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HOW MERGERS IN THE NATION’S AGRICULTURAL

INDUSTRY IMPACT CONSUMERS

FIELD HEARING

BEFORE THE

COMMITTEE ON COMMERCE,

SCIENCE, AND TRANSPORTATION

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JULY 24, 1999

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JOHN MCCAIN, Arizona, Chairman

TED STEVENS, Alaska

CONRAD BURNS, Montana

SLADE GORTON, Washington

TRENT LOTT, Mississippi

KAY BAILEY HUTCHISON, Texas

OLYMPIA J. SNOWE, Maine

JOHN ASHCROFT, Missouri

BILL FRIST, Tennessee

SPENCER ABRAHAM, Michigan

SAM BROWNBACK, Kansas

ERNEST F. HOLLINGS, South Carolina

DANIEL K. INOUYE, Hawaii

JOHN D. ROCKEFELLER IV, West Virginia

JOHN F. KERRY, Massachusetts

JOHN B. BREAUX, Louisiana

RICHARD H. BRYAN, Nevada

BYRON L. DORGAN, North Dakota

RON WYDEN, Oregon

MAX CLELAND, Georgia

MARK BUSE, Staff Director

MARTHA P. ALLBRIGHT, General Counsel

IVAN A. SCHLAGER, Democratic Chief Counsel and Staff Director

KEVIN D. KAYES, Democratic General Counsel

(III)

CONTENTS

Page

Field Hearing held July 24, 1999 ........................................................................... 1

Opening Statement of Senator Burns .................................................................... 1

Prepared statement .......................................................................................... 3

WITNESSES

Bullock, Steve, Executive Assistant Attorney general, Montana Department

of Justice, Helena, MT, on behalf of Attorney General Joe Mazurek .............. 11

Prepared statement .......................................................................................... 16

Heffernan, William, Department of Rural Sociology, University of MissouriColumbia, Report ‘‘Consolidation in the Food and Agriculture System’’ ......... 22

Hibbard, Chase T., President, Montana Wool Growers Association ................... 53

Prepared statement .......................................................................................... 56

Kissinger, Will, Deputy Director, Montana Department of Agriculture, Helena, MT, on behalf of Ralph Peck, Director of the Montana Department

of Agriculture ........................................................................................................ 4

Prepared statement .......................................................................................... 6

Maki, Kenneth L., President, Montana Farmers Union, Great Falls, MT ......... 21

Prepared statement .......................................................................................... 45

McClure, David L., President, Montana Farm Bureau Federation, Bozeman,

MT ......................................................................................................................... 17

Prepared statement .......................................................................................... 20

Nelson, Bruce, State Executive Director, Farm Service Agency, U.S. Department of Agriculture .............................................................................................. 7

Prepared statement .......................................................................................... 9

Peterson, Jim, Executive Vice President, Montana Stockgrowers Association,

Helena, MT ........................................................................................................... 47

Prepared statement .......................................................................................... 50

APPENDIX

Klein, Joel I., Assistant Attorney General, Antitrust Division, Department

of Justice, prepared statement ............................................................................ 63

(1)

HOW MERGERS IN THE NATION’S AGRICULTURAL INDUSTRY IMPACT CONSUMERS

SATURDAY, JULY 24, 1999

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Great Falls, MT.

The committee met, pursuant to notice, at 10 a.m., in the Commission Board Room of the Civil Center, 2 Park Avenue, Great

Falls, Montana, Hon. Conrad Burns presiding.

Staff members assigned to this hearing: Robert Taylor, Republican counsel; and Moses Boyd, Democratic senior counsel.

OPENING STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA

Senator BURNS [presiding]. We will call this Committee to order

here in Great Falls, Montana.

This is an official Commerce Committee hearing to be held this

morning on mergers and acquisitions. As you know, there are lots

of members on the Commerce Committee that are very concerned

about not only mergers and acquisitions around the country, but

also, very little attention has been paid to what is happening over

in the agricultural sector. So we thought we would come to Montana, take a look at activities out here and visit with a lot of people

who have views on acquisitions and mergers and how they are

going to affect their life.

Now, let us kind of lay it out a little bit. We are probably in the

midst of the most wave of mergers we have ever seen. It is estimated in 1998 alone, mergers went way over the one trillion dollar

mark, and that includes everything from agricultural to telecommunications to banking, through it all. It is occurring in all sectors of our economy, and they are having a dramatic impact, I

think, on agricultural as we know it.

As you know, Montana farmers and ranchers are struggling.

Price declines for agricultural commodities have had a devastating

effect here in Montana on every economy. You can go down any

main street in any city in Montana, and they will tell you business

is not all that good, and it relates directly to how we are getting

along in the agricultural sector.

That is not to say that we have not dealt with low prices before,

but the landscape is different now. Every commodity is at a low

end, whether it is cattle, whether it is sheep or hogs or grain; it

does not make any difference. All commodities are at a low end.

In fact, if you want to make the comparisons and allow for inflation and everything else, we are getting less for our products on the

2

farm now than we did during the Great Depression. That is how

devastating this has been.

We have faced these times before, but always there has been one

segment of American agricultural that has always sort of been on

the profitable side, and have been those who diversify, able to survive. This time, it is a lot different.

What roles do consolidations and mergers play in either the

cause for these depressed prices that we are experiencing now, and

how will they affect price recovery? Can we recover if the landscape

is different? If consolidation increases, will prices continue to decrease and absolutely take all of our chances away of any kind of

price increase?

You know, the market is just kind of like an hourglass, with all

the market power funneled to the middle. Market transparency becomes very difficult. Market price discovery, which is now how we

business folks make business decisions, becomes almost impossible.

One important factor that has not been talked about is, what is the

impact on the consumer?

Now, I have been around agricultural long enough that we have

always been able to eat our way out of overproduction, because everything we produce is consumed, but at a price.

Well, right now, and I saw this over the holidays of 1998 and going into 1999, I did see pork chops at $5.50 a pound when you

had $9 hogs live weight.

Now, if you move that retail price down to where it correlates

with the price in the grocery store, then we can eat our way out

of some overproduction. But that didn’t happen last December, and

that is what triggered this interest in mergers and in consolidation

in vertical and horizontal integration as far as the production is

concerned.

Four major packers still control 79 percent of the meat packing

industry in the United States. Now, that is the meat packing industry. Four. That is a pretty huge thing.

Montana livestock producers, we cannot compete against that because big producers can hedge; they can forward contracts; they

have got a lot of options that a little producer does not.

Now, some will argue that vertical integration is beneficial to the

industry as a whole, but some will argue that vertical and horizontal integration is good also. I am not convinced that that is true.

It appears to me benefits only flow to the large-scale operation.

Concentration eliminates the chance for the young producer to

get into the business. Young farmers will find it very difficult to

break into the industry with the demands of cattle, startup costs

associated with the farm and ranch, and the chances are slim that

new producers will have enough capital or enough toehold to really

get started. If vertical integration increases, it becomes nearly impossible.

I strongly believe concentration and vertical integration in the

poultry and the pork industries has shown us that neither are advantageous to the average agricultural producer or the consumer.

It continues today.

I look forward to the testimony of all the folks up here. These

are all Montanans. They represent the several industries of Montana, the segment of their economy in agricultural. So I am interVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 71812.TXT SCOM1 PsN: SCOM1
3

ested in hearing what they have to say. What they say will be

made part of the record of the Commerce Committee, and that

record will influence on what kind of policy we will formulate as

far as dealing with mergers and consolidations.

I have one disappointment, however. I also note with frustration

and anger that the Ation Administration’s Justice Department is

not represented on this panel today.

The Justice Department plays a key role in antitrust enforcement. Their failure to be here to explain their policies to rural

America speaks volumes about what their real agenda is. Farmers

and ranchers in States like Montana and the people there are most

affected by these mergers.

The decision by the Justice Department and their absence is

really unexcusable, and I am really disappointed in it, and a strong

letter to follow, let us put it that way. But they just refused to

come to Montana and look Montana farmers in the eye and say,

OK, this is the path that we have taken.

So I look forward in listening to the witness today, and we are

going to just start off here, and I will call some folks, and then we

will just kind of have a discussion, because that is the way we

learn things.

If there is anybody here that understands what consolidations

and mergers and no market means, I think it would be Chase

Hibbard who’s representing the wool growers.

My gosh, we have only had one packer, Chase, for a long time,

and it is very, very difficult, and it led to some situations that we

see in the sheep and lamb industry today.

So I am going to start off here with Panel 1. We have got Will

Kissinger here, Deputy Director of the Montana Department of Agricultural, and Will, if you have got a short statement, and what

you would like to say to us today, we would recognize you at this

time.

By the way, if you want to consolidate your message, that is fine

because I will make sure that your full testimony is made part of

the record.

Also, an announcement that the record will remain open 10 days

after the hearings today, and you can make comments to the Committee. If other members of the Committee wish to ask you questions, and they will write to you, if you would respond both to the

Committee and to the individual Senator, we would appreciate that

too. You may get one or two, because that has happened before, so

I will make that announcement now.

So thank you for coming. We don’t want to sew things up any

more today.

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Thank you all for coming today. The title of today’s hearing is ‘‘How mergers in

the nation’s agriculture industry impact consumers.’’ We are in the midst of an incredible wave of mergers. It is estimated that in 1998 the total value of these mergers was more $1 trillion.

The merger wave is occurring in all sectors of the economy including agriculture.

Mergers are having a dramatic impact on agriculture and on Montana.

As you know, Montana farmers and ranchers are struggling. Price declines for agricultural commodities have had a devastating impact on the economy.

4

With several years of low prices, many agricultural folks have been forced to sell

the farms and ranches they have made their living from; some nearly all their lives.

Producers have faced several years of a depressed market, largely due to consolidation and mergers. If consolidation increases, prices will continue to decrease. Further consolidation will lead to nothing more than spiraling downward prices and

more agricultural producers losing their farms and ranches.

Concentration in the livestock industry is much like an hourglass, with all the

market power funneled to the middle. We need transparency in marketing prior to

the commodity reaching the consumer.

Close examination of mergers for anti-competitive effects is of utmost importance

in maintaining an accessible market for livestock and grain producers.

Four major packers control 79 percent of the meat packing industry in the United

States. Montana livestock producers cannot compete with so few marketing options

available. Montana ranks 11th in the Nation for number of cattle and calves with

close to 3 million head and ranks 2nd in total acres of land in agriculture. Producers

need more avenues to market their goods.

Some will argue that vertical integration is beneficial to the industry as a whole.

This is simply not true. Those benefits only apply to large-scale operations. Vertical

integration is based on economies of scale and therefore present an advantage to

the large producer. After he has pushed enough small producers out of business to

reach a profitable level of operation.

Concentration eliminates the chance for a young producer to start a new operation. Young farmers will have no opportunity to break into the industry. With a

lack of sustainable loans and startup costs associated with agricultural business, the

chances are slim as it is for new producers to start. As vertical integration increases, it will become nearly impossible.

I strongly believe concentration and vertical integration in the poultry and pork

industries have shown us that neither are advantageous to the average agricultural

producer. Concentration present in the grain and the meat industry has decreased

the price the producer ultimately receives for the commodity produced.

I look forward to the testimony of the witnesses we have present today. But I also

note with frustration and anger that the Administration is under represented. The

Justice Department plays the key role in anti-trust enforcement. Their failure to be

here to explain their policies to rural America in rural America speaks volumes

about their real agenda. Farmers and ranchers in states like Montana are the people most affected by the decisions made by the Justice Department and their absence in excusable.

Senator BURNS. Will Kissinger, Deputy Director of Department of

Agricultural out of Helena. Thanks for coming this morning.

STATEMENT OF WILL KISSINGER, DEPUTY DIRECTOR,

MONTANA DEPARTMENT OF AGRICULTURE, HELENA, MT

Mr. KISSINGER. Thank you, Senator.

For the record, my name is Will Kissinger, Deputy Director of

the Montana Department of Agriculture in Helena. I am here today

to present testimony on behalf of Ralph Peck, Director of the Montana Department of Agriculture.

Thank you, Senator, for the opportunity to provide testimony on

this issue of great importance to the Montana agricultural industry.

As you well know, agricultural is Montana’s No. 1 industry. As

such, the overall strength and viability of Montana’s economy is dependent on the economic well-being of our agricultural industry.

Montana’s primary agricultural commodities, which include livestock and grains, are facing a number of market challenges as we

move into the 21st Century. Changes in the global market, adjustments in price structure and lack of market competition resulting

from the agricultural industry mergers and consolidation all have

a great effect on the way we do business in Montana.

It is vitally important that Montana’s agricultural producers

have open competitive markets for their commodities. Recent mergVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00008 Fmt 6633 Sfmt 6601 71812.TXT SCOM1 PsN: SCOM1
5

ers, such as the recently approved merger of the grain merchandising division of Continental Grain Company and Cargill have the

potential of greatly reducing the number of markets available for

grain produced in the United States, which therefore affects Montana’s grain producers. Continental is the second-largest grain company in the world, while Cargill is the largest grain company in the

United States.

Approximately 80 percent of Montana’s grain is shipped to the

Pacific Rim through the Pacific Northwest. With the approved

merger of Continental and Cargill, there are now only five grain

companies physically capable of loading grain from the Pacific

Northwest to the Pacific Rim. Other exporting companies must pay

a put-through handling fee to these companies.

Continental Grain Company and Cargill have always been

known as fierce competitors in the international grain market.

While these two companies currently do not directly purchase grain

from Montana producers, they do purchase grain from the companies located in Montana. The merger of the worldwide grain merchandising division of Continental Grain Company with Cargill

means fewer competitive grain merchandising companies and one

less buyer of Montana grain.

The livestock producers of Montana and the Nation are also concerned about noncompetitiveness within the U.S. meat packing industry, resulting in part, from several decades of merging and consolidation within the meat packing industry.

As already indicated, currently four meat packing companies control 79 percent of the nation’s cattle slaughter, up 36 percent since

1980. During the last several decades, the number of meat packing

plants have dramatically declined. In 1974, 1,350 federally inspected plants slaughtered cattle. By 1997, the number of federally

inspected plants dropped to 812, a decline of 60 percent.

This rapid decline in the numbers of meat packing companies

and slaughter plants has led to a corresponding lack of market access by Montana’s livestock producers. While other factors such as

captive supplies, cyclic overproduction and limited price disclosure

may also contribute to the current, protracted slump in livestock

prices, many producers believe that meat packer concentration is

at the core of the problem.

In conclusion, if Montana’s farmers and ranchers are to receive

top prices for their agricultural products, there needs to be strong

competition for our products between those companies purchasing

commodities from our producers. The ongoing trend toward merger

and consolidation of these companies is a hindrance to market access and open competition—and open competitive buying. Consequently, we strongly urge that the appropriate Federal officials

vigorously, but fairly, enforce existing antitrust laws to ensure competitive markets for Montana’s agricultural products.

Thank you for consideration of our testimony. We wish to thank

Senator Burns and member of the Committee on Commerce,

Science, and Transportation for holding this hearing in Montana.

We appreciate the opportunity to provide input into your decisionmaking process.

[The prepared statement of Mr. Kissinger follows:]

6

PREPARED STATEMENT OF WILL KISSINGER, DEPUTY DIRECTOR,

MONTANA DEPARTMENT OF AGRICULTURE, HELENA, MT.

Mr. Chairman, members of the Committee, for the record my name is Will Kissinger, Deputy Director of the Montana Department of Agriculture, Helena, Montana. I am here today to present testimony on behalf of Ralph Peck, Director of the

Montana Department of Agriculture.

Thank you Mr. Chairman and Committee members for the opportunity to provide

testimony before you on this issue of such great importance to Montana’s agricultural industry.

Agriculture is Montana’s No. 1 industry. As such, the overall strength and viability of Montana’s economy is dependent on the economic wellbeing of our agricultural

industry. Montana’s primary agricultural commodities, which include livestock and

grains, are facing a number of market challenges as we move into the twenty-first

century. Changes in the global market, adjustments in price structure, and lack of

market competition resulting from agriculture industry mergers and consolidation

all have a great effect on the way we do business here in Montana.

It is vitally important that Montana’s agricultural producers have open competitive markets for their commodities. Recent mergers, such as the recently approved

merger of the grain merchandizing division of Continental Grain Company and

Cargill have the potential of greatly reducing the number of markets available for

grain produced in the United States, which therefore effects Montana’s grain producers. Continental is the second largest grain company in the world, while Cargill

is the largest grain company in the United States. Approximately 80 percent of

Montana’s grain is shipped to the Pacific Rim through the pacific northwest. With

the approved merger of Continental and Cargill, there are now only five grain companies physically capable of loading grain from the pacific northwest to the pacific

rim. Other exporting companies must pay a put-through handling fee to these companies.

Continental Grain Company and Cargill have always been known as fierce competitors in the international grain trade. While these two companies currently do

not directly purchase grain from Montana producers, they do purchase grain from

companies located in Montana. The merger of the worldwide grain merchandizing

division of Continental Grain Company with Cargill means fewer competitive grain

merchandizing companies, and one less buyer of Montana grain.

The livestock producers of Montana and the Nation are also concerned about noncompetitiveness within the U.S. meat packing industry, resulting in part, from several decades of merging and consolidation within the meat packing industry. Currently four meat packing companies control 87 percent of the nations cattle slaughter, up 36 percent since 1980. During the last several decades the number of meat

packing plants have dramatically declined. In 1974, 1,350 federally inspected plants

slaughtered cattle. By 1997, the number of federally inspected plants dropped to

812, a decline of 60 percent.

This rapid decline in the numbers of meat packing companies and slaughter

plants has lead to a corresponding lack of market access by Montana’s livestock producers. While other factors such as captive supplies, cyclic overproduction, and limited price disclosure may also contribute to the current, protracted slump in livestock prices, many producers believe that meat packer concentration is at the core

of the problem.

In conclusion, if Montana’s farmers and ranchers are to receive top prices for their

agricultural commodities, there needs to be strong competition for our products between those companies purchasing commodities from our producers. The ongoing

trend toward merger and consolidation of these companies is a hindrance to market

access and open competitive buying. Consequently, we strongly urge that the appropriate Federal officials vigorously, but fairly, enforce existing anti-trust laws to ensure competitive markets for Montana’s agricultural products.

Thank you for consideration of my testimony. We wish to thank Senator Burns

and members of the Senate Committee on Commerce, Science, and Transportation

for holding this hearing in Montana. We appreciate the opportunity to provide input

into your decisionmaking process.

Senator BURNS. Thank you very much, Will.

Now a statement and some insight from Bruce Nelson, who is Director of the Agricultural Commodity, or whatever it is. They

change those names so many times, Bruce, I do not know whether

I am afoot or horseback.

7

But yours is a big job and a tough job, and you probably have

some insight on this, and so we welcome you, and we thank you

for coming today. We appreciate that very much.

STATEMENT OF BRUCE NELSON, STATE EXECUTIVE

DIRECTOR, FARM SERVICE AGENCY, U.S. DEPARTMENT OF

AGRICULTURE

Mr. NELSON. Yes, Senator, thanks very much. I appreciate the

invitation here today.

The AUDIENCE. Turn your mike up.

Mr. NELSON. I guess you have to get up close and personal with

the microphone.

I want to thank you and the other folks here who also participated in the Department of Agriculture and U.S. trade representatives WTO session in Bozeman yesterday. So, we have been on the

road a couple days together. Again, I appreciate your testimony

yesterday.

My name is Bruce Nelson. I am the State Executive Director of

the Farm Service Agency of the U.S. Department of Agriculture.

As you know, Senator, while I have strong personal opinions on

these issues, this is a little bit out of my area of expertise. I could

answer questions about loan deficiency payments and issues like

that, but I am not an expert on this.

The Secretary of Agriculture asked me to be here today because

he felt it was very important for USDA to be represented and to

share with you the thoughts of the Department of Agriculture on

this. But frankly, again, I am here to listen. If you have questions,

I am going to have to get the answers for you because I am not

going to be able to answer many questions here today, and I will

let everybody know that up front. So, the best I can do is make

sure that you do get answers to your questions.

Permit me to begin by stating that the U.S. Department of Agriculture, USDA, is concerned about the potential for mergers and

market concentration to reduce competition in agricultural markets. Again, I was specifically asked by the Secretary to join you

here today for that reason.

For this reason, Secretary Glickman strongly urged the Department of Justice to review carefully the planned Cargill acquisition

of Continental Grain Company’s grain trading business to determine whether the acquisition will notably increase concentration in

agricultural and its allied industries, causing potential adverse economic effects on farmers and on consumers.

USDA experts on production and marketing assisted the Department of Justice in its review by providing information and advice.

In the end, the Department of Justice took the steps necessary to

protect American farmers from the potential adverse effects of the

acquisition. The consent decree called for Cargill to divest itself

from those market locations where acquisition of Continental’s facility would have resulted in excessive market power and would

have limited farmers’ choices in marketing their crops.

There are a variety of reasons for the mergers, acquisitions, joint

ventures and alliances occurring in the grain industry. We see joint

ventures such as United Harvest, whereby Harvest States, with an

emphasize on originating grain, joined up with United Grain CorVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 71812.TXT SCOM1 PsN: SCOM1
8

poration, a well-established exporter, to market grains in the Pacific Northwest. A similar arrangement involved the establishment

of Concourse Grain Limited Liability Company, a joint venture between Farmland Industries and ConAgra, Incorporated, to market

grain out of the Gulf.

An important change occurring in the international market that

is influencing market structure is the privatization of importers.

Private buyers rather than government agencies are the customers

for a larger and larger share of the U.S. export market. Private

buyers have exhibited greater influence over purchase decisions,

specifications and terms of trade. This typically results in smaller

purchases tailored to the specific quality needs of the particular

end user. This, in turn, has an effect on the grain marketing system as companies deal with more complicated logistical issues and

new operational challenges.

Finally, privatization of importers has created the need for exporters to expand their market development efforts. No longer can

exporters simply bid on government tenders. They must target customers and build long-term relationships as a reliable supplier of

quality grain.

As you can see, the simple shifting from a government-purchasing agency to a private buyer can have far-reaching effects on

the market structure and competitiveness of the U.S. grain industry.

Another factor that has influenced the structure of the domestic

market involves the railroad demand for unit trains. As a result,

grain companies have expanded certain facilities to have the capability to load unit trains while closing other facilities. Here in Montana, the number of elevators has declined 40 percent since 1980.

This decline has been countered by a significant increase in the average storage capacity of each elevator from just over 4,000 metric

tons to over 11,000 metric tons.

All of the changes that I have discussed and the resulting impact

on market structure were driven by customer demand for traditional crops. The accelerated change in crop quality due to biotechnology will further challenge the market structure. New crop

varieties, whether biotech or traditional, tailor-made for a specific

end user, will require additional quality testing and market segregation.

Many farmers already are entering into contracts to produce, for

a premium, a variety of crops, such as hard white wheat, malting

barley, waxy corn, high corn oil, Synchrony Tolerant soybeans,

STS, which makes them more tolerant to soybean herbicides. These

options will increase in the future as additional enhanced quality

grains enter the market.

I started my remarks today with the comment that the U.S. Department of Agriculture is concerned about the potential for mergers and market concentration to reduce competition in agricultural

markets.

Will the grain industry remain competitive in the future as we

encounter future mergers and alliances? Will biotechnology offer

greater opportunities for farmers, or fewer?

These questions remain unanswered. It is important that agriculture become more productive, efficient and competitive, but it is

9

also important that these changes do not become at the expense of

family farmers and ranchers who also deserve to share in the benefits of today’s technological advances.

With rapid industrialization in the livestock industry, we have

stepped up our monitoring and investigations of possible anticompetitive behavior. We need to understand better the implication

of these market changes and will exercise our authority under the

Packers and Stockyard Act as necessary. However, this authority

does not extend to the grain industry. As I stated earlier, we will

continue working with the Department of Justice to ensure the protection of American farmers. We will have a watchful eye over the

market, and within the framework of our authority, monitor for

anticompetitive behavior.

In conclusion, the past decade has brought considerable change

in the grain industry. International trade, transportation, information technology and increased consumer demand have resulted in

greater consolidation of the market. The advances in biotechnology

will drive further consolidation and vertical coordination in the

market.

Our challenge is to promote the development of a 21st Century

market where farmers and ranchers share in the benefit of those

technological advances.

Thank you.

[The prepared statement of Mr. Nelson follows:]

PREPARED STATEMENT OF BRUCE NELSON, STATE EXECUTIVE DIRECTOR,

FARM SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE

I appreciate the opportunity to appear today and talk about the changes occurring

in the grain industry and the role of the U.S. Department of Agriculture regarding

those changes.

Permit me to begin by stating that the U.S. Department of Agriculture (USDA)

is concerned about the potential for mergers and market concentration to reduce

competition in agricultural markets. For this reason, Secretary Glickman strongly

urged the Department of Justice (DOJ) to review carefully the planned Cargill acquisition of Continental Grain Company’s grain trading business to determine

whether the acquisition will notably increase concentration in agriculture and its allied industries, causing potential adverse economic effects on farmers and consumers.

USDA experts on production and marketing readily assisted the Department of

Justice in its review by providing information and advice. In the end, the Department of Justice took the steps necessary to protect American farmers from the potential adverse effects of the acquisition. The consent decree called for Cargill to divest itself from those market locations where acquisition of Continental’s facilities

would have resulted in excessive market power and would have limited farmer’s

choices in marketing their crops.

There are a variety of reasons for the mergers, acquisitions, joint ventures, and

alliances occurring in the grain industry. We see joint ventures such as United Harvest whereby Harvest States, with an emphasis on originating grain, joined up with

United Grain Corporation, a well-established exporter, to market grains in the Pacific Northwest. A similar arrangement involved the establishment of Concourse

Grain L.L. Company, a joint venture between Farmland Industries and ConAgra,

Inc. to market grain out of the Gulf.

We also see horizontal arrangements between competing exporters, such as the

October 1998 agreement between Zen Noh and Bunge to operate jointly Gulf Port

facilities and market grain. This allows the companies to exploit the unique features

of their respective facilities. The Zen Noh facility is designed for high volumes of

generic commodities such as U.S. number 2 corn and soybeans. Conversely, the

Bunge facility in Destrehan, LA is better suited to handle wheat shipments with

refined quality specifications. These and future arrangements are driven by the

need to achieve greater logistical coordination, better meet the quality demands of

10

customers, improve the efficiency of facility operations, or simply balance the market power of other competitors.

An important change occurring in the international market that is influencing

market structure is the privatization of importers. Private buyers rather than government agencies are the customers for a larger and larger portion of the U.S. export market. Private buyers have exhibited greater influence over purchase decisions, specifications, and terms of trade. This typically results in smaller purchases

tailored to the specific quality needs of the particular end-user. This, in turn, has

an effect on the grain marketing system as companies deal with more complicated

logistical issues and new operational challenges.

To meet the demands of the new overseas buyer, grain firms must improve their

information network concerning the quantity, quality and timing of demand. They

must also expand their capability to segregate and deliver a greater diversity of

qualities. Grain firms have also found it necessary to expand their grain cleaning

and conditioning capabilities in order to meet the specific quality needs of the overseas buyer.

Finally, privatization of importers has created the need for exporters to expand

their market development efforts. No longer can exporters simply bid on government

tenders. They must target customers and build long term relationships as a reliable

supplier of quality grain. As you can see, the simple shifting from a governmentpurchasing agency to a private buyer can have far reaching effects on the market

structure and competitiveness of the U.S. grain industry.

Another factor that has influenced the structure of the domestic market involves

the railroad demand for unit trains. As a result, grain companies have expanded

certain facilities to have the capability to load unit trains, while closing other facilities. Here in Montana the number of elevators has declined 40 percent since 1980.

This decline has been countered by a significant increase in the average storage capacity from just over 4,000 metric tons to over 11,000 metric tons.

All of the changes that I have discussed and the resulting impact on market structure were driven by customer demand for traditional crops. The accelerated change

in crop quality due to biotechnology will further challenge the market structure.

New crop varieties, whether biotech or traditional, tailored-made for a specific end

use will require additional quality testing and market segregation. Many farmers

already are entering into contracts to produce, for a premium, a variety of crops,

such as hard white wheat, malting barley, waxy corn, high oil corn, Synchrony Tolerant Soybeans STS—which makes them more tolerent of soybean herbicides. These

options will increase in the future as additional enhanced quality grains enter the

market.

Marketing systems or channels will evolve combining input industries, producers,

handlers, processors, and even retailers. The systems will be designed to deliver the

right quantity and quality of grain at the right time to the processor in an efficient

and cost-effective manner. Will such systems consider farmers an equal player that

shares in the added value delivered to the final consumer?

I started my remarks today with the comment that the U.S. Department of Agriculture is concerned about the potential for mergers and market concentration to

reduce competition in agricultural markets.

Will the grain industry remain highly competitive in the future as we encounter

further mergers and alliances? Will biotechnology offer greater opportunities to

farmers or fewer?

These questions remain unanswered. It’s important that agriculture become more

productive, efficient, and competitive. But it is also important that these changes

do not come at the expense of family farmers and ranchers who also deserve to

share in the benefits of today’s technological advances.

With the rapid industrialization in the livestock industry, we have stepped up our

monitoring and investigations of possible anti-competitive behavior. We need to understand better the implication of these market changes and will exercise our authority under the Packers and Stockyard Act as necessary. However, this authority

does not extend to the grain industry. As I stated earlier, we will continue working

with the Department of Justice to ensure the protection of America’s farmers. We

will have a watchful eye over the market and within the framework of our authority, monitor for anti-competitive behavior.

While market trends point toward more contracting for specialty crops, farmers

must work to ensure that such contracts offer fair and reasonable terms. Market

concentration can force producers into lopsided contractual terms because there is

no other option available. Most poultry production occurs under contracts that result

in the farmer being nothing more than an extension of the processor. This is not

the system USDA wants to see evolve for row crops. Again, farmers need choices

and the opportunity to share in the benefits of today’s technological advances.

11

Advances in row crops, especially those driven by biotechnology, must result in

greater, not fewer options for farmers. The industry must develop products that

show real results to farmers. The ability of farmers to compete on a level playing

field with adequate choices available must be preserved. This technology has the capability to increase the value of cereals and oilseeds. Farmers must have the opportunity to share in the return from the added value. We must achieve a balance between fairness to farmers and corporate returns.

In conclusion, the past decade has brought considerable change to the grain industry. International trade, transportation, information technology, and increased

consumer demand have resulted in greater consolidation of the market. The advances in biotechnology will drive further consolidation and vertical coordination in

the market. Our challenge is to promote the development of a 21st century market

where farmers share in the benefits of technological advances.

Thank you.

Senator BURNS. You bet. Thank you, Bruce.

Steve Bullock, who is Executive Attorney General of the Office

of the Attorney General, State of Montana, is here with us today

from Helena. Steve, thank you for coming, and we would like to

hear your insights.

STATEMENT OF STEVE BULLOCK, EXECUTIVE ASSISTANT ATTORNEY GENERAL, MONTANA DEPARTMENT OF JUSTICE,

HELENA, MT

Mr. BULLOCK. Thank you, Senator Burns.

Good morning, members of the Committee. For the record, my

name is Steve Bullock, and I am the Executive Assistant Attorney

General for the Montana Department of Justice. I am testifying

today on behalf of Attorney General Joe Mazurek, who would very

much like to be here, but he’s out of State at this time.

Under both State and Federal law, the State Attorney General

has statutory authority to enforce the antitrust laws, and we have

been and are continuing to be extremely concerned about the topics

being discussed here today.

It’s my understanding that the hearing is convened to discuss the

impact of how mergers in the agricultural industry impact consumers. While that topic alone could probably keep us holed up

here in the Civic Center for a couple of days, it is critical that we

more or less frame the issue in terms of consumers and producers.

On the one hand, be it the U.S. Senator, the lawyer, or the farmer

and rancher, we are all consumers. However, framing the issue to

include producers just simply makes sense, because agriculture is

a critical sector of our Montana economy, and there are counties

and communities throughout the State of Montana that are entirely dependent upon agricultural. In Montana, when the farmer

and rancher hurt, each and everyone of us as consumers also hurt.

I will distribute a packet to include in the record for your consideration. It starts with a news article from earlier this year that I

think kind of tells it all for us. ‘‘Meat packers flourish as producers

struggle.’’ Given the history of market concentration in agricultural, this should not come as a surprise.

[The packet referred to above follows:]

12

2/16/99

Meatpackers flourish as producers struggle

Gannett Newspapers

Meatpackers have been the bad guys in the recent free fall in hog prices, and

their latest earnings reports have done little to dispel that perception.

An abundant supply of low-priced livestock has enabled companies like IBP Inc.,

Excel Corp., Hormel Corp. and Farmland Industries to run their packing plants at

full tilt, book orders for animals well ahead of slaughter, and reap record profits.

But do the packers deserve blame for the recent collapse in the hog market and

for the longer-term and more extensive losses in the beef industry?

Should they be having a heyday while livestock producers are struggling to stay

in business?

Earlier this month IBP Inc.—the nation’s largest red-meat packer—reported

record-high fourth-quarter earnings that were more than four times higher than

those of the same period a year ago. The company also posted its second-highest an- nual earnings: $205 million in 1998, up from $117 million the previous year.

Such reports do little to engender good feelings between producers and packers— camps often at odds with one another, particularly when the spread widens between

farm-level, wholesale and retail prices, as it did last year.

Proponents of independent family farms have been among the most ardent critics

of the packers, particularly as the economic fallout from low hog and cattle prices

has increased, building like a mid-summer thunderstorm over the Plains.

They say packers give preferential treatment and better prices to large-scale producers with livestock marketing contracts.

They also declare that because farmers selling on the cash market don’t have

equal access to the higher prices, they end up supplying the bulk of the lowest-cost

hogs and cattle to meatpackers.

In their view, the packers’ most recent run of profits has occurred at their expense.

But others argue that the meat-packers have done what any manufacturer would

do—capitalize on an ample supply of low-cost raw material. ‘‘That’s capitalism,’’ said John Lawrence, an Extension livestock economist at Iowa

State University. ‘‘Was there price-gouging occurring? That requires an investigation.’’ Steve Kay, editor and publisher of Cattle Buyers Weekly, an industry newsletter

based in Petaluma, Calif., believes farmers have only themselves to blame for raising more hogs than meatpackers could process.

For their part, cattle producers have been sending heavier animals to market.

In one recent week, for instance, the average beef carcass at U.S. packing plants

weighed 740 pounds—24 pounds heavier than at the same point a year ago. According to Kay, that’s the equivalent of sending 24,000 additional animals to slaughter

weekly. He calls it ‘‘a colossal amount of extra pounds of beef’’ on the market. ‘‘I’m empathetic to the squeeze on small producers,’’ he said, noting that he grew

up on a small family farm in New Zealand. ‘‘It’s a terribly tough time.... (But) unless

you’re producing a premium product, being small and producing a commodity product just doesn’t work.’’ Officials in the meatpacking industry do not apologize for making more money because of lower farm-level prices; in fact, they say the recent run-up in earnings is

just part of a cyclical business that will enable them to recover from earlier times

when it was a seller’s market and farmers were reaping plump profits.

Even trade group leaders, whose constituents include farmers facing financial

ruin because of low commodity prices, don’t condemn the packers for making money.

‘‘I don’t like those large profits,’’ said Joel Brinkmeyer, executive director of the

Iowa Cattlemen’s Association. ‘‘... At the same time, we need competition in the industry.’’

Historically, profit-taking in the livestock sector has shifted from producers to

packers along with changes in supplies and market demand. When farmers are getting a higher price for their animals, processors’ margins are tighter and their net

income is reduced. Conversely, low prices for livestock boost packers’ margins.

‘‘They tend to be counter-cyclical; the packer profits tend to be highest when the

producer losses are the greatest,’’ said Chuck Lambert, economist for the National

Cattlemen’s Beef Association in Washington. ‘‘They tend to be a mirror image of

each other.’’

Even so, many producers, farm group leaders and rural advocates believe the

meatpackers bear at least some of the responsibility for the growing financial ag crisis.

13

What’s more, they say consumers are being ripped off, because meat prices at the

retail level have not retreated as they normally do when hog and cattle prices fall.

They want the federal government to intervene and have called for investigations.

56th Legislature, MT

SENATE JOINT RESOLUTION NO. 11

A Joint Resolution of the Senate and the House of Representatives of the State

of Montana urging an investigation into the causes of ongoing Depressed Market

Prices for Agricultural Products; and urging the initiation of actions that will stabilize the Nation’s Food Producers, Main Street Businesses, and Rural America as

a Whole.

WHEREAS, an economic emergency has been created by ongoing depressed prices

in the marketplace for agricultural products; and

WHEREAS, an investigation into the causes of the depressed prices is warranted;

and

WHEREAS, actions should be initiated to stabilize the nation’s food producers,

main street businesses, and rural America as a whole.

NOW, THEREFORE, BE IT RESOLVED BY THE SENATE AND THE HOUSE

OF REPRESENTATIVES OF THE STATE OF MONTANA:

That a full investigation be undertaken into the causes of ongoing depressed

prices in the marketplace for agricultural products, including a full examination of

market competitiveness in livestock and crops and a re-examination of trade agreements.

BE IT FURTHER RESOLVED, that actions be initiated that will stabilize the nation’s food producers, main street businesses, and rural America as a whole, including:

(1) emergency price supports and a safety net system for all agricultural products,

to be lifted only when international and domestic markets are reformed in a way

that renders them open, public, and competitive and when domestic prices for agricultural products are determined to be above the cost of production as calculated

by the U.S. Department of Agriculture;

(2) fair compensation for lost agricultural income, as called for under trade compensation and assistance programs of the Agricultural Trade Act of 1978 and the

Federal Agricultural Improvement and Reform Act of 1996 (FAIR Act), for all existing and future sanctions;

(3) further support for risk management tools and education, such as the pilot

projects for forward contracts and the use of hedges and options, and development

and funding of a more effective yield and income insurance program by Congress

and the administration;

(4) vigorous antitrust investigations into the concentration of ownership in meat

packing, grain handling, and retail trade, including a complete investigation of the

possible effects of the proposed Cargill-Continental merger;

(5) expansion and development of new international markets for agricultural products and ensuring that agricultural producers have advisory status at any agricultural trade negotiations, with a priority on price transparency of the Canadian

Wheat Board;

(6) reductions of regulations and taxes to enable farmers and ranchers to be more

profitable;

(7) country of origin labeling;

(8) limiting use of the U.S. Department of Agriculture stamp to products produced

in the United States;

(9) mandatory price reporting of livestock and grain;

(10) moving responsibility for enforcement of the federal Packers and Stockyards

Act from the U.S. Department of Agriculture to the U.S. Department of Justice;

(11) inspections of imported agricultural products to ensure that imported products meet standards equivalent to United States standards for food safety, environmental protection, and worker protection; and

(12) ensuring that farm and ranch producers are represented at the 1999 World

Trade Organization.

BE IT FURTHER RESOLVED, that the Secretary of State send a copy of this resolution to the members of the Montana Congressional Delegation.

14

52nd Legislature, MT

SENATE JOINT RESOLUTION No. 14

A joint resolution of the Senate and the House of Representatives of the State of

Montana requesting an interim study of the concentration in the livestock feeding

and packing industries; and requiring a report of the findings of the study to the

53rd legislature.

WHEREAS, the market share of the top four beef packing companies was just

25% in 1977 and rose to 74% of the market in 1987; and

WHEREAS, concentration among packing companies that slaughter sheep and

lambs has increased from four firms controlling 57% in 1977 to three firms controlling at least 76% in 1987; and

WHEREAS, trends toward concentration and vertical integration of the livestock

industry threaten free enterprise and the independence of Montana’s livestock producers, as well as the economic vitality of our communities that are dependent on

the livestock industry; and

WHEREAS, continued concentration and vertical integration of the livestock industry may also have serious adverse implications for the health and safety or both

workers and consumers.

NOW, THEREFORE BE IT RESOLVED BY THE SENATE AND THE HOUSE

OF REPRESENTATIVES OF THE STATE OF MONTANA:

That an appropriate interim committee be assigned to examine:

(1) the economic impact of concentration and vertical integration by the dominant

meatpackers on Montana’s livestock producers;

(2) the relationship between the economic impact of the concentration on producers and other aspects of the state’s present and future economy, such as the tax

base, population, and viability of our rural communities; and

(3) legal remedies and other appropriate actions available to the State of Montana

to counteract any adverse problems posed by increased concentration or to prevent

further concentration.

BE IT FURTHER RESOLVED, that the interim committee report the findings of

the study to the 53rd Legislature and present options for legislative consideration

if the committee determines that options are necessary.

Also within the packet are two different legislative resolutions

passed at the State level. The first, Senate Joint Resolution No. 11,

which was passed this year, received wide bipartisan support, and

it calls for, among other things, vigorous antitrust investigations

into the concentration of ownership in the meat packing, grain handling and retail trade industries and moving responsibility for antitrust and consumer protection enforcement from the U.S. Department of Agriculture to the U.S. Department of Justice.

The second resolution hasn’t received as much notice, however.

It is a resolution that was passed by the Montana legislature in

1991 calling for an interim committee to study the impacts of market concentration in the packing and feeding industry. It is my understanding that the resolution was passed some 8 years ago, but

the study was never funded.

It’s important to point out that the legislature at the State level

looked at this from 1991 to 1999. Not much has changed.

I’d like to be able to say that this problem originated in Montana

in 1991, and Montana stock growers and grain growers and all of

us as consumers have only been hamstrung by market concentration for the last decade. However, it was actually at the turn of the

century when five firms controlled 55 percent of the market that

led to the eventual passage of the Packers and Stockyard Act of

1921.

Over 75 years later, we are in a worse, not a better, position. For

example, as Senator Burns pointed out, the top four beef packers

15

account for 80 percent of the cattle slaughter. Twenty feedlots, less

than 1 percent of the total, account for over 50 percent of all head

sold. The largest five pork packers slaughter over 60 percent of the

hogs, and the top four flour millers control over 60 percent of the

market.

I guess for all the Federal efforts, I cannot say that the last 75

years have really placed Montana, and our Nation’s grain and

stock growers in any better position.

So, the question becomes what should Congress do? For our part

at the Montana Department of Justice, I have about three feet of

files just from efforts we have joined in conjunction with the National Association of Attorneys General over the last few years. I

have included in the pamphlet six letters we have written in the

last 21⁄2 years to Members of Congress and members of the executive branch, including one we recently sent to the Department of

Justice concerning the Cargill/Continental merger.

Although we will continue to be vigilant in expressing to you and

other members of the Federal Government our concerns, admittedly, there’s little more that the Montana Department of Justice

can do.

As you may recall, earlier in my testimony, I stated that the Attorneys General’s office has statutory authority over antitrust. In

Montana, however, that is sort of like being given the artillery tank

but not given the fuel to run that tank.

While it is true that we have the authority and responsibility, it

is in large measure an empty promise because we do not have the

resources. It is not uncommon for smaller States to have only one

or two attorneys working in antitrust. In Montana, the legislature

has not seen fit to provide any resources for antitrust enforcement.

Even if the day comes, however, when we have the ability to vigorously enforce State laws, it is important to realize that market

concentration in agricultural is more than a Montana problem. It

is an American problem that demands national attention from Congress and the executive branch.

We are beyond the point of needing to ask where to begin. It is

now time to say let us begin.

I think that the blueprints for action of what Congress and other

can do, they are already in front of us and have been discussed for

several years.

Among other things, these efforts should include making the

market more transparent by requiring public disclosure of the

prices and terms of all sales and forward contracts.

We need to be carefully scrutinizing all proposed mergers in the

meat packing, grain handling, and retail trade industries.

We need to be prohibiting unfair trade practices in the livestock

industry, which includes price discrimination, and making it a priority to enforce Section 202 of the Packers and Stockyard Act.

We believe that coordination is key. We need to work on coordinating the effort of Federal agencies, including the U.S. Department of Agriculture, U.S. Department of Justice and the Federal

Trade Commission. This should include consideration of moving enforcement of the Act from the Department of Agriculture to the Department of Justice.

16

Finally, we need to make certain to provide greater protection for

producers against retaliation by packers on account of statements

made regarding the packers’ actions and practices.

That above list may only scratch the surface of what needs to be

done, but I think the important message is that we, as consumers,

be it the farmers, the ranchers, the lawyers or the U.S. Senators,

who have been talking about the problems of agricultural market

concentration for decades, it is time to stop talking and start taking

action. Thank you.

[The prepared statement of Mr. Bullock follows:]

PREPARED STATEMENT OF STEVE BULLOCK, EXECUTIVE ASSISTANT ATTORNEY

GENERAL, MONTANA DEPARTMENT OF JUSTICE, HELENA, MT.

Good morning. For the record, my name is Steve Bullock and I am the Executive

Assistant Attorney General for the Montana Department of Justice. I am testifying

today on the behalf of Attorney General Joe Mazurek. General Mazurek would have

very much liked to be here today, but is traveling out of State this weekend at a

work-related conference.

Under both State and Federal law, the Attorney General has statutory authority

to enforce the antitrust laws, and we are extremely concerned about the issues you

are discussing today.

It is my understanding that you have convened this hearing today to discuss how

mergers in the agricultural industry impact consumers. While that topic alone could

probably keep us holed up in the Civic Center for several days, it is critical that

we frame the issue in terms of consumers and producers.

One the one hand, be it the U.S. Senator, the lawyer, the farmer or the rancher,

we are all consumers. However, framing the issue to include producers simply

makes sense. Agriculture is a critical sector of our Montana economy, and there are

counties and communities across our State that are entirely dependent upon agriculture. In Montana, when the farmer and rancher as producers hurt, each and

every one of us as consumers also hurt.

I am distributing a packet for your consideration:

It starts with a news article from earlier this year. The packers are having record

years for profitability, as Montana’s and our nation’s stock growers continue to

struggle. Given the history of market concentration in agriculture, this should not

come as a surprise.

Also in this packet are two legislative resolutions.

The first, SJR 11, you may have already received this morning. It calls for, among

other things, vigorous antitrust investigations into the concentration of ownership

in the meat packing, grain handling, and retail trade, and moving responsibility for

antitrust and consumer protection enforcement from the U.S. Department of Agriculture to the U.S. Department of Justice. This resolution was passed during the

1999 legislative session with broad bipartisan support.

The second resolution you probably have not seen, however. It is a resolution

passed by the Montana legislature during the 1991 session, calling for an interim

committee to study the impacts of market concentration in the packing and feeding

industry. It is my understanding that although the resolution passed, the study was

not funded.

I would like to say the problems of concentration in the packing and feeding industry originated in 1991, and Montana’s grain and stock growers—and all of us

as consumers—have only been hamstrung by market concentration for the last decade. However, it was actually at the turn of the century, when five firms controlled

55 percent of the market, that led Congress to enact to the Packers and Stockyards

Act of 1921.

Over 75 years later, we are in a worse, not better position. For example:

• The top four beef packers account for 80 percent of the cattle slaughter;

• Twenty feedlots—less than 1 percent of the total—account for over 50 percent

of all head sold;

• The largest five pork packers slaughter over 60 percent of the hogs; and

• The top four flour millers control over 60 percent of the market.

So I guess for all of the Federal efforts, I cannot say that the last 75 years has

really placed Montana’s—and our nation’s—grain and stock growers in any better

position.

17

For our part at the Montana Department of Justice, I have about three feet of

files, just from efforts we have joined in conjunction with the National Association

of Attorneys General.

I have included six letters in the last two and one-half years which Attorney General Mazurek has sent to the Secretary of Agriculture and Members of Congress,

including one we recently sent to the United States Department of Justice concerning the Cargill-Continental merger.

Although we will continue to be vigilant in expressing to you and other members

of the Federal Government our concerns, admittedly there is little more that Montana Department of Justice can do on its own.

As you may recall, earlier I stated that the Attorney General has statutory authority over antitrust. In Montana however, this is sort of like being given the artillery tank, but not having the fuel to run that tank. While it is true we have the

authority and responsibility, it is in large measure an empty promise because we

do not have the resources. It is not uncommon for smaller states to have only one

or two attorneys working in antitrust. In Montana, the legislature has not seen fit

to provide resources for any antitrust enforcement.

Even if the day comes when we have the ability to vigorously enforce State laws,

however, it is important to recognize that market concentration in agriculture is

more than a Montana problem. It is an American problem that demands national

attention from Congress and the executive branch. We are beyond the point of needing to ask where to begin, and it is now time to say ‘‘let us begin.’’

The blueprints for action are already in front of you, and have been discussed for

several years. Among other things, these efforts should include:

• Making the market more transparent by requiring public disclosure of the

prices and terms of all sales and forward contracts;

• Carefully scrutinizing all proposed mergers in the meat packing, grain handling, and retail trade industries;

• Prohibiting unfair trade practices in the livestock industry, including price discrimination, and making it a priority to enforce Section 202 of the Packers and

Stockyard Act;

• Coordinating the efforts of Federal agencies, including the United States Department of Agriculture, the United States Department of Justice and the Federal

Trade Commission. This should include moving enforcement of the Stockyards and

Packers Act from the Department of Agriculture to the Department of Justice; and

• Providing greater protection for producers against retaliation by packers on account of statements made regarding the packers’ actions.

The above list may only scratch the surface of what needs to be done, but I think

the more important message is that we as consumers—be it the farmers and ranchers, the lawyers, and even the U.S. Senators—have been talking about the problems

of agriculture market concentration for decades. It is time to stop talking, and start

acting.

Senator BURNS. Thank you, Steve. We appreciate your comments

very much.

Now representing the Montana Farm Bureau Federation, Jake is

not here today; we’ve got Dave McClure, who is president of the organization. Of course, we have got Ken Maki here with the Farmers Union. I think we will start with those two organizations who

represent a huge cross-section of Montana agriculture.

So, thank you very much, Dave, and I am looking forward to

some of the suggestions you might have.

STATEMENT OF DAVID L. MCCLURE, PRESIDENT, MONTANA

FARM BUREAU FEDERATION, BOZEMAN, MT

Mr. MCCLURE. Thank you, Senator, for the opportunity to provide testimony for this hearing on mergers.

For the record, I am Dave McClure, president of the Montana

Farm Bureau Federation with offices in Bozeman, MT.

Senator BURNS. Oh, by the way, excuse me just for a second.

With the wave of all these hearings that have been going across

the State, we were in Bozeman yesterday, and there are two or

three of them, and we are going on to another one this afternoon.

18

When are you guys going to hay?

Mr. MAKI. Last night.

Senator BURNS. Huh?

Mr. MAKI. Until dark.

Senator BURNS. Some folks are still cutting. They are wanting to

cut grain, so we better get you out of here pretty quick.

Mr. HIBBARD. It’s got to rain first.

Senator BURNS. OK.

Mr. MCCLURE. But I am a farmer in the Lewistown area full

time; I do represent the organization. Montana Farm Bureau is the

largest agriculture organization in the State with over 8,500 member families.

I am here today to speak on how mergers in the nation’s agriculture industry impact consumers, but more importantly, I am

here to speak about how these mergers impact our members, the

farmers and ranchers in Montana.

Farm Bureau policy on monopoly is clear. Monopoly power,

whether it arises in industry, labor, finance, agricultural or government, is a threat to our competitive enterprise system and the individual freedom of every American. That is out of our Farm Bureau

policy book.

Another one is that we oppose mergers, acquisitions or leveraged

buyouts which tend to create a monopoly of production, marketing

and transportation or reduce competition in acquiring, pricing or

transportation of commodities and products.

We believe Congress should continue to monitor the agriculture

industry for antitrust abuse. I think we could add the Attorney

General’s Office to that also.

It is frustrating, because at least in transportation, we have been

involved for about 20 years in the McCarty Farms case, which

Montana was declared a captive—industry?

Senator BURNS. Shipper.

Mr. MCCLURE. Captive of no competition in the transportation

industry, but still today, we are paying higher costs for transportation than farmers and ranchers in other States which are much

further from the coast, and so it seems we haven’t got any relief

in that area yet.

U.S. consumers already enjoy an abundant, wholesome food supply at the lowest percentage of its disposable personal income of

any country in the world. According to the USDA, U.S. consumers

in 1997 spent about 10.7 percent of their income on food.

The recent mergers have the potential to provide additional efficiencies to the food processing and distribution system. The domestic market for food is a mature industry. Population grows only

about 1 percent per year. Per capita consumption increases only

marginally each year. In a slow growth market, it is natural for individual companies to attempt to expand by buying out other companies. This happens in all industries, not just food.

This can be clearly seen in grocery store chains. In 1967, the four

largest chains had 19 percent of the market. Today, the top 4 percent—I am trying to pick this out of this—they are up to 17 percent, the top four grocery chains.

To varying degrees, this same pattern also appears to be happening in the processing industry as well.

19

With consumers already getting food at a bargain, further gains

in efficiencies are likely to have only modest impacts on consumer

prices.

Most of the changes are expected to be in the variety of foods

available and the consumer perception of food quality and wholesomeness. Consumers demand a wide variety of options to meet

specific choices about what to eat and in what form. Ready-to-eat

and partially prepared foods continue to be more popular, and processors and grocery chains will focus on meeting those demands.

While U.S. consumers already have the safest supply of food in

the world, they continue to seek further assurances that the foods

they buy meet their high expectations. Modern food companies will

have the financial and technical resources to focus on those concerns.

You have got copies of my written testimony. I want to depart

from that right now and get into a couple of issues.

As I said, there are efficiencies inherent in these mergers. Production agricultural would like to have the ability to share in those

efficiencies and to share in that increased financial flow.

But I think as we have seen in, for instance, the gas business,

we continue to see less gas stations and less and less family operated, and a lot of that is because of government regulations. It appears that only those large, well-financed corporations are able to

meet government regulations and stay in business.

I think it is also part of what is happening in the pork industry.

I am currently serving on a task force for farm policy for the American Farm Bureau, and I sit on the regulatory subcommittee of

that task force.

The pork industries had a terrible hit, down to $9, as you mentioned, Mr. Senator, and it appears that a portion of that problem

was caused by anticipation of government regulations from Federal

and State and counties on the pork industry, and those large producers that were able to expand their operations, did it in anticipation of increased regulations and hoped to be grandfathered in.

They expanded at a time when the market didn’t call for it. They

did it, as I said, in anticipation of regulation, and that destroyed

the hog industry.

Small family-operated operations are least able to cope with a

downturn of that type and are also the least able to cope with

meeting the regulations that seem to be coming more and more

from government.

I think that is a big factor that we see in this merger of large

corporations, because only then are they able to comply with all the

regulations that are coming across.

In fact, some of these large corporations, as you know, testified

in Washington, DC in favor of regulations that would tend to limit

entrance into their market by new operations that aren’t well financed enough to comply.

As I said, you have got my written testimony. But hopefully efficiency cannot and will be at the expense of equity in the U.S. market, or we will all lose in the end.

Thank you for this opportunity to testify.

[The prepared statement of Mr. McClure follows:]

20

PREPARED STATEMENT OF DAVID L. MCCLURE, PRESIDENT, MONTANA FARM

BUREAU FEDERATION, BOZEMAN, MT.

Thank you, Mr. Chairman, for the opportunity to provide testimony for this hearing on mergers. For the record, I am David L. McClure, President of the Montana

Farm Bureau Federation with offices in Bozeman, Montana. The Montana Farm Bureau is the largest agricultural organization in the State with over 8500 members.

I am here today to speak on ‘‘How Mergers in the Nation’s Agricultural Industry

Impact Consumers.’’ More importantly, I am here today to speak about how these

mergers impact our members, Montana’s farmers and ranchers.

Farm Bureau policy on monopoly is clear.

• ‘‘Monopoly power—whether it arises in industry, labor, finance, agriculture or

government—is a threat to our competitive enterprise system and the individual

freedom of every American.’’

• We oppose mergers, acquisitions or leveraged buyouts which tend to create a

monopoly of production, marketing and transportation situations or reduce competition in acquiring, pricing or transportation of commodities and products.’’

• ‘‘We believe Congress should continue to monitor the agriculture industry for

antitrust abuse.’’

U.S. consumers already enjoy an abundant, wholesome food supply at the lowest

percent of disposable personal income of any country in the world. According to

USDA, U.S. consumers in 1997 spent about 10.7 percent of their income on food.

The recent mergers have the potential to provide additional efficiencies to the food

processing and distribution system. The domestic market for food is a mature industry. Population grows about 1 percent per year. Per capita consumption increases

only marginally each year. In a slow growth market, it is natural for individual companies to attempt to expand by buying out other existing companies. This happens

in all industries, not just food.

This can be clearly seen in grocery store chains. In 1967, the four largest chains

had 19 percent of the market and the largest 20 chains had 34 percent of the market. By 1987, there had been little change with the top four having 17 percent of

the market and the top 20 having 37 percent of the market.

By 1997, a few changes began to be seen. The top 4 had 18 percent of the market,

almost unchanged from 1987. The top 20 had 44 percent of the market, up 7 percentage points from 1987. Estimates for the end of 1999 show a sharp rise in the

market share of the top 4 to 27 percent. The share for the top 20 by the end of 1999

is expected to be about 48 percent.

To varying degrees, this same pattern also appears to be happening at the processing and distribution levels.

With consumers already getting food at a bargain, further gains in efficiencies are

likely to have only modest impacts on consumer prices.

Most of the changes are expected to be in the variety of foods available and consumer perceptions of food quality and wholesomeness. Consumers demand a wide

variety of options to meet specific choices about what to eat and in what form.

Ready-to-eat and partially prepared foods continue to be more popular and processors and grocery chains will focus on meeting these demands.

While U.S. consumers already have the safest supply of food in the world, they

continue to seek further assurances that the foods they buy meet their high expectations. Modern food companies will have the financial and technical resources to

focus on those concerns.

One major challenge these companies will have is to meet the needs of those consumers who want a supply of locally produced fresh foods. Large food suppliers have

the ability to source food across the country and around the world to meet the demands of consumers. Responding to local markets with seasonal variability is a

much tougher task.

As representatives of farmers and ranchers, the Farm Bureau is concerned about

how we fit into a world of larger processors and retailers. While consumers are on

one end of the system, farmers and ranchers are the producers of the products that

eventually are eaten by consumers.

USDA estimates show that in 1997 farmers and ranchers received about 21 cents

of each dollar spent on food by consumers. This is the lowest amount ever for the

yearly USDA estimates. There is no reason to believe that this will increase with

the mergers that have occurred in recent years. As consumers continue to seek more

services added to food between the farm gate and their dinner tables, the farm and

ranch portion will continue to decline.

Price discovery for farm and ranch products will become a larger issue in the

years ahead. As the larger processors and retailers seek a stable supply of food to

21

meet the needs of consumers, business relationships between producers and processors will continue to change.

The one definite reality is that the greatest risk will go to the weakest portion

of the production/processing/marketing chain. Farmers and ranchers bring value to

the marketing chain and will need to work aggressively to be rewarded for the risks

inherent in production. We accept the risk and do the work but the reward continues to diminish.

The key to consumers having an abundant, wholesome supply of food at affordable

prices is farmers and ranchers earning a living producing the raw food products.

If mergers create unsustainable cost/risk ratios that force U.S. farmers and ranchers out of business, the supply of food goes down and consumer prices go up. The

most cost efficient short term solution to a diminishing U.S. agricultural base may

appear to the conglomerate, the consumer and Congress to be cheap foreign imports,

but this creates dependence on foreign producers who are often subsidized by their

governments with the goal of gaining U.S. market dominance. Once U.S. producers

are priced out of the market, dominance is gained and the U.S. becomes dependent

on foreign powers for our most basic resource, food. That will not be good for consumers or the country.

It is not my intent, Mr. Chairman, to deride trade or trade agreements. Foreign

markets are essential to the health of Montana’s agriculture industry. But as Farm

Bureau has said repeatedly, free trade must be fair trade, and mergers are a factor

in any fairness assessment. Efficiency cannot be at the expense of equity in the U.S.

market, Mr. Chairman, or in the end we will all lose.

Senator BURNS. Thank you, David.

Ken Maki, who is President of Montana Farmers Union located

right here in Great Falls. Thanks for coming this morning, Mr.

Maki, we appreciate you coming.

STATEMENT OF KENNETH L. MAKI, PRESIDENT, MONTANA

FARMERS UNION, GREAT FALLS, MT

Mr. MAKI. Good morning, Senator, and I really appreciate the opportunity to testify on something that is pretty vital to all of us in

Montana Farmers Union and, in fact, in the State of Montana.

Just for the record, I am Ken Maki. I am the president of Montana Farmers Union, and I own a small ranch east of here in the

Highwood Mountains.

To get back to your earlier comment about how we are getting

the hay done, well, I tell you, my son and I are running the farm,

and at the moment he’s farming, and I’m running!

Any time there’s a merger, obviously there is less competition.

There have been some whoppers lately. It is alarming to watch

them take place, and we are just having token and cosmetic antitrust stipulations which have been imposed by the last several

ation Administrations, not just this one, but several ation Administrations, and not much being done by them. It is a big concern to

me.

Just to digress a little bit back into history, those journalists that

are in the crowd, they know a little bit about the muckraking era

at the beginning of the 1900’s, mass-produced assembly lines not

only in machinery and equipment, but in the packing industry.

You know what? We knew then, and Congress knew then that

there was a big problem, not only for producers, but for workers

and everybody. It took 20 years before we got a Packers and Stockyard Act.

Now, 5 years ago, we were at a fly-in—Farmers Union sponsored

a fly-in—and we were talking to some of the big shots at that

USDA. I told them listen, ‘‘If it’s going to take 20 years to get anyVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 71812.TXT SCOM1 PsN: SCOM1
22

*[Dr. William Heffernan’s Report, submitted by Kenneth L. Maki, was reprinted by permission of the author and the National Farmers Union.]

thing done here, most of the people in this room today aren’t going

to be here to enjoy any benefit or any result of it.’’

I am so afraid, Senator, that that may be what’s going to happen

again. I sure hope that you can light a fire, or we can light a fire,

or somebody can do something to go get this ball off of dead center,

because it’s definitely a problem.

Now, Montana Farmers Union sent a letter recently to Attorney

General Janet Reno. We asked for formation of a special unit to investigate proposed mergers in the agricultural arena. I am awaiting a reply, and even more so, I am awaiting some action, some results.

We don’t believe the USDA is able to handle the matter under

the Packers and Stockyard Act or other Federal legislation within

their purview. Neither are we confident that the Department of

Justice will do enough to ensure that farmers and ranchers are

safe from marketplace monopolies. Both agencies probably need

more in the way of appropriation from you to address those problems.

I’m not going to go through all of my study. There are copies

back there. I have some here also.

The one thing you don’t have a copy of is a study by Dr. William

Heffernan from the University of Missouri. I gave a copy to the

clerk, and Senator, I have given you and your office a couple of copies of that already. This study has all the statistics. It is pretty

deep research, and it doesn’t pull any punches.

The reason I say that, is that we have been pretty receptive to

cooperatives in this business of, what would we call it,

anticompetitivism, I guess, in our markets. You know what, cooperatives are caught in that chain too! The references are made

right in Dr. Heffernan’s Report.*

REPORT OF DR. WILLIAM HEFFERNAN, DEPARTMENT OF RURAL SOCIOLOGY,

UNIVERSITY OF MISSOURI

CONSOLIDATION IN THE FOOD AND AGRICULTURE SYSTEM

INTRODUCTION

The organizational structure of the national/global food system is dynamic. New

firm names emerge, often the result of new joint ventures, and old names disappear.

But underlying these changes is a continuing concentration of ownership and control

of the food system. These structural changes are so strong that they often undermine the desired and expected outcomes of much of the agricultural policy developed

over the past couple of decades. These structural changes, often referred to as ‘‘the

industrialization of agriculture,’’ have progressed to the point that some agricultural

economists now refer to the agricultural stage of the food system as ‘‘food manufacturing.’’

No longer can agricultural policy be discussed apart from the food system, because

major engines of change that are impacting agriculture and muting the impact of

agricultural legislation come from the larger food system. As one who has been

studying the changes in the structure for over three decades, I am delighted the

Congress has chosen to include a dialog on the structure of the food system as part

of the agricultural policy debate. Concentration of the food system must be a part

of that debate, if the policy is to address some of the problems faced by farmers and

the relatively few remaining rural communities that still depend heavily on an agricultural base.

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One often hears the statement that agriculture is changing and we must adapt

to the changes. Few persons who repeat the statement really understand the magnitude of the changes and the implications of them for agriculture and for the longterm sustainability of the food system. It is almost heresy to ask if these changes

are what the people of our country really want or, if they are not what is desired,

how we might redirect the change. The changes are the result of notoriously short

sighted market forces and not the result of public dialog, the foundation of a democracy. Neither are the changes the result of some mystical figure or an ‘‘invisible

hand.’’

For well over a decade, several of us at the University of Missouri have been reporting the concentration ratios of the largest four processors of most of the major

commodities produced in the Midwest. We liken the food system to an hour glass

in which farm commodities produced by thousands of farmers must pass through

the narrow part of the glass that is analogous to the few firms that control the processing of the commodities before the food is distributed to millions of people in this

and other countries.

We focus on the largest four processing firms because the economic literature in

the mid-1980’s indicated there was general agreement that if four firms had 40 percent of the market, that market was no longer competitive. We realized that this

selection was somewhat arbitrary, but it has provided a useful benchmark.

When we began collecting the data in the mid-1980’s, this information was relatively easy to obtain in trade journals, government reports, annual reports from

corporations and other secondary sources. Over time, this information has become

more difficult to obtain. Trade journals have come under pressure to not publish

some of this information and government agencies often say that to reveal the proportion of a market controlled by a single firm in such a concentrated market is revealing proprietary information.

I once appeared on a panel to discuss the concentration of the beef sector with

three others. Each of us had a different percentage of the market controlled by the

largest four beef slaughtering firms. We agreed on the largest four firms and their

ranking, and differed only slightly on the percentage of the market the four controlled. The range of difference was only about 6 percent and probably not really

significant because we all agreed the top four had at least 75 percent of the market.

Yet as a social scientist, I am uneasy about such differences. Differences of this

magnitude can (and should) raise questions about the legitimacy of such research.

We work hard to get these numbers and I’ll defend the trends we highlight from

the data, but I cannot defend each percentage.

The fact that these ‘‘CR 4 Tables’’ (see tables attached to this report) have become

popular indicates that most people have not found information on market share to

be very accessible. In a democracy where we expect the citizens to be involved in

setting national policy, it is absolutely necessary that they have accurate information on some of the major drivers of change. At times I have appeared publicly with

persons from some of the firms listed in our tables. My initial comment is that if

my data differ from the data of the representative of the large firms, the audience

must accept the data from the firm because primary data always trump secondary

data and I only have access to secondary data. The public must have better data.

I would urge Congress to seek better data and make it available to the public as

it begins to debate the relationship between concentration and agricultural policy

and rural issues.

Data in the table indicate that four firms control over 40 percent of the processing

of the major commodities produced in the Midwest. In addition, a few firms appear

in the list of the top four processing firms for several commodities. For example,

ConAgra is on the list of top four processing firms for beef, pork, turkeys and sheep,

as well as seafood, a commodity not listed in the tables. This year it has slipped

to fifth place in broiler production and processing. The data also begin to suggest

the vertical integration in the food system. For example, Cargill ranks in the top

four firms producing animal feed, feeding cattle and processing cattle.

The data do not reveal the extent of vertical integration in the food system in the

United States or the complex web of interactions among the top firms. This data

cannot even attempt to address the global nature of the food system. In an effort

to communicate the complicated interaction between the firms and reveal the structure of the food system, we have attempted to diagram some of the formalized

working relationships between the dominant firms in the global food system. This

information does not begin to exhaust the list of mergers, joint ventures and side

agreements. We have only scratched the surface. These data are exploratory, but

suggest the type of information needed to understand the concentration of the global

food system.

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We have already noted the difficulty of getting information in this country. Getting global information is far more difficult. To understand the U.S. food system,

one must understand the global food system; to understand the global food system,

one must understand the operations of the major global firms such as Cargill, ADM,

and ConAgra. Cargill has operations in 70 countries and is a privately held firm.

How do we get all of the necessary information? We have exposed the tip of the iceberg, but exposure only indicates the type of information needed to understand the

global food system.

The major concern about concentration in the food system focuses on the control

exercised by a handful of firms over decisionmaking throughout the food system.

The question is who is able to make decisions about buying and selling products in

a marketplace. The focus of economic power is usually placed on the individual firm

and its market share. For some of the global firms, this is still somewhat appropriate. However, decisionmaking can also be exercised through the various relationships in which a firm is involved even if it does not hold a majority share. The

changing nature of the food system suggests that relationships among the firms are

becoming much more complex and much more important.

In the past, most of the global grain firms were family held operations that tried

to maintain low visibility and were quite secretive about their transactions. These

firms operated in one or two stages of the food system and in a very few commodities. Today the system is becoming much more complex starting with involvement

in biotechnology, extending through production, and ending with highly processed

food. Increasingly, these firms are developing a variety of different alliances with

other players in the system. Acquisition is still a common method of combining two

or more firms, but mergers, joint ventures, partnerships, contacts, and less formalized relationships, such as agreements and side agreements, are also utilized. We

will use the concept ‘‘cluster of firms’’ to represent these new economic arrangements.

We have chosen to organize the information around the emerging clusters of firms

that control the food system from gene to supermarket shelf. The term ‘‘alliance’’

is frequently used to suggest the ‘‘seamless system’’ which describes the emerging,

fully vertically integrated food system from gene to shelf. Within this emerging system, there will be no markets and thus no ‘‘price discovery’’ from the gene, fertilizer

processing and chemical production to the supermarket shelf. The only time the

public will ever know the ‘‘price’’ of animal protein is when it arrives in the meat

case. As this system evolves, even the price of the livestock feed and its ingredients,

such as the corn, will not be known to the public, because like today’s broilers the

product will not be sold. The firm owns the chick and sends it to their processing

facility from which it emerges, perhaps in a TV dinner. However, the prices along

the line of production are never discovered until the chicken is sold to the consumer.

In a food chain cluster, the food product is passed along from stage to stage, but

ownership never changes and neither does the location of the decisionmaking. Starting with the intellectual property rights that governments give to the biotechnology

firms, the food product always remains the property of a firm or cluster of firms.

The farmer becomes a grower, providing the 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.

The system is still evolving and it is not yet possible to determine how many clusters may evolve, but experiences in other economic sectors, like the auto industry,

suggest we seldom see monopolies evolve. Even at the global level, where there are

no anti-trust regulations, oligopolies, not monopolies, tend to emerge. We are predicting the development of four or five food clusters, because the number of clusters

will be heavily influenced by the number of firms who have access to the intellectual

property rights. The underlying assumption here is that biotechnology will be accepted by most nations of the world, an assumption that may not be valid, because

this acceptance is still in question in some countries. We will make this assumption

here because the monopoly power that accompanies the intellectual property rights

that leads to control of the gene pool will be most difficult for any new or emerging

cluster to obtain. We are certainly open to a critique of our starting point. Disagreeing with our point of departure for the sake of organizing the data should not

influence the relevance of the data we use to describe the evolving system.

THE FOOD CHAIN CLUSTERS

Cargill/Monsanto

Monsanto is one of the leading biotechnology firms. The joint venture between

Monsanto and Cargill announced in 1998, clearly established one of the clusters.

Cargill had already established its own food chain over the past several years by

25

planned acquisitions. It was one of the largest seed firms in the world with seed

operations, including research operations, in twenty-three countries of the world.

However, Cargill did not have access to biotechnology and the new genetic products

it would produce. As the Wall Street Journal (9/29/98) pointed out, ‘‘most seed companies have either aligned themselves with, or been acquired by, crop-biotechnology

juggernauts such as Monsanto Co., DuPont Co. and Dow Chemical Co.’’ Thus, they

sold their international seed operation to Monsanto and their domestic seed operation to AgrEvo, a Berlin-based joint venture between Hoechst and Schering (Wall

Street Journal 9/29/98). Cargill then formed a joint venture with Monsanto, the

company that had the intellectual property rights to develop the genes and had a

very comprehensive array of seed firms (Knight-Ridder/Tribune 7/28/98).

Perhaps most importantly, the Cargill/Monsanto cluster is now in the process of

obtaining control of the ‘‘terminator gene’’ that can be inserted into plants to cause

all of their seeds to be sterile. No longer will Monsanto have to depend on access

to farmers’ fields for collection of tissue samples to make sure farmers do not keep

any seed from 1 year’s crop to plant the following year. Use of the terminator gene

will mean that all crop farmers must return each year to obtain their seed from seed

firms, just as corn producers have done for the past half-century.

There are two points to be made from the above scenario. The first point is that

the reorganization of the food system is very dynamic and new technologies and

other changes coming from outside the system can greatly disrupt the plans and organizational structure that a firm or cluster has developed. The second point is that

a firm the size of Cargill has access to such large sums of capital that it can usually

acquire whatever assets are necessary to survive. In addition, they are recognized

as such formidable firms in the system that they can easily find other partners

eager to join with them because the new partner is also eager to remain an active

player in a food chain cluster. The Cargill/Monsanto cluster brings together giants

in their respective stages of the food system. They needed each other to be a part

of a complete cluster. They have a complete food chain, but they realize that very

few clusters will survive so they continue to actively pursue other firms through acquisitions, joint ventures or other arrangements to increase their economic power.

The most recent proposed acquisition is the grain merchandizing division of Continental Grain. This acquisition brings with it almost 70 inland grain elevators and

seven export terminals (Wall Street Journal, 11/10/98). The acquisition of Continental’s grain division would appear to be relatively inconsequential if one examines the

elevator capacity in bushels or the number of facilities, two items that are often

used as indicators of ‘‘point of first purchase of grain’’ (purchase of grain directly

from farmer). In certain regions of the country, such as along the Illinois and Ohio

rivers, Cargill’s acquisition does limit a farmer’s choice to either Cargill or ADM.

The largest four firms (Cargill, ADM, Continental Grain and Bunge) only have 24

percent of the elevator capacity in bushels and 39 percent of the facilities.

The importance of the merger becomes more obvious when the data show that the

four firms control almost 60 percent of the port facilities. The Cargill acquisition of

Continental would mean that Cargill ‘‘would control more than 40 percent of all

U.S. corn exports, a third of all soybeans exports and at least 20 percent of wheat

exports.’’ (Grainnet, 12/1998). At the global level, the merger combines what was reported at the start of the decade to be the largest two global grain traders (KnightRidder/Tribune Business News, 11/10/98). The emergence of ADM as a major global

grain trader came through the acquisition of parts of Louis Dreyfus (originally a

joint venture involving ADM leasing elevators) and Pillsbury (a part of Grand Metropolitan, a British firm that merged with Guiness). Bunge was third for a time,

but a joint venture to share wheat handling facilities between ConAgra and Farmland Industries and the alliance between Cenex-Harvest States directly to ConAgra

(through Peavey), and indirectly to Farmland, has reduced the number of global

grain traders during the past decade.

The pressures causing a firm like Cargill to continue to seek to enlarge its cluster

is perhaps best summarized in a quote from the Wall Street Journal (11/10/98

p. A3):

As grain handlers go, Continental Grain is at a big disadvantage because it

doesn’t have the facilities to mill and refine crops into higher-value products,

such as flour and high-fructose corn syrup. When U.S. exports slow, as they

have this year [1998], Continental Grain can’t shift crops to domestic uses in

the same way that Cargill and Archer-Daniels-Midland Co. can. Cargill and

Archer-Daniels are major grain processors . . .

For Cargill, a deal with Continental Grain would increase the number of its

grain-gathering facilities all along the Mississippi River and in important exporting ports such as New Orleans. In 1996, Continental Grain operated 70 inVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
26

land grain elevators and seven export terminals. It isn’t clear whether Cargill

would close some overlapping operations.

Cargill’s interest in Continental Grain follows several moves by Archer-Daniels of Decatur, Illinois, to increase its grain-storage capacity through joint ventures and acquisitions. Industry officials said Archer-Daniels can top about 500

million bushels of grain worldwide. A pact with Continental Grain would allow

Cargill to directly access more grain than Archer-Daniels currently can.

Continental was also feeling the pressures of a changing food system. According

to the Wall Street Journal (11/11/98, pA10), Continental CEO Paul Fribourg was

convinced that his company could not continue as a grain handler because of competitors expanding into ‘‘the more-profitable businesses of milling and crop biotechnology.’’ In fact, the company considered merging with a commodity processor

before selling the business to Cargill. The deal raises some interesting questions.

What does ContiGroup, the remainder of Continental, plan to do for access to grain

for feeding its hogs, cattle and poultry and where does it plan to get its cattle

slaughtered? Does ContiGroup feel it can add to its processing capacity to meet its

growth projections and compete with Smithfield, IBP, ConAgra and Cargill and the

clusters it is joining? Is there some side agreement that has not yet been made public which will include ContiGroup within the Cargill/Monsanto cluster? What happens to the alliances Continental had with Harvest States (Tacoma Export Marketing Co.), Optimum, a joint venture with DuPont/Pioneer, ContiPasz, a feed company in Poland, and its venture with Quincy Soybean Company, now owned by

ADM?

Industry analysts suggest one of the reasons Cargill needs more facilities is to position the company as a major grain trader as identity-preserved products come on

line. Those promoting value-added opportunities for farmers have suggested that

small, single facility firms, like new generation cooperatives, might find a niche in

the handling of identity-preserved products because the big grain traders could not

or would not come into such small markets. With the additional facilities Cargill has

just acquired, it is in position to utilize a facility in the center of a farming region

that could produce the new product and contract with surrounding farmers for the

product. Cargill could use marketing contracts or production contracts much like it

does in the poultry sector.

Reports suggest Cargill paid about one billion dollars for Continental (Wall Street

Journal, 11/11/98 p. A10). That is only about half of their 1998 income. Cargill could

buy two operations the size of Continental’s global grain division with 1 year’s earn- ings. That is economic power. There is freedom of entry into the global food system

for those firms that can match that level of purchasing power. Cargill’s corporate

goal is to double in size every 5 to 7 years that it says it has achieved for the past

40 years. Since the major firms in these clusters expect to make at a 20 percent

return on their equity, the Cargill goal is very similar with other such firms.

ConAgra

With diversified interests ranging from ‘‘farm gate to dinner plate,’’ a ConAgra

subsidiary can be found along most links of the food chain. ConAgra is one of the

three largest flour millers in North America and ranks fourth in dry corn milling

in the U.S. The company produces its own livestock feed and ranks third in cattle

feeding and second in cattle slaughtering. It ranks third in pork processing and fifth

in broiler production and processing. In its 1997 Annual Report, ConAgra explained

that its United Agri Products (UAP) business is a leading distributor of crop protection chemicals, fertilizers and seeds in the U.S., Canada, Mexico, Chile and U.K.

UAP is moving into new markets around the world, such as through a joint venture

with Zeneca Agrochemicals (now AstraZeneca) in the Cape region of South Africa

which will establish a base for UAP growth on the African continent. ConAgra’s an- nual report also noted that UAP is a leader in the distribution of new biotechnology

products, principally seeds. As part of ConAgra, UAP identifies new applications for

biotechnology in the food industry and provides links to other ConAgra companies,

which can capitalize on the application potential for consumers.

In the handling and transportation of grain, ConAgra owns about 100 elevators

and 1,000 barges and 2,000 railroad cars. ConAgra’s grain trading company, Peavey,

is ranked third in ownership of U.S. covered barge fleet. American Commercial

Barge Lines, Inc., is No. 1, followed by Artco, a company owned by Archer Daniels

Midland. According to the trade journal Feedstuffs (9/95), these top three controlled

53 percent of the nation’s covered barge fleet.

Despite ConAgra’s long history of being a company from ‘‘seed to shelf’’, we are

unsure of the direction of their food chain cluster, although hints are to be found

in their annual report. One indication is ConAgra’s Agri Products division teaming

with DuPont in a group of joint ventures, about a dozen developmental businesses.

27

According to a New York Times article (10/30/97), ConAgra’s range of expertise may

make it especially attractive to potential business allies like DuPont. For example,

DuPont has relied heavily on ConAgra for the initial commercialization of its new

high-oil corn. Once United Agri Products found farmers to grow the corn under contract, ConAgra’s chicken operations bought the grain.

Relationships that exist between the food chain clusters also complicate any kind

of explanation of the food system. For example, ConAgra and ADM formed a joint

venture in mid 1998 to operate the Kalama grain export facility in Washington

State. The new company, owned 50–50 by the two giants, is known as Kalama Export and operates one of the most efficient export facilities on the West Coast. The

facility was built by ConAgra and operated under its auspices from 1983 until the

joint venture formed. In another grain-based alliance, ConAgra and Farmland Industries have linked together to improve both companies’ services to farmers and

grain marketing and export activities. The new alliance will consist of two entities,

Concourse Grain and Farmland-Atwood. Concourse Grain will operate two ConAgra

export elevators and two Farmland elevators (one export, one interior) and will market wheat originated by the two companies. This alliance will enable domestic and

wheat customers to access multiple classes of wheat, and international customers

to be served from multiple U.S. export points. Prior to these grain ventures,

ConAgra created a joint venture with Harvest States Cooperatives in 1994 to operate three elevators in Iowa and two export grain terminals in Louisiana. The 50–

50 partnership, called HSPV, was expected to improve efficiency and flexibility in

grain origination, shipment and handling of grain exports for both Harvest States

and ConAgra’s grain export company, Peavey (Feedstuffs 9/12/94).

ConAgra follows the processing of food farther down the food chain than Cargill

and ADM, ultimately selling labeled food items that most consumers would recognize such as Armour, Monfort, Swift, Butterball, Healthy Choice, Peter Pan Peanut

Butter, Hunt’s, and many others. It currently ranks second behind Philip Morris as

the leading food processor in the U.S. In its 1998 Annual Report, ConAgra noted

18 consecutive years of earnings per share growth at a compound rate of 15 percent.

Fiscal 1998 sales totaled $23.8 billion and fiscal 1998 operating profit, $1.6 billion.

Chief executive Bruce Rohde, who succeeded Philip Fletcher in September 1997, has

set a goal of making ConAgra the world’s largest and most profitable food company

by the year 2005. This means passing not only Philip Morris, but also world-leader

Nestle of Switzerland.

ConAgra’s growth during the 1990’s has been accomplished through a strategy of

acquisitions, divestitures and adding value to their products. Under the leadership

of Philip Fletcher, the company’s practice was to have 80–100 acquisition candidates

in screening at all times. ConAgra was able to report in 1998 that it had acquired

or created joint ventures with approximately 150 companies during the past 10

years.

Novartis/ADM

Novartis is a Swiss firm formed by the merger of CIBA-Geigy and Sandoz in late

1996. According to their 1997 Annual Report, the company has agribusiness operations in 50 countries worldwide. Their ‘‘agriservices’’ are primarily in crop protection chemicals, seeds and animal health. The merger of the two large chemical

firms—plus the acquisition of Merck in 1997—puts Novartis in the leading position

in the global agrochemical field with sales of $4 billion in 1997 (Chemical Week 5/

21/97). This left Monsanto (not including its recent buying spree), Zeneca (a British

firm that recently merged with a Swedish firm to create AstraZeneca) and DuPont

all vying for second place in the global agrochemical field. In 1997, Europe Chemical

News (4/28/97) estimated that Novartis had 15 percent of the global agrochemical

market. Moreover, the company ‘‘has the largest R&D budget in the life sciences industry’’ according to their own press release in May 1997. Their emphasis on R&D

is also reflected in their collaboration with the University of California-Berkeley,

where they recently signed a 5-year $25 million research agreement to work ‘‘in all

areas of functional genomics related to agriculture, including gene-library construction, sequencing, mapping and bioin-formatics.’’ (Chemical Market Reporter 11/30/

98)

The Novartis/ADM connection is established through Novartis joint venture with

Land O’ Lakes to develop specialty corn hybrids for the food and feed markets.

Novartis purchased a 50 percent interest in Wilson Seeds Inc., a subsidiary of Land

O’ Lakes. The joint venture will also acquire genetics from Sturdy Grow Hybrids,

already in a venture with Novartis to introduce a white corn hybrid with the Bt

trait (PR Newswire, 10/14/98). Land O’ Lakes maintains an alliance with Growmark

(energy products) and recently took over Countrymark, a major eastern Corn Belt

cooperative, both of which are in joint ventures with ADM. The link between

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1 Bovard, James. 1995. ‘‘Archer Daniels Midland: A Case Study in Corporate Welfare.’’ Cato

Institute Policy Analysis #241.

Novartis/ADM is somewhat tenuous because Countrymark did not include their

grain marketing division in the joint venture, a division that is already in a grain

joint venture with ADM. However, the point is that the Novartis/ADM cluster, unlike Monsanto/Cargill, is really predicated on relationships with farmer cooperatives.

Though some might dismiss this Novartis/ADM connection as insignificant, one

must raise the question of what these relationships could indicate in the future as

firms jockey for position in these food chain clusters. First, ADM, with its vast network of processing facilities, lacked access to farmers, a problem the firm remedied

through a long-standing joint venture with Growmark and the more recent ones

with Countrymark, Riceland, and United Grain Growers. The Growmark and

Countrymark joint ventures, for instance, give ADM access to 50 percent of the corn

and soybean market region, and 75 percent of Canada’s corn and soybean market

region (Feedstuffs 8/12/96). The 42 percent share ADM gained in United Grain

Growers—a former cooperative that is now publicly owned with major stakeholders

also being the Alberta and Manitoba wheat pools—gives ADM widespread access to

farmers in western Canada.

For the cooperatives who lacked the muscle of large firms in downstream processing—as in the case of Minnesota Corn Processors, a new generation wet corn

milling cooperative that sold a 30 percent non-voting share to ADM—ADM offered

a far-flung global network in which to sell their grain. No one put it more succinctly

than the president of Harvest States, who said when the Cenex-Harvest States

merger was announced, that ‘‘agriculture cooperatives must operate today ‘in a land

of giants’ where capital and scale ‘are absolutely necessary’ . . . in a market where

corporate multinationals rule.’’ (Feedstuffs 11/24/97) ADM’s own partner,

Growmark’s CEO Norm Jones, commented that the joint ventures with ADM positioned Growmark and Countrymark in the global agricultural industry, which represents the only expansion possibility for most cooperatives. (Feedstuffs 8/12/96)

ADM has also used joint ventures with cooperatives such as Goldkist and Ag Processing Inc. (AGP) in the feed business. A spokesperson for Consolidated Nutrition

(ADM’s joint venture with AGP) said that cooperatives ‘‘recognize the importance of

partnerships as instruments to be competitive in an industry consolidating as substantially as the feed industry.’’ (Feedstuffs 12/22/97)

The Novartis/ADM connection is also important because Novartis—while a truly

global and powerful company with substantial sales in chemical, seed, animal health

and human nutrition products—lacked access to further processing in either grain

commodities or food products. Novartis will need ADM’s grain handling and processing web to be able to guarantee producers using their seed stock a downstream

market. ADM, on the other hand, lacked access to biotech and needs Novartis’ genetics, seed stocks and chemicals. As spokesman Martin Andreas of ADM said in

a Feedstuffs interview (1/12/98) ‘‘ ‘If you’re not plugged into the global market today,’ a company will have limited opportunity to prosper. . . . An international network ‘is critical [and] if you are not tied into an international system, then you are not

a traveler.’ ’’ Novartis’ genes, seeds and chemicals compliment ADM’s far-flung grain collection

and processing network, created through the aggressive pursuit of joint ventures

and alliances in Europe and Latin America. ADM’s stake in A.C. Toepfer, one of the

world’s largest grain trading firms, and Dwayne Andreas’ claim that ‘‘my partners

in the EU are 12 of the biggest farmers’ cooperatives in the world . . .’’ 1 allowed

ADM to process 45 percent of the commodities entering Eastern Europe from the

West in 1993. ADM has also pursued joint ventures and acquisitions in Latin America in the last few years. Just their purchase of parts of Glencore’s holdings in

Brazil and Paraguay generated a 4 percent increase in their share of the world’s soybean trade (Feedstuffs 6/9/97). Moreover, they maintain joint ventures in a variety of different commodity processing and feed operations in Brazil, Paraguay, Bolivia and Mexico—and these are the alliances that are most easily documented.

ADM has also advanced into the Chinese market through its oilseed refining, feed

and broiler processing operations, where ADM is the junior partner with the Chinese government and a local processor. In discussing China’s dilemma of balancing

the need for food security or economic security, Martin Andreas, ADM’s spokesman,

commented ‘‘It means that China is resigned to importing food and paying for it

with products made from their overabundant supply of cheap labor.’’ (Journal of

Commerce 2/17/98)

While ADM appears to be firmly networked at the commodity processing level,

what is not so apparent is how they are going to substantially enter branded food

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products—as ConAgra has done—or production and processing in the livestock sector. ADM’s venture into production and processing of livestock has been undertaken

through their joint venture with AGP, Consolidated Nutrition, which has sow production on line, as well as ADM’s steady increase of its stake in IBP, the largest

U.S. beef packer and second largest U.S. pork packer. Although data are not readily

available, IBP appears to have contracts with large feeding operations to guarantee

captive supplies of beef—and some pork although not as widespread as beef contracts. In a more surprising move, ADM has chosen to decrease its holdings in Pilgrim’s Pride to 6.4 percent, a firm in which they had an almost 20 percent stake

in 1992 according to Feedstuffs (7/13/92), at the same time they maintain a broiler

processing plant in China. IBP has also moved into the Chinese market, bringing

a fully integrated pork production and processing facility on line in 1997 (IBP Annual Report). We are not sure what this means in terms of the food chain cluster

for beef, pork, turkey or broiler production and processing. Are Smithfield and

Tyson poised to join this chain? Or will they move somewhere else while ADM pursues its relationship with IBP?

It is clear that we have only scratched the surface of the Novartis/ADM/IBP cluster. Data are very difficult to obtain, particularly reliable data about global operations. For instance, who are ADM’s EU cooperative partners, besides the ones we

have listed? How do ADM’s operations in China impact farmers in the United

States? What role does ADM’s own brokerage firm, among the top 40 largest in the

US, play in currency and grain futures trading, particularly when ADM is a major

grain handler and processor in Europe, North and South America and Asia?

Finally, the development of feed additives and other derivatives from wet corn

milling remains a fascinating and potentially lucrative market as shown by Cargill’s

interest in entering the additives market through joint ventures with firms like

Degussa. ADM is quite powerful in the production of lysine and citric acid—as evidenced by their recent legal troubles in the U.S. and EU in regards to both products—and is gaining ground in such new products as Vitamin E and soy isoflavones.

The key question, which none of the major cluster firms has yet addressed, is what

happens with further processed branded food products and supermarket sales?

Novartis has their Gerber baby food, ADM has Haldane foods in Britain and their

continuing production of Harvest Burger vegetarian alternative for Worthington

Foods in the U.S., and IBP acquired institutional processor and supplier

FoodBrands Inc. However, none yet have the presence of ConAgra—or Philip Morris

for that matter—on the shelf or in the cooler in supermarkets. These questions still

remain and are particularly relevant to public policy debates.

MOVING BEYOND THE DATA

There are a host of major players in the food system which are not included in

our three food chain clusters. Some have already begun to form alliances and others

are still acting in a rather individualistic manner. Most likely, some of these will

join together to form new food chain clusters, while others may join the clusters we

have identified. Pioneer and Mycogen can form the anchor for other chains. Firms

like American Home Products, DuPont, Dow, AstraZeneca, and Aventis, a recent

joint venture of Rhone-Poulenc and Hoechst-Schering, are likely to join a cluster,

as are some of the fertilizer firms. Bunge, a major grain trader, and some major

animal production and processing firms like Tyson, Perdue, Smithfield and its alliance members Carroll’s Foods and Murphy Family Farms, might well develop a

working relationship. There are already relationships between many of these firms

for which we have not indicated a cluster and some of them have or have had relationships with firms in the three clusters we have identified.

Watching the clusters develop by forming new relationships and breaking some

of the old and speculating on what other relationships might develop is like watching a chess match and trying to anticipate the players’ next moves. In this game,

there can be four or more winners. The system is very dynamic. However, a look

at the list of acquisitions and mergers during the past decade, or as we have shown

within the last 5 years, suggests far more names were lost as firms joined another

management unit than new names emerged. Many of these new names are simply

the realignment of existing firms.

The diagrams help to communicate three points. The first is that a very small

number of dominant food chain clusters appear to be emerging. Some are organized

around one or two dominant players as exemplified in the cases of Cargill/Monsanto

and ConAgra, which is only loosely connected to a biotechnology firm. The

Norvartis/ADM/IBP case suggests another method of building a food chain cluster

that is probably the path many of the major key players not yet involved in a cluster will follow. At least during the formative period, a dominant firm from the bioVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
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technology area, one from the grain trading and processing area, and one from the

meat production and processing develop a working relationship that is a bit more

tentative than a merger. We are not suggesting these relationships are set in stone,

even acquisitions can be sold. But the freedom of entry is restricted.

The second point is that the food system is becoming very complicated and difficult to describe. The complication in describing the system results from the fact

that there is not a group of individualistic firms out there competing with one another. We are especially interested in all the relationships that exist within the clusters and those crossing from one food chain cluster to another. Some of these are

the result of firm A having a relationship with firm B, and then developing a new

relationship with firm C. But some of the relationships crossing cluster boundaries

are new. The whole system is woven together by a host of working relationships between firms and, at least for the short run, the system looks pretty fluid. One is

left asking the question: just how much competition is there in the system? We

know there are examples of rivalry between firms and in some cases the firms are

spending millions of dollars in court to settle their differences. Maybe the society

would benefit most if the differences were to be settled in a competitive market!

Knowing that Nippon Meats of Japan has a 12 to 15 year joint venture with Cargill

producing broilers in Thailand makes it hard to believe there are not some constraints in the competition they exercise in this country as Nippon becomes a hog

producer and processor in United States.

The third point is that as the food chain clusters form, with major management

decisions made by a small core of firm executives, there is little room left in the

global food system for independent farmers. The experts, even the leaders of cooperatives, are telling farmers they must give up their independence and join an

alliance. This is another way of saying ‘‘give up your decisionmaking prerogatives

to the food chain cluster if you want to maintain an economically viable farming operation.’’ In most of the livestock commodities, the production stage is integrated into the

larger food system. Ninety-five percent of the boilers are produced under production

contracts with fewer than 40 firms. Essentially, there is no price discovery for chicken feed, day old chicks or live broilers. The food product does not sell at these

stages. Basically there is no national market for live broilers. (There are niche markets emerging for range poultry and other specialty poultry, but processing is

emerging as a major problem.) The production system is about the same for turkeys

and eggs. At the end of low hog prices, which may last for at least another year,

there will be few independent hog producers remaining. The issue is not who can

produce the hogs the most efficiently. The issue is who has the deepest pockets and

market share. Even now, the issue of market access for producers who do not have

special relationships with feed or slaughtering firms has become obvious. Twenty

feedlots feed about half of the cattle in the U.S. and these are either owned by the

slaughtering firms or have contracts with the processing firms. Operators of ‘‘independent lots’’ tell us that they seldom see buyers from more than one firm. Dairy

farms are being consolidated, leaving only the cow/calf sector out of the integrated

system. The cow/calf sector is the most highly subsidized sector of agriculture, subsidized by non-farm income. The cow/calf producers without access to non-farm income are facing economic hard times.

The movement toward increasingly differentiated products is bringing more contracts into field crop production. Two recent technologies will hasten the process of

vertical integration in the crop sector. The first is biotechnology and the terminator

gene that places the farmer at the mercy of the food cluster for seed to plant the

crop. If the firms in the processing stage of the cluster require specific genetic material and the farmer cannot get that seed, he/she has no market access. The second

technology is precision farming’s global positioning system. It is no longer necessary

for the farmer to have personal contact with their land and crop to make appropriate management decisions. Most of the decisions can now be made in the farmer’s

office. Any decisions that can be made without contact with the land and the crop

can be made in an office in a distant city. In the not too distant future the person

operating the corn planter will not know much about the genetic material of the

corn being planted—just like the broiler grower does not know about the genetic

stock of the birds he/she feeds. As the ‘‘farmer’’ watches the big truck with the computer on board reading from a satellite, he/she will not know much about the fertilize or chemical being applied to the field—just like the grower does not know

much about the feed fed to the birds he/she cares for but does not own. The crop

farmer will be paid on a piece rate basis just like the grower.

Increasingly we hear about the need for only 20,000 to 30,000 farms in the United

States to produce for the global food system. The next question becomes what is a

farm? In business ation Administration literature, firm usually applies to a manageVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
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ment unit. Traditionally the term farm has also referred to a management unit. If

the integrating firm becomes the management unit as is implied in the case of broiler production, how many farms will there be in the United States in the future?

CONCERNS ABOUT THE FOOD SYSTEM

Many different groups and individuals in this and other countries are raising serious concerns about the globalizing food system. One concern focuses on the consequences for rural communities of this restructuring.

Today, most rural economic development specialists discount agriculture as a contributor to rural development. The major reason why agriculture contributes so little

to the community is because of the emerging structure of the food system. In a family business, such as family farm, a family grain elevator, or a family grocery store,

the family subtracts its annual expenses from its income to determine profits that

are then allocated among labor, management and capital. For the economic wellbeing of the family and the rural community, it makes little difference how the profits are allocated among the three costs of labor, management and capital. The local

family spends much of the ‘‘profit’’ in the local community. In addition, when the

rural community retained all of income related to the three factor of production, the

funds circulated more in the community. Not just the family farms, but all of the

family businesses providing the agricultural infrastructure contributed to the economic well-being of the community. In the past when family businesses were the

predominant system in rural communities, researchers talked of multiplier effects

of three or four. Newly generated dollars in the agricultural sector would circulate

in the community, changing hands from one entrepreneurial family to another three

or four times before leaving the rural community. This greatly enhanced the economic viability of the community.

Large non-local corporations, whether hiring labor as wage earners or piece rate

workers as in the case of growers, see labor as just another input cost to be purchased as cheaply as possible. The ‘‘profits’’ then are allocated to return on management and capital and are usually taken from the rural community. They go to the

company’s headquarters and are then sent to all corners of the globe to be reinvested in the food system. One can ask the question, why were agriculturally based

rural communities, with an ample natural resource base, more economically viable

than mining based rural communities which also had an ample natural resource

base? The answer lies primarily with the economic structure of the major economic

base. Increasingly, our agriculturally based communities, like regions with major

poultry operations, are looking like mining communities.

Increasingly, the major decisions in the food system are being made by an everdeclining number of firms, a growing number of which are involved in the food system clusters. They are primarily concerned with maximizing their profits. That is

the purpose of such corporations. ConAgra says its major mission is to increase the

wealth of its stockholders. But, these firms are in position to decide which people

in the world will eat. Their decisions are based on whether one has the money to

buy food. We hear a lot about the growing population of the world and how feeding

the increasing millions will provide great opportunities for farmers in the United

States. The problem is that much of the population increase is in the ‘‘have-not’’ nations of the world, in countries where the people earn only a few hundred dollars

a year. These families cannot afford to buy imported food! The global firms travel

the world ‘‘sourcing’’ their products from those countries where they can get the

product the cheapest and selling them into the countries that will pay the most.

This raises the question of whether the countries with rapidly growing populations

will be our farmers’ customers or their competitors.

One hears a lot about agri/food exports from the United States and the potential

benefits for our farmers. Much less attention is given to United States food imports.

On a dollar basis, the exports and imports have been growing at about the same

level for the past two decades. This means that on a percentage basis, imports have

been increasing more rapidly, because imports started at a lower dollar value. For

example, about one-third of the vegetables consumed in this country are imported.

The United States is also a net importer of beef.

Issues of food quality and especially food safety are also receiving increased attention. Perhaps the bigger issue is whether the global food system is sustainable. The

production, processing and distribution stages have all been built on cheap petroleum. Considerable debate exists on when the world’s petroleum resources will be

depleted, but most agree the price will begin moving up in the not-too-distant future. Will the resulting price shocks cause the whole food system to restructure

again?

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Another question being asked, given the financial problems faced by some nations,

is: What would happen if the United States were to experience a depression like

that of the 1920’s and 1930’s? A depression is a major disorganization of the economic system. Think for a moment what that would mean in a system of ‘‘just-intime delivery.’’ Will food products get to the stores on a regular schedule? Will my

neighbor be able to get a replacement engine from England for his new New Holland combine if it breaks down during harvest? Will the seed, chemicals and fertilizer, coming from all parts of the world, get to the farmer in time? A shutdown

of the agricultural production system for a few weeks can have quite different consequences than shutting down an automobile assembly plant for the same amount

of time. A lengthy delay in agricultural production could mean the loss of the year’s

crop.

The control of the animal genetics pool is also concentrating and the genetic base

for domestic animals is narrowing. For example, over 90 percent of all the commercially produced turkeys in the world come from three breeding flocks. The system

is ripe for a new strain of avian flu to evolve for which these birds have no resistance. Similar concerns exist in hog, chicken and dairy cattle genetics.

These are food issues and not just agricultural and rural issues. The global food

system is becoming more like many of the other economic sectors. But food is different from all other goods and services exchanged in the international market.

Food is a human necessity and it is needed on a regular basis. Those who control

the global food system have the ultimate in economic power. As Dwayne Andreas,

former chairman of ADM, said:

The food business is far and away the most important business in the world.

Everything else is a luxury. Food is what you need to sustain life every day.

Food is fuel. You can’t run a tractor without fuel, and you can’t run a human

being without it either. Food is the absolute beginning. (Reuters, 1/25/99)

One hears much about ‘‘niche markets’’ as new opportunities for farmers. Such

opportunities do exist. There is a major rebirth of farmers’ markets, local food

routes, subscription sales and other forms of direct marketing between farmers and

consumer, with small processors involved when needed. As the food firms get larger

and cover wider geographic and cultural areas, they leave behind a growing number

of small markets they do not serve. The more consumers learn about the ways their

food is grown in far away places, the more many of them are concerned with where

their food is produced, who produces it, and how it is produced. The structural vulnerability of the emerging food system is called into further question when one remembers the situation in the former Soviet Union. The Western world began to realize there were major problems in the centralized food system of the former Soviet

Union when it was learned that small farm plots were producing a significant proportion of the country’s food. Large centralized organizations have problems adapting to change. They commonly have problems with management, with coordination,

and with worker satisfaction.

These are good reasons to predict that the evolving system is vulnerable. It will

probably be restructured again in the future. A vulnerable food system will most

likely be ‘‘restructured’’ numerous times in the future—but at what social and economic cost to whom? When ‘‘restructuring’’ occurs, some people pay a very high price

for the changes. It is highly questionable whether society as a whole really benefits.

If the number of farms is reduced to about 25,000 in the next decade, there will

be many farm families who will be involuntarily removed from their land. In the

mid 1980’s, Congress allocated funds for helping the families who followed the advice of the experts and by doing so lost all of their assets. These funds were used

wisely and they helped many families during their transition from the farm. The

motto then was ‘‘We may not be able to save every family farm, but we can save

every farm family.’’

Perhaps the policy emerging from this dialog on concentration in the food system

can lead to a new system that will save both. Just a quarter of a century ago, our

decentralized system of agricultural production was held up as a model for the

world.

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 the 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 generations?

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They (co-operatives) were formed to provide independent alternatives, but now they are having to compete with this mega-merger

mania that is going through the countryside and must compete

45

with the highly-vertically integrated corporations. Some of them

have joined alliances in order to survive, and you know that some

of those are currently in the mill. (eg: CHS-Farmland)

Now, I want to turn, besides the fact that we are farmers and

ranchers, we are consumers. I want to bring up another point. Concentration threatens our food security within not only the United

States but in the global arena. Chains—and these are mentioned

in that Heffernan study—these chains or clusters, jeopardize our

food security because just a few dominant firms control the major

decisionmaking throughout the food chain, and their decisions are

based on what is most profitable to the company.

The genetic pool is becoming limited. For example, and he

(Heffernan) cites one, over 90 percent of the commercially produced

turkeys in the world come from three breeding flocks. Now, if the

avion flu all of a sudden infects a flock, that would kind of wipe

out our turkey population. It’d probably be pretty good for some of

the small turkey producers, but there likely won’t be any of them

left.

So, I guess, Senator, we are here at your mercy. We will help you

all we can. I appreciate you calling this hearing. We can spend a

lot of time, and I’ve got a lot of other statistics, which I am not

going to bother to go through. This happens to be a pet subject of

mine from when I was back in college. I would certainly hope that

maybe this is just the beginning of getting some stones uncovered.

Thank you, Senator.

[The prepared statement of Mr. Maki follows:]

PREPARED STATEMENT OF KENNETH L. MAKI, PRESIDENT, MONTANA FARMERS

UNION, GREAT FALLS, MT.

Good Morning, Senator Burns, and thank you for the opportunity to testify on a

subject vital to the membership of Montana Farmers Union.

I am Ken Maki, president of Montana Farmers Union, a non-profit statewide

membership organization of family farmers and ranchers with members in all 56

counties. They produce cattle and other livestock, wheat and other grains, honey,

ostrich, mint and other commodities.

Our members who produce grains must deal with Burlington Northern & Santa

Fe Railway, which effectively is a monopoly within Montana and makes them captive shippers. They pay some of the highest freight rates in the Nation for lack of

rail competition.

Similarly, these producers are witnessing loss of control of their livelihoods into

fewer and fewer corporate hands by mergers in the agricultural sphere like those

which formed BNSF.

Anytime there is a merger, obviously there is less competition. And there have

been some whoppers lately. It is alarming to watch them take place, with but token

and cosmetic anti-trust stipulations imposed by the last several ation Administrations in Washington.

Cargill of Minnesota, the largest privately-owned business in the United States, also is the second largest North American grain trader ($9.9 billion U.S. 1998), following only Archer Daniels Midland. Cargill recently bought the grain operations

of Continental, the fifth largest grain trader in the U.S. ($5.5 billion U.S. 1998).

Both operate foreign elevators and port facilities. Although neither has significant

operations within Montana, the new entity certainly will influence farmgate prices

here.

Cargill now will handle about one-third of all U.S. grain exports and it probably

is not finished acquiring competitors. You are aware of the dependence of Montana

growers on the export market. Cargill is actively buying and partnering in Canada

too.

Monsanto acquires DeKalb Genetics and Delta Pine & Land Co. of Mississippi.

DuPont buys Hi-Bred International, the world’s largest seed corn company. St. Paul

Bank and CoBank merge into a $22 billion operation. Wells Fargo buys Norwest.

CENEX buys Land O’ Lakes, then acquires Harvest States and now is combining

46

with Farmland Industries, which already has made its debut in Montana television

advertising.

Farmers Union in a recent letter to Attorney General Janet Reno asked formation

of a special unit to investigate proposed mergers in the agricultural arena, as well

as anti-trust investigation of the existing concentrations of ownership in meatpacking and grain handling.

We do not believe the U.S. Department of Agriculture is able to handle the matter

under the Packers & Stockyards Act or other Federal legislation within its purview.

Neither are we confident the U.S. Department of Justice will do enough to insure

that farmers and ranchers are safe from marketplace monopolies. Both agencies

probably need more in the way of appropriations from you to address these problems.

The following figures are from a study commissioned by National Farmers Union

with the University of Missouri:

Beef Port Flour Millers

IBP Inc. .................................................................................................................. 1st 2nd ....................

ConAgra .................................................................................................................. 2nd 3rd 2nd

Cargill .................................................................................................................... 3rd 4th 3rd

Farmland ................................................................................................................ 4th 5th ....................

Smithfield ............................................................................................................... .................... 1st ....................

Archer Daniels Midland ......................................................................................... .................... .................... 1st

Cereal Food Processors .......................................................................................... .................... .................... 4th

Hormel .................................................................................................................... .................... 6th ....................

Total .............................................................................................................. 79% 75% 62%

You see the same names popping up in all categories. I have heard higher figures.

ConAgra owns the Peavey elevators in Montana. A corporate realignment recently

resulted in closing the elevators in Carter, Rudyard, Chester and Shelby, resulting

in less competition in those markets.

In South Dakota, where the State legislature enacted price transparency for cattle

buyers, packers now are refusing to buy animals on the spot market. Why? What’s to hide? Market and price manipulation, that’s what. The corporations finally have

turned the corner on controlling the markets and they are afraid of disclosure.

IBP in the last quarter of last year quadrupled its profits over the preceding year ($92 million to $22 million), mainly because of the lowest prices to hog producers

in decades. Cattle and grain prices in Montana also have been terrible.

Philosophically, we are disturbed there may be an overtaking of democratic principles by purely capitalistic powers, because small family farmers and ranchers keep

getting squeezed out year after year. They feel ignored and unprotected by their

government, so they have been demonstrating in growing numbers in Montana and

other states. They need good public policy, not annual stopgap emergency measures.

Victories such as R-CALF’s action on Canadian cattle imports are precious few— and we have yet to see if that preliminary finding for the Ranchers Cattlemen Action Legal Foundation will be upheld by both the Commerce Department and the

International Trade Commission.

Large volumes of subsidized imports from Canada and elsewhere have shown the

shortcomings of so-called free trade treaties for several years now and Farmers

Union still believes a wholesale renegotiation of those treaties is in order.

Farmers Union believes that near-monopoly conditions in the food buying and

processing sector now may have more of an influence on farmgate prices than lower

demand for U.S. commodities along the Pacific Rim and cyclical domestic overproduction. Probably, there are enough laws and regulations already on the books

to remedy this situation, so we ask Capitol Hill to light a fire under the appropriate

agencies to force divestitures and restore true competition for family farmers and

ranchers. At the very least, there should be a moratorium on mergers and acquisitions until their effects on small farm income are evaluated.

Meanwhile, unfortunately, it is necessary for Congress to enact another stopgap

bailout to keep the farm economy going. It must be done immediately. Farmers

Union and Elizabeth Dole want it done now. But Senate Majority Leader Trent Lott

and Senate Agriculture Committee Chairman Richard Lugar say later this year,

after harvest. That’s too late. Please tell your colleagues in leadership those Montana farmers and ranchers need a hand now, not Christmas presents after they’ve

already sold their places.

Thank you.

47

Senator BURNS. Thank you, Ken. Thank you for coming this

morning and taking the time. We appreciate that very much.

On the third panel this morning, we are going to start in, because these are grower groups, we have got some folks here that

are right over here, Jim Johnson and John Marsh, from Montana

State University, they are agriculture economists. You guys might

want to get prepared if you want to offer a few words after we have

our panel, but you might catch some questions or something, you

know, even from the folks up here.

It is good to see the grain growers here, and we will hear from

these other folks in a little bit, but we want to thank Montana

State University for sending two of their best up here this morning.

We use them as resources, so we really appreciate you coming.

Jim Peterson, who is Executive Vice-President of the

Stockgrowers Association from Helena is here this morning. Jim,

we would be interested in getting your insight and your testimony.

STATEMENT OF JIM PETERSON, EXECUTIVE VICE PRESIDENT,

MONTANA STOCKGROWERS ASSOCIATION, HELENA, MT

Mr. PETERSON. Thank you, Senator Burns.

I decided to take a rather nontraditional, unconventional approach to this hearing today, and I hope it is appropriate.

I am here today speaking on behalf of Montana Stockgrowers Association, but also on behalf of some personal experience I’ve had

over the years that I’d like to share with you.

Since 1884, Montana Stockgrowers has been representing its

members to try to ensure a fair, competitive and favorable economic environment for the beef industry, and on behalf of it’s 3,400

members, I appreciate this opportunity to comment.

For the record, my name is Jim Peterson. I am a cow/calf operator, cattle feeder and a farmer from central Montana. But I also

spent 10 years on the staff of the Texas Cattle Feeders Association.

I managed an agricultural lending unit or a commercial bank in

Amarillo, and we had $200 million of cattle loans. I was the chief

financial officer for a major public company in California, the largest privately-owned ranch in the State of California, the Tejon

Ranch.

I share this with you only to say that I have had experience on

both sides of the fence, the pasture fence and the feed yard fence,

and both sides of the desk, the borrowing side and the lending side.

I want to share some background as well as a specific example

that took place the first quarter of this year and some suggested

conclusions of what we might try to do with it.

Back in the seventies, when I was working in a feed yard in

Texas, we sold cattle one pen at a time. The buyer used to come

to the feed yard, and we had one person on our staff who’s full-time

job was taking buyers around. They looked at the cattle one pen

at a time and negotiated on the price of that pen based on the feeding conditions, the quality of the cattle and the price that day.

Each pen was negotiated one at a time.

Today, feed yards sell their cattle, the entire show list, is sold at

one price over a period of about 15 minutes to 1 hour during the

week.

48

No one on the feed yard staff specializes in marketing cattle. The

manager carries a cell phone with him 24 hours a day and they sell

those cattle, the entire show list.

That’s today’s cash market in the high plains regions where

about 1⁄2 to 2⁄3 of the cattle are sold. The remainder of the fed cattle

are sold on what we call a ‘‘value-based marketing system’’ using

a formula or a grid. This represents about 1⁄3 of the federally-inspected fed beef slaughtered today. It varies a little bit, but it is

up in that 20 percent to 35 percent category.

These cattle are sold on a grid or a formula based on their carcass merits. There’s usually a carcass quality grid that is used but

the base price is not negotiated. The base price is subject to the average high of the week, the average cash price of the week, or the

slaughter plant average for the week.

Typically what happens is these cattle get committed to the

packer 30 days in advance, sometimes 6 months in advance, if it

happens to be a Nebraska corn-fed feed program. The grid’s agreed

upon; the delivery date might be agreed upon. The base price however is determined after the fact.

So what happens is the better cattle right now tend to move toward the grid; the higher quality cattle move toward the grid so

people can try to get paid a little more. The average, the national

average on the grid is about $12 per head premium over the other

cattle.

But what happens is, the base price is determined by the cattle

that are left. I contend this activity results in a downward bias on

the market because you have the base price established by the

poorer cattle. The good cattle are going into the grid based on the

base price of the cattle are left, and the $12 you gained on the grid,

you give up in the base price.

In my testimony, I have attached what is Attachment A, and I

would like for those of you that have a copy of that to take a good

look at it.

During the first quarter of 1999, most wholesale beef prices were

higher than they had been since 1996. We hit as high as $1.18 lb.

in the beef. As an industry, we marketed record amounts of beef.

We marketed more beef this spring than any time since 1996, and

I think it might even go back to 1993. We did it at a higher price

than any time since 1996. As a result, if you look at the chart for

the first quarter, the farm to wholesale spread for the first quarter

was 69 percent higher than last year and 46 percent higher than

the last 4-year average.

The realities of this graph I think show that concentration and

resulting market power has led to extraordinary processing profits

for major packers by, No. 1, a disciplined live cattle cost containment program, which is a result of marketing techniques that I described to you, and No. 2, a successful defense of the highest wholesale beef prices seen since 1996.

So our problem is not demand, and it is pretty hard to say that

the packers are doing anything illegal, because we sold beef higher

than we have ever sold it. I mean, you can’t beat them over the

head for selling our product for a higher price than it’s been sold

since 1996, and more volume than we have seen in the last 5 years.

49

But the cattle feeding sector of our industry doesn’t really market fed cattle anymore. They schedule them for slaughter and sell

the whole show list in 15 minutes. My friends in Texas and I go

round and round about this, Senator, on how we can fix that problem.

I think producers easily gave up $50 a head this past spring. The $50 per head went to the packers. It didn’t go anywhere else. It is

easy to see on the chart where it went. As you know, as has been

stated earlier, there are four major packers that control about 70

percent of the fed cattle slaughtered and about 60 percent of the

total cattle slaughtered.

Montana Stockgrowers has been very involved in negotiations of

mandatory price reporting, and this has been done because we

have been asking ourselves, ‘‘What can we do?’’ The only segment

of the industry today that is a nonmargin operator is the cattle producer. Everybody else works on the margin. As long as your cost

of sales is lower than your sales, and you can meet your expenses

or have a margin, you’re going to be profitable. It doesn’t make any

difference where you are on the scale. You can go up and down the

scale, but the producer always takes what’s left.

We contend that mandatory price reporting will put transparency

in the system, and we have been very supportive of that effort. We

have been involved in negotiations with the major packers, with

the National Cattlemen Beef Association in an effort to draft some

mandatory price reporting legislation that I know is being debated

in Congress, probably as we speak. It’s been heard before the

House and the Senate.

I would encourage you strongly to support that legislation. I

know you do; I am not suggesting you don’t. You have been one of

our best assets. But I think it’s got to happen in Congress, and that

is the first step.

We contend that with price transparency, then you can measure

what’s going on. It’s pretty hard to fix something you can’t measure. Right now, we don’t have any mandatory price reporting. We

don’t know what’s happening with these grid cattle. Many times

cattle get sold, and we don’t know what the price is.

There is a lawsuit going on right now with the Justice Department relating to selling cattle and not reporting the price (that’s

been part of the condition of sale). So this price transparency has

to come first. Once we get the price transparency, then we can see

what we can do as far as determining price.

We contend we have to have price transparency through mandatory price reporting before we can have price discovery. Once you

can see transparency in the system—and I think this is particularly true between the family farmer and the corporate entity. Most

large corporate entities are not in favor of price transparency because they can negotiate an alliance and negotiate a deal, and they

like to keep it to themselves. But the small producer doesn’t have

that opportunity, and the only way you can overcome that is with

price transparency. Then you can go to price discovery.

There is no question that market power exists today. On the

other hand, I can’t say that I have seen anything actually illegal

taking place. There’s been Justice Department and P/S study after

study that has not been able to identify anything illegal.

50

But the market power is there, and I contend that we have got

to do something about it when producers can’t move the market

price in a situation like we had this spring. We had higher wholesale beef prices anytime in the last 5 years. We moved more beef

than any period of time in the last 5 years. We have something

wrong. In the old days, we could move the market. Today, we can’t.

Thank you, Senator, for this opportunity to comment. Be happy

to answer any questions.

[The prepared statement of Mr. Peterson follows:]

PREPARED STATEMENT OF JIM PETERSON, EXECUTIVE VICE PRESIDENT, MONTANA STOCKGROWERS ASSOCIATION, HELENA, MT.

Mr. Chairman, since 1884, the Montana Stockgrowers Association has been representing its members to insure a fair, competitive and favorable economic climate

for the beef industry in Montana and in the U.S. On behalf of its 3,400 member

producers across the U.S., I appreciate this opportunity to comment on the impact

of concentration and mergers on the nation’s agricultural industry.

My name is Jim Peterson. I am a cow/calf producer, cattle feeder and farmer from

central Montana. For the last 9 years, I have also served as executive vice president

for the Montana Stockgrowers Association. Prior to that, I served 10 years on the

staff of the Texas Cattle Feeders Association, managed the agricultural lending department for the First National Bank of Amarillo, served as chief financial officer

of the Tejon Ranch Company in California which is traded on the American Stock

Exchange, and hold advanced college degrees in both agricultural management, finance, and banking. I share this with you only to represent that I have spent the

last twenty-five years in agriculture active in business that is greatly affected by

the impact of concentration on our business.

Back in the 1970’s, when I was working in the feedlot industry of Texas, feed

yards sold fed cattle one pen at a time to buyers who looked at the cattle. Sales

took place on a ‘‘pen by pen basis,’’ and cattle were sold based on a negotiated cash

price subject to the visual appraisal of the buyer and the seller. Today, feed yards

sell their entire show list (which includes many pens of cattle with differing quality)

at one average price over what might be 15 minutes to a 1-hour period for the week.

Or, they may sell cattle on a value-based ‘‘formula’’ or ‘‘grid’’ with the fed cattle to

be delivered at a future date without a negotiated base price. The base price is then

determined by an average cash price for the week in that marketing area or a ‘‘plant

average’’ for the week. The result is upwards to one-third of the USDA federallyinspected fed cattle processed today are being marketed on a value-based marketing

system without any kind of a negotiated base price. Therefore, the better cattle are

sold without a negotiated base price with the base price based on an average price

in an area or a plant made up by the poorer quality cattle that are left. I contend

this contributes to a downward bias in the market and allows market power

through concentration to impact the market even more than it normally might.

An example to make my point, is the first quarter of 1999 and the graph I have

attached to this testimony as Attachment ‘‘A’’. During the first quarter of 1999,

wholesale beef prices were higher than they have been since 1996. As an industry,

we marketed record amounts of beef. The beef tonnage marketed was higher than

it had been since anytime in 1996. As you can see from the graph, reported on the

DTN Market Reporting Services on July 16, the packer farm-to-wholesale spread for

the first quarter of 1999 was 69 percent greater than last year and 46 percent larger

than the 4 year average.

The realities of this graph support how concentration and market power led extraordinary processing profits of major packers by (1) disciplined live cattle cost containment which is a result of the marketing techniques that I described earlier, and

larger feedlot offerings, and (2) the successful defense of the highest wholesale beef

prices seen since 1993.

So our problem is not beef demand. It’s better than it has been since 1993. But

cattle producers weren’t able to improve the prices paid to feedlots and producers

for the raw commodity . . . fed beef. As a result, I estimate beef producers failed

to receive an extra $50 per head we deserved. It went to the packing industry.

As you know, four major packers now control 70 percent of all cattle slaughtered

in the U.S. and they control 80 percent of all fed cattle slaughtered. The resulting

market power allowed for packers’ successful cost containment of the raw commodity (fed beef) in the first quarter of this year in a period of time when more beef

was moving at a higher wholesale price than any time since 1993.

51

The question now becomes what we do. As you know, there is mandatory price

reporting legislation before Congress as we speak. The Montana Stockgrowers Association is very supportive of mandatory price reporting because we feel it will put

transparency into the marketing system, something we absolutely must have. Once

we get market transparency through price reporting we can than begin to deal with

the real issue which is price discovery.

People ask me all the time what good will price reporting do. I contend that you

can’t fix something you can’t measure. Price reporting will allow us to measure the

impact of selling cattle, the whole show list at one time, on an average price. It will

help us evaluate selling on a formula or grid without a negotiated base price. It will

help evaluate how price based on an average high of the week or plant average affects value-based marketing.

This legislation is controversial, but I urge you to support passage of this legislation as presented currently by NCBA (National Cattlemen’s Beef Association). We

have participated in the negotiations and strongly urge you to support the legislation.

Second, once price reporting and price transparency can be obtained, we can than

look at a better system of price discovery through some incentive program that will

encourage or possibly even require that cattle be sold on some kind of negotiated

price basis.

We are opposed to telling people how to sell cattle, but we feel it is important

and in these tough economic times with the mergers and concentrations that exist

in our industry today, that a mechanism of transparency be present to measure the

impact of marketing activities and allow us to develop a better system of price discovery for our product.

There is no question that market power exists, on the other hand I have not seen

any evidence indicating anything illegal is taking place. I must say, however, that

this market power has led to the producers being unable to move the market in

their favor at a time when beef demand and wholesale price is as high as it has

been in the last 5 years.

Thank you for this opportunity to comment.

52

Attachment A

53

Senator BURNS. OK. Thank you. Thank you, Jim.

Well, we are working on price reporting. I will tell you a conversation, I will inject this into the hearing right now, we had a

conversation with one of the packing entities, and they are very

much opposed to what we have proposed. I said, would you do business on the New York Stock Exchange if they didn’t post prices?

When we have a competitive free market system, if everybody kept

their prices under the lid, would we do any of those things?

He looked at me, and he said, I just thought you was a damn

farmer, and I said that’s all I am. But it just appears to me that

price discovery is very, very important, and so is transparency.

When I was in Canada, and we sat down and we met with the

people from China, we found out one thing, they have no transparency at all up there, and their problems are bigger than ours.

So we are going to have to solve some of theirs before we solve— so we can solve some of ours, to be right honest with you.

Chase Hibbard, Montana Sheep Wool Growers Association. You

know what it is to have a narrow market more than anybody here

probably.

STATEMENT OF CHASE T. HIBBARD, PRESIDENT,

MONTANA WOOL GROWERS ASSOCIATION

Mr. HIBBARD. Thank you, Senator Burns, members of the Committee, panelists, attendees. I appreciate very much the opportunity to participate in this discussion this morning. So far, it is

been very enlightening and interesting. I look forward to a little

discussion afterwards as we all conclude our prepared statements.

I am a sheep and cattle rancher. My ranch is located about 40

miles southeast of here as the crows flies. I am also a State legislator, having just completed my fourth term.

I am also a past board member of the Montana Power Company

where I watched that company emerge from a regulated monopoly

to a mostly unregulated business that is subject to market forces

like all other businesses, so I got a little different perspective of

things from that standpoint as well.

I am president of the Montana Wool Growers Association, representing about 1,800 to 2,000 growers in Montana, and I am also

on the board of the American Sheep Industry Association.

Survival in agriculture is a topic that is hot right now, yesterday,

today, this afternoon. I think that there’s a lot of problems that all

kind of come together. This is one of them. Yesterday we were talking about trade issues. Those are big as well.

These are crucial. You know, our obligation, the people that we

employ and thousands of Montanans are vitally interested in the

outcome of several of these issues. It’s a tough, tough business.

I have been involved now very closely for the last 23 years. During that time, I have seen wool at 50 cents a pound; I’ve seen wool

at $2 a pound. I have seen 50 cent lambs; I have seen $1 lambs,

and calves from about 45 cents to $1.01.

Market fluctuations are a fact of life in this business; they always have been and always will be. Combined with the other risks

that we face—weather, disease, predators, alfalfa weevil right now

as we speak, a labor situation that is increasingly difficult—makes

this a very difficult business.

54

With many forces contributing to that situation, it’s really difficult to focus on any single area as the most significant factor, and

I find it even difficult to assign relative importance to the numerous forces at work.

However, in my opinion, probably one of the most significant

ones right now facing us is this is free trade world economy, which

is not being kind to the commodities. If we were in high tech, I

think we would love it. Commodities poses some real challenges

and makes things very difficult to us.

Of equal importance right now facing us is the relative strength

of our dollar. That makes imports cheap and exports expensive.

Under this free trade world economy, production will flow to whomever can produce the most economically in the world and distribute

their product, no matter where they are located.

In Montana, and for that matter, in the United States, production costs are high on a worldwide comparative basis. We heard a

lot of testimony to that extent yesterday at the WTO hearing in

Bozeman.

With the strength of the U.S. dollar, it puts it even—makes it

even more difficult and even a more noncompetitive situation. We

painfully experienced this in the sheep business over the past couple of years as Australian and New Zealand lambs undercut our

market price by over 40 percent. Fortunately, we just got a 201

trade action which is going into place which places tariffs and

quotas on imports from New Zealand and Australia over a 3-year

period, which will help us immensely.

In Montana, our sheep numbers are down to about 300,000 head

compared to nearly 550,000 5 years ago. Nationwide numbers are

down about 35 percent.

In today’s subject matter, we are focusing on mergers in the agricultural industry and how they ultimately impact the consumer.

That’s a very good question. I view this topic with mixed feelings,

and some of these feelings I think have already been expressed by

previous presenters.

Mergers and acquisitions are a reality in today’s economy. Getting bigger and more efficient, unfortunately, may be what it may

take to survive.

I can remember 25 years ago, I think that one could make a good

living with 200 cows, 250 cows. I think that number moved up to

somewhere around 500 head. Today, I don’t have any idea what it

takes to make a decent living. We run almost 2,000, and I can tell

you, it’s a struggle with that many. Getting bigger is a strong economic force, and unfortunately, it could be a reality in today’s

world.

Concentration has been an issue that has received a lot of focus

over the last several years. There’s little doubt that it has occurred.

As Senator Burns said, in our industry, we are down to just a

handful of processors. One, basically one processor for this part of

the country. Our lambs used to go to Erneston, OR. Now they go

all the way down to Dixon, CA to be processed. It’s the only game

in town.

There’s little doubt that concentration has occurred big time. Unfortunately, the problem is that we know that concentration has occurred, and it seems as though any effort to prove wrongdoing

55

pretty much focuses on collusion, and that has never been proven,

to my knowledge. I am not sure that it will be. It’s a very difficult

situation.

We have these huge market forces that are forcing these consolidations, and I don’t know if it is getting larger and larger, but politically, we have a great difficulty proving they are doing anything

wrong. But we all know that our choices are limited. There’s got

to be a certain critical mass out there to have efficient market competition, and when numbers drop below that critical mass, competition just does not occur. That is a fact of life. But we cannot prove

wrongdoing. This is a difficult problem.

Also, in the sheep business, we look at this—we’re not sure how

to view it. As I say, our numbers are down so significantly that it

would be very nice to have a number of markets to go to, but with

a rapidly shrinking industry, I guess at times, we are fortunate

that we have anybody that will take them. That’s too bad, again

an economic reality.

How these mergers ultimately affect the consumer, from my

view, is also a difficult call. The free market world economy that

is making our business more difficult should, in theory, be delivering products to the consumer at reduced prices. If it is not, then

there are some extraordinary profits being made somewhere in the

middle.

The possibility arises that fewer competing firms processing, producing, marketing and delivering products could lead to less efficient competition, we know that’s the fact, and higher ultimate

price to the consumer. We don’t know that.

I don’t really know if these so-called efficiencies achieved through

merger pass on to the consumer. I doubt that the primary wholesale producer, those of us in this room, see better prices; I doubt

that seriously.

In the sheep industry, it didn’t appear that when foreign product

was coming in and cutting our prices by 40 percent, that the retail

price ever really came down at the same time.

I really do view this subject today with mixed feelings. Mergers

are a fact of life and a necessity to survive in today’s economic environment. That is not necessarily a good thing for those of us in

primary production, particularly with family farms.

On the other hand, we must do everything we can to survive,

and the world economy will dictate that production flows to the

most efficient. In that case, merging or getting bigger may be a

smart choice or perhaps even the only choice. I do not know if the

ultimate benefit does, in fact, flow to the consumer, as I’ve said.

These economic forces that we are facing are very, very strong.

They will continue upon their present course.

The role of government is the thing that I think we need to determine. There are certain things the government can do. There

are other things that government can’t do. I think monitoring; I

think understanding the situation; I think documenting; I think

some of the ideas that have come out here earlier in testimony. Jim

Peterson gave, I thought, very good testimony about transparency,

about price reporting, about problems with the grid. I think that

these are areas that government could get involved in.

56

Getting bigger is a fact with economic forces behind it that I am

not sure politics can be real effective dealing with. They’re very

strong worldwide economic forces. We have to determine where politics can be effective and what our farm policy must be in this

country. So I think focusing on some of the things that we can do,

and realizing that there are some things that we can’t do is an important consideration.

[The prepared statement of Mr. Hibbard follows:]

PREPARED STATEMENT OF CHASE T. HIBBARD, PRESIDENT, MONTANA WOOL GROWERS

ASSOCIATION

Mr. Chairman, members of the Committee, for the record I am Chase Hibbard.

I am a 4th generation cattle and sheep rancher from Helena, Montana. Our ranch

is located 40 miles, as the crow flies, Southwest of Great Falls.

I am a State legislator having served four terms, I currently serve as the President of the Montana Wool Growers Association which represents about 2,000 Montana sheep producers. I also serve on the Board of Directors of the American Sheep

Industry Association.

Survival in animal agriculture is vital to the economic well being of my family,

the dozen or so people we employ, and thousands of other Montanans. I have been

the President of Sieben Live Stock Co., our family corporation for the past 23 years.

During that time span we have seen $2.00 wool and $.50 wool, $.50 lambs and $1.00

lambs, $.45 calves and $1.01 calves. Market fluctuations are a fact of life in this

business, always have been and probably always will be. Combined with the other

risks of weather, disease, predators, insects, and a labor situation which is becoming

increasingly difficult, this is a tough business!

There are so many forces contributing to the precarious economic situation we are

in that it is difficult to focus upon any single area or topic as the most significant

factor. It is even difficult to assign relative importance to the numerous forces at

work.

In my opinion, probably one of the more significant problems currently facing us

stems from the ‘‘free-trade-world-economy.’’ Of equal importance is the strength of

the U.S. dollar which makes imports cheap and exports expensive.

Under a ‘‘free-trade-world-economy’’ production flows to whomever can produce

the most economically and distribute their product, no matter where they are located in the world. In Montana, and for that matter most of the United States, production costs are high on a worldwide comparative basis. Currently the strength of

the U.S. dollar is making imports cheap and exports expensive. This puts us in a

very noncompetitive situation. We have painfully experienced this in the sheep business over the past couple of years as Australian and New Zealand lambs have undercut our market price by over 40 percent.

I would like to focus on the sheep business which is a shadow of its former self.

Here in Montana our sheep numbers are down to under 300,000 head of breeding

ewes. Approximately 5 years ago there were nearly 550,000. Sheep numbers are

down 25–35 percent nationwide in the same time period. As previously discussed

there are a number of reasons why and it is difficult to point one’s finger at any

single specific cause.

Today’s subject matter is Mergers in the Agricultural Industry and How They Ultimately Impact the Consumer. I view this topic with mixed feelings. Mergers and

acquisitions are a reality in today’s economy. Getting bigger and more efficient may

be what it takes to survive.

From an agricultural perspective ‘‘concentration’’ in the meatpacking industry has

been a subject that has received much attention. There is little doubt that concentration has occurred and theory holds that you need a certain critical mass of

competitive concerns in order to have an efficient marketplace. The number of processors has most likely dropped below that critical mass requirement. The political

problem that is presented is proving that collusion exists. It seems as though there

have been many attempts to address collusion, but to my knowledge, it has yet to

be proven. It may never be proven, but the lack of competition definitely leads to

a less efficient marketplace, meaning less choices for us who market our products,

probably lower prices, and less competition may well result in fewer choices and

higher prices to consumers as well.

How mergers in the agricultural industry ultimately impact consumers is a difficult call. On one hand, this same ‘‘free-market-world-economy’’ that is making our

business more difficult should, in theory, be delivering products to the consumer at

57

reduced prices. If it is not, then there are some extra-ordinary profits being made

somewhere in the middle. The possibility arises that fewer competing firms producing, processing, marketing, and delivering products could lead to less-efficient

competition and higher ultimate prices to the consumer.

I really do not know if these so-called efficiencies achieved through merger pass

on to the consumer. I doubt the primary wholesale producer sees better prices, probably in fact receives poorer prices. In the sheep industry, it did not appear that with

foreign product undercutting our market that prices ever came down much at the

retail, consumer level.

I really do view the subject of today’s hearing with mixed feelings. Mergers are

a fact of life and a necessity to survive in today’s economic environment. That is

not necessarily a good thing for those of us in primary production particularly with

family farms. On the other hand we must do everything we can to survive and the

world economy will dictate that production flows to the most efficient. In that case,

merging or getting bigger may be a smart choice, or perhaps even the only choice.

I do not know if the ultimate benefit does in fact flow to the consumer.

The economic forces at hand are strong ones. They will continue upon their

present course. Monitoring and vigilance by government may be necessary in order

to determine the ultimate impact upon consumers.

Thank you for your time and consideration.

Senator BURNS. Thank you very much, Chase. We appreciate

your testimony.

We understand we have a representative here from Representative Hill’s office and also from Senator Baucus’ office sitting around

here—there you go, way back there. You can be noticed if you don’t

mind. There you go.

If you have anything you want, any testimony or anything you

want to offer at this hearing, why, we would sure make it part of

the record if you would want to do that.

I have a couple of questions, and I have a couple of questions

with regard to Mr. Peterson’s testimony and also to Mr. Hibbard,

and all of you.

If we could tweak a law that would probably do more to help you,

what would it be? I will ask all of you to respond to that. That is

a producer group. I realize that Mr. Nelson is in a different kind

of a situation, but if you could change one law or pass any one

piece of legislation, and you had the power to do so and get it on

the President’s desk, what would it be? Then we will work from

that.

I will just start—well, we will just start with you, Ken, Ken

Maki, what, as far as concentration and this kind of thing, if you

had the power to pass one law, basically what would it say?

Mr. MAKI. Well, I think there would be different things for different commodities. But I can tell you one thing, I understand cattle a little better than most anything else.

Formula pricing seems to me to be a real, real bubble. I mean,

I do not want to take my calves someplace and sell them and not

get my money for it until 6 months or 3 months or 9 months in

the future, depending on what the price is going to be. That trickles back to us producers and feeders and everybody else.

Formula pricing, looks to me like it is the most contrary thing

to a freely competitive market that I have ever seen. How we have

gotten that instituted is kind of beyond me.

We heard yesterday about prying open foreign markets and all

that sort of thing. I think we have to pry open our own market.

You know, it looks to me like if those packers had to bid on supply,

it would be a lot better situation than if they had a piece of paper

that said this, so and so is going to sell this through us, and the

58

price is going to be determined 1 week or 2 weeks prior to the sale,

or some combination. I don’t even understand all that formula, but

it just sounds to me like it is really contrary to a competitive process, which is what we have built this country on.

Senator BURNS. Jim Peterson. Nothing like putting you right in

the stirrups, is there? You can thank me later.

Mr. PETERSON. You know, with all due respect, Ken, I think formula pricing is, the grid and the formula, I mean if you’re a rancher out there, and you think you got the best feeder cattle in the

country, are you going to get paid for them by selling them on the

average or feeding them in a feed yard where they sell the whole

show list at one price, and they mix the Mexican corrientes in with

the wonderful black cattle up north, and you all get the same

price? I mean, it is easy for the manager to tell you, ah, you know,

you got the top of the market.

But, I don’t see how you get paid for value if you don’t have some

kind of value-based marketing system. I mean, why are you going

to go pay $4,000 for a bull and work on your seed stock production

to make a more quality and consistent product and then sell it on

the average? Particularly, when you don’t even negotiate on a penby-pen basis.

Now, I don’t disagree that—I mean I said that the formula right

now, in my opinion, has a downward bias on the market, but that

doesn’t mean the formula is bad. What I am saying is there’s no

negotiated base price associated with that formula, and the base

price might be negotiated on the wrong things.

I mean, why don’t we tie our base price to the retail price or the

118 wholesale price, and then we’ll corner the market, and instead

of us taking $61 for our cattle this spring, we get 70, based on the

formula, and if you have quality cattle, you get the 118 wholesale

beef prices that the packer helped establish. Then you can tie it to

the formula, and if you have higher quality cattle, you can also get

that $12 a head average better than the national average.

So, my concern is that we have lost the negotiated pricing system. We have lost the transparency in the system. As Chase

Hibbard said, unless you can operate on a large enough volume to

negotiate, you can’t compete.

A guy like—I’ll use an example that most of you may have heard

of, Paul Engler, Cactus Feeders in Texas. I know Paul personally.

He sells every one of his cattle on formula, sells them no other way.

He’s not particularly happy with the formula, but it does two

things for him. One, he’s big enough he can negotiate a decent base

price; two, he doesn’t have to worry about selling cattle every day.

He knows he can get the cattle slaughtered. The guy feeds, 400,000

or 500,000 cattle a year. So, getting those cattle moved at the right

time is important to him, so he has got this agreement with IBP,

they’ll take the cattle whenever they are ready on the formula.

Now, he’s not—he will tell you personally he’s not real happy

with the way it works, because the base pricing system sometimes

works against you.

So, Ken, I don’t know that the formula is necessarily bad. I personally think that in the industry, a little like Chase Hibbard, I

think the merger thing is going to happen because of economics of

scale. I think the grid and formula is going to happen because the

59

industry is moving that way so fast right now, it’s scary. A third

of the kill is in it right now. I see more and more of that happening. The problem is we don’t—we can’t—we don’t have transparency, No. 1, to find out what’s really happening, and because we

can’t find out what’s happening, we’re all running around speculating and pointing fingers as to who is the blame. As I said earlier, it’s really hard to fix something you can’t measure.

Senator BURNS. I always use the old, the old story about volume

and this type thing about two brothers from Montana going to Mississippi buying watermelons. They haul them back to Montana,

buy them for 74 cents, and then haul them up here and sell them

for 73 cents. One looked at it and said we’re not making any

money. He says, I know it, we got to get a bigger truck. Sometimes

that doesn’t work.

Dave McClure, you’re next.

Mr. MCCLURE. Senator, you posed a difficult question.

I think we are all experiencing the pain of change, and we are

going to continue to have change in agricultural and a lot of other

industries too.

I guess if I had one bill that I thought was more important than

others, it would be that Congress and the agencies are forced to a

cost benefit analysis on everything they do.

There’s good regulations that are needed, but as I mentioned earlier, these regulations are forcing, in my opinion, some of these consolidations, and they’re forcing costs on all the producers that I

think in the past have somewhat been ignored.

We continually try to get a higher return, a higher price on our

products to cover all these costs, and we should continue to fight

for that, but that is probably a pretty narrow band where we can

gain.

But the costs inherent because of regulations forced on us are

growing; they’re ominous, and they also make us less competitive

in this global economy, and we are forced to endure those costs

when a lot of our competitors are not, and I think that is a very

real threat. If that continues, our consumers in this country may

be more reliant on imports than they are now, and that’s another

scary thought.

But we have got to be competitive in this world market, and as

long as these costs are thrust on us, sometimes there isn’t a benefit

there to match the cost, and that is of great concern.

I think we see, for instance, EPA right now may be going beyond

the intent of Congress in enforcement of the Food Quality Protection Act. It appears we’re going to be losing some products that

maybe our competitors are going to continue to have in the world

market.

Like I say, in that area, and hopefully that way look forward to

what’s going to happen in the future and not try to solve problems

that have already happened and are gone.

Senator BURNS. Chase.

Mr. HIBBARD. Thank you, Senator. I think I can make this brief.

I think, first of all, I doubt the ability to stop or slow down much

the trend in mergers and consolidations. I think that the worldwide

economic forces are such that that’s going to happen.

60

Having said that, I think better price reporting and market

transparency is No. 1.

No. 2, country of origin labeling.

No. 3, I think that maybe it is time to revisit our farm policy and

take a look at the protectionism issue that is pretty much out the

door.

We are on the free world trade bandwagon, and we are seeing

the fallout of that here in Montana and elsewhere around the country. Those of us who raise commodities are simply not competitive.

Perhaps that political barriers need to be looked at again, particularly where our trading partners aren’t playing by the same rules

that we are.

For instance, European unions restricting imports, which makes

our country a dumping ground. The European union subsidizing

their sheep producers to the extent of 20-some dollars a ewe. We

have a different situation here totally. So, I guess those would be

my priorities.

The last one is a difficult one. You know, the family farm was

big in this country. Preserving the family farm was big in this

country for years and years and years, and we have evolved away

from that now. We’re out there competing, but we are not competing on a level playing field.

Senator BURNS. OK.

Mr. Kissinger.

Mr. KISSINGER. Thanks, Senator. I just want to take a little different tack.

As far as changing any laws, I am going to leave that up to recommendations from the experts here.

But one thing that is obvious to me is enforcement of the existing

laws. We see that time and time again. It came out yesterday at

the World Trade Organization hearings that cattle coming down

from Canada, only 1 percent are in inspected. One percent. They

get the USDA grade on them, and, no, they look good, good American beef, but they are from Canada.

You know, Ron and Alfred and Hank, they were up there, remember these—how many hog trucks have we had come through,

and we were actually at the rally. We had a number of reefers

come through, back in an area and out of there in 5 minutes, and

yet they were supposedly inspected.

You know, again they mentioned yesterday, well, that was due

to a lack of resources; we just didn’t have manpower and resources.

That may be true; I am not questioning that but, you know, possibly as you in your position in the Appropriations Committee,

maybe some of these things can be targeted to try to improve, try

to get stronger enforcement.

On the antitrust, that is another issue. Again, they don’t have resources and so on. I think agricultural may be not a high priority

with people who deal with the antitrust issues. But maybe through,

again, appropriations or some of the influence you have, that can

begin to be targeted so we have a fair playing field.

So with that, that is all I have.

Senator BURNS. Steve, do you have a thought?

Mr. BULLOCK. Maybe one thought.

Senator BURNS. Lawyers always do.

61

Mr. BULLOCK. That’s a bad thing being at the end at the end and

hearing the thoughts of everyone else.

Senator BURNS. That is right.

Mr. BULLOCK. A large chunk of ensuring a competitive market

is giving people information to act, by which market transparency

is critical.

Along with that, whereas I focus a lot on antitrust, a chunk of

it should be taking a look at what laws we already have.

Section 202 of the Packers and Stockyard Act is a proactive law.

It’s supposed to address trade and competition of these market

power entities at the very start. You’re not supposed to wait until

the merger happens; you’re supposed to say, what can I do

proactively to ensure healthy competition.

Maybe revisiting the Packers and Stockyard Act and also seeing

how it is implemented might be the first step.

Senator BURNS. Of all the sections I will tell you that we looked

at, and with some suggested changes, and we are still looking at

that trying to find language, you know how difficult that becomes,

is Section 202, and that is where it boils down to.

Anybody else have any other comments? I don’t have any other

questions, but we want to hear from some of our people.

Yes?

Mr. PETERSON. Can I make one more comment?

Senator BURNS. Yeah, you can make more statements. You can

talk all day if you want to.

Mr. PETERSON. I think the Committee vetoed that.

Three things I didn’t get to, to answer your question, three

things. I think price reporting ought to be No. 1 on your list. We

have got to have the transparency.

I think the one thing you can do that might lead us to more labeling of product is limiting the USDA grade and U.S. product. I

think that would be No. 2.

I know there’s tremendous opposition to country of origin labeling in Congress, and I’ve had this debate with myself, you know,

do we spend our money labeling their product, or do we spend our

money labeling our product?

We can produce the highest quality, safest, most abundant supply of food of any country in the world. Why don’t we take advantage of that and label our product, develop some kind of U.S. label

and reserve it for U.S. producers so we can get paid for what we

do?

Third, this thing that Chase is talking about, trading, I think we

got to back up and take a fresh look at how we trade. The only

thing common in our trade right now with other countries is the

commodity itself. Everything else is different. Currencies, environment, our societies, economies, regulations, everything is different.

The only thing that is common in what we trade is the commodity,

and it is lowering the standard of living of our producers.

Senator BURNS. OK.

Ken.

Mr. MAKI. You know, I am sorry, Senator, I thought you wanted

something new and different.

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We have been wrangling about price reporting and the country

of origin labeling for a long time. I’d have to agree with these gentlemen here.

The only thing that I would say about price reporting is, you can

have price reporting, and you can have price reporting, and whatever it is, it’s got to be workable and timely. The important thing

is that we get that information to our producers and to the public

in a quick and timely manner.

I think as you look at it from the consumer’s standpoint, perhaps

the consumer would say labeling is the most important. I think

that our consumers, just as everybody said here, Jim, Chase, we

have a relatively safe product probably 991⁄2 percent of the time

produced in this country. Our processors and our standards are

good.

I think that our consumers out there, for the most part, would

say, hey, if it’s American made, and it was American produced,

they’ll buy it. It might be a little bit higher, but I think that they

would go for it. So I believe the labeling issue is pretty darned important as far as the consumer is concerned.

As far as we producers, the price reporting is absolutely essential.

I’m sorry, I thought you wanted me to come up with something

new and different.

Senator BURNS. You did. You always do.

Before we can hear from our folks down here, and we sure want

to, all of us do, we will close this hearing as of right now.

Just a reminder, that any questions that come to the witnesses,

answer those to the individual Senator, and the Committee.

We will also leave the record open for 10 days. So the formal part

of these hearings are now closed.

[Whereupon, at 11:30 a.m., the hearing was adjourned.]

(63)

A P P E N D I X

PREPARED STATEMENT OF JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST

DIVISION, DEPARTMENT OF JUSTICE

INTRODUCTION

The Department of Justice is pleased to be invited to submit for the Committee’s

record this statement regarding the role of the federal antitrust laws and the Department’s Antitrust Division with regard to protecting competition in the agricultural sector of our economy.

There have been a number of occasions recently in which agricultural producers

and others have expressed concern about how the agricultural marketplace is functioning, about the levels of concentration in agriculture generally, and about possible antitcompetitive conduct in certain sectors. The Department takes these concerns very seriously.

By any measure, the Department has spent a significant amount of time, energy,

and resources on agriculture issues in the recent past, and has brought a number

of significant enforcement actions.

This statement will briefly describe the situations that the antitrust laws address,

and then discuss a number of the enforcement actions the Department has taken.

The antitrust laws prohibit conspiracies to deny market access or otherwise suppress competition. They also prohibit the use of predatory and/or exclusionary conduct to acquire or hold on to a monopoly in a market. And they prohibit mergers

that are likely to substantially lessen competition in a market.

The agriculture marketplace is undergoing significant change. There are advances

in technology, productivity, and in many sectors, a trend toward consolidation. In

the midst of these changes, the Department’s Antitrust Division has a narrow but

important role. The antitrust laws are based on the notion that competitive market

forces should play the primary role in determining the structure of our economy.

The Department’s job is to stop the specific kinds of private-sector conduct mentioned a minute ago from interfering with those market forces.

The primary beneficiary of antitrust enforcement is the consumer, who receives

better quality, increased innovation, and lower prices when competition is not interfered with. But antitrust enforcement also benefits the producers and marketers

who want to compete in supplying products and services to consumers by enabling

them to do so free from anticompetitive interference. And the overall U.S. economy

also benefits, as the products and services desired by consumers are made available

in greater quantities through a better allocation of resources, and at competitive

market prices.

We are law enforcers, not regulators. We do not have the power to restructure

any industry, any market, or any company, or stop any practice, except to prevent

or cure specific violations of the antitrust laws that we can prove in court. Our authority rests ultimately on our ability to bring enforcement actions. And when we

bring an action, the court decides whether the antitrust laws are being violated in

the particular instance, and whether the remedy we are seeking fits the violation.

The antitrust laws apply in the same way in every industry, with a very few exceptions where their application is limited by specific statute. A number of industries are also regulated by government agencies under statutes that go beyond the

antitrust laws to establish additional, industry-specific regulatory requirements and

standards. For example, the meat-packing industry is regulated by USDA’s Grain

Inspection, Packers and Stockyards Ation Administration.

While the antitrust laws play an important role in helping keep markets competitive, they will never address all of the complex issues facing American agriculture

in this time of change. That is why the government continues to focus on a broad

range of agriculture policy issues.

64

WHAT THE ANTITRUST LAWS PROHIBIT

As mentioned above, there are three different types of antitrust violations. First,

it is a violation of section 1 of the Sherman Act for separate firms to agree among

themselves not to compete with each other, but instead to join forces against their

consumers or their suppliers. Second, it is a violation of section 2 of the Sherman

Act for a firm to monopolize or attempt to monopolize a market. Third, it is a violation of section 7 of the Clayton Act for a firm to merge with another firm or acquire

its assets if to do so would be likely to substantially lessen competition in any market. Following is a description of each of these types of violations and of how we

approach each of them.

1. Collusion

The first type of antitrust violation, when firms that are holding themselves out

to the public as competing against each other instead agree with each other to unreasonably restrain competition among themselves, is often referred to as collusion.

Collusion is a willful subversion of the normal operation of free markets, and can

result in serious harm to consumers, suppliers, and the economy. It virtually always

results directly in inflated prices to consumers, or depressed prices to suppliers, and

in denial of choices in the marketplace; indeed, that is its purpose. The most common types of collusion are agreements to fix prices, agreements to allocate markets,

and agreements to boycott particular customers, suppliers, or competitors.

Price fixing can include agreeing on the specific price, or rigging a specific bid,

but it can also include agreeing to increase or depress price levels, or agreeing to

follow a formula that has the intended effect of raising or depressing prices or price

levels. Allocation of markets can include agreeing to divide up geographic areas to

avoid competition, or agreeing to divide up customers or suppliers within an area,

or agreeing to divide up a sequence of bids. Group boycotts can include any agreement among competitors that they will deal with their customers or their suppliers

only on particular terms, in order to suppress competition.

This summary of course oversimplifies the full range of Section 1 violations. There

are other kinds of such violations where the anticompetitive intent and effect may

be less clear-cut. But all Section 1 violations share the same basic characteristic,

that firms who are supposed to be independent actors in the marketplace are instead agreeing to join forces to restrain competition.

It is important to remember that with any of these forms of collusion, proving a

case requires evidence of an agreement between the firms in question. It is not

enough to show merely that two agribusiness firms, for example, bid the same price

for a commodity, or that one tends to buy in one area and another tends to buy

in another area. What would concern us is if there are additional facts, such as patterns of bids over time, or patterns of attendance at various sales or auctions, that

don’t make competitive sense—that can’t be explained as part of normal competitive

behavior. Needless to say, if we obtained reliable evidence about two firms discussing with each other what price they intend to bid or accept, or where they plan

to focus their buying or selling, we would definitely be concerned and look into it.

Among our collusion cases in the agriculture area are three that we have brought

in the recent past. The first one I’ll mention is our criminal prosecution against Archer Daniels Midland and others, beginning in 1996, 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, now the third largest. Other participating corporations have also

been prosecuted and assessed multi-million-dollar fines. In addition, three ADM executives were convicted for their personal roles in the cartel; earlier this month, two

of them were sentenced to serve 2 years in prison and fined $350,000 a piece for

their involvement, and the other executive had 20 months added to a prison sentence he was already serving for another offense.

The second collusion case is our prosecution of the Swiss pharmaceutical giant,

F. Hoffmann-La Roche Ltd., and a German firm, BASF Aktiengesellschaft, for their

roles in a worldwide conspiracy, over the course of 9 years, to raise and fix prices

and allocate market shares for certain vitamins sold in the United States and elsewhere. The conspiracy affected $5 billion in U.S. commerce, involving vitamins used

not only as nutritional supplements and food additives, but also as additives in animal feed. On May 20 of this year, the two firms agreed to plead guilty, with Hoffman-La Roche to pay a fine of $500 million and BASF to pay a fine of $225 million.

These are the largest and second largest antitrust fines in history—in fact, the $500

million fine is the largest criminal fine of any kind in history. A former HoffmannVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00068 Fmt 6601 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
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La Roche executive also agreed to submit to U.S. jurisdiction, to plead guilty to participating in the conspiracy and lying to Justice Department investigators about it,

and to serve a 4-month prison term and pay a $100,000 fine. These prosecutions

are part of an ongoing investigation of the worldwide vitamin industry in which

there have been nine prosecutions to date.

The third collusion case is a much smaller case in monetary terms than the first

two; but it is an important one for agricultural producers nonetheless. In December

1997, as the result of an investigation conducted with valuable assistance from

USDA, who was also conducting its own investigation under the Packers and Stockyards Act into some of the same conduct, the Department criminally prosecuted two

cattle buyers in Nebraska for bid-rigging in connection with the procurement of cattle for a meat packer. Both individuals pled guilty and were fined and ordered to

make restitution to the victims.

There is an important exception to the prohibition against agreements to restrain

competition, found in the Capper-Volstead Act. This law allows producers of agricultural commodities to form processing and marketing cooperatives—in effect to engage in joint selling at a price agreed to by the producer members of the co-op—

subject to certain limitations enforced in the first instance by USDA.

2. Monopolization or Attempt to Monopolize

The second type of antitrust violation, monopolization or attempt to monopolize,

is a violation of Section 2 of the Sherman Act. For various reasons, this type of antitrust violation occurs less commonly than collusion, but it is also a serious willful

subversion of the free marketplace. An example of monopolization or attempt to monopolize would be a dominant company in the market attempting to drive its competitors out of business by interfering with their ability to engage in the business.

This might be attempted by the clearly dominant firm refusing to buy from producers who sell to any of its competitors, or refusing to ship with transportation

companies who ship for any of its competitors, or refusing to sell to distributors or

retailers who handle the products of any of its competitors—if the dominant company in question had enough market power that these refusals would have anticompetitive effects. Monopolization does not require proof of an agreement among

two or more firms; one firm can illegally monopolize by itself.

But it is important to understand that monopolization cannot be proved just by

showing that a firm has engaged in restrictive conduct. The law also requires proof

that the firm has a monopoly—and that requires an extremely high market share

all to itself—and that it engaged in the restrictive conduct in order to acquire or

maintain the monopoly. Or, in the case of attempted monopolization, it must be

proved that the firm has a ‘‘dangerous probability’’ of acquiring a monopoly as a result of the restrictive conduct. And to prove ‘‘dangerous probability,’’ the courts generally require, for starters, that the firm involved in the restrictive conduct already

have a quite large market share—a 50-percent share for a single firm might not be

enough. And even a 60-to-70 percent market share might not be enough, if other

facts indicate that the restrictive conduct involved is unlikely to succeed in creating

a monopoly.

Just as important, Section 2 monopolization cannot be proved just by showing

that the market is highly concentrated. Under our antitrust laws, a firm may lawfully have a monopoly—even 100 percent of the market—as long as the firm has

not acquired or maintained that monopoly through the kind of restrictive conduct

I described a minute ago, but rather, in the words of Judge Learned Hand, ‘‘by virtue of superior skill, foresight and industry.’’

So both elements—very high single-firm market share, plus conduct to exclude or

harm competition—must be proved. One or the other by itself is not enough.

3. Mergers

The third type of antitrust violation, a merger or acquisition that is likely to substantially lessen competition in a particular product market and geographic market,

has a different legal standard from the other two in that it does not require proof

that anticompetitive conduct has already occurred. Here, the principal focus is not

on the conduct of the merging parties, but on whether the merger would change the

market structure to such a degree that competition would likely be substantially

lessened. The remedy we seek for a merger that violates the Clayton Act is to sue

to stop the merger, or to insist that it be modified to remove the cause for antitrust

concern.

Merger reviews require a careful analysis of the markets involved. The Antitrust

Division analyzes mergers pursuant to Horizontal Merger Guidelines developed

jointly by the Department of Justice and the Federal Trade Commission. The analysis is aimed at determining whether the merger is likely to create or increase marVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00069 Fmt 6601 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
66

ket power, or to facilitate the exercise of market power, in any market. Market

power is the ability of a firm to raise the price charged to customers—or to lower

the price paid to suppliers—a small but significant amount without that move being

defeated by counteractive competitive responses by other competing firms moving in

to take away those customers or suppliers.

Before we get to that analytical step, however, we must first go through the exercise of determining the scope of the product markets and geographic markets that

would be affected by the merger. This is an essential first step in our analysis— until we know the size and shape of the market, we cannot know how big any firm’s market share is, for example. The scope of a market is generally defined by the

smallest geographic area in which a hypothetical firm, assuming it faced no competition for its product in that area, could make a small but significant change in

price stick. Usually, we are looking at that firm as a seller, and determining the

smallest area within which the firm’s customers would be unable to thwart the

firm’s inflated pricing by going outside that area for their buying needs. But, as our

Merger Guidelines expressly note, we also look at the firm as a buyer, and determine the smallest area in which sellers to the firm would be unable to thwart the

firm’s depressed prices by selling to others outside that area—that is, because it

would be economically impractical to travel or ship outside that area.

A decision as to the dimensions of this area can sometimes be reached by examining recent buying and selling patterns in the marketplace. But the decision can

also depend on a variety of other, more subtle factors, because the ultimate question

is not how far the buyers and sellers have traveled or shipped in the past, but how

far they could or would travel or ship in response to anticompetitive price changes.

Once we have defined the market, we turn to the question of market concentration and how it would be affected by the merger. There is no automatic threshold

of market concentration that will always result in a determination that a merger

would violate section 7 of the Clayton Act. Other factors also play an important role

in analyzing the impact of the merger—such as other structural features of the market that make anticompetitive effects more likely or less likely; and the ease or difficulty of entry into the marketplace by new competitors who could neutralize any

anticompetitive potential. We would also consider the impact of any demonstrable

efficiency gains from the merger that would demonstrably result in competitive benefits.

In the recent past, the Department has reviewed a number of proposed mergers

and acquisitions in the agricultural marketplace.

For example, in the biogenetics area, last year we investigated Monsanto’s 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 to satisfy our concerns, Monsanto spun off its claims to agrobacteriummediated transformation technology, a recently developed technology used to introduce new traits into corn seed, such as insect resistance, to the University of California at Berkeley. Monsanto also entered into binding commitments to license its

Holden’s corn germplasm to over 150 seed companies that currently buy it from

Monsarlto, so that they can use it to create their own corn hybrids.

After investigating the proposed Cargill/Continental Grain merger for several

months, and earlier this month we challenged the merger as originally proposed and

filed a complaint and proposed consent decree in court. To resolve our competitive

concerns, Cargill and Continental will divest a number of grain facilities throughout

the Midwest and in the West, as well as in the Texas Gulf. While this consent decree, if approved by the court, will resolve the competitive problems, it is still pending before the court under a Tunney Act proceeding in which the court makes the

final determination that the decree is in the public interest. Because the case is still

pending, there are limits to what I can say now, but a fair bit about the case is

already in the public record in our filings thus far.

Cargill and Continental operate nationwide distribution networks that annually

move millions of tons of grain and soybeans to customers throughout the U.S. and

around the world. We looked at all the markets that would be affected by the merger, and concluded that in a number of them, competition would be . adversely affected if the assets of the two firms were merged. In this case our concerns were

focused on competition among the two firms in the so-called ‘‘upstream’’ markets—

competition for the purchase of grain and soybeans from farmers and other suppliers. The lessening of competition resulting from the merger would have resulted

in farmers being anticompetitively forced to accept less money for their major crops

than before the merger.

Among the required divestitures, we insisted on divestitures in three different

markets where both Cargill and Continental currently operate competing port eleVerDate 11-MAY-2000 06:36 May 08, 2002 Jkt 071812 PO 00000 Frm 00070 Fmt 6601 Sfmt 6621 71812.TXT SCOM1 PsN: SCOM1
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vators, to preserve the competition that currently exists there: (1) Seattle, where the

elevators now compete to purchase corn and soybeans from farmers in portions of

Minnesota, North Dakota, and South Dakota; (2) Stockton, California, where the

elevators now compete to purchase wheat and corn from farmers in central California; and (3) Beaumont, Texas, where the elevators now compete to purchase soybeans and wheat from farmers in east Texas and western Louisiana. In addition to

benefiting farmers and other suppliers in the above-mentioned states—who can be

said to be captive to the elevators involved—the required divestitures may also benefit farmers and other suppliers in Illinois, Iowa, Nebraska, Missouri, Kansas, Oklahoma, Colorado, and New Mexico, who, while not necessarily captive to the elevators involved, nevertheless rely on them as competitive alternatives.

We are also requiring 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.

In the case of the Illinois River divestitures, and an additional required divestiture of a port elevator in Chicago, the merger would also have anticompetitively concentrated ownership of delivery points that have been authorized by the Chicago

Board of Trade for settlement of corn and soybean futures contracts. The delivery

points would then have been under the control of Cargill and one other firm, which

would have increased the risk that prices for CBOT corn and soybean futures contracts could be manipulated. These required divestitures will address this concern

regarding adverse effects on competition in the futures markets.

In addition, we are requiring divestiture of a rail terminal in Troy, Ohio, and we

are prohibiting 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.

And we are also requiring Cargill to enter into what is called a ‘‘throughput agreement’’ to make one-third of the loading capacity at its Havana, Illinois, river elevator available for leasing to an independent grain company, and are imposing restrictions on Cargill in the event it seeks to enter into a throughput agreement with the

operator of the Seattle facility.

It should be noted that the Department received valuable assistance in our review

of the Cargill/Continental merger from the U.S. Department of Agriculture, as well

as the Commodity Futures Trading Commission, and several State attorneys general.

We have also reviewed a number of mergers in the meatpacking area. In 1993

and 1994, for example, we received reports that Cargill’s large meat-packing subsidiary Excel, the second largest steer/heifer packer next to IBP, was looking into

acquiring Beef America, at the time the fifth largest steer/heifer packer. As a result

of our concerns that competition might be adversely affected by the increased concentration in steer/heifer that would result from this merger, we opened an investigation and began asking questions of Excel and others in the marketplace. Excel

never put forth a formal proposal, and we were ultimately able to close our investigation.

Before concluding the discussion of merger enforcement, it is important to mention railroad mergers, such as the merger approved in 1996 between Union Pacific

and Southern Pacific. Because rail transportation is one of the primary means of

getting agricultural produce to market, the competitive effects of these mergers are

also of great importance to the farming community. Unfortunately, we do not have

authority to review rail mergers in the ordinary fashion under the antitrust laws.

Initially, Congress gave the authority to review rail mergers to the Interstate

Commerce Commission. When Congress abolished the ICC in 1995 and created the

Surface Transportation Board to take over some of the ICC’s authority, we and others in the Ation Administration urged Congress to turn over review of rail mergers—at least their competitive implications—to the antitrust enforcement agencies.

The decision was made instead to leave that responsibility with the Surface Transportation Board, and to give the Justice Department a more limited advisory role.

That is, we can make recommendations to the Board. The Board is required to give

our recommendations ‘‘substantial weight,’’ but is not required to follow them.

We recommended that the Board deny the Union Pacific/Southern Pacific merger,

because we were concerned that it would significantly harm competition in numerous markets west and south of Chicago all the way to the Pacific Ocean and the

Gulf of Mexico. The Board approved the merger. Many parties have continued to

express competitive concerns about the merger since then.

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CONCLUSION

The Antitrust Division takes seriously its responsibility to protect the marketplace—including the agricultural marketplace—against anticompetitive conduct and

mergers that substantially lessen competition. As this statement makes clear, the

Division has a strong record of acting in this important sector when the antitrust

laws are violated.

Thank you for the opportunity to present this statement for the Committee’s

record.

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