[Senate Hearing 106-1007]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1007
HOW MERGERS IN THE NATION'S AGRICULTURAL INDUSTRY IMPACT CONSUMERS
=======================================================================
FIELD HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JULY 24, 1999
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Staff Director
Martha P. Allbright, General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Kevin D. Kayes, Democratic General Counsel
C O N T E N T S
----------
Page
Field Hearing held July 24, 1999................................. 1
Opening Statement of Senator Burns............................... 1
Prepared statement........................................... 3
Witnesses
Bullock, Steve, Executive Assistant Attorney general, Montana
Department of Justice, Helena, MT, on behalf of Attorney
General Joe Mazurek............................................ 11
Prepared statement........................................... 16
Heffernan, William, Department of Rural Sociology, University of
Missouri-Columbia, Report ``Consolidation in the Food and
Agriculture System''........................................... 22
Hibbard, Chase T., President, Montana Wool Growers Association... 53
Prepared statement........................................... 56
Kissinger, Will, Deputy Director, Montana Department of
Agriculture, Helena, MT, on behalf of Ralph Peck, Director of
the Montana Department of Agriculture.......................... 4
Prepared statement........................................... 6
Maki, Kenneth L., President, Montana Farmers Union, Great Falls,
MT............................................................. 21
Prepared statement........................................... 45
McClure, David L., President, Montana Farm Bureau Federation,
Bozeman, MT.................................................... 17
Prepared statement........................................... 20
Nelson, Bruce, State Executive Director, Farm Service Agency,
U.S. Department of Agriculture................................. 7
Prepared statement........................................... 9
Peterson, Jim, Executive Vice President, Montana Stockgrowers
Association, Helena, MT........................................ 47
Prepared statement........................................... 50
Appendix
Klein, Joel I., Assistant Attorney General, Antitrust Division,
Department of Justice, prepared statement...................... 63
HOW MERGERS IN THE NATION'S AGRICULTURAL INDUSTRY IMPACT CONSUMERS
----------
SATURDAY, JULY 24, 1999
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Great Falls, MT.
The committee met, pursuant to notice, at 10 a.m., in the
Commission Board Room of the Civil Center, 2 Park Avenue, Great
Falls, Montana, Hon. Conrad Burns presiding.
Staff members assigned to this hearing: Robert Taylor,
Republican counsel; and Moses Boyd, Democratic senior counsel.
OPENING STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns [presiding]. We will call this Committee to
order here in Great Falls, Montana.
This is an official Commerce Committee hearing to be held
this morning on mergers and acquisitions. As you know, there
are lots of members on the Commerce Committee that are very
concerned about not only mergers and acquisitions around the
country, but also, very little attention has been paid to what
is happening over in the agricultural sector. So we thought we
would come to Montana, take a look at activities out here and
visit with a lot of people who have views on acquisitions and
mergers and how they are going to affect their life.
Now, let us kind of lay it out a little bit. We are
probably in the midst of the most wave of mergers we have ever
seen. It is estimated in 1998 alone, mergers went way over the
one trillion dollar mark, and that includes everything from
agricultural to telecommunications to banking, through it all.
It is occurring in all sectors of our economy, and they are
having a dramatic impact, I think, on agricultural as we know
it.
As you know, Montana farmers and ranchers are struggling.
Price declines for agricultural commodities have had a
devastating effect here in Montana on every economy. You can go
down any main street in any city in Montana, and they will tell
you business is not all that good, and it relates directly to
how we are getting along in the agricultural sector.
That is not to say that we have not dealt with low prices
before, but the landscape is different now. Every commodity is
at a low end, whether it is cattle, whether it is sheep or hogs
or grain; it does not make any difference. All commodities are
at a low end.
In fact, if you want to make the comparisons and allow for
inflation and everything else, we are getting less for our
products on the farm now than we did during the Great
Depression. That is how devastating this has been.
We have faced these times before, but always there has been
one segment of American agricultural that has always sort of
been on the profitable side, and have been those who diversify,
able to survive. This time, it is a lot different.
What roles do consolidations and mergers play in either the
cause for these depressed prices that we are experiencing now,
and how will they affect price recovery? Can we recover if the
landscape is different? If consolidation increases, will prices
continue to decrease and absolutely take all of our chances
away of any kind of price increase?
You know, the market is just kind of like an hourglass,
with all the market power funneled to the middle. Market
transparency becomes very difficult. Market price discovery,
which is now how we business folks make business decisions,
becomes almost impossible. One important factor that has not
been talked about is, what is the impact on the consumer?
Now, I have been around agricultural long enough that we
have always been able to eat our way out of overproduction,
because everything we produce is consumed, but at a price.
Well, right now, and I saw this over the holidays of 1998
and going into 1999, I did see pork chops at $5.50 a pound when
you had $9 hogs live weight.
Now, if you move that retail price down to where it
correlates with the price in the grocery store, then we can eat
our way out of some overproduction. But that didn't happen last
December, and that is what triggered this interest in mergers
and in consolidation in vertical and horizontal integration as
far as the production is concerned.
Four major packers still control 79 percent of the meat
packing industry in the United States. Now, that is the meat
packing industry. Four. That is a pretty huge thing.
Montana livestock producers, we cannot compete against that
because big producers can hedge; they can forward contracts;
they have got a lot of options that a little producer does not.
Now, some will argue that vertical integration is
beneficial to the industry as a whole, but some will argue that
vertical and horizontal integration is good also. I am not
convinced that that is true. It appears to me benefits only
flow to the large-scale operation.
Concentration eliminates the chance for the young producer
to get into the business. Young farmers will find it very
difficult to break into the industry with the demands of
cattle, startup costs associated with the farm and ranch, and
the chances are slim that new producers will have enough
capital or enough toehold to really get started. If vertical
integration increases, it becomes nearly impossible.
I strongly believe concentration and vertical integration
in the poultry and the pork industries has shown us that
neither are advantageous to the average agricultural producer
or the consumer. It continues today.
I look forward to the testimony of all the folks up here.
These are all Montanans. They represent the several industries
of Montana, the segment of their economy in agricultural. So I
am interested in hearing what they have to say. What they say
will be made part of the record of the Commerce Committee, and
that record will influence on what kind of policy we will
formulate as far as dealing with mergers and consolidations.
I have one disappointment, however. I also note with
frustration and anger that the Ation Administration's Justice
Department is not represented on this panel today.
The Justice Department plays a key role in antitrust
enforcement. Their failure to be here to explain their policies
to rural America speaks volumes about what their real agenda
is. Farmers and ranchers in States like Montana and the people
there are most affected by these mergers.
The decision by the Justice Department and their absence is
really unexcusable, and I am really disappointed in it, and a
strong letter to follow, let us put it that way. But they just
refused to come to Montana and look Montana farmers in the eye
and say, OK, this is the path that we have taken.
So I look forward in listening to the witness today, and we
are going to just start off here, and I will call some folks,
and then we will just kind of have a discussion, because that
is the way we learn things.
If there is anybody here that understands what
consolidations and mergers and no market means, I think it
would be Chase Hibbard who's representing the wool growers.
My gosh, we have only had one packer, Chase, for a long
time, and it is very, very difficult, and it led to some
situations that we see in the sheep and lamb industry today.
So I am going to start off here with Panel 1. We have got
Will Kissinger here, Deputy Director of the Montana Department
of Agricultural, and Will, if you have got a short statement,
and what you would like to say to us today, we would recognize
you at this time.
By the way, if you want to consolidate your message, that
is fine because I will make sure that your full testimony is
made part of the record.
Also, an announcement that the record will remain open 10
days after the hearings today, and you can make comments to the
Committee. If other members of the Committee wish to ask you
questions, and they will write to you, if you would respond
both to the Committee and to the individual Senator, we would
appreciate that too. You may get one or two, because that has
happened before, so I will make that announcement now.
So thank you for coming. We don't want to sew things up any
more today.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
Thank you all for coming today. The title of today's hearing is
``How mergers in the nation's agriculture industry impact consumers.''
We are in the midst of an incredible wave of mergers. It is estimated
that in 1998 the total value of these mergers was more $1 trillion.
The merger wave is occurring in all sectors of the economy
including agriculture. Mergers are having a dramatic impact on
agriculture and on Montana.
As you know, Montana farmers and ranchers are struggling. Price
declines for agricultural commodities have had a devastating impact on
the economy.
With several years of low prices, many agricultural folks have been
forced to sell the farms and ranches they have made their living from;
some nearly all their lives.
Producers have faced several years of a depressed market, largely
due to consolidation and mergers. If consolidation increases, prices
will continue to decrease. Further consolidation will lead to nothing
more than spiraling downward prices and more agricultural producers
losing their farms and ranches.
Concentration in the livestock industry is much like an hourglass,
with all the market power funneled to the middle. We need transparency
in marketing prior to the commodity reaching the consumer.
Close examination of mergers for anti-competitive effects is of
utmost importance in maintaining an accessible market for livestock and
grain producers.
Four major packers control 79 percent of the meat packing industry
in the United States. Montana livestock producers cannot compete with
so few marketing options available. Montana ranks 11th in the Nation
for number of cattle and calves with close to 3 million head and ranks
2nd in total acres of land in agriculture. Producers need more avenues
to market their goods.
Some will argue that vertical integration is beneficial to the
industry as a whole. This is simply not true. Those benefits only apply
to large-scale operations. Vertical integration is based on economies
of scale and therefore present an advantage to the large producer.
After he has pushed enough small producers out of business to reach a
profitable level of operation.
Concentration eliminates the chance for a young producer to start a
new operation. Young farmers will have no opportunity to break into the
industry. With a lack of sustainable loans and startup costs associated
with agricultural business, the chances are slim as it is for new
producers to start. As vertical integration increases, it will become
nearly impossible.
I strongly believe concentration and vertical integration in the
poultry and pork industries have shown us that neither are advantageous
to the average agricultural producer. Concentration present in the
grain and the meat industry has decreased the price the producer
ultimately receives for the commodity produced.
I look forward to the testimony of the witnesses we have present
today. But I also note with frustration and anger that the
Administration is under represented. The Justice Department plays the
key role in anti-trust enforcement. Their failure to be here to explain
their policies to rural America in rural America speaks volumes about
their real agenda. Farmers and ranchers in states like Montana are the
people most affected by the decisions made by the Justice Department
and their absence in excusable.
Senator Burns. Will Kissinger, Deputy Director of
Department of Agricultural out of Helena. Thanks for coming
this morning.
STATEMENT OF WILL KISSINGER, DEPUTY DIRECTOR, MONTANA
DEPARTMENT OF AGRICULTURE, HELENA, MT
Mr. Kissinger. Thank you, Senator.
For the record, my name is Will Kissinger, Deputy Director
of the Montana Department of Agriculture in Helena. I am here
today to present testimony on behalf of Ralph Peck, Director of
the Montana Department of Agriculture.
Thank you, Senator, for the opportunity to provide
testimony on this issue of great importance to the Montana
agricultural industry.
As you well know, agricultural is Montana's No. 1 industry.
As such, the overall strength and viability of Montana's
economy is dependent on the economic well-being of our
agricultural industry.
Montana's primary agricultural commodities, which include
livestock and grains, are facing a number of market challenges
as we move into the 21st Century. Changes in the global market,
adjustments in price structure and lack of market competition
resulting from the agricultural industry mergers and
consolidation all have a great effect on the way we do business
in Montana.
It is vitally important that Montana's agricultural
producers have open competitive markets for their commodities.
Recent mergers, such as the recently approved merger of the
grain merchandising division of Continental Grain Company and
Cargill have the potential of greatly reducing the number of
markets available for grain produced in the United States,
which therefore affects Montana's grain producers. Continental
is the second-largest grain company in the world, while Cargill
is the largest grain company in the United States.
Approximately 80 percent of Montana's grain is shipped to
the Pacific Rim through the Pacific Northwest. With the
approved merger of Continental and Cargill, there are now only
five grain companies physically capable of loading grain from
the Pacific Northwest to the Pacific Rim. Other exporting
companies must pay a put-through handling fee to these
companies.
Continental Grain Company and Cargill have always been
known as fierce competitors in the international grain market.
While these two companies currently do not directly purchase
grain from Montana producers, they do purchase grain from the
companies located in Montana. The merger of the worldwide grain
merchandising division of Continental Grain Company with
Cargill means fewer competitive grain merchandising companies
and one less buyer of Montana grain.
The livestock producers of Montana and the Nation are also
concerned about noncompetitiveness within the U.S. meat packing
industry, resulting in part, from several decades of merging
and consolidation within the meat packing industry.
As already indicated, currently four meat packing companies
control 79 percent of the nation's cattle slaughter, up 36
percent since 1980. During the last several decades, the number
of meat packing plants have dramatically declined. In 1974,
1,350 federally inspected plants slaughtered cattle. By 1997,
the number of federally inspected plants dropped to 812, a
decline of 60 percent.
This rapid decline in the numbers of meat packing companies
and slaughter plants has led to a corresponding lack of market
access by Montana's livestock producers. While other factors
such as captive supplies, cyclic overproduction and limited
price disclosure may also contribute to the current, protracted
slump in livestock prices, many producers believe that meat
packer concentration is at the core of the problem.
In conclusion, if Montana's farmers and ranchers are to
receive top prices for their agricultural products, there needs
to be strong competition for our products between those
companies purchasing commodities from our producers. The
ongoing trend toward merger and consolidation of these
companies is a hindrance to market access and open
competition--and open competitive buying. Consequently, we
strongly urge that the appropriate Federal officials
vigorously, but fairly, enforce existing antitrust laws to
ensure competitive markets for Montana's agricultural products.
Thank you for consideration of our testimony. We wish to
thank Senator Burns and member of the Committee on Commerce,
Science, and Transportation for holding this hearing in
Montana. We appreciate the opportunity to provide input into
your decisionmaking process.
[The prepared statement of Mr. Kissinger follows:]
Prepared Statement of Will Kissinger, Deputy Director,
Montana Department of Agriculture, Helena, Mt.
Mr. Chairman, members of the Committee, for the record my name is
Will Kissinger, Deputy Director of the Montana Department of
Agriculture, Helena, Montana. I am here today to present testimony on
behalf of Ralph Peck, Director of the Montana Department of
Agriculture.
Thank you Mr. Chairman and Committee members for the opportunity to
provide testimony before you on this issue of such great importance to
Montana's agricultural industry.
Agriculture is Montana's No. 1 industry. As such, the overall
strength and viability of Montana's economy is dependent on the
economic wellbeing of our agricultural industry. Montana's primary
agricultural commodities, which include livestock and grains, are
facing a number of market challenges as we move into the twenty-first
century. Changes in the global market, adjustments in price structure,
and lack of market competition resulting from agriculture industry
mergers and consolidation all have a great effect on the way we do
business here in Montana.
It is vitally important that Montana's agricultural producers have
open competitive markets for their commodities. Recent mergers, such as
the recently approved merger of the grain merchandizing division of
Continental Grain Company and Cargill have the potential of greatly
reducing the number of markets available for grain produced in the
United States, which therefore effects Montana's grain producers.
Continental is the second largest grain company in the world, while
Cargill is the largest grain company in the United States.
Approximately 80 percent of Montana's grain is shipped to the Pacific
Rim through the pacific northwest. With the approved merger of
Continental and Cargill, there are now only five grain companies
physically capable of loading grain from the pacific northwest to the
pacific rim. Other exporting companies must pay a put-through handling
fee to these companies.
Continental Grain Company and Cargill have always been known as
fierce competitors in the international grain trade. While these two
companies currently do not directly purchase grain from Montana
producers, they do purchase grain from companies located in Montana.
The merger of the worldwide grain merchandizing division of Continental
Grain Company with Cargill means fewer competitive grain merchandizing
companies, and one less buyer of Montana grain.
The livestock producers of Montana and the Nation are also
concerned about non- competitiveness within the U.S. meat packing
industry, resulting in part, from several decades of merging and
consolidation within the meat packing industry. Currently four meat
packing companies control 87 percent of the nations cattle slaughter,
up 36 percent since 1980. During the last several decades the number of
meat packing plants have dramatically declined. In 1974, 1,350
federally inspected plants slaughtered cattle. By 1997, the number of
federally inspected plants dropped to 812, a decline of 60 percent.
This rapid decline in the numbers of meat packing companies and
slaughter plants has lead to a corresponding lack of market access by
Montana's livestock producers. While other factors such as captive
supplies, cyclic overproduction, and limited price disclosure may also
contribute to the current, protracted slump in livestock prices, many
producers believe that meat packer concentration is at the core of the
problem.
In conclusion, if Montana's farmers and ranchers are to receive top
prices for their agricultural commodities, there needs to be strong
competition for our products between those companies purchasing
commodities from our producers. The ongoing trend toward merger and
consolidation of these companies is a hindrance to market access and
open competitive buying. Consequently, we strongly urge that the
appropriate Federal officials vigorously, but fairly, enforce existing
anti-trust laws to ensure competitive markets for Montana's
agricultural products.
Thank you for consideration of my testimony. We wish to thank
Senator Burns and members of the Senate Committee on Commerce, Science,
and Transportation for holding this hearing in Montana. We appreciate
the opportunity to provide input into your decisionmaking process.
Senator Burns. Thank you very much, Will.
Now a statement and some insight from Bruce Nelson, who is
Director of the Agricultural Commodity, or whatever it is. They
change those names so many times, Bruce, I do not know whether
I am afoot or horseback.
But yours is a big job and a tough job, and you probably
have some insight on this, and so we welcome you, and we thank
you for coming today. We appreciate that very much.
STATEMENT OF BRUCE NELSON, STATE EXECUTIVE
DIRECTOR, FARM SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE
Mr. Nelson. Yes, Senator, thanks very much. I appreciate
the invitation here today.
The Audience. Turn your mike up.
Mr. Nelson. I guess you have to get up close and personal
with the microphone.
I want to thank you and the other folks here who also
participated in the Department of Agriculture and U.S. trade
representatives WTO session in Bozeman yesterday. So, we have
been on the road a couple days together. Again, I appreciate
your testimony yesterday.
My name is Bruce Nelson. I am the State Executive Director
of the Farm Service Agency of the U.S. Department of
Agriculture.
As you know, Senator, while I have strong personal opinions
on these issues, this is a little bit out of my area of
expertise. I could answer questions about loan deficiency
payments and issues like that, but I am not an expert on this.
The Secretary of Agriculture asked me to be here today
because he felt it was very important for USDA to be
represented and to share with you the thoughts of the
Department of Agriculture on this. But frankly, again, I am
here to listen. If you have questions, I am going to have to
get the answers for you because I am not going to be able to
answer many questions here today, and I will let everybody know
that up front. So, the best I can do is make sure that you do
get answers to your questions.
Permit me to begin by stating that the U.S. Department of
Agriculture, USDA, is concerned about the potential for mergers
and market concentration to reduce competition in agricultural
markets. Again, I was specifically asked by the Secretary to
join you here today for that reason.
For this reason, Secretary Glickman strongly urged the
Department of Justice to review carefully the planned Cargill
acquisition of Continental Grain Company's grain trading
business to determine whether the acquisition will notably
increase concentration in agricultural and its allied
industries, causing potential adverse economic effects on
farmers and on consumers.
USDA experts on production and marketing assisted the
Department of Justice in its review by providing information
and advice. In the end, the Department of Justice took the
steps necessary to protect American farmers from the potential
adverse effects of the acquisition. The consent decree called
for Cargill to divest itself from those market locations where
acquisition of Continental's facility would have resulted in
excessive market power and would have limited farmers' choices
in marketing their crops.
There are a variety of reasons for the mergers,
acquisitions, joint ventures and alliances occurring in the
grain industry. We see joint ventures such as United Harvest,
whereby Harvest States, with an emphasize on originating grain,
joined up with United Grain Corporation, a well-established
exporter, to market grains in the Pacific Northwest. A similar
arrangement involved the establishment of Concourse Grain
Limited Liability Company, a joint venture between Farmland
Industries and ConAgra, Incorporated, to market grain out of
the Gulf.
An important change occurring in the international market
that is influencing market structure is the privatization of
importers. Private buyers rather than government agencies are
the customers for a larger and larger share of the U.S. export
market. Private buyers have exhibited greater influence over
purchase decisions, specifications and terms of trade. This
typically results in smaller purchases tailored to the specific
quality needs of the particular end user. This, in turn, has an
effect on the grain marketing system as companies deal with
more complicated logistical issues and new operational
challenges.
Finally, privatization of importers has created the need
for exporters to expand their market development efforts. No
longer can exporters simply bid on government tenders. They
must target customers and build long-term relationships as a
reliable supplier of quality grain.
As you can see, the simple shifting from a government-
purchasing agency to a private buyer can have far-reaching
effects on the market structure and competitiveness of the U.S.
grain industry.
Another factor that has influenced the structure of the
domestic market involves the railroad demand for unit trains.
As a result, grain companies have expanded certain facilities
to have the capability to load unit trains while closing other
facilities. Here in Montana, the number of elevators has
declined 40 percent since 1980. This decline has been countered
by a significant increase in the average storage capacity of
each elevator from just over 4,000 metric tons to over 11,000
metric tons.
All of the changes that I have discussed and the resulting
impact on market structure were driven by customer demand for
traditional crops. The accelerated change in crop quality due
to biotechnology will further challenge the market structure.
New crop varieties, whether biotech or traditional, tailor-made
for a specific end user, will require additional quality
testing and market segregation.
Many farmers already are entering into contracts to
produce, for a premium, a variety of crops, such as hard white
wheat, malting barley, waxy corn, high corn oil, Synchrony
Tolerant soybeans, STS, which makes them more tolerant to
soybean herbicides. These options will increase in the future
as additional enhanced quality grains enter the market.
I started my remarks today with the comment that the U.S.
Department of Agriculture is concerned about the potential for
mergers and market concentration to reduce competition in
agricultural markets.
Will the grain industry remain competitive in the future as
we encounter future mergers and alliances? Will biotechnology
offer greater opportunities for farmers, or fewer?
These questions remain unanswered. It is important that
agriculture become more productive, efficient and competitive,
but it is also important that these changes do not become at
the expense of family farmers and ranchers who also deserve to
share in the benefits of today's technological advances.
With rapid industrialization in the livestock industry, we
have stepped up our monitoring and investigations of possible
anticompetitive behavior. We need to understand better the
implication of these market changes and will exercise our
authority under the Packers and Stockyard Act as necessary.
However, this authority does not extend to the grain industry.
As I stated earlier, we will continue working with the
Department of Justice to ensure the protection of American
farmers. We will have a watchful eye over the market, and
within the framework of our authority, monitor for
anticompetitive behavior.
In conclusion, the past decade has brought considerable
change in the grain industry. International trade,
transportation, information technology and increased consumer
demand have resulted in greater consolidation of the market.
The advances in biotechnology will drive further consolidation
and vertical coordination in the market.
Our challenge is to promote the development of a 21st
Century market where farmers and ranchers share in the benefit
of those technological advances.
Thank you.
[The prepared statement of Mr. Nelson follows:]
Prepared Statement of Bruce Nelson, State Executive Director,
Farm Service Agency, U.S. Department of Agriculture
I appreciate the opportunity to appear today and talk about the
changes occurring in the grain industry and the role of the U.S.
Department of Agriculture regarding those changes.
Permit me to begin by stating that the U.S. Department of
Agriculture (USDA) is concerned about the potential for mergers and
market concentration to reduce competition in agricultural markets. For
this reason, Secretary Glickman strongly urged the Department of
Justice (DOJ) to review carefully the planned Cargill acquisition of
Continental Grain Company's grain trading business to determine whether
the acquisition will notably increase concentration in agriculture and
its allied industries, causing potential adverse economic effects on
farmers and consumers.
USDA experts on production and marketing readily assisted the
Department of Justice in its review by providing information and
advice. In the end, the Department of Justice took the steps necessary
to protect American farmers from the potential adverse effects of the
acquisition. The consent decree called for Cargill to divest itself
from those market locations where acquisition of Continental's
facilities would have resulted in excessive market power and would have
limited farmer's choices in marketing their crops.
There are a variety of reasons for the mergers, acquisitions, joint
ventures, and alliances occurring in the grain industry. We see joint
ventures such as United Harvest whereby Harvest States, with an
emphasis on originating grain, joined up with United Grain Corporation,
a well-established exporter, to market grains in the Pacific Northwest.
A similar arrangement involved the establishment of Concourse Grain
L.L. Company, a joint venture between Farmland Industries and ConAgra,
Inc. to market grain out of the Gulf.
We also see horizontal arrangements between competing exporters,
such as the October 1998 agreement between Zen Noh and Bunge to operate
jointly Gulf Port facilities and market grain. This allows the
companies to exploit the unique features of their respective
facilities. The Zen Noh facility is designed for high volumes of
generic commodities such as U.S. number 2 corn and soybeans.
Conversely, the Bunge facility in Destrehan, LA is better suited to
handle wheat shipments with refined quality specifications. These and
future arrangements are driven by the need to achieve greater
logistical coordination, better meet the quality demands of customers,
improve the efficiency of facility operations, or simply balance the
market power of other competitors.
An important change occurring in the international market that is
influencing market structure is the privatization of importers. Private
buyers rather than government agencies are the customers for a larger
and larger portion of the U.S. export market. Private buyers have
exhibited greater influence over purchase decisions, specifications,
and terms of trade. This typically results in smaller purchases
tailored to the specific quality needs of the particular end-user.
This, in turn, has an effect on the grain marketing system as companies
deal with more complicated logistical issues and new operational
challenges.
To meet the demands of the new overseas buyer, grain firms must
improve their information network concerning the quantity, quality and
timing of demand. They must also expand their capability to segregate
and deliver a greater diversity of qualities. Grain firms have also
found it necessary to expand their grain cleaning and conditioning
capabilities in order to meet the specific quality needs of the
overseas buyer.
Finally, privatization of importers has created the need for
exporters to expand their market development efforts. No longer can
exporters simply bid on government tenders. They must target customers
and build long term relationships as a reliable supplier of quality
grain. As you can see, the simple shifting from a government-purchasing
agency to a private buyer can have far reaching effects on the market
structure and competitiveness of the U.S. grain industry.
Another factor that has influenced the structure of the domestic
market involves the railroad demand for unit trains. As a result, grain
companies have expanded certain facilities to have the capability to
load unit trains, while closing other facilities. Here in Montana the
number of elevators has declined 40 percent since 1980. This decline
has been countered by a significant increase in the average storage
capacity from just over 4,000 metric tons to over 11,000 metric tons.
All of the changes that I have discussed and the resulting impact
on market structure were driven by customer demand for traditional
crops. The accelerated change in crop quality due to biotechnology will
further challenge the market structure. New crop varieties, whether
biotech or traditional, tailored-made for a specific end use will
require additional quality testing and market segregation. Many farmers
already are entering into contracts to produce, for a premium, a
variety of crops, such as hard white wheat, malting barley, waxy corn,
high oil corn, Synchrony Tolerant Soybeans STS--which makes them more
tolerent of soybean herbicides. These options will increase in the
future as additional enhanced quality grains enter the market.
Marketing systems or channels will evolve combining input
industries, producers, handlers, processors, and even retailers. The
systems will be designed to deliver the right quantity and quality of
grain at the right time to the processor in an efficient and cost-
effective manner. Will such systems consider farmers an equal player
that shares in the added value delivered to the final consumer?
I started my remarks today with the comment that the U.S.
Department of Agriculture is concerned about the potential for mergers
and market concentration to reduce competition in agricultural markets.
Will the grain industry remain highly competitive in the future as
we encounter further mergers and alliances? Will biotechnology offer
greater opportunities to farmers or fewer?
These questions remain unanswered. It's important that agriculture
become more productive, efficient, and competitive. But it is also
important that these changes do not come at the expense of family
farmers and ranchers who also deserve to share in the benefits of
today's technological advances.
With the rapid industrialization in the livestock industry, we have
stepped up our monitoring and investigations of possible anti-
competitive behavior. We need to understand better the implication of
these market changes and will exercise our authority under the Packers
and Stockyard Act as necessary. However, this authority does not extend
to the grain industry. As I stated earlier, we will continue working
with the Department of Justice to ensure the protection of America's
farmers. We will have a watchful eye over the market and within the
framework of our authority, monitor for anti-competitive behavior.
While market trends point toward more contracting for specialty
crops, farmers must work to ensure that such contracts offer fair and
reasonable terms. Market concentration can force producers into
lopsided contractual terms because there is no other option available.
Most poultry production occurs under contracts that result in the
farmer being nothing more than an extension of the processor. This is
not the system USDA wants to see evolve for row crops. Again, farmers
need choices and the opportunity to share in the benefits of today's
technological advances.
Advances in row crops, especially those driven by biotechnology,
must result in greater, not fewer options for farmers. The industry
must develop products that show real results to farmers. The ability of
farmers to compete on a level playing field with adequate choices
available must be preserved. This technology has the capability to
increase the value of cereals and oilseeds. Farmers must have the
opportunity to share in the return from the added value. We must
achieve a balance between fairness to farmers and corporate returns.
In conclusion, the past decade has brought considerable change to
the grain industry. International trade, transportation, information
technology, and increased consumer demand have resulted in greater
consolidation of the market. The advances in biotechnology will drive
further consolidation and vertical coordination in the market. Our
challenge is to promote the development of a 21st century market where
farmers share in the benefits of technological advances.
Thank you.
Senator Burns. You bet. Thank you, Bruce.
Steve Bullock, who is Executive Attorney General of the
Office of the Attorney General, State of Montana, is here with
us today from Helena. Steve, thank you for coming, and we would
like to hear your insights.
STATEMENT OF STEVE BULLOCK, EXECUTIVE ASSISTANT ATTORNEY
GENERAL, MONTANA DEPARTMENT OF JUSTICE, HELENA, MT
Mr. Bullock. Thank you, Senator Burns.
Good morning, members of the Committee. For the record, my
name is Steve Bullock, and I am the Executive Assistant
Attorney General for the Montana Department of Justice. I am
testifying today on behalf of Attorney General Joe Mazurek, who
would very much like to be here, but he's out of State at this
time.
Under both State and Federal law, the State Attorney
General has statutory authority to enforce the antitrust laws,
and we have been and are continuing to be extremely concerned
about the topics being discussed here today.
It's my understanding that the hearing is convened to
discuss the impact of how mergers in the agricultural industry
impact consumers. While that topic alone could probably keep us
holed up here in the Civic Center for a couple of days, it is
critical that we more or less frame the issue in terms of
consumers and producers. On the one hand, be it the U.S.
Senator, the lawyer, or the farmer and rancher, we are all
consumers. However, framing the issue to include producers just
simply makes sense, because agriculture is a critical sector of
our Montana economy, and there are counties and communities
throughout the State of Montana that are entirely dependent
upon agricultural. In Montana, when the farmer and rancher
hurt, each and everyone of us as consumers also hurt.
I will distribute a packet to include in the record for
your consideration. It starts with a news article from earlier
this year that I think kind of tells it all for us. ``Meat
packers flourish as producers struggle.'' Given the history of
market concentration in agricultural, this should not come as a
surprise.
[The packet referred to above follows:]
2/16/99
Meatpackers flourish as producers struggle
Gannett Newspapers
Meatpackers have been the bad guys in the recent free fall in hog
prices, and their latest earnings reports have done little to dispel
that perception.
An abundant supply of low-priced livestock has enabled companies
like IBP Inc., Excel Corp., Hormel Corp. and Farmland Industries to run
their packing plants at full tilt, book orders for animals well ahead
of slaughter, and reap record profits.
But do the packers deserve blame for the recent collapse in the hog
market and for the longer-term and more extensive losses in the beef
industry?
Should they be having a heyday while livestock producers are
struggling to stay in business?
Earlier this month IBP Inc.--the nation's largest red-meat packer--
reported record-high fourth-quarter earnings that were more than four
times higher than those of the same period a year ago. The company also
posted its second-highest annual earnings: $205 million in 1998, up
from $117 million the previous year.
Such reports do little to engender good feelings between producers
and packers--camps often at odds with one another, particularly when
the spread widens between farm-level, wholesale and retail prices, as
it did last year.
Proponents of independent family farms have been among the most
ardent critics of the packers, particularly as the economic fallout
from low hog and cattle prices has increased, building like a mid-
summer thunderstorm over the Plains.
They say packers give preferential treatment and better prices to
large-scale producers with livestock marketing contracts.
They also declare that because farmers selling on the cash market
don't have equal access to the higher prices, they end up supplying the
bulk of the lowest-cost hogs and cattle to meatpackers.
In their view, the packers' most recent run of profits has occurred
at their expense.
But others argue that the meat-packers have done what any
manufacturer would do--capitalize on an ample supply of low-cost raw
material.
``That's capitalism,'' said John Lawrence, an Extension livestock
economist at Iowa State University. ``Was there price-gouging
occurring? That requires an investigation.''
Steve Kay, editor and publisher of Cattle Buyers Weekly, an
industry newsletter based in Petaluma, Calif., believes farmers have
only themselves to blame for raising more hogs than meatpackers could
process.
For their part, cattle producers have been sending heavier animals
to market.
In one recent week, for instance, the average beef carcass at U.S.
packing plants weighed 740 pounds--24 pounds heavier than at the same
point a year ago. According to Kay, that's the equivalent of sending
24,000 additional animals to slaughter weekly. He calls it ``a colossal
amount of extra pounds of beef'' on the market.
``I'm empathetic to the squeeze on small producers,'' he said,
noting that he grew up on a small family farm in New Zealand. ``It's a
terribly tough time.... (But) unless you're producing a premium
product, being small and producing a commodity product just doesn't
work.''
Officials in the meatpacking industry do not apologize for making
more money because of lower farm-level prices; in fact, they say the
recent run-up in earnings is just part of a cyclical business that will
enable them to recover from earlier times when it was a seller's market
and farmers were reaping plump profits.
Even trade group leaders, whose constituents include farmers facing
financial ruin because of low commodity prices, don't condemn the
packers for making money.
``I don't like those large profits,'' said Joel Brinkmeyer,
executive director of the Iowa Cattlemen's Association. ``... At the
same time, we need competition in the industry.''
Historically, profit-taking in the livestock sector has shifted
from producers to packers along with changes in supplies and market
demand. When farmers are getting a higher price for their animals,
processors' margins are tighter and their net income is reduced.
Conversely, low prices for livestock boost packers' margins.
``They tend to be counter-cyclical; the packer profits tend to be
highest when the producer losses are the greatest,'' said Chuck
Lambert, economist for the National Cattlemen's Beef Association in
Washington. ``They tend to be a mirror image of each other.''
Even so, many producers, farm group leaders and rural advocates
believe the meatpackers bear at least some of the responsibility for
the growing financial ag crisis.
What's more, they say consumers are being ripped off, because meat
prices at the retail level have not retreated as they normally do when
hog and cattle prices fall. They want the federal government to
intervene and have called for investigations.
______
56th Legislature, MT
SENATE JOINT RESOLUTION NO. 11
A Joint Resolution of the Senate and the House of Representatives
of the State of Montana urging an investigation into the causes of
ongoing Depressed Market Prices for Agricultural Products; and urging
the initiation of actions that will stabilize the Nation's Food
Producers, Main Street Businesses, and Rural America as a Whole.
WHEREAS, an economic emergency has been created by ongoing
depressed prices in the marketplace for agricultural products; and
WHEREAS, an investigation into the causes of the depressed prices
is warranted; and
WHEREAS, actions should be initiated to stabilize the nation's food
producers, main street businesses, and rural America as a whole.
NOW, THEREFORE, BE IT RESOLVED BY THE SENATE AND THE HOUSE OF
REPRESENTATIVES OF THE STATE OF MONTANA:
That a full investigation be undertaken into the causes of ongoing
depressed prices in the marketplace for agricultural products,
including a full examination of market competitiveness in livestock and
crops and a re-examination of trade agreements.
BE IT FURTHER RESOLVED, that actions be initiated that will
stabilize the nation's food producers, main street businesses, and
rural America as a whole, including:
(1) emergency price supports and a safety net system for all
agricultural products, to be lifted only when international and
domestic markets are reformed in a way that renders them open, public,
and competitive and when domestic prices for agricultural products are
determined to be above the cost of production as calculated by the U.S.
Department of Agriculture;
(2) fair compensation for lost agricultural income, as called for
under trade compensation and assistance programs of the Agricultural
Trade Act of 1978 and the Federal Agricultural Improvement and Reform
Act of 1996 (FAIR Act), for all existing and future sanctions;
(3) further support for risk management tools and education, such
as the pilot projects for forward contracts and the use of hedges and
options, and development and funding of a more effective yield and
income insurance program by Congress and the administration;
(4) vigorous antitrust investigations into the concentration of
ownership in meat packing, grain handling, and retail trade, including
a complete investigation of the possible effects of the proposed
Cargill-Continental merger;
(5) expansion and development of new international markets for
agricultural products and ensuring that agricultural producers have
advisory status at any agricultural trade negotiations, with a priority
on price transparency of the Canadian Wheat Board;
(6) reductions of regulations and taxes to enable farmers and
ranchers to be more profitable;
(7) country of origin labeling;
(8) limiting use of the U.S. Department of Agriculture stamp to
products produced in the United States;
(9) mandatory price reporting of livestock and grain;
(10) moving responsibility for enforcement of the federal Packers
and Stockyards Act from the U.S. Department of Agriculture to the U.S.
Department of Justice;
(11) inspections of imported agricultural products to ensure that
imported products meet standards equivalent to United States standards
for food safety, environmental protection, and worker protection; and
(12) ensuring that farm and ranch producers are represented at the
1999 World Trade Organization.
BE IT FURTHER RESOLVED, that the Secretary of State send a copy of
this resolution to the members of the Montana Congressional Delegation.
52nd Legislature, MT
SENATE JOINT RESOLUTION No. 14
A joint resolution of the Senate and the House of Representatives
of the State of Montana requesting an interim study of the
concentration in the livestock feeding and packing industries; and
requiring a report of the findings of the study to the 53rd
legislature.
WHEREAS, the market share of the top four beef packing companies
was just 25% in 1977 and rose to 74% of the market in 1987; and
WHEREAS, concentration among packing companies that slaughter sheep
and lambs has increased from four firms controlling 57% in 1977 to
three firms controlling at least 76% in 1987; and
WHEREAS, trends toward concentration and vertical integration of
the livestock industry threaten free enterprise and the independence of
Montana's livestock producers, as well as the economic vitality of our
communities that are dependent on the livestock industry; and
WHEREAS, continued concentration and vertical integration of the
livestock industry may also have serious adverse implications for the
health and safety or both workers and consumers.
NOW, THEREFORE BE IT RESOLVED BY THE SENATE AND THE HOUSE OF
REPRESENTATIVES OF THE STATE OF MONTANA:
That an appropriate interim committee be assigned to examine:
(1) the economic impact of concentration and vertical integration
by the dominant meatpackers on Montana's livestock producers;
(2) the relationship between the economic impact of the
concentration on producers and other aspects of the state's present and
future economy, such as the tax base, population, and viability of our
rural communities; and
(3) legal remedies and other appropriate actions available to the
State of Montana to counteract any adverse problems posed by increased
concentration or to prevent further concentration.
BE IT FURTHER RESOLVED, that the interim committee report the
findings of the study to the 53rd Legislature and present options for
legislative consideration if the committee determines that options are
necessary.
Also within the packet are two different legislative
resolutions passed at the State level. The first, Senate Joint
Resolution No. 11, which was passed this year, received wide
bipartisan support, and it calls for, among other things,
vigorous antitrust investigations into the concentration of
ownership in the meat packing, grain handling and retail trade
industries and moving responsibility for antitrust and consumer
protection enforcement from the U.S. Department of Agriculture
to the U.S. Department of Justice.
The second resolution hasn't received as much notice,
however. It is a resolution that was passed by the Montana
legislature in 1991 calling for an interim committee to study
the impacts of market concentration in the packing and feeding
industry. It is my understanding that the resolution was passed
some 8 years ago, but the study was never funded.
It's important to point out that the legislature at the
State level looked at this from 1991 to 1999. Not much has
changed.
I'd like to be able to say that this problem originated in
Montana in 1991, and Montana stock growers and grain growers
and all of us as consumers have only been hamstrung by market
concentration for the last decade. However, it was actually at
the turn of the century when five firms controlled 55 percent
of the market that led to the eventual passage of the Packers
and Stockyard Act of 1921.
Over 75 years later, we are in a worse, not a better,
position. For example, as Senator Burns pointed out, the top
four beef packers account for 80 percent of the cattle
slaughter. Twenty feedlots, less than 1 percent of the total,
account for over 50 percent of all head sold. The largest five
pork packers slaughter over 60 percent of the hogs, and the top
four flour millers control over 60 percent of the market.
I guess for all the Federal efforts, I cannot say that the
last 75 years have really placed Montana, and our Nation's
grain and stock growers in any better position.
So, the question becomes what should Congress do? For our
part at the Montana Department of Justice, I have about three
feet of files just from efforts we have joined in conjunction
with the National Association of Attorneys General over the
last few years. I have included in the pamphlet six letters we
have written in the last 2\1/2\ years to Members of Congress
and members of the executive branch, including one we recently
sent to the Department of Justice concerning the Cargill/
Continental merger.
Although we will continue to be vigilant in expressing to
you and other members of the Federal Government our concerns,
admittedly, there's little more that the Montana Department of
Justice can do.
As you may recall, earlier in my testimony, I stated that
the Attorneys General's office has statutory authority over
antitrust. In Montana, however, that is sort of like being
given the artillery tank but not given the fuel to run that
tank.
While it is true that we have the authority and
responsibility, it is in large measure an empty promise because
we do not have the resources. It is not uncommon for smaller
States to have only one or two attorneys working in antitrust.
In Montana, the legislature has not seen fit to provide any
resources for antitrust enforcement.
Even if the day comes, however, when we have the ability to
vigorously enforce State laws, it is important to realize that
market concentration in agricultural is more than a Montana
problem. It is an American problem that demands national
attention from Congress and the executive branch.
We are beyond the point of needing to ask where to begin.
It is now time to say let us begin.
I think that the blueprints for action of what Congress and
other can do, they are already in front of us and have been
discussed for several years.
Among other things, these efforts should include making the
market more transparent by requiring public disclosure of the
prices and terms of all sales and forward contracts.
We need to be carefully scrutinizing all proposed mergers
in the meat packing, grain handling, and retail trade
industries.
We need to be prohibiting unfair trade practices in the
livestock industry, which includes price discrimination, and
making it a priority to enforce Section 202 of the Packers and
Stockyard Act.
We believe that coordination is key. We need to work on
coordinating the effort of Federal agencies, including the U.S.
Department of Agriculture, U.S. Department of Justice and the
Federal Trade Commission. This should include consideration of
moving enforcement of the Act from the Department of
Agriculture to the Department of Justice.
Finally, we need to make certain to provide greater
protection for producers against retaliation by packers on
account of statements made regarding the packers' actions and
practices.
That above list may only scratch the surface of what needs
to be done, but I think the important message is that we, as
consumers, be it the farmers, the ranchers, the lawyers or the
U.S. Senators, who have been talking about the problems of
agricultural market concentration for decades, it is time to
stop talking and start taking action. Thank you.
[The prepared statement of Mr. Bullock follows:]
Prepared Statement of Steve Bullock, Executive Assistant Attorney
General, Montana Department of Justice, Helena, Mt.
Good morning. For the record, my name is Steve Bullock and I am the
Executive Assistant Attorney General for the Montana Department of
Justice. I am testifying today on the behalf of Attorney General Joe
Mazurek. General Mazurek would have very much liked to be here today,
but is traveling out of State this weekend at a work-related
conference.
Under both State and Federal law, the Attorney General has
statutory authority to enforce the antitrust laws, and we are extremely
concerned about the issues you are discussing today.
It is my understanding that you have convened this hearing today to
discuss how mergers in the agricultural industry impact consumers.
While that topic alone could probably keep us holed up in the Civic
Center for several days, it is critical that we frame the issue in
terms of consumers and producers.
One the one hand, be it the U.S. Senator, the lawyer, the farmer or
the rancher, we are all consumers. However, framing the issue to
include producers simply makes sense. Agriculture is a critical sector
of our Montana economy, and there are counties and communities across
our State that are entirely dependent upon agriculture. In Montana,
when the farmer and rancher as producers hurt, each and every one of us
as consumers also hurt.
I am distributing a packet for your consideration:
It starts with a news article from earlier this year. The packers
are having record years for profitability, as Montana's and our
nation's stock growers continue to struggle. Given the history of
market concentration in agriculture, this should not come as a
surprise.
Also in this packet are two legislative resolutions.
The first, SJR 11, you may have already received this morning. It
calls for, among other things, vigorous antitrust investigations into
the concentration of ownership in the meat packing, grain handling, and
retail trade, and moving responsibility for antitrust and consumer
protection enforcement from the U.S. Department of Agriculture to the
U.S. Department of Justice. This resolution was passed during the 1999
legislative session with broad bipartisan support.
The second resolution you probably have not seen, however. It is a
resolution passed by the Montana legislature during the 1991 session,
calling for an interim committee to study the impacts of market
concentration in the packing and feeding industry. It is my
understanding that although the resolution passed, the study was not
funded.
I would like to say the problems of concentration in the packing
and feeding industry originated in 1991, and Montana's grain and stock
growers--and all of us as consumers--have only been hamstrung by market
concentration for the last decade. However, it was actually at the turn
of the century, when five firms controlled 55 percent of the market,
that led Congress to enact to the Packers and Stockyards Act of 1921.
Over 75 years later, we are in a worse, not better position. For
example:
The top four beef packers account for 80 percent of the
cattle slaughter;
Twenty feedlots--less than 1 percent of the total--account
for over 50 percent of all head sold;
The largest five pork packers slaughter over 60 percent of
the hogs; and
The top four flour millers control over 60 percent of the
market.
So I guess for all of the Federal efforts, I cannot say that the
last 75 years has really placed Montana's--and our nation's--grain and
stock growers in any better position.
For our part at the Montana Department of Justice, I have about
three feet of files, just from efforts we have joined in conjunction
with the National Association of Attorneys General.
I have included six letters in the last two and one-half years
which Attorney General Mazurek has sent to the Secretary of Agriculture
and Members of Congress, including one we recently sent to the United
States Department of Justice concerning the Cargill-Continental merger.
Although we will continue to be vigilant in expressing to you and
other members of the Federal Government our concerns, admittedly there
is little more that Montana Department of Justice can do on its own.
As you may recall, earlier I stated that the Attorney General has
statutory authority over antitrust. In Montana however, this is sort of
like being given the artillery tank, but not having the fuel to run
that tank. While it is true we have the authority and responsibility,
it is in large measure an empty promise because we do not have the
resources. It is not uncommon for smaller states to have only one or
two attorneys working in antitrust. In Montana, the legislature has not
seen fit to provide resources for any antitrust enforcement.
Even if the day comes when we have the ability to vigorously
enforce State laws, however, it is important to recognize that market
concentration in agriculture is more than a Montana problem. It is an
American problem that demands national attention from Congress and the
executive branch. We are beyond the point of needing to ask where to
begin, and it is now time to say ``let us begin.''
The blueprints for action are already in front of you, and have
been discussed for several years. Among other things, these efforts
should include:
Making the market more transparent by requiring public
disclosure of the prices and terms of all sales and forward contracts;
Carefully scrutinizing all proposed mergers in the meat
packing, grain handling, and retail trade industries;
Prohibiting unfair trade practices in the livestock
industry, including price discrimination, and making it a priority to
enforce Section 202 of the Packers and Stockyard Act;
Coordinating the efforts of Federal agencies, including
the United States Department of Agriculture, the United States
Department of Justice and the Federal Trade Commission. This should
include moving enforcement of the Stockyards and Packers Act from the
Department of Agriculture to the Department of Justice; and
Providing greater protection for producers against
retaliation by packers on account of statements made regarding the
packers' actions.
The above list may only scratch the surface of what needs to be
done, but I think the more important message is that we as consumers--
be it the farmers and ranchers, the lawyers, and even the U.S.
Senators--have been talking about the problems of agriculture market
concentration for decades. It is time to stop talking, and start
acting.
Senator Burns. Thank you, Steve. We appreciate your
comments very much.
Now representing the Montana Farm Bureau Federation, Jake
is not here today; we've got Dave McClure, who is president of
the organization. Of course, we have got Ken Maki here with the
Farmers Union. I think we will start with those two
organizations who represent a huge cross-section of Montana
agriculture.
So, thank you very much, Dave, and I am looking forward to
some of the suggestions you might have.
STATEMENT OF DAVID L. McCLURE, PRESIDENT, MONTANA FARM BUREAU
FEDERATION, BOZEMAN, MT
Mr. McClure. Thank you, Senator, for the opportunity to
provide testimony for this hearing on mergers.
For the record, I am Dave McClure, president of the Montana
Farm Bureau Federation with offices in Bozeman, MT.
Senator Burns. Oh, by the way, excuse me just for a second.
With the wave of all these hearings that have been going
across the State, we were in Bozeman yesterday, and there are
two or three of them, and we are going on to another one this
afternoon.
When are you guys going to hay?
Mr. Maki. Last night.
Senator Burns. Huh?
Mr. Maki. Until dark.
Senator Burns. Some folks are still cutting. They are
wanting to cut grain, so we better get you out of here pretty
quick.
Mr. Hibbard. It's got to rain first.
Senator Burns. OK.
Mr. McClure. But I am a farmer in the Lewistown area full
time; I do represent the organization. Montana Farm Bureau is
the largest agriculture organization in the State with over
8,500 member families.
I am here today to speak on how mergers in the nation's
agriculture industry impact consumers, but more importantly, I
am here to speak about how these mergers impact our members,
the farmers and ranchers in Montana.
Farm Bureau policy on monopoly is clear. Monopoly power,
whether it arises in industry, labor, finance, agricultural or
government, is a threat to our competitive enterprise system
and the individual freedom of every American. That is out of
our Farm Bureau policy book.
Another one is that we oppose mergers, acquisitions or
leveraged buyouts which tend to create a monopoly of
production, marketing and transportation or reduce competition
in acquiring, pricing or transportation of commodities and
products.
We believe Congress should continue to monitor the
agriculture industry for antitrust abuse. I think we could add
the Attorney General's Office to that also.
It is frustrating, because at least in transportation, we
have been involved for about 20 years in the McCarty Farms
case, which Montana was declared a captive--industry?
Senator Burns. Shipper.
Mr. McClure. Captive of no competition in the
transportation industry, but still today, we are paying higher
costs for transportation than farmers and ranchers in other
States which are much further from the coast, and so it seems
we haven't got any relief in that area yet.
U.S. consumers already enjoy an abundant, wholesome food
supply at the lowest percentage of its disposable personal
income of any country in the world. According to the USDA, U.S.
consumers in 1997 spent about 10.7 percent of their income on
food.
The recent mergers have the potential to provide additional
efficiencies to the food processing and distribution system.
The domestic market for food is a mature industry. Population
grows only about 1 percent per year. Per capita consumption
increases only marginally each year. In a slow growth market,
it is natural for individual companies to attempt to expand by
buying out other companies. This happens in all industries, not
just food.
This can be clearly seen in grocery store chains. In 1967,
the four largest chains had 19 percent of the market. Today,
the top 4 percent--I am trying to pick this out of this--they
are up to 17 percent, the top four grocery chains.
To varying degrees, this same pattern also appears to be
happening in the processing industry as well.
With consumers already getting food at a bargain, further
gains in efficiencies are likely to have only modest impacts on
consumer prices.
Most of the changes are expected to be in the variety of
foods available and the consumer perception of food quality and
wholesomeness. Consumers demand a wide variety of options to
meet specific choices about what to eat and in what form.
Ready-to-eat and partially prepared foods continue to be more
popular, and processors and grocery chains will focus on
meeting those demands.
While U.S. consumers already have the safest supply of food
in the world, they continue to seek further assurances that the
foods they buy meet their high expectations. Modern food
companies will have the financial and technical resources to
focus on those concerns.
You have got copies of my written testimony. I want to
depart from that right now and get into a couple of issues.
As I said, there are efficiencies inherent in these
mergers. Production agricultural would like to have the ability
to share in those efficiencies and to share in that increased
financial flow.
But I think as we have seen in, for instance, the gas
business, we continue to see less gas stations and less and
less family operated, and a lot of that is because of
government regulations. It appears that only those large, well-
financed corporations are able to meet government regulations
and stay in business.
I think it is also part of what is happening in the pork
industry. I am currently serving on a task force for farm
policy for the American Farm Bureau, and I sit on the
regulatory subcommittee of that task force.
The pork industries had a terrible hit, down to $9, as you
mentioned, Mr. Senator, and it appears that a portion of that
problem was caused by anticipation of government regulations
from Federal and State and counties on the pork industry, and
those large producers that were able to expand their
operations, did it in anticipation of increased regulations and
hoped to be grandfathered in. They expanded at a time when the
market didn't call for it. They did it, as I said, in
anticipation of regulation, and that destroyed the hog
industry.
Small family-operated operations are least able to cope
with a downturn of that type and are also the least able to
cope with meeting the regulations that seem to be coming more
and more from government.
I think that is a big factor that we see in this merger of
large corporations, because only then are they able to comply
with all the regulations that are coming across.
In fact, some of these large corporations, as you know,
testified in Washington, DC in favor of regulations that would
tend to limit entrance into their market by new operations that
aren't well financed enough to comply.
As I said, you have got my written testimony. But hopefully
efficiency cannot and will be at the expense of equity in the
U.S. market, or we will all lose in the end.
Thank you for this opportunity to testify.
[The prepared statement of Mr. McClure follows:]
Prepared Statement of David L. McClure, President, Montana Farm
Bureau Federation, Bozeman, Mt.
Thank you, Mr. Chairman, for the opportunity to provide testimony
for this hearing on mergers. For the record, I am David L. McClure,
President of the Montana Farm Bureau Federation with offices in
Bozeman, Montana. The Montana Farm Bureau is the largest agricultural
organization in the State with over 8500 members. I am here today to
speak on ``How Mergers in the Nation's Agricultural Industry Impact
Consumers.'' More importantly, I am here today to speak about how these
mergers impact our members, Montana's farmers and ranchers.
Farm Bureau policy on monopoly is clear.
``Monopoly power--whether it arises in industry, labor,
finance, agriculture or government--is a threat to our competitive
enterprise system and the individual freedom of every American.''
We oppose mergers, acquisitions or leveraged buyouts which
tend to create a monopoly of production, marketing and transportation
situations or reduce competition in acquiring, pricing or
transportation of commodities and products.''
``We believe Congress should continue to monitor the
agriculture industry for antitrust abuse.''
U.S. consumers already enjoy an abundant, wholesome food supply at
the lowest percent of disposable personal income of any country in the
world. According to USDA, U.S. consumers in 1997 spent about 10.7
percent of their income on food.
The recent mergers have the potential to provide additional
efficiencies to the food processing and distribution system. The
domestic market for food is a mature industry. Population grows about 1
percent per year. Per capita consumption increases only marginally each
year. In a slow growth market, it is natural for individual companies
to attempt to expand by buying out other existing companies. This
happens in all industries, not just food.
This can be clearly seen in grocery store chains. In 1967, the four
largest chains had 19 percent of the market and the largest 20 chains
had 34 percent of the market. By 1987, there had been little change
with the top four having 17 percent of the market and the top 20 having
37 percent of the market.
By 1997, a few changes began to be seen. The top 4 had 18 percent
of the market, almost unchanged from 1987. The top 20 had 44 percent of
the market, up 7 percentage points from 1987. Estimates for the end of
1999 show a sharp rise in the market share of the top 4 to 27 percent.
The share for the top 20 by the end of 1999 is expected to be about 48
percent.
To varying degrees, this same pattern also appears to be happening
at the processing and distribution levels.
With consumers already getting food at a bargain, further gains in
efficiencies are likely to have only modest impacts on consumer prices.
Most of the changes are expected to be in the variety of foods
available and consumer perceptions of food quality and wholesomeness.
Consumers demand a wide variety of options to meet specific choices
about what to eat and in what form. Ready-to-eat and partially prepared
foods continue to be more popular and processors and grocery chains
will focus on meeting these demands.
While U.S. consumers already have the safest supply of food in the
world, they continue to seek further assurances that the foods they buy
meet their high expectations. Modern food companies will have the
financial and technical resources to focus on those concerns.
One major challenge these companies will have is to meet the needs
of those consumers who want a supply of locally produced fresh foods.
Large food suppliers have the ability to source food across the country
and around the world to meet the demands of consumers. Responding to
local markets with seasonal variability is a much tougher task.
As representatives of farmers and ranchers, the Farm Bureau is
concerned about how we fit into a world of larger processors and
retailers. While consumers are on one end of the system, farmers and
ranchers are the producers of the products that eventually are eaten by
consumers.
USDA estimates show that in 1997 farmers and ranchers received
about 21 cents of each dollar spent on food by consumers. This is the
lowest amount ever for the yearly USDA estimates. There is no reason to
believe that this will increase with the mergers that have occurred in
recent years. As consumers continue to seek more services added to food
between the farm gate and their dinner tables, the farm and ranch
portion will continue to decline.
Price discovery for farm and ranch products will become a larger
issue in the years ahead. As the larger processors and retailers seek a
stable supply of food to meet the needs of consumers, business
relationships between producers and processors will continue to change.
The one definite reality is that the greatest risk will go to the
weakest portion of the production/processing/marketing chain. Farmers
and ranchers bring value to the marketing chain and will need to work
aggressively to be rewarded for the risks inherent in production. We
accept the risk and do the work but the reward continues to diminish.
The key to consumers having an abundant, wholesome supply of food
at affordable prices is farmers and ranchers earning a living producing
the raw food products.
If mergers create unsustainable cost/risk ratios that force U.S.
farmers and ranchers out of business, the supply of food goes down and
consumer prices go up. The most cost efficient short term solution to a
diminishing U.S. agricultural base may appear to the conglomerate, the
consumer and Congress to be cheap foreign imports, but this creates
dependence on foreign producers who are often subsidized by their
governments with the goal of gaining U.S. market dominance. Once U.S.
producers are priced out of the market, dominance is gained and the
U.S. becomes dependent on foreign powers for our most basic resource,
food. That will not be good for consumers or the country.
It is not my intent, Mr. Chairman, to deride trade or trade
agreements. Foreign markets are essential to the health of Montana's
agriculture industry. But as Farm Bureau has said repeatedly, free
trade must be fair trade, and mergers are a factor in any fairness
assessment. Efficiency cannot be at the expense of equity in the U.S.
market, Mr. Chairman, or in the end we will all lose.
Senator Burns. Thank you, David.
Ken Maki, who is President of Montana Farmers Union located
right here in Great Falls. Thanks for coming this morning, Mr.
Maki, we appreciate you coming.
STATEMENT OF KENNETH L. MAKI, PRESIDENT, MONTANA FARMERS UNION,
GREAT FALLS, MT
Mr. Maki. Good morning, Senator, and I really appreciate
the opportunity to testify on something that is pretty vital to
all of us in Montana Farmers Union and, in fact, in the State
of Montana.
Just for the record, I am Ken Maki. I am the president of
Montana Farmers Union, and I own a small ranch east of here in
the Highwood Mountains.
To get back to your earlier comment about how we are
getting the hay done, well, I tell you, my son and I are
running the farm, and at the moment he's farming, and I'm
running!
Any time there's a merger, obviously there is less
competition. There have been some whoppers lately. It is
alarming to watch them take place, and we are just having token
and cosmetic antitrust stipulations which have been imposed by
the last several ation Administrations, not just this one, but
several ation Administrations, and not much being done by them.
It is a big concern to me.
Just to digress a little bit back into history, those
journalists that are in the crowd, they know a little bit about
the muckraking era at the beginning of the 1900's, mass-
produced assembly lines not only in machinery and equipment,
but in the packing industry.
You know what? We knew then, and Congress knew then that
there was a big problem, not only for producers, but for
workers and everybody. It took 20 years before we got a Packers
and Stockyard Act.
Now, 5 years ago, we were at a fly-in--Farmers Union
sponsored a fly-in--and we were talking to some of the big
shots at that USDA. I told them listen, ``If it's going to take
20 years to get anything done here, most of the people in this
room today aren't going to be here to enjoy any benefit or any
result of it.''
I am so afraid, Senator, that that may be what's going to
happen again. I sure hope that you can light a fire, or we can
light a fire, or somebody can do something to go get this ball
off of dead center, because it's definitely a problem.
Now, Montana Farmers Union sent a letter recently to
Attorney General Janet Reno. We asked for formation of a
special unit to investigate proposed mergers in the
agricultural arena. I am awaiting a reply, and even more so, I
am awaiting some action, some results.
We don't believe the USDA is able to handle the matter
under the Packers and Stockyard Act or other Federal
legislation within their purview. Neither are we confident that
the Department of Justice will do enough to ensure that farmers
and ranchers are safe from marketplace monopolies. Both
agencies probably need more in the way of appropriation from
you to address those problems.
I'm not going to go through all of my study. There are
copies back there. I have some here also.
The one thing you don't have a copy of is a study by Dr.
William Heffernan from the University of Missouri. I gave a
copy to the clerk, and Senator, I have given you and your
office a couple of copies of that already. This study has all
the statistics. It is pretty deep research, and it doesn't pull
any punches.
The reason I say that, is that we have been pretty
receptive to cooperatives in this business of, what would we
call it, anticompetitivism, I guess, in our markets. You know
what, cooperatives are caught in that chain too! The references
are made right in Dr. Heffernan's Report.*
---------------------------------------------------------------------------
*[Dr. William Heffernan's Report, submitted by Kenneth L. Maki, was
reprinted by permission of the author and the National Farmers Union.]
Report of Dr. William Heffernan, Department of Rural Sociology,
University of Missouri
Consolidation in the Food and Agriculture System
introduction
The organizational structure of the national/global food system is
dynamic. New firm names emerge, often the result of new joint ventures,
and old names disappear. But underlying these changes is a continuing
concentration of ownership and control of the food system. These
structural changes are so strong that they often undermine the desired
and expected outcomes of much of the agricultural policy developed over
the past couple of decades. These structural changes, often referred to
as ``the industrialization of agriculture,'' have progressed to the
point that some agricultural economists now refer to the agricultural
stage of the food system as ``food manufacturing.''
No longer can agricultural policy be discussed apart from the food
system, because major engines of change that are impacting agriculture
and muting the impact of agricultural legislation come from the larger
food system. As one who has been studying the changes in the structure
for over three decades, I am delighted the Congress has chosen to
include a dialog on the structure of the food system as part of the
agricultural policy debate. Concentration of the food system must be a
part of that debate, if the policy is to address some of the problems
faced by farmers and the relatively few remaining rural communities
that still depend heavily on an agricultural base.
One often hears the statement that agriculture is changing and we
must adapt to the changes. Few persons who repeat the statement really
understand the magnitude of the changes and the implications of them
for agriculture and for the long-term sustainability of the food
system. It is almost heresy to ask if these changes are what the people
of our country really want or, if they are not what is desired, how we
might redirect the change. The changes are the result of notoriously
short sighted market forces and not the result of public dialog, the
foundation of a democracy. Neither are the changes the result of some
mystical figure or an ``invisible hand.''
For well over a decade, several of us at the University of Missouri
have been reporting the concentration ratios of the largest four
processors of most of the major commodities produced in the Midwest. We
liken the food system to an hour glass in which farm commodities
produced by thousands of farmers must pass through the narrow part of
the glass that is analogous to the few firms that control the
processing of the commodities before the food is distributed to
millions of people in this and other countries.
We focus on the largest four processing firms because the economic
literature in the mid-1980's indicated there was general agreement that
if four firms had 40 percent of the market, that market was no longer
competitive. We realized that this selection was somewhat arbitrary,
but it has provided a useful benchmark.
When we began collecting the data in the mid-1980's, this
information was relatively easy to obtain in trade journals, government
reports, annual reports from corporations and other secondary sources.
Over time, this information has become more difficult to obtain. Trade
journals have come under pressure to not publish some of this
information and government agencies often say that to reveal the
proportion of a market controlled by a single firm in such a
concentrated market is revealing proprietary information.
I once appeared on a panel to discuss the concentration of the beef
sector with three others. Each of us had a different percentage of the
market controlled by the largest four beef slaughtering firms. We
agreed on the largest four firms and their ranking, and differed only
slightly on the percentage of the market the four controlled. The range
of difference was only about 6 percent and probably not really
significant because we all agreed the top four had at least 75 percent
of the market. Yet as a social scientist, I am uneasy about such
differences. Differences of this magnitude can (and should) raise
questions about the legitimacy of such research. We work hard to get
these numbers and I'll defend the trends we highlight from the data,
but I cannot defend each percentage.
The fact that these ``CR 4 Tables'' (see tables attached to this
report) have become popular indicates that most people have not found
information on market share to be very accessible. In a democracy where
we expect the citizens to be involved in setting national policy, it is
absolutely necessary that they have accurate information on some of the
major drivers of change. At times I have appeared publicly with persons
from some of the firms listed in our tables. My initial comment is that
if my data differ from the data of the representative of the large
firms, the audience must accept the data from the firm because primary
data always trump secondary data and I only have access to secondary
data. The public must have better data. I would urge Congress to seek
better data and make it available to the public as it begins to debate
the relationship between concentration and agricultural policy and
rural issues.
Data in the table indicate that four firms control over 40 percent
of the processing of the major commodities produced in the Midwest. In
addition, a few firms appear in the list of the top four processing
firms for several commodities. For example, ConAgra is on the list of
top four processing firms for beef, pork, turkeys and sheep, as well as
seafood, a commodity not listed in the tables. This year it has slipped
to fifth place in broiler production and processing. The data also
begin to suggest the vertical integration in the food system. For
example, Cargill ranks in the top four firms producing animal feed,
feeding cattle and processing cattle.
The data do not reveal the extent of vertical integration in the
food system in the United States or the complex web of interactions
among the top firms. This data cannot even attempt to address the
global nature of the food system. In an effort to communicate the
complicated interaction between the firms and reveal the structure of
the food system, we have attempted to diagram some of the formalized
working relationships between the dominant firms in the global food
system. This information does not begin to exhaust the list of mergers,
joint ventures and side agreements. We have only scratched the surface.
These data are exploratory, but suggest the type of information needed
to understand the concentration of the global food system.
We have already noted the difficulty of getting information in this
country. Getting global information is far more difficult. To
understand the U.S. food system, one must understand the global food
system; to understand the global food system, one must understand the
operations of the major global firms such as Cargill, ADM, and ConAgra.
Cargill has operations in 70 countries and is a privately held firm.
How do we get all of the necessary information? We have exposed the tip
of the iceberg, but exposure only indicates the type of information
needed to understand the global food system.
The major concern about concentration in the food system focuses on
the control exercised by a handful of firms over decisionmaking
throughout the food system. The question is who is able to make
decisions about buying and selling products in a marketplace. The focus
of economic power is usually placed on the individual firm and its
market share. For some of the global firms, this is still somewhat
appropriate. However, decisionmaking can also be exercised through the
various relationships in which a firm is involved even if it does not
hold a majority share. The changing nature of the food system suggests
that relationships among the firms are becoming much more complex and
much more important.
In the past, most of the global grain firms were family held
operations that tried to maintain low visibility and were quite
secretive about their transactions. These firms operated in one or two
stages of the food system and in a very few commodities. Today the
system is becoming much more complex starting with involvement in
biotechnology, extending through production, and ending with highly
processed food. Increasingly, these firms are developing a variety of
different alliances with other players in the system. Acquisition is
still a common method of combining two or more firms, but mergers,
joint ventures, partnerships, contacts, and less formalized
relationships, such as agreements and side agreements, are also
utilized. We will use the concept ``cluster of firms'' to represent
these new economic arrangements.
We have chosen to organize the information around the emerging
clusters of firms that control the food system from gene to supermarket
shelf. The term ``alliance'' is frequently used to suggest the
``seamless system'' which describes the emerging, fully vertically
integrated food system from gene to shelf. Within this emerging system,
there will be no markets and thus no ``price discovery'' from the gene,
fertilizer processing and chemical production to the supermarket shelf.
The only time the public will ever know the ``price'' of animal protein
is when it arrives in the meat case. As this system evolves, even the
price of the livestock feed and its ingredients, such as the corn, will
not be known to the public, because like today's broilers the product
will not be sold. The firm owns the chick and sends it to their
processing facility from which it emerges, perhaps in a TV dinner.
However, the prices along the line of production are never discovered
until the chicken is sold to the consumer. In a food chain cluster, the
food product is passed along from stage to stage, but ownership never
changes and neither does the location of the decisionmaking. Starting
with the intellectual property rights that governments give to the
biotechnology firms, the food product always remains the property of a
firm or cluster of firms. The farmer becomes a grower, providing the
labor and often some of the capital, but never owning the product as it
moves through the food system and never making the major management
decisions.
The system is still evolving and it is not yet possible to
determine how many clusters may evolve, but experiences in other
economic sectors, like the auto industry, suggest we seldom see
monopolies evolve. Even at the global level, where there are no anti-
trust regulations, oligopolies, not monopolies, tend to emerge. We are
predicting the development of four or five food clusters, because the
number of clusters will be heavily influenced by the number of firms
who have access to the intellectual property rights. The underlying
assumption here is that biotechnology will be accepted by most nations
of the world, an assumption that may not be valid, because this
acceptance is still in question in some countries. We will make this
assumption here because the monopoly power that accompanies the
intellectual property rights that leads to control of the gene pool
will be most difficult for any new or emerging cluster to obtain. We
are certainly open to a critique of our starting point. Disagreeing
with our point of departure for the sake of organizing the data should
not influence the relevance of the data we use to describe the evolving
system.
the food chain clusters
Cargill/Monsanto
Monsanto is one of the leading biotechnology firms. The joint
venture between Monsanto and Cargill announced in 1998, clearly
established one of the clusters. Cargill had already established its
own food chain over the past several years by planned acquisitions. It
was one of the largest seed firms in the world with seed operations,
including research operations, in twenty-three countries of the world.
However, Cargill did not have access to biotechnology and the new
genetic products it would produce. As the Wall Street Journal (9/29/98)
pointed out, ``most seed companies have either aligned themselves with,
or been acquired by, crop-biotechnology juggernauts such as Monsanto
Co., DuPont Co. and Dow Chemical Co.'' Thus, they sold their
international seed operation to Monsanto and their domestic seed
operation to AgrEvo, a Berlin-based joint venture between Hoechst and
Schering (Wall Street Journal 9/29/98). Cargill then formed a joint
venture with Monsanto, the company that had the intellectual property
rights to develop the genes and had a very comprehensive array of seed
firms (Knight-Ridder/Tribune 7/28/98).
Perhaps most importantly, the Cargill/Monsanto cluster is now in
the process of obtaining control of the ``terminator gene'' that can be
inserted into plants to cause all of their seeds to be sterile. No
longer will Monsanto have to depend on access to farmers' fields for
collection of tissue samples to make sure farmers do not keep any seed
from 1 year's crop to plant the following year. Use of the terminator
gene will mean that all crop farmers must return each year to obtain
their seed from seed firms, just as corn producers have done for the
past half-century.
There are two points to be made from the above scenario. The first
point is that the reorganization of the food system is very dynamic and
new technologies and other changes coming from outside the system can
greatly disrupt the plans and organizational structure that a firm or
cluster has developed. The second point is that a firm the size of
Cargill has access to such large sums of capital that it can usually
acquire whatever assets are necessary to survive. In addition, they are
recognized as such formidable firms in the system that they can easily
find other partners eager to join with them because the new partner is
also eager to remain an active player in a food chain cluster. The
Cargill/Monsanto cluster brings together giants in their respective
stages of the food system. They needed each other to be a part of a
complete cluster. They have a complete food chain, but they realize
that very few clusters will survive so they continue to actively pursue
other firms through acquisitions, joint ventures or other arrangements
to increase their economic power.
The most recent proposed acquisition is the grain merchandizing
division of Continental Grain. This acquisition brings with it almost
70 inland grain elevators and seven export terminals (Wall Street
Journal, 11/10/98). The acquisition of Continental's grain division
would appear to be relatively inconsequential if one examines the
elevator capacity in bushels or the number of facilities, two items
that are often used as indicators of ``point of first purchase of
grain'' (purchase of grain directly from farmer). In certain regions of
the country, such as along the Illinois and Ohio rivers, Cargill's
acquisition does limit a farmer's choice to either Cargill or ADM. The
largest four firms (Cargill, ADM, Continental Grain and Bunge) only
have 24 percent of the elevator capacity in bushels and 39 percent of
the facilities.
The importance of the merger becomes more obvious when the data
show that the four firms control almost 60 percent of the port
facilities. The Cargill acquisition of Continental would mean that
Cargill ``would control more than 40 percent of all U.S. corn exports,
a third of all soybeans exports and at least 20 percent of wheat
exports.'' (Grainnet, 12/1998). At the global level, the merger
combines what was reported at the start of the decade to be the largest
two global grain traders (Knight-Ridder/Tribune Business News, 11/10/
98). The emergence of ADM as a major global grain trader came through
the acquisition of parts of Louis Dreyfus (originally a joint venture
involving ADM leasing elevators) and Pillsbury (a part of Grand
Metropolitan, a British firm that merged with Guiness). Bunge was third
for a time, but a joint venture to share wheat handling facilities
between ConAgra and Farmland Industries and the alliance between Cenex-
Harvest States directly to ConAgra (through Peavey), and indirectly to
Farmland, has reduced the number of global grain traders during the
past decade.
The pressures causing a firm like Cargill to continue to seek to
enlarge its cluster is perhaps best summarized in a quote from the Wall
Street Journal (11/10/98
p. A3):
As grain handlers go, Continental Grain is at a big
disadvantage because it doesn't have the facilities to mill and
refine crops into higher-value products, such as flour and
high-fructose corn syrup. When U.S. exports slow, as they have
this year [1998], Continental Grain can't shift crops to
domestic uses in the same way that Cargill and Archer-Daniels-
Midland Co. can. Cargill and
Archer-Daniels are major grain processors . . .
For Cargill, a deal with Continental Grain would increase the
number of its grain-gathering facilities all along the
Mississippi River and in important exporting ports such as New
Orleans. In 1996, Continental Grain operated 70 inland grain
elevators and seven export terminals. It isn't clear whether
Cargill would close some overlapping operations.
Cargill's interest in Continental Grain follows several moves
by Archer-Daniels of Decatur, Illinois, to increase its grain-
storage capacity through joint ventures and acquisitions.
Industry officials said Archer-Daniels can top about 500
million bushels of grain worldwide. A pact with Continental
Grain would allow Cargill to directly access more grain than
Archer-Daniels currently can.
Continental was also feeling the pressures of a changing food
system. According to the Wall Street Journal (11/11/98, pA10),
Continental CEO Paul Fribourg was convinced that his company could not
continue as a grain handler because of competitors expanding into ``the
more-profitable businesses of milling and crop biotechnology.'' In
fact, the company considered merging with a commodity processor before
selling the business to Cargill. The deal raises some interesting
questions. What does ContiGroup, the remainder of Continental, plan to
do for access to grain for feeding its hogs, cattle and poultry and
where does it plan to get its cattle slaughtered? Does ContiGroup feel
it can add to its processing capacity to meet its growth projections
and compete with Smithfield, IBP, ConAgra and Cargill and the clusters
it is joining? Is there some side agreement that has not yet been made
public which will include ContiGroup within the Cargill/Monsanto
cluster? What happens to the alliances Continental had with Harvest
States (Tacoma Export Marketing Co.), Optimum, a joint venture with
DuPont/Pioneer, ContiPasz, a feed company in Poland, and its venture
with Quincy Soybean Company, now owned by ADM?
Industry analysts suggest one of the reasons Cargill needs more
facilities is to position the company as a major grain trader as
identity-preserved products come on line. Those promoting value-added
opportunities for farmers have suggested that small, single facility
firms, like new generation cooperatives, might find a niche in the
handling of identity-preserved products because the big grain traders
could not or would not come into such small markets. With the
additional facilities Cargill has just acquired, it is in position to
utilize a facility in the center of a farming region that could produce
the new product and contract with surrounding farmers for the product.
Cargill could use marketing contracts or production contracts much like
it does in the poultry sector.
Reports suggest Cargill paid about one billion dollars for
Continental (Wall Street Journal, 11/11/98 p. A10). That is only about
half of their 1998 income. Cargill could buy two operations the size of
Continental's global grain division with 1 year's earnings. That is
economic power. There is freedom of entry into the global food system
for those firms that can match that level of purchasing power.
Cargill's corporate goal is to double in size every 5 to 7 years that
it says it has achieved for the past 40 years. Since the major firms in
these clusters expect to make at a 20 percent return on their equity,
the Cargill goal is very similar with other such firms.
ConAgra
With diversified interests ranging from ``farm gate to dinner
plate,'' a ConAgra subsidiary can be found along most links of the food
chain. ConAgra is one of the three largest flour millers in North
America and ranks fourth in dry corn milling in the U.S. The company
produces its own livestock feed and ranks third in cattle feeding and
second in cattle slaughtering. It ranks third in pork processing and
fifth in broiler production and processing. In its 1997 Annual Report,
ConAgra explained that its United Agri Products (UAP) business is a
leading distributor of crop protection chemicals, fertilizers and seeds
in the U.S., Canada, Mexico, Chile and U.K. UAP is moving into new
markets around the world, such as through a joint venture with Zeneca
Agrochemicals (now AstraZeneca) in the Cape region of South Africa
which will establish a base for UAP growth on the African continent.
ConAgra's annual report also noted that UAP is a leader in the
distribution of new biotechnology products, principally seeds. As part
of ConAgra, UAP identifies new applications for biotechnology in the
food industry and provides links to other ConAgra companies, which can
capitalize on the application potential for consumers.
In the handling and transportation of grain, ConAgra owns about 100
elevators and 1,000 barges and 2,000 railroad cars. ConAgra's grain
trading company, Peavey, is ranked third in ownership of U.S. covered
barge fleet. American Commercial Barge Lines, Inc., is No. 1, followed
by Artco, a company owned by Archer Daniels Midland. According to the
trade journal Feedstuffs (9/95), these top three controlled 53 percent
of the nation's covered barge fleet.
Despite ConAgra's long history of being a company from ``seed to
shelf'', we are unsure of the direction of their food chain cluster,
although hints are to be found in their annual report. One indication
is ConAgra's Agri Products division teaming with DuPont in a group of
joint ventures, about a dozen developmental businesses. According to a
New York Times article (10/30/97), ConAgra's range of expertise may
make it especially attractive to potential business allies like DuPont.
For example, DuPont has relied heavily on ConAgra for the initial
commercialization of its new high-oil corn. Once United Agri Products
found farmers to grow the corn under contract, ConAgra's chicken
operations bought the grain.
Relationships that exist between the food chain clusters also
complicate any kind of explanation of the food system. For example,
ConAgra and ADM formed a joint venture in mid 1998 to operate the
Kalama grain export facility in Washington State. The new company,
owned 50-50 by the two giants, is known as Kalama Export and operates
one of the most efficient export facilities on the West Coast. The
facility was built by ConAgra and operated under its auspices from 1983
until the joint venture formed. In another grain-based alliance,
ConAgra and Farmland Industries have linked together to improve both
companies' services to farmers and grain marketing and export
activities. The new alliance will consist of two entities, Concourse
Grain and Farmland-Atwood. Concourse Grain will operate two ConAgra
export elevators and two Farmland elevators (one export, one interior)
and will market wheat originated by the two companies. This alliance
will enable domestic and wheat customers to access multiple classes of
wheat, and international customers to be served from multiple U.S.
export points. Prior to these grain ventures, ConAgra created a joint
venture with Harvest States Cooperatives in 1994 to operate three
elevators in Iowa and two export grain terminals in Louisiana. The 50-
50 partnership, called HSPV, was expected to improve efficiency and
flexibility in grain origination, shipment and handling of grain
exports for both Harvest States and ConAgra's grain export company,
Peavey (Feedstuffs 9/12/94).
ConAgra follows the processing of food farther down the food chain
than Cargill and ADM, ultimately selling labeled food items that most
consumers would recognize such as Armour, Monfort, Swift, Butterball,
Healthy Choice, Peter Pan Peanut Butter, Hunt's, and many others. It
currently ranks second behind Philip Morris as the leading food
processor in the U.S. In its 1998 Annual Report, ConAgra noted 18
consecutive years of earnings per share growth at a compound rate of 15
percent. Fiscal 1998 sales totaled $23.8 billion and fiscal 1998
operating profit, $1.6 billion. Chief executive Bruce Rohde, who
succeeded Philip Fletcher in September 1997, has set a goal of making
ConAgra the world's largest and most profitable food company by the
year 2005. This means passing not only Philip Morris, but also world-
leader Nestle of Switzerland.
ConAgra's growth during the 1990's has been accomplished through a
strategy of acquisitions, divestitures and adding value to their
products. Under the leadership of Philip Fletcher, the company's
practice was to have 80-100 acquisition candidates in screening at all
times. ConAgra was able to report in 1998 that it had acquired or
created joint ventures with approximately 150 companies during the past
10 years.
Novartis/ADM
Novartis is a Swiss firm formed by the merger of CIBA-Geigy and
Sandoz in late 1996. According to their 1997 Annual Report, the company
has agribusiness operations in 50 countries worldwide. Their
``agriservices'' are primarily in crop protection chemicals, seeds and
animal health. The merger of the two large chemical firms--plus the
acquisition of Merck in 1997--puts Novartis in the leading position in
the global agrochemical field with sales of $4 billion in 1997
(Chemical Week 5/21/97). This left Monsanto (not including its recent
buying spree), Zeneca (a British firm that recently merged with a
Swedish firm to create AstraZeneca) and DuPont all vying for second
place in the global agrochemical field. In 1997, Europe Chemical News
(4/28/97) estimated that Novartis had 15 percent of the global
agrochemical market. Moreover, the company ``has the largest R&D budget
in the life sciences industry'' according to their own press release in
May 1997. Their emphasis on R&D is also reflected in their
collaboration with the University of California-Berkeley, where they
recently signed a 5-year $25 million research agreement to work ``in
all areas of functional genomics related to agriculture, including
gene-library construction, sequencing, mapping and bioin-formatics.''
(Chemical Market Reporter 11/30/98)
The Novartis/ADM connection is established through Novartis joint
venture with Land O' Lakes to develop specialty corn hybrids for the
food and feed markets. Novartis purchased a 50 percent interest in
Wilson Seeds Inc., a subsidiary of Land O' Lakes. The joint venture
will also acquire genetics from Sturdy Grow Hybrids, already in a
venture with Novartis to introduce a white corn hybrid with the Bt
trait (PR Newswire, 10/14/98). Land O' Lakes maintains an alliance with
Growmark (energy products) and recently took over Countrymark, a major
eastern Corn Belt cooperative, both of which are in joint ventures with
ADM. The link between Novartis/ADM is somewhat tenuous because
Countrymark did not include their grain marketing division in the joint
venture, a division that is already in a grain joint venture with ADM.
However, the point is that the Novartis/ADM cluster, unlike Monsanto/
Cargill, is really predicated on relationships with farmer
cooperatives.
Though some might dismiss this Novartis/ADM connection as
insignificant, one must raise the question of what these relationships
could indicate in the future as firms jockey for position in these food
chain clusters. First, ADM, with its vast network of processing
facilities, lacked access to farmers, a problem the firm remedied
through a long-standing joint venture with Growmark and the more recent
ones with Countrymark, Riceland, and United Grain Growers. The Growmark
and Countrymark joint ventures, for instance, give ADM access to 50
percent of the corn and soybean market region, and 75 percent of
Canada's corn and soybean market region (Feedstuffs 8/12/96). The 42
percent share ADM gained in United Grain Growers--a former cooperative
that is now publicly owned with major stakeholders also being the
Alberta and Manitoba wheat pools--gives ADM widespread access to
farmers in western Canada.
For the cooperatives who lacked the muscle of large firms in
downstream processing--as in the case of Minnesota Corn Processors, a
new generation wet corn milling cooperative that sold a 30 percent non-
voting share to ADM--ADM offered a far-flung global network in which to
sell their grain. No one put it more succinctly than the president of
Harvest States, who said when the Cenex-Harvest States merger was
announced, that ``agriculture cooperatives must operate today `in a
land of giants' where capital and scale `are absolutely necessary' . .
. in a market where corporate multinationals rule.'' (Feedstuffs 11/24/
97) ADM's own partner, Growmark's CEO Norm Jones, commented that the
joint ventures with ADM positioned Growmark and Countrymark in the
global agricultural industry, which represents the only expansion
possibility for most cooperatives. (Feedstuffs 8/12/96) ADM has also
used joint ventures with cooperatives such as Goldkist and Ag
Processing Inc. (AGP) in the feed business. A spokesperson for
Consolidated Nutrition (ADM's joint venture with AGP) said that
cooperatives ``recognize the importance of partnerships as instruments
to be competitive in an industry consolidating as substantially as the
feed industry.'' (Feedstuffs 12/22/97)
The Novartis/ADM connection is also important because Novartis--
while a truly global and powerful company with substantial sales in
chemical, seed, animal health and human nutrition products--lacked
access to further processing in either grain commodities or food
products. Novartis will need ADM's grain handling and processing web to
be able to guarantee producers using their seed stock a downstream
market. ADM, on the other hand, lacked access to biotech and needs
Novartis' genetics, seed stocks and chemicals. As spokesman Martin
Andreas of ADM said in a Feedstuffs interview (1/12/98) `` `If you're
not plugged into the global market today,' a company will have limited
opportunity to prosper. . . . An international network `is critical
[and] if you are not tied into an international system, then you are
not a traveler.' ''
Novartis' genes, seeds and chemicals compliment ADM's far-flung
grain collection and processing network, created through the aggressive
pursuit of joint ventures and alliances in Europe and Latin America.
ADM's stake in A.C. Toepfer, one of the world's largest grain trading
firms, and Dwayne Andreas' claim that ``my partners in the EU are 12 of
the biggest farmers' cooperatives in the world . . .'' \1\ allowed ADM
to process 45 percent of the commodities entering Eastern Europe from
the West in 1993. ADM has also pursued joint ventures and acquisitions
in Latin America in the last few years. Just their purchase of parts of
Glencore's holdings in Brazil and Paraguay generated a 4 percent
increase in their share of the world's soybean trade (Feedstuffs 6/9/
97). Moreover, they maintain joint ventures in a variety of different
commodity processing and feed operations in Brazil, Paraguay, Bolivia
and Mexico--and these are the alliances that are most easily
documented. ADM has also advanced into the Chinese market through its
oilseed refining, feed and broiler processing operations, where ADM is
the junior partner with the Chinese government and a local processor.
In discussing China's dilemma of balancing the need for food security
or economic security, Martin Andreas, ADM's spokesman, commented ``It
means that China is resigned to importing food and paying for it with
products made from their overabundant supply of cheap labor.'' (Journal
of Commerce 2/17/98)
---------------------------------------------------------------------------
\1\ Bovard, James. 1995. ``Archer Daniels Midland: A Case Study in
Corporate Welfare.'' Cato Institute Policy Analysis #241.
---------------------------------------------------------------------------
While ADM appears to be firmly networked at the commodity
processing level, what is not so apparent is how they are going to
substantially enter branded food products--as ConAgra has done--or
production and processing in the livestock sector. ADM's venture into
production and processing of livestock has been undertaken through
their joint venture with AGP, Consolidated Nutrition, which has sow
production on line, as well as ADM's steady increase of its stake in
IBP, the largest U.S. beef packer and second largest U.S. pork packer.
Although data are not readily available, IBP appears to have contracts
with large feeding operations to guarantee captive supplies of beef--
and some pork although not as widespread as beef contracts. In a more
surprising move, ADM has chosen to decrease its holdings in Pilgrim's
Pride to 6.4 percent, a firm in which they had an almost 20 percent
stake in 1992 according to Feedstuffs (7/13/92), at the same time they
maintain a broiler processing plant in China. IBP has also moved into
the Chinese market, bringing a fully integrated pork production and
processing facility on line in 1997 (IBP Annual Report). We are not
sure what this means in terms of the food chain cluster for beef, pork,
turkey or broiler production and processing. Are Smithfield and Tyson
poised to join this chain? Or will they move somewhere else while ADM
pursues its relationship with IBP?
It is clear that we have only scratched the surface of the
Novartis/ADM/IBP cluster. Data are very difficult to obtain,
particularly reliable data about global operations. For instance, who
are ADM's EU cooperative partners, besides the ones we have listed? How
do ADM's operations in China impact farmers in the United States? What
role does ADM's own brokerage firm, among the top 40 largest in the US,
play in currency and grain futures trading, particularly when ADM is a
major grain handler and processor in Europe, North and South America
and Asia?
Finally, the development of feed additives and other derivatives
from wet corn milling remains a fascinating and potentially lucrative
market as shown by Cargill's interest in entering the additives market
through joint ventures with firms like Degussa. ADM is quite powerful
in the production of lysine and citric acid--as evidenced by their
recent legal troubles in the U.S. and EU in regards to both products--
and is gaining ground in such new products as Vitamin E and soy
isoflavones. The key question, which none of the major cluster firms
has yet addressed, is what happens with further processed branded food
products and supermarket sales? Novartis has their Gerber baby food,
ADM has Haldane foods in Britain and their continuing production of
Harvest Burger vegetarian alternative for Worthington Foods in the
U.S., and IBP acquired institutional processor and supplier FoodBrands
Inc. However, none yet have the presence of ConAgra--or Philip Morris
for that matter--on the shelf or in the cooler in supermarkets. These
questions still remain and are particularly relevant to public policy
debates.
moving beyond the data
There are a host of major players in the food system which are not
included in our three food chain clusters. Some have already begun to
form alliances and others are still acting in a rather individualistic
manner. Most likely, some of these will join together to form new food
chain clusters, while others may join the clusters we have identified.
Pioneer and Mycogen can form the anchor for other chains. Firms like
American Home Products, DuPont, Dow, AstraZeneca, and Aventis, a recent
joint venture of Rhone-Poulenc and Hoechst-Schering, are likely to join
a cluster, as are some of the fertilizer firms. Bunge, a major grain
trader, and some major animal production and processing firms like
Tyson, Perdue, Smithfield and its alliance members Carroll's Foods and
Murphy Family Farms, might well develop a working relationship. There
are already relationships between many of these firms for which we have
not indicated a cluster and some of them have or have had relationships
with firms in the three clusters we have identified.
Watching the clusters develop by forming new relationships and
breaking some of the old and speculating on what other relationships
might develop is like watching a chess match and trying to anticipate
the players' next moves. In this game, there can be four or more
winners. The system is very dynamic. However, a look at the list of
acquisitions and mergers during the past decade, or as we have shown
within the last 5 years, suggests far more names were lost as firms
joined another management unit than new names emerged. Many of these
new names are simply the realignment of existing firms.
The diagrams help to communicate three points. The first is that a
very small number of dominant food chain clusters appear to be
emerging. Some are organized around one or two dominant players as
exemplified in the cases of Cargill/Monsanto and ConAgra, which is only
loosely connected to a biotechnology firm. The Norvartis/ADM/IBP case
suggests another method of building a food chain cluster that is
probably the path many of the major key players not yet involved in a
cluster will follow. At least during the formative period, a dominant
firm from the biotechnology area, one from the grain trading and
processing area, and one from the meat production and processing
develop a working relationship that is a bit more tentative than a
merger. We are not suggesting these relationships are set in stone,
even acquisitions can be sold. But the freedom of entry is restricted.
The second point is that the food system is becoming very
complicated and difficult to describe. The complication in describing
the system results from the fact that there is not a group of
individualistic firms out there competing with one another. We are
especially interested in all the relationships that exist within the
clusters and those crossing from one food chain cluster to another.
Some of these are the result of firm A having a relationship with firm
B, and then developing a new relationship with firm C. But some of the
relationships crossing cluster boundaries are new. The whole system is
woven together by a host of working relationships between firms and, at
least for the short run, the system looks pretty fluid. One is left
asking the question: just how much competition is there in the system?
We know there are examples of rivalry between firms and in some cases
the firms are spending millions of dollars in court to settle their
differences. Maybe the society would benefit most if the differences
were to be settled in a competitive market! Knowing that Nippon Meats
of Japan has a 12 to 15 year joint venture with Cargill producing
broilers in Thailand makes it hard to believe there are not some
constraints in the competition they exercise in this country as Nippon
becomes a hog producer and processor in United States.
The third point is that as the food chain clusters form, with major
management decisions made by a small core of firm executives, there is
little room left in the global food system for independent farmers. The
experts, even the leaders of cooperatives, are telling farmers they
must give up their independence and join an alliance. This is another
way of saying ``give up your decisionmaking prerogatives to the food
chain cluster if you want to maintain an economically viable farming
operation.''
In most of the livestock commodities, the production stage is
integrated into the larger food system. Ninety-five percent of the
boilers are produced under production contracts with fewer than 40
firms. Essentially, there is no price discovery for chicken feed, day
old chicks or live broilers. The food product does not sell at these
stages. Basically there is no national market for live broilers. (There
are niche markets emerging for range poultry and other specialty
poultry, but processing is emerging as a major problem.) The production
system is about the same for turkeys and eggs. At the end of low hog
prices, which may last for at least another year, there will be few
independent hog producers remaining. The issue is not who can produce
the hogs the most efficiently. The issue is who has the deepest pockets
and market share. Even now, the issue of market access for producers
who do not have special relationships with feed or slaughtering firms
has become obvious. Twenty feedlots feed about half of the cattle in
the U.S. and these are either owned by the slaughtering firms or have
contracts with the processing firms. Operators of ``independent lots''
tell us that they seldom see buyers from more than one firm. Dairy
farms are being consolidated, leaving only the cow/calf sector out of
the integrated system. The cow/calf sector is the most highly
subsidized sector of agriculture, subsidized by non-farm income. The
cow/calf producers without access to non-farm income are facing
economic hard times.
The movement toward increasingly differentiated products is
bringing more contracts into field crop production. Two recent
technologies will hasten the process of vertical integration in the
crop sector. The first is biotechnology and the terminator gene that
places the farmer at the mercy of the food cluster for seed to plant
the crop. If the firms in the processing stage of the cluster require
specific genetic material and the farmer cannot get that seed, he/she
has no market access. The second technology is precision farming's
global positioning system. It is no longer necessary for the farmer to
have personal contact with their land and crop to make appropriate
management decisions. Most of the decisions can now be made in the
farmer's office. Any decisions that can be made without contact with
the land and the crop can be made in an office in a distant city. In
the not too distant future the person operating the corn planter will
not know much about the genetic material of the corn being planted--
just like the broiler grower does not know about the genetic stock of
the birds he/she feeds. As the ``farmer'' watches the big truck with
the computer on board reading from a satellite, he/she will not know
much about the fertilize or chemical being applied to the field--just
like the grower does not know much about the feed fed to the birds he/
she cares for but does not own. The crop farmer will be paid on a piece
rate basis just like the grower.
Increasingly we hear about the need for only 20,000 to 30,000 farms
in the United States to produce for the global food system. The next
question becomes what is a farm? In business ation Administration
literature, firm usually applies to a management unit. Traditionally
the term farm has also referred to a management unit. If the
integrating firm becomes the management unit as is implied in the case
of broiler production, how many farms will there be in the United
States in the future?
concerns about the food system
Many different groups and individuals in this and other countries
are raising serious concerns about the globalizing food system. One
concern focuses on the consequences for rural communities of this
restructuring.
Today, most rural economic development specialists discount
agriculture as a contributor to rural development. The major reason why
agriculture contributes so little to the community is because of the
emerging structure of the food system. In a family business, such as
family farm, a family grain elevator, or a family grocery store, the
family subtracts its annual expenses from its income to determine
profits that are then allocated among labor, management and capital.
For the economic well-being of the family and the rural community, it
makes little difference how the profits are allocated among the three
costs of labor, management and capital. The local family spends much of
the ``profit'' in the local community. In addition, when the rural
community retained all of income related to the three factor of
production, the funds circulated more in the community. Not just the
family farms, but all of the family businesses providing the
agricultural infrastructure contributed to the economic well-being of
the community. In the past when family businesses were the predominant
system in rural communities, researchers talked of multiplier effects
of three or four. Newly generated dollars in the agricultural sector
would circulate in the community, changing hands from one
entrepreneurial family to another three or four times before leaving
the rural community. This greatly enhanced the economic viability of
the community.
Large non-local corporations, whether hiring labor as wage earners
or piece rate workers as in the case of growers, see labor as just
another input cost to be purchased as cheaply as possible. The
``profits'' then are allocated to return on management and capital and
are usually taken from the rural community. They go to the company's
headquarters and are then sent to all corners of the globe to be
reinvested in the food system. One can ask the question, why were
agriculturally based rural communities, with an ample natural resource
base, more economically viable than mining based rural communities
which also had an ample natural resource base? The answer lies
primarily with the economic structure of the major economic base.
Increasingly, our agriculturally based communities, like regions with
major poultry operations, are looking like mining communities.
Increasingly, the major decisions in the food system are being made
by an ever-declining number of firms, a growing number of which are
involved in the food system clusters. They are primarily concerned with
maximizing their profits. That is the purpose of such corporations.
ConAgra says its major mission is to increase the wealth of its
stockholders. But, these firms are in position to decide which people
in the world will eat. Their decisions are based on whether one has the
money to buy food. We hear a lot about the growing population of the
world and how feeding the increasing millions will provide great
opportunities for farmers in the United States. The problem is that
much of the population increase is in the ``have-not'' nations of the
world, in countries where the people earn only a few hundred dollars a
year. These families cannot afford to buy imported food! The global
firms travel the world ``sourcing'' their products from those countries
where they can get the product the cheapest and selling them into the
countries that will pay the most. This raises the question of whether
the countries with rapidly growing populations will be our farmers'
customers or their competitors.
One hears a lot about agri/food exports from the United States and
the potential benefits for our farmers. Much less attention is given to
United States food imports. On a dollar basis, the exports and imports
have been growing at about the same level for the past two decades.
This means that on a percentage basis, imports have been increasing
more rapidly, because imports started at a lower dollar value. For
example, about one-third of the vegetables consumed in this country are
imported. The United States is also a net importer of beef.
Issues of food quality and especially food safety are also
receiving increased attention. Perhaps the bigger issue is whether the
global food system is sustainable. The production, processing and
distribution stages have all been built on cheap petroleum.
Considerable debate exists on when the world's petroleum resources will
be depleted, but most agree the price will begin moving up in the not-
too-distant future. Will the resulting price shocks cause the whole
food system to restructure again?
Another question being asked, given the financial problems faced by
some nations, is: What would happen if the United States were to
experience a depression like that of the 1920's and 1930's? A
depression is a major disorganization of the economic system. Think for
a moment what that would mean in a system of ``just-in-time delivery.''
Will food products get to the stores on a regular schedule? Will my
neighbor be able to get a replacement engine from England for his new
New Holland combine if it breaks down during harvest? Will the seed,
chemicals and fertilizer, coming from all parts of the world, get to
the farmer in time? A shutdown of the agricultural production system
for a few weeks can have quite different consequences than shutting
down an automobile assembly plant for the same amount of time. A
lengthy delay in agricultural production could mean the loss of the
year's crop.
The control of the animal genetics pool is also concentrating and
the genetic base for domestic animals is narrowing. For example, over
90 percent of all the commercially produced turkeys in the world come
from three breeding flocks. The system is ripe for a new strain of
avian flu to evolve for which these birds have no resistance. Similar
concerns exist in hog, chicken and dairy cattle genetics.
These are food issues and not just agricultural and rural issues.
The global food system is becoming more like many of the other economic
sectors. But food is different from all other goods and services
exchanged in the international market. Food is a human necessity and it
is needed on a regular basis. Those who control the global food system
have the ultimate in economic power. As Dwayne Andreas, former chairman
of ADM, said:
The food business is far and away the most important business
in the world. Everything else is a luxury. Food is what you
need to sustain life every day. Food is fuel. You can't run a
tractor without fuel, and you can't run a human being without
it either. Food is the absolute beginning. (Reuters, 1/25/99)
One hears much about ``niche markets'' as new opportunities for
farmers. Such opportunities do exist. There is a major rebirth of
farmers' markets, local food routes, subscription sales and other forms
of direct marketing between farmers and consumer, with small processors
involved when needed. As the food firms get larger and cover wider
geographic and cultural areas, they leave behind a growing number of
small markets they do not serve. The more consumers learn about the
ways their food is grown in far away places, the more many of them are
concerned with where their food is produced, who produces it, and how
it is produced. The structural vulnerability of the emerging food
system is called into further question when one remembers the situation
in the former Soviet Union. The Western world began to realize there
were major problems in the centralized food system of the former Soviet
Union when it was learned that small farm plots were producing a
significant proportion of the country's food. Large centralized
organizations have problems adapting to change. They commonly have
problems with management, with coordination, and with worker
satisfaction.
These are good reasons to predict that the evolving system is
vulnerable. It will probably be restructured again in the future. A
vulnerable food system will most likely be ``restructured'' numerous
times in the future--but at what social and economic cost to whom? When
``restructuring'' occurs, some people pay a very high price for the
changes. It is highly questionable whether society as a whole really
benefits.
If the number of farms is reduced to about 25,000 in the next
decade, there will be many farm families who will be involuntarily
removed from their land. In the mid 1980's, Congress allocated funds
for helping the families who followed the advice of the experts and by
doing so lost all of their assets. These funds were used wisely and
they helped many families during their transition from the farm. The
motto then was ``We may not be able to save every family farm, but we
can save every farm family.''
Perhaps the policy emerging from this dialog on concentration in
the food system can lead to a new system that will save both. Just a
quarter of a century ago, our decentralized system of agricultural
production was held up as a model for the world.
The centralized food system that continues to emerge was never
voted on by the people of this country, or for that matter, the people
of the world. It is the product of deliberate decisions made by a very
few powerful human actors. This is not the only system that could
emerge. Is it not time to ask some critical questions about our food
system and about what is in the best interest of this and future
generations?
[GRAPHIC] [TIFF OMITTED] T1812.002
[GRAPHIC] [TIFF OMITTED] T1812.003
[GRAPHIC] [TIFF OMITTED] T1812.004
[GRAPHIC] [TIFF OMITTED] T1812.005
[GRAPHIC] [TIFF OMITTED] T1812.006
[GRAPHIC] [TIFF OMITTED] T1812.007
[GRAPHIC] [TIFF OMITTED] T1812.008
[GRAPHIC] [TIFF OMITTED] T1812.009
[GRAPHIC] [TIFF OMITTED] T1812.010
[GRAPHIC] [TIFF OMITTED] T1812.011
[GRAPHIC] [TIFF OMITTED] T1812.012
[GRAPHIC] [TIFF OMITTED] T1812.013
They (co-operatives) were formed to provide independent
alternatives, but now they are having to compete with this
mega-merger mania that is going through the countryside and
must compete with the highly-vertically integrated
corporations. Some of them have joined alliances in order to
survive, and you know that some of those are currently in the
mill. (eg: CHS-Farmland)
Now, I want to turn, besides the fact that we are farmers
and ranchers, we are consumers. I want to bring up another
point. Concentration threatens our food security within not
only the United States but in the global arena. Chains--and
these are mentioned in that Heffernan study--these chains or
clusters, jeopardize our food security because just a few
dominant firms control the major decisionmaking throughout the
food chain, and their decisions are based on what is most
profitable to the company.
The genetic pool is becoming limited. For example, and he
(Heffernan) cites one, over 90 percent of the commercially
produced turkeys in the world come from three breeding flocks.
Now, if the avion flu all of a sudden infects a flock, that
would kind of wipe out our turkey population. It'd probably be
pretty good for some of the small turkey producers, but there
likely won't be any of them left.
So, I guess, Senator, we are here at your mercy. We will
help you all we can. I appreciate you calling this hearing. We
can spend a lot of time, and I've got a lot of other
statistics, which I am not going to bother to go through. This
happens to be a pet subject of mine from when I was back in
college. I would certainly hope that maybe this is just the
beginning of getting some stones uncovered. Thank you, Senator.
[The prepared statement of Mr. Maki follows:]
Prepared Statement of Kenneth L. Maki, President, Montana Farmers
Union, Great Falls, Mt.
Good Morning, Senator Burns, and thank you for the opportunity to
testify on a subject vital to the membership of Montana Farmers Union.
I am Ken Maki, president of Montana Farmers Union, a non-profit
statewide membership organization of family farmers and ranchers with
members in all 56 counties. They produce cattle and other livestock,
wheat and other grains, honey, ostrich, mint and other commodities.
Our members who produce grains must deal with Burlington Northern &
Santa Fe Railway, which effectively is a monopoly within Montana and
makes them captive shippers. They pay some of the highest freight rates
in the Nation for lack of rail competition.
Similarly, these producers are witnessing loss of control of their
livelihoods into fewer and fewer corporate hands by mergers in the
agricultural sphere like those which formed BNSF.
Anytime there is a merger, obviously there is less competition. And
there have been some whoppers lately. It is alarming to watch them take
place, with but token and cosmetic anti-trust stipulations imposed by
the last several ation Administrations in Washington.
Cargill of Minnesota, the largest privately-owned business in the
United States, also is the second largest North American grain trader
($9.9 billion U.S. 1998), following only Archer Daniels Midland.
Cargill recently bought the grain operations of Continental, the fifth
largest grain trader in the U.S. ($5.5 billion U.S. 1998). Both operate
foreign elevators and port facilities. Although neither has significant
operations within Montana, the new entity certainly will influence
farmgate prices here.
Cargill now will handle about one-third of all U.S. grain exports
and it probably is not finished acquiring competitors. You are aware of
the dependence of Montana growers on the export market. Cargill is
actively buying and partnering in Canada too.
Monsanto acquires DeKalb Genetics and Delta Pine & Land Co. of
Mississippi. DuPont buys Hi-Bred International, the world's largest
seed corn company. St. Paul Bank and CoBank merge into a $22 billion
operation. Wells Fargo buys Norwest. CENEX buys Land O' Lakes, then
acquires Harvest States and now is combining with Farmland Industries,
which already has made its debut in Montana television advertising.
Farmers Union in a recent letter to Attorney General Janet Reno
asked formation of a special unit to investigate proposed mergers in
the agricultural arena, as well as anti-trust investigation of the
existing concentrations of ownership in meatpack-
ing and grain handling.
We do not believe the U.S. Department of Agriculture is able to
handle the matter under the Packers & Stockyards Act or other Federal
legislation within its purview. Neither are we confident the U.S.
Department of Justice will do enough to insure that farmers and
ranchers are safe from marketplace monopolies. Both agencies probably
need more in the way of appropriations from you to address these
problems.
The following figures are from a study commissioned by National
Farmers Union with the University of Missouri:
------------------------------------------------------------------------
Flour
Beef Port Millers
------------------------------------------------------------------------
IBP Inc....................... 1st 2nd ............
ConAgra....................... 2nd 3rd 2nd
Cargill....................... 3rd 4th 3rd
Farmland...................... 4th 5th ............
Smithfield.................... ............ 1st ............
Archer Daniels Midland........ ............ ............ 1st
Cereal Food Processors........ ............ ............ 4th
Hormel........................ ............ 6th ............
-----------------------------------------
Total....................... 79% 75% 62%
------------------------------------------------------------------------
You see the same names popping up in all categories. I have heard
higher figures.
ConAgra owns the Peavey elevators in Montana. A corporate
realignment recently resulted in closing the elevators in Carter,
Rudyard, Chester and Shelby, resulting in less competition in those
markets.
In South Dakota, where the State legislature enacted price
transparency for cattle buyers, packers now are refusing to buy animals
on the spot market. Why? What's to hide? Market and price manipulation,
that's what. The corporations finally have turned the corner on
controlling the markets and they are afraid of disclosure.
IBP in the last quarter of last year quadrupled its profits over
the preceding year ($92 million to $22 million), mainly because of the
lowest prices to hog producers in decades. Cattle and grain prices in
Montana also have been terrible.
Philosophically, we are disturbed there may be an overtaking of
democratic principles by purely capitalistic powers, because small
family farmers and ranchers keep getting squeezed out year after year.
They feel ignored and unprotected by their government, so they have
been demonstrating in growing numbers in Montana and other states. They
need good public policy, not annual stopgap emergency measures.
Victories such as R-CALF's action on Canadian cattle imports are
precious few--and we have yet to see if that preliminary finding for
the Ranchers Cattlemen Action Legal Foundation will be upheld by both
the Commerce Department and the International Trade Commission.
Large volumes of subsidized imports from Canada and elsewhere have
shown the shortcomings of so-called free trade treaties for several
years now and Farmers Union still believes a wholesale renegotiation of
those treaties is in order.
Farmers Union believes that near-monopoly conditions in the food
buying and processing sector now may have more of an influence on
farmgate prices than lower demand for U.S. commodities along the
Pacific Rim and cyclical domestic overproduction. Probably, there are
enough laws and regulations already on the books to remedy this
situation, so we ask Capitol Hill to light a fire under the appropriate
agencies to force divestitures and restore true competition for family
farmers and ranchers. At the very least, there should be a moratorium
on mergers and acquisitions until their effects on small farm income
are evaluated.
Meanwhile, unfortunately, it is necessary for Congress to enact
another stopgap bailout to keep the farm economy going. It must be done
immediately. Farmers Union and Elizabeth Dole want it done now. But
Senate Majority Leader Trent Lott and Senate Agriculture Committee
Chairman Richard Lugar say later this year, after harvest. That's too
late. Please tell your colleagues in leadership those Montana farmers
and ranchers need a hand now, not Christmas presents after they've
already sold their places.
Thank you.
Senator Burns. Thank you, Ken. Thank you for coming this
morning and taking the time. We appreciate that very much.
On the third panel this morning, we are going to start in,
because these are grower groups, we have got some folks here
that are right over here, Jim Johnson and John Marsh, from
Montana State University, they are agriculture economists. You
guys might want to get prepared if you want to offer a few
words after we have our panel, but you might catch some
questions or something, you know, even from the folks up here.
It is good to see the grain growers here, and we will hear
from these other folks in a little bit, but we want to thank
Montana State University for sending two of their best up here
this morning. We use them as resources, so we really appreciate
you coming.
Jim Peterson, who is Executive Vice-President of the
Stockgrowers Association from Helena is here this morning. Jim,
we would be interested in getting your insight and your
testimony.
STATEMENT OF JIM PETERSON, EXECUTIVE VICE PRESIDENT, MONTANA
STOCKGROWERS ASSOCIATION, HELENA, MT
Mr. Peterson. Thank you, Senator Burns.
I decided to take a rather nontraditional, unconventional
approach to this hearing today, and I hope it is appropriate.
I am here today speaking on behalf of Montana Stockgrowers
Association, but also on behalf of some personal experience
I've had over the years that I'd like to share with you.
Since 1884, Montana Stockgrowers has been representing its
members to try to ensure a fair, competitive and favorable
economic environment for the beef industry, and on behalf of
it's 3,400 members, I appreciate this opportunity to comment.
For the record, my name is Jim Peterson. I am a cow/calf
operator, cattle feeder and a farmer from central Montana. But
I also spent 10 years on the staff of the Texas Cattle Feeders
Association. I managed an agricultural lending unit or a
commercial bank in Amarillo, and we had $200 million of cattle
loans. I was the chief financial officer for a major public
company in California, the largest privately-owned ranch in the
State of California, the Tejon Ranch.
I share this with you only to say that I have had
experience on both sides of the fence, the pasture fence and
the feed yard fence, and both sides of the desk, the borrowing
side and the lending side.
I want to share some background as well as a specific
example that took place the first quarter of this year and some
suggested conclusions of what we might try to do with it.
Back in the seventies, when I was working in a feed yard in
Texas, we sold cattle one pen at a time. The buyer used to come
to the feed yard, and we had one person on our staff who's
full-time job was taking buyers around. They looked at the
cattle one pen at a time and negotiated on the price of that
pen based on the feeding conditions, the quality of the cattle
and the price that day. Each pen was negotiated one at a time.
Today, feed yards sell their cattle, the entire show list,
is sold at one price over a period of about 15 minutes to 1
hour during the week.
No one on the feed yard staff specializes in marketing
cattle. The manager carries a cell phone with him 24 hours a
day and they sell those cattle, the entire show list.
That's today's cash market in the high plains regions where
about \1/2\ to \2/3\ of the cattle are sold. The remainder of
the fed cattle are sold on what we call a ``value-based
marketing system'' using a formula or a grid. This represents
about \1/3\ of the federally-inspected fed beef slaughtered
today. It varies a little bit, but it is up in that 20 percent
to 35 percent category.
These cattle are sold on a grid or a formula based on their
carcass merits. There's usually a carcass quality grid that is
used but the base price is not negotiated. The base price is
subject to the average high of the week, the average cash price
of the week, or the slaughter plant average for the week.
Typically what happens is these cattle get committed to the
packer 30 days in advance, sometimes 6 months in advance, if it
happens to be a Nebraska corn-fed feed program. The grid's
agreed upon; the delivery date might be agreed upon. The base
price however is determined after the fact.
So what happens is the better cattle right now tend to move
toward the grid; the higher quality cattle move toward the grid
so people can try to get paid a little more. The average, the
national average on the grid is about $12 per head premium over
the other cattle.
But what happens is, the base price is determined by the
cattle that are left. I contend this activity results in a
downward bias on the market because you have the base price
established by the poorer cattle. The good cattle are going
into the grid based on the base price of the cattle are left,
and the $12 you gained on the grid, you give up in the base
price.
In my testimony, I have attached what is Attachment A, and
I would like for those of you that have a copy of that to take
a good look at it.
During the first quarter of 1999, most wholesale beef
prices were higher than they had been since 1996. We hit as
high as $1.18 lb. in the beef. As an industry, we marketed
record amounts of beef. We marketed more beef this spring than
any time since 1996, and I think it might even go back to 1993.
We did it at a higher price than any time since 1996. As a
result, if you look at the chart for the first quarter, the
farm to wholesale spread for the first quarter was 69 percent
higher than last year and 46 percent higher than the last 4-
year average.
The realities of this graph I think show that concentration
and resulting market power has led to extraordinary processing
profits for major packers by, No. 1, a disciplined live cattle
cost containment program, which is a result of marketing
techniques that I described to you, and No. 2, a successful
defense of the highest wholesale beef prices seen since 1996.
So our problem is not demand, and it is pretty hard to say
that the packers are doing anything illegal, because we sold
beef higher than we have ever sold it. I mean, you can't beat
them over the head for selling our product for a higher price
than it's been sold since 1996, and more volume than we have
seen in the last 5 years.
But the cattle feeding sector of our industry doesn't
really market fed cattle anymore. They schedule them for
slaughter and sell the whole show list in 15 minutes. My
friends in Texas and I go round and round about this, Senator,
on how we can fix that problem.
I think producers easily gave up $50 a head this past
spring. The $50 per head went to the packers. It didn't go
anywhere else. It is easy to see on the chart where it went. As
you know, as has been stated earlier, there are four major
packers that control about 70 percent of the fed cattle
slaughtered and about 60 percent of the total cattle
slaughtered.
Montana Stockgrowers has been very involved in negotiations
of mandatory price reporting, and this has been done because we
have been asking ourselves, ``What can we do?'' The only
segment of the industry today that is a nonmargin operator is
the cattle producer. Everybody else works on the margin. As
long as your cost of sales is lower than your sales, and you
can meet your expenses or have a margin, you're going to be
profitable. It doesn't make any difference where you are on the
scale. You can go up and down the scale, but the producer
always takes what's left.
We contend that mandatory price reporting will put
transparency in the system, and we have been very supportive of
that effort. We have been involved in negotiations with the
major packers, with the National Cattlemen Beef Association in
an effort to draft some mandatory price reporting legislation
that I know is being debated in Congress, probably as we speak.
It's been heard before the House and the Senate.
I would encourage you strongly to support that legislation.
I know you do; I am not suggesting you don't. You have been one
of our best assets. But I think it's got to happen in Congress,
and that is the first step.
We contend that with price transparency, then you can
measure what's going on. It's pretty hard to fix something you
can't measure. Right now, we don't have any mandatory price
reporting. We don't know what's happening with these grid
cattle. Many times cattle get sold, and we don't know what the
price is.
There is a lawsuit going on right now with the Justice
Department relating to selling cattle and not reporting the
price (that's been part of the condition of sale). So this
price transparency has to come first. Once we get the price
transparency, then we can see what we can do as far as
determining price.
We contend we have to have price transparency through
mandatory price reporting before we can have price discovery.
Once you can see transparency in the system--and I think this
is particularly true between the family farmer and the
corporate entity. Most large corporate entities are not in
favor of price transparency because they can negotiate an
alliance and negotiate a deal, and they like to keep it to
themselves. But the small producer doesn't have that
opportunity, and the only way you can overcome that is with
price transparency. Then you can go to price discovery.
There is no question that market power exists today. On the
other hand, I can't say that I have seen anything actually
illegal taking place. There's been Justice Department and P/S
study after study that has not been able to identify anything
illegal.
But the market power is there, and I contend that we have
got to do something about it when producers can't move the
market price in a situation like we had this spring. We had
higher wholesale beef prices anytime in the last 5 years. We
moved more beef than any period of time in the last 5 years. We
have something wrong. In the old days, we could move the
market. Today, we can't.
Thank you, Senator, for this opportunity to comment. Be
happy to answer any questions.
[The prepared statement of Mr. Peterson follows:]
Prepared Statement of Jim Peterson, Executive Vice President,
Montana Stockgrowers Association, Helena, Mt.
Mr. Chairman, since 1884, the Montana Stockgrowers Association has
been representing its members to insure a fair, competitive and
favorable economic climate for the beef industry in Montana and in the
U.S. On behalf of its 3,400 member producers across the U.S., I
appreciate this opportunity to comment on the impact of concentration
and mergers on the nation's agricultural industry.
My name is Jim Peterson. I am a cow/calf producer, cattle feeder
and farmer from central Montana. For the last 9 years, I have also
served as executive vice president for the Montana Stockgrowers
Association. Prior to that, I served 10 years on the staff of the Texas
Cattle Feeders Association, managed the agricultural lending department
for the First National Bank of Amarillo, served as chief financial
officer of the Tejon Ranch Company in California which is traded on the
American Stock Exchange, and hold advanced college degrees in both
agricultural management, finance, and banking. I share this with you
only to represent that I have spent the last twenty-five years in
agriculture active in business that is greatly affected by the impact
of concentration on our business.
Back in the 1970's, when I was working in the feedlot industry of
Texas, feed yards sold fed cattle one pen at a time to buyers who
looked at the cattle. Sales took place on a ``pen by pen basis,'' and
cattle were sold based on a negotiated cash price subject to the visual
appraisal of the buyer and the seller. Today, feed yards sell their
entire show list (which includes many pens of cattle with differing
quality) at one average price over what might be 15 minutes to a 1-hour
period for the week. Or, they may sell cattle on a value-based
``formula'' or ``grid'' with the fed cattle to be delivered at a future
date without a negotiated base price. The base price is then determined
by an average cash price for the week in that marketing area or a
``plant average'' for the week. The result is upwards to one-third of
the USDA federally-
inspected fed cattle processed today are being marketed on a value-
based marketing system without any kind of a negotiated base price.
Therefore, the better cattle are sold without a negotiated base price
with the base price based on an average price in an area or a plant
made up by the poorer quality cattle that are left. I contend this
contributes to a downward bias in the market and allows market power
through concentration to impact the market even more than it normally
might.
An example to make my point, is the first quarter of 1999 and the
graph I have attached to this testimony as Attachment ``A''. During the
first quarter of 1999, wholesale beef prices were higher than they have
been since 1996. As an industry, we marketed record amounts of beef.
The beef tonnage marketed was higher than it had been since anytime in
1996. As you can see from the graph, reported on the DTN Market
Reporting Services on July 16, the packer farm-to-wholesale spread for
the first quarter of 1999 was 69 percent greater than last year and 46
percent larger than the 4 year average.
The realities of this graph support how concentration and market
power led extraordinary processing profits of major packers by (1)
disciplined live cattle cost containment which is a result of the
marketing techniques that I described earlier, and larger feedlot
offerings, and (2) the successful defense of the highest wholesale beef
prices seen since 1993.
So our problem is not beef demand. It's better than it has been
since 1993. But cattle producers weren't able to improve the prices
paid to feedlots and producers for the raw commodity . . . fed beef. As
a result, I estimate beef producers failed to receive an extra $50 per
head we deserved. It went to the packing industry.
As you know, four major packers now control 70 percent of all
cattle slaughtered in the U.S. and they control 80 percent of all fed
cattle slaughtered. The resulting market power allowed for packers'
successful cost containment of the raw commodity (fed beef) in the
first quarter of this year in a period of time when more beef was
moving at a higher wholesale price than any time since 1993.
The question now becomes what we do. As you know, there is
mandatory price reporting legislation before Congress as we speak. The
Montana Stockgrowers Association is very supportive of mandatory price
reporting because we feel it will put transparency into the marketing
system, something we absolutely must have. Once we get market
transparency through price reporting we can than begin to deal with the
real issue which is price discovery.
People ask me all the time what good will price reporting do. I
contend that you can't fix something you can't measure. Price reporting
will allow us to measure the impact of selling cattle, the whole show
list at one time, on an average price. It will help us evaluate selling
on a formula or grid without a negotiated base price. It will help
evaluate how price based on an average high of the week or plant
average affects value-based marketing.
This legislation is controversial, but I urge you to support
passage of this legislation as presented currently by NCBA (National
Cattlemen's Beef Association). We have participated in the negotiations
and strongly urge you to support the legislation.
Second, once price reporting and price transparency can be
obtained, we can than look at a better system of price discovery
through some incentive program that will encourage or possibly even
require that cattle be sold on some kind of negotiated price basis.
We are opposed to telling people how to sell cattle, but we feel it
is important and in these tough economic times with the mergers and
concentrations that exist in our industry today, that a mechanism of
transparency be present to measure the impact of marketing activities
and allow us to develop a better system of price discovery for our
product.
There is no question that market power exists, on the other hand I
have not seen any evidence indicating anything illegal is taking place.
I must say, however, that this market power has led to the producers
being unable to move the market in their favor at a time when beef
demand and wholesale price is as high as it has been in the last 5
years.
Thank you for this opportunity to comment.
Attachment A
[GRAPHIC] [TIFF OMITTED] T1812.001
Senator Burns. OK. Thank you. Thank you, Jim.
Well, we are working on price reporting. I will tell you a
conversation, I will inject this into the hearing right now, we
had a conversation with one of the packing entities, and they
are very much opposed to what we have proposed. I said, would
you do business on the New York Stock Exchange if they didn't
post prices? When we have a competitive free market system, if
everybody kept their prices under the lid, would we do any of
those things?
He looked at me, and he said, I just thought you was a damn
farmer, and I said that's all I am. But it just appears to me
that price discovery is very, very important, and so is
transparency.
When I was in Canada, and we sat down and we met with the
people from China, we found out one thing, they have no
transparency at all up there, and their problems are bigger
than ours. So we are going to have to solve some of theirs
before we solve--so we can solve some of ours, to be right
honest with you.
Chase Hibbard, Montana Sheep Wool Growers Association. You
know what it is to have a narrow market more than anybody here
probably.
STATEMENT OF CHASE T. HIBBARD, PRESIDENT,
MONTANA WOOL GROWERS ASSOCIATION
Mr. Hibbard. Thank you, Senator Burns, members of the
Committee, panelists, attendees. I appreciate very much the
opportunity to participate in this discussion this morning. So
far, it is been very enlightening and interesting. I look
forward to a little discussion afterwards as we all conclude
our prepared statements.
I am a sheep and cattle rancher. My ranch is located about
40 miles southeast of here as the crows flies. I am also a
State legislator, having just completed my fourth term.
I am also a past board member of the Montana Power Company
where I watched that company emerge from a regulated monopoly
to a mostly unregulated business that is subject to market
forces like all other businesses, so I got a little different
perspective of things from that standpoint as well.
I am president of the Montana Wool Growers Association,
representing about 1,800 to 2,000 growers in Montana, and I am
also on the board of the American Sheep Industry Association.
Survival in agriculture is a topic that is hot right now,
yesterday, today, this afternoon. I think that there's a lot of
problems that all kind of come together. This is one of them.
Yesterday we were talking about trade issues. Those are big as
well.
These are crucial. You know, our obligation, the people
that we employ and thousands of Montanans are vitally
interested in the outcome of several of these issues. It's a
tough, tough business.
I have been involved now very closely for the last 23
years. During that time, I have seen wool at 50 cents a pound;
I've seen wool at $2 a pound. I have seen 50 cent lambs; I have
seen $1 lambs, and calves from about 45 cents to $1.01.
Market fluctuations are a fact of life in this business;
they always have been and always will be. Combined with the
other risks that we face--weather, disease, predators, alfalfa
weevil right now as we speak, a labor situation that is
increasingly difficult--makes this a very difficult business.
With many forces contributing to that situation, it's
really difficult to focus on any single area as the most
significant factor, and I find it even difficult to assign
relative importance to the numerous forces at work.
However, in my opinion, probably one of the most
significant ones right now facing us is this is free trade
world economy, which is not being kind to the commodities. If
we were in high tech, I think we would love it. Commodities
poses some real challenges and makes things very difficult to
us.
Of equal importance right now facing us is the relative
strength of our dollar. That makes imports cheap and exports
expensive. Under this free trade world economy, production will
flow to whomever can produce the most economically in the world
and distribute their product, no matter where they are located.
In Montana, and for that matter, in the United States,
production costs are high on a worldwide comparative basis. We
heard a lot of testimony to that extent yesterday at the WTO
hearing in Bozeman.
With the strength of the U.S. dollar, it puts it even--
makes it even more difficult and even a more noncompetitive
situation. We painfully experienced this in the sheep business
over the past couple of years as Australian and New Zealand
lambs undercut our market price by over 40 percent.
Fortunately, we just got a 201 trade action which is going into
place which places tariffs and quotas on imports from New
Zealand and Australia over a 3-year period, which will help us
immensely.
In Montana, our sheep numbers are down to about 300,000
head compared to nearly 550,000 5 years ago. Nationwide numbers
are down about 35 percent.
In today's subject matter, we are focusing on mergers in
the agricultural industry and how they ultimately impact the
consumer. That's a very good question. I view this topic with
mixed feelings, and some of these feelings I think have already
been expressed by previous presenters.
Mergers and acquisitions are a reality in today's economy.
Getting bigger and more efficient, unfortunately, may be what
it may take to survive.
I can remember 25 years ago, I think that one could make a
good living with 200 cows, 250 cows. I think that number moved
up to somewhere around 500 head. Today, I don't have any idea
what it takes to make a decent living. We run almost 2,000, and
I can tell you, it's a struggle with that many. Getting bigger
is a strong economic force, and unfortunately, it could be a
reality in today's world.
Concentration has been an issue that has received a lot of
focus over the last several years. There's little doubt that it
has occurred. As Senator Burns said, in our industry, we are
down to just a handful of processors. One, basically one
processor for this part of the country. Our lambs used to go to
Erneston, OR. Now they go all the way down to Dixon, CA to be
processed. It's the only game in town.
There's little doubt that concentration has occurred big
time. Unfortunately, the problem is that we know that
concentration has occurred, and it seems as though any effort
to prove wrongdoing
pretty much focuses on collusion, and that has never been
proven, to my knowledge. I am not sure that it will be. It's a
very difficult situation.
We have these huge market forces that are forcing these
consolidations, and I don't know if it is getting larger and
larger, but politically, we have a great difficulty proving
they are doing anything wrong. But we all know that our choices
are limited. There's got to be a certain critical mass out
there to have efficient market competition, and when numbers
drop below that critical mass, competition just does not occur.
That is a fact of life. But we cannot prove wrongdoing. This is
a difficult problem.
Also, in the sheep business, we look at this--we're not
sure how to view it. As I say, our numbers are down so
significantly that it would be very nice to have a number of
markets to go to, but with a rapidly shrinking industry, I
guess at times, we are fortunate that we have anybody that will
take them. That's too bad, again an economic reality.
How these mergers ultimately affect the consumer, from my
view, is also a difficult call. The free market world economy
that is making our business more difficult should, in theory,
be delivering products to the consumer at reduced prices. If it
is not, then there are some extraordinary profits being made
somewhere in the middle.
The possibility arises that fewer competing firms
processing, producing, marketing and delivering products could
lead to less efficient competition, we know that's the fact,
and higher ultimate price to the consumer. We don't know that.
I don't really know if these so-called efficiencies
achieved through merger pass on to the consumer. I doubt that
the primary wholesale producer, those of us in this room, see
better prices; I doubt that seriously.
In the sheep industry, it didn't appear that when foreign
product was coming in and cutting our prices by 40 percent,
that the retail price ever really came down at the same time.
I really do view this subject today with mixed feelings.
Mergers are a fact of life and a necessity to survive in
today's economic environment. That is not necessarily a good
thing for those of us in primary production, particularly with
family farms.
On the other hand, we must do everything we can to survive,
and the world economy will dictate that production flows to the
most efficient. In that case, merging or getting bigger may be
a smart choice or perhaps even the only choice. I do not know
if the ultimate benefit does, in fact, flow to the consumer, as
I've said.
These economic forces that we are facing are very, very
strong. They will continue upon their present course.
The role of government is the thing that I think we need to
determine. There are certain things the government can do.
There are other things that government can't do. I think
monitoring; I think understanding the situation; I think
documenting; I think some of the ideas that have come out here
earlier in testimony. Jim Peterson gave, I thought, very good
testimony about transparency, about price reporting, about
problems with the grid. I think that these are areas that
government could get involved in.
Getting bigger is a fact with economic forces behind it
that I am not sure politics can be real effective dealing with.
They're very strong worldwide economic forces. We have to
determine where politics can be effective and what our farm
policy must be in this country. So I think focusing on some of
the things that we can do, and realizing that there are some
things that we can't do is an important consideration.
[The prepared statement of Mr. Hibbard follows:]
Prepared Statement of Chase T. Hibbard, President, Montana Wool Growers
Association
Mr. Chairman, members of the Committee, for the record I am Chase
Hibbard. I am a 4th generation cattle and sheep rancher from Helena,
Montana. Our ranch is located 40 miles, as the crow flies, Southwest of
Great Falls.
I am a State legislator having served four terms, I currently serve
as the President of the Montana Wool Growers Association which
represents about 2,000 Montana sheep producers. I also serve on the
Board of Directors of the American Sheep Industry Association.
Survival in animal agriculture is vital to the economic well being
of my family, the dozen or so people we employ, and thousands of other
Montanans. I have been the President of Sieben Live Stock Co., our
family corporation for the past 23 years. During that time span we have
seen $2.00 wool and $.50 wool, $.50 lambs and $1.00 lambs, $.45 calves
and $1.01 calves. Market fluctuations are a fact of life in this
business, always have been and probably always will be. Combined with
the other risks of weather, disease, predators, insects, and a labor
situation which is becoming increasingly difficult, this is a tough
business!
There are so many forces contributing to the precarious economic
situation we are in that it is difficult to focus upon any single area
or topic as the most significant factor. It is even difficult to assign
relative importance to the numerous forces at work.
In my opinion, probably one of the more significant problems
currently facing us stems from the ``free-trade-world-economy.'' Of
equal importance is the strength of the U.S. dollar which makes imports
cheap and exports expensive.
Under a ``free-trade-world-economy'' production flows to whomever
can produce the most economically and distribute their product, no
matter where they are located in the world. In Montana, and for that
matter most of the United States, production costs are high on a
worldwide comparative basis. Currently the strength of the U.S. dollar
is making imports cheap and exports expensive. This puts us in a very
noncompetitive situation. We have painfully experienced this in the
sheep business over the past couple of years as Australian and New
Zealand lambs have undercut our market price by over 40 percent.
I would like to focus on the sheep business which is a shadow of
its former self. Here in Montana our sheep numbers are down to under
300,000 head of breeding ewes. Approximately 5 years ago there were
nearly 550,000. Sheep numbers are down 25-35 percent nationwide in the
same time period. As previously discussed there are a number of reasons
why and it is difficult to point one's finger at any single specific
cause.
Today's subject matter is Mergers in the Agricultural Industry and
How They Ultimately Impact the Consumer. I view this topic with mixed
feelings. Mergers and acquisitions are a reality in today's economy.
Getting bigger and more efficient may be what it takes to survive.
From an agricultural perspective ``concentration'' in the
meatpacking industry has been a subject that has received much
attention. There is little doubt that concentration has occurred and
theory holds that you need a certain critical mass of competitive
concerns in order to have an efficient marketplace. The number of
processors has most likely dropped below that critical mass
requirement. The political problem that is presented is proving that
collusion exists. It seems as though there have been many attempts to
address collusion, but to my knowledge, it has yet to be proven. It may
never be proven, but the lack of competition definitely leads to a less
efficient marketplace, meaning less choices for us who market our
products, probably lower prices, and less competition may well result
in fewer choices and higher prices to consumers as well.
How mergers in the agricultural industry ultimately impact
consumers is a difficult call. On one hand, this same ``free-market-
world-economy'' that is making our business more difficult should, in
theory, be delivering products to the consumer at reduced prices. If it
is not, then there are some extra-ordinary profits being made somewhere
in the middle. The possibility arises that fewer competing firms
producing, processing, marketing, and delivering products could lead to
less-efficient competition and higher ultimate prices to the consumer.
I really do not know if these so-called efficiencies achieved
through merger pass on to the consumer. I doubt the primary wholesale
producer sees better prices, probably in fact receives poorer prices.
In the sheep industry, it did not appear that with foreign product
undercutting our market that prices ever came down much at the retail,
consumer level.
I really do view the subject of today's hearing with mixed
feelings. Mergers are a fact of life and a necessity to survive in
today's economic environment. That is not necessarily a good thing for
those of us in primary production particularly with family farms. On
the other hand we must do everything we can to survive and the world
economy will dictate that production flows to the most efficient. In
that case, merging or getting bigger may be a smart choice, or perhaps
even the only choice. I do not know if the ultimate benefit does in
fact flow to the consumer.
The economic forces at hand are strong ones. They will continue
upon their present course. Monitoring and vigilance by government may
be necessary in order to determine the ultimate impact upon consumers.
Thank you for your time and consideration.
Senator Burns. Thank you very much, Chase. We appreciate
your testimony.
We understand we have a representative here from
Representative Hill's office and also from Senator Baucus'
office sitting around here--there you go, way back there. You
can be noticed if you don't mind. There you go.
If you have anything you want, any testimony or anything
you want to offer at this hearing, why, we would sure make it
part of the record if you would want to do that.
I have a couple of questions, and I have a couple of
questions with regard to Mr. Peterson's testimony and also to
Mr. Hibbard, and all of you.
If we could tweak a law that would probably do more to help
you, what would it be? I will ask all of you to respond to
that. That is a producer group. I realize that Mr. Nelson is in
a different kind of a situation, but if you could change one
law or pass any one piece of legislation, and you had the power
to do so and get it on the President's desk, what would it be?
Then we will work from that.
I will just start--well, we will just start with you, Ken,
Ken Maki, what, as far as concentration and this kind of thing,
if you had the power to pass one law, basically what would it
say?
Mr. Maki. Well, I think there would be different things for
different commodities. But I can tell you one thing, I
understand cattle a little better than most anything else.
Formula pricing seems to me to be a real, real bubble. I
mean, I do not want to take my calves someplace and sell them
and not get my money for it until 6 months or 3 months or 9
months in the future, depending on what the price is going to
be. That trickles back to us producers and feeders and
everybody else.
Formula pricing, looks to me like it is the most contrary
thing to a freely competitive market that I have ever seen. How
we have gotten that instituted is kind of beyond me.
We heard yesterday about prying open foreign markets and
all that sort of thing. I think we have to pry open our own
market. You know, it looks to me like if those packers had to
bid on supply, it would be a lot better situation than if they
had a piece of paper that said this, so and so is going to sell
this through us, and the price is going to be determined 1 week
or 2 weeks prior to the sale, or some combination. I don't even
understand all that formula, but it just sounds to me like it
is really contrary to a competitive process, which is what we
have built this country on.
Senator Burns. Jim Peterson. Nothing like putting you right
in the stirrups, is there? You can thank me later.
Mr. Peterson. You know, with all due respect, Ken, I think
formula pricing is, the grid and the formula, I mean if you're
a rancher out there, and you think you got the best feeder
cattle in the country, are you going to get paid for them by
selling them on the average or feeding them in a feed yard
where they sell the whole show list at one price, and they mix
the Mexican corrientes in with the wonderful black cattle up
north, and you all get the same price? I mean, it is easy for
the manager to tell you, ah, you know, you got the top of the
market.
But, I don't see how you get paid for value if you don't
have some kind of value-based marketing system. I mean, why are
you going to go pay $4,000 for a bull and work on your seed
stock production to make a more quality and consistent product
and then sell it on the average? Particularly, when you don't
even negotiate on a pen-by-pen basis.
Now, I don't disagree that--I mean I said that the formula
right now, in my opinion, has a downward bias on the market,
but that doesn't mean the formula is bad. What I am saying is
there's no negotiated base price associated with that formula,
and the base price might be negotiated on the wrong things.
I mean, why don't we tie our base price to the retail price
or the 118 wholesale price, and then we'll corner the market,
and instead of us taking $61 for our cattle this spring, we get
70, based on the formula, and if you have quality cattle, you
get the 118 wholesale beef prices that the packer helped
establish. Then you can tie it to the formula, and if you have
higher quality cattle, you can also get that $12 a head average
better than the national average.
So, my concern is that we have lost the negotiated pricing
system. We have lost the transparency in the system. As Chase
Hibbard said, unless you can operate on a large enough volume
to negotiate, you can't compete.
A guy like--I'll use an example that most of you may have
heard of, Paul Engler, Cactus Feeders in Texas. I know Paul
personally. He sells every one of his cattle on formula, sells
them no other way.
He's not particularly happy with the formula, but it does
two things for him. One, he's big enough he can negotiate a
decent base price; two, he doesn't have to worry about selling
cattle every day. He knows he can get the cattle slaughtered.
The guy feeds, 400,000 or 500,000 cattle a year. So, getting
those cattle moved at the right time is important to him, so he
has got this agreement with IBP, they'll take the cattle
whenever they are ready on the formula.
Now, he's not--he will tell you personally he's not real
happy with the way it works, because the base pricing system
sometimes works against you.
So, Ken, I don't know that the formula is necessarily bad.
I personally think that in the industry, a little like Chase
Hibbard, I think the merger thing is going to happen because of
economics of scale. I think the grid and formula is going to
happen because the industry is moving that way so fast right
now, it's scary. A third of the kill is in it right now. I see
more and more of that happening. The problem is we don't--we
can't--we don't have transparency, No. 1, to find out what's
really happening, and because we can't find out what's
happening, we're all running around speculating and pointing
fingers as to who is the blame. As I said earlier, it's really
hard to fix something you can't measure.
Senator Burns. I always use the old, the old story about
volume and this type thing about two brothers from Montana
going to Mississippi buying watermelons. They haul them back to
Montana, buy them for 74 cents, and then haul them up here and
sell them for 73 cents. One looked at it and said we're not
making any money. He says, I know it, we got to get a bigger
truck. Sometimes that doesn't work.
Dave McClure, you're next.
Mr. McClure. Senator, you posed a difficult question.
I think we are all experiencing the pain of change, and we
are going to continue to have change in agricultural and a lot
of other industries too.
I guess if I had one bill that I thought was more important
than others, it would be that Congress and the agencies are
forced to a cost benefit analysis on everything they do.
There's good regulations that are needed, but as I
mentioned earlier, these regulations are forcing, in my
opinion, some of these consolidations, and they're forcing
costs on all the producers that I think in the past have
somewhat been ignored.
We continually try to get a higher return, a higher price
on our products to cover all these costs, and we should
continue to fight for that, but that is probably a pretty
narrow band where we can gain.
But the costs inherent because of regulations forced on us
are growing; they're ominous, and they also make us less
competitive in this global economy, and we are forced to endure
those costs when a lot of our competitors are not, and I think
that is a very real threat. If that continues, our consumers in
this country may be more reliant on imports than they are now,
and that's another scary thought.
But we have got to be competitive in this world market, and
as long as these costs are thrust on us, sometimes there isn't
a benefit there to match the cost, and that is of great
concern.
I think we see, for instance, EPA right now may be going
beyond the intent of Congress in enforcement of the Food
Quality Protection Act. It appears we're going to be losing
some products that maybe our competitors are going to continue
to have in the world market.
Like I say, in that area, and hopefully that way look
forward to what's going to happen in the future and not try to
solve problems that have already happened and are gone.
Senator Burns. Chase.
Mr. Hibbard. Thank you, Senator. I think I can make this
brief.
I think, first of all, I doubt the ability to stop or slow
down much the trend in mergers and consolidations. I think that
the worldwide economic forces are such that that's going to
happen.
Having said that, I think better price reporting and market
transparency is No. 1.
No. 2, country of origin labeling.
No. 3, I think that maybe it is time to revisit our farm
policy and take a look at the protectionism issue that is
pretty much out the door.
We are on the free world trade bandwagon, and we are seeing
the fallout of that here in Montana and elsewhere around the
country. Those of us who raise commodities are simply not
competitive. Perhaps that political barriers need to be looked
at again, particularly where our trading partners aren't
playing by the same rules that we are.
For instance, European unions restricting imports, which
makes our country a dumping ground. The European union
subsidizing their sheep producers to the extent of 20-some
dollars a ewe. We have a different situation here totally. So,
I guess those would be my priorities.
The last one is a difficult one. You know, the family farm
was big in this country. Preserving the family farm was big in
this country for years and years and years, and we have evolved
away from that now. We're out there competing, but we are not
competing on a level playing field.
Senator Burns. OK.
Mr. Kissinger.
Mr. Kissinger. Thanks, Senator. I just want to take a
little different tack.
As far as changing any laws, I am going to leave that up to
recommendations from the experts here.
But one thing that is obvious to me is enforcement of the
existing laws. We see that time and time again. It came out
yesterday at the World Trade Organization hearings that cattle
coming down from Canada, only 1 percent are in inspected. One
percent. They get the USDA grade on them, and, no, they look
good, good American beef, but they are from Canada.
You know, Ron and Alfred and Hank, they were up there,
remember these--how many hog trucks have we had come through,
and we were actually at the rally. We had a number of reefers
come through, back in an area and out of there in 5 minutes,
and yet they were supposedly inspected.
You know, again they mentioned yesterday, well, that was
due to a lack of resources; we just didn't have manpower and
resources. That may be true; I am not questioning that but, you
know, possibly as you in your position in the Appropriations
Committee, maybe some of these things can be targeted to try to
improve, try to get stronger enforcement.
On the antitrust, that is another issue. Again, they don't
have resources and so on. I think agricultural may be not a
high priority with people who deal with the antitrust issues.
But maybe through, again, appropriations or some of the
influence you have, that can begin to be targeted so we have a
fair playing field.
So with that, that is all I have.
Senator Burns. Steve, do you have a thought?
Mr. Bullock. Maybe one thought.
Senator Burns. Lawyers always do.
Mr. Bullock. That's a bad thing being at the end at the end
and hearing the thoughts of everyone else.
Senator Burns. That is right.
Mr. Bullock. A large chunk of ensuring a competitive market
is giving people information to act, by which market
transparency is critical.
Along with that, whereas I focus a lot on antitrust, a
chunk of it should be taking a look at what laws we already
have.
Section 202 of the Packers and Stockyard Act is a proactive
law. It's supposed to address trade and competition of these
market power entities at the very start. You're not supposed to
wait until the merger happens; you're supposed to say, what can
I do proactively to ensure healthy competition.
Maybe revisiting the Packers and Stockyard Act and also
seeing how it is implemented might be the first step.
Senator Burns. Of all the sections I will tell you that we
looked at, and with some suggested changes, and we are still
looking at that trying to find language, you know how difficult
that becomes, is Section 202, and that is where it boils down
to.
Anybody else have any other comments? I don't have any
other questions, but we want to hear from some of our people.
Yes?
Mr. Peterson. Can I make one more comment?
Senator Burns. Yeah, you can make more statements. You can
talk all day if you want to.
Mr. Peterson. I think the Committee vetoed that.
Three things I didn't get to, to answer your question,
three things. I think price reporting ought to be No. 1 on your
list. We have got to have the transparency.
I think the one thing you can do that might lead us to more
labeling of product is limiting the USDA grade and U.S.
product. I think that would be No. 2.
I know there's tremendous opposition to country of origin
labeling in Congress, and I've had this debate with myself, you
know, do we spend our money labeling their product, or do we
spend our money labeling our product?
We can produce the highest quality, safest, most abundant
supply of food of any country in the world. Why don't we take
advantage of that and label our product, develop some kind of
U.S. label and reserve it for U.S. producers so we can get paid
for what we do?
Third, this thing that Chase is talking about, trading, I
think we got to back up and take a fresh look at how we trade.
The only thing common in our trade right now with other
countries is the commodity itself. Everything else is
different. Currencies, environment, our societies, economies,
regulations, everything is different. The only thing that is
common in what we trade is the commodity, and it is lowering
the standard of living of our producers.
Senator Burns. OK.
Ken.
Mr. Maki. You know, I am sorry, Senator, I thought you
wanted something new and different.
We have been wrangling about price reporting and the
country of origin labeling for a long time. I'd have to agree
with these gentlemen here.
The only thing that I would say about price reporting is,
you can have price reporting, and you can have price reporting,
and whatever it is, it's got to be workable and timely. The
important thing is that we get that information to our
producers and to the public in a quick and timely manner.
I think as you look at it from the consumer's standpoint,
perhaps the consumer would say labeling is the most important.
I think that our consumers, just as everybody said here, Jim,
Chase, we have a relatively safe product probably 99\1/2\
percent of the time produced in this country. Our processors
and our standards are good.
I think that our consumers out there, for the most part,
would say, hey, if it's American made, and it was American
produced, they'll buy it. It might be a little bit higher, but
I think that they would go for it. So I believe the labeling
issue is pretty darned important as far as the consumer is
concerned.
As far as we producers, the price reporting is absolutely
essential.
I'm sorry, I thought you wanted me to come up with
something new and different.
Senator Burns. You did. You always do.
Before we can hear from our folks down here, and we sure
want to, all of us do, we will close this hearing as of right
now.
Just a reminder, that any questions that come to the
witnesses, answer those to the individual Senator, and the
Committee.
We will also leave the record open for 10 days. So the
formal part of these hearings are now closed.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
A P P E N D I X
----------
Prepared Statement of Joel I. Klein, Assistant Attorney General,
Antitrust Division, Department of Justice
introduction
The Department of Justice is pleased to be invited to submit for
the Committee's record this statement regarding the role of the federal
antitrust laws and the Department's Antitrust Division with regard to
protecting competition in the agricultural sector of our economy.
There have been a number of occasions recently in which
agricultural producers and others have expressed concern about how the
agricultural marketplace is functioning, about the levels of
concentration in agriculture generally, and about possible
antitcompetitive conduct in certain sectors. The Department takes these
concerns very seriously.
By any measure, the Department has spent a significant amount of
time, energy, and resources on agriculture issues in the recent past,
and has brought a number of significant enforcement actions.
This statement will briefly describe the situations that the
antitrust laws address, and then discuss a number of the enforcement
actions the Department has taken. The antitrust laws prohibit
conspiracies to deny market access or otherwise suppress competition.
They also prohibit the use of predatory and/or exclusionary conduct to
acquire or hold on to a monopoly in a market. And they prohibit mergers
that are likely to substantially lessen competition in a market.
The agriculture marketplace is undergoing significant change. There
are advances in technology, productivity, and in many sectors, a trend
toward consolidation. In the midst of these changes, the Department's
Antitrust Division has a narrow but important role. The antitrust laws
are based on the notion that competitive market forces should play the
primary role in determining the structure of our economy. The
Department's job is to stop the specific kinds of private-sector
conduct mentioned a minute ago from interfering with those market
forces.
The primary beneficiary of antitrust enforcement is the consumer,
who receives better quality, increased innovation, and lower prices
when competition is not interfered with. But antitrust enforcement also
benefits the producers and marketers who want to compete in supplying
products and services to consumers by enabling them to do so free from
anticompetitive interference. And the overall U.S. economy also
benefits, as the products and services desired by consumers are made
available in greater quantities through a better allocation of
resources, and at competitive market prices.
We are law enforcers, not regulators. We do not have the power to
restructure any industry, any market, or any company, or stop any
practice, except to prevent or cure specific violations of the
antitrust laws that we can prove in court. Our authority rests
ultimately on our ability to bring enforcement actions. And when we
bring an action, the court decides whether the antitrust laws are being
violated in the particular instance, and whether the remedy we are
seeking fits the violation.
The antitrust laws apply in the same way in every industry, with a
very few exceptions where their application is limited by specific
statute. A number of industries are also regulated by government
agencies under statutes that go beyond the antitrust laws to establish
additional, industry-specific regulatory requirements and standards.
For example, the meat-packing industry is regulated by USDA's Grain
Inspection, Packers and Stockyards Ation Administration.
While the antitrust laws play an important role in helping keep
markets competitive, they will never address all of the complex issues
facing American agriculture in this time of change. That is why the
government continues to focus on a broad range of agriculture policy
issues.
what the antitrust laws prohibit
As mentioned above, there are three different types of antitrust
violations. First, it is a violation of section 1 of the Sherman Act
for separate firms to agree among themselves not to compete with each
other, but instead to join forces against their consumers or their
suppliers. Second, it is a violation of section 2 of the Sherman Act
for a firm to monopolize or attempt to monopolize a market. Third, it
is a violation of section 7 of the Clayton Act for a firm to merge with
another firm or acquire its assets if to do so would be likely to
substantially lessen competition in any market. Following is a
description of each of these types of violations and of how we approach
each of them.
1. Collusion
The first type of antitrust violation, when firms that are holding
themselves out to the public as competing against each other instead
agree with each other to unreasonably restrain competition among
themselves, is often referred to as collusion. Collusion is a willful
subversion of the normal operation of free markets, and can result in
serious harm to consumers, suppliers, and the economy. It virtually
always results directly in inflated prices to consumers, or depressed
prices to suppliers, and in denial of choices in the marketplace;
indeed, that is its purpose. The most common types of collusion are
agreements to fix prices, agreements to allocate markets, and
agreements to boycott particular customers, suppliers, or competitors.
Price fixing can include agreeing on the specific price, or rigging
a specific bid, but it can also include agreeing to increase or depress
price levels, or agreeing to follow a formula that has the intended
effect of raising or depressing prices or price levels. Allocation of
markets can include agreeing to divide up geographic areas to avoid
competition, or agreeing to divide up customers or suppliers within an
area, or agreeing to divide up a sequence of bids. Group boycotts can
include any agreement among competitors that they will deal with their
customers or their suppliers only on particular terms, in order to
suppress competition.
This summary of course oversimplifies the full range of Section 1
violations. There are other kinds of such violations where the
anticompetitive intent and effect may be less clear-cut. But all
Section 1 violations share the same basic characteristic, that firms
who are supposed to be independent actors in the marketplace are
instead agreeing to join forces to restrain competition.
It is important to remember that with any of these forms of
collusion, proving a case requires evidence of an agreement between the
firms in question. It is not enough to show merely that two
agribusiness firms, for example, bid the same price for a commodity, or
that one tends to buy in one area and another tends to buy in another
area. What would concern us is if there are additional facts, such as
patterns of bids over time, or patterns of attendance at various sales
or auctions, that don't make competitive sense--that can't be explained
as part of normal competitive behavior. Needless to say, if we obtained
reliable evidence about two firms discussing with each other what price
they intend to bid or accept, or where they plan to focus their buying
or selling, we would definitely be concerned and look into it.
Among our collusion cases in the agriculture area are three that we
have brought in the recent past. The first one I'll mention is our
criminal prosecution against Archer Daniels Midland and others,
beginning in 1996, for participating in an international cartel
organized to suppress competition for lysine, an important livestock
and poultry feed additive. The cartel had inflated the price of this
important agricultural input by tens of millions of dollars during the
course of the conspiracy. ADM pled guilty, and was fined $100 million--
at the time the largest criminal antitrust fine in history, now the
third largest. Other participating corporations have also been
prosecuted and assessed multi-million-dollar fines. In addition, three
ADM executives were convicted for their personal roles in the cartel;
earlier this month, two of them were sentenced to serve 2 years in
prison and fined $350,000 a piece for their involvement, and the other
executive had 20 months added to a prison sentence he was already
serving for another offense.
The second collusion case is our prosecution of the Swiss
pharmaceutical giant, F. Hoffmann-La Roche Ltd., and a German firm,
BASF Aktiengesellschaft, for their roles in a worldwide conspiracy,
over the course of 9 years, to raise and fix prices and allocate market
shares for certain vitamins sold in the United States and elsewhere.
The conspiracy affected $5 billion in U.S. commerce, involving vitamins
used not only as nutritional supplements and food additives, but also
as additives in animal feed. On May 20 of this year, the two firms
agreed to plead guilty, with Hoffman-La Roche to pay a fine of $500
million and BASF to pay a fine of $225 million. These are the largest
and second largest antitrust fines in history--in fact, the $500
million fine is the largest criminal fine of any kind in history. A
former Hoffmann-La Roche executive also agreed to submit to U.S.
jurisdiction, to plead guilty to participating in the conspiracy and
lying to Justice Department investigators about it, and to serve a 4-
month prison term and pay a $100,000 fine. These prosecutions are part
of an ongoing investigation of the worldwide vitamin industry in which
there have been nine prosecutions to date.
The third collusion case is a much smaller case in monetary terms
than the first two; but it is an important one for agricultural
producers nonetheless. In December 1997, as the result of an
investigation conducted with valuable assistance from USDA, who was
also conducting its own investigation under the Packers and Stockyards
Act into some of the same conduct, the Department criminally prosecuted
two cattle buyers in Nebraska for bid-rigging in connection with the
procurement of cattle for a meat packer. Both individuals pled guilty
and were fined and ordered to make restitution to the victims.
There is an important exception to the prohibition against
agreements to restrain competition, found in the Capper-Volstead Act.
This law allows producers of agricultural commodities to form
processing and marketing cooperatives--in effect to engage in joint
selling at a price agreed to by the producer members of the co-op--
subject to certain limitations enforced in the first instance by USDA.
2. Monopolization or Attempt to Monopolize
The second type of antitrust violation, monopolization or attempt
to monopolize, is a violation of Section 2 of the Sherman Act. For
various reasons, this type of antitrust violation occurs less commonly
than collusion, but it is also a serious willful subversion of the free
marketplace. An example of monopolization or attempt to monopolize
would be a dominant company in the market attempting to drive its
competitors out of business by interfering with their ability to engage
in the business. This might be attempted by the clearly dominant firm
refusing to buy from producers who sell to any of its competitors, or
refusing to ship with transportation companies who ship for any of its
competitors, or refusing to sell to distributors or retailers who
handle the products of any of its competitors--if the dominant company
in question had enough market power that these refusals would have
anticompetitive effects. Monopolization does not require proof of an
agreement among two or more firms; one firm can illegally monopolize by
itself.
But it is important to understand that monopolization cannot be
proved just by showing that a firm has engaged in restrictive conduct.
The law also requires proof that the firm has a monopoly--and that
requires an extremely high market share all to itself--and that it
engaged in the restrictive conduct in order to acquire or maintain the
monopoly. Or, in the case of attempted monopolization, it must be
proved that the firm has a ``dangerous probability'' of acquiring a
monopoly as a result of the restrictive conduct. And to prove
``dangerous probability,'' the courts generally require, for starters,
that the firm involved in the restrictive conduct already have a quite
large market share--a 50-percent share for a single firm might not be
enough. And even a 60-to-70 percent market share might not be enough,
if other facts indicate that the restrictive conduct involved is
unlikely to succeed in creating a monopoly.
Just as important, Section 2 monopolization cannot be proved just
by showing that the market is highly concentrated. Under our antitrust
laws, a firm may lawfully have a monopoly--even 100 percent of the
market--as long as the firm has not acquired or maintained that
monopoly through the kind of restrictive conduct I described a minute
ago, but rather, in the words of Judge Learned Hand, ``by virtue of
superior skill, foresight and industry.''
So both elements--very high single-firm market share, plus conduct
to exclude or harm competition--must be proved. One or the other by
itself is not enough.
3. Mergers
The third type of antitrust violation, a merger or acquisition that
is likely to substantially lessen competition in a particular product
market and geographic market, has a different legal standard from the
other two in that it does not require proof that anticompetitive
conduct has already occurred. Here, the principal focus is not on the
conduct of the merging parties, but on whether the merger would change
the market structure to such a degree that competition would likely be
substantially lessened. The remedy we seek for a merger that violates
the Clayton Act is to sue to stop the merger, or to insist that it be
modified to remove the cause for antitrust concern.
Merger reviews require a careful analysis of the markets involved.
The Antitrust Division analyzes mergers pursuant to Horizontal Merger
Guidelines developed jointly by the Department of Justice and the
Federal Trade Commission. The analysis is aimed at determining whether
the merger is likely to create or increase market power, or to
facilitate the exercise of market power, in any market. Market power is
the ability of a firm to raise the price charged to customers--or to
lower the price paid to suppliers--a small but significant amount
without that move being defeated by counteractive competitive responses
by other competing firms moving in to take away those customers or
suppliers.
Before we get to that analytical step, however, we must first go
through the exercise of determining the scope of the product markets
and geographic markets that would be affected by the merger. This is an
essential first step in our analysis--until we know the size and shape
of the market, we cannot know how big any firm's market share is, for
example. The scope of a market is generally defined by the smallest
geographic area in which a hypothetical firm, assuming it faced no
competition for its product in that area, could make a small but
significant change in price stick. Usually, we are looking at that firm
as a seller, and determining the smallest area within which the firm's
customers would be unable to thwart the firm's inflated pricing by
going outside that area for their buying needs. But, as our Merger
Guidelines expressly note, we also look at the firm as a buyer, and
determine the smallest area in which sellers to the firm would be
unable to thwart the firm's depressed prices by selling to others
outside that area--that is, because it would be economically
impractical to travel or ship outside that area.
A decision as to the dimensions of this area can sometimes be
reached by examining recent buying and selling patterns in the
marketplace. But the decision can also depend on a variety of other,
more subtle factors, because the ultimate question is not how far the
buyers and sellers have traveled or shipped in the past, but how far
they could or would travel or ship in response to anticompetitive price
changes.
Once we have defined the market, we turn to the question of market
concentration and how it would be affected by the merger. There is no
automatic threshold of market concentration that will always result in
a determination that a merger would violate section 7 of the Clayton
Act. Other factors also play an important role in analyzing the impact
of the merger--such as other structural features of the market that
make anticompetitive effects more likely or less likely; and the ease
or difficulty of entry into the marketplace by new competitors who
could neutralize any anticompetitive potential. We would also consider
the impact of any demonstrable efficiency gains from the merger that
would demonstrably result in competitive benefits.
In the recent past, the Department has reviewed a number of
proposed mergers and acquisitions in the agricultural marketplace.
For example, in the biogenetics area, last year we investigated
Monsanto's acquisition of DeKalb Genetics Corporation. Both companies
were leaders in corn seed biotechnology, and owned patents that gave
them control over important technology. We expressed strong concerns
about how the merger would affect competition for seed, and to satisfy
our concerns, Monsanto spun off its claims to agrobacterium-mediated
transformation technology, a recently developed technology used to
introduce new traits into corn seed, such as insect resistance, to the
University of California at Berkeley. Monsanto also entered into
binding commitments to license its Holden's corn germplasm to over 150
seed companies that currently buy it from Monsarlto, so that they can
use it to create their own corn hybrids.
After investigating the proposed Cargill/Continental Grain merger
for several months, and earlier this month we challenged the merger as
originally proposed and filed a complaint and proposed consent decree
in court. To resolve our competitive concerns, Cargill and Continental
will divest a number of grain facilities throughout the Midwest and in
the West, as well as in the Texas Gulf. While this consent decree, if
approved by the court, will resolve the competitive problems, it is
still pending before the court under a Tunney Act proceeding in which
the court makes the final determination that the decree is in the
public interest. Because the case is still pending, there are limits to
what I can say now, but a fair bit about the case is already in the
public record in our filings thus far.
Cargill and Continental operate nationwide distribution networks
that annually move millions of tons of grain and soybeans to customers
throughout the U.S. and around the world. We looked at all the markets
that would be affected by the merger, and concluded that in a number of
them, competition would be . adversely affected if the assets of the
two firms were merged. In this case our concerns were focused on
competition among the two firms in the so-called ``upstream'' markets--
competition for the purchase of grain and soybeans from farmers and
other suppliers. The lessening of competition resulting from the merger
would have resulted in farmers being anticompetitively forced to accept
less money for their major crops than before the merger.
Among the required divestitures, we insisted on divestitures in
three different markets where both Cargill and Continental currently
operate competing port elevators, to preserve the competition that
currently exists there: (1) Seattle, where the elevators now compete to
purchase corn and soybeans from farmers in portions of Minnesota, North
Dakota, and South Dakota; (2) Stockton, California, where the elevators
now compete to purchase wheat and corn from farmers in central
California; and (3) Beaumont, Texas, where the elevators now compete to
purchase soybeans and wheat from farmers in east Texas and western
Louisiana. In addition to benefiting farmers and other suppliers in the
above-mentioned states--who can be said to be captive to the elevators
involved--the required divestitures may also benefit farmers and other
suppliers in Illinois, Iowa, Nebraska, Missouri, Kansas, Oklahoma,
Colorado, and New Mexico, who, while not necessarily captive to the
elevators involved, nevertheless rely on them as competitive
alternatives.
We are also requiring divestitures of river elevators on the
Mississippi River in East Dubuque, Illinois, and Caruthersville,
Missouri, and along the Illinois River between Morris and Chicago,
where the merger would have otherwise harmed competition for the
purchase of grain and soybeans from farmers in those areas.
In the case of the Illinois River divestitures, and an additional
required divestiture of a port elevator in Chicago, the merger would
also have anticompetitively concentrated ownership of delivery points
that have been authorized by the Chicago Board of Trade for settlement
of corn and soybean futures contracts. The delivery points would then
have been under the control of Cargill and one other firm, which would
have increased the risk that prices for CBOT corn and soybean futures
contracts could be manipulated. These required divestitures will
address this concern regarding adverse effects on competition in the
futures markets.
In addition, we are requiring divestiture of a rail terminal in
Troy, Ohio, and we are prohibiting Cargill from acquiring the rail
terminal facility in Salina, Kansas, that had formerly been operated by
Continental, and from acquiring the river elevator in Birds Point,
Missouri, in which Continental until recently had held a minority
interest, in order to protect competition for the purchase of grain and
soybeans in those areas.
And we are also requiring Cargill to enter into what is called a
``throughput agreement'' to make one-third of the loading capacity at
its Havana, Illinois, river elevator available for leasing to an
independent grain company, and are imposing restrictions on Cargill in
the event it seeks to enter into a throughput agreement with the
operator of the Seattle facility.
It should be noted that the Department received valuable assistance
in our review of the Cargill/Continental merger from the U.S.
Department of Agriculture, as well as the Commodity Futures Trading
Commission, and several State attorneys general.
We have also reviewed a number of mergers in the meatpacking area.
In 1993 and 1994, for example, we received reports that Cargill's large
meat-packing subsidiary Excel, the second largest steer/heifer packer
next to IBP, was looking into acquiring Beef America, at the time the
fifth largest steer/heifer packer. As a result of our concerns that
competition might be adversely affected by the increased concentration
in steer/heifer that would result from this merger, we opened an
investigation and began asking questions of Excel and others in the
marketplace. Excel never put forth a formal proposal, and we were
ultimately able to close our investigation.
Before concluding the discussion of merger enforcement, it is
important to mention railroad mergers, such as the merger approved in
1996 between Union Pacific and Southern Pacific. Because rail
transportation is one of the primary means of getting agricultural
produce to market, the competitive effects of these mergers are also of
great importance to the farming community. Unfortunately, we do not
have authority to review rail mergers in the ordinary fashion under the
antitrust laws.
Initially, Congress gave the authority to review rail mergers to
the Interstate Commerce Commission. When Congress abolished the ICC in
1995 and created the Surface Transportation Board to take over some of
the ICC's authority, we and others in the Ation Administration urged
Congress to turn over review of rail mergers--at least their
competitive implications--to the antitrust enforcement agencies. The
decision was made instead to leave that responsibility with the Surface
Transportation Board, and to give the Justice Department a more limited
advisory role. That is, we can make recommendations to the Board. The
Board is required to give our recommendations ``substantial weight,''
but is not required to follow them.
We recommended that the Board deny the Union Pacific/Southern
Pacific merger, because we were concerned that it would significantly
harm competition in numerous markets west and south of Chicago all the
way to the Pacific Ocean and the Gulf of Mexico. The Board approved the
merger. Many parties have continued to express competitive concerns
about the merger since then.
conclusion
The Antitrust Division takes seriously its responsibility to
protect the marketplace--including the agricultural marketplace--
against anticompetitive conduct and mergers that substantially lessen
competition. As this statement makes clear, the Division has a strong
record of acting in this important sector when the antitrust laws are
violated.
Thank you for the opportunity to present this statement for the
Committee's record.