This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

1845

Vol. 62, No. 9

Tuesday, January 14, 1997

1Concentration in the Red Meat Packing Industry,

Packers and Stockyards Programs, Grain Inspection,

Packers and Stockyards Administration, USDA,

February 1996.

2Concentration in Agriculture: A Report of the

USDA Advisory Committee on Agricultural

Concentration, Agricultural Marketing Service,

USDA, June 1996.

DEPARTMENT OF AGRICULTURE

Grain Inspection, Packers and

Stockyards Administration

9 CFR Part 200

Filing of a Petition for Rulemaking:

Packer Livestock Procurement

Practices

AGENCY: GIPSA, Agriculture.

ACTION: Notice of receipt of petition for

rulemaking.

SUMMARY: The U.S. Department of

Agriculture (USDA) has received a

petition for rulemaking from the

Western Organization of Resource

Councils (WORC). The petition requests

the Secretary to initiate rulemaking

under the Packers and Stockyards Act to

restrict certain livestock procurement

practices by meat packers. USDA is

soliciting public comment on the

petition and will utilize these comments

in assessing the need for the requested

rulemaking. This notice provides all

interested parties an opportunity to

participate in that process.

DATES: Comments concerning this

petition are invited and must be

received on or before April 14, 1997.

ADDRESSES: Send an original and two

copies of comments to the Acting

Deputy Administrator, Packers and

Stockyards Programs, GIPSA, USDA,

Stop 3641, 1400 Independence Avenue,

SW, Room 3039–S, Washington, D.C.

20250.

FOR FURTHER INFORMATION CONTACT:

Tommy Morris, Director, Packer and

Poultry Division, (202) 720–7063.

SUPPLEMENTARY INFORMATION:

Background

In early 1995, prices for cattle

dropped sharply and steadily declined.

Various groups in the industry, mainly

cattle producers, urged Congress and

USDA to take action to improve

conditions. USDA has undertaken

several initiatives to respond to the

concerns of the industry.

On February 14, 1996, USDA released

a congressionally-mandated study on

concentration in the red meat industry.1

The study included projects on the beef

sector that included examining cattle

procurement markets, price

determination, captive supplies, and the

effects of concentration on cattle prices.

Although the study confirmed the

existence of concentration in the red

meat industry, it provided no definitive

evidence that concentration had an

appreciable effect on cattle prices.

Following release of the study, the

Advisory Committee on Agricultural

Concentration was appointed by the

Secretary to review the study and a

number of other issues involving

concentration in agriculture. The

Advisory Committee submitted its

recommendations and findings on June

6, 1996.2 The recommendations of the

majority report included increased

monitoring and enforcement of antitrust

and regulatory policy, limiting packer

activities regarding price differentiation,

improving collection and reporting of

market data, and value-based pricing.

The Advisory Committee also submitted

three minority reports. The

recommendations of the minority

reports included taking additional

action to address the concerns of

producers relating to the adverse effect

of concentration on the cattle industry,

increased reporting of export data, and

educating producers about the current

market environment.

On July 31, 1996, the Secretary

announced the first in a series of actions

by USDA to improve competition in the

livestock industry. These actions

address two of the major areas of

recommendations made by the Advisory

Committee. These first actions, taken to

immediately address the concerns of

many livestock producers, include price

reporting initiatives that will broaden

the coverage of market transactions

reported and improve the timeliness

and availability of information on the

growing international trade in livestock

and meat products.

The Petition

Independent of USDA’s activities, the

Secretary received a petition for

rulemaking submitted by the Western

Organization of Resource Councils

(Petitioner) on October 12, 1996. The

Petitioner requests that USDA issue

rules under the authority of the Packers

and Stockyards Act that would prohibit

packers from procuring cattle for

slaughter through the use of a forward

contract unless certain specified

conditions are met and that would

prohibit packers from owning and

feeding cattle, unless the cattle are sold

for slaughter in an open, public market.

The Petitioner

The Petitioner represents that it is a

federation of grassroots organizations

located in Colorado, Idaho, Montana,

North Dakota, South Dakota, and

Wyoming that was formed in 1979. The

various organizations are composed of

affiliated citizen groups in 42

communities across the region. The

6,000 members of these groups are

farmers, ranchers, small business

owners, and working people who seek

to protect natural resources, family

farms, and rural communities. They

include both cattle ranchers and beef

consumers.

Need for the Suggested Rules

The Petitioner has submitted this

petition for rulemaking because it

believes that packers’ direct ownership

and feeding of cattle for slaughter and

their procurement of slaughter supplies

through formula or basis-priced forward

contracts have decreased prices paid to

cattle producers. The Petitioner also

believes that because cattle sold through

formula or basis-priced forward

contracts are not traded publicly and

packer-fed cattle are not sold publicly,

these practices unjustly discriminate

against some producers and provide

unreasonable preferences to others.

According to the Petitioner, these

practices are in violation of Section 202

of the Packers and Stockyards Act and

should be restricted through rules.

Request for Comments

USDA is seeking public comment on

the petition from academia, all segments

of the industry (including, for example,

producers, marketing firms, meat

packing firms) and other interested

parties, including small entities that
1846 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

1 5 U.S.C. § 553(e).

2 7 CFR § 1.28.

may be affected by implementation of

the Petitioner’s proposal. Small entities

are defined as firms that meet the

following standards: (1) beef cattle

producers, except feedlots, with annual

receipts of $500,000 or less for beef

cattle sales; (2) beef cattle feedlots with

annual receipts of $1.5 million or less

for beef cattle sales; and (3) meat

packing plants with 500 employees or

less.

Comments received on the petition

will provide the Secretary of Agriculture

with additional information to consider

in determining whether or not the

rulemaking requested by the Petitioner

should be undertaken. The submission

of comments that address the following

questions would be particularly helpful.

These questions are suggested merely as

the framework for your comments.

1. What competitive or other

economic effects would implementing

the rules that WORC is asking USDA to

propose (hereinafter ‘‘proposed rules’’)

have on individual businesses and the

cattle and beef industry as a whole?

2. What are the competitive effects of

formula or basis-priced forward

contracting and packer feeding on cattle

producers, feedlots, meat packers, meat

wholesalers and retailers, and

consumers?

3. What would be the effects of

implementing the proposed rules on the

structure, conduct, and competitive

performance of the cattle producing,

cattle feeding, meat packing,

wholesaling and retailing industries?

What would be the effect on the

structure, conduct and competitive

performance of livestock and meat

markets? In answering these questions,

what do you consider to be the relevant

markets and how do you define them?

4. How do formula or basis-priced

forward contracting and packer feeding

affect cattle prices? Do formula or basispriced forward contracting and packer

feeding have adverse competitive effects

or other adverse economic effects? Are

there competitive benefits or other

economic benefits associated with use

of formula or basis-priced forward

contracting and packer feeding that

would not support implementing the

proposed rules?

5. Do the research studies cited by the

Petitioner support its position that the

formula or basis-priced forward

contracting and packer feeding practices

outlined in the petition result in

competitive harm or other economic

harm to cattle producers and that the

practices harm competition in beef

packing? Are there other studies that

USDA should consider?

6. Does sufficient evidence exist to

find that the formula or basis-priced

forward contracting and packer feeding

practices outlined in the petition violate

Section 202 of the Packers and

Stockyards Act? If so, what is that

evidence?

7. Is regulatory action needed?

8. Are the proposed rules too broad or

too restrictive?

9. Do the proposed rules adequately

address the concerns raised by the

Petitioner?

10. Are there alternatives to

rulemaking that would address the

concerns raised by the Petitioner?

Please include any data, analyses, or

other empirical evidence that supports

your position. USDA is also particularly

interested in receiving comments from

the academic community on this

petition, including available theory,

research and other information.

USDA has sought extensive public

comment from all members of the

agriculture sector while addressing

concentration in agriculture and

strongly encourages participation in this

important process.

Done at Washington, D.C. this 8th day of

January 1997.

James R. Baker,

Administrator, Grain Inspection, Packers and

Stockyards Administration.

Petition Received

On October 12, 1996, USDA received

the following petition asking USDA to

issue rules to restrict certain livestock

procurement practices. The appendices

forwarded with this petition are

available for review at USDA, GIPSA,

Packers and Stockyards Programs, 1400

Independence Avenue, SW, Room

3039–S, Washington, D.C. 20250. Copies

may be obtained by writing or calling

that office at (202) 720–7063 or 720–

7051. The petition is hereby published

in order that USDA may obtain public

comment on this requested regulatory

action.

Petition for Rule-Making on Captive

Supply Procurement Practices Under

the Packers and Stockyards Act

Submitted by The Western Organization

of Resource Councils

October 8, 1996.

Introduction

The Western Organization of Resource

Councils (WORC) petitions Secretary of

Agriculture, Dan Glickman, to exercise

his authority under the Packers and

Stockyards Act to issue rules restricting

packers’ use of certain procurement

practices to acquire captive supplies of

slaughter cattle. WORC requests that the

Secretary issue rules that:

1. Prohibit packers from procuring

cattle for slaughter through the use of a

forward contract, unless the contract

contains a firm base price that can be

equated to a fixed dollar amount on the

day the contract is signed and the

forward contract is offered or bid in an

open, public manner.

2. Prohibit packers from owning and

feeding cattle, unless the cattle are sold

for slaughter in an open, public market.

Packers’ direct ownership and feeding

of cattle for slaughter and their

procurement of slaughter supplies

through forward contracts have

decreased prices paid to cattle

producers. In addition, because forward

contracts are not traded publicly and

packer-fed cattle are not sold publicly,

these practices unjustly discriminate

against some producers and provide

unreasonable preferences to others.

Thus, these practices are in violation of

Section 202 of the Packers and

Stockyards Act (7 U.S.C. § 192) and

should be restricted through rules.

The Western Organization of Resource

Councils (WORC) is a federation of

grassroots organizations: the Western

Colorado Congress (Colorado), the Idaho

Rural Council (Idaho), the Dakota

Resource Council (North Dakota),

Dakota Rural Action (South Dakota), the

Northern Plains Resource Council

(Montana) and the Powder River Basin

Resource Council (Wyoming). WORC

was formed in 1979.

These six organizations are composed

of affiliated citizens’ groups in 42

communities across the region. The

6000 members of these groups are

farmers, ranchers and small business

and working people who seek to protect

natural resources, family farms and

rural communities. They include both

cattle ranchers and beef consumers.

Language of Rules

This petition for rule-making is

submitted pursuant to the

Administrative Procedures Act, 5 U.S.C.

§ 553(e) and USDA regulation 7 CFR

§ 1.28. The statute provides that ‘‘each

agency shall give an interested person

the right to petition for the issuance,

amendments, or repeal of a rule.’’ 1 In

addition, the USDA regulations provide

that interested persons can petition

USDA officials to issue, amend or repeal

a rule.2 WORC asks that the Secretary

publish the following proposed rule in

the Federal Register and invite public

comment both in writing and at USDAsponsored informal public hearings:
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1847

3Concentration in Agriculture: A report of the

USDA Advisory Committee in Agricultural

Concentration, Agricultural Marketing Service,

USDA, June 1996, p. 31.

4Id. at 31.

Restrictions on the Use of Captive

Supply Procurement Practices

1. Restrictions on Use of Forward

Contracts

No packer shall procure cattle for

slaughter through the use of a formula

or basis price forward contract. All

forward contracts used by packers for

purchase of cattle slaughter supplies

shall contain a firm base price that can

be equated to a specified dollar amount

at the time the contract is entered into

and be offered or bid in an open, public

manner.

(a) The term ‘‘forward contract’’

means any contract, whether oral or

written, for purchase of cattle that

provides for their delivery to a packer at

a date more than seven days after the

date the contract is entered into,

without regard to whether the contract

is for a specified lot of cattle or for a

specified number of cattle during a

certain period such as a week, month or

year.

(b) The term ‘‘formula or basis price’’

means any price term that establishes a

base from which the purchase price is

calculated by reference to a price that

will not be reported until a date after the

day the forward contract is entered into.

For example: (1) ‘‘formula price

contract’’ would include a contract in

which the base is the average reported

cash price for some day or week in the

future, and (2) ‘‘basis price contract’’

would include a contract in which the

base is determined with reference to a

futures market price that will not be

determined until some future date.

(c) This section permits the use of

forward contracts under which

producers will be paid more or less than

the firm base price, when the

adjustments to the base are for quality,

grade or other value factors that are

readily verifiable market factors and are

outside the control of the packer/buyer.

(d) The phrase ‘‘offered or bid in an

open, public manner’’ means that the

offer or bid is made in a forum (1) to

which both potential buyers and sellers

in general have access, (2) designed to

solicit more than one blind bid, and (3)

that allows sellers and buyers to witness

bids made and accepted. For example,

a forward contract could be traded in an

electronic market to which both cattle

sellers and buyers in general have

access.

2. Restrictions on Packer Ownership of

Cattle

No packer shall own and feed cattle

unless those cattle are sold for slaughter

in an open, public market.

(a) This provision does not apply to

cattle owned by a packer for fewer than

seven days before slaughter.

(b) This provision applies to cattle

owned by a packer without regard to

whether they are fed at a packer owned

facility or on contract at a facility owned

by another.

(c) The term ‘‘public market’’ means

a forum (1) to which both potential

cattle buyers and sellers in general have

access, (2) which is designed to solicit

more than one blind bid, and (3) which

allows sellers and buyers to witness

bids made and accepted. The term

‘‘public market’’ includes, but is not

limited to, live auction markets, video

auction markets and electronic markets.

Explanation of the Rule

A. Forward Contracts

The forward contract provision of this

rule prohibits packers from using

‘‘formula or basis price’’ forward

contracts. This does not mean that

packers can no longer use forward

contracts to procure slaughter supplies.

In fact, packers and producers could

still enter into contracts in which the

price is set through a formula if there is

a firm base price which can be equated

with a specific dollar amount when the

contract is entered into. The difference

is that the base price could not be the

average reported cash price at some

future date or a reference to a futures

price that will not be determined until

some future date. This part of the

proposed rule attempts to eliminate the

problem identified by the minority

report of the USDA Advisory Committee

on Agricultural Concentration:

The problem with formula pricing, as it is

currently used, is not a problem of value

pricing. Rather, the problem lies in the base

from which the carcass value is calculated.

In all the methods currently used, the packer

has the power to artificially lower the base

price from which premiums and discounts

are calculated.

When the futures market is used to

establish a base, the packers are heavy

players on both sides. Their futures market

activities, whatever the motivation and

whether the packers are long or short in the

market, affect the price they pay for formula

cattle and, ultimately, for negotiated sales.

. . .

When the formula is based upon the

average spot price for the preceding period,

that base has three weaknesses which can be

used to artificially lower the price received

by the producer. First, formula producers and

packers claim that the best cattle are sold on

a formula basis. That means that the pool of

cattle sold on a spot basis is below average

in quality. Thus, the ‘‘average’’ market price

upon which the formula cattle are sold is, in

reality, a below-average price. Second, the

base price is again determined in large part

by the packers’ own market activities. They

determine what price is bid for non-contract

cattle. If they bid low for non-formula cattle,

their price for formula cattle will likewise be

lower. Regardless of whether packers act

consciously in this manner, it is in their best

interest to do so. . . . Finally . . . the use of

captive supply thins the market.3

As a result of this finding the minority

report recommended that ‘‘formula

contracts as they are presently

constituted should be banned’’ and

‘‘value-based pricing must be based

upon readily verifiable market factors

outside the control of the packer/

buyer.’’ 4

The proposed rule on forward

contracts also requires that all forward

contracts for procurement of slaughter

supplies must be ‘‘offered or bid in an

open, public manner.’’ Under the

proposed rule, in addition to containing

a firm base price, all forward contracts

must be offered or bid publicly to

producers in general. This addresses

another recommendation of the

Advisory Committee on Agricultural

Concentration minority report—that

value-based pricing ‘‘must be made

uniformly available within the limits of

the packers’ purchasing needs.’’

Requiring firm-base price, publicly

bid forward contracts for slaughter

supplies is a constructive reform. It

meets the packers’ need for orderly

procurement and provides them

assurance that their competition is not

‘‘stealing’’ cattle (assurance that only

public bidding can provide). By

allowing forward contracts with firm

base prices to continue, it meets the

needs of the cattle producers’ lenders’

for security and solid cash flow

projections for their loans. Further, it

meets the entire industry’s need for

timely, accurate, value-based,

competitive price discovery.

A system of firm-base price, publicly

bid forward contracts for slaughter

supplies is friendly to smaller feeders,

who are at the greatest disadvantage in

direct ‘‘negotiation’’ and most easily

pressured into exploitative, captive

supply contract arrangements. It is

friendly to custom feeders who have a

hard time attracting investors in today’s

manipulated market. And it is friendly

to the basic cow/calf and feeder cattle

markets, because it would work against

the current severe discounting of feeder

prices in response to the volatility of the

fat cattle market. Finally, it would make

retained ownership by the cow/calf or

feeder operator throughout the fed cattle

stage a viable option. Currently, retained
1848 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

5Colorado Health Care Ass’n v. Colorado Dept. of

Social Services, 842 F.2d 1158 (10th Cir. 1988);

McLeod v. I.N.S., 802 F.2d 89 (3rd Cir. 1986); DiazSoto v. I.N.S., 797 F.2d 262 (5th Cir. 1986);

Organized Fisherman of Florida V. Hodel, 775 F.2d

1544 (11th Cir. 1985); Air Pollution Control District

of Jefferson County, Kentucky v. U.S. EPA, 739 F.2d

1071 (6th Cir. 1984); and National Small Shipments

Traffic Conference, Inc. v. ICC, 725 F.2d 1442 (D.C.

Cir. 1984).

6Manasota-88, Inc. V. Thomas, 799 F.2d 687, 691

(11th Cir. 1986).

7Citizens to Preserve Overton Park v. Volpe, 401

U.S. 402, (1971); and Ethyl Corp. v. E.P.A., 541 F.2d

1 (D.C. Cir. 1976).

8Citizens to Preserve Overton Park, Inc. v. Volpe,

401 U.S. 402, 416 (1971).

9United States v. Means, 858 F.2d 404, 409 (8th

cir. 1988), cert. denied, 492 U.S. 910 (1989) (quoting

Brotherhood of Railway and Airline Clerks v.

Burlington Northern Inc., 722 F.2d 380, 380 (8th

Cir. 1983)).

10See, Motor Vehicles Mfrs. Ass’n v. State Farm

Insurance Agency, 463 U.S. 29, 43 (1983).

11Helmuth, John W., Buyer concentration in

Livestock Markets: Trends, Impacts, and

Implications, Iowa State University, Address to

Dakota Rural Action, July 10–12, 1995, at 1.

12Ward, Clement E., Meatpacking Industry

Changes: Causes and Consequences, Department of

Agricultural Economics, Division of Agricultural

Sciences and Natural Resources, Oklahoma State

University, A.E. Paper 92137, December 1992, at 4,

citing Ward, Clement E. Relationship Between Fed

Cattle Market Shares and Prices Paid by

Beefpackers in Localized Markets, Western Journal

of Agricultural Economics 7(1982): 79–86: and

Ward, Clement E. Inter-firm Differences Between

Fed Cattle Prices in the Southern Plains, American

Journal of Agricultural Economics, 74(1992): 2 480–

85.

ownership involves an intolerable and

unnecessary degree of price risk.

Under this proposal feeders will not

lose the ability to enter into forward

contracts. With the use of hedges and

options, up-to-date price reports from

USDA and a public open-bid market for

slaughter supplies, feeders could

forward contract at any point in the

feeding process.

To make this system work, there

needs to be a formally organized market

in firm-base price bid forward

contracts—a bit like a NASDAQ

exchange for livestock. The able,

ambitious people in the marketing

sector of the livestock industry certainly

can provide this vital market service.

Several examples exist today of

functioning electronic markets for

agricultural commodities. The most

applicable of these is BeefEx, or the Beef

Exchange, an electronic exchange set up

by the operators of the cotton exchange

in Lubbock, Texas. There is also an

electronic market for fed cattle in

Canada (TEAM).

B. Packer Ownership of Cattle

Under the proposed rule setting

restrictions on packer ownership and

feeding of cattle, packers could still feed

their own cattle but they would be

required to offer them for sale publicly.

This could be done through a livestock

auction yard, an electronic market or

some other equivalent method of

soliciting blind, open bids. Presumably,

in most cases, a packer would outbid

the other packers for its own animals.

By requiring the public sale of those

cattle, their value and impact on overall

cattle prices would be properly reflected

in the market. The physical movement

of cattle and the packers ability to

coordinate production and plan

slaughter would be the same as now.

The only difference would be that

market demand for cattle would be

publicly expressed and the true price

discovered in the market.

As with forward contracts, packer-fed

cattle can be publicly offered through

electronic exchanges or some other

equivalent method. There is widespread

recognition that electronic markets

could improve competition and provide

better price discovery if all parties

would participate. Historically,

however, packers have been reluctant to

do so, especially when they have

benefited from less than perfect price

discovery under the status quo.

C. Public Market

The requirements that packer-fed

cattle and firm-base price forward

contracts be traded publicly means that

they are traded in a market forum in

which both buyers and sellers have

general access. It does not mean that

more than one bid must be made before

the sale is completed. Rather, it means

that the bid is made in a forum designed

to solicit more than one bid and which

allows other sellers and buyers to

witness the bids made and accepted.

The proposed rule does not limit any

producer’s ability to accept a bid, as

long as it is a firm-base price bid and the

offer and acceptance are made openly

and in such a way that anyone can offer

and anyone can buy.

Standards for Issuance of Informal

Rules

Final agency rules are accorded and

assumption of procedural and

substantive regularity.5 This deferential

standard of review of an agency’s final

rule decision ‘‘presumes the validity of

agency action and prohibits the

reviewing court from substituting its

judgment for that of the agency.’’ 6

Courts will defer to the agency’s

interpretation of statutory language that

it has been charged with implementing

when: (1) the action is within the

agency’s scope of authority, (2) the

action is not arbitrary and capricious,

and (3) the agency has followed

required procedures.7

The arbitrary and capricious standard

of review is a narrow one.8 Under this

narrow review standard, USDA’s action

to issue a rule need merely be rationally

based on an administrative record: the

agency’s action can be set aside as

arbitrary and capricious ‘‘only where it

is not supportable on any rational

basis.’’ 9 An agency decision which

demonstrates that the agency examined

relevant data and articulated ‘‘a rational

connection between the facts found and

the choice made’’ will not be reversed

under this standard.10

The following extensive discussion of

economic studies, the Packers and

Stockyards Act’s legislative history, the

statutory language and case law

provides all of the necessary factual and

legal bases for issuance of this proposed

rule. The numerous cited economic

studies present a substantial factual

basis for the rules. The legislative

history and case law demonstrate that

there is a rational connection between

the facts established in the studies and

the decision to issue the proposed rules

pursuant to section 202 of the Packers

and Stockyards Act, 7 U.S.C. § 192.

Economic Evidence Supporting the

Proposed Rule

A. Impact of Concentration on Prices

Fifteen years ago the top four firms in

steer and heifer slaughter controlled

about 35% of the market, five years ago

the four-firm concentration ratio for

steer and heifer slaughter was about 70

percent, today it is over 80 percent.11

These figures are measured on a

national basis. However, when

concentration is measured in smaller

geographic market areas it is often even

higher than when measured on such a

broad basis. Two studies from

Oklahoma State University demonstrate

this point, as the author of those studies

reports:

The four largest buyers of fed cattle in the

Southern Plains (Southwest Kansas,

Oklahoma Panhandle, and Texas Panhandle)

bought 81 percent of fed cattle purchases in

a study using 1979 data and 96 percent of fed

cattle purchases in a similar study ten years

later. Both percentages are considerably

higher than the four-firm concentration ratio

of U.S. steer and heifer slaughter for the same

years, 34.5 percent in 1979 and 70.4 percent

in 1989.12

When just four packing firms have

such a large share of the steer and heifer

slaughter market, their individual

buying decisions may have an effect on

prices paid to cattle producers. Such

effects may occur whether or not the

packers deliberately take actions to

manipulate prices. As Dr. John Helmuth

has stated: ‘‘Economic studies show that
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1849

13Helmuth, John W. (1995), supra note 9 at 1.

14Strange, Marty, Nancy L. Thompson,

Competition and the Livestock Market: Report of a

Task Force Commissioned by the Center For Rural

Affairs, Center For Rural Affairs, Walthill,

Nebraska, April 1990, at 10.

15From Competition and the Livestock Market:

Report of a Task Force Commissioned by the Center

for Rural Affairs, Walthill, Nebraska, Wes Sandall

et al., Center for Rural Affairs, Walthill, Nebraska,

April, 1990, at 10, 11, citing (1) Quail, Gwen, Bruce

Marion, Frederick Geithman, and Jeffrey Marquardt,

1986, The Impact of Packer Buyer Concentration on

Live Cattle Prices, Working Paper 89, NC–117,

University of Wisconsin-Madison; (2) Menkhaus,

Dale J., and James S. St. Clair, and Zahedi

Ahmaddaud, 1981, The Effects of Industry

Structure on Price: A Case in the Beef Industry,

Western Journal of Agricultural Economics, 6(1981):

147–53; (3) Ward, Clement E. 1981, Short-Period

Pricing Models for Fed Cattle and Impacts of

Wholesale Carcass Beef and Live Cattle Futures

Market Prices, Southern Journal of Agricultural

Economics, 13(1981): 125–32; (4) Ward, Clement, E.

1982, Relationship Between Fed Cattle Market

Shares and Prices Paid by Beefpackers in Localized

Markets, Western Journal of Agricultural

Economics, 7(1982): 79–86; and (5) Ward, Clement

E. 1983, Price Impacts of a Structural Change in

Pork Processing: A Case Study in Oklahoma,

Oklahoma State University, Current Farm

Economics, 56(1983): 3–9.

16Ward, Clement E. (1992) supra note 12 at 7,

citing Marion, Bruce W., Frederick E. Geithman,

and Gwen Quail, Monopsony Power in an Industry

in Disequilibrium: Beef Packing, 1971–1986,

University of Wisconsin, WP–96, December 1990:

Azzam, Azzeddine M. and John R. Schroeter,

Implications of Increased Regional Concentration

and Oligopsonistic Coordination in the Beef

Packing Industry, Western Journal of Agricultural

Economics. 16(1991): 374–81.

17Marion, Bruce W. and Frederick E. Geithman,

Concentration-Price Relations in Regional Fed

Cattle Markets, Food Marketing Policy Center,

Research Report No. 25, April 1994, University of

Connecticut, Department of Agriculture and

Resource Economics, pp. 19–21.

18Helmuth, John W. (1995) supra note 11 at 4.

19Ward, Clement E., (December, 1992) at 7 citing

Ward, Clement E., Timm J. Bliss, Forward

Contracting of Fed Cattle: Extent, Benefits, Impacts,

and Solutions, Blacksburg, VA: Research Institute

on Livestock Pricing, Research Bulletin 4–89,

November 1989).

when the four-firm concentration ratio

gets over 40% firms start to have enough

market power to have some control over

price. By the time it gets to 80% they

have as much power as a monopoly

would have.’’ 13

The Center for Rural Affairs reports

on a series of economic studies

examining concentration’s effect on

prices:

There is a large body of economic research

establishing a high positive relationship

between the level of concentration among

sellers and prices buyers must pay. About

three-fourths of the more than 70 studies

undertaken in this field in general conclude

that concentration is related to prices (Weiss

1988). Although this research relates to

situations in which the concentration level is

high among sellers (called oligopoly) rather

than among buyers (called oligopsonies), the

basic theory is the same on both sides of the

market. Higher levels of concentration should

result in price levels that favor the more

concentrated side of the market—higher

prices for concentrated sellers (oligopolies),

lower prices for concentrated buyers

(oligopsonies).14

There is now also a considerable

amount of research on the relationship

of packer concentration and prices paid

to livestock producers. This research

strongly suggests that significantly

depressed market prices have

accompanied increases in concentration

in regional markets. The Center for

Rural Affairs reported on several of

these studies that used data from

periods when the meatpacking industry

was much less concentrated than it is

today:

One study (Quail 1986) analyzed the

impact of market concentration on fed cattle

prices in 13 regional markets between 1971

and 1980. Among the study’s conclusions:

For every 10 percentage point increase in

market share held by the top four firms in a

market, fed cattle prices dropped $.14 per

cwt.;

In the four major regional markets, the four

leading packers controlled from 67% to 97%

of the market in 1980 and in each case there

was a statistically significant negative

correlation between concentration and

market prices;

The increase in packer concentration

between 1971 and 1980 is estimated to have

cost cattle feeders $.19 per cwt., or $45.2

million in 1980 alone;

The price-depressing effect of buyer

concentration averaged about 1.7% over the

period 1976–1980;

If the four leading packers in the four

leading regions had had only 40% of the

market between 1976 and 1980, instead of

the 55% to 85% they actually averaged,

average cattle prices would have been $.47

higher and cattle feeders would have had $82

million more income.

Another study (Menkhaus et al 1981)

analyzed the impact of concentration on fed

cattle prices in twelve major cattle feeding

states in 1972 and 15 states in 1977. It found

that in both years more concentrated markets

yielded lower fed cattle prices. In 1972, for

each 10 percentage point increase in the

share of the market procured by the top four

packers, the price of choice steers fell $.145

per cwt., and in 1977, $.22 per cwt. This

amounts to a price depressing effect of about

1.2% in 1972 and 1.6% in 1977.

Ward (1981) considered the relationship

between number of buyers and prices paid

for fed cattle in 31 feedlots or marketing

agencies in six regional markets in July, 1979.

He found such a relationship in one of the

four markets. In that market, each additional

bidder raised prices $.22 to $.28 per cwt.

Not all studies reach such clear

conclusions. Using the same data from July,

1979, Ward (1982) analyzed the relationship

between market shares held by packers in

local markets and prices paid for fed cattle

in those markets. He concluded that larger

packers were not depressing prices in local

markets and found no evidence of lower

prices in more concentrated markets.

But Ward (1983) did find that when there

was a sudden change in the local hog market

structure caused by the closing of

Oklahoma’s only pork plant, prices at the

Oklahoma City terminal market in the year

following the plant closing averaged $.63 to

$1.05 lower per cwt. than in Kansas City and

Omaha terminals and direct trade markets in

interior Iowa-Southern Minnesota in the year

following the plant closing.15

Two more recent studies, one

published in December 1990 by Bruce

W. Marion, Frederick E. Geithman and

Gwen Quail, and one published by John

R. Schroeter and Azzeddine Azzam in

1991, on the relationship between

regional fed cattle prices and

meatpacking concentration, also

demonstrate that higher levels of

concentration were associated with

lower prices paid for fed cattle.16

In addition, in April, 1994, Bruce

Marion of the University of Wisconsin

released an update of his earlier study

which found that as concentration

increases prices paid to farmers

decrease. This study is worth quoting:

The results of this article support the

hypothesis that packer monopsony power

had a significant negative effect on cattle

prices during the 1971–86 period * * * the

presence of monopsony power is evident in

regional live cattle markets throughout the

period and is slightly stronger in the latter

half than in the first half of the period.

For several regions on which most of our

analysis was done, cattle prices were

estimated to be about 3 percent less in the

most concentrated region/year compared to

the least concentrated region/year.17

As John Helmuth has pointed out in

reference to this study, such a ‘‘three

percent difference is more than $20 per

head on $70/cwt cattle.18

A study conducted by Clement E.

Ward after a series of mergers and

acquisitions in 1987 found that the Big

Three packers paid significantly lower

prices for fed cattle in the Southern

Plains and in subregions of the Southern

Plains (Southwest Kansas, North Texas

and Oklahoma Panhandle, and South

Texas Panhandle) than did their

competitors as a group. However, there

were differences among the Big Three in

how much they paid for fed cattle. Each

firm did not pay lower prices than

competing firms.19

Additional recent studies have found

that packers do exercise monopsony

powers to distort prices paid to

livestock producers. These studies are

described in a November 1995 report

issued by the Center for Rural Affairs:

Azzam and Pagoulatos (1990) found that

packers exercise market power to both raise

the prices they receive for meat and to lower

the price they pay for livestock, but that the
1850 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

20From From the Carcass to the Kitchen:

Competition and the Wholesale Meat Market,

Strange, Marty and Higby, Annette, Center for Rural

Affairs, Walthill, Nebraska, November 1995, citing

(1) Azzam, Azzeddine, and Emilio Pagoulatos,

1990, Testing Oligopolistic and Oligopsonistic

Behavior: An Application to the U.S. Meat-Packing

Industry, Journal of Agricultural Economics 41(3):

362–370; (2) Azzam, Azzeddine, and John

Schroeter, 1991, Implications of Increased Regional

Concentration and Oligopsonistic Coordination in

the Beef Packing Industry, Western Journal of

Agricultural Economics 16(2): 374–381; (3) Azzam,

Azzeddine, 1992, Testing the Competitiveness of

Food Price Spreads, Journal of Agricultural

Economics 43(2): 248–256; and (4) Stieger, Kyle W.,

and Azzeddine Azzam and B. Wade Brorsen, 1993,

Markdown Pricing and Cattle Supply in the Beef

Packing Industry, American Journal of Agricultural

Economics 75:549–558.

21Aspelin, Arnold and Gerald Engelman, Packer

Feeding of Cattle; its volume and significance,

Packers and Stockyards Division, Consumer and

Marketing Service, USDA, Marketing Research

Report No. 776, Nov. 1966.

22 Id. at 10.

23 Id. at 13.

24 Id. at 16.

25 Id. at 22.

26Schroeder, Ted C., Rodney Jones, James Minert

and Andrew P. Barkley; ‘‘The Impact of Forward

Contracting on Fed Cattle Transaction Prices’’,

Review of Agricultural Economics, Vol. 15, No. 2,

May 1993, pp. 326–337, at page 335.

27 Id. at 335.

degree of market power they had was

significantly higher in the livestock

procurement side of the market than in the

wholesale meat market.* * *

Azzam and Schroeter (1991) next

considered regional procurement markets for

beef. They found that packers used market

power to depress prices an estimated one

percent, considerably less than other studies

in this field. But they noted that even a half

percent decline in cattle prices would

increase packer profits about 35 percent and

reduce cattle feeder profits about $4.40/head,

or nearly 9 percent. Using a different

methodology for data over the same time

period 1988–91, Azzam (1992) also found

that beef packers have market power to lower

cattle prices, but not to raise meat prices in

the wholesale market.

Stieger, Azzam, and Brorsen (1993) found

that packers typically price cattle on the

difference between the wholesale price they

receive for boxed beef or carcasses and their

average processing cost. That difference is

called the marketing margin. As anticipated

supply of cattle decreases, making it more

difficult for packers to keep their plants fully

operating and therefore raising their average

processing costs, they ‘‘markdown’’ cattle

bids—that is, they increase their marketing

margin in order to cover their increased cost.

They may be paying more for cattle in an

absolute sense, but not as much more as they

are worth in the short supply situation. In

effect, they are pricing the cattle below their

marginal value. The statistical analysis

indicated that between 1972 and 1986, fed

cattle were priced significantly below their

marginal value during 31 of 59 quarters. On

average, this markdown was 1.31 percent, or

17 percent of the marketing margin, and

amounted to $1.54 per hundredweight of

retail meat. The authors estimate that was

worth about $62 million to the packers.20

These studies provide a sufficient

basis for USDA to find that monopsony

power of the packers is likely to have

the effect of manipulating prices by

depressing the prices paid to cattle

producers.

B. Impact of Packer Feeding on Prices

Other studies have examined whether

particular slaughter cattle procurement

practices effect prices paid to producers.

One Packers and Stockyards Division

study that examined the price impacts

from packer-feeding in the mid-1960s

explains how an oligopsonistic packer

that feeds its own cattle can adversely

affect prices paid to other producers for

slaughter supplies: 21

It is the oligopsonistic packer that is able

to utilize its packer feeding operations to

influence the price of fed cattle in a local

market. Only the oligopsonistic packer can

do that, and the possible effects of packer

feeding on the price of cattle are confined

largely to the markets where oligopsony

exists.* * * [W]hen a degree of oligopsony

exists, a packer’s own supply of fed cattle can

be used to restrict market purchases and

exploit the market by paying lower prices

than otherwise would have been paid. The

amount of the price effect will depend on the

extent of the packer’s oligopsony influence as

well as on how readily suppliers and local

feeders can divert their marketings to other

markets.

An oligopsonistic packer that has a supply

of cattle in its feedlots can use those cattle

as a bargaining tool. Its fed cattle serve as a

standby reserve in its price negotiations.

Livestock sellers know that such a packer can

fulfill his slaughtering needs at a particular

time by transferring his own cattle to his

plant, instead of buying cattle on the market.

And since such a packer is—by definition—

large enough to exert an influence on the

local market, its management of its fed cattle

during the price negotiations has an effect on

the local market price. Stated simply, in the

short run, packer feeding can confer an extra

degree of market power on an oligopsonistic

packer.22

This study found that packer-fed

cattle caused a significant decline in the

local market price when the packer had

some oligopsonistic power:

Packer-fed cattle transferred to the plant of

the sample packer had a persistent

depressing effect on the local price for Choice

steers compared with prices at other markets.

During the first five or six months of the year,

the local price was consistently below the

average for other markets, about in

proportion to the number of packer-fed

shipments to plant. As Packer-fed shipments

to plant declined from a level of about 1,100

head a week early in the year to about 100

head in the 15th week, the local price

approached the level of prices at other

markets. From mid-year until the 38th-42nd

weeks, packer-fed shipments generally

declined to a low level (zero in the 40th

week) and prices at the local market

improved to the point that they exceeded the

seven-market average by about $.50 per cwt

in the 40th week. Then, as packer-fed

shipments to plant increased during the last

10 or 12 weeks of the year, the price situation

at the market deteriorated in comparison to

other markets.23

* * * * *

Regression analysis of the data * * *

confirmed the conclusion that packer-fed

shipments to plant depressed the local price

relative to prices at other markets. A 100-

head increase in packer-fed shipments to

plant, on average, lowered the local average

price for Choice steers relative to other

markets for the entire week by about $.06

cwt. Or, a 100 head decrease in packer-fed

shipments to plant allowed the local price to

improve by about $.06 per cwt. compared to

the other markets. Since packer-fed

shipments varied from zero to over 1,000

head per week, packer feeding affected the

local weekly price by as much as $.50 per

cwt.24

This study went on to find that in a

competitive market ‘‘feeding done by an

individual packer can have no

appreciable effect on the price of

cattle.’’ 25

This study provides sufficient basis

for USDA to find that packer ownership

and feeding of its own slaughter

supplies is likely to have the effect of

manipulating prices by depressing the

prices paid to cattle producers.

C. Forward Contract Impact on Price

Other recent studies have found that

forward contracting for fed cattle

supplies has a depressing effect on

prices. A study that estimated the shortrun price impacts of forward contracting

in the southwest Kansas marketing

region during six months of 1990 found:

Over the six months, for the level of

contracted cattle, contract deliveries were

associated with $0.15/cwt to $0.31/cwt

reduced transaction prices. When forward

contract shipment levels were relatively high,

changes in forward contract shipments had a

larger impact on transaction prices than

during periods when shipments were low.26

The authors of this study point out

that these results may be related to the

market condition during the data

collection period of May through

November 1990, during which time

cattle supplies were very low. They

suggested that ‘‘the relatively small

supplies of cattle when compared to

existing slaughter capacity are providing

a safety net against any market power

levied by the larger packing firms.’’ 27

A recent report issued by the Grain

Inspection and Packers and Stockyards

Administration show that from April 5,

1992 to April 3, 1993, the packers’ use

of forward contracts and marketing

agreements to procure slaughter cattle
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1851

28Concentration in the Red Meat Packing

Industry, Grain Inspection and Packers and

Stockyards Administration, USDA, February 1996,

pp. 25–31.

29Concentration in the Red Meat Packing

Industry, Grain Inspection and Packers and

Stockyards Administration, USDA, February 1996,

pp. 15–23.

30 Id. at 16–17 [emphasis added].

31 Id. at 22.

32Concentration in the Red Meat Packing

Industry, Grain Inspection and Packers and

Stockyards Administration, USDA, February 1996,

pp. 30–31.

33From Competition and the Livestock Market:

Report of a Task Force Commissioned by the Center

for Rural Affairs, Walthill, Nebraska, Wes Sandall

et al., Center for Rural Affairs, Walthill, Nebraska,

April 1990, citing (1) Holder, David L., Benefits of

a Sheep and Lamb Teleauction in Virginia and West

Virginia, U.S. Department of Agriculture,

Economics, Statistics, and Cooperatives Service,

selected paper for the Southern Agricultural

Economics Association meetings, February, 1979;

(2) Ward, Clement E., An Empirical Study of Price

Continued

had a depressing effect on prices to

producers.28 The report states:

Increased deliveries of forward-contracted

cattle were associated with reduced prices in

the cash market while increasing inventories

of forward-contracted cattle were associated

with increased cash-market prices.

Daily increases in the rate of deliveries of

forward-contracted and marketing agreement

cattle had a slightly negative effect on daily

cash-market prices. . . .

Prices paid for cattle delivered under

forward contracts on a given day were about

$3.00 per cwt lower (dressed-weight basis)

than prices for similar cattle on the cash

market.

Increases in cash market price were found

to lead to increases in the monthly quantities

of the volume of forward-contracted, and

marketing agreement cattle used by large

plants. Cash-market price variability is

positively associated with the volume of

forward-contracted and marketing agreement

cattle used by large plants.

This report demonstrates that when

cash-market prices increased, packers

increased their inventories of forwardcontracted cattle. When deliveries of

that forward-contract inventory

increased, the cash-market price for

cattle declined.

These statistics provided sufficient

basis for the USDA to make a finding

that the current use of forward contracts

is likely to have the effect of

manipulating prices by depressing the

cash-market prices paid to cattle

producers.

D. Use of Formula-Priced Forward

Contracts

Forward contracts generally are not

traded publicly. In practice they are

often offered only to certain producers

providing those producers with

preferential treatment over other

producers. The recent GIPSA report,

Concentration in the Red Meat Packing

Industry, does not directly address

whether forward contracts and

marketing agreements (marketing

agreements as defined by the report are

included in the definition of forward

contract in the proposed rule) are

offered by packers on a preferential

basis to certain cattle producers.

However, it does provide some insight

into who actually enters into forward

contracts.29 The report states:

Small firms use spot markets almost

exclusively, whereas the Big Three packers

are more likely to use alternative

procurement methods. Con Agra, Excel, and

IBP account for 73 percent of spot market

transactions, but [for] 88 percent of marketing

agreements and 95 percent of forward

contracts. * * *

The largest feedlots are also more likely

than small feedlots to use alternative

procurement strategies. Feedlots handling

more than 32,000 cattle per year accounted

for 26 percent of spot marketing transactions,

but [for] 39 percent of forward contracts, 64

percent of marketing agreements. * * * Most

forward contracts (73 percent) were priced on

the basis of carcass weight, while formula

pricing was used for most marketing

agreements. * * * The Big Three firms

handled 93 percent of the formula-priced lots

and 83 percent of the carcass-weight

arrangements.30

The report clearly demonstrates that

the Big Three packing firms and the

largest feedlots account for the vast

majority of the formula-priced

agreements. This is particularly

important given the study’s finding that

‘‘market agreement cattle brought prices

about 54 cents above spot market

prices.’’ 31

This data suggests that in practice the

largest feedlots have preferential access

to marketing agreements—and therefore

to an assured market for their cattle.

And that this preferential status does

not only ensure market access in the

long term but also provides a price

advantage not available to producers not

offered the marketing agreements.

This study provides sufficient basis to

find that current use of the marketingagreement types of forward contracts is

likely to result in an undue and

unreasonable advantage for certain

large-scale producers, providing them

over the long term with preferential

access and a higher price than are

afforded other producers.

E. Captive Supply Decisions and Impact

on Price

The Concentration in the Red Meat

Packing Industry report issued by the

Grain Inspection and Packers and

Stockyards Administration in February

1996, despite its many flaws, does

demonstrate that the use of captive

supply procurement methods in the

cattle industry causes a decline in the

cash-market price for cattle. It shows

that packers increase their captive

supply inventories when cash-market

prices increase. The report also

demonstrates that as packers increase

the deliveries of captive supplies, the

cash-market prices decline. The report

states:

The overall effect of captive supplies on

prices paid for cattle in the cash market was

negative but small * * *.

Increases in cash market price were found

to lead to increases in the monthly quantities

of packer-fed, forward-contracted, and

marketing agreement cattle used by large

plants. Cash-market price variability is

positively associated with the volume of

forward-contracted and marketing agreement

cattle used by large plants * * *.

The findings indicate that expected higher

prices increase the volume of packer feeding

and other captive supply used, whereas

expectations of falling prices lead to

decreases * * *.

The overall effect of increased use of

captive supply on shortrun prices paid for

cattle in the cash market appears to be

negative but small.32

This study provides sufficient basis

for USDA to find that current practices

with regard to captive supply use by

packers, including formula-priced

forward contracts and packer ownership

and feeding of its own slaughter

supplies are likely to have the effect of

manipulating prices by depressing cashmarket prices paid to cattle producers.

F. Impact of Number of Buyers on Price

Clement E. Ward has also recently

summarized another line of relevant

research designed to determine the

effects which number of buyers had on

livestock prices. He states:

A number of studies of the experimental

electronic livestock markets have given us

additional insight into the relationship

between concentrated market structure and

prices for livestock. Holder (1979) found that

slaughter lamb prices were $.70 per cwt.

higher after introduction of a telemarket.

Ward (1984) studied the relationship

between the number of bidders in an

Oklahoma teleauction and prices paid for

slaughter lambs between 1979 and 1982, and

found that each additional bidder added

$1.10 per cwt. to prices paid and widened

the price difference between the teleauction

and live auction at San Angelo, Texas, by

$.60 per cwt. Finally, Rhodus et al. (1985)

analyzed the impact of an electronic market

on hog prices in Ohio compared with direct

trade markets in Indiana, the market in

Peoria, Illinois, and a major order-buying

company operating in Ohio. They concluded

that average prices paid through the

electronic market were $.94 higher than

order-buyer prices at Peoria and $.99 higher

than Indiana direct trades by order-buyers.33
1852 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

Discovery and Competition for Slaughter Lambs,

Western Journal of Agricultural Economics, 9

(1984): 135–44; and (3) Rhodus, W. Timothy, E.

Dean Baldwin, and Dennis R. Henderson, Pricing

Accuracy and Efficiency in a Pilot Electronic Hog

Market, American Journal of Agricultural

Economics, 71 (1989): 874–82.

34From Meatpacking Industry Changes: Causes

and Consequences, December 1992, Agricultural

Economics A.E. Paper 92137, Department of

Agricultural Economics, Division of Agricultural

Sciences and Natural Resources, Oklahoma State

University, citing (1) Love, Harold G. and D. Milton

Shuffett, Short-Run Price Effects of a Structural

Change in a Terminal Market for Hogs, Journal of

Farm Economics, 47(1965): 803–812; (2) Ward,

Clement E., Price Impacts of a Structural Change in

Pork Processing—A Case Study in Oklahoma,

Oklahoma Agricultural Experiment Station, Current

Farm Economics, 56 (1983): 3–9; (3) Hayenga,

Marvin L., Ronald E. Deiter, and Christobal

Montoya, Price Impacts Associated with the Closing

of Hog Slaughtering Plants, North Central Journal of

Agricultural Economics, 8 (1986: 237–42; (4)

Holder, David L., Benefits of a Sheep and Lamb

Teleauction in Virginia and West Virginia, U.S.

Department of Agriculture, Economics Statistics,

and Cooperative Service, selected paper for the

Southern Economics Association meetings,

February 1979; (5) Ward, Clement E., An Empirical

Study of Price Discovery and Competition for

Slaughter Lambs, Western Journal of Agricultural

Economics, 9 (1984): 135–44; (6) Rhodus, W.

Timothy, E. Dean Baldwin, and Dennis R.

Henderson, Pricing Accuracy and Efficiency in a

Pilot Electronic Hog Market, American Journal of

Agricultural Economics, 71 (1989): 874–82; (7)

Sporleder, Thomas L. and Phil L. Colling,

Competition and Price Relationships for an

Electronic Market, Texas A&M University,

Department of Agricultural Economics, selected

paper for the American Agricultural Economics

Association meetings, August 1986; (8) Ward,

Clement E., Short-Period Pricing Models for Fed

Cattle and Impacts of wholesale Carcass Beef and

Live Cattle Futures Market Prices, Southern Journal

of Agricultural Economics, 13 (1981): 125–32; (9)

Ward, Clement E., Inter-firm Differences Between

Fed Cattle Prices in the Southern Plains, American

Journal of Agricultural Economics, 74 (1992): 2

480–85; and (10) Schroeder, Ted, Rodney James,

James Mintert, and Andrew Barkley, Short-Run

Price Impacts of Packer-Controlled Cattle Supplies,

Manhattan, KS: Invited Paper, Western Agricultural

Economics Association meetings, July 1990.

35 61 Cong. Rec. 1863 (1921).

36Helmuth, John W., (1995), supra note 10 at 1.

37 61 Cong. Rec. 1877–1878, and 2618–2619

(1921).

38 ‘‘Beef Price Spread Data’’ Table 10—Estimated

Historical Series for Beef, Choice Yield Grade 3:

Retail, Wholesale and Farm Values, Price Spreads,

and Farmers’ Share. USDA, Economic Research

Service, Stock No. 90006.

The Center for Rural Affairs also has

reported on studies designed to

determine the effects which number of

buyers had on livestock prices:

Generally, fewer buyers mean less demand

for slaughter livestock and less buyer

competition, both of which lead to lower

livestock prices * * *. Three independent

studies (Love and Shuffett; Ward 1983;

Hayenga, et al.) found that when hog

slaughtering plants were closed in Kentucky,

Oklahoma, and Iowa, slaughter hog prices in

markets adjacent to the plants declined either

absolutely or relative to other markets. In

some cases, markets adjusted after a period

of weeks to price levels close to those

existing prior to plant closing.

Conversely, more buyers generally mean

more demand for slaughter livestock and

more buyer competition, both of which lead

to higher prices * * *. Hayenga, et al. found

that slaughter hog prices increased for a time

when new hog slaughtering plants opened in

Iowa. The adoption of electronic markets,

giving more buyers better access to livestock

offered for sale, has typically resulted in

higher livestock prices. Such studies include

electronic markets for slaughter lambs in

Virginia and Oklahoma (Holder; Ward 1984),

hogs in Ohio (Rhodus, et al.) and feeder cattle

in Texas (Sporleder and Colling). Number of

buyers bidding on fed cattle was found to

have a positive effect on fed cattle transaction

prices in three separate studies (Ward 1981,

1992; Schroeder, et al.).34

These studies regarding the impact of

the number of buyers on livestock prices

provide sufficient basis for a finding

that use of a public market, where

buyers and sellers in general have

access for trading of forward contracts

and packer-fed cattle, will improve

prices paid to cattle producers.

G. Conclusion From Economic Studies

The economic studies discussed

above provide substantial evidence

supporting findings that the current use

of forward contracts and packer-owned

cattle to procure captive slaughter

supplies are likely to have the effect of

manipulating prices by depressing those

prices paid to cattle producers. These

studies also support a finding that the

trading of forward contracts and packerowned cattle in a public market

designed to encourage more bidders on

cattle is likely to improve prices paid to

producers.

The following discussion of the

legislative history, statutory language

and case law interpretation of the

Packers and Stockyards Act establishes

that this evidence is sufficient basis for

issuing the proposed rules restricting

packer feeding of its own slaughter

supplies and use of forward contracts.

Legal Authority To Issue Proposed Rule

Under the Packers and Stockyards

Act, the Secretary of Agriculture clearly

has the authority to issue rules

regulating packer captive supply

livestock procurement methods to

ensure compliance with Section 202 of

the Act (7 U.S.C. § 192). In fact, the

legislative history of the Act

demonstrates that he has the obligation

to issue rules necessary to ensure that

packers continue to comply with

Section 202 as the industry structure

and procurement practices change.

A. Legislative History of the Packers and

Stockyards Act

1. Context of the Packing Industry at the

Time the Act was Passed

Legislative history shows that the

concentration levels in the beef packing

industry at the time the Packers and

Stockyards Act was enacted 75 years

ago were lower than the concentration

level today. Representative Voight, in

the debate on the House bill, cited the

concentration figures from the Federal

Trade Commission report:

It appears from the report of the Federal

Trade Commission that in 1916 the Big Five’s

percentage of interstate slaughter was as

follows: cattle 82.2, calves 76.6, hogs 61.2,

sheep and lamb 86.4. * * * In view of the

steady growth of the business of the Big Five

it is reasonable to assume that at this date

these figures should be raised from 5 to 10

percent. I conclude, therefore, that at the

present time the Big Five’s percentage of

interstate slaughter is between 75 and 80 per

cent * * * the monopoly of the Big five

becomes very apparent.35

In contrast, today, four firms, rather

than five, control well over 80 percent

of the steer and heifer slaughter.36

At the time the Act was passed

Congress was also very concerned about

the fact that the packers were

continuing to charge wholesalers

increasingly higher prices even while

prices paid to producers were low.

Representative McLaughlin and Senator

Kendrick introduced figures in their

respective houses that demonstrated

that despite the fact that the packers

were paying producers the same price

for cattle in April 1921, as they had paid

in February, 1916, they were charging

the wholesalers 52.6 percent higher

prices in 1921 than in 1916.37 Similarly,

over the last twenty-five years we have

seen a steady climb in the percentage of

the retail meat dollar that goes to

packers. The annual average percent of

the retail dollar going to packers in 1970

was 12.7. This figure fluctuated over the

following twenty-five years, with a

general trend upward, until in 1995 the

packers share of the retail dollar was

25.5 percent. During this same period

producers’ share of the retail dollar

dropped from 64 percent in 1970 to 49

percent in 1995.38

Seventy-five years ago when Congress

recognized trends in the packing

industry that virtually mirror those we

see today it acted to pass the most

comprehensive anti-trust legislation

ever enacted in this country. The

powers granted under that Act should

be vigorously administered today to

prevent the kind of harm to producers

that the Act was written to address.
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1853

39House Report No. 77, 67th Cong., 1st Sess. 2

(1921) (emphasis added).

40See also 61 Cong. Rec. 1799, 1801, 4738, 8310

(1921).

41See also 61 Cong. Rec. 1801, 1805–1806, 1887–

1888 (1921).

42Conference Report, H.R. Rep. No. 324, 67 cong.

1st Sess., at 3 and 5–6. Statement of the Managers

on the Part of the House; 61 Cong. Rec. 4778, 4779

(1921).

43H.R. Rep. No. 77, 67th Cong. 1st Sess. 2 (1921);

61 Cong. Rec. 1799 (1921).

44 61 Cong. Rec. 1868 (1921) (emphasis added).

45Hearings on H.R. 14, H.R. 232, H.R. 5032, and

H.R. 5692 Before the House Committee on

Agriculture, 67th Cong. 1st Sess., ser. D, 26 (1921).

46 61 Cong. Rec. 4780 (1921).

47 61 Cong. Rec. 4782 (1921).

48See 61 Cong. Rec. 2674–2675 (1921).

49 61 Cong. Rec. 2675 (1921).

2. Extraordinarily Broad Rule-making

Power

Upon thorough review of the

legislative history of the Packers and

Stockyards Act there can be no doubt

that Congress meant to grant the

Secretary the broadest possible rulemaking authority over the livestock

procurement practices of the packers.

The extraordinarily broad scope of the

regulatory authority granted to the

Secretary under the 1921 Act was

expressed in the House report as

follows:

A careful study of the bill, will, I am sure,

convince one that it and existing laws, given

the Secretary of Agriculture complete

inquisitorial, visitorial, supervisory, and

regulatory power over the packers,

stockyards and all activities connected

therewith; that it is a most comprehensive

measure and extends farther than any

previous law in the regulation of private

business, in time of peace, except possibly

the interstate commerce act.39

The Congressional intention to give

the Secretary of Agriculture complete

regulatory powers over the packers and

all their activities was emphasized

throughout the debate on the bill.40

Similarly, the intention to pass the

‘‘most far-reaching measure and extend

further than any previous law into the

regulation of privates business’’ was

also an often repeated point in the

debate.41

The conference report on the bill

emphasized, in the strongest terms

possible, the Congressional intent to

grant the Secretary extraordinary

regulatory powers—‘‘Congress intends

to exercise in the bill, the fullest control

of packers and stockyards which the

Constitution permits’’.42

3. Authority to Regulate to Prevent and

Compel

The legislative history also makes it

clear that Congress intended that the

Secretary use his regulatory powers

aggressively to prevent packer practices

made illegal by the Act. Repeatedly the

bill was described as giving the

Secretary the authority ‘‘to prevent

packers * * * from engaging in an

unfair, unjustly discriminatory, or

deceptive practice or device.’’ 43

Representative Voight of Wisconsin,

who strongly favored the bill, stated that

it could be used to prevent unlawful

practices by the packers and to compel

them to employ lawful business

practices:

The bill is sufficiently broad so that, if

vigorously administered, the Secretary can

prevent combination among packer and can

compel them and all others connected with

the industry to do business in a lawful and

proper way. * * * the Secretary under this

bill is given the power to make rules that will

make them [packers] do business on the

level.44

The legislative history makes clear

that Congress intended the Secretary to

exercise his extraordinarily broad

regulatory powers to prevent conditions

under which packers could gain control

of the livestock market, and, thereby,

induce healthy competition. The report

on the Hearings on several of the bills

debated states that the Act seeks ‘‘to

prohibit the particular conditions under

which monopoly is built up, and to

prevent a monopoly in the first place

and to induce healthy competition.’’ 45

4. Authority to Issue Substantive Rules

There was extensive debate in the

Senate over whether the regulatory body

should be allowed to issue rules or

regulations for which the packers could

be held civilly and criminally liable.

This debate was ultimately resolved

when the Senate amended the House

bill by adding a second provision

granting the Secretary authority to issue

rules and regulations necessary to carry

out the provisions of the Act. The

conference report on the bill explains

how the two houses dealt with this

double grant of authority to issue rules

and regulations:

On Amendment No. 17: This amendment

adds to the House bill a provision

empowering the Secretary of Agriculture to

‘make such rules, regulations, and orders as

may be necessary to carry out the provisions

of this act.’. The House bill did not contain

this specific provision, but did make

applicable to the jurisdiction and powers of

the Secretary of Agriculture in enforcing the

act the powers given to the Federal Trade

Commission by section 6 of the Federal

Trade Commission Act, one of the provisions

of which authorized that commission to

make rules and regulations for the

enforcement of the act, the two being

substantially the same; and the House

recedes.46

Representative Haugen, the chief

author of the bill that eventually was

enacted, also similarly references this

amendment in his comments on the

conference report.47

Maybe as significant as the double

grant of authority to issue rules, for

purposes of determining Congressional

intent with regard to the type of rules

proposed in this petition, is the fact that

the Senate defeated an amendment that

would have limited the Secretary’s

authority to issue rules only ‘‘as to

procedures.’’ 48 During the debate on

this proposed amendment Senator

Walsh from Montana clearly stated that

the intent of the bill without this

amendment was to allow the Secretary

to issue substantive type rules that are

consistent with the act’s provisions. He

also emphasized that courts would have

the full authority to review such rules

through a review of any order issued by

the Secretary requiring a packer to

comply with the rule.

I may say that a further examination of the

general statutes does not reveal any statute

making criminal the act which is denounced

as unlawful. Accordingly the only procedure

which can be instituted on charges of having

violated an order, rule, or regulation is the

procedure recited in the proposed act. If the

Secretary * * * believes that the rule,

regulation or order comes under the act, of

course he will make the order; but that will

be ineffective until it is passed upon by the

court, and the court will pass upon the

question as to whether the rule, regulation,

or order falls under the provisions of this act

so as to make disobedience of its contempt.49

Senator Walsh’s reference to

procedures for bringing charges for

violations of the Act is to the provision

of the bill that is now codified at 7

U.S.C. § 193. This is the statutory

provision the Secretary uses to bring

charges against packers for violating the

unfair and deceptive trade practices

section of the Act, 7 U.S.C. § 192.

Senator Walsh’s statement, thus,

indicates that Congress intended that

the Secretary would issue substantive

rules defining what packers must do to

comply with this provision of the Act,

and that packers would be adequately

protected from arbitrary rule-making by

having access to review of the rule by

the courts. Senator Walsh’s statements

demonstrate that Congress clearly

envisioned that the Secretary would be

issuing precisely the type of substantive

rule that is proposed in this petition.

5. Purpose to Protect Producers Interest

A primary purpose for passage of the

Packers and Stockyards Act was to

protect the interest of the producer. This

intention is clearly expressed in the
1854 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

50 61 Cong. Rec. 1809 (1921).

51 61 Cong. Rec. 1868 (1921).

52Stafford v. Wallace, 258 U.S. 495, 515–516, 42

S. Ct. 397, 401 (1922).

53Bosma v. USDA, 754 F.2d 804, 808 (8th Circuit

1984), citing H. Rep. No. 1048, 85th Cong. 2d

Session, reprinted in 1958 U.S. Code Cong. and

Admin. News, 5212, 5213.

54Swift & Co. v. United States, 393 F.2d 247, 253

(7th Cir. 1968); citing Stafford v. Wallace, 258 U.S.

at 521; and Safeway Stores, Inc. v. Freeman, 369

F.2d 952, 956 (1966); see also, Farrow v USDA, 760

F.2d 211, 214 (8th Circuit 1984).

55 61 Cong. Rec. 1861 (9121).

56 61 Cong. Rec. 1805 (1921).

57H.R. Rep. 77 on Packer Act Amendment of

1924 at 3.

58H.R. Rep No 1048, 85th Cong., 1st Sess 3

(1957).

59 Id. at 5.

60Sen. Rep. No. 94–932, 94th Cong, 2d Sess. 4

(1976).

61 1978 USCAAN 2204, Senate Report.

legislative history. Representative

Tincher stated:

It is my judgment that the passage of this

bill, that its proper administration, will

permit the meat producer to exist; that it will

reduce the amount paid out between the

producer and the consumer to such an extent

that it will make the business for the

producer more profitable, and not be

injurious to the consumer.50

Similarly, Representative Voight of

Wisconsin expressed the sincere belief

that this bill would benefit producer

and consumer alike:

I think if this monopoly of the Big Five is

done away with, and the laws of trade are

given a chance to function, it is going to

benefit producer and consumer alike;

genuine competition will benefit both.51

In an early case interpreting the Act

the U.S. Supreme Court recognized that

one of its primary purposes was to

protect producers’ from the packers’

control over prices paid for livestock:

The chief evil feared is the monopoly of

the packers, enabling them unduly and

arbitrarily to lower prices to the shipper, who

sells, and unduly and arbitrarily to increase

the price to the consumer, who buys.52

The Eighth Circuit Court of Appeals

has more recently stated

One of the purposes of the Packers and

Stockyards Act is to safeguard farmers and

ranchers against receiving less than the true

market value of their livestock.53

Courts have held that the Act should

be liberally enforced in order to

accomplish its purpose of protecting

producers interests:

The Act is remedial legislation and is to be

construed liberally in accord with its purpose

to prevent economic harm to producers and

consumers at the expense of the

middleman.54

6. Authority to Regulate to Ensure Open,

Competitive Markets

Congress recognized that to protect

producers’ interests the Secretary must

be granted the authority to regulate

packer practices to ensure open,

competitive markets for livestock. When

the Act was passed in 1921 virtually the

sole source of supply for slaughter cattle

was through the stockyards. So Congress

not only emphasized regulation of the

packers but also of the stockyards as the

public market of that day.

Congress, however, did make clear its

intention was to ensure open,

competitive markets for buying and

selling livestock no matter where those

markets occurred. Rep. Haugen of Iowa,

whose bill was ultimately enacted with

only minor modification, introduced the

conference report to the House on

August 9, 1921. In his discussion of the

rejected Senate amendments he

indicated that buying or selling ‘‘in

commerce live stock at the stockyard’’

was equivalent to being a buyer or seller

of ‘‘live stock in commerce’’.

Representative Jones from Texas, a

strong supporter of the Act, most clearly

stated the importance of open,

competitive markets for the producer:

The producer must always sell in a market

that he does not control. He buys at the other

man’s price. His only hope of securing a fair

price lies in an open, competitive market.55

Congress knew well that the only way

open, competitive markets for livestock

and meat could be maintained was if the

Secretary was given the authority to

regulate practices of one sector of the

industry that could adversely affect

other sectors. Congress recognized that

one of the most significant aspects of

this legislation was that it authorized

regulation of unfair practices as between

the packer and the producer and

between the packer and the consumer.

In response to a question as to how this

Act strengthened the authorities under

the Federal Trade Commission Act,

Representative Anderson stated:

As to the intent of ‘‘unfair competition’’ [in

the FTC Act] it only includes acts which

constitute a violation of the rights of the

competitor, and it must be a method which

is used by a competitor on the same plane.

* * * For instance, the method of

competition used by a manufacturer which

we might think was a violation of the moral

rights of the wholesaler would not be a

violation of the Federal Trade Commission

Act, because the interpretation of that is that

it must be unfair as between competitors who

stand on the same plane. This goes further

than that, as it affects the public interest to

a large extent, and the unfair competition or

unfair competition or unfair practice as

between the packer and the general public,

the packer and the producer, or the packer

and any other agency connected with the

marketing of livestock.56

Congressional commitment to

maintaining open and competitive

markets for livestock was reemphasized

throughout the amendments to the Act

in later years. In 1924 the Act was

amended to increase the authority of the

Secretary to sanction violators. The

House Report notes that the Secretary

personally appeared to the committee

and urged strengthening the law to

enable him to confront ‘‘conditions that

are detrimental to the open, competitive

marketing of livestock.’’ 57

When enacting the 1958 amendments

Congress noted significant changes in

the meatpacking industry and the

environment in which it operates. The

House report stated ‘‘[e]qually

significant (as the development of 1400

to 1500 country auctions and markets)

is the growth which has taken place in

country buying—buying by packers or

livestock dealers direct from the

producer * * * today a common

practice in almost every part of the

country and more than 40 percent of all

livestock sold moves in this manner.’’ 58

This report also makes clear that

Congress intended the 1958 Act

amendments to ensure that the

Secretary had jurisdiction over ‘‘all

livestock marketing involved in

interstate commerce including country

buying of livestock.’’ 59

In 1976, Congress again strengthened

the Act to give the Secretary greater

powers in regulating the packers.

Further changes in the pattern of

livestock marketing between 1958 and

1976 led to these amendments.

Following the 1958 amendment,

‘‘packers continued to push to acquire

slaughter livestock at its source,’’ and by

1976 it was estimated that ‘‘well over

80% of all slaughter livestock is

purchased by the packers directly from

producers and custom feedlots.’’ 60

In 1978, when Congress amended the

Act with regard to rates and charges at

auction markets, it again expressed the

importance of securing competitive

livestock markets for producers. ‘‘The

continued availability of competitive,

reasonably priced, and conveniently

located livestock marketing channels is

essential, particularly for small

producers.’’ 61

The legislative history clearly

establishes that Congress intended to

grant the Secretary the authority to

regulate packer practices necessary to

ensure open, competitive markets for

livestock. When marketing conditions

changed over time, Congress amended

the Act to ensure the Secretary would

continue to be able to address packer

practices even in the context of country
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1855

62 61 Cong. Rec. 1887 (1921).

63 61 Cong. Rec. 1888(1921).

64 7 U.S.C. § 228(a) (emphasis added).

65 7 U.S.C. § 222.

66 39 Fed. Reg. 17529, 17537 (May 17, 1974)

(emphasis added.) 67 Id. at 1327.

buying direct from feedlots or

producers.

7. Obligation to Adjust Rules to Changes

in Industry Structure

While in 1921 the stockyards were the

public market which Congress wanted

to ensure would be made open and

competitive, Congress had the foresight

to recognize that in the long-term

industry marketing practices might

change. It structured the Act to grant the

Secretary authority to take action that

would ensure open, competitive

markets as the industry changed over

time. In doing so Congress intentionally

placed the obligation on the Secretary of

Agriculture to monitor the packing

industry and adjust regulatory controls

to ensure compliance with the purposes

of the Act as industry structure changed.

Congress recognized that enacting a

statutory list of specific prohibited

packer practices would not further one

of its primary goals—to structure an act

that would keep pace with the changing

structure of the livestock industry.

Congressman Anderson of Minnesota, a

member of the House Committee on

Agriculture and a sponsor of one of the

bills that led to the Act, stated during

the debates in the House that:

Industry is progressive. The methods of

industry and the manufacture and

distribution change from day to day, and no

positive iron-clad rule of law can be written

upon the statute books which will keep pace

with the progress of industry. So we have not

sought to write into this bill arbitrary and

iron-clad rules of law. We have rather chosen

to lay down certain more or less definite

rules, rules which are sufficiently flexible to

enable the administrative authority to keep

pace with the changes of methods in

distribution and manufacture and in industry

in the country.62

Congressman Anderson later noted

that ‘‘the provisions of this legislation as

to the packers must be more or less

elastic in order that they may keep pace

with the state and development of the

industry.’’ 63

8. Legislative History Conclusion

The legislative history establishes that

Congress intended that the Secretary use

his authority under the Act to protect

the interests of livestock producers

through regulation of packer practices

that threaten an open, competitive

markets for livestock. It also shows that

Congress intended that the Secretary do

this in part through issuance of

substantive rules that will prevent

packer practices prohibited by the Act

and compel lawful action by packers.

Congress expected the Secretary to

vigorously enforce the Act according to

these principles, adjusting the rules and

enforcement policies to keep pace with

the state and development of the

industry even as numbers of cattle

purchased directly from feedlots and

producers increased. The legislative

history demonstrates that Congress

clearly intended the Secretary to issue

substantive rules of the nature proposed

in this petition.

B. Statutory Authority for Rule Making

The statutory language granting the

Secretary of Agriculture these

extraordinarily comprehensive

regulatory powers, including the

authority to issue substantive

regulations regarding packer practices,

is found at 7 U.S.C. §§ 228(a) and 222.

Section 228 states:

The Secretary may make such rules,

regulations and orders as may be necessary

to carry out the provision of the Act * * *.64

Section 222 grants the Secretary of

Agriculture all of the enforcement

powers held by the Federal Trade

Commission under Title 15 Section 46,

48, and 50.65 Section 46(a) authorizes

the Secretary ‘‘to make rules and

regulations for the purpose of carrying

out the provisions’’ of the Act.

When issuing regulations in 1974, the

Packers and Stockyards Administration

acknowledged that these two statutory

sections granted it the authority to issue

substantive rules:

The position of the Administration is that

the general rule-making authority contained

in section 407 of the Packers and Stockyards

Act (7 U.S.C. § 228) and section 6(g) of the

Federal Trade Commission Act (15 U.S.C.

§ 46) authorizes the Secretary to issue

substantive as well as procedural and

advisory regulations necessary to carry out

the provisions of the Act.66

Courts have also recognized that the

Secretary has the authority to issue

legislative rules under the Packers and

Stockyards Act. These legislative rules

have the force and effect of law. See,

e.g., United States v. Marshall Durbin &

Co., No. CV 84–PT–1920–S (ND Ala

Sept. 11, 1985), where the court

recognized that the Secretary has the

authority to issue legislative rules

having the force and effect of law, but

held that a poultry weighing regulation

should be regarded as an interpretive

rule, since the Secretary did not comply

with the notice and comment

procedures of the Administrative

Procedure Act.

One court has specifically addressed

the Secretary’s rule-making authority

under Section 202 of the Act. In Central

Coast Meats v. USDA, 541 F.2d 1325

(1976), the court held that USDA did

not have the authority under § 202(a) to

enforce a rule that made it a per se

violation for a packer to own a dealer or

vice-versa. The court based this holding

on its understanding that 202 (c) and (d)

specifically addressed the evils of

packers’ acting as dealers and it clearly

contemplated that packers could act as

dealers in certain circumstances.67 This

decision would not prohibit the

issuance of the rules proposed in this

petition. The rules proposed here do not

create the type of per se prohibition the

court was concerned with in the Central

Coast Meats decision. These proposed

rules do not make packers’ use of

forward contracts a per se violation. Nor

do they make packer feeding a per se

violation. Rather, these rules identify

the circumstances under which forward

contracts and packer feeding result in

violations of the Act.

Forward contracts that are formulapriced fail to establish the value paid for

an animal on the day it is committed.

This allows an opportunity for the

manipulation of the price between the

day the livestock is committed and the

date it is delivered. Forward contracts

which are not traded publicly create

preferences for those producers offered

those contracts over those not offered

such contracts. Such preference of one

producer over others is likely to injure

the competitive position of those not

receiving the offer and this violates

Section 202(b) of the Act.

The proposed rule’s requirement that

all forward contracts contain a firm-base

price and be traded in an open, public

manner eliminates the circumstances

under which forward contract use

violates § 202 of the Act. Similarly,

packer feeding of its own slaughter

supplies can have the effect of reducing

prices paid to producers on the cash

market. Such practice also provides a

preference to the persons owning the

packer as well as owning the cattle.

Thus a packer’s feeding of its own

slaughter supplies is likely to affect a

manipulation of price and also likely to

injure the other cattle producers’ ability

to compete with the packer. The

proposed rule that packer owned and

fed cattle be sold in public markets

eliminates the circumstance in which

packer feeding results in violations of

the Act. Rather than establishing a per

se violation of the Act, the proposed

rules are explicitly designed to address

the specific circumstances under which

forward contracts and producer
1856 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

68Swift & Co. V. Wallace, 105 F.2d 848, at 853

and 863.

69Swift & Co. v. Wallace, 105 F.2d 848, at 862

(7th Cir. 1939).

70 Id. at 863.

71See Armour & Co. v. United States, 402 F.2d

712 (7th Cir. 1968).

72Swift & Co. v. Wallace, 105 F.2d 848, at 853

(7th Cir. 1939).

ownership and feeding of cattle result in

violations of the Act.

Both the legislative history and the

statutory language of the Packers and

Stockyards Act make it clear that the

Secretary has extraordinarily broad

authority to issue substantive rules

regulating packer practices.

C. Statutory Authority for Captive

Supply Rules

The types of packer practices that are

to be regulated through the Secretary’s

rulemaking authority were set out in

Section 202 of the Act, 7 U.S.C. § 192.

This section establishes that:

It shall be unlawful with respect to

livestock * * * for any packer * * * to:

(a) Engage in or use any unfair, unjustly

discriminatory, or deceptive practice or

device; or

(b) Make or give any undue or

unreasonable preference or advantage to any

particular person or locality in any respect

whatsoever, or subject any particular person

or locality to any undue or unreasonable

prejudice or disadvantage in any respect

whatsoever; or * * *

(e) Engage in any course of business or do

any act for purpose or with the effect of

manipulating or controlling prices, or of

creating a monopoly in the acquisition of,

buying, selling, or dealing in, any article, or

of restraining commerce.

D. Assertion That Secretary Lacks Rulemaking Authority Is Wrong

Despite the Congressional grant of

extraordinarily broad rule-making

authority and its intent that the

Secretary amend its rules as necessary

to ensure packer compliance with the

Act as industry structure changes, the

Secretary has asserted that he has no

authority to issue rules prohibiting

packer captive supply procurement

practices. In Secretary Glickman’s letter

dated October 3, 1995, to Representative

Pat Williams, he asserts that the Grain

Inspection and Packers and Stockyards

Administration’s policy is ‘‘to promote

fair and open competition among

packers and not to dictate or regulate

the specific methods and terms of sale

to be utilized.’’ The Secretary cites Swift

& Co. v. Wallace, 105 F.2d 848 (7th Cir.

1939), to support this policy. He states

that the court in that case noted that

Section 202 ‘‘does not purport to confer

upon the Secretary of Agriculture any

authority directly to regulate prices, or

discounts, or sales methods; and clearly

does not contemplate the exercise of any

authority to establish uniformity of

practice with respect thereto.’’

This was the Secretary’s response to

a request from several congressmen to

fully consider the Western Organization

of Resource Council’s request that rules

of the nature proposed in this petition

be issued.

The Secretary’s reliance on the Swift

case as justification for not issuing rules

prohibiting these practices is misplaced.

The Swift decision does not support his

assertion that he has no authority to

regulate these packer practices. In fact,

the court in Swift explicitly states that

the Secretary has the authority to

restrict packer practices that violate

Section 202 of the Packers and

Stockyards Act.68 This decision makes

clear that the only limitation on the

Secretary’s authority to regulate packer

practices is that restricted practices

must be in violation of the Act.

1. Swift Case Analysis

a. Holdings in Swift Decision

In the Swift case, Swift had been

granting longer credit terms and better

discounts to the institutional trade

(hotels, restaurants, clubs, steamship

lines, and public institutions) than it

offered to purveyors (those businesses

which buy meat products from packers

and then resell them to the institutional

trade). USDA issued a cease and desist

order that required Swift to:

[C]ease and desist from engaging in the

unfair, unjustly discriminatory and deceptive

practice and device of denying to any buyer

of packer products the same terms of credit

that are extended to any other buyer, of

substantially the same credit rating

purchasing packer products of like kind,

quantity and quality, under substantially the

same circumstances.69

The Court of Appeals found a

problem with the form of the cease and

desist order issued by USDA. It held

that USDA acted outside its authority

under the Packers and Stockyards Act in

issuing an order that required Swift to

grant uniform terms of credit and

discounts to all customers.70

2. Legal Analysis

a. Swift Decision is Not Controlling Law

in Most of the Country

The Swift decision cited by the

Secretary is controlling law only in the

Seventh Circuit, which includes

Wisconsin, Illinois, and Indiana. While

other courts may consider the Swift

decision when deciding similar issues,

it is not controlling law in other federal

circuits. Other federal courts may

decide the issue differently.

Since the Swift decision was issued

by 1939, it has been cited only once by

the Seventh Circuit for the proposition

the Secretary uses it for.71 However, the

Armour decision does not give any more

insight into what the Swift court meant

by the quote Secretary Glickman now

cites. No other courts have cited the

case for this specific proposition.

However, the case is cited often to

support other principles regarding the

Packers and Stockyards Act.

b. In Context, the Quote Does Not

Support the Secretary’s Position

When the quote cited by the Secretary

is read in its proper context in the Swift

decision, it is clear that it does not

support the Secretary’s general refusal

to prohibit the packer practices as

requested. Two important principles

expressed by the court shed light on the

intent of the quoted language. First, the

court of appeals recognized the

Secretary’s authority to prohibit and

restrict practices that are found to

violate Section 202 of the Packers and

Stockyards Act. Second, the reference to

the lack of authority to establish

uniformity of practice is to the court’s

finding that the form of the cease and

desist order in that case was improper

because the Act does not authorize the

Secretary to change an unjustly

discriminatory or unreasonable

preferential practice into a fair practice

through an affirmative mandate that the

practice be applied uniformly to all

affected.

(1) USDA Has the Authority to Restrict

Unlawful Packer Practices

The quote cited by the Secretary is as

follows:

The foregoing language does not purport to

confer upon the Secretary of Agriculture any

authority directly to regulate prices, or

discounts, or sales methods; and clearly does

not contemplate the exercise of any authority

to establish uniformity of practice in respect

thereto.72

The sentence immediately following

this quote recognizes that the Secretary

does have the authority to regulate

practices if ‘‘in fact’’ they constitute

unfair, unjustly discriminatory, or

deceptive practices, or if they provide

undue or unreasonable preference or

advantage as between persons or

localities. The court states:

Differences of variations in prices, or in the

terms of credit, or amounts of discount, or in

practices do not come within the ban of the

act unless they in fact constitute engaging in

or using an unfair or unjustly discriminatory

or deceptive practice or device in commerce

or unless they constitute a making or giving,

in commerce, of an undue or unreasonable
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1857

73 Id. at 853.

74 Id. at 863.

75 Id. at 862–63.

76 Id..

77 Id. at 863.

78Hearing on H.R. 14, H.R. 232, H.R. 5032, and

H.R. 5692 Before the House Committee on

Agriculture, 67th Cong, 1st Sess., ser. D, 26 (1921).

79 Daniels v. United States, 242 F.2d 39, 42 (7th

Cir. 1957), cert. denied, 354 U.S. 939, reh’g denied,

355 U.S. 852 (1957); Bowman v. USDA, 363 F.2d

81, 185 (5th Cir. 1966), quoting Daniels.

80See Armour & Company v. United States, 402

F.2d 712, 717 (7th Cir. 1968), which describes how

several previous Seventh Circuit opinions

incorporated this concept, including Swift & Co. v.

Wallace, 105 F.2d 848 (7th Cir. 1939); Wilson & Co.

v. Benson, 286 F.2d 891 (7th Cir. 1961); Swift & Co.

v. United States, 408 F.2d 849 (7th Cir. 1962); see

also Corona Livestock v. USDA, 607 F.2d 811, 815

(9th Cir. 1979).

81 De Jong Packing Co. v. USDA, 618 F.2d 1329,

1336–37 (9th Cir. 1980) (emphasis added).

82Bosma v. USDA, 754 F.2d 804, 808 (9th Cir.

1984), (emphasis added).

83 Id. at 808–809.

84 Id.

85Farrow v. USDA, 760 F.2d 211, 215 (8th Cir.

1985).

preference or advantage, or result in undue

or unreasonable prejudice or disadvantage as

between persons or localities.73

Later in the decision, the court makes

clear that the Secretary has the authority

to restrict packer practices that violate

Section 202. The court states:

If a practice in respect to the giving of

discount or terms of credit in fact constitutes

an undue and unreasonable preference or

advantage, or subjects some person or

locality to undue and unreasonable prejudice

or disadvantage, then clearly the Secretary of

Agriculture has the power to restrict the

practice to the point where it is fair and

reasonable * * *74

Clearly, the court recognized that

once USDA finds that a particular

packer practice violates Section 202, it

has the authority to restrict that practice

until it is fair and reasonable. The

economic studies discussed above

demonstrate that current use of formulapriced forward contracts and packer

ownership and feeding of its own

slaughter supplies likely affect a

manipulation of prices paid to

producers and provide certain

producers competitive advantages and

preferences that are in violation of § 202

of the Act. The proposed rule restricts

these practices only to the extent

necessary to make them fair and

reasonable and to prevent violation of

the Act.

(2) Regulating Uniform Packer Practices

The court in the Swift case also held

that the cease and desist order issued by

the Secretary went beyond his authority

because it was in effect an affirmative

command to require ‘‘uniformity’’ of

discount terms, terms of credit, and

trade practices.75 The court interpreted

the cease and desist order issued by

USDA to affirmatively require Swift to

give discounts and particular terms of

credit to any customer as a condition to

being permitted to continue giving

terms of credit or discounts that were

found unreasonable and prejudicial.

The court held that once a discount,

term of credit, or practice was found to

be undue or unreasonable preference, or

unjustly discriminatory, the Secretary

did not have the authority to change the

practice into a proper practice by

requiring it to be extended to all others

who may be affected thereby. It held

that the Secretary does have the power

to restrict a practice to the point where

it is fair and reasonable but does not

have the power to change the

unreasonable preference into a fair

practice by affirmatively mandating that

it be applied uniformly to all affected.76

The court states:

If a practice in respect to the giving of

discount or terms of credit in fact constitutes

an undue and unreasonable preference or

advantage, or subjects some person or

locality to undue and unreasonable prejudice

or disadvantage, then clearly the Secretary of

Agriculture has the power to restrict the

practice to the point where it is fair and

reasonable; but we do not believe that the

Secretary has the power to change a practice,

which is assumed to be unreasonable and to

create an unreasonable preference, into a

proper practice by requiring it to be extended

to all others who may be affected.77

The reference to the lack of authority

to establish uniform practices in the

quote used by Secretary Glickman is

explained by this statement. All that the

Swift court meant was that the Secretary

does not have the authority to

affirmatively mandate that for an

unlawful practice to become lawful, it

must be applied uniformly.

The Secretary’s assertion that the

Swift case supports his decision not to

issue rules prohibiting the packer

practices requested by the Western

Organization of Resource Councils is

wrong. The proposed rule restricts

packer captive supply procurement

methods only to the extent necessary to

stop violation of the Act. The proposed

rule does not mandate terms of sale

through forward contracts or packerowned cattle. Unlike the cease and

desist order in the Swift case which

required offering the same terms of

credit to all buyers, the proposed rule

does not require packers to buy all cattle

on the same price terms. Forward

contracts must be traded publicly, but

the firm-base price does not have to be

the same for all cattle. Similarly, packerowned and fed cattle must be sold in a

public market, but the cattle do not all

have to be sold on the same terms.

E. Incipiency Theory of Enforcement

The legislative history of the Packers

and Stockyards Act indicates that the

Act seeks ‘‘to prohibit the particular

conditions under which monopoly is

built up, and to prevent a monopoly in

the first place and to induce healthy

competition.’’ 78

Such legislative history has been

interpreted by courts to mean that one

of the purposes of the Packers and

Stockyards Act is to prevent ‘‘potential

injury by stopping unlawful practices in

their incipiency’’ and that ‘‘proof of a

particular injury is not required’’ to

permit regulation of packer practices.79

Several courts have affirmed the

principle that the Secretary has the

authority to prevent unlawful practices

in their incipiency but require that

before doing so he must find either

some non-competive intent or some

likelihood of competitive injury.80

These cases do not require the Secretary

to find actual injury. He is only required

to demonstrate a likelihood that injury

of the sort the Act is designed to prevent

will occur. As the Court of Appeals for

the Ninth Circuit has stated:

Unfair practices under Section 202 are not

confined to those where competitive injury

has already resulted, but include those where

there is a reasonable likelihood that the

purpose will be achieved and that the result

will be an undue restraint of trade.81

In Bosma v. USDA, the Ninth Circuit

Court of Appeals quoted its Central

Coast Meats, Inc. holding that the

department must show that the

challenged conduct ‘‘is likely to

produce the sort of injury the Act is

designed to prevent.’’ 82 The court found

that actual harm resulted when an

auction operator purchased livestock

from consignments for speculation.83

However, the court also held that the

failure of the auction operator to inform

consignors that he was the actual

purchaser of the livestock was

‘‘inherently unfair’’ and ‘‘it may be

considered an ‘unfair’ or ‘deceptive’

practice absent a more specific showing

of actual harm.’’ 84

Similarly, in a case involving an

agreement by two competitors not to

compete for certain cows at an auction

market, the Eight Circuit Court of

Appeals held that ‘‘actual injury’’ need

not be proven because the ‘‘purpose of

the Act is to halt unfair trade practices

in their incipiency, before the harm is

suffered.’’ 85 The court stated that ‘‘the

Secretary need only establish the

likelihood that an arrangement will
1858 Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules

86 Id.

87 Id. at 214.

88 Id.

89See, e.g., Swift & Co. v. Wallace, 105 F.2d 848,

at 855–857 (7th Cir. 1939).

90 Id. at 857.

91 Id. at 854–57.

92 Id. at 857. 93 7 U.S.C. § 192(e).

result in competitive injury to establish

a violation.86 The court agreed with the

judicial officer that ‘‘a practice which is

likely to reduce competition and prices

paid to farmers for cattle can be found

an unfair practice under the Act.’’ 87 The

court concluded that ‘‘this is so even in

the absence of evidence that the

participants made their agreement for

the purpose of reducing prices to

farmers or that it has that result.’’ 88

These cases firmly establish that the

Secretary may take action to prevent

unlawful packer practices in their

incipiency if he finds that these

practices are reasonably likely to

produce the sort of injury the Act is

intended to prevent. The economic

studies discussed above provide a

sufficient factual basis for finding that

the packers current use of forward

contracts and packers’ feeding of their

own slaughter supplies in today’s

concentrated markets are likely to cause

reductions in prices paid to producers

and result in undue preferences for

certain producers over others.

The incipiency theory of enforcement

of the Packers and Stockyards Act can

be applied in the rule-making process as

well as in an administrative complaint

proceeding. In the rulemaking process

the Secretary makes the necessary

findings with regard to the packer

practices in general, whereas in an

administrative complaint proceeding

the necessary finding would be made as

to a particular situation. The captive

supply procurement practices addressed

by the proposed rule are so widespread

that restrictions on USDA’s resources

will not permit them to be addressed

effectively through individual

administrative complaints. These

practices can only be addressed

effectively through issuance of a rule.

F. The Relevance of Competition in an

Undue Preference Case

The Seventh Circuit Court of Appeals

has held that when considering whether

a packer practice provides an undue and

unreasonable preference or is unjustly

discriminatory, the effect on

competition as between the party

alleged to have obtained the preferential

treatment and the party alleged to have

been discriminated against is of primary

importance. Even good faith

competition between packers will not

prevent a finding of discrimination or

unreasonable preference if the parties

preferred or discriminated against are

not other packers.89

In this Seventh Circuit case, Swift had

been granting longer credit terms and

better discounts to the institutional

trade (hotels, restaurants, clubs,

steamship lines, and public institutions)

than it offered to purveyors (those

businesses which buy meat products

from packers and then resell them to the

institutional trade). The Seventh Circuit

Court of Appeals set aside USDA’s

ruling that the discounts and terms of

credit at issue were in violation of

Section 202 of the Packers and

Stockyards Act.90 The court found that

USDA had not properly taken into

account the issue of competition when

making its decision.91 Under the court’s

analysis, the purveyors that claimed

they were being discriminated against

were competitors of the packer, not

competitors of the institutional trade.

Both the packers and the purveyors sold

meat to the institutional trade. The

preferential credit terms and discounts,

however, were given to the institutional

trade. The court found that an important

aspect of ‘‘competition’’ to be concerned

about in an unjustly discriminatory or

unreasonable preference case would be

that between the party preferred and the

party claiming prejudice. The court

stated:

Normally the lack of competition between

the parties preferred and the parties claiming

to be subjected to discrimination would be a

fact of substantial significance for the

determination of the existence of ‘‘any undue

and unreasonable preference or

advantage.’’ 92

Because the purveyors were not

competing with the institutional trade,

the court found no discrimination

between competitors. Thus, it found

that USDA had not provided an

adequate factual basis for holding the

practices to be violations of the Act.

When considering whether the

packers’ captive supply procurement

methods result in undue and

unreasonable preferences or unjust

discrimination, their effect on the

competition between livestock

producers must be considered. Because

captive supply agreements are offered

selectively to livestock producers and

provide preferential access to slaughter

plants for those who enter into them,

they injure the ability to compete of

those producers who are not offered

such agreements for the sale of their

livestock. The proposed rule is designed

to restrict use of forward contracts and

packer owned and fed cattle only to the

extent necessary to prevent unjust

discrimination or undue preferences

between competing producers. It does

so by requiring forward contracts and

producer owned and fed cattle to be

traded in a public market.

G. Secretary Has the Authority to Issue

the Proposed Captive Supply Rules

The legislative history discussed

above demonstrates that a primary

purpose of the Packers and Stockyards

Act was to ensure that producers

received full value for their livestock.

The Secretary was granted the authority

to regulate packers to ensure open,

competitive livestock markets and,

thereby prevent arbitrary depression of

prices through the oligopsonistic

powers of the packers. See pp. 25–29.

This history and the language of the Act

also demonstrates that the Secretary has

the authority to issue substantive rules

to prevent packers from taking any

actions prohibited by Section 202 of the

Act. See pp. 23–25. The courts have

held that Congress intended to give the

Secretary the authority to regulate

packers’ activities so as to stop practices

that are likely to cause the type of harm

to producers that the Act is designed to

address in their incipiency—before the

harm is suffered. See pp. 37–39 above.

The above described economic

evidence provides a substantial factual

basis for finding that the current use of

formula-priced forward contracts and

direct packer feeding of cattle for

slaughter in today’s highly concentrated

markets is likely to cause the type of

harm to producers that Congress

intended to prohibit under Section 202

of the Act.

Section 202(e) expressly prohibits

packers from engaging in ‘‘any course of

business’’ or doing ‘‘any act’’ with ‘‘the

effect of manipulating or controlling

prices.’’ 93 Numerous economic studies

cited above indicate that, in general,

when packer concentration levels

increase producers prices decrease. See

pp. 8–13 above. Recent studies support

a finding that packers’ oligopsonistic

power does have a negative impact on

producers’ prices, costing producers

millions of dollars a year. See pp. 8–13

above. For example, one important

study found, through statistical analysis

that, between 1972 and 1986, fed cattle

prices were significantly below their

marginal value during 39 of 51 quarters.

On average the mark-down was 1.31

percent, or 17 percent of the marketing

margin, amounting to $1.54 per

hundredweight of retail meat. The

authors estimate that this was worth
Federal Register / Vol. 62, No. 9 / Tuesday, January 14, 1997 / Proposed Rules 1859

94 7 U.S.C. § 192(a).

95 7 U.S.C. § 192(b).

about $62 million dollars to the packers.

See p. 13 above. While these studies do

not identify any specific practices that

cause the reduction in prices, they do

demonstrate that oligopsonistic packer

buying practices, in general, have the

effect of manipulating prices paid to

producers. These studies establish a

substantial factual basis for finding a

strong likelihood that general buying

practices of oligopsonistic packers will

result in producers receiving less than

the full value of their livestock. They

provide substantial evidence for finding

that oligopsonistic packers’ buying

practices should be restricted under

Section 202 of the Act.

Economic studies have also attempted

to isolate specific livestock procurement

practices to determine their effect on

producer prices. One study found that

packers’ feeding of their own cattle for

slaughter has a depressing effects on

prices other producers are paid for their

livestock. See, pp. 13–15 above. Other

studies have shown that packers’ use of

forward contracts also has depressing

effect on prices paid to producers for

their livestock. See pp. 15–19 above.

Concentration in the Red Meat Packing

Industry, issued by the Grain Inspection

and the Packers and Stockyards

Administration in February, 1996,

demonstrates that the use of captive

supply procurement methods in the

cattle industry is associated with a

decline in cash-market price for cattle.

It shows that packers increase their

captive supply inventories when cashmarket prices increase, and as they

increase captive supply deliveries from

these inventories, cash-market prices

decline. See p. 18 above. These studies

provide sufficient evidentiary support

for a finding that packer feeding of their

own slaughter supplies and their use of

forward contracts are likely to have the

effect of manipulating prices paid to

producers in violation of Section 202(e)

of the Act. Such practices should, thus,

be restricted by regulation.

Section 202(a) of the Act prohibits

packers from engaging in any ‘‘unjustly

discriminatory’’ practice or device.94

Section 202(b) prohibits packers from

giving any person an ‘‘undue or

unreasonable preference or advantage’’

‘‘in any respect whatsoever.’’95

When considering whether packers’

feeding of their own slaughter supplies

and use of forward contracts constitute

undue preferences or unjust

discrimination in violation of Section

202 (a) and (b) of the Act, the effect of

these practices on competition between

livestock producers must be considered.

See pp. 39–40 above. Packer feeding of

their own slaughter supplies and use of

forward contracts are very likely to

injure competition between livestock

producers. By definition, packers that

own and feed cattle for their

slaughtering plants provide preferential

treatment for their stockholders over

other livestock producers. Packerowned cattle enjoy preferential access to

the slaughtering facility; thus the

packer-owned cattle are guaranteed a

market. This type of activity does injure

competition between, the packers and

their shareholders on the one hand, and

other livestock producers on the other.

Similarly, forward contracts which are

not traded publicly but offered to

certain livestock producers selectively

also provide preferential access to

slaughter plants for those who enter into

them. Livestock producers who are not

offered the forward contracts are at a

significant competitive disadvantage.

That these practices may make the

packers more competitive with each

other does not control the determination

of whether they violate the ‘‘undue and

unreasonable preference’’ or ‘‘unjustly

discriminatory’’ language of the Act.

Packer feeding of its own cattle for

slaughter and forward contracts as they

are used today are likely to result in

undue preferences and unjust

discrimination in violation of Sections

202 (a) and (b) of the Act. Their use

should thus be restricted through

regulation.

This discussion demonstrates that

there is substantial factual and legal

basis for issuing rules under Section 202

of the Act restricting the use of forward

contracts and packer feeding of its own

slaughter supplies. The rules proposed

in this petition offer the least intrusive

form of restriction on these practices

that will ensure compliance with the

purposes of the Act. These proposed

rules do not prohibit the use of forward

contracts, but merely require that the

contracts contain a firm-base price and

be traded in an open public market. The

proposed rules also do not prohibit

packers from owning and feeding cattle.

The proposed rule only requires that

packer-owned cattle be traded in a

public market.

These restrictions are designed to

protect producers’ interests by

encouraging open, competitive markets

for livestock. They are designed to take

advantage of what economic studies

suggest encourage competitive markets

for livestock—that more bidders for

livestock mean higher prices to

producers and that electronic or

telemarkets markets also increase prices

paid for livestock. See pp. 18–20 above.

They are designed to provide equitable

access to markets for all livestock

producers preventing unjust

discrimination between livestock

producers by packers.

For these reasons WORC requests that

Secretary Glickman issue the rule set

out above at pp. 2–4.

Attorneys for Western Organization of

Resource Councils.

Lynn A. Hayes,

Attorney at Law. Farmers’ Legal Action

Group, Inc., 1301 Minnesota Building, 46 East

Fourth Street, Saint Paul, Minnesota 55101–

1109, (612) 223–5400, (612) 223–5335 (fax).

[FR Doc. 97–739 Filed 1–13–97; 8:45 am]

BILLING CODE 3410–EN–M

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 96–NM–60–AD]

RIN 2120–AA64

Airworthiness Directives; Airbus

Industrie Model A310 Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) that is applicable to

certain Airbus Model A310 series

airplanes. This proposal would require

repetitive inspections to detect

discrepancies or damage of the steady

bearing assemblies of the flap

transmission system, and replacement

of any discrepant or damaged assembly

with a new, like assembly. This

proposal also would require eventual

replacement of all the steady bearing

assemblies with new, improved

assemblies, which would terminate the

repetitive inspection requirement. This

proposal is prompted by reports of

cracking of the hardened steel inner

race, and broken or missing inner races

of the steady bearing assemblies. The

actions specified by the proposed AD

are intended to prevent such

discrepancies and damage of the shafts

of the steady bearing assemblies, which

could cause the shafts to fail; failure of

the steady bearing shafts during a

subsequent asymmetric stop could

result in an uncommanded asymmetric

retraction of the flap, and subsequent

reduced controllability of the airplane.

DATES: Comments must be received by

February 24, 1997.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation