Mr. Farrish.

STATEMENT OF HUBERT FARRISH, PRESIDENT, COLUMBIA

GRAIN, PORTLAND, OREGON, REPRESENTING THE NORTH

AMERICAN EXPORT GRAIN ASSOCIATION

Mr. FARRISH. Thank you, Mr. Chairman and members of the

Committee.

The export grain industry appreciates the opportunity to present

its views on the role, function and performance of the Federal

Grain Inspection Service. This hearing is timely, since five sections

of the Act that authorize FGIS expire September 30 of this year.

I am Bert Farrish. I am president of Columbia Grain, Inc.

headquartered in Portland, Oregon. Columbia is an exporter of

grain primarily to Asia and the Middle East and we are one of the

largest users of the services provided by Federal Grain Inspection

62

Service in the United States. Today I am testifying on behalf of the

North American Export Grain Association, an industry group that

represents U.S. grain exporters and associate members.

In my testimony today I will discuss what I think this agency is

doing well, how the Agency could improve, and the challenges for

the future. I will present an abbreviated version of the written testimony and would ask that the written testimony be entered into

the record.

A little background. The Federal Grain Inspection Service was

created in 1976 to administer a uniform national grain inspection

and weighing program, as required by the U.S. Grain Standards

Act. The Act provides that official inspections of grain are mandatory at export and voluntary for domestic shipments.

I would like to make a few remarks regarding FGIS operations.

In the view of exporters, the Federal Grain Inspection Service has

two broad missions. The first is to directly provide the service of

inspecting and weighing grain for export or to supervise delegated

state agencies that provide this service; and second, to provide the

structure and administration of the Grain Standards Act, which

benefits all producers, processors and consumers. So my remarks

will be made in the context of those two broad missions.

First, what are some of the successes of the Federal Grain Inspection Service? The FGIS weight and grade certificate has great

credibility and integrity with importers worldwide. U.S. exporters

want to protect this integrity. The Federal Grain Inspection Service

has responded to industry cost concerns by reducing total staff and

lowering the cost per ton for providing service. Number three, FGIS

is working with industry on a broad range of important issues. And

fourth, FGIS has communicated well with the grain trade through

its advisory committee and various industry committees.

Second, what are some of the areas of concern or need for improvement with the Agency? First, the struggle for cost control and

improvement will never end. As long as the industry perceives

itself paying excessive fees for export service, there will be pressure

to reduce costs. We need cost control, but not at a loss of certificate

integrity. And I would commend the Agency for absorbing part of

a recently proposed fee increase through improved efficiencies, but

we look for more improvement.

As a government agency, FGIS operates by a different set of

rules than the private sector does. Operating costs for this agency

are far higher than would be the case for a similar private sector

provider.

Also, FGIS needs more freedom to develop operating flexibility.

The grain trade, particularly at export, is ever-changing and needs

flexibility to adapt and compete.

Third, we can improve communication through existing formats,

particularly concerning research that the Agency is contemplating

conducting.

And fourth, we need to better address the funding that supports

what we see as FGIS’s dual functions. Those functions are to, first,

act as a direct service provider at export, and second, to provide

broad regulatory oversight of the grain industry.

The agency is funded by two methods. The first is user fees; the

second, appropriated funds. In our view, it is critical that approVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
63

priated funds are readily available for the support of standardization and methods development activities. The U.S. exporter, who is

a mandated user, cannot continue to shoulder more in user fees

than its fair share.

And lastly, the time required for changing procedures and regulations needs to shrink to accommodate the faster pace of change

in business.

And lastly, I would like to talk about the future a little bit. This

is an exciting and challenging time for both U.S. producers and exporters. In the future, GIPSA should work closely with all segments of the grain industry to, first, be prepared to provide GMO

trait testing as the market may require; second, to identify and

provide the testing of end use value characteristics of U.S. grains;

third, to continue developing technology that lowers costs and improves delivery of services and data; fourth, to identify e-commerce

opportunities; continue to identify and conduct research that benefits the grain industry; and last, to continue to improve contacts

with grain importers worldwide.

I would conclude by saying that the export industry needs

GIPSA-FGIS to be a cost-effective, forward-looking business partner that assists U.S. producers and exporters in expanding our

world market share. We think that FGIS is a critical link in the

success of the U.S. export grain trade. That concludes my testimony, Mr. Chairman.

[The prepared statement of Mr. Farrish can be found in the appendix on page 141.]

