<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:91787.wais]
S. Hrg. 108-311
AGRICULTURAL CONSOLIDATION AND THE SMITHFIELD/FARMLAND DEAL
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 23, 2003
__________
Serial No. J-108-29
__________
Printed for the use of the Committee on the Judiciary
91-787 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800
Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001
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
------
Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia JOHN EDWARDS, North Carolina
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 71
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa,
prepared statement............................................. 72
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 88
WITNESSES
Bell, Patrick, Farmer, Kenansville, North Carolina............... 14
Hughes, Will, Administrator, Division of Agricultural
Development, Wisconsin Department of Agriculture, Trade and
Consumer Protection, Madison, Wisconsin........................ 9
Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota. 4
Kremer, Russ, President, Missouri Farmers Union, Jefferson City,
Missouri, on behalf of the National Farmers Union.............. 12
Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio.. 7
Stumo, Michael C., General Counsel, Organization for Competitive
Markets, Winstead, Connecticut................................. 16
Tweeten, Luther, Agriculture Consultant, Columbus, Ohio.......... 11
QUESTIONS AND ANSWERS
Responses of Robert Blackwell to questions submitted by Senators
DeWine and Kohl................................................ 31
Responses of Russ Kremer to questions submitted by Senators
DeWine and Kohl................................................ 40
Responses of Michael Stumo to questions submitted by Senators
DeWine and Kohl................................................ 42
Responses of Luther Tweeten to questions submitted by Senators
DeWine and Kohl................................................ 50
SUBMISSIONS FOR THE RECORD
Agri-Mark Dairy Cooperative, Robert D. Wellington, Senior Vice
President for Economics, Communiations and Legislative Affairs,
statement...................................................... 53
Bell, Patrick, Farmer, Kenansville, North Carolina, prepared
statement...................................................... 59
Boyle, J. Patrick, President and CEO, American Meat Institute,
Arlington, Virginia, prepared statement........................ 61
Consumer Federation of America, Washington, D.C., statement...... 65
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared
statement...................................................... 74
Hughes, Will, Administrator, Division of Agricultural
Development, Wisconsin Department of Agriculture, Trade and
Consumer Protection, Madison, Wisconsin, prepared statement.... 76
Kremer, Russ, President, Missouri Farmers Union, Jefferson City,
Missouri, on behalf of the National Farmers Union, prepared
statement...................................................... 83
Public Citizen, Wenonah Hauter, Director, Critical Mass Energy
and Environment Program, Washington, D.C., letter.............. 91
Sebring, Joseph, President John Morrell, Inc., Cincinnati, Ohio,
prepared statement and attachments............................. 93
Sparks Companies, Inc., McLean, Virginia, study.................. 109
Stumo, Michael C., General Counsel, Organization for Competitive
Markets, Winstead, Connecticut................................. 123
Tweeten, Luther, Agriculture Consultant, Columbus, Ohio.......... 129
AGRICULTURAL CONSOLIDATION AND THE SMITHFIELD/FARMLAND DEAL
----------
WEDNESDAY, JULY 23, 2003
United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights, of the Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 4:03 p.m., in
room SD-138, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine and Kohl.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good afternoon. Welcome to the Antitrust
Subcommittee. Today's hearing will examine the Smithfield/
Farmland deal as well as horizontal consolidation and, perhaps
more importantly, vertical integration in the agriculture
industry.
Horizontal consolidation has become a common sight in many
industries in recent years as mergers among direct competitors
have increased the size and scope of companies, even while
decreasing the number of companies left to compete. The pros
and cons of horizontal consolidation also have become well
known as antitrust enforces and this Subcommittee have weighed
and balanced claims of increased efficiencies versus concerns
of market dominance and decreased innovation.
The evaluation of vertical integration and its effects is
often more difficult. Vertical integration within the
agricultural sector, which we will examine today in this
Committee, is, of course, no different. Increasingly over time,
we have seen packers create arrangements where the own or
control their sources of supply. This vertical integration
often raises competitive concerns that packers will refuse to
purchase from any non-integrated source, decimating the spot
market and leaving independent farmers with ever decreasing
opportunities to sell their products. The loss of these market
opportunities may lead to the loss of more independent farmers
and to greater horizontal consolidation at the producer level.
Along with these potential harms comes a potential upside.
It is clear that vertical integration may generate efficiencies
and other benefits. For example, many farmers sell their hogs
under the system of contract farming, which is a form of
vertical integration. Specifically, the farmer agrees to raise
the hogs in a certain manner and under certain conditions. In
return, the package guarantees a set price. This provides the
packer with a reliable source of product and allows the farmers
to bank on the certainty that those contracts provide against
volatile market price swings. In addition, many believe that
vertical integration has increased the ability of the
livestock-processing industry to meet the demands of their
retain customers--demands for higher-quality products, reliable
delivery, and national distribution--all of which also allow
industry to compete more effectively in the international
market.
The specific deal before us today is somewhat unusual in
that it may not raise all of the concerns that horizontal
consolidation raises. As an initial matter, we have to note
that the pork-processing market is less concentrated than other
protein markets, such as beef, where the top four processors
control 80 percent of the market. As a result, this deal does
not automatically trigger the types of concerns that further
horizontal consolidation in those markets might trigger.
Of course, the deal still requires antitrust review, and
there is some limited horizontal overlap in the areas where
both Smithfield and Farmland buy hogs. Even in those areas of
overlap, however, there may be enough remaining pork processors
that no antitrust harm may result from this deal.
This deal is also unusual because Farmland Industries is
bankruptcy. Smithfield's purchase of Farmland's pork-processing
operations means that those operations will go from being part
of a company floundering in bankruptcy, with all of the
uncertainty that accompanies bankruptcy, to being part of a
strong stable company in Smithfield.
Now, despite these unusual aspects, overall this deal and
the trends of horizontal consolidation and vertical integration
in agriculture give us a lot to discuss today. This
Subcommittee has been and continues to be committed to
achieving and maintaining an agriculture industry that is a
highly competitive industry--an industry which can and should
benefit all its participants, including producers, processors,
and consumers. We look forward to hearing from our witnesses on
all of these important issues today.
Now let me turn to my friend and colleague and the Ranking
Member of this Committee, Senator Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Mr. Chairman, thank you for holding this
important hearing today. Concentration and consolidation in the
agricultural industry is a major concern for hard-working
families and farmers across our country. Today we are examining
the merger between Smithfield and Farmland, combining the
Nation's number one and number five pork processors, but this
deal represents just one of many that have occurred in recent
years throughout our agricultural economy.
The increased numbers of mergers and acquisitions among the
Nation's top processing firms raises serious concerns about
whether there is a competitive market that enables our farmers
to have a fair chance to receive a fair price for their
products. Our Nation's farmers, who comprise less than 2
percent of the population, produce the most abundant,
wholesome, and by the cheapest food on the face of the Earth.
However, the way in which food is produced is rapidly
changing, creating significant new challenges. We have seen a
massive reorganization in our food chain due to the increasing
numbers of mergers in industries such as livestock, grain,
rail, and biotechnology.
During this period of enormous transformation in the
agriculture industry, disparity in market power between family
farmers and large conglomerates all too often leaves the
individual farmer with little choice regarding who will buy
their products and under what terms.
Many commodities, including pork, beef, poultry, and
grains, have experienced significant degrees of concentration.
In the pork industry, the top four processing firms control
more than 60 percent of the total market, a number which will
increase to more than 65 percent if the merger we are
considering today is approved. On the beef side, the top four
beef packers purchase about 80 percent of the Nation's cattle.
Rather than buying on the open market, processors of farm
commodities are relying more and more on contractual agreements
with farmers, which bind the farmers to sell a specified amount
of product for prices specified by the processors.
In many cases, there is no longer a significant open market
to which farmers and ranchers can turn. These contractual
arrangements damage the independence of family farmers, leaving
them little choice regarding what to grow and the terms on
which to sell their products.
For example, from 1993 to 2001, the share of total hogs
sold through contractual arrangements increased from 10 percent
to 72 percent. Consequently, sales and purchases through the
traditional spot markets have dwindled to 28 percent total
sales. We should be concerned that the same trend may occur in
the dairy industry. Similar concentration in the dairy industry
has already occurred to some extent, particularly in the fluid
milk market in the Northeast. Thankfully, this is not yet the
case in the Upper Midwest. Dairy producers in our region
continue to enjoy a significant degree of competition for their
milk supplies.
But we must do all we can to make sure that it stays that
way. It is only through proper and aggressive enforcement of
current antitrust laws, both at the Department of Justice and
the FTC, and also by vigilant enforcement of the Packers and
Stockyards Act at the Department of Agriculture, that we can be
certain that producers and consumers alike benefit from open
and fair markets.
We should also consider whether the Department of
Agriculture should be given a greater role in advising the
Justice Department and the FTC in evaluating the competitive
effects of agriculture mergers. We must not allow abuse
practices or disparities in bargaining power between farmers
and agribusiness to disrupt farmers' equal access to the market
or farmers' ability to receive fair prices for their products.
I am pleased that we will hear today from this panel of
experts. I would like particularly to thank Will Hughes of the
Wisconsin Department of Agriculture, Trade and Consumer
Protection, for being here this afternoon. We appreciate you
making arrangements to testify under such a short time frame.
And we welcome all our witnesses this afternoon and look
forward to hearing your thoughts on this important and timely
issue.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Kohl, thank you very much.
We are delighted to have today as our first witness Hon.
Tim Johnson, U.S. Senator from South Dakota. Senator Johnson,
thank you for joining us, and go right ahead.
STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM THE STATE OF
SOUTH DAKOTA
Senator Johnson. Well, thank you, Chairman DeWine and
Senator Kohl. I appreciate you allowing me to testify at
today's hearing on agricultural market concentration,
Smithfield's proposed acquisition of Farmland's Pork Division,
and legislation I have sponsored with my colleague, Senator
Grassley, to ban packer ownership of livestock.
On July 15, Smithfield Foods offered to purchase the Pork
Division of the bankrupt cooperative, Farmland Industries. The
purchase agreement is subject to court approval, and the
Justice Department must ratify the acquisition as well.
