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[Senate Hearing 107-229]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-229

                    AGRICULTURE MARKET CONCENTRATION

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

                      COMMITTEE ON APPROPRIATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                      MAY 17, 2001--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                               __________

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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
                                     MARY L. LANDRIEU, Louisiana
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
                 Terry Sauvain, Minority Staff Director

  Subcommittee on Agriculture, Rural Development, and Related Agencies

                  THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania          HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky            BYRON L. DORGAN, North Dakota
CONRAD BURNS, Montana                DIANNE FEINSTEIN, California
LARRY CRAIG, Idaho                   RICHARD J. DURBIN, Illinois
TED STEVENS, Alaska                  TIM JOHNSON, South Dakota
  (ex offico)                        ROBERT C. BYRD, West Virginia
                                       (ex offico)
                           Professional Staff

                             Rebecca Davies
                        Martha Scott Poindexter
                               Les Spivey
                           Rachelle Schroeder
                       Galen Fountain (Minority)
                        Jessica Arden (Minority)

                         Administrative Support

                         Angela Lee (Minority)

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening statement of Senator Thad Cochran........................     1
Statement of Senator Herb Kohl...................................     2
Statement of Senator Tim Johnson.................................     2
    Prepared statement...........................................     4
Statement of Keith Collins, Chief Economist, Department of 
  Agriculture....................................................     6
Structural change................................................     7
Prepared statement of Keith Collins..............................     8
Statement of JoAnn Waterfield, Deputy Administrator for Packers 
  and Stockyards Programs, Grain Inspection, Packers and 
  Stockyards Administration, Department of Agriculture...........    14
    Prepared statement...........................................    17
Questions submitted by Senator Byron L. Dorgan...................    22
Attorneys employ by packers and stockyards programs..............    23
Accountants versus economists....................................    24
Transfer to the Department of Justice............................    24
Questions submitted by Senator Tim Johnson.......................    25
Captive supply problem...........................................    25
Bargaining power for producers...................................    25
Use of economists instead of attorneys in investigations.........    25
General Accounting Office report on GIPSA........................    26
Packers and stockyards programs regulatory personnel needs.......    27
Creation of an Office of Agriculture in the Department of Justice    27
Statement of John M. Nannes, Acting Assistant Attorney General, 
  Antitrust Division, Department of Justice......................    27
Enforcement of antitrust laws....................................    28
Agricultural mergers.............................................    28
Agricultural criminal enforcement actions........................    29
Civil investigations.............................................    29
Prepared statement of John M. Nannes.............................    30
Mandatory price reporting........................................    36
Antitrust enforcement............................................    36
Statement of Senator Byron L. Dorgan.............................    36
    Prepared statement...........................................    38
Market concentration's effect on economic growth.................    38
Antitrust vs. FTC responsibilities...............................    39
Dairy compacts...................................................    40
Effect of government programs on agricultural consolidation......    40
Mandatory price reporting........................................    41
3/60 rule........................................................    43
Special counsel for agriculture..................................    44
Less competition vs. increased concentration.....................    45
Food dollar trends to family farm................................    46
Increased marketing costs........................................    46
Clayton Act......................................................    47
Prepared statement of Senator Richard J. Durbin..................    48
Statement of Mark D. Dopp, Senior Vice President and General 
  Counsel, American Meat Institute...............................    49
    Prepared statement...........................................    51
Statement of William Roenigk, Senior Vice President, National 
  Chicken Council................................................    53
    Prepared statement...........................................    54
Statement of Jon Caspers, Vice President, National Pork Producers 
  Council........................................................    57
    Prepared statement...........................................    60
Statement of David S. Reiff, President, Reiff Grain and Feed, on 
  behalf of the National Grain and Feed Association..............    62
    Prepared statement...........................................    63
Statement of Thomas F. Stokes, President, Organization for 
  Competitive Markets............................................    66
    Prepared statement...........................................    68
Statement of Dudley Butler, on behalf of the Mississippi 
  Cattlemen's Association........................................    74
    Prepared statement...........................................    77
Statement of Robert Carlson, President, North Dakota farmers 
  Union..........................................................    83
    Prepared statement...........................................    85
Statement of Peter C. Carstensen, Associate Dean for Research and 
  Faculity Development, University of Wisconsin-Madision Law 
  School.........................................................    91
    Prepared statement...........................................    93
Statement of Dan Kelley, farmer, State of Illinois...............   104
    Prepared statement...........................................   107
Statement of Tom Miller, Attorney General, State of Iowa.........   110
    Prepared statement...........................................   111
Statement of David Reis, President-elect, Illinois Pork Producers   114
Prepared statement of the American Cotton Shippers Association...   119

 
                    AGRICULTURE MARKET CONCENTRATION

                              ----------                              

                         THURSDAY, MAY 17, 2001

                           U.S. Senate,    
         Subcommittee on Agriculture, Rural
                 Development, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Thad Cochran (chairman) presiding.
    Present: Senators Cochran, Specter, Kohl, Durbin, Dorgan, 
and Johnson.

               OPENING STATEMENT OF SENATOR THAD COCHRAN

    Senator Cochran. Please come to order. It's a pleasure to 
convene this morning a hearing of this subcommittee, the 
Subcommittee on Appropriations for Agriculture Rural 
Development and related agencies.
    We meet today to consider the issue of market concentration 
in agriculture and the effect it may have on the funding of 
programs under the jurisdiction of this subcommittee.
    In 1996, the Department of Agriculture formed an advisory 
committee to investigate concentration in the agricultural 
economy, and over the past several years, funds have been 
appropriated to implement the advisory committees' 
recommendations.
    Among these recommendations were increased monitoring and 
enforcement of antitrust and regulatory policy, advising 
producers about requirements to obtain a contract, and action 
to end inequities in meat inspection.
    The advisory committee also recommended mandatory livestock 
price reporting which was included in the fiscal year 2000 
funding bill for the Department of Agriculture, and it 
implemented by the department last month.
    The debate over concentration and consolidation in 
agriculture and the appropriate role of the Federal Government 
in regulating markets and whether changes in current laws would 
be appropriate will be issues for consideration during the 
reauthorization of the farm bill.
    We hope to learn more about these issues today, including 
the consequences of activities we have funded in the past and 
which have been implemented.
    We're pleased to have with us three panels of witnesses 
whose statements will be made a part of the record in full.
    In the first panel, we're pleased to welcome Keith Collins 
who is Chief Economist with the United States Department of 
Agriculture. JoAnn Waterfield, Deputy Administrator of the 
Packers and Stockyards Programs of the Department of 
Agriculture. And John M. Nannes, who is Acting Assistant 
Attorney General with the Antitrust Division of the Department 
of Justice.
    Before proceeding to hear from our witnesses, I'm going to 
yield at this point to other senators on the subcommittee for 
any comments or opening remarks they would like to make.
    My distinguished friend from Wisconsin is the ranking 
member on the committee, Senator Kohl.

                     STATEMENT OF SENATOR HERB KOHL

    Senator Kohl. I thank you very much, Mr. Chairman. Mr. 
Chairman, if there has been one single rallying cry over the 
years, it is to support the Federal Farm Programs. It would be 
a statement of determination to save the family farm. That 
proclamation has been a constant theme in the halls of Congress 
and throughout the countryside.
    This phrase often conjures up the vision of the small 
scale, fiercely independent operator modeled after the 
principle of the yeoman operator that Thomas Jefferson 
considered to be the basic ingredient of American democracy.
    So we might ask what are we to save the farm from? One 
obvious answer is to save it from the grip of unwarranted 
market concentration.
    Aside from our basic ideals of government, the United 
States has perhaps no better demonstration of genius than our 
economic system. The free flow of goods and services throughout 
our country and our general principles of commerce have 
established the most powerful economic force in the world.
    The simple concepts of supply and demand do, in fact, work. 
Our responsibility is to assure that conditions of law, policy, 
and economics in which supply and demand thrive are always 
present. And so our focus today is to examine the extent to 
which market concentration threatens this delicate balance of 
economic forces.
    The panels assembled here today will provide a broad range 
of information necessary to better understand just what is at 
stake in this debate and the form in which the debate should be 
drawn.
    I especially want to recognize Professor Peter Carstensen 
of the University of Wisconsin School of Law for his special 
expertise and long work on these issues, and for his previous 
assistance when we examined some of these issues before the 
judiciary subcommittee on antitrust business rights and 
competition, on which I am also the ranking member.
    So I look forward, along with the rest of this panel, to 
today's discussion and also to hearing suggestions on how this 
subcommittee might better work to support a sound agricultural 
economy. Thank you, Mr. Chairman.
    Senator Cochran. Senator Johnson.

                    STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Mr. Chairman, for holding what 
I think is a very timely and very important hearing. 
Anticompetitive concentration issues are a matter of great 
concern and importance all across farm and ranch country in 
America today and certainly in my home State of South Dakota.
    Over 60 rural groups recently wrote the House Ag Committee 
seeking the first time inclusion of a competition title in the 
next farm bill, a request that I enthusiastically support, of 
which I think is a reflection about the broad-based concern 
about the underlying structure of American agriculture and the 
direction that we are going today.
    This is not the Ag Committee, obviously. This is the 
Agriculture Appropriations Subcommittee, and our issues are a 
bit narrower but nonetheless critically important on this 
subcommittee.
    I'm concerned, Mr. Chairman, that USDA's marketing 
regulatory operations budget has been slashed by $231 million 
in fiscal 2001, and that the Ag Marketing Service has been cut 
from $61 million in that fiscal year, a cut that I fear may not 
permit the AMS to successfully administer our new mandatory 
price reporting program, one of the key strategies that was put 
in place just this past year in the hopes of leveling the 
playing field, so to speak, between independent livestock 
producers and the packing industry.
    Moreover, the Grain Inspection Packers and Stockers 
Administration or GIPSA budget has been essentially flat lined, 
and I fear that that may not equip them to investigate and 
guard against unfair trade practices in the packing industry.
    Last year the GAO reported that GIPSA lacks the staff, 
budget, and expertise to properly investigate anti-competitive 
behavior in livestock markets. That was prior to taking on a 
flat-line budget this year.
    GAO recommended the GIPSA require an earlier integration of 
attorneys in the planning and review of investigation and 
closer consultation take place between GIPSA, the Department of 
Justice, and FTC during investigations. And I look forward to 
learning how GIPSA plans to meet these recommendations under 
their tight budget constraints.
    Farmers and ranchers have weathered a storm of mergers in 
recent years between grain producers, seed and biotech 
companies, railroads, equipment dealers, grocery chains, meat 
packers. This is a matter of utmost importance.
    Our farmers and ranchers, I think, understand that the open 
marketplace is still the major price discovery mechanism that 
independent producers must rely on to gain a fair price. But 
when the open market is then lacking in activity, the ability 
of one or two players to affect that market is enormous.

                           PREPARED STATEMENT

    So I look forward to the testimony today. I welcome very 
able panels that the chairman has invited to share some 
insights with us today, and I look forward to this hearing.
    Senator Cochran. Thank you, Senator.
    Senator Johnson. I have a formal statement to offer.
    Senator Cochran. That will be included in the record.
    [The statement follows:]

               Prepared Statement of Senator Tim Johnson

    Thank you Chairman Cochran for holding this subcommittee hearing on 
marketplace concentration in agriculture. Without a doubt, 
concentration in agriculture is one of the most serious issues facing 
family farmers and ranchers today. I believe Congress and the 
Administration must always promote and protect real competition as a 
key element of our free enterprise economy--the envy of the 
capitalistic world--so I thank Chairman Cochran and Senator Kohl for 
conducting our hearing.
    I believe that if Congress and the Administration fail to cooperate 
to restore competition in all commodity and livestock markets now, the 
results will be crushing for independent family producers and the 
entire fabric of rural America. Agricultural producers want to derive 
income from the marketplace, but in order to assure that can happen, 
Congress must act now to restore fair competition to crop and livestock 
markets.
    Given that farm income is in-part dependent upon competitive 
commodity and livestock markets, over 60 farm and rural groups recently 
wrote the House Agriculture Committee seeking the first-time inclusion 
of a ``competition title'' in the next farm bill, a request I 
enthusiastically support. It is clear by this recent appeal and the 
number of witnesses present to testify on this subject today, that 
competition policy is extremely important to the overall prosperity or 
decline of rural America.
    Regarding USDA's budget proposal for fiscal year 2002, I appreciate 
the President's desire to fund national priorities in a restrained way 
so as to provide significant tax relief to America's working families. 
I too support a significant tax cut. Yet, we must address the budget 
and tax cut in a balanced fashion, assuring efforts are made to pay 
down the Federal debt and fund key programs--such as USDA efforts to 
promote competition in agriculture. While USDA's proposed budget 
adequately addresses some of our priorities, I believe it fails to make 
some specific and significant investments in a secure farm safety net, 
conservation programs, and efforts to restore marketplace competition.
    For instance, the Agricultural Marketing Service (AMS) budget has 
been cut by $61 million from fiscal year 2001. The mission of AMS is to 
promote competitive and efficient markets, and AMS must carry out the 
bulk of our new mandatory price reporting program. I am concerned a cut 
in the AMS budget may not permit the successful and complete 
administration of mandatory price reporting.
    Moreover, the overall Marketing and Regulatory Programs budget has 
been slashed $231 million from fiscal year 2001, the Grain Inspection, 
Packers and Stockyards Administration (GIPSA) budget has been 
essentially flat-lined, and I do not have confidence that GIPSA's 
budget adequately equip that agency to investigate and guard against 
the unfair trade practices by meatpackers. This is very troubling 
because a September 2000 General Accounting Office (GAO) Report 
asserted that GIPSA lacks the staff, budget, and expertise to 
investigate anti-competitive behavior in livestock markets. Therefore, 
GAO recommended that GIPSA require an earlier integration of attorneys 
in the planning and review of investigations and closer consultation 
take place between GIPSA, the Department of Justice, and the Federal 
Trade Commission during investigations. Last year, Congress concurred 
and required GIPSA to implement GAO's recommended improvements by the 
passage of the Grain Standard and Warehouse Improvement Act of 2000 
(Public Law 106-472). I look forward to learning how GIPSA plans to 
meet the mandate of Congress on this matter.
    Overall, it seems to me we need more competition in agriculture, 
not less. However, the proposed wave of mergers and acquisitions among 
agribusinesses has set the stage for anticompetititve agriculture. 
Farmers and ranchers have weathered a storm of mergers in recent years 
between grain processing giants, seed and biotechnology companies, 
railroads, farm equipment dealers, retail grocery chains, and 
meatpackers. Now that Tyson Foods has turned its back on the 
acquisition of IBP, it's not clear if the meat giant's two other former 
bidders remain interested. While many analysts suggest that IBP's 
competitors are not now interested in a deal, the stage is still set 
for concentration to sweep competition away, leaving independent 
farmers and ranchers without an active marketplace in which to sell 
their crops or livestock.
    On a broad scale, concentration in agriculture results in a 
marketplace with a small number of firms controlling transactions of 
agricultural goods between producers and consumers--and these firms 
leverage a dominating amount of bargaining power over both producers 
and consumers. On a specific scale, consider the meatpacking industry. 
Prior to 1990, horizontal concentration by meatpackers swept the 
nation, leaving the U.S. with three or four big meatpackers left to 
purchase beef cattle, pork, and lamb for slaughter. After 1990, these 
same firms added the element of vertical integration to their arsenal, 
effectively controlling much of their slaughter needs through captive 
supply and outright livestock ownership. The consequence for 
independent producers was a meager cash marketplace without much 
competition among meatpackers at all.
    Yet, that open marketplace is still the major price discovery 
mechanism that independent producers rely upon to gain a fair price. 
So, when the open market is thin and lacking activity, the ability of 
one or two dominant meatpackers to affect the market is tremendous. For 
instance, if in a given week a meatpacker utilizes all of its captive 
supplies and packer owned livestock to fill its kill needs, it has the 
ability to level off a price spike or even depress prices paid in the 
open market. Despite a producer's best effort to raise a quality live 
animal, the power leveraged by a packer or group of packers can destroy 
the opportunity to ensure a fair price.
    A USDA-GIPSA study of cattle procurement practices by meatpackers 
in the Texas panhandle region of the U.S. found a ``robust 
correlation'' between higher captive supplies (and packer ownership) 
and lower spot cattle prices ``in every case.'' Captive supplies are 
livestock generally controlled by packers through outright ownership or 
contractual agreements. This indicates to me that when meatpackers own 
large percentages of their slaughter requirements, the volume and vigor 
of a cash or open market is significantly reduced.
    According to Dr. Ron Plain, agricultural economist at the 
University of Missouri, 75 percent of hogs are either packer-owned or 
under production contracts by packers. Other studies and estimates 
indicate at least nearly 60 percent of the slaughter market for hogs is 
under packer ownership and control while some economists predict the 
open market for live hogs will disappear in five years.
    In beef cattle slaughter, meatpacker industry figures show that on 
average about 5 percent of slaughter is actually packer owned. Yet, 
because USDA seems unable to determine the exact level of captive 
supply controlled by packers through contracts and other marketing 
arrangements, this figure could be misleading. Additionally, due to a 
small number of beef packers controlling around 80 percent of overall 
slaughter, some regions of the country have one packer feeding and 
owning around 14 percent of its slaughter needs. According to USDA-
GIPSA, overall captive supply, on average, is nearly 20 percent of 
total fed beef slaughter.
    Independent cattle feeders and farmers used to have several buyers 
competing for their cattle every day of the week. With increasing 
captive supplies, packers do not bid aggressively for cattle to fill 
their slaughtering needs. In some instances, cattle feeders have only a 
few hours within one or two days a week to accept packer bids for 
cattle, most often in ``take-it-or-leave-it'' scenarios. Economists 
consulting the Western Organization of Resource Councils found that for 
each percent of captive supply, spot or cash prices decreased by eight 
cents per hundred weight.
    A decision on the part of one meatpacker may have a substantial 
effect on the marketplace. For example, when Smithfield shut down the 
pork plant in Huron, South Dakota--formerly owned by American Foods 
Group--pork producers in my State were left with merely a single market 
for their slaughter hogs. Alternatively, a decision on the part of a 
livestock producer seller has little if any effect at all on price. 
What does this mean? It means the marketplace is not competitive.
    It is now evident that current meatpacker livestock procurement 
practices (packer ownership, captive supplies, and other marketing 
arrangements) tend to transpire outside the open, cash, spot market. As 
a result, the process of bidding in an open fashion for the purpose of 
procuring slaughter livestock--which is really central to competition 
and a cornerstone to free-enterprise--is fading away. Therefore, 
livestock producers--who depend upon competitive bidding to gain a fair 
price--are forced to either enter into contractual, ownership, or 
marketing arrangements with a packer or find themselves squeezed out of 
marketing opportunities.
    I have introduced bipartisan legislation to restore a competitive 
bidding process to slaughter livestock markets, and in turn, ensure the 
future economic security of independent livestock producers. I have 
been joined by Senators Grassley (R-IA), Thomas (R-WY), and Daschle (D-
SD) in introducing S. 142 (the RANCHER Act) to prohibit meatpackers 
from owning livestock prior to slaughter.
    This legislation has the support of the National Farmers Union, the 
South Dakota Farmers Union, the South Dakota Cattlemens Association, 
the Center for Rural Affairs, the Organization for Competitive Markets, 
Ranchers--Cattlemen Action Legal Fund (R-CALF), the Iowa Pork Producers 
Association, and Illinois Farm Bureau Federation.
    My legislation is timely because of recent movement in the 
meatpacking industry (Tyson's failed effort to buy IBP, Smithfield's 
uncertain plans with IBP) to choke-off market access from independent 
livestock producers. My bill recognizes the need for greater value-
added opportunities and exempts producer owned and controlled 
cooperatives and small producer owned meatpackers from the ownership 
prohibition. This legislation is also retroactive, requiring 
meatpackers to divest of ownership interests in slaughter livestock.
    Despite the alleged criticism, a ban on packer ownership of 
livestock would not drive packers out of business. As indicated in 
earnings reports and press releases from the major packers, most of 
their income and earnings are generated from branded products and 
companies marketing products in a more direct fashion to consumers. My 
bill would not limit IBP, Conagra, Cargill, or Smithfield from buying 
food service companies, branding foods, or finding new global markets. 
The bill simply forbids meatpackers from owning livestock prior to 
slaughter.
    It should also be noted that other industries in America have 
limits on vertical integration. For example, network broadcasters are 
limited in their ability to own local television and radio stations. 
Similarly, movie production companies are not allowed to own movie 
theaters. Finally, Barnes and Noble--the nation's largest bookseller--
was recently prevented from buying out the nation's largest book 
distributer.
    For many years, those who support captive supplies and vertical 
integration have held contract poultry production up as a role model 
for where to go with pork, beef, and lamb. Under their model, farmers 
make significant investments in sole-purpose buildings using their own 
capital, and sign contracts with large, integrated companies. The 
contractual terms stipulate that the farmer provides the labor, 
management, and facilities required to raise the company-owned birds to 
the appropriate slaughter weight. Unfortunately, due to a lack of 
bargaining power on the part of poultry growers, the typical contract 
relationship between growers and the poultry companies has become more 
and more one-sided, leaving many producers with ``take-it-or-leave-it'' 
contracts with very unfavorable terms. The companies control all the 
production decisions, leaving the growers little if any independence in 
the decision making process on their own farms.
    Unfortunately, the poultry model is now being emulated by the 
processors of other livestock and commodities. According to GIPSA, 
``the percentage of hogs produced through various production and 
marketing contracts has increased sharply in recent years, and now 
accounts for 65 percent of all slaughter hogs.'' For the 2000 season, 
all the major tobacco companies are now contracting with growers for 
some portion of their domestic supplies. Other commodities commonly 
produced under contract include, but are not limited to: beef cattle, 
corn, soybeans, sugar cane, and cotton. Without the establishment of 
basic farmer or rancher safeguards, many of the producers of these 
commodities potentially face the same pattern of abuse experienced by 
poultry growers.
    It all boils down to whether we want independent producers in 
agriculture, or if we will yield to concentration and see farmers and 
ranchers become low wage employees on their own land. I'm proud to 
stand up for competitive agriculture that boasts a broad base of 
independent, family farmers and ranchers. I look forward to the insight 
that today's witnesses will provide to our discussion of agriculture 
concentration. Thank you Mr. Chairman, this concludes my opening 
statement.

    Senator Cochran. Mr. Collins, we'll begin with you. We 
appreciate your attendance and furnishing us with a prepared 
statement. It will be made a part of the record in full, and we 
ask you make whatever summary statements you should choose.

   STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, DEPARTMENT 
                    OF AGRICULTURE

    Mr. Collins. Thank you, Mr. Chairman, Mr. Kohl. Mr. 
Johnson. Thanks for the invitation to participate in this 
hearing today. I'm going to comment as an overview to start 
your day on forces driving consolidation in food and 
agriculture and some of the economic issues that these trends 
have raised.
    Consolidation and concentration in the food system refers 
to changes in number, in the size distribution of firms and 
agribusiness firms as well as changes in the business 
arrangements they make among one another.
    A primary cause is economies of scale, which allows larger 
volumes to be produced and marketed at lower per unit cost, and 
usually that's due to more efficient production plants or 
managing systems or distribution methods.
    Consolidation can also be caused by other factors. 
Economies of size, for example, can provide, increased access 
to capital for research and advertising, volume-based price 
reductions on production inputs that a large firm can buy or 
premium price on large volumes of specific outputs they might 
be able to sell.
    Still other factors that can generate concentration and 
consolidation include the exit of firms from an industry due to 
inability to compete or the desire to seek higher returns in a 
different industry. The ability to serve larger markets may 
also contribute to merger activity as firms try to build on 
distribution networks of already established smaller firms.

                           STRUCTURAL CHANGE

    An important aspect of structural change is increased 
coordination in the farm to consumer chain, which refers to 
contractual arrangements, alliances, joint ventures, or 
vertical integration.
    Consumers in America today are increasingly demanding 
higher quality food products that offer nutritional benefits, 
convenience, freshness, and taste. Contraction and vertical 
integration help downstream firms ensure that they can provide 
such characteristics, and that they are provided when they're 
needed and with minimal inventory costs.
    With these as driving forces, there has been substantial 
consolidation and the emergence of large firms in a variety of 
markets tied to farming, from input suppliers to retail 
grocers.
    For example, while we still have thousands of farm 
machinery dealers today, very few companies produce tractors or 
large equipment. Much of that consolidation occurred a long 
time ago so that by 1986 the top four tractor firms had 80 
percent of the market.
    The more recent example of rising consolidation is in the 
seed industry where major restructuring took place in the 
1990s. Large chemical or pharmaceutical companies acquired seed 
businesses as a way to complement their existing agricultural 
chemical businesses and their expertise in molecular biology. 
One study placed the four firm concentration ratio in 1998 at 
67 percent for corn seed sales, 49 percent for soybean seed 
sales, and 87 percent for cotton seed sales.
    At the other end of the food chain, the market share of the 
largest 20 food retailers increased from 39 percent to 52 
percent during the 1990s. Analysis of the 100 largest U.S. 
cities found that the market share of the four largest food 
retailers was 72 percent in 1998. Although that was up very 
little during the 1990s.
    Consolidation has also occurred between the farm input 
industry and the food retail markets. In farm production it has 
been occurring for decades. And recently it has been very rapid 
for hogs and milk production. It's also occurred in grain 
handling and transportation, particularly among railroads and 
barge lines.
    It's occurred in much of the food processing sector such as 
meat packing, especially for cattle slaughter during the mid 
1980s and hog slaughter during the 1990s.
    The economic growth in a market-oriented economy like the 
one we live in involves business formation, internal expansion, 
mergers, acquisitions, and alliances of various kinds. It also 
includes spinoffs, divestitures, and exits. These dynamics of 
change have generally resulted in consumer products being more 
efficiently produced and of higher quality and lower price than 
otherwise.
    Nevertheless, there are a number of concerns that bear our 
attention. One issue is the extent to which increasing 
concentration increases the ability of firms to exercise market 
power. The firms with market power may successively mark up 
prices charged to consumers or depress prices paid to farmers 
below competitive levels.
    They may also shift costs to farmers by demanding certain 
services. Increasing concentration may also facilitate 
collusion or other relationships between firms that inhibit 
competition. These issues need to be examined in well-defined 
markets and with careful attention to the possible actions of 
existing competitors which could include producers of 
substitute products and the potential for entry of new 
competitors.
    A second issue is the extent to which increasing 
concentration reduces product innovation and development.
    A third issue is the extent to which increasing competition 
affects the ability of sellers, such as farmers, to find 
markets for their products as vertical integration thins out 
some markets.
    A fourth issue is market transparency and the need for 
access to adequate, timely information on market conditions to 
avoid putting firms at a competitive disadvantage.
    As food and agricultural markets have moved from being 
local markets to regional markets to national markets to global 
markets, businesses in the food system have moved towards 
larger scale of production. While this evolution can improve 
coordination within the food chain and the response to changing 
consumer preferences, the potential for market power increases. 
This makes monitoring of markets, provision of information and 
enforcement of the antitrust laws increasingly important to 
farmers and consumers.

                           PREPARED STATEMENT

    These are responsibilities that the Justice Department is 
very concerned with, and these are responsibilities that we 
take very seriously at USDA. And Ms. Waterfield will describe 
some of our actions in that arena. Thank you, Mr. Chairman.
    [The statement follows:]

                  Prepared Statement of Keith Collins

    Mr. Chairman and members of the Subcommittee, thank you for the 
invitation to participate in this hearing to discuss concentration in 
the U.S. food system. All segments of the agricultural sector are 
undergoing structural change for a wide variety of reasons. I will 
examine some of the factors contributing to consolidation and 
concentration in the food production and marketing system and briefly 
present data on recent structural trends in the food system, including 
farm inputs, farm production, transportation, processing, 
merchandising, and retailing. Lastly, I will discuss some of the 
economic issues that have been raised regarding increasing levels of 
concentration in the food production and marketing system.
    The U.S. food and fiber system, which includes farming and related 
industries, accounted for 16 percent of U.S. gross domestic product 
(GDP) in 1999 and employed over 24 million people, or 17 percent of the 
U.S. labor force. Although farming employs only about 1 percent of the 
U.S. workforce and accounts for less than 1 percent of total GDP, the 
contribution of farming to the national economy is much greater because 
of production agriculture's reliance on other industries for production 
inputs and for the processing, merchandising, and retailing of the 
products farmers and ranchers produce. The efficiency of this system 
has enabled U.S. agriculture to provide an abundant, safe and 
affordable food supply for U.S. citizens and to be a dominant supplier 
of food and fiber to the rest of the world's population.
              reasons for consolidation and concentration
    Consolidation and concentration in the food system refers to 
changes in the number and size distribution of farms and agribusiness 
firms and the changing business arrangements farms and firms make with 
one another. Structural change is studied because of concerns over the 
economic and social effects of certain business structures, 
particularly consolidation of farms and firms. Consolidation of firms 
into very large production units is sometimes called 
``industrialization.''
    Many factors contribute to consolidation and concentration in the 
U.S. food system. A primary cause is economies of scale. Economies of 
scale allow larger volumes to be produced at lower per unit production 
costs, thereby increasing a firm's potential profitability. These 
economies can take many forms, such as larger and more automated 
production and processing facilities, reduced overhead costs, and lower 
distribution costs. Consolidation may also be encouraged by pecuniary 
economies related to size, such as increased access to capital for 
research and advertising, volume-based price reductions on production 
inputs which can lower per unit production costs, or premium prices on 
large volumes of specific outputs which increase per unit returns. 
Other factors that can generate consolidation include the exit of firms 
due to the inability to compete with more efficient firms, the decision 
of entrepreneurs and providers of capital to seek more lucrative 
business opportunities in other industries, and government programs, 
including farm programs, tax provisions, research programs and credit 
programs. The emerging global economy may contribute to merger 
activity, as firms try to build on the distribution networks already 
established by smaller firms operating within countries.
    Some have suggested that the slow overall rate of growth in food 
consumption also contributes to structural change. Slow growth in food 
consumption may cause firms to look for a competitive edge by offering 
new products and to expand long-term growth and profitability by 
increasing and diversifying their product lines through mergers and 
acquisitions.
    An important aspect of structural change is increased 
``coordination'' in the farm-to-consumer chain, which refers to 
contractual arrangements, alliances, or vertical integration. Consumers 
are increasingly demanding higher quality food products that offer 
nutritional benefits, convenience, and taste, rather than simply bulk 
or homogenous commodities purchased for home meal preparation. 
Contracting and vertical integration help downstream firms ensure that 
the commodities produced by farmers and ranchers and processed into 
food products meet the specific characteristics consumers want and that 
those products can be provided as needed with minimal inventory costs.

                     RECENT TRENDS IN CONCENTRATION

    Farm Inputs: Farm Machinery.--In 1997, 1,263 establishments 
produced farm machinery in the United States, delivering nearly $16 
billion in products. That compares with 1,576 companies that delivered 
about $7 billion in products 10 years earlier. The industry consists of 
a small number of full-line manufacturers that produce complete lines 
of equipment, including tractors, combines, tillage, and planting 
equipment, and a large number of smaller firms producing specialized 
equipment for regional markets. The industry has undergone substantial 
consolidation for many decades, especially for producers of large 
equipment, such as tractors. As farming transitioned from horse to 
machine, numerous tractor manufacturers emerged. The fate of most of 
these firms paralleled the consolidation in the auto industry with many 
brand names disappearing as the century unfolded. A significant 
industry shakeout occurred during the farm credit crisis of the 1980's 
when farmers sharply reduced farm machinery purchases, leading to a 
series of mergers, acquisitions, and joint ventures in the industry. By 
1986, the top four firms accounted for 80 percent of tractor sales. 
While no data are available on the current four-firm concentration 
ratio-the percentage of market share controlled by the four largest 
firms-tractor sales continue to be dominated by a few firms.
    The number of farm machinery dealers also declined sharply as the 
number of major manufacturers declined, inventory costs increased, and 
small dealers could not the afford parts and service departments that 
larger competitors could provide. In 1997, there were 6,937 farm 
machinery dealers selling primarily to farmers, but many of these were 
owned or franchised dealerships of manufacturing firms.
    Farm Inputs: Seeds.--A major restructuring took place in the seed 
industry during the 1990s as large, multinational agricultural 
businesses purchased or formed joint ventures with smaller seed and 
plant breeding companies. Many of the large companies were chemical or 
pharmaceutical companies, so acquiring seed businesses appears driven 
by an effort to complement their existing agricultural chemical 
businesses and their expertise in molecular biology. The pace of 
consolidation was rapid and significant in scope. One review of 
consolidation activity for 1998 found that 10 biotechnology firms were 
involved in 186 mergers, acquisitions, joint ventures or other 
collaborations or alliances. A 1999 study by Iowa State University 
placed the four-firm concentration ratio in 1998 at 67 percent for corn 
seed, 49 percent for soybean seed, and 87 percent for cotton seed.
    During 2000 and 2001, some of these multinational companies spun 
off or announced plans to sell agricultural divisions. These decisions 
may reflect ongoing difficulties in the biotech seed industry, such as 
some consumer resistance, or higher-than-expected development and 
commercialization costs. Nevertheless, the restructurings that occur 
are likely to continue to leave the seed industry dominated by a few 
large players.
    Farm production.--Rapid consolidation occurred in farm production 
between 1935 and 1970, as the number of U.S. farms fell by over 50 
percent, from 6.8 million to under 3 million. The primary factor 
contributing to the decline has been increasing mechanization. 
Mechanical power, larger, more efficient farm equipment, and 
improvements in farming methods greatly increased labor productivity in 
agriculture after the mid-1930's. Because of increasing productivity, 
less labor was needed to produce crops and livestock, allowing farmers 
to expand the size of their operations. In addition, technological 
advances in livestock, poultry, and milk production enabled large 
numbers of animals to be managed in confined operations. Increasing 
productivity tended to keep returns low especially for those producers 
who failed to adopt cost-cutting technologies, contributing to the 
decline in farm numbers. Despite the rapid consolidation in farm 
numbers, over 90 percent of farms remain family operated.
    Over the past decade, farm numbers have stabilized as many farm 
households have been able to supplement their farm income with income 
from off-farm jobs. In 1935, the incomes of farm-operator households 
averaged 40 percent below the average income of non-farm families. In 
recent years, the average income of farm-operator households has 
exceeded the average income of non-farm families. In 1999, the income 
of non-farm families averaged $55,000. The Economic Research Service 
(ERS) estimates the total income of farm-operator households averaged 
$64,000 in 1999, with about 90 percent of the income coming from off-
farm sources. While farm numbers have declined over time and a larger 
share of production is accounted for by an increasingly smaller number 
of producers, production remains largely unconcentrated for major 
crops. According to the Census of Agriculture, there were 359,666 farms 
growing corn for grain; 241,334 farms growing wheat for grain; and 
353,566 farms growing soybeans in 1997.
    There were 1.011 million farm operations with cattle in 1997. The 
pace of concentration for cow-calf operations has remained well below 
that of other livestock and poultry sectors. However, of the 
approximately 110,000 feedlots in 1997, the largest 2 percent marketed 
85 percent of the fed cattle. The four largest feeding firms had annual 
feeding capacity in 2000 equal to 11 percent of total annual steer and 
heifer slaughter. In 1997, there were 99,238 dairy, 63,246 poultry, and 
102,108 hog farms. In 1997, 3 percent of hog farms accounted for over 
50 percent of sales and 3 percent of dairy farms accounted for over 
one-third of milk sales. Poultry production was less concentrated but 
95 percent of the broilers are produced under contract to fewer than 40 
firms. While consolidation in hog and poultry production appears to 
have slowed, the movement to larger and fewer dairy operations 
continues.
    Handling and transportation.--Based on data from the Grain 
Inspection, Packers and Stockyards Administration, market shares of the 
four largest agricultural export firms ranged from 47 percent for wheat 
to almost 70 percent for corn in 1998. While the share of total U.S. 
wheat exports held by the four top firms has remained relatively 
constant over time, the U.S. corn export market has become more 
concentrated. The export share for soybeans of the four top firms 
declined over the period from 1985-98. The changes in aggregate U.S. 
market share may mask changes at a particular port and the fact that 
the four top companies for some markets may have changed from period to 
period. In general, those reporting areas where export volumes are 
large and growing, such as New Orleans, tend to be less concentrated 
than reporting areas with smaller and declining volumes. For example, 
volume exported through the Atlantic Coast reporting area declined by 
about two-thirds over 1985 to 1998. The number of firms fell to four or 
less over the same period. Also, over the same period, the volume of 
soybeans exported through the Great Lakes reporting area increased by 
over 123 percent and the share of inspected exports by the four largest 
firms fell from 100 percent in 1990 to 71 percent in 1998.
    Control of storage capacity has implications for export facilities, 
inland or country elevators, and overseas grain handling facilities. 
While storage capacity is generally not limited to only a few firms at 
the national or state level, local markets may be serviced by a limited 
number of facilities, potentially constraining farmers' storage and 
marketing options.
    At the national level, the four largest firms account for about 27 
percent of total elevator capacity. While there is much variation 
across states, in general, concentration tends to be lowest in those 
states with the largest off-farm storage capacities. Mississippi, 
Louisiana, and Arkansas show relatively high concentration ratios 
partially reflecting the exclusion of rice from the off-farm storage 
capacity data for these States. Federally-inspected warehouse data also 
do not reflect volume moving through warehouses, so concentration 
levels could be higher if the amount of grain handled by the larger 
firms is proportionately greater than their share of total elevator 
capacity.
    Of all transportation modes, trucking is the least concentrated. 
While there are a couple of very large truck firms, there are no 
significant obstacles for entry into the trucking industry. Specialized 
refrigerated trucks are more problematic, but generally trucking is 
much less concentrated than most other industries.
    There are three major barge lines covering traffic on the 
Mississippi River System and connecting rivers: American Commercial 
Barge Lines (ACBL) is the largest, followed by American River 
Transportation (owned by ADM) and Cargo Carriers (owned by Cargill). 
These three barge lines own 55 percent of the total covered barges, 
although there are 32 barge companies in total.
    Over the period 1997-99, there have been approximately 30 mergers 
in the ocean freight industry. The most recent acquisition of Sealand 
by Maersk gives the new firm a 13 percent market share. The top ten 
carriers in 1990 had a market share of 33 percent, rising to nearly 50 
percent today.
    The top five Class I railroads accounted for 57 percent of all 
Class I railroad grain traffic in 1982, and by 1995, this figure had 
climbed to 90 percent and then to 96 percent by 1999. In addition, 95 
percent of all Class I railroad revenue ton-miles in 1997 were hauled 
by the five largest railroads, compared to only 75 percent of Class I 
railroad revenue ton-miles in 1990.
    Rail competition is not only a function of the number of available 
railroads, but also the quality and effectiveness of competitive 
options from the other transportation modes in particular markets. 
Although the number of Class I railroads has been reduced since 
deregulation, some have argued competition may be more intense because 
the remaining large railroads are stronger and their market reach is 
greater.
    The number of route miles operated by each of the remaining Class I 
railroads has also increased greatly. Railroad mergers of the 1960's 
and 1970's combined smaller rail systems which operated in smaller 
geographic territories. In the 1980's, newly merged systems began to 
gain dominance within some geographic regions. In 1960, the average 
Class I railroad in the United States operated 1,956 route miles, which 
rose to 4,226 route miles in 1980 and to 13,313 route miles in 1998. 
Today, two large railroads dominate in the western United States, and 
two large railroads dominate in the eastern United States.
    Processing.--Concentration in food processing continues to trend 
upward. The top four firms accounted for about 20 percent of food 
processing sales in 1997, compared to nearly 12 percent in 1987. The 
market share of the four largest firms in red meat packing rose from 47 
percent in 1987 to over 60 percent in 1998. The four-firm concentration 
ratio for steer and heifer slaughter rose from 50 percent in 1985 to 82 
percent in 2000, but has remained stable since the mid 1990s. The four 
largest hog slaughter firms accounted for 56 percent of total 
commercial hog slaughter in 2000, up from 40 percent in 1990 and 34 
percent in 1980.
    The number of federally inspected hog slaughter plants fell from 
1,322 in 1976 to 770 in 1996. USDA's 1996 study, Concentration in the 
Red Meat Packing Industry, found no correlation between regional 
concentration and price; rather, geographic hog pricing patterns were 
found to be consistent with a single national market for slaughter 
hogs. Hogs slaughtered in large plants (those slaughtering at least 1 
million head annually) and steers and heifers slaughtered in large 
plants (at least 500,000 head annually) continue to account for an 
increasing share of annual slaughter. ERS analyses found that there are 
economies of scale associated with these shifts in plant size, which 
suggests lower costs for larger plants and lower consumer prices.
    Larger dairy processing firms also account for an increasing share 
of dairy processing. In 1998, companies with $800 million or more in 
sales accounted for 69 percent of U.S. dairy sales. The market share of 
large proprietary dairy companies increased from 39 percent in 1975 to 
over 42 percent in 1998, while the market share of large U.S. dairy 
cooperatives increased from 17 percent to 27 percent over the same 
period.
    Mergers and acquisitions have accounted for much of the 
concentration in the food processing industry. A booming economy 
appears to have driven the latest wave of consolidation in the food 
industry. Dairy processors led the number of mergers and acquisitions 
occurring from 1993 to the first half of 1998. Dairy processors 
accounted for 69 mergers and acquisitions, meat processors for 60, soft 
drink bottlers for 53, snack food processors for 44, and poultry 
processors had 32 mergers and acquisitions. Mergers and acquisitions 
continued into 2000. Within the 27 food or food related categories 
tracked by The Food Institute, merger and acquisition activity 
increased in 18 categories, with activity declining in 6, and remaining 
unchanged in 3.
    Food Merchandising.--The food wholesaling sector continues to 
experience steady growth in sales and concentration through 
acquisitions. Merchant food wholesalers work with processors to 
distribute products to retailers and food service establishments. 
Mergers and acquisitions of the leading general-line grocery 
wholesalers have resulted in increased concentration. The top four 
general-line wholesalers accounted for over 40 percent of sales in 
1997, up from 26 percent in 1987. Wholesalers that specialize in meat 
and poultry distribution have also experienced substantial increases in 
concentration over the past ten years, especially since 1992, while 
concentration in dairy product distribution has remained stable. As 
their customer base continues to decline due to rapid consolidation by 
supermarket chains, many grocery wholesalers continue to acquire 
retailers. In addition, concentration has also become international in 
scope as companies from outside the United States acquire U.S. food 
wholesalers. Both consolidation and international trends are expected 
to continue.
    Mergers and acquisitions in food wholesaling can lead to efficiency 
gains that reduce costs and provide flexibility to offer more variety 
to customers within a market region. Furthermore, by growing in a 
familiar geographic region, a company can gain a better understanding 
of the consumer. By vertically expanding into retail markets, companies 
attempt to create synergies that reduce operating costs.
    Retailing.--Widespread consolidation within food retailing has 
increased the share of total grocery store sales accounted for by the 
largest firms. Between 1990 and 1999, the market share of the largest 
20 food retailers increased from 39 percent to 52 percent. Much of the 
increase in concentration took place between 1997 and 1999 when almost 
3,500 supermarkets were purchased, representing $67 billion in sales. 
Analysis by ERS of the 100-largest U.S. cities found that increases in 
local market concentration has been moderate. In the 100 largest U.S. 
cities, the market share of the four largest food retailers rose from 
69 percent in 1992 to 72 percent in 1998.
    A number of forces have led to food retail consolidation including 
slow growth in annual grocery store sales, increased spending for 
prepared foods and meals away from home, and growth of food sales by 
nontraditional retailers. During the 1990's, grocery store sales, 
adjusted for inflation, grew about 1 percent annually.
    With incomes rising, consumers increased their preference for 
greater convenience by purchasing more prepared foods and more meals 
outside the home.
    These trends help to promote a competitive food retailing industry.
    The expansion of retail food sales by discount mass-merchandise, 
warehouse club, and convenience stores has provided additional sources 
of competition for traditional food retailers. Mass merchandisers such 
as Wal-Mart, Kmart, and Target, and warehouse club store operators such 
as Costco, Sam's, and BJ's have increased their share of retail food 
sales from 5 percent in 1992 to 8 percent in 1998, while traditional 
food stores' share of retail food sales fell from 85 to 80 percent of 
sales over the same period. Further expansion of mass merchandisers in 
the retail food business is expected to increase their market share of 
retail food sales over the next several years.
    Increasingly, consolidating retailers are using supply-chain 
management practices, which are activities coordinated with suppliers 
that generate operating, procurement, marketing, and distribution 
efficiencies, to reduce costs. Retailers claim that expected efficiency 
gains and lower investment requirements will allow them to maintain 
profitability and allow them to compete with mass-merchandiser, 
warehouse club stores, and other potential rivals. Retailers are likely 
to continue to consolidate through mergers and acquisitions in order to 
maintain profitability as competition heightens for the consumer food 
dollar.
                economic issues raised by concentration
    Economic growth in an industry involves business formation and 
expansion, mergers, acquisitions, alliances of various kinds, and 
exits. These dynamics of change in a market-oriented economy, such as 
ours, have generally resulted in consumer products more efficiently 
produced and of higher quality and lower price than otherwise. 
Nevertheless, economists cite several concerns with concentrated 
markets.
    One issue is the extent to which increasing market concentration 
reduces competition and increases the ability of firms to exercise 
market power. Firms with market power are able to capture a larger 
return by offering consumers higher prices for goods of the same or 
even lower quality. Such behavior may persist unless other firms emerge 
to offer lower priced, better products. Likewise, concentrated buyers 
may depress prices paid to their suppliers below competitive levels and 
may shift costs to their suppliers by demanding that suppliers provide 
certain services. In addition, increasing concentration may facilitate 
collusion or other relationships between firms that inhibit 
competition, resulting in higher prices being paid by consumers.
    An important limitation to market power in any industry are the 
possible actions of existing competitors, which could include producers 
of substitute products, and the potential for new competitors. Price 
distortions and market inefficiency, as reflected in abnormally large 
returns on investment, can be an incentive for entry of new 
competitors. Even when concentration is high, the potential threat of 
new entrants may prevent firms in a concentrated industry from 
maintaining high prices.
    A second issue is the extent to which increasing concentration 
reduces product innovation and development. Imitation of new 
technologies is usually cheaper and quicker than conducting the basic 
research needed to develop and bring new products to market. In 
concentrated markets, product improvement may not be as necessary to 
maintain market share, so firms may not be as inclined to invest in 
research and product development. On the other hand, increasing 
concentration does not necessarily mean less investment in research and 
new products. Increasing concentration may enhance investment in new 
technologies, since larger firms may be more able to obtain the capital 
and human resources to fund research and market development programs.
    A third issue is the extent to which increasing concentration 
affects the ability of sellers, such as farmers, to find markets for 
their products. This issue has been raised with respect to the 
livestock and poultry industries where some producers have concerns 
that their ability to independently raise animals and market them in 
traditional cash markets is declining.
    A fourth issue is market transparency. As markets consolidate 
horizontally and vertically, access to market information could also 
decline. As information continues to increase in importance as a means 
to reduce costs and improve decisionmaking, lack of timely, relevant 
information on market conditions becomes a competitive disadvantage.
    Analysis of the effect concentration has on the prices received or 
paid by farmers has been mixed. One broad indication of concentration 
often cited is the farmers' declining share of retail food 
expenditures. The farm-to-retail price spread--the difference between 
the farm value and the retail price of food--rose 5 percent in 1999, 
reflecting changes in the structure of the food marketing system, 
consumer demand for food, along with higher prices for marketing 
inputs, such as labor and energy. The nominal farm-to-retail price 
spread for all food products rose 41 percent during the last decade. In 
real terms, the farm-to-retail price spread for food increased 11 
percent over the past 10 years. Higher costs for labor, packaging, 
energy, transportation, and other marketing inputs pushed the farm-to-
retail spread wider, but increases in productivity can partially offset 
these higher costs. Changes in the cost of these marketing inputs, 
which are influenced by consumer demand for convenience and other 
preferences, generally have a greater effect on the retail price of 
food than do fluctuations in prices received by farmers. However, the 
relationship between farm and retail prices is more pronounced for food 
items that undergo little processing, such as fresh fruits and 
vegetables or fluid milk.
    By reducing competition, concentration may result in higher 
consumer prices and a slower response by retail food prices when farm 
prices decline. While concentration in food retailing has accelerated 
since 1996, food-at-home prices, as measured by the CPI for all food-
at-home, have fallen relative to the CPI for all items. An ERS study 
found that additional packing services and new products account for the 
rising wholesale-to-retail price spread for meats. The study could not 
attribute the rise in the wholesale-to-retail price spread for meat to 
increased concentration in the meat packing industry.
    As food and agricultural markets have moved from local to regional 
to national to global, businesses in the food system has moved toward 
increasing their scale of production. While this evolution can improve 
coordination within the food chain and the response to changing 
consumer preferences, the potential for market power increases. This 
makes enforcement of antitrust laws increasingly important to farmers 
and consumers. The Grain Inspection, Packers and Stockyards 
Administration, the Department of Justice, and the Federal Trade 
Commission take seriously their responsibilities in merger enforcement 
actions, price fixing and market allocation, restraint of trade, and 
other anticompetitive practices.
    That completes my testimony. I will be happy to respond to 
questions.

    Senator Cochran. Thank you, Mr. Collins.
    Ms. Waterfield, we'll hear from you now.

STATEMENT OF JOANN WATERFIELD, DEPUTY ADMINISTRATOR FOR PACKERS AND 
  STOCKYARDS PROGRAMS, GRAIN INSPECTION, PACKERS AND STOCKYARDS 
  ADMINISTRATION, DEPARTMENT OF AGRICULTURE

    Ms. Waterfield. Thank you, Mr. Chairman. Mr. Chairman and 
members of the subcommittee, good morning and thank you for 
allowing me the privilege of speaking on behalf of the Grain 
Inspection, Packers and Stockyards Administration.
    Ms. Waterfield. The Packers and Stockyard Programs is 
responsible for enforcing the Packers and Stockyards Act which 
prohibits, among other things, unfair, deceptive, fraudulent 
practices by market agencies, dealers, stockyards, packers, and 
live poultry dealers in the livestock, poultry, and meat 
packing industries.
    I moved into the position of deputy administrator in 
September 2000 from USDA's Office of the General Counsel where 
I led litigation teams responsible for enforcing the Packers 
and Stockyards Act and also the Perishable Agricultural 
Commodities Act.
    And let me say that I feel very privileged to represent the 
men and women of the Packers and Stockyards Programs, and I 
have long respected their professionalism, dedication, and 
their tenacity in pursuing and developing complex 
investigations and cases.

