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91–787 PDF 2004

S. HRG. 108–311

AGRICULTURAL CONSOLIDATION AND THE

SMITHFIELD/FARMLAND DEAL

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

JULY 23, 2003

Serial No. J–108–29

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

LINDSEY O. GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

JOHN EDWARDS, North Carolina 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page 

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 71

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

statement .............................................................................................................. 72

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 2

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

statement .............................................................................................................. 88

WITNESSES 

Bell, Patrick, Farmer, Kenansville, North Carolina ............................................. 14

Hughes, Will, Administrator, Division of Agricultural Development, Wisconsin 

Department of Agriculture, Trade and Consumer Protection, Madison, Wisconsin .................................................................................................................... 9

Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota .................. 4

Kremer, Russ, President, Missouri Farmers Union, Jefferson City, Missouri, 

on behalf of the National Farmers Union .......................................................... 12

Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio ........................ 7

Stumo, Michael C., General Counsel, Organization for Competitive Markets, 

Winstead, Connecticut ......................................................................................... 16

Tweeten, Luther, Agriculture Consultant, Columbus, Ohio ................................ 11

QUESTIONS AND ANSWERS 

Responses of Robert Blackwell to questions submitted by Senators DeWine 

and Kohl ................................................................................................................ 31

Responses of Russ Kremer to questions submitted by Senators DeWine and 

Kohl ....................................................................................................................... 40

Responses of Michael Stumo to questions submitted by Senators DeWine 

and Kohl ................................................................................................................ 42

Responses of Luther Tweeten to questions submitted by Senators DeWine 

and Kohl ................................................................................................................ 50

SUBMISSIONS FOR THE RECORD 

Agri-Mark Dairy Cooperative, Robert D. Wellington, Senior Vice President 

for Economics, Communiations and Legislative Affairs, statement ................ 53

Bell, Patrick, Farmer, Kenansville, North Carolina, prepared statement .......... 59

Boyle, J. Patrick, President and CEO, American Meat Institute, Arlington, 

Virginia, prepared statement .............................................................................. 61

Consumer Federation of America, Washington, D.C., statement ........................ 65

Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared statement ...................................................................................................................... 74

Hughes, Will, Administrator, Division of Agricultural Development, Wisconsin 

Department of Agriculture, Trade and Consumer Protection, Madison, Wisconsin, prepared statement ................................................................................. 76

Kremer, Russ, President, Missouri Farmers Union, Jefferson City, Missouri, 

on behalf of the National Farmers Union, prepared statement ....................... 83

Public Citizen, Wenonah Hauter, Director, Critical Mass Energy and Environment Program, Washington, D.C., letter ........................................................... 91

Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio, prepared 

statement and attachments ................................................................................. 93

Sparks Companies, Inc., McLean, Virginia, study ................................................ 109

Page

IV

Stumo, Michael C., General Counsel, Organization for Competitive Markets, 

Winstead, Connecticut ......................................................................................... 123

Tweeten, Luther, Agriculture Consultant, Columbus, Ohio ................................ 129

(1)

AGRICULTURAL CONSOLIDATION AND THE 

SMITHFIELD/FARMLAND DEAL 

WEDNESDAY, JULY 23, 2003 

UNITED STATES SENATE, SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, OF THE COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to notice, at 4:03 p.m., in room 

SD–138, Dirksen Senate Office Building, Hon. Mike DeWine, 

Chairman of the Subcommittee, presiding. 

Present: Senators DeWine and Kohl. 

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR 

FROM THE STATE OF OHIO 

Chairman DEWINE. Good afternoon. Welcome to the Antitrust 

Subcommittee. Today’s hearing will examine the Smithfield/Farmland deal as well as horizontal consolidation and, perhaps more importantly, vertical integration in the agriculture industry. 

Horizontal consolidation has become a common sight in many industries in recent years as mergers among direct competitors have 

increased the size and scope of companies, even while decreasing 

the number of companies left to compete. The pros and cons of horizontal consolidation also have become well known as antitrust enforces and this Subcommittee have weighed and balanced claims of 

increased efficiencies versus concerns of market dominance and decreased innovation. 

The evaluation of vertical integration and its effects is often more 

difficult. Vertical integration within the agricultural sector, which 

we will examine today in this Committee, is, of course, no different. 

Increasingly over time, we have seen packers create arrangements 

where the own or control their sources of supply. This vertical integration often raises competitive concerns that packers will refuse 

to purchase from any non-integrated source, decimating the spot 

market and leaving independent farmers with ever decreasing opportunities to sell their products. The loss of these market opportunities may lead to the loss of more independent farmers and to 

greater horizontal consolidation at the producer level. 

Along with these potential harms comes a potential upside. It is 

clear that vertical integration may generate efficiencies and other 

benefits. For example, many farmers sell their hogs under the system of contract farming, which is a form of vertical integration. 

Specifically, the farmer agrees to raise the hogs in a certain manner and under certain conditions. In return, the package guarantees a set price. This provides the packer with a reliable source of 

2

product and allows the farmers to bank on the certainty that those 

contracts provide against volatile market price swings. In addition, 

many believe that vertical integration has increased the ability of 

the livestock-processing industry to meet the demands of their retain customers—demands for higher-quality products, reliable delivery, and national distribution—all of which also allow industry 

to compete more effectively in the international market. 

The specific deal before us today is somewhat unusual in that it 

may not raise all of the concerns that horizontal consolidation 

raises. As an initial matter, we have to note that the pork-processing market is less concentrated than other protein markets, 

such as beef, where the top four processors control 80 percent of 

the market. As a result, this deal does not automatically trigger 

the types of concerns that further horizontal consolidation in those 

markets might trigger. 

Of course, the deal still requires antitrust review, and there is 

some limited horizontal overlap in the areas where both Smithfield 

and Farmland buy hogs. Even in those areas of overlap, however, 

there may be enough remaining pork processors that no antitrust 

harm may result from this deal. 

This deal is also unusual because Farmland Industries is bankruptcy. Smithfield’s purchase of Farmland’s pork-processing operations means that those operations will go from being part of a 

company floundering in bankruptcy, with all of the uncertainty 

that accompanies bankruptcy, to being part of a strong stable company in Smithfield. 

Now, despite these unusual aspects, overall this deal and the 

trends of horizontal consolidation and vertical integration in agriculture give us a lot to discuss today. This Subcommittee has been 

and continues to be committed to achieving and maintaining an agriculture industry that is a highly competitive industry—an industry which can and should benefit all its participants, including producers, processors, and consumers. We look forward to hearing 

from our witnesses on all of these important issues today. 

Now let me turn to my friend and colleague and the Ranking 

Member of this Committee, Senator Kohl. 

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

STATE OF WISCONSIN 

Senator KOHL. Mr. Chairman, thank you for holding this important hearing today. Concentration and consolidation in the agricultural industry is a major concern for hard-working families and 

farmers across our country. Today we are examining the merger 

between Smithfield and Farmland, combining the Nation’s number 

one and number five pork processors, but this deal represents just 

one of many that have occurred in recent years throughout our agricultural economy. 

The increased numbers of mergers and acquisitions among the 

Nation’s top processing firms raises serious concerns about whether 

there is a competitive market that enables our farmers to have a 

fair chance to receive a fair price for their products. Our Nation’s 

farmers, who comprise less than 2 percent of the population, 

produce the most abundant, wholesome, and by the cheapest food 

on the face of the Earth. 

3

However, the way in which food is produced is rapidly changing, 

creating significant new challenges. We have seen a massive reorganization in our food chain due to the increasing numbers of 

mergers in industries such as livestock, grain, rail, and biotechnology. 

During this period of enormous transformation in the agriculture 

industry, disparity in market power between family farmers and 

large conglomerates all too often leaves the individual farmer with 

little choice regarding who will buy their products and under what 

terms. 

Many commodities, including pork, beef, poultry, and grains, 

have experienced significant degrees of concentration. In the pork 

industry, the top four processing firms control more than 60 percent of the total market, a number which will increase to more 

than 65 percent if the merger we are considering today is approved. 

On the beef side, the top four beef packers purchase about 80 percent of the Nation’s cattle. Rather than buying on the open market, 

processors of farm commodities are relying more and more on contractual agreements with farmers, which bind the farmers to sell 

a specified amount of product for prices specified by the processors. 

In many cases, there is no longer a significant open market to 

which farmers and ranchers can turn. These contractual arrangements damage the independence of family farmers, leaving them 

little choice regarding what to grow and the terms on which to sell 

their products. 

For example, from 1993 to 2001, the share of total hogs sold 

through contractual arrangements increased from 10 percent to 72 

percent. Consequently, sales and purchases through the traditional 

spot markets have dwindled to 28 percent total sales. We should 

be concerned that the same trend may occur in the dairy industry. 

Similar concentration in the dairy industry has already occurred to 

some extent, particularly in the fluid milk market in the Northeast. 

Thankfully, this is not yet the case in the Upper Midwest. Dairy 

producers in our region continue to enjoy a significant degree of 

competition for their milk supplies. 

But we must do all we can to make sure that it stays that way. 

It is only through proper and aggressive enforcement of current 

antitrust laws, both at the Department of Justice and the FTC, and 

also by vigilant enforcement of the Packers and Stockyards Act at 

the Department of Agriculture, that we can be certain that producers and consumers alike benefit from open and fair markets. 

We should also consider whether the Department of Agriculture 

should be given a greater role in advising the Justice Department 

and the FTC in evaluating the competitive effects of agriculture 

mergers. We must not allow abuse practices or disparities in bargaining power between farmers and agribusiness to disrupt farmers’ equal access to the market or farmers’ ability to receive fair 

prices for their products. 

I am pleased that we will hear today from this panel of experts. 

I would like particularly to thank Will Hughes of the Wisconsin 

Department of Agriculture, Trade and Consumer Protection, for 

being here this afternoon. We appreciate you making arrangements 

to testify under such a short time frame. And we welcome all our 

4

witnesses this afternoon and look forward to hearing your thoughts 

on this important and timely issue. 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Kohl, thank you very much. 

We are delighted to have today as our first witness Hon. Tim 

Johnson, U.S. Senator from South Dakota. Senator Johnson, thank 

you for joining us, and go right ahead. 

STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM 

THE STATE OF SOUTH DAKOTA 

Senator JOHNSON. Well, thank you, Chairman DeWine and Senator Kohl. I appreciate you allowing me to testify at today’s hearing 

on agricultural market concentration, Smithfield’s proposed acquisition of Farmland’s Pork Division, and legislation I have sponsored 

with my colleague, Senator Grassley, to ban packer ownership of 

livestock. 

On July 15, Smithfield Foods offered to purchase the Pork Division of the bankrupt cooperative, Farmland Industries. The purchase agreement is subject to court approval, and the Justice Department must ratify the acquisition as well. 

Today, I join Senators Grassley and Harkin to call for an immediate and comprehensive review of this deal by the Department of 

Justice. The Antitrust Division of DOJ needs to carefully examine 

the possible negative consequences this buyout could cause for pork 

producers and consumers. 

Smithfield made a host of promises in conjunction with the 

Farmland deal, including the pledge that the company will honor 

all production contracts with farmers and maintain slaughter capacity at all Farmland facilities. 

Previous actions demonstrate that Smithfield is an opportunistic 

company whose number one job is to increase financial returns for 

its shareholders, and South Dakota workers and farmers have suffered the consequences. 

On August 8 of 1997, Smithfield purchased the Dakota porkprocessing facility in Huron, South Dakota. The plant employed 

750 people, slaughtered around 7,000 hogs daily. It was Huron’s 

largest employer and one of two South Dakota markets for slaughter-ready hogs. One day later, on August 9th, Smithfield shut down 

the Dakota pork plant, laid off the 750 South Dakotans who were 

employed there. The community of Huron has never fully recovered 

since. 

In the matter of a single day, nearly a thousand South Dakota 

workers were laid off, an important rural community in South Dakota suffered a devastating economic blow, and thousands of South 

Dakota pork producers were left with only one market for their 

slaughter hogs, another facility owned by Smithfield in Sioux Falls, 

South Dakota. 

Before Smithfield closed the Dakota pork plant in 1997, South 

Dakota had over 3,000 independent pork producers. Today there 

are about 1,600 pork producers remaining in my State. Market experts have forecast that if Smithfield is allowed to purchase Farmland, additional pork facilities could be subject to unilateral closure 

by the company. 

5

I believe the Department of Justice will conclude that this sale 

would boost Smithfield’s already mighty market power in South 

Dakota, Iowa, Nebraska, and Minnesota, reducing or even eliminating competition in several critical regional and local markets. 

Since 1981, Smithfield has acquired nearly 20 competitors, and the 

company is continually stalking others in hopes to expand market 

share and increase profits. 

As the world’s largest pork producer, Smithfield currently owns 

one out of every four pigs in the United States, a total of about 

760,000 hogs. The addition of Farmland’s 36,000 sows would put 

Smithfield close to 800,000 sows. Smithfield is also in negotiations 

currently to purchase Alliance Farms, which has 7,500 hogs in Illinois and 20,000 in Colorado. If the Alliance and Farmland purchases are approved, Smithfield’s total ownership will be in the 

range of 825,000 hogs. 

As the world’s largest pork processors, Smithfield produces 60 

percent of the pigs they slaughter. A merger with Farmland would 

give them direct control over 30 percent of the slaughter hog market in the entire United States. This market power would result in 

reduced competition and fewer independent pork producers. 

While the Department of Justice must approve this deal before 

Smithfield can completely acquire Farmland’s Pork Division, 

Smithfield market aggression is just another reminder that the 

Johnson-Grassley packer ban legislation, Senate bill 27, is, in fact, 

desperately needed. Congress and the administration both have a 

role to play in ensuring that we have more competition, not less, 

in agricultural markets. Indeed, current laws are often too antiquated to deal with the modern market tactics of meat packers and 

others. Additionally, Federal regulators have been slow to enforce 

the existing laws. 

Our packer ban legislation would amend an 80-year-old law, the 

Packers and Stockyards Act, under the jurisdiction of USDA. Three 

years ago, when I first introduced legislation to ban packers from 

owning livestock, we were able to pass the packer ban twice last 

year through the United States Senate during consideration of the 

farm bill. Unfortunately, it was killed by the House of Representatives in conference committee. 

The Johnson-Grassley bill gives independent producers a fair 

chance to compete. Our legislation would prevent packers, including Smithfield, from operating as a producer and result in a more 

competitive, open, and transparent market. In short, it is one modest step to ensure the free enterprise system still applies to livestock markets. 

USDA says that packer concentration has increased 45 percent 

in the past 20 years. During this time, the food retailing and packing industries have amassed profits triple the rate of the general 

food inflation. In fact, cargo increased profits by 67 percent to 2001. 

Smithfield increased profits by 28 percent. And after Tyson bought 

out IBP, its profits tripled. As a result, we have a meat-food industry which is doing well at the expense of our farmers and ranchers 

because they have the economic power to influence markets in 

their favor. Independent livestock producers do not. 

The issues of packer ownership in agricultural market concentration go to the very heart of what agriculture will look like in the 

6

future. Will it be controlled by a handful of powerful firms where 

farmers and ranchers become, in effect, low-wage employees bearing all the risk but none of the gain in the market? Or will it be 

a future of independent family farmers and ranchers contributing 

to rural communities that are diverse and economically strong, 

independent producers who have the leverage to demand a decent 

price for their animals? These problems demand a comprehensive 

approach which includes the attention of the Judiciary Committee, 

Agriculture Committee, Department of Justice, and USDA. 

Mr. Chairman, I close with the following recommendations: 

One, that the Antitrust Division of the Department of Justice 

should scrutinize Smithfield’s proposed purchase of Farmland’s 

Pork Division and consider preventing it; 

Two, Congress should enact the Johnson-Grassley packer ban 

legislation; 

Three, Congress should consider legislation sponsored by my colleague Senator Enzi and me to prohibit captive supplies of market 

livestock; 

Fourth, finally, Congress should consider legislation pushed by 

Senator Daschle to require USDA to review whether a proposed 

merger would have a negative effect on family farmers and rural 

communities and to increase penalties for antitrust violations. 

Thank you, Chairman DeWine, Senator Kohl, for this opportunity to share my thoughts with you today. 

Chairman DEWINE. Senator Johnson, thank you very much for 

a very provocative statement, and it gives us something to think 

about as we hear the testimony from the other witnesses. We appreciate it very, very much. 

Senator JOHNSON. Thank you. 

Senator KOHL. Thank you very much, Senator Johnson. 

Chairman DEWINE. I would ask our other witnesses to come up. 

Senator Grassley had to attend a meeting at the White House. He 

asked me to put a statement into the record, which I will, as well 

as two letters, one from the Consumer Federation of America and 

one from Public Citizen. In addition, we have a statement from 

Senator Leahy. Without objection, all of these will now be made a 

part of the record. 

I would ask all our witnesses now to please come up, and I will 

now introduce our witnesses. 

Joe Sebring is the CEO of John Morrell, a subsidiary of Smithfield Foods. John Morrell is the leader in the pork packaging industry and is based out of Cincinnati. It is considered to be the oldest, 

continuously operating meat processor in the United States. 

The next witness is Will Hughes, the administrator for the Division of Agricultural Development for the Wisconsin Department of 

Agriculture, Trade and Consumer Protection. His division has been 

given the task of assisting Wisconsin farmers in adapting to the 

growing demands of the agriculture marketplace. 

Dr. Luther Tweeten is a retired professor at Ohio State University. He has authored several publications in the area of agriculture consolidation and has testified before this Subcommittee in 

the past. 

7

Mr. Russ Kremer is the president of Missouri Farmers Union. He 

has been involved in pork production his entire life, and he brings 

to the Subcommittee his experience as an independent farmer. 

Mr. Patrick Bell is a hog farmer from Kenansville, North Carolina. After graduating from the University of North Carolina, he 

worked in the banking industry for several years before returning 

to his family farm. 

Finally, Mr. Michael Stumo is general counsel for the Organization for Competitive Markets, which is a nonprofit organization focusing on antitrust and competition issues in agriculture. 

We will start on my left with Mr. Sebring. Mr. Sebring, would 

you like to start? We are going to have a 5-minute rule. We are 

going to stick to the 5-minute rule so that we can have ample opportunity for questions. When you see the yellow light, that means 

you have a minute left. 

Mr. Sebring? 

STATEMENT OF JOSEPH SEBRING, PRESIDENT, JOHN 

MORRELL, INC., CINCINNATI, OHIO 

Mr. SEBRING. Thank you, Mr. Chairman. I would like to correct 

the record. The Dakota pork plant was closed before Smithfield 

took possession, and in South Dakota, there is already a ban on 

corporate farming. And in spite of that, the hog population has 

dwindled by 50 percent in the last about 5 years. 

Thank you, Mr. Chairman, for the opportunity to share the view 

of Smithfield Foods about Federal policy for the meat-packing industry and the pending acquisition of Farmland Foods by Smithfield Foods. 

I am Joe Sebring, president of John Morrell, an Ohio-based company that produces processed meats and fresh pork. Our industry 

is already subject to the Sherman Act, the Clayton Act, the Robinson-Patman Act, the Federal Trade Commission Act, State laws, 

the Uniform Commercial Code, and the Packers and Stockyards 

Act. There is no reason for more restrictions on our industry. 

Smithfield has made a bid for certain assets of Farmland Foods. 

Farmland’s creditors and bondholders recognized that the Smithfield transaction would provide the greatest opportunity to generate the highest available value to creditors, bondholders, and the 

people of Farmland Foods. Over $1.4 billion in aggregate claims have been filed against 

Farmland Industries for more than 20,000 farmers and 141,000 

small businesses. For example, in South Dakota, 291 bondholders 

have claims of nearly $28 million, and there are more than 2,200 

creditors who are owed about $84 million. There are more than 

4,200 Iowan bondholders with claims against Farmland exceeding 

$37 million. The 4,257 Iowan creditors of Farmland are owed more 

than $92 million. They have waited long enough. 

Smithfield will honor all current Farmland Foods hog production 

contracts, 6,100 employees of the Farmland Foods will keep their 

jobs, and the Farmland Foods facilities will remain open. The 

UFCW will continue to be recognized at the unionized plants, and 

Smithfield has offered to assume the Farmland Foods pension plan. 

Farmland Foods headquarters will remain in Kansas City, and 

Smithfield will preserve the Farmland brand. 

8

Our customers demand consistent meat quality, ready and predictable supplies, and a fair price. They want their meat to be consistently lean every time. Fast-food retailers and grocers have imposed strict requirements on packers. Vertical coordination is the 

best way to meet these requirements. It is a pull-through model. 

We are pulled along by the demands of our customers and have 

met those demands by maintaining some level of vertical coordination. The slightest interruption in supply is unacceptable to our 

customers. That means that forward contracting with hog producers must be balanced by company-owned animals in order to assure consistent supplies. 

During the last 2 years, John Morrell has bought 33 to 45 percent of the hogs available on the open market, and Smithfield itself 

sells 25 to 30 percent of the hogs sold on the open market. 

Consumers have demanded leaner pork, so we have developed 

our lean generation pork. We can provide this new leaner pork because we control the way that hogs are raised. Without some level 

of coordination among hog producers and meat packers, we will be 

out of the business of producing consistently lean pork. 

There are other benefits to a coordinated system of production. 

Our on-farm biosecurity procedures and data are completely within 

our control. A reasonable level of vertical coordination allows us to 

ensure delivery of safe meat products to comply with EPA standards and other regulations and to guard against tampering by terrorists. Our system enables us to keep our products traceable and 

limits the number of people who have access to the products all 

along the chain of supply. It is not just a matter of economics. It 

is also a matter of homeland security. 

Forward contracting allows farmers to plan for the future. Lenders now routinely demand that farmers produce contracts before 

providing them with financing. In our system, both company-owned 

farms and contract growers have the benefit of a predictable place 

to sell their animals, regardless of any spikes or downturns in the 

market prices. 

Family farmers are our fellow hog producers and our suppliers. 

John Morrell purchased more than half of its hogs from non-contract farmers in the last fiscal year. That is almost 4 million hogs. 

We don’t agree that barring our company from raising hogs will 

help independent hog producers. It plainly will harm them. 

We have built our business model in response to the non-negotiable demands of the consumer and the marketplace. With a flexibility achieved through a reasonable level of vertical coordination, 

we maintain low and stable prices for consumers by owning and 

contracting for hogs. We ask only that our company not be barred 

from owning or contracting for some of our hogs as we strive to 

stay competitive. We honor family farmers, and we ask you to keep 

in mind that the coordination of our system serves the food security 

effort and to look at the economic data and consider what a ban 

on packer ownership would do to our industry. 

Thank you very much. 

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

for the record.] 

Chairman DEWINE. Mr. Hughes? 

9

STATEMENT OF WILL HUGHES, ADMINISTRATOR, DIVISION OF 

AGRICULTURAL DEVELOPMENT, WISCONSIN DEPARTMENT 

OF AGRICULTURE, TRADE AND CONSUMER PROTECTION, 

MADISON, WISCONSIN 

Mr. HUGHES. Thank you, Chairman DeWine and Senator Kohl, 

for the opportunity to share today some perspectives from a State 

government as it relates to concentration in food and agriculture. 

On behalf of the State and its 77,000 producers, I would especially 

like to thank Senator Kohl for his excellent leadership and representation of Wisconsin agriculture and for his invitation to us to 

speak about these issues related to concentration and its implications for producers. 

My testimony today is going to talk primarily about policy and 

make a few policy recommendations that we hope Congress would 

consider as it establishes both the national agricultural and antitrust policy that I agree with Senator Johnson needs to be comprehensive and coordinated. 

Let me first give you just a snippet of information about our 

agency and its uniqueness. We are called the Agriculture, Trade 

and Consumer Protection agency because we have what is called 

the ‘‘Little FTC Act’’ in Wisconsin, which gives us sweeping powers 

to protect consumers and competition in the areas of fair business 

trade practices. And I want to give you a few examples of where 

we have had some relevant activities that deal with concentration 

in markets and uneven market power. 

We have established rules in the vegetable processing industry 

in dealing with contracts between the producers and the processors. We have had major enforcement actions against price discrimination in milk procurement where one producer is treated differently in pricing relative to another producer without any basis 

in cost differences and so on. We have had a major investigation 

into the business practices associated with the National Cheese Exchange, using the power of that Little FTC Act. 

In each of these cases, Wisconsin had to act on its own, and we, 

quite frankly, did not get coordinating help from the Federal Government. And it is not only difficult for farmers to address these 

issues on their own or through their organizations, but it is also 

difficult for individual States. And as concentration increases rapidly from the retail sector back through the supply chain, the 

issues do not go away. 

We wanted to express to you the importance of what we think 

is evidence of having a competitive market in the dairy industry. 

Wisconsin is blessed with having a fairly high number or large 

number of buyers competing for milk produced by the 16,500 Wisconsin dairy producers. We have a graph in our testimony that 

compares the Western region of the United States with the Upper 

Midwest region, and it is a mechanism of pricing that is reported 

by USDA that shows that, on average, over the last 5 years, that 

price difference has been $1.03 between the Midwest and the Western region. And we believe that that illustrates the value of preserving competition in agricultural markets. 

I can give you a specific example: A producer in Wisconsin at a 

meeting a few years ago laid out a chart for a very large audience 

to show that he had 13 competing buyers for his milk in an area 

10

of northeast Wisconsin, had every pay price pegged all the way 

down the line—open, transparent information that that producer 

had with choices. That is the value of preserving competition. 

Wisconsin Department of Ag’s priority is to revitalize and grow 

the dairy industry with diverse farm production systems, and that 

includes, if we do that, attracting a good climate for producing milk 

as well as a good climate for buying milk. And included in that is 

an active and favorable climate for dairy producer cooperatives to 

thrive in the business environment. 

This process gets difficult as concentration increases, and we 

would like to bolster that heritage of producer-owned organizations, 

and to do that we think that there are a few recommendations, policy recommendations, that you should consider. 

One is to improve and tighten coordination on antitrust and concentration issues not only between the U.S. Department of Justice 

and USDA but also among States. An active working group in that 

area would be very important. 

We would also like to see, given the tremendous activity and 

issues surrounding concentration, that there be increased funding 

committed to support agricultural concentration research and antitrust issues, not only to have a better idea of what is going on and 

the impacts of what is going on, but also to help formulate new policy frameworks to address these issues. In the 1960’s and 1970’s, 

there was a lot of research in the industrial organization area concerning the food sector. Go back in the early part of the century, 

the same. There is a dearth of it now, and it needs, given what is 

going on, to be improved. 

We would like to see, because we believe innovation and new 

business formation creates a healthy marketplace for both producers and consumers, increased programs and funding for the development of producer-owned and value-added businesses. 

We would like to see strengthening the competition in the meat 

industry by removing the prohibition on interstate meat shipments 

from State-inspected—it is actually meat and poultry product 

plants. And we have 300 of those in Wisconsin, and there are some 

very innovative companies in that mix that the U.S. marketplace 

as well as the Wisconsin economy would enjoy the benefits of. 

We would like to see that producers have continued ability to 

bargain for fair prices and fair terms of trade and that the transparency of pricing for agricultural commodities continue to be emphasized and improved upon from what it is now. 

Again, our agency goes on the idea that putting our policies and 

rules, establishing standards that govern fair business practices, is 

what is needed, gets the public more involved, puts more light on 

the subject, and that should be part of the policy recommendations 

that you consider. 

Thank you for the opportunity to share these perspectives. 

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

for the record.] 

Chairman DEWINE. Thank you, Mr. Hughes. 

Dr. Tweeten? 

11

STATEMENT OF LUTHER TWEETEN, AGRICULTURE 

CONSULTANT, COLUMBUS, OHIO 

Mr. TWEETEN. First of all, I wish to thank Chairman DeWine 

and Senator Kohl for the opportunity to be here. 

I regard the Smithfield Foods acquisition of Farmland Foods to 

be a positive development for the food industry, including for producers and consumers. There will be short-and long-run effects. As 

has already been pointed out here, the short-run effect is pretty 

much status quo. Smithfield has agreed to even retain the labor 

union, the workers, the pay rates, the brand name of Farmland, 

the management, and so forth. So it will be a kind of status quo 

in the short term. However, knowing Smithfield, they don’t let the 

grass grow under their feet. They change in response to changing 

conditions. 

Over time, there is likely to be larger plants serving larger areas. 

There is likely to be an expansion of production and marketing contracts. And, of course, there is going to be concentration. 

Now, the share of the market held by Smithfield, according to 

the data I have, is about 20 percent. That will go up to 27 percent. 

The principal benefit of this merger is that you are absorbing 

Farmland, which is a small, not financially viable company that 

does not do a lot of service for farmers, for consumers, for competition, absorbing it by a company that is financially viable, dynamic, 

innovative. That is going to help competition. It is going to be better for the parties involved, including the creditors. 

One of the concerns is about concentration. This is not going to 

do a lot to concentration. But what is the impact of concentration 

on producers and consumers? We have looked at this at Ohio State 

in terms of marketing margins. There are two effects here of concern. One of those is with concentration, larger firms, economies of 

size. That reduces cost of production. If they are passed on to farmers and consumers, it means lower marketing margins. 

On the other hand, you have increasing market power. If that effect dominates, then you are going to have larger marketing margins in either higher prices to consumers, lower prices to farmers, 

or both. 

What we find for the hog industry, the beef industry, and the 

turkey industry is that the net effect of concentration is lower marketing margins. Now, that is the good news. 

The bad news is that the benefits are passed to consumers, not 

to producers. That is exactly what economic theory would tell you. 

Economic theory tells you and empirical data indicate that processors pay farmers what it takes to get the product delivered. In 

the longer term, this means covering the full cost of production on 

adequate size, commercial, well-managed farms. We find empirical 

evidence for that. And it does not matter whether you are dealing 

with a monopolist, a monopsonist, a competitive firm, a cooperative, or whatever. Nobody is going to give farmers gifts in terms of 

prices. They are going to have to earn it. They are going to have 

to compete. And so they are all going to operate on the supply 

curve. 

Now, the question is: Where on the supply curve? The conventional wisdom is that because of imperfect competition, the imperfect firm will pay less, operate lower on the curve, take lesser 

12

quantity at a lower price. However, that is not the right thinking. 

What, in fact, happens is that oligopolistic firms, which dominate 

the food processing and marketing industry, advertise and innovative massively. A consequence of that is that we sell an awful lot 

of food. In fact, they are so good at selling food that nearly twothirds of Americans are overweight, and about half of those overweight people are obese. 

So what I am saying is that farmers operate higher on their supply curve, higher price, higher quantity, because of imperfect competition in the agribusiness sector. 

All right. My time is running out here, so let me close with a couple of recommendations. 

First of all, I do find merit in this acquisition. There is certainly 

a basis for moving forward with it. 

The second thing I want to point out is that it would be highly 

desirable to have greater transparency in markets, in the hog as 

well as other enterprises in agriculture. I know that is not easy to 

do in the case of marketing and production contracts because those 

contracts often differ from one case to another. But I think what 

we need to do is have the people from the processing industries, 

producers, academics, sit down and try to work out some templates 

that will allow them to report better and give people a greater opportunity to compare outcomes, to compare returns among farmers, 

States, industries, and so forth. 

Thank you. 

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

for the record.] 

Chairman DEWINE. Doctor, thank you very much. 

Mr. Kremer? 

STATEMENT OF RUSS KREMER, PRESIDENT, MISSOURI FARMERS UNION, JEFFERSON CITY, MISSOURI, ON BEHALF OF 

THE NATIONAL FARMERS UNION 

Mr. KREMER. Yes, thank you, Chairman DeWine and Ranking 

Member Kohl, for the opportunity to testify before the Subcommittee on agricultural concentration and the proposed sale of 

Farmland Foods pork division to Smithfield Foods. I ask that my 

full statement be submitted into the record. 

Chairman DEWINE. It will be made a part of the record. Thank 

you very much. 

Mr. KREMER. I am Russ Kremer, president of the Missouri Farmers Union, and I am here today to testify on behalf of the National 

Farmers Union. 

I have been involved in independent pork production since I was 

a child in a count that, for many years, led our State in the number 

of independent pork operations. However, during the past year, we 

have seen our marketing opportunities and, therefore, our profit 

opportunities dwindle dramatically. Market choices during that 

time in my area have declined from five to two. The potential acquisition of Farmland by Smithfield Foods threatens to reduce that 

number to one. Without competitive bids and fair market prices, 

another large exodus of family farmers from the pork industry is 

likely to occur. Many of our local communities that once enjoyed a 

sustained economy due to the circulation of revenue from indeVerDate 0ct 09 2002 12:51 Feb 17, 2004 Jkt 091787 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91787.TXT SJUD4 PsN: CMORC
13

pendent pork farms and community-based businesses will continue 

to experience serious decimation. 

The trend toward horizontal and vertical integration in the agriculture and food sectors does not allow independent producers to 

succeed without protection from unfair and anti-competitive practices. The loss of our Nation’s largest farmer-owned cooperative is 

not only devastating to America’s independent agricultural producers, but also furthers the goal of Smithfield Foods to gain greater control of the pork production and processing sector. If this sale 

is approved by the U.S. Bankruptcy Court and the Department of 

Justice, Smithfield Foods will control 27 percent of the pork processing industry. The top four processing firms—Smithfield, 

ConAgra, Tyson/IBP, and Cargill—will now control 60 percent of 

the market, up from the 37-percent level in 1987. 

Currently, Smithfield raises 12 million of the 20 million hogs 

slaughtered in their processing plants on a yearly basis. The addition of Farmland’s 36,000 sows will increase the Smithfield’s sow 

inventory to approximately 800,000. This is 3 times the number of 

sows owned by the next largest pork producer—Premium Standard 

Farms. 

In 1994, the Smithfield sow inventory totaled approximately 

65,000. In less than 10 years, this single company has managed to 

increase its ownership of sows 12-fold through acquisitions and 

mergers such as the one being discussed today. To allow this proposal to be approved prior to Congress conducting a thorough review to ensure antitrust laws are adequate would be like shutting 

the gate after all the pigs get out. 

I believe producers in my State and across the country will be 

further faced with lack of buyers and a competitive price for their 

hogs as a result of this proposed acquisition. Smithfield officials 

have indicated that if the proposal is approved, they would continue to operate and maintain production levels at all Farmland 

plants. What has been left unsaid is the fate of the other plants 

purchased by Smithfield through previous acquisitions and mergers 

that may now be determined inefficient. Employees of these plants 

will be put out of jobs, local producers will be left with fewer marketing opportunities, and the communities will be responsible to 

clean up the mess left behind. 

Although contract production is often touted as a viable opportunity and risk management tool for farmers, without contractor 

competition in the region the contractee has little bargaining power 

when it is time to renew that 5- or 7-year contract. That farmer 

often finds himself in a ‘‘take it or leave it’’ position. 

Concentration of the agriculture and retail food sectors has, in 

many instances, discouraged the growth and development of smaller, farmer-owned, value-added cooperatives. As president of the 

Ozark Mountain Pork Cooperative, a new-generation cooperative 

that processes and markets pork from member-owned hogs, I myself have witnessed many challenges to accessing the marketplace 

because of this huge market concentration and power. Large conglomerates often have tight control of brokers and retail distributors. 

The loss of family farms and other independently owned businesses is not inevitable. The National Farmers Union believes 

14

there are a number of reforms that can originate within this Subcommittee to ensure fairness, transparency, protection, and bargaining rights for producers, which would restore and enhance 

competition for agricultural markets. A few of these I may list at 

this time: 

Number one, we feel that Congress should expand the role of 

USDA to initiate the review of proposed mergers in the agricultural 

sector and require an economic impact statement be provided, detailing the impact of a proposed merger on farmers and ranchers 

prior to approval. 

We feel that Congress should require USDA to collect and publish concentration information. 

We support the implementation of a temporary moratorium on 

large agricultural mergers. The moratorium is necessary to provide 

Congress with time to review current law and strengthen its appropriate time to restore market competition for producers and consumers. 

We also believe a specific level of concentration should be established, a so-called threshold level, that triggers a presumption of a 

violation of antitrust law. 

I have also highlighted more of these reforms in my written testimony for the record. 

Thank you, Mr. Chairman, for the opportunity to testify today 

and for holding this important hearing. We look forward to working 

with you in this Subcommittee and the entire Congress to strengthen antitrust laws and foster a transparency and fair marketplace 

for all producers. I welcome the opportunity to answer any questions the Subcommittee members may have. 

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

for the record.] 

Chairman DEWINE. Mr. Kremer, thank you very much. 

Mr. Bell? 

STATEMENT OF PATRICK BELL, FARMER, KENANSVILLE, 

NORTH CAROLINA 

Mr. BELL. Thank you, Mr. Chairman. I appreciate the opportunity to come talk with your Committee today. 

My name is Patrick Bell, and I am a contract hog farmer from 

North Carolina. I came to give you my perspective as someone who 

is on the farm every day because I think it is important for this 

Committee to hear from someone who is actually out there every 

day doing the job. 

I have a hog farm that is under contract with Murphy Farms, 

which is part of Smithfield Foods. I would like to begin my testimony by telling the Committee a little about my background. I 

grew up in a small town named Kenansville, in eastern North 

Carolina, a lot like Mayberry. It is a small, tight-knit community 

of about 900 people, where agriculture was the most important industry and basically the only industry. 

I came from a farming family, but when I was ready to begin my 

working life, it really was not an option for me to work full-time 

on my family farm, and certainly not an opportunity for me to get 

my own farm. I went to college and graduated from the University 

of North Carolina in Chapel Hill. I went into the banking industry, 

15

worked for banks for about 10 years as a branch manager and commercial loan officer. 

In 1992, I turned 30 years old, and my father celebrated his 60th 

birthday that same year. He sat me down and he gave me a choice. 

He said, ‘‘Son, you are the only child. You have got a choice. You 

can continue in banking and commit yourself to a life outside of 

farming, or you can return home to your small town. We have very 

little industry or opportunity beyond the farm gate, but if you will 

come back home, you can take over our contract hog farming operation.’’ 

It was a tough decision for me to make, but I decided to return 

home and go into business with my father. That was 9 years ago, 

and we have had a few struggles. But since then, we have expanded our operation to almost twice its original size. Now our 

farm earns enough money for me to support my family, myself, my 

mother and father, and that gives me a lot of satisfaction. 

In hindsight, the decision to return home was one of the best decisions I ever made because it allowed me to live in the small town 

I grew up in and that I loved; it allowed me to be in business with 

my father, who I am very close to and that I love; and it allowed 

me to provide for my family—we just had a set of twins that are 

4 months old—and build some long-term security. 

My family and I have a deep, emotional attachment to farming. 

But when I made the decision to come back home and leave banking, I always knew it was a business decision. When I decided to 

return home to look at the contract agreement that was with Murphy Farms at the time, I had three main questions: 

Number one, if I invest my savings in this farm, will it be a good 

investment that has good, solid, consistent cash flow? 

Number two, does the company that I will contract with have the 

ability to pay my contract, and can I count on them to pay the contract? 

And, number three, will this investment provide a stable income 

and reliable profit for me and my family over the long term? 

Well, after being in the hog business for 15 years under contract, 

first with my father and then with me and my father, I am happy 

to say the answer to all three questions is absolutely yes. 

Finally, I think it is important for this Committee to understand 

that the North Carolina hog business is not owned by some nameless, faceless, monolithic corporation or group of people. In my 

State, and in most other hog-producing States they operate in, the 

hog business is composed of a lot of small family farmers like me. 

In fact, small farmers like me grow 80 percent of Smithfield Foods 

hogs in North Carolina. The contracts we have make it possible for 

us to stay on our family farm or come back home, as I did, and provide a living for our family by growing these hogs under contract 

with Smithfield. 

When I signed that contract, I not only knew that I was going 

to get a fair price, but I knew what the future was going to hold 

for my family. I would not have to be worried about market ups 

and downs. I know that Smithfield bears the costs and supplies the 

expertise for my veterinary services, provides technical assistance 

for compliance with environmental and safety regulations, all of 

which they fully expect me to comply with. In return, I get—and 

16

this is an important thing as an ex-banker. I get to tell the people 

I do business with in my small town that I have a stable business. 

I get to tell the local banker, which is very important, the local 

hardware store, and everyone else, they can extend me credit because I will be able to pay it because of this contract. 

When I was a banker, I had the unhappy duty of turning down 

some good farmers for loans—they were good people and good 

farmers—because they did not have contracts for their hogs. They 

were independents. The price of hogs went to 8 and 10 cents a 

pound at one time. Not sustainable as an independent. It was a 

hard thing to do, but I am just grateful that my business is not 

subject to that kind of uncertainty. 

One of the things that is not in my written testimony that I 

would like to interject here quickly, Mr. Chairman, if you will, I 

have heard some conversation about the packer ban as I came in 

here today, and I am not privy to all the details of the packer ban. 

I do not know much about it except what I have read. But I do 

know this: In North Carolina, we farm under contract, mostly contract farming, and without the packer being able to own the hogs 

in North Carolina, I would be out of business. And most of the people I know, the 2,300 contract growers in our State are not going 

to run down to the local bank and borrow money to put pigs in the 

houses and buy feed, number one, because they are not willing to 

take that risk; and, number two, the bank is not going to loan them 

the money, not in North Carolina. 

The legislation I assume is national legislation. The last thing is 

I do not know the details of the Smithfield/Farmland acquisition. 

I know nothing about it, never really even heard of Farmland. But 

I am sure of one thing. Hog farmers who have contracts with 

Farmland should be very glad that Smithfield will honor those contracts. I know from experience they are dealing with honorable people. They will get a fair price. They will be able to enjoy stability 

in their business, and it will help be able to keep their family 

farms alive and thriving. 

Thank you for the opportunity to address your Committee. 

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

the record.] 

Chairman DEWINE. Mr. Bell, thank you very much. 

Mr. Stumo? 

STATEMENT OF MICHAEL C. STUMO, GENERAL COUNSEL, ORGANIZATION FOR COMPETITIVE MARKETS, WINSTEAD, CONNECTICUT 

Mr. STUMO. Thank you, Chairman DeWine, Senator Kohl, for allowing me to testify. As well as being general counsel for Organization for Competitive Markets, I am a former hog producer and hog 

buyer from Iowa. 

The reason that we do not want—that we want to intervene and 

allow the market to work and keep the market working at this 

point is so that we do not have the lack of choices that are in North 

Carolina where the farmers in Iowa, Minnesota, South Dakota, Nebraska, and Wisconsin have to ask Smithfield whether they want 

to produce or there is no other option. This merger—this acquisition, rather, of two of the top—the top pork processing company in 

17

the country of another top-tier processor is bad for not only producers but consumers. That is why Consumer Federation of America opposes it, that is why Public Citizen opposes it, because we 

have seen in recent years not only the downward trend for hogs 

and hog prices and hog farm profitability, which everyone agrees 

to, but also in the last 10 years increasing gross profit margins by 

packers and retailers, which is showing us that they are less efficient or they are exercising market power to the detriment of producers and consumers. That is why producers and consumers are 

united on this issue. 

The big problem with this merger is that Smithfield—or acquisition, excuse me, is Smithfield is gaining increased power in the 

price-setting region of the U.S. hog market. The Iowa-southern 

Minnesota price is the gold standard. It sets the price for the country. This is different than a merger occurring in another area of the 

country and increased concentration there, because the Iowa-southern Minnesota prices establish first the transitions to the Western 

corn belt market price, which is Iowa, southern Minnesota, Nebraska, and South Dakota, primarily. And all the contracts that 

are formulated from an open market price as well as other open 

market transactions elsewhere in the country are derived from the 

first determined Iowa-southern Minnesota price. So this is like BP 

acquiring ARCO and the concern about the price-setting mechanism in oil and gas of Cushing, Oklahoma, that they would be able 

to control and affect that price-setting mechanism which affects oil 

and gas prices elsewhere in the industry. This is the same thing. 

So we have Smithfield Sioux Falls and Sioux City plants, and we 

have Farmland’s Crete, Nebraska, and Denison, Iowa, plants. We 

have about a 250-mile draw or procurement area, significant overlaps here. So what we are doing is taking out a major buyer in the 

price-setting region of the country with these significant overlap 

areas. 

Now, the recent estimates by folks like Glenn Grimes and Ron 

Planey, University of Missouri, that follow the hog industry are 

that 87 percent of the hog industry is vertically integrated. That 

includes packer-owned and contracted, non-packer-owned contracts. 

Ninety percent of the contracts that are not packer-owned pigs are 

a formula market based in some way off the open market price. So 

there is not only a tremendous incentive always for the packer to 

reduce open market price to save money on the hogs he is actually 

purchasing, but now, with 90 percent of the contracts formulated 

on this open market, if the price goes up because of supply and demand conditions by a couple of bucks, all of a sudden that telescopes and directly affects and makes far more expensive all those 

hogs that are pegged to the open market. So it is a different scenario, tremendous incentive to push price down. 

There is no reasonable argument that hog prices will go up as 

a result of this transaction. The reasonable argument is that hog 

prices will go down. If we assume a $1 decrease in live hog price 

on 270-pound hogs, 375,000 pigs per day, that is $1 million per day 

lost to the U.S. hog production industry; 250 kill days, that is $250 

million per year lost to U.S. producers, gains to Smithfield and the 

other packers. Consumers do not see it because there is no relationVerDate 0ct 09 2002 12:51 Feb 17, 2004 Jkt 091787 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\91787.TXT SJUD4 PsN: CMORC
18

ship between farm gate price and consumer price. Pure market 

power scenario. There is no evidence to the contrary. 

Further, Farmland is not a failing firm in the pork business. 

This is a Chapter 11 reorganization. They sold off a fertilizer business, grains, and beef. The pork business is a profitable business. 

Third-quarter results released a week ago Monday, $9 million profit. Annualized, that is $36 million. That is the seventh consecutive 

quarter in which Farmland pork profits have been greater than 

year prior. Everyone assumed that Farmland would reorganize 

around pork, but we have Smithfield desiring more market power, 

the creditors Committee desiring more payoff, but it is contrary to 

the public interest and fair open markets. So producers can make 

money, not go on a taxpayer dole, and they can stay in business. 

We need competitive markets for this entrepreneurial industry. 

Thus, I urge the Congress and the DOJ to scrutinize and block this 

merger. We cannot have one buyer and begging Smithfield to get 

into business all over the country. 

Thank you. 

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

for the record.] 

Chairman DEWINE. Well, let me thank our panel. We will start 

with questions. We are scheduled to have two votes at 5 o’clock, 

and the Senate is rather unpredictable. So we will see if that actually happens or not. If it does happen, we will have to stop, and 

because there are two votes it will take a while. But we will proceed with questions until that happens. 

Let me ask any member of the panel who would like to respond. 

The spot market or cash market has now been decreasing. I do not 

know what the number is. I have heard it is down to possibly 10, 

12, 13 percent of the market. What implication does that have if 

that continues to decrease? What significance does that have? Does 

that matter? 

Mr. TWEETEN. I would like to respond. 

Chairman DEWINE. Dr. Tweeten has already indicated in his 

written testimony that maybe it is not that important, but go 

ahead, Doctor. We will start with you, and then we will see if anybody else disagrees. 

Mr. TWEETEN. Well, I think one of the myths about markets is 

that you have to have a cash market to have competitive pricing 

and output. Contracts also have to recognize markets. Again, I go 

back to what I said before, and that is, if you do not pay farmers 

enough to cover their costs over the long period of time, they are 

not going to produce. And that means that if you are under a contract system or a cash system, you are still going to have to respect 

supply and demand. 

Agriculture is unique in that it has a lot of cash markets. There 

are lot of industries in this country, such as automobiles and so 

forth, that have almost no cash market. Parts suppliers, for example, there is very little cash market. It is almost all in a contract 

basis. But supply and demand still rule in those industries. 

Mr. BELL. Mr. Chairman, if I may interject something? 

Chairman DEWINE. Mr. Bell, go ahead. 

Mr. BELL. As a contract grower, we have been in the pig business 

under contract for 15 years, and over that period of time, in the 

19

last 5 years we have gotten, I think, four or five increases in what 

we are paid. 

During the worst hog market, I guess in U.S. history, when the 

price was 8 cents per pound a few years ago, a lot of people used 

up the equity they built up over generations in their farm trying 

to stay afloat through independents, that is the best year I had in 

the hog business. Best year I ever had because I always get paid 

a consistent, steady price. 

Chairman DEWINE. Mr. Kremer? 

Mr. KREMER. Yes, as a participant in the spot market system, it 

has a devastating effect. It is interesting to note that as these large 

vertical integrators talk about building plants, they talk about buying from 13 to 20 percent off the open market. We are the residual 

suppliers, and it is kind of like if they need our hogs, they will bid 

them up somewhat. But most of the time they do not need our hogs 

and so the market has continued to go down, and so it certainly 

puts strain on us. 

But the other thing, too, is that the spot market does, you know, 

drive the prices, for instance, when it comes time for contract deals, 

et cetera. And so as larger integrators concentrate more and the 

spot market becomes less, it shoves the price down and, therefore, 

it affects everyone across the board in a negative way as far as producers. 

Chairman DEWINE. Mr. Stumo? 

Mr. STUMO. The 87-percent vertical, of course, leaves 13-percent 

theoretical open market. The experts that advise us, the ag economists, industrial organization specialists, believe that 3 to 5 percent of the actual hogs traded, those in the Iowa-southern Minnesota market, actually set the price for virtually all the other 

hogs. 

It is a fundamental tenet of industrial organization that when 

you have a few dominant firms interacting in a high-volume market, that is a problem because there are only a few dominant firms. 

However, if they interact in a very thin market, the ability for 

them to push price down or manipulate price downward is exponentially increased. 

Chairman DEWINE. Mr. Sebring? 

Mr. SEBRING. Senator, in the morning, we look and see what the 

demand is for pork for our business. What do our customers need? 

How many hogs do we need to run the plant efficiently? And if we 

need hogs that day, if there is a demand for pork, we go out and 

we buy the hogs that we need to fill our kill and to fill orders. And 

if there is a demand for that product, we bid up for those hogs and 

we bid up for those hogs and we bid up for those hogs until we get 

the number we need. 

If, however, our customers slow down on the sale of pork and sell 

beef or sell chicken and they back off on the demand, yes, the market can go down. But that is the dynamics of the free market. And 

I do not know what percentage is bought every day, but I can tell 

you that is how we operate. When we need pork, we bid the price 

up. There is no other packer on earth that wants pork prices higher than Smithfield Foods. 

Chairman DEWINE. Mr. Sebring, how much of your business do 

you want to be on long-term contract? 

20

Mr. SEBRING. We are comfortable right now with—right now our 

contracts in corporate hogs are less than 50 percent. We do not 

have a problem buying hogs on the open market at 50 percent or 

more, as long as they are available. 

Chairman DEWINE. But I would assume that there is some point 

that you do not want a contract above, isn’t there? 

Mr. SEBRING. I am sorry? 

Chairman DEWINE. I would assume that there is some point you 

do not want a contract above. I mean, you would not want to lock 

yourself in—I do not know your business, but I would assume you 

would not want to lock yourself in at 100 percent of— 

Mr. SEBRING. No, we do not. 

Chairman DEWINE. You have got to have some flexibility in 

there. You cannot guess the market. 

Mr. SEBRING. Absolutely. We want to be able to go to the open 

market every day. 

Chairman DEWINE. Yes. 

Mr. SEBRING. But if that open market continues to shrink—and 

I am not talking about how many people are buying on the market, 

but just literally hogs being available, then that is when we turn 

to contractors and to our own farms to try and produce and have 

enough hogs to fill our plants. Our plants will not run without the 

hogs. 

Chairman DEWINE. Okay. We are going to stop at this point. We 

are into a roll call vote, and we will be back when we can get back. 

You can go right ahead. 

Senator Kohl is going to ask a question. When Senator Kohl is 

done asking questions, we will stop. I am going to leave and go 

vote. 

Senator KOHL. Thank you, Mr. Chairman. 

Mr. Hughes, during much of the year 2003, Wisconsin dairy producers suffered through extremely low milk prices. Congress created a new dairy income assistance program during this time as 

part of the farm bill to help producers during periods of depressed 

prices. This program has been helpful, but obviously it is not the 

entire solution to the problems. 

Mr. Hughes, can you give the Subcommittee your impression on 

the status of the dairy industry in Wisconsin? Specifically, how do 

issues related to concentration and consolidation affect the dairy 

industry? What impact does increased concentration among dairy 

cooperatives have on the ability of Wisconsin dairy producers to 

make a living? And, in your opinion, what are some of the things 

that we can do about this problem? 

Mr. HUGHES. Okay. Thank you, Senator Kohl. 

The situation in the dairy industry in Wisconsin is it is very 

challenged, as you know. We liken it to somewhat like in the automobile industry in the 1970’s in Detroit. But the recent 20-month 

or so down cycle is more of a problem of supply and demand imbalance caused somewhat by import increases, particularly in cheese 

and milk protein concentrate. Also, the softness in the economy has 

really affected demand for dairy products. And the milk payments, 

the milk income loss payments have been the life saver in many 

respects in the dairy industry in Wisconsin. 

21

The concentration issue has a long-term effect in dairy. It is hard 

to measure it day by day, but every year we see in recent years 

a major acceleration in consolidation both within the retail—excuse 

me, the fluid milk processing area as well as in the dairy cooperative arena. And as I stated earlier in my testimony, the best thing 

that a farmer in Wisconsin or any dairy farmer anywhere or any 

producer can have is a number of competing buyers for their product. 

I like to say that once I see in a market less than four competing 

buyers for a product, I get very concerned. And I think it is fair 

to say that the movers and shakers in the dairy industry do not—

and it is a different industry. You cannot liken it to vegetable processing or meat processing, but they do not want to see the kind of 

vertical integration and concentration that is occurring in poultry, 

hogs, and so on. 

But the tendencies are there, and it does not have to go that 

way, but it well could. And I think the thing that is important to 

do about this—and in Wisconsin, it is somewhat of a structural 

problem because of the competition from the West Coast. But I 

think we need to do whatever we can in State and Federal programs to keep encouraging producer ownership and vital dairy producer cooperatives and have multiple buyers acting in the marketplace for producer milk. I think that creates innovation and 

strengthens the industry and gives consumers better results. 

I am not sure that you can legislate or regulate the farm share 

of the retail dollar which gets discussed in lots of sessions. It is a 

very complicated subject why the retail margins have increased. 

There is lots of value-adding, ranging from advertising and promotion merchandising activities to just the degree of product diversity that is adding to that market basket cost. And the key thing 

there is to make sure that the farm level prices are not being depressed by that concentrating nature in the industry. 

And I think we need to have a strong proactive antitrust approach that ensures that that does not happen, and that needs to 

be coordinated with ag policy. 

Senator KOHL. I thank you, Mr. Hughes. 

We will stand in recess now until Chairman DeWine returns. We 

will be in recess. 

[Recess 5:12 p.m. to 5:49 p.m.] 

Chairman DEWINE. Well, thank you very much. We will see how 

long we can go here go here without the Senate having its next 

vote. 

Mr. Sebring and other processors seem to argue, I guess do argue 

that one of the reasons to have these contracts is to have the uniformity and higher-quality product. ‘‘Consistency,’’ I guess, is one 

of the ways that they describe that. 

Mr. Kremer, as an independent farmer, how do you respond to 

that? Do you think your product is an inferior product? 

Mr. KREMER. Well, we are also, as I mentioned in my testimony, 

we have organized a value-added pork cooperative and have done 

a lot of studies and a lot of focus work and realize what consumers 

want are choices and they want competitive choices. And, of course, 

I also mentioned that it is very hard to break those types of barriers. 

22

You know, I do not think it is as much—I mean, we can provide 

uniformity. In fact, the standards that the packers that are buying 

from us, you know, they have dictated that we have the lean kind 

of hogs, et cetera. And so I do disagree with that. I do say what 

the system is turning into, especially in the consolidation of the retail industry, is locking out some diversity. And that is what we 

face as we try to enter into some of the major retails systems, you 

know, the brokerage firms are basically consolidated, and it is hard 

to break that system. We cannot afford the $10,000 per product per 

year slotting fees that are required, and what happens, what we 

have seen in some of the largest retail settings, is that because the 

supply source is dominated by the larger conglomerates, actually 

the choices go down. They say this is our standard line of products. 

And so I think that is an issue, and we know that consumers 

want choices, and we feel that smaller, more community-based entities such as ours are what consumers desire. 

Mr. BELL. Mr. Chairman, can I add something to that, please? 

Chairman DEWINE. Sure, Mr. Bell. 

Mr. BELL. One of the advantages of being a contract farmer is 

that I would like to be concerned about genetics, about what needs 

to come to my farm and what does not need to come to my farm. 

I do not know a thing about genetics. We are really not concerned 

about genetics. All I am interested in is that I get paid per head 

per pig on my farm. And to me, that is the real advantage. I am 

not a genetics expert. I am not a feed mixture or nutritionist expert. All I know how to do is raise the pigs, and that is all I have 

to worry about. So, to me, under contract that is an advantage. 

One thing that is sort of—I have been in a few meetings in the 

Midwest, pork meetings out there, and have met some people in 

the Midwest. And one thing that bothers me a little that I would 

like to say is that I have gotten comments such as, well, we are 

a family farm out here and you are not in North Carolina. My dad 

and I are the only ones who run our farm. I don’t see how much 

more family we can get than that. 

It is a matter of perception, in my mind. In North Carolina, the 

typical size farm is maybe 200 acres. That is a big farm in North 

Carolina. I went to the Midwest, and I was talking to this guy who 

was a farmer. I said, ‘‘Well, how big is your corn farm?’’ He was 

a corn farmer. He said, ‘‘We have got about 12,000 acres.’’ That is 

a county in North Carolina. That is huge. 

You know, when I was there, they said, ‘‘Well, you guys are nothing but tenant farmers in North Carolina.’’ Well, calling a contract 

farmer a tenant farmer assumes two things: 

Number one, that you do not understand the contract you have 

entered into, and I graduate from one of the top ten universities 

in this country in business school, and I guarantee you, I understand a contract. And the contract was a good choice for me to 

come home to do. 

Number two, it assumes you were forced into that contract. And 

I would not have left the job I had, which was a pretty good job, 

to come home to a small town and enter into this contract situation. As a matter of fact, if it was a tenant farmer situation, it 

would be Smithfield that is a tenant on my farm because I own the 

23

building and the land and they just have their pigs and feed out 

there. 

If it was a tenant farmer situation and I am being forced into 

this and I am not intelligent enough to understand the contract I 

have entered, I would not be trying to buy a farm from my neighbor who is just down the road. As a matter of fact, we are going 

to meet about it Friday. He passed away and I am buying it from 

his wife. 

So, to me, that argument does not hold much weight, but that 

is just my perspective. 

Chairman DEWINE. Mr. Stumo? 

Mr. STUMO. The contracts that I see in the Upper Midwest and 

the formula arrangements, the grade and yield premiums are the 

same as the open market transactions; thus, the incentive structure for quality is the same for both the contract and the open market. There is no distinction. And we are aware of no studies that 

have shown that there is some inherent quality benefit in the contracts or that there is one in practice versus the open market. So 

we see the same quality incentive structure both ways. 

Chairman DEWINE. Mr. Sebring, you buy from the open market. 

You buy on contract. You buy both, correct? 

Mr. SEBRING. Yes. 

Chairman DEWINE. Difference in quality? 

Mr. SEBRING. Yes. 

Chairman DEWINE. But yet you are buying both? 

Mr. SEBRING. Yes. Well, the contracted hogs have to meet certain 

quality standards, irrespective of, you know, the market conditions. 

And so those hogs are—we enter into contracts with the higherquality hog producers, producers that have the genetics that we are 

interested in. Yes, they do get penalized if they bring us bad hogs, 

or they can get a premium if they bring us good hogs. But our goal 

is for them to bring us good hogs, and we expect them to earn some 

premiums. 

But we also pay premiums for scheduling, having the hogs at our 

barns when we need them, and we pay different premiums for the 

type of feed and quality of the hogs up front. And then, yes, we pay 

them on a grade and yield basis also. 

Chairman DEWINE. Does it matter to me as a consumer when I 

walk in the grocery store if I get a contract slice of one of your hogs 

or if I get a spot market hog? I am being a little sarcastic here, 

a little funny. But does it? 

Mr. SEBRING. Today, more and more retailers and packers are 

trying to specialize, have various types of pork: the lean generation 

product we talked about, that is a very lean product; intramuscular 

lean and fat trim. But there is also the other side of that. We are 

developing prime pork programs that have marbling in the pork 

and the pork is literally fatter than it has been in many years. And 

there is a demand for that. 

But, you know, for the most part, the consumer would not know 

on the average—today our hogs are all pretty good. They are all 

pretty lean. Our average lean-to-fat ratio is 54 today. Ten years ago 

it was 47, 48 percent lean, today 54 percent lean. So most of the 

hogs that are grown today are higher-quality hogs. 

24

The contract is there so we know we are going to have enough 

hogs to run the plants. 

Chairman DEWINE. You are getting your average up. 

Mr. SEBRING. Yes. The quality, the average of the quality is getting better. And if you do not do that as a producer, you are not 

going to make it. 

Chairman DEWINE. Mr. Stumo, Mr. Sebring wrote in his testimony that Smithfield and Farmland do not compete for the same 

hogs, but you have told us that there is overlaps between Smithfield and Farmland. Do you two want to explain the discrepancy in 

your— 

Mr. STUMO. I disagree with Mr. Sebring. We have producers in 

our organization that sell to both, have them both bid on their hogs 

in Iowa and Nebraska. 

Chairman DEWINE. Mr. Sebring? 

Mr. SEBRING. There probably is some limited overlap, but for the 

most part, they are getting their hogs to fill their kill every day, 

and we are. So I would say there is enough hogs to go around between us. 

Chairman DEWINE. As I listen to the testimony, it is not surprising I guess, I seem to get sort of two visions of farming, Mr. 

Kramer and Mr. Bell, of what farming should be, one contract 

farming—maybe that is the vision of the future—the other is independent farming. One is the vision of the future. You two want to 

comment on that? It just seems like I am looking at different 

worlds here. 

Mr. BELL. I will be glad to comment on that, Mr. Chairman. 

Chairman DEWINE. I get the impression, Mr. Bell, you did not 

think you could make it the other way. 

Mr. BELL. It is not an impression. In North Carolina it is reality. 

In North Carolina, as a former banker, I saw situations where people would come into my bank, having used up their life savings and 

all the equity they build up over two generations to make it 

through a down market. The bank foreclosed on a lot of hog farms 

when prices are low. And I had seen that. I do not know if that 

is isolated to North Carolina or if that happens in the Midwest. 

They may not have any farmers go under if they are independent, 

but in North Carolina it happens. 

As a banker looking at that, I was not willing to take that risk. 

I saw that happen to too many people I was also not willing to do 

what needed to be done nutrition wise, to be a nutritionist, to be 

a breeder, to be everything that I needed to be to be an independent, and a marketer for myself. Because of the contract, I was 

given all those things as part of my contract. Realistically, it is a 

matter of perception, Mr. Chairman, the perception that a family 

farm is 300 pigs or 200 pigs or 500 pigs, to me is—I grown more 

pigs than that, but by the same token a perception from someone 

in Iowa who has 12,000 acres of corn, to me that is not a family 

farm, that is a corporation. 

Mr. KREMER. I have a different perspective, and I am not here 

to—I am not against contracting. People have the right to contract. 

But I have experiences with contract, most of them very, very bad 

experiences. As a young farmer advisor for 12 years, running a vocational agriculture program in an adult education program, it was 

25

my job to oversee 300 farm families, and we always looked into the 

contract farming as an option, as a possible risk management tool, 

but we used it limited on account of the experiences we had. 

For instances, we have 28 turkey producers that raise for a company, and 15, 20 years ago they had a great honeymoon. They 

started out with 7-year contracts, and renewed for 5 years, and 

then it became one and now they are on a flock-to-flock contract 

with no other competition around. That is what it is. So you tell 

me what kind of inter-generational opportunity there is as the 

prices went down. We have seen some poultry people, poultry contractors and even some hog contracts, basically had their 3-year 

contract and then were not renewed. 

In some instances, a person came up to me one time and said, 

you know, people keep saying that investment of a half a million 

dollars into a contract operation is a great investment, a great opportunity, however they said, if I would have done that, invested 

in that particular company as a corporate stockholder 20 years ago 

instead of having just worn out poultry buildings at the time, I 

would have had $6.5 million. 

I think the other point too is the danger of vertically integrated 

contract operators for rural communities is the fact that they normally do not utilize local resources, buying feed from the local company, support the local hardware store. Most of the time they come, 

actually suck out the resources and suck it out of the communities. 

Mr. BELL. Could I respond to that, Mr. Chairman? 

Chairman DEWINE. Sure. 

Mr. BELL. My intake on that is completely 180 degrees in opposition. 

Chairman DEWINE. Where do you buy your stuff? 

Mr. BELL. Sir? 

Chairman DEWINE. Where do you buy your products? 

Mr. BELL. Well, in Kenansville, there is not many choices. We 

have got one hardware store. It is called Brown’s Service Center. 

It is like the Wal-Mart of Duplin County. We can find everything 

we need there, from boots to whatever. I spend probably 4 to 

$5,000 a month there. I have about a 3 to $400 a month gas bill 

at the local gas station. The perception is—what he is talking 

about is a corporate business, the integrator— 

Chairman DEWINE. Where does your feed come from? 

Mr. BELL. I have absolutely no idea. It comes from a feed truck 

that comes to my farm. I have absolutely no idea. 

Chairman DEWINE. I mean who do you buy it from though? 

Mr. BELL. I do not buy any feed. I have no idea. 

Chairman DEWINE. I am sorry? 

Mr. BELL. I do not buy any feed. I have no idea. I do not own 

the feed or the pigs. I just own the buildings and the land. 

Chairman DEWINE. But the feed is supplied by? 

Mr. BELL. —Smithfield. 

Mr. TWEETEN. Probably it comes from Cincinnati, Ohio. 

Mr. BELL. But to respond to something he said a minute ago that 

I could not disagree with him more as a banker and as a common 

sense— 

Chairman DEWINE. That would be nice if it did. It very well 

could be, but that was an interesting comment. 

26

Mr. BELL. Mr. Chairman, one thing that I could not disagree 

with more that he said a minute ago, I understand what he is talking about, in the poultry business I have heard of that, you know, 

people wish they had not built the buildings, 20 years later they 

have a worn-out poultry house. The poultry business is a lot different than the hog business. They are completely different animals. I have got hog houses that I know in Duplin County where 

we are that are 30-years-old, still producing pigs every day, still on 

contract, getting raises on a contract, and I can assure if you are 

had gone to your local banker 20 years ago and said, hey, I want 

to borrow a half million dollars to buy some Tyson Food stock, he 

would have laughed you out of the bank. Now, they will lend you 

a half million dollars to build a poultry operation or a hog farm because you have consistent, steady cash flow. He is not going to lend 

you a half million dollars to buy some stock. 

Chairman DEWINE. Dr. Tweeten? 

Mr. TWEETEN. I think it is important to remember that this is 

not your father’s Oldsmobile. This is a different kind of industry 

than we had two decades ago, three decades ago. Consumers have 

become much more affluent. They are demanding much more from 

the foods that they buy in the supermarket. My wife complains a 

great deal about her inability to buy the kind of bacon she is looking for. 

What worked in the past in terms of meeting the needs of consumers does not work anymore; that is, you now need to have a 

system that tailors the production to the needs of consumers. That 

means lean pork. It means the right breeding program, the right 

feeding program, the right time and place of delivery, all these 

specifications. In the old days, we coordinated this whole system by 

the market at each stage of the food production and marketing 

process. That is getting much more difficult to do. It is now cheaper 

in many cases to use a managed system. That is where these production contracts come in. 

There is a great deal to be said for the flexibility for firms to 

make their own decisions as to what best serves their need, and 

they cannot help but respond to the demands of the consumer. 

Chairman DEWINE. Dr. Tweeten, in his testimony Mr. Kremer 

states that, and I quote, ‘‘Agribusiness firms are showing record 

profits while at the same time farmers and ranchers are struggling 

to survive and consumer food costs continue to rise.’’ 

This would seem to contradict your testimony, especially regarding food costs and the profitability of the processors. Do you want 

to respond to that? 

Mr. TWEETEN. Well, yes. The profit margins in agribusiness are 

very modest, and they are very modest relative to other industries 

in this country. And as I say, in a recent paper I looked at ten different types of farms, and what we find is that commercial farms—

and it turned out on average it took about $400,000 worth of sales. 

But farms with over $400,000 sales per year more than covered all 

their costs. They got rates of return comparable to what you see 

in other industries. In other words, this idea that markets do not 

work is simply a myth. 

Now, you say the small farm, the inefficient farm should have a 

decent reward for its activities. Well, at Ohio State University, we 

27

do not pay quarter-time teachers who are incompetent very well. 

So if a farmer is small— 

Chairman DEWINE. I missed that. You do not do what? 

Mr. TWEETEN. We do not pay teachers teaching one-tenth time 

and they are incompetent, we do not pay them very well. In fact, 

we dismiss them. They never get tenure. 

The point is that if you are a small farmer who is inefficient, do 

not expect a very good return on your investment. 

Now, we have an awful lot of small farms, and they have been 

holding their own pretty well. But they do it through off-farm income and it is a hobby farm and they are going to stay in business 

because they are supporting their hobby with their off-farm income. 

But the majority of production is produced by commercial farms 

that make a very favorable return on their investment. The majority of farmers, because they are too small or inefficient, lose money. 

Mr. BELL. Mr. Chairman, if I could interject one more thing to 

what he said? And I am not an economist, and I am not from the 

Midwest so I do not understand some of the arguments being made 

or the mentality. But I will tell you this: It surprises me that when 

you look at economies of scale— 

Chairman DEWINE. We have about the same mentality in the 

Midwest, Mr. Bell, as I am sure you do down South. 

Mr. BELL. Well, we are little different down South. But what I 

do not understand, I guess, about the perception is that economies 

of scale work in other businesses, and it works in the row crop 

business. But in the hog business it does not seem to be something 

they want to consider. 

Mr. SEBRING. Mr. Chairman? 

Chairman DEWINE. Mr. Sebring? 

Mr. SEBRING. Yes, I would like to respond, too. We have introduced some statistics to the Committee that show packer margins 

versus producer margins for the last 10, 12 years. And, historically, 

the producers have made more money per head than the packers, 

and very seldom does that reverse where the packing plants makes 

more money per head than the producer. 

Chairman DEWINE. Mr. Hughes, what is your opinion about 

this? 

Mr. HUGHES. Well, I think the— 

Chairman DEWINE. You are a State enforcement officer. You can 

give us some insight on this. 

Mr. HUGHES. Instead of talking about contracting per se, I think 

if you step out a little broader and look at concentration—I was 

just on the way out reading a magazine called Dairy Field that 

showed that last year the only growing aspect of the dairy industry 

where margins were healthy was in the fluid milk business. And 

it was because there is enough competitors left in that field that 

they are really trying to grow business volume, market share, and 

they are doing that through product innovation, and the fluid milk 

sales was the healthy part of the dairy business last year. I do not 

think that would occur if you got a more highly concentrated industry, and when you come to contracting in the dairy business at the 

producer level, they very much warn against trying to forward contract your milk for more than 50 percent of your milk volume. Now, 

it is not the same business as grain or vegetables or hogs. And I 

28

think if you stuck the dairy industry into a strict contractual environment, you would have disincentives in that environment for 

some of the innovation that you would see otherwise where there 

is more choices for the producer to sell their product and meet different and varying specifications. That is where you are going to 

get the innovation all the way through the market chain. 

Chairman DEWINE. Mr. Stumo? 

Mr. STUMO. Chairman DeWine, I think we have been talking 

about the vertical system versus the open market system as if they 

are black and white in that they cannot co-exist, we either have 

one or the other. 

I think in my perspective, in OCM’s perspective, we need a sufficient open market that is resistant to manipulation, that is resistant to artificial depression of price, to discipline the contract side. 

If we go 100 percent vertical, as in poultry, with no market to discipline the returns to determine price, to have price discovery, everything is unilateral, packer-down, and contract modifications for 

every renewal. 

Thus, we see gross profit margins increase 190 percent over 20 

years for the poultry companies, and the poultry producers on average having zero return on investment, zero return on management, 

minimum wage, and a mortgage. 

In the pork industry, we still do have a thin but it is an open 

market, and that disciplines the contracts. If we lose the open market, or if it becomes even more susceptible to manipulation, that 

does not discipline the contracts because people do not have an option to opt back into the open market. That is why it is important 

to have something like, for example, Senator Grassley and others 

have proposed a bill for 25-percent spot market each day, so that 

preserves an open market, allows the contracts, the open market 

is sufficient volume to be more resistant to manipulation, and that 

is one way to look at it. That is the way I look at it. 

Chairman DEWINE. Well, I have heard from some of the other 

panelists who seem to imply you do not need any spot market. You 

obviously disagree with that. 

Mr. STUMO. Yes, if you do not have that auction interface to determine price, to determine quality, with the quality specs and an 

open negotiating, negotiated haggling style bid going on all the 

time, then you have strictly a contract relationship where the 

power of the dominant firm in a contract relationship is exponentially greater than the power of a dominant firm in some sort of 

an auction or open market interface. 

Chairman DEWINE. Dr. Tweeten, how far down can you get with 

percentage, spot market? 

Mr. TWEETEN. I would say— 

Chairman DEWINE. And still be viable. 

Mr. TWEETEN. Zero. 

Chairman DEWINE. You do not need a spot market? 

Mr. TWEETEN. No. As I say, demand and supply—demand and 

supply operate whether you have a spot market or not. Furthermore, my experience is—and we have done some surveys on this—

that the independents who are operating in the spot market are far 

unhappier with their economic situation than the farmers who are 

contracting. 

29

Chairman DEWINE. Where, Dr. Tweeten, I am just trying to 

think in agriculture, where in agriculture has that happened so 

far? 

Mr. TWEETEN. That there is on— 

Chairman DEWINE. That there is no spot market. 

Mr. TWEETEN. In a number of fruits and vegetables it is essentially all contract. 

Chairman DEWINE. What would those be? 

Mr. TWEETEN. I think of sweet corn, for example, in my area of 

the country. Many other fruits and vegetables I think follow pretty 

much the same pattern. 

Chairman DEWINE. All contracted? 

Mr. TWEETEN. All contracted. 

Chairman DEWINE. And what has happened in those industries? 

Mr. TWEETEN. They function very well. Function very well. And 

it is pointed out, too, by Mr. Sebring that in many cases companies 

like to have a bit of a spot market because if the contract production does not fit all their needs, they can always go into the cash 

market. The problem is that there is a great deal of instability in 

that cash market because it handles—it is a residual claimant on 

demand, and that means there is going to be a lot of volatility because some years they will come in and need a lot, in some years 

not so much. So it is highly volatile. And I cannot imagine that 

those spot market suppliers are going to be very happy with that 

arrangement. 

Chairman DEWINE. Mr. Hughes? 

Mr. HUGHES. I would just like to add, I think that although contracts, of course, have to respond to some kind of supply and demand condition, the idea that there needs to be—to make supply 

and demand work optimally, there needs to be very good information that is level on both sides of the bargaining table. And in the 

vegetable industry in Wisconsin, the only way that that mechanism 

is working is sort of twofold: one is that the processors know what 

the opportunity cost for a grower is to grow soybeans or corn or potatoes versus contract vegetables. But for the producers who may 

only have one or two choices in the marketplace, in order for them 

to make an informed decision, their association provides a function 

to provide a reporting mechanism because in this case the Government does not have a price reporting mechanism to make sure that 

the offered contract prices are transparent and, therefore, Producer 

A knows what Producers B, C, and D may be having as an option 

so that they have a little more information to make their decisions 

on. And I think that is a vital piece of the equation—transparency. 

Chairman DEWINE. All right. Last statement, Mr. Sebring. 

Mr. SEBRING. Two things, Mr. Chairman. Number one, that rule 

or law was passed not too long ago where we do report all of our 

spot buys every day. That is required by all of our competitors and 

by every packer. 

I do not know of many industries where—for instance, General 

Motors does not tell Ford what it costs to build a car. 

What we are saying today is we just do not want the Government to impose a ban on packer ownership and packer management for hog supply. The spot market works. We think the system 

today is working. But we have huge amounts of dollars invested in 

30

packing houses, and we need to have a steady supply of high-quality hogs to keep those plants running, to keep people employed, 

and to keep our industry moving along and profitable for both 

sides. And we do think it is working, and that is all we are asking 

for. 

Thank you. 

Chairman DEWINE. Well, good. I want to thank you all very 

much. I know several of you have planes to catch. I appreciate it. 

Starting a hearing at 4 o’clock is not easy, and being interrupted 

by votes is not easy. Your testimony has been very helpful to the 

Subcommittee. 

Thank you very much. 

[Whereupon, at 6:20 p.m., the Subcommittee was adjourned.] 

[Questions and answers and submissions for the record follow.]

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