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93–985 PDF 2004

S. HRG. 108–478

MONOPSONY ISSUES IN AGRICULTURE: BUYING

POWER OF PROCESSORS IN OUR NATION’S

AGRICULTURAL MARKETS

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 30, 2003

Serial No. J–108–51

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

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C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Craig, Hon. Larry E., a U.S. Senator from the State of Idaho ............................ 1

prepared statement .......................................................................................... 116

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin ............. 9

prepared statement .......................................................................................... 123

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa ..................... 2

prepared statement .......................................................................................... 125

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, prepared 

statement .............................................................................................................. 138

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 6

prepared statement .......................................................................................... 140

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 5

prepared statement .......................................................................................... 142

WITNESSES 

Bailey, DeeVon, Professor and Extension Economist, Department of Economics, Utah State University, Logan, Utah ............................................................ 20

Carstensen, Peter C., George Young-Bascom Professor of Law, University 

of Wisconsin Law School, Madison, Wisconsin .................................................. 25

Cotterill, Ronald W., Professor of Agricultural and Resource Economics, University of Connecticut, Storrs, Connecticut ........................................................ 22

Harkin, Hon. Tom, a U.S. Senator from the State of Iowa .................................. 8

Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, Department 

of Justice, Washington, D.C. ............................................................................... 11

QUESTIONS AND ANSWERS 

Responses of R. Hewitt Pate to questions submitted by Senators Grassley 

and Leahy ............................................................................................................. 34

SUBMISSIONS FOR THE RECORD 

Alabama Contract Poultry Growers Association, American Farm Bureau Federation, Campaign for Contract Agriculture, Consumer Federation of America, Georgia Poultry Justice Alliance, Humane Society of the United States, 

National Contract Poultry Growers Association, National Farmers Union, 

North Carolina Contract Poultry Growers Association, Organization for 

Competitive Markets, Rural Advancement Foundation International-USA, 

Sustainable Agriculture Coalition, United Poultry Growers Association, 

joint letter ............................................................................................................. 43

Bailey, DeeVon, Professor and Extension Economist, Department of Economics, Utah State University, Logan, Utah, prepared statement ........................ 45

Butler, J. Dudley, Yazoo County, Mississippi, statement .................................... 50

Carrington, Paul D., Chadwick Professor of Law, Duke University, statement 55

Carstensen, Peter C., George Young-Bascom Professor of Law, University 

of Wisconsin Law School, Madison, Wisconsin, prepared statement ............... 58

Cotterill, Ronald W., Professor of Agricultural and Resource Economics, University of Connecticut, Storrs, Connecticut, prepared statement .................... 84

Dobbs, Mabel, Western Organizationof Resource Councils, Billings, Montana, 

statement .............................................................................................................. 118

Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared statement ...................................................................................................................... 128

Harl, Neil, Professor, Iowa State University, Ames, Iowa, statement ................ 130

Page

IV

National Council of Farmer Cooperatives, Washington, D.C., statement ........... 145

Organization for Competitive Markets, Lincoln, Nebraska, statement .............. 148

Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, U.S. Department of Justice, Washington, D.C. prepared statement ................................... 154

Wellington, Robert D., Senior Vice-President for Economics, Communications 

and Legislative Affairs, Agri-Mark Dairy Cooperative, Lawrence, Massachusetts, statement .................................................................................................... 169

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MONOPSONY ISSUES IN AGRICULTURE: BUYING POWER OF PROCESSORS IN OUR NATION’S AGRICULTURAL MARKETS 

THURSDAY, OCTOBER 30, 2003 

UNITED STATES SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:39 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Larry Craig presiding. 

Present: Senators Craig, Grassley, Specter, Leahy, Kohl, and 

Feingold. 

OPENING STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR 

FROM THE STATE OF IDAHO 

Senator CRAIG. The Committee on the Judiciary will be in order. 

We tackle and interesting and fascinating topic today: Monopsony Issues in Agriculture: Buying Power of Processors in our Nation’s Agricultural Markets. Let me start by welcoming our distinguished panel of witnesses here today to discuss an issue that is 

very significant in American agriculture. We are here to discuss 

the marketplace in which nearly 2 million U.S. agricultural producers operate. 

Those 2 million are directly responsible for feeding you, me, and 

this country, and in many instances people all around the world. 

First, I think it is important to recognize that enhanced and advanced communications systems and technologies have heavily contributed to a more integrated world. Our economy faces increasingly stronger global influences and market forces. New economic 

relationships and the United States’ resources and leadership in 

building these relationships around the globe have set the stage for 

the opportunities and the challenges that our domestic industries 

now encounter. 

In the agricultural industry, this is particularly true. The agricultural sector is unique and involves very complex economic models and relationships when compared to others. I believe no other 

industry faces the same degree of uncertainty and risk that those 

roughly two million producers and their families encounter on a 

daily basis. 

It is this uniqueness and attention to risk in our agricultural industry that brings us here today. Agricultural producers are desperately trying to operate in a marketplace that demands low enduse prices, yet high quality through increased efficiencies, and how 

2

to increase producer profitability, although subjected to the status 

of a price taker, not a price maker. 

It is no secret that today’s domestic market, especially in the 

livestock and value-added arenas, has witnessed a significant shift 

from supplying meat cuts for consumers through farmer markets in 

the local town square, to shipping livestock hundreds or even thousands miles away to the a large packing and processing plant 

whose products eventually reach millions. 

With this in mind, it is important to note that within the U.S., 

markets differ significantly by region. In the Northwest, our producers must shift their crops or livestock through limited means to 

markets that are few and far between. The traditional sales yard 

is still prevalent, yet becoming very rare. In contrast, areas such 

as the Midwest contain vastly larger herds that supply a much 

greater number of processors who may be just down the road from 

the farm. 

Just recently one of only a few remaining packing plants in my 

State closed; 272 people were immediately looking for new jobs. Although this may be deemed a small operation by some standards, 

it represents a larger issue that producers are becoming increasingly aware of the importance that risk mitigation plays in their 

operational plans. 

Contractual arrangements with buyers are proving more popular 

to combat risk, and I believe it is the responsibility of those in Congress and in regulatory positions to ensure that these arrangements are fair and not exploited. 

Today, we will receive testimony from our panel that will explore 

their actions and thoughts on this issue of fairness in today’s agricultural markets, and how the terms ‘‘monopsony’’ and ‘‘monopoly’’ 

adhere to this vital sector of our economy. 

I hope the hearing will help shed some light on the frustration 

that I and my colleagues have experienced most recently in the 

2002 farm bill, in sifting through all of these complicated issues. 

Again, we welcome you and we look forward to your testimony. 

Before I turn to our witnesses, let me recognize one of my colleagues on the Judiciary Committee, Senator Grassley. 

STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR 

FROM THE STATE OF IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman. I appreciate your 

providing an opportunity for this important discussion of the negative impact of monopsonistic control and the impact it can have on 

family farmers and rural America. 

Monopsony is to buying as monopoly is to selling. When family 

farmers have limited options to market their commodities, they 

face potential monopsonistic conditions. For decades, the Government has aggressively protected America’s consumers through the 

Sherman and Clayton Acts from monopolistic activities. Unfortunately, the concept of monopsonies has not seemingly drawn as 

much attention. 

Today, I hope that we take this opportunity to focus on how the 

Department of Justice attempts to identify monopsonistic practices. 

While I believe Justice attempts in good faith to remedy 

3

monopsonies when it finds a problem, I worry that the calf has not 

found the creep when it comes to this issue. 

I am concerned that the Department of Justice doesn’t have the 

agricultural specialists on board who understand the unique marketing dynamics that farmers experience in their relationship with 

industry. The Department of Justice can’t remedy the problem unless it understands the potential harm. 

To the Department of Justice’s credit, it has challenged or limited agricultural and agribusiness mergers in the past due to 

monopsonistic concerns. I know that Assistant Attorney General 

Pate has laid out many examples in his testimony of the Department of Justice’s interest in keeping markets competitive. 

One example of the Department’s commitment that Mr. Pate did 

not describe is United States v. Rice Growers Association. Justice 

tried this case in 1986 and challenged the purchase of one milling 

firm buying another milling firm. The Department found that within the regional market, the new entity would control 60 percent of 

the rice purchased and that was found unacceptable to the Department. 

Clearly, DOJ has the authority to act. I am just not certain that 

this Department of Justice, or for that matter any Department of 

Justice in recent history has hired professionals with the expertise 

and background to identify the actual markets being affected. 

For instance, 87 percent of all hogs are contract or packer-owned 

pigs. That means that only 13 percent have the potential to be 

open or spot market pigs for slaughter. Over 90 percent of the hog 

marketing contracts are based on the composite spot market price 

to establish the base value. Many hogs not bound to written contracts are sold under oral formulas. The value of these types of oral 

agreements does not necessarily track with spot market value. In 

addition, hogs sold outside the western corn belt don’t contribute 

substantively to the mandatory price reporting data. 

I have seen estimates that of the 13 percent of the hogs deemed 

open market pigs for slaughter, only 3 to 5 percent traded daily are 

actually legitimate spot market pigs. The 3- to 5-percent figure sets 

the price daily for 90 percent of the pigs that packers have under 

marketing contracts. 

It should be easy to understand that as the actual spot market 

thins out, if packers choose not to participate in the spot market 

everyday, packers potentially will be able to manipulate the spot 

market price and influence the worth of marketing contracts. I feel 

strongly that we need to be on the look-out for this type of manipulation of the marketplace. 

Unfortunately, the potential for this type of manipulation grew 

considerably when Smithfield, the world’s largest vertical integrator, acquired Farmland. Department of Justice staff informed 

my office that the Justice Department did not believe that this 

transaction met any threshold to justify challenging the acquisition. Justice explained that there would still be multiple purchasers in the western corn belt after this merger took place. 

I have tried to take a look at the packers participating in the 

southern Minnesota, all of Iowa, South Dakota, and the Nebraska 

region. Unless the Department of Justice believes that a family 

farmer which produces 2,000 hogs per year, selling 40 per week, 

4

using a trailer pulled by a pickup can reasonably be expected to deliver hogs up to 300 miles away from his farm, we definitely have 

a problem. 

On a related topic, I would be remiss if I did not take this opportunity to voice concern not only for the spot market’s impact on 

contracts, but for the construction of producer contracts. As the 

lead sponsor of the Fair Contracts for Growers Act, S. 91, I am very 

concerned about the abuse of arbitration clauses in take-it-or-leaveit non-negotiable contracts such as those that are typical in the 

livestock and poultry sectors. 

Certainly, arbitration, if agreed to voluntarily by both parties involved, can be a useful tool for resolving disputes. But what we are 

now seeing in the livestock and poultry sectors is that arbitration 

clauses are being forced on farmers not as a legitimate alternative 

dispute mechanism, but as a mechanism to prevent farmers from 

challenging the abusive actions of large packers or integrators. 