                             Concentration

    I was asked to provide you with an overview on 
concentration today in these industries, but I also hope to 
provide you with a better understanding of the agency and our 
contributions to the livestock, poultry, and meat packing 
industries and ultimately the benefits we provide to American 
agriculture.
    Our ability to address concentration is limited to our 
statutory authority. The Packers and Stockyards Act gives the 
Secretary of Agriculture the authority to regulate dealers, 
stockyards, market agencies, packers, and live poultry dealers 
who operate in interstate and foreign commerce.
    Certain provisions of the Federal Trade Commission Act were 
made applicable to the Secretary's enforcement of the act and 
grant the Secretary investigatory powers.
    To protect the livestock, poultry, and meat packing 
industries, the Act requires market agencies and dealers to 
register. Market agencies and dealers are required to be 
bonded, and market agencies, dealers, packers, and live poultry 
dealers must meet specific payment requirements.
    To protect unpaid sellers of livestock, packers are subject 
to trust provisions that require packers to hold the proceeds 
from all livestock purchased in cash sales and all inventory of 
receivables of proceeds from meat, mean food products, or 
livestock products derived therefrom, to be held in trust for 
unpaid sellers until payment is made in full. There is a 
similar provision for live poultry dealers, but there is not a 
similar provision for livestock dealers.
    The Packers and Stockyards Programs uses our statutory 
authority to investigate alleged and potential violations of 
the Act and regulations. And we prosecute violations that we 
find through our investigations, either directly through our 
administrative actions or through referral to the Department of 
Justice.
    And while high levels of concentration cause a red flag and 
require additional oversight to ensure that there is no harm or 
injury that the act was intended to prohibit in the livestock, 
meat packing, and poultry industries, concentration in itself 
is not a violation of the act.
    Firms are largely free to pursue their own economic 
interest by opening or closing plants, expanding into new 
geographic areas, adopting new technology and cost cutting 
innovations that are being integrated every day into livestock 
production and slaughter.
    The Packers and Stockyards Programs, and the Department of 
Agriculture do not have pre-merger authority, and we don't have 
the authority to stop mergers from taking place.
    The authority to investigate mergers and acquisitions 
resides with the Department of Justice and the Federal Trade 
Commission. And, when requested, we supply information and 
expertise to assist those agencies with their investigations of 
mergers or competitive issues involving the grain, livestock, 
meat packing, and poultry industries.
    If we find and prove a violation of section 202 of the Act, 
we request sanctions that include orders to cease and desist 
from unlawful practices, and civil penalties.
    We recognize that there are concerns about rising levels of 
concentration in the livestock and meat packing industries 
leading to fewer competitive marketing opportunities for 
producers. However, again, the Packers and Stockyards Act does 
not prohibit concentration.
    Concentration has remained fairly constant since 1996 in 
the meat packing industry, but we recognize that looking 
further in the past, that concentration in both the cattle and 
hog slaughtering industries has increased greatly since 1985.

              PACKERS AND STOCKYARDS PROGRAMS' INITIATIVES

    In the past few years, the Packers and Stockyards Programs 
has been in a state of dynamic change. During fiscal year 2000, 
for example, the reorganization and filling of crucial 
positions within the Packers and Stockyards Program was 
completed. We utilized cross-regional expertise to address 
national issues, and we're looking more effectively now at 
emerging technology, evolving, marketing strategies and other 
issues affecting the industries and the constituencies we 
serve.
    We're monitoring the livestock meat packing and poultry 
industries which are estimated by the Department of Commerce in 
fiscal year 2000 to have an annual wholesale value of $142 
billion.
    At the close of calendar year 2000, there were 1,318 
stockyards, 6,195 marketing agencies and dealers, more than 
2,000 packer buyers registered with the Packers and Stockyards 
Programs. There are an estimated 6,000 slaughtering and 
processing packers subject to the Act.
    Also, in fiscal year 2000, 266 slaughtering packers, each 
of whom purchased more than $500,000 worth of livestock in 
1999, were required to be bonded and file annual reports with 
us.
    In addition to that, 205 poultry firms, live poultry 
dealers, and a significant number of meat distributors, 
brokers, and dealers were subject to the Act.
    Last year we conducted more than 1,800 investigations of 
potential violations of the Act which was a 33 percent increase 
over the previous year.
    Last year we returned more than $15 million to the 
industry, to our stakeholders, as a result of our custodial 
audits, in working with insolvent dealers, market agencies, and 
packers to correct their insolvencies, and in one poultry 
trust.
    This year, halfway through the fiscal year, we've returned 
$14.6 million to the industry, and through a case that we 
initiated against a major meat packer, that meat packer 
reportedly returned $3 million to hog producers that it 
underpaid as a result of failing to disclose a change in a 
formula used to estimate lean percent that it purchased on a 
carcass basis without notifying its producers.
    Last year we sent 15 rapid response teams out as a result 
of complaints we received in nine States, and those rapid 
response teams helped recover more than $3 million for growers 
and producers.
    This year we've had 20 rapid response teams out, 2 of them 
are out right now. We've returned more than $2.5 million as a 
result of those rapid response teams.
    We recognize that our regulatory responsibilities are at 
the heart of our mission. And to this end we closely monitor 
practices that may impede the trade of livestock, meat, and 
poultry.
    We place a high priority on investigating all complaints 
and further developing information we receive concerning 
allegations of anticompetitive, unjustly discriminatory or 
unfair practices in the livestock, meat packing, and poultry 
industries.
    The agency also maintains a 24-hour hotline on which 
constituents may anonymously voice their concerns. We respond 
to and investigate all issues addressed by the callers. Last 
year we responded to 140 calls compared to 126 in 1999, and 
those were in addition to the calls we receive every day in our 
three regional offices as well as in many headquarters.
    We're also strengthening our investigations and assessments 
of the competitive implications of structural changes in the 
livestock, meat packing, and poultry industries. To further 
this initiative, we're currently involved in six cooperative 
research agreements which we anticipate will all be completed 
this year.
    We're also involved in rule-making initiatives. We 
anticipate publishing our final rule on the swine contract 
library later this year. We're working on implementing the 
recommendations that were made in the GAO report that was 
published last year. We intend to implement all of the 
recommendations by November of 2001.
    We currently have eight cases scheduled for hearing. We 
have 40 cases being reviewed by the Office of the General 
Counsel to see if there is sufficient evidence to go forward to 
filing a complaint. We have 14 cases in headquarters being 
reviewed by our branch chiefs for referral down to the Office 
of the General Counsel.
    We have three competitive investigation work plans being 
reviewed which we will work with the Office of the General 
Counsel if we decide to go forward with them.
    And in addition to that, we are continuing to develop and 
retain well qualified and talented staff to enhance our ability 
to address complex industry issues.

         Prepared statement and additional submitted questions

    Mr. Chairman and members of the subcommittee, I want to 
thank you again for the privilege of addressing you and 
representing the Packers and Stockyards Programs. If you have 
any further questions, I'll be happy to entertain them. If 
there are any questions that I cannot address at this hearing, 
I'll be happy to take your questions, research them further, 
and get back to you at a later date. Thank you.
    Senator Cochran. Ms. Waterfield, thank you.
    [The information follows:]

                 Prepared Statement of JoAnn Waterfield

    Mr. Chairman and members of the Committee, good afternoon and thank 
you for allowing me the privilege of speaking on behalf of the Grain 
Inspection, Packers and Stockyards Programs (GIPSA). I am JoAnn 
Waterfield and I am the Deputy Administrator for GIPSA responsible for 
oversight of the Packers and Stockyards Programs (P&SP). The P&SP is 
responsible for enforcing the Packers and Stockyards Act (the Act) 
which prohibits unfair, deceptive, fraudulent practices by market 
agencies, dealers, stockyards, packers and live poultry dealers in the 
livestock, poultry, and meatpacking industries. I moved into this 
position in September 2000 from USDA's Office of the General Counsel 
where I led litigation teams responsible for enforcing the Packers and 
Stockyards Act. I feel privileged to represent the men and women of 
P&SP and have long respected their professionalism, dedication, and 
tenacity in pursuing and developing complex investigations and cases. I 
was asked to provide you with an overview on concentration today, but I 
also hope to provide you with a better understanding of the Agency and 
its contributions to the livestock, poultry and meatpacking industries 
and ultimately its benefit to American Agriculture.
    Our ability to address concentration is limited to our statutory 
authority. P&SP has responsibility for addressing issues relating to 
competition and unfair trade practices in the livestock, meatpacking, 
and poultry industries through our authority to enforce the Packers and 
Stockyards Act of 1921, as amended and supplemented. The Act gives the 
Secretary of Agriculture the authority to regulate dealers, stockyards, 
market agencies, packers, and live poultry dealers who operate in 
interstate and foreign commerce. The Act makes it unlawful for a 
regulated entity to engage in unfair, unjustly discriminatory or 
deceptive practices. Engaging in any course of business for the purpose 
or effect of manipulating or controlling prices, creating a monopoly, 
or restraining commerce is also a violation of the Act.
    Certain provisions of the Federal Trade Commission Act were made 
applicable to the Secretary's enforcement of the Act and grant the 
Secretary investigatory powers, including the power to gather and 
compile information, concerning the organization, business conduct, and 
practices of regulated entities, and to require by subpoena the 
attendance and testimony of witnesses in investigations.
    To protect the livestock, poultry, and meatpacking industries, the 
Act requires market agencies and dealers to register; market agencies, 
packers, and dealers to be bonded; and market agencies, dealers, 
packers, and live poultry dealers to meet specific payment 
requirements. To protect the unpaid sellers of livestock, packers are 
subject to trust provisions which require that all livestock purchased 
in cash sales, and all inventories of, or receivables of proceeds from 
meat, meat food products, or livestock products derived therefrom, be 
held in trust for the unpaid sellers until payment is made in full. 
There is a similar provision for live poultry dealers, but none for 
livestock dealers.
    P&SP uses its statutory authority to investigate alleged and 
potential violations of the Act and regulations, and prosecute 
violations detected through those investigations, either directly 
through administrative actions or through referral to the Department of 
Justice.
    Concentration is not prohibited by the Act, and while high 
concentration levels gave a ``red flag' requiring additional oversight 
to ensure that there is no harm or injury that the Act was intended to 
prevent in the livestock, meatpacking and/or poultry industries. 
Concentration is not, in and of itself, a violation of the Act. Firms 
are largely free to pursue their own economic interests by opening or 
closing plants, expanding into new geographic areas, adopting new 
technology, and cost-reducing innovations that are being integrated 
into livestock production.
    Since P&SP does not have pre-merger existing authority, PS&P does 
not have the ability to stop mergers from taking place. The authority 
to investigate mergers and acquisitions resides with the Department of 
Justice and Federal Trade Commission, and, as requested, GIPSA supplies 
information and expertise to these Agencies in any investigations of 
mergers or competitiveness issues involving the grain, livestock, and 
poultry industries.
    If, however, packers engage in any of the acts prohibited by 
Section 202 of the Act, GIPSA investigates and initiates enforcement 
actions. Upon a finding of violation of Section 202, the Act provides 
for sanctions that include an order to ``cease and desist'' from the 
prohibited practice, and a civil penalty.
    There is concern about the rising levels of concentration in the 
livestock and meatpacking industries leading to fewer competitive 
marketing opportunities for producers. Concentration has remained 
fairly constant since 1994. However, if you look further in the past, 
concentration in both cattle and hog slaughter has increased greatly 
since 1985. The following chart provides an historic perspective of the 
trends I have described.

                                FOUR-FIRM CONCENTRATION IN MEATPACKING, 1980-2000
                                     [Percent of total commercial slaughter]
----------------------------------------------------------------------------------------------------------------
                                                     Steers &
              Year                  Cattle \1\        heifers      Cows & bulls        Hogs        Sheet & lambs
----------------------------------------------------------------------------------------------------------------
1980............................              28              36              10              34              56
1981............................              31              40              10              33              53
1982............................              32              41              99              36              44
1983............................              36              47              10              29              44
1984............................              37              50              11              35              49
1985............................              39              50              17              32              51
1986............................              42              55              18              33              54
1987............................              54              67              20              37              75
1988............................              57              70              18              34              77
1989............................              57              70              18              34              74
1990............................              59              72              20              40              70
1991............................              61              75              20              44              72
1992............................              64              78              24              44              71
1993............................              67              81              25              43              73
1994............................              69              82              25              45              73
1995............................              69              81              28              46              72
1996............................              66              79              29              55              73
1997............................              68              80              31              54              70
1998............................              70              81              33              56              68
1999............................              70              81              32              56              68
2000............................              69              82              32              56             67
----------------------------------------------------------------------------------------------------------------
\1\ Includes steers, heifers, cows, and bulls.
Note: All figures for years 1980 through 1990 are based on firms' fiscal years as reported to GIPSA. Figures for
  1991 through 2000 are based on calendar year federally-inspected slaughter.

    For the past few years, P&SP has been in a state of dynamic change. 
During fiscal year 2000, the reorganization and filling of crucial 
positions within the Packers and Stockyards Programs was completed. The 
agency now employs a total of 180, in three species-specific regional 
offices (Atlanta--Poultry, Des Moines--Hogs, and Denver--Cattle and 
Sheep) that are directed by headquarters in Washington D.C. A full 
contingent of legal specialists (all of whom are attorneys), 
economists, and financial specialists has been established. An 
intensive training program and a multi-disciplinary approach to 
developing investigation plans have also been developed. Economists now 
on staff provide insight and guidance in developing, analyzing and 
explaining complex econometric models used by the Agency in performing 
its regulatory responsibilities, including litigation and market 
oversight.
    P&SP utilizes cross-regional expertise to address national issues 
and to look more effectively at emerging technology, evolving marketing 
strategies, and other issues affecting the industries and the 
constituencies we serve. For example, we have a cross-regional team 
looking at electronic transactions involving livestock. This team is 
comprised of representatives from each regional office with differing, 
but complementary areas of expertise . . . financial, legal, and 
economic.
    P&SP monitors the livestock, meatpacking, and poultry industries, 
estimated by the Department of Commerce in fiscal year 2000 to have an 
annual wholesale value of $142 billion. At the close of 2000, there 
were 1,318 stockyards, 6,195 market agencies and dealers, and 2,039 
packer buyers registered with P&SP. An estimated 6,000 slaughtering and 
processing packers are subject to the Act. In fiscal year 2000, 266 
slaughtering packers, each of whom purchased over $500,000 of livestock 
in 1999, were required to be bonded and file reports with GIPSA. In 
addition, 205 poultry firms and a significant number of meat 
distributors, brokers, and dealers are subject to the Act.
    Last year, P&SP conducted over 1,800 investigations of potential 
violations of the P&S Act, a 33 percent increase over the previous 
year. Most violations were corrected voluntarily, resulting in 
livestock and poultry producers receiving payment for the sale of their 
products. During fiscal year 2000, 17 administrative or Federal court 
complaints were issued (a net increase of 5 over the previous year) to 
bring subject firms into compliance with the Act. In addition, USDA 
issued 13 decisions and orders against 21 individuals or firms for 
violating the Act.
    P&SP continues to provide payment protection to livestock and 
poultry producers. Financial investigations conducted last year 
resulted in $5.9 million being restored to custodial accounts 
established and maintained for the benefit of livestock sellers. This 
is more than double fiscal year 1999 restoration figures of $2.7 
million. Since the 1976 amendments to the Act, livestock sellers have 
been paid $59.7 million under the Act's statutory trust provision. In 
2000, one poultry trust complaint received by GIPSA resulted in payment 
of $250,000 to live poultry growers. By comparison, there were none in 
1999. During fiscal year 2000, 192 insolvent dealers and market 
agencies corrected or reduced their insolvencies by $6.7 million, an 
increase of more than $2 million from the previous year. Insolvent 
packers corrected or reduced insolvencies by $2.2 million.
    Our regulatory responsibilities are at the heart of our mission. To 
this end, P&S closely monitors practices that may impede the trade of 
livestock, meat, and poultry. We place a high priority on investigating 
all complaints and further developing information received concerning 
allegations of anti-competitive, unjustly discriminatory, or unfair 
practices in the livestock, meatpacking, and poultry industries. 
Appropriate corrective action is initiated when evidence of these 
practices is discovered.
    Rapid Response teams continue to address urgent industry issues and 
are deployed when a situation warrants immediate attention or action. 
The ability of these teams to respond within 36 to 48 hours of being 
notified of a crisis provides the public with more immediate 
notification of problems with a stockyard or market agency. Last fiscal 
year, 15 teams were deployed to investigate cases in 9 states. Teams 
helped recover more than $3 million for growers and producers. The 
Agency also provides a hotline (1-800-998-3447) on which constituents 
may anonymously voice their concerns. P&SP responds to and investigates 
all issues addressed by the callers. Last year, the Agency responded to 
140 calls, compared to 126 in 1999.
    P&SP is also strengthening investigations and assessments of the 
competitive implications of structural changes in the livestock, 
meatpacking, and poultry industries. To further this initiative, P&SP 
entered into five cooperative research agreements in fiscal year 1999. 
Two examine competitive conditions in beef markets, two address 
competitive issues and compensation methods used in broiler production 
in the poultry industry, and the final project examines bidding 
behavior in a laboratory setting to gain insights into expected 
behavior in actual cattle markets. These projects will be completed in 
fiscal year 2001 and fiscal year 2002.
    We have several hearings currently scheduled--at least two in 
June--and two major cases, against two of the largest packers in the 
Nation. The first involves a firm alleged to have violated the Act by 
failing to notify sellers that it had changed its equation for 
estimating the lean percent of animals purchased on a carcass merit 
basis. We allege that as a result of this change the company underpaid 
more than 1,250 farmers by about $1.8 million. The second case alleges 
that a company retaliated against a feedlot for publishing a letter 
critical of the company by failing to bid or purchase from the feedlot. 
P&SP has incurred major litigation expenses and resources preparing for 
each of these cases. We have spent almost $.5 million in litigation 
expenses in the first case I described.
    In addition to normal regulatory duties, P&SP has been tasked with 
four Congressional Mandates, which will impact the Agency next year, 
and in subsequent years. They are the Swine Contract Library, Captive 
Supply Study, an Annual Assessment of the Cattle and Hog Industries, 
and the Agency's implementation of the General Accounting Office's 
recommendations in last year's report.
    1. The first mandate, the Swine Contract Library, set out in the 
Agricultural Rural Development, Food and Drug Administration, and 
Related Agencies Appropriations Act of 2000 (Public Law 106-78) was 
signed into law on October 22, 1999. It amended the P&S Act to require 
P&SP to establish and maintain a library of contract provisions offered 
by packers to swine producers for the purchase of swine and to make 
that information available to the public. The swine contract library 
must include contracts from swine packing plants with a slaughter 
capacity of 100,000 swine or more per year; this includes approximately 
50 plants owned by 29 packers which account for over 95 percent of the 
market. In addition to providing all hog purchase contracts to P&SP, 
these 29 packers are required to provide monthly reports to P&SP 
specifying the number of swine committed and the maximum number of 
swine to be delivered over the next six to twelve months by contract 
type.
    GIPSA published a Notice of Proposed Rulemaking on September 5, 
2000 to implement the Swine Contract Library and is drafting the final 
rule. In addition to the rulemaking process, P&SP has devoted resources 
to implement the actual contract library, involving computer hardware 
and software development, and data collection forms. The library will 
use a Web-based system to facilitate real-time data input from swine 
packers and data access by the public.
    2. The second mandate arising out of last year's appropriations 
bill, is in a Conference Report (House Report No. 106-948) that directs 
GIPSA to complete a comprehensive study on Captive Supplies by 
September 30, 2001. The report will examine and report on whether or 
not cattle that are procured pursuant to a captive supply arrangement 
by a packer's non-reporting subsidiary, affiliate and owners, officers 
and employees are being included in the cattle reported as captive 
supply. Additionally, the report will explain differences in the volume 
of captive supplies reported in the P&SP Annual Statistical Report and 
those reported by other entities. Because of the scope of the report 
and the requirements of the Paperwork Reduction Act, we will not be 
able to complete this report by September 30th of this year, however, 
we will provide Congress with an interim report consisting of 
qualitative analyses that are descriptive of the issues.
    3. The third mandate requires the Agency to submit an annual report 
to Congress that assesses the cattle and hog industries. The Packers 
and Stockyards Act was amended in the Grain Standards and Warehouse 
Improvement Act of 2000 (Public Law 106-472) to require the Agency to 
submit an Annual Report Assessing the Cattle and Hog Industries. The 
report will include an assessment of the general economic state of the 
cattle and hog industries, changing business practices in these 
industries and practices that appear to raise concerns under the P&S 
Act. We estimate that 2,000 staff hours and $72,000 were spent in 
compiling this report for 2000.
    4. The final mandate began with the General Accounting Office's 
(GAO) Report to Congress, issued in September 2000, ``Actions Needed to 
Improve Investigations of Competitive Practices.'' The Grain Standards 
and Warehouse Improvement Act of 2000 (Public Law 106-472) required 
implementation of the recommendations in the GAO Report as well as a 
report describing the actions taken to improve investigations of 
competitive practices by November 9, 2001.
    The GAO report addresses actions to improve P&SP's ability to 
investigate complex issues. The report recommends that the Secretary of 
Agriculture develop a teamwork approach with P&SP economists and the 
Office of General Counsel (OGC) attorneys for complex investigations. 
We began implementing this recommendation a month after the September 
report with combined competition training for legal specialists, 
economists, and OGC attorneys. P&SP now has two legal specialists in 
each regional office, who have recently completed training provided by 
OGC. We have formalized procedures within P&SP by instituting 
investigation reviews by senior management when cases involve 
competition issues, are complex, are large, involve more than one unit 
(financial, competition, trade practices), involve more than one 
region, or require unusual resources. A regional legal specialist 
reviews each investigation plan before it is submitted for 
consideration to senior P&SP management. Once senior management has 
reviewed and approved each investigative plan, the investigation 
proceeds. Each case is monitored throughout the investigation. OGC 
reviews complex investigation plans prior to commencement of the 
investigation and thus has been integrated into the investigative 
process of complex cases.
    The GAO report recommended that GIPSA improve its competitive 
investigations by adopting methods and guidance similar to those used 
by the Department of Justice (DOJ) and the Federal Trade Commission 
(FTC). GIPSA, working through the Department's Office of the General 
Counsel, is reviewing DOJ and FTC investigative procedures.
    The GAO report recommended that the Secretary modify the grade 
structure for economists. The process of upgrading economists' and 
legal specialists' positions is underway and should be completed 
shortly.
    The GAO report also recommends that GIPSA provide industry 
participants and Congress with clarifications of the Agency's views on 
competitive activities by reporting changing business practices in the 
cattle and hog industries and by identifying market operations or 
activities that raise concerns. We have strengthened our commitment to 
communicate our policies more clearly and effectively to our 
stakeholders. We will publish an annual report assessing the cattle and 
hog industries. We are in the process of hiring an outreach coordinator 
to improve our communication with Congress and the public we serve.
    In addition to the Congressional mandates, P&SP will be 
participating in a GAO investigation initiated by Senator Daschle to 
examine USDA's econometric models. He has asked the GAO to ``assess the 
extent to which these models may be understating the effects of 
imports, market concentration, and the use of marketing agreements and 
forward contracts on domestic cattle prices.'' Senator Daschle has also 
requested that GAO provide recommendations on how USDA models could be 
``improved or revised, to provide the most comprehensive analysis 
possible of the impact of certain factors on prices at the producer 
level, including: import volumes and competition; increasing use of 
marketing agreements and forward contracts; and increasing 
consolidation in the processing, wholesaling and retail distribution 
sectors.'' We fully expect GAO to review the 1996 packer concentration 
study, the follow-up cooperative agreements with universities that 
examined concentration and captive supplies, and other activities 
relating to concentration and captive supplies. GAO expects to complete 
its investigation within one year.
    While working to be wholly responsive to Congressional mandates and 
to provide timely information to GAO, P&SP has initiated the 
development of regulations to help us better serve our various 
constituencies. The regulations will support our enforcement of the 
Act. We are currently working on several rulemaking initiatives.
    P&SP will actively seek to serve the industry by: providing payment 
protection to livestock and poultry producers; increasing the number of 
investigations of potential competitive violations of the Act; pursuing 
voluntary corrections of violations of the Act that will result in 
livestock and poultry producers receiving additional funds; continuing 
to reach out to both educate and inform constituencies served by the 
Agency of the benefits and protections offered to livestock and poultry 
producers; monitoring and responding rapidly to complaints of 
anticompetitive, unjustly discriminatory or unfair practices in the 
livestock, meat and poultry industries; pursuing cooperative agreements 
that contribute valuable information to P&SP's understanding of the 
industries; facing-off with industry giants and expending resources to 
correct violations of the Act; responding thoroughly and responsibly to 
all governmental and Congressional mandates; and pursuing rulemaking 
that enhances P&SP's ability to investigate and litigate violations of 
the Act. However, our ability to control or limit concentration lies 
solely within parameters defined by the Act and limits set therein.
    P&SP teams of legal, financial, and economic specialists are 
currently addressing 14 cases, are working with OGC on 8 cases 
scheduled for hearing, and are assisting in over 40 cases which are 
being developed for enforcement by the OGC. In addition to managing 
complex cases, we will be continuing to develop and retain well-
qualified and talented staff to enhance our ability to address industry 
issues.
    Mr. Chairmen and members of the subcommittee, thank you for the 
privilege of addressing you and representing the P&SP. If you have 
further questions, I would be happy to entertain them. If I cannot 
address them at this hearing, I will have your questions researched 
further and respond directly to you at a later date.

             Questions Submitted by Senator Byron L. Dorgan

    Question. In recent years there has been an assumption that 
efficiency should be the primary goal in our agribusiness production 
chain, but many so-called efficiencies gained by concentrated entities 
are actually externalized costs shifted from the company to the 
communities that must supply medical care for uninsured labor, 
increased education costs for immigrant families, and environmental 
problems resulting from concentrated production systems. Why haven't 
you measured the full cost of production in these efficiency gains of 
these concentrated companies?
    Answer. In a market-based economy, business structures undergo 
constant evolution, reflecting the emergence of new technology and new 
profit-making opportunities. Over the past several years, markets have 
generally become more concentrated and this trend is not unique to 
agricultural markets. Despite increasing levels of concentration across 
many markets, environmental problems and other market externalities, 
for the most part, do not appear to have escalated appreciably. This 
observation is not based on an exhaustive industry-by-industry study of 
agribusiness firms but a reflection of the lack of pressure on 
policymakers for new environmental laws and regulations. While it may 
be useful to conduct in-depth industrial studies of the evolution and 
transformation of companies and industries and of the indirect effects 
that occur over time, including estimates of external costs, such as 
medical, education, and environmental costs, these effects are 
difficult to measure and may have limited application. Therefore, we 
are focusing our research resources on areas where we believe results 
can be obtained most cost effectively.
    Question. Why aren't externalized costs part of how USDA measures 
gains and losses particularly in the processing sector?
    Answer. As indicated above, there is merit in conducting in-depth 
industrial studies of the evolution and transformation of companies and 
industries and of the direct and indirect efficiency gains or losses 
that occur over time, including estimates of external costs. Estimates 
of externalized costs would necessitate site-specific information on 
production and hiring practices, air and water quality, and possibly 
other environmental indicators. Using these environmental and other 
indicators, methods would have to be developed to estimate the direct 
and indirect costs imposed on society by an agribusiness processing 
firm. At the present time, there are no widely accepted methods for 
estimating the cumulative sum of these costs. Such activities would be 
costly and compete for limited research resources. Thus, our research 
priorities are focused on areas where we believe we can have the 
greatest impact for our research dollar.
    Question. For some time we have had an increase between what the 
producer receives and what the consumer pays at the counter for food. 
Why does USDA continually ignore the increasing pressure from both the 
processing and retail sectors on both the commodity price and the price 
the consumer pays?
    Answer. USDA data indicates that farmers' share of the retail food 
dollar has declined by over 50 percent since the early 1970's. Over the 
same period, concentration levels have increased in food processing and 
retailing. While some may conclude from the two trends that increasing 
concentration is at least partially responsible for the drop in the 
share of the retail food dollar going to farmers, correlation does not 
necessarily imply causation. In fact, many economists argue that the 
decline in the farmers' share of the retail food dollar reflects 
consumers steadily increasing preference for convenience foods that 
require special processing and packaging. The rising preference for 
convenience foods is an outgrowth of higher income levels and rising 
employment of both spouses outside the home. Another factor behind the 
declining farm share of the retail dollar is the rapid productivity 
growth in production agriculture compared with productivity growth in 
food processing and transportation.
    Question. To just simply say we pay such a low percentage for food 
on a global comparison, when we have the largest disposable income in 
the world, doesn't mean that consumers aren't being unfairly charged 
for their purchases, does it?
    Answer. You are correct. Comparing the percentage of income spent 
on food by U.S. consumers relative to consumers in other countries does 
not indicate whether consumers in this country are being overcharged.
    Question. Why does USDA consistently return to the same economists 
for so-called independent research on captive supply and market 
concentration?
    Answer. We've made every effort at USDA to elicit comments and 
research on captive supplies and market concentration from all 
interested parties. USDA has held two forums on captive supplies and 
market concentration over the past couple of years. At each of those 
forums, all interested parties were invited to participate. If you know 
of any individuals that have conducted recent research on captive 
supplies and market concentration that we may not be aware of, we would 
appreciate receiving those reports and meeting with those individuals.
    Question. Why aren't you using economists from universities outside 
of the traditional land grants?
    Answer. This question appears to relate to economic research 
related to captive supplies and market concentration. As indicated in 
the response to the previous question, we've made every effort at USDA 
to elicit comments and research from all interested parties and from 
economists both inside and outside of the traditional land grants. An 
example would be the diverse peer reviewers we used for the Texas fed 
cattle procurement studies.
    Question. Do you check the background of the economists you award 
grants to, to make sure they are independent of the entities they are 
researching? Answer. USDA awards research grants to economists who are 
recognized in their field of study and have a history of publishing 
peer-reviewed research. Individuals receiving grants are noted by their 
peers as conducting leading-edge, independent research in their field 
of expertise. The Department does not conduct background checks, but 
checks are made to see whether an individual received funding in the 
past from an entity that they are researching. Each potential applicant 
for an award is requested to disclose their funding sources.
    Question. Given that a truly competitive market requires meaningful 
choice by producers for marketing outlets, would you agree that the 
market at the farm gate is almost non-existent in many parts of the 
country?
    Answer. In some parts of the country the number of buyers of farm 
products and sellers of farm inputs may be limited. However, new and 
emerging marketing outlets are creating new marketing opportunities for 
farmers and ranchers. For example, we are seeing the re-emergence of 
farmers' markets as a viable market for some producers. And, the 
internet is greatly expanding the availability of market information 
and the potential market for some products. Through the internet, 
farmers and ranchers do not have to be restricted to buying from their 
local farm input supplier or selling to the local cattle or grain 
buyer. In addition, increasing availability of market information 
through the internet and other sources, provides farmers and ranchers 
with information on which to judge whether local prices offered by farm 
input sellers and buyers of grain and cattle are fair. Increasing 
market information may also motivate local buyers and sellers to offer 
fair prices to farmers and ranchers.
    Question. Most every Federal agency that does investigations 
utilizes investigators that have legal training so they can analyze 
facts in light of whether the law has been violated. However, USDA-
GIPSA uses economists with little or no legal training to perform 
investigations. Would you agree that one reason that GIPSA has been 
hampered in its enforcement duties is that it has not utilized 
investigators which are trained in the law, especially the Packers and 
Stockyards Act?
    Answer. I do not agree that GIPSA's enforcement duties have been 
hampered because investigators are not trained in the law, especially 
the Packers and Stockyards Act. While an economist's academic training 
alone does not prepare them to perform investigations, GIPSA's 
economists undergo rigorous training programs once they come on board. 
The objectives of these training programs are to help investigators 
identify violations of the Packers and Stockyards Act and perform 
investigations working in conjunction with other agencies, such as 
USDA's Office of General Counsel and the Department of Justice.

          ATTORNEYS EMPLOY BY PACKERS AND STOCKYARDS PROGRAMS

    Question. How many attorneys will be directly employed by Packers 
and Stockyards Programs--not general to USDA but specifically assigned 
to P&S?
    Answer. The Packers and Stockyards Programs (P&SP), Grain 
Inspection, Packers and Stockyards Administration, has seven legal 
specialist positions (one position is temporarily vacant at the present 
time). All legal specialists employed by P&SP are licensed attorneys. 
There are two legal specialists in each of the three regional offices, 
and a supervisory legal specialist in the P&SP Washington headquarters 
office. The supervisory legal specialist reports directly to the P&SP 
Deputy Administrator, who is also a licensed attorney. The duties of 
the legal specialists include: (1) participating in investigation 
planning and execution; (2) consulting with the Office of the General 
Counsel (OGC) attorneys; (3) conducting research; and (4) reviewing 
P&SP correspondence. Additionally, the OGC Trade Practices Division 
provides all legal services to P&SP. Trade Practices currently has 
twelve attorneys who provide legal services to two programs, P&SP and 
the Perishable Agricultural Commodities Branch of the Agricultural 
Marketing Service.
    Question. That compares to how many attorneys from IBP or Cargill 
for example?
    Answer. P&SP does not have access to information about how many 
attorneys are employed by either IBP or Cargill. During the litigation 
of the IBP case in 1997, IBP had six attorneys present at the 
administrative hearing.

                     ACCOUNTANTS VERSUS ECONOMISTS

    Question. In the past we've relied heavily on economists for 
analysis on potential price fixing in the packing sector. Economists, 
however, tend to use complicated formulas unreadable by the lay public 
to ``study'' the possibility there may be price fixing. Isn't it more 
logical to use accountants who can provide a more direct, substantive 
analysis of figures that can be made understandable to the public and 
therefore more intelligible to a jury, instead of just general, 
industry-wide assumptions as we often see in the econometric formulas 
USDA puts out?
    Answer. Cases in which P&SP has alleged violations by packers of 
section 202 of the Packers and Stockyards Act are tried before an 
Administrative Law Judge in an administrative hearing. There is no jury 
in those proceedings. Enforcement of section 202 alleging violation by 
a live poultry dealer (processor) is through referral to the Department 
of Justice and trial in Federal court where there may be a jury trial. 
In preparation for litigation, P&SP economists work closely with OGC 
attorneys to ensure evidence is presented in a clear, logical fashion 
that is understandable. Economic formulas are sometimes necessary to 
demonstrate causal relationships and/or harm to producers. During the 
investigation of a case, P&SP legal specialists and OGC attorneys work 
with the economists to ensure the data and evidence that are necessary 
for the analysis is collected and after referral of the case to OGC, 
the economists work with OGC to ensure that the analysis is presented 
in clear and concise exhibits introduced by appropriate witness 
explanation and clarification. Auditors and accountants, including 
certified public accountants, are used in investigative teams, as are 
marketing specialists, but auditing and accounting theory and practice 
are not always adequate to prove causality and/or effects of economic 
behavior such as price fixing, with the attendant economic and 
competitive harm. One of the principal findings of the 1997 USDA Office 
of the Inspector General investigation was that P&SP needed economists 
to prepare economic models to demonstrate the adverse effects of 
anticompetitive behavior in the marketplace. P&SP has formalized a 
teamwork approach to ensure that GIPSA's economists, legal specialists, 
auditors and marketing specialists work with OGC to identify and prove 
violations of the Packers and Stockyards Act.

                 TRANSFER TO THE DEPARTMENT OF JUSTICE

    Question. From your experience and knowledge of P&S and its 
internal and external problems, should it be moved from USDA?
    Answer. We believe P&SP can best address livestock and poultry 
industry problems and regulate individuals and businesses subject to 
the P&S Act as part of USDA. P&SP's collective expertise and experience 
within USDA is essential to its continued effectiveness in the 
regulation of the livestock, meatpacking, and poultry industries. We do 
agree that P&SP can improve its effectiveness by studying other 
agencies' investigative procedures, such as the procedures used by the 
Department of Justice and the Federal Trade Commission. P&SP is 
reviewing investigative procedures used by these agencies to improve 
its investigations of anticompetitive practices. As part of OGC's 
training of legal specialists in March, 2001, attorneys from the 
Federal Trade Commission conducted a training session for P&SP legal 
specialists, computer specialists, economists and recently hired OGC 
attorneys on procedures for requesting and obtaining electronic records 
for investigations.
    Question. (1) How many major cases can you handle at once? (2) How 
many attorneys are working on competition issues under the P&S Act? (3) 
Would you object to the creation of an Office of Agriculture in DOJ to 
address not only antitrust issues in agriculture generally, but to have 
dual jurisdiction over the trade practices portion of your jurisdiction 
under the Packers & Stockyards Act?
    Answer. (1) We have the capability of handling multiple cases of 
varying degrees of complexity at one time. Since each case differs with 
regard to its level of complexity and its requirement of human and 
fiscal resources, it is not possible to answer the question of how many 
competition cases we could handle with exactness. For example, we could 
handle two cases in the investigation state and two in the briefing 
stage while there were two in litigation. We estimate that only two 
complex cases could be handled simultaneously in active litigation, 
which presumes administrative hearings held concurrently. (2) All P&SP 
legal specialists (seven positions) and OGC Trade Practices Division 
attorneys (12 attorneys) spend a significant amount of time working on 
competition issues under the P&S Act. (3) P&SP takes no position 
regarding the creation of an Office of Agriculture in the Department of 
Justice (DOJ) to handle antitrust or trade practices. P&SP works 
closely with the DOJ and the Federal Trade Commission (FTC) to monitor 
the regulated industry regarding antitrust issues. We believe P&SP 
currently has the experience, training, and expertise to properly 
enforce the trade practices portion of our jurisdiction, as well as the 
competition and financial portions. We further believe that together 
the existing entities of P&SP, DOJ, and the FTC do an effective job 
monitoring industry antitrust issues.
                                 ______
                                 

               Questions Submitted by Senator Tim Johnson

                         CAPTIVE SUPPLY PROBLEM

    Question. In September of 2000, USDA held a public forum on the 
problem of captive supply in Denver. Captive supply can include 
arrangements that meat packers utilize to lock-up or secure a given 
amount of kill needs, such as packer-owned livestock, formula or 
negotiated sales, or contracted production. Producers are concerned 
that growing captive supply results in an inactive and anti-competitive 
cash marketplace. What was the outcome of the forum and what does USDA 
plan to do to address the growing issue of captive supply in livestock 
markets?
    Answer. At the September 2000 USDA public forum, a broad spectrum 
of views were presented on whether captive supplies artificially 
depress prices to cattle producers. Some presenters argued that captive 
supplies were depressing cattle prices, while the majority of 
economists held the viewpoint that captive supplies were not adversely 
affecting prices offered to cattle producers. Thus, the current 
available evidence, on balance, suggests captive supplies are not 
contributing to an inactive and anti-competitive marketplace for 
cattle. USDA continues to monitor captive supplies and to review 
analytical studies as they become available. No other action regarding 
captive supplies are being contemplated at this time.

                     BARGAINING POWER FOR PRODUCERS

    Question. Given that a truly competitive market requires meaningful 
choices for farmers and ranchers in terms of marketing outlets, would 
you agree that the market at the farm-gate level is almost non-existent 
in many parts of the country?
    Answer. In some parts of the country the number of buyers of farm 
products and sellers of farm inputs may be limited. However, new and 
emerging marketing outlets are creating new marketing opportunities for 
farmers and ranchers. For example, we are seeing the re-emergence of 
farmers' markets as a viable market for some producers. And, the 
internet is greatly expanding the availability of market information 
and the potential marketplace for farm products. Through the internet, 
farmers and ranchers do not have to be restricted to buying from their 
local farm input supplier or selling to the local cattle or grain 
buyer. In addition, increasing availability of market information 
through the internet and other sources, provides farmers and ranchers 
with information on which to judge whether local prices offered by farm 
input sellers and buyers of grain and cattle are fair. Increasing 
market information may also motivate local buyers and sellers to offer 
fair prices to farmers and ranchers.

        USE OF ECONOMISTS INSTEAD OF ATTORNEYS IN INVESTIGATIONS

    Question. Most Federal agencies that conduct investigations 
primarily utilize investigators that have legal training so they can 
analyze facts in light of whether the law has been violated. However, 
USDA-GIPSA uses economists with little or no legal training to perform 
investigations. Would you agree that one reason that GIPSA has been 
hampered in its enforcement duties is that it has not utilized 
investigators which are trained in the law for trade practices and 
competition cases, especially the Packers and Stockyards Act?
    Answer. USDA's Office of the Inspector General issued a report in 
1998 and the Government Accounting Office issued a report in 2000 that 
found that a lack of legal expertise has hampered GIPSA's 
investigations, particularly in complex cases such as restriction of 
competition investigations. GAO recommended that GIPSA work more 
closely with USDA's Office of the General Counsel (OGC) early in 
investigations. GIPSA is working to increase the role of OGC attorneys 
in competition investigations and include the Assistant General Counsel 
of OGC's Trade Practice Division in the decisions of which 
investigations to pursue and what evidence is necessary to pursue them. 
GIPSA created seven legal specialist positions within P&SP, all are 
licensed attorneys. The duties of the legal specialists include: (1) 
participating in investigation planning and execution; (2) consulting 
with OGC attorneys; (3) conducting research; and (4) reviewing P&SP 
correspondence.
    Question. How many attorneys are working on competition issues 
under the P&S Act? Is this number adequate?
    Answer. As noted above, P&SP has seven legal specialist positions; 
two in each of the three regional offices, and a supervisory legal 
specialist in the P&SP Washington headquarters office. These attorneys 
provide assistance to our investigators in consultation with the 
attorneys in OGC, and conduct research. The twelve attorneys in the 
Trade Practices Division of OGC provide legal services to P&S, 
including litigation services. All of these attorneys spend a 
substantial amount of time on competition issues. At this point in 
time, this number of attorneys is adequate to handle the cases that are 
being developed.
    Question. How many major cases can GIPSA handle at once?
    Answer. We have the capability of handling multiple cases of 
varying degrees of complexity at one time. Since each case differs with 
regard to its level of complexity and its requirement of human and 
fiscal resources, it is not possible to answer the question of how many 
competition cases we could handle with exactness. For example, we could 
handle two cases in the investigation state and two in the briefing 
stage while there were two in litigation. We estimate that only two 
complex cases could be handled simultaneously in active litigation, 
which presumes administrative hearings held concurrently.

               GENERAL ACCOUNTING OFFICE REPORT ON GIPSA

    Question. A September 2000 General Accounting Office Report 
asserted that the Grain Inspection, Packers and Stockyards 
Administration lacks the staff, budget, and expertise to investigate 
anticompetitive behavior in livestock markets, and GAO recommended 
(Report# RCED-00-242) that GIPSA require an earlier integration of 
attorneys in the planning and review of investigations and closer 
consultation take place between GIPSA, the Department of Justice, and 
the Federal Trade Commission during investigations. This will enable 
GIPSA to implement GAO's recommended improvements as required by the 
November 9, 2000 passage of the Grain Standard and Warehouse 
Improvement Act of 2000 (Public Law 106-472). What is the status of 
GIPSA efforts to comply with our Congressional mandate and GAO's 
recommendations to secure more attorneys and integrate those attorneys 
into investigations?
    Answer. The General Accounting Office (GAO) issued the ``Actions 
Needed to Improve Investigations of Competitive Practices'' report to 
Congress in September 2000. The Grain Standards and Warehouse 
Improvement Act of 2000 (Public Law 106-472) requires implementation of 
the recommendations identified in the GAO report as well as a report 
describing the actions taken to improve investigations of competitive 
practices by November 9, 2001.
    The GAO report addressed actions that will improve the ability of 
Packers and Stockyards Programs (P&SP) to investigate complex issues. 
The report recommends that the Secretary of Agriculture:
  --develop a teamwork approach for complex investigations with P&SP 
        economists and Office of the General Counsel (OGC) attorneys,
  --improve competition investigations by adopting methods and guidance 
        similar to the Department of Justice (DOJ) and the Federal 
        Trade Commission (FTC),
  --modify the grade structure for economists, and
  --provide industry participants and Congress with clarifications of 
        P&SP's views on competitive activities by reporting changing 
        business practices in the cattle and hog industries and 
        identifying market operations or activities which raise 
        concerns.
    Developing a teamwork approach for complex investigations with P&SP 
economists and OGC attorneys began one month after the September report 
with training in the development and use of econometric evidence for 
legal specialists, economists and OGC attorneys. In addition, OGC 
conducted a one-week training program for P&SP legal specialists in 
March 2001. P&SP is currently developing and implementing an 
investigation review plan that will include OGC in the early stages of 
a competition case's development and investigation. In response to 
additional appropriations provided by Congress for the purpose, OGC 
added two additional attorneys to the Trade Practices Division staff 
with the possibility of adding an additional two attorneys as the 
caseload requires. In addition, P&SP created a supervisory legal 
specialist position to provide for central supervision of its legal 
specialists. As part of the ``early and often'' consultation with OGC, 
recommended by the GAO report, OGC conducted a week long training 
program for P&SP legal specialists in March 2001.
    We have formalized procedures within P&SP by instituting 
investigation reviews by senior management. This review occurs when 
several of the following criteria are present:
  --the case involves issues of competition
  --the case is complex
  --the investigation is extensive
  --the investigation involves more than one unit of P&SP (financial, 
        competition, trade practices) in the investigation,
  --the case involves more than one regional office
  --the case would require the commitment of large human or fiscal 
        resources
    Once senior management has reviewed and approved each investigation 
plan, the investigation proceeds, and each investigation is monitored 
throughout the investigation. We ask OGC to review competition and 
complex investigation plans prior to commencement of the investigation.
    We continue to review DOJ and FTC investigative procedures to 
improve our investigative procedures of alleged anticompetitive 
practices. P&SP has contacted DOJ and FTC staff to set the stage for 
further discussions. As part the OGC training for legal specialists 
held in March of this year, attorneys from the FTC conducted a training 
session for P&SP legal specialists, computer specialists, and 
economists and recently hired OGC attorneys on procedures for 
requesting and obtaining electronic records for investigations.
    The process of upgrading economist positions is underway to allow 
P&SP to hire and retain well-qualified individuals.
    We have strengthened our commitment to communicate our policies 
more clearly and effectively to our stakeholders. We have published an 
annual report assessing the cattle and hog industries. We are in the 
process of hiring additional staff to improve our communication with 
Congress and the public we serve.
    We are continuing to reach out to both educate and inform 
constituencies served by the Agency of the benefits and protections 
offered to livestock and poultry producers.
       packers and stockyards programs regulatory personnel needs
    Question. Does P&S have adequate personnel on board to promulgate 
regulations in a timely fashion? How many reg writers does P&S 
currently employ?
    Answer. At the present time, P&SO has one regulatory analyst. We 
plan to hire another program analyst with regulatory writing experience 
to assist with promulgating regulations and other related P&SP program 
activities. Due to the relatively small size and the nature of the 
work, few regulations are issued during the course of the year so that 
personnel working on regulations and rulemaking initiatives also work 
on congressional mandates, proposed legislation, paperwork reduction 
act requirements, and other program activities as needed.
   creation of an office of agriculture in the department of justice
    Question. Would you object to the creation of an Office of 
Agricultural Competition in DOJ to address not only antitrust issues in 
agriculture generally, but to have dual jurisdiction over the trade 
practices and competition portion of your jurisdiction under the 
Packers and Stockyards Act?
    Answer: P&SP takes no position regarding the creation of an Office 
of Agriculture in the Department of Justice (DOJ) to handle antitrust 
or trade practices. P&SP works closely with the DOJ and the Federal 
Trade Commission (FTC) to monitor the livestock, meatpacking, and 
poultry industries regarding antitrust issues. We believe P&SP 
currently has the experience, training, and expertise to properly 
enforce the trade practices portion of our jurisdiction over these 
industries, as well as the competition and financial portions. We 
further believe that together the existing entities of P&SP, DOJ, and 
the FTC do an effective job monitoring industry antitrust issues.

    Senator Cochran. Mr. Nannes.
    Mr. Nannes.

  STATEMENT OF JOHN M. NANNES, ACTING ASSISTANT ATTORNEY GENERAL, 
            ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

    Mr. Nannes. Thank you, Mr. Chairman. I'm pleased to have 
the opportunity this morning to discuss antitrust enforcement 
in the agricultural marketplace.
    As I believe you know, we are awaiting a Senate vote on the 
nomination of Charles James to be the Assistant Attorney 
General for the Antitrust Division. Until that time, the 
Division is deferring policy statements.
    However, the Antitrust Division is first and foremost a law 
enforcement agency, and our enforcement work continues even 
during times of transition. For that reason, I thought it would 
be helpful to the subcommittee if I were to describe how the 
Division applies the antitrust laws to agricultural industries.
    We know that the agricultural marketplace is undergoing 
significant changes. In the midst of these changes, farmers and 
especially family farmers have expressed concern about 
concentration in agricultural markets. Farmers know that 
antitrust enforcement is essential to assuring competitive 
markets.

                     ENFORCEMENT OF ANTITRUST LAWS

    The Antitrust Division has been very active in enforcing 
the antitrust laws in the agricultural sector. Let me briefly 
describe for you some of our recent enforcement actions.
    In our conversations with farm groups, we have found that 
farmers are especially concerned about the potential impact of 
mergers, so let me start there. Section 7 of the Clayton Act 
prohibits mergers or acquisitions that may tend to lessen 
competition. In the past 3 years, the Antitrust Division has 
challenged four significant mergers that we concluded could 
have harmed competition in agricultural markets.
    First, we challenged Monsanto's proposed acquisition of 
DeKalb Genetics Corporation, which would have significantly 
reduced competition in corn seed, biotechnology innovation to 
the detriment of farmers.
    Second, we challenged Cargill's proposed acquisition of 
Continental's grain business, which would have significantly 
reduced competition in the purchase of grain and soybeans from 
farmers in various local and regional markets.
    Third, we challenged New Holland's proposed acquisition of 
Case, which would have significantly reduced competition in the 
sale of tractors and hay tools to farmers.
    Fourth, we challenged Monsanto's proposed acquisition of 
Delta and Pine Land, which would have significantly reduced 
competition in cotton seed, biotechnology, once again to the 
detriment of farmers.