The CHAIRMAN. Thank you very much, Mr. Farrish.

Mr. Smigelski?

STATEMENT OF ROBERT SMIGELSKI, THE ANDERSON, INCORPORATED, REPRESENTING THE NATIONAL GRAIN AND FEED

ASSOCIATION, MAUMEE, OHIO

Mr. SMIGELSKI. Mr. Chairman, my name is Robert Smigelski. I

am Agriculture Group Operations Manager for the Andersons in

Maumee, Ohio. I am representing the National Grain and Feed Association and serve as that organization’s chairman of the Grades

and Weights Committee. We appreciate the opportunity to provide

input on the Grain Inspection, Packers and Stockyards Administration and will focus our comments on the Federal Grain Inspection

Service, a program within GIPSA that administers the U.S. Grain

Standards Act.

The NGFA has a strong and long experience with FGIS operations, including its official standards and grades. Furthermore,

NGFA members operate both interior and export facilities. These

factors provide us with a broad and deep perspective on FGIS services in both the domestic and the export markets.

We support the Agency’s efforts to maintain accuracy and consistency in the official inspection and weighing system. The credibility and integrity that FGIS strives to maintain in the official

system is very important to grain handlers and very beneficial to

the exporters in the United States.

FGIS and industry maintain a positive working relationship.

Agency management routinely meets with us to discuss issues affecting the official system.

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We appreciate agency efforts to increase the efficiency of U.S.

grain marketing, streamline grain inspection and weighing, and

provide cost-effective grain inspection and weighing services. In

this regard, the Agency has been working with industry to improve

automation at export facilities, an effort we applaud.

Recently FGIS announced plans to establish a reference laboratory in its Technical Service Center in Kansas City, Missouri to

verify the accuracy and repeatability of test kits used to detect biotechnology-enhanced crops. We believe this service will be beneficial to industry and we support this effort to increase the kind

and the amount of service the Agency provides.

While the Agency is working in a positive way to meet its mandate under the U.S. Grain Standards Act, we think that the 2000

agency reauthorization provides an opportunity for industry and

Congress to consider some potential changes in the official inspection system that could be beneficial. Let me share with the Committee our thoughts on several of these issues.

The cost and efficiency of official service in domestic markets has

been a concern to NGFA members. To determine if market forces

could be successfully used to address this issue, the Agency began

a serious series of pilot programs in 1995 to open selected interior

official territories to competitive bidding for service. We support

these pilot programs and believe the results justify granting FGIS

permanent authority to allow increased competition within the domestic official system.

The cost of official services is also a concern at export elevators.

Since FGIS must provide personnel for the bulk of official services

at export facilities, a series of fee increases instituted by FGIS over

the last several years has impacted more directly on the exporters.

In fact, one of the top expense items of the export elevators is the

cost of inspections. While the Agency reported improved financial

performance in the fiscal year 1999, the cost of official inspections

at export locations and future management of those costs remain

a concern.

To address this situation, one option under serious consideration

by the National Grain and Feed Association would be to shift FGIS

from a more traditional government agency model to a performance-based organization, PBO, within the Government. The PBO

concept was designed as a business model for government agencies

heavily focussed on service to the private sector, a description that

fits much of FGIS operations, as well.

While several questions remain, we believe the PBO concept

could offer FGIS greater flexibility in the way it manages its operation while retaining strong Federal Government oversight on the

inspection functions.

Another policy option to consider is reducing the 40-percent cap

on administrative and supervisory fees to a 20-percent cap. Reducing the mandated cap on overhead costs would be consistent with

trends within private industry and may also be consistent with

trends within the Agency itself.

Lastly, given today’s rapidly changing global business environment, we think that the seven-year period incorporated in the 1993

reauthorization was simply too long. Rather, we recommend that

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Congress consider reauthorizing the Agency for no more than 5-

years.

Thank you, Mr. Chairman, for the opportunity to testify. I will

be available to answer questions.

[The prepared statement of Mr. Smigelski can be found in the

appendix on page 151.]

The CHAIRMAN. Thank you, Sir.

Mr. Clark?

STATEMENT OF MIKE CLARK, VICE PRESIDENT, ILLINOIS

CORN GROWERS ASSOCIATION, REPRESENTING AMERICAN

SOYBEAN ASSOCIATION NATIONAL ASSOCIATION OF WHEAT

GROWERS NATIONAL CORN GROWERS ASSOCIATION,

HOMER ILLINOIS

Mr. CLARK. Thank you, Mr. Chairman. I am Mike Clark and I

currently serve as vice president of the Illinois Corn Growers Association. I raise corn, soybeans and wheat near Homer, Illinois and

Vedersburg, Indiana.

It is my honor today to appear before you on behalf of the American Soybean Association, the National Association of Wheat Growers and the National Corn Growers Association.

As a farmer, my operation is directly impacted by the work of

GIPSA and the grain standards it enforces. As we enter the new

century, we should take the time to review how our government operates and ask ourselves: is there a better way? This certainly applies to GIPSA and the standards it enforces. Indeed, many of the

grain standards are nearly a century old themselves, having been

created by the Grain Standards Act of 1916.

While GIPSA is to be commended for its efforts in modernizing

its operation, little has been done to bring grain standards into the

21st century. As you well know, U.S. producers must export a significant portion of their crop each year to remain solvent. This requires us to compete in a world market against well-positioned

competitors. Across the globe, world grain buyers have grown more

sophisticated in their buying requirements, yet we continue to rely

on standards that largely only describe external characteristics.

Current U.S. grain standards measure only volume and outward

appearance. Very few inspection standards exist to give grain buyers the information they really want: the end-use characteristics of

the crop. Farm groups, this Committee and the Agency need to engage in open dialogue to determine if these needs are to be met by

the public or private sector.

Take, for example, how we measure protein in wheat. While

wheat is graded by the amount of protein it contains, no standards

are available to measure the quality of the protein or the gluten

content. Tests and standards need to be developed to identify the

inherent traits that bring about the highest end-use value and help

identify and preserves true wheat quality.

Millers and bakers want to know how the wheat they purchase

will grind into flour, how it will bake into bread, and how it will

affect the quality of their product. Without making changes which

reflect end-use quality, U.S. grain producers will be left flat-footed

on the world market, unable to capture the true value of their

product.

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To its credit, GIPSA has made some advances in this area. However, much remains to be done. We need to harness the continued

advances being made in technology to bring about a reliable and

quick test that will predict the intrinsic qualities desired by the

end user. In addition, we must retain the flexibility to adapt such

standards as new technologies are developed.

These issues are made even more complex when we consider the

growth of biotechnology. For example, consider for a moment how

biotechnology is currently affecting the corn industry.

Biotechnology is clearly the single largest driver of change for the

corn industry. As such, it will be important for all segments of the

industry—producer, processor and regulator—to define their new

and different role in this era. The rate of change spurred by biotechnology is so rapid that we cannot rely upon the time-tested

practice of defining policies based on the experience of the past but

rather, by anticipating the needs of the future.

We are still defining the regulatory expectations of GIPSA and

other government agencies in that future. We do anticipate that in

the future the opportunities for corn farmers to extract additional

value from the drop will arise from being able to move up and

down the value chain. This means we will need to better know and

identify the intrinsic qualities of an increasingly segmented corn

market—a marketplace where farmers, handlers, processors and

customers will be tracking, testing and identity-preserving individual loads of grain.

In this new arena, standardization of tests and testing equipment will be vital. GIPSA can play an important role in making

sure that tests for intrinsic qualities are timely, repeatable, verifiable and of a nature that can be used by commerce in our country

elevator system.

Likewise, the soybean industry is actively considering the development of testing and analytical procedures for a variety of traits

derived through both commercial breeding and biotechnology.

These traits include high content levels of oleic and stearate fatty

acids, low linolenic acid content, low phytate content, and high sucrose content. Soybean growers are working with other industry

partners to develop standards for these characteristics for recommendation to GIPSA.

The impact of biotechnology on the grain trade and, in turn, our

expectations of GIPSA is currently evolving. We are still exploring

our expectations of contracts, grades and standards in the future.

While we cannot say today with certainty our expectations for

GIPSA in the future, we look forward to dialogue with the Agency

and this Committee to clarify that role.

Meanwhile, we must continue to monitor and improve GIPSA’s

everyday operations and the grain standards we currently have. It

is vitally important that, in addition to the current user fee system,

GIPSA continue to also be funded by appropriated Federal funds.

The standardization and development of tests, as well as other related GIPSA activities, benefit society at large and should be funded by society rather than through user fees.