Farmers who are forced into arbitration proceedings are rarely, 

if ever, successful. In large part, this is because the process is 

stacked against them because arbitration does not allow for the 

right of discovery. If a farmer is attempting to prove that he has 

been treated unfairly or has been the victim of fraud, all the data 

that would allow him to argue his case is completely controlled by 

the company being accused of misdeeds. Without access to that 

data through the normal discovery process, it is impossible for a 

farmer or any grower to prove their case. 

Lastly, arbitration proceedings are not part of the public record. 

By forcing growers to sign away their rights to resolve disputes in 

court, livestock and poultry companies are able to limit public 

knowledge about any abusive practices. 

So it is easy to understand why large, vertically-integrated livestock and poultry companies might see the benefits of including 

mandatory arbitration clauses in their contracts. Unfortunately, we 

understand that farmers are often put in a position that they either have to sign the contract presented to them or face bankruptcy. 

The Chairman of this Committee was the lead sponsor of a bill 

in the last Congress which addressed concerns about the abuse of 

mandatory arbitration clauses in contracts between auto manufacturers and car dealerships. That legislation, which is nearly identical in structure to the bill that Senator Feingold and I have introduced, is now law. 

Our legislation would simply specify that both parties in a livestock or poultry contract must agree in writing to pursue arbitration after the dispute arises to assure that farmers choose the arbitration voluntarily. It is my hope that we will be comfortable affording farmers the same protections against abusive contract 

terms that we have provided for the car dealers of America. 

In conclusion, I thank the Chairman for this hearing. I look forward to working with both the Committee and the Department of 

Justice to further explore this issue. I would also like to submit for 

the record the testimony of Dr. Neil Harl, from Iowa State University, whom we invited to testify today but had a conflict. 

Senator CRAIG. Thank you very much, Senator Grassley. Of 

course, that will become part of the record. 

5

Now, let me turn to the Ranking Member of the full Committee, 

Senator Leahy. 

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

FROM THE STATE OF VERMONT 

Senator LEAHY. Thank you very much, Mr. Chairman. I do want 

to thank the Committee for holding this hearing examining the 

buying power of processors in our Nation’s agricultural markets. 

I am glad to see our witnesses here. Dr. Cotterill, I am glad to 

have you here. He is Professor of Agricultural and Resource Economics at the University of Connecticut. I have worked with him 

a lot on daily matters over the years. 

Monopsony is not an easy word to say, as we have all found, each 

one of us, as we have scrambled with that. What it means, though, 

is pretty easy to understand. It is the increasing power of large, 

concentrated agricultural processing firms and their ability to 

lower the prices received by farmers who supply them with milk 

and meat and grain. This trend is having a tremendous impact on 

the lives and livelihoods of American farmers in virtually every region of this country. 

In my own State of Vermont, agriculture is a vital industry, and 

dairy is the most significant part of that. It accounts for roughly 

three-quarters of our State’s net farm income. For decades, dairy 

farmers seemed immune from the consequences of restructuring because, through their cooperatives, they also served as milk processors for the local or regional markets. National markets didn’t 

exist. 

That has changed dramatically over the past few years. As a result, our farmers are not getting a fair share of the retail price of 

milk, but giant corporate processors are raking in anticompetitive 

profits at the same time they are raising prices to consumers. The 

price goes down to the producer, the price goes up to the consumers, and these conglomerates get the money. 

My major concern in New England relates to Dean Foods, Inc., 

which merged with Suiza Foods in 2001 and formed the large milk 

processing company, not in the region, but in the world. I was really surprised and disappointed when the Justice Department’s Antitrust Division approved this merger because it meant that the new 

company would control almost 70 percent of all the milk supply 

throughout all of New England. 

They achieved this by buying up local dairies and then, of course, 

immediately closing them down. Actually, Dean Foods controls 

more than 30 percent of all milk production nationally, in addition 

to a lot of other alliances they have. 

I have been concerned about last year’s proposed merger between 

H.B. Hood and National Dairy Holdings. I led a bipartisan group 

of 10 Senators in asking the Justice Department’s Antitrust Division to investigate the merger. It would allow one company, Dairy 

Farmers of America, to control more than 90 percent of the New 

England fluid milk supply. Fortunately, because the Antitrust Division actually looked at it, H.B. Hood withdrew its original plan, in 

May, and it is now being restructured. 

The opportunity for dairy farmers to market their milk independently is practically gone. Today, two cooperatives control access to 

6

most of the Nation’s processing facilities. They are using this access 

to expand further. It is not good for daily farmers, it is not good 

for other market participants, it is not good for consumers. 

In a competitive market, if input costs fall, competition tends to 

drive consumer prices lower, and that makes sure that manufacturers don’t get windfall profits. But that doesn’t work in the dairy industry. Retail prices for fluid milk are virtually unchanged this 

year, even though prices that farmers receive are off 50 cents per 

gallon. 

I think the Justice Department should still investigate why lower 

farm prices for milk have not been passed on to consumers. I have 

asked the General Accounting Office to investigate this disparity 

between farm and retail milk prices. It is not just important for 

Vermont; it is important for the daily industry country-wide to establish greater protections against market abuses by huge agribusinesses. 

I think the American people and the farmers who produce America’s agricultural goods deserve strong watch-dogging by their Government. If we have strong watch dogs here, it works, and it is 

going to help the market opportunities for America’s farmers and 

ranchers. It is also going to protect farmers and ranchers against 

those who have such enormous power to just overcome anything 

they might do. 

Mr. Chairman, I have a much longer statement and I would ask 

to put it in the record. 

Senator CRAIG. Without objection, your full statement will become a part of the record. Thank you very much for that. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Senator CRAIG. Let me turn to another member of our Committee, Senator Herb Kohl. 

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 

STATE OF WISCONSIN 

Senator KOHL. Thank you, Mr. Chairman. Thank you for holding 

this hearing to examine the troubling trend of increased concentration in the agricultural industry. 

The alarming transformation of rural America continues. Increased concentration on the buyer side has dramatically shrunk 

the market for farmers and driven many out of business. It is clear 

that now more than ever, we need vigorous and aggressive enforcement of our antitrust laws to prevent concentration that harms 

competition in this marketplace. 

We need to seriously examine whether our antitrust laws are 

being properly enforced to prevent excessive agricultural consolidation. Antitrust enforcement should not permit the creation of dominant market power by a buyer of agricultural products any more 

than it would permit the creation of a monopoly by a seller. In addition, antitrust regulators should be sensitive to the effects of consolidation in regional markets, as many agricultural products are 

perishable. 

We must ensure that the Justice Department devotes sufficient 

resources and staff to the agricultural sector. Our farmers and 

ranchers, less than 2 percent of our population, produce the most 

7

abundant, wholesome, and by far the cheapest supply of food in the 

world. Yet, prices fall for farmers as they find fewer and fewer buyers for their products. And despite this, prices stagnate or even rise 

for our consumers. 

This trend is evident across commodities. From 1993 to 2001, the 

share of hogs sold through contractual arrangements increased 

from 10 percent to 72 percent. In poultry, nearly 100 percent of the 

market depends on contractual arrangements. 

Of greater concern to me, the dairy industry is experiencing the 

effects of processor concentration. Dairy producers in Wisconsin 

and around the country recently emerged from a 20-month period 

where milk prices hit a 25-year low. The U.S. fluid milk market is 

a $23 billion-a-year industry. The combination if Suiza and Dairy 

Farmers of America now controls approximately 70 percent of the 

fluid milk processing and distribution in 13 northeastern States. 

This concentration in buying power at the processor and retail 

level has not led to lower prices for consumers. In fact, 2 months 

also when the national average price paid to farmers for fluid milk 

declined by 13 percent, the average national retail price paid by 

consumers at the grocery store declined by only 5.5 percent. 

Rural America is in crisis. Their way of life and economy, countless communities, and too many farm families are struggling because there is a dwindling free market for American agriculture’s 

superior product. We need to revisit the way our antitrust laws are 

being applied to agriculture. We need to discard the outmoded doctrine that buying power is treated with a lower degree of scrutiny 

than the aggregation of selling power. 

Dominant buying power among food processors ought not to be 

permitted any more than a monopoly among food retailers. Dominant regional market shares should be permitted no more than 

dominant shares in national markets. 

We need to ensure that the Justice Department enforcement 

tools are adequate to do their very important job. We were pleased 

several years ago when the Justice Department appointed at our 

request a special counsel responsible for competition in agriculture. 

However, serious questions have been raised as to whether the Justice Department has devoted sufficient resources to this task. We 

need to scrutinize the Antitrust Division to ensure that it is devoting sufficient resources and manpower to competition in agriculture. 

We are pleased to welcome our witnesses, and for me particularly 

Peter Carstensen, from the University of Wisconsin Law School. I 

have always been impressed with Mr. Carstensen’s work on this 

issue, and so we all look forward to a productive hearing. 

Thank you, Mr. Chairman. 

Senator CRAIG. Senator, thank you very much. 

Now, let us turn to our first panel and our first panelist, Senator 

Tom Harkin, of course, Ranking Member of the full Senate Ag 

Committee. We know that these are issues awfully important in his 

home State. 

Senator please proceed. 

8

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

THE STATE OF IOWA 

Senator HARKIN. Thank you very much, Mr. Chairman, and 

thank you for the opportunity to be here and for holding this hearing. I, first of all, want to associate myself with the statements I 

heard from Senator Grassley, Senator Leahy and Senator Kohl. I 

think they are right on the mark on this, and perhaps some of the 

things I will say will be repetition, but maybe just with a little different slant. 

The consolidation horizontally and vertically in the processing 

and retail sectors of our food industry is a real problem facing rural 

America. We sometimes forget that the goal of antitrust policy was 

to protect small firms, like independent farmers, that sell their 

goods. As Senator Kohl pointed out, it is not just the buyers, but 

also the sellers that need to be protected when they deal with an 

anticompetitive and consolidated market. 

As ranking member, as you point out, Mr. Chairman, of the Agriculture Committee, I am too familiar with the numbers. Eighty 

percent of steer and heifer slaughter is controlled by four firms. 

Soon, 64 percent of all hog slaughter will be controlled by 4 firms. 

You have heard a couple of people speak about the dairy industry 

and what is happening in certain parts of our country in the dairy 

industry. 

Well, just as these industries have become more horizontally consolidated, they have also increased the use of vertical arrangements. Hog packers now have 80 to 90 percent of their supply tied 

up in some type of a vertical arrangement. These are just a few examples of the increased horizontal consolidation and vertical integration in agriculture. 

The essential problem with consolidation and vertical integration, when taken too far, is that such trends reduce choice and efficiency in the marketplace. The lack of choice leads to unequal bargaining power in business relationships. With unequal market 

power, the more dominant firm will always take advantage of the 

more vulnerable party by squeezing price, shifting liabilities, or demanding certain terms without paying an associated price. 

Again, as Senator Kohl pointed out, Congress enacted the Sherman and Clayton Acts not only to protect consumers from sellers 

who have too much power, but also to protect sellers from buyers 

who have too much power. 

One of the most disturbing news that we have seen out our way 

is the recent acquisition of Farmland Foods by Smithfield—again, 

just another example of what we are talking about here. Many of 

us wrote letters and signed on to letters to the Attorney General 

expressing grave reservations about Smithfield acquiring Farmland. But the Department seemed to ignore the concerns of independent producers and they let the deal go through untouched. 

Of course, Smithfield’s acquisition of Farmland will strengthen 

its leverage over family pork producers and represents even more 

concentration and vertical integration in the already rapidly consolidated pork processing industry. 

Smithfield’s version of hog production in which it owns all of the 

hogs and reaps all of the entrepreneurial profit does not bode well 

for the future of the rural Midwest. Smithfield has a history of 

9

shutting down plants that it buys. Yet, even if the plants remain 

open, the market would still lose a buyer and become even more 

concentrated. But despite Smithfield’s past actions and the potential degree of control they would hold over the sector, the Department of Justice allowed the acquisition to go through untouched. 

As Ranking Member of the Ag Committee, I realize the job of addressing competition problems in agriculture does not lie solely 

with your Committee. The Ag Committee has jurisdiction over the 

Packers and Stockyards Act, the Agricultural Fair Practices Act, 

and the Perishable Agricultural Commodities Act. 

Again, all of these laws are designed to protect producers from 

unfair trade practices or help producers gain bargaining power 

through cooperatives. In fact, one of the reasons I wanted to testify 

today, Mr. Chairman, was to invite more cooperation between our 

two committees to work together to protect farmers against unfair 

and anticompetitive conduct. 

In conclusion, I want to thank you for convening this very important hearing. This may not make the front page of the New York 

Times. It may not be the headline on the CBS Evening News, but 

in terms of the number of people that are being affected by this 

horizontal consolidation and vertical integration in agriculture, it 

probably dwarfs anything the news is going to cover tonight, or tomorrow on the front page. 

Whether they realize it or not, this ripples through the food 

chain. It ripples through the food markets, through the grocery 

stores, and right down to the consumer level. So that is why the 

business you are about is important for the free market, and it is 

important for our producers as well as our consumers. 

Thank you very much, Mr. Chairman. 

Senator CRAIG. Senator Harkin, thank you very much for that 

statement. 

Senator Feingold, we have allowed opening statements by all of 

our colleagues today. So if you so have, please proceed. 

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

FROM THE STATE OF WISCONSIN 

Senator FEINGOLD. Thank you, Mr. Chairman. That is very kind 

of you. 

I appreciate your holding this hearing to shed light on an important issue for farmers and their families. I must say I am awfully 

pleased to be with this group of Senators, including Senator Harkin, all of whom have shown enormous leadership in this area. 

I appreciate the opportunity to briefly share my views on the 

power of buyers in our agricultural markets. Increased consolidation and market concentration are, without question, a very significant concern for producers throughout the Nation. As I travel 

throughout my home State of Wisconsin, these issues are raised 

constantly by farmers and growers. 

Monopsony power is a serious concern because this power can so 

easily be abused. When there is only one buyer of a commodity, 

farmers fear that the price that they receive and the terms of the 

transaction will be unfairly biased against them. Farmers are 

rightfully troubled by inadequate market access, price discrimination against the small independent producer, and, of course, the 

10

loss of negotiating power for the men and women who actually 

produce the product. 

I am pleased to be an original cosponsor of the Fair Contracts for 

Growers Act of 2003, and I have been delighted to work with Senator Grassley on this issue. It addresses one unfair result—monopsony power in this industry. It is designed to provide greater fairness in the arbitration process relating to livestock and poultry 

contracts. 

I believe that arbitration can be an effective and appropriate 

method to resolve disputes between farmers and those who purchase their products, but only when both parties voluntarily participate. Many farmers, however, due to their disadvantaged economic position, are forced to sign contracts presented to them by 

large processing firms that include mandatory arbitration clauses. 

There is no negotiation between the farmer and the processor in 

these instances. Farmers must accept the contract as written, 

waiving their constitutional right to have their disputes under the 

contract decided by a trial by jury. 

I would like to submit a letter for the record, Mr. Chairman, 

from numerous farm and consumer organizations, as well as advocates for animal protection in rural communities, expressing their 

support for the Fair Contracts for Growers Act. 

Senator CRAIG. Without objection. 

Senator FEINGOLD. Thank you, Mr. Chairman. 

The Senate and this Committee have both demonstrated strong 

bipartisan support for rectifying the injustices of mandatory arbitration. During the debate on the farm bill in the last Congress, I 

offered an amendment with Senator Grassley to prohibit the use of 

mandatory arbitration clauses in livestock and poultry contracts. 

Our amendment passed the Senate by a vote of 63 to 31, but it was 

dropped in conference. 

This Committee has supported similar arbitration measures in 

the past, such as the auto dealer arbitration bill that the Chairman 

worked to enact in the 107th Congress. The Fair Contracts for 

Growers Act addresses only one piece of this complex business relationship in agricultural markets that are becoming increasingly 

concentrated. The growing concentration of agricultural buyers 

raises serious questions about the Department of Justice’s enforcement of existing laws, as well as the adequacy of those laws to ensure a fair, open, and equitable market. 

Again, I thank the Chairman for letting me speak. 

Senator CRAIG. Thank you very much, Senator. 

Now, let us turn to our second panelist and ask him, if you, Mr. 

Pate, to please come to the table. 

Our second panelist today is R. Hewitt Pate, the Assistant Attorney General for Antitrust. Mr. Pate became the Assistant Attorney 

General for Antitrust this past June, but served as an Acting Assistant Attorney General from November 23, 2002, until his confirmation by the Senate. 

My guess is that some of our colleagues might be, and have already been a bit critical of actions by or failure to act by the Office 

of the Attorney General on certain issues. So we are anxious to 

hear from you, Hewitt, as it relates to the work that is underway 

in the Justice Department on these critical issues. 

11

STATEMENT OF R. HEWITT PATE, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, 

WASHINGTON, D.C. 

Mr. PATE. Thank you very much, Mr. Chairman and members of 

the Committee. I would start by saying that I welcome the scrutiny. In our system of Government, that is how we improve our 

public institutions, and so I appreciate the opportunity to appear 

before this Committee today. 

I have a longer written statement, but I would like to begin with 

a briefer statement, if I may. 

Senator CRAIG. Your full statement will be a part of the record. 

Thank you. 

Mr. PATE. Thank you, Mr. Chairman. 

The agricultural marketplace, as many of you have mentioned, is 

undergoing significant change—international challenges, technological innovation, and new forms of business relationships. In the 

midst of these changes, farmers are rightly concerned about whether agricultural markets are remaining competitive. We take these 

concerns very seriously. We know that competition at all levels in 

the production process leads to better quality, more innovation, and 

competitive prices. Enforcement of the antitrust laws can benefit 

farmers as purchasers of goods and services that allow them to 

grow crops and raise livestock, just as it also protects consumers 

of the crops that they raise and sell. 

We have been very active in enforcing the antitrust laws in the 

agricultural sector. We have also undertaken a special outreach effort, meeting with producers and producer groups in Washington 

and around the country to listen to their concerns and to improve 

everyone’s understanding of the role of the antitrust laws. 

This afternoon’s hearing focuses on monopsony, and I think it is 

fair to say that, more than some other industries, agriculture has 

a structure that makes so-called monopsony concerns more likely 

to arise. That is because the industry is characterized by many 

smaller producers selling to fewer and larger processors. 

We are sensitive to this and we look closely at so-called monopsony concerns in enforcement. Monopsony is the mirror image of 

monopoly, but, of course, on the buying side rather than the selling 

side. This is an antitrust concern because if market power is created that enables a buyer to reduce the quantity it buys in order 

to force down the per-unit price it pays, and if that depresses producer incentives and brings output down below the competitive 

level, then society is deprived of the benefits of the full amount of 

production that should take place in a competitive economy. 

The competitive harm to suppliers thus can lead directly to competitive harm for consumers. So focusing on promoting competition 

goes hand in hand with our taking enforcement action in a monopsony case when the facts warrant. 

As you all well know, we bring three types of antitrust enforcement actions typically. Under Section 1, we both criminally and 

civilly prevent combinations and collusion that damage competition. We bring actions under our monopolization statute, Section 2. 

And finally, of course, under Section 7 of the Clayton Act, we are 

responsible for merger enforcement and for preventing mergers 

that substantially lessen competition. 

12

We have been active under each of these headings. In our criminal enforcement program, we have taken action in a number of 

cases that have resulted in savings to farmers in the case of feed 

additives, herbicides, and otherwise, where they have been the victim of price-fixing and illegal cartel activity. Likewise, on the criminal side, a few years back we have prosecuted cattle buyers, where 

they have been guilty of bid-rigging in the purchase of cattle. 

In terms of merger enforcement, we have active now a case 

called Southern Belle, in Kentucky, in the milk industry. This was 

a case which actually fell below the Hart-Scott-Rodino thresholds 

and has closed, but nonetheless we are engaged in litigation there. 

As has been mentioned in previous remarks this afternoon, the 

NDH/Hood dairy merger was withdrawn during the Department’s 

scrutiny of that merger. We have taken efforts to be more transparent with parties about our concerns as we go through the course 

of an investigation. In that case, that appeared to result in a transaction being withdrawn. It has been modified and a different transaction is under review now. That process is ongoing. 

Likewise, the Cargill/Continental case and the Suiza/Dean case 

were mentioned earlier. In Cargill/Continental, we explicitly recognized the need to protect producers from monopsony concerns. And 

in Suiza/Dean, while the transaction was not stopped outright, we 

demanded significant divestitures in that transaction to protect 

competition. 

So we have been active throughout this market, throughout the 

tools at our disposal to try to protect competition, and I look forward to answering your questions about our work this afternoon. 

Thank you. 

Senator CRAIG. Hewitt, thank you very much for your testimony 

and for being here. 

Let me now turn to my colleague, Senator Grassley, for an opening round. 

Senator GRASSLEY. Mr. Pate, I would like to start by stating once 

again that I think that you have statutory authority to pursue 

monopsonistic activities. My concern is that the Department of Justice has not established specific guidelines or brought on enough 

expertise to properly address that issue. 

This isn’t to say that the Department of Justice is doing a worse 

job than any past Department of Justice. So, in fairness, I haven’t 

been happy with Departments of Justice on this issue of agribusiness through several administrations. 

Does the Department of Justice have specific authority to determine the competitive impact of vertical integration in agriculture 

on farmers? 

Mr. PATE. There is no question that we have the ability, and we 

do in specific mergers look at vertical concerns. There is no question that we have authority to look at monopsony, as well as monopoly. We did that explicitly in the Cargill/Continental case. That 

was part of the Suiza/Dean inquiry I mentioned. It was part of 

what we were looking at in NDH/Hood. So the answer to both of 

those is yes. 

Senator GRASSLEY. Do you follow specific guidelines that you 

have in writing to measure? 

13

Mr. PATE. Our horizontal merger guidelines, for example, are 

constructed around the more typical situation of seller side power 

and monopoly. Monopsony is the mirror image of that. So the same 

considerations that would apply on the monopoly side apply in analyzing monopsony. 

That is not to say the cases are in every event the same. As I 

have discussed, I agree with some of the comments made earlier 

that agricultural markets can be different than other markets. We 

look case by case at every transaction, but consistent with the 

guidelines we have on the monopoly side, when we look at monopsony questions. 

Senator GRASSLEY. You referred to Cargill/Continental. In that 

merger, the Department of Justice required partial divestiture. Has 

the Department of Justice performed any analysis to determine 

whether that divestiture has preserved competition? 

Mr. PATE. Typically, we do not do retrospective examinations of 

markets, except that when we face future transactions or enforcement actions, then we get the opportunity to look back in that context. But it is not generally part of what we do to conduct studies. 

We do have two sections within the Department who stay 

abreast of agricultural issues and are specifically responsible for 

them, and they do keep up in date in terms of market trends in 

those areas. So I am sure that attorneys within those sections have 

some of the information of the type you are talking about. 

Senator GRASSLEY. Did the Department of Justice study hog-buying practices by packers and the impact of those practices on competition before approving the largest pork integrator merger in U.S. 

history? 

Mr. PATE. If you are referring to the Smithfield/Farmland merger— 

Senator GRASSLEY. Yes. 

Mr. PATE. —I was recused from that case. I did not participate 

in it, so I can’t tell you directly about the nature of that investigation. Before coming to the hearing today, I learned that the Department sent to Attorney General Miller, in Iowa, describing its activities. 

On that basis, I can tell you that certainly the answer is yes, and 

that as would be the case in any case that we examine, we would 

look at producers, consumers, the companies that operate in that 

market, and determine what the market facts were in the case. 

Senator GRASSLEY. Eighty-seven percent of all hogs are contracted or packer-owned; 13 percent are deemed open-market. 

Those are statistics I used in my opening remarks. In practice, 

then, as I have previously said, 3 to 5 percent of the hogs traded 

set the national price, and that surely happens in the Midwest. 

Ninety percent of the hog marketing contracts are tied to a composite average of the spot market for compensation. Many spotmarket hogs are sold under oral formulas, and open-market hogs 

sold outside the western corn belt don’t contribute to price-setting. 

This leaves the remaining pool of spot-market hogs very limited. 

Yet, those pigs set the price for all hogs tied to marketing contracts 

throughout the country. 

The western corn belt market is at its core made in Iowa, Minnesota, South Dakota, and Nebraska. This is where those 3 to 5 

14

percent of the true spot market hogs are located. When the Department of Justice allows dominant integrators to command the southern Minnesota-northern Iowa markets, you give integrators the opportunity to limit spot market purchasing and prices. Spot markets 

are easier to manipulate than higher-volume markets. That is just 

the plain fact. 

So my question is does the Department of Justice recognize the 

power integrators have in thin spot markets and that the western 

corn belt is the dominant price-setting region for hogs in the 

United States? 

Mr. PATE. I read with interest some of the testimony on these 

points that Professor Carstensen submitted. There is no question 

that it is correct to observe that a more thinly traded market is 

less likely to establish a competitive market price than one in 

which there are more participants. 

The antitrust laws in our reviews don’t go generally to the question of whether an auction or an open sale process, on the one 

hand, or contracting on the other is to be, as a general matter, as 

preferred form of contracting. When we do a merger analysis, the 

question we are asking is whether the merger itself is likely to lead 

to a decrease in competition. But we would look at the question of 

the effect on both auction markets and contracted purchasers when 

we do that. 

Senator GRASSLEY. I would have two questions in writing, two 

questions to follow up on my first two questions, and then I have 

one question I did not ask. So I will submit those. 

Senator CRAIG. Senator, thank you. We will submit questions in 

writing. Senator Leahy also has questions that he will submit in 

writing to all of our panelists. 

We have a vote on. I am going to turn to Senator Specter to 

make any opening comments and offer any questions he might 

have. I am going to leave for the vote. If you would recess the Committee at the conclusion of your thoughts and questions, that way 

we can be back and keep it going, and honor some reasonable time 

to our third panelists, also. 

Thank you. 

Senator SPECTER [PRESIDING.] Well, thank you very much, Mr. 

Chairman, and thank you, Mr. Pate, for the job which you are 

doing. 

Senator Grassley made a comment about his evaluation of the 

Department of Justice. He has been active in evaluating the Department of Justice for many years. I recall the first Attorney General that Senator Grassley worked with was William French Smith, 

and Senator Grassley had some substantial disagreements with Attorney General William French Smith. 

One day at a social event at the Department, the Attorney General turned to me and said, why are you so critical of me? 

Senator GRASSLEY. He was obviously getting us mixed up. 

Senator SPECTER. What did you say? 

Senator GRASSLEY. He was obviously getting us mixed up. 

Senator SPECTER. Can you imagine such a blight on Senator 

Grassley to be confused with me? 

[Laughter.] 

15

Senator SPECTER. After the hearings on Justice Thomas, I heard 

many reports. 

What were those, Senator Grassley? 

Senator GRASSLEY. Those reports were why was I so mean to 

Anita Hill, and I never asked her one question. They were getting 

me mixed up with you. 

Senator SPECTER. You can see what a terrible situation he has 

had for 23 years to have to sit next to me on the Judiciary Committee. 

Senator GRASSLEY. That is why I am leaving now. 

[Laughter.] 

Senator SPECTER. So I advise you, Mr. Pate, to be very wary, 

very wary of Senator Grassley even when he is gone. 

Mr. Pate, I am glad that we are having this hearing on monopsony. That is a subject matter which is a word almost never, never 

used, but one of great importance. I am very much concerned about 

the impact on dairy farmers. As we have seen in Pennsylvania, the 

price of milk at the store goes up and the price of milk to the farmer goes down. The fluctuations have been very extensive, sometimes more than $16 a hundredweight, and then in a short period 

of time, less than $10 a hundredweight. 

We have had a series of hearings on trying to understand why 

it is that the farmer gets a lower price and the grocer gets a higher 

price simultaneously. It may be that monopsony is the answer, that 

a single buyer or a limited number of buyers are able to deal with 

many purchasers to exert, in effect, monopoly power which drives 

down the price to the producers. 

Do you have any thoughts on that subject? 

Mr. PATE. Well, again, it varies from case to case. It could be the 

case that there is a monopsony problem on the purchase of raw 

materials side, but no problem on the consumer side of the market 

because there is vigorous competition on the selling side. 

The reverse could be true, or there could be problems of market 

power on both sides of the transaction. That could be true in the 

dairy or other industries. So that would be something we would 

evaluate case by case when we are reviewing a transaction. 

Senator SPECTER. There is substantial competition in the marketplace for sellers of milk. There may not be for buyers of milk. 

I am glad to hear your agreement that the Department of Justice 

has full power to deal with monopsony, and I think there really 

needs to be a very, very vigorous pursuit of that line. 

We are still struggling with the problem of what is happening in 

Pennsylvania and we are in the process of preparing legislation 

which would tie the price of milk to the cost of production. We face 

a very serious problem about having the small milk producer going 

out of business, and at the current rate we may have an greater 

problem with the small dairy producers. So the activities of the Department of Justice could be very, very helpful. 

I recollect your Department’s intervention with the matter of a 

small company in St. Mary’s. It wasn’t milk; it was a manufacturer. But the Department of Justice can have a tremendous impact. Just to show an interest and to seek an inquiry in an investigation can be very, very helpful. 

16

As Senator Craig said, we are in the middle of a vote and I am 

going to have to depart momentarily to make the vote. We have 15 

minutes and a 5-minute overlap. We have a very, very busy schedule today trying to finish up the business of the Senate and I am 

going to try to return, but I am not sure that I can. Mike Oscar, 

my deputy, is here and we will be paying very close attention to 

what your Department does on this important subject. 

I have been advised that Senator Kohl has some questions for 

you, Mr. Pate. So we would appreciate it if you would remain. Senator Kohl should not be too long in returning. 

Mr. PATE. Thank you, Senator. 

Senator SPECTER. The Committee will stand in recess for a few 

moments. 

[The Committee stood in recess from 3:29 p.m. to 3:39 p.m.] 

Senator CRAIG [PRESIDING.] The Committee will reconvene. 

Thank you all very much for your patience. 

Let me turn to my colleague, Senator Kohl. 

Senator KOHL. Thank you, Senator Craig. 

Mr. Pate, as we have been saying, traditional antitrust doctrine 

gives less scrutiny to buyers gaining dominant market positions 

than to sellers gaining dominant positions via monopolies. This is 

because monopsonies have the potential to result in lower prices to 

consumers. 

In the agricultural sector, we have seen in recent years tremendous buying power gained by food processors, resulting in depressed prices and substantial economic losses to farmers. In fact, 

as we have said, the top 4 beef packers now control 81 percent of 

the market, the top 4 pork processors control 59 percent 9of the 

market, and the top 4 poultry processors control 50 percent of the 

market. All of these percentages are going up considerably. 

In light of this consolidation, shouldn’t we now treat monopsony 

in agriculture with the same scrutiny that we give to monopolies? 

Shouldn’t we be particularly concerned about buyers gaining dominant market positions with respect to agricultural goods, Mr. Pate? 

Mr. PATE. We are particularly concerned about it. I think it is 

not fair to say that the law has established that there should be 

less scrutiny, but simply that there have been fewer cases where 

this comes up. We are more used to dealing with cases where the 

alleged harm is on the side of sales, but we equally do look for monopsony problems. 

I think there is some comment today that is repeated that it has 

been established that monopsony can produce anticompetitive 

harms at lower levels of concentration than monopoly. While I 

think that is a claim that is asserted, it is not one that has been 

studied by economists and backed up, but is one that should be 

looked at. And if it could be proven that that is true—I know, for 

example, Senator Kohl, you have been interested in this possibility 

in the group purchasing area in the health care field. 

This is something that I think we need to look at and determine 

whether it is the case and then tailor our enforcement efforts accordingly. But we do look at monopsony concerns. As you say, we 

do have to be concerned that we not act in situations where we are 

preventing lower prices and better products to consumers. But the 

concerns I am hearing here today are about situations where the 

17

monopsony side is causing losses to the producers, but yet that 

isn’t passed through. 

Senator KOHL. Well, it has been pretty well demonstrated now 

that over the course of many, many months, for example, milk 

prices have been at record lows, or world-record lows, and there 

was nothing even comparable reflected at the retail level in prices 

to consumers. I don’t think there is any question about that occurring and with respect to what has obviously become a demonstrated consolidation of cooperatives and providing farmers with 

virtually no one to sell to except a single co-op. 

How much more studying do you need to do before you—I am not 

trying to be disrespectful, but when do you make a conclusion that 

this is not the right way in which we should be going and then try 

and find a remedy, which I would be the first to agree is not easy? 

Mr. PATE. Well, in particular cases we don’t find that hard at all. 

That is why, while there may be disagreement as to whether our 

divestiture was the correct solution, in Suiza/Dean we took aggressive action to require divestiture, why in the face of divestiture the 

NDH/Hood transaction was withdrawn. That is why we are taking 

action in the Southern Belle case. That is why we took action in 

Cargill/Continental. 

As to generally solving that problem—and I know reference was 

made to legislation that would peg retail prices to percentages or 

to multiples of the raw milk price. That is something that is mentioned in Mr. Cotterill’s statement as New York legislation that has 

proposed that. That type of direct price regulation and market outcome-dictating solution is not one that the antitrust laws are involved with. 

So case by case, we are going to be there enforcing. Can antitrust 

law address every non-antitrust structuring of the market that 

some policymakers might think is appropriate? No, that is not 

what it is intended to do. 

Senator KOHL. I must say I still have this concern that when all 

is said and done and another year goes by or 2 years go by, in spite 

of this tremendous consolidation that is occurring and continues to 

occur in, for instance, the beef packing industry and milk processing, and hogs and poultry, there will not be—and I hope I am 

wrong—sufficient action on the part of your Department. 

We were pleased when several years ago the Antitrust Division 

appointed a special counsel for agriculture that we had requested. 

It is important that a senior staff member be responsible for supervising and directing the division’s enforcement efforts, but aggressive enforcement in this sector requires much more than just the 

supervision of one senior official. What is important is that the 

Antitrust Division devote sufficient resources and manpower to 

monitor and investigate competition in the agricultural sector. 

Could you please tell us the amount of current resources both in 

terms of funds expended and staff employed on competition in the 

agricultural sector, and has this changed significantly over, say, 

the last 5 years? 

Mr. PATE. I can give you a sense of that. In terms of budget 

breakdown, I don’t have a dollar figure in terms of hours spent. I 

can tell you that we have two sections in which we have substantial attorneys devoted to agricultural enforcement. 

18

We have a transportation, energy, and agriculture section that 

deals with agriculture matters. In our Lit I section, we have a 

number of attorneys who are specifically focused on the dairy industry. These cases often are pretty intense. In Suiza/Dean, for example, in addition, we had 8 economists and 13 lawyers working 

on that case while it was open. So at any given time, we may have 

many tens of attorneys and economists working on agricultural 

matters. It depends on what is active at the division. 

Mr. Ross, as you mentioned, coordinates that. Agriculture is the 

only area that has a specific special counsel assigned to it at the 

division. I do not think, based on what I know, that there has been 

a significant change in resources over a 5-year period. I would say 

that there has been an increase in the attention paid to it. I think 

Mr. Ross’ presence there is a part of that that is constructive. 

I hope that is helpful in answering your question. 

Senator KOHL. Some in the agricultural industry have argued 

that the Department of Agriculture should have a greater role with 

respect to examining consolidation in the agriculture industry. In 

other industries, the Justice Department sometimes gives advice to 

the department that regulates that industry. 

For example, when the FCC is considering whether to allow a 

local phone company to offer long-distance service, the Justice Department gives the FCC advice on whether the local phone company has opened its facilities to competition. 

Mr. Pate, how does the Justice Department make use of the Department of Agriculture’s expertise when considering agricultural 

mergers? Are there more steps that you might take to ensure that 

USDA has a role in providing Justice with its expertise and views 

regarding your review of transactions in agriculture? 

Mr. PATE. Senator, that is a good question. We have a memorandum of understanding between the Justice Department and the 

USDA in terms of our need to cooperate on mergers and other matters. We make use of that in every case. 

I know even in the Smithfield matter, on which I know there is 

a good deal of concern, I noticed that the letter to Attorney General 

Miller specifically notes that we consulted and got input from the 

Agriculture Department there. 

I think comparing it to the telecom industry or others, I am not 

sure that the situation calls for any sort of specific statutory assignment. I think it is something we should pay attention to. Since 

I came on board, we have scheduled and put in place a meeting 

with the front offices of USDA and the Antitrust Division to try to 

share information on competition issues in agriculture, agricultural 

issues that affect competition and our mission. So that is something we do readily and I think need to continue to do and do more 

of. 

Senator KOHL. Thank you, Mr. Chairman. 

Senator CRAIG. Herb, thank you very much for those very 

thoughtful questions. 

I have one question only. There are others I will submit for the 

record for the sake of time so we can get our third panel up. We 

are in active business over on the floor at the moment and I think 

the plan a series of additional amendments. So we will try to expedite as much as possible. 

19

Attorney General Pate, I have to admit that the very word ‘‘monopsony’’ threatens to give me a headache, in at least attempting 

to understand it. I think that Senator Kohl was pursuing this in 

a variety of ways through his questions, but how difficult, or easy 

for that matter, is it for you and your staff to assess the threat that 

monopsony behavior possesses in the marketplace? Is there a relatively easy formula that the myriad of your economists and attorneys look at? 

Mr. PATE. I think there is not an easy formula. As some have 

mentioned here this afternoon, we have somewhat less experience 

with it. I have got a Webster’s unabridged dictionary in my office 

and I looked up ‘‘monopsony’’ before coming over to the hearing and 

it wasn’t in there—the first word I have ever failed to find. Now, 

this isn’t a new dictionary, but the point I am making is that we 

have had less experience with it. It is something that our economists have less experience with. 

As I said, though, in many cases it would be the mirror image 

of monopoly, to which we have written guidelines and more experience. But even in those cases, we don’t have ready-fit guidelines. 

We have to take each case on its own bottom and look at the market facts. 

Even in the context of something such as our HHI numbers, they 

are not a cut-out formula that decides cases. So I don’t think it is 

necessarily something that is more difficult. It is something we do 

have less experience with over time. 

Senator CRAIG. Well, we thank you very much for your presence 

here today. As I say, there will be a series of questions coming your 

way so that we can have a complete and full record and we will 

appreciate your responding to them, and your staff. Thank you 

very much. 

Mr. PATE. Thank you, Senator. 

[The prepared statement of Mr. Pate appears as a submission for 

the record.] 

Senator CRAIG. Now, let us turn to our third panel today, consisting of three distinguished professors, and maybe they will be 

able to shed light on the why Webster’s failed to put this in at least 

the edition of the dictionary that Mr. Pate has. 

We will hear from Dr. DeeVon Bailey, who is a professor and extension economist at Utah State University. I understand, Dr. Bailey, you live in the Cash Valley, which is a greater extension of 

southern Idaho. 

Mr. BAILEY. Well, we don’t look at it that way. 

Senator CRAIG. We will let you respond to that in your testimony. 

Also, we have with us Dr. Ron Cotterill, who is a Professor of Agricultural and Resource Economics at the University of Connecticut. Last, but certainly not least, we will hear from Professor 

Peter Carstensen, who is George H. Young-Bascom Professor of 

Law at the University of Wisconsin, in Madison. 

Gentlemen, again, thank you. Dr. Bailey, please proceed. 

20

STATEMENT OF DEEVON BAILEY, PROFESSOR AND EXTENSION ECONOMIST, DEPARTMENT OF ECONOMICS, UTAH 

STATE UNIVERSITY, LOGAN, UTAH 

Mr. BAILEY. Thank you, Mr. Chairman. If you think ‘‘monopsony’’ 

is a difficult word, actually the correct term is more ‘‘oligopsony,’’ 

which indicates that there are a few buyers, not just one. 

Senator CRAIG. I just learned ‘‘monopsony.’’ Let’s stay with that, 

all right? 

Mr. BAILEY. Indeed, I am from Utah and I am a professor and 

extension economist in the Department of Economics at Utah State 

University. I grew up in the small farming community of Paradise, 

Utah, which is in the Cash Valley, certainly one of the most beautiful places on Earth. 

Senator CRAIG. We judge that by the flow of the Bear River. 

Mr. BAILEY. Yes. 

Senator CRAIG. It flows out of Idaho, through the Cash Valley, 

into the Great Salt Lake. So we do expect and understand that it 

is an extension of the greater State of Idaho. Thank you. 

Mr. BAILEY. I will not argue with you on that point, Senator. 

I did grow up working on my family’s farm and ranch, and I 

managed our family’s cattle ranch for 2 years following my uncle’s 

death in a farming accident. I love the cattle business, but I also 

know firsthand the inherent business risk associated with working 

in that business. I believe I also understand the concerns producers 

have about the changing structure of U.S. agriculture, especially in 

regard to packer concentration. 

In 1999, a colleague, Lynn Hunnicutt, and I entered into a cooperative research agreement with USDA, GIPSA. This agreement 

gave us access to a confidential data set which reported all of the 

individual transactions for 4 beef packers in a single major beef 

production area of the country over a 15-month period during the 

mid-1990’s. The data included information on packer purchases 

from over 300 feedlots during the study period. The purpose of our 

research was to examine the effect of transactions costs on the stability of packer-feedlot relationships. 

In a competitive cash market, both packers and feedlot operators 

should theoretically have choices about when and with whom 

transactions take place. If relationships within cash markets are 

found to be rigid—that is that market participants tend to have exclusive relationships with each other over time—then several possible economic reasons might explain this behavior. 

One possible explanation for rigid exclusive business relationships might be that packers simply exercise control over feedlots by 

somehow dictating the terms under which transactions take place. 

Another possible explanation for exclusivity is that all feedlots offer 

about the same price for cattle of the same quality, but that some 

feedlots and packers simply are able to conduct business at a lower 

cost than they would if they dealt with other feedlots and packers. 

In other words, exclusivity may benefit both packers and feedlot 

operators because transactions costs are minimized by doing so. 

The final possibility is that exclusivity expresses itself because 

one packer simply consistently offers a higher price to a feedlot operator for his or her cattle, and as a result the feedlot consistently 

sells to that packer. Economic theory suggests, however, that if 

21

large firms compete vigorously with each other that their market 

shares will be unstable. 

We used a spatial statistic in our research and we conducted two 

tests. Our first test was less restrictive than the second and found 

that, depending on the definition for our spatial statistic, the majority of feedlots, between 59 to 86 percent, sold primarily to just 

one packer or primary buyer. 

A few feedlots had two primary buyers, but almost none of the 

feedlots had three primary buyers. 

Our second test determined if feedlots tended to sell all of their 

cattle only to primary buyers. We broke the data into two-week 

time periods, which is a typical planning horizon between when 

cattle are purchased and eventually processed, to determine if feedlot operators tended to switch between packers from time to time. 

We found that when feedlot operators sold cattle, they almost always sold all of their cattle to their primary buyers. For example, 

for all transactions both cash and contract during the study period, 

feedlots sold only to their primary buyers 80 percent of the time. 

This means that if the feedlot operator offered cattle for sale during 

10 of the two-week periods, he or she sold cattle on the average to 

the primary buyer or their primary buyers in 8 of those 10 periods. 

Most feedlots sold only to their primary buyers in all cases, since 

the median percentage of periods when transactions were only with 

the primary customers was 100 percent. This suggests that feedlots 

did little switching from their primary buyers during the study period, and indicates that exclusive and very stable relationships existed between feedlots and packers during this 15-month period. 

We tested the reasons for why exclusive, stable relationships existed between these feedlots and packers using regression analysis. 

We found that the level of previous dealings between a feedlot and 

a packer significantly influenced the proportion of cattle the feedlot 

operators sold to that same packer in the current time period. 

Also, downward adjustments in the proportion of cattle sold by 

a feedlot to an individual packer were larger than upward adjustments, but were done only infrequently, actually in only about 5 

percent of the possible cases. This suggests that once a business relationship has been established between a feedlot and a packer 

that that relationship is more likely to continue in the future than 

it would if no previous relationship existed. 

It also suggests that feedlots frequently make incremental upward adjustments in the proportion of cattle they sell to a primary 

buyer, but that downward adjustments are made infrequently. Our 

results indicate that previous proportions used as a proxy for all 

transactions costs and the presence of a contracting relationship 

between feedlot and packer all influence the proportion of sales between the feedlot and packer. 

Other proxies for transactions costs, such as feedlot size and 

market volume, were not shown to have a statistically significant 

influence on the proportion of sales from a feedlot to a packer. Unfortunately, we had only information about successful bids for cattle and not all the bids that were placed on cattle. As a result, we 

could test for adjustments in the proportion sold only by using the 

average price packers paid for a base type of cattle, and the base 

was choice yield grade 3 steers. 

22

Although the sign for the test was positive, as expected, indicating that as a packer with a higher price was present that some 

adjustment was made, the test could not yield a reliable conclusion, 

since the parameter estimate was not statistically significant. 

The results of our analysis suggest that relationships between 

packers and feedlots can be understood at least in part through 

transaction costs. Consequently, these relationships may be mutually beneficial to both packers and feedlots. Perhaps the most important finding of our research is the fact that it is necessary to 

incorporate transaction costs into economic models that are looking 

at this industry. 

Thank you. 

[The prepared statement of Mr. Bailey appears as a submission 

for the record.] 

Senator CRAIG. Doctor, thank you very much. 

Now, let us turn to Dr. Cotterill. 

STATEMENT OF RONALD W. COTTERILL, PROFESSOR OF AGRICULTURAL AND RESOURCE ECONOMICS, UNIVERSITY OF 

CONNECTICUT, STORRS, CONNECTICUT 

Mr. COTTERILL. Well, Mr. Chairman, my coauthors, Adam 

Rabinowitz and Li Tian, who are with me here in the room, and 

I would like to thank the Committee for the opportunity to share 

our research with you today. 

Milk prices are cyclical, but recently we have seen an extended 

20-month milk price depression. Moreover, dairy farmers in the 

Northeast have been the victims of what I will term a pincer movement in policy during that period. 

The first pincer is that Federal milk market orders have been relaxed to allow competitive market forces to set fluid milk prices. On 

the face of it, this sounds positive. But the second pincer has been 

that mergers have transformed the region’s processing and retailing markets so that we no longer have competitive market forces. 

Stop and Shop, the region’s leading supermarket chain, is now a 

dominant firm in most local retail markets in southern New England. Dean Foods is now our dominant fluid milk processor. 

Antitrust enforcement has been active, as we have heard today. 

However, it has clearly been inadequate. I know the track record 

on a firsthand basis because I have been involved as economic expert for the region’s State attorneys general in two of these key enforcement actions and several others in the greater Northeast. We 

have tried, and failed, to stem the rise to dominance in both sectors. Subsequently, there has been an increase in market power, a 

subject that I now turn to. 

Figure 5 in our written testimony summarizes our findings on 

milk channel pricing in New England. In June 2003, farmers received $1.03 per gallon for raw milk bottled. Processors collected an 

additional $.60 for the wholesale price of milk. So the wholesale 

price for milk delivered into supermarket coolers was $1.63 per gallon. 

Now, the region’s top four retailers charge more than $3.07 for 

that milk. This means they captured $1.45 per gallon for in-store 

cost and profits. Our research at Pennsylvania State and the University of Maine indicate that store handling costs are, at most, 

23

$.40 per gallon in these large supermarkets. So that means their 

bottom-line profits are $1.00 per gallon or more. That is after all 

costs are accounted for. 

Based on similar repeated surveys, we conclude that during the 

farm milk price depression, New England supermarket chains’ bottom-line profits per gallon were equal to or higher than the price 

that farmers actually received for that very same milk. 

Now, think about that for a moment. The bottom-line net profits 

at the supermarket level are higher than the price that the farmer 

receives for his labor and all his inputs and his effort to sell that 

milk to the processor. We submit that this is economically inefficient milk pricing, as well as unfair milk pricing by almost any 

standard of fairness. 

The source of this excessive retail margin during the milk price 

depression in the Northeast was primarily low farm milk prices, 

not higher retail prices, and I will have more to say on that in a 

moment. Large supermarket chains now deal from a position of 

power when negotiating wholesale milk prices. Processors thus 

have to deal in a similar fashion with farmers and their cooperatives. Consequently, farm milk prices in the Northeast are lower 

than they would be in a competitive market channel. 

How low? Well, if you look at July, Northeast dairy farmers received at the mailbox $11.63 per hundredweight. In Wisconsin, 

which by the admission of the economists at the University of Wisconsin is an effectively competitive raw milk market, farmers received $12.26 per hundredweight in July. 

Now, let’s think of spatial markets in milk for a moment. If, in 

fact, the Northeast milk market were competitive, milk prices there 

would be higher, not lower, than those in Wisconsin. They should 

be higher by at least the amount of the cost to transport milk or 

milk products from Wisconsin to the Northeast. And I repeat milk 

prices in the Northeast were lower, not higher, than in the supply 

basin of the upper Midwest. 

Milk prices in the Northeast, absent the exercise of market 

power against the region’s farmers, could very well be $14 per hundredweight or higher at the farm level. Our analysis also suggests 

that if the Northeast becomes milk-deficient and must haul milk 

from the Midwest, Northeast consumers will pay higher prices than 

they would from an indigenous milk industry. 

But what can we do about this? Policy options include the following. I will give the standard shibboleth of more vigorous antitrust enforcement, especially against the currently active Hood/

NDH merger. That is a horizontal merger with the Crowley plants 

in Albany, New York, and Concord, New Hampshire. These plants 

compete with Hood and others in New England. It should simply 

be stopped. End of case. Simply don’t allow it. 

A second approach would be a strengthening of the Federal milk 

market orders by elevating the Class I differential in monopsonistic 

markets to protect farmers from low prices. After all, one of the 

original reasons for establishing milk market orders was to protect 

farmers from monopsonistic pricing by channel firms. I think we 

have forgotten that over the last 10 years in our agricultural policy 

area. 

24

Alternatively, States in the Northeast must consider policies that 

address monopsonistic pricing. Effectively, we are beginning to give 

up on the Federal solution. At the University of Connecticut, we 

have developed a price collar policy that can lower consumer prices 

and elevate farm prices without imposing price ceilings or explicit 

price controls. 

Price collars change the incentive structure of the market channel. Profit-maximizing behavior leads to prices that eliminate most 

of the excessive channel profit margin. However, firms still earn 

profits. It is not confiscatory of basic profitability. 

Price collars also raise farm prices and lower consumer prices 

during milk price depressions such as the one we have recently experienced. In the current environment where farm prices are relatively high, they really would not be binding on the farm side, but 

they would be binding, as the New York price gouging law is on 

the consumer side. 

Finally, I would suggest a couple of more general observations on 

this area. Public empirical research by university economists is 

shrinking up because we simply do not have access to the relevant 

economic data. The Justice Department gets such data in merger 

investigations, but often it is confidential and they can’t reveal it 

and they can’t publish research on what they see. 

At the University of Connecticut, over the last 10 years we have 

spent over $200,000 buying scanner data by hook and crook from 

the Information Resources, Inc. company. I have quietly talked 

with one person or another over those years and basically bought 

the data with no constraints. 

Recently, IRI has finally shut the door on me, after being burned 

three times, and now they have negotiated a very explicit policy toward universities. The University of Wisconsin recently bought 

scanner data. They can’t reveal the name of the market that the 

data is for, they can’t reveal the name of the firm that the data 

is for, and they can’t even reveal the name of the brand that the 

data are for. They also have to get approval from IRI for the publishing of their research results. I would submit that this constraint on access to data by public economists, in fact, is a serious 

problem. 

Finally, I would say that in antitrust policy there is a serious gap 

between merger enforcement and Sherman Act enforcement. Any 

merger that raises prices is illegal, basically, if we are talking 

about a monopoly, or if it lowers prices if it is a monopsony. And 

we often apply that, but people get through the slats. 

The Sherman Act monopolization standard is so far removed 

from what we see in this consciously parallel pricing by oligopolists 

and oligopsonists that, in fact, we really can’t get at these companies with the current antitrust laws. So we need to address either 

tighter merger enforcement or a rethinking of the underlying laws, 

or we have to go to external regulation rather than antitrust in 

some of these market areas. 

That concludes my testimony. 

[The prepared statement of Mr. Cotterill appears as a submission 

for the record.] 

Senator CRAIG. Doctor, thank you very much. 

25

We have about 5 minutes left in a vote, so I am going to once 

again—I am sorry, Professor—recess the Committee. I will hustle, 

vote, and be right back. 

Mr. CARSTENSEN. I picked a late plane to go home on tonight. 

Senator CRAIG. You are very fortunate. 

Thank you. 

[The Committee stood in recess from 4:10 p.m. to 4:27 p.m.] 

Senator CRAIG. The Committee will reconvene. Thank you all 

again for your patience. 

Let us turn to Professor Peter Carstensen, from the University 

of Wisconsin at Madison. Thank you. 

STATEMENT OF PETER C. CARSTENSEN, GEORGE H. YOUNGBASCOM PROFESSOR OF LAW, UNIVERSITY OF WISCONSIN 

LAW SCHOOL, MADISON, WISCONSIN 

Mr. CARSTENSEN. Thank you, Senator. The advantage of the 

break was that my name tag has now been correctly spelled, so 

there was some benefit from that. 

I am honored to be asked to offer my views on the problems confronting farmers and ranchers in selling their products. The focus 

of this hearing is on the monopsonistic character of those markets 

and the potential for law, both antitrust law and market-specific 

regulation, to restore open and competitive markets. I would like 

to summarize my fairly extensive written statement in about six 

points, if I may. 

First, farmers are poorly served by the existing market structures and practices. They confront excessive concentration in agricultural product markets that create strong inducements to engage 

in unfair and discriminatory practices. 

Second, there is clear evidence of abuse of the resulting buying 

power, manipulation of public market prices to drive down the private transactional prices, direct exploitation of sellers by low 

prices, discrimination that denies equal access to the market, and 

imposition of other unfair and exploitative conditions such as compulsory arbitration. 

Third, I think the harder problem which we have been talking 

about today is how to restore fair, open, equitable, and accessible 

markets. If there are unconcentrated markets, there is a strong 

tendency to achieve those kinds of methods naturally through the 

market process. Where they lack those inherent tendencies, where 

there is concentration, where there is unequal informational power, 

then we have the problem in the market. But law can play a very 

important role in reducing the capacity to engage in strategic conduct and restore the balance between the parties. This is market 

facilitation; it is not replacement of the market. We have two legal 

systems that are relevant here—antitrust law and market facilitation-type regulation. 

My fourth point: Antitrust law should and can make an important contribution. However, I think antitrust enforcers have failed 

in two respects. First, and most importantly, they do not appreciate 

the differences between monopsonistic buying power issues and 

more familiar seller power issues. 

We heard the Assistant Attorney General start off by saying that 

monopsony is the mirror image of monopoly. You will notice that 

26

after the first recess when he came back, he began to qualify that 

statement and acknowledged that maybe there were some differences and they needed to be studied more. It is an important 

recognition on his part. 

Secondly, they need to develop relevant enforcement policies that 

focus on the problems of monopsonistic power. The failure to do 

this, I think, has resulted in a great weakening of the potential for 

antitrust enforcement. 

I suggest that there are four things that this Committee should 

focus on in terms of antitrust enforcement policy and law: first, the 

need to develop express buyer power guidelines for both merger 

and restraint of trade analysis. I have elaborated on some of the 

theoretical bases for that kind of separate focus, separate analysis, 

because it is not a mirror image. 

Secondly, as a number of you have emphasized, we need more active enforcement of our current law against mergers and conduct 

creating anticompetitive risks—the Farmland/Smithfield transaction. We have got areas of recurring collusion. We have got areas 

of monopoly power that are known to the Justice Department. My 

reaction to some of the Assistant Attorney General’s comments is, 

in summary, listening is not enough. They have the resources, they 

have the capacity. They need to be out doing active investigation. 

Third, we need greater transparency concerning the decisions to 

enforce or not to enforce. Today, I learned a little bit more about 

why they might not have taken action in Farmland. They have 

never made a public statement about that. A little bit more about 

what they were trying to do in Suiza-Dean—they have never made 

anything more than the most generalized kinds of statements 

about that transaction. 

I am very pleased with what I understand to be the proposal 

from Senator Kohl and Senator DeWine on various antitrust reforms that focus in on strengthening the Tunney Act, another place 

which will compel some greater transparency and disclosure. I 

think that is a very important proposal. 

Finally, I think that we really need to reconsider the judicially 

imposed limit on those who indirectly are injured by antitrust violations having the ability to bring lawsuits. Specifically, Wisconsin 

farmers were the victims of price manipulation in the cheese market, but they were only indirectly injured. They had no remedy 

under Federal law and they were unable to get remedy under State 

law. 

Nonetheless, all this said, antitrust law has inherent limits. I 

think that is the best way to put it. We need to have other sources 

of legal control. We have some now in the Packers and Stockyards 

Act and the Agricultural Fair Practices Act. These are not very 

well-developed areas of law. Worse, the Secretary of Agriculture 

under both political parties, I must say, has failed to use the power 

to make rules and regulations that could have facilitated fair and 

open practices at least in some markets, especially livestock markets. 

In my paper, I have suggested that there is an idealized kind of 

elaborate statutory system that ought to facilitate agricultural 

markets. Realistically, I think there are two presently pending proposals that deserve your attention and support. 

27

Senators Grassley and Feingold—and they have already referenced this in their statements—have S. 91 that would prohibit 

arbitration clauses in livestock supply contracts. The biggest problem is it (S. 91) doesn’t apply in any other agricultural contract. 

Senator Enzi and others have proposed S. 1044 that would impose market-facilitating regulation on the use of supply contracts, 

again limited to livestock markets. It should be much more general. 

If we are going to have forward-looking contracts, they need to be 

subject to a legal regime. 

In sum, monopsony power in agriculture is a growing threat to 

the operation of agricultural product markets. It is vital that the 

law be used both to limit the growth of this power and to regulate 

its use. Both consumers and producers will be better off if both 

antitrust law and market-specific regulation are directed at the 

problems that have arisen in this area. 

It is my hope that members of this Committee will use their influence both to bring about legislative change and to insist on more 

active and effective enforcement of the existing laws that address 

these problems. 

Thank you. 

[The prepared statement of Mr. Carstensen appears as a submission for the record.] 

Senator CRAIG. Professor, thank you very much for that testimony. 

Senator Kohl, questions of the panel? 

Senator KOHL. I think your testimony in all three cases has been 

really good and informative and enlightening. My conclusion, listening to you all, particularly you, Mr. Carstensen, is that if we are 

going to do something effective about monopsony, it takes the Federal Government, whether it is the Justice Department or the Congress, to step in and take a look at it all and come up with new 

ideas, new thoughts, new rules, new regulations, new oversight, 

new legal action or additional legal action to correct what I believe 

you are all saying is a situation that is not good either for the producers or for consumers and needs to be improved, as I said, at the 

hand of the Government, as it is expressed through the Justice Department and through the legislature. 

Mr. Carstensen, are you saying that? 

Mr. CARSTENSEN. Yes, very much so. Professor Cotterill made the 

point about the need for better data. There is a lot of information 

that exists which unfortunately scholars can’t get access to, so that 

it makes it much harder to develop and to prove the kinds of intuitions that we have about how competition is harmed in the markets. 

Again, the Federal Government through the power of the Federal 

Trade Commission and the Department of Agriculture to collect 

data can be very helpful as part of that process of developing better 

theories and then employing them effectively through legislation 

and through enforcement. 

Senator KOHL. Mr. Cotterill, what is your observation with respect to what I said? 

Mr. COTTERILL. I think that you are entirely accurate, sir. I applaud your idea that the Federal Government has a role to play in 

28

our agricultural markets. It is something I learned at the University of Wisconsin as a student 30 years ago. 

The University of Wisconsin has been a strong player over the 

last 100 years in defining markets, defining the rules that create 

markets, and defining antitrust policies. I applaud all of that. 

However, I am also to the point where I am beginning to think 

that it is difficult at the Federal level to make that progress, and 

I am almost becoming a fan of Antonin Scalia, of the Supreme 

Court, that the States also should be empowered to deal with industrial policy questions that affect their citizens. I know that is 

a very difficult area, as you are well aware of as well. So I think 

we will see progress in both areas, hopefully. 

Senator KOHL. Dr. DeeVon Bailey? 

Mr. BAILEY. Yes, Senator. I believe my feelings are somewhat 

less pronounced, I guess would be the way that I would state that. 

I believe, for one thing, that the food system has been a great success story in the United States, that we have all types of different 

food and many, many different varieties that actually in real terms 

is less in price for consumers today than it was 10 or 15 years ago. 

So I am not as strong in my opinions as far as whether consumers have been injured in some way. That doesn’t mean that 

they haven’t been for sure. The possibility exists that perhaps some 

market power has injured consumers. But if you look just on the 

surface of things, you have to applaud what agribusiness has been 

able to accomplish in this country. 

On the producer side, there have been questions for many, many 

years. Actually, these same kinds of discussions were taking place 

at the turn of the 20th century, too, within Congress and also out 

in the country. People were concerned about the power exercised by 

processors. So I think it has been a topic that we have discussed 

for a long time. 

It maybe is a more important topic than usual at this point because of the increased influence of the retailers and the power that 

they are exerting on the market, or potential power that they are 

exerting on the market right now. So I agree that it is an important issue. 

I also agree with the other two panelists that data really is the 

issue. Without cost data, for instance, it is very, very difficult to 

come up with a definitive answer regarding whether market power 

exists or monopsony power exists in these markets. 

Senator KOHL. Mr. Chairman. 

Senator CRAIG. Herb, thank you. 

Gentlemen, thank you for your response to those questions. Both 

Senator Kohl and I were visiting on the way over from that vote 

talking about the dynamics of that market out there and what we 

might do about it in a way that continues to keep a viable market, 

and certainly a market that the consumer and producer benefit 

from. 

I think you are right, Dr. Bailey. There is no question that if you 

walk into any supermarket today in this country versus the rest of 

the world, that demonstration of supply and variety of supply and 

cost has to be an amazing success story. 

On the other side are my producers in Idaho and in the Cash 

Valley who have not recognized true return on investment of any 

29

magnitude that justifies reinvestment in a long while. I grow increasingly concerned about the ability of the producer side of agriculture to capitalize itself unless they enter into contracts with 

processor distributors that may not be in their best interest in the 

long run, and yet that appears to be the situation. 

Gentlemen, you watch these markets closely. All of you peer into 

your crystal ball in a moment and tell me what you see as the 

trend line and the effect. I can look backward. I probably have a 

more difficult time looking forward. 

Dr. Bailey, would you start? 

Mr. BAILEY. I believe without question that the trend line is toward more contracting, closer relationships in these markets. What 

we have seen prior to the last few years is closer relationships between farmers and packers, mostly through contracting, and that 

trend continues. 

But perhaps even the more important phenomenon that is occurring in the market now is closer relationships between retailers 

and processors to the farmer. I think that if I had to choose one 

trend that I see in food markets during the next decade, it is more 

closely specified types of food products beginning at the retail down 

to the farm level. 

So that would suggest an even greater pressure to perform on 

the part of farmers to specifications that are dictated at some place 

above them in the channel. Probably the only way to avoid that is 

some sort of intervention, but one also has to ask the question, is 

that the right choice; would consumers actually support that kind 

of intervention, because they are likely the ones that will end up 

paying higher prices for food as a result. 

Certainly, from the argument of fairness, there are concerns. As 

I said, I grew up on a farm. I know the struggles that farmers face, 

but we are on the horns of a dilemma in many ways in this regard. 

How do we keep food costs low, provide high-quality food products 

to consumers, but yet make sure that farmers can make a decent 

living? 

Senator CRAIG. If I go to Safeway today, I am going to buy only 

Angus beef, or at least be led to buy only Angus beef. So some of 

that type of quality or consolidation for the retail purpose, the 

shaping of a product, is very much at hand. 

Dr. Cotterill, would you respond to my broader question that relates to trend lines and impact on both consumer and producer? 

Mr. COTTERILL. Well, Professor Bailey has given the stock answer from the agricultural economics profession. I mean, it is the 

consensus view. The St. Louis Fed program and others all see this 

increasing integration. 

I am going to give you a different view. I think that unless something is done either through policies at the Federal or the State 

level—and it starts with data, it starts with supporting research on 

the externalities of these systems—Professor Bailey’s prediction 

will be the winner. But there are substantial externalities in this 

system the way it is currently put together. 

There was a recent article in the New York Times Sunday Magazine on the amount of fat on Americans today, and attempting to 

link it perhaps in an unscientific fashion to the structure of our 

30

food system and the nature of the way we deliver products to people. 

I think there is a link. It may not be proved perfectly well, although 25 years ago at the University of Wisconsin Professor Bruce 

Marion did a study that correlated the amount of fat on people to 

the kind of diet and concentration in certain industries. So it has 

been done. I think that is an externality that we need to deal with. 

Another externality is the environmental and the cultural and 

the social aspects of rural America. I was skiing in Switzerland this 

winter and within 150 yards of the condo in the Swiss Alps were 

three dairy farmers, each with about 25 brown Swiss cows. The 

machinery that they used to cut the hay on the Alps looked like 

gators that you see on golf courses, these tiny little machines that 

they run around up there. I said how in the world can you justify 

that kind of a dairy industry in Switzerland? Well, the spillovers 

to keeping the Alps brush-free, to keep the mountain meadows the 

way they are, are there. 

This summer, I drove through northern Vermont on my way to 

the Montreal ag econ meetings and I took a swing out through 

Fairfax, Vermont, and others, and stopped at some of the rural 

communities with churches and some of the events that were going 

on. Just for me personally, to have those kinds of communities—

it is like Richland Center, Wisconsin. That is a treasure; that is an 

asset for this country, in general. 

So I think that you have to come to ways to recognize that, and 

I think the Europeans—we malign them for many of their programs, but with all due respect, I think that if we want a particular kind of rural America, we are going to have to do something 

like that. So that is the other side of what Professor Bailey gave 

you. 

Senator CRAIG. Well, I don’t dispute there is another side. My biases are clear. My wife just retired as a dietician with the National 

Dairy Council. When we begin to talk about fat and food, we have 

also got to talk about reinstating mandatory recreation and mandatory exercise with our grade school kids at the school level, which 

they don’t like today, and a rather, shall I say, sit-on-your-backside 

society. 

So there is a combination of things that have to occur, I think, 

if we are going to look at regulations that determine how much fat 

you can consume in a day or standards in that area. ‘‘Buyer Beware’’ is a significant approach, I do believe, in the marketplace if, 

in fact, it is a balanced one and it balances out. 

Dr. Carstensen? 

Mr. CARSTENSEN. Professor; I am not a doctor. 

Senator CRAIG. All right, professor, thank you. 

Mr. CARSTENSEN. My daughter has just gotten her M.D. degree, 

so she is the Dr. Carstensen in our family. 

Senator CRAIG. Well, in that relationship, then, you had better 

maintain it. 

Mr. CARSTENSEN. Right, right. 

I think one of the things to bear in mind is that there is usually 

more than one road to accomplishing desirable economic and social 

objectives. If we don’t do things to structure the fundamentals of 

how agricultural markets operate, then the contracting, that which 

31

I have characterized as the serf-like status for farmers is very likely to emerge because there won’t be any other legal structure in 

hand. 

We had a hearing back about a year ago before the Senate Ag 

Committee where Professor Koontz from Colorado State talked 

about the things the Department of Agriculture could do much 

more proactively to develop standards, to develop criteria, certification systems, that would facilitate providing a greater variety 

and specification of agricultural products without having to go 

through the contractual system. 

Contract is the default system. It requires—and this goes back 

to something that Senator Kohl said—it requires positive government action to construct a workable transactional market. That 

isn’t going to happen naturally because it is not in the interests of 

many of the economic players. 

So it seems to me again this is where one really needs to stand 

back and say here is the path that we are going to go down if we 

don’t do anything. Are there ways to redefine that path, to preserve 

a number of the things that Ron Cotterill has spoken about, while 

still maintaining efficiency in the system? 

Again, my view is there are, and we know from past experience 

there are, many ways to achieve efficient, desirable consequences 

in terms of the end product, the inexpensive food in the store. Let’s 

look for ways that are going to preserve farms, that are going to 

preserve freedom of choice for farmers, because otherwise you are 

going to wind up with, as I say, a serf-like situation where those 

contracts are going to require an enormous regulatory system of 

their own. 

It is not going to be transaction cost-free. Again, the externalities 

will be there. The kinds of problems in the rural countryside, the 

kinds of environmental problems that will result from the restructuring of agriculture will be there. You are going to have to deal 

with them and you are going to look at them as costs of welfare 

or costs of pollution. They are costs to the food system and I think 

better designed relationships are going to avoid a lot of those costs 

so that the net social cost will be lower even if the price of the food 

may be a penny or two higher because we use a system that is 

more farmer-friendly. 

Senator CRAIG. Well, gentlemen, you challenge us and we are 

glad you did. 

Senator KOHL. Mr. Chairman? 

Senator CRAIG. Yes, Senator Kohl. 

Senator KOHL. We have not injected into this conversation, and 

perhaps we won’t today, but the Federal Government is providing 

enormous assistance to farmers in our country. I think the stats 

are that about half of farm income today comes from the Federal 

Government, and that is because what the farmers are getting 

from their buyers is insufficient. 

So we are giving them back tax dollars to keep them in business 

because we want to keep the rural economy there and we want to 

keep our farming sector alive. If we pull the plug, that would be 

a disaster. You know, we would have to have hearing upon hearing 

and laws upon laws, and redo the whole terrain of our rural areas 

32

in America if we pulled the Federal plug on assistance. Half of 

them would go out of business within a month or two. 

So there is that that we need to understand, that it is not a selfregulating mechanism that is going on right now. It is a Government subsidization system, which I have voted for. I am not suggesting we should pull the plug, but we haven’t figured out what 

to do. 

Dr. Bailey, do you have a thought on that? 

Mr. BAILEY. Actually, I think my colleagues were being a little 

bit hard on me. 

Mr. COTTERILL. Oh, no. You represent the whole profession, sir. 

Senator KOHL. Would you suggest that perhaps we should pull 

the plug? 

Mr. BAILEY. No, no, absolutely not. I think that there are 

externalities associated with having a viable farming community in 

rural areas in virtually every State. Farms maintain open space. 

They are stewards to the land. There are many, many positive 

externalities that are occurring as a result of farming. 

I also believe that much of the innovation especially in the meat 

industry is not coming at this point from the large processors. It 

is coming from small firms that are trying to find niches and trying 

to develop products that address consumer needs which the processors in many respects have not done as good a job as they could 

have in the past. 

So I think that the Government does need to view farming beyond simply the food that is produced by farming, that there are 

other very positive things that occur because of farming. But also 

it is important, I think, to maintain an environment where innovation can occur in these industries. 

Actually, there are a lot of innovative things that are taking 

place in small-scale farming now. We should not ignore that and 

should try to foster it, and I think that that is one way, along with 

the money that is going into commodity programs, that possibly we 

can help to revitalize some of the farming activities that are occurring in the country. 

Mr. COTTERILL. I am fascinated that you bring up the issue of 

subsidies because that is something that has concerned me, because I think that with the Freedom to Farm Act back in 1995 or 

1996, it was actually a victory for agribusiness rather than farmers. 

Farmers were sold a bill of goods on that one because, yes, we 

are spending billions of dollars to keep our farmers in business. 

But having said that, they really are constrained by the Government just as they were constrained by the supply control that they 

didn’t like prior to this; as a matter of fact, maybe more so now 

than then. 

The real benefits of those low prices haven’t always been passed 

on to consumers. In a non-competitive market channel, the market 

power does mean that some of those lower raw prices stay with the 

agribusiness firms. In a competitive channel, you get it passed on. 

In non-competitive, you don’t. 

So you have a whole new lobbying game here in Washington 

where you have the agribusiness processors and the retailers. They 

like this program. I am not so sure it benefits farmers, but there 

33

is a complication to it as well because this program in many ways 

is driven by the idea of global trade and the idea that, in fact, 

America’s farmers are going to compete in a global market. Therefore, we can’t go back to the old supply control programs and the 

higher market prices that we had. 

I am not so sure that is true. If you look in some of our industries like dairy. I am not so sure that you couldn’t go back to some 

of the supply control, get some of these market prices a little higher and save the Government billions of dollars. I think we have to 

reconsider supply control in our agricultural markets, like we had 

for about 50 years before 1995. But I am not an agricultural policy 

economist, so you probably might get a stronger answer on the 

other side from some of them. But that is my perspective on it. 

Mr. CARSTENSEN. I will just chime in that the subsidy issue creates again a set of distorted incentives in the market process and 

it requires, as you start fiddling with this system, thinking through 

fairly carefully how the subsidy incentives play off against the contracting incentives, the other ways that we can interfere in the 

market. It doesn’t make your jobs any easier, I am sorry to say. 

Senator KOHL. Thank you, Mr. Chairman. 

Senator CRAIG. Well, gentlemen, we wish we could continue this. 

I have enjoyed not only your testimony, but the conversation. I 

think it is increasingly valuable. I think that one of the reasons 

this hearing is being held is the frustration that we are all sensing 

on our own part as it relates to policy and how that contains and 

retains a balance that allows profitability at the production level 

and the pass-through and reasonable prices and high quality to the 

consumer. 

Certainly, in my State there is really no segment of my agriculture that hasn’t gone untouched by fairly extensive periods of 

less than profitability. I have looked at the staying power of that 

industry and its equities versus its debt structure. If you look at 

and parallel that, you see a substantial problem growing out there 

today that at some point is going to get spoken to. 

Gentlemen, we thank you. I will say in closing this hearing that 

the record will remain open for 7 days for any written submissions, 

and there will be some questions coming your way and we will 

thank you for your response to those. Again, we thank you all for 

being here. 

The Committee will stand adjourned. 

[Whereupon, at 4:59 p.m., the Committee was adjourned.] 

[Question and answers and submissions for the record follow.] 

[Additional material is being retained in the Committee files.]

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