                          Agricultural mergers

    Taken as a whole, I'd suggest that these enforcement 
actions demonstrate the following points. First, we carefully 
review agricultural mergers for their competitive implications.
    Second, our focus is not limited to traditional 
agricultural products, but extends also to technology 
innovation.
    Third, while we consider proposed divestitures to address 
the competitive problems that we find with a merger, we won't 
hesitate in challenging the entire merger if we conclude that 
lesser forms of relief are not sufficient to address fully the 
competitive problem presented by the merger.
    Fourth, we'll challenge a merger, whether the likely harm 
is that farmers will have to pay anticompetitively high prices 
for the products they purchase, or that farmers will have to 
accept anticompetitively low prices for products they sell, as 
demonstrated by Cargill/Continental.
    I want to emphasize this last point because I know it is a 
matter of particular concern to the subcommittee and to farmers 
who often have to sell their products to large agribusinesses.
    For a while there seems to have been some uncertainty about 
whether we can consider a merger's possible anticompetitive 
harm to producers. The answer is: Cargill/Continental 
demonstrates is that we can and we do.
    We conducted a very substantial investigation of the 
Cargill Continental merger. The merging parties were sellers of 
grain and soybeans in the United States and in international 
markets, and also were buyers of grains and soybeans in various 
local and regional domestic markets. We looked at all of the 
potentially affected markets.
    We concluded the merger would not harm competition in the 
markets in which the parties were sellers. However, we did find 
that the merger would likely have had an anticompetitive effect 
in some markets in which Cargill and Continental were buyers, 
and could have depressed the prices received by farmers for 
grain and soybeans in those regions.
    We challenged the merger on that basis and on that theory, 
and the parties resolved our concerns by restructuring the 
merger and agreeing to significant divestitures of port, rail, 
and river terminals. The district court judge to whom that 
decree was submitted concluded that that decree was very much 
in the public interest.

               AGRICULTURAL CRIMINAL ENFORCEMENT ACTIONS

    The Division has also brought a number of significant 
criminal enforcement actions related to agriculture in the last 
few years under section one of the Sherman Act, which makes 
unlawful contracts, combinations, and conspiracies in restraint 
of trade. Our criminal enforcement focuses on the types of 
agreements that are blatantly anticompetitive, such as price 
fixing and allocations of customers and markets.
    In the agricultural sector, we have prosecuted companies 
that fix prices for products purchased by farmers, such as 
lysine and vitamins used as animal feed additives, securing 
numerous convictions of companies and individuals and some of 
the highest fines in antitrust enforcement history.
    The Division also investigates other kinds of business 
behavior that may have anticompetitive effects. Such conduct 
may constitute an illegal restraint of trade or an unlawful 
monopolization or attempted monopolization in violation of the 
Sherman Act.

                          CIVIL INVESTIGATIONS

    We have conducted a number of civil investigations in which 
we have considered whether conduct is having an anticompetitive 
impact on farmers, and if we determine that such is the case, 
we will take appropriate enforcement action.
    The Division works hard to ensure that it is receiving the 
information necessary to make the best informed judgments with 
respect to agricultural antitrust issues.
    We often obtain valuable information for our merger 
investigations from the USDA, and from time to time USDA has 
referred to us other matters that have led to criminal 
prosecution.
    In turn, we have provided assistance to the USDA--mostly as 
consultants on competition-related studies, and more recently 
by sharing information regarding our investigative techniques 
to follow up on the recommendations made in the recent GAO 
report and subsequent legislation.
    Our working relationship is reflected in a written 
memorandum of understanding with the USDA, and we have a very 
constructive working relationship with that agency as well as 
with other Federal agencies that have responsibilities in these 
areas, and the various state attorneys general.

                           prepared statement

    In conclusion, the Antitrust Division understands the 
concerns that have been expressed about competition in 
agricultural markets. We take seriously our responsibility to 
assure that the antitrust laws are enforced no less vigorously 
in the agricultural markets than in the rest of our economy.
    We believe our enforcement efforts demonstrate that 
commitment, Mr. Chairman. I would be happy to respond to any 
questions that you or your colleagues may have.
    [The statement follows:]

                  Prepared Statement of John M. Nannes

    Good morning, Mr. Chairman and members of the Subcommittee. I am 
pleased to have the opportunity to discuss issues relating to antitrust 
enforcement in the agricultural marketplace.
    As I believe most of you know, we are awaiting a Senate vote on the 
nomination of Charles James to be Assistant Attorney General for the 
Antitrust Division. Until that time, the Division is deferring official 
policy statements. However, the Antitrust Division is first and 
foremost a law enforcement agency, and our enforcement work continues 
even during times of transition. For that reason, I thought it would be 
helpful to the Subcommittee if I were to describe how the Division 
enforces the antitrust laws and review how those laws have been applied 
in agricultural industries.
    We know that the agricultural marketplace is undergoing significant 
change. Farmers are adjusting to challenges in international markets, 
to major technological and biological changes in the products they buy 
and sell, and to new forms of business relationships between producers 
and processors.
    In the midst of these changes, farmers have expressed concern about 
the level of competitiveness in agricultural markets. Farmers know that 
competition at all levels in the production process leads to better 
quality, more innovation, and competitive prices. They know, too, how 
important antitrust enforcement is to ensuring competitive markets. 
Enforcement of the antitrust laws can benefit farmers in their capacity 
as purchasers of goods and services that allow them to grow crops and 
raise livestock, and also in their capacity as sellers of crops and 
livestock to feed people, not only in our country but also throughout 
the world.
    The Antitrust Division takes these concerns seriously and has been 
very active in enforcing the antitrust laws in the agricultural sector.
    Under Section 7 of the Clayton Act, the Division can challenge a 
merger or acquisition that it concludes may tend substantially to 
lessen competition. During the past few years, the Division has 
challenged a number of significant mergers that would have harmed 
agricultural markets, such as:
  --the proposed acquisition by Monsanto of DeKalb Genetics 
        Corporation, which would have significantly reduced competition 
        in corn seed biotechnology innovation to the detriment of 
        farmers;
  --the proposed acquisition by Cargill of Continental's grain 
        business, which would have significantly reduced competition in 
        the purchase of grain and soybeans from farmers in various 
        local and regional markets;
  --the proposed acquisition by New Holland of Case, which would have 
        significantly reduced competition in the sale of tractors and 
        hay tools to farmers; and
  --the proposed acquisition by Monsanto of Delta & Pine Land, which 
        would have significantly reduced competition in cotton seed 
        biotechnology to the detriment of farmers.
    Under section 1 of the Sherman Act, the Antitrust Division can 
challenge agreements between competitors that restrain trade. With 
respect to the types of agreements that are obviously anticompetitive--
such as price fixing and allocations of markets and/or customers--the 
Division often proceeds by criminally prosecuting the companies and 
individuals involved. In recent years, the Division has criminally 
prosecuted various companies for fixing prices for products purchased 
by farmers--lysine and vitamins--and has secured numerous criminal 
convictions and some of the highest fines in antitrust history. Under 
the Sherman Act, the Division can also proceed civilly to challenge 
other types of agreements or unlawful monopolies that it concludes are 
injuring suppliers or customers; here, too, it brings enforcement 
actions to challenge anticompetitive business conduct that injures 
farmers.
                           MERGER ENFORCEMENT

    In our conversations with farm groups, we have found that farmers 
are especially concerned about the potential impact of mergers and 
acquisitions (``mergers''). Farmers are concerned that mergers will 
limit the number of sellers of seed, chemicals, machinery, and other 
equipment from whom they can buy and will limit the number of customers 
for crops and livestock to whom they can sell. For this reason, I think 
it may be helpful to start with a discussion of the Antitrust 
Division's merger enforcement program, with particular emphasis on 
recent merger enforcement actions that the Antitrust Division has taken 
in the agricultural sector.

                      MERGER ENFORCEMENT STANDARDS

    Section 7 of the Clayton Act prohibits the acquisition of stock or 
assets if ``the effect of such acquisition may be substantially to 
lessen competition, or to tend to create a monopoly.'' This enables us 
to arrest anticompetitive mergers in their incipiency, to forestall 
harm that would otherwise ensue but be difficult to undo after the 
parties have consummated a merger. Thus, merger enforcement standards 
are forward-looking and, while the Antitrust Division often considers 
historic performance in an industry, the primary focus is to determine 
the likely competitive effects of a proposed merger in the future.
    The Antitrust Division shares merger enforcement authority with the 
Federal Trade Commission (``FTC''), with the exception of certain 
industries in which the FTC's jurisdiction is limited by statute. The 
agencies jointly have developed Horizontal Merger Guidelines that 
describe the inquiry they follow in analyzing mergers. ``The unifying 
theme of the Guidelines is that mergers should not be permitted to 
create or enhance market power or to facilitate its exercise. Market 
power to a seller is the ability profitably to maintain prices above 
competitive levels for a significant period of time.'' Merger 
Guidelines Sec. 0.1.
    We ordinarily seek to define the relevant markets in which the 
parties to a merger compete and then to determine whether the merger 
would be likely to lessen competition substantially in those markets. 
In performing this analysis, the Antitrust Division and the FTC 
consider both the post-merger market concentration and the increase in 
concentration resulting from the merger. Generally speaking, the 
Antitrust Division has been likely to challenge a transaction that 
results in a substantial increase in concentration in a market that is 
already highly concentrated, although appropriate consideration has 
also been given to other factors, such as the likelihood of entry by 
new competitors, that could affect whether the merger is likely to 
create or enhance market power or facilitate its exercise.
    In most instances, the concern raised by a merger is the potential 
ability of the merging companies to raise above the competitive level 
the price of the products or services they sell. Of course, it is also 
possible that a merger will have the potential to substantially lessen 
competition with respect to the price that the merging companies pay to 
purchase products or services. This is a matter of particular concern 
to farmers, who often sell their products to large agribusinesses. The 
Merger Guidelines specifically provide that the same analytical 
framework used to analyze the ``seller-side'' is also applied to the 
``buyer-side'': Market power also encompasses the ability of a single 
buyer (a ``monopsonist''), a coordinating group of buyers, or a single 
buyer, not a monopsonist, to depress the price paid for a product to a 
level that is below the competitive price and thereby depress output. 
The exercise of market power by buyers (``monopsony power'') has 
adverse effects comparable to those associated with the exercise of 
market power by sellers. In order to assess potential monopsony 
concerns, the Agency will apply an analytical framework analogous to 
the framework of these Guidelines.
    Merger Guidelines Sec. 0.1. Thus, the Antitrust Division has 
reviewed mergers to determine not only whether they posed a competitive 
threat to persons buying goods or services from the merged entity, but 
also--as demonstrated by the Cargill/Continental case--whether they 
posed a competitive threat to persons selling goods or services to the 
merged entity.
    While most of the merger challenges brought by the Antitrust 
Division have involved companies that compete with one another 
(``horizontal competitors''), the agencies also consider whether 
mergers involving companies at different levels in the production and 
marketing process (``vertical relationships'') may have anticompetitive 
consequences. Challenges to vertical mergers are less frequent because 
these mergers often allow the merged companies to compete more 
efficiently in the marketplace, by reducing costs or streamlining 
production. However, there are circumstances in which a vertical merger 
may substantially lessen competition, such as by foreclosing 
competitive access to one of the markets involved in a way that raises 
barriers to entry or otherwise threatens competitive prices. In those 
instances, the Division takes whatever enforcement action may be 
warranted.
                    PROCEDURES FOR REVIEWING MERGERS

    The Antitrust Division and the FTC use a clearance process to work 
out which agency will review a particular merger. The primary 
determinant is agency expertise about the product or service at issue, 
so that a merger is usually reviewed by whichever of the two agencies 
is most knowledgeable about the relevant product or service.
    We take concentration into account from the beginning of our 
review. In determining whether or not to conduct an investigation, we 
consider the pre-merger and post-merger concentration levels in the 
affected markets. In those industries already characterized by high 
concentration levels, there is a substantially increased likelihood 
that a proposed merger is subjected to a formal--and often quite 
extensive--antitrust investigation.
    The Antitrust Division and the FTC have an array of investigatory 
tools from which to choose in conducting such an investigation. Parties 
to most mergers meeting certain size thresholds must provide the 
agencies with advance notice and observe a waiting period before 
consummating the merger, during which time the reviewing antitrust 
agency may obtain relevant information and conduct an investigation. In 
circumstances in which such notice is not required, the reviewing 
antitrust agency has other statutory powers for obtaining information.
    If the reviewing antitrust agency concludes that the merger is not 
competitively problematic, the investigation ends and the parties then 
are generally free to proceed with the merger. However, if the 
reviewing antitrust agency identifies competitive concerns, it explains 
the nature of those concerns to the parties, and the parties have an 
opportunity to address them. Unless the parties can convince the agency 
that its competitive concerns are not warranted, the agency prepares to 
file suit to seek an injunction against the merger.
    Sometimes the parties make a proposal to address the competitive 
concerns that the reviewing antitrust agency has identified. For 
example, when a merger between multi-product firms raises competitive 
concerns with respect to only a subset of their products, divestiture 
of the competitively problematic product lines may solve the 
competitive problem, allowing the parties to proceed with the rest of 
the merger. There are times, however, when the merging parties' 
proposed changes to the merger are not enough to solve the problem or 
the problem is so pervasive that the agencies conclude the transaction 
must be prohibited in its entirety. In those circumstances, the 
reviewing antitrust agency challenges the merger in court, generally 
seeking a preliminary injunction to prevent consummation of the merger 
while it is being challenged.
  recent merger enforcement actions in agriculture-related industries
    As a result of the clearance process with the FTC, the Antitrust 
Division has investigated the preponderance of mergers affecting 
agriculture, with a prominent exception being grocery store mergers, 
which are usually reviewed by the FTC. In the past few years, the 
Antitrust Division has successfully challenged four significant 
proposed mergers in agriculture-related industries that we concluded 
would adversely affect farmers. Each of those transactions was 
important in its own right, and, collectively, they demonstrate the 
Division's commitment to enforce the antitrust laws in this vital 
segment of our economy.
    Three years ago, the Antitrust Division investigated Monsanto's 
proposed acquisition of DeKalb Genetics Corporation. Both companies 
were leaders in corn seed biotechnology and owned patents that gave 
them control over important technology. We expressed strong concerns 
about how the merger would affect competition for seed and 
biotechnology innovation. To satisfy our concerns, Monsanto spun off to 
an independent research facility its claims to agrobacterium-mediated 
transformation technology, a recently developed technology used to 
introduce new traits, such as insect resistance, into corn seed. 
Monsanto also entered into binding commitments to license its Holden's 
corn germplasm to over 150 seed companies that currently buy it from 
Monsanto, so that they can use it to create their own corn hybrids.
    Two years ago, the Antitrust Division comprehensively reviewed the 
proposed purchase by Cargill of Continental's grain business, which 
resulted in a suit to challenge the merger as originally proposed. The 
merger affected a number of markets. The parties were buyers of grain 
and soybeans in various local and regional domestic markets and also 
sellers of grain and soybeans in the United States and abroad. We 
carefully looked at all of the potentially affected markets, and 
ultimately concluded that the proposed merger likely would have 
anticompetitively depressed prices received by farmers for their grain 
and soybeans in certain regions of the country; we were also concerned 
that the merger would have had anticompetitive effects with respect to 
certain futures markets.
    To resolve our competitive concerns, Cargill and Continental agreed 
to divest a number of facilities throughout the Midwest and in the 
West, as well as in the Texas Gulf. The nature of the relief 
demonstrates the individualized attention that we paid to local and 
regional markets. We insisted on divestitures in three different 
geographic markets where both Cargill and Continental operated 
competing port elevators: (1) Seattle, where their elevators competed 
to purchase corn and soybeans from farmers in portions of Minnesota, 
North Dakota, and South Dakota; (2) Stockton, California, where their 
elevators competed to purchase wheat and corn from farmers in central 
California; and (3) Beaumont, Texas, where their elevators competed to 
purchase soybeans and wheat from farmers in east Texas and western 
Louisiana.
    We also required divestitures of river elevators on the Mississippi 
River in East Dubuque, Illinois, and Caruthersville, Missouri, and 
along the Illinois River between Morris and Chicago, where the merger 
would have otherwise harmed competition for the purchase of grain and 
soybeans from farmers in those areas. The Illinois River divestitures 
(and an additional required divestiture of a port elevator in Chicago) 
also prevented the merger from anticompetitively concentrating 
ownership of delivery points that have been authorized by the Chicago 
Board of Trade for settlement of corn and soybean futures contracts.
    In addition, we required divestiture of a rail terminal in Troy, 
Ohio, and we prohibited Cargill from acquiring the rail terminal 
facility in Salina, Kansas, that had formerly been operated by 
Continental, and from acquiring the river elevator in Birds Point, 
Missouri, in which Continental until recently had held a minority 
interest, in order to protect competition for the purchase of grain and 
soybeans in those areas.
    This relief was designed to ensure that farmers in the affected 
markets would continue to have alternative buyers for their grain and 
soybeans. After reviewing public comments on the proposed consent 
decree and the Division's response to those comments, the court 
determined that the decree was in the public interest and entered it in 
June 2000.
    In November 1999, the Antitrust Division filed a complaint 
challenging the proposed merger between New Holland and Case 
Corporation because of our concern that the transaction would lead to 
higher prices for certain types of machinery purchased by farmers. The 
parties manufactured and sold two- and four-wheel drive tractors that 
were used by farmers for a variety of applications, including pulling 
implements to till soil and cultivate crops. They also manufactured and 
sold a variety of hay and forage equipment, including square balers and 
self-propelled windrowers. The Antitrust Division concluded that the 
transaction would significantly lessen competition and lead to higher 
prices and lower-quality products.
    The parties agreed to significant divestitures in order to resolve 
our concerns. Those divestitures included New Holland's large two-
wheel-drive agricultural tractor business, New Holland's four-wheel-
drive tractor business, and Case's interest in a joint venture that 
makes hay and forage equipment. Following the public comment and 
response period, the court determined that the decree was in the public 
interest and entered it in March 2000.
    Last year, Monsanto abandoned its proposed acquisition of Delta & 
Pine Land Co., after the Antitrust Division indicated that it was 
prepared to challenge the merger in court. The Division concluded that 
the merger, which would have combined the two largest cotton seed 
companies, would have anticompetitively harmed farmers raising cotton.
    Taken as a whole, these enforcement actions provide a good picture 
of our merger enforcement efforts in agriculture-related industries. 
The Antitrust Division carefully reviews agricultural mergers for their 
competitive implications, and files suit if a merger is likely to lead 
to anticompetitive prices either for products purchased by farmers (New 
Holland/Case) or for products sold by farmers (Cargill/Continental). 
The Division's concerns are not limited to traditional agricultural 
products, but extend also to biotechnology innovation (Monsanto/DeKalb 
and Monsanto/Delta & Pine Land). And, while the Antitrust Division 
considers proposed divestitures and other forms of relief that permit a 
merger to proceed as restructured, the Division challenges a merger 
outright if it concludes that lesser forms of relief are not likely to 
address fully the competitive problems raised by the merger (Monsanto/
Delta & Pine Land).

               CRIMINAL ENFORCEMENT OF THE ANTITRUST LAWS

    In addition to enforcing the antitrust laws against anticompetitive 
mergers, the Antitrust Division has moved aggressively to prosecute 
companies that engage in price fixing or allocation of markets or 
customers. Such conduct willfully subverts the operation of free 
markets and can cause serious economic harm. It virtually always 
results in inflated prices to purchasers or depressed prices to 
suppliers; indeed, that is the very purpose of such conduct.
    Section 1 of the Sherman Act prohibits contracts, combinations, and 
conspiracies that restrain trade. The key to such illegal conduct is an 
anticompetitive agreement among competitors. It is not enough for the 
Antitrust Division to show that competitors charged the same or similar 
prices for a product or service. We must prove that the competitors 
agreed upon prices or price levels, or upon the allocation of customers 
or markets. A company convicted of violating the antitrust laws is 
subject to substantial fines, and an individual convicted of violating 
the antitrust laws is subject to substantial fines and imprisonment.
    In the past few years, the Antitrust Division has prosecuted a 
number of cases and secured convictions and hefty fines in various 
industries involving products purchased by farmers. Two prosecutions 
deserve particular mention.
  --Beginning in 1996, the Antitrust Division prosecuted Archer Daniels 
        Midland and others for participating in an international cartel 
        organized to suppress competition for lysine, an important 
        livestock and poultry feed additive. The cartel had inflated 
        the price of this important agricultural input by tens of 
        millions of dollars during the course of the conspiracy. ADM 
        pled guilty and was fined $100 million--at the time the largest 
        criminal antitrust fine in history. Two Japanese and two Korean 
        firms also were prosecuted for their participation in the 
        worldwide lysine cartel and were assessed multi-million-dollar 
        fines. In addition, three former ADM executives were convicted 
        for their personal roles in the cartel; two of them have been 
        sentenced to serve 36 and 33 months in prison, respectively, 
        and fined $350,000 apiece for their involvement, and the other 
        executive had 20 months added to a prison sentence he was 
        already serving for another offense.
  --Two years ago, the Antitrust Division prosecuted the Swiss 
        pharmaceutical giant, F. Hoffmann-La Roche Ltd., and a German 
        firm, BASF Aktiengesellschaft, for their roles in a decade-long 
        worldwide conspiracy to fix prices and allocate sales volumes 
        for vitamins used as food and animal feed additives and 
        nutritional supplements. The vitamin conspiracy affected 
        billions of dollars of U.S. commerce. Hoffman-La Roche and BASF 
        pled guilty and were fined $500 million and $225 million, 
        respectively. These are the largest and second-largest 
        antitrust fines in history--in fact, the $500 million fine is 
        the largest criminal fine ever imposed in any Justice 
        Department proceeding under any statute. Three former Hoffmann-
        La Roche executives from Switzerland and three former BASF 
        executives from Germany agreed to submit to U.S. jurisdiction, 
        to plead guilty, to serve time in a U.S. prison, and to pay 
        substantial fines for their role in the vitamin cartel. These 
        prosecutions were part of an ongoing investigation of the 
        worldwide vitamin industry, in which there have been 24 
        corporate and individual prosecutions to date, including 
        convictions of Swiss, German, Canadian, Japanese, and U.S. 
        firms, and convictions of 12 American and foreign executives 
        who are serving or have served time in Federal prison, and 
        another executive who has agreed to plead guilty and is 
        awaiting sentencing.
    The lysine and vitamin cases received substantial publicity because 
of the prominence of the companies involved, the amount of commerce at 
stake, and the record size of the fines. But we have also brought 
prosecutions on a smaller scale. We successfully prosecuted two cattle 
buyers in Nebraska a few years ago for bid-rigging in connection with 
procurement of cattle for a meat packer, after an investigation 
conducted with valuable assistance from the Department of Agriculture 
(``USDA''), which was investigating some of the same conduct under the 
Packers and Stockyards Act. In short, we have brought charges against 
companies that engage in criminal anticompetitive behavior that 
adversely affects farmers, from isolated acts to multi-year 
international conspiracies.

       INVESTIGATIONS OF OTHER POTENTIAL ANTICOMPETITIVE CONDUCT

    The Antitrust Division also investigates other forms of business 
behavior that may have anticompetitive effects. Such conduct may 
constitute an illegal restraint of trade under Section 1 of the Sherman 
Act or unlawful monopolization or attempted monopolization under 
Section 2 of the Sherman Act. Conduct that may raise competitive issues 
of particular interest to farmers include strategic alliances between 
agribusiness companies, joint ventures among suppliers, and 
restrictions imposed on intellectual property rights.
    The Antitrust Division has conducted a number of civil 
investigations into whether some particular conduct is unreasonably 
restraining trade to the detriment of farmers. One such investigation 
resulted in the Division filing a lawsuit last fall to challenge a non-
compete agreement between developers of long-shelf-life-tomato seeds, 
after we had concluded that the agreement was interfering with the 
development of new seeds for use by American farmers. That case is 
pending before the district court in Arizona.
     other agriculture-related activities at the antitrust division
    The Antitrust Division has a long-standing cooperative relationship 
with USDA, through which we have provided assistance to each other in a 
number of respects. Division attorneys and economists investigating 
particular mergers have made extensive use of the wealth of information 
about agricultural markets that USDA collects in the ordinary course of 
its work. USDA has also contacted the Division to provide other useful 
information regarding major agriculture-related mergers we were 
investigating, and has forwarded investigative leads to the Division, 
such as the one resulting in the prosecution of the two cattle buyers 
in Nebraska for price-fixing. The Division has assisted USDA by 
consulting on studies USDA has conducted regarding competition-related 
aspects of agricultural markets, such as the red meat studies a few 
years ago, as well as on USDA's recent efforts to revise its 
investigative processes at the Grain Inspection, Packers and Stockyards 
Administration.
    Two years ago, the Division entered into a memorandum of 
understanding with USDA, along with the FTC, to memorialize this 
working relationship and to reaffirm our commitment to work together 
and exchange information as appropriate on competitive developments in 
the agricultural marketplace.
    The Antitrust Division also works with other relevant Federal 
agencies on specific matters of common interest. For example, the 
Division worked closely with the Commodities Futures Trading Commission 
during the investigation of the Cargill/Continental merger.
    Last year, the Division created the position of special counsel for 
agriculture. The special counsel reports directly to the Assistant 
Attorney General and works exclusively on agricultural issues. The 
Antitrust Division has a full contingent of attorneys and economists 
available to work on agriculture-related matters, some of whom have 
extensive experience and expertise in those markets, and the special 
counsel has been a valuable complement to those existing enforcement 
resources, providing a sustained focus and public presence to our 
investigative and outreach efforts in agriculture. He has met with and 
spoken to a number of agricultural producers and producer groups, both 
here in Washington and in farm states, to explain to them how the 
antitrust laws work and how to bring relevant information to our 
attention. He has also met and maintained contact with a number of 
state attorneys general from farm states.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, we in the Antitrust 
Division understand the concerns that have been expressed about 
competition in agricultural markets. We take seriously our 
responsibility to ensure that the antitrust laws are enforced no less 
vigorously in agricultural markets than they are elsewhere in our 
economy. We believe that our enforcement record demonstrates that 
commitment.
    I would be happy to respond to whatever questions the Subcommittee 
may have.

    Senator Cochran. Thank you very much, Mr. Nannes, for that 
overview of the Antitrust Division's role in this subject.

                       MANDATORY PRICE REPORTING

    Ms. Waterfield, some are concerned that the mandatory price 
reporting system that was implemented this past April has had 
the effect of providing less information to producers than they 
received under the old voluntary system. Is this an accurate 
assessment? Or if it isn't, tell us what you think the benefits 
have been, if any, from the mandatory price reporting system.
    Ms. Waterfield. Well, Senator Cochran, the mandatory price 
reporting system is legislation that is being handled, as you 
know, by our sister agency, the Agricultural Marketing Service. 
Obviously it affects the industries that we regulate and 
monitor.
    We currently have two rapid response teams out, both in the 
cattle industry and the hog industry, talking with producers to 
ensure that there are no problems in the industries that we 
monitor as a result of mandatory price reporting.
    What we found so far in the cattle industry is that there 
has not been much of an adverse impact as a result of mandatory 
price reporting.

                         ANTITRUST ENFORCEMENT

    Senator Cochran. There has been some legislation proposed 
that would create some additional antitrust enforcement 
authority outside the Department of Justice at the USDA to 
oppose pre-merger review opinions.
    My question is do you believe that creating a special 
counsel for competition within USDA who would have the same 
power as the assistant attorney general for antitrust at the 
Department of Justice would help in enforcement of agribusiness 
merger violations?
    Ms. Waterfield. Is that directed at me, Senator Cochran?
    Senator Cochran. Yes.
    Ms. Waterfield. That question would be better addressed to 
the department's legislative affairs office.
    Senator Cochran. Okay. Senator Dorgan had actually asked 
that we convene this hearing, and we discussed the logistics 
and where the hearing ought to be conducted and witnesses we 
ought to invite. And Senator Dorgan had another commitment, had 
to open a hearing at another appropriations subcommittee and 
therefore was not here for opening statements.
    I'm going to yield at this time to Senator Dorgan for any 
opening statement that he would like to make.

                  STATEMENT OF SENATOR BYRON L. DORGAN

    Senator Dorgan. Mr. Chairman, thank you. I will be brief, 
and I was at the Treasury appropriations subcommittee with 
Senator Campbell that we had to open up, and I apologize for 
being a bit late. Thank you for your statements. I read the 
statements of this panel and others.
    If I might just use a couple of charts to make a couple of 
points, I'll be quite brief. Market concentration in the meat 
processing industry, the red line, is where we are now. Beef, 
80 percent top four firms. Pork, 57 percent. Sheep, 73 percent. 
Poultry, 55 percent.
    If I had put that chart up 20 or 30 years ago, it would 
have looked dramatically different than this, but this shows a 
level of concentration in those industries. Why do ranchers in 
my part of the country keep talking about concentration and the 
danger it involves for them?
    Well, this chart shows 76 percent of the cattle market. 76 
percent of the cattle market are under contract by the Big Four 
companies. Four percent bought on the public market by the Big 
Four. So when we talk about market share, the Big Four, and 
what it is doing to cattle market, and prices and so on, this 
is why ranchers are very concerned and becoming increasingly 
concerned as time goes on.
    Let me just show two additional charts. Market 
concentration in the grain processing industry. Flour milling, 
top four firms, 62 percent. Wet corn milling, 74 percent. 
Soybean crushing, 64 percent.
    Finally, let me show the charts of the farmer's share of 
the retail dollar, which interestingly enough moves in an 
inverse relationship to the concentration in the various 
industries. Farmer's share of the retail beef dollar is 
dramatically different, dramatically reduced. The farmers' 
share of the retail pork dollar exactly the same thing. The 
farmer's share of the cereal grains dollars, exactly the same 
thing.
    The point is fairly obvious to me. As the enterprises in 
which farmers purchase from and the enterprises in the 
industries to which farmers sell become larger and have more 
economic muscle, they are reducing the farmer's share of the 
food dollar and increasing their own share.
    And so our family farmers say is this a stacked deck? Is 
this a fair economy for us to operate in, or is there 
concentration here that is unhealthy? And I think the answer, 
from my standpoint, is there is concentration that is 
unhealthy.
    I'm not an attorney who's schooled, for example, in 
antitrust law, but as I listen to the discussion here, it seems 
to me family farmers and ranchers in this country know that 
something is wrong. We are moving in the wrong direction, and 
somehow nobody seems to do much about it.
    If I might just make a point, Ms. Waterfield said things 
have been fairly stable since 1995. I think that was her 
statement. In the pork industry, the four top pork producers in 
1995, I believe, have become two pork producers through two 
major acquisitions. So changes are occurring even as we speak. 
This is moving very rapidly.

                           prepared statement

    And the question is do we have a competitive market? And as 
soon as I have the opportunity to ask questions, Mr. Chairman, 
I'm going to ask questions. Do you think that the markets in 
these areas are more competitive or less competitive? So we can 
talk through that just a bit.
    If they are, in fact, becoming less and less competitive 
and I would expect you would agree that is the case, then what 
are the remedies for that?
    Mr. Chairman, you are kind to call on me for a statement, 
and I appreciate it.
    [The statement follows:]

             Prepared Statement of Senator Byron L. Dorgan

    Mr. Chairman, I'd first like to thank you for holding this hearing 
on Market Concentration in agriculture. I requested that the 
Subcommittee hold this hearing, and I appreciate all of the work that 
you and your staff put into making it happen. Concentration in 
agriculture has been a growing problem for years. But now, it's quite 
obvious to most that the trend towards larger and fewer companies in 
control of our major agriculture markets is accelerating. I'm hopeful 
this hearing will help Congress find a solution to this ever pressing 
problem, and I commend you for your support on this issue.
    I'd also like to welcome the diverse panel of witnesses appearing 
today. I say diverse, because we have with us today Federal agency 
heads representing the Department of Agriculture and Justice, state and 
university officials, livestock groups, farm groups, industry 
representatives, and a farmer. I look forward to hearing your views and 
any recommendations you may offer Congress in regards to legislative 
action aimed towards controlling the growth of agriculture market 
concentration.
    During debate on the Packers and Stockyards Act of 1921, Wyoming 
Senator John B. Kendrick said, ``The livestock industry has been 
brought to such a high degree of concentration that it is dominated by 
a few men. The big packers, so called, stand between hundreds of 
thousands of producers on one hand and millions of consumers on the 
other. They have their fingers on the pulse of both the producing and 
consuming markets and are in such a position of strategic advantage 
they have unrestrained power to manipulate both markets to their own 
advantage and to the disadvantage of over 99 percent of the people of 
the country. Such power is too great, Mr. President, to repose in the 
hands of any men.''
    Well, the Packers and Stockyards Act was passed. However, I believe 
Senator Kendrick's words would ring true again today. The numbers speak 
for themselves. The degree to which a few control these markets is 
astounding. Worse yet, the degree of concentration is increasing at a 
pace that causes compiled statistics to become obsolete soon after a 
study is completed. For instance, the top four pork producers of a 
couple of years ago are now just two Smithfield has devoured Murphy 
Farms and Carroll's Foods.
    To survive and be assured of some stability due to slumping 
markets, farmers have increasingly turned to contract production. 
However, one look at the plight of many poultry producers and segment 
of agriculture which is almost exclusively controlled by contract 
production should cause many to pause if they consider contract 
agriculture the means to their salvation. I won't go into detail, but 
let me just say that it's common knowledge that the ``first'' contract 
offered a farmer is more than likely going to be the best. We've all 
heard about the poultry producers who are offered unfavorable contracts 
with a take-it-or-leave-it now ultimatum attached.
    Almost every farmer out in the country cites growing market 
concentration and all the associated ills this plague produces as a 
serious problem that needs to be addressed. But, it isn't being 
addressed. Obviously, something is wrong. Either our anti-trust laws 
are not being enforced, or they need to be changed. Hopefully this 
hearing will deduce what exactly the problem is and then offer up a 
course of action to pursue to correct that problem.
    Mr. Chairman, I want to thank you again for scheduling this 
hearing.

    Senator Cochran. Thank you very much, Senator.

            MARKET CONCENTRATION'S EFFECT ON ECONOMIC GROWTH

    Mr. Collins, in your testimony, you raise the issue of 
market concentration and its affect on economic growth that 
usually results in a more efficient and higher quality product. 
Do you feel there has been a significant decline in research 
and development to enhance products due to market 
concentration? Or is it just the opposite?
    Mr. Collins. Mr. Chairman, I think that is an issue that 
can cut both ways. I think in a highly concentrated industry 
where a firm may have market power, they may not necessarily 
need to do research and product development, innovate as much 
to maintain their market share. So that would be a force 
working against research and development.
    On the other hand, as firms have gotten larger, they get 
deeper pockets, and they have more money available to conduct 
research and product development. I'm not exactly sure where 
that comes out. It would be something that you'd have to look 
at industry by industry.
    We could look at the food products that are delivered to 
the American consumer today generally coming from the 
concentrated industries that Mr. Dorgan just identified all 
across the food processing and retailing. And yet we know that 
the food industry has been highly innovative and have done a 
lot to develop new products. I'll give you an example.
    Back in the early 1970s, the food industry was producing 
about 1,000 new products a year. By the time we got to the mid 
1990s, the food industry was introducing something in the order 
of 15,000 to 16,000 new products a year. That doesn't prove the 
point one way or another, but it does seem to me that as the 
economy has grown, despite concentration, we have seen a lot of 
research and product development innovation.

                   ANTITRUST VS. FTC RESPONSIBILITIES

    Senator Cochran. In addition, Mr. Nannes, to the work of 
the Department of Justice and the Department of Agriculture 
through the grain inspection, Packers and Stockyard Act, the 
Federal Trade Commission also has some responsibilities. Are 
there enough laws on the books now that give these agencies and 
departments the powers they need to police and enforce or 
prohibit anticompetitive activity?
    Mr. Nannes. Senator, in response to your question, let me 
note that, as you indicated, we and the Federal Trade 
Commission share antitrust enforcement responsibility. We 
worked out a liaison agreement with the Federal Trade 
Commission so that industries don't face duplicative antitrust 
investigations.
    For example, the Federal Trade Commission is the agency 
that over time has developed the expertise with respect to 
supermarkets and grocery stores. So, it is the agency that has 
brought enforcement actions in that particular field.
    With respect to mergers, we apply the same statute, which 
is section 7 of the Clayton Act, to which I made reference 
earlier. This is the statute that applies generally throughout 
the industry and across industry lines as the appropriate 
demarcation as between mergers that may be pro-competitive and 
efficient, and those that run the risk of creating or enhancing 
market power of the kind that Dr. Collins has referred to.
    Over time, sir, I think section 7 of the Clayton Act has 
served as a very good framework for us to separate the 
anticompetitive transactions from transactions that do not 
present competitive risks.
    Senator Cochran. It seems to me that the wording of the 
act, as you referred to it in your statement, is very broad. It 
gives the regulators a great deal of leeway to make decisions 
and to bring actions and to challenge mergers.
    Mr. Nannes. Sir, that is correct, with one important 
limiting factor. And that is that we are a law enforcement 
agency. The judgments we make as prosecutors we have to be able 
to back up in court.
    And so our ability to apply the antitrust laws is informed 
very substantially by the courts' interpretations of those 
laws. Over the course of the past 30-plus years, we have 
developed at various times merger guidelines that indicate to 
industry and to public bodies the factors we take into account 
when we are doing our merger review. So that operates also to 
inform the kind of judgments we make in merger review.
    Senator Cochran. Senator Kohl.
    Senator Kohl. Thank you very much, Senator Cochran.

                             DAIRY COMPACTS

    Mr. Collins, in your prepared statement you said that 
within the food processing industry, dairy processors led the 
number of mergers and acquisitions in recent years. Could you 
provide any insight into the effect that dairy compacts may 
have on the trend towards concentration within the dairy 
processing sector?
    Mr. Collins. Mr. Kohl, the Northeast Interstate Dairy 
Compact is very similar--the way it operates is very similar to 
Federal, milk marketing orders. It sets a minimum price for 
class 1 milk use for fluid consumption, just like Federal 
orders do.
    I don't know of any research that has linked the milk 
marketing orders system to changes in consolidation or 
concentration in dairy processing. So my first answer to your 
question would be that I don't know of any studies that show a 
link.
    I would say, however, that if you look at some of the 
theoretical factors that drive consolidation, one of the things 
that we've seen is consolidation in some markets that have slow 
growth. We've seen where there has been economies of scale, 
firms get larger, merge, acquire to offset the slow growth of 
demand.
    They've gotten bigger to grow their own company by 
increasing their market share.
    So milk marketing orders, I think, do slow the consumption 
of fluid milk. Fluid milk has been a stagnant industry anyway. 
It has been competing with soft drinks and fruit juices and all 
kinds of beverages. And when you raise the price of fluid milk 
that much higher, it slows consumption that much more.
    Only to the extent that we've seen in some slow growth 
markets an incentive for firms to consolidate, I would argue 
that would be a link to the compact. But I would say it would 
probably be a fairly marginal, fairly small effect.

      EFFECT OF GOVERNMENT PROGRAMS ON AGRICULTURAL CONSOLIDATION

    Senator Kohl. Thank you, Mr. Collins. You mentioned 
government programs can contribute to agricultural 
consolidation, and concentration in a number of ways. Please 
identify these programs most likely to increase or decrease 
concentration in the ag sector, especially those that are 
funded by this subcommittee.
    Mr. Collins. That statement in my written testimony, Mr. 
Kohl, was not to suggest that the subcommittee is funding 
programs that spur consolidation. It was a general statement to 
say that government programs, tax policy, and regulation can 
encourage consolidation.
    I think that some examples might be when we used to have 
passive loss investing which encouraged investment in feed 
lots, which led to consolidation in the feed lot business. I 
think you know things like patent laws, for example, do confirm 
a monopoly in the short term for firms.
    It was just a general statement to say that government 
programs can contribute, as well as all the other factors I 
mentioned. I didn't mention that part in my opening statement. 
I mentioned all the other factors because I think the others 
have been more important, but government programs can be a 
factor as well.
    I think farm program payments are an example. They cut both 
ways. We see farm program payments have raised agricultural 
land values, that is a barrier to entry for beginning farmers 
into agriculture or farm production. Payments going to large 
producers may, in fact, help them provide the financial 
leverage to buy out smaller producers.
    It's a general statement that I think there are a lot of 
programs that do affect the pace of consolidation. And it's 
just something that we have to be mindful of when we implement 
programs and pass laws.
    Senator Kohl. I thank you, Mr. Collins. I thank you, Mr. 
Chairman.
    Senator Cochran. Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman.

                       MANDATORY PRICE REPORTING

    Two years ago, Mr. Collins, Congress adopted a mandatory 
price reporting legislation following passage in numerous 
States of State-based price reporting laws. Now that USDA has 
this legislation up and running, some livestock producers have 
expressed concerns about the so-called 360 guideline.
    The 360 guideline prohibits the publication of a markets 
pricing information in any reporting period unless there are at 
least three firms reporting information for that market, and no 
firm has more than 60 percent of the trade for that market.
    Producers have expressed concern to many of us that this 
will prohibit the reporting of pricing data on a daily basis if 
a firm with sizable concentration in an area of market is the 
only firm buying livestock.
    I recognize the type of confidentiality at work here may be 
necessary to ensure proprietary business information not being 
inappropriately reported, and at the very least, the problem 
shed some light on the anticompetitive nature of the slaughter 
livestock market as a result of meat packer concentration, a 
larger issue that price reporting was never really intended to 
combat.
    I know that USDA is aware of the 360 problem and is 
examining some alternatives, and I also believe it is only fair 
to give USDA some time to implement price reporting. And at 
this stage, the 360 rule I don't think should be seen as a 
death knell of price reporting.
    But if this problem grows and other problems spring up that 
lead to less and untimely market information, then Congress may 
need to take legislative action.
    I believe it's in our mutual interest to ensure producers 
have confidence in the rules and guidelines used to implement 
the price reporting law. And so the questions I have for you, 
first, does USDA have the authority to make adjustments to the 
360 rule without new legislation, would it be helpful to back 
up any price reporting changes with some sort of cleanup effort 
on our part?
    Second, any updates you have on the implementation and, 
lastly, are additional funds needed in order to make this 
program work?
    Mr. Collins. Mr. Johnson, I would be happy to answer this 
question as best I can. It's a similar question Mr. Cochran 
asked Ms. Waterfield, I believe. I would like to step back and 
just comment on this for a minute.
    This is a story of good news, bad news, and hopefully good 
news in the end. Certainly it is a story of some frustration at 
the Department of Agriculture.
    I know members on this committee like Mr. Dorgan, like 
yourself were instrumental in supporting mandatory livestock 
reporting which resulted in legislation in 1999. And on April 
2nd we put into effect mandatory livestock reporting.
    The good news about that is that an area of the farm 
economy that needed more information has legislation and a 
means now to get more information to help improve the 
competitive bargaining power of producers.
    We put out under mandatory price reporting what we call 91 
reports, 91 data series; 41 of those are new and have never 
been reported before. A lot of that has to do with forward 
contracted sales and that sort of thing.
    The good news is we've got a system up, it was put in place 
April 2nd, and it's going to provide and it is providing more 
information than we have provided before.
    The bad news is there have been some glitches. The first 
glitch has been what we're calling technical difficulties. And 
there are two forms of technical difficulties.
    One form is software problems. We have a contractor that 
has developed the software. Sometimes the software has not 
aggregated the data right, so we haven't reported a data point 
on some days. At other times, the data that are reported, if 
you've looked at any of these reports as I have, is hard to 
read. You don't know what you're looking at sometimes when you 
look at the data. So the reporting formats were not that good 
initially.
    Those problems are being addressed and fixed, by and large. 
We did have another problem I think yesterday or the day before 
with another software problem on a data series, but by and 
large such errors happened mostly during the first week and a 
half of April.
    I think we're now down to the point where out of the 91 
reports only like 3 or 4 are not being reported because of 
technical difficulty. And I think within another week we're 
going to have those resolved.

                               3/60 rule

    The second source of problems that you identified has been 
the confidentiality issue. And it has been widely publicized 
that we have used this 3/60 rule to determine whether we're 
going to report data on a particular day, particular time of 
the day, such as 11:00 a.m. or 3:00 p.m. That 3/60 rule is one 
that we've used elsewhere in the department.
    The National Agricultural Statistics Service uses a similar 
rule, having to require at least three entities to report with 
each having no more than some share of the market. We use a 60 
percent share, other Federal agencies have used 50 percent or 
70 percent. It's a standard rule for determining 
confidentiality.
    The problem has been, of course, now if you look at our 
reports, particularly for direct cattle purchases in certain 
States, cash market cattle purchases in Texas, Oklahoma, in 
Kansas, in Nebraska, we haven't been reporting because of 
confidentiality. These were data we were reporting under the 
voluntary reporting system, and this has led to a lot of 
frustration by producers.
    I can tell you the answer your question specifically, you 
asked if the 3/60 rule to change that would require 
legislation, the answer to that is no, it would not require 
legislation. It was not in the statute, it was not in the 
legislation. It's a reporting standard that we adopted 
diligently.
    Secretary Veneman has been involved on this and has met on 
this issue. We're looking at alternative ways to approach this 
question, and I don't know that I can go into that in much 
detail.
    There's some statistical formulaic ways you can use to see 
the maximum amount of information without identifying somebody.
    There's alternative ways of looking at the market in 
deciding whether we're going to disclose the identity of a 
buyer or seller based on the information that's being reported.
    It's a little more complicated than I first thought. As the 
statisticians have looked at it, I can tell you that we do have 
a couple of options identified and they are in the review and 
decision process right now.
    And I think if we can get an agreement on doing something 
other than what we've been doing, I think we can rectify a lot 
of the problems that we're seeing with lack of reporting due to 
confidentiality.
    If we don't get an agreement, if the people who are 
reviewing this stuff like our lawyers and others say no, we 
can't do this, then the only alternative is the second part of 
your question, do we need legislation? Yeah, that may be what 
it comes down to. We might have to revert to voluntary 
reporting for some series if there's no other way to get them.
    Under voluntary reporting, the people that are reporting 
wanted that information public, they didn't care about 
disclosure. We could go back and do that again for the series 
that we can't get the adequate information on.
    But I think you also said something important that you need 
to give the department a little time to work this out, and I 
appreciate you saying that. Because I think--the way I'm 
looking at it the moment sitting here today, I think we can do 
something here. Maybe tomorrow that will be a different story, 
but today I think we can go do something here.
    So with a little more time, hopefully we can start 
providing most of the 91 reports we're supposed to be 
providing.
    Mr. Johnson. Well, thank you, Dr. Collins. And I do realize 
that this is complex, more complex than might first meet the 
eye to a casual observer. And it does take time to work it 
through.
    On the other hand, we also want to urge you to be very 
expeditious in trying to get this work at the kind of level 
that it needs to work with.
    Mr. Collins. It is a problem, Mr. Johnson, because there 
are producers who have priced for a long time their animals off 
of a base price. Now all of a sudden we're not reporting that 
base price, and they have to make an adjustment.
    That causes a lot of concern that they might be taken 
advantage of. So we understand that, and we are working on this 
very diligently. We have a big meeting planned on it tomorrow.
    Senator Johnson. Very good. If I may, Mr. Chairman, may I 
ask one additional brief question?
    Senator Cochran. If it suits Senator Dorgan.
    Senator Johnson. I should yield to Senator Dorgan.

                    SPECIAL COUNSEL FOR AGRICULTURE

    Let me ask Mr. Nannes just very briefly, Senators Harkin 
and Lugar and I worked on legislation last year to create a 
special counsel for agricultural position in the DOJ's 
Antitrust Division.
    Subsequent to our introduction of that legislation, 
Attorney General Reno created the position without our bill. 
And appointed Mr. Doug Ross to serve in that capacity. Once 
again this year, Senators Harkin, Lugar, and I are looking at 
this legislation.
    Can you shed any light on whether Attorney General Ashcroft 
plans to have Mr. Ross continue in that role, or, if not, 
whether a new special counsel for agriculture will be 
appointed?
    Mr. Nannes. I'll try, Senator. Senator, it's my 
recollection that the decision to appoint a Special Counsel for 
Agriculture in the Antitrust Division last year was actually 
made by the Assistant Attorney General.
    I have not spoken specifically with Charles James about 
what his thoughts are with respect to a special counsel, and 
that decision would ultimately rest with him. I do know, as a 
general matter, that he is sensitive and understands the issues 
associated with the appropriate enforcement of the antitrust 
laws in agricultural industries. So it would be my expectation 
that he would turn to that matter quite promptly upon his 
confirmation.
    Senator Johnson. I would appreciate it if you would convey 
to Mr. James the strong interest I have and I know numerous 
others have that there be a special focus on this effort within 
DOJ. And it's my hope that some special counsel will be 
appointed. I yield.
    Senator Cochran. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you. Some, myself 
included, are concerned that we have kind of a slow motion 
bureaucracy in dealing these issues of concentration, and 
family farmers get very impatient. I'd like to ask a couple of 
questions about these markets.

