SPEAKERS CONTENTS INSERTS
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55–091 CC
1999
1999
LIVESTOCK PRICES
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
FEBRUARY 10, 1999
Serial No. 106–1
Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
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LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
Vice Chairman
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
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DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
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DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
JAMES H. CAHILL, Printing Editor
(ii)
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, prepared statement
Berry, Hon. Marion, a Representative in Congress from the State of Arkansas, prepared statement
Chenoweth, Hon. Helen, a Representative in Congress from the State of Idaho, prepared statement
Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Pomeroy, Hon. Earl, a Representative in Congress from the State of North Dakota, prepared statement
Submitted material
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Smith, Hon. Nick, a Representative in Congress from the State of Michigan, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Witnesses
Collins, Keith, Chief Economist, U.S. Department of Agriculture
Prepared statement
Evans, Gary E., executive vice-president and chief operating officer, Farmland Industries, Inc.
Prepared statement
Jarolimek, Craig, vice-president, National Pork Producers Council
Prepared statement
Page, Greg, corporate vice-president; sector president, red meat group, Cargill, Inc.
Prepared statement
Payne, Sam, vice chairman, dues division, National Cattlemen's Beef Association
Prepared statement
Siddoway, Cindy, vice-president, American Sheep Industry Association
Prepared statement
Submitted Material
Boyle, J. Patrick, president and chief executive officer, American Meat Institute, submitted statement
Food Industry Trade Council, submitted statement
Hulshof, Hon. Kenny C., a Representative in Congress from the State of Missouri, submitted statement
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LIVESTOCK PRICES
WEDNESDAY, FEBRUARY 10, 1999
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to notice, at 10:27 a.m. in room 1300 Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Barrett, Boehner, Ewing, Goodlatte, Pombo, Canady, Smith, Everett, Lucas of Oklahoma, Chenoweth, Hostettler, Chambliss, LaHood, Moran, Thune, Jenkins, Cooksey, Calvert, Gutknecht, Riley, Walden, Simpson, Ose, Hayes, Stenholm, Peterson, Dooley, Clayton, Minge, Hilliard, Pomeroy, Holden, Bishop, Baldacci, Berry, Goode, McIntyre, Stabenow, Etheridge, Boswell, Phelps, Lucas of Kentucky, Thompson of California, and Hill.
Staff present: William E. O'Conner, Jr., staff director; Lance Kotschwar, chief counsel; Tom Sell, Pete Thomson, Greg Zerzan, Jeff Harrison, John Goldberg, Callista Bisek, Wanda Worsham, clerk; Vernie Hubert, minority counsel; Andy Baker, and Andy Johnson.
The CHAIRMAN. The hearing will come to order.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. I would like to welcome our witnesses and my colleagues to today's hearing on livestock prices. As we all know, prices for many commodities have fallen dramatically and in some cases below the cost of production. The livestock sector has been particularly hard-hit. Price have been down for cattle and sheep producers for nearly 3 years and pork producers have seen drastic market declines very recently.
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These adverse market conditions have caused considerable fear and hardship for many of this committee's constituents. This in turn has generated numerous and lively discussions about why prices have fallen and what to do about it. It has been my experience in talking with my constituents that while everyone feels very strongly about it, there is little agreement on what role that Government can play in improving the market.
Today we hope to shed some light on the complex workings of these markets. By the end of this hearing each of us should have a firm understanding of what has happened in the livestock markets in recent years and months to get us to where we are today, and where we will likely be in the future. As members of this committee are called upon to respond to the serious difficulties facing livestock producers, we must do so with a sound understanding of the problem if we expect to make wise policy decisions for the future.
I look forward to the testimony of our witnesses and the questions of my colleagues to those witnesses and would recognize the gentleman from Texas, Mr. Stenholm, for any comments.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman, and thank you for holding this hearing.
The last few years have been especially tough times for the livestock industry. Not only have producers endured devastating drought but an epidemic of low prices has further eroded their hard-earned equity. During these years producers of beef, lamb, and more recently pork have all experienced prices that are simply too low to endure.
We know that livestock and poultry products account for more than half the value of all our domestic agriculture production so when livestock producers suffer, their losses inevitably spill over to all the rural businesses that depend on them for their own livelihoods. Consequently, if we are to maintain a healthy rural America, we must pay particular attention to the impact that livestock prices ultimately have on producers, rural businesses and rural communities.
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The causes for current low prices are certainly a complex matter, a combination of increased supplies, poor market information, drought-induced liquidations, and limited exports and in many cases unlimited imports. Each have been responsible for this price catastrophe.
The task before this committee is to carefully investigate these factors and to determine what responses are appropriate. The challenges facing our livestock producers point to the need for a more workable, comprehensive safety net for livestock, as well as for crops. Providing that improved safety net will be one of the key challenges facing the Agriculture Committee during this Congress.
I am hopeful that through the hearing process we can all better understand the complex dynamics at work in our nation's livestock industry.
Mr. Chairman, I look forward to working together with you to provide the common sense policies and solutions which our livestock producers need and deserve.
The CHAIRMAN. Thank you, Mr. Stenholm.
Any Member who has a statement for the record may submit it at this time.
[The prepared statements of Members follow:]
PREPARED STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
I am very pleased the Committee on Agriculture is taking up the issue of livestock prices as our first order of business this year. Thank you to our new chairman for his leadership on this issue and getting this committee off to a strong start.
Nineteen hundred and ninety-eight was a very difficult year for pork producers as they witnessed the lowest hog prices since 1972. The year 1998 also was very difficult for cattle producers. Fed cattle prices averaged in the low 60's—the lowest in the 1990's—and feeder cattle prices averaged in the low 70's, also very low for the 1990's. We all hoped the cattle market would climb out of its cyclical low in 1998. Unfortunately, it didn't happen.
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This year is predicted to be a better year for cattle producers, especially as we get into fall and winter. And 1999 should bring some price stability to hog producers. However, many, many producers are seeing their equity erode at an unprecedented pace. I personally know producers that are asking if they should get out now before they go too deeply into debt or if they should try to make it work for a little while longer.
These issues are the real challenge for the Agriculture Committee. We need to address them. However, we need to be sensitive to how any action could impact other sectors of the agriculture economy and the U.S.'s position in international trading negotiations.
I look forward to hearing from today's witnesses about how the committee can help livestock producers and getting started on a resolution to the problems.
PREPARED STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
I would like to thank the chairman for holding this important hearing on livestock prices and consolidation within the packing industry. Livestock is a major component of U.S. agricultural production. In 1998, farmers and ranchers received an estimated $93 billion for their livestock and livestock products, representing 47 percent of total farm market receipts. With the exception of limited disaster assistance, most livestock producers are entirely dependent upon the market place for their success which makes the current situation of low commodity prices very disturbing.
A number of factors coalesced in 1998 to drive down livestock commodity prices. Record-large per capita meat and poultry supplies, weaker export markets, and too many animals chasing too few slaughter facilities, have combined to drive down prices received by producers nearly 15 percent below the average of the 1990's. The drop in hog prices was especially severe, as average slaughter hog prices fell nearly 40 percent in 1998. USDA has predicted that red meat and poultry production will remain at record levels again this year which means there may be little recovery in prices unless export markets change.
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With this reality in mind, some livestock producers have suggested some type of government assistance to help cope with low prices. Recommendations include the establishment at USDA of a guaranteed loan program for livestock producers while others are suggesting a one-time-only direct cash assistance to those producers most hurt during this downturn. Also, in a market based system competition is important which is why farmers should know the price they will be paid. I look forward to the witnesses comments on mandatory price reporting.
There is no doubt that government can play a constructive roll in providing focus to help producers better manage risk. I look forward to hearing from our witnesses today on their interpretations of current market conditions, their prognosis for the future, and what type of roll government should take.
PREPARED STATEMENT OF HON. HELEN CHENOWETH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IDAHO
Thank you, Mr. Chairman. I appreciate your holding this hearing to review livestock prices. I cannot overstate the importance of this issue to my producers in Idaho. The series of livestock hearings you are planning are very, very welcomed, and I look forward to bringing a lot of information to the attention of the committee.
Today's American agriculture is suffering from low commodity prices, poor yields and unfair trade barriers in the international market place. In 1997, after almost 2 years of record highs, prices began to fall and natural disasters have depressed farm income in several regions of the country.
Mr. Chairman, there isn't a single cause that can be easily pointed out. Indeed, there are many factors which must be weighed, including how our American producers are treated in the international market place. What I do believe, though, is that halting the unfair trade practices of the Canadian Government will enable us to get to the truth of fair pricing for our domestic agricultural commodities.
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During the last 10 years Canada has increased the number of cattle exported to the United States. In 1988, Canada sent nearly 488,000 head of cattle to the United States. By 1996, the Canadian number had increased to 1.5 million head. Contrast this with United States exports to Canada when U.S. live exports totaled 15,300 head in 1988. The number rose to 92,400 head in 1994 and then declined to 41,200 head in 1997. These figures are alarming.
The fact is, a majority of these livestock imports in the past years have been dumped into the United States at below the foreign country's cost of production. Also, other factors such as significant import supplies, subsidized imported commodities and unfair trade practices have contributed to the American cattlemen's and rancher's economic distress.
I was pleased to learn that the U.S. International Trade Commission (ITC) determined that the domestic cattle producers across the United States are being injured by the imports of live cattle from Canada. As a result of ITC's findings, the U.S. Department of Commerce will now proceed to determine whether imports of live cattle from Canada have been dumped and subsidized. I look forward to reviewing the U.S. Department of Commerce's findings in this case.
Mr. Chairman, ITC's determination is a step in the right direction to restore conditions of fair trade for the American cattle industry. However, we must not stop here.
We must continue to find solutions to help stabilize prices for the domestic cattle industry and others who are involved in the production of live cattle. We must continue to initiate action to deal with the negative impact of imports on profitability in the American cattle industry. We must aggressively seize opportunities to market livestock products in the countries with fast growing populations. Lastly, we must embrace fair trade agreements which promote incentives for U.S. resources, labor and capital, to name just a few.
Mr. Chairman, I'm pleased to report that in an effort to improve the financial conditions for the livestock industry, I have again introduced legislation (H.R. 222) to provide the agriculture community with the information they need and want. H.R. 222 provides for country-of-origin labeling on retail meat and meat products. This means that whichever country the livestock is born and raised and slaughtered in, its origin will be clearly labeled on all meat.