Today, I join Senators Grassley and Harkin to call for an
immediate and comprehensive review of this deal by the
Department of Justice. The Antitrust Division of DOJ needs to
carefully examine the possible negative consequences this
buyout could cause for pork producers and consumers.
Smithfield made a host of promises in conjunction with the
Farmland deal, including the pledge that the company will honor
all production contracts with farmers and maintain slaughter
capacity at all Farmland facilities.
Previous actions demonstrate that Smithfield is an
opportunistic company whose number one job is to increase
financial returns for its shareholders, and South Dakota
workers and farmers have suffered the consequences.
On August 8 of 1997, Smithfield purchased the Dakota pork-
processing facility in Huron, South Dakota. The plant employed
750 people, slaughtered around 7,000 hogs daily. It was Huron's
largest employer and one of two South Dakota markets for
slaughter-ready hogs. One day later, on August 9th, Smithfield
shut down the Dakota pork plant, laid off the 750 South
Dakotans who were employed there. The community of Huron has
never fully recovered since.
In the matter of a single day, nearly a thousand South
Dakota workers were laid off, an important rural community in
South Dakota suffered a devastating economic blow, and
thousands of South Dakota pork producers were left with only
one market for their slaughter hogs, another facility owned by
Smithfield in Sioux Falls, South Dakota.
Before Smithfield closed the Dakota pork plant in 1997,
South Dakota had over 3,000 independent pork producers. Today
there are about 1,600 pork producers remaining in my State.
Market experts have forecast that if Smithfield is allowed to
purchase Farmland, additional pork facilities could be subject
to unilateral closure by the company.
I believe the Department of Justice will conclude that this
sale would boost Smithfield's already mighty market power in
South Dakota, Iowa, Nebraska, and Minnesota, reducing or even
eliminating competition in several critical regional and local
markets. Since 1981, Smithfield has acquired nearly 20
competitors, and the company is continually stalking others in
hopes to expand market share and increase profits.
As the world's largest pork producer, Smithfield currently
owns one out of every four pigs in the United States, a total
of about 760,000 hogs. The addition of Farmland's 36,000 sows
would put Smithfield close to 800,000 sows. Smithfield is also
in negotiations currently to purchase Alliance Farms, which has
7,500 hogs in Illinois and 20,000 in Colorado. If the Alliance
and Farmland purchases are approved, Smithfield's total
ownership will be in the range of 825,000 hogs.
As the world's largest pork processors, Smithfield produces
60 percent of the pigs they slaughter. A merger with Farmland
would give them direct control over 30 percent of the slaughter
hog market in the entire United States. This market power would
result in reduced competition and fewer independent pork
producers.
While the Department of Justice must approve this deal
before Smithfield can completely acquire Farmland's Pork
Division, Smithfield market aggression is just another reminder
that the Johnson-Grassley packer ban legislation, Senate bill
27, is, in fact, desperately needed. Congress and the
administration both have a role to play in ensuring that we
have more competition, not less, in agricultural markets.
Indeed, current laws are often too antiquated to deal with the
modern market tactics of meat packers and others. Additionally,
Federal regulators have been slow to enforce the existing laws.
Our packer ban legislation would amend an 80-year-old law,
the Packers and Stockyards Act, under the jurisdiction of USDA.
Three years ago, when I first introduced legislation to ban
packers from owning livestock, we were able to pass the packer
ban twice last year through the United States Senate during
consideration of the farm bill. Unfortunately, it was killed by
the House of Representatives in conference committee.
The Johnson-Grassley bill gives independent producers a
fair chance to compete. Our legislation would prevent packers,
including Smithfield, from operating as a producer and result
in a more competitive, open, and transparent market. In short,
it is one modest step to ensure the free enterprise system
still applies to livestock markets.
USDA says that packer concentration has increased 45
percent in the past 20 years. During this time, the food
retailing and packing industries have amassed profits triple
the rate of the general food inflation. In fact, cargo
increased profits by 67 percent to 2001. Smithfield increased
profits by 28 percent. And after Tyson bought out IBP, its
profits tripled. As a result, we have a meat-food industry
which is doing well at the expense of our farmers and ranchers
because they have the economic power to influence markets in
their favor. Independent livestock producers do not.
The issues of packer ownership in agricultural market
concentration go to the very heart of what agriculture will
look like in the future. Will it be controlled by a handful of
powerful firms where farmers and ranchers become, in effect,
low-wage employees bearing all the risk but none of the gain in
the market? Or will it be a future of independent family
farmers and ranchers contributing to rural communities that are
diverse and economically strong, independent producers who have
the leverage to demand a decent price for their animals? These
problems demand a comprehensive approach which includes the
attention of the Judiciary Committee, Agriculture Committee,
Department of Justice, and USDA.
Mr. Chairman, I close with the following recommendations:
One, that the Antitrust Division of the Department of
Justice should scrutinize Smithfield's proposed purchase of
Farmland's Pork Division and consider preventing it;
Two, Congress should enact the Johnson-Grassley packer ban
legislation;
Three, Congress should consider legislation sponsored by my
colleague Senator Enzi and me to prohibit captive supplies of
market livestock;
Fourth, finally, Congress should consider legislation
pushed by Senator Daschle to require USDA to review whether a
proposed merger would have a negative effect on family farmers
and rural communities and to increase penalties for antitrust
violations.
Thank you, Chairman DeWine, Senator Kohl, for this
opportunity to share my thoughts with you today.
Chairman DeWine. Senator Johnson, thank you very much for a
very provocative statement, and it gives us something to think
about as we hear the testimony from the other witnesses. We
appreciate it very, very much.
Senator Johnson. Thank you.
Senator Kohl. Thank you very much, Senator Johnson.
Chairman DeWine. I would ask our other witnesses to come
up. Senator Grassley had to attend a meeting at the White
House. He asked me to put a statement into the record, which I
will, as well as two letters, one from the Consumer Federation
of America and one from Public Citizen. In addition, we have a
statement from Senator Leahy. Without objection, all of these
will now be made a part of the record.
I would ask all our witnesses now to please come up, and I
will now introduce our witnesses.
Joe Sebring is the CEO of John Morrell, a subsidiary of
Smithfield Foods. John Morrell is the leader in the pork
packaging industry and is based out of Cincinnati. It is
considered to be the oldest, continuously operating meat
processor in the United States.
The next witness is Will Hughes, the administrator for the
Division of Agricultural Development for the Wisconsin
Department of Agriculture, Trade and Consumer Protection. His
division has been given the task of assisting Wisconsin farmers
in adapting to the growing demands of the agriculture
marketplace.
Dr. Luther Tweeten is a retired professor at Ohio State
University. He has authored several publications in the area of
agriculture consolidation and has testified before this
Subcommittee in the past.
Mr. Russ Kremer is the president of Missouri Farmers Union.
He has been involved in pork production his entire life, and he
brings to the Subcommittee his experience as an independent
farmer.
Mr. Patrick Bell is a hog farmer from Kenansville, North
Carolina. After graduating from the University of North
Carolina, he worked in the banking industry for several years
before returning to his family farm.
Finally, Mr. Michael Stumo is general counsel for the
Organization for Competitive Markets, which is a nonprofit
organization focusing on antitrust and competition issues in
agriculture.
We will start on my left with Mr. Sebring. Mr. Sebring,
would you like to start? We are going to have a 5-minute rule.
We are going to stick to the 5-minute rule so that we can have
ample opportunity for questions. When you see the yellow light,
that means you have a minute left.
Mr. Sebring?
STATEMENT OF JOSEPH SEBRING, PRESIDENT, JOHN MORRELL, INC.,
CINCINNATI, OHIO
Mr. Sebring. Thank you, Mr. Chairman. I would like to
correct the record. The Dakota pork plant was closed before
Smithfield took possession, and in South Dakota, there is
already a ban on corporate farming. And in spite of that, the
hog population has dwindled by 50 percent in the last about 5
years.
Thank you, Mr. Chairman, for the opportunity to share the
view of Smithfield Foods about Federal policy for the meat-
packing industry and the pending acquisition of Farmland Foods
by Smithfield Foods.
I am Joe Sebring, president of John Morrell, an Ohio-based
company that produces processed meats and fresh pork. Our
industry is already subject to the Sherman Act, the Clayton
Act, the Robinson-Patman Act, the Federal Trade Commission Act,
State laws, the Uniform Commercial Code, and the Packers and
Stockyards Act. There is no reason for more restrictions on our
industry.
Smithfield has made a bid for certain assets of Farmland
Foods. Farmland's creditors and bondholders recognized that the
Smithfield transaction would provide the greatest opportunity
to generate the highest available value to creditors,
bondholders, and the people of Farmland Foods.
Over $1.4 billion in aggregate claims have been filed
against Farmland Industries for more than 20,000 farmers and
141,000 small businesses. For example, in South Dakota, 291
bondholders have claims of nearly $28 million, and there are
more than 2,200 creditors who are owed about $84 million. There
are more than 4,200 Iowan bondholders with claims against
Farmland exceeding $37 million. The 4,257 Iowan creditors of
Farmland are owed more than $92 million. They have waited long
enough.
Smithfield will honor all current Farmland Foods hog
production contracts, 6,100 employees of the Farmland Foods
will keep their jobs, and the Farmland Foods facilities will
remain open. The UFCW will continue to be recognized at the
unionized plants, and Smithfield has offered to assume the
Farmland Foods pension plan. Farmland Foods headquarters will
remain in Kansas City, and Smithfield will preserve the
Farmland brand.
Our customers demand consistent meat quality, ready and
predictable supplies, and a fair price. They want their meat to
be consistently lean every time. Fast-food retailers and
grocers have imposed strict requirements on packers. Vertical
coordination is the best way to meet these requirements. It is
a pull-through model. We are pulled along by the demands of our
customers and have met those demands by maintaining some level
of vertical coordination. The slightest interruption in supply
is unacceptable to our customers. That means that forward
contracting with hog producers must be balanced by company-
owned animals in order to assure consistent supplies.
During the last 2 years, John Morrell has bought 33 to 45
percent of the hogs available on the open market, and
Smithfield itself sells 25 to 30 percent of the hogs sold on
the open market.
Consumers have demanded leaner pork, so we have developed
our lean generation pork. We can provide this new leaner pork
because we control the way that hogs are raised. Without some
level of coordination among hog producers and meat packers, we
will be out of the business of producing consistently lean
pork.
There are other benefits to a coordinated system of
production. Our on-farm biosecurity procedures and data are
completely within our control. A reasonable level of vertical
coordination allows us to ensure delivery of safe meat products
to comply with EPA standards and other regulations and to guard
against tampering by terrorists. Our system enables us to keep
our products traceable and limits the number of people who have
access to the products all along the chain of supply. It is not
just a matter of economics. It is also a matter of homeland
security.
Forward contracting allows farmers to plan for the future.
Lenders now routinely demand that farmers produce contracts
before providing them with financing. In our system, both
company-owned farms and contract growers have the benefit of a
predictable place to sell their animals, regardless of any
spikes or downturns in the market prices.
Family farmers are our fellow hog producers and our
suppliers. John Morrell purchased more than half of its hogs
from non-contract farmers in the last fiscal year. That is
almost 4 million hogs. We don't agree that barring our company
from raising hogs will help independent hog producers. It
plainly will harm them.
We have built our business model in response to the non-
negotiable demands of the consumer and the marketplace. With a
flexibility achieved through a reasonable level of vertical
coordination, we maintain low and stable prices for consumers
by owning and contracting for hogs. We ask only that our
company not be barred from owning or contracting for some of
our hogs as we strive to stay competitive. We honor family
farmers, and we ask you to keep in mind that the coordination
of our system serves the food security effort and to look at
the economic data and consider what a ban on packer ownership
would do to our industry.
Thank you very much.
[The prepared statement of Mr. Sebring appears as a
submission for the record.]
Chairman DeWine. Mr. Hughes?
STATEMENT OF WILL HUGHES, ADMINISTRATOR, DIVISION OF
AGRICULTURAL DEVELOPMENT, WISCONSIN DEPARTMENT OF AGRICULTURE,
TRADE AND CONSUMER PROTECTION, MADISON, WISCONSIN
Mr. Hughes. Thank you, Chairman DeWine and Senator Kohl,
for the opportunity to share today some perspectives from a
State government as it relates to concentration in food and
agriculture. On behalf of the State and its 77,000 producers, I
would especially like to thank Senator Kohl for his excellent
leadership and representation of Wisconsin agriculture and for
his invitation to us to speak about these issues related to
concentration and its implications for producers.
My testimony today is going to talk primarily about policy
and make a few policy recommendations that we hope Congress
would consider as it establishes both the national agricultural
and antitrust policy that I agree with Senator Johnson needs to
be comprehensive and coordinated.
Let me first give you just a snippet of information about
our agency and its uniqueness. We are called the Agriculture,
Trade and Consumer Protection agency because we have what is
called the ``Little FTC Act'' in Wisconsin, which gives us
sweeping powers to protect consumers and competition in the
areas of fair business trade practices. And I want to give you
a few examples of where we have had some relevant activities
that deal with concentration in markets and uneven market
power.
We have established rules in the vegetable processing
industry in dealing with contracts between the producers and
the processors. We have had major enforcement actions against
price discrimination in milk procurement where one producer is
treated differently in pricing relative to another producer
without any basis in cost differences and so on. We have had a
major investigation into the business practices associated with
the National Cheese Exchange, using the power of that Little
FTC Act.
In each of these cases, Wisconsin had to act on its own,
and we, quite frankly, did not get coordinating help from the
Federal Government. And it is not only difficult for farmers to
address these issues on their own or through their
organizations, but it is also difficult for individual States.
And as concentration increases rapidly from the retail sector
back through the supply chain, the issues do not go away.
We wanted to express to you the importance of what we think
is evidence of having a competitive market in the dairy
industry. Wisconsin is blessed with having a fairly high number
or large number of buyers competing for milk produced by the
16,500 Wisconsin dairy producers. We have a graph in our
testimony that compares the Western region of the United States
with the Upper Midwest region, and it is a mechanism of pricing
that is reported by USDA that shows that, on average, over the
last 5 years, that price difference has been $1.03 between the
Midwest and the Western region. And we believe that that
illustrates the value of preserving competition in agricultural
markets.
I can give you a specific example: A producer in Wisconsin
at a meeting a few years ago laid out a chart for a very large
audience to show that he had 13 competing buyers for his milk
in an area of northeast Wisconsin, had every pay price pegged
all the way down the line--open, transparent information that
that producer had with choices. That is the value of preserving
competition.
Wisconsin Department of Ag's priority is to revitalize and
grow the dairy industry with diverse farm production systems,
and that includes, if we do that, attracting a good climate for
producing milk as well as a good climate for buying milk. And
included in that is an active and favorable climate for dairy
producer cooperatives to thrive in the business environment.
This process gets difficult as concentration increases, and
we would like to bolster that heritage of producer-owned
organizations, and to do that we think that there are a few
recommendations, policy recommendations, that you should
consider.
One is to improve and tighten coordination on antitrust and
concentration issues not only between the U.S. Department of
Justice and USDA but also among States. An active working group
in that area would be very important.
We would also like to see, given the tremendous activity
and issues surrounding concentration, that there be increased
funding committed to support agricultural concentration
research and antitrust issues, not only to have a better idea
of what is going on and the impacts of what is going on, but
also to help formulate new policy frameworks to address these
issues. In the 1960's and 1970's, there was a lot of research
in the industrial organization area concerning the food sector.
Go back in the early part of the century, the same. There is a
dearth of it now, and it needs, given what is going on, to be
improved.
We would like to see, because we believe innovation and new
business formation creates a healthy marketplace for both
producers and consumers, increased programs and funding for the
development of producer-owned and value-added businesses.
We would like to see strengthening the competition in the
meat industry by removing the prohibition on interstate meat
shipments from State-inspected--it is actually meat and poultry
product plants. And we have 300 of those in Wisconsin, and
there are some very innovative companies in that mix that the
U.S. marketplace as well as the Wisconsin economy would enjoy
the benefits of.
We would like to see that producers have continued ability
to bargain for fair prices and fair terms of trade and that the
transparency of pricing for agricultural commodities continue
to be emphasized and improved upon from what it is now.
Again, our agency goes on the idea that putting our
policies and rules, establishing standards that govern fair
business practices, is what is needed, gets the public more
involved, puts more light on the subject, and that should be
part of the policy recommendations that you consider.
Thank you for the opportunity to share these perspectives.
[The prepared statement of Mr. Hughes appears as a
submission for the record.]
Chairman DeWine. Thank you, Mr. Hughes.
Dr. Tweeten?
STATEMENT OF LUTHER TWEETEN, AGRICULTURE CONSULTANT, COLUMBUS,
OHIO
Mr. Tweeten. First of all, I wish to thank Chairman DeWine
and Senator Kohl for the opportunity to be here.
I regard the Smithfield Foods acquisition of Farmland Foods
to be a positive development for the food industry, including
for producers and consumers. There will be short-and long-run
effects. As has already been pointed out here, the short-run
effect is pretty much status quo. Smithfield has agreed to even
retain the labor union, the workers, the pay rates, the brand
name of Farmland, the management, and so forth. So it will be a
kind of status quo in the short term. However, knowing
Smithfield, they don't let the grass grow under their feet.
They change in response to changing conditions.
Over time, there is likely to be larger plants serving
larger areas. There is likely to be an expansion of production
and marketing contracts. And, of course, there is going to be
concentration.
Now, the share of the market held by Smithfield, according
to the data I have, is about 20 percent. That will go up to 27
percent. The principal benefit of this merger is that you are
absorbing Farmland, which is a small, not financially viable
company that does not do a lot of service for farmers, for
consumers, for competition, absorbing it by a company that is
financially viable, dynamic, innovative. That is going to help
competition. It is going to be better for the parties involved,
including the creditors.
One of the concerns is about concentration. This is not
going to do a lot to concentration. But what is the impact of
concentration on producers and consumers? We have looked at
this at Ohio State in terms of marketing margins. There are two
effects here of concern. One of those is with concentration,
larger firms, economies of size. That reduces cost of
production. If they are passed on to farmers and consumers, it
means lower marketing margins.
On the other hand, you have increasing market power. If
that effect dominates, then you are going to have larger
marketing margins in either higher prices to consumers, lower
prices to farmers, or both.
What we find for the hog industry, the beef industry, and
the turkey industry is that the net effect of concentration is
lower marketing margins. Now, that is the good news.
The bad news is that the benefits are passed to consumers,
not to producers. That is exactly what economic theory would
tell you. Economic theory tells you and empirical data indicate
that processors pay farmers what it takes to get the product
delivered. In the longer term, this means covering the full
cost of production on adequate size, commercial, well-managed
farms. We find empirical evidence for that. And it does not
matter whether you are dealing with a monopolist, a
monopsonist, a competitive firm, a cooperative, or whatever.
Nobody is going to give farmers gifts in terms of prices. They
are going to have to earn it. They are going to have to
compete. And so they are all going to operate on the supply
curve.
Now, the question is: Where on the supply curve? The
conventional wisdom is that because of imperfect competition,
the imperfect firm will pay less, operate lower on the curve,
take lesser quantity at a lower price. However, that is not the
right thinking. What, in fact, happens is that oligopolistic
firms, which dominate the food processing and marketing
industry, advertise and innovative massively. A consequence of
that is that we sell an awful lot of food. In fact, they are so
good at selling food that nearly two-thirds of Americans are
overweight, and about half of those overweight people are
obese.
So what I am saying is that farmers operate higher on their
supply curve, higher price, higher quantity, because of
imperfect competition in the agribusiness sector.
All right. My time is running out here, so let me close
with a couple of recommendations.
First of all, I do find merit in this acquisition. There is
certainly a basis for moving forward with it.
The second thing I want to point out is that it would be
highly desirable to have greater transparency in markets, in
the hog as well as other enterprises in agriculture. I know
that is not easy to do in the case of marketing and production
contracts because those contracts often differ from one case to
another. But I think what we need to do is have the people from
the processing industries, producers, academics, sit down and
try to work out some templates that will allow them to report
better and give people a greater opportunity to compare
outcomes, to compare returns among farmers, States, industries,
and so forth.
Thank you.
[The prepared statement of Mr. Tweeten appears as a
submission for the record.]
Chairman DeWine. Doctor, thank you very much.
Mr. Kremer?
STATEMENT OF RUSS KREMER, PRESIDENT, MISSOURI FARMERS UNION,
JEFFERSON CITY, MISSOURI, ON BEHALF OF THE NATIONAL FARMERS
UNION
Mr. Kremer. Yes, thank you, Chairman DeWine and Ranking
Member Kohl, for the opportunity to testify before the
Subcommittee on agricultural concentration and the proposed
sale of Farmland Foods pork division to Smithfield Foods. I ask
that my full statement be submitted into the record.
Chairman DeWine. It will be made a part of the record.
Thank you very much.
Mr. Kremer. I am Russ Kremer, president of the Missouri
Farmers Union, and I am here today to testify on behalf of the
National Farmers Union.
I have been involved in independent pork production since I
was a child in a count that, for many years, led our State in
the number of independent pork operations. However, during the
past year, we have seen our marketing opportunities and,
therefore, our profit opportunities dwindle dramatically.
Market choices during that time in my area have declined from
five to two. The potential acquisition of Farmland by
Smithfield Foods threatens to reduce that number to one.
Without competitive bids and fair market prices, another large
exodus of family farmers from the pork industry is likely to
occur. Many of our local communities that once enjoyed a
sustained economy due to the circulation of revenue from
independent pork farms and community-based businesses will
continue to experience serious decimation.
The trend toward horizontal and vertical integration in the
agriculture and food sectors does not allow independent
producers to succeed without protection from unfair and anti-
competitive practices. The loss of our Nation's largest farmer-
owned cooperative is not only devastating to America's
independent agricultural producers, but also furthers the goal
of Smithfield Foods to gain greater control of the pork
production and processing sector. If this sale is approved by
the U.S. Bankruptcy Court and the Department of Justice,
Smithfield Foods will control 27 percent of the pork processing
industry. The top four processing firms--Smithfield, ConAgra,
Tyson/IBP, and Cargill--will now control 60 percent of the
market, up from the 37-percent level in 1987.
Currently, Smithfield raises 12 million of the 20 million
hogs slaughtered in their processing plants on a yearly basis.
The addition of Farmland's 36,000 sows will increase the
Smithfield's sow inventory to approximately 800,000. This is 3
times the number of sows owned by the next largest pork
producer--Premium Standard Farms.
In 1994, the Smithfield sow inventory totaled approximately
65,000. In less than 10 years, this single company has managed
to increase its ownership of sows 12-fold through acquisitions
and mergers such as the one being discussed today. To allow
this proposal to be approved prior to Congress conducting a
thorough review to ensure antitrust laws are adequate would be
like shutting the gate after all the pigs get out.
I believe producers in my State and across the country will
be further faced with lack of buyers and a competitive price
for their hogs as a result of this proposed acquisition.
Smithfield officials have indicated that if the proposal is
approved, they would continue to operate and maintain
production levels at all Farmland plants. What has been left
unsaid is the fate of the other plants purchased by Smithfield
through previous acquisitions and mergers that may now be
determined inefficient. Employees of these plants will be put
out of jobs, local producers will be left with fewer marketing
opportunities, and the communities will be responsible to clean
up the mess left behind.
Although contract production is often touted as a viable
opportunity and risk management tool for farmers, without
contractor competition in the region the contractee has little
bargaining power when it is time to renew that 5- or 7-year
contract. That farmer often finds himself in a ``take it or
leave it'' position.
Concentration of the agriculture and retail food sectors
has, in many instances, discouraged the growth and development
of smaller, farmer-owned, value-added cooperatives. As
president of the Ozark Mountain Pork Cooperative, a new-
generation cooperative that processes and markets pork from
member-owned hogs, I myself have witnessed many challenges to
accessing the marketplace because of this huge market
concentration and power. Large conglomerates often have tight
control of brokers and retail distributors.
The loss of family farms and other independently owned
businesses is not inevitable. The National Farmers Union
believes there are a number of reforms that can originate
within this Subcommittee to ensure fairness, transparency,
protection, and bargaining rights for producers, which would
restore and enhance competition for agricultural markets. A few
of these I may list at this time:
Number one, we feel that Congress should expand the role of
USDA to initiate the review of proposed mergers in the
agricultural sector and require an economic impact statement be
provided, detailing the impact of a proposed merger on farmers
and ranchers prior to approval.
We feel that Congress should require USDA to collect and
publish concentration information.
We support the implementation of a temporary moratorium on
large agricultural mergers. The moratorium is necessary to
provide Congress with time to review current law and strengthen
its appropriate time to restore market competition for
producers and consumers.
We also believe a specific level of concentration should be
established, a so-called threshold level, that triggers a
presumption of a violation of antitrust law.
I have also highlighted more of these reforms in my written
testimony for the record.
Thank you, Mr. Chairman, for the opportunity to testify
today and for holding this important hearing. We look forward
to working with you in this Subcommittee and the entire
Congress to strengthen antitrust laws and foster a transparency
and fair marketplace for all producers. I welcome the
opportunity to answer any questions the Subcommittee members
may have.
[The prepared statement of Mr. Kremer appears as a
submission for the record.]
Chairman DeWine. Mr. Kremer, thank you very much.
Mr. Bell?
STATEMENT OF PATRICK BELL, FARMER, KENANSVILLE, NORTH CAROLINA
Mr. Bell. Thank you, Mr. Chairman. I appreciate the
opportunity to come talk with your Committee today.
My name is Patrick Bell, and I am a contract hog farmer
from North Carolina. I came to give you my perspective as
someone who is on the farm every day because I think it is
important for this Committee to hear from someone who is
actually out there every day doing the job.
I have a hog farm that is under contract with Murphy Farms,
which is part of Smithfield Foods. I would like to begin my
testimony by telling the Committee a little about my
background. I grew up in a small town named Kenansville, in
eastern North Carolina, a lot like Mayberry. It is a small,
tight-knit community of about 900 people, where agriculture was
the most important industry and basically the only industry.
I came from a farming family, but when I was ready to begin
my working life, it really was not an option for me to work
full-time on my family farm, and certainly not an opportunity
for me to get my own farm. I went to college and graduated from
the University of North Carolina in Chapel Hill. I went into
the banking industry, worked for banks for about 10 years as a
branch manager and commercial loan officer.
In 1992, I turned 30 years old, and my father celebrated
his 60th birthday that same year. He sat me down and he gave me
a choice. He said, ``Son, you are the only child. You have got
a choice. You can continue in banking and commit yourself to a
life outside of farming, or you can return home to your small
town. We have very little industry or opportunity beyond the
farm gate, but if you will come back home, you can take over
our contract hog farming operation.''
It was a tough decision for me to make, but I decided to
return home and go into business with my father. That was 9
years ago, and we have had a few struggles. But since then, we
have expanded our operation to almost twice its original size.
Now our farm earns enough money for me to support my family,
myself, my mother and father, and that gives me a lot of
satisfaction.
In hindsight, the decision to return home was one of the
best decisions I ever made because it allowed me to live in the
small town I grew up in and that I loved; it allowed me to be
in business with my father, who I am very close to and that I
love; and it allowed me to provide for my family--we just had a
set of twins that are 4 months old--and build some long-term
security.
My family and I have a deep, emotional attachment to
farming. But when I made the decision to come back home and
leave banking, I always knew it was a business decision. When I
decided to return home to look at the contract agreement that
was with Murphy Farms at the time, I had three main questions:
Number one, if I invest my savings in this farm, will it be
a good investment that has good, solid, consistent cash flow?
Number two, does the company that I will contract with have
the ability to pay my contract, and can I count on them to pay
the contract?
And, number three, will this investment provide a stable
income and reliable profit for me and my family over the long
term?
Well, after being in the hog business for 15 years under
contract, first with my father and then with me and my father,
I am happy to say the answer to all three questions is
absolutely yes.
Finally, I think it is important for this Committee to
understand that the North Carolina hog business is not owned by
some nameless, faceless, monolithic corporation or group of
people. In my State, and in most other hog-producing States
they operate in, the hog business is composed of a lot of small
family farmers like me. In fact, small farmers like me grow 80
percent of Smithfield Foods hogs in North Carolina. The
contracts we have make it possible for us to stay on our family
farm or come back home, as I did, and provide a living for our
family by growing these hogs under contract with Smithfield.
When I signed that contract, I not only knew that I was
going to get a fair price, but I knew what the future was going
to hold for my family. I would not have to be worried about
market ups and downs. I know that Smithfield bears the costs
and supplies the expertise for my veterinary services, provides
technical assistance for compliance with environmental and
safety regulations, all of which they fully expect me to comply
with. In return, I get--and this is an important thing as an
ex-banker. I get to tell the people I do business with in my
small town that I have a stable business. I get to tell the
local banker, which is very important, the local hardware
store, and everyone else, they can extend me credit because I
will be able to pay it because of this contract.
When I was a banker, I had the unhappy duty of turning down
some good farmers for loans--they were good people and good
farmers--because they did not have contracts for their hogs.
They were independents. The price of hogs went to 8 and 10
cents a pound at one time. Not sustainable as an independent.
It was a hard thing to do, but I am just grateful that my
business is not subject to that kind of uncertainty.
One of the things that is not in my written testimony that
I would like to interject here quickly, Mr. Chairman, if you
will, I have heard some conversation about the packer ban as I
came in here today, and I am not privy to all the details of
the packer ban. I do not know much about it except what I have
read. But I do know this: In North Carolina, we farm under
contract, mostly contract farming, and without the packer being
able to own the hogs in North Carolina, I would be out of
business. And most of the people I know, the 2,300 contract
growers in our State are not going to run down to the local
bank and borrow money to put pigs in the houses and buy feed,
number one, because they are not willing to take that risk;
and, number two, the bank is not going to loan them the money,
not in North Carolina.
The legislation I assume is national legislation. The last
thing is I do not know the details of the Smithfield/Farmland
acquisition. I know nothing about it, never really even heard
of Farmland. But I am sure of one thing. Hog farmers who have
contracts with Farmland should be very glad that Smithfield
will honor those contracts. I know from experience they are
dealing with honorable people. They will get a fair price. They
will be able to enjoy stability in their business, and it will
help be able to keep their family farms alive and thriving.
Thank you for the opportunity to address your Committee.
[The prepared statement of Mr. Bell appears as a submission
for the record.]
Chairman DeWine. Mr. Bell, thank you very much.
Mr. Stumo?
STATEMENT OF MICHAEL C. STUMO, GENERAL COUNSEL, ORGANIZATION
FOR COMPETITIVE MARKETS, WINSTEAD, CONNECTICUT
Mr. Stumo. Thank you, Chairman DeWine, Senator Kohl, for
allowing me to testify. As well as being general counsel for
Organization for Competitive Markets, I am a former hog
producer and hog buyer from Iowa.
The reason that we do not want--that we want to intervene
and allow the market to work and keep the market working at
this point is so that we do not have the lack of choices that
are in North Carolina where the farmers in Iowa, Minnesota,
South Dakota, Nebraska, and Wisconsin have to ask Smithfield
whether they want to produce or there is no other option. This
merger--this acquisition, rather, of two of the top--the top
pork processing company in the country of another top-tier
processor is bad for not only producers but consumers. That is
why Consumer Federation of America opposes it, that is why
Public Citizen opposes it, because we have seen in recent years
not only the downward trend for hogs and hog prices and hog
farm profitability, which everyone agrees to, but also in the
last 10 years increasing gross profit margins by packers and
retailers, which is showing us that they are less efficient or
they are exercising market power to the detriment of producers
and consumers. That is why producers and consumers are united
on this issue.
The big problem with this merger is that Smithfield--or
acquisition, excuse me, is Smithfield is gaining increased
power in the price-setting region of the U.S. hog market. The
Iowa-southern Minnesota price is the gold standard. It sets the
price for the country. This is different than a merger
occurring in another area of the country and increased
concentration there, because the Iowa-southern Minnesota prices
establish first the transitions to the Western corn belt market
price, which is Iowa, southern Minnesota, Nebraska, and South
Dakota, primarily. And all the contracts that are formulated
from an open market price as well as other open market
transactions elsewhere in the country are derived from the
first determined Iowa-southern Minnesota price. So this is like
BP acquiring ARCO and the concern about the price-setting
mechanism in oil and gas of Cushing, Oklahoma, that they would
be able to control and affect that price-setting mechanism
which affects oil and gas prices elsewhere in the industry.
This is the same thing.
So we have Smithfield Sioux Falls and Sioux City plants,
and we have Farmland's Crete, Nebraska, and Denison, Iowa,
plants. We have about a 250-mile draw or procurement area,
significant overlaps here. So what we are doing is taking out a
major buyer in the price-setting region of the country with
these significant overlap areas.
Now, the recent estimates by folks like Glenn Grimes and
Ron Planey, University of Missouri, that follow the hog
industry are that 87 percent of the hog industry is vertically
integrated. That includes packer-owned and contracted, non-
packer-owned contracts. Ninety percent of the contracts that
are not packer-owned pigs are a formula market based in some
way off the open market price. So there is not only a
tremendous incentive always for the packer to reduce open
market price to save money on the hogs he is actually
purchasing, but now, with 90 percent of the contracts
formulated on this open market, if the price goes up because of
supply and demand conditions by a couple of bucks, all of a
sudden that telescopes and directly affects and makes far more
expensive all those hogs that are pegged to the open market. So
it is a different scenario, tremendous incentive to push price
down.
There is no reasonable argument that hog prices will go up
as a result of this transaction. The reasonable argument is
that hog prices will go down. If we assume a $1 decrease in
live hog price on 270-pound hogs, 375,000 pigs per day, that is
$1 million per day lost to the U.S. hog production industry;
250 kill days, that is $250 million per year lost to U.S.
producers, gains to Smithfield and the other packers. Consumers
do not see it because there is no relationship between farm
gate price and consumer price. Pure market power scenario.
There is no evidence to the contrary.
Further, Farmland is not a failing firm in the pork
business. This is a Chapter 11 reorganization. They sold off a
fertilizer business, grains, and beef. The pork business is a
profitable business. Third-quarter results released a week ago
Monday, $9 million profit. Annualized, that is $36 million.
That is the seventh consecutive quarter in which Farmland pork
profits have been greater than year prior. Everyone assumed
that Farmland would reorganize around pork, but we have
Smithfield desiring more market power, the creditors Committee
desiring more payoff, but it is contrary to the public interest
and fair open markets. So producers can make money, not go on a
taxpayer dole, and they can stay in business.
We need competitive markets for this entrepreneurial
industry. Thus, I urge the Congress and the DOJ to scrutinize
and block this merger. We cannot have one buyer and begging
Smithfield to get into business all over the country.
Thank you.
[The prepared statement of Mr. Stumo appears as a
submission for the record.]
Chairman DeWine. Well, let me thank our panel. We will
start with questions. We are scheduled to have two votes at 5
o'clock, and the Senate is rather unpredictable. So we will see
if that actually happens or not. If it does happen, we will
have to stop, and because there are two votes it will take a
while. But we will proceed with questions until that happens.
Let me ask any member of the panel who would like to
respond. The spot market or cash market has now been
decreasing. I do not know what the number is. I have heard it
is down to possibly 10, 12, 13 percent of the market. What
implication does that have if that continues to decrease? What
significance does that have? Does that matter?
Mr. Tweeten. I would like to respond.
Chairman DeWine. Dr. Tweeten has already indicated in his
written testimony that maybe it is not that important, but go
ahead, Doctor. We will start with you, and then we will see if
anybody else disagrees.
Mr. Tweeten. Well, I think one of the myths about markets
is that you have to have a cash market to have competitive
pricing and output. Contracts also have to recognize markets.
Again, I go back to what I said before, and that is, if you do
not pay farmers enough to cover their costs over the long
period of time, they are not going to produce. And that means
that if you are under a contract system or a cash system, you
are still going to have to respect supply and demand.
Agriculture is unique in that it has a lot of cash markets.
There are lot of industries in this country, such as
automobiles and so forth, that have almost no cash market.
Parts suppliers, for example, there is very little cash market.
It is almost all in a contract basis. But supply and demand
still rule in those industries.
Mr. Bell. Mr. Chairman, if I may interject something?
Chairman DeWine. Mr. Bell, go ahead.
Mr. Bell. As a contract grower, we have been in the pig
business under contract for 15 years, and over that period of
time, in the last 5 years we have gotten, I think, four or five
increases in what we are paid.
During the worst hog market, I guess in U.S. history, when
the price was 8 cents per pound a few years ago, a lot of
people used up the equity they built up over generations in
their farm trying to stay afloat through independents, that is
the best year I had in the hog business. Best year I ever had
because I always get paid a consistent, steady price.
Chairman DeWine. Mr. Kremer?
Mr. Kremer. Yes, as a participant in the spot market
system, it has a devastating effect. It is interesting to note
that as these large vertical integrators talk about building
plants, they talk about buying from 13 to 20 percent off the
open market. We are the residual suppliers, and it is kind of
like if they need our hogs, they will bid them up somewhat. But
most of the time they do not need our hogs and so the market
has continued to go down, and so it certainly puts strain on
us.
But the other thing, too, is that the spot market does, you
know, drive the prices, for instance, when it comes time for
contract deals, et cetera. And so as larger integrators
concentrate more and the spot market becomes less, it shoves
the price down and, therefore, it affects everyone across the
board in a negative way as far as producers.
Chairman DeWine. Mr. Stumo?
Mr. Stumo. The 87-percent vertical, of course, leaves 13-
percent theoretical open market. The experts that advise us,
the ag economists, industrial organization specialists, believe
that 3 to 5 percent of the actual hogs traded, those in the
Iowa-southern Minnesota market, actually set the price for
virtually all the other hogs.
It is a fundamental tenet of industrial organization that
when you have a few dominant firms interacting in a high-volume
market, that is a problem because there are only a few dominant
firms. However, if they interact in a very thin market, the
ability for them to push price down or manipulate price
downward is exponentially increased.
Chairman DeWine. Mr. Sebring?
Mr. Sebring. Senator, in the morning, we look and see what
the demand is for pork for our business. What do our customers
need? How many hogs do we need to run the plant efficiently?
And if we need hogs that day, if there is a demand for pork, we
go out and we buy the hogs that we need to fill our kill and to
fill orders. And if there is a demand for that product, we bid
up for those hogs and we bid up for those hogs and we bid up
for those hogs until we get the number we need.
If, however, our customers slow down on the sale of pork
and sell beef or sell chicken and they back off on the demand,
yes, the market can go down. But that is the dynamics of the
free market. And I do not know what percentage is bought every
day, but I can tell you that is how we operate. When we need
pork, we bid the price up. There is no other packer on earth
that wants pork prices higher than Smithfield Foods.
Chairman DeWine. Mr. Sebring, how much of your business do
you want to be on long-term contract?
Mr. Sebring. We are comfortable right now with--right now
our contracts in corporate hogs are less than 50 percent. We do
not have a problem buying hogs on the open market at 50 percent
or more, as long as they are available.
Chairman DeWine. But I would assume that there is some
point that you do not want a contract above, isn't there?
Mr. Sebring. I am sorry?
Chairman DeWine. I would assume that there is some point
you do not want a contract above. I mean, you would not want to
lock yourself in--I do not know your business, but I would
assume you would not want to lock yourself in at 100 percent
of--
Mr. Sebring. No, we do not.
Chairman DeWine. You have got to have some flexibility in
there. You cannot guess the market.
Mr. Sebring. Absolutely. We want to be able to go to the
open market every day.
Chairman DeWine. Yes.
Mr. Sebring. But if that open market continues to shrink--
and I am not talking about how many people are buying on the
market, but just literally hogs being available, then that is
when we turn to contractors and to our own farms to try and
produce and have enough hogs to fill our plants. Our plants
will not run without the hogs.
Chairman DeWine. Okay. We are going to stop at this point.
We are into a roll call vote, and we will be back when we can
get back. You can go right ahead.
Senator Kohl is going to ask a question. When Senator Kohl
is done asking questions, we will stop. I am going to leave and
go vote.
Senator Kohl. Thank you, Mr. Chairman.
Mr. Hughes, during much of the year 2003, Wisconsin dairy
producers suffered through extremely low milk prices. Congress
created a new dairy income assistance program during this time
as part of the farm bill to help producers during periods of
depressed prices. This program has been helpful, but obviously
it is not the entire solution to the problems.
Mr. Hughes, can you give the Subcommittee your impression
on the status of the dairy industry in Wisconsin? Specifically,
how do issues related to concentration and consolidation affect
the dairy industry? What impact does increased concentration
among dairy cooperatives have on the ability of Wisconsin dairy
producers to make a living? And, in your opinion, what are some
of the things that we can do about this problem?
Mr. Hughes. Okay. Thank you, Senator Kohl.
The situation in the dairy industry in Wisconsin is it is
very challenged, as you know. We liken it to somewhat like in
the automobile industry in the 1970's in Detroit. But the
recent 20-month or so down cycle is more of a problem of supply
and demand imbalance caused somewhat by import increases,
particularly in cheese and milk protein concentrate. Also, the
softness in the economy has really affected demand for dairy
products. And the milk payments, the milk income loss payments
have been the life saver in many respects in the dairy industry
in Wisconsin.
The concentration issue has a long-term effect in dairy. It
is hard to measure it day by day, but every year we see in
recent years a major acceleration in consolidation both within
the retail--excuse me, the fluid milk processing area as well
as in the dairy cooperative arena. And as I stated earlier in
my testimony, the best thing that a farmer in Wisconsin or any
dairy farmer anywhere or any producer can have is a number of
competing buyers for their product.
I like to say that once I see in a market less than four
competing buyers for a product, I get very concerned. And I
think it is fair to say that the movers and shakers in the
dairy industry do not--and it is a different industry. You
cannot liken it to vegetable processing or meat processing, but
they do not want to see the kind of vertical integration and
concentration that is occurring in poultry, hogs, and so on.
But the tendencies are there, and it does not have to go
that way, but it well could. And I think the thing that is
important to do about this--and in Wisconsin, it is somewhat of
a structural problem because of the competition from the West
Coast. But I think we need to do whatever we can in State and
Federal programs to keep encouraging producer ownership and
vital dairy producer cooperatives and have multiple buyers
acting in the marketplace for producer milk. I think that
creates innovation and strengthens the industry and gives
consumers better results.
I am not sure that you can legislate or regulate the farm
share of the retail dollar which gets discussed in lots of
sessions. It is a very complicated subject why the retail
margins have increased. There is lots of value-adding, ranging
from advertising and promotion merchandising activities to just
the degree of product diversity that is adding to that market
basket cost. And the key thing there is to make sure that the
farm level prices are not being depressed by that concentrating
nature in the industry.
And I think we need to have a strong proactive antitrust
approach that ensures that that does not happen, and that needs
to be coordinated with ag policy.
Senator Kohl. I thank you, Mr. Hughes.
We will stand in recess now until Chairman DeWine returns.
We will be in recess.
[Recess 5:12 p.m. to 5:49 p.m.]
Chairman DeWine. Well, thank you very much. We will see how
long we can go here go here without the Senate having its next
vote.
Mr. Sebring and other processors seem to argue, I guess do
argue that one of the reasons to have these contracts is to
have the uniformity and higher-quality product.
``Consistency,'' I guess, is one of the ways that they describe
that.
Mr. Kremer, as an independent farmer, how do you respond to
that? Do you think your product is an inferior product?
Mr. Kremer. Well, we are also, as I mentioned in my
testimony, we have organized a value-added pork cooperative and
have done a lot of studies and a lot of focus work and realize
what consumers want are choices and they want competitive
choices. And, of course, I also mentioned that it is very hard
to break those types of barriers.
You know, I do not think it is as much--I mean, we can
provide uniformity. In fact, the standards that the packers
that are buying from us, you know, they have dictated that we
have the lean kind of hogs, et cetera. And so I do disagree
with that. I do say what the system is turning into, especially
in the consolidation of the retail industry, is locking out
some diversity. And that is what we face as we try to enter
into some of the major retails systems, you know, the brokerage
firms are basically consolidated, and it is hard to break that
system. We cannot afford the $10,000 per product per year
slotting fees that are required, and what happens, what we have
seen in some of the largest retail settings, is that because
the supply source is dominated by the larger conglomerates,
actually the choices go down. They say this is our standard
line of products.
And so I think that is an issue, and we know that consumers
want choices, and we feel that smaller, more community-based
entities such as ours are what consumers desire.
Mr. Bell. Mr. Chairman, can I add something to that,
please?
Chairman DeWine. Sure, Mr. Bell.
Mr. Bell. One of the advantages of being a contract farmer
is that I would like to be concerned about genetics, about what
needs to come to my farm and what does not need to come to my
farm. I do not know a thing about genetics. We are really not
concerned about genetics. All I am interested in is that I get
paid per head per pig on my farm. And to me, that is the real
advantage. I am not a genetics expert. I am not a feed mixture
or nutritionist expert. All I know how to do is raise the pigs,
and that is all I have to worry about. So, to me, under
contract that is an advantage.
One thing that is sort of--I have been in a few meetings in
the Midwest, pork meetings out there, and have met some people
in the Midwest. And one thing that bothers me a little that I
would like to say is that I have gotten comments such as, well,
we are a family farm out here and you are not in North
Carolina. My dad and I are the only ones who run our farm. I
don't see how much more family we can get than that.
It is a matter of perception, in my mind. In North
Carolina, the typical size farm is maybe 200 acres. That is a
big farm in North Carolina. I went to the Midwest, and I was
talking to this guy who was a farmer. I said, ``Well, how big
is your corn farm?'' He was a corn farmer. He said, ``We have
got about 12,000 acres.'' That is a county in North Carolina.
That is huge.
You know, when I was there, they said, ``Well, you guys are
nothing but tenant farmers in North Carolina.'' Well, calling a
contract farmer a tenant farmer assumes two things:
Number one, that you do not understand the contract you
have entered into, and I graduate from one of the top ten
universities in this country in business school, and I
guarantee you, I understand a contract. And the contract was a
good choice for me to come home to do.
Number two, it assumes you were forced into that contract.
And I would not have left the job I had, which was a pretty
good job, to come home to a small town and enter into this
contract situation. As a matter of fact, if it was a tenant
farmer situation, it would be Smithfield that is a tenant on my
farm because I own the building and the land and they just have
their pigs and feed out there.
If it was a tenant farmer situation and I am being forced
into this and I am not intelligent enough to understand the
contract I have entered, I would not be trying to buy a farm
from my neighbor who is just down the road. As a matter of
fact, we are going to meet about it Friday. He passed away and
I am buying it from his wife.
So, to me, that argument does not hold much weight, but
that is just my perspective.
Chairman DeWine. Mr. Stumo?
Mr. Stumo. The contracts that I see in the Upper Midwest
and the formula arrangements, the grade and yield premiums are
the same as the open market transactions; thus, the incentive
structure for quality is the same for both the contract and the
open market. There is no distinction. And we are aware of no
studies that have shown that there is some inherent quality
benefit in the contracts or that there is one in practice
versus the open market. So we see the same quality incentive
structure both ways.
Chairman DeWine. Mr. Sebring, you buy from the open market.
You buy on contract. You buy both, correct?
Mr. Sebring. Yes.
Chairman DeWine. Difference in quality?
Mr. Sebring. Yes.
Chairman DeWine. But yet you are buying both?
Mr. Sebring. Yes. Well, the contracted hogs have to meet
certain quality standards, irrespective of, you know, the
market conditions. And so those hogs are--we enter into
contracts with the higher-quality hog producers, producers that
have the genetics that we are interested in. Yes, they do get
penalized if they bring us bad hogs, or they can get a premium
if they bring us good hogs. But our goal is for them to bring
us good hogs, and we expect them to earn some premiums.
But we also pay premiums for scheduling, having the hogs at
our barns when we need them, and we pay different premiums for
the type of feed and quality of the hogs up front. And then,
yes, we pay them on a grade and yield basis also.
Chairman DeWine. Does it matter to me as a consumer when I
walk in the grocery store if I get a contract slice of one of
your hogs or if I get a spot market hog? I am being a little
sarcastic here, a little funny. But does it?
Mr. Sebring. Today, more and more retailers and packers are
trying to specialize, have various types of pork: the lean
generation product we talked about, that is a very lean
product; intramuscular lean and fat trim. But there is also the
other side of that. We are developing prime pork programs that
have marbling in the pork and the pork is literally fatter than
it has been in many years. And there is a demand for that.
But, you know, for the most part, the consumer would not
know on the average--today our hogs are all pretty good. They
are all pretty lean. Our average lean-to-fat ratio is 54 today.
Ten years ago it was 47, 48 percent lean, today 54 percent
lean. So most of the hogs that are grown today are higher-
quality hogs.
The contract is there so we know we are going to have
enough hogs to run the plants.
Chairman DeWine. You are getting your average up.
Mr. Sebring. Yes. The quality, the average of the quality
is getting better. And if you do not do that as a producer, you
are not going to make it.
Chairman DeWine. Mr. Stumo, Mr. Sebring wrote in his
testimony that Smithfield and Farmland do not compete for the
same hogs, but you have told us that there is overlaps between
Smithfield and Farmland. Do you two want to explain the
discrepancy in your--
Mr. Stumo. I disagree with Mr. Sebring. We have producers
in our organization that sell to both, have them both bid on
their hogs in Iowa and Nebraska.
Chairman DeWine. Mr. Sebring?
Mr. Sebring. There probably is some limited overlap, but
for the most part, they are getting their hogs to fill their
kill every day, and we are. So I would say there is enough hogs
to go around between us.
Chairman DeWine. As I listen to the testimony, it is not
surprising I guess, I seem to get sort of two visions of
farming, Mr. Kramer and Mr. Bell, of what farming should be,
one contract farming--maybe that is the vision of the future--
the other is independent farming. One is the vision of the
future. You two want to comment on that? It just seems like I
am looking at different worlds here.
Mr. Bell. I will be glad to comment on that, Mr. Chairman.
Chairman DeWine. I get the impression, Mr. Bell, you did
not think you could make it the other way.
Mr. Bell. It is not an impression. In North Carolina it is
reality. In North Carolina, as a former banker, I saw
situations where people would come into my bank, having used up
their life savings and all the equity they build up over two
generations to make it through a down market. The bank
foreclosed on a lot of hog farms when prices are low. And I had
seen that. I do not know if that is isolated to North Carolina
or if that happens in the Midwest. They may not have any
farmers go under if they are independent, but in North Carolina
it happens.
As a banker looking at that, I was not willing to take that
risk. I saw that happen to too many people I was also not
willing to do what needed to be done nutrition wise, to be a
nutritionist, to be a breeder, to be everything that I needed
to be to be an independent, and a marketer for myself. Because
of the contract, I was given all those things as part of my
contract. Realistically, it is a matter of perception, Mr.
Chairman, the perception that a family farm is 300 pigs or 200
pigs or 500 pigs, to me is--I grown more pigs than that, but by
the same token a perception from someone in Iowa who has 12,000
acres of corn, to me that is not a family farm, that is a
corporation.
Mr. Kremer. I have a different perspective, and I am not
here to--I am not against contracting. People have the right to
contract. But I have experiences with contract, most of them
very, very bad experiences. As a young farmer advisor for 12
years, running a vocational agriculture program in an adult
education program, it was my job to oversee 300 farm families,
and we always looked into the contract farming as an option, as
a possible risk management tool, but we used it limited on
account of the experiences we had.
For instances, we have 28 turkey producers that raise for a
company, and 15, 20 years ago they had a great honeymoon. They
started out with 7-year contracts, and renewed for 5 years, and
then it became one and now they are on a flock-to-flock
contract with no other competition around. That is what it is.
So you tell me what kind of inter-generational opportunity
there is as the prices went down. We have seen some poultry
people, poultry contractors and even some hog contracts,
basically had their 3-year contract and then were not renewed.
In some instances, a person came up to me one time and
said, you know, people keep saying that investment of a half a
million dollars into a contract operation is a great
investment, a great opportunity, however they said, if I would
have done that, invested in that particular company as a
corporate stockholder 20 years ago instead of having just worn
out poultry buildings at the time, I would have had $6.5
million.
I think the other point too is the danger of vertically
integrated contract operators for rural communities is the fact
that they normally do not utilize local resources, buying feed
from the local company, support the local hardware store. Most
of the time they come, actually suck out the resources and suck
it out of the communities.
Mr. Bell. Could I respond to that, Mr. Chairman?
Chairman DeWine. Sure.
Mr. Bell. My intake on that is completely 180 degrees in
opposition.
Chairman DeWine. Where do you buy your stuff?
Mr. Bell. Sir?
Chairman DeWine. Where do you buy your products?
Mr. Bell. Well, in Kenansville, there is not many choices.
We have got one hardware store. It is called Brown's Service
Center. It is like the Wal-Mart of Duplin County. We can find
everything we need there, from boots to whatever. I spend
probably 4 to $5,000 a month there. I have about a 3 to $400 a
month gas bill at the local gas station. The perception is--
what he is talking about is a corporate business, the
integrator--
Chairman DeWine. Where does your feed come from?
Mr. Bell. I have absolutely no idea. It comes from a feed
truck that comes to my farm. I have absolutely no idea.
Chairman DeWine. I mean who do you buy it from though?
Mr. Bell. I do not buy any feed. I have no idea.
Chairman DeWine. I am sorry?
Mr. Bell. I do not buy any feed. I have no idea. I do not
own the feed or the pigs. I just own the buildings and the
land.
Chairman DeWine. But the feed is supplied by?
Mr. Bell. --Smithfield.
Mr. Tweeten. Probably it comes from Cincinnati, Ohio.
Mr. Bell. But to respond to something he said a minute ago
that I could not disagree with him more as a banker and as a
common sense--
Chairman DeWine. That would be nice if it did. It very well
could be, but that was an interesting comment.
Mr. Bell. Mr. Chairman, one thing that I could not disagree
with more that he said a minute ago, I understand what he is
talking about, in the poultry business I have heard of that,
you know, people wish they had not built the buildings, 20
years later they have a worn-out poultry house. The poultry
business is a lot different than the hog business. They are
completely different animals. I have got hog houses that I know
in Duplin County where we are that are 30-years-old, still
producing pigs every day, still on contract, getting raises on
a contract, and I can assure if you are had gone to your local
banker 20 years ago and said, hey, I want to borrow a half
million dollars to buy some Tyson Food stock, he would have
laughed you out of the bank. Now, they will lend you a half
million dollars to build a poultry operation or a hog farm
because you have consistent, steady cash flow. He is not going
to lend you a half million dollars to buy some stock.
Chairman DeWine. Dr. Tweeten?
Mr. Tweeten. I think it is important to remember that this
is not your father's Oldsmobile. This is a different kind of
industry than we had two decades ago, three decades ago.
Consumers have become much more affluent. They are demanding
much more from the foods that they buy in the supermarket. My
wife complains a great deal about her inability to buy the kind
of bacon she is looking for.
What worked in the past in terms of meeting the needs of
consumers does not work anymore; that is, you now need to have
a system that tailors the production to the needs of consumers.
That means lean pork. It means the right breeding program, the
right feeding program, the right time and place of delivery,
all these specifications. In the old days, we coordinated this
whole system by the market at each stage of the food production
and marketing process. That is getting much more difficult to
do. It is now cheaper in many cases to use a managed system.
That is where these production contracts come in.
There is a great deal to be said for the flexibility for
firms to make their own decisions as to what best serves their
need, and they cannot help but respond to the demands of the
consumer.
Chairman DeWine. Dr. Tweeten, in his testimony Mr. Kremer
states that, and I quote, ``Agribusiness firms are showing
record profits while at the same time farmers and ranchers are
struggling to survive and consumer food costs continue to
rise.''
This would seem to contradict your testimony, especially
regarding food costs and the profitability of the processors.
Do you want to respond to that?
Mr. Tweeten. Well, yes. The profit margins in agribusiness
are very modest, and they are very modest relative to other
industries in this country. And as I say, in a recent paper I
looked at ten different types of farms, and what we find is
that commercial farms--and it turned out on average it took
about $400,000 worth of sales. But farms with over $400,000
sales per year more than covered all their costs. They got
rates of return comparable to what you see in other industries.
In other words, this idea that markets do not work is simply a
myth.
Now, you say the small farm, the inefficient farm should
have a decent reward for its activities. Well, at Ohio State
University, we do not pay quarter-time teachers who are
incompetent very well. So if a farmer is small--
Chairman DeWine. I missed that. You do not do what?
Mr. Tweeten. We do not pay teachers teaching one-tenth time
and they are incompetent, we do not pay them very well. In
fact, we dismiss them. They never get tenure.
The point is that if you are a small farmer who is
inefficient, do not expect a very good return on your
investment.
Now, we have an awful lot of small farms, and they have
been holding their own pretty well. But they do it through off-
farm income and it is a hobby farm and they are going to stay
in business because they are supporting their hobby with their
off-farm income. But the majority of production is produced by
commercial farms that make a very favorable return on their
investment. The majority of farmers, because they are too small
or inefficient, lose money.
Mr. Bell. Mr. Chairman, if I could interject one more thing
to what he said? And I am not an economist, and I am not from
the Midwest so I do not understand some of the arguments being
made or the mentality. But I will tell you this: It surprises
me that when you look at economies of scale--
Chairman DeWine. We have about the same mentality in the
Midwest, Mr. Bell, as I am sure you do down South.
Mr. Bell. Well, we are little different down South. But
what I do not understand, I guess, about the perception is that
economies of scale work in other businesses, and it works in
the row crop business. But in the hog business it does not seem
to be something they want to consider.
Mr. Sebring. Mr. Chairman?
Chairman DeWine. Mr. Sebring?
Mr. Sebring. Yes, I would like to respond, too. We have
introduced some statistics to the Committee that show packer
margins versus producer margins for the last 10, 12 years. And,
historically, the producers have made more money per head than
the packers, and very seldom does that reverse where the
packing plants makes more money per head than the producer.
Chairman DeWine. Mr. Hughes, what is your opinion about
this?
Mr. Hughes. Well, I think the--
Chairman DeWine. You are a State enforcement officer. You
can give us some insight on this.
Mr. Hughes. Instead of talking about contracting per se, I
think if you step out a little broader and look at
concentration--I was just on the way out reading a magazine
called Dairy Field that showed that last year the only growing
aspect of the dairy industry where margins were healthy was in
the fluid milk business. And it was because there is enough
competitors left in that field that they are really trying to
grow business volume, market share, and they are doing that
through product innovation, and the fluid milk sales was the
healthy part of the dairy business last year. I do not think
that would occur if you got a more highly concentrated
industry, and when you come to contracting in the dairy
business at the producer level, they very much warn against
trying to forward contract your milk for more than 50 percent
of your milk volume. Now, it is not the same business as grain
or vegetables or hogs. And I think if you stuck the dairy
industry into a strict contractual environment, you would have
disincentives in that environment for some of the innovation
that you would see otherwise where there is more choices for
the producer to sell their product and meet different and
varying specifications. That is where you are going to get the
innovation all the way through the market chain.
Chairman DeWine. Mr. Stumo?
Mr. Stumo. Chairman DeWine, I think we have been talking
about the vertical system versus the open market system as if
they are black and white in that they cannot co-exist, we
either have one or the other.
I think in my perspective, in OCM's perspective, we need a
sufficient open market that is resistant to manipulation, that
is resistant to artificial depression of price, to discipline
the contract side. If we go 100 percent vertical, as in
poultry, with no market to discipline the returns to determine
price, to have price discovery, everything is unilateral,
packer-down, and contract modifications for every renewal.
Thus, we see gross profit margins increase 190 percent over
20 years for the poultry companies, and the poultry producers
on average having zero return on investment, zero return on
management, minimum wage, and a mortgage.
In the pork industry, we still do have a thin but it is an
open market, and that disciplines the contracts. If we lose the
open market, or if it becomes even more susceptible to
manipulation, that does not discipline the contracts because
people do not have an option to opt back into the open market.
That is why it is important to have something like, for
example, Senator Grassley and others have proposed a bill for
25-percent spot market each day, so that preserves an open
market, allows the contracts, the open market is sufficient
volume to be more resistant to manipulation, and that is one
way to look at it. That is the way I look at it.
Chairman DeWine. Well, I have heard from some of the other
panelists who seem to imply you do not need any spot market.
You obviously disagree with that.
Mr. Stumo. Yes, if you do not have that auction interface
to determine price, to determine quality, with the quality
specs and an open negotiating, negotiated haggling style bid
going on all the time, then you have strictly a contract
relationship where the power of the dominant firm in a contract
relationship is exponentially greater than the power of a
dominant firm in some sort of an auction or open market
interface.
Chairman DeWine. Dr. Tweeten, how far down can you get with
percentage, spot market?
Mr. Tweeten. I would say--
Chairman DeWine. And still be viable.
Mr. Tweeten. Zero.
Chairman DeWine. You do not need a spot market?
Mr. Tweeten. No. As I say, demand and supply--demand and
supply operate whether you have a spot market or not.
Furthermore, my experience is--and we have done some surveys on
this--that the independents who are operating in the spot
market are far unhappier with their economic situation than the
farmers who are contracting.
Chairman DeWine. Where, Dr. Tweeten, I am just trying to
think in agriculture, where in agriculture has that happened so
far?
Mr. Tweeten. That there is on--
Chairman DeWine. That there is no spot market.
Mr. Tweeten. In a number of fruits and vegetables it is
essentially all contract.
Chairman DeWine. What would those be?
Mr. Tweeten. I think of sweet corn, for example, in my area
of the country. Many other fruits and vegetables I think follow
pretty much the same pattern.
Chairman DeWine. All contracted?
Mr. Tweeten. All contracted.
Chairman DeWine. And what has happened in those industries?
Mr. Tweeten. They function very well. Function very well.
And it is pointed out, too, by Mr. Sebring that in many cases
companies like to have a bit of a spot market because if the
contract production does not fit all their needs, they can
always go into the cash market. The problem is that there is a
great deal of instability in that cash market because it
handles--it is a residual claimant on demand, and that means
there is going to be a lot of volatility because some years
they will come in and need a lot, in some years not so much. So
it is highly volatile. And I cannot imagine that those spot
market suppliers are going to be very happy with that
arrangement.
Chairman DeWine. Mr. Hughes?
Mr. Hughes. I would just like to add, I think that although
contracts, of course, have to respond to some kind of supply
and demand condition, the idea that there needs to be--to make
supply and demand work optimally, there needs to be very good
information that is level on both sides of the bargaining
table. And in the vegetable industry in Wisconsin, the only way
that that mechanism is working is sort of twofold: one is that
the processors know what the opportunity cost for a grower is
to grow soybeans or corn or potatoes versus contract
vegetables. But for the producers who may only have one or two
choices in the marketplace, in order for them to make an
informed decision, their association provides a function to
provide a reporting mechanism because in this case the
Government does not have a price reporting mechanism to make
sure that the offered contract prices are transparent and,
therefore, Producer A knows what Producers B, C, and D may be
having as an option so that they have a little more information
to make their decisions on. And I think that is a vital piece
of the equation--transparency.
Chairman DeWine. All right. Last statement, Mr. Sebring.
Mr. Sebring. Two things, Mr. Chairman. Number one, that
rule or law was passed not too long ago where we do report all
of our spot buys every day. That is required by all of our
competitors and by every packer.
I do not know of many industries where--for instance,
General Motors does not tell Ford what it costs to build a car.
What we are saying today is we just do not want the
Government to impose a ban on packer ownership and packer
management for hog supply. The spot market works. We think the
system today is working. But we have huge amounts of dollars
invested in packing houses, and we need to have a steady supply
of high-quality hogs to keep those plants running, to keep
people employed, and to keep our industry moving along and
profitable for both sides. And we do think it is working, and
that is all we are asking for.
Thank you.
Chairman DeWine. Well, good. I want to thank you all very
much. I know several of you have planes to catch. I appreciate
it. Starting a hearing at 4 o'clock is not easy, and being
interrupted by votes is not easy. Your testimony has been very
helpful to the Subcommittee.
Thank you very much.
[Whereupon, at 6:20 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
[GRAPHIC] [TIFF OMITTED] T1787.001
[GRAPHIC] [TIFF OMITTED] T1787.002
[GRAPHIC] [TIFF OMITTED] T1787.003
[GRAPHIC] [TIFF OMITTED] T1787.004
[GRAPHIC] [TIFF OMITTED] T1787.005
[GRAPHIC] [TIFF OMITTED] T1787.006
[GRAPHIC] [TIFF OMITTED] T1787.007
[GRAPHIC] [TIFF OMITTED] T1787.008
[GRAPHIC] [TIFF OMITTED] T1787.009
[GRAPHIC] [TIFF OMITTED] T1787.010
[GRAPHIC] [TIFF OMITTED] T1787.011
[GRAPHIC] [TIFF OMITTED] T1787.012
[GRAPHIC] [TIFF OMITTED] T1787.013
[GRAPHIC] [TIFF OMITTED] T1787.014
[GRAPHIC] [TIFF OMITTED] T1787.015
[GRAPHIC] [TIFF OMITTED] T1787.016
[GRAPHIC] [TIFF OMITTED] T1787.017
[GRAPHIC] [TIFF OMITTED] T1787.018
[GRAPHIC] [TIFF OMITTED] T1787.019
[GRAPHIC] [TIFF OMITTED] T1787.020
[GRAPHIC] [TIFF OMITTED] T1787.021
[GRAPHIC] [TIFF OMITTED] T1787.022
[GRAPHIC] [TIFF OMITTED] T1787.023
[GRAPHIC] [TIFF OMITTED] T1787.024
[GRAPHIC] [TIFF OMITTED] T1787.025
[GRAPHIC] [TIFF OMITTED] T1787.026
[GRAPHIC] [TIFF OMITTED] T1787.027
[GRAPHIC] [TIFF OMITTED] T1787.028
[GRAPHIC] [TIFF OMITTED] T1787.029
[GRAPHIC] [TIFF OMITTED] T1787.030
[GRAPHIC] [TIFF OMITTED] T1787.031
[GRAPHIC] [TIFF OMITTED] T1787.032
[GRAPHIC] [TIFF OMITTED] T1787.033
[GRAPHIC] [TIFF OMITTED] T1787.034
[GRAPHIC] [TIFF OMITTED] T1787.035
[GRAPHIC] [TIFF OMITTED] T1787.036
[GRAPHIC] [TIFF OMITTED] T1787.037
[GRAPHIC] [TIFF OMITTED] T1787.038
[GRAPHIC] [TIFF OMITTED] T1787.039
[GRAPHIC] [TIFF OMITTED] T1787.040
[GRAPHIC] [TIFF OMITTED] T1787.041
[GRAPHIC] [TIFF OMITTED] T1787.042
[GRAPHIC] [TIFF OMITTED] T1787.043
[GRAPHIC] [TIFF OMITTED] T1787.044
[GRAPHIC] [TIFF OMITTED] T1787.045
[GRAPHIC] [TIFF OMITTED] T1787.046
[GRAPHIC] [TIFF OMITTED] T1787.047
[GRAPHIC] [TIFF OMITTED] T1787.048
[GRAPHIC] [TIFF OMITTED] T1787.049
[GRAPHIC] [TIFF OMITTED] T1787.050
[GRAPHIC] [TIFF OMITTED] T1787.051
[GRAPHIC] [TIFF OMITTED] T1787.052
[GRAPHIC] [TIFF OMITTED] T1787.053
[GRAPHIC] [TIFF OMITTED] T1787.054
[GRAPHIC] [TIFF OMITTED] T1787.055
[GRAPHIC] [TIFF OMITTED] T1787.056
[GRAPHIC] [TIFF OMITTED] T1787.057
[GRAPHIC] [TIFF OMITTED] T1787.058
[GRAPHIC] [TIFF OMITTED] T1787.059
[GRAPHIC] [TIFF OMITTED] T1787.060
[GRAPHIC] [TIFF OMITTED] T1787.061
[GRAPHIC] [TIFF OMITTED] T1787.062
[GRAPHIC] [TIFF OMITTED] T1787.063
[GRAPHIC] [TIFF OMITTED] T1787.064
[GRAPHIC] [TIFF OMITTED] T1787.065
[GRAPHIC] [TIFF OMITTED] T1787.066
[GRAPHIC] [TIFF OMITTED] T1787.067
[GRAPHIC] [TIFF OMITTED] T1787.068
[GRAPHIC] [TIFF OMITTED] T1787.069
[GRAPHIC] [TIFF OMITTED] T1787.070
[GRAPHIC] [TIFF OMITTED] T1787.071
[GRAPHIC] [TIFF OMITTED] T1787.072
[GRAPHIC] [TIFF OMITTED] T1787.073
[GRAPHIC] [TIFF OMITTED] T1787.074
[GRAPHIC] [TIFF OMITTED] T1787.075
[GRAPHIC] [TIFF OMITTED] T1787.076
[GRAPHIC] [TIFF OMITTED] T1787.077
[GRAPHIC] [TIFF OMITTED] T1787.078
[GRAPHIC] [TIFF OMITTED] T1787.079
[GRAPHIC] [TIFF OMITTED] T1787.080
[GRAPHIC] [TIFF OMITTED] T1787.081
[GRAPHIC] [TIFF OMITTED] T1787.082
[GRAPHIC] [TIFF OMITTED] T1787.083
[GRAPHIC] [TIFF OMITTED] T1787.084
[GRAPHIC] [TIFF OMITTED] T1787.085
[GRAPHIC] [TIFF OMITTED] T1787.086
[GRAPHIC] [TIFF OMITTED] T1787.087
[GRAPHIC] [TIFF OMITTED] T1787.088
[GRAPHIC] [TIFF OMITTED] T1787.089
[GRAPHIC] [TIFF OMITTED] T1787.090
[GRAPHIC] [TIFF OMITTED] T1787.091
[GRAPHIC] [TIFF OMITTED] T1787.092
[GRAPHIC] [TIFF OMITTED] T1787.093
[GRAPHIC] [TIFF OMITTED] T1787.094
[GRAPHIC] [TIFF OMITTED] T1787.095
[GRAPHIC] [TIFF OMITTED] T1787.096
[GRAPHIC] [TIFF OMITTED] T1787.097
[GRAPHIC] [TIFF OMITTED] T1787.098
[GRAPHIC] [TIFF OMITTED] T1787.099
[GRAPHIC] [TIFF OMITTED] T1787.100
[GRAPHIC] [TIFF OMITTED] T1787.101