              LESS COMPETITION VS. INCREASED CONCENTRATION

    We have the Sherman Act, we have the Clayton Act. You, Mr. 
Nannes, talked about section 7 of the Clayton Act. Both Sherman 
and Clayton have been interpreted differently over a century, 
and sometimes used aggressively, sometimes not used at all.
    Is it generally agreed by the three of you that there is 
less competition and more concentration in the following 
areas--these are markets that family farmers must purchase 
from--fertilizer, petroleum, seed, farm equipment. Would you 
generally agree that there is more concentration in those 
areas? And if there was more concentration, would you then 
conclude there is less competition in those areas?
    Mr. Collins. I will start. I would agree there is more 
concentration. I think the question as to whether there is less 
competition, you'd have to go market by market, and I may not 
be fully informed on all of them. But I would say that is a 
much more difficult question.
    Within the economics profession, for example, in meat 
packing, I would say there is no consensus. The body of 
literature shows some studies would argue that there is the 
exercise of market power, that we're not getting competitive 
pricing. Other studies would argue that we are getting 
competitive pricing.
    The seed industry is almost another example on its own 
because the seed industry is complicated not only by 
concentration but it is complicated by very far-reaching patent 
protection. So there are these reach-through-the-chain kinds of 
patent protection which confer some market power on firms that 
have such patents.
    Senator Dorgan. Would you agree the loss of the share of 
the food dollar that farmers are suffering? You saw the charts 
I used. I would assume you would agree with the direction of 
the charts, that you could logically conclude that the loss of 
the farmer's share of the food dollar relates to the 
concentration of those they sell to and buy from.
    Mr. Collins. No, I don't think I could.
    Senator Dorgan. Then let me ask it a different way. You 
talked about markets that farmers sell into, pork, beef, grain 
trade, and so on. Is there general agreement that there has 
been substantial increased concentration in those areas?
    Mr. Collins. Yes, I agree there has been.
    Senator Dorgan. Do you generally agree, to the extent we 
teach things in economics that stand the test of time, that 
when you have more concentration that competition travels in an 
inverse relationship to concentration?
    Mr. Collins. Not necessarily. I think you certainly can 
have increased concentration, but you can still have a 
perfectly competitive outcome in industries, even though they 
continue to concentrate.
    Beyond some point, and there's no hard and fast rules about 
this, I know there are merger guidelines, for example, the 
Department of Justice would use, beyond some point they raise a 
lot of flags.
    You get so few firms that have such high market share that 
then the prospect, the probability of anticompetitive pricing 
arises. But whether it actually occurs or not requires you to 
go in and look at the competitive behavior of the individual 
firms. You certainly could have low barriers to entry. You 
certainly could have substitute products that are not in that 
industry that could constrain price, the exercise of market 
power and constrain excess pricing.
    Senator Dorgan. Could you have purchase competition with 
two competitors in every one of these industries I've described 
under your analysis ?
    Mr. Collins. Theoretically, yes, but I doubt it. Unlikely.
    Senator Dorgan. Is it more unlikely that you have purchase 
competition or near purchase competition if you have 4 
competitors controlling 80 percent of the industry versus 10 
competitors 20 years ago or 30 competitors 50 years ago?
    Mr. Collins. I would say that as a probability statement, 
yes, the probability is that you would have less competitive 
pricing in the more highly concentrated market.
    But my problem with saying that with probability one is the 
lack of the empirical literature to support it.

                   FOOD DOLLAR TRENDS TO FAMILY FARM

    Senator Dorgan. Let me try one more time for just a moment 
on this issue of the shrinking percentage of the food dollar 
that is achieved by family farms in this country. To what would 
you attribute that trend, if it is not to concentration in the 
industries that farmers buy from and sell to? What other 
conceivable reason would exist for that?
    Mr. Collins. I'll take a shot at that. I haven't looked at 
that trend for all time, but I have looked at it since the 
1950s. The farm share of the consumer dollar and, by the data 
we report, is the value at the farm level of the farm 
production that goes into the products bought by consumers--
consumer expenditure for both food at home and food away from 
home.
    So in 1952 the farm share of that consumer expenditure 
dollar was 42 percent. In 1999, it was 20 percent. So it 
clearly has gone down, and it's gone down as industries have 
concentrated.
    The problem with drawing causation effect is there is a lot 
of other things have happened too. Over the last 50 years, 
we've seen dramatic changes in the structure of our economy. 
We've seen women enter the work force. We've seen the demand 
for convenience foods. We've seen the movement to eat food away 
from home. We've seen the development of microwave ovens and 
microwavable food.

                       INCREASED MARKETING COSTS

    Mr. Collins. What we've seen is a tremendous increase in 
the marketing costs that go into the retail price. And those 
marketing costs are coming because the food that is sold today 
is not the same food that was sold in 1950. It has a whole 
bunch of services and characteristics associated it with it 
that have changed over time to make it fresher, to make more 
convenient, and to make it different.
    I mentioned the statistic earlier that we were having 1,000 
new food introductions in 1970, and we had 16,000 new food 
introductions in mid 1990s, and there was also research and 
development costs associated with all of these food 
introductions.
    Senator Dorgan. How many different companies, Mr. Collins?
    Mr. Collins. I'm sure it is a much fewer number of 
companies.
    Senator Dorgan. How many companies do you think market 
grains of the cereals at the grocery stores?
    Mr. Collins. My guess is the four firm concentration ratio 
is about 85 percent.
    Senator Dorgan. There's a lot of different products, aren't 
there?
    Mr. Collins. There's a lot of different products.
    Senator Dorgan. Highly concentrated on the grocery store 
shelf.
    Mr. Collins. All of those different products add to the 
cost to the consumer through the research and development in 
bringing that kind of product to market.
    Senator Dorgan. I understand and I appreciate your 
response. When I started economics, we also learned that you've 
got to have empirical data to sustain a conclusion. On the 
other hand, when you see cars drive at night with their lights 
on, one can conclude it's because it's dark out. And----
    Mr. Collins. Based on statistics.
    Senator Dorgan. Yeah. Let me ask one final question, if I 
might, of Mr. Nannes. I would like to submit a list of 
questions to the panel. I appreciate the testimony of the 
panel.

                              CLAYTON ACT

    Mr. Nannes, do you think there is reason or need to take a 
look at changing section 7 of the Clayton Act in any way? I 
think your testimony suggested that you think it is working and 
perfectly usable. Do you see a need for change at this point?
    Mr. Nannes. Senator, my personal view would be not to 
change section 7. The statute has been changed a couple of 
times over the years. What it forces people to do then is to 
substantially recalibrate the extent of permissible and 
impermissible transactions and makes business much less 
certain.
    Right now we have a series of guidelines that have been 
published by the Federal agencies and have been out there in 
the marketplace for quite a while. I think they are appropriate 
in that they set certain benchmarks of concentration levels 
that prompt concern, but properly direct the agencies, once 
they're looking at a transaction, to try to assess as best we 
can the likely competitive effects of the transaction.
    It would be difficult, I think, to change it without having 
very substantial ripple effects across the broad range of not 
only U.S. companies but also foreign companies that have to 
deal with our antitrust laws.
    Senator Dorgan. Mr. Chairman, we have two other panels, and 
I appreciate the testimony of this panel. I must say in 
conclusion a whole lot of farmers and ranchers feel they are 
victims at this point to a marketplace that is not working to a 
marketplace that is highly concentrated both in which they sell 
their products and from which they buy their products.
    They look to us to be the referees in determining what is 
competitive and anticompetitive behavior. And the purpose of 
holding this hearing is to plung the depths of some of these 
topics, and I appreciate your testimony today.
    Senator Cochran. Thank you, Senator. We appreciate your 
being here. Thank you very much for your contribution to our 
hearing.
    We will now call our second panel to the witness table, and 
I will introduce them as they are coming up to take their 
places.
    Mark Dopp is Senior Vice President and General Counsel of 
the American Meat Institute. William Roenigk is the senior Vice 
President of the National Chicken Council. John Caspers is Vice 
President of the National Pork Producers Council. David Reiff 
is representing the National Grain and Feed Association. And 
Fred Stokes is president of the Organization for Competitive 
Markets.
    We have copies of the statements that have been prepared by 
the members of this panel. We will print those statements in 
the record in full and encourage our witnesses to summarize 
their statements so we will have an opportunity to discuss the 
issues with you in our question period.

                           PREPARED STATEMENT

    I might say also that Senator Durbin of Illinois was here 
at the beginning of this hearing and has an opening statement 
which we will file and make a part of the record in full.
    [The statement follows:]

            Prepared Statement of Senator Richard J. Durbin

    Mr. Chairman, Senator Kohl, thank you for holding this important 
hearing today. First, I'd like to welcome David Reis (pronounced rice) 
to this morning's hearing. He will testify later today--on the third 
panel--about his experiences with a livestock cooperative in central 
and southern Illinois.
    David is a fifth generation family farmer from Ste. Marie in Jasper 
County, Illinois and the president-elect of the Illinois Pork Producers 
Association.
    I invited David to come to Washington and to testify today because 
of his active involvement in American Premium Foods Co-Op. Over a year 
ago, David led a group of pork producers to Capitol Hill to discuss 
ways to improve farm prices and the rural economy. He presented an 
innovative co-op concept that would ultimately benefit more than 240 
independent Illinois pork producers and help stabilize a shaky rural 
economy.
    Just a few years ago, our nation's pork producers had to struggle 
with historic low hog prices that put many producers out of business. 
Value-added ventures, such as American Premium Foods, will help small 
to medium-sized producers compete in the ever-changing pork industry by 
ensuring market access, reducing price risk, and generating greater net 
returns.
    As you will hear from David, starting a new business isn't easy. 
David's story, determination, and common sense approach to marketing 
agricultural products are good examples of a farmer who is embracing 
modern, 21st Century solutions to old problems.
    In addition to David Reis, I want to say a word of welcome to 
another Illinoisan, Dan Kelley. Dan is the Chairman of the Board of 
Growmark and is from Normal, Illinois. We all recognize Growmark as an 
example of a successful and well-established cooperative.
    I believe it is a testament to the cooperative system that we have 
two Illinois representatives here today. Nationally, there are 
approximately 48,000 cooperatives generating more than $500 billion in 
annual economic activity. Although this concept of producers working 
together is not new, many farmers are finding innovative ways to come 
together in order to improve their position in the marketplace.
    To help encourage the establishment of value-added cooperatives, I 
will be working with my colleague, Sen. Charles Grassley, to fully fund 
a Federal grant that helps cover start-up costs for these businesses. 
These grants are the only funding dedicated to value-added businesses. 
Unfortunately, as currently written, USDA's fiscal year 2002 budget 
does not include adequate funding to cover start-up costs for these co-
ops.
    Currently the Department has designated $10 million for a round of 
these value-added grants. This doesn't begin to cover the growing 
demand. More than 200 applications totaling at least $55 million were 
recently submitted by cooperatives from throughout the country.
    As we look at ways to address concentration in agriculture, we 
should not forget that innovative cooperatives are a constructive 
answer to helping individual producers maintain competitiveness. User-
owned, user-controlled, and user-benefitted cooperatives can help 
family farms survive and thrive.
    Thank you, Mr. Chairman. I look forward to working with you and the 
Subcommittee to address the needs of our nation's cooperatives.

    Senator Cochran. He also wanted me to extend a special 
welcome to Mr. David Reis, who is going to be a member of our 
third panel.
    So let's begin with panel number 2. Mr. Dopp, you may 
proceed.

      STATEMENT OF MARK D. DOPP, SENIOR VICE PRESIDENT AND 
            GENERAL COUNSEL, AMERICAN MEAT INSTITUTE

    Mr. Dopp. Thank you, Mr. Chairman, other members of the 
subcommittee. Since 1906, AMI has represented the nation's meat 
and poultry industry, which today employs nearly 500,000 
individuals and contributes about $90 billion in sales to the 
nation's economy.
    Along AMI's member companies, 60 percent are small family-
owned businesses employing fewer than 100 persons. These 
companies operate in one of the toughest, most competitive, and 
certainly the most scrutinized sectors of the economy. In fact, 
adhering just last fall, a former USDA general counsel stated 
the meat industry is probably the most studied industry in the 
U.S. economy.
    Food production, distribution, and marketing sector has 
undergone a phenomenal change in the past decade. Consumers 
demand a constant and geographically dispersed supply of 
consistent quality, low-priced products. This demand has driven 
consolidation in the retail sector and, in turn, food 
manufactures have consolidated in an effort to keep peace with 
the retail and food service customers.
    We see similar trends in the healthcare, financial 
services, high tech, and other industries.
    Tough competition in the meat industry is driving 
businesses to operate more efficiently and more aggressively 
than ever before. My member companies believe consolidation is 
a response to intense competition and marketplace realities. It 
is not part of some sinister plot.
    Mr. Chairman, mergers and acquisitions are viewed by 
today's business and investment community as generally good 
developments because they help sustain or strengthen 
businesses, they reserve jobs, and often they keep communities 
financially healthy.
    The fact is it is better for a struggling meat packer to 
merge or be acquired and stay in business than for that company 
to cease operations costing all of the employees their jobs.
    This fact is especially true in smaller rural communities 
where meat packing company may be one of the community's larger 
employers. Against this economic backdrop, AMI opposed the 
various agribusiness antitrust bills that have been introduced 
in recent years. Bills that would create new and different pre-
merger review processes and antitrust enforcement procedures 
for the agribusiness sector. Allow me to comment on a few 
specifics.
    One idea would allow USDA to oppose the pre-merger review 
opinions of the Justice Department, thus pitting one Federal 
agency against another. This idea conflicts with the recent 
recommendation of the international competition policy advisory 
committee and it would also give USDA access to pre-merger 
review documents containing extremely sensitive information 
about the affected companies.
    Last year GAO issued a report highly critical of grain 
inspection Packers and Stockyards Administration. And given 
those criticisms, it seems ill advised to confer more authority 
on that agency.
    Although the bills at issue are intended to save the rural 
Americans, we believe they will have the opposite affect. A 
merger or acquisition often is the only way to preserve a sales 
outlet or input supplier for America's farmers. And bills that 
seek to bar such mergers would have a chilling affect on the 
already financially ailing agribusiness sector.
    Stalling mergers could impede the flow of capital 
investment to the agribusiness community and could drive 
struggling businesses to close their doors. This hurts not only 
the customers and the input suppliers of America's farmers, but 
those farmers as well.
    Some bills also would affect contracting. Contracts are 
important to agribusiness and to farmers because they help 
provide stability for buyers and for sellers.
    For example, a bank may be more likely to approve a loan to 
a farm with contracts for its commodities, thus helping to 
finance expansion and efficiency. Currently such contracts are 
already subject to a host of Federal and State statutes.
    Legislation has been suggested that would set special 
requirements for contracts between farmers and agribusinesses 
and, in effect, would allow government officials to participate 
in the contracting process. This concerns us.
    It is one thing to call for a fair and legal contract, it 
is quite another to impose unique and ambiguous standards on 
one class of business that stem from a fundamental lack of 
understanding.
    In that regard, we commend USDA's agricultural marketing 
service recently for posting on its web site information for 
farmers and others about how to understand the growing trend in 
contracting. In fact, educational efforts are probably a far 
better solution than legislation in this case.
    Also of concern is the impact these bills will have on 
trade. Exports are key to the growth and viability of the 
livestock and meat industry. But competition is fierce. For 
example, U.S. exporters struggling for a share of markets in 
the Far East face very difficult competition from Canadian, 
Australian, New Zealand, Danish, and Argentine meat packers.
    To the extent that the U.S. government adopts policies that 
increase the regulatory burden on American meat producers and 
processors or impedes structural adjustments that promote 
efficiency, U.S. meats become more costly and less competitive 
in foreign markets, and we risk losing market share.

                           Prepared statement

    In conclusion, the meat industry is but one of numerous 
sectors in the agribusiness community that would be hurt by the 
bills at issue. I urge you not to single out the agribusiness 
community for a different approach to pre-merger reviews and 
antitrust enforcement. Thank you for the opportunity to appear 
today, and I'd be happy to answer any questions.
    [The statement follows:]

                   Prepared Statement of Mark D. Dopp

    My name is Mark Dopp and I am senior vice president and general 
counsel of the American Meat Institute. AMI has provided service to the 
nation's meat and poultry industry--an industry that employs nearly 
500,000 individuals and contributes about $90 billion in sales to the 
nation's economy--for more than 94 years.
    Among AMI's member companies, 60 percent are small, family-owned 
businesses employing fewer than 100 individuals. These companies 
operate, compete, sometimes struggle and mostly thrive in what has 
become one of the toughest, most competitive and certainly the most 
scrutinized sectors of our economy: meat packing and processing. In 
fact, at a hearing just last fall, a former USDA General Counsel stated 
that the meat industry is probably the most studied industry in the 
U.S. economy. I believe my member companies, who have cooperated with 
USDA, the General Accounting Office and many other interest groups and 
academic researchers on numerous studies, would agree with that 
assessment.
    The food production, distribution and marketing sector has 
undergone phenomenal change in the past decade. Consumers today demand 
a constant and geographically dispersed supply of consistent quality, 
low-priced products. This demand has driven consolidation in the retail 
sector. Whether it's Home Depot for handyman supplies or McDonalds for 
burgers or Safeway for groceries, the American consumer has driven and 
benefited from this retail consolidation. In turn, food manufacturers 
have consolidated in an effort to keep pace with their retail and 
foodservice customers. And many that supply goods or services to food 
manufacturers--such as farmers, equipment or ingredient suppliers--have 
also consolidated. We see the same trends in the healthcare, financial 
services, pharmaceutical, telecommunications, airline, banking, 
automobile manufacturing and high-tech industries.
    My member companies would argue that consolidation is a reaction to 
intense competition and marketplace realities. It is not--as some have 
suggested--some sinister plot in and of itself. Tough competition in 
the meat industry is driving businesses to operate more efficiently and 
more aggressively than ever before. And sometimes, that competition has 
meant that businesses choose to merge or to acquire or to be acquired 
in order to stay in business.
    Mr. Chairman, mergers and acquisitions are viewed by today's 
business and investment community as generally good developments, 
because they help sustain or strengthen businesses, they preserve jobs 
and many times they keep communities financially healthy. Let's face 
it--it is better for a struggling meatpacker to merge or be acquired, 
and stay in business, than for that company to cease operations and 
release all of its employees. This fact is especially true in smaller, 
rural communities, where a meatpacking company may be one of the 
community's larger employers.
    Against this economic backdrop, AMI's Board of Directors strongly 
opposes the agribusiness antitrust bills that have been introduced in 
recent years that would create new and different premerger review 
processes and antitrust enforcement procedures for the agribusiness 
sector.
                  REENGINEERING ANTITRUST ENFORCEMENT

    One concept that has been discussed would give USDA the ability to 
oppose the pre-merger review opinions of the Justice Department, thus 
pitting one Federal agency against another. This idea conflicts with 
the recent recommendation of the International Competition Policy 
Advisory Committee (antitrust experts appointed by the U.S. Department 
of Justice).
    Such a process would add uncertainty to the application of 
antitrust statutes. It would also give USDA access to pre-merger review 
documents containing extremely sensitive information about the affected 
companies (known as Hart-Scott-Rodino filings). Sharing such 
proprietary information with yet another government agency may well 
jeopardize its confidentiality, damaging the affected companies, their 
shareholders and investors, as well as their suppliers and customers.
    GAO last year issued a report highly critical of USDA's Grain 
Inspection/Packers and Stockyards Administration (GIPSA). Given those 
criticisms of GIPSA, I suggest that any efforts to confer greater 
authority or responsibilities to that agency are, if not ill advised, 
certainly ill timed.
    Other bills have proposed even broader changes to antitrust 
enforcement, affecting not only agribusiness, but also agriculture-
related businesses. Specifically, those bills would affect all 
businesses that process agricultural commodities, as well as those who 
do business with the agriculture sector. For example, it has been 
proposed that businesses as diverse as banks, textile manufacturers, 
food processors, supermarkets, paper mills, tobacco companies, seed 
companies and farm machinery manufacturers to file separately with USDA 
(in addition to the USDOJ) for pre-merger review and approval. These 
businesses would be required to disclose highly confidential 
information about contractual relationships and business alliances with 
USDA each year.
                        UNINTENDED CONSEQUENCES

    Although these types of bills are intended to assist rural 
Americans, we believe they will have quite the opposite effect. It is 
important to remember that a merger or acquisition often is the only 
way to preserve a sales outlet or an input supplier for America's 
farmers. We believe these bills will have a chilling effect on the 
already financially-ailing agribusiness sector by creating obstacles to 
mergers and requiring the sharing of proprietary business information. 
Stalling mergers will impede the flow of capital investment to the 
agribusiness community and may well drive struggling businesses to 
close their doors rather than wade through a new morass of complicated 
pre-merger approval processes. The customers and input-suppliers of 
America's farmers will be hurt, and this will hurt, not help, America's 
farmers.
             MANDATING NEW TERMS FOR AGRIBUSINESS CONTRACTS

    A growing number of transactions between agribusinesses and farmers 
involve contracts. Provisions in these contracts cover everything from 
the quality of the agricultural commodity to its method or date of 
delivery to its volume to its price. Contracts provide a degree of 
stability for both buyers and sellers. For example, banks may be more 
likely to approve loans to farmers who hold contracts for their 
commodities; thus farmers benefit from the financial security offered 
by contracts. Currently, contracts between agribusinesses and farmers 
are developed on a case-by-case basis, guided by the Uniform Commercial 
Code and applicable provisions of the Packers and Stockyards Act, the 
Perishable Agricultural Commodities Act and other Federal and State 
statutes. Legislation to create new requirements for contracts between 
farmers and agribusinesses will have significant, negative legal and 
business implications.
    Within some states and here in the U.S. Senate, some are 
considering legislation that would set special new requirements for 
contracts between farmers and agribusinesses. In general, the bills 
would mandate all contracts between farmers and agribusinesses to 
include a ``clear written disclosure statement'' describing material 
risks of the contract to the farmer. They would also require that the 
disclosure statement meet a host of ``readability requirements,'' such 
as ``ten-point modern type, one-point leaded,'' being written in 
``clear and coherent language using words and grammar that are 
understandable by a person of average intelligence, education and 
experience within the industry'' and the inclusion of a ``mandatory 
cover page.'' The mandatory cover page must include this statement, 
``READ YOUR CONTRACT CAREFULLY. This cover sheet provides only a brief 
summary of your contract. This is not the contract and only the terms 
of the actual contract are legally binding. The contract itself sets 
forth, in detail, the rights and obligations of both you and the 
contractor or processor. IT IS THEREFORE IMPORTANT THAT YOU READ YOUR 
CONTRACT CAREFULLY.''
    Some of the state bills also provide for each state attorney 
general or other, suitable official to review agricultural contracts 
and certify that they meet the requirements of the law. In the Senate 
bill, the Secretary of Agriculture would have this responsibility. The 
bill would also void all provisions of any agricultural contract that 
are confidential. We have serious concerns about the ambiguous 
provisions of this kind of legislation. It is one thing to call for a 
fair and legal contract. It is quite different to impose unique and 
ambiguous standards for one class of business that frankly stem from a 
lack of understanding. USDA's Agricultural Marketing Service should be 
commended for recently posting on its website new information for 
farmers and others on how to understand the growing trend of 
contracting. In fact, educational efforts are probably a far better 
solution than legislation in this case.
                 the importance of international trade
    Exports hold the key, in fact will be the primary engine, to the 
future growth and viability of the U.S. livestock and meat industry. 
Whether we like it, the long-term viability of the sector depends on 
our ability to compete in world markets. U.S. exporters struggling for 
a share of many of the promising, newly invigorated markets in the Far 
East are facing ferocious competition from Canadian, Australian, New 
Zealand, Danish and Argentine meat marketers. To the extent the U.S. 
government adopts policies that increase the regulatory burden on U.S. 
meat producers and processors or impede structural adjustments that 
promote efficiency, U.S meats become more costly and less competitive 
in foreign markets and we risk losing all-important market share.
    We should remain focused on the fact that we are participating--or 
attempting to participate--in a global marketplace. Misguided 
decisions, intended to benefit one segment of the industry, could 
easily backfire to the detriment of the entire industry if such actions 
have the ultimate effect of pricing our meat products out of 
international markets.
                               CONCLUSION

    The meat industry is but one of numerous sectors in the 
agribusiness community that would be hurt by antitrust or contract 
reform bills of the type begin contemplated. In addition to AMI, these 
bills are opposed by organizations as diverse as the antitrust section 
of the American Bar Association, to the National Association of 
Manufacturers, the U.S. Chamber of Commerce, the Grocery Manufacturers 
of America, the Food Marketing Institute and virtually all food and 
commodity processing organizations. I urge you not to single out the 
agribusiness community for a different approach to premerger reviews 
and antitrust enforcement. Thank you for the opportunity to appear 
before you today.

    Senator Cochran. Thank you. Mr. William Roenigk, Senior 
Vice President of the National Chicken Council. Mr. Roenigk, 
you may proceed.

        STATEMENT OF WILLIAM ROENIGK, SENIOR VICE PRESIDENT, 
                     NATIONAL CHICKEN COUNCIL

    Mr. Roenigk. Good morning. Thank you, Mr. Chairman, Senator 
Dorgan, and the other committee members for the opportunity to 
present the National Chicken Council's comments regarding 
agricultural market concentration. I will summarize my written 
comments.
    I am Bill Roenigk, Senior Vice President of the National 
Chicken Council. Our organization represents companies that 
produce, process, and market about 95 percent of the birds in 
the United States. Almost without exception, these firms are 
vertically integrated from the live bird to delivery of 
consumer-ready products to the market.
    These companies contract with independent farmers to have 
them manage breeder hatchery supply flocks and grow flocks of 
broilers. This arrangement has been the standard business model 
for the U.S. broiler industry since the late 1950s.
    Last year's production of broilers was 20 times the amount 
in 1950. We believe such an impressive record of consistent 
growth is a good evidence that the system is serving well 
consumer, contract growers, and broiler companies.
    At the same time, we've experienced this expansive 
production, the broiler industry, like many other parts of 
agriculture and agribusiness, continue to move towards fewer 
but larger survivors. There are currently about 45 
commercially-sized broiler companies.
    As consolidation occurs, however, very few operating assets 
cease production. Also I'm not aware of contract growers having 
their operations disrupted by this trend towards consolidation. 
If we could use GIPSA's latest annual report as a gauge of 
performance, I believe if you review that, you will conclude, 
like I do, that the industry's record is excellent, especially 
for the larger, more established firms.
    There are many factors and pressures driving the U.S. 
Poultry industry towards fewer but larger companies. Continued 
intense competition within our own business and with competing 
red meat industry requires companies to have the financial 
resources to sustain operations during prolonged periods of 
less than satisfactory levels of financial returns. That means 
losses.
    The customers in the food sectors, whether they are 
supermarkets, restaurants, institutional buyers of raw material 
are not only becoming fewer and larger but more and more these 
companies are emphasizing centralized purchasing of products 
such as chicken.
    As intense as the domestic market is, I believe the 
international markets are just, if not more so, demanding of 
the suppliers to the global market. These companies must be of 
adequate size to provide significant quantities of products. 
Being able to accept certain levels of market risk in the 
international markets also tilts the chances for success 
towards larger firms.
    The dynamics of globalization are changing world markets. 
Dr. Bruce Babcock with Iowa State University last month told 
the Senate Agriculture Committee that the real action for U.S. 
agriculture exports is no longer grain and oil seed commodities 
but rather value added further processed products such as 
poultry, red meat, and similar products.
    The National Chicken Council believes with the right 
regulatory and legislative and economic environment, the U.S. 
Poultry industry can continue to build exports that will help 
strengthen U.S. agriculture and the general economy.
    Last year our industry exported over 18 percent of our 
production. I believe within 5 years more than one out of four 
pounds of U.S. chicken will be exported.
    Also last month Secretary of Agriculture, Ann Veneman, 
expressed views similar to Dr. Babcock's. She noted that the 
sectors or the links in a food chain are more interconnected 
than ever because we have changing consumer markets demanding 
increasingly challenging the traditional ways of doing 
business.
    Technology in many areas is transforming world markets and 
global relationships. The United States, according to the 
secretary, must have agricultural producers who can rapidly 
respond to the changes in global markets and all involved 
should recognize the interdependencies of the links in the food 
chain.

                           Prepared statement

    I believe Dr. Babcock and Secretary Veneman are correct in 
their assessments. It is time for us all to work across the 
links in the food chain to grow the opportunities for all of 
us.
    I appreciate the opportunity to share the National Chicken 
Council's views with the committee.
    [The statement follows:]

                Prepared Statement of William P. Roenigk

    Thank you, Chairman Cochran, Senator Kohl, and Committee Members 
for the opportunity to present the National Chicken Council's views and 
recommendations regarding the very important issue of agricultural 
market concentration. The National Chicken Council appreciates the 
Chairman's invitation to be part of this very vital discussion. I am 
William P. Roenigk, Senior Vice President of the National Chicken 
Council.
    The National Chicken Council represents companies that produce and 
process about 95 percent of the young meat chickens (broilers) in the 
United States. These vertically-integrated firms contract with growers 
to raise the live birds for processing and contract with breeder 
farmers to supply fertile eggs for hatching. The system of production, 
processing and marketing is highly coordinated and operates using the 
just-in-time method. Given the relatively short time from day-old chick 
to market-ready chicken, it is critical that such a system be in place 
and that all parts of the system operate in concert.

                          VERTICAL INTEGRATION

    During the 1950s and 1960s broiler production and processing 
evolved into the vertically-integrated industry structure that has been 
the standard business model for five decades. Last year more than 8 
billion broilers weighing over 41.5 billion pounds, liveweight, were 
produced. This production level last year was 20 times the amount in 
1950. Few, if any, agribusinesses can match this record of growth. 
Success for achieving this amazing growth is based on providing 
wholesome, high-quality food while making chicken a better food dollar 
value essentially year after year. We believe the system has well 
served consumers, growers, and processors.
    Contract growers and processors are mutually dependent on each 
other. It is in neither party's interest to jeopardize the economic 
viability of the other party. Almost one-half of all contract broiler 
growers have grown for the same processor for at least ten years and an 
additional 25 percent have contracted with the same company for five to 
nine years. Many growers have requested the opportunity to build more 
growout housing so that they can expand their operations. Further, most 
processors have waiting lists of other farmers who wish to begin 
growing broilers. The stability and success of the contract system for 
broilers has been good for agriculture.

                          REGULATORY AUTHORITY

    The contractual relationship between broiler growers and the 
broiler firms is regulated by USDA's Grain Inspection and Packers and 
Stockyards Administration's (GIPSA). Periodically, this relationship is 
reviewed by Congress. In 1987, the administrative enforcement authority 
(including civil money penalty authority) of GIPSA with respect to 
transactions involving live poultry and poultry products was fully and 
carefully considered by Congress. Congress declined to provide more 
authority to GIPSA for any violations of the Packers and Stockyards Act 
(P&S Act) other than those relating to prompt payment and the statutory 
trust for live poultry dealers. NCC is not aware of conditions that 
have changed or developments that have occurred since 1987 that would 
warrant Congress reversing its decision.
    Also, at certain times GIPSA argues that it needs authority to 
proceed administratively against, and impose civil penalties on, 
poultry processors who violate the P&S Act's prohibition against unfair 
or deceptive practices. GIPSA says such authority is needed because it 
has this authority already for the red meat industry.
    As previously noted, poultry is produced, processed, and marketed 
in a very coordinated, vertically-integrated system. This business 
model's structure is distinctly different than the methods used in many 
other agribusinesses. Because young meat chicken is produced, 
processed, and marketed in a distinctly different system and because 
the vertically-integrated firms have successful, on-going contractual 
relationships with their growers, it is unnecessary to burden business 
with additional government regulations.
    In short, unlike the situation in the production systems that are 
not closely-linked from production to processing to markets, private 
actions for breach of contract under common law contract principles, as 
well as under statutory provisions protecting growers, are available to 
police relationships among poultry growers, dealers, and processors, 
thereby going a long way to ensure fair dealing for all. This legal 
point about contractual obligations is important, but often overlooked 
in the discussion of the broader issue of regulating contractual 
relationships.
    GIPSA, together with other government agencies, has more than 
adequate authority to ensure fair dealing within the poultry industry. 
First, GIPSA has authority to issue cease and desist orders and levy 
civil penalties for violations of the P&S Act's protections regarding 
prompt payment and the statutory trust. Second, GIPSA may investigate 
and refer to the Department of Justice for enforcement in the Federal 
Courts other violations of the P&S Act involving live poultry (for 
example, weighing practices and contract compliance). Finally, the P&S 
Act gives the Federal Trade Commission jurisdiction over marketing 
practices involving poultry products. There exists ample oversight and 
authority for poultry.
    Regarding broiler companies performance with respect to GIPSA 
regulations involving contract growers, the 2000 Annual Report of the 
Grain Inspection, Packers and Stockyards Administration report, we 
believe, gives the industry high marks. For example, GIPSA investigated 
during fiscal year 2000 the operations of 97 live poultry dealers. 
Nearly 44 percent of these investigations were the result of complaints 
received from contract growers. GIPSA investigations are designed to 
determine whether the contract settlement terms of live poultry dealers 
throughout the United States are deceptive or unfair to the growers who 
grow poultry under these agreements. According to the annual report, 
one violation was found and the company resolved the issue through a 
consent agreement.
    Regarding protection for contract growers to be assured they 
receive payments, there are safeguards. In February 1988, the P&S Act 
was amended to include a statutory trust provision similar to the 
packer trust giving payment protection to live poultry growers and 
sellers. Since the 1988 amendments, live poultry producers have been 
paid $7.5 million under the statutory trust provisions. It is important 
to note, however, that during the twelve years since 1988 tens of 
billions of dollars in contract payments have been made on a regular, 
steady basis whether the market for chicken was robust or less-than-
robust. The poultry trust payouts reflect claims for unpaid purchases 
of all types of poultry, including broilers, turkeys, and spent fowl.
    GIPSA in its annual report said ``(i)t (trust payouts) primarily 
shows the failure of small regional firms that have ceased operations 
and failed to pay growers or poultry sellers. It does not accurately 
portray an economic trend for the industry as a whole but only reflects 
a sum of the failures of small marginal operations. The national firms 
are large, completely integrated operations that are relatively stable 
financially. Any changes that occur are the results of mergers or sales 
of the total operation and do not usually result in losses to poultry 
growers or sellers.'' In fiscal year 2000, one poultry trust complaint 
was received by GIPSA, resulting in over $250,000 in payments to live 
poultry producers, the agency noted. Given the experience since 1988, 
it can be reasonably concluded that the statutory trust provision for 
poultry works and does provide adequate protection.

                            CHANGING MARKETS

    Although the U.S. poultry industry does not have the same degree of 
market concentration as certain other meat processing industries, it 
clearly is experiencing the same marketplace dynamics that are 
occurring in many, if not most, food sectors. Intense competition 
within the chicken business and within the competing meat complex 
requires companies who want to be survivors to more carefully and 
adroitly analyze the changing markets. Then, of course, the real 
challenge is to convert the results of the analysis into a successful 
marketing plan.
    Market pressures to meet the requirements of large national food 
chains, whether supermarkets or foodservice, is one major factor 
driving chicken companies to expand through acquisitions, resulting in 
a continued trend toward industry consolidation. However, the pressure 
is not just domestic. International demands are also increasing the 
global pressures on U.S. chicken companies.
    A recent statement to the Senate Agricultural Committee by Dr. 
Bruce A. Babcock/Center for Agricultural and Rural Development, Iowa 
State University summarized this situation. He told the Committee. . . 
. ``(a) significant change that has taken place over the last 10 years 
is the greater integration of world agricultural markets. Increased 
integration means that agricultural commodities will flow more readily 
to markets that offer a price premium. From an economist's perspective 
this means less price variability across markets and less price 
variability within domestic markets. From agriculture's perspective, 
greater integration means more competition and a greater need to 
deliver products that the world's consumers want. A farm bill that 
gives U.S. agriculture the right incentives to deliver the kinds of 
food products overseas customers want will enhance the long-term health 
and competitiveness of the sector.''
    Dr. Babcock also explained the future success for U.S. agriculture 
is likely to be capturing the trend toward more exports of value-added 
products, such as poultry and other animal products, rather than 
traditional commodities. To meet anticipated strong world demand, U.S. 
poultry and livestock producers must be competitive with favorable 
costs and high-quality products. In his testimony, he expressed his 
conclusion as follows, ``(c)onsider the economic changes that have 
taken place over the last 10 years. Ten years ago, program commodities 
broadly defined (grains, feeds cotton, oilseeds and oilseed products) 
accounted for 64 percent of the value of agricultural exports. In 2000, 
they accounted for 49 percent. We project they will account for even 
less in the future. The United States faces increased competition in 
bulk grain and oilseed export markets. Export demand for higher-value 
commodities, such as meat, processed foods, and fruit responds directly 
to increased per-capita income levels. Thus, continued world economic 
growth will result in relatively greater demand for U.S. exports of 
these higher-value commodities.'' \1\
---------------------------------------------------------------------------
    \1\Bruce A. Babcock, Center for Agricultural and Rural Development, 
Iowa State University. Testimony Before The United States Senate 
Committee on Agriculture, Nutrition and Forestry, April 25, 2001.
---------------------------------------------------------------------------
    The important point is that the United States must maintain and 
improve a regulatory, legislative, and economic environment that will 
permit agribusiness to create, connect, and grow to meet this world 
demand for animal agriculture products.
    A similar conclusion was recently expressed by Secretary of 
Agriculture Ann M. Veneman when she spoke at a recent agribusiness 
forum. The Secretary explained that the changing and increasingly 
demanding global market for U.S. agriculture products is impacting the 
basics of American agriculture. Last month she said, ``(s)eventy years 
later, it no longer makes sense to speak of the ``farm economy'' as if 
it exists in some kind of vacuum. Today we must look at the entire food 
chain. The various sectors of the food economy are more interconnected 
than they've ever been, and they grow more interconnected every day.
    U.S. agriculture operates in a global, high-tech, consumer-driven 
environment. Capital and information flow instantly between buyer and 
seller. And changing consumer demands are challenging existing 
marketing institutions and traditional ways of doing business.''
    The Secretary noted that multinational companies source raw 
materials from all over the world, process them and then sell 
throughout the world. Increasingly, she added, the global marketplace 
is being driven by consumers who demand quality, safety, health, and 
convenience, and who grow ever-more affluent. These globally-oriented 
firms need to create and maintain flexible relationships, strategic 
partnerships, and other alliances across the old boundaries that used 
to separate producers from processors from retailers, the Secretary 
explained.
    Transforming world markets, Secretary Veneman said, are the 
technological improvements in transportation, storage and food science. 
Information technology is also vastly improving efficiency in all links 
of the food chain. Biotechnology is generating new products that make 
farmers more productive and consumers healthier. Further, the Secretary 
said many links of the food chain have changed, and will continue to 
change. For the U.S. broiler industry as it works to meet the stepped-
up demands of the marketplace, Secretary Veneman's analysis could not 
be more correct.
    Although Secretary Veneman's focus was on agricultural policy her 
analysis and recommendations clearly apply to the policy issues 
involving agricultural market concentration. She summarized the current 
agricultural market situation by noting that ``(a)n agricultural policy 
for the 21st century should be one that can respond to the rapidly 
changing structure of global markets. It should be one that recognizes 
the interdependencies of the food chain. The success of input 
suppliers, farmers, processors, distributors, retailers, and consumers 
all depend on one another. The best path to an agricultural policy 
under which each of these segments of the food industry can prosper is 
to have each segment come to the table and work together to design the 
next generation of agricultural policies.'' \2\ We agree.
---------------------------------------------------------------------------
    \2\ Ann M. Veneman, Secretary of Agriculture, The Sparks Companies 
9th Annual Food & Agricultural Policy Conference, April 17, 2001, 
Washington, DC.
---------------------------------------------------------------------------
                               CONCLUSION

    Today's and tomorrow's market forces compel U.S. agribusiness to 
work across the links in the food chain to grow the opportunities for 
all. It is not a time to legislate and regulate about how best to 
arrange the links in the food chain.
    The National Chicken Council is pleased to have this opportunity to 
provide our input. We look forward to working with the Subcommittee and 
other interested groups to address the issue of agriculture market 
concentration in a thoughtful, productive way.

    Senator Cochran. Thank you very much.
    Mr. Caspers, welcome.

     STATEMENT OF JON CASPERS, VICE PRESIDENT, NATIONAL PORK 
                       PRODUCERS COUNCIL

    Mr. Caspers. Thank you, Mr. Chairman and members. I am a 
pork producer from Swaledale, Iowa, and serve as Vice President 
of the National Pork Producers Council.
    Today I'm representing America's pork producers, and I'm 
pleased to discuss with you what we believe is a growing 
critical need for Federal Government investment and action 
regarding agriculture concentration.
    Agricultural concentration is a difficult and emotionally 
charged issue. Many producers are concerned about their ability 
to continue to compete and maintain market access in a hog 
market that is experiencing increasing levels of concentration.
    We need your help and understanding the relevant issues in 
order to take appropriate actions to assure an efficient 
marketplace that accurately rewards producers while providing 
an abundant supply of affordable, safe, and nutritious pork.
    The concentration in the pork packing sector is measured by 
the four firm concentration ratio or CR4, grew from 32 percent 
in 1985 to 56 percent in 1998. GIPSA's 2000 annual report shows 
a CR4 of 56 in 1999. And the eight firm concentration ratio now 
stands in excess of 75 percent.
    While not guaranteeing--not a guarantee of non-competitive 
conduct that increases consumer prices and producer prices, 
these levels and their trends increase the possibility of such 
conduct and provide ample incentive for ongoing research and 
heightened vigilance.
    The CR4 for the hog production segment has grown from 
negligible levels in the early 1980s to about 18 percent 
following the 1999 acquisition of Carroll's Foods and Murphy 
Family Farms by Smithfield and the 2000 purchase of Lundies by 
Premium Standard Farms.
    Vertical integration of packers owning hogs has grown from 
an estimated 6.4 percent in 1994 to roughly 24 percent today. 
The recent efforts of Tyson Foods to buy IBP brought this topic 
back to the forefront. We'll also submit a research paper 
commissioned by NPPC as part of the official record for this 
hearing. I believe it provides valuable insight into the 
relevant economic issues that should be considered in cases of 
mergers, especially those that involve vertical integration as 
well.
    In addition to increasing vertical integration, vertical 
coordination through marketing contracts is increasing rapidly. 
As recently as 1994, 71 percent of hogs were sold in the cash 
market and only 20 percent were sold using a formula price. In 
January 2001, 82.7 percent were purchased through some type of 
contractual marketing agreement and only 17.3 percent were cash 
market purchases.
    This trend has reduced the size of the negotiated hog 
market substantially and caused many concerns about the 
efficiency and accuracy about today's price discovery process. 
These concerns become even more acute when one considers that 
the price is 17 percent of the hogs sold through cash market 
transactions, directly sets the price for the 54 percent of all 
hogs that are sold on formula price contracts.
    Firms are getting larger and controlling larger market 
shares at every level of the pork industry, including 
production, packing, processing, and retailing.
    There's no doubt that this increased concentration 
increases the possibility for non-competitive behavior. To that 
end, the Federal Government must be diligent and aggressive in 
enforcing the Sherman Act, the Federal Trade Commission Act, 
the Clayton Act, and the Packers and Stockyards Act.
    Attacking perceived agricultural concentration problems 
with a regulatory or judicial acts may not, however, be as 
beneficial as sharpening the acts with more knowledge about 
today's firms and systems and how they work.
    In fiscal 1992, Congress appropriated $500,000 for USDA to 
conduct a study of concentration in the red meat packing 
industry. The vast majority of these funds were spent 
investigating the fed cattle and fed beef segments, which and 
are still among the most highly concentrated in agriculture.
    Since that time, though, the pork industry has changed more 
rapidly and more dramatically than virtually any other ag 
sector. MPBC has repeatedly asked Congress to pay the same kind 
of attention to the knowledge and understanding level of the 
pork industry that it paid to the beef industry in 1992. I 
renew that request today.
    Specifically MPBC emplores this committee to approve 
appropriations for the following research. First of all, the 
Department of Agriculture should fund studies on hog market 
structure and competitiveness issues within the pork industry. 
All lying present realities, future scenarios, and the 
implications for producers' economic well-being in our nations 
food supply.
    These studies would be similar to those done in the early 
1990s for beef. We estimate they would cost approximately 
$750,000.
    Secondly, to establish a yardstick against which claims of 
price discrimination could be compared, the Department of 
Agriculture should fund a study of the factors that comprise 
economically justifiable price differentials, including factors 
such as volume, time of delivery, carcass specifications, et 
cetera.
    Such research may involve detailed work on packing plant 
and packing firm economics, a portion of which MPBC has already 
initiated and would be willing to share with USDA researchers 
as part of a comprehensive research effort. We estimate this 
project could be completed for approximately $400,000.
    Thirdly, a study of the threshold levels of standard 
concentration measures used by the Department of Justice to 
trigger scrutiny or investigation of mergers should be 
conducted. We believe the study should focus on current 
threshold levels, why they are used, and most importantly, 
whether they're applicable to a market for highly perishable 
products such as livestock. We estimate such a study could be 
completed for $150,000.
    In summary, MPBC realizes guaranteeing U.S. agricultural 
producers have a fair, transparent, and competitive market for 
their products is a huge and continuing challenge. MPBC is 
ready and willing to work with you and the subcommittee on 
agriculture concentration issues.
    Before closing, Mr. Chairman, I want to also point out that 
USDA is still not to date fully carried out its full 
legislative mandate under Mandatory Livestock Reporting Act of 
1999.
    To its credit, USDA is making progress on a number of the 
mandated programs including the mandatory price reporting 
system, the monthly hogs, and PGGs report and improved retail 
meat price data.
    But some mandated programs like the required reporting of 
separate counts that barrow, gilt slaughter and yard alleys 
have even to be designed. If this was due to funding, we would 
urge this committee to rectify the situation at once.

                           Prepared statement

    Mr. Chairman, cooperation driven by information and 
knowledge rather than concentration is the key to finding 
reasonable long term solutions to the complex issue of ag 
concentration.
    That concludes my comments. Thank you for the opportunity 
to share National Pork Producers' views on this important 
issue.
    [The statement follows:]

                   Prepared Statement of Jon Caspers

    Mr. Chairman and Members of the Subcommittee: My name is Jon 
Caspers. I am a pork producer from Swaledale, Iowa and serve as the 
Vice-President of the National Pork Producers Council (NPPC). Today, I 
am representing America's pork producers and am pleased to discuss with 
you what we believe is a growing, critical need for Federal government 
investment and action regarding agriculture concentration.
    Agricultural concentration is a difficult and emotionally charged 
issue. It has become more-so as congressional committee after 
congressional committee has held hearing upon hearing and yet done 
little tangible work to even understand the critical issues. Many pork 
producers are concerned about their ability to continue to compete and 
maintain market access in a hog market that is experiencing increasing 
levels of concentration. We need your help in understanding the 
relevant issues in order to take appropriate actions to assure an 
efficient marketplace that accurately rewards producers while providing 
an abundant supply of affordable, safe, nutritious pork.
                      pork industry concentration
    Allow me to update you and Subcommittee members on the current 
status of concentration and vertical coordination in the pork industry.
    Concentration in the pork packing sector as measured by the 4-firm 
concentration ratio (CR-4) grew from 32.2 percent in 1985 to 56.3 
percent in 1998. GIPSA's 2000 Annual Report shows a CR4 of 56 in 1999. 
The market shares of Smithfield, IBP, Swift and Excel are currently 
included in this measure of total market share. The eight-firm 
concentration ratio now stands in excess of 75 percent. While not a 
guarantee of non-competitive conduct that increases consumer prices 
and/or reduces producer prices, these levels and their trends increase 
the possibility of such conduct and provide ample incentive for ongoing 
research and heightened vigilance.
    The CR-4 for the hog production segment has grown from negligible 
levels in the early 1980s to about 18 percent following the 1999 
acquisition of Carroll's Foods and Murphy Family Farms by Smithfield 
Foods and the 2000 purchase of Lundy's by Premium Standard Farms. The 
market shares of Smithfield, Premium Standard Farms, Seaboard and 
Prestage comprise this figure.
    Vertical integration of packers owning hogs has grown from an 
estimated 6.4 percent in 1994 to roughly 24 percent today. Smithfield, 
Premium Standard Farms, Seaboard, Excel, and Farmland are the companies 
contributing the most to this total. The recent efforts of Tyson Foods 
and Smithfield Foods to buy IBP, Inc. brought this topic back to the 
forefront. I also submit a research paper commissioned by NPPC and 
authored Dr. Clem Ward of Oklahoma State University, Dr. Steve Meyer of 
NPPC and Dr. Azzadine Azzam of the University of Nebraska as part of 
the official record of this hearing. I believe it provides valuable 
insight into the relevant economic issues that should be considered in 
cases of mergers, especially those that involve vertical integration as 
well.
    In addition to increasing vertical integration (which NPPC defines 
as actual ownership of hog production by a packer or of packing by a 
hog producer), vertical coordination through marketing contracts is 
increasing rapidly. As recently as 1994, 71 percent of the hogs were 
sold on the cash market transactions and only 20 percent were sold 
using a price formula. In January 2001, 82.7 percent were purchased 
through some type of contractual marketing agreement and 17.3 percent 
were cash market purchases. This trend has reduced the size of the 
negotiated hog market substantially and caused many concerns about the 
efficiency and accuracy of the today's price discovery process. These 
concerns become even more acute when one considers that the price of 
the 17.3 percent of hogs sold through cash market transactions directly 
sets the price for an additional 54 percent of all hogs that are sold 
on formula-priced contracts.
                        what should congress do
    Firms are getting larger and controlling larger market shares at 
every level of the pork industry, including production, packing, 
processing and retailing. There is no doubt that this increased 
concentration increases the possibility for non-competitive behavior. 
To that end, the Federal government must be diligent and aggressive in 
enforcing the Sherman Act, Federal Trade Commission Act, Clayton Act 
and Packers and Stockyards Act. We urge the Congress and the 
Administration to clearly communicate their resolve for such aggressive 
enforcement and, wherever appropriate, to act upon that resolve.
    Attacking perceived agriculture concentration problems with a 
regulatory or judicial axe may not, however, be as beneficial as 
sharpening that axe with more knowledge about today's firms and systems 
and how they work. In fiscal 1992, Congress appropriated $500,000 for 
USDA to conduct a study of concentration in the red meat packing 
industry. The vast majority of these funds were spent investigating the 
fed cattle and fed beef segments which were (and still are) among the 
most highly concentrated in agriculture.
    Since that time, though, the pork industry has changed more rapidly 
and more dramatically than virtually any other agricultural sector. 
NPPC has repeatedly asked Congress to pay the same kind of attention to 
the knowledge and understanding level of pork industry that it paid to 
the beef industry in 1992. As forcefully as respect for the members of 
this committee will allow, I renew that request today. Specifically, 
NPPC implores this committee to approve appropriations for the 
following research:
  --Hog Market Structure & Competitiveness Study.--The Department of 
        Agriculture should fund studies on hog market structure and 
        competitiveness issues within the pork industry, outlining 
        present realities, future scenarios and the implications for 
        producers' economic wellbeing and our nation's food supply. 
        These studies would be similar to those done in the early 1990s 
        for beef. We estimate that they would cost $750,000.
  --Study of Justifiable Price Differentials.--To establish a yardstick 
        against which claims of price discrimination could be compared, 
        the Department of Agriculture should fund a study the factors 
        that comprise economically justifiable price differentials, 
        including factors such as volume, time of delivery, carcass 
        specifications, etc. Such research may involve detailed work on 
        packing plant and packing firm economics, a portion of which 
        NPPC has already initiated and would be willing to share with 
        USDA researchers as part of a comprehensive research effort. We 
        estimate that this project could be completed for $400,000.
  --Study of DOJ Concentration Threshold Levels.--A study of the 
        threshold levels of standard concentration measures 
        (Herfendahl-Hirshman Index, Concentration Ratios, etc.) used by 
        the Department of Justice to trigger scrutiny or investigation 
        of mergers should be conducted. We believe the study should 
        focus on the current thresholds, why they are used and, most 
        importantly, whether they are applicable to a market for a 
        highly perishable product such as livestock. We estimate that 
        such a study could be completed for $150,000.
    In addition to funding these projects, Congress should stipulate 
that they be carried out in a timely fashion. The study of meat 
industry concentration funded in fiscal 1992 was published in February 
1996 largely due to delays in program implementation and to lengthy 
reviews within USDA that many observers felt were unnecessary. These 
delays invited criticism of the work even before it was published and, 
we believe, unfairly reduced its credibility. It was a piece of 
outstanding economic research that was discredited because of an 
appearance of timidity and uncertainty. When you fund these pork 
industry projects, please do everything in your power to see that they 
do not meet the same fate.
                                SUMMARY

    NPPC realizes that guaranteeing U.S. agricultural producers a fair, 
transparent and competitive market for their products is a huge and 
continuing challenge. NPPC is ready and willing to work with you and 
the Subcommittee on agriculture concentration issues.
    Before closing, Mr. Chairman, I want to also point out that USDA 
has still not, to date, fully carried out its full legislative mandate 
under the Mandatory Livestock Reporting Act of 1999. To its credit, 
USDA is making progress on a number of the mandated programs, including 
the mandatory price reporting system, monthly hogs and pigs reports and 
improved retail meat price data. But some mandated programs, like the 
required reporting of separate counts of barrow slaughter and gilt 
slaughter, have, to our knowledge, yet to even be designed. If this is 
due to funding, we urge this committee to rectify the situation at 
once.
    Mr. Chairman, cooperation driven by information and knowledge, 
rather than confrontation, is the key to finding reasonable long-term 
solutions to the complex issue of agriculture concentration. Such 
cooperation can help the industry avoid the negative ``unintended 
consequences'' of legislative and regulatory actions that, in the long 
term, could harm producers in particular and the agricultural industry 
in general.
    That concludes my comments. Thank you for the opportunity to share 
pork producers' views on this important issue.

    Senator Cochran. Thank you for your testimony and your 
solutions.
    We'll now hear from Mr. David Reiff representing the 
National Grain and Feed Association.

 STATEMENT OF DAVID S. REIFF, PRESIDENT, REIFF GRAIN AND FEED, 
     ON BEHALF OF THE NATIONAL GRAIN AND FEED ASSOCIATION

    Mr. Reiff. Thank you, Chairman Cochran, Ranking Member 
Kohl, and distinguished members. I am Dave Reiff, president of 
Reiff Grain and Feed, Fairfield, Iowa. I appreciate this 
opportunity to speak today on this important issue.
    First, a little bit about my company. Reiff Grain & Feed is 
a country elevator firm in southeast Iowa, about 100 miles from 
Des Moines. We offered feed milling, seeds, and agronomy 
services to a few hundred family farms in our area.
    We originate grain from these producers and offer it back 
out to our livestock feeders as well as several exporters on 
the mid Mississippi and several processors in the area.
    Reiff Grain & Feed is a member of the National Grain and 
Feed Association on whose board of directors I serve and on 
whose behalf I'm testifying.
    Agribusiness consolidation today is one of the hottest 
topics in rural America. There's no doubt that grain businesses 
are consolidated at the most integrated and capital intensive 
level of the industry: Food processing and manufacturing. This 
reflects a trend that is occurring in every part of the 
economy.
    As my written testimony explains in greater detail, 
however, more important distinctions must be made between not 
only the manufacturing first purchaser levels of the field but 
also between the various user segments in the grain 
marketplace.
    In many cases there are dozens of separate potential first 
purchasers for producers to market their grain to. Country 
elevators, export elevators, warehouses, river terminals, on 
farm buying are all customers of farmers.
    In wheat country, it is not uncommon for elevators to be no 
more than 20 miles apart. In corn areas, 10 miles is typical. 
In my part of Iowa there are six elevators within a 30-mile 
radius.
    Further, cash and futures prices for thousands of markets 
are posted around the clock on several different information 
networks with truck, rail, river modes of transportation 
directly competing in many areas, producers are able to move 
their crops to the most attractive market at reasonable rates. 
Competition, transparency, and accessibility make for a highly 
competitive marketplace.
    In addition, competition between various segments of the 
industry is intense. Domestic and export users of grain must 
vie for producer's business. There is fierce competition 
between different domestic users, country elevators, feed 
mills, feeders, processors, and industrial users.
    I would like to mention a matter that is related to the 
concentration issue. Much attention has been focused on the 
practice of contracting between producers and agribusiness 
firms. Cash grain contracting is the most important price risk 
management tool used by grain farmers today. I urge Congress to 
be very cautious in legislating how commerce is going to be 
conducted because there can be some negative unintended 
consequences.
    For example, our local hog producers have an opportunity to 
enter into a contract that will allow them to benefit in part 
of the retail margin if the packer is successful with a branded 
approach in the marketplace.
    But now that producer benefit would be in danger of 
possibly not passing scrutiny by the State attorney general's 
office if produced Iowa legislation passes.
    The competitive advantages contained in this contract may 
be viewed as secret clauses, thus disallowing the contract.
    However, if the competitive advantages are made pubic, they 
may no longer have value to the producer in the marketplace. 
Our farm producers badly need new opportunities to stay viable.
    Another instance, the local feed lot operator is 
contracting privately with a cattle finishing corporation to 
provide yardage services. This seems to be very beneficial to 
both parties. I hope this new partnership isn't stopped by a 
requirement that terms their agreement be made public under the 
new contracting proposal.
    Thus while contracting legislation may be well intentioned, 
there's a high probability of doing more harm than good. I 
would like to submit to the record a white paper prepared by 
the National Grain and Feed Association that goes into more 
detail on this issue.

                           Prepared statement

    In conclusion, I would like to emphasize to the 
subcommittee that while consolidation is occurring at the top 
level of grain handling industry, producers have access to a 
competitive, available, and transparent market. Thank you 
again. I will be pleased to try to respond to questions.
    [The statement follows:]

                  Prepared Statement of David S. Reiff

                              INTRODUCTION

    Chairman Cochran, Ranking Member Kohl, and Members of the 
Subcommittee, my name is Dave Reiff, and I am president of Reiff Grain 
and Feed, Inc., of Fairfield, Iowa. Thank you for this opportunity to 
testify on the important subject of consolidation in the agriculture 
economy, as it relates to the grain sector.
    Reiff Grain & Feed, Inc. is a 25 year-old country elevator in Iowa, 
about 100 miles southeast of Des Moines. We offer feed milling, seeds, 
and agronomy services to a few hundred family farms in our area. We 
originate grain from these producers and offer it out to our livestock 
feeders as well as several exporters on the mid-Mississippi and several 
processors in the area.
    I appear today on behalf of the National Grain and Feed 
Association, of which my firm is a member. The NGFA consists of about 
1,000 grain, feed, processing and grain-related companies that operate 
5,000 facilities that store, handle, merchandise, mill, process and 
export more than two-thirds of all U.S. grains and oilseeds. About 70 
percent of NGFA member firms are small businesses-country elevators and 
feed mills. Also affiliated with the NGFA are 36 state and regional 
grain and feed associations.
    My testimony today will demonstrate that while many factors are 
driving integration within the grain sector, competition among the 
various segments within the industry remains strong; that the grain 
market is highly transparent; and that substantial competition exists 
at the first purchaser level for grain.

                     WHY IS CONSOLIDATION OCCURRING

    Every industry in the U.S. and around the globe is consolidating, 
particularly those industries that are mature and driven by competitive 
pressures to reduce cost. The U.S. has 3 automobile manufacturers, two 
major farm implement manufacturers, 4-5 major airlines, etc. 
Consolidation (both horizontal and vertical) in grain, feed and food 
processing industries is being driven not only by cost competition, but 
also by other factors including:
    A shrinking farmer customer base.--While the number of total farms 
in the U.S. seems to have leveled off, the number of commercial farms 
(those with $100,000 or more in gross sales) continues to decline. With 
a shrinking customer base, fewer firms are necessary.
    Incentives to provide enhanced services to producers.--Firms are 
offering more services to producers in order to build affinity and 
retain them as customers. Some examples include tailored risk 
management plans, farm input consulting, application services, and 
record keeping. This trend requires greater expertise and manpower on 
the part of the grain handler.
    Consolidation in rail transportation.--There are now only 7 major 
grain-hauling railroads in the U.S. Rail accounts for 25 percent of 
commercial grain shipments. Consolidation in the rail industry has 
resulted in many ``captive shippers,'' or facilities that are served by 
only one railroad and have limited access to alternative and price-
competitive modes of transport. This situation has resulted in many 
grain firms having to operate facilities on separate rail lines in 
order to ensure service in case of disruption or uneconomic pricing on 
one line. In addition, the move toward lower rail rates for larger 
shipment sizes has been accelerating. This trend saves producers money 
in shipping to destination markets, but requires grain facilities to 
increase their capacity to load.
    Low rates of return among grain buyers/handlers.--This trend has 
been documented in several government studies. Low rates of return push 
individuals to compete or leave the industry and sell out to larger 
companies.
    Compliance with government regulations.--The increasing number and 
complexity of government regulations tend to drive investment and 
operational costs higher. Larger companies are required simply to 
support the resources needed for regulatory compliance.
    In addition, vertical integration and increased coordination in the 
marketing/production chain is being driven by the need to provide both 
more uniformity and more customer choice at the retail customer level. 
In today's food marketplace, to meet the uniformity parameters 
necessary for retail product consistency requires considerably more 
management control over production, delivery and quality specifications 
of raw and semi-processed products at each stage of the food chain. 
Some firms are choosing to obtain this increased management control 
through ownership--full vertical integration of a company and its 
products going from raw materials through the final food product.
    However, there are other firms that are taking different 
approaches. Through joint ventures, sharing of resources to jointly 
coordinate portions of the production-delivery stream for food, and 
through the use of contracts that require tight quality specifications 
and just-in-time delivery provisions, companies do have the option to 
achieve retail product uniformity without full vertical integration.

             COMPETITION WITHIN THE GRAIN SECTOR IS STRONG

    The heaviest concentration in some segments of the grain and 
processing sector tend to occur at levels that require extensive 
capital investments--oilseed crushing, flour milling, wet corn milling, 
and dry corn milling. However, the fact that fewer than 10 firms in 
each of these sectors own or operate a high proportion of processing 
capacity does not mean that markets into which farmers sell product are 
lacking in competition. The chart below reflects the percentage market 
share of each major commodity moving into various markets.
    As an example, wet corn milling, which produces starch, corn 
sweeteners, corn oil and livestock feed, accounts for about 15 percent 
of total corn markets. There are fewer than 10 firms in the entire U.S. 
corn wet milling industry, but these wet corn mills have to compete 
against a large number of feed manufacturers and livestock producers, 
dry corn millers, and exporters in bidding for corn. Considering that 
grain markets are truly global in competition, the fact that the U.S. 
produces less than 25 percent of all major grains indicates that 
foreign competition and global markets have considerable influence on 
the pricing of grain. This global influence tends to be reflected in 
futures market prices in Chicago, Kansas City and Minneapolis, which in 
turn affect cash prices offered on a given day.

                                         U.S. MAJOR GRAINS AND OILSEEDS
                                            [Percentage Market Share]
----------------------------------------------------------------------------------------------------------------
                                             Domestic
                                 --------------------------------                                  U.S. Prod. As
                                                       Food/          Export           Total        Percent of
                                    Animal Feed     Industrial                                     World Market
----------------------------------------------------------------------------------------------------------------
Corn............................              59              20              21             100          \1\ 31
Wheat...........................              12              40              48             100              11
Soybeans \2\....................          \3\ 62              38             100         \1\ 29
----------------------------------------------------------------------------------------------------------------
\1\ ``Corn'' percentage is actually a percentage of U.S. production of all coarse grains that compete mostly for
  animal feed markets (other coarse grains include oats, barley, sorghum, and millet). ``Soybean'' percentage is
  actually U.S. production of all oilseeds compared to the world (competing oilseeds include sunflower,
  rapeseed, cottonseed, and palm).
\2\ Soybeans crushed (processed) subsequently go into food products (both oil and protein), animal feed (protein
  meal), and a wide range of industrial use markets.
\3\ Domestic crush

                 THE GRAIN MARKET IS HIGHLY TRANSPARENT

    The U.S. has three public futures exchanges: the Chicago Board of 
Trade, Kansas City Board of Trade, and the Minneapolis Grain Exchange. 
Thousands of buyers and sellers within the U.S. and throughout the 
world openly participate and compete in these markets daily, with 
current price information communicated on a global basis. For many 
years this public market pricing information has been available through 
daily newspapers and radio/television news services. Now in the 
electronic age, public futures exchange prices are available through 
very affordable computer link services through the internet or via 
firms such as Data Transmission Network (DTN), Future Source Bridge, 
Commodity Quote Graphics, and Reuters. Some of these services, in 
addition to providing futures market price information, also offer cash 
grain market prices and bids. For example, DTN releases daily cash 
market prices from more than 2,000 locations in the U.S., updated 
around the clock. This information reaches more than 100,000 customers 
across the country. Similar data are available through other 
electronic, voice and print media.
    This very public and highly competitive method of price discovery 
gives every farmer in the U.S. a strong indication of the value of the 
commodity that he/she produces or holds in storage on a daily basis.

           COMPETITION IS STRONG AT THE FIRST PURCHASER LEVEL

    There are many options for producers when it comes to potential 
customers for their product. The chart below contains a rough estimate 
of the customers and facilities available to producers in key states:

----------------------------------------------------------------------------------------------------------------
                                                                   Co-op/farmer-
                                                   Co-op/farmer-       owned       Private firms      Private
                                                    owned firms     facilities                      facilities
----------------------------------------------------------------------------------------------------------------
Illinois........................................             162             473             198             578
Indiana.........................................              20              93             111             260
Iowa............................................             104             209             134             326
Minnesota.......................................             124             135             280             320
Kansas..........................................             107             122             133             288
Nebraska........................................              56             242              74             156
North Dakota....................................             150             300              40             140
Oklahoma........................................              84              41             182              93
Pacific/Northwest...............................             208             112             715             385
----------------------------------------------------------------------------------------------------------------

    In corn growing states, it is common to have competing elevators 
located within 10 miles of each other; in wheat states, 20-25 miles 
between elevators is typical. In some areas, there are also grain 
buyers who travel to farms by truck and buy from the producer on-site.
    It must be recognized that while grain and oilseed processors and 
exporters often purchase grain directly from farmers, the companies 
tend to buy the majority of their raw material from independent local 
businesses operating elevators owned by private entities or farmer 
cooperatives. These ``first buyers'' that purchase grain directly from 
farmers participate in an intensely competitive, nearly atomistic 
industry.
    In addition, farmers' marketing alternatives are expanding. Since 
grain can be trucked at affordable rates over substantial distances--by 
hauling companies or producers themselves--producers can access the 
highest-return markets, including elevators, river terminals, or 
processors. This increases the competition among grain merchants for 
customers, to the benefit of the producer. With regards to grain 
storage, producers are as much competitors in the market as are grain 
merchants. Commercial storage in the U.S. is estimated at 8 billion 
bushels, while on-farm storage is more than 11 billion. Farmers must 
manage the risk of quality deterioration, and the costs of placing the 
grain in storage plus retrieving it, but the overall effect of on-farm 
storage is a competitive alternative for the producer to either 
commercial storage or spot sales.

                               CONCLUSION

    The grain industry, like the rest of the economy, is consolidating. 
This is occurring for many reasons, not the least of which is to 
provide better and more cost-effective service to producer-customers. 
This does not mean, however, that competition is lacking. To the 
contrary, it is evident that robust competition exists at the first 
buyer level and among the sectors of the industry; and that grain 
markets are highly transparent. These factors work together to ensure 
competitive markets remain the norm for grain farmers in the U.S.
    This concludes my testimony. Thank you.

    Senator Cochran. Thanks, Mr. Reiff. And the study you 
referred to will be printed in the record. We thank you for 
submitting that.
    Mr. Fred Stokes, President for the Organization for 
Competitive Markets. Welcome.

    STATEMENT OF THOMAS F. STOKES, PRESIDENT, ORGANIZATION 
                   FOR COMPETITIVE MARKETS

    Mr. Stokes. Thank you, sir. Senator Cochran, Senator 
Dorgan, I appreciate the opportunity to appear before this 
hearing on a subject that we believe is at the center of the 
current farm crisis. I'll make my remarks brief. And I ask that 
my more detailed written testimony be included in the record.
    The organization for competitive markets is a multi-
disciplinary non-profit group of farmers, ranchers, academics, 
attorneys, business people, and State legislators working for a 
fair, open, and competitive agricultural marketplace. We see 
market concentration as a major impediment to bringing about 
such marketplace.
    The organization for competitive markets is among some 65 
organizations that have advocated a separate title in the new 
farm bill dealing with competition issues. Included in my 
written testimony is our statement on this subject, and we hope 
that it will be considered as this new bill is written.
    Last year the merger of Cargill and Continental Grain was 
finalized. Now Archer Daniels Midland is buying the grain-
handling facilities of Farmland, increasing their already 
dominant position in grain market.
    Essentially Cargill and ADM will come together and 
constitute the market for grain. The proposed merger of Tyson 
with IBP failed, though for reasons that are not completely 
clear. IBP stock has since plummeted.
    It looks like Smithfield might make another attempt to buy 
the world's largest beef packer and the second largest pork 
packer. Given recent history, it would say that such a merger 
would be approved.
    The concentrated and non-competitive marketplace 
systematically and increasingly short changes farmers and 
ranchers. Major packers made four times their normal earnings 
when we had 8 cent hogs.
    In a State legislative hearing when asked by a State 
senator if they couldn't pay producers more in light of their 
windfall profits, a representative of one of the major packers 
said he didn't recall getting a Christmas present from any pork 
producer.
    In addition to concentration, there is the matter of 
vertical integration. Dr. Neil Harl at Iowa State has dubbed 
concentration and vertical integration the deadly combination. 
They bring about contract farming. Company tractor drivers and 
hog house janitors replacing family farmers. Some call this 
chickenization.
    Vertical integration through contracts give processors and 
packers captive supplies. Captive supplies, in return, result 
in fewer bitters and more passive bitters. Spot market prices 
are lower, volume is also lower, and the resulting thin market 
more subject to manipulation.
    Consolidation in another area also robs farmers of their 
rightful share of the consumer dollar. In 1964, President 
Johnson established the National Food Marketing Commission. The 
report from the commission concluded, among other things, that 
retail food chains were rapidly emerging as the dominant player 
in the food marketing system.
    And in this study entitled Consolidation and Food Retailing 
and Dairy, published January the 8th of this year, Dr. Bill 
Heffernan pointed to the very rapid consolidation of the retail 
food industry over the past three years, and he stated 
retailers are now in a position to dictate terms to food 
manufacturers who then force change back through the system at 
the farm level.
    Dr. Keith Collins, who testified in the earlier panel, is 
on record as seeing retail margins as a problem. To get some 
sense of how retail margins have escalated and have affected 
farm gate prices, I have provided a chart which is very similar 
to Senator Dorgan's chart which shows the relationship between 
retail prices and the farmers--and the price farmers receive.
    And I might add contrary to some testimony that's already 
been given here, we would contend that this gap is not because 
of food that is of higher quality or has been added. A whole 
light of--beef would be an example. The retailer got a lower 
margin for beef back in the days of hanging carcasses than it 
does today when it gets it in box form which greatly decreases 
his cost of processing.
    So it's not necessarily true that these--that this gap is 
because of these margins or because of the extra things the 
retailer does.
    In September of last year, ERS calculated that the retail 
margin from the single steer was $722. Obviously this is out of 
line. A significant portion of this should have gone to the 
producer but went to the retailer because of his sell it or 
smell it market power.
    I realize the committee is not tasked with regulating 
retail margins. You can, however, help foster a new marketing 
system which provides a new route from the farm gate to food 
consumers and gives producers a fairer share of the end value.
    Programs such as the Value-Added Grant Program authored by 
Senator Grassley. The new generation cooperatives offer promise 
for a system that would reverse the drastic decline in the 
farmer's share of the food dollar.
    Global markets, mad cow disease, and the seemingly more 
frequent incidence of food-borne illness have raised new 
concerns about food. Consumers now want to know more about 
where their food comes from and how it was handled.
    Consumers have more confidence in food that was produced 
and handled under the more stringent requirement in this 
country. It's time we had country-of-origin labeling.
    Free trade is not turning out to be the panacea it was 
represented to be. It also raises the issue of food security. 
Going to the low cost provider in the global marketplace for 
our food makes about as much sense as having our more advanced 
military weaponry made in China. We need markets that are 
established and maintained in consonance with the original 
intent of our antitrust laws.
    Enforcement agencies should be headed with people who 
desire to enforce these laws, and Congress should give them the 
necessary resources to do their job. We need transparent 
markets.

                           Prepared statement

    Open, transparent, and competitive markets for agriculture 
are our best bet for just recompense for those that tend the 
flocks and till the soil. And for a safe, dependable, and 
affordable food supply for our people. And I'll be happy to 
respond to any questions.
    [The statement follows:]

                   Prepared Statement of Fred Stokes

                              INTRODUCTION

    Thank you for this opportunity to present testimony on agricultural 
concentration issues. The Organization for Competitive Markets (OCM) is 
a multidisciplinary nonprofit group of farmers, ranchers, academics, 
attorneys, businesspersons and state legislators working for a fair, 
open and competitive agricultural marketplace. OCM is the only 
nonprofit organization in the country with a primary focus on antitrust 
and trade practices policy in agriculture. This testimony is submitted 
to enhance informed discussion on the propriety, and contents, of a 
Competition Title in the next Farm Bill. Sixty-five organizations have 
signed a letter in favor of including such a Competition Title. (See 
Exhibit B, Letter to Sen. Lugar, May 1, 2001).
    Family farmers ultimately derive their income from the agricultural 
marketplace. These independent producers have always been in a position 
of weakness in selling their product to large processors and in buying 
their inputs from large suppliers. Though there has been a tremendous 
focus on openness and competition in the export markets, the domestic 
marketplace has become closed and noncompetitive. Today the position of 
the family farmer has become even weaker as consolidation in 
agribusiness and food retail has reached all time highs. Farmers have 
fewer buyers and suppliers than ever before. The result is an 
increasing loss of family farms and the smallest farm share of the 
consumer dollar in history.
    The Agricultural and Food subeconomy can be divided into four 
sectors: 1) agricultural input suppliers; 2) farmers, ranchers and 
growers; 3) processors and packers; and 4) food retailers. All but the 
farm sector have experienced unprecedented consolidation in recent 
years, surrounding farmers with 800 pound gorillas that are able to 
squeeze farm income to zero. The result is that no matter the level of 
income, even with the doubling of Federal support, farmers' income 
languishes. Congress must comprehensively address this problem by 
confronting the problems inherent in consolidation and vertical 
integration.
    One hundred years ago, this nation reacted appropriately to citizen 
concerns about large, powerful companies by establishing rules 
constraining such businesses when they achieved a level of market power 
that harmed, or risked harming, the public interest, trade and 
commerce. The United State Congress enacted the first competition laws 
in the world to ensure that commerce remain free and fair. These 
competition laws include the Sherman Act, Clayton Act, Federal Trade 
Commission Act and Packers & Stockyards Act. Since that time, many 
countries in the world have followed this U.S. example to constrain 
undue market power in their domestic economies.

  DANGERS POSED BY A CONSOLIDATED AND VERTICALLY INTEGRATED FOOD AND 
                          AGRIBUSINESS SECTOR

    Unfortunately, competition policy has been severely weakened in 
this country, especially in agriculture, due to Federal caselaw, 
underfunded enforcement, and unfounded reliance on efficiency claims. 
These weakening factors have resulted in a significant degradation of 
the domestic agricultural market infrastructure. For instance, the 
cattle, hog and poultry sectors all have structures ripe for unfair 
methods of competition by the packer or processor. In cattle, the top 
four slaughter firms control over eighty percent of the market, with 
IBP, Inc. controlling thirty two percent of the steer and heifer 
market. The top four hog packers control about fifty-six percent of the 
market, including Smithfield with over eighteen percent. The poultry 
industry is similar to hogs, with Tyson controlling over a quarter of 
the market. This trend toward consolidation continues. Just recently 
IBP was the subject of a bidding war between Smithfield and Tyson. ADM 
announced that it plans to take control of Farmland's grain assets 
throughout the U.S. Purina announced that it is in discussions with a 
suitor to sell its assets.
    The dangers posed by horizontal concentration are exacerbated by 
the spiraling vertical integration in these industries. Vertical 
integration, where one firm controls numerous sectors in the production 
cycle, has long been utilized in poultry. In that industry, poultry 
integrators installed a system in which the processor owns the 
chickens; and the grower owns the land, buildings, equipment, chicken 
litter and the dead chickens. The same dynamic has overtaken the hog 
industry. Only about seventeen percent of all hogs were marketed on the 
open or spot market in 2000. The rest of the hogs are either owned by 
packers or contracted in advance so the packer avoids the open market. 
With the emergence of genetically modified crops and the seed company's 
monopoly control of life forms, these companies increasingly utilize 
exclusive vertical relationships to maintain control of their product.
    These trends have led to what Professor Harl calls ``the deadly 
combination of concentration and vertical integration.'' The 
combination of the two leaves the producer in an unenviable position: 
suddenly he has very few, possibly one, processor with whom to deal in 
his region, and no open market to send his product. Nevertheless, 
financers and other agricultural advisors have short-sightedly urged 
farmers to lock themselves into contracts, thinking that abandoning the 
open market would allow the farmer, and the bank, to circumvent risk. 
The price risk of the open market might have been avoided; but the 
increased risk of unfair and anticompetitive practices was ushered in 
with the proliferation of contracts.
    The result of contracts on the aggregate market is that processors 
and packers now have captive markets. Captive supplies result in not 
only fewer bidders, but the remaining bidders are much more passive 
because they have captured supply through non-price means: forward 
contracts, production contracts, marketing agreements and packer and 
processor ownership. This gives the processor more control over 
inventory while transforming them into passive bidders that can procure 
the balance of their supply through conservative bidding. Spot market 
transactions are priced lower, are lower in volume, and the thin market 
increases the risk of manipulation. (For a thorough discussion of the 
dangers of captive supply and the USDA authority to address these 
dangers, see Exhibit A, Written Testimony of Organization for 
Competitive Markets Before the USDA's Public Forum on Captive Supplies 
in the Livestock Sector, Denver, Colorado September 21, 2000, also at 
http://www.competitivemarkets.com/library/testimony/gipsa/
GIPSA.OCM.web.092100.htm.)
    Yet another sector that funnels the food dollar away from farmers 
is the food retail sector. The margin that retailers have retained of 
the consumer dollar has soared, while the farmers' share has plunged. 
Consolidation in food retail has also harmed consumers. The top five 
food retailers in the United States now account for 42 percent of all 
sales. This number has skyrocketed from 24 percent in 1997. Regionally, 
consolidation and its effects are even more stark. For instance, Dr. 
Ron Cotteril, of the University of Connecticut Food Marketing Policy 
Center, recently released a case study on consumer milk prices in the 
Northeast that showed three supermarkets accounted for 85 percent of 
all milk sales. At the same time that the retail sector was 
consolidating, consumer milk prices steadily increased. The study 
concluded that a $50 million increase in the milk bill paid by 
consumers is due exclusively to the market power of private companies, 
i.e. supermarket retailers and dairy processors.
    We urge Congress to strengthen competition and trade practices 
policy by enacting legislation that protects family farmers from 
anticompetitive and unfair practices. Over 65 groups including OCM have 
joined together recently to urge Congress to create a Competition 
Policy title in the farm bill. (See Exhibit B, Letter to Sen. Richard 
Lugar, May 1, 2001). Congress must address the disparities in market 
power at the same time that it considers provisions to improve farm 
income. Otherwise, input suppliers, processors and retailers will 
continue to reap farmers' share of the food dollar.

          RECOMMENDATIONS FOR IMPROVED POLICY AND ENFORCEMENT

    OCM believes that Congress needs to take a comprehensive approach 
in addressing the complicated problems associated with concentration 
and vertical integration. For purposes of analytical discussion, we 
have divided our recommendations into four areas: Antitrust policy and 
enforcement; competition and trade practices policy and enforcement in 
the livestock sector; fairness in contracting; and creating new 
competition.
              Antitrust Policy and Enforcement in Agriculture

    General antitrust laws, such as the Sherman, Clayton and FTC Acts 
were originally intended to hinder huge firms from exercising undue 
market power. The Federal judiciary and past administrations have 
gutted the enforcement of these laws. The Department of Justice and the 
FTC woefully lack the resources to address the explosion of mergers and 
increased consolidation. The policies and court interpretations of 
these laws intended to protect consumers, small businesses and farmers 
have degraded to the point where Congressional clarification is 
required. Enforcement officials and judges have been too quick to 
blindly accept efficiency arguments, without proof, while ignoring the 
plight of small businesses and independent suppliers such as farmers.
    To breath life back into antitrust policy, Congress should:
  --Clarify that the antitrust laws focus on supplier harm in addition 
        to consumer harm;
  --Enact new legislation to prohibit mergers or acquisitions that 
        allow a firm to gain more than a fifteen percent market share 
        nationally in any agricultural business, including the retail 
        supermarket trade. This allows firms to reach peak efficiencies 
        of scale without achieving the dominance which has 
        anticompetitive results;
  --Create and fund an Office of Agricultural Competition in the 
        Department of Justice to increase the resources and talent 
        available at DOJ for agriculture;
  --Amend the Clayton Antitrust Act to make it clear that a person who 
        suffers indirect or pass-through harm can recover damages 
        resulting from anti-competitive conduct (repeal the Illinois 
        Brick decision);
  --Enact legislation easing the ability of farmers to achieve class 
        status in litigation involving anticompetitive practices by 
        agricultural businesses, including the retail supermarket 
        trade; and
  --Significantly increase funding for enforcement of antitrust laws 
        generally.

COMPETITION AND TRADE PRACTICE POLICY AND ENFORCEMENT IN THE LIVESTOCK 
                                 SECTOR

    Congress has long recognized the special nature of the livestock 
industry and the increased likelihood that packers and processors will 
treat farmers and ranchers unfairly. In 1921 Congress passed the 
Packers and Stockyards Act to address the problems inherent in a 
consolidated packing industry that had vertical relationships with the 
marketing channels of the day, the stockyards and rail lines. Although 
OCM and others have long argued that sufficient authority exists within 
the far-reaching Act to affect real change in the livestock industry, 
the USDA has not acted. Farmers and ranchers can wait no longer. 
Congress must step in to prohibit deleterious practices associated with 
the consolidated and vertically integrated sector. It has been eighty 
years since a Congress substantively affected the P&S Act. Congress 
must act again.
    We urge Congress to:
  --Consider transferring jurisdiction over competition issues in the 
        livestock sector from the United States Department of 
        Agriculture to a newly created Office of Agricultural 
        Competition in the Department of Justice;
  --Prohibit red meat processors from owning livestock or livestock 
        production operations;
  --Enact a two-year suspension on mergers and acquisitions between 
        firms in the red meat and poultry processing sectors;
  --Create an transparent, fully functioning market in livestock 
        contracting through requiring all contracts to be offered for 
        bidding in an open, public manner and necessitating that a 
        fixed base price be negotiated at the time of the agreement (as 
        opposed to formulating the price from another market);
  --Declare discrimination in non-price procurement terms by processors 
        as to producers as anticompetitive or discriminatory practices 
        unless such benefits are offered to all in an open, public 
        manner. Such non-price benefits include, but are not limited 
        to, delivery terms, processor financing, and processor leasing/
        ownership of facilities or land;
  --Provide poultry growers with full protection under the P&S Act; and
  --Increase transparency and full information in the marketplace by 
        eliminating the 3/60 rule from the administration of mandatory 
        price reporting by the USDA Market News Service.

                        FAIRNESS IN CONTRACTING

    Contracting provides packers and processors relational market 
power. A number of ways exist for a firm to exert this ``lock-in'' 
power: (1) packers exploit farmer's sunk costs reasonably incurred in 
connection with carrying the packer's contract requirements; (2) the 
packer imposes additional costs on a disfavored farmer; and (3) the 
packer refuses to offer the farmer favorable business opportunities 
available to other farmers. Examples of this type of market power 
abound in both the poultry and hog contracting sectors. This market 
power provides the packing and processing firms the ability to pressure 
farmers and growers in a number of ways. Contracts that require 
substantial investment for a packer's particular requirements put the 
farmer at risk of exploitation in the future. These types of contracts 
are common. In poultry, contracts provide the integrator great 
discretion in what it may demand as far as capital requirements. In 
hogs, some packers require that the farmer restock its entire herd with 
the packer's preferred genetic line, and restrict the farmer from 
selling offspring of those genetics. Once the farmer has built new 
buildings for hundreds of thousands of dollars or restocked his entire 
herd, he is no longer in the position to freely seek other processors 
with whom to deal. He is set up to serve one particular packer or 
processor. This ``lock-in'' effect allows the processor to treat the 
farmer less favorably in the future and the contracts are written in a 
way that allows processors to do this. Because the farmer is locked in 
to the processor's system, he will suffer the injurious conduct because 
he has no better options.
    To the extent that contracting is allowed between agricultural 
producers and processors, we urge that Congress enact the following 
provisions:
  --Prohibit confidentiality clauses in contracts;
  --Require contracts to be in plain language and to disclose material 
        risks;
  --Prohibit mandatory arbitration clauses;
  --Provide contract producers with a three-day right to review 
        contracts;
  --Prohibit unfair practices, including tournament contracts that base 
        pay on a ranking system based on variables outside of the 
        farmers' control;
  --Prohibit arbitrary cancellation of contracts that required 
        significant capital investment;
  --Provide producers with a first-priority lien for payments due under 
        a contract;
  --Protect producers from having contracts terminated capriciously or 
        as a form of retribution; and
  --Prohibit processors from retaliating or discriminating against 
        producers who exercise rights including the right to join 
        producer organizations.

                        CREATING NEW COMPETITION

    The establishment of new competitors in the agriculture sector is 
key to diffusing the power of the dominant firms and providing 
profitable opportunities for family farmers. Federal and State 
governments provide tremendous amounts of money to dominant firms in 
the form of grants, loans, tax breaks, research and development 
subsidies. We urge the Congress to redirect much of these funds to spur 
the development of new start-ups that will provide new opportunities 
for family farmers to market their products.
  --Target most food and agriculture related grant and loan programs to 
        small to mid-sized farms and farmer-owned businesses. This 
        should not be limited to entities structured as cooperatives;
  --Focus most research performed within USDA or funded by USDA on 
        small to mid-sized farms and farmer-owned businesses;
  --Provide a preference to bids from farmer-owned food entities for 
        government food procurement contracts. Government contracts 
        should also require smaller volumes, as opposed to the large 
        volumes currently included in such contracts, to allow small 
        suppliers to bid. Further, a study should be done to identify 
        barriers to government buying from farm-based or farmer-owned 
        food suppliers in an effort to find and implement solutions to 
        such barriers;
  --Increase the level of funding for the USDA Value Added Agriculture 
        grant programs facilitated by Sen. Charles Grassley last year; 
        and
  --Foster direct procurement from farmers and farmer-owned entities 
        for the Federal Food Stamp program and Women, Infants and 
        Children program. The electronic funds transfer cards used to 
        transfer moneys and pay food providers in these programs are 
        barriers to farmer participation. These constraints came be 
        overcome.
                               CONCLUSION

    Congress has focused, in recent years, on open and competitive 
markets at the international level. It should now work harder for open 
and competitive markets at the farm gate level domestically. It is at 
the farm gate where producers derive their income from the marketplace. 
Marketing choices are necessary for a functioning market. Concentration 
allows private economic power the proven ability to unduly drive farm 
gate prices down and consumer food prices up. Competition and choice 
will provide more marketing choices for farmers, fewer barriers to 
entry for new competition, and prices which more accurately reflect 
supply and demand. It is time for a Competition Title to be included in 
the Farm Bill to address these problems in a comprehensive manner.

    Senator Cochran. Thank you, Mr. Stokes. I appreciate you 
coming up from Mississippi to be with us today. I've talked 
with you on the phone several times and in person a couple of 
times. It's good to have you as part of this panel.
    I think we've had a balanced overview from this panel of 
the different commodity and food group areas that are 
represented, and we appreciate very much the statements that 
you have prepared to make a part of this record.
    Because we have another panel, and we have some other 
obligations that are developing on the floor of the Senate, I 
don't want you to feel like we don't care about you if we don't 
ask you a bunch of questions. But to hear the other panel and 
to have them to have an opportunity to speak, our questions are 
going to be abbreviated.
    I just want you to know it won't be an insult to you. I 
hope you won't consider it as such.
    One thing Mr. Stokes mentioned I was going to ask all of 
the panel about, he referred to cooperatives. And I can 
remember the time when individual producers decided that that 
was one of the answers to concentration in the industry groups 
that were buying farm products and commodities to compete. 
Farmer-owned cooperatives would be one of the answers.
    Isn't it true that that has worked to help provide power in 
the marketplace to individual farmers? I'll just start with Mr. 
Caspers and see what your reaction to that is.
    Mr. Caspers. Yes, we're very supportive of farmer-owned 
cooperatives and some of the new generation cooperatives that 
are farming. I think there is a lot of interest amongst our 
members all across the country. MPPC was instrumental 
approximately two years ago in starting what has developed into 
pork America.
    They continue to develop and have a number of members 
across the country, and I think on the next panel you have a 
member of ours that's involved in a pork cooperative venture in 
Illinois that hopes to go to construction this year.
    Senator Cochran. Mr. Dopp, what's your view of that?
    Mr. Dopp. Well, Senator, I'm not sure I can add much to 
that other than to comment that one of our large members, in 
fact Farmland Foods is part of a cooperative, and they have 
been successful on a number of levels and a number of areas for 
a number of years.
    Senator Cochran. Mr. Roenigk?
    Mr. Roenigk. Yes, thank you. As a general statement, 
agricultural cooperatives are beneficial to agriculture; 
however, in the broiler industry, for whatever reason, many, 
many years ago we had several cooperatives. Today we have just 
one survivor that is a cooperative.
    In fact, in the 1980s I think the government helped start 
at least one if not more cooperatives to see if they worked 
again, but whatever the dynamics are, they don't seem to work 
in our industry. But as a general principle, I agree. 
Cooperatives are a good thing to have.
    Senator Cochran. Mr. Reiff.
    Mr. Reiff. Really not much to add. The Farmland/ADM recent 
joint venture was mentioned. They obviously found value in 
linking up, and the cooperative itself was having some 
difficulty. But I think by and large it probably is viable.
    Senator Cochran. Mr. Stokes?
    Mr. Stokes. Well, I generally agree that they're a good 
thing. There are some who have run amuck, in my opinion. And I 
wouldn't necessarily hold Farmland up as an outstanding example 
of what cooperatives could do.
    Senator Cochran. One of the industries in our State, a new 
industry, catfish production, falls away from the processing, 
the growing of the fish, and the processing, growing grain. 
Some of these are cooperatives, some are owned by corporate 
parent companies. Like ConAgra, as a matter of fact, has gotten 
into that business.
    I don't know whether this is less competition. It seems to 
me that there has been a proliferation of different businesses 
in that industry. It's a fairly new industry. I wonder if any 
of you have any comments about that, if you know anything about 
it, whether you think that's bad or good. It's competing with 
the chickens probably a little more than they want.
    What do you think, Mr. Roenigk?
    Mr. Roenigk. I'm certainly not a catfish industry expert, 
so I hesitate to speak about the catfish industry. But you're 
correct that in Mississippi there's a large catfish industry 
like some of our neighboring States.
    The broiler industry is very strong in Mississippi, 
Arkansas, and many other States. The investment and 
relationship is probably still evolving in the catfish 
industry. At some point, a business model probably will emerge 
where it has some better opportunity to exercise its advantage 
in the marketplace, whether it is branding or further 
processing or exporting or whatever.
    So, as you say, it's still a new industry. This mix will 
probably stay for a while until one model beats out another 
model, not that that will be totally the way the market is, but 
it's still evolving. I realize that's not a very helpful 
answer, but that's the best I know.
    Senator Cochran. I appreciate that, and we appreciate your 
contribution.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, we have the reconciliation 
bill and the tax cut beginning to be on the Floor about a half 
an hour ago, so I'm going to forego questions of the panel.
    I think your contributions have provided substantially 
different perspectives from I guess different viewpoints on 
these issues, and I think they contribute to our ability to 
understand how various groups and interests feel about these 
issues.
    So we appreciate the statements you've made. We do have, I 
think, five or six people on the third panel, and I want to be 
able to get to that before we have to go to the Floor of the 
Senate.
    Senator Cochran. Thank you, Senator. Thank you all for your 
preparation. We appreciate it very much.
    Our third panel of witnesses we would ask to come forward 
to the witness table. I will introduce them as they are coming 
forward. Mr. Dudley Butler represents the Mississippi 
Cattleman's Association.
    Robert Carlson is the President of the North Dakota's 
Farmers Union. Peter Carstensen is Associate Dean for Research 
and Faculty Development at the University of Wisconsin Madison 
Law School. Mr. Dan Kelley is an Illinois farmer. Tom Miller is 
the Attorney General of the State of Iowa, and David Reiss who 
is President Elect of the Illinois Pork Producers Association.
    We have copies of your prepared statements, and they will 
be made a part of the record in full. I would encourage you to 
make summary comments from your statement, and then we'll have 
an opportunity, I hope, to ask you some questions.
    Let's start off with our first witness in this third panel, 
Mr. Dudley Butler.

         STATEMENT OF DUDLEY BUTLER, ON BEHALF OF THE 
             MISSISSIPPI CATTLEMEN'S ASSOCIATION

    Mr. Butler. Mr. Chairman and members of the committee, I 
appreciate the opportunity you're giving me to testify. As you 
said, my name is Dudley Butler. I live on my ranch in Yazoo 
County, Mississippi. I'm also a practicing trial lawyer, 
arbitrator, mediator, as well as a cattleman.
    I serve as cochair of the ADR subcommittee, promotion 
subcommittee for the Bar Association, and I'm also acting as 
special assistant to the President of the National Cattleman's 
Beef Association.
    I want to speak to you about the contracts that are used in 
agriculture now, and most specifically about some of the 
clauses that are put in those contracts. I believe that 
arbitration is a valuable alternative to dispute resolution 
procedure if entered into knowingly and voluntarily.
    Under the right circumstances, it can be fair, cost 
effective, and time saving. Under the wrong circumstances, it 
is unfair and totally inequitable.
    Although I first became involved in the poultry industry 
while trying to promote arbitration and mediation, I must tell 
you that at this present time I represent numerous poultry 
growers in litigation against poultry companies. Part of that 
litigation involves the attack on mandatory arbitration clauses 
contained in poultry growing contracts.
    Many of these arbitration clauses require poultry growers 
to waive any right to a jury trial and also contained cost 
laden provision that make arbitration inaccessible. In other 
words, the litigation forum is taken away by contract, and the 
arbitration forum is taken away by economics, thereby leaving 
the grower with no forum in which to bring his dispute.
    These clauses are forced upon growers because they have no 
other resource than to accept these provisions under duress. 
They owe large sums of money on their farm and have no other 
way to repay the loans but to receive chickens from the poultry 
companies.
    Therefore, I feel that the arbitration clauses are being 
used as a weapon not as a dispute resolution device. This is 
obviously contrary to the intent of the framers of the Federal 
Arbitration Act as evidenced by section 2 which states that an 
arbitration provision in any maritime transaction or 
transaction involving commerce shall be valid, irrevocable, and 
enforceable save upon such grounds as exist at law or inequity 
for the revocation of any contract.
    Surely citizens should not be required to waive their 
constitutional right to a trial by jury while under such 
duress. As you well know, the constitutional right of trial by 
jury is as important as freedom of speech, religion, and other 
rights that were granted by the framers of our Constitution.
    I agree with many of my colleagues as well as the learned 
justices O'Connor and Rehnquist that the Federal Arbitration 
Act was not meant to apply in State courts. But was meant as a 
procedural statute to apply in Federal court to certain 
classifications of businesses as evidenced by the legislative 
history provided in the dissenting opinion, Southland 
Corporation v. Keating.
    In Breman v. Zapata Off-Shore Oil Company, the Supreme 
Court noted that contract fixing a particular forum for 
resolution of all disputes was made in an arm's length 
negotiation by experienced and sophisticated businessmen.
    A poultry growing contract is not an arm's length 
negotiated agreement. Quite to the contrary. As a contract of 
adhesion presented to the grower on a take-it-or-leave-it 
basis, poultry growers are not experienced and sophisticated 
businessmen.
    Therefore, my concern that I am presenting to this 
committee is that the use of mandatory arbitration clauses 
along with the waiver of any right to a trial by jury is, in 
fact, counterproductive to the promotion of the arbitration 
process.
    The arbitration process, although meant to be expedient and 
cost effective, has become extremely time consuming and 
expensive under the wording of many of the mandatory clauses 
now used in production contracts.
    Do we want a dispute resolution device, or do we want a 
cost controlling liability reduction device, and therefore an 
income producing element used in the agricultural industry? Do 
we want to preclude farmers from having any forum to air their 
disputes, thereby reducing the cost of operations for large 
companies and supposedly the cost of goods to consumers?
    What price are we willing to pay for cheaper food? Clearly 
any waiver of a right to a trial by jury must be clear and 
voluntary. This right is given to criminals, why is it not 
provided to law abiding hard working farmers?
    Mandatory arbitration clauses are also having an extremely 
detrimental effect to the reduction of litigation in that they 
are creating a totally new area to be litigated which is in 
direct conflict with the whole purpose of alternative dispute 
resolution.
    I think there are two simple answers to these complex 
problems. The first is for the Federal Arbitration Act to be 
amended to reflect exactly what courts and entities it applies 
to.
    The other is that the act can be amended or additional laws 
passed to mandate that an individual or entity be allowed to 
choose his forum, whether it be litigation or arbitration at 
the time the claim is made.
    This is the only time that a knowledgeable and voluntary 
decision can be made. Just as a yacht is not usable on a five-
acre farm pond, a John boat is not usable in an ocean. 
Decisions concerning proper forums have to be made after the 
type, complexity, and amount of the claim is known.
    We must look to history, for we can't see where we're going 
unless we know where we've been. This level of concentration in 
agriculture was experienced in the early 1900s, and arising 
from those problems was the passage of the Packers and 
Stockyard Act to protect farmers against corporation 
concentration. Today we must move to do the same.
    One move is the protection of producers against mandatory 
waiver of trial by jury and mandatory arbitration clauses. I 
remember early in law school a professor informed me that 
justice and fairness are not the same thing. He was right. 
Justice is based on the law, fairness is fueled by wisdom.
    The American Bar Association, the American Medical 
Association, and the American Arbitration Association on the 
commission on healthcare dispute resolution used such wisdom 
and found as follows: In disputes involving patients, binding 
forms of dispute resolution should be used only where the 
parties agree to do so after a dispute arises. This is the only 
way to guarantee that the agreement to arbitrate is both 
knowing and voluntary.
    It is necessary to ensure that the parties' constitutional 
and other legal rights are protected. I wholeheartedly agree 
with that finding and believe that the only way to assure the 
successful promotion of arbitration is to ensure that it is 
voluntary.
    I am concluding by citing to you from the book of Isaiah. 
Isaiah was a great religious and political influence during the 
reign of King Hezekiah and Juda, and he also served as his 
chief advisor.
    In chapter 10:12, ``Woe to those who make unjust laws, to 
those who issue oppressive decrees to deprive the poor of their 
rights and withhold justice from the oppressed of my people.''

                           Prepared statement

    I agree that agriculture is evolving, and I think it's 
paramount that the laws evolve with it to protect those that 
are out there producing on the family farm.
    I think it is going to develop into almost a national 
security issue if we do not do something to protect our people 
that are tilling the soil, raising chickens, raising hogs, 
raising cattle, and other types of farm.
    [The statement follows:]

                  Prepared Statement of Dudley Butler

    Mr. Chairman and members of the committee, I appreciate the 
opportunity you are giving me to testify. My name is Dudley Butler, I 
am from Yazoo County, Mississippi where my family and I live on our 
cattle ranch. I am a practicing trial lawyer, arbitrator and mediator, 
as well as a cattleman. I serve as co-chairman of the ADR promotions 
sub-committee for the Mississippi Bar Association and I am currently 
acting as special assistant to the President of the National 
Cattlemen's Beef Association.
    I grew up in the small town of Batesville, Mississippi living in a 
household with my Mother and Father, who was a union pipe fitter, and 
my maternal Grandmother and Grandfather, who was a grocer for Kroger 
Company. I think that you could say that my Father was a union man and 
my Grandfather was a company man. My paternal Grandfather was a very 
poor sharecropper in Humphrey County, Mississippi. I share this with 
you because I think it has helped me throughout my life to envision 
both sides of problems that are presented in any litigation or dispute.
    I believe that arbitration is a valuable alternative dispute 
resolution procedure if entered into knowingly and voluntarily. Under 
the right circumstances it can be fair, cost effective and time saving. 
Under the wrong circumstances it is unfair and totally inequitable. 
Although I first became involved with the poultry industry while trying 
to promote arbitration and mediation, I must tell you that at this time 
I represent numerous poultry growers in litigation against poultry 
companies. Part of that litigation involves the attack on the mandatory 
arbitration clauses contained in poultry growing contracts. Many of 
these arbitration clauses require poultry growers to waive any right to 
a jury trial and also contain cost laden provisions that make 
arbitration inaccessible. In other words, the litigation forum is taken 
away by contract and the arbitration forum is taken away by economics, 
thereby leaving the grower with no forum in which to bring his dispute. 
These clauses are forced upon the growers because they have no other 
recourse than to accept these provisions under duress. They owe large 
sums of money on their farm and have no other way to repay the loans 
but to receive chickens from the poultry companies. Therefore, I feel 
that the arbitration clauses are being used as a weapon not a dispute 
resolution device. This is obviously contrary to the intent of the 
framers of the Federal Arbitration Act as evidenced by Section 2 which 
states:

    ``A written provision in any maritime transaction or a contract 
evidencing a transacting involving commerce to settle by arbitration a 
controversy thereafter arising out of such contract or transaction, or 
the refusal to perform the whole or any part thereof, or an agreement 
in writing to submit to arbitration an existing controversy arising out 
of such contract, transaction, or refusal shall be valid, irrevocable, 
and enforceable, save upon such grounds as exists at law or in equity 
for the revocation of any contract.'' (emphasis added )

    Surely citizens should not be required to waive their 
constitutional right to a trial by jury while under such duress. As you 
well know, the constitutional right of trial by jury is as important as 
is freedom of speech, religion and other inalienable rights that were 
granted by the framers of our Constitution. I agree with many of my 
colleagues, as well as the learned Justices O'Connor and Rehnquist, 
that the Federal Arbitration Act was not meant to apply in state courts 
but was meant as a procedural statute to apply in Federal court to 
certain classifications of businesses as evidenced by the legislative 
history provided in the dissenting opinion in Southland Corporation v. 
Keating, 465 U.S.1(1984) which is as follows:

    ``Section 2 does not, on it's face, identify which judicial forums 
are bound by its requirements or what procedures govern its 
enforcement. The FAA deals with these matters in Sec. Sec. 3 and 4. 
Section 3 provides:
    `If any suit or proceeding be brought in any of the courts of the 
United States upon any issue referable to arbitration . . . the court . 
. . shall on application of one of the parties stay the trial of the 
action until arbitration has been had in accordance with the terms of 
the agreement . . . . '

    Section 4 species that a party aggrieved by another's refusal to 
arbitrate ``may petition any United states district court which, save 
for such agreement, would have jurisdiction under title 28, in a civil 
action or in admiralty of the subject matter . . . for an order 
directing that such arbitration proceed in the manner provided for in 
such agreement . . . .''
    Today the Court takes the facial silence of Sec. 2 as a license to 
declare that state as well as Federal courts must apply Sec. 2. In 
addition, though this is not spelled out in the opinion, the Court 
holds that in enforcing this newly discovered Federal right states 
courts must follow procedures specified in Sec. 3. The Court's decision 
is impelled by an understandable desire to encourage the use of 
arbitration, but it utterly fails to recognized the clear congressional 
intent underlaying the FAA. Congress intended to require Federal, not 
State, courts to respect arbitration agreements.
    The FAA was enacted in 1925. As demonstrated infra, at 24-29, 
Congress thought it was exercising its power to dictate either 
procedure or ``general Federal law'' in Federal courts. The issue 
presented here is the result of three subsequent decisions of this 
Court.
    In 1938 this Court decided Erie R. Co. v. Tompkins, 304 U.S.64. 
Erie denied the Federal Government the power to create substantive law 
solely by virtue of the Art. III power to control Federal-court 
jurisdiction. Eighteen years later the Court decided Bernhardt v. 
Polygraphic Co., 350 U.S. 198 (1956). Bernhardt held that the duty to 
arbitrate a contract dispute is outcome-determinative--i. e. 
``substantive''--and therefore a matter normally governed by state law 
in Federal diversity cases.
    Bernhardt gave rise to concern that the FAA could thereafter 
constitutionally be applied only in Federal-court cases arising under 
Federal law, not in diversity cases.
    In Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 U.S. 395, 404-
405 (1967), we addressed that concern, and held that the FAA may 
constitutionally be applied to proceedings in a Federal diversity 
court. The FAA covers only contracts involving interstate commerce or 
maritime affairs, and Congress ``plainly has power to legislate'' in 
that area.
    Nevertheless, the Prima Paint decision ``carefully avoided any 
explicit endorsement of the view that the Arbitration Act embodied 
substantive policies that were to be applied to all contracts within 
its scope, whether sued on in state or Federal courts.'' P. Bator, P. 
Mishkin, D. Shapiro, & H. Wechsler, Hart and Wechsler's The Federal 
Courts and the Federal System 731-732(2d ed. 1978). Today's case is the 
first in which this Court has had occasion to determine whether the FAA 
applies to state-court proceedings. One statement on the subject did 
appear in Moses H. Cone Memorial Hospital v. Mercury Construction 
Corp., 460 U.S. 1(1983), but that case involved a Federal, not a State, 
court proceeding; its dictum concerning the law applicable in state 
courts was wholly unnecessary to its holding.
    The majority opinion decides three issues. First, it holds that 
Sec. 2 creates Federal substantive rights that must be enforced by the 
state courts. Second, though the issue is not raised in this case, the 
Court states ante, at 15-16, n. 9, that Sec. 2 substantive rights may 
not be the basis for invoking Federal-court jurisdiction under 28 
U.S.C. Sec. 1331. Third, the Court reads Sec. 2 to require state courts 
to enforce Sec. 2 rights using procedures that mimic those specified 
for Federal courts by FAA Sec. Sec. 3 and 4. The first of these 
conclusions is unquestionably wrong as a matter of statutory 
construction; the second appears to be an attempt to limit the damage 
done by the first; the third is unnecessary and unwise.
    One rarely finds a legislative history as unambiguous as the FAA's. 
That history establishes conclusively that the 1925 Congress viewed the 
FAA as a procedural statute, applicable only in Federal courts, 
derived, Congress believed, largely from the Federal power to control 
the jurisdiction of the Federal courts.
    In 1925 Congress emphatically believed arbitration to be a matter 
of ``procedure.'' At hearings on the Act congressional Subcommittees 
were told: ``The theory on which you do this is that you have the right 
to tell the Federal courts how to proceed'' The House Report on the FAA 
stated: ``Whether an agreement for arbitration shall be enforced or not 
is a question of procedure . . .'' On the floor of the House 
Congressman Graham assured his fellow Members that the FAA ``does not 
involve any new principle of law except to provide a simple method . . 
.  in order to give enforcement . . . It creates no new legislation, 
grants no new rights, except a remedy to enforce an agreement in 
commercial contracts and in admiralty contracts.''
    A month after the Act was signed into law the American Bar 
Association Committee that had drafted and pressed for passage of the 
Federal legislation wrote:

    ``The statute establishes a procedure in the Federal courts for the 
enforcement of arbitration agreements . . . A Federal statute providing 
for the enforcement of arbitration agreements does relate solely to 
procedure of the Federal courts. . . . [W]hether or not an arbitration 
agreement is to be enforced is a question of the law of procedure and 
is determined by the law of the jurisdiction wherein the remedy is 
sought. That the enforcement of arbitration contracts is within the law 
of procedure as distinguished from substantive law is well settled by 
the decisions of our courts.''

    Since Bernhardt, a right to arbitration has been characterized as 
``substantive,'' and that holding is not challenged here. But Congress 
in 1925 did not characterize the FAA as this Court did in 1956. 
Congress believed that the FAA established nothing more than a rule of 
procedure, a rule therefore applicable only in the Federal courts.''
    If characterizing the FAA as procedural was not enough, the 
draftsman of the Act, the House Report, and the early commentators all 
flatly stated that the Act was intended to affect only Federal court 
proceedings. Mr. Cohen, the American Bar Association member who drafted 
the bill, assured two congressional Subcommittees in joint hearings:

    ``Nor can it be said that the Congress of the United States, 
directing its own courts . . ., would infringe upon'' the provinces or 
prerogatives of the States . . . [T]he question of the enforcement 
relates to the law of remedies and not to substantive law. The rule 
must be changed for the jurisdiction in which the agreement is sought 
to be enforced . . . There is no disposition therefore by means of the 
Federal bludgeon to force an individual State into an unwilling 
submission to arbitration enforcement.''

    The House Report on FAA unambiguously stated: ``Before 
[arbitration] contracts could be enforced in the Federal courts . . . 
This law is essential. The bill declares that such agreements shall be 
recognized and enforced by the courts of the United States.''
    Yet another indication that Congress did not intend the FAA to 
govern state-court proceedings is found in the powers Congress relied 
on in passing the Act. The FAA might have been grounded on Congress' 
powers to regulate interstate and maritime affairs, since the Act 
extends only to contracts in those areas. There are, indeed, references 
in the legislative history to the corresponding Federal powers. More 
numerous, however, are the references to Congress' pre-Erie power to 
prescribe ``general law'' applicable in all Federal courts. At the 
congressional hearings, for example: ``Congress rests solely upon its 
power to prescribe the jurisdiction and duties of the Federal Courts.'' 
And in the House Report:

    ``The matter is properly the subject of Federal action. Whether an 
agreement for arbitration shall be enforced or not is a question of 
procedure to be determined by the law court in which the proceeding is 
brought and not one of substantive law to be determined by the law of 
the forum in which the contract is made . . .''

    Plainly, a power derived from Congress' Art. III control over 
Federal-court jurisdiction would not by any flight of fancy permit 
Congress to control proceedings in state courts.
    The foregoing cannot be dismissed as ``ambiguities'' in the 
legislative history. It is accurate to say that the entire history 
contains only one ambiguity, and that appears in the single sentence of 
the House Report cited by the Court ante, at 12-13. That ambiguity, 
however, is definitively resolved elsewhere in the same House Report, 
see supra, at 27, and throughout the rest of the legislative history.
    The structure of the FAA itself runs directly contrary to the 
reading the Court today gives to Sec. 2. Sections 3 and 4 are the 
implementing provisions of the Act, and they expressly apply only to 
Federal courts. Section 4 refers to the ``United States district 
court[s],'' and provides that it can be invoked only in a court that 
has jurisdiction under Title 28 of the United States Code. As 
originally enacted, Sec. 3 referred, in the same terms as Sec. 4, to 
``courts [or court] of the United States'' There has been a minor 
amendment in Sec. 4's phrasing, but no substantive change in either 
sections's limitation to Federal courts.
    None of this Court's prior decisions has authoritatively construed 
the Act otherwise. It bears repeating that both Prima Paint and Moses 
H. Cone involved Federal-court litigation. The applicability of the FAA 
to state-court proceedings was simply not before the Court in either 
case. Justice Black would surely be surprised to find either the 
majority opinion or his dissent in Prima Paint cited by the Court 
today, as both are, ante, at 11, 12. His dissent took pains to point 
out:

    ```The Court here does not hold . . . that the body of Federal 
substantive law created by Federal judges under the Arbitration Act is 
required to be applied by state courts. A holding to that effect-which 
the Court seems to leave up in the air would flout the intention of the 
framers of the Act.''

    Nothing in the Prima Paint majority opinion contradicts this 
statement.
    The Prima Paint majority gave full but precise effect to the 
original congressional intent it recognized that notwithstanding the 
intervention of Erie the FAA's restrictive focus in maritime and 
interstate contracts permits its application in Federal diversity 
courts. Today's decision, in contrast, glosses over both the careful 
crafting of Prima Paint and the historical reasons that made Prima 
Paint necessary, and gives the FAA a reach far broader than Congress 
intended.''
    Section 2, like the rest of the FAA, should have no application 
whatsoever in state courts. Assuming, to the contrary that Sec. 2 does 
create a Federal right that state courts must enforce, state courts 
should nonetheless be allowed, at least in the first instance, to 
fashion their own procedures for enforcing the right. Unfortunately, 
the Court seems to direct that the arbitration clause at issue here 
must be specifically enforced; apparently no other means of enforcement 
is permissible.
    It is settled that a state court must honor federally created 
rights and that it may not unreasonably undermine them by invoking 
contrary local procedure. ``[T]he assertion of Federal rights, when 
plainly and reasonably made, is not to be defeated under the name of 
local practice.'' Brown v Western A. Co. of Alabama, 338 U.S. 294,299 
(1949). But absent specific direction from Congress the state courts 
have always been permitted to apply their own reasonable procedures 
when enforcing Federal rights. Before we undertake to read a set of 
complex and mandatory procedures into Sec. 2's brief and general 
language, we should at a minimum allow state courts and legislatures a 
chance to develop their own method for enforcing the new Federal 
rights. Some might choose to award compensatory or punitive damages for 
the violation of an arbitration agreement; some might award litigation 
costs to the party who remained willing to arbitrate; some might affirm 
the ``validity and enforceability'' of arbitration agreements in other 
ways. Any of these approaches could vindicate Sec. 2 rights in a manner 
fully consonant with the language and background of that provision.
    The unelaborated terms of Sec. 2 certainly invite flexible 
enforcement. At common law many jurisdictions were hostile to 
arbitration agreements. Kulukundis Shipping Co. v. Amtorg Trading 
Corp., 126 F. 2d 978, 982-984 (CA2 1942). That hostility was reflected 
in two different doctrines: ``revocability,'' which allowed parties to 
repudiate arbitration agreements at any time before the arbitrator's 
award was made and ``invalidity'' or ``enforceability,'' equivalent 
rules that flatly denied any remedy for the failure to honor an 
arbitration agreement. In contrast, common-law jurisdiction that 
enforced arbitration agreements did so in at least three different ways 
through actions for damages, actions for specific enforcement, or by 
enforcing sanctions imposed by trade and commercial associations on 
members who violated arbitration agreements. In 1925 a forum allowing 
any one of these remedies would have been thought to recognize the 
``validity and enforceability'' of arbitration clauses.
    This Court has previously rejected the view that state courts can 
adequately protect Federal rights only if ``such courts in enforcing 
the Federal right are to be treated as Federal courts and subjected pro 
hac vice to [federal] limitation . . . .'' Minneapolis & St. Louis R. 
Co. v Bombolis, 241 U.S. 211, 221 (1916). As explained by Professor 
Hart:

    ``The general rule, bottomed deeply in belief in the importance of 
state control of state judicial procedure, is that Federal law takes 
the state courts as it finds them. . . . Some differences in remedy and 
procedure are inescapable if the different governments are to retain a 
measure of independence in deciding how justice should be administered. 
If the differences become so conspicuous as to affect advance 
calculations of outcome, and so to induce an undesirable shopping 
between forums, the remedy does not lie in the sacrifice of the 
independence of either government. It lies rather in provision by the 
Federal government, confident of the justice of its own procedures, of 
a Federal forum equally accessible to both litigants.''

    In summary, even were I to accept the majority's reading of Sec. 2, 
I would disagree with the Court's disposition of this case. After 
articulating the nature and scope of the Federal right it discerns in 
Sec. 2, the Court should remand to the state court, which has acted, 
heretofore, under a misapprehension of Federal law. The state court 
should determine, at least in the first instance, what procedures it 
will follow to vindicate the newly articulated Federal rights. Cf. 
Missouri ex rel. Southern R. Co, v Mayfield, 340 U.S. 1,5 (1950).
    The Court, ante, at 15-16, rejects the idea of requiring the FAA to 
be applied only in Federal courts partly out of concern with the 
problem of forum shopping. The concern is unfounded. Because the FAA 
makes the Federal courts equally accessible to both parties to a 
dispute, no forum shopping would be possible even if we gave the FAA a 
construction faithful to the congressional intent. In controversies 
involving incomplete diversity of citizenship there is simply no access 
to Federal court and therefore no possibility of forum shopping. In 
controversies with complete diversity of citizenship the FAA grants 
Federal-court access equally to both parties; no party can gain any 
advantage by forum shopping. Even when the party resisting arbitration 
initiates an action in state court, the opposing party can invoke FAA 
Sec. 4 and promptly secure a Federal-court order to compel arbitration. 
See, e.g., Moses H. Cone Memorial Hospital v, Mercury Construction 
Corp., 460 U.S. 1 (1983).
    Ironically, the FAA was passed specifically to rectify forum 
shopping problems created by this Court's decision in Swift v Tyson, 16 
Pet. (1842). By 1925 several major commercial States had passed state 
arbitration laws, but the Federal courts refused to enforce those laws 
in diversity cases. The drafters of the FAA might have anticipated 
Bernhardt by legislation and required Federal diversity courts to adopt 
the arbitration law of the State in which they sat. But they 
deliberately chose a different approach. As was pointed out at 
congressional hearings, an additional goal of the Act was to make 
arbitration agreements enforceable even in Federal courts located in a 
States that had no arbitration law. The drafters' plan for maintaining 
reasonable harmony between state and Federal practices was not to 
bludgeon States into compliance, but rather to adopt a uniform Federal 
law, patterned after New York's path-breaking state statue, and 
simultaneously to press for passage of coordinated state legislation. 
The key language of the Uniform Act for Commercial Arbitration was, 
accordingly, identical to that in Sec. 2 of the FAA.
    In Summary, forum shopping concerns in connection with the FAA are 
a distraction that does not withstand scrutiny. The Court ignores the 
drafters' carefully devised plan for dealing with those problems. V.
    Today's decision adds yet another chapter to the FAA's already 
colorful history. In 1842 this Court's ruling in Swift v. Tyson, supra, 
set up a major obstacle to the enforcement of state arbitration laws in 
Federal diversity courts. In 1925 Congress sought to rectify the 
problem by enacting the FAA; the intent was to create uniform law 
binding only in the Federal courts. In Erie R. Co. v. Thomkins, 304 
U.S. 64 (1938), and then in Bernhart Polygraphic Co., 350 U.S. 198 
(1956), this Court significantly curtailed Federal power. In 1967 our 
decision in Prima Paint upheld the application of the FAA in a Federal-
court proceeding as a valid exercise of Congress' Commerce Clause and 
admiralty powers. Today the Court discovers a Federal right in FAA 
Sec. 2 that the state courts must enforce. Apparently confident that 
state courts are not competent to devise their own procedures for 
protecting the newly discovered Federal right, the Court summarily 
prescribes a specific procedure, found nowhere in Sec. 2 or its common-
law origins, that the state courts are to follow.
    Today's decision is unfaithful to congressional intent, 
unnecessary, and, in light of the FAA's antecedents and the intervening 
contraction of Federal power, inexplicable. Although arbitration is a 
worthy alternative to litigation, today's exercise in judicial 
revisionism goes to far. I respectfully dissent.
    In The Breman v. Zapata Off-Shore Co., 407 U.S.1, 12 (1972), the 
Supreme Court noted that the contract fixing a particular forum for 
resolution of all disputes ``was made in arm's-length negotiations by 
experienced and sophisticated businessmen, and absent some compelling 
and countervailing reason it should be honored by the parties and 
enforced by the courts.''
    A Poultry Growing Contract is not an arm's-length negotiated 
agreement, quite the contrary, it is a contract of adhesion presented 
to the grower on a ``take it or leave it'' basis. Poultry growers are 
not experienced and sophisticated businessmen.
    Although this is true, we must currently recognize that the Supreme 
Court, whose majority opinion in the Southland case hinged on the term 
commerce, has spoken and therefore we must accept their decision based 
on the present law, that arbitration clauses are enforceable in state 
court actions against all types of business and individuals. Therefore 
my concern that I am presenting to this committee is that the use of 
mandatory arbitration clauses along with the waiver of any right to a 
jury trial is in fact counterproductive to the promotion of the 
arbitration process. The arbitration process although meant to be 
expedient and cost effective has become extremely time consuming and 
expensive under the wording of many of the mandatory clauses now used 
in production contracts. Do we want a dispute resolution device or do 
we want a cost controlling liability reduction device and therefore a 
income producing element used in the agricultural industry? Do we want 
to preclude farmers from having any forum to air their disputes, 
thereby reducing the cost of operations for large companies and 
supposedly the cost of goods to consumers? What price are we willing to 
pay for cheaper food? Clearly any waiver of a right to trial by jury 
must be clear and voluntary. This right is given to criminals, why is 
it not provided to law abiding, hard working farmers.
    Mandatory arbitration clauses are also having an extremely 
detrimental effect to the reduction of litigation, in that they are 
creating a totally new area to be litigated, which is in direct 
conflict with the whole purpose of alternative dispute resolution.
    I want to make it perfectly clear that I am not here trying to 
attack the arbitration process, quite the contrary, I am here to 
promote it. Although I do not agree that it should be as expansive as 
our courts have ruled, I have accepted this proposition and will flow 
with that change. A wise old man told me when I was somewhat younger 
that change is not painful, resistance to change is painful. Therefore, 
we must look to find ways to alleviate these problems. I think that 
there are two simple answers to these complex problems.
  --The Federal Arbitration Act can be amended to reflect exactly what 
        courts and entities it applies to.
  --The act can also be amended or additional laws passed to mandate 
        that an individual or entity be allowed to choose his forum, 
        whether it be litigation or arbitration, at the time the claim 
        is made.
    This is the only time that a knowledgeable and voluntary decision 
can be made. Just as a yacht is not usable in a five acre farm pond, a 
john boat is not usable in the ocean. Decisions concerning proper 
forums have to made after the type, complexity and amount of the claim 
is known.
    We must look to history, for we can't see where we are going unless 
we know where we have been. This level of concentration in agriculture 
was experienced in the early 1900's and arising from those problems was 
the passage of the Packers and Stockyard Act to protect farmers against 
corporate concentration. Today we must move to do the same. One move is 
the protection of producers against mandatory waiver of trial by jury 
and mandatory arbitration clauses.
    I remember, early in Law School, a professor informed me that 
justice and fairness are not the same thing. He was right, justice is 
based on the law, fairness is fueled by wisdom. The American Bar 
Association, The American Medical Association, and The American 
Arbitration Association on the Commission on Healthcare Dispute 
Resolution used such wisdom and found as follows:

    ``In disputes involving patients, binding forms of dispute 
resolutions should be used only where the parties agree to do so after 
a dispute arises.'' This is ``the only way to guarantee that the 
agreement to arbitrate is both knowing and voluntary,'' it is necessary 
to ensure ``that the parties constitutional and other legal rights are 
protected.''

    I whole heartedly agree with this finding and believe that the only 
way to assure the successful promotion of the arbitration process is to 
ensure that it is voluntary.
    I will conclude by citing to you from the Book of Isaiah. Isaiah 
was a great religious and political influence during the reign of King 
Hezekiah, King of Judah, whom he served as chief advisor. Chapter10: 1-
2 ``Woe to those who make unjust laws, to those who issue oppressive 
decrees, to deprive the poor of their rights and withhold justice from 
the oppressed of my people, making widows their prey and robbing the 
fatherless.''

    Senator Cochran. Thank you, Mr. Butler.
    Mr. Carlson, President of the North Dakota's Farmers Union. 
You may proceed.
    Senator Dorgan. Mr. Chairman, let me welcome Mr. Carlson. 
Mr. Carlson is not only president of the Farmers Union, but 
it's a strong national voice for family farmers and active 
nationally for a long, long while on these issues. And I 
welcome him to the committee.

        STATEMENT OF ROBERT CARLSON, PRESIDENT, NORTH DAKOTA 
                          FARMERS UNION

    Mr. Carlson. Thank you very much, Senator Dorgan, and I 
thank you very much, Senator Cochran, for holding this hearing. 
It's a pleasure to be here and a great opportunity to be here.
    Mr. Chairman, I'm going to summarize my testimony rather 
extensively. You have a written copy, and I will try to just 
hit some of the high points.
    As I understand it, the reason for this committee holding 
this hearing was to help answer the question, and I may be 
paraphrasing what you said earlier, Mr. Chairman, but to help 
answer the question does the increased concentration in the 
agricultural marketplace result in demands upon this committee 
for greater appropriations in the field of sport and farmers?
    Mr. Chairman, our members, and we are the largest farm 
organization in the State, would answer that question yes by 
simple logic. When you have more concentration, you have less 
competition and farm income is reduced. Therefore our demands 
on this committee and on this Congress for supplemental farm 
income is increased.
    Now, I grant you it is difficult to quantify that amount in 
many cases. In one I think we do have some quantification of 
the cost, and that's in the area of transportation. People have 
talked to this committee about the food chain. Farmers are the 
beginning of that food chain, and I would say in many cases in 
terms of market power certainly they're the weakest link in 
that food chain.
    One of the most powerful links in that food chain is very 
close to us as farmers, and that's transportation. In North 
Dakota, more than 80 percent of the grain in our State is 
shipped out by rail. Yet only three percent of our State's 
elevators have access to more than one railroad.
    In short, North Dakota farmers essentially are captive 
shippers to either Burlington, Santa Fe Springs, or the other 
alternative, the Canadian Pacific line to move their 
commodities to domestic users in export terminals.
    The North Dakota Public Service Commission and this is 
where we have quantification estimates that North Dakota 
farmers are overcharged $100 million annually due to lack of 
competition. That is $100 million in today's pathetic grain 
prices that is made up for, to some degree, by our loan 
deficiency payments.
    So that $100 million that is due to overcharging by 
railroads in North Dakota is actually transferred from LDPs to 
the railroads.
    You have the Upper Great Plains Transportation Institute at 
North Coast State University, a very well-respected academic 
think tank also can quantify the cost to farmers of the lack of 
competition in the rail business.
    Just to illustrate, the Burlington Northern Santa Fe 
transportation rate per car mile for 52-car unit train from 
Marmarth, North Dakota, to Minneapolis, Minnesota, was $5.68. 
The rate per car mile for the same type of train from 
Creighton, Nebraska, to Minneapolis was $3.17, a 79 percent 
difference.
    Again, the train is similar, and the mileage is very 
similar. What brings this comparison into focus is the fact 
that the distance from Mina to Minneapolis is 472 miles on the 
Burlington Northern line, versus 463 miles on the Creighton to 
Minneapolis line. And such disparity in rates show up in unit 
train great movements to the Pacific northwest in a very, very 
similar manner.
    Clearly the lack of competing railroads leads to higher 
rates and poorer service to the grain shippers who are captive 
to one railroad line. Whether there is not competition, there 
must be regulation, and Congress needs to provide authority for 
rail regulation in those types of instances.
    A second area I'll briefly summarize, Mr. Chairman, is in 
the identification of food chains. In 1999, Dr. William 
Heffernan of the University of Missouri identified two food 
chain businesses or conglomeration of businesses capable of 
controlling food production from genetic engineering to the 
grocery store shelf. One of those entities was Cargill 
Monsanto, a second was ConAgra by itself, and a third Novartis/
ADM. Cooperatives which were formed to provide independent 
alternatives have to compete with these vertically integrated 
corporations.
    Some co-ops have had to form alliances with those chains in 
order to survive. More alarmingly, some cooperatives have been 
out muscled by corporate giants, denying farmers a measure of 
self-control and competition.
    Earlier this month, Archer Daniels Midland and Farmland 
industry completed a deal that gives ADM control of Farmland 
Grain Elevators across the country. The agreement between ADM 
and Farmland means ADM will take control of Farmland's 24 grain 
elevators in a joint venture.
    The join venture creates a company, ADM Farmland, Inc., to 
lease and operate Farmland's grain assets. But despite being 
called a joint venture, there is little doubt that ADM will be 
in the operation driver seat when it comes to operations. So 
the big get bigger and competition lessens.
    A third and final area, Mr. Chairman, Mr. Heffernan 
identified just this year in a study commissioned by the 
National Farmer's Union rapid growth of concentration in the 
retail food industry. And let me just pick a couple of 
highlights from that excellent study.
    Major players in food retailing in the United States are 
Kroger, Albertson's, Wal-Mart, Safeway, and Ahold USA, a Dutch 
firm. These five supermarket chains account for over 40 percent 
of retail food sales in the United States. By comparison, the 
top five retailers counted for only 20 percent of food sales in 
1993.
    What does that mean to farmers and to farm income? Well, it 
means that as retailers grow larger through acquisitions and 
mergers, they develop their own vertically integrated 
distribution systems that tend to shut out wholesalers, small 
processors, and smaller retailers.
    And what that means is that those of us who have been 
active in forming value-added cooperatives in North Dakota and 
elsewhere face barriers to entering products into the 
marketplace, into the food stores when we do form those, be it 
a pasta cooperative or meat cooperatives. We need to get shelf 
space, and when those corporations charge high slotting fees, 
it's very difficult to do that.

                           Prepared statement

    I will conclude, Mr. Chairman, by saying that our 
organization supports the insertion of a concentration title 
into the new farm bill. We have about a dozen recommendations 
that we believe should be a part of that concentration title. I 
will leave those for you to see in my written testimony and 
conclude with my sincere thanks to you for holding this 
hearing.
    [The statement follows:]

                  Prepared Statement of Robert Carlson

    Mr. Chairman: My name is Robert Carlson. I have a small grains and 
bison farm near Glenburn, North Dakota. Also, I am president of North 
Dakota Farmers Union, my state's largest general farm organization.
    I appreciate this opportunity to share with you the impact to 
farmers and ranchers that is occurring due to concentration among 
agricultural businesses.
    One fact is indisputable. There are fewer farmers today than there 
were 20 years ago, and there are fewer businesses in control of the 
transportation, processing, and marketing of family farm produced crops 
and livestock. Big business has merged into fewer and larger companies 
by choice. Sometimes they do so to gain efficiencies, often they do so 
to more effectively dominate a market. On the other hand, family-sized 
farms are not getting bigger by choice. While many food processing 
businesses are recording record profits, many farmers and ranchers are 
struggling to get by. Clearly, some measure of the healthy profits 
being reaped by big business are coming at the expense of our nations' 
small farms and ranches. The viability of our nation's rural 
communities and infrastructure is closely linked to the relative 
financial health of farms and ranches.

                             TRANSPORTATION

    Farmers are the first link in our nation's food system. They 
provide more than enough crops and livestock to feed our nation. The 
balance is exported which reduces our nation's trade deficit. In North 
Dakota, more than 80 percent of the grain is shipped out by rail. Yet 
only three percent of my state's elevators have access to more than one 
railroad. In short, North Dakota farmers essentially are captive 
shippers to either Burlington Northern Sante Fe or Canadian Pacific Soo 
Line to move their commodities to domestic users and export terminals. 
The North Dakota Public Service Commission estimates that North Dakota 
farmers are overcharged $100 million annually due to a lack of 
competition. The Upper Great Plains Transportation Institute (UGPTI) 
has studied numerous transportation issues that affect North Dakota 
farmers. UGPTI found, for example, that BNSF's transportation rate per 
car mile for a 52-car unit train from Minot, ND to Minneapolis, MN, was 
$5.68. The rate per car mile for the same type of train from Crete, NE, 
to Minneapolis was $3.17--a 79 percent difference. What brings this 
comparison into focus is the fact that the distance from Minot to 
Minneapolis is 472 miles on BNSF's main line versus 463 miles from 
Crete to Minneapolis on BNSF's main line through Nebraska.
    Such disparity in rates shows up in unit-train grain movements to 
the Pacific Northwest (PNW). BNSF's rate for grain moving from Devils 
Lake, ND, to an export terminal in Portland, OR, is considerably higher 
than for grain shipped from Hastings, NE, to the same terminal even 
though the distance from Devils Lake is 1,424 as compared to 1,788 
miles.
    In the 1970s, North Dakota was served by five Class I railroads 
Northern Pacific, Great Northern, Soo Line, Milwaukee Road, and Chicago 
Northwestern. One can reasonably assume that five carriers competed for 
grain shipments. With only two Class I railroads today, farmers are 
faced with trucking their grain a considerable distance to choose 
between two railroads. In fact, Soo Line is now part of the larger 
Canadian Pacific Railroad, while Burlington Northern Sante Fe's 35,000 
route miles cover 28 western states and two Canadian provinces. It's 
worth noting that in Nebraska, where BNSF's rates are lower, Union 
Pacific operates a high density main line which runs parallel to BNSF. 
Due to concentration in the rail industry, Union Pacific and BNSF have 
emerged as the two dominate-- and only remaining Class I--western rail 
giants. Both railroads serve many of the same export facilities, 
manufacturing regions and transportation gateways, which creates keen 
competition.
    In effect, Burlington Northern Sante Fe is profiting at the expense 
of North Dakota farmers. At the same time, farmers in my state are put 
at a competitive disadvantage because lower shipping rates provide 
Nebraska farmers with a ``built-in'' discount which can be used to 
increase their share of the export market. Without strong competition, 
railroads take full advantage of their captive shippers. The Surface 
Transportation Board is set up to consider complaints regarding rates. 
Often, small shippers and individual farmers are overwhelmed by the 
expense, time, and resources required to initiate a case to prove a 
railroad has market dominance. Just recently, BNSF was ready to merge 
with Canadian National, a transcontinental railroad across Canada, 
until the U.S. government put a moratorium on mergers. CN already has 
merged one U.S. railroad--Illinois Central--into its map of route 
miles. How few railroads will it take before one no longer has to make 
a case for market dominance?
                             FOOD CLUSTERS

    In the 1950s, there were hundreds of Class I railroads. Today there 
are but a handful. The old adage that ``bigger is better'' doesn't 
apply to increasing concentration in agricultural industries, 
especially considering the impact to family farm agriculture and rural 
economies--be it transportation or food clusters.
    In 1999, Dr. William Heffernan of the University of Missouri-
Colombia, released findings of a study which illustrated how 
consolidation in the food and agriculture industry had molded hundreds 
of independent food companies into four or five ``food clusters.'' A 
few business giants understand well how using their massive economic 
muscle can squeeze higher rates of return for stockholders at the 
expense of producers and consumers.
    Concentration spawns numerous negative consequences that are felt 
across rural America, including:
  --Harming community development by taking profits back to corporate 
        headquarters instead of investing in the communities in which 
        the goods were produced.
  --Eliminating independent producers and other independent businesses, 
        who will not be able to stay in business without agreeing to be 
        linked to ``the chains'' for access to inputs and marketing.
  --Making it more difficult for new businesses to start.
    Who are ``the chains'' in Heffernan's study? Three food chains are 
capable of controlling food production from genetic engineering to the 
grocery store shelf: Cargill-Monsanto, ConAgra, and Novartis-ADM. The 
first two built chains through acquisitions, while Novartis-ADM relies 
on marketing agreements.
    Cooperatives, which were formed to provide independent 
alternatives, have to compete with these vertically-integrated 
corporations. Some co-ops have had to form alliances with the chains in 
order to survive. More alarmingly, some cooperatives have been out-
muscled by corporate giants, denying farmers a measure of self control 
and competition.
    Earlier this month, Archer Daniels Midland Co. and Farmland 
Industries completed a deal that gives ADM control of Farmland grain 
elevators across the country. The agreement between ADM and Farmland, 
the largest farmer-owned U.S. cooperative, means ADM will take control 
of Farmland's 24 grain elevators. The joint venture creates a company, 
ADM/Farmland Inc., to lease and operate Farmland's grain assets 
throughout the United States. Despite being called a joint venture, 
there's little doubt that ADM will be in the driver's seat when it 
comes to operations. The big get bigger and competition lessens.
    Heffernan's study reveals some alarming trends regarding the big 
business of ownership and control of the. Food system. As the study 
notes, ``The changes are the result of notoriously short-sighted market 
forces and not the result of public dialogue.'' Think of the food 
system as an hour glass with producers at the top and consumers at the 
bottom. There are millions of producers and many millions of consumers 
at either end, yet only a handful of chains control the processing 
bottleneck middle. In the 1980s, economists shared a general agreement 
that if four firms controlled 40 percent of the market, that market was 
no longer competitive.
    Current information on market control is much harder to come by. 
Heffernan estimated that four firms control more than 40 percent of the 
processing of major commodities produced in the Midwest. For example, 
ConAgra is on the list of the top four processing firms for beef, pork, 
turkeys and sheep (as well as seafood). At the time of the study, 
ConAgra slipped to fifth place in broiler production and processing. 
The data also suggested vertical integration in the food system. 
Cargill ranks in the top four firms producing animal feed, feeding 
cattle and processing cattle.
    The information doesn't reveal the extent of vertical integration 
in the food system in the U.S. or the complex web of interactions among 
the top four firms. Nor does the study attempt to address the global 
nature of the food system. Cargill has operations in 70 countries and 
is a privately held firm. Difficulty in obtaining information about 
such firms makes it equally difficult to formulate public policy 
regarding concentration.
    ``The major concern about concentration in the food system focuses 
on the control exercised by a handful of firms over decision-making 
throughout the food system. The question is: Who is able to make 
decisions about buying and selling products in a marketplace,''' stated 
Heffernan's report.
    In the past, most global grain firms were family-held operations 
that operated in one or two stages of the food system in a few 
commodities. Today's food clusters, however, are weaving economic webs 
that trap farmers and ranchers. ConAgra Fertilizer Company may supply 
the fertilizer for the crop in the field, then buy the grain through 
ConAgra Grain Company and arrange for it to be to ConAgra Flour 
Milling. Chun King, a subsidiary of ConAgra could then use the flour 
for a product destined for a grocery store shelf. When a few companies 
can wield such market dominance from one end of the food chain to the 
other, it stands to reason that ConAgra will act to keep everything all 
in the corporate family regardless of the impact to family farmers.
    Today the system is much more complex, beginning with involvement 
in biotechnology, extending through production and ending with highly 
processed food. Through mergers, acquisitions, alliances, joint 
ventures, contracts, partnerships and agreements, the major chains are 
assembling ``clusters of firms'' that control the food system from the 
gene to the supermarket. Within this emerging system, there will be no 
markets. There will be no price discovery from the gene, fertilizer, 
processing and production to the supermarket shelf. The only time the 
public will know the price is when a product arrives in the 
supermarket.
    ``As this system evolves, even the price of the livestock feed and 
its ingredients, such as corn, will not be known to the public, because 
like today's broilers the product will not be sold,'' Heffernan said. 
In a food chain cluster, the food product is passed along from stage to 
stage, but ownership never changes. The farmer becomes a grower, 
providing labor and often some of the capital, but never owning the 
product as it moves through the food system and never making the major 
management decisions,'' according to the study.
    Heffernan identified the following rapidly emerging food clusters: 
Cargill/Monsanto; ConAgra; and Novartis/ADM.
    Cargill/Monsanto is a leading biotechnology firm and an established 
cluster. Cargill has the deep pockets needed to buy its way to the top. 
In 1998, Cargill moved to acquire the grain merchandizing division of 
Continental, which would give Cargill alone control of 40 percent of 
all U.S. corn exports, more than 30 percent of soybean exports and at 
least 20 percent of wheat exports. Cargill's corporate goal is to 
double in size every five to seven years.
    The goal of getting bigger is shared by ConAgra. Heffernan's study 
found that it was one of the three largest flour millers in North 
America, ranked fourth in dry corn milling and produced its own 
livestock feed. ConAgra ranked third in cattle feeding, third in pork 
processing and second in cattle slaughtering. ConAgra owns about 100 
elevators, 1,000 barges and 2,000 rail cars.
     A notable difference between ConAgra and Cargill or ADM is that 
ConAgra follows the processing of food farther down the food chain, 
ultimately selling labeled food items that most consumers recognize. 
Armour, Swift, Butterball, Healthy Choice, Peter Pan Peanut Butter and 
Hunt's are just a few of the ConAgra labels. ConAgra ranked second 
behind Phillip Morris as the leading food processor in the U.S.
    Novartis/ADM is another food cluster that already dominates the 
industry. Novartis is a Swiss firm that has agribusiness operations in 
50 countries around the world. Novartis focuses on crop protection, 
chemicals, seed and animal health. Novartis entered a five year, $25 
million research agreement with the University of California-Berkeley 
to study gene-library construction, sequencing and mapping.
    A primary reason for the Cenex Harvest States merger was the 
viewpoint that co-ops need more financial muscle and resources to 
compete in a world of giants. Such giants, however, have encircled the 
world with their operations.
    More worrisome is that independent farmers will have few options in 
a global food system in which major management decisions are made by a 
small core of executives. Heffernan says there is no price discovery 
for chicken feed, chicks or live broilers, as the food product is owned 
at these stages by the same food cluster. The same is true for turkeys.
    Two recent technologies will speed up the process of vertical 
integration in the crop sector. The first is biotechnology and the 
terminator gene that keeps farmers locked into one source of seed. The 
second is precision farming's global positioning system, which will 
allow decisions about crop management to be made from a remote 
location. Farmers face the prospect of becoming ``hired hands'' who 
drive tractors for a paycheck. Farmers will still shoulder production 
risks, but management decisions may be made at computers located in a 
food chain's office hundreds of miles away.
    Heffernan says a system of family farms are an economic engine that 
fuels the prosperity of rural communities. Large non-local 
corporations, however, see labor as an input cost to be purchased as 
cheaply as possible while profits are siphoned from the community. As 
mentioned earlier, large corporations are becoming larger and their 
profits follow suit. Family farms and rural communities are 
experiencing economic decline. There is a connection.
    ``Increasingly, the major decisions in the food system are being 
made by an ever-declining number of firms. They are primarily concerned 
with maximizing their profits,'' the Heffernan observed. But giving in 
to food clusters is not inevitable. Consumers and government are asking 
questions about the control and power of food clusters. More to the 
point, Heffernan offers this challenge. ``The centralized food system 
that continues to emerge was never voted on by the people of this 
country, or for that matter, the people of this world. It is the 
product of deliberate decisions made by a very few powerful human 
actors. This is not the only system that could emerge. Is it not time 
to ask some critical questions about our food system and about what is 
in the best interest of this and future generation?''

                                 RETAIL

    Earlier this year, Dr. Heffernan issued the results of a new study 
which looked carefully at concentration in the food retail industry. 
Let me excerpt the more telling comments from his study.
     ``Over the last forty years, the agro/food system in the United 
States, and in much of the rest of the world, has been in the process 
of being restructured one commodity sector after another. For instance, 
change came to the beef sector at the feedlot level. Today 20 feedlots 
feed 50 percent of the cattle and are directly connected to the four 
processing firms that control 81 percent of the beef processing either 
by direct ownership or through formal contracts.
    ``Over the past couple of years, it has become increasingly clear 
that the food chain clusters are being extended through the retail 
stage with such new processing arrangements as ``case-ready'' products. 
This final step in the alliance is so powerful that it is further 
restructuring some of the commodity sectors that began horizontal and 
vertical integration long before the dairy sector.
    ``The major players in food retailing in the United States are 
Kroger, Albertson's, Wal-Mart, Safeway and Ahold USA, a subsidiary of 
the Dutch firm Royal Ahold. Together these five supermarket chains 
account for over 40 percent of food retail sales in the United States. 
By comparison, the top five food retailers accounted for only 20 
percent of food sales in 1993. Average market concentration of the four 
top retailers in individual metropolitan areas around the U.S. stood at 
73 percent just a few years ago and there is little indication that it 
has decreased.''
    The number one supermarket in US, Kroger Co. based in Ohio, is 
estimated to receive 10 cents of every dollar spent in supermarkets in 
this country. According to its 1999 Annual Report, Kroger's ``primary 
financial goal is to increase annual earnings per share by 16-18 
percent over the next three years.'' For the record, in 1997 
Albertson's had a 22.2 percent return on equity, while Safeway enjoyed 
36 percent return on equity.
    North Dakota farmers would be tickled if they could look forward to 
the same rate of return.
    As many retailers are now doing, Kroger has ties back to the 
production side of the food business. In March 1998, Kroger began to 
sell case-ready beef and pork products under Kroger's own label, and 
are processed by Excel, a subsidiary of Cargill. This type of 
arrangement directly ties these retail stores to the Monsanto/Cargill 
food chain cluster identified by Dr. Heffernan in 1999. As the study 
explains, ``Wal-Mart, which had virtually non-existent food sales in 
1993, is now the second largest food retailer in the US, and is on 
track to become the largest, with surprisingly strong food sales at its 
Supercenters. When Wal-Mart entered the supermarket business in the 
mid-1990s, other stores were wary because of the incredible logistics 
system and supplier pricing that Wal-Mart brought to the business. More 
importantly, Wal-Mart's large size and market power causes concern as 
it integrates backward in the food system by creating relationships 
with dominant food chain clusters. Wal-Mart is one of the first 
supermarkets to use case-ready meat in its stores. The first such 
prepackaged beef came from IBP.
    ``Wal-Mart is a key player on the global level. In 1997, Wal-Mart 
made a foray into Germany, buying Wertkauf and Spar Handels 
hypermarkets, and then headed west in 1999 to purchase Asda, Britain's 
third largest-supermarket. Wal-Mart also operates in Argentina, Brazil, 
Canada, and Mexico, and is involved in joint ventures in China and 
Korea. Some analysts predict there will be only six or so global food 
retailers in the near future Wal-Mart and the European firms of 
Carrefour, Ahold and Tesco (UK) are likely contenders.''
    Dr. Heffernan has revealed how retailer dominance, or vertical 
integration, in the food system presents challenges for farmers, 
processors and distributors. As retailers grow larger through 
acquisitions and mergers, they develop their own vertically integrated 
distribution systems that tend to shut out wholesalers, small 
processors and smaller retailers.
    Another challenge for smaller food producers and processors is the 
retailer fees that many large chains demand. It has been estimated that 
between 50 and 75 percent of total net profit for large retailers comes 
from ``slotting allowances, advertising fees,'' and other arrangements 
which do not represent cash sales of food to consumers. There are a 
whole range of ``trade promotions'' that manufacturers pay retailers, 
including slotting allowances (which are supposed to be for new product 
entry only), display fees, presentation fees, ``pay-to-stay'' fees and 
failure fees.
                THE IMPACT TO FARMER-OWNED COOPERATIVES

    Farmers are at the mercy of large multinational businesses. One 
solution is for farmers to vertically integrate farther ``up'' into the 
food chain. Farmers have pooled their resources to create value-added 
cooperatives. Two such cooperatives in North Dakota are process bison 
and durum. In fact, the durum cooperative, Dakota Growers Pasta 
Company, has become quite successful.
    The power of concentration is moving ominously, but quietly, into 
the food retail sector. Food retailers are using their massive access 
to consumers to force suppliers to become lower-cost providers of 
processed food. The bulk of products produced by Dakota Growers Pasta 
is for the private label market. Small companies such as Dakota Growers 
Pasta do not have the resources to buy shelf space in major food retail 
outlets. Even as a value-added product, pasta and other processed foods 
are becoming commodities themselves as food retail giants increase 
their power in the food chain. Also, if such co-ops are bold enough to 
fully promote their own label, they will no longer be in the business 
of filling private label orders and without that business volume they 
will no longer be in business. So even as value-added co-ops are moving 
up into the food chain, retail market power is allowing a few giants to 
squeeze more pennies out of the system. Farmers make the investment in 
a cooperative processing plant, retailers use their immense leverage to 
lock in the benefits.
    Higher energy prices and extremely low corn prices have encouraged 
farmers to explore forming ethanol manufacturing cooperatives. We all 
applaud these ventures for creating new uses for agricultural products 
and increasing farm income. But what happens if corn prices increase or 
energy prices tumble? These co-op's won't have the deep pockets to 
survive. It's happened before. The results will bankrupt ethanol co-ops 
that the ADMs of the world will buy up for little investment. And once 
again, the big will get bigger at the expense of farm families.
    Cooperatives work for their farmer-members. They can't simply go 
out and buy up the competition to become bigger. Cooperatives were 
formed to create competition and to be answerable to farmers.
    In fact, major food retailers are not concerned about the future 
viability of American agriculture. They are focused on extracting the 
maximum profit possible for the benefit of stockholders.
    As Dr. Heffernan concluded in his study on retail concentration: 
``The loss of U.S. farmers makes little difference to transnational 
corporations, whether they are headquartered in the US as are many of 
the dominant agro/food processors, or in other countries as are most of 
the emerging retail firms. They travel the world to find where they can 
`source' the product with the least cost and then move the product 
where it can be sold for the highest price. In many of the poor 
countries, workers in rural areas receive less than five dollars a day. 
Health and environmental regulations, if they exist, are rarely 
enforced so firms can operate with lower costs in these countries. 
Transnational corporations are experts at reaping the economic benefits 
of globalization while pushing the economic, social, environmental and 
other costs onto the public. If regulations in this country are 
implemented to prevent corporations from shifting costs to the public 
sector, but nothing is done to prevent them from shifting the cost in 
other countries, then farmers in this country automatically become high 
cost producers.''
    Our nation's consumers and farmers are on the outside looking in 
when it comes to who really makes decisions about food in this nation. 
Consumers are frustrated when they know the price of wheat has dropped 
but a loaf of bread costs the same or more. Farmers shoulder higher 
transportation costs to ship their grain to market. Just because rail 
mergers have left them isolated from competition. (In virtually every 
other business, from automobiles to Internet book sales, its the buyer 
who has to pay the freight.) Food is far too valuable to leave its 
future to a few. Food is life. We have seen what happens when a handful 
of people control our nation's energy supplies. Imagine what will 
happen if a few giants will ultimately control food from the field to 
the checkout line.
                            RECOMMENDATIONS

    The loss of family farms and other independently-owned businesses 
is not inevitable. The accelerated march toward a totally vertically 
integrated production system can be turned around with action to 
strengthen the regulatory system and revitalize independently-owned 
businesses. Here are a number of promising solutions worth your 
consideration.
    Put ag mergers on hold.--Congress should enact a moratorium on 
agricultural mergers. Last fall the Senate rejected an amendment 
calling for an 18-month moratorium on large agricultural mergers 
involving companies with assets of $100 million acquiring companies 
with assets of $10 million or more.
    Prohibit packer ownership of livestock.--Ownership allows the 
packer to control supply to manipulate the market so that farmers and 
ranchers receive less money. Legislation in the last Congress would 
have limited packer ownership to 14 days prior to slaughter.
    Strengthen mandatory price reporting.--Congress should continue 
oversight of mandatory price reporting legislation. The price reporting 
bill passed in 1999 was promulgated by USDA this fall and is in effect 
for 2001. However, questions remain regarding regional reporting. 
Producers need area-specific information that more accurately reflects 
regional and state prices.
    Report concentration data.--Congress should require USDA to collect 
concentration information. Currently, the University of Missouri 
collects information to show the top four firms in many different 
commodity areas. However, the some vital information is not readily 
available to the university. USDA is in position to have the best 
access to the information.
    Disclose joint ventures.--The Justice Department (DOJ) and the 
Federal Trade Commission (FTC) should require firms to submit 
information on joint ventures and alliances that are between firms 
above a certain size. In many cases, firms that are participating in 
joint venture arrangements behave just like firms that have merged. 
Yet, joint ventures and alliances have not been subject to any 
scrutiny.
    Establish permissible levels of concentration.--Congress should 
consider enacting a level of concentration that triggers an automatic 
antitrust violation to make it easier for the Justice Department and 
the Federal Trade Commission to prevent high levels of concentration.
    Disclose merger reasons.--Congress should require the Justice 
Department and the Federal Trade Commission to detail why mergers 
subject to antitrust review are okay, if the decision is made not to 
oppose the merger. This would improve accountability.
    Require economic impact statements.--Congress should require an 
economic impact statement detailing the impact a merger or joint 
venture will have on farmers and ranchers prior to approval.
    Label for country-of-origin.--Congress should enact country-of-
origin labeling to allow consumers to know where their food supply is 
being produced. Country-of-origin legislation was introduced in both 
the House and Senate in the last Congress. Recent issues regarding 
foot-and-mouth disease has consumer asking where their food comes from.
    Focus research & development to family-sized farms.--Congress 
should ensure that publicly-funded research benefits family-sized 
agricultural businesses and their communities. Congress should prohibit 
the use of rural development grants for the creation of factory farms.
    Authorize producer bargaining.--The Senate should enact legislation 
to authorize contract producers to form collective bargaining units to 
negotiate with integrators.
    Fund Local Market Development.--Congress should consider 
prioritizing research on local and regional markets as well as research 
on small business structure as part of the National Research Initiative 
(NRI). By offering information, training and financial assistance in 
the forms of grants and loans, communities could foster the formation 
of food cooperatives and other key small businesses.
    Prohibit slotting fees.--Congress should prohibit slotting fees, 
i.e., the large fees charged to suppliers to put their product on the 
store shelf. Slotting fees provide windfall profits to retailers and 
create a barrier for new firms and products.
    Authorize interstate shipment.--Allow interstate shipment of state-
inspected meat.
    Provide Model Contract Legislation.--Enact legislation to enhance 
fairness and provide producer protection in agricultural production 
contracts.

    Senator Cochran. Thank you for your contribution to the 
hearing and for being here and for the insertions that we will 
have in the record because of your participation.
    We'll now hear from Mr. Peter Carstensen, Associate Dean 
for Research and Faculty Development at the University of 
Wisconsin, Madison Law School.

STATEMENT OF PETER C. CARSTENSEN, ASSOCIATE DEAN FOR RESEARCH AND 
FACULITY DEVELOPMENT, UNIVERSITY OF WISCONSIN-MADISION LAW SCHOOL 

    Mr. Carstensen. Thank you very much, Mr. Chairman. It's a 
great honor to be invited to participate in this hearing. I 
especially appreciate the very kind words of Senator Kohl at 
the beginning.
    I think of myself as a competition law and policy 
generalist, although in the last 3 years I have become 
increasingly focused on a number of the problems that we have 
in agriculture and how competition policy plays out there.
    My particular focus today in the statement that I submitted 
was on the role of the GIPSA, and of regulation given 
concentration in various agricultural markets.
    And earlier testimony last year before both the Senate Ag 
Committee and the Antitrust Subcommittee, the Judiciary 
Committee, I've made more general statements about 
concentration and competition policy.
    My full statement proceeds in kind of four steps in 
recommendations. The first step which you've heard a lot about 
already has to do with the existence of concentrated markets 
and the kind of buyer conduct that is taking place within the 
context of those markets. And I don't need to reiterate the 
kind of data that you've already heard today.
    And the additional examples, Farmland being one, another 
that concerns me deeply in the dairy area Swiza and Dean are 
proposing to merge, according to media reports. That would give 
those two firms combined 30 percent of the fluid milk market in 
America.
    So concentration is spreading out into additional 
agricultural markets. We've heard some suggestion that 
concentration is necessary for efficiency. It seems to me it is 
very, very unlikely that in any of these markets the levels of 
concentration that we see have any relationship to efficiency 
in production of goods and services. And so I don't think that 
the efficiency needs are what drives these kinds of 
organizations.
    We also have changes in conduct, the growth of contracting. 
I don't want anybody to think that we should be opposed to 
longer term contracting to other forms of marketing in 
agriculture, but we do need to have a legal structure then that 
avoids the new and different risks that are created in the 
context of those kinds of marketing arrangements.
    And, again, you've heard a lot already about the problems 
of differential pricing, of lack of access, of other contract 
terms. Some of these terms in the arbitration clauses, et 
cetera. They're extremely questionable. Confidentiality clauses 
that keep farmers from sharing information with each other. If 
we want open and transparent markets, we've got to deal with 
this.
    Right now the context is one which I think of as lawless. 
We do not have a good legal structure to oversee how these 
newly emerging and developing markets are created, are managed 
and supervised.
    Here again my particular suggestion to you, typical for a 
law professor, I suppose, is that law plays a very important 
role in facilitating fair, efficient, competitive, accessible 
markets, and that--and I wrote at some length about that. How 
that, in fairness, especially in concentrated markets can 
arise. How markets can be exploited, manipulated by strategic 
conduct.
    And the role of law both enforcing competition policy but 
also in providing other kinds of regulation to achieve fair and 
equitable treatment of individual participants as well as 
facilitating the efficient operation of those markets.
    The Packers and Stockyards Act is an early example of that 
kind of legislation. 1921 Congress recognized that disputed 
antitrust interventions in meat markets there were serious 
problems. And adopted the PSA with a combined interest in 
facilitating improved competition, addressing anticompetitive 
issues as well as the fairness of contracts and the access to 
the market.
    And so we have a congressional policy here, which is my 
third point, GIPSA has simply failed, and the Department of 
Agriculture has failed to provide the necessary regulation for 
the modern contract terms and the essential enforcement of 
access, fairness, and competition.
    I was pleased to hear that they are finally going to do 
something about hog contracts. I'm personally pretty miffed 
that a year ago almost last September in Denver, a panel of 
experts of a variety of different points of view on contracting 
all agreed that there were at least a few things that could be 
forbidden by rule because there was no possible justification 
in terms of market for those.
    And Mr. Keith Collins was there and heard us all agree, and 
I think he was a little surprised. They haven't done a thing to 
even adopt those basic regulations. And that's, to me, a very 
serious problem. They have the authority, and they are simply 
not using it to create the rules that will facilitate the fair 
market practices, the accessible market practices.
    Secondly and closely related, there's a serious problem of 
lack of enforcement capacity organization and just plain staff. 
And I think that's pointed out in the GAO study. And it's 
something that needs to be addressed.
    It is something which this subcommittee can address if you 
can find some resources, and then make sure that they are 
appropriately used by GIPSA and the Department of Agriculture.
    Fourth and something that you've heard raised here already, 
there are a variety of provisions in agricultural law for 
fairness in a variety of markets. The PSA doesn't address 
dairy, doesn't address some of the problems in grain 
contracting. There are other provisions in the laws that 
address some of these issues in slightly different ways. I 
think and you've heard this suggested, using the upcoming farm 
bill, to create a competition title to focus on reconciling, 
making more general the rules of competition, facilitating the 
markets to create better rules of access, better rules of 
fairness is a wonderful opportunity to kind of restate the law 
of agricultural markets.
    My statement concludes with some suggestions of where we 
might go. Basically GIPSA needs better organization so that it 
can adopt and enforce its rules. It needs more adequate 
resources. I think you need to facilitate those, the work of 
developing a competition section of your new upcoming statute.

                           Prepared statement

    And I got to say to you, gentlemen, in particular this 
isn't going to be cheap. It's going to cost money to do it. But 
it's also going to cost you and your staffs time and attention 
to pursue and make sure the Department of Agriculture follows 
up and carries out. Because you guys control the purse strings. 
You're in a position where I hope that you will invest a little 
time and effort at that part of it. Thank you very much.
    [The statement follows:]

               Prepared Statement of Peter C. Carstensen

                                PREFACE

    I am a generalist with respect to competition law and policy, 
having studied a variety of industries and legal issues in the course 
of my career. This background allows me to place many of the issues 
concerning competition in agriculture in the broader context of 
recurring competition policy issues that confront our economy, with its 
reliance on the marketplace as the primary institution for allocating 
goods and services.
    For the last three years, I have focused a significant part of my 
attention on the specific competitive issues that confront agricultural 
markets on both the input and output side.\1\ As a result, I have been 
reading a great deal about these issues from a variety of perspectives 
as well as learning from many experts in the field. I also bring a 
modest background in some aspects of these issues. As a government 
lawyer some 30 years ago, I reviewed the old meat packing consent 
decree and in the process came to appreciate the context within which 
Congress crafted the Packers and Stockyards Act. In 1995, I served in 
Wisconsin on a committee that reviewed and proposed modifications for 
the regulations governing contracts for vegetables being purchased for 
canning. I have also done an extensive examination of the grain 
marketing industry in connection with a study of the famous Chicago 
Board of Trade decision which is a landmark antitrust case.\2\ In 
addition, my work on the competitive implications of other kinds of 
vertical distribution arrangements has provided me with relevant 
background on some of the key issues being considered today.\3\ Last 
September, I was one of six invited academic experts in the U.S. 
Department of Agriculture's Public Forum on Captive Supplies held in 
Denver, Colorado.\4\ We were asked to evaluate the need to adopt 
regulations under the Packers and Stockyards Act to deal with concerns 
about anticompetitive and inequitable treatment of farmers and ranchers 
who raise beef cattle. In addition, in the past year, I have been an 
invited witness in hearings before the Senate Agriculture Committee and 
the Senate Subcommittee on Antitrust, Business Rights and Competition 
on agricultural competition issues.
---------------------------------------------------------------------------
    \1\ Carstensen, ``Concentration and the Destruction of Competition 
in Agricultural Markets: The Case for Change in Public Policy,'' 2000 
Wis. L. Rev. 531.
    \2\ Carstensen, ``The Content of the Hollow Core of Antitrust: The 
Chicago Board of Trade Case and the Meaning of the Rule of Reason' in 
Restraint of Trade Analysis,'' 15 Research in Law and Economics 1 
(1992).
    \3\ E.g., Carstensen & Dahlson, ``Vertical Restraints in Beer 
Distribution: A Study of the Business and Legal Justifications for 
Restricting Competition,'' 1986 Wisconsin Law Review 1; Carstensen, 
``Legal and Economic Analysis of Vertical Restraints: A Search for 
Reality or Myth Making,'' in Issues After A Century of Federal 
Competition Policy, Wills, Culbertson, Caswell, ed., 95 (1987).
    \4\ The written statements made at that forum are available at the 
U.S. Department of Agriculture website: www.usda.gov/gipsa/forum/
forumprogram.htm
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                                OVERVIEW

    I appreciate the opportunity to testify at this hearing. Congress 
should be deeply concerned about the implications of the existing 
concentrated structure and continuing patterns of consolidation in the 
meat packing industry for the survival and economic well being of the 
farmers and ranchers who raise livestock. The same issues exist in many 
other areas of agriculture especially in milk production and processing 
where there is even less effective regulation despite a number of 
statutes that seek to establish rights and protections for farmers and 
ranchers. The focus of this hearing is on the Grain Inspection and 
Packers and Stockyards Administration (GIPSA) which Congress intended 
to play a central role in ensuring efficiency, fairness and equal 
access in meat and grain markets. Yet today, livestock growers face 
serious problems in marketing their animals as a result of the failure 
of GIPSA to respond appropriately to the dramatic changes in the 
structure and buying practices in the industries it oversees.
    In 1921, Congress adopted the Packers and Stockyards Act (PSA) to 
provide a legal structure to govern the relationships between farmers 
and ranchers raising livestock--especially cattle and hogs--and the 
stockyards and slaughter houses. At that time, and again today, the 
buyers were highly concentrated nationally and there were, then and 
now, even fewer buyers in any specific locality. Congress had three 
goals in adopting the PSA-eliminating anticompetitive practices in the 
marketplace, ensuring access to all producers, and providing for 
fairness in transactions. Congress also recognized that it could not 
revisit the specifics of conduct on a regular basis and so it 
authorized the Secretary of Agriculture to adopt rules to implement the 
broad policy goals of the PSA. GIPSA is the agency within the 
Department of Agriculture that has the assignment of enforcing the PSA 
by developing rules and regulations that will further the goals of the 
statute and then enforcing those regulations through administrative 
proceedings. Further Congress authorized farmers and ranchers who were 
victims of violations of the law to bring suits and collect damages.
    For very important reasons, both competition and equitable 
treatment were and are equally important elements of public policy 
toward market contexts in which there is a great disparity of economic 
power among the participants. In the long run there is strong 
connection between equitable treatment of market participants and the 
overall growth and vitality of the economy. But at any point in time, 
plausible arguments can be made that the concerns are discrete. As a 
precursor of this more modern dichotomy, the PSA is striking in its 
explicit combination of both competition and equity concerns within a 
single statute.
    Some of this country's greatest economic successes come from its 
effective enforcement of equal economic opportunity without regard to 
whether there is a clear and immediate relationship to conventional 
notions of competition. For example, our public capital markets are at 
the center of the growing global economy, exactly because our law and 
policy provides real protection for the economic interests of the 
individual investor.
    The present situation for the marketing of livestock involves a 
substantial proportion of transactions occurring outside the 
traditional spot market. At the same time, the spot market remains a 
central price-making mechanism. The resulting interaction between spot 
and captive sales has produced significant and persistent price 
differentials for similar grades and quality based on the method of 
sale and unequal treatment of potential sellers. Such outcomes may, 
arguably, not involve immediate, obvious anticompetitive consequences 
for the overall market, but they certainly raise serious questions of 
fairness and equity among producers. Moreover, data on market 
transactions reveal a very large disparity in prices paid for similar 
livestock. This too suggests that the present system is not functioning 
in an efficient or fair manner.
    In the longer term inequitable market conditions can and usually do 
create additional barriers to the growth and development of 
economically and socially desirable competition. Concentration both 
increases the incentives to engage in discriminatory conduct and makes 
it more likely to have adverse consequences on the competitiveness of 
the affected markets. Risk and uncertainty are two of the greatest 
barriers to entry into any market. When there are a few dominant 
players with the capacity to engage in significant strategic conduct 
with respect to pricing or access, those firms have a clear incentive 
to employ that power to enhance uncertainty in order to deter new entry 
or growth by marginal firms.
    As a country we have a long and dishonorable history of market 
manipulation and exploitation in a range of contexts from cheese, grain 
and meat to gas, automobiles and securities. An essential role for law 
and regulation is to constitute the operation of markets so that they 
function in efficient and neutral ways. Law must police the conduct of 
such markets because self-interested parties, especially when power is 
disproportionately allocated and markets are concentrated, have an 
inherent conflict of interest.
    Sadly, GIPSA and the Department of Agriculture have persistently 
failed to make effective use of their powers. There are neither 
appropriate regulations nor effective enforce of the law. As a result, 
livestock sales have increasingly become lawless. Raw economic power 
determines who gets access to favorable prices and contract terms. In 
the long run, the failure to facilitate efficient, accessible and fair 
markets for livestock will only harm both producers and domestic 
slaughterhouses. It is also likely to result in higher prices for 
consumers.
    Similar issues increasingly exist in other agricultural businesses. 
Over the years, Congress has sought to address specific problems by 
focused legislation. Unfortunately, only a few of these statutes have 
proven even marginally effective in responding to strategic conduct by 
buyers of agricultural products. It is time for Congress and the 
Department of Agriculture to take a broader view of the problems that 
America's farmers and ranchers face in the modern marketplace. The 
upcoming revisions of the farm bill provide an opportunity to revise, 
consolidate, and expand the various statutes intended to provide 
efficient, fair and accessible markets for agricultural products. Such 
a project is essential to the maintaining workable, competitive markets 
for agricultural products of all kinds.
    In other contexts from airlines to railroads to electric power to 
telecommunications, we face similar issues. How to make an effective 
transition from an old market structure and regulatory system to a 
workable, competitive market? The predictable and recurrent failures in 
this process result directly from the failure to recognize that lawless 
markets are inefficient and unreliable. Markets require carefully 
planned rules to achieve desirable, efficient performance. Such rules 
do not replace the market with direct commands rather they facilitate 
its efficient, fair, and equitable operation. The failures and 
successes of the past can provide important lessons on how to develop 
appropriate rules and regulations that reduce or eliminate the harms 
that come from lawless opportunism.
    The goals of fairness, access and efficiency can be achieved in 
livestock markets. But GIPSA and the Department of Agriculture must be 
committed to this process. In the past, regrettably, these agencies 
have lacked the will to protect farmers and ranchers. The 
appropriations process provides a means for Congress to insist that the 
agency propose, adopt and enforce effective regulations in a timely 
manner.
    The rest of this statement elaborates on these issues. It first 
discusses the changes in both the structure and conduct of livestock 
markets as well as the consequences for producers that result from 
these changes in a lawless market. Second, it is important to 
appreciate the significant positive role that law and regulation play 
in creating and maintaining efficient, competitive, fair and accessible 
markets. In light of this framework and background, there is a 
discussion of the failures of GIPSA both to initiate appropriate rule 
making necessary to achieve the kind of market relationships that 
Congress had sought and to enforce the existing rules in a meaningful 
and effective way. Fourth, the Department of Agriculture has a number 
of other obligations to enforce market facilitation legislation that 
has not been integrated into an effective overall mission by Congress 
or within the agency. Finally, there are some recommendations including 
the suggestion that GIPSA get appropriate funding only if it 
significantly changes its methods of operation so that it can 
effectively carry out its obligations of rule making and enforcement.

       MARKET STRUCTURE AND THE CHANGING NATURE OF BUYER CONDUCT

        National and Regional Concentration is Very Substantial

    Studies show that the slaughter industry is highly concentrated and 
that concentration is substantially greater than it was in 1980. The 
latest statistics that I have found show that the four largest firms in 
steer and heifer slaughter did more than 80 percent of that business 
nationally in 2000.\5\ Moreover, one firm, IBP alone did more than 32 
percent. In hogs the concentration is lower with the four largest firms 
account for 56 percent of that business nationally.\6\ This data 
understates concentration from the perspective of livestock raisers. 
Regionally, it is rarely the case that more than two or three of these 
firms compete as buyers and in many areas effectively only one major 
firm is buying. Thus, effective concentration in the regional buying 
markets is much higher. I should also note that the dominant firms in 
beef are also leaders in pork.
---------------------------------------------------------------------------
    \5\ Cattle Buyers Weekly, September 18, 2000.
    \6\ Id.
---------------------------------------------------------------------------
    In 1980, by way of contrast, nationally the four largest firms in 
steers and heifers had 36 percent while the four largest in hogs had a 
34 percent share. A significant factor in this structural change was a 
series of mergers that took place in the mid and late 1980s. At the 
time of those mergers, the prevailing theory was that if the 
downstream, consumer markets remained competitive that competition 
would protect the upstream producers from discriminatory and 
exploitative pricing by the meat packers. This prediction has proven 
false. Regardless of the level of downstream competition, a dominant 
buyer can force down the prices it pays below a competitive price and 
so extract monopoly rents even though it sells its products in a more 
competitive market. Recent data on margins in meat packing show that 
the margin retained by the slaughter houses has increased 
substantially. This suggests that the slaughter houses are exploiting 
more vigorously their monopsonistic or oligopsonistic power to depress 
farm prices relative to the prices they are getting from the grocery 
stores.
    Some have argued that high concentration is necessary for 
significant efficiency gains. The fact is that high concentration is 
not related to efficiency. The optimal plants for hog or beef 
processing require only 2 to 4 percent of the total national volume. If 
there were some further efficiency from multi-plant operation, 
something which even industry representatives declined to claim last 
year in Denver, the market could easily sustain 7 to 10 separate 
processors in both pork and beef and each could have 2 or 3 plants. 
This in turn would create a much more competitive buying structure for 
cattle and hogs.
    Because of bad theory in the 1980s we have excessive concentration 
in meat processing markets today. This means that the packers have both 
the capacity and the incentive to engage in strategic conduct whose 
primary function is either to exploit their buyer power or entrench 
that power against potential competition. This set of factors in turn 
creates the need for effective regulation of market conduct to reduce 
the negative impacts of such strategic conduct.
    The problems of concentration exist in other important processor 
markets as well. A handful of firms lead by Kraft dominant cheese 
making. Today the country faces the threat of similar concentration in 
fluid milk. The two largest processors, Dean and Suiza, propose to 
merge. The media reports indicate that between them they may process 
more than 30 percent of the milk sold in this country. Moreover, these 
are the only two firms with nearly national processing capacity. As the 
grocery business consolidates into fewer and fewer national chains, 
those chains are looking for single suppliers to all or most of their 
stores. The pending merger will eliminate the potential for vigorous 
competition in supplying this need which in turn is very likely to harm 
both milk producers and consumers.\7\
---------------------------------------------------------------------------
    \7\A recent study of milk pricing in New England suggests that 
after Suiza acquired dominance in that region it played a leading role 
in increasing the margins between the farmer and consumer. Cotterill, 
R.W., and A. W. Franklin. ``The Public Interest and Private Economic 
Power: A Case Study of the Northeast Dairy Compact,'' May 3, 2001.
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              Changes in the Methods of Buying Livestock

    Historically, cattle were sold in stockyards in which buyers and 
sellers met. The livestock were then sent onto nearby slaughter houses. 
The stockyard provided the advantage of an open auction market. 
Unfortunately, because of the limits imposed by geography, only a few 
slaughter houses could operate in close proximity to any specific 
stockyard. The result was rampant market manipulation. This experience 
is an important background to the PSA which sought to regulate the 
conduct of stockyards to ensure, insofar as law could, that they 
operated in an open and fair way, accessible to all.
    With the development of refrigerator trucks and the interstate 
highway system, slaughter houses moved into the country to be closer to 
the sources of supply. This produced a different context in which 
buyers from the various slaughter houses visited farmers and made bids 
on livestock. As a youth and young man I recall hearing my beef raising 
cousins in Iowa discuss the pros and cons of different pricing methods 
and the qualities of the buyers for the four or five different 
slaughter houses that were regular bidders for their steers.
    As the packing industry consolidated in the 1980s and 1990s the 
number of bidders declined to one or two. Increasingly, favored feedlot 
operators were offered contracts of one kind or another to supply 
cattle or hogs to specific buyers. Today, most livestock is sold under 
some kind of a longer term contract arrangement usually with the price 
based on a reported market price at the time of actual delivery. This 
creates a strong incentive for price manipulation. If a buyer can lower 
the public price, that will lower its costs over a much larger number 
of purchases. Moreover, because contracts require delivery within set 
time periods and the packer has a greater ability to manage its public 
auction demand to control the prices it pays on contract.
    Interestingly, in the cattle business, despite these incentives the 
contract producer gets the advantage of persistently higher prices in 
comparison to direct sale prices. This is the repeated finding of major 
studies sponsored by GIPSA. This does not disprove the claim that 
prices are manipulated to achieve, on average, lower prices than a 
robustly competitive market would have produced. It only establishes 
that the packers as buyers have persistently favored some producers 
over others.
    The point here is that there are persistent price differences for 
similar grade and quality livestock based on the method of purchase. 
Moreover, and equally important, the packers determine which producers 
get the benefit of the higher contract prices. The implication is 
twofold. First, the favored operator has an incentive to serve its 
economic master because its next best option involves a substantial 
loss of revenue. Such an operator is not well positioned to bargain 
effectively on the terms of the transaction. Second, the fact that the 
buyers are under no obligation to deal with all comers on equal terms 
means that they can refuse to deal with operator. The fact of high 
concentration on the packers side means that such refusals will often 
deny access to the more lucrative contract market. Indeed, by refusing 
even to bid for livestock for immediate sale the packer can eliminate a 
disfavored operator from the business entirely.
    Such bargaining power with its capacity to force terms on the 
seller or even destroy a farmer's business by refusing to deal entirely 
is exactly the kind of discretion that the PSA was supposed to regulate 
to ensure both fairness and equal access for farmers and ranchers.
    As the more comprehensive price reporting of sales has become 
available, a further and equally significant fact is emerging. On sales 
of similar livestock prices vary quite substantially. This again 
suggests that the markets are working very imperfectly. Why such price 
differences exist and persist should be source of great concern to 
those charged with ensuring the fairness and openness of these markets.
    The most extreme example of what can happen is found in poultry. 
Once there was an open market in which growers could sell their 
chickens and turkeys. Today, there is no longer a spot or public market 
for general production. All supplies are captive under contracts that 
impose a wide variety of unfair conditions on the growers. Recently, 
the attorney general of Oklahoma has offered the opinion that many 
contracts for production of crops and livestock are now contracts of 
adhesion which may in fact reduce independent farmers to the position 
of employees.\8\
---------------------------------------------------------------------------
    \8\ Oklahoma Attorney General Opinions 01-17 (April 11, 2001).
---------------------------------------------------------------------------
    Without regulation, the risk is that the public markets will either 
disappear entirely or that they will become very vulnerable to 
manipulation. These risks impose burdens and costs on farmers and 
ranchers as well as consumers. In the long run, such market contexts 
are inefficient, anticompetitive and undesirable for all those who rely 
on such markets to move food and fiber from the farm to the consumer.

  THE CONSEQUENCES OF A LAWLESS MARKET: STRATEGIC CONDUCT, DENIAL OF 
                        ACCESS, UNFAIR CONTRACTS

    Among the earliest antitrust cases were ones that challenged the 
legality of regulations governing stock yards.\9\ In the two initial 
cases, the Supreme Court upheld the restrictions because it interpreted 
them as designed to avoid conflicts and opportunistic behavior that 
undermine the creditability and viability of the stockyards in 
question. Thus, from the earliest judicial review, the courts have 
recognized that restrictions on some kinds of conduct are essential to 
the fair and efficient operation of trading markets. Thus some 
restraint on conduct by market participants would be acceptable in the 
face of the Sherman Act's condemnation of contracts in restraint of 
trade.
---------------------------------------------------------------------------
    \9\  Anderson v. U.S., 171 U.S. 604 (1898); Hopkins v. U.S., 171 
U.S. 678 (1898).
---------------------------------------------------------------------------
    On the other side of the leger, in 1912, the Court upheld a 
criminal complaint against an individual who sought to manipulate a 
commodity exchange.\10\ In that same era, the government sued both the 
egg and butter exchanges because in each case dominant buyers were 
manipulating the pricing process in order to influence the prices of 
off-exchange transactions.\11\ These three cases underscored the 
inherent risks to the market that arise when thin spot markets play a 
central role in the process of bringing goods, especially agricultural 
products, to consumers. The management of public price making has 
remained a continuing source of concern to antitrust law in a wide 
range of fields exactly because of its potential to be used in a 
variety of anticompetitive ways.
---------------------------------------------------------------------------
    \10\ U.S. v. Patten, 226 U.S. 525 (1912) (the case involved the 
cotton exchange, but Patten was also a major grain trader).
    \11\ U.S. v. Chicago Butter & Egg Board, (Civil 30042, N.D. Ill. 
1910); U.S. v. Elgin Board of Trade (Eq. 31051, N.D. Ill. 1912).
---------------------------------------------------------------------------
    In 1913, the government challenged the over-night pricing rules for 
grain to arrive of the Chicago Board of Trade. The Board of Trade 
ultimately won in the Supreme Court in 1918 despite the undisputed fact 
that these rules operated to establish rigid overnight prices that all 
members had to pay.\12\ The record showed that this rule was necessary 
so that the Board could provide an efficient, open, and non-
discriminatory market for grain. Prior to the rules, large integrated 
firms were able to manipulate the market at various times by bidding 
off the exchange at night at higher prices than they were paying on the 
exchange. In addition, the Board of Trade changed its rules for bidding 
to rural elevators so that the integrated firms were no long able to 
discriminate among sellers of similar grades of grain. The impact of 
these rules was to make the commodity exchange a more efficient and 
effective market for grain despite the constraints imposed on some of 
its members freedom of action.\13\ Such constraints are essential in 
any organized exchange market. Participants, particularly those who are 
fully or partially integrated, have a strong incentive to behave in 
opportunistic ways with respect to their participation in the organized 
market. Such conduct must be restricted if organized exchanges are to 
provide effective and reliable price making mechanisms.
---------------------------------------------------------------------------
    \12\ Bd. of Trade of the City of Chicago v. U.S., 296 U.S. 231 
(1918). This decision is the leading decision applying the rule of 
reason to a restraint of trade and upholding it.
    \13\ For a fuller discussion of the business and economic factors 
in the board of trade case see Carstensen, supra note 2.
---------------------------------------------------------------------------
    Two other leading Supreme Court cases also involved market 
manipulation activities that bear some relationship to the current 
situation in livestock and agriculture generally. In the Socony 
case,\14\ the major oil refiners conspired, unlawfully, to buy up 
surplus gas to affect the spot market price and manipulated the 
reporting of prices in order to ensure higher prices to themselves 
under their long term supply contracts with wholesalers and 
distributors. These long term contracts used the spot market price to 
price specific deliveries. Lastly in American Tobacco the dominant 
cigarette makers were found to have violated the Sherman Act by 
collectively biding up the price for tobacco that was useful to their 
competitors but not to themselves.\15\ By manipulating the tobacco 
auctions, they caused their competitors to have higher input costs 
which disabled their competition. Thus, in the latter case, the goal 
was to harm competitors while in the first case it was to impose higher 
costs on customers. The most relevant point for present purposes is 
that in both cases auction or spot market manipulation advanced 
anticompetitive goals. The highly concentrated character of the 
gasoline refining and cigarette production markets meant that those 
firms had both the incentive and the capacity to engage in market 
manipulation to advance their anticompetitive interests.
---------------------------------------------------------------------------
    \14\ U.S. v. Socony Oil Co., 310 U.S. 50 (1940).
    \15\ U.S. v. American Tobacco, 328 U.S. 781 (1946).
---------------------------------------------------------------------------
    In two decisions in the course of the 1990s the Supreme Court has 
reiterated its recognition of the risks to competition and economic 
welfare arising from vertical restraints.\16\ These cases involved 
distribution restraints and the Court's concern was with the power 
created in retailers by exclusive territories and similar restrictions 
on intra-brand competition to over charge their customers. Nonetheless, 
these decisions recognize the broader truth that vertical restrictions 
of every kind, however laudable their initial intent, can have adverse 
competitive effects. In another important decision the Court recognized 
that a refusal to deal with a supplier based on an understanding with 
another supplier can constitute an unreasonable restraint of trade.\17\ 
The lesson once again is that upstream vertical agreements can also 
result in serious harm to the competitive viability of the market 
system.
---------------------------------------------------------------------------
    \16\ Atlantic Richfield Co. v. USA Petroleum, 495 U.S. 328 (1990); 
State Oil v. Khan, 522 U.S. 53 (1997).
    \17\ NYNEX v. Discon, 525 U.S. 128 (1998).
---------------------------------------------------------------------------
    Recently, the Seventh Circuit Court of Appeals, following up on 
this theme, upheld the Federal Trade Commission's challenge to Toys R 
Us (TRU), a major toy retailer, efforts to restrict its suppliers sale 
of toys to TRU's competitors.\18\ TRU is the largest retailer of toys 
in the country--selling about 20 percent. It induced its major 
suppliers to refuse to provide comparable toys to its lowest price 
competitors in order to protect its profit margins. There is a somewhat 
similar case in the European Union involving retailer buying power.\19\ 
These cases re-emphasize the dangers of buying power to the overall 
competitive operation of the market. They also show that lower market 
shares may create serious competitive issues than are normally seen on 
the selling side. Congressional hearings on the effect of slotting 
allowances have highlighted comparable harms to competition in the food 
distribution system.
---------------------------------------------------------------------------
    \18\ Toys R Us v. FTC, 221 F3rd 1334 (7th Cir., 2000)
    \19\ Kesko/Tuko, Case T-134197, European Commission; see, Curtin, 
Goldberg, Savrin, ``The EC's Rejection of the Kesko/Tuko Merger: 
Leading the Way to the Application of a ``Gatekeeper'' Analysis of 
Retailer Market Power Under U.S. Antitrust Law,'' 40 Boston College L. 
Rev. 537 (1999).
---------------------------------------------------------------------------
    Outside the courts, Professor Willard Mueller and associates have 
examined the operation of the Wisconsin cheese exchange and found that 
it was manipulated under certain conditions to the advantage of the 
major buyers. The underlying facts are similar to the manipulation of 
cheese exchanges by the meat packers at the turn of the century. 
Moreover, this study shows how major buyers have the incentive to seek 
to use commodity trading to protect their long run economic interests 
in controlling price. Recently, the 9th Circuit has upheld the right of 
dairy farmers in California to sue the cheese makers for the reduced 
milk prices that resulted from this conduct.\20\ As I discussed earlier 
the pending Suiza-Dean merger will move fluid milk markets toward the 
structure of beef and cheese markets to the detriment of producers and 
consumers alike.
---------------------------------------------------------------------------
    \20\ Knevelbaard Dairies v. Kraft Foods, 232 F3d 979 (9th cir. 
2000).
---------------------------------------------------------------------------
    The upshot of this record is that when markets are concentrated, 
dominant firms have great incentives to engage in anticompetitive 
discriminatory conduct whose purpose is both to entrench and exploit 
their position.

   LAW AND REGULATION AS A POSITIVE FORCE IN FACILITATING EFFICIENT, 
                COMPETITIVE, FAIR AND ACCESSIBLE MARKETS

    Public policy in this country employs two strategies to accomplish 
the goals of fair, efficient and accessible competitive markets. First, 
antitrust law exists to maintain competitive market structures and 
forbid anticompetitive conduct. Second, industry and topic specific 
legislation seeks to provide a balance between the interests of 
contending groups of economic actors. Such legislation seeks fairness 
and equity in the market place.
    Competition and fairness tend to yield similar results. In the case 
of regulating concentrated markets, however, there is some tension. To 
induce competitive efforts among existing dominant firms, it is 
sometimes the case that concealing information and creating opaque 
market situations will induce such firms to behave in a more 
competitive way. Conversely, creating greater price transparency is 
likely to facilitate tacit coordination among dominate firms provided 
substantial barriers to entry remain. On the other hand, reducing the 
capacity of dominant firms to engage in opportunistic, strategic 
behavior with respect to key inputs through regulating the manner in 
which the market for inputs operates provides the kind of assurance 
that new entrants or marginal firms seeking to expand need to encourage 
more active competition on the merits.
    I reference these tensions to underscore the complexity of the 
choices that must be made and necessity that there be a reasonable 
comprehension of the dynamics of the specific markets including the 
potential for effective entry and expansion.
    Because antitrust law is concerned with competition and not the 
specific interest of traders in equitable treatment, Congress and the 
states have created a number of specific statutory systems to protect 
the less powerful parties in their relationships with powerful 
customers or suppliers. At the national level there is specific 
legislation to protect the interests of automobile dealers,\21\ gas 
station operators,\22\ as well as investors in the stock market.\23\ 
State law provides protection for independent dealers serving major 
enterprises.\24\ The central theme of all of these regulations is the 
need to ensure equitable treatment of all those who participate in an 
economic process. Because there are substantial disparities in economic 
size and power in a wide range of markets, government has necessarily 
had to play an important role in ensuring the equitable treatment of 
participants.
---------------------------------------------------------------------------
    \21\ Automobile Dealers Day in Court Act, 15 U.S.C. 1221 et seq.
    \22\ Petroleum Marketing Practices Act, as amended, 15 U.S.C. 2801 
et seq.
    \23\ Securities and Exchange Act of 1934, as amended, 15 U.S.C. 78a 
et seq.
    \24\ See, e.g., Wisconsin Fair Dealership Law, Wisc. Stat. chap. 
135.
---------------------------------------------------------------------------
    In agricultural markets in particular there is a long history, 
dating back to the earliest days of the English common law, of concern 
for the equitable treatment of producers and consumers. That history 
shows that there have been frequent abuses of temporary market 
dominance and unacceptable efforts to exploit informational or 
strategic advantage. Some of the remedies attempted in the past proved 
equally unattractive. Hence, the lesson is that there is a long 
standing and significant concern for the fairness and equity of markets 
in agricultural products. This concern is also evidence that over the 
long sweep of history there have been recurrent examples of strategic 
behavior causing serious social dislocation and requiring legislative 
or administrative intervention.
    Modern regulation of market equity involves two general kinds of 
concerns both of which are manifest in the present problems facing 
American agriculture. One concern is for the integrity of the 
transactional market when it plays a central role in defining the price 
of transactions as well as equal treatment of participants in terms of 
access to favorable opportunities to buy or sell. This is most evident 
in the rules governing access to public securities markets in which all 
traders are to receive as equal treatment as possible. In addition, the 
law demands extensive and continuous disclosure of detailed business 
information so that investors and their advisors can make informed 
judgements.
    A second recurring concern in the law is for equitable terms with 
respect to long term contractual arrangements. The petroleum marketing 
act, for example, gives the lessee of a gas station the right, under 
certain circumstances, to buy the station if the refiner proposes to 
sell it to a third party. The fundamental concept here is that the law 
must protect the interests of powerless actors in the market in the 
interest of both equity and efficient market operation.
    The present situation with respect to captive supplies of livestock 
and their impact on the spot market as well as the implication of 
foreclosing substantial numbers of growers from access to longer term 
contracts illustrates the combined problem of equity and access. If 
foreclosing certain forms of transaction creates any real economic 
problems for the packers, then the question is how can any legitimate 
needs be satisfied in a way that is consistent with the fundamental 
goals of equal access and equitable treatment. A useful starting point 
might be the suggestions of Professor Stephan Koontz (Colorado State) 
to the Senate Agriculture Committee last year concerning livestock 
markets. Professor Koontz suggested that the Department of Agriculture 
needs to be much more pro-active in developing new grading standards 
and certification systems so that the transactional market could 
provide a place in which buyers could readily find the kind and quality 
of animal that they sought.\25\ It is not enough he points out to be 
concerned with bad practices, the government must be take the 
initiative to modernize the spot market and related market transactions 
to facilitate the desired transactions. This point applies generally. 
Government must take the initiative to facilitate workably competitive, 
efficient market contexts. Public markets do not happen on their own in 
equitable and fair ways. The strength of the economic interests at 
stake in the market will shape them to serve their own interests. The 
role of government is to restore the balance and facilitate the 
equitable development of the market.
---------------------------------------------------------------------------
    \25\ See statement of Professor Koontz to the Senate Agriculture 
Committee at its hearing on April 27, 2000.
---------------------------------------------------------------------------
    As one who has looked askance generally at conduct oriented 
regulation, I would say that my own first preference would be to see a 
large scale restructuring of the meat packing industry. The number of 
plants of the largest scale substantially exceed the number of firms; 
yet such levels of multi-plant operation are extremely unlikely to 
achieve any notable economies.\26\ Indeed, the coordination costs are 
likely to result in slightly higher overall costs for such extended 
networks. If the industry were reorganized to make it more workably 
competitive, e.g., limiting firms to no more than 3 or 4 plants in 
dispersed parts of the country, there would be much more reason to have 
confidence that observed market behavior was efficiency oriented and 
not infected with anticompetitive or strategic considerations. In such 
a world, specific conduct regulations would be less necessary except, 
perhaps, for a requirement of open access to long term contracts. In 
fact, in my view, as I have written in connection with the somewhat 
analogous language of the FTC act, sections 202(a) and 202(e) give the 
secretary the authority to impose such requirements on the 
industry.\27\ However, in the case of the PSA, the secretary would have 
to find that purely conduct oriented rules would not be effective. 
There are a few antitrust cases involving restraints of trade where 
structural relief was imposed that would provide further support for 
such an approach.\28\
---------------------------------------------------------------------------
    \26\ This point was made recently by James MacDonald, a senior USDA 
economist. MacDonald, ``Concentration in Agriculture,'' paper presented 
at the Agriculture Outlook Forum, Feb. 24, 2000, at p.3.
    \27\ Carstensen & Questal, The Use of Section 5 of the Federal 
Trade Commission Act to Attack Large Conglomerate Mergers,'' 63 Cornell 
Law Review 841 (1978).
    \28\  U.S. v. Paramount Pictures, 334 U.S. 131 (1948); see also 
U.S. v. American Can Co., 87 F. Supp. 18 (N.D. Cal. 1949).
---------------------------------------------------------------------------
    Realistically, of course, it is unlikely that the secretary would 
at this time adopt regulations that required large scale reorganization 
of the meat packing industry, however desirable that might be. Hence, 
the focus has to be on the role of law to minimize or eliminate the 
unfair, strategic, inefficient conduct of powerful buyers. In a lawless 
market, economic power is unchecked. That which is rational for 
individual, powerful economic actors is not necessarily fair to the 
parties on the other side of the transaction or, more importantly, in 
the best long run interest of economic efficiency.
    The commands of the Packers and Stockyards Act (PSA) are as 
concerned with controlling the unfair conduct of packers as they are 
with the elimination of purely anticompetitive conduct in the market. 
As such, the PSA is the precursor of a number of statutes at both the 
national and state levels that seek to redress the balance between 
small business operators and their large customers or suppliers. Thus, 
section 202(a) of the PSA forbids packers from using ``any unfair, 
unjustly discriminatory, or deceptive practice or device'' without 
requiring that such practice or device also have an anticompetitive 
effect or intention. Similarly, section 202(e) condemns ``any course of 
business'' which has ``the purpose'' or ``effect of manipulating or 
controlling prices'' as well as such acts when they cause monopoly or 
restrain competition in the market. Other provisions, e.g., sec. 
202(c), explicitly require adverse competitive effect before there is a 
violation. Thus, the PSA is a blend of provisions controlling conduct 
based on considerations of fairness and equity and ones focused on 
avoiding broader anticompetitive effects.
    The PSA has a clear point of view--it instructs the Secretary to 
regulate the conduct of packers and stockyards to protect producers and 
buyers from unfair and discriminatory conduct. PSA 202(a) and 202(e) 
are clear that equity and fairness concerns in addition to overall 
competitive analysis are relevant to evaluating such conduct. Moreover, 
the PSA recognizes that harmful results can be either intended or the 
consequences of the decisions made by packers. Thus, that the packer 
did not intend to discriminate or be ``unfair'' and indeed did not gain 
by its conduct is no defense. If the effect of particular market 
conduct is to discriminate, then there is a violation. This aspect of 
the PSA necessarily includes a concern for the equitable distribution 
of wealth as between the various participants in the process of 
production. This is an important theme in public regulation of market 
activity.\29\
---------------------------------------------------------------------------
    \29\ See Calabarsi & Melamed, ``Property Rules, Liability Rules and 
Inalienability: One View of the Cathedral,'' 85 Harv. L. Rev. 1089 
(1972) (analysis of economic regulation stressing the role and effect 
of law in creating and assigning rights to wealth).
---------------------------------------------------------------------------
    The PSA does not confer price regulatory power on the Secretary. 
Rather the Secretary's role is to ensure equal and fair treatment of 
those who supply and buy from meat packers as well as to enforce 
competitive market requirements on the conduct of the packers. Legal 
regulation is essential to the creditability of any public market 
because of the incentives of powerful firms engaged in the market to 
exploit their strategic advantage to the detriment of the public users 
of the market. Federal securities law which strictly regulates the 
operation of our public capital markets is a good example of this 
strategy. American investor protection laws are so valuable that 
foreign corporations voluntarily list on our stock exchanges so that 
their shareholders will get the benefit of American securities law 
including full disclosure of corporate information. This strategy in 
turn permits easier and cheaper access to the public capital market 
because investors have the protections of a strong regulatory system 
ensuring equitable treatment.
    Unfortunately the authority of the secretary to police the fairness 
and equity of treatment in agricultural markets is limited. The PSA 
addresses only the business of meat packing. No comparable direct 
authority exists to policy grain or dairy contracts. As market 
structure and conduct akin to that in livestock and poultry markets 
come to dominate other sectors, it will be increasingly important that 
the law authorize the Secretary to provide rules and regulations to 
ensure fairness in pricing and equal access to market opportunities for 
all farmers and ranchers.

                    THE CURRENT PROBLEMS WITH GIPSA

    There is a manifest need for effective regulation of the livestock 
markets to ensure efficiency, fairness and equity in light of the high 
concentration and resulting incentives to engage in strategic conduct. 
The public record fully documents the existence of serious problems 
concerning both fairness and equity in these markets. To remedy these 
problems, two elements are essential. First, there need to be rules to 
define the scope of bargains and provide rights of access to the market 
place. Second, those rules need to be enforced effectively by a 
combination of agency action and private claims when necessary.
    Given the dramatic changes in the ways in which livestock are sold, 
it is striking that the Department and GIPSA have totally failed to 
exercise the rule making authority that they possess to craft 
appropriate, market facilitating regulations to govern the new methods 
of buying and selling livestock. The previous administration failed for 
years to act on a petition from the Western Organization of Resources 
Councils (WORC) that requested new regulation of contract buying of 
livestock. I am not here endorsing the WORC proposal in its entirety. 
It did point to central issues in the emerging market for cattle and 
the record showed beyond any reasonable dispute that there were and are 
problems with the present operation of that market. What is intensely 
frustrating is that the previous administration never acted one way or 
the other on any element of the proposal even those as to which there 
was nearly unanimous consensus.
    Specifically, at the USDA's forum last September in Denver on the 
WORC proposal, the panel of experts who did not agree on much else were 
in agreement that packers should never be permitted to use as the basis 
for pricing a future delivery their own price for cattle on the day of 
delivery. Such a method of pricing was unduly vulnerable to 
manipulation and was unnecessary for any legitimate pricing need. Yet 
the Department of Agriculture and GIPSA could not bring themselves to 
adopt even such a basic prophylactic rule!
    In sum, the first serious failure of GIPSA under the past 
administration was its complete failure to develop rules and 
regulations to govern the emerging market situations. Left to their own 
devices, the large buyers will, as the Attorney General of Oklahoma has 
opined, force contracts of adhesion onto farmers and ranchers. For 
example, such contracts often deny the producer access to the courts 
and at the same impose unfair and inequitable arbitration terms that 
effectively deny the producer all recourse. Confidentially clauses keep 
farmers and ranchers from sharing information that would make them more 
sophisticated decision makers. Even price reporting is unavailable 
where buyers are very highly concentrated. This fact would seem to 
require special regulations to ensure equitable treatment of sellers in 
such markets. Yet GIPSA has done and is apparently doing nothing to 
provide basic regulation for any market.
    Market facilitating regulation is long over due and this committee 
should insist that GIPSA get on with the task. The courts have had and 
will continue to have a very hard time interpreting the general terms 
of the PSA. They can not protect farmers and provide appropriate 
balance without regulations that better define the rights and duties of 
the parties.
    The second failure of the Department of Agriculture is its refusal 
to staff GIPSA in a way that would permit effective enforcement of 
current regulations let alone the ones that ought to be adopted. In 
September 2000, the GAO reported on GIPSA to Congress.\30\ That report 
highlighted the continued failure of GIPSA to enforce effectively the 
existing regulations. The report highlighted the very poor structure 
and staffing of investigations. GIPSA itself lacks the staff and 
authority to pursue the cases it investigates. Indeed, it appears the 
staff must investigate without the support and involvement of those who 
will litigate the case if it is filed. Moreover, the number of 
attorneys available in the general counsel's office to conduct 
litigation has declined in recent years to a pitiful five--not all of 
whom are assigned full-time to GIPSA.\31\ The report further indicates 
that GIPSA did not have appropriate methods for investigating ``complex 
anticompetitive practice[s]''.\32\
---------------------------------------------------------------------------
    \30\ GAO, Report to Congressional Committees: Packers and 
Stockyards Programs Actions Needed to Improve Investigations of 
Competitive Practices (2000).
    \31\ Id. 15.
    \32\ Id. 6.
---------------------------------------------------------------------------
    Regulations, however good, have little effect if there is no 
enforcement. While farmers and ranchers can bring individual cases or 
class actions, such efforts are very time consuming and may focus more 
on specific private concerns and less on the broad public interest in 
ensuring open and fair markets. Thus, effective public law enforcement 
is essential to the creation and maintenance of fair and open markets. 
This is the lesson of antitrust law and securities law to name but two 
examples.

   THE BROADER MARKET FACILITATION OBLIGATIONS OF THE DEPARTMENT OF 
                              AGRICULTURE

    The PSA is not the only statute that addresses issues of 
competition and access in agricultural markets. The Agricultural Fair 
Practices Act deals with specific kinds of unfair trade practices 
involving coercion of producers into joining or not joining 
associations.\33\ The Capper Volstead Act not only exempts agricultural 
cooperatives from antitrust law in some significant degree but also 
requires the Secretary to police market conduct to ensure that 
cooperatives do not unduly restrain competition.\34\ There are a number 
of other examples. The common theme is that Congress has identified 
specific failures of these markets to operate in fair, accessible and 
efficient ways and has adopted specific statutory rules. The result is 
a patchwork of responses to particular issues and problems that has not 
been revised and made systematic to define a workable legal context for 
agricultural markets.
---------------------------------------------------------------------------
    \33\ 7 USC sec. 2301 et seq.
    \34\ 7 USC sec. 291, 292.
---------------------------------------------------------------------------
    As Congress has come to rely more on the market place to set prices 
and allocate demand for supplies in these markets, there is an 
increased need to review this legislative thicket and identify a 
systematic set of rules to govern the market process in agriculture. 
The elements of this system recur in various legislative context and 
are entirely consistent with the PSA. The goals are efficient, 
competitive, fair and accessible markets.
    I reference this broader context here because Congress is embarking 
on a major review of agricultural policy as it is considering new 
general farm legislation. I understand that there is discussion of 
including a title on competition issues. It seems to me that an 
important element of that review should be an effort to access the 
scope, consistency, and operation of the existing complex of laws 
regulating agricultural markets. It is likely that this would lead to 
an effort to revise and restate this law in ways that are more 
applicable to modern conditions and provide for more general coverage 
for the basic principles found in those laws. Such an effort would also 
require a focused effort to identify the means for effective 
enforcement of these regulations through an appropriate combination of 
public and private mechanisms.
    Related to the legislative patchwork governing agricultural markets 
is the disjointed structure of the Department of Agriculture's own 
enforcement efforts. GIPSA deals with meat and grain. Another part of 
the Department deals with cooperatives and still others focus on market 
information. It appears to me that a full review of the organization of 
responsibilities for administering the market facilitation aspects of 
the Department's mission would be an important contribution to 
modernizing and making effective the implementation of competitive, 
fair, efficient and accessible agricultural markets.

    RECOMMENDATIONS FOR CREATING OR RESTORING A WORKABLE MARKETPLACE

    Several matters seem to me to be central to dealing effectively 
with the need for an efficient, fair, competitive and accessible 
agricultural marketplace. I have the following recommendations:
  --GIPSA and the Department of Agriculture need to address the 
        organizational problems inherent in the present structure of 
        the department. It is not organized in a way that permits it to 
        carry out its obligations to facilitate the working of 
        agricultural markets. This means that both GIPSA's internal 
        operations and its relationship to other market facilitating 
        elements of the department need to be carefully examined and a 
        better system of coordination needs to emerge.
  --There is a very specific need to deal with lawless markets in 
        livestock by effective rule making in light of three goals for 
        PSA. Good, market facilitating regulation makes strategic 
        behavior less feasible and serves the long best interest of all 
        participants in an open, accessible, competitive and efficient 
        market. As the nature of market relationships have changed, it 
        is especially important to develop rules and regulations that 
        guide all parties as to their rights and duties. The risks of 
        disruption and distortion in agricultural markets are real and 
        substantial if such rule making is not undertaken in a timely 
        fashion.
  --Regulation without effective enforcement of the rules will not 
        resolve the inherent problems of the marketplace. It is 
        essential to implement recommendations on reorganization of 
        staffing of GIPSA so that it can become an effective law 
        enforcement agency.
  --More generally, as Congress approaches the process of revising the 
        overall statutory regime governing American agriculture, it is 
        very important to initiate a review of the various statutes 
        that regulate these markets and to develop a comprehensive 
        statutory scheme to facilitate all agricultural markets. The 
        fundamental goals for this system are well established; the 
        challenge is to create a more systematic and workable set of 
        rules that provide structure for the wide range of markets and 
        market contexts in which farmers and ranchers sell their 
        produce.
  --Lastly, reform is not cheap. To have agricultural markets that are 
        competitive, efficient, fair and accessible, there are costs. 
        One part is to make sure that the Department of Agriculture has 
        the financial resources to hire the necessary staff. The other 
        and perhaps less visible cost is for Senators and Members of 
        Congress to monitor the progress of the Department to make sure 
        that it in fact carries out its obligations. These costs should 
        be incurred. The alternative is the gradual erosion of our 
        entire agricultural economy.

                               CONCLUSION

    American agriculture in general and in the livestock segment of 
that industry is at a cross roads. The persistent concentration and 
radical changes in the methods of buying livestock have created serious 
problems which are likely to become worse in the absence of necessary 
market facilitating regulations and effective enforcement of those 
rules. Not all the problems facing agriculture are going to be solvable 
by reliance on market. But Congress has wisely elected to seek to rely 
as much as possible on the market as the best mechanism to organize the 
movement of food and fiber from the farmer and rancher to the final 
consumer. Given that fundamental choice, the Department and GIPSA must 
perform better their assigned tasks of facilitating a competitive and 
efficient marketplace while also ensuring access and fair terms to 
producers.

    Senator Cochran. Thank you, Mr. Carstensen.
    Mr. Dan Kelley.

      STATEMENT OF DAN KELLEY, FARMER, STATE OF ILLINOIS

    Mr. Kelley. Thank you, Mr. Chairman, Mr. Dorgan. It's a 
pleasure to be here and an honor to be here. I'm a farmer from 
Normal, Illinois, where I'm actively engaged in a farming 
partnership with my two brothers.
    In the interest of time and the fact that I still have 
soybeans to plant, we'll move through this rather quickly. My 
brothers and I operate a couple of thousand acres of land in 
central Illinois and also serve as chairman of the board and 
president of GROWMARK Federated Regional Cooperative located in 
Bloomington, Illinois.
    As a federated cooperative GROWMARK is owned and controlled 
by some 250,000 independent family farmers, and there are 
approximately 320 local cooperatives with their total sales 
being about $1.4 billion.
    The farmer owners that make up GROWMARK range in size from 
part-time hobby farm operators to full-time producers, 
commercial operations. But the average size is about 300 acres. 
The mission of GROWMARK when it was started 75 years ago was to 
improve the long-term profitability of its farmer owners. That 
purpose still exists today.
    As an independent family farmer, I cannot stress just how 
important that continues to be, especially in today's business 
environment. Like all farmer cooperatives, GROWMARK has unique 
accountability and focus because of the fact that it is farmer 
owned and farmer controlled.
    GROWMARK over the last 5 years has returned $140 million in 
additional income to its members as a result of value added 
activities in the form of patronage. Farmers today continue to 
operate in a very challenging business environment. I think 
that's been addressed by other panelists.
    Globalization continues to derive changes throughout every 
sector of our economy. We're seeing across the board 
consolidation in energy, chemical, banking, financial services 
and especially in the food processing retailing sectors.
    The National Council for Farmer Cooperatives, the national 
trade organization representing America's farmer-owned 
cooperatives which GROWMARK is one recently did an analysis of 
the relative position of farmer cooperatives in the food and 
agriculture system.
    Some of the items that it highlighted were that while 
cooperatives continue to play a significant role in the farm 
economy accounting for 28 percent for all farm supply sales and 
29 percent of all commodities marketed by farmers, they must 
increasingly compete with firms much larger in size and that 
are better capitalized.
    In addition, the businesses that farmer cooperatives buy 
from and sell to continue to grow in size. The top 10 firms in 
the farm supply food supply and food processing retailing 
sectors, for example, have average total sales of approximately 
$25 billion, more than six times greater than the average in 
the top 10 farmer-owned cooperatives.
    Most significantly, no individual farmer cooperative has 
sufficient sales in any of these aggregate industry segments to 
be among the top 10 firms in the United States.
    As was pointed out earlier in the chart, the farmer's share 
of consumer food dollars has now declined to where it just 
represents 20 cents, its lowest level ever. Reversing this 
decline would substantially improve the farmer's economic well-
being and possibly reduce the impact of the budget on LDPs and 
other forms of direct payments to farmers.
    If we could increase the share of the consumer dollar by 
just 1 cent from 20 to 21 cents, we would generate an 
additional $6 billion of income. The challenge, of course, is 
how do we, given the current business environment and ongoing 
trends, achieve this?
    My view, the best way is to maintain and strengthen the 
ability of farmers to join together in cooperative self-help 
efforts. To be successful, however, we must make sure that we, 
as farmers, in our cooperative businesses are strategically 
positioned to be able to compete in what clearly is a rapidly 
changing global marketplace.
    As was mentioned, our competitors and customers have grown 
in size, and we must challenge ourselves to be able to exist to 
survive and to this rife using similar strategies.
    For this reason, I, as a farmer, am very concerned over 
various proposals to address the issue of ag concentration, 
however well intended they may be. That would make it more 
costly and difficult for farmers and our cooperatives to 
strategically position ourselves to compete in a changing 
global economy.
    The practical effect may very well be to simply lock 
farmers such as myself and our cooperatives into a permanent 
disadvantage relative to our competitors.
    And in business, if you don't meet the competition, you 
won't be in business very long.
    There are, however, a number of actions that Congress and 
the Administration can and should take, based upon the 
recommendations of a special task force ag concentration 
established by the National Council Farmer Cooperatives.
    These include maintaining and strengthen the ability of 
farmers to join together in cooperative self-help efforts, 
making sure our existing antitrust laws are fully enforced. 
That's been addressed today.
    Maintaining the position of special counsel for agriculture 
within the U.S. Department of Justice along with needed 
funding. Support continuation of the existing memorandum of 
understanding involving USDA and Justice along with Federal 
Trade Commission to encourage cooperation on antitrust issues 
involving agriculture, and conducting a review of the Packer 
and Stockyards Act of 1921, as well as the programs and 
responsibilities of USDA's grain inspection packer and 
stockyards administration to determine what additional 
authorities may be needed, if any.
    Most important, I believe it is the need for public 
policies and programs to help maintain and strengthen the 
ability of farmers to join together in cooperative self-help 
efforts. I served as a cochairman of a task force with national 
counsel, and we identified several areas where we think some 
minimal changes in government policy would help farmers to help 
themselves.
    By providing farmers and their cooperatives with improved 
access to capital to help gain ownership in value-added 
activities beyond the farm gate to invest in new equipment to 
modernize and expand and meet costly environmental and other 
regulatory requirements, additional capital is needed. Without 
access to capital, which is our greatest challenge, we will not 
succeed.
    We can do this by increasing USDA's business and loan 
guarantee program for farmer cooperatives up to $10 million, 
and making it more consistent with similar programs for other 
cooperatives, such as rural electrics.
    Clarifying existing authority for guaranteed loan programs 
for farmers to purchase stock in new value-added businesses to 
include both new and existing farmer-owned cooperatives, 
providing tax incentives to help attract capital, and encourage 
investment of farmer-owned cooperatives.
    Enactment of the cooperative tax provisions included in 
Senate bill 312, as introduced by Senators Grassley, Baucus, 
and among others. Establishment of an equity capital fund as 
proposed previously by Senators Harkin and Craig to help 
farmers attract capital and investment.
    In addition, a task force strongly recommended USDA and 
other Federal programs aimed at encouraging self-help by 
farmers be revitalized and given higher priority.
    This would include establishing a separate USDA agency 
totally dedicated and focused on encouraging cooperative self-
help, include research, technical, and education.
    Six million, the new agency would be called the Farm 
Cooperative Business Service, and $6 million for the new agency 
to be called the Farm Cooperative Business Service, and $6 
million for research, education, and technical assistance 
grant.
    We also recommend that funding for value-added technical 
assistance grants authorized under the Ag Risk Protection Act 
of 2000 be increased from $15 to $25 million annually to 
enhance the ability of farmers to become more involved in 
value-added activities beyond the farm gate.
    Together we believe these recommendations will provide 
farmers with greater opportunity to improve their income from 
marketplace to cooperative self-help efforts and promote 
competition.

                           Prepared statement

    Mr. Chairman, it has been said that a man with a full 
stomach has many problems, while a starving man has only one. 
So does it with our nation. Isn't it fantastic, thanks to the 
American farmer and American agribusiness, that we have a 
multitude of problems for you to deal with. I close my 
testimony. Thank you.
    [The statement follows:]

                    Prepared Statement of Dan Kelley

    Thank you, Mr. Chairman. My name is Dan Kelley and I am a producer 
from Normal, Illinois, where I am actively engaged in a farming 
partnership with my two brothers. Together, we operate a 2,080 acre 
diversified grain farm. I also serve as chairman of the board and 
president of GROWMARK, a federated regional farmer-owned farm supply 
and grain cooperative headquartered in Bloomington, Illinois.
    Mr. Chairman, I want to commend you for this hearing. I also want 
to express appreciation to you and the Congress for the actions taken 
to help meet the near term challenges facing farmers. It appears that 
similar economic assistance will again be needed this year. At the same 
time, I am hopeful that we can begin to look at a more long term 
strategy to help farmers compete more effectively in a rapidly changing 
global economy and to generate more of their income from the 
marketplace.
    As a federated regional cooperative, GROWMARK is owned and 
controlled by some 250,000 independent family farmers and their 
approximately 320 local cooperatives with total sales of nearly $1.4 
billion. The majority of our members are in Illinois, Iowa and 
Wisconsin, but we are also experiencing growing membership in Indiana, 
Michigan and Ohio. The farmer owners that make up GROWMARK range in 
size from part-time ``hobby farm'' operators to full-time, family-
owned, commercial operations with the average farm size being 
approximately 300 acres.
    The mission of GROWMARK is to improve the long-term profitability 
of its farmer owners. Farmers joined together to form what is now 
GROWMARK to help ensure a dependable supply of critically needed farm-
related inputs and enhanced opportunities to market their grain on a 
competitive basis. That purpose still exists today. As an independent 
family farmer, I can not stress just how important that continues to 
be, especially in today's business environment. Like all farmer 
cooperatives, GROWMARK has a unique accountability and focus because of 
the fact that it is farmer owned and farmer controlled.
    Through its system of 320 local cooperatives, GROWMARK provides 
crop and livestock production inputs, petroleum products, consumer 
goods and grain marketing services to its farmer owners on a cost-
effective and competitive basis. It also provides manufacturing, 
processing, quality control, product procurement and a range of other 
services to its local cooperatives for the benefit of their farmer 
owners.
    As a cooperative, earnings from these activities are returned to 
GROWMARK's member owners on a patronage basis. Over the last 5 years, 
GROWMARK has returned more than $140 million in additional income to 
its members as a result of such ``value-added'' activities. This is 
significant given the business environment of the past 5 years.
    Farmers today continue to operate in a very challenging business 
environment. Farm income continues to be highly variable due to the 
inherent risks involving production agriculture and the volatile nature 
of commodity markets. Commodity prices remain depressed. Production 
costs continue to increase. The global marketplace continues to be 
characterized by subsidized foreign competition and artificial trade 
barriers.
    Globalization continues to drive changes throughout every sector of 
the economy. This has led to increasing consolidation at every level as 
businesses attempt to gain the size, scale and efficiencies needed to 
remain viable and competitive long term. This is underscored by recent 
mergers in the energy, chemical, insurance, banking, financial 
services, manufacturing, and transportation industries, as well as in 
agriculture, especially in the food processing and retailing sectors.
    The National Council of Farmer Cooperatives (NCFC), a national 
trade association representing America's farmer owned cooperatives of 
which GROWMARK is a member, recently did an analysis of the relative 
position of farmer cooperatives in the food and agriculture system. 
Among the highlights, it found that--
    While farmer cooperatives continue to play a significant role in 
the farm economy, accounting for 28 percent of all farm supply sales 
and 29 percent of all commodities marketed by farmers, they must 
increasingly compete with firms much larger in size and better 
capitalized.
    In addition, the businesses that farmer cooperatives buy from or 
sell to continue to grow in size and market share.
    The Top 10 firms in the farm supply, food processing and food 
retailing sectors, for example, have average total sales of 
approximately $25 billion--more than six times greater than the average 
for the Top 10 farmer owned cooperatives ($4 billion).
    The Top 10 firms in the farm supply, food processing and food 
retailing sectors have increased their market share above 40 percent in 
each sector.
    Most significantly, no individual farmer cooperative has sufficient 
sales in any of these aggregate industry segments to be among the Top 
10 firms.
    The farmer's share of the consumer food dollar has now declined to 
where it now represents just 20 cents--its lowest level ever. Reversing 
this decline would substantially improve the farmer's economic well 
being. For example, increasing the farmer's share of the consumer food 
dollar by just one cent to 21 cents would generate an additional $6 
billion in income. The challenge of course is how, given the current 
business environment and ongoing trends.
    In my view, the best way to help achieve this is to maintain and 
strengthen the ability of farmers to join together in cooperative self-
help efforts. To be successful, however, we have to make sure we as 
farmers and our cooperative businesses are strategically positioned to 
be able to compete in what clearly is a rapidly changing global 
marketplace.
    As our major competitors and customers have grown or consolidated 
to gain the size and scale needed to compete on a global basis, we have 
had to look at similar strategies. These have involved merging with 
other farmer cooperatives as well as entering into joint ventures and 
strategic alliances--to help reduce costs, be more competitive, and 
better meet customer demands in an effort to ensure that farmers like 
me continue to have access to competitively priced products as well as 
more competitive markets, and the opportunity to capture a greater 
share of the earnings related to such activities.
    For this reason, as a farmer, I am very concerned over various 
proposals to address the issues of agriculture concentration, however 
well intended, that would make it more costly and difficult for farmers 
and their cooperatives to strategically position themselves to compete 
in a changing global economy. The practical effect would be simply to 
lock farmers and their cooperatives into a permanent disadvantage 
relative to their competitors. And, in business if you don't meet the 
competition, you won't be in business very long.
    Again, it is important to emphasize that farmer cooperatives are 
farmer owned and farmer controlled. They operate on a democratic basis. 
When it comes to mergers and consolidations, not only must the board of 
directors, which is elected by the farmer owners from among themselves, 
approve the decision, but in most cases so must a majority of the 
cooperative's members. Many states (including Iowa, Minnesota, North 
and South Dakota, and Wisconsin) even require a two-thirds majority 
vote of a cooperative's members before a merger can be approved. For 
this reason, any proposal that would limit or restrict the ability of 
farmers like myself to determine what is in our mutual best interest, 
make it more costly, or make it more difficult to make timely business 
decisions should be opposed.
    There are, however, a number of actions that Congress and the 
Administration can and should take based upon the recommendations of a 
special task force on agriculture concentration established by the 
National Council of Farmer Cooperatives. These include:
  --Maintaining and strengthening the ability of farmers to join 
        together in cooperative self-help efforts.
  --Making sure existing antitrust laws are fully enforced. Currently, 
        two Federal agencies--the U.S. Department of Justice (DOJ) and 
        Federal Trade Commission (FTC)--and the state Attorneys General 
        have enforcement power over agricultural mergers and 
        acquisitions. The U.S. Department of Agriculture also plays a 
        role and is consulted by DOJ and FTC under existing protocol.
  --Maintaining the position of the Special Counsel for Agriculture 
        within the U.S. Department of Justice, along with needed 
        funding, to provide continued review and oversight with regard 
        to agriculture antitrust issues.
  --Supporting continuation of the existing memorandum of understanding 
        (MOU) involving the U.S. Departments of Agriculture and 
        Justice, along with the Federal Trade Commission, to encourage 
        cooperation on antitrust issues involving agriculture.
  --Conducting a review of the Packers and Stockyards Act of 1921, as 
        well as the programs and responsibilities of USDA's Grain 
        Inspection, Packers and Stockyards Administration (GIPSA) to 
        determine what additional authorities may be needed, if any.
    Most important, I believe, is the need to maintain and strengthen 
the ability of farmers to join together in cooperative self-help 
efforts. Such action--on a sustained basis--would help promote 
competition and maintain the independence of the family farmer. It 
would also provide farmers a greater opportunity to generate more of 
their income from the marketplace, capitalize on potential market 
opportunities, better manage their risk, and compete more effectively 
in a rapidly changing global economy.
    Again, it can not be overly emphasized, farmer cooperatives are 
farmer owned and controlled. They exist for the mutual benefit of their 
farmer members. There are nearly 3,500 local and regional farmer owned 
cooperatives across the U.S. whose member owners include a majority of 
the nation's nearly 2 million individual farmers. With nearly 300,000 
full time and seasonal employees, they also provide a significant 
source of employment in many rural communities.
    Joining together in cooperative self-help efforts provides farmers 
with the advantages of economies of scale and bargaining power, and the 
opportunity to participate in value-added activities beyond the farm 
gate. Earnings derived from related business activities are returned to 
the cooperative's farmer owners on a patronage basis.
    A separate NCFC task force, on which I serve as co-chairman, has 
identified a number of actions that would help encourage and promote 
such cooperative self-help efforts. These include:
  --Providing farmers and their cooperatives with improved access to 
        capital to help gain ownership in value-added activities beyond 
        the farm gate, to invest in new equipment, to modernize and 
        expand, and meet costly environmental and other regulatory 
        requirements. Without question, access to capital is one of the 
        greatest challenges facing farmer cooperatives. To help meet 
        this challenge, the task force recommended several options, 
        including:
  --Increasing USDA's Business and Industry Loan Guarantee Program for 
        farmer cooperatives up to $10 billion and making it more 
        consistent with similar programs for other types of 
        cooperatives (such as rural electric cooperatives);
  --Clarifying existing authority providing guaranteed loans to farmers 
        for the purchase of stock in a new, value-added business, to 
        include both new and existing farmer owned cooperative 
        businesses for the same purpose;
  --Providing tax incentives to help attract capital and encourage 
        investment in farmer owned cooperative businesses;
  --Enactment of the cooperative tax provisions included in S. 312 as 
        introduced by Senators Grassley and Baucus, among others. Such 
        legislation includes modification of the dividend allocation 
        rule, which results in a triple tax on cooperative dividends on 
        preferred stock, unfairly reduces the amount of patronage 
        earnings that a cooperative may distribute to its members, and 
        limits its use as a means of raising equity capital; and
    Establishment of an equity capital fund such as that proposed 
previously by Senators Harkin and Craig, among others, that would help 
further provide farmer owned cooperatives and related businesses with 
improved access to capital.
    In addition, the task force strongly recommended that existing 
Federal programs aimed at encouraging cooperative self-help efforts by 
farmers should be revitalized and given a high priority. To help 
achieve this, it was strongly recommended that Congress approve the 
establishment of a separate agency within USDA to be called the Farmer 
Cooperative Business Service and provide not less than $6 million 
annually for the purpose of carrying out and administering related 
research, education and technical assistance programs.
    It also recommended that an additional $6 million be provided for 
cooperative research, education and technical assistance grants to be 
carried out through public-private partnerships involving associations, 
cooperatives, land grant colleges and universities, to further assist 
farmers, including limited resource farmers, in making the most 
effective use of the cooperative business model to improve their 
economic well being.
    Finally, the task force recommended that funding for Value-Added 
Technical Assistance Grants authorized under the Agricultural Risk 
Protection Act of 2000 be increased from $15 million to $25 million 
annually to further enhance the ability of farmers to become more 
involved in value added activities beyond the farm gate.
    Together, we believe these recommendations will provide farmers 
with a greater opportunity to improve their income from the 
marketplace, manage their risk, capitalize on potential market 
opportunities, compete more effectively in a rapidly changing global 
economy, and enhance their economic well being and profitability long 
term.
    Mr. Chairman, this concludes my testimony. Again, I want to thank 
you for allowing me as an independent farmer to appear before you to 
discuss this important issue. I will be happy to answer any questions 
you or members of the Subcommittee may have.

    Senator Cochran. Thank you, Mr. Kelley, for your 
interesting and provocative statement.
    The Honorable Tom Miller is Attorney General of the State 
of Iowa. We'll hear from you now. Welcome.

       STATEMENT OF TOM MILLER, ATTORNEY GENERAL, STATE OF IOWA

    Mr. Miller. Thank you very much, and I'll be brief, so 
brief I'll make one point, and then give an example to support 
the point.
    The point I want to make, it's in my testimony, but I think 
it's very important, and that is that these issues that we're 
dealing with, concentration-related issues, antitrust and 
antitrust enforcement plays an important role in dealing with 
them, but far from an exclusive role. That what we need here is 
a comprehensive set of public policy principles and programs to 
deal with the issue.
    And the example I give is this in contracting. In Iowa, 
we're probably seeing as much contracting as any State because 
contracting is moving forward in pork, probably more than in 
other parts of agriculture, and Iowa has about 25 percent of 
the PGGs in this country.
    The concern is that we not let farmers become, because of 
imbalance in negotiating power, virtual serfs on their land. 
Like any situation, there are extreme positions to be avoided. 
We do not take the position that these contracts should be 
outlawed or prohibited in their entirety. They can be an 
important economic form.
    Nor do we think that there should be no regulation at all 
so that we spiral into this sort of potential serfdom 
situation.
    So what we did as attorney generals, as we often do, we 
work together. Sixteen States formed what we thought and 
believe are model producer protection legislation. 
Incidentally, Senator Dorgan, then Attorney General Heidi 
Heicamp, were cochair of that group last year when we worked on 
it among the 16 States, and we've sent you an outline of that 
legislation. It has to do with a ban on confidentiality, that 
it be transparent.
    Now, the farmer makes the choice on whether it's disclosed 
or not. It's not automatically disclosed to everyone. The 
farmer or the contractor alone makes that call that certain 
unfair practices are dealt with in terms of retaliation for 
forming any kind of group activity, whistle blower, et cetera. 
Disclosure of risk is required.
    There's a producer lien too that the farmer has the first 
lien on the animals. And there's restrictions on unfair cutting 
off the contracts, given the capital investments that the 
farmers have made.
    We think these are realistic, fair provisions that give the 
farmer, who otherwise is in a very unequal negotiating 
position, some realistic ability to negotiate a fair contract 
that ultimately is in his interest, society's, and I would 
argue the contract owner's as well.
    Senator Harkin, Senator Daschle, and others have introduced 
this legislation at the national level at the Senate, of 
course. We urge your consideration of that.
    There are two real important parts of that legislation. One 
allows voluntary producer associations so that farmers can get 
together and negotiate or work with the contract owners on some 
group basis and requires good faith bargaining.
    The other is a provision that allows the States to 
experiment and doesn't preempt the States. This, I think, is an 
important area for the laboratories of democracy in the States 
to work.

                           Prepared statement

    So I would ask you to take the middle ground here, not to 
stop these contracts but not to allow them to be totally one 
sided either, but to put some form of law in there that the 
farmer is given some meaningful position, some meaningful 
bargaining position so that this industry can flourish rather 
than having a situation where there are serfs on the land. 
Thank you both, Senators.
    [The statement follows:]

                    Prepared Statement of Tom Miller

    I want to thank the committee for this opportunity to testify on an 
issue of great concern to agricultural producers and consumers in my 
home state of Iowa and across the country--concentration in 
agriculture.
    I, like many other state attorneys general, have become concerned 
about the rapid trend toward consolidation in agriculture at both 
horizontal and vertical levels. Through mergers, acquisitions, 
alliances, and other arrangements, fewer and fewer firms control the 
production, processing, preparation, and retailing of agricultural 
commodities and food. My worry is that this conglomeration of economic 
power may lead to anti-competitive practices and adversely affect the 
prices paid to farmers for commodities and the prices paid by consumers 
for food.

        ANTITRUST ROLE OF STATE ATTORNEYS GENERAL IN AGRICULTURE

    State attorneys general play a significant role in fostering full 
and free competition in the United States economy through the 
enforcement of Federal and State antitrust laws. We work in a 
multistate process to investigate and prosecute alleged anti-
competitive activities in all sectors of the economy, including 
agriculture. We collaborate closely on these issues with the United 
States Department of Justice (USDOJ), the Federal Trade Commission, and 
the Packers and Stockyards Administration of the United States 
Department of Agriculture (USDA).
    Examples of agricultural antitrust matters in which the states have 
been involved include a multimillion dollar settlement with major farm 
chemical manufacturers for alleged retail price maintenance, the 
Cargill/Continental merger, Smithfield Foods' acquisition of Murphy 
Family Farms, the Case/New Holland merger, and Tyson Foods' aborted 
acquisition of IBP. State attorneys general will continue to be 
vigilant in investigating allegations of anti-competitive behavior in 
agriculture and will vigorously enforce antitrust laws where 
appropriate. We particularly want to cooperate and share information 
with USDOJ and USDA.
    However, in dealing with agricultural concentration and related 
issues, antitrust law is only one part of a possible solution to the 
problems farmers face today. For the antitrust law is a limited law as 
enacted and interpreted during the last century. Furthermore, the 
Federal courts in the last two decades have been restrictive in their 
interpretations of the antitrust law. The antitrust enforcers, 
including state attorney generals, must aggressively bring cases that 
fit within the antitrust law or arguably are within the prohibitions of 
the acts. But that will not solve all the problems that brought us here 
today. Antitrust is only part of the public policy approach to these 
issues.
              OTHER ACTIVITIES OF STATE ATTORNEYS GENERAL

    In addition to antitrust enforcement, state attorneys general have 
undertaken several other types of activities which we believe will help 
producers and others deal with the impacts of concentration in 
agriculture.
                    Agricultural Contracting

    The use of production contracts and marketing contracts by firms 
with ever-growing market shares has dramatically increased vertical 
integration in American agriculture. Dr. Neil Harl, the noted 
agricultural economist and attorney from Iowa State University, has 
called this the ``rising tide in contract agriculture.''
    There are important reasons why contractors (most often processors) 
and farmers utilize, and can benefit from, contracts. Indeed, some 
argue that contracting may greatly increase economic efficiency in 
agriculture. However, contracting poses serious risks for producers 
and, ultimately, for consumers. This is particularly true in some 
agricultural sectors where there is a high level of horizontal 
concentration combined with vertical linkages through contracts. In 
this situation, producers are, as Dr. Harl puts it, ``contracting with 
near monopolists.'' He calls this a ``deadly combination.''
Risks of Contracting
    In general, contracting can pose several risks for producers, 
including the following:

                   Disparity in Bargaining Power

    There is greater and greater disparity between processors and 
farmers with respect to market information and bargaining power. Large 
companies often offer contracts to producers on a ``take it or leave 
it'' basis. The contractual risks to producers are buried in pages of 
legalese and producers are stuck with unfair contract terms. In the 
poultry industry, which has been vertically integrated for decades 
through the extensive use of contracts, we hear repeated allegations of 
unfair treatment of producers.

                    Unfair Shifting of Risk

    Contracting can result in the unfair shifting of economic risks to 
farmers. This is common in production contracts that require producers 
to make substantial capital investments. For example, in the poultry 
industry, some producers are contractually required to make long term 
capital investments in buildings and equipment, but are only offered a 
contract that covers one flock of birds.

                 Loss of Market Transparency

    The first lesson of ``Economics 101'' is that economic efficiency 
can only be attained in a free market if market participants have 
adequate information to make economic decisions. The importance of 
market transparency and price discovery is so fundamental that it is 
academic dogma.
    Traditionally, a hallmark of American agriculture was the free flow 
of market information available through auctions, terminals, and 
futures trading. Sadly, that situation has changed dramatically. Today, 
agricultural production and marketing contracts routinely contain 
strict confidentiality clauses. (As discussed below, this is not true 
in Iowa where confidentiality clauses are prohibited.) Some 
confidentiality clauses are so restrictive that farmers are reluctant 
to consult with their lawyers and financial advisors. As a result, most 
agricultural contracting is conducted in virtual secrecy, which 
severely limits the ability of farmers to compare contracts and 
negotiate the best, or even a fair, deal.

State Legislation--the ``Producer Protection Act.''

    States have an opportunity and indeed a responsibility to consider 
reasonable oversight of agricultural contracting that will lessen the 
risks of contracting and promote meaningful competition in agriculture.
    Our work in production contracting began with educational efforts 
for producers. In 1995, I formed the ``Attorney General's Task Force on 
Production Contracts'' that developed grain and livestock production 
contract checklists to help farmers negotiate production contracts. The 
checklists have been widely distributed throughout the country via the 
Internet.
    Producer education is important. However, as the number of 
complaints about contracting filed with my Farm Division increased, I 
became convinced legislation was necessary. Last year, I led a group of 
state attorneys general in an effort to develop model state legislation 
on contracting. The goal was to draft provisions that would provide 
needed protections for farmers without overly burdening processors. The 
product was model state legislation entitled the ``Producer Protection 
Act.'' The legislation was endorsed in principle by the Attorneys 
General of Colorado, Indiana, Kentucky, Minnesota, Mississippi, 
Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Vermont, 
West Virginia, Wisconsin, and Wyoming.
    In brief, the Act has several noteworthy provisions:

                      Bans on Confidentiality

    Based on an Iowa statute passed in 1999, the Act prohibits the 
inclusion of confidentiality provisions in agricultural production and 
marketing contracts. This prohibition would allow producers to freely 
share their contracts with lawyers, bankers, other producers, and 
government officials.
    Utilizing the protections of Iowa's law, my Farm Division has taken 
about 70 different types of contracts provided by producers and put 
them on our website (with producers' names deleted). This website 
(www.iowaattorneygeneral.org) is one of the few places in the nation 
where producers can obtain information needed to compare price and 
other terms and conditions of contracts. We believe this information 
will enable farmers to negotiate better deals.

                       Unfair Practices

    The model Act makes it an unfair practice for processors to 
retaliate or discriminate against producers who exercise certain 
rights, including the right to join producer organizations, to freely 
contract with others, and to be a ``whisteblower.'' In Iowa, we have 
received an increasing number of reports that contractors have made 
threats to retaliate if producers file complaints about contractual 
problems with our Farm Division or exercise statutory rights (e.g., 
filing a contract producer lien). The threats have included threats to 
provide substandard animals and threats to terminate or not renew 
contracts.
                       Disclosure of Risks

    The model Act requires contracts to include a cover page which must 
contain a disclosure of material risks written in plain language. This 
is based on a Minnesota law passed in 2000 that has proven to be quite 
helpful to producers.

                         Right to Review

    Similar to protections found in consumer law (e.g., door-to-door 
sales rules), the model Act provides contract producers with a three-
day right to review production contracts.

                      Contract Producer Lien

    Based on a 1999 Iowa statute, the model Act provides producers with 
a first priority lien for payments due under a production contract. 
This alleviates one of the real risks faced by producers in production 
contracting--getting paid.

                      Capital Investments

    The model Act makes it harder for processors to terminate 
production contracts capriciously or as a form of retribution if 
farmers have already made sizable capital investments pursuant to 
requirements in the contracts.
    Since the Producer Protection Act was announced in September of 
2000, state attorneys general have worked with various farm groups, 
agribusinesses, governors, state agriculture commissioners, and 
legislators to revise and improve the legislation as needed in their 
respective states. Eighteen state legislatures considered various 
versions of the Act. No state has passed all parts of the Act 
(although, as mentioned, segments of it are already law in Iowa and 
other states). We will continue to cooperate with interested parties 
and decision makers in the coming years to see effective and reasonable 
state legislation enacted.

Federal Legislation on Contracting

    Federal legislation has been introduced that closely resembles the 
states' Producer Protection Act. I strongly support the concept of 
enacting Federal protections which mirror the states' proposals. One of 
the goals of the model state legislation was to encourage a similar 
state framework for the regulation of contracting. The idea was to 
avoid a patchwork of divergent state laws and the regulatory burden it 
would place on agribusinesses. Obviously, Federal legislation would 
accomplish this goal.
    However, if Federal legislation is enacted, it is crucial that 
states are not preempted in their ability to grant producers additional 
protections based on the specific needs existing in a state.

         AGRICULTURAL FAIR PRACTICES AND PRODUCER ASSOCIATIONS

    There is no question that farmers and ranchers now more than ever 
need to join together to bargain for better contractual terms with 
large agribusinesses. Many believe that the lopsided disparity in 
bargaining power between producers and processors can only be corrected 
if producers forge alliances. As Dr. Neil Harl states, ``Historically, 
farmers have been unwilling to accept such a disciplined approach to 
achieving bargaining power. However, the time may be near when that 
will be the only practical alternative to vulnerability and serfdom.''
    States are currently limited in their ability to enact legislation 
in the area of collective bargaining for agricultural producers due to 
preemption language in the Agricultural Fair Practices Act of 1967 
(AFPA). Fortunately, Federal legislation has been introduced in this 
area which contains two important components:
Producers' Ability to Bargain Strengthened
    The proposed Federal legislation establishes a process by which 
voluntary producer associations can receive accreditation from USDA. In 
turn, these accredited associations are authorized to bargain with 
large processors, contractors, and cooperatives (defined as 
``designated handlers'' in the legislation). Mutual obligations of good 
faith bargaining are imposed on both the accredited associations and 
the designated handlers.
    Additionally, the Federal legislation strengthens the ability of 
producers to organize associations without fearing coercion, 
intimidation, or discrimination by large agribusinesses as a result.
State Laws Not Preempted
    Significantly, the Federal legislation makes clear that state laws 
dealing with producer bargaining are not invalidated by Federal law 
(i.e., the AFPA).
    I would strongly encourage the enactment of this Federal 
legislation. Farmers across the country would then have the tools 
needed to band together and negotiate agreements which, hopefully, 
would give them their fair share of the profits available in production 
agriculture.
    In summary, state attorneys general will continue to aggressively 
enforce antitrust laws, but will also press for state and Federal 
legislation which we believe will be more effective in dealing with the 
negative impacts of consolidation in agriculture.
    Again, I thank the committee for the opportunity to discuss this 
serious problem.

    Senator Cochran. Thank you, Mr. Miller.
    Mr. David Reis, President-Elect Illinois Pork Producers. 
Welcome.

STATEMENT OF DAVID REIS, PRESIDENT-ELECT, ILLINOIS PORK 
            PRODUCERS

    Mr. Reis. Thank you, Chairman Cochran, and members of the 
committee. As you said, my name is David Reis. I'm a pork 
producer in Illinois, St. Real, Illinois. I'm currently serving 
as President-Elect of Illinois Pork Producers Association and 
also as a volunteer consultant to and a member of the American 
Premium Foods Cooperative.
    It is truly an honor to be here before this subcommittee on 
behalf of the over 240 members of the independent pork 
producers of our co-op to set a different angle on what we're 
trying to do to deal with the changing agricultural industry.
    We've heard a lot of testimony today about the fact that 
agriculture is going through a period of change and transition 
and consolidation. The result is the traditional family farm is 
giving way to a system of contracted and integrated corporate 
operations.
    And in some of the producer groups and producers themselves 
have resorted to spending a lot of their time and resources on 
trying to figure out how they can stop this trend, whether it's 
price control measures or moratoriums on mergers and 
acquisitions or whatever it might be.
    But a couple of years ago we at American Premium Foods took 
another approach, and we wanted to be proactive and engage in 
activities that would allow us to not only to control our own 
destinies but also to create more jobs in the communities in 
which we live and offer economic stimulus to that area.
    We wanted to provide or establish a correlation between the 
prices that consumers are paying for their products and what 
farmers are receiving for their commodities.
    American Premium Foods was organized in late 1999 after 
almost a year of business plan development and membership 
recruitment by its founding leadership. It's comprised of 
independent pork producers from throughout Illinois. We plan to 
construct a pork packing and fresh processing facility that is 
capable of handling 2,800 head per day.
    The plant will be one of the most automated and sanitary in 
the United States. In our facility, even with the equipment and 
stringent homework that we're going into, it will even meet the 
tough European Union standards so we'll be able to export our 
meat to other countries. No other plant in the United States 
will have that.
    We'll market our meat under the newly formed Meadow Brook 
Farms label in which American Premium Foods owns a 51 percent 
majority of. The farmers also own the brand name label that 
we're going to establish after that.
    Each carcass going through this plant will be individually 
tracked. The producer members will be paid for, the wholesale 
value of the primal cuts from their hogs. Profits from 
additional processing as they come in will be paid out 
according to the producer's percentage ownership in the plant.
    Our $30 million-dollar facility will employ 210 people and 
will have an annual payroll of approximately $6 million. 
Because of its smaller size, the plant is designed to be an 
environmentally friendly asset to the community in which we 
choose to put it.
    You hear so many stories about these large plants moving 
into town, and they're 10,000 12,000, 16,000 head a day, and 
they run into opposition. We feel that the site will be 
friendly to that community in which we choose.
    Our project, as smooth as it may sound, hasn't been without 
its share of problems and attack from critics and non-
supporters. Because this venture of this size is the first one 
in the country, we don't have a business model to follow.
    It was deemed high risk start up from banks and not only 
the banks that are going to be loaning the money to the 
cooperative, but the banks would be loaning the money to the 
individual producers that are buying their shares and providing 
their part of the equity.
    We are advised to be aware of snake oil salesmen, that this 
is a concept that couldn't work in getting back to the equity 
part of the producer's equity was lost in the low hog prices in 
1998. Here they were, they lost their equity, we knew we had a 
problem. Now they're wanting to invest in something that might 
help them get out of that.
    So all of those things, as you can tell, is real easy for 
the critics to sit back and say this can't be done. But I'm 
proud of the group. It's held its course, and it's continued to 
believe that what we're doing is worth fighting for. Because 
truly what's at stake is the existence of the independent pork 
producer, the ones that are left.
    We've been, as I said, working on this project for 2 years 
now. But each day that passes, the consolidation that everyone 
has talked here about today continues. We need to move projects 
like this forward.
    Just a few weeks ago it was announced that Seaport 
Corporation has scrapped its plans to build a new processing 
plant in Kansas. This gives proof that and confirms that most 
of the growth incurred by these large packing plants is through 
acquisitions and mergers. They're not investing in new 
facilities.
    And the talk of the news now is that high fuel costs are a 
result of an industry that hasn't continued to reinvest in 
itself. There is some correlation there with that industry.
    So what can the Senate Appropriations Committee do to help? 
We need common sense solutions and assistance if more projects 
such as ours are going to successfully move through the 
critical period of planning and start up. Whether it's beef or 
pork packing plants, soybean crushing plants, ethanol 
production, aquaculture, or many other value-added consents are 
being discussed. Oftentimes the difference between success and 
failure is the amount of time spent doing the preliminary work. 
And this all takes a lot of time and a lot of money.
    These ventures need assistance in hiring the best firms to 
do the feasibility studies, the business plan development, the 
market plan development. We know how to raise pork in a pork 
industry. We know how to do it better than anyone else in the 
world. We need a little boost here in terms of not only 
assistance in paying for consultation but maybe centers that 
could help us do with that research to help us in a broader 
sense with ventures as large as this. So as we spread out, we 
need a little help getting there.
    So that we offer these suggestions, allow and encourage all 
agencies and their employees associated with value-added co-op 
development to instill a positive attitude and to look for 
solutions, not obstacles, when consulting projects like ours.
    Right now there seems to be incentives only for writing 
good loans and not all loans are good. So let's take a look at 
this operation and what can we do to help you folks.
    Dramatically streamline the grant and loan application 
process and fund these programs at a higher level. We talked 
about the Grassley value-added grant application. That's one 
thing. I think the rules there can be streamlined a little bit. 
And with the USDA-backed loans, it shouldn't take 15 to 16 
months to get through a process. I don't know if the States 
vary in their level that they can go up to, but in Illinois 
it's $10 million.
    You go through several months of going through the process 
and they say, well, we need to refer you to the USDA in 
Washington. So then you go through all of this process again 
and this all takes time.
    I really didn't say about the time, but all the time we're 
spending on this we still have to run our farms. We're short of 
labor, we're short of cash to pay the labor. Our wives work in 
town. And being gone 2 or 3 days a week for 2 years, it starts 
taking a toll on us. I wanted to reemphasize it on the time.
    Another option is introduce and pass legislation that 
offers tax incentives to members who invest in new generation 
co-ops. And, lastly, an example that was talked about, several 
States have value-added bills and rules that they are currently 
working with. Maybe a block grant to those States that maybe 
matches their funds if they put in $5 million and another 5 
million would come from the Federal Government.
    In closing, Mr. Chairman, members of the committee, the 
producers in our group have pretty much laid their operations 
on the line. They've invested a lot of sweat equity and time 
and money and are going to be investing a lot of money when we 
make the capital call on this operation. They feel that the 
future of independent pork producers relies on this, the key 
ingredient in our rural economy.
    And we hope that through the testimony from all of these 
people that we can work together to find common sense ways to 
help operations such as or projects such as ours get up and get 
going. So I want to thank you for your invitation and be happy 
to answer any questions.
    Senator Cochran. Thank you, Mr. Reis. We appreciate your 
contribution to this hearing and all of the members of this 
panel. We're grateful to you for the time you took to prepare 
statements and think about the subject we had under review 
today. And to add to our understanding of some of the 
challenges that we face. And also to open our minds to new 
ideas and suggestions for ways to improve the opportunities for 
farmers and production agriculture to operate their enterprises 
profitably.
    And some new suggestions about how to get out of the 
problem of concentration and ensure that we do have the 
opportunity that results in fair chances to sell at fair prices 
the products that are produced.
    Mr. Miller. Senator, we appreciate you sitting through 2\1/
2\ hours so we could all have our say here. Thank you.
    Senator Cochran. I am interested in the suggestions. I 
thought Mr. Butler's comments about the arbitration clauses 
were provoking. We need to be sure that there is a fair 
opportunity to have disagreements dealt with. And we shouldn't 
prefer one side over the other in these arrangements.
    And so we need to look at that again to see what we can do 
at the Federal level. Whether or not the State legislatures 
have more of a role to play in some of the local laws and 
practices as well.
    But I'm hopeful that we will all benefit from this, and as 
we go through our appropriations bill this year and look at the 
requests we have from the different agencies at the Department 
of Agriculture for funding, we'll look at some of the 
suggestions we got today and consider them very seriously. I 
know you had some specific suggestions, and we appreciate that. 
Other witnesses did as well.

                         Conclusion of hearing

    Senator Cochran. We appreciate your attendance, and the 
hearing is recessed.
    [Whereupon, at 12:40 p.m., Thursday, May 17, the hearing 
was concluded and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

         Material Submitted Subsequent to Conclusion of Hearing

    [Clerk's note.--The following statement was received by the 
subcommittee subsequent to the conclusion of the hearing. The 
statement will be inserted in the record at this point.]
    [The statement follows:]

     Prepared Statement of the American Cotton Shippers Association

    The American Cotton Shippers Association is opposed to the 
enactment of the legislation that would impose on the cotton industry 
and its highly competitive marketing system the oversight of the 
Federal Government.
                            interest of acsa

    ACSA was founded in 1924 and is composed of primary buyers, mill 
service agents, merchants, shippers, and exporters of raw cotton who 
are members of four federated associations located in sixteen states 
throughout the cotton belt:
    Atlantic Cotton Association (AL, FL, GA, NC, SC, & VA) Southern 
Cotton Association (AR, LA, MS, MO, & TN) Texas Cotton Association (OK 
& TX) Western Cotton Shippers Association (AZ, CA, & NM)
    ACSA member firms handle over 80 percent of the U.S. cotton sold in 
domestic and export markets. In 2000-2001, domestic mills will consume 
10.25 million bales and 6.75 million bales will be shipped to foreign 
mills. Because of their involvement in the sale and shipment of cotton, 
ACSA members are directly impacted by any action of the Congress that 
impedes their ability to purchase the product of America's cotton 
producers at competitive prices. Therefore, our interest is manifest in 
the proposal before the Subcommittee since the pricing and marketing of 
US cotton is a sound and effective example of a highly competitive 
deregulated system that functions in the best interests of our 
producer, domestic mill, and export customers.
    Proposed Legislation Restricts Competitive Marketing of Cotton 
Legislation introduced in the 106th Congress, S. 2252, The Agriculture 
Competition Enhancement Act, and S. 2411, The Farmers and Ranchers Fair 
Competition Act of 2000 and pending legislation S. 20, Securing a 
Future for Independent Agriculture Act of 2001, in the 107th Congress 
would have an adverse impact on the marketing of cotton.
    At the heart of each measure is a section which will result in USDA 
regulation of cotton purchases and sales by making it unlawful for any 
dealer, processor, commission merchant, or broker to make or give any 
undue or unreasonable preference or advantage to any particular person 
or locality or subject any particular person or locality to any undue 
or unreasonable disadvantage in connection with any transaction 
involving any agricultural commodity.
    The concerns over market concentration in sectors of the livestock 
industry will have the effect of regulating cotton sales and threatens 
a marketing structure, which over the years has provided cotton 
producers with an active and competitive market for the sale of cotton.
    This provision will preclude the offering of price premiums to 
areas of the cotton belt that produce high quality fiber with strong 
market demand and the establishment of discounts for poor fiber 
qualities in other areas. In instances of a short world supply of 
poorer quality fibers this could result in a premium for the lower 
qualities, given its world demand, over that of finer qualities 
produced in that or other regions of the United States. Would such 
market circumstances be subject to the review of USDA?
    Further, this unnecessary and restrictive language precludes 
discounts for cotton produced and stored in areas where warehouse 
service is poor and delays are frequently encountered and prohibits the 
payment of premiums in areas where the warehouses provide timely or 
even immediate shipment.
    This provision would also create havoc with forward contracts 
entered into with producers from the same region at different points in 
time at different fixed prices or prices determined by futures market 
prices. Those who contract at different times or fix the futures price 
in different months could be deemed to have ``an unreasonable 
preference or advantage.'' The same is true for those who sell in the 
spot market at different points in time. All of these situations 
establish prices and the last thing our industry needs is a USDA bureau 
determining that marketing factors ``subject any particular person or 
locality to any undue or unreasonable prejudice or disadvantage.''
    We also have concerns with the restrictions on the sale or 
acquisition of relatively small merchant businesses, warehouses, and 
cotton gins with annual net sales of more than $10 million, which is 
equivalent to handling approximately 25,000 bales of cotton.

   INTERFERENCE WITH CONTRACTING PROCESS IS A GRIEVOUS & UNNECESSARY 
                   OVERREACHING BY FEDERAL GOVERNMENT

    The premise of S. 20 in Subtitle C, Contract Fairness, Section 121 
is that agricultural contracts are not entered into in good faith with 
respect to performance and enforcement and that producers are 
unsophisticated and unfamiliar with their contractual rights in a 
competitive marketplace. This erroneous premise ignores the Common Law 
contract rights of the parties to agricultural contracts, which are 
incorporated in the Uniform Commercial Code and continually updated by 
the National Conference of Commissioners on Uniform State Laws and the 
American Law Institute to reflect patterns of trade, customs and usages 
and court decisions. It ignores the educational programs of producer 
and trade organizations on the contracting process, and the transparent 
process of the cotton industry, which has utilized fully explained 
uniform contracts for over 25 years. Additionally, to subject contract 
provisions to the approval of the Secretary of Agriculture is a 
grievous and unnecessary overreaching of the independent rights of 
contracting parties, as is the right of parties for mutually desirable 
and agreeable reasons to maintain the confidential nature of their 
lawful contract terms and conditions. Further, establishing a Central 
Filing System for the purposes of perfecting liens was recently 
considered and rejected by the Congress in its recent review and 
updating of the Federal Warehouse Act. Most disturbing is the proposal 
to void the long established policy of the US Congress to foster the 
use of arbitration when contractual disputes cannot be amicably 
resolved. Arbitration is available to cotton, wheat, feed grain and oil 
seed producers throughout the United States and provides a fair, 
efficient, and inexpensive recourse to dispute resolution. To suggest 
otherwise would contravene the numerous favorable decisions of the 
state and Federal judiciary and repudiate a sound public policy and 
well established and accepted industry practice.

    NO COMPELLING NEED & NO DEMAND FOR REGULATION OF COTTON INDUSTRY

    This one-size-fits-all regulatory reaction to the transitional 
nature of the livestock production and processing sector and the 
current oversupplied US and world farm economies will do nothing more 
than worsen the situation. In our view there is no real or government 
fabricated substitute for competition.
    The cotton marketing system is a proven success and a competitive 
model well suited for the US cotton industry. In no other sector of the 
farm economy is the factor of competition more prevalent than in the 
cotton industry. There is no justification for its regulation and the 
producer segment of our industry has not expressed a desire that cotton 
be subjected to the provisions of S. 20, S. 2252 or S. 2411. In fact 
the National Cotton Council of America has an express policies in 
opposition to such legislation. Therefore, we respectfully request that 
any consideration exempt cotton and the other price supported 
commodities from inclusion in the proposed legislation.

                                  
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