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Imported beef is 22 percent of total U.S. beef consumption, while imported lamb has jumped dramatically in the last four years to 20 percent of total U.S. lamb consumption, and imported pork is currently at 3.3 percent of total U.S. pork consumption.
It is clear that our beef, mutton and pork producers have voluntarily instituted and comply with the strictest food safety, inspection and pesticide criteria in the world to provide consumers with a product that is tasty, wholesome, and most of all, safe. Yet, imported, subsidized meat has given foreign producers an unfair edge on the market, especially when consumers see a United States Department of Agriculture approved label. Many consumers falsely believe that they are buying high-quality American meat.
For many countries, labeling the origin of product is commonplace. In fact, other countries are moving to make their meat supplies more traceable and accountable to the consumer. Japan and the European Union have labeling requirements for imported meat. Also, Mexico is moving to tighten regulations governing the import of beef. If other countries are doing this, the United States should be able to do the same.
Meat industry groups are so sure that America produces will benefit under H.R. 222 that they strongly support country-of-origin labeling. I'm joined in my effort to pass this legislation by the American Farm Bureau, the National Cattlemen's Beef Association, the National Farmers Union, and the American Sheep Industry Association, Inc.
I am certain that, after consideration of the facts, the House Agriculture Committee and the U.S. Congress will recognize the same thing that the producer and the consumer recognize—American meat is the best in the world, and all meat should be labeled for country-of-origin.
Mr. Chairman, with your help, we can ensure that the high-quality American meat that we're proud of is properly labeled and receives the recognition it deserves.
I look forward today to hearing from our panels of witnesses to better understand how to improve the economy for the American livestock industry.
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STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Thank you, Mr. Chairman for holding this important and timely hearing on the status of the livestock industry in the United States. Holding a hearing of this nature demonstrates that the Committee on Agriculture is sending a strong message to the 1.9 million farmers in the United States that their economic concerns will be addressed during the 106th Congress.
This hearing could not be more timely. The status of the American livestock industry is at a watershed moment. Many livestock producers are facing near dire economic conditions with many deciding that their life long dreams and goals of owning a farm or ranch simply are not worth it anymore. Many producers are simply leaving the farm or ranch (without a fight similar to the 1980's economic crisis) to finally participate in the boom of the United States economy instead of lingering in the bust of low commodity prices.
Prices for all commodities are at near all time lows. During 1998, corn sold in some areas for only a $1.10 per bushel, wheat sold for as low as $2 per bushel, beef cattle sold for mid-$50's per hundredweight., and sheep sold in the low $70's per hundredweight. But nothing brought clearer the economic pain that ''farm country'' is experiencing than the debacle that occurred in the hog sector. During November and December 1998, hogs sold for an unbelievable $5 per hundredweight. Prices have not been close to that low in modern times even when compared (adjusted for inflation) to the economic devastation of the Great Depression.
I have a very difficult time comprehending how prices could have fallen that low. Especially, when profits for processors and manufacturers are at record highs and one of the country's largest packing firms reports record profits during the 4th quarter of 1998 (the same time hog prices were at record lows). With the number of hog producers falling from 579,310 in 1981 to 138,690 in 1998, and cattle ranches falling from 1.9 million to 1.2 million, clearly America's family farmers are falling victim to something more toxic than simple inefficiency.
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When prices reach below Great Depression levels, I believe that government must take necessary actions to protect our family farmers. I believe government must create a level playing field for family farmers. Because action must be taken immediately, I strongly endorse two important legislative provisions—country-of-origin labeling and mandatory price reporting.
I have joined more than 30 House Members as an original cosponsor of the Country of Origin Meat Labeling Act of 1999. This legislation is consumer friendly, beneficial to American cattle ranchers, and common-sense. I strongly believe that American consumers deserve to know the source of the meat and meat products they feed their families. If Americans can determine the country-of-origin for car stereos, televisions, and blue jeans, why can't they know the origin of the meat products they consume? American cattle ranchers are proud of the top quality product they produce and have invested heavily in genetic research to produce a top quality product. Unfortunately, without country-of-origin labeling, ranchers fall victim to meat recalls and food-borne illnesses that are caused by foreign meat imported into the United States.
Today, I am pleased to join the bipartisan efforts of Representatives Boswell, Minge, Gutknecht, Emerson, and Thune in comprehensive mandatory price reporting provisions for live cattle and boxed beef. Currently, without mandatory price reporting American cattle farmers and hog producers have no idea what price they will receive for the cattle they sell on the spot market until days later. Without market transparency family ranchers and hog producers are at the will of large corporate packers and the prices they pay. With the strong bipartisan efforts that have gone into drafting this legislation, I am hopeful that mandatory price reporting will pass this Congress.
As a Representative from a cattle producing State and as a person deeply concerned about the future of the American livestock industry, I warn that Congress cannot afford to follow the status quo and do nothing. We must act and we must act quickly!
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PREPARED STATEMENT OF HON. MARION BERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARKANSAS
Thank you Mr. Chairman and thank you Mr. Stenholm. I appreciate that the first legislation this committee will consider is trade related. As a strong supporter of expanded opportunities for our farmers, I am concerned that too often our Government hinders rather than encourages exports. The two bills we will consider today make useful changes to our country's laws to enhance our ability to compete. This is the right message to send to our farmers and to our trading partners: Congress is ready to fight for the opportunity to export American products. When fairness prevails, Americans prevail. We are typically the most efficient producer and competitor in the world; and this extends well beyond agriculture. America has made enormous gains in productivity in the last thirty years and our economy is strong as a result. We must follow through on these achievements by protecting the markets we have established overseas, expanding export opportunities, and fighting unfair practices by our competitors.
I would also like to thank the chairman and Mr. Stenholm for holding a hearing to review livestock prices. The situation facing meat producers today is devastating. This is a good opportunity for us to hear the range of options available to Congress to help. Time is running short for many of the farmers and livestock producers out there. I also want to thank today's witnesses for coming down to discuss the matter today.
Thank you Mr. Chairman.
The CHAIRMAN. We would like to invite our first panel of witnesses to the table.
Dr. Keith Collins is the Chief Economist of the U.S. Department of Agriculture. Dr. Collins is accompanied by Mr. Harold Davis, who is the Deputy Administrator of Grain Inspection, Packers and Stockyards Administration at USDA; and Mr. Barry Carpenter, who is the Deputy Administrator for the Agricultural Marketing Service.
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Dr. Collins, we recognize you and ask you to proceed when ready.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY HAROLD DAVIS, DEPUTY ADMINISTRATOR, GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION AND BARRY CARPENTER, DEPUTY ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE
Mr. COLLINS. I thank you very much, Mr. Chairman and members of the committee. On behalf of the Department of Agriculture I want to thank you for inviting us to be here today and lead off your hearing on a very important issue, the developments in livestock markets, particularly prices.
I have distributed a written testimony that contains a lot of data, and descriptions of economic and market developments. What I would like to do in the next couple of minutes is just confine my comments to the current market situation for hogs and cattle, two commodities that had a farm value of about $43 billion in 1998.
The market for most livestock producers over the past year was very rough. Per capita meat and poultry supplies were a record high. We had drought, which reduced forage supplies in many areas of the country and total meat and poultry exports declined. Unfortunately, for 1999 I believe we are going to look at another year of record high total meat and poultry supplies.
Focusing on cattle, fed cattle prices declined 7 percent in 1998 and that was the lowest level in the 1990's. U.S. cattle numbers have been dropping quite steadily since late 1995 when producers began liquidating herds and so the obvious question is with cattle numbers coming down steadily why did we have the weakest prices in the decade?
The simple answer is that producers continue to send their animals to market. They are not retaining animals to rebuild their breeding herds. Drought in Texas and the Southern States also aggravated the liquidation.
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Another factor has been the weight at which animals are being slaughtered. The average dressed weight for cattle in 1998 was 723 pounds. That was an all-time record high and it was up from about 700 pounds the year before, so we have this combination of continuing liquidation, and record high weights. The result of that was that we had a 1 percent increase in beef production even though we had a far fewer number of animals in the United States.
What are the prospects for 1999? Well, when you have shrinking herds, you get fewer placements into feed lots. Ultimately that is going to mean less beef supplies, higher beef prices, higher cattle prices, and all of that is starting to happen right now and will happen through 1999. Unfortunately, this is taking longer to happen than we previously thought and it is slower in coming.
We just put out some new forecasts at 8:30 this morning with our supply and demand estimates report, and our current forecast for beef production in 1999 is it will be down 3 percent, which is a lot less than we had thought a few months ago. Cattle prices are expected to be up about 7 percent in 1999.
Turning to hogs, average prices in 1998 were the lowest in 26 years and of course in mid-December we had prices in the $10 per hundredweight range. Several factors combined to cause this unprecedented drop in hog prices, one being the very good returns we had in 1996 and 1997, another being very strong increases in exports for several successive years. All gave producers the signal to expand and expand they did. If you go back to September 1, 1998, we had 63.5 million hogs on farms in the United States. That was the highest number since 1980.
The result was that in 1998 we increased pork production by 10 percent. That is a tremendous increase when you compare that to the rate of population growth.
Well, what are the prospects for 1999? Large pork supplies will pressure hog prices for the first half of 1999 and I think they will keep hog prices in the $25 to $35 per hundredweight range, which is going to keep most producers under financial pressure, because that is below break-even costs. As hog slaughter begins to decline, as we move through the year, I think by the second half of the year we'll move above a year-earlier prices.
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Low livestock prices, particularly for hogs, have increased attention to the transmission of prices from the farm level to the retail level. For example, the farm value of 1 pound of hog was only 10 percent of its retail value in the month of December and that has led to a lot of concerns about post-farmgate rigidity of prices and whether that is enriching processors and retailers at farmers' expense.
In looking at the long-term price spreads, I don't think they suggest any particular pattern of anti-competitive behavior at the packer or the retail level.
The short-term drop that we saw in December reflected the very rapid drop in hog prices in late 1998 when we bumped up against slaughter capacity and it reflected the usual stickiness that we have seen in past episodes in retail prices. Some people have also argued that retail demand has been strong and that kept retail prices up, and the retailers have argued to us that the data we use on retail prices is not very accurate, that it doesn't properly volume weight sales and that actual retail prices are lower than reported.
Lastly, I want to mention the issue of consolidation of livestock farms into large production units and the concentration in the meat-packing industry. The increased consolidation, concentration, coordination can provide higher quality products at lower prices and help the Nation use its production resources better, but it can also affect environmental quality. It can affect the economic opportunities of small farms and can affect rural communities that are dependent on agriculture, and it is because of those possible downsides that the Secretary of Agriculture created a National Commission on Small Farms and created an Advisory Committee on Concentration, and in response to the reports of those two commissions we have taken a number of actions that deal with market transparency and to deal with enforcement, and I have outlined some of those in my testimony.