Just this year, GIPSA developed standards for a new class of

wheat—hard white. It is to be commended for working with wheat

producers and commissions from across the country to develop reliVerDate 11-MAY-2000 10:23 Oct 11, 2000 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 C:\DOCS\65409.TXT SAGRI1 PsN: SAGRI1
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able, workable standards that will help guide the development of

this class of wheat across the Midwest.

While not all producer groups are in agreement, the National Association of Wheat Growers commends GIPSA and its partners at

the Foreign Agricultural Service for their efforts in advancing

USDA’s grain cleaning initiative.

Again, Mr. Chairman, let me thank you and the Committee for

the opportunity to appear before you today. I appreciate your timely evaluation of these concerns.

[The prepared statement of Mr. Clark can be found in the appendix on page 154.]

The CHAIRMAN. Well, thank you, Mr. Clark.

STATEMENT OF DENNIS WIESE, NATIONAL FARMERS UNION,

FLANDREAU, SOUTH DAKOTA

Mr. WIESE. Thank you, Mr. Chairman. My name is Dennis Wiese

and I am president of the South Dakota Farmers Union and I also

represent the National Farmers Union today.

First, let me say thank you for last year’s price reporting initiatives. While I want to confine my comments to the FGIS issues, I

think it is worth noting that your efforts here have made a big difference as to the plight of the farmers in the countryside.

I testified in South Dakota in Federal court and had to go

through the issues of whether price reporting was important to producers, and they find it very important. It is only one piece but it

was certainly a huge step, one that yes, the states had to take initiative. The Federal Government, through congressional action, did

not happen, even though it was in the body back in 1995 by Senator Daschle, but I do commend you and this Committee for helping move that forward.

Also, I would like to also refer a little bit to what could be enhanced on that before I go on. That is that inside of the price reporting there needs to be an identification of the differential pricing. Differential pricing is not prohibitive or wrong necessarily but

if it becomes discriminatory in that process—and that is where I

think both USDA and our own attorney general in South Dakota

have identified some needs to determine whether or not there is actual inappropriate practices being applied there.

Now to the Federal Grain Inspection Service, which grades—they

become the basis for determining our adjustments to the final settlement of sales agreements between the farmers and the merchandisers and in transaction between the merchandising sector and domestic processors and our overseas customers.

In order to ensure objectivity and accuracy in fulfilling this mission, FGIS engages in research and development activities to review and test new procedures, standards and technology, provides

ongoing education for inspectors, and engages in monitoring its

performance and output against other grain inspection systems.

A user fee system that is periodically modified has been established to recover a significant portion of the cost of the services provided by FGIS. However, as with the majority of the marketing expenses associated with the grain sector, the producer, directly or

indirectly, pays the cost of those inspection services through adjustments to the price received at the farm-gate. The farmer thus has

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a strong vested interest in the efficiently run agency that adopts,

consistently applies and enforces standards that enhance the marketability and the competitiveness of U.S. grains to achieve the

highest level of consumer satisfaction.

In the new decade, significant economic challenges confront grain

producers that are related to the mission of FGIS. These challenges

include the traditional issues of agency service levels, modifications

to standards, dispute settlement and user fees. In addition, FGIS

must adapt to emerging considerations that are the result of increased competition for markets and market share. These issues include grain cleaning and new production and product technologies.

The issue of grain cleaning takes on new significance in a global

market where many forms of intervention have been reduced that,

in the past, have been used to offset market advantages associated

with large-scale commodity cleaning requirements and operations.

In addition, the increased market power associated with highly

concentrated and integrated multinational merchandising and processing sectors allows these companies to play differing national

marketing systems—i.e., those that require grain to be cleaned versus those that do not—against one another to the disadvantage of

grain producers globally.

We believe the U.S. should utilize a portion of the budget savings

associated with those reductions to implement a grain cleaning

pilot program to test the effectiveness of such a system, including

its customer relations impact.

Some may view this approach as unnecessary and undesirable

intervention on the part of government that is not supported by the

marketplace. However, many of those same opponents directly benefit from the business generated by systems engaged in grain

cleaning and/or creates additional company profits by blending various grades of U.S. grains that have been purchased from the producer at a discount already.

New technologies, such as genetic manipulation of grain crops to

achieve specific production or physical attributes, raise serious

grain inspection issues. These include certification as to the presence or absence of GMOs, product segregation, and the potential

for and vesting of liability in the event of misidentification of bioengineered crops.

Unless and until all nations reach agreement on the conditions

of acceptance of these crops, and cost-effective, efficient testing procedures are developed consistent with such an agreement, regulatory agencies and producers will remain at risk. The FGIS in its

certification role will be challenged in terms of its credibility. U.S.

crop producers will ultimately bear the market risk of the technology through the imposition of domestic and international market barriers, price discounts, and potentially legal liability. The majority of economic benefits associated with biotech will flow to those

with the greatest level of multinational integration.

We support congressional action to ensure that producers of genetically enhanced agricultural products are held harmless from

any legal liability that may result from the production or marketing of these products and that producers should not be responsible

for the cost of any testing requirements that may be imposed.

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In addition, we support cooperative international efforts to ensure consumer confidence in the ag products they purchase, including the establishment of a labeling requirement to allow consumers

the ability to make informed purchasing decisions.

Finally, the market for GMO products is likely to require a much

better system product segregation than currently exists in the U.S.

We would encourage on-farm grain storage facility loan programs

to be utilized, as well as a limited farmer-owned reserve program.

Thank you for your time and I would be happy to answer any

questions.

[The prepared statement of Mr. Wiese can be found in the appendix on page 159.]

The CHAIRMAN. Thank you very much, Mr. Wiese.

I want to take advantage of the expertise of this panel and the

organizations you represent. First of all, clearly you have all talked

about the need for standards that recognize something beyond external appearance. I suspect that probably that is understood by

FGIS, by USDA, but the usefulness of this hearing is once again,

in a more high-profile way, to indicate the changing needs of marketing in our country, given the opposition that we have elsewhere.

Likewise, the grain cleaning situation we heard talked about a

little earlier in the testimony this morning with a lot of conflicting

testimony, as the gentleman said, but that does not mean it is put

to rest. The USDA at least is engaged in those hearings and coming to some decisions. And, as Senator Roberts stressed a number

of times, some administrative policies could be adopted here that

would be very helpful. Our Committee is very interested in that,

as you are, and I simply want to acknowledge that interest and follow-through that we shall try to bring to bear.

I want to ask, however, as a topical situation, yesterday I had

a long press conference and gave a first impression of this Biosafety Protocol that the United States acceded to the day before

and my feeling about that was very adverse. As I note in the press

today, some of my comments seem to run counter to others from

grain organizations, some of which are quoted as saying it is really

not so bad or it will not have that much effect.

But I found in the World Perspectives, Incorporated Ag Report

today, in a piece written by Gary Blumenthal, and I give credit to

him; he points out that the United States agreed to sweeping controls over the movement of these grains. He said, ‘‘Advanced, informed consent will be required before shipping genetically modified seed and before shipping grains for consumption in instances

where a country lacks its own regulatory controls. Grains that contain genetically modified content must be labeled ’May contain’

until more detailed labeling requirements are negotiated within 2-

years and the precautionary principle applies even to countries

that do not have to show scientific certainty before blocking imports of food they believe could be harmful.’’

Specifically, he says, ‘‘Countries may consider adverse socioeconomic impact in considering whether to block imports of genetically modified food. The Biosafety Protocol is not subordinate to

any other agreement, since it occurred later in time than the Uruguay Round and therefore could be considered superior in international law.’’

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Now this newsletter says ‘‘The breadth and depth of capitulation

by the United States is shocking. There is even an exemption for

pharmaceuticals for humans, as though the biotech process is only

dangerous in food, as opposed to drugs.’’ This appears to me, as

people begin to allow these to seep in, pretty serious business.

We have talked today prospectively about the need for standards,

the need for the marketability of what we are doing. We have this

pilot project or the beginning of this laboratory that may give us

some idea of to what extent a shipment of grain has biotechnology

or it does not. We have heard testimony before this Committee that

this is difficult to detect with the precision that some are requiring;

namely, 99-percent pure, less than 1-percent biotech. And, as a

matter of fact, that much grain—some have even said most grain

in the United States—may have a touch of biotech after three or

four or 5-years the fields and pollination and so forth. It raises very

real questions for USDA if there are premiums for the nonbiotech

suddenly and quite a distortion in price.

For example, we still have LDPs, we still have loans. USDA, the

Government could just stuck with a lot of grain sitting around that

suddenly does not have the markets that we anticipated because

countries are saying we have a socioeconomic bias and we are busy

and eager to take any pharmaceuticals you have because they are

life-saving but we have a protectionist policy with regard to grain.

And you have acceded to this protocol, so you are stuck with it.

Now, this would appear to me to be something that needs boards

of directors meetings pretty generally with people who are representing grain farmers in the country, to see what is going on here

and what is to be done. Clearly, the obligation by FGIS is enormous.

If there has to be proof before a country will accept a grain shipment, who says this is perfectly fine? The country may not have

any grain inspection of its own, so it says to the United States,

‘‘Prove it.’’ Well, somebody has to do the proving, presumably FGIS

or somebody’s laboratory back here that can certify this before the

shipment is made. Or at least it could be challenged if such a shipment is made without that certification.

So I ask any of you for some general impressions as to where we

are and what additional things we ought to be visiting with FGIS

about, given this enormous change, I think, in the lay of the land

with regard to exports of bulk grain from this country that are implied by this protocol. Does anyone have a first impression? Yes,

Mr. Wiese?

Mr. WIESE. I have never been short for words, Mr. Chairman. I

guess what we have is massive confusion amongst the farmers.

First of all, their concern is who are the consumers that they are

supposed to be supposedly producing for? They were told to supply

the genetically modified stuff and lo and behold, we really do not

have a market for that. So I think that is their first concern. There

are no premiums paid to any farmer for any of that stuff; never

was. So that never existed.

And I think lastly and probably most importantly is if there is

an identification of that type of commodity commingled, who is

going to be held liable in the cases of the repercussions, whether

they come from domestic or international partners?

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I think those are all very pertinent issues and things that we believe should be addressed through FGIS so that we have some

standard. Ultimately I assume they will respond with some state

agency being a partner on that, as well.

The CHAIRMAN. I think those are very relevant questions, I suppose some that might have been asked before we acceded to the

protocol, but nevertheless still very relevant now that we are in

this fix.

Yes, Sir?

Mr. SMIGELSKI. We are still struggling with what the market is.

Is it biotech or is it nonbiotech? And very bluntly, in order to do

a good job of testing the grain at the elevator level and at the export level, we do need an agency such as Federal Grain Inspection

to do that, but they are simply testing the test. They are making

sure that they do measure what they are measuring.

The industry is providing this from the various sectors, but what

we need is we need a very quick, very reliable means of testing

that will consistently, over a consistent period of time, measure exactly whether it is biotech or not. The challenge is to get one that

we can depend on and one that will do it quickly.

The CHAIRMAN. Now, we do not have one now?

Mr. SMIGELSKI. Well, we have one—we have several, but they

can be questioned. There are questions. You take a one-minute or

two-minute test and then you take a three-day laboratory test that

is more scientific and has a longer period of time to come up with

the conclusions and it may prove a positive reading to be negative

or vice versa.

The CHAIRMAN. Well, as a practical matter, what happens then

if country X says, ‘‘I do not think your test is very reliable’’? In

other words, you are asserting that this is pure of any biotechnology but how do we know?

Mr. SMIGELSKI. Well, we are doing very much the same thing

that we are telling the farmer. We are telling the producer that before you plant, make sure that you have a market. And before I

contract with a foreign country about whether it is biotech or not

biotech, I want to know what the parameters are and which test

will serve as, let’s say, the ruling test. So we try to do that in a

contract.

The CHAIRMAN. Now, getting back to Mr. Wiese’s question, if I

am a corn farmer in Indiana or he is a corn farmer in South Dakota or what have you, do we then try to find out the destination

of the corn from our farms? In other words, there is no way we can

do that.

Mr. SMIGELSKI. Right.

The CHAIRMAN. So where do we get the signal, then, as to where

there is a market for all this?

Mr. SMIGELSKI. What we are doing is we are advising the producer to check with his market. He has to check with the elevators

that he plans on delivering the grain and say, ‘‘Are you taking this

commodity and are you paying a premium for it or aren’t you?’’ The

biggest concern they have today is whether they will take it.

The CHAIRMAN. Yes. But it at the elevator level, then. So if you

are able to make the sale to the elevator, you are home free as a

producer. Then it is his problem.

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Mr. SMIGELSKI. Right, but that is the problem. We are struggling, my company itself, we are struggling with what we are going

to do with all the biotech grain.

The CHAIRMAN. Sure. I am worried about my elevator at Beech

Grove as to what sort of a struggle they are going to have.

Mr. SMIGELSKI. I agree. You should worry.

The CHAIRMAN. Yes, Sir?

Mr. FARRISH. Mr. Chairman, just to speak briefly on the Biosafety Protocol, initially when I read the article in the newspaper

concerning it, I thought well, this does not look too bad if all we

have is some ‘‘may concern’’ language. But I think the further we

get into the agreement and as North American Export Grain Association [NAEGA], looked at the agreement, we are not comfortable

with this agreement.

The CHAIRMAN. No.

Mr. FARRISH. We think it presents us some real problems with

exporting grain. Like the others, I would describe the industry as

basically feeling its way through a dark cage on this and really not

knowing where we are headed. My firm is not engaged currently

in the corn and soybean business but trust me—in the wheat business, we are standing back and watching what happens here very

carefully because we know we are probably best for the biotech

arena.

With regard to FGIS, while they do not do the tests directly, they

are in Kansas City, in the Technical Center there, developing testing procedures to test the validity, if you will, of the testing kits

that private companies are providing the industry, but testing at

the tailgate, at the country elevator, will never be the solution to

this problem, not in the near future, because the tests take too long

to run and no farmer or country elevator wants to be subjected to

that type of time.

I would suggest that our organization believes that the answer

to the problem lies in harmonization of the standards, acceptability

standards or standards for accepting these products worldwide. We

need somehow, through our trade negotiations, to get to some harmonization of the procedures and the regulations for these crops.

Then we think we will have the problem behind us.

And there are still many who believe that this industry can successfully segregate Genetically modified organism [GMO] and nonGMO prompts, and we do not believe that, that is really feasible.

There is too much risk in the transportation and handling system

for contamination back and forth between the two to really make

this possible.

If we did try to make that possible, the expense would be enormous. It would require building two separate handling systems and

transportation systems for grain products.

The CHAIRMAN. Well, that is the testimony we have heard before

here, that ultimately this is a gesture in futility while we are all

busy trying to parcel all this out, and your point, I think, is the

right one. Our trade negotiators have got to do a better job. You

know, we cannot accept one disaster after another in this area, but

that is for another hearing at another time.

Mr. Wiese, you were trying to——

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Mr. WIESE. Well, from the standard for the farmer who delivers

to that small town, who then has that product delivered to another

facility, he may deliver to a coop who has an alliance with a private

institution that then takes it to a port that neither of them control

through a transportation system that may have different commodities handled in it previously. I think at some point you have to determine what is an acceptable level, if any at all, much as we do

on other grain standard issues.

Then I think the other thing is you could do it at the local level,

much as we do protein levels. You could do it also much like we

do in a livestock setting with a grade and yield. We will pay a certain portion for every bushel out until the test returns.

The CHAIRMAN. Mr. Clark, do you have any comment on all this?

Mr. CLARK. Yes. As a producer, obviously we are in a state of

transition but on the Biosafety Protocol, that will not deter us from

our overall support of biotech. Planning decisions are unique individual risk management decisions for the individual producer and

the first job should be to get—a good step would be to get the

standardization of tests so that the results could be acceptable for

everyone.

In Illinois, in our corn growers organization, we have put out

booklets to our members that basically say, ‘‘Know before you grow.

Know what your customer wants. Know who your customer is.’’ We

have a map of the state and have circles on the different buyers

and users in the state and what they are wanting to have.

We have Staley’s in Decatur and Lafayette, Indiana coming out

and saying they do not want GMOs for fall delivery. ADM, the

question is still out on them on whether they will use those in their

processing plants, whether they will accept them at the river terminals. Frito-Lay elevator near my home in Homer came out last

week saying they wanted to go non-GMO. Lalhop in Danville is

still on the fence and that is one of my biggest customers. Then my

local elevator in Homer is owned by them. They do not foresee a

problem right now with GMO crops because their biggest customers are in the Southeast, the poultry and pork industry.

But the biggest thing for producers is to know who your customer is; that is who you are producing the product for; that is who

is paying your bills ultimately for you, and to grow what your customer wants. That decision should be left up to an individual farmer as far as his risk management program.

The CHAIRMAN. Well, I thank each one of you. Let the record

show that you all lasted for 4-hours and were still cogent and wise

even after that period. We look forward to staying in touch with

each of you.

These subjects, we will revisit and I appreciate all witnesses who

have come today.

The hearing is adjourned.

[Whereupon, at 1:03 p.m., the Committee was adjourned.]

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