<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:93985.wais]
S. Hrg. 108-478
MONOPSONY ISSUES IN AGRICULTURE: BUYING POWER OF PROCESSORS IN OUR
NATION'S AGRICULTURAL MARKETS
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2003
__________
Serial No. J-108-51
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
Bruce Artim, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Craig, Hon. Larry E., a U.S. Senator from the State of Idaho..... 1
prepared statement........................................... 116
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 9
prepared statement........................................... 123
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 2
prepared statement........................................... 125
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah,
prepared statement............................................. 138
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 6
prepared statement........................................... 140
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 5
prepared statement........................................... 142
WITNESSES
Bailey, DeeVon, Professor and Extension Economist, Department of
Economics, Utah State University, Logan, Utah.................. 20
Carstensen, Peter C., George Young-Bascom Professor of Law,
University of Wisconsin Law School, Madison, Wisconsin......... 25
Cotterill, Ronald W., Professor of Agricultural and Resource
Economics, University of Connecticut, Storrs, Connecticut...... 22
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa.......... 8
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division,
Department of Justice, Washington, D.C......................... 11
QUESTIONS AND ANSWERS
Responses of R. Hewitt Pate to questions submitted by Senators
Grassley and Leahy............................................. 34
SUBMISSIONS FOR THE RECORD
Alabama Contract Poultry Growers Association, American Farm
Bureau Federation, Campaign for Contract Agriculture, Consumer
Federation of America, Georgia Poultry Justice Alliance, Humane
Society of the United States, National Contract Poultry Growers
Association, National Farmers Union, North Carolina Contract
Poultry Growers Association, Organization for Competitive
Markets, Rural Advancement Foundation International-USA,
Sustainable Agriculture Coalition, United Poultry Growers
Association, joint letter...................................... 43
Bailey, DeeVon, Professor and Extension Economist, Department of
Economics, Utah State University, Logan, Utah, prepared
statement...................................................... 45
Butler, J. Dudley, Yazoo County, Mississippi, statement.......... 50
Carrington, Paul D., Chadwick Professor of Law, Duke University,
statement...................................................... 55
Carstensen, Peter C., George Young-Bascom Professor of Law,
University of Wisconsin Law School, Madison, Wisconsin,
prepared statement............................................. 58
Cotterill, Ronald W., Professor of Agricultural and Resource
Economics, University of Connecticut, Storrs, Connecticut,
prepared statement............................................. 84
Dobbs, Mabel, Western Organizationof Resource Councils, Billings,
Montana, statement............................................. 118
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared
statement...................................................... 128
Harl, Neil, Professor, Iowa State University, Ames, Iowa,
statement...................................................... 130
National Council of Farmer Cooperatives, Washington, D.C.,
statement...................................................... 145
Organization for Competitive Markets, Lincoln, Nebraska,
statement...................................................... 148
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division,
U.S. Department of Justice, Washington, D.C. prepared statement 154
Wellington, Robert D., Senior Vice-President for Economics,
Communications and Legislative Affairs, Agri-Mark Dairy
Cooperative, Lawrence, Massachusetts, statement................ 169
MONOPSONY ISSUES IN AGRICULTURE: BUYING POWER OF PROCESSORS IN OUR
NATION'S AGRICULTURAL MARKETS
----------
THURSDAY, OCTOBER 30, 2003
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 2:39 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Larry Craig
presiding.
Present: Senators Craig, Grassley, Specter, Leahy, Kohl,
and Feingold.
OPENING STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR FROM THE
STATE OF IDAHO
Senator Craig. The Committee on the Judiciary will be in
order.
We tackle and interesting and fascinating topic today:
Monopsony Issues in Agriculture: Buying Power of Processors in
our Nation's Agricultural Markets. Let me start by welcoming
our distinguished panel of witnesses here today to discuss an
issue that is very significant in American agriculture. We are
here to discuss the marketplace in which nearly 2 million U.S.
agricultural producers operate.
Those 2 million are directly responsible for feeding you,
me, and this country, and in many instances people all around
the world.
First, I think it is important to recognize that enhanced
and advanced communications systems and technologies have
heavily contributed to a more integrated world. Our economy
faces increasingly stronger global influences and market
forces. New economic relationships and the United States'
resources and leadership in building these relationships around
the globe have set the stage for the opportunities and the
challenges that our domestic industries now encounter.
In the agricultural industry, this is particularly true.
The agricultural sector is unique and involves very complex
economic models and relationships when compared to others. I
believe no other industry faces the same degree of uncertainty
and risk that those roughly two million producers and their
families encounter on a daily basis.
It is this uniqueness and attention to risk in our
agricultural industry that brings us here today. Agricultural
producers are desperately trying to operate in a marketplace
that demands low end-use prices, yet high quality through
increased efficiencies, and how to increase producer
profitability, although subjected to the status of a price
taker, not a price maker.
It is no secret that today's domestic market, especially in
the livestock and value-added arenas, has witnessed a
significant shift from supplying meat cuts for consumers
through farmer markets in the local town square, to shipping
livestock hundreds or even thousands miles away to the a large
packing and processing plant whose products eventually reach
millions.
With this in mind, it is important to note that within the
U.S., markets differ significantly by region. In the Northwest,
our producers must shift their crops or livestock through
limited means to markets that are few and far between. The
traditional sales yard is still prevalent, yet becoming very
rare. In contrast, areas such as the Midwest contain vastly
larger herds that supply a much greater number of processors
who may be just down the road from the farm.
Just recently one of only a few remaining packing plants in
my State closed; 272 people were immediately looking for new
jobs. Although this may be deemed a small operation by some
standards, it represents a larger issue that producers are
becoming increasingly aware of the importance that risk
mitigation plays in their operational plans.
Contractual arrangements with buyers are proving more
popular to combat risk, and I believe it is the responsibility
of those in Congress and in regulatory positions to ensure that
these arrangements are fair and not exploited.
Today, we will receive testimony from our panel that will
explore their actions and thoughts on this issue of fairness in
today's agricultural markets, and how the terms ``monopsony''
and ``monopoly'' adhere to this vital sector of our economy.
I hope the hearing will help shed some light on the
frustration that I and my colleagues have experienced most
recently in the 2002 farm bill, in sifting through all of these
complicated issues. Again, we welcome you and we look forward
to your testimony.
Before I turn to our witnesses, let me recognize one of my
colleagues on the Judiciary Committee, Senator Grassley.
STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you, Mr. Chairman. I appreciate
your providing an opportunity for this important discussion of
the negative impact of monopsonistic control and the impact it
can have on family farmers and rural America.
Monopsony is to buying as monopoly is to selling. When
family farmers have limited options to market their
commodities, they face potential monopsonistic conditions. For
decades, the Government has aggressively protected America's
consumers through the Sherman and Clayton Acts from
monopolistic activities. Unfortunately, the concept of
monopsonies has not seemingly drawn as much attention.
Today, I hope that we take this opportunity to focus on how
the Department of Justice attempts to identify monopsonistic
practices. While I believe Justice attempts in good faith to
remedy monopsonies when it finds a problem, I worry that the
calf has not found the creep when it comes to this issue.
I am concerned that the Department of Justice doesn't have
the agricultural specialists on board who understand the unique
marketing dynamics that farmers experience in their
relationship with industry. The Department of Justice can't
remedy the problem unless it understands the potential harm.
To the Department of Justice's credit, it has challenged or
limited agricultural and agribusiness mergers in the past due
to monopsonistic concerns. I know that Assistant Attorney
General Pate has laid out many examples in his testimony of the
Department of Justice's interest in keeping markets
competitive.
One example of the Department's commitment that Mr. Pate
did not describe is United States v. Rice Growers Association.
Justice tried this case in 1986 and challenged the purchase of
one milling firm buying another milling firm. The Department
found that within the regional market, the new entity would
control 60 percent of the rice purchased and that was found
unacceptable to the Department.
Clearly, DOJ has the authority to act. I am just not
certain that this Department of Justice, or for that matter any
Department of Justice in recent history has hired professionals
with the expertise and background to identify the actual
markets being affected.
For instance, 87 percent of all hogs are contract or
packer-owned pigs. That means that only 13 percent have the
potential to be open or spot market pigs for slaughter. Over 90
percent of the hog marketing contracts are based on the
composite spot market price to establish the base value. Many
hogs not bound to written contracts are sold under oral
formulas. The value of these types of oral agreements does not
necessarily track with spot market value. In addition, hogs
sold outside the western corn belt don't contribute
substantively to the mandatory price reporting data.
I have seen estimates that of the 13 percent of the hogs
deemed open market pigs for slaughter, only 3 to 5 percent
traded daily are actually legitimate spot market pigs. The 3-
to 5-percent figure sets the price daily for 90 percent of the
pigs that packers have under marketing contracts.
It should be easy to understand that as the actual spot
market thins out, if packers choose not to participate in the
spot market everyday, packers potentially will be able to
manipulate the spot market price and influence the worth of
marketing contracts. I feel strongly that we need to be on the
look-out for this type of manipulation of the marketplace.
Unfortunately, the potential for this type of manipulation
grew considerably when Smithfield, the world's largest vertical
integrator, acquired Farmland. Department of Justice staff
informed my office that the Justice Department did not believe
that this transaction met any threshold to justify challenging
the acquisition. Justice explained that there would still be
multiple purchasers in the western corn belt after this merger
took place.
I have tried to take a look at the packers participating in
the southern Minnesota, all of Iowa, South Dakota, and the
Nebraska region. Unless the Department of Justice believes that
a family farmer which produces 2,000 hogs per year, selling 40
per week, using a trailer pulled by a pickup can reasonably be
expected to deliver hogs up to 300 miles away from his farm, we
definitely have a problem.
On a related topic, I would be remiss if I did not take
this opportunity to voice concern not only for the spot
market's impact on contracts, but for the construction of
producer contracts. As the lead sponsor of the Fair Contracts
for Growers Act, S. 91, I am very concerned about the abuse of
arbitration clauses in take-it-or-leave-it non-negotiable
contracts such as those that are typical in the livestock and
poultry sectors.
Certainly, arbitration, if agreed to voluntarily by both
parties involved, can be a useful tool for resolving disputes.
But what we are now seeing in the livestock and poultry sectors
is that arbitration clauses are being forced on farmers not as
a legitimate alternative dispute mechanism, but as a mechanism
to prevent farmers from challenging the abusive actions of
large packers or integrators.
Farmers who are forced into arbitration proceedings are
rarely, if ever, successful. In large part, this is because the
process is stacked against them because arbitration does not
allow for the right of discovery. If a farmer is attempting to
prove that he has been treated unfairly or has been the victim
of fraud, all the data that would allow him to argue his case
is completely controlled by the company being accused of
misdeeds. Without access to that data through the normal
discovery process, it is impossible for a farmer or any grower
to prove their case.
Lastly, arbitration proceedings are not part of the public
record. By forcing growers to sign away their rights to resolve
disputes in court, livestock and poultry companies are able to
limit public knowledge about any abusive practices.
So it is easy to understand why large, vertically-
integrated livestock and poultry companies might see the
benefits of including mandatory arbitration clauses in their
contracts. Unfortunately, we understand that farmers are often
put in a position that they either have to sign the contract
presented to them or face bankruptcy.
The Chairman of this Committee was the lead sponsor of a
bill in the last Congress which addressed concerns about the
abuse of mandatory arbitration clauses in contracts between
auto manufacturers and car dealerships. That legislation, which
is nearly identical in structure to the bill that Senator
Feingold and I have introduced, is now law.
Our legislation would simply specify that both parties in a
livestock or poultry contract must agree in writing to pursue
arbitration after the dispute arises to assure that farmers
choose the arbitration voluntarily. It is my hope that we will
be comfortable affording farmers the same protections against
abusive contract terms that we have provided for the car
dealers of America.
In conclusion, I thank the Chairman for this hearing. I
look forward to working with both the Committee and the
Department of Justice to further explore this issue. I would
also like to submit for the record the testimony of Dr. Neil
Harl, from Iowa State University, whom we invited to testify
today but had a conflict.
Senator Craig. Thank you very much, Senator Grassley. Of
course, that will become part of the record.
Now, let me turn to the Ranking Member of the full
Committee, Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you very much, Mr. Chairman. I do want
to thank the Committee for holding this hearing examining the
buying power of processors in our Nation's agricultural
markets.
I am glad to see our witnesses here. Dr. Cotterill, I am
glad to have you here. He is Professor of Agricultural and
Resource Economics at the University of Connecticut. I have
worked with him a lot on daily matters over the years.
Monopsony is not an easy word to say, as we have all found,
each one of us, as we have scrambled with that. What it means,
though, is pretty easy to understand. It is the increasing
power of large, concentrated agricultural processing firms and
their ability to lower the prices received by farmers who
supply them with milk and meat and grain. This trend is having
a tremendous impact on the lives and livelihoods of American
farmers in virtually every region of this country.
In my own State of Vermont, agriculture is a vital
industry, and dairy is the most significant part of that. It
accounts for roughly three-quarters of our State's net farm
income. For decades, dairy farmers seemed immune from the
consequences of restructuring because, through their
cooperatives, they also served as milk processors for the local
or regional markets. National markets didn't exist.
That has changed dramatically over the past few years. As a
result, our farmers are not getting a fair share of the retail
price of milk, but giant corporate processors are raking in
anticompetitive profits at the same time they are raising
prices to consumers. The price goes down to the producer, the
price goes up to the consumers, and these conglomerates get the
money.
My major concern in New England relates to Dean Foods,
Inc., which merged with Suiza Foods in 2001 and formed the
large milk processing company, not in the region, but in the
world. I was really surprised and disappointed when the Justice
Department's Antitrust Division approved this merger because it
meant that the new company would control almost 70 percent of
all the milk supply throughout all of New England.
They achieved this by buying up local dairies and then, of
course, immediately closing them down. Actually, Dean Foods
controls more than 30 percent of all milk production
nationally, in addition to a lot of other alliances they have.
I have been concerned about last year's proposed merger
between H.B. Hood and National Dairy Holdings. I led a
bipartisan group of 10 Senators in asking the Justice
Department's Antitrust Division to investigate the merger. It
would allow one company, Dairy Farmers of America, to control
more than 90 percent of the New England fluid milk supply.
Fortunately, because the Antitrust Division actually looked at
it, H.B. Hood withdrew its original plan, in May, and it is now
being restructured.
The opportunity for dairy farmers to market their milk
independently is practically gone. Today, two cooperatives
control access to most of the Nation's processing facilities.
They are using this access to expand further. It is not good
for daily farmers, it is not good for other market
participants, it is not good for consumers.
In a competitive market, if input costs fall, competition
tends to drive consumer prices lower, and that makes sure that
manufacturers don't get windfall profits. But that doesn't work
in the dairy industry. Retail prices for fluid milk are
virtually unchanged this year, even though prices that farmers
receive are off 50 cents per gallon.
I think the Justice Department should still investigate why
lower farm prices for milk have not been passed on to
consumers. I have asked the General Accounting Office to
investigate this disparity between farm and retail milk prices.
It is not just important for Vermont; it is important for the
daily industry country-wide to establish greater protections
against market abuses by huge agribusinesses.
I think the American people and the farmers who produce
America's agricultural goods deserve strong watch-dogging by
their Government. If we have strong watch dogs here, it works,
and it is going to help the market opportunities for America's
farmers and ranchers. It is also going to protect farmers and
ranchers against those who have such enormous power to just
overcome anything they might do.
Mr. Chairman, I have a much longer statement and I would
ask to put it in the record.
Senator Craig. Without objection, your full statement will
become a part of the record. Thank you very much for that.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Senator Craig. Let me turn to another member of our
Committee, Senator Herb Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Mr. Chairman. Thank you for
holding this hearing to examine the troubling trend of
increased concentration in the agricultural industry.
The alarming transformation of rural America continues.
Increased concentration on the buyer side has dramatically
shrunk the market for farmers and driven many out of business.
It is clear that now more than ever, we need vigorous and
aggressive enforcement of our antitrust laws to prevent
concentration that harms competition in this marketplace.
We need to seriously examine whether our antitrust laws are
being properly enforced to prevent excessive agricultural
consolidation. Antitrust enforcement should not permit the
creation of dominant market power by a buyer of agricultural
products any more than it would permit the creation of a
monopoly by a seller. In addition, antitrust regulators should
be sensitive to the effects of consolidation in regional
markets, as many agricultural products are perishable.
We must ensure that the Justice Department devotes
sufficient resources and staff to the agricultural sector. Our
farmers and ranchers, less than 2 percent of our population,
produce the most abundant, wholesome, and by far the cheapest
supply of food in the world. Yet, prices fall for farmers as
they find fewer and fewer buyers for their products. And
despite this, prices stagnate or even rise for our consumers.
This trend is evident across commodities. From 1993 to
2001, the share of hogs sold through contractual arrangements
increased from 10 percent to 72 percent. In poultry, nearly 100
percent of the market depends on contractual arrangements.
Of greater concern to me, the dairy industry is
experiencing the effects of processor concentration. Dairy
producers in Wisconsin and around the country recently emerged
from a 20-month period where milk prices hit a 25-year low. The
U.S. fluid milk market is a $23 billion-a-year industry. The
combination if Suiza and Dairy Farmers of America now controls
approximately 70 percent of the fluid milk processing and
distribution in 13 northeastern States.
This concentration in buying power at the processor and
retail level has not led to lower prices for consumers. In
fact, 2 months also when the national average price paid to
farmers for fluid milk declined by 13 percent, the average
national retail price paid by consumers at the grocery store
declined by only 5.5 percent.
Rural America is in crisis. Their way of life and economy,
countless communities, and too many farm families are
struggling because there is a dwindling free market for
American agriculture's superior product. We need to revisit the
way our antitrust laws are being applied to agriculture. We
need to discard the outmoded doctrine that buying power is
treated with a lower degree of scrutiny than the aggregation of
selling power.
Dominant buying power among food processors ought not to be
permitted any more than a monopoly among food retailers.
Dominant regional market shares should be permitted no more
than dominant shares in national markets.
We need to ensure that the Justice Department enforcement
tools are adequate to do their very important job. We were
pleased several years ago when the Justice Department appointed
at our request a special counsel responsible for competition in
agriculture. However, serious questions have been raised as to
whether the Justice Department has devoted sufficient resources
to this task. We need to scrutinize the Antitrust Division to
ensure that it is devoting sufficient resources and manpower to
competition in agriculture.
We are pleased to welcome our witnesses, and for me
particularly Peter Carstensen, from the University of Wisconsin
Law School. I have always been impressed with Mr. Carstensen's
work on this issue, and so we all look forward to a productive
hearing.
Thank you, Mr. Chairman.
Senator Craig. Senator, thank you very much.
Now, let us turn to our first panel and our first panelist,
Senator Tom Harkin, of course, Ranking Member of the full
Senate Ag Committee. We know that these are issues awfully
important in his home State.
Senator please proceed.
STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM THE STATE OF
IOWA
Senator Harkin. Thank you very much, Mr. Chairman, and
thank you for the opportunity to be here and for holding this
hearing. I, first of all, want to associate myself with the
statements I heard from Senator Grassley, Senator Leahy and
Senator Kohl. I think they are right on the mark on this, and
perhaps some of the things I will say will be repetition, but
maybe just with a little different slant.
The consolidation horizontally and vertically in the
processing and retail sectors of our food industry is a real
problem facing rural America. We sometimes forget that the goal
of antitrust policy was to protect small firms, like
independent farmers, that sell their goods. As Senator Kohl
pointed out, it is not just the buyers, but also the sellers
that need to be protected when they deal with an
anticompetitive and consolidated market.
As ranking member, as you point out, Mr. Chairman, of the
Agriculture Committee, I am too familiar with the numbers.
Eighty percent of steer and heifer slaughter is controlled by
four firms. Soon, 64 percent of all hog slaughter will be
controlled by 4 firms. You have heard a couple of people speak
about the dairy industry and what is happening in certain parts
of our country in the dairy industry.
Well, just as these industries have become more
horizontally consolidated, they have also increased the use of
vertical arrangements. Hog packers now have 80 to 90 percent of
their supply tied up in some type of a vertical arrangement.
These are just a few examples of the increased horizontal
consolidation and vertical integration in agriculture.
The essential problem with consolidation and vertical
integration, when taken too far, is that such trends reduce
choice and efficiency in the marketplace. The lack of choice
leads to unequal bargaining power in business relationships.
With unequal market power, the more dominant firm will always
take advantage of the more vulnerable party by squeezing price,
shifting liabilities, or demanding certain terms without paying
an associated price.
Again, as Senator Kohl pointed out, Congress enacted the
Sherman and Clayton Acts not only to protect consumers from
sellers who have too much power, but also to protect sellers
from buyers who have too much power.
One of the most disturbing news that we have seen out our
way is the recent acquisition of Farmland Foods by Smithfield--
again, just another example of what we are talking about here.
Many of us wrote letters and signed on to letters to the
Attorney General expressing grave reservations about Smithfield
acquiring Farmland. But the Department seemed to ignore the
concerns of independent producers and they let the deal go
through untouched.
Of course, Smithfield's acquisition of Farmland will
strengthen its leverage over family pork producers and
represents even more concentration and vertical integration in
the already rapidly consolidated pork processing industry.
Smithfield's version of hog production in which it owns all
of the hogs and reaps all of the entrepreneurial profit does
not bode well for the future of the rural Midwest. Smithfield
has a history of shutting down plants that it buys. Yet, even
if the plants remain open, the market would still lose a buyer
and become even more concentrated. But despite Smithfield's
past actions and the potential degree of control they would
hold over the sector, the Department of Justice allowed the
acquisition to go through untouched.
As Ranking Member of the Ag Committee, I realize the job of
addressing competition problems in agriculture does not lie
solely with your Committee. The Ag Committee has jurisdiction
over the Packers and Stockyards Act, the Agricultural Fair
Practices Act, and the Perishable Agricultural Commodities Act.
Again, all of these laws are designed to protect producers
from unfair trade practices or help producers gain bargaining
power through cooperatives. In fact, one of the reasons I
wanted to testify today, Mr. Chairman, was to invite more
cooperation between our two committees to work together to
protect farmers against unfair and anticompetitive conduct.
In conclusion, I want to thank you for convening this very
important hearing. This may not make the front page of the New
York Times. It may not be the headline on the CBS Evening News,
but in terms of the number of people that are being affected by
this horizontal consolidation and vertical integration in
agriculture, it probably dwarfs anything the news is going to
cover tonight, or tomorrow on the front page.
Whether they realize it or not, this ripples through the
food chain. It ripples through the food markets, through the
grocery stores, and right down to the consumer level. So that
is why the business you are about is important for the free
market, and it is important for our producers as well as our
consumers.
Thank you very much, Mr. Chairman.
Senator Craig. Senator Harkin, thank you very much for that
statement.
Senator Feingold, we have allowed opening statements by all
of our colleagues today. So if you so have, please proceed.
STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Feingold. Thank you, Mr. Chairman. That is very
kind of you.
I appreciate your holding this hearing to shed light on an
important issue for farmers and their families. I must say I am
awfully pleased to be with this group of Senators, including
Senator Harkin, all of whom have shown enormous leadership in
this area.
I appreciate the opportunity to briefly share my views on
the power of buyers in our agricultural markets. Increased
consolidation and market concentration are, without question, a
very significant concern for producers throughout the Nation.
As I travel throughout my home State of Wisconsin, these issues
are raised constantly by farmers and growers.
Monopsony power is a serious concern because this power can
so easily be abused. When there is only one buyer of a
commodity, farmers fear that the price that they receive and
the terms of the transaction will be unfairly biased against
them. Farmers are rightfully troubled by inadequate market
access, price discrimination against the small independent
producer, and, of course, the loss of negotiating power for the
men and women who actually produce the product.
I am pleased to be an original cosponsor of the Fair
Contracts for Growers Act of 2003, and I have been delighted to
work with Senator Grassley on this issue. It addresses one
unfair result--monopsony power in this industry. It is designed
to provide greater fairness in the arbitration process relating
to livestock and poultry contracts.
I believe that arbitration can be an effective and
appropriate method to resolve disputes between farmers and
those who purchase their products, but only when both parties
voluntarily participate. Many farmers, however, due to their
disadvantaged economic position, are forced to sign contracts
presented to them by large processing firms that include
mandatory arbitration clauses.
There is no negotiation between the farmer and the
processor in these instances. Farmers must accept the contract
as written, waiving their constitutional right to have their
disputes under the contract decided by a trial by jury.
I would like to submit a letter for the record, Mr.
Chairman, from numerous farm and consumer organizations, as
well as advocates for animal protection in rural communities,
expressing their support for the Fair Contracts for Growers
Act.
Senator Craig. Without objection.
Senator Feingold. Thank you, Mr. Chairman.
The Senate and this Committee have both demonstrated strong
bipartisan support for rectifying the injustices of mandatory
arbitration. During the debate on the farm bill in the last
Congress, I offered an amendment with Senator Grassley to
prohibit the use of mandatory arbitration clauses in livestock
and poultry contracts. Our amendment passed the Senate by a
vote of 63 to 31, but it was dropped in conference.
This Committee has supported similar arbitration measures
in the past, such as the auto dealer arbitration bill that the
Chairman worked to enact in the 107th Congress. The Fair
Contracts for Growers Act addresses only one piece of this
complex business relationship in agricultural markets that are
becoming increasingly concentrated. The growing concentration
of agricultural buyers raises serious questions about the
Department of Justice's enforcement of existing laws, as well
as the adequacy of those laws to ensure a fair, open, and
equitable market.
Again, I thank the Chairman for letting me speak.
Senator Craig. Thank you very much, Senator.
Now, let us turn to our second panelist and ask him, if
you, Mr. Pate, to please come to the table.
Our second panelist today is R. Hewitt Pate, the Assistant
Attorney General for Antitrust. Mr. Pate became the Assistant
Attorney General for Antitrust this past June, but served as an
Acting Assistant Attorney General from November 23, 2002, until
his confirmation by the Senate.
My guess is that some of our colleagues might be, and have
already been a bit critical of actions by or failure to act by
the Office of the Attorney General on certain issues. So we are
anxious to hear from you, Hewitt, as it relates to the work
that is underway in the Justice Department on these critical
issues.
STATEMENT OF R. HEWITT PATE, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.
Mr. Pate. Thank you very much, Mr. Chairman and members of
the Committee. I would start by saying that I welcome the
scrutiny. In our system of Government, that is how we improve
our public institutions, and so I appreciate the opportunity to
appear before this Committee today.
I have a longer written statement, but I would like to
begin with a briefer statement, if I may.
Senator Craig. Your full statement will be a part of the
record. Thank you.
Mr. Pate. Thank you, Mr. Chairman.
The agricultural marketplace, as many of you have
mentioned, is undergoing significant change--international
challenges, technological innovation, and new forms of business
relationships. In the midst of these changes, farmers are
rightly concerned about whether agricultural markets are
remaining competitive. We take these concerns very seriously.
We know that competition at all levels in the production
process leads to better quality, more innovation, and
competitive prices. Enforcement of the antitrust laws can
benefit farmers as purchasers of goods and services that allow
them to grow crops and raise livestock, just as it also
protects consumers of the crops that they raise and sell.
We have been very active in enforcing the antitrust laws in
the agricultural sector. We have also undertaken a special
outreach effort, meeting with producers and producer groups in
Washington and around the country to listen to their concerns
and to improve everyone's understanding of the role of the
antitrust laws.
This afternoon's hearing focuses on monopsony, and I think
it is fair to say that, more than some other industries,
agriculture has a structure that makes so-called monopsony
concerns more likely to arise. That is because the industry is
characterized by many smaller producers selling to fewer and
larger processors.
We are sensitive to this and we look closely at so-called
monopsony concerns in enforcement. Monopsony is the mirror
image of monopoly, but, of course, on the buying side rather
than the selling side. This is an antitrust concern because if
market power is created that enables a buyer to reduce the
quantity it buys in order to force down the per-unit price it
pays, and if that depresses producer incentives and brings
output down below the competitive level, then society is
deprived of the benefits of the full amount of production that
should take place in a competitive economy.
The competitive harm to suppliers thus can lead directly to
competitive harm for consumers. So focusing on promoting
competition goes hand in hand with our taking enforcement
action in a monopsony case when the facts warrant.
As you all well know, we bring three types of antitrust
enforcement actions typically. Under Section 1, we both
criminally and civilly prevent combinations and collusion that
damage competition. We bring actions under our monopolization
statute, Section 2. And finally, of course, under Section 7 of
the Clayton Act, we are responsible for merger enforcement and
for preventing mergers that substantially lessen competition.
We have been active under each of these headings. In our
criminal enforcement program, we have taken action in a number
of cases that have resulted in savings to farmers in the case
of feed additives, herbicides, and otherwise, where they have
been the victim of price-fixing and illegal cartel activity.
Likewise, on the criminal side, a few years back we have
prosecuted cattle buyers, where they have been guilty of bid-
rigging in the purchase of cattle.
In terms of merger enforcement, we have active now a case
called Southern Belle, in Kentucky, in the milk industry. This
was a case which actually fell below the Hart-Scott-Rodino
thresholds and has closed, but nonetheless we are engaged in
litigation there.
As has been mentioned in previous remarks this afternoon,
the NDH/Hood dairy merger was withdrawn during the Department's
scrutiny of that merger. We have taken efforts to be more
transparent with parties about our concerns as we go through
the course of an investigation. In that case, that appeared to
result in a transaction being withdrawn. It has been modified
and a different transaction is under review now. That process
is ongoing.
Likewise, the Cargill/Continental case and the Suiza/Dean
case were mentioned earlier. In Cargill/Continental, we
explicitly recognized the need to protect producers from
monopsony concerns. And in Suiza/Dean, while the transaction
was not stopped outright, we demanded significant divestitures
in that transaction to protect competition.
So we have been active throughout this market, throughout
the tools at our disposal to try to protect competition, and I
look forward to answering your questions about our work this
afternoon.
Thank you.
Senator Craig. Hewitt, thank you very much for your
testimony and for being here.
Let me now turn to my colleague, Senator Grassley, for an
opening round.
Senator Grassley. Mr. Pate, I would like to start by
stating once again that I think that you have statutory
authority to pursue monopsonistic activities. My concern is
that the Department of Justice has not established specific
guidelines or brought on enough expertise to properly address
that issue.
This isn't to say that the Department of Justice is doing a
worse job than any past Department of Justice. So, in fairness,
I haven't been happy with Departments of Justice on this issue
of agribusiness through several administrations.
Does the Department of Justice have specific authority to
determine the competitive impact of vertical integration in
agriculture on farmers?
Mr. Pate. There is no question that we have the ability,
and we do in specific mergers look at vertical concerns. There
is no question that we have authority to look at monopsony, as
well as monopoly. We did that explicitly in the Cargill/
Continental case. That was part of the Suiza/Dean inquiry I
mentioned. It was part of what we were looking at in NDH/Hood.
So the answer to both of those is yes.
Senator Grassley. Do you follow specific guidelines that
you have in writing to measure?
Mr. Pate. Our horizontal merger guidelines, for example,
are constructed around the more typical situation of seller
side power and monopoly. Monopsony is the mirror image of that.
So the same considerations that would apply on the monopoly
side apply in analyzing monopsony.
That is not to say the cases are in every event the same.
As I have discussed, I agree with some of the comments made
earlier that agricultural markets can be different than other
markets. We look case by case at every transaction, but
consistent with the guidelines we have on the monopoly side,
when we look at monopsony questions.
Senator Grassley. You referred to Cargill/Continental. In
that merger, the Department of Justice required partial
divestiture. Has the Department of Justice performed any
analysis to determine whether that divestiture has preserved
competition?
Mr. Pate. Typically, we do not do retrospective
examinations of markets, except that when we face future
transactions or enforcement actions, then we get the
opportunity to look back in that context. But it is not
generally part of what we do to conduct studies.
We do have two sections within the Department who stay
abreast of agricultural issues and are specifically responsible
for them, and they do keep up in date in terms of market trends
in those areas. So I am sure that attorneys within those
sections have some of the information of the type you are
talking about.
Senator Grassley. Did the Department of Justice study hog-
buying practices by packers and the impact of those practices
on competition before approving the largest pork integrator
merger in U.S. history?
Mr. Pate. If you are referring to the Smithfield/Farmland
merger--
Senator Grassley. Yes.
Mr. Pate. --I was recused from that case. I did not
participate in it, so I can't tell you directly about the
nature of that investigation. Before coming to the hearing
today, I learned that the Department sent to Attorney General
Miller, in Iowa, describing its activities.
On that basis, I can tell you that certainly the answer is
yes, and that as would be the case in any case that we examine,
we would look at producers, consumers, the companies that
operate in that market, and determine what the market facts
were in the case.
Senator Grassley. Eighty-seven percent of all hogs are
contracted or packer-owned; 13 percent are deemed open-market.
Those are statistics I used in my opening remarks. In practice,
then, as I have previously said, 3 to 5 percent of the hogs
traded set the national price, and that surely happens in the
Midwest.
Ninety percent of the hog marketing contracts are tied to a
composite average of the spot market for compensation. Many
spot-market hogs are sold under oral formulas, and open-market
hogs sold outside the western corn belt don't contribute to
price-setting. This leaves the remaining pool of spot-market
hogs very limited. Yet, those pigs set the price for all hogs
tied to marketing contracts throughout the country.
The western corn belt market is at its core made in Iowa,
Minnesota, South Dakota, and Nebraska. This is where those 3 to
5 percent of the true spot market hogs are located. When the
Department of Justice allows dominant integrators to command
the southern Minnesota-northern Iowa markets, you give
integrators the opportunity to limit spot market purchasing and
prices. Spot markets are easier to manipulate than higher-
volume markets. That is just the plain fact.
So my question is does the Department of Justice recognize
the power integrators have in thin spot markets and that the
western corn belt is the dominant price-setting region for hogs
in the United States?
Mr. Pate. I read with interest some of the testimony on
these points that Professor Carstensen submitted. There is no
question that it is correct to observe that a more thinly
traded market is less likely to establish a competitive market
price than one in which there are more participants.
The antitrust laws in our reviews don't go generally to the
question of whether an auction or an open sale process, on the
one hand, or contracting on the other is to be, as a general
matter, as preferred form of contracting. When we do a merger
analysis, the question we are asking is whether the merger
itself is likely to lead to a decrease in competition. But we
would look at the question of the effect on both auction
markets and contracted purchasers when we do that.
Senator Grassley. I would have two questions in writing,
two questions to follow up on my first two questions, and then
I have one question I did not ask. So I will submit those.
Senator Craig. Senator, thank you. We will submit questions
in writing. Senator Leahy also has questions that he will
submit in writing to all of our panelists.
We have a vote on. I am going to turn to Senator Specter to
make any opening comments and offer any questions he might
have. I am going to leave for the vote. If you would recess the
Committee at the conclusion of your thoughts and questions,
that way we can be back and keep it going, and honor some
reasonable time to our third panelists, also.
Thank you.
Senator Specter [presiding.] Well, thank you very much, Mr.
Chairman, and thank you, Mr. Pate, for the job which you are
doing.
Senator Grassley made a comment about his evaluation of the
Department of Justice. He has been active in evaluating the
Department of Justice for many years. I recall the first
Attorney General that Senator Grassley worked with was William
French Smith, and Senator Grassley had some substantial
disagreements with Attorney General William French Smith.
One day at a social event at the Department, the Attorney
General turned to me and said, why are you so critical of me?
Senator Grassley. He was obviously getting us mixed up.
Senator Specter. What did you say?
Senator Grassley. He was obviously getting us mixed up.
Senator Specter. Can you imagine such a blight on Senator
Grassley to be confused with me?
[Laughter.]
Senator Specter. After the hearings on Justice Thomas, I
heard many reports.
What were those, Senator Grassley?
Senator Grassley. Those reports were why was I so mean to
Anita Hill, and I never asked her one question. They were
getting me mixed up with you.
Senator Specter. You can see what a terrible situation he
has had for 23 years to have to sit next to me on the Judiciary
Committee.
Senator Grassley. That is why I am leaving now.
[Laughter.]
Senator Specter. So I advise you, Mr. Pate, to be very
wary, very wary of Senator Grassley even when he is gone.
Mr. Pate, I am glad that we are having this hearing on
monopsony. That is a subject matter which is a word almost
never, never used, but one of great importance. I am very much
concerned about the impact on dairy farmers. As we have seen in
Pennsylvania, the price of milk at the store goes up and the
price of milk to the farmer goes down. The fluctuations have
been very extensive, sometimes more than $16 a hundredweight,
and then in a short period of time, less than $10 a
hundredweight.
We have had a series of hearings on trying to understand
why it is that the farmer gets a lower price and the grocer
gets a higher price simultaneously. It may be that monopsony is
the answer, that a single buyer or a limited number of buyers
are able to deal with many purchasers to exert, in effect,
monopoly power which drives down the price to the producers.
Do you have any thoughts on that subject?
Mr. Pate. Well, again, it varies from case to case. It
could be the case that there is a monopsony problem on the
purchase of raw materials side, but no problem on the consumer
side of the market because there is vigorous competition on the
selling side.
The reverse could be true, or there could be problems of
market power on both sides of the transaction. That could be
true in the dairy or other industries. So that would be
something we would evaluate case by case when we are reviewing
a transaction.
Senator Specter. There is substantial competition in the
marketplace for sellers of milk. There may not be for buyers of
milk. I am glad to hear your agreement that the Department of
Justice has full power to deal with monopsony, and I think
there really needs to be a very, very vigorous pursuit of that
line.
We are still struggling with the problem of what is
happening in Pennsylvania and we are in the process of
preparing legislation which would tie the price of milk to the
cost of production. We face a very serious problem about having
the small milk producer going out of business, and at the
current rate we may have an greater problem with the small
dairy producers. So the activities of the Department of Justice
could be very, very helpful.
I recollect your Department's intervention with the matter
of a small company in St. Mary's. It wasn't milk; it was a
manufacturer. But the Department of Justice can have a
tremendous impact. Just to show an interest and to seek an
inquiry in an investigation can be very, very helpful.
As Senator Craig said, we are in the middle of a vote and I
am going to have to depart momentarily to make the vote. We
have 15 minutes and a 5-minute overlap. We have a very, very
busy schedule today trying to finish up the business of the
Senate and I am going to try to return, but I am not sure that
I can. Mike Oscar, my deputy, is here and we will be paying
very close attention to what your Department does on this
important subject.
I have been advised that Senator Kohl has some questions
for you, Mr. Pate. So we would appreciate it if you would
remain. Senator Kohl should not be too long in returning.
Mr. Pate. Thank you, Senator.
Senator Specter. The Committee will stand in recess for a
few moments.
[The Committee stood in recess from 3:29 p.m. to 3:39 p.m.]
Senator Craig [presiding.] The Committee will reconvene.
Thank you all very much for your patience.
Let me turn to my colleague, Senator Kohl.
Senator Kohl. Thank you, Senator Craig.
Mr. Pate, as we have been saying, traditional antitrust
doctrine gives less scrutiny to buyers gaining dominant market
positions than to sellers gaining dominant positions via
monopolies. This is because monopsonies have the potential to
result in lower prices to consumers.
In the agricultural sector, we have seen in recent years
tremendous buying power gained by food processors, resulting in
depressed prices and substantial economic losses to farmers. In
fact, as we have said, the top 4 beef packers now control 81
percent of the market, the top 4 pork processors control 59
percent 9of the market, and the top 4 poultry processors
control 50 percent of the market. All of these percentages are
going up considerably.
In light of this consolidation, shouldn't we now treat
monopsony in agriculture with the same scrutiny that we give to
monopolies? Shouldn't we be particularly concerned about buyers
gaining dominant market positions with respect to agricultural
goods, Mr. Pate?
Mr. Pate. We are particularly concerned about it. I think
it is not fair to say that the law has established that there
should be less scrutiny, but simply that there have been fewer
cases where this comes up. We are more used to dealing with
cases where the alleged harm is on the side of sales, but we
equally do look for monopsony problems.
I think there is some comment today that is repeated that
it has been established that monopsony can produce
anticompetitive harms at lower levels of concentration than
monopoly. While I think that is a claim that is asserted, it is
not one that has been studied by economists and backed up, but
is one that should be looked at. And if it could be proven that
that is true--I know, for example, Senator Kohl, you have been
interested in this possibility in the group purchasing area in
the health care field.
This is something that I think we need to look at and
determine whether it is the case and then tailor our
enforcement efforts accordingly. But we do look at monopsony
concerns. As you say, we do have to be concerned that we not
act in situations where we are preventing lower prices and
better products to consumers. But the concerns I am hearing
here today are about situations where the monopsony side is
causing losses to the producers, but yet that isn't passed
through.
Senator Kohl. Well, it has been pretty well demonstrated
now that over the course of many, many months, for example,
milk prices have been at record lows, or world-record lows, and
there was nothing even comparable reflected at the retail level
in prices to consumers. I don't think there is any question
about that occurring and with respect to what has obviously
become a demonstrated consolidation of cooperatives and
providing farmers with virtually no one to sell to except a
single co-op.
How much more studying do you need to do before you--I am
not trying to be disrespectful, but when do you make a
conclusion that this is not the right way in which we should be
going and then try and find a remedy, which I would be the
first to agree is not easy?
Mr. Pate. Well, in particular cases we don't find that hard
at all. That is why, while there may be disagreement as to
whether our divestiture was the correct solution, in Suiza/Dean
we took aggressive action to require divestiture, why in the
face of divestiture the NDH/Hood transaction was withdrawn.
That is why we are taking action in the Southern Belle case.
That is why we took action in Cargill/Continental.
As to generally solving that problem--and I know reference
was made to legislation that would peg retail prices to
percentages or to multiples of the raw milk price. That is
something that is mentioned in Mr. Cotterill's statement as New
York legislation that has proposed that. That type of direct
price regulation and market outcome-dictating solution is not
one that the antitrust laws are involved with.
So case by case, we are going to be there enforcing. Can
antitrust law address every non-antitrust structuring of the
market that some policymakers might think is appropriate? No,
that is not what it is intended to do.
Senator Kohl. I must say I still have this concern that
when all is said and done and another year goes by or 2 years
go by, in spite of this tremendous consolidation that is
occurring and continues to occur in, for instance, the beef
packing industry and milk processing, and hogs and poultry,
there will not be--and I hope I am wrong--sufficient action on
the part of your Department.
We were pleased when several years ago the Antitrust
Division appointed a special counsel for agriculture that we
had requested. It is important that a senior staff member be
responsible for supervising and directing the division's
enforcement efforts, but aggressive enforcement in this sector
requires much more than just the supervision of one senior
official. What is important is that the Antitrust Division
devote sufficient resources and manpower to monitor and
investigate competition in the agricultural sector.
Could you please tell us the amount of current resources
both in terms of funds expended and staff employed on
competition in the agricultural sector, and has this changed
significantly over, say, the last 5 years?
Mr. Pate. I can give you a sense of that. In terms of
budget breakdown, I don't have a dollar figure in terms of
hours spent. I can tell you that we have two sections in which
we have substantial attorneys devoted to agricultural
enforcement.
We have a transportation, energy, and agriculture section
that deals with agriculture matters. In our Lit I section, we
have a number of attorneys who are specifically focused on the
dairy industry. These cases often are pretty intense. In Suiza/
Dean, for example, in addition, we had 8 economists and 13
lawyers working on that case while it was open. So at any given
time, we may have many tens of attorneys and economists working
on agricultural matters. It depends on what is active at the
division.
Mr. Ross, as you mentioned, coordinates that. Agriculture
is the only area that has a specific special counsel assigned
to it at the division. I do not think, based on what I know,
that there has been a significant change in resources over a 5-
year period. I would say that there has been an increase in the
attention paid to it. I think Mr. Ross' presence there is a
part of that that is constructive.
I hope that is helpful in answering your question.
Senator Kohl. Some in the agricultural industry have argued
that the Department of Agriculture should have a greater role
with respect to examining consolidation in the agriculture
industry. In other industries, the Justice Department sometimes
gives advice to the department that regulates that industry.
For example, when the FCC is considering whether to allow a
local phone company to offer long-distance service, the Justice
Department gives the FCC advice on whether the local phone
company has opened its facilities to competition.
Mr. Pate, how does the Justice Department make use of the
Department of Agriculture's expertise when considering
agricultural mergers? Are there more steps that you might take
to ensure that USDA has a role in providing Justice with its
expertise and views regarding your review of transactions in
agriculture?
Mr. Pate. Senator, that is a good question. We have a
memorandum of understanding between the Justice Department and
the USDA in terms of our need to cooperate on mergers and other
matters. We make use of that in every case.
I know even in the Smithfield matter, on which I know there
is a good deal of concern, I noticed that the letter to
Attorney General Miller specifically notes that we consulted
and got input from the Agriculture Department there.
I think comparing it to the telecom industry or others, I
am not sure that the situation calls for any sort of specific
statutory assignment. I think it is something we should pay
attention to. Since I came on board, we have scheduled and put
in place a meeting with the front offices of USDA and the
Antitrust Division to try to share information on competition
issues in agriculture, agricultural issues that affect
competition and our mission. So that is something we do readily
and I think need to continue to do and do more of.
Senator Kohl. Thank you, Mr. Chairman.
Senator Craig. Herb, thank you very much for those very
thoughtful questions.
I have one question only. There are others I will submit
for the record for the sake of time so we can get our third
panel up. We are in active business over on the floor at the
moment and I think the plan a series of additional amendments.
So we will try to expedite as much as possible.
Attorney General Pate, I have to admit that the very word
``monopsony'' threatens to give me a headache, in at least
attempting to understand it. I think that Senator Kohl was
pursuing this in a variety of ways through his questions, but
how difficult, or easy for that matter, is it for you and your
staff to assess the threat that monopsony behavior possesses in
the marketplace? Is there a relatively easy formula that the
myriad of your economists and attorneys look at?
Mr. Pate. I think there is not an easy formula. As some
have mentioned here this afternoon, we have somewhat less
experience with it. I have got a Webster's unabridged
dictionary in my office and I looked up ``monopsony'' before
coming over to the hearing and it wasn't in there--the first
word I have ever failed to find. Now, this isn't a new
dictionary, but the point I am making is that we have had less
experience with it. It is something that our economists have
less experience with.
As I said, though, in many cases it would be the mirror
image of monopoly, to which we have written guidelines and more
experience. But even in those cases, we don't have ready-fit
guidelines. We have to take each case on its own bottom and
look at the market facts.
Even in the context of something such as our HHI numbers,
they are not a cut-out formula that decides cases. So I don't
think it is necessarily something that is more difficult. It is
something we do have less experience with over time.
Senator Craig. Well, we thank you very much for your
presence here today. As I say, there will be a series of
questions coming your way so that we can have a complete and
full record and we will appreciate your responding to them, and
your staff. Thank you very much.
Mr. Pate. Thank you, Senator.
[The prepared statement of Mr. Pate appears as a submission
for the record.]
Senator Craig. Now, let us turn to our third panel today,
consisting of three distinguished professors, and maybe they
will be able to shed light on the why Webster's failed to put
this in at least the edition of the dictionary that Mr. Pate
has.
We will hear from Dr. DeeVon Bailey, who is a professor and
extension economist at Utah State University. I understand, Dr.
Bailey, you live in the Cash Valley, which is a greater
extension of southern Idaho.
Mr. Bailey. Well, we don't look at it that way.
Senator Craig. We will let you respond to that in your
testimony.
Also, we have with us Dr. Ron Cotterill, who is a Professor
of Agricultural and Resource Economics at the University of
Connecticut. Last, but certainly not least, we will hear from
Professor Peter Carstensen, who is George H. Young-Bascom
Professor of Law at the University of Wisconsin, in Madison.
Gentlemen, again, thank you. Dr. Bailey, please proceed.
STATEMENT OF DEEVON BAILEY, PROFESSOR AND EXTENSION ECONOMIST,
DEPARTMENT OF ECONOMICS, UTAH STATE UNIVERSITY, LOGAN, UTAH
Mr. Bailey. Thank you, Mr. Chairman. If you think
``monopsony'' is a difficult word, actually the correct term is
more ``oligopsony,'' which indicates that there are a few
buyers, not just one.
Senator Craig. I just learned ``monopsony.'' Let's stay
with that, all right?
Mr. Bailey. Indeed, I am from Utah and I am a professor and
extension economist in the Department of Economics at Utah
State University. I grew up in the small farming community of
Paradise, Utah, which is in the Cash Valley, certainly one of
the most beautiful places on Earth.
Senator Craig. We judge that by the flow of the Bear River.
Mr. Bailey. Yes.
Senator Craig. It flows out of Idaho, through the Cash
Valley, into the Great Salt Lake. So we do expect and
understand that it is an extension of the greater State of
Idaho. Thank you.
Mr. Bailey. I will not argue with you on that point,
Senator.
I did grow up working on my family's farm and ranch, and I
managed our family's cattle ranch for 2 years following my
uncle's death in a farming accident. I love the cattle
business, but I also know firsthand the inherent business risk
associated with working in that business. I believe I also
understand the concerns producers have about the changing
structure of U.S. agriculture, especially in regard to packer
concentration.
In 1999, a colleague, Lynn Hunnicutt, and I entered into a
cooperative research agreement with USDA, GIPSA. This agreement
gave us access to a confidential data set which reported all of
the individual transactions for 4 beef packers in a single
major beef production area of the country over a 15-month
period during the mid-1990's. The data included information on
packer purchases from over 300 feedlots during the study
period. The purpose of our research was to examine the effect
of transactions costs on the stability of packer-feedlot
relationships.
In a competitive cash market, both packers and feedlot
operators should theoretically have choices about when and with
whom transactions take place. If relationships within cash
markets are found to be rigid--that is that market participants
tend to have exclusive relationships with each other over
time--then several possible economic reasons might explain this
behavior.
One possible explanation for rigid exclusive business
relationships might be that packers simply exercise control
over feedlots by somehow dictating the terms under which
transactions take place. Another possible explanation for
exclusivity is that all feedlots offer about the same price for
cattle of the same quality, but that some feedlots and packers
simply are able to conduct business at a lower cost than they
would if they dealt with other feedlots and packers. In other
words, exclusivity may benefit both packers and feedlot
operators because transactions costs are minimized by doing so.
The final possibility is that exclusivity expresses itself
because one packer simply consistently offers a higher price to
a feedlot operator for his or her cattle, and as a result the
feedlot consistently sells to that packer. Economic theory
suggests, however, that if large firms compete vigorously with
each other that their market shares will be unstable.
We used a spatial statistic in our research and we
conducted two tests. Our first test was less restrictive than
the second and found that, depending on the definition for our
spatial statistic, the majority of feedlots, between 59 to 86
percent, sold primarily to just one packer or primary buyer.
A few feedlots had two primary buyers, but almost none of
the feedlots had three primary buyers.
Our second test determined if feedlots tended to sell all
of their cattle only to primary buyers. We broke the data into
two-week time periods, which is a typical planning horizon
between when cattle are purchased and eventually processed, to
determine if feedlot operators tended to switch between packers
from time to time.
We found that when feedlot operators sold cattle, they
almost always sold all of their cattle to their primary buyers.
For example, for all transactions both cash and contract during
the study period, feedlots sold only to their primary buyers 80
percent of the time. This means that if the feedlot operator
offered cattle for sale during 10 of the two-week periods, he
or she sold cattle on the average to the primary buyer or their
primary buyers in 8 of those 10 periods.
Most feedlots sold only to their primary buyers in all
cases, since the median percentage of periods when transactions
were only with the primary customers was 100 percent. This
suggests that feedlots did little switching from their primary
buyers during the study period, and indicates that exclusive
and very stable relationships existed between feedlots and
packers during this 15-month period.
We tested the reasons for why exclusive, stable
relationships existed between these feedlots and packers using
regression analysis. We found that the level of previous
dealings between a feedlot and a packer significantly
influenced the proportion of cattle the feedlot operators sold
to that same packer in the current time period.
Also, downward adjustments in the proportion of cattle sold
by a feedlot to an individual packer were larger than upward
adjustments, but were done only infrequently, actually in only
about 5 percent of the possible cases. This suggests that once
a business relationship has been established between a feedlot
and a packer that that relationship is more likely to continue
in the future than it would if no previous relationship
existed.
It also suggests that feedlots frequently make incremental
upward adjustments in the proportion of cattle they sell to a
primary buyer, but that downward adjustments are made
infrequently. Our results indicate that previous proportions
used as a proxy for all transactions costs and the presence of
a contracting relationship between feedlot and packer all
influence the proportion of sales between the feedlot and
packer.
Other proxies for transactions costs, such as feedlot size
and market volume, were not shown to have a statistically
significant influence on the proportion of sales from a feedlot
to a packer. Unfortunately, we had only information about
successful bids for cattle and not all the bids that were
placed on cattle. As a result, we could test for adjustments in
the proportion sold only by using the average price packers
paid for a base type of cattle, and the base was choice yield
grade 3 steers.
Although the sign for the test was positive, as expected,
indicating that as a packer with a higher price was present
that some adjustment was made, the test could not yield a
reliable conclusion, since the parameter estimate was not
statistically significant.
The results of our analysis suggest that relationships
between packers and feedlots can be understood at least in part
through transaction costs. Consequently, these relationships
may be mutually beneficial to both packers and feedlots.
Perhaps the most important finding of our research is the fact
that it is necessary to incorporate transaction costs into
economic models that are looking at this industry.
Thank you.
[The prepared statement of Mr. Bailey appears as a
submission for the record.]
Senator Craig. Doctor, thank you very much.
Now, let us turn to Dr. Cotterill.
STATEMENT OF RONALD W. COTTERILL, PROFESSOR OF AGRICULTURAL AND
RESOURCE ECONOMICS, UNIVERSITY OF CONNECTICUT, STORRS,
CONNECTICUT
Mr. Cotterill. Well, Mr. Chairman, my coauthors, Adam
Rabinowitz and Li Tian, who are with me here in the room, and I
would like to thank the Committee for the opportunity to share
our research with you today.
Milk prices are cyclical, but recently we have seen an
extended 20-month milk price depression. Moreover, dairy
farmers in the Northeast have been the victims of what I will
term a pincer movement in policy during that period.
The first pincer is that Federal milk market orders have
been relaxed to allow competitive market forces to set fluid
milk prices. On the face of it, this sounds positive. But the
second pincer has been that mergers have transformed the
region's processing and retailing markets so that we no longer
have competitive market forces. Stop and Shop, the region's
leading supermarket chain, is now a dominant firm in most local
retail markets in southern New England. Dean Foods is now our
dominant fluid milk processor.
Antitrust enforcement has been active, as we have heard
today. However, it has clearly been inadequate. I know the
track record on a firsthand basis because I have been involved
as economic expert for the region's State attorneys general in
two of these key enforcement actions and several others in the
greater Northeast. We have tried, and failed, to stem the rise
to dominance in both sectors. Subsequently, there has been an
increase in market power, a subject that I now turn to.
Figure 5 in our written testimony summarizes our findings
on milk channel pricing in New England. In June 2003, farmers
received $1.03 per gallon for raw milk bottled. Processors
collected an additional $.60 for the wholesale price of milk.
So the wholesale price for milk delivered into supermarket
coolers was $1.63 per gallon.
Now, the region's top four retailers charge more than $3.07
for that milk. This means they captured $1.45 per gallon for
in-store cost and profits. Our research at Pennsylvania State
and the University of Maine indicate that store handling costs
are, at most, $.40 per gallon in these large supermarkets. So
that means their bottom-line profits are $1.00 per gallon or
more. That is after all costs are accounted for.
Based on similar repeated surveys, we conclude that during
the farm milk price depression, New England supermarket chains'
bottom-line profits per gallon were equal to or higher than the
price that farmers actually received for that very same milk.
Now, think about that for a moment. The bottom-line net
profits at the supermarket level are higher than the price that
the farmer receives for his labor and all his inputs and his
effort to sell that milk to the processor. We submit that this
is economically inefficient milk pricing, as well as unfair
milk pricing by almost any standard of fairness.
The source of this excessive retail margin during the milk
price depression in the Northeast was primarily low farm milk
prices, not higher retail prices, and I will have more to say
on that in a moment. Large supermarket chains now deal from a
position of power when negotiating wholesale milk prices.
Processors thus have to deal in a similar fashion with farmers
and their cooperatives. Consequently, farm milk prices in the
Northeast are lower than they would be in a competitive market
channel.
How low? Well, if you look at July, Northeast dairy farmers
received at the mailbox $11.63 per hundredweight. In Wisconsin,
which by the admission of the economists at the University of
Wisconsin is an effectively competitive raw milk market,
farmers received $12.26 per hundredweight in July.
Now, let's think of spatial markets in milk for a moment.
If, in fact, the Northeast milk market were competitive, milk
prices there would be higher, not lower, than those in
Wisconsin. They should be higher by at least the amount of the
cost to transport milk or milk products from Wisconsin to the
Northeast. And I repeat milk prices in the Northeast were
lower, not higher, than in the supply basin of the upper
Midwest.
Milk prices in the Northeast, absent the exercise of market
power against the region's farmers, could very well be $14 per
hundredweight or higher at the farm level. Our analysis also
suggests that if the Northeast becomes milk-deficient and must
haul milk from the Midwest, Northeast consumers will pay higher
prices than they would from an indigenous milk industry.
But what can we do about this? Policy options include the
following. I will give the standard shibboleth of more vigorous
antitrust enforcement, especially against the currently active
Hood/NDH merger. That is a horizontal merger with the Crowley
plants in Albany, New York, and Concord, New Hampshire. These
plants compete with Hood and others in New England. It should
simply be stopped. End of case. Simply don't allow it.
A second approach would be a strengthening of the Federal
milk market orders by elevating the Class I differential in
monopsonistic markets to protect farmers from low prices. After
all, one of the original reasons for establishing milk market
orders was to protect farmers from monopsonistic pricing by
channel firms. I think we have forgotten that over the last 10
years in our agricultural policy area.
Alternatively, States in the Northeast must consider
policies that address monopsonistic pricing. Effectively, we
are beginning to give up on the Federal solution. At the
University of Connecticut, we have developed a price collar
policy that can lower consumer prices and elevate farm prices
without imposing price ceilings or explicit price controls.
Price collars change the incentive structure of the market
channel. Profit-maximizing behavior leads to prices that
eliminate most of the excessive channel profit margin. However,
firms still earn profits. It is not confiscatory of basic
profitability.
Price collars also raise farm prices and lower consumer
prices during milk price depressions such as the one we have
recently experienced. In the current environment where farm
prices are relatively high, they really would not be binding on
the farm side, but they would be binding, as the New York price
gouging law is on the consumer side.
Finally, I would suggest a couple of more general
observations on this area. Public empirical research by
university economists is shrinking up because we simply do not
have access to the relevant economic data. The Justice
Department gets such data in merger investigations, but often
it is confidential and they can't reveal it and they can't
publish research on what they see.
At the University of Connecticut, over the last 10 years we
have spent over $200,000 buying scanner data by hook and crook
from the Information Resources, Inc. company. I have quietly
talked with one person or another over those years and
basically bought the data with no constraints.
Recently, IRI has finally shut the door on me, after being
burned three times, and now they have negotiated a very
explicit policy toward universities. The University of
Wisconsin recently bought scanner data. They can't reveal the
name of the market that the data is for, they can't reveal the
name of the firm that the data is for, and they can't even
reveal the name of the brand that the data are for. They also
have to get approval from IRI for the publishing of their
research results. I would submit that this constraint on access
to data by public economists, in fact, is a serious problem.
Finally, I would say that in antitrust policy there is a
serious gap between merger enforcement and Sherman Act
enforcement. Any merger that raises prices is illegal,
basically, if we are talking about a monopoly, or if it lowers
prices if it is a monopsony. And we often apply that, but
people get through the slats.
The Sherman Act monopolization standard is so far removed
from what we see in this consciously parallel pricing by
oligopolists and oligopsonists that, in fact, we really can't
get at these companies with the current antitrust laws. So we
need to address either tighter merger enforcement or a
rethinking of the underlying laws, or we have to go to external
regulation rather than antitrust in some of these market areas.
That concludes my testimony.
[The prepared statement of Mr. Cotterill appears as a
submission for the record.]
Senator Craig. Doctor, thank you very much.
We have about 5 minutes left in a vote, so I am going to
once again--I am sorry, Professor--recess the Committee. I will
hustle, vote, and be right back.
Mr. Carstensen. I picked a late plane to go home on
tonight.
Senator Craig. You are very fortunate.
Thank you.
[The Committee stood in recess from 4:10 p.m. to 4:27 p.m.]
Senator Craig. The Committee will reconvene. Thank you all
again for your patience.
Let us turn to Professor Peter Carstensen, from the
University of Wisconsin at Madison. Thank you.
STATEMENT OF PETER C. CARSTENSEN, GEORGE H. YOUNG-BASCOM
PROFESSOR OF LAW, UNIVERSITY OF WISCONSIN LAW SCHOOL, MADISON,
WISCONSIN
Mr. Carstensen. Thank you, Senator. The advantage of the
break was that my name tag has now been correctly spelled, so
there was some benefit from that.
I am honored to be asked to offer my views on the problems
confronting farmers and ranchers in selling their products. The
focus of this hearing is on the monopsonistic character of
those markets and the potential for law, both antitrust law and
market-specific regulation, to restore open and competitive
markets. I would like to summarize my fairly extensive written
statement in about six points, if I may.
First, farmers are poorly served by the existing market
structures and practices. They confront excessive concentration
in agricultural product markets that create strong inducements
to engage in unfair and discriminatory practices.
Second, there is clear evidence of abuse of the resulting
buying power, manipulation of public market prices to drive
down the private transactional prices, direct exploitation of
sellers by low prices, discrimination that denies equal access
to the market, and imposition of other unfair and exploitative
conditions such as compulsory arbitration.
Third, I think the harder problem which we have been
talking about today is how to restore fair, open, equitable,
and accessible markets. If there are unconcentrated markets,
there is a strong tendency to achieve those kinds of methods
naturally through the market process. Where they lack those
inherent tendencies, where there is concentration, where there
is unequal informational power, then we have the problem in the
market. But law can play a very important role in reducing the
capacity to engage in strategic conduct and restore the balance
between the parties. This is market facilitation; it is not
replacement of the market. We have two legal systems that are
relevant here--antitrust law and market facilitation-type
regulation.
My fourth point: Antitrust law should and can make an
important contribution. However, I think antitrust enforcers
have failed in two respects. First, and most importantly, they
do not appreciate the differences between monopsonistic buying
power issues and more familiar seller power issues.
We heard the Assistant Attorney General start off by saying
that monopsony is the mirror image of monopoly. You will notice
that after the first recess when he came back, he began to
qualify that statement and acknowledged that maybe there were
some differences and they needed to be studied more. It is an
important recognition on his part.
Secondly, they need to develop relevant enforcement
policies that focus on the problems of monopsonistic power. The
failure to do this, I think, has resulted in a great weakening
of the potential for antitrust enforcement.
I suggest that there are four things that this Committee
should focus on in terms of antitrust enforcement policy and
law: first, the need to develop express buyer power guidelines
for both merger and restraint of trade analysis. I have
elaborated on some of the theoretical bases for that kind of
separate focus, separate analysis, because it is not a mirror
image.
Secondly, as a number of you have emphasized, we need more
active enforcement of our current law against mergers and
conduct creating anticompetitive risks--the Farmland/Smithfield
transaction. We have got areas of recurring collusion. We have
got areas of monopoly power that are known to the Justice
Department. My reaction to some of the Assistant Attorney
General's comments is, in summary, listening is not enough.
They have the resources, they have the capacity. They need to
be out doing active investigation.
Third, we need greater transparency concerning the
decisions to enforce or not to enforce. Today, I learned a
little bit more about why they might not have taken action in
Farmland. They have never made a public statement about that. A
little bit more about what they were trying to do in Suiza-
Dean--they have never made anything more than the most
generalized kinds of statements about that transaction.
I am very pleased with what I understand to be the proposal
from Senator Kohl and Senator DeWine on various antitrust
reforms that focus in on strengthening the Tunney Act, another
place which will compel some greater transparency and
disclosure. I think that is a very important proposal.
Finally, I think that we really need to reconsider the
judicially imposed limit on those who indirectly are injured by
antitrust violations having the ability to bring lawsuits.
Specifically, Wisconsin farmers were the victims of price
manipulation in the cheese market, but they were only
indirectly injured. They had no remedy under Federal law and
they were unable to get remedy under State law.
Nonetheless, all this said, antitrust law has inherent
limits. I think that is the best way to put it. We need to have
other sources of legal control. We have some now in the Packers
and Stockyards Act and the Agricultural Fair Practices Act.
These are not very well-developed areas of law. Worse, the
Secretary of Agriculture under both political parties, I must
say, has failed to use the power to make rules and regulations
that could have facilitated fair and open practices at least in
some markets, especially livestock markets.
In my paper, I have suggested that there is an idealized
kind of elaborate statutory system that ought to facilitate
agricultural markets. Realistically, I think there are two
presently pending proposals that deserve your attention and
support.
Senators Grassley and Feingold--and they have already
referenced this in their statements--have S. 91 that would
prohibit arbitration clauses in livestock supply contracts. The
biggest problem is it (S. 91) doesn't apply in any other
agricultural contract.
Senator Enzi and others have proposed S. 1044 that would
impose market-facilitating regulation on the use of supply
contracts, again limited to livestock markets. It should be
much more general. If we are going to have forward-looking
contracts, they need to be subject to a legal regime.
In sum, monopsony power in agriculture is a growing threat
to the operation of agricultural product markets. It is vital
that the law be used both to limit the growth of this power and
to regulate its use. Both consumers and producers will be
better off if both antitrust law and market-specific regulation
are directed at the problems that have arisen in this area.
It is my hope that members of this Committee will use their
influence both to bring about legislative change and to insist
on more active and effective enforcement of the existing laws
that address these problems.
Thank you.
[The prepared statement of Mr. Carstensen appears as a
submission for the record.]
Senator Craig. Professor, thank you very much for that
testimony.
Senator Kohl, questions of the panel?
Senator Kohl. I think your testimony in all three cases has
been really good and informative and enlightening. My
conclusion, listening to you all, particularly you, Mr.
Carstensen, is that if we are going to do something effective
about monopsony, it takes the Federal Government, whether it is
the Justice Department or the Congress, to step in and take a
look at it all and come up with new ideas, new thoughts, new
rules, new regulations, new oversight, new legal action or
additional legal action to correct what I believe you are all
saying is a situation that is not good either for the producers
or for consumers and needs to be improved, as I said, at the
hand of the Government, as it is expressed through the Justice
Department and through the legislature.
Mr. Carstensen, are you saying that?
Mr. Carstensen. Yes, very much so. Professor Cotterill made
the point about the need for better data. There is a lot of
information that exists which unfortunately scholars can't get
access to, so that it makes it much harder to develop and to
prove the kinds of intuitions that we have about how
competition is harmed in the markets.
Again, the Federal Government through the power of the
Federal Trade Commission and the Department of Agriculture to
collect data can be very helpful as part of that process of
developing better theories and then employing them effectively
through legislation and through enforcement.
Senator Kohl. Mr. Cotterill, what is your observation with
respect to what I said?
Mr. Cotterill. I think that you are entirely accurate, sir.
I applaud your idea that the Federal Government has a role to
play in our agricultural markets. It is something I learned at
the University of Wisconsin as a student 30 years ago.
The University of Wisconsin has been a strong player over
the last 100 years in defining markets, defining the rules that
create markets, and defining antitrust policies. I applaud all
of that.
However, I am also to the point where I am beginning to
think that it is difficult at the Federal level to make that
progress, and I am almost becoming a fan of Antonin Scalia, of
the Supreme Court, that the States also should be empowered to
deal with industrial policy questions that affect their
citizens. I know that is a very difficult area, as you are well
aware of as well. So I think we will see progress in both
areas, hopefully.
Senator Kohl. Dr. DeeVon Bailey?
Mr. Bailey. Yes, Senator. I believe my feelings are
somewhat less pronounced, I guess would be the way that I would
state that. I believe, for one thing, that the food system has
been a great success story in the United States, that we have
all types of different food and many, many different varieties
that actually in real terms is less in price for consumers
today than it was 10 or 15 years ago.
So I am not as strong in my opinions as far as whether
consumers have been injured in some way. That doesn't mean that
they haven't been for sure. The possibility exists that perhaps
some market power has injured consumers. But if you look just
on the surface of things, you have to applaud what agribusiness
has been able to accomplish in this country.
On the producer side, there have been questions for many,
many years. Actually, these same kinds of discussions were
taking place at the turn of the 20th century, too, within
Congress and also out in the country. People were concerned
about the power exercised by processors. So I think it has been
a topic that we have discussed for a long time.
It maybe is a more important topic than usual at this point
because of the increased influence of the retailers and the
power that they are exerting on the market, or potential power
that they are exerting on the market right now. So I agree that
it is an important issue.
I also agree with the other two panelists that data really
is the issue. Without cost data, for instance, it is very, very
difficult to come up with a definitive answer regarding whether
market power exists or monopsony power exists in these markets.
Senator Kohl. Mr. Chairman.
Senator Craig. Herb, thank you.
Gentlemen, thank you for your response to those questions.
Both Senator Kohl and I were visiting on the way over from that
vote talking about the dynamics of that market out there and
what we might do about it in a way that continues to keep a
viable market, and certainly a market that the consumer and
producer benefit from.
I think you are right, Dr. Bailey. There is no question
that if you walk into any supermarket today in this country
versus the rest of the world, that demonstration of supply and
variety of supply and cost has to be an amazing success story.
On the other side are my producers in Idaho and in the Cash
Valley who have not recognized true return on investment of any
magnitude that justifies reinvestment in a long while. I grow
increasingly concerned about the ability of the producer side
of agriculture to capitalize itself unless they enter into
contracts with processor distributors that may not be in their
best interest in the long run, and yet that appears to be the
situation.
Gentlemen, you watch these markets closely. All of you peer
into your crystal ball in a moment and tell me what you see as
the trend line and the effect. I can look backward. I probably
have a more difficult time looking forward.
Dr. Bailey, would you start?
Mr. Bailey. I believe without question that the trend line
is toward more contracting, closer relationships in these
markets. What we have seen prior to the last few years is
closer relationships between farmers and packers, mostly
through contracting, and that trend continues.
But perhaps even the more important phenomenon that is
occurring in the market now is closer relationships between
retailers and processors to the farmer. I think that if I had
to choose one trend that I see in food markets during the next
decade, it is more closely specified types of food products
beginning at the retail down to the farm level.
So that would suggest an even greater pressure to perform
on the part of farmers to specifications that are dictated at
some place above them in the channel. Probably the only way to
avoid that is some sort of intervention, but one also has to
ask the question, is that the right choice; would consumers
actually support that kind of intervention, because they are
likely the ones that will end up paying higher prices for food
as a result.
Certainly, from the argument of fairness, there are
concerns. As I said, I grew up on a farm. I know the struggles
that farmers face, but we are on the horns of a dilemma in many
ways in this regard. How do we keep food costs low, provide
high-quality food products to consumers, but yet make sure that
farmers can make a decent living?
Senator Craig. If I go to Safeway today, I am going to buy
only Angus beef, or at least be led to buy only Angus beef. So
some of that type of quality or consolidation for the retail
purpose, the shaping of a product, is very much at hand.
Dr. Cotterill, would you respond to my broader question
that relates to trend lines and impact on both consumer and
producer?
Mr. Cotterill. Well, Professor Bailey has given the stock
answer from the agricultural economics profession. I mean, it
is the consensus view. The St. Louis Fed program and others all
see this increasing integration.
I am going to give you a different view. I think that
unless something is done either through policies at the Federal
or the State level--and it starts with data, it starts with
supporting research on the externalities of these systems--
Professor Bailey's prediction will be the winner. But there are
substantial externalities in this system the way it is
currently put together.
There was a recent article in the New York Times Sunday
Magazine on the amount of fat on Americans today, and
attempting to link it perhaps in an unscientific fashion to the
structure of our food system and the nature of the way we
deliver products to people.
I think there is a link. It may not be proved perfectly
well, although 25 years ago at the University of Wisconsin
Professor Bruce Marion did a study that correlated the amount
of fat on people to the kind of diet and concentration in
certain industries. So it has been done. I think that is an
externality that we need to deal with.
Another externality is the environmental and the cultural
and the social aspects of rural America. I was skiing in
Switzerland this winter and within 150 yards of the condo in
the Swiss Alps were three dairy farmers, each with about 25
brown Swiss cows. The machinery that they used to cut the hay
on the Alps looked like gators that you see on golf courses,
these tiny little machines that they run around up there. I
said how in the world can you justify that kind of a dairy
industry in Switzerland? Well, the spillovers to keeping the
Alps brush-free, to keep the mountain meadows the way they are,
are there.
This summer, I drove through northern Vermont on my way to
the Montreal ag econ meetings and I took a swing out through
Fairfax, Vermont, and others, and stopped at some of the rural
communities with churches and some of the events that were
going on. Just for me personally, to have those kinds of
communities--it is like Richland Center, Wisconsin. That is a
treasure; that is an asset for this country, in general.
So I think that you have to come to ways to recognize that,
and I think the Europeans--we malign them for many of their
programs, but with all due respect, I think that if we want a
particular kind of rural America, we are going to have to do
something like that. So that is the other side of what
Professor Bailey gave you.
Senator Craig. Well, I don't dispute there is another side.
My biases are clear. My wife just retired as a dietician with
the National Dairy Council. When we begin to talk about fat and
food, we have also got to talk about reinstating mandatory
recreation and mandatory exercise with our grade school kids at
the school level, which they don't like today, and a rather,
shall I say, sit-on-your-backside society.
So there is a combination of things that have to occur, I
think, if we are going to look at regulations that determine
how much fat you can consume in a day or standards in that
area. ``Buyer Beware'' is a significant approach, I do believe,
in the marketplace if, in fact, it is a balanced one and it
balances out.
Dr. Carstensen?
Mr. Carstensen. Professor; I am not a doctor.
Senator Craig. All right, professor, thank you.
Mr. Carstensen. My daughter has just gotten her M.D.
degree, so she is the Dr. Carstensen in our family.
Senator Craig. Well, in that relationship, then, you had
better maintain it.
Mr. Carstensen. Right, right.
I think one of the things to bear in mind is that there is
usually more than one road to accomplishing desirable economic
and social objectives. If we don't do things to structure the
fundamentals of how agricultural markets operate, then the
contracting, that which I have characterized as the serf-like
status for farmers is very likely to emerge because there won't
be any other legal structure in hand.
We had a hearing back about a year ago before the Senate Ag
Committee where Professor Koontz from Colorado State talked
about the things the Department of Agriculture could do much
more proactively to develop standards, to develop criteria,
certification systems, that would facilitate providing a
greater variety and specification of agricultural products
without having to go through the contractual system.
Contract is the default system. It requires--and this goes
back to something that Senator Kohl said--it requires positive
government action to construct a workable transactional market.
That isn't going to happen naturally because it is not in the
interests of many of the economic players.
So it seems to me again this is where one really needs to
stand back and say here is the path that we are going to go
down if we don't do anything. Are there ways to redefine that
path, to preserve a number of the things that Ron Cotterill has
spoken about, while still maintaining efficiency in the system?
Again, my view is there are, and we know from past
experience there are, many ways to achieve efficient, desirable
consequences in terms of the end product, the inexpensive food
in the store. Let's look for ways that are going to preserve
farms, that are going to preserve freedom of choice for
farmers, because otherwise you are going to wind up with, as I
say, a serf-like situation where those contracts are going to
require an enormous regulatory system of their own.
It is not going to be transaction cost-free. Again, the
externalities will be there. The kinds of problems in the rural
countryside, the kinds of environmental problems that will
result from the restructuring of agriculture will be there. You
are going to have to deal with them and you are going to look
at them as costs of welfare or costs of pollution. They are
costs to the food system and I think better designed
relationships are going to avoid a lot of those costs so that
the net social cost will be lower even if the price of the food
may be a penny or two higher because we use a system that is
more farmer-friendly.
Senator Craig. Well, gentlemen, you challenge us and we are
glad you did.
Senator Kohl. Mr. Chairman?
Senator Craig. Yes, Senator Kohl.
Senator Kohl. We have not injected into this conversation,
and perhaps we won't today, but the Federal Government is
providing enormous assistance to farmers in our country. I
think the stats are that about half of farm income today comes
from the Federal Government, and that is because what the
farmers are getting from their buyers is insufficient.
So we are giving them back tax dollars to keep them in
business because we want to keep the rural economy there and we
want to keep our farming sector alive. If we pull the plug,
that would be a disaster. You know, we would have to have
hearing upon hearing and laws upon laws, and redo the whole
terrain of our rural areas in America if we pulled the Federal
plug on assistance. Half of them would go out of business
within a month or two.
So there is that that we need to understand, that it is not
a self-regulating mechanism that is going on right now. It is a
Government subsidization system, which I have voted for. I am
not suggesting we should pull the plug, but we haven't figured
out what to do.
Dr. Bailey, do you have a thought on that?
Mr. Bailey. Actually, I think my colleagues were being a
little bit hard on me.
Mr. Cotterill. Oh, no. You represent the whole profession,
sir.
Senator Kohl. Would you suggest that perhaps we should pull
the plug?
Mr. Bailey. No, no, absolutely not. I think that there are
externalities associated with having a viable farming community
in rural areas in virtually every State. Farms maintain open
space. They are stewards to the land. There are many, many
positive externalities that are occurring as a result of
farming.
I also believe that much of the innovation especially in
the meat industry is not coming at this point from the large
processors. It is coming from small firms that are trying to
find niches and trying to develop products that address
consumer needs which the processors in many respects have not
done as good a job as they could have in the past.
So I think that the Government does need to view farming
beyond simply the food that is produced by farming, that there
are other very positive things that occur because of farming.
But also it is important, I think, to maintain an environment
where innovation can occur in these industries.
Actually, there are a lot of innovative things that are
taking place in small-scale farming now. We should not ignore
that and should try to foster it, and I think that that is one
way, along with the money that is going into commodity
programs, that possibly we can help to revitalize some of the
farming activities that are occurring in the country.
Mr. Cotterill. I am fascinated that you bring up the issue
of subsidies because that is something that has concerned me,
because I think that with the Freedom to Farm Act back in 1995
or 1996, it was actually a victory for agribusiness rather than
farmers.
Farmers were sold a bill of goods on that one because, yes,
we are spending billions of dollars to keep our farmers in
business. But having said that, they really are constrained by
the Government just as they were constrained by the supply
control that they didn't like prior to this; as a matter of
fact, maybe more so now than then.
The real benefits of those low prices haven't always been
passed on to consumers. In a non-competitive market channel,
the market power does mean that some of those lower raw prices
stay with the agribusiness firms. In a competitive channel, you
get it passed on. In non-competitive, you don't.
So you have a whole new lobbying game here in Washington
where you have the agribusiness processors and the retailers.
They like this program. I am not so sure it benefits farmers,
but there is a complication to it as well because this program
in many ways is driven by the idea of global trade and the idea
that, in fact, America's farmers are going to compete in a
global market. Therefore, we can't go back to the old supply
control programs and the higher market prices that we had.
I am not so sure that is true. If you look in some of our
industries like dairy. I am not so sure that you couldn't go
back to some of the supply control, get some of these market
prices a little higher and save the Government billions of
dollars. I think we have to reconsider supply control in our
agricultural markets, like we had for about 50 years before
1995. But I am not an agricultural policy economist, so you
probably might get a stronger answer on the other side from
some of them. But that is my perspective on it.
Mr. Carstensen. I will just chime in that the subsidy issue
creates again a set of distorted incentives in the market
process and it requires, as you start fiddling with this
system, thinking through fairly carefully how the subsidy
incentives play off against the contracting incentives, the
other ways that we can interfere in the market. It doesn't make
your jobs any easier, I am sorry to say.
Senator Kohl. Thank you, Mr. Chairman.
Senator Craig. Well, gentlemen, we wish we could continue
this. I have enjoyed not only your testimony, but the
conversation. I think it is increasingly valuable. I think that
one of the reasons this hearing is being held is the
frustration that we are all sensing on our own part as it
relates to policy and how that contains and retains a balance
that allows profitability at the production level and the pass-
through and reasonable prices and high quality to the consumer.
Certainly, in my State there is really no segment of my
agriculture that hasn't gone untouched by fairly extensive
periods of less than profitability. I have looked at the
staying power of that industry and its equities versus its debt
structure. If you look at and parallel that, you see a
substantial problem growing out there today that at some point
is going to get spoken to.
Gentlemen, we thank you. I will say in closing this hearing
that the record will remain open for 7 days for any written
submissions, and there will be some questions coming your way
and we will thank you for your response to those. Again, we
thank you all for being here.
The Committee will stand adjourned.
[Whereupon, at 4:59 p.m., the Committee was adjourned.]
[Question and answers and submissions for the record
follow.]
[Additional material is being retained in the Committee
files.]
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