I would mention that Secretary Glickman spoke with me this morning about this hearing and wanted me to be sure that I conveyed the position that our door is not closed on these issues. We continue to aggressively look at our authorities and we will be taking future actions I think that will be effective and perceived as aggressive.
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That completes my testimony. We would be happy to respond to your questions.
[The prepared statement of Mr. Collins appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much, Dr. Collins. Do you have anyone who is with you who wishes to make a statement?
Mr. COLLINS. No, sir. That's it.
The CHAIRMAN. Thank you, sir. I would commend your entire testimony to the members of the committee and appreciate your giving it to us in that timely fashion and I did have the opportunity to review that.
What is the actual name of the panel or the commission that the Secretary brought together to look at the concentration issue?
Mr. COLLINS. The Advisory Committee on Agricultural Concentration is as close as I remember it.
The CHAIRMAN. That includes the concentration of, let's say, hog or cattle operations from many farms to larger operations?
Mr. COLLINS. Yes, sir, it addressed primarily concentration in the red meat industry and in the rail industry and it had representatives on it that were farmers as well as processors.
The CHAIRMAN. Are they also looking at the concentration and the other aspects of livestock from, let's say, packers and others as well outside of the farming operations?
Mr. COLLINS. No, sir. That committee has run its course. It is no longer in existence and the work that we now do in that area is done primarily by us at USDA with our own internal task forces as well as working with other groups across the executive branch.
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The CHAIRMAN. Could you describe the interaction among the various species, cattle, pork, sheep, with respect to prices, and does the degree of interaction in them give incentive for each to be concerned about what is happening to the other?
Mr. COLLINS. Generally this is an issue that economists have tried to study for a long time, and to give you a rough idea maybe I'll put it quantitatively. If you have a 10 percent increase in production of, let's say, pork like we had in 1998, generally that is associated with about a 7 percent decline in the market price of pork.
That is roughly the same for poultry and beef as well—roughly 10 percent increases reduce prices in the order of 6 or 7 percent.
Your question is about the interactions of one species on another and generally that is a term that economists refer to as cross-price effects, and generally the cross-price effects are a lot smaller. A 10 percent increase in the supply of pork is usually associated with about a 1 percent decline in the price of beef because as people eat more pork they eat less beef, and that is not a very strong cross-price effect. Generally a 10 percent increase in the supply of beef or pork is associated with about a 2 percent decline in consumption of poultry, so fairly small cross-price effects. Pork and beef tend to substitute more for one another than pork and beef do with poultry, so I think there is some reason to be concerned, but I don't think it is that great.
If I were to look at what happened in 1998 with the increase we had in pork production I would say that probably in and of itself, by itself, no other effect such as the increase in beef production which occurred, I would say that would probably be responsible for about a 1 percent decline in the price of beef and maybe a 1.5 percent decline in the price of poultry.
The CHAIRMAN. One of the considerations that is discussed a great deal that we hear from constituents and others is in regard to the country-of-origin labelling issue, and part of that discussion is that if in fact we had country-of-origin labelling that it would increase demand for U.S. agricultural products.
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Does the Department have or do you have any information that might shed light on that, any data that might show that that may or may not be the impact?
Mr. COLLINS. That is something that we are working on. As I am sure you know, we did not take a position on country-of-origin labelling last year. It was brought up last year and in our appropriations bill, passed this past fall, we have a mandated study to look at the effects of country-of-origin labelling and the mandate is for us to report back to Congress within 180 days of enactment of our fiscal year 1999 appropriations bill.
That study is being conducted by the Food Safety Inspection Service together with the Agricultural Marketing Service, the Economic Research Service, other agencies at USDA, and we are looking at those very issues, benefits and costs essentially of country-of-origin labelling and so I would probably reserve judgment on the demand effects of that until we see that study.
The CHAIRMAN. Does that study also include fruits and vegetables?
Mr. COLLINS. No. There is a separate fruits and vegetables study that is mandated to be done by the GAO. Unfortunately I don't recall the timetable which that is on, but I think the information that will come out in that study will also be useful for looking at the meat industry as well.
The CHAIRMAN. In the study which is ongoing on meat, is the anticipation that study would then show what the presumed or estimated cost would be and how that cost might be borne throughout the industry?
Mr. COLLINS. Yes, sir, that's one of our intentions. I am going to have to go back and take a look at design of that study in light of the different country-of-origin proposals that are coming out because some of them have included species or cuts of meat that others did not include and some of them have defined what a U.S. animal is differently.
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The CHAIRMAN. Right.
Mr. COLLINS. And those definitions certainly are going to affect the cost to be imposed on the industry as well as the department.
The CHAIRMAN. Thank you very much, Dr. Collins.
Mr. Stenholm.
Mr. STENHOLM. Dr. Collins, as you well know, there is a tremendous amount of controversy concerning imports, exports, trade policy and the so-called level playing field of fairness question.
Last year, at the time that our hog markets were collapsing, we saw a rather substantial increase in the number of imported hogs, about a million head according to your figures.
A decision yesterday by the International Trade Commission confirmed the belief of many of us that our domestic sheep industry has been severely damaged by cheap imports. As you know, the President must now determine whether withdrawal or modification of concessions or imposition of duties on competitive imported products is appropriate.
What will USDA's role be in making recommendations to the President and what actions do you believe would help restore lamb prices?
Mr. COLLINS. That's a little difficult question for me to answer. Up to this point USDA has not been involved in the case that has been filed with the ITC. I think at this point what happens is that the ITC will proceed with a recommendation to the President on the appropriate remedy to deal with the injury that has been imposed on the lamb meat industry.
In the past when such recommendations have come forward there has been interagency discussion within the Executive Branch about those remedies. To the extent that that takes place, the USDA will be there to make appropriate recommendations.
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Mr. STENHOLM. According to figures you submitted in your written testimony today, commercial production of lamb has gone from 343 million pounds in 1992 to a an estimated 247 million, pounds in 1998. and as you know and I hope everyone else knows, we had a loss of the wool and mohair program because of a general philosophical belief that this industry can survive in the world marketplace free and unhindered by any Government support. What we now know is that the sheep industry and the goat industry have in fact had a difficult time adjusting to the so-called world market.
As they have attempted to adjust, they find that all of a sudden imports have gone from 50 million pounds to 94 million pounds and this is what caused the 6–0 decision yesterday by the ITC. At least those six individuals found that harm has been done and that actions should be taken under our laws. We are going to have more witnesses and considerably more discussion on the overall question of trade policy, of whether we can pass fast track, and whether we can send our negotiators to the table to negotiate a more level playing field.
There are significant differences between the United States and Canada, particularly on the hog question, I would be interested in having the views of you and the Secretary regarding this specific question and how it might be applicable to other livestock industry concerns.
Mr. COLLINS. I think our general view on this mirrors what you just said. The wool and mohair program was very important to the industry. It was phased out in the 1993 to 1995 period—I think 1996 was the last year of wool payments. Now we saw roughly a 20 percent decline in the Nation's sheep inventory over that period. That is devastating really, and then when the industry begins to stabilize, after it has made its adjustment to the demise of the wool and mohair program, prices do start to rise because of the cutback in production and the door opens to a lot of imports.
We saw a fairly sharp drop in lamb prices last year, something like $13 per hundredweight, which was very detrimental, so I think USDA's very sensitive to this issue and what has happened to U.S. sheep producers and the lamb industry.
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Mr. STENHOLM. This is going to be an ongoing question because certainly I recognize that the future of agriculture in the United States lies in the world market. That is where our future lies. At the same time, under current economic conditions, it seems like we have become the dumping group for a lot of other countries who for whatever reasons choose not to act responsibly according to the interpretation of the trade laws. The expression act responsibly becomes an opinion.
Mr. COLLINS. Right.
Mr. STENHOLM. I appreciate very much the chairman holding this hearing and the subjects that we are going to get into with others—consenting country-of-origin labelling and price reporting, among others.
One of the disturbing things to me, in reading quickly some of the record of the previously referenced ITC ruling, is that many times we really do not know what the price is of the product coming into this country. How could anyone with a straight face say we have a market system when we do not know what the market is? How can we do that?
Mr. COLLINS. Well, to the extent that you don't have good market information, you can't expect the markets to work very effectively or efficiently and that is a big concern that we have and it is certainly true with respect to lamb imports. Lamb imports of course were one of the items in the mandatory price reporting pilot that we are directed to do, so we are sensitive to that.
I would say that the one broader concern we have about this issue is as we go down this road of filing ITC cases, of putting barriers up against import surges which in many cases can be legitimate, other countries are also doing the same thing. As you know, in this year, in 1999, the Mexicans imposed countervailing duties on all live hog exports for essentially similar kinds of arguments and so the one concern I have about this is one seems to beget another and in a world where we are trying to liberalize markets and increase international trade, we also have to keep that in mind as we proceed with these kinds of cases.
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The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman. Thank you, Mr. Collins, for being with us again for this very important hearing and thank you in advance for your agreeing to be in my State on Monday for another similar hearing out in middle America. We appreciate it very much.
Mr. COLLINS. Oh, my pleasure.
Mr. BARRETT. Last night I was reading over a copy of the Winter, 1999 Trade Research News, and I read the discussion about the relationship between our cattle inventories and the USDA's measure of beef production. The authors, it seemed to me, tried to make the point that although USDA's data overstates the amount of beef actually produced in this country, it doesn't impact proper analysis if the appropriate adjustments are made to USDA's measures of imports and U.S. beef production, which sounds terribly technical, and some of my producers out in my part of the world have indicated a similar concern about not only USDA's data and trade figures but about the whole process.
What I am getting around to is is there an easier way to disseminate this information, to make it a little easier for laymen, to make it a little easier for even a number of our producers. Can we break out some of these numbers? Can we disseminate it in a different way?
Your comments, please.
Mr. COLLINS. This whole question of data collection and reporting goes back to Mr. Stenholm's issue about transparency, and as markets have weakened, there's been more and more call for market information, price information as well as quantity information like you are talking about.
In the past year, we have had some changes in our numbers which have also changed people's perceptions about what is going to happen in the marketplace, and that has led to concerns about some of our reports.
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I'll make a general statement about these reports, first of all. What we do is voluntary reporting. They are based on samples but these are not small samples in most cases. Our price samples sometimes tend to be a little smaller but our quantity samples are quite large.
I'll give you an example. For hogs, we inventory every hog operation in the United States that has more than 5,000 hogs and we do a sample of those that are smaller. In total, we actually count 60 percent of all the hogs in the United States and at any one time there's about 60 million, so these are not small samples that we take.
Second, because they are probability-based, I can make a statement about the degree of error in these studies and the probability is 95 percent, if you believe our statisticians, that we are going to be within plus or minus seven-tenths of 1 percent. Now that is pretty darn small, but when you figure we have 100 million head of cattle in the United States, seven-tenths of 1 percent is 700,000 cattle, so we can be off by several hundred thousand head of cattle and I think that that is what is one of the factors involved with the beef market right now.
We generally thought and analysts generally thought that we would have lower cattle inventories when we did in our January survey. We turned out to have higher cattle inventories than most people thought and it was generally because our calf crop was larger than we expected and last year's death loss was considerably lower, a positive benefit of El Nino. We had about 300,000 fewer cattle deaths last year than in the past, so these kinds of things happen, which cause a difference between what our survey numbers are, and what people think will happen in the marketplace, so that is sort of the first part of your comment.
The second part, about what we can report, there is no doubt that we can do a better job. If you have ever read our hogs and pigs report—not exactly a best seller outside of the hogs and pigs industry—or our cattle report, you will be mystified. There's a lot of jargon in them and they are very hard to understand and in fact when we had the Advisory Committee on Concentration—its 30 members or whatever—we had many people in the livestock industry on that committee asking for us to report new kinds of data which in fact we were already reporting, so there is a maze of information. All you have to do is go to Agricultural Marketing Service's Website, or the National Agricultural Statistics Service's Website and you will be quickly inundated with all the reports.
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I think we have to do a better job in getting this information out and we have to rethink the timeliness with which we do it, and I would again go back to the hog situation in December. We put out quarterly hog reports, yet we had a situation where we ran up against slaughter capacity. You know, maybe we should do it more frequently than quarterly so that the industry will have a better sense of what is coming along and can make the appropriate adjustments.
These are the kinds of issues that we have to look at and I agree with you.
Mr. BARRETT. I appreciate that. I am amazed at the number of producers that have raised this question with me, either directly or indirectly. And I guess you are suggesting that the system is good but it could be better.
Mr. COLLINS. That is what I am suggesting.
Mr. BARRETT. What resources do you need, could you use, to make the quality of the data better?
Mr. COLLINS. Well, obviously what is on the table in the last couple of months has been mandatory price reporting, that the Department should have that authority. Some of the legislation is very prescriptive. It would tell us what we should collect and exactly who should collect it and when it should be reported. Others are more flexible and give us an opportunity to go through a rulemaking and decide what we should collect and report.
I would have to say that Secretary Glickman supports mandatory price reporting, so that is one tool. Second, there is always a question of dollars. When we got the mandatory price-reporting pilot, I will have to confess that we have not yet announced the plans and how we are going to implement the mandatory price-reporting pilot, because we have yet to receive a proposal from the agencies that comes in under the $250,000 that Congress appropriated. And now we have a piece of legislation which would add swine and muscle cuts of swine to that mandatory reporting pilot, which will in fact make it even more difficult to try and do a mandatory reporting 12-month pilot on $250,000, which also, I might say, has to cover the costs of developing the electronic reporting system for export sales, which was mandated in our appropriations bill.
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Mr. HILLIARD. Will the gentleman yield?
The CHAIRMAN. The gentleman's time has expired.
Mr. HILLIARD. I just had a quick followup right on that point.
Could you not cross-subsidize? Are you prohibited by the legislation from finding some other money in the USDA budget to bolster that up?
Mr. COLLINS. No, the Secretary has the option, he has certain authority to move funds from one account to another, and we may end up doing that in the end. At this point the people responsible for those program areas were concerned about using appropriated funds for some activity for which they were not appropriated, but as you know, the Secretary has interchange authority and we may end up doing something like that in the end.
Mr. BARRETT. Thank you, Mr. Collins. My time has expired. I appreciate your comments.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman.
I guess, Mr. Collins, what is—the emphasis behind this hearing is I guess concerns in terms of what has led to the decline in a lot of our commodity and livestock prices, and also some of the attention on concentration and some of the issues related to transparency are—I guess are motivated by some concerns that there are some imperfections in the market and there may be some potential for monopolistic behavior that is having an unfair impact on producer prices, and that is leading some folks to consider some policies.
I guess, though, as an economist, when you analyze the data, the supply of the various meat protein products that are out there, did you see anything that was occurring on the price side of it that is in any way unusual or would not correlate with what we would see from a historical perspective on the response of livestock prices to supply?
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Mr. COLLINS. A good question. With respect to beef, I think generally the kinds of models that we use to project beef prices, we can account, based on fundamental supply and demand factors, for most of the price changes, the vast majority of price changes that occur in beef.
With respect to hogs, we have been able to do that as well, except that that broke down in late 1998. We had an unusual set of factors that come together at that point, and it becomes difficult to say with absolute precision what every factor was.
The most obvious discrepancy, which has been widely reported from the New York Times and everywhere else, has been the decline in the farm value of the retail dollar spent on pork, down to 10 percent. Typically it averages 30 to 35 percent. Ten percent is unprecedented. In 1994, when we had a collapse in the hog market, it was 23 percent, I think. So this very sharp decline, and a somewhat less decline in the wholesale prices, and a much less decline in the retail prices, has led to questions about the exercise of market power of packers and retailers.
There is nothing in looking at that data that can tell you whether that any exercise of power that occurred was illegal. I mean, there is no way you can look at that data and conclude that. And you can also look at a whole variety of possible explanations as to why we observe the things that we observe.
We know that every time farm prices have dropped sharply, retail prices have not followed the drop down. And you can list a half a dozen reasons that grocers will give you. You know, they will tell you that my customers remember every price increase but forget all the decreases. Therefore, I am going to be very reluctant to change my prices.
So, a built-in lag. You go to a supermarket and what have you got? You have got tens of thousands of items being sold. Is the grocer really concerned about the market share of each and every item? No, I think that there is a lag—they are not just selling hogs at the grocery store, they are selling everything. So there is a natural lag I think to respond to these changes. And so when their input prices decline and they start making a little more money, are they going to be quick to pass that on to the consumer? In a perfect world, they will be. But competition is not perfect. There are these lags that occur. And we have called those competitive in other industries, and we are very concerned about it in this industry. And we need more work on that.
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I am not trying to say that, you know, everything is ''hunky dory,'' this is a phenomenon that we observed in December that we expected and are comfortable with; we are not. In fact, as the Secretary said yesterday in his hearing before the Senate Appropriations subcommittee, that we are working with the Department of Justice and the Federal Trade Commission to look at price transmission, and he has asked the Grain Inspection, Packers and Stockyards Administration to also dig into the transmission of prices and see if we can understand better what's occurring.
At USDA we have not focused on prices from the wholesale level to the retail level. Retail prices are a Bureau of Labor Statistics and Federal Trade Commission issue. But we are going to get into that. We think we are more interested in that.
Mr. DOOLEY. And you would agree that one month does not necessarily make a trend, either. You obviously would have to see how long this 10 percent farm-retail would persist.
Another question I had is in your testimony you talk about the growing use of forward contracting and collectively referred to as captive supplies. There are some folks in the industry that are worried that that is leading to a thinner spot market which is making those prices more volatile. Has there been any work that has done a correlation between forward contracting prices and spot prices, and also has that also been correlated to supply-and-demand situations?
Because I would assume that spot prices, when we are in a situation where you have oversupply, that they might be a little softer than what some people might be on a forward contract, but also the reverse can be true, too. If you had supplies being maybe less than what we would have anticipated, spot prices might be higher than contract prices. And I was just wondering, has there been any statistical analysis of the correlation between these two also as it relates to supplies?
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Mr. COLLINS. Yes. I would say this is the heart of a lot of work that has gone on in the USDA in the last couple of years, is going on now, and will continue to go on. I am sure many of you have heard this term, the WORC petition, the Western Organization of Resource Councils, who have petitioned the Department to use its authority to preclude, prohibit certain kinds of forward contracting and to prohibit packer-owned and fed cattle. That petition was published by the Department nearly 2 years ago I think, and we have been doing work on that since then, and we did work prior to that.
In the mid–1990's there was a large amount of money appropriated to the USDA to do a study on concentration in the red-meat industry, and a pivotal part of that study was to look at this question of the relationship between captive supplies and cash markets.
The answer is yes, a lot of that work has been done. I will tell you, the work that was done in the mid–1990's did not find a great relation. Much of the focus over the last couple of years has been on this hypothesis that packers in their forward contracts have the ability to call forward cattle at a certain time. There is a window in which they can call it forward. And much of the cattle is priced based on a spot price, so that the allegation is that packers will call forward cattle to affect the spot market price, thereby affecting the formula-based price on all their forward contracts. And so that is the hypothesis that we have looked at.
And we had one study that we contracted out, a large university study, that found ambiguous effects. There are individuals who think the effects that were found were significant. The Department's analysts think that the effects found were not significant. And so there is a debate about the numbers, and I will tell you there are six different econometric models there with 8 million variables. And when you get rooms full of economists together, boy, you can guess what happens. It is really entertaining.
And so there is a lot of debate about what that study meant. We are following that up, and we are doing subsequent studies to that that are under way right now. We have a range of studies contracted with universities, and we have just completed our West Texas Feedlot Procurement Study. What we have done there is we have impaneled a group of six university professors from around the country, some agricultural people, some not agricultural people, some industrial organization specialists from non-land-grant universities, of all things. We have got them together in Washington yesterday and we briefed them on that study.
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And we have asked them this very question: What can you tell us about the relationships between concentration and market prices? So people are frustrated in cattle and hog country. They are frustrated with USDA. You know, they are not sure we know what is going on. They are not sure we are doing anything.
This is difficult stuff, I must say. It takes a lot of work to find evidence that somebody is illegally abusing their market power, that is, acting in a predatory, manipulative, controlling way, in a discriminatory way. And the tools that we use take a long time to construct. And so we have increased our resources in this area. We are doing more studies. We have one group of studies that was done. It was inconclusive. We are now under way with another group of studies.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. No questions.
The CHAIRMAN. Mr. Minge.
Mr. MINGE. Thank you, Mr. Chairman.
First, I would like to express my appreciation for your being here, Mr. Collins. Today I anticipate that several of us on this committee will be introducing a bill for mandatory price reporting. It would include Mr. Thune, Mr. Boswell, Mrs. Emerson, myself, and possibly others. And we have worked with the National Pork Producers. We feel that this effort should move ahead, it should move ahead immediately, that we have gone through a devastating collapse of prices for hogs, that the price for hogs probably reached its lowest level in the history of this country adjusted for inflation last December. And that unfortunately the appearance out there in Middle America is that Washington has fiddled while the hog farmers have gone out of business. And really I think that we are under an obligation to be responsive here.
If we had seen milk prices or grain prices collapse the way hog prices did, there would have been a special session of Congress, I expect. It was so devastating, and I heard so many farmers explain what was happening in their operations, and now we even see possibly some banks are threatened by this experience.
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I would like to followup on a couple of items that have been already raised. One is the spot market, and the concern that when you have a certain percentage, let us say 50 percent to 60 percent of your plant capacity filled with contracts, and you are reaching a point where because of holidays or something else you may be able to limit what you want to buy in the spot market, and that spot market price just collapses, and what we saw in December I think is a likely example of that, and I appreciate the fact that as economists you are looking for sort of the magic bullet here, you are looking for the skeleton in the closet or something like that, but it is very elusive. And I am wondering if we cannot move ahead sort of on our best estimates and say in terms of policy what do we need to do so that we learn from what happened last December and we do not have American farmers that are raising hogs or raising anything else put through this kind of a wringer again.
Mr. COLLINS. First, let me comment on your mandatory-reporting statement. We agree with that. We are not great supporters of this mandatory pilot authority that we have been given, that we would conduct for 12 months on limited funds and then report something publicly after 12 months. I think the Secretary's view at this point is go ahead, provide us mandatory authority, and let us get on with it. And a lot of that has to do with being able to provide producers an understanding of the terms and conditions of contracts, which some people will argue are as varied as there are numbers of producers and numbers of packers. So I think, you know, our position on that is analogous to yours.
On what can be done about this, there are a couple of schools of thought, I think. One is—well, first a comment on how fast these markets are changing. We did a survey in January 1996, on hog procurement practices, and in that survey we showed that 80 percent of all hog trades were done on the spot market. The most recent surveys that have been done by Iowa State University, University of Missouri, are showing that probably about 40 percent is now being transacted on the spot market. And in some areas of the country, like in the Southeast or the Southwest, it is substantially less than that. So in like a 3-year period we have had a tremendous escalation of contracting in the hog industry. And I think that as that market thins out, that cash market thins out, it is going to be associated with more price volatility.
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Well, how do you deal with that? Well, I do not have the magic-bullet answer on that, but one extreme is you encourage contracting. You do not let producers get hung out by not having access to contracts.
Mr. MINGE. Maybe one thing I could just add in there, what we are finding is that once packing plants reach a certain level of supply requirement through contracts, they are not terribly interested in more contracts.
Mr. COLLINS. That is right.
Mr. MINGE. Because they see some advantages to purchasing a residual amount on the spot market.
Mr. COLLINS. That is right.
Mr. MINGE. And those farmers, especially smaller farmers that are not in on a contract, have that opportunity foreclosed—and this is creating some real hardship, and it is creating hardship unfortunately among the farmers that are probably least able to roll with it, and I am talking often about beginning farmers that are thinly capitalized.
I would like to make just a couple of more points here before my time runs out, and I would I suppose in a way rather listen to your observations, but the clock is running.
We face a credit problem as well in rural America, and it is tied in in part to the collapse of hog prices. We have hundreds of farmers, at least in my area, and I expect thousands of farmers across the United States, who cannot access normal credit channels because of the dramatic drop in their net worth last November, December, and January. The FSA's loan guarantee authority and direct loan programs have been fully subscribed in some States, and they are expected to be exhausted before crops go in the ground this spring, late spring. And I would hope that the Department is moving aggressively to obtain a supplemental appropriation from Congress.
And checking with OMB and the White House earlier in the week, I understood that no request had come from the Department to OMB or the White House yet for supplemental funding for the FSA loan programs. And I realize this is not your division of FSA, but I would just like to urge that this be done and you carry the comment back to the Department.
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Mr. COLLINS. I would say that as of last week we had about a billion dollars in unobligated balances in our ownership and operating loan funds combined. You are correct, we think those funds will run out faster than usual over the next couple of months. We are proceeding with sending documentation to OMB for a supplemental. The only reason it slowed a little bit was so that we could get firm estimates of the rate at which we would run out of funds. Second, we have some other programs for which we will probably seek a supplemental appropriations request, too.
Mr. MINGE. I understand in some of the programs we are out of funds in 15 States already, that as of the beginning of February.
Mr. COLLINS. That is true.
Mr. MINGE. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Minge.
Mr. Lucas of Oklahoma.
Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman.
And, Dr. Collins, I realize that we operate in a changing world. In my own State of Oklahoma 5 years ago we had a few hundred thousand hogs, and now we have a few hundred thousand hogs plus 2 million.
Mr. COLLINS. Right.
Mr. LUCAS of Oklahoma. I look at your statistics and I see in that same 5-year period that poultry production has increased by approximately 20 percent. So I realize that there are many things going on out there. But my constituents I think would like to be reassured that on the one hand, and that might be my first question, that our present laws are being fully enforced by the Department. How many people, what kind of resources, and how does it compare to the past with how we have enforced the Packers and Stockyards Act?
Mr. COLLINS. Let me start with that and maybe ask Mr. Davis if he would respond to that. I would say that obviously this is a high-priority area, and we want to increase our enforcement activity. We have to increase our resources in it. And we have done that. We last year asked for increased appropriations for the Grain Inspection, Packers and Stockyards Administration so we could conduct a reorganization of the agency, which we did. We have concentrated investigative teams in three States, in Iowa for hogs, Colorado for cattle, and Atlanta, GA, for poultry. We have teams that consist of economic, statistical, and legal expertise, not something we had in the past.
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This year we have also asked for an increased appropriation again to augment both our red meat and our poultry investigations. I cannot say to you that this is an astonishing increase in resources. This is not a $25 million increase or something like that. We are talking in the neighborhood last year of about $2 1/2 million increase for a one-time request to conduct a reorganization. And this year the Grain Inspection, Packers and Stockyards Administration budget request is almost the same as last year. The one-time $2 1/2 million would come out and would be replaced by increased funds for investigative activities in poultry and red meat. So we are responding with more resources. Maybe Mr. Davis could add some more detail to that.
Mr. DAVIS. Thank you. The whole purpose of the reorganization was to allow us to move forward into this area of competitive issues. For the last 5 years we have spent a far larger share of our resources on competitive issues than ever in my entire career in the agency. We have not had economists in our field offices until just within the last year. When we did the reorganization we began putting economists. We plan to put 10 to 12 economists and legal specialists in each of these three offices, one to focus on these particular issues involving captive supplies, industry structure, and what amounts to competitive issues in the industry. We are moving just as quickly as we possibly can to gear up to be able to be more effective in addressing these issues.
The thing that we continue to be faced with is concerns about concentration—is concentration bad? And before we can say that concentration is bad, we need to be able to show some effects from concentration that are in fact having an impact on producers. And to date the evidence is just simply not there to support that.
Mr. LUCAS of Oklahoma. But I can reassure my constituents that in the spirit of the laws that existed on the books for many decades now, you are doing your best to enforce those laws, to gather the data as is available to you as required by the law, that there has been no lax, no lessening of your efforts. And that is what I am understanding you to say, you are fully engaged and committed with the resources available to you.
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Mr. COLLINS. I would say one more thing.
The CHAIRMAN. Would the gentleman yield just a moment, if I could do some housecleaning business, and then we will not take this out of your time.
There has been a vote called. It appears there is only one vote, and then there will be about an hour before the next one. The Chair's suggestion would be if we could alternate this and go vote, we won't stop it, we will just keep going with the questioning so we do not just leave our witnesses hanging here. And I appreciate the gentleman letting me interrupt. Please go ahead, Doctor.
Mr. COLLINS. All right. Thank you, Mr. Chairman.
I would say I agree with your conclusion that we are doing our best to enforce the statutory authorities that we have, but beyond that, the Secretary of Agriculture is pressing us to look hard at our statutory authorities and be sure that we are interpreting them properly. Have we given the Grain Inspection and Stockyards Administration and the Secretary enough flexibility under the law, or are there more flexibilities? Are there more things that he can do under the law that we are not now doing simply because we have not done them historically? So we are pressing those authorities right now, and we are reexamining them.
Mr. LUCAS of Oklahoma. Dr. Collins, in your written testimony you point out that between the beef supplies acquired by the packer-feeders and the forward contracts, that represents about 20 percent of the fed cattle out there. Does that number concern you?
Mr. COLLINS. Not in and of itself it does not. I do not think 20 percent is all that disproportionate. And as Mr. Davis said, in the studies that we have contracted so far, we have not seen substantial economic effects of captive supplies. So at this point I would say no.
When I look at the hog industry and I start getting up to 60 percent, I am beginning to get concerned about the possible effects of that. In cattle, I am not. That 20 percent is broken down about 4 percent as packer-owned and fed and about 16 percent is forward contracted or marketing agreements. At this point, that does not strike me as abnormal. I mean, forward contracting and marketing agreements are endemic in American business, and that seems like a nonalarming percentage to me personally.
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Mr. LUCAS of Oklahoma. Thank you, Dr. Collins.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Lucas.
Mr. Pomeroy.
Mr. POMEROY. Mr. Chairman, I want to begin by thanking you for holding this hearing. I have been on this committee for three full Congresses, and during that time I have sensed that sometimes chairmen ran away from problems rather than tackling them head on. As a brand-new chairman you are clearly demonstrating you are going to tackle these issues head on, and I appreciate it.
To that end, I would like to offer a statement for the record, and proceed with questioning Mr. Collins and Mr. Davis.
The CHAIRMAN. All statements will be accepted.
Mr. POMEROY. You know, from where I sit, and those I represent, you see a growth in terms of captive supply control through the mechanisms you speak of, actual ownership and forward contracting. You see reduction in plant capacity and fewer entities participating in the processing business down to now a very finite number. And you see this kind of market difficulty, a prolonged trough in the beef and then this totally shocking collapse of the hog market. And while you say that effective concentration cannot be proven, I represent people that this looks like you walk in a room and there is a guy dead on the floor and another guy holding a smoking gun, but because you did not see him shoot it, you cannot conclude that there was a crime that took place. I mean, the evidence to me is compelling. I do not propose to be an economist, thank God, but, I mean, something has—will you at least concede this, the structure of the marketplace is considerably different than it was in 1985?
Mr. COLLINS. Oh, yes, I will concede that concentration levels are higher, contracting has changed, the location of the industry has changed. It is much more pronounced, I would say, in hogs than in cattle. But, yes, the industry has changed.
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You say would I at least concede this. I will also concede that we are concerned about the very issues you raised in the first part of your comment. This is a very difficult issue, as I said earlier. When we take an action against someone, if that action is not justified, we will be in court instantaneously with someone seeking a temporary restraining order, and we have to have evidence for what we do. The court precedent on these cases has set a pretty high standard.
I mean, we have to show that there is material harm, harm has occurred. We have to show that there is predatory intent. We have to show that the actions are manipulative or collusive or unduly discriminatory. And when analysts look at a 10 percent increase in pork production at the same time that demand has not changed that much, traditional economic models will say that, by God, hog prices are going to sink. And so, where then is the illegal predatory activity that caused the price effect?
Mr. POMEROY. In a way, using the—we had a little better opportunity to stop some of the consolidation that has taken place under the existing Federal statutory framework than we do to chase after trying to——
Mr. COLLINS. Absolutely.
Mr. POMEROY. Trying to bust the trusts now that they exist.
Mr. COLLINS. I would agree with that. I would say absolutely.
Mr. POMEROY. Then I think, Mr. Chairman, we should really think about, and I have heard an awful lot of talk about how the sweeping Packers and Stockyards Act passed in the twenties gives us everything we need. Maybe it does not, and maybe we need to work with the Department to find less exacting tests, but fair, that will provide some relief here.
Moving on, in terms of hog production, you know, I think the description that we have chickenized hog production is pretty doggone descriptive of what has happened. Is there any other component of the livestock industry where production has so revolutionized itself in recent years relative to increasing capacity?
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Mr. COLLINS. I hate to bring this one up, but perhaps milk, I mean, we are seeing the same kind of dramatic decline in number of operations. In fact, the decline in number of operations for hog producers and milk—about the same.
Mr. POMEROY. Milk I do not begin to understand.
Mr. COLLINS. You do not care about milk.
Mr. POMEROY. I care about it, but I do not begin to understand it.
Mr. COLLINS. Yes.
Mr. POMEROY. I like Collin Peterson's description. He says three people in Congress purport to understand the milk pricing legislation, and they are lying.
Mr. COLLINS. Or else they want to keep it that way, just those three.
Mr. POMEROY. Let us leave milk and go to livestock, animal production.
Mr. COLLINS. Fine.
Mr. POMEROY. Or include poultry for that matter.
Mr. COLLINS. Well, poultry, of course, had a dramatic transformation.
Mr. POMEROY. That happened already.
Mr. COLLINS. That already happened. And hogs is undergoing that right now. Cattle feeding has undergone a pretty dramatic transformation. Cattle feeding is pretty concentrated, but calf, that is not.
Mr. POMEROY. You know, a couple years ago it seemed to me that we were looking at pork, the future of pork was expanded production, increased efficiencies in production. Well, sooner or later that runs into the brick wall of demand, and maybe we have seen——
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Mr. COLLINS. Let me tell you about this survey that Iowa State took in 1997. They asked 8,500 hog producers how much they planned to expand production between then and the year 2000, and the answer was 36 percent. So there is an expansion mentality in the industry, and as they got more efficient, and they got much more efficient, far more pigs per breeding animal, as they got larger, it slammed into slower-growing demand.
Mr. POMEROY. A final point. If we are nuts on production, so is Canada. I mean, you indicate that Canadian exports now represent 4 percent of our market. Four percent, that is a lot. And you state in your testimony due to large hog production, low prices, and labor problems at the Canadian packing plants, and yet our export projection is down because Canadian production is on an increase. What would be driving that other than Canada looking at potential expansion in the U.S. market and unlimited opportunity to exploit it under NAFTA?
Mr. COLLINS. Well, what is driving it is that under NAFTA we essentially have an open border with Canada, and what is driving it is the same forces that are causing expansion in the United States are causing expansion in Canada. They are undergoing the same structural transformation, they are undergoing the same changes in packing plants. They have escalated their exports into Asia, for example, for pork. They are looking to build markets in Asia. They have had a fairly substantial increase in hog numbers in the 1990's. And so the same forces are at work there.
The CHAIRMAN. The Chair would indicate that there is probably less than 5 minutes remaining in this vote. Mr. Smith will be recognized next, and if we all have to go, you can play ''Jeopardy!,'' give us the answer and we will ask the question later.
Mr. SMITH. I like that. [Laughter.]
Looking at the concentration, what part of the Department is considering not only the concentration in terms of the slaughter facilities for cattle, for hogs, but also the concentration and the pressure that is being put on many farmers from the supply or input end in terms of a lot of chemical companies are now aligning themselves with a lot of seed companies to say to farmers, you either buy—if you buy both your seed and your fertilizer and chemicals from us, then we will give you a bigger deal. Is there somebody in the Department that is looking along with the Department of Justice in terms of are we going too far in this concentration, both—and you indicated some work in the slaughter end as well as the other end.
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Mr. COLLINS. Yes, Mr. Smith, absolutely. With respect to meat packing, the Grain Inspection, Packers and Stockyards Administration is primarily focused on that. With respect to input suppliers, the seed industries, the life sciences companies that you spoke of, we have regulatory authority in the area of permitting field trials to go on, for example, for seed. That authority is housed in APHIS, Animal and Plant Health Inspection Service——
Mr. SMITH. Let me interrupt because I am going to run to vote. But it seems to me that also was part of the pricing problem for hogs a shortage of capacity in terms of slaughter capacity?
Mr. COLLINS. Well, you could say it was a shortage of capacity or a surplus of hogs, but it was clearly high-capacity utilization.
Mr. SMITH. Which one was it? Which one was it in terms of traditional volume that goes through those houses?
Mr. COLLINS. Oh, I would say it is more on the supply-of-hog side. A 10 percent increase in pork production is unprecedented.
Mr. SMITH. And is the concentration in the limitation of that slaughter—is that in any way related to the size of those firms keeping other smaller slaughterhouses out of the business?
Mr. COLLINS. Well, that is an issue that we are going to look at. I would say that over the last 5 years the slaughter capacity in the hog industry has increased. Our estimate is roughly 3 1/2 percent. Over the last 2 years it has declined. One of the things we want to look at is the reasons for the decline and the pattern of ownership and closure of plants.
Mr. SMITH. The committee will stand in recess until recalled by the Chair or his replacement in a few minutes.
Mr. COLLINS. Thank you.
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[Recess.]
The CHAIRMAN. We might resume the hearing. I see that no one wanted to do the ''Jeopardy!'' suggestion, but we would have those on record.
Mr. Dooley had some comments that he would like to make.
Mr. DOOLEY. It is kind of a line of questioning or just one question, really. In terms of this mandatory price reporting, I guess if we go down that path, and I understand what you are saying to the administration, we did not give you enough money to put together a pilot program that was going to really provide the information that was going to allow us to make a more informed decision whether or not this is going to work is what I understand you are saying. And I guess, though, you know, to go down and to—what you are asking—saying that you want legislation for mandatory price reporting is what I also thought I heard you say.
I just kind of want to know with the future in commodity markets that we have in place now, that obviously play a role in price discovery, is why should we see any significant variation in terms of what prices would be reported in a mandatory pricing regime than what we would see now being played out on the exchanges?
Mr. COLLINS. That is a good question, and it is one of the reasons why we have struggled with the concept of mandatory reporting over the last couple of years. First of all, consider the market we are talking about. We are talking about meat, a market in which USDA has unique regulatory authority. We do not have that in grains. We do not have that in other commodities. But we have the Packers and Stockyards Act, which gives us special responsibilities with respect to meat.
And where we have seen this rapid transformation, first in the poultry industry, now in the hogs, I think there is a question—one of the issues is a question of confidence on the part of producers with the data that we are reporting.
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We report data that is based on samples. Let me give you one example. Producers are concerned about prices that we report on boxed beef. And so we looked at our survey on boxed beef and we see that for a long time we were getting about 20 to 25 percent or so of the volume of boxed beef sales. So we redoubled our efforts last year and said we are going to try and make sure we have got more to make sure we are not misreporting this number, because the boxed beef price is an important determinant in determining the live animal price. So we have upped that the best we could, and we are getting now about 40, 45 percent. From a statistician's point of view I do not think that is too bad, but it does leave a standard of error, and it does concern producers.
Now that is a fairly objective data point, one that we can go out and get our hands around. The more difficult ones are the questions of contracts, for example. We conducted a procurement study last year on hogs in the western Corn Belt, and what we tried to look at was the reasons for difference in prices. And one of the things we found was that there were differences in prices for similar quality—identical quality animals that we could not explain. We think that there must be some details in the provisions of the contracts that we do not have information on. And so I think it is things like that that have led to a concern on the parts of producers about whether we are getting full information, whether we are reporting full information, and whether that can be conducted adequately under a voluntary reporting program.
Now in the end, will it give us different prices? I do not know the answer to that, because we do not have a mandatory reporting program today. It will certainly give us more information on contracting than we currently have, because we do not have a lot of information on contracting. But will the boxed beef price be different if we have 100 percent of all trades accounted for as opposed to 40 percent? That is the answer I do not know at this point.
Mr. DOOLEY. Well, my only concern is that if we are moving down that path, we already have, you know, the statistical difference between 40 percent and 80 percent, you are never going to get to 100 percent, and quality of the data is also always going to be questioned. I guess I have a hard time accepting that you are going to have a great, you know, difference in terms of what the final outcome is, and yet we are going to place another mandate here to, you know, to address something that I do not know if it would happen if we were not in an oversupply situation with low commodity prices, and I question making policy, you know, that has long-term implications that is motivated by, you know, maybe a short-term situation versus long-term.
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And the other issue is, all these forward contractings are voluntary agreements. I mean, I am a farmer. If I want to go out and contract to provide, you know, a commodity at a set price, that is my business, and I guess I question what is the appropriate role of the Government to, you know, have access to that contract or, you know, or what business it really is. And really once again as a producer, why is it in my interest not to maximize my profits, and if I can see a better market opportunity by maybe taking action on the commodity exchanges in order to lock in or hedge, you know, I have every financial incentive to do that, and that is going to be reflected in the contract. I cannot conceive of a producer, you know, taking action, entering into a contract that is not in his bottom-line interest.
Mr. COLLINS. Mr. Dooley, if we were doing a decision memo for the Secretary on this issue, you just did all the cons for us. Those are all good points. On the other hand, we do have a constituency out there that is concerned about provisions of contracts and the fairness or perhaps the discriminatory aspect of contracts.
One example might be small producers, who will argue to us that they do not get access to contracts with a particular packer because there are volume requirements or there are volume discounts, and those volume discounts are not cost-based, which might be the allegation to us. And so it is those kinds of concerns that are out there as well.
Getting into the nitty-gritty detail of the provisions of contracting so people want to see the light of day, and once it sees the light of day, if it does not inform the market, if it does not change anything, then so be it. But if it does, then it would be worthwhile to do.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman.
Mr. Collins, I think there is very little that we can do that impacts the short-term price of commodities. I think that long-term there are a number of things that we can do through policies that affect price. Has the Department done any studies on the cost of mandated programs, we are talking about mandatory reporting, country-of-origin labeling, things like that, and there is obviously a cost associated with those?
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In determining our decision as to whether or not to proceed with some of these ideas, it would be helpful to know who actually bears the burden of those programs. From your previous testimony, I am suspecting you are going to give us in the near future an estimated cost on some of these programs, and if that is the case, it would be helpful to know who ultimately bears that cost. Has the Department done any studies on that?
Mr. COLLINS. We have done some very rough estimates of the costs of running a mandatory price-reporting program, and as part of our mandated study on country-of-origin labeling, we are going to do detailed cost estimates of country-of-origin labeling. In the past the Department has put out total cost to the industry and USDA in country-of-origin labeling on the order of $60 million, and has suggested that a mandatory price-reporting program, depending on what we choose to collect, if it is up to the Secretary, if he has discretion to mandate, could run anywhere from $1 million to $7 million.
But those are all at this point, at least the $60 million estimate, is now out of date. It was associated with one particular bill from last year. There are new bills on the table now. And so we are going to look at that all over again. The $1 million to $7 million, again that depends upon how we would proceed with constructing such a program.
Mr. POMBO. And who pays that $60 million? Who ultimately bears the cost of that?
Mr. COLLINS. Well, most of that would be the industry. I mean, it would get passed——
Mr. POMBO. Who in the industry?
Mr. COLLINS. It would get passed back to producers and passed forward to consumers.
Mr. POMBO. Do you have anything to base that on, that the producer would pick up a certain percentage of it and the consumer would pick up a certain percentage of it? Have you done any studies on that?
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Mr. COLLINS. I have not, but I am sure that is what we are doing with our current mandated study. If you increase the cost of production for a processor who has to report, for example, or has to identity-preserve animals all the way through the system, as country-of-origin labeling would require, there are economic analysis techniques that allow you to estimate the incidence of the increase in cost of production, that is, how much of it gets passed back and how much of it gets passed forward. But I have not done that. But it can be done.
Mr. POMBO. Do you expect to give us those numbers or an estimate?
Mr. COLLINS. I think we would.
Mr. POMBO. And do you feel that that would be similar for all such mandated things? I know one of the things that is proposed right now is a user fee on inspections. Do you think that the breakdown in the cost of who actually bears that cost would be similar to country-of-origin labeling?
Mr. COLLINS. I have not thought of it like that.
Mr. POMBO. Would the producer end up paying that the same way he would in other areas?
Mr. COLLINS. Yes, I think that is probably roughly right. With respect to user fees, we are talking about something in the order of $500 million, user fees for inspection services, something in the order of $500 million on an industry that had sales of $93 billion or $94 billion last year. So less than five-tenths of a penny per pound of meat produced. My guess would be that most of that would probably be passed forward to consumers, but I would—I probably should not have said that. I should reserve judgment on that. I have not done that analysis.
Mr. POMBO. Will that analysis be done for us?
Mr. COLLINS. I think the user fee issue for inspections, that analysis has already been done. I will certainly locate that for you and send it to you, and I will check into the country-of-origin labeling and ask that that be done.
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Mr. POMBO. Yes, I would definitely like to know that. I think for us to make an educated decision on a lot of these areas it would be worthwhile to know who actually bears the burden of the cost, whether it is user fees, mandatory reporting, or country-of-origin labeling.
I have another question going along those same lines in terms of long-term policy planning. We have seen in a number of sectors of the meat business plant closings, whether you want to call that part of concentration or not, we have seen increased imports, we have seen a decrease in demand in many products domestically. Do you believe that as we look at this long-term, does that add up to a permanent loss of domestic market share for our domestic producers?
Mr. COLLINS. Do you mean as opposed to imports?
Mr. POMBO. Yes.
Mr. COLLINS. The domestic share of——
Mr. POMBO. A permanent loss. And we can look at the sheep industry as an example of what many people fear is a permanent loss of the domestic market in terms of market share.
Mr. COLLINS. I do not think broadly across meat that it is a permanent loss. I think it more likely is for sheep than cattle or hogs. And one of the situations we face right now is that we have just come off of a couple of years, 1995, 1996, 1997, with pretty good prices through most of the world for many agricultural commodities. We had an expansion in production.
That has been confronted with a global slowdown, recession in Asia, the collapse of the former Soviet Union, which were pretty big meat consumers, and now recession in Brazil and perhaps other American countries. Meat consumption is coming down at the same time meat production had gone up.
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Then we had a number of disease episodes around the world that added to this. We had pork disease in Taiwan which basically shut down their market and is causing a very substantial liquidation in their herd. And the liquidations that are coming in places like South Korea because of the collapse or the recessions that they have faced there has put more meat on the world market at the same time that demand is weak. We are feeling that in the United States because there is more meat available on the world market. We are seeing beef imports up because of that. With respect to Canada, we are seeing pork imports up because of the sort of unified market we have in North America now with Canadian producers getting the same signals to expand that our producers have.
But I think it can go the other way as well. I look out to 1999. I would like to say there will be a decline in live hog imports. I think there might be. I do not think it will be great, but I think that we are going to see a new packing plant open up in western Canada, much of the hog expansion is going on in western Canada, we hear about a lot of contracts within Canada for hogs to move east toward Quebec, and hopefully we will see more slaughter up there and more animals stay up there and we will not see the penetration in live hogs.
I think that we have a very competitive meat industry in the United States, and I think that our imports are going to rise and fall based on these global economic conditions.
Mr. POMBO. The producers are I believe very competitive. I believe the industry is competitive on the world market. But at the same time, with an increased regulatory burden, are we sending, under the current trade policies that exist, are we sending the signals to the international market that it is cheaper to produce in other countries long-term and therefore that is where the market signals are going?
Mr. COLLINS. I think that is a legitimate concern. It has arisen on several fronts, one is the animal feed operation draft regulation that EPA and USDA are working on. That issue has been raised in that context. It has been raised with respect to all of the State and local laws that have been enacted with respect to restrictions on hog operations due to odor and size or form of ownership or whatever. And I do not know how to quantify that.
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There have been a couple of studies that have looked at this in the hog industry. I believe Michigan State University, Penn State University have both done studies that have tried to correlate the location of hog production with environmental constraints. My reading of those is that they are not really conclusive. They said environmental constraints is a factor, but there is a whole bunch of other things going on, such as labor costs, such as land costs, capital costs, ability to get labor, things like that, construction costs. So I am not dismissing it. It is certainly a factor. I do not know how much to weigh it.
When we had the animal feed operation public hearings around the country, many producers came to the table and made that very point that you have just made. So that is sort of firsthand anecdotal evidence that it is affecting the location of production.
Mr. POMBO. Both domestically and international.
The CHAIRMAN. The gentleman's time has expired.
Mr. COLLINS. Right. I think one thing is you move out of States where the restrictions are very severe, or you move out of countries, if the country restrictions are very severe.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
Dr. Collins, I just want to say as a new member of this committee how much I have admired you in the past, and I look forward to working with you on the great issues confronting agriculture and the American farmer over the next several years. And it is my honor to be here asking you a few questions.
I want to talk principally today about hogs and what is happening to pork production in the United States. There are several issues that I think—there are several things that we are talking about that we could do right now that would have an impact, the first of which—and perhaps you have already discussed this, and I apologize, I had another meeting that I had to get out to—but first of all in terms of Canada and what is happening in Canada, now I am told that there are about four million Canadian hogs that are coming into our markets.
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I would like to at least suggest this for your consideration, and I have mentioned this before, we believe—and I represent also a dairy area—that the Canadians are not exactly living up to their end of the bargain as it relates to dairy exports into Canada. As a result, we have pushed the idea of filing a 301 petition against Canada, but it seems to me that we do have some leverage here to deal with the Canadians immediately, and that is if they are not going to open up their markets to our dairy exports, then perhaps we ought to close their markets or our markets to them in terms of finished hogs. And I throw that out only as a suggestion for your consideration, but I think it is time for American public-policy makers to be a little tougher with our trading partners, that if they are not going to play fair with us, then perhaps we are going to have to take some kind of actions on our part.
The second issue is the whole issue of contracts, and I was not completely satisfied with your response to my colleague from California. I do not really believe that contracts are necessarily inherently good or bad. They are a tool. And like a hammer or fire, then can serve us well or they can cause problems.
It seems to me that the role that we have to play in terms of this whole issue of contracts is that there needs to be better information available to producers. I think one of the things that I have encountered, and I have had a lot of meetings with pork producers in my area, is that many times they do not know what contracts are available. They may not know what their neighbor has for a contract. And the way I look at this is it seems to me we do have a responsibility as a Federal Government to make certain that there are orderly markets and that there is good information available.
And let me give you an analogy. In some respects the livestock markets are like the stock markets. Five years ago over 80 percent of the hogs being sold were sold at auction, so that everyone knew what was happening and they had a good idea of what prices were actually being—what hogs and cattle were being sold for. Today that sort of has flipped, and we have a situation where it is not really clear what those prices are. And I do think we have a legal and a moral responsibility to those producers. And I do hope that we can work together to put more of those cards out on the table.
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And I use the analogy of the farmer—we often hear that they are the ultimate gamblers, and they sit down at this casino every day. The problem is, it seems to me, with these contracts is that not all the cards are out there on the table so that everybody can see and count the cards and know what is available. So I hope we can work together to put more transparency into this pricing situation.
One other point, and I am sorry these are more comments than they are questions, but I have not had a chance to visit with you much since I was appointed to the committee. The next one that has been discussed at least is the potential of shipping breeding stock and/or feeder pigs into Central America, the victims of Hurricane Mitch. Can you give us any kind of an update on what may or may not be happening with that particular idea?
Mr. COLLINS. I would like to comment on a couple of things. First of all, thank you for your comments, and I pay special attention to them, because I know you have some expertise in auction markets, and so when you talk about the performance of these markets, I am paying attention.
I would say with respect to Central America, we looked at a whole range of options to help boost hog prices in December and early January. Some of those options are still on the table, but they are kind of, I would say, perhaps in an inactive status at the moment.
Looking at live hog exports to Central America was one of the options that is in abeyance at this point. We took a whole range of actions from buying a substantial amount of pork under section 32 to—almost an unprecedented program in paying out $50 million in direct payments to hog producers. We found a lot of difficulties with the live-hog export program. It had been proposed to us that we export as many as 300,000 head. When we had our consulates in Central America check to see how many animals they wanted, they came up with something on the order of 5 or 6,000. So there was a big difference between what was proposed to us and what the countries were willing to take. And there were lots of questions raised about where these animals would be slaughtered, what would be the sanitary conditions, did we have the airplanes to move them to Central America, how many planeloads would it take given the number of planes that were available, which was pretty small, something on the order of 10 planes. The cost of it and the logistics involved made us set it aside for the time being.
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Since that time, slaughter has fallen pretty sharply. We were slaughtering about 400,000 hogs a day at the peak in December. We are now down to about 365,000 or so. So we are not up to that point where we are really at over optimal capacity. We were killing 200,000 hogs on Saturday in December. We are now down to about 80,000 hogs on Saturday now, less than 50 percent of where we were. So the reason for moving the live hogs out of the country was to avoid having those hogs go to the slaughter facilities which were being inundated. We are not quite at that point now, so I do not think it is as pressing to go that route.
Just one comment on the Canadian issue. That is a difficult issue, and I wanted to just comment on it, because it is difficult. But we did go through quite an extensive negotiation with Canada this past fall, and we did sign, quote, a record of understanding with the Canadians. It did not deal with dairy. You are right. But their dairy program is essentially grandfathered under NAFTA and the Uruguay Round agreement. And the way we are going to end up dealing with their dairy program is through multilateral trade negotiations. I mean, we could do it bilaterally, but they have not shown any interest in engaging in bilateral negotiations.
Mr. COLLINS. With respect to hogs, in the record of understanding, we did get some help. As you probably know, Canada required a 30-day quarantine for hogs moving into Canada for pseudo-rabies and brucellosis. For hogs coming from brucellosis-free and pseudo-rabies-free areas, that quarantine has been eliminated. And, so, we hope we can move hogs forward. We are not at this point.
But I would say if you looked at cattle, we are making some progress there. We have something called the Northwest Pilot Project which, for a long time, no cattle moved north under because the Canadians required track-ability of animals wherever they went, from place to place, and there were limitations on animals being moved from one feedlot to another. Well, they have relaxed those requirements, and we exported about 160 percent more cattle in 1998 than we did in 1997. Now, those are still small numbers, but we are moving in the right direction.
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Mr. BARRETT. The gentleman from South Dakota, Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman.
Dr. Collins I, too, want to thank you for your insights and for your patience in sitting through this long process and listening to all our questions and comments. There is enormous trauma and frustration in my part of the country with what is happening in the livestock industry, and there is zero confidence in the pricing system. And as my friend from Minnesota, Mr. Minge, indicated, we later today will be introducing mandatory price reporting legislation.
What I would like to know is you stated in your testimony that the data used in estimating farm to retail price spreads may understate farm value due to a failure to fully account for contract prices and spot prices that do not reflect average quality trading. That's a quote.
In your opinion, would access to the terms and formula in other contracts provide producers with the information necessary to compete on a level playing field?
Mr. COLLINS. I am not 100 percent sure of that. I think it would move us in that direction. But since I really don't know what is out there, it is unreported or not collected by us, I can't say it with certainty, but I think it would certainly help our statistics. I think they would probably be more accurate.
I am not here to indict our voluntary reporting program. I think we have done a good job in our voluntary reporting program over the years. But the institutions in some of these markets have changed so much that it is difficult for us to get on top of them, and I think that is the reason why we and the Secretary support mandatory reporting. So that if there is something out there that is getting by us, this will give us a chance to get it.
Mr. THUNE. You also stated that imports represent but a small percentage of the United States' slaughter of swine and cattle, and I would be curious to know, would the impact of this small percentage, in your judgment, be greater in particular regions of the country? If so, in what region or regions and to what degree?
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Mr. COLLINS. Well, I think it has an effect in different regions and different kinds of effects. We do import a lot of feeder cattle from Mexico. That turns out, I think, to probably be a benefit to a lot of people in Texas who feed those out. We do import a lot of hogs from Canada, and they come in to certain slaughter facilities. There are some slaughter facilities that are heavily dependent on Canadian hogs. And so if you are an American hog producer trying to produce in the location of that hog facility, that could certainly have an effect on you.
I think, as we have seen Canadian cattle come down through Montana and North Dakota in the last couple of years, clearly, that has had an effect on markets in those areas, the same way North Dakota has been affected by Canadian wheat coming across the border. So I do think that the regional effects can be more pronounced.
I went out to Montana last year and met with a group of producers out there. In fact, Mr. Davis and I went out there, and after the meeting was over, they made us come out on the street to watch the Canadian trucks that were going back to Canada empty. And that was the first time I had seen that, and it is quite an astonishing thing, when you think of importing 4 million hogs and you think of how many trucks that might take, or the same thing for 1.3 million head of cattle. And they are coming in—they are coming in through certain areas. And so I think that there are more pronounced regional effects.
Mr. THUNE. In your testimony you indicated that net import situation be about 2 percent, I think, of slaughter, and I want to say that number is fairly—that with some degree both hogs and cattle of the total slaughter in this country, in terms of what is left after exports, the imports. But you would never convince anybody in either of the Dakotas, I am sure, that that is the case, because they do see the trucks rolling down Highway 85 and down Interstate 29.
Mr. COLLINS. I know.
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Mr. THUNE. Do you keep statistics on a regional basis? I mean because I would be curious to know. I read these national statistics and I don't think they are at all representative of what we are seeing in our part of the country.
Mr. COLLINS. We do not keep supply and demand statistics regionally. We do have data on where animals are crossing. Live animal crossings, for example, we get that data from APHIS, our veterinarians, who have to approve the animals coming in. So we have data on the crossing points, but that is probably as much as I could give you.
Mr. THUNE. One last question, and this is respect to the hog industry. It seems at least that the dramatic decrease in prices paid to producers is due, at least in part, to significant increases in supply which are precipitated by increases in profitability, and that would follow certain principles and rules of economics. I am just curious if you might have any insights or thoughts as to what tools or practices could be implemented to help control the violent swings that we have witnesses over the last few years in the hog industry. I mean it is like it is feast and famine. And most of our producers would just like some stability, something that would be somewhat reliable. I realize it is function of supply and demand, at least to a degree, but any thoughts on that?
Mr. COLLINS. That is a difficult one. I have not thought too much about how the Government can intervene in markets to make prices less volatile. I think, of course, it comes from my profession, but I think what we would tend to focus on is adaptive behavior on the part of the producer for dealing with those kinds of markets, having the adequate risk management tools available.
In the case of grains, there's lots of risk management tools available, which some producers, many producers use. They range from, of course, crop insurance to forward sales.
In livestock markets, I think there are probably fewer available. First of all, you don't have insurance. You don't have even revenue insurance pilots going on, like we have in crops right now, which I think could be stabilizing. That is one of the things that the Department of Agriculture wants to look at, is revenue insurance programs for livestock and livestock products.
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Also, there is this question, that I don't really know the answer to, about the extent to which certain farm operations are precluded from contracting because of their size, or what they can offer. I mean we have countered that by saying, well, you ought to form strategic alliances. You ought to form bargaining cooperatives, and we are willing to help you form bargaining cooperatives through our rural business-cooperatives service.
But for people in the cattle industry, or even the hog industry, cooperatives have not been a way of life. If you look at the percentage of animals sold through cooperatives, it is pretty small compared to something like milk, where you have 85 to 90 percent of all milk sold through cooperatives.
So I think there are ways that we can do a better job on the risk management side by helping provide the tools for producers, and that is the direction that I, at least at this immediate moment, would prefer to go than trying to figure out how we could intervene in the marketplace to probably try and make prices less volatile.
Mr. THUNE. I thank and yield back, thank the Chair.
The CHAIRMAN. Mrs. Chenoweth.
Mrs. CHENOWETH. Thank you very much.
Mr. Collins, I have been very interested in your comments and thank you very much for being here.
Mr. COLLINS. Thank you.
Mrs. CHENOWETH. I wanted to followup on some of the questions Mr. Pombo asked and some of the statements Mr. Gutknecht made. Isn't it true that last year imports in cattle increased about 8 percent, which brings us up to about 20 percent of the beef that is consumed now in America is imported?
Mr. COLLINS. Imports of cattle actually went down a little bit, but imports of beef did go up about that amount. So if you are talking just beef, the product, yes, you are right.
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Mrs. CHENOWETH. I am talking just beef. Isn't it also true that when we have frozen blocks of meat coming in to the United States, that there is a bar code already on the meat so that the information with regards to the kind of meat it is and where it came from is already affixed to the frozen block?
Mr. COLLINS. I am told that is true. I have never looked at one, but I am told that is true.
Mrs. CHENOWETH. And isn't it true that carcasses, like of live cattle, like my figures show that we had about 3.3 million head of cattle come in from Canada, and you said 1.3. I would like to clarify that with you and your staff because I want to use the right numbers.
Mr. COLLINS. I would be happy to. Our numbers would show 1.95 million head came in in 1998, two-thirds from Canada, the rest from Mexico. I would be happy to get you the data on that.
Mrs. CHENOWETH. Thank you, Mr. Collins. Aren't those carcasses stamped as to the country that they came from already?
Mr. COLLINS. As far as I know, they are. And certainly, if we grade them, we require them to be stamped.
Mrs. CHENOWETH. So once it goes through the processing, I mean it is already known which country that carcass has come from?
Mr. COLLINS. Well, they are all coming from basically just a couple of countries, so that is true.
Mrs. CHENOWETH. I wanted to ask you, Mr. Collins, I was interested in your comments about the Indonesian pork, that there was a disease.
Mr. COLLINS. Taiwan.
Mrs. CHENOWETH. Taiwan. Taiwanