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[Senate Hearing 106-1007]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1007
 
   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

                    U.S. GOVERNMENT PRINTING OFFICE
                             WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                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

                            C O N T E N T S

                              ----------                              
                                                                   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 
  Missouri-Columbia, 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

   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 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 interested 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.
    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 mergers, 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:]
        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 non- competitiveness 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.
    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 Corporation, 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 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 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 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 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.
    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:]

                                                            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 annual 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.
    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.
                                               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 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 2\1/2\ 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.
    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.
    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.
    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.
    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:]
    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 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 anything 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.*
---------------------------------------------------------------------------
    *[Dr. William Heffernan's Report, submitted by Kenneth L. Maki, was 
reprinted by permission of the author and the National Farmers Union.]

    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.
    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 long-term 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.
    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 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 (Knight-Ridder/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 inland 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 earnings. 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 annual 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. 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 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)
---------------------------------------------------------------------------
    \1\ Bovard, James. 1995. ``Archer Daniels Midland: A Case Study in 
Corporate Welfare.'' Cato Institute Policy Analysis #241.
---------------------------------------------------------------------------
    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 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 biotechnology 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 management 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 well-being 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 ever-declining 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?
    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-in-time 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 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 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 meatpack-
ing 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:

------------------------------------------------------------------------
                                                                Flour
                                    Beef          Port         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.

    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.
    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.
    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.
    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 federally-
inspected 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.
    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.
                                                       Attachment A
[GRAPHIC] [TIFF OMITTED] T1812.001

    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.
    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 
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.
    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 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 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 pen-by-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 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.
    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.
    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.
    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 99\1/2\ 
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.]
                            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.
                    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 Hoffmann-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 market 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 agrobacterium-mediated 
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 elevators, 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.
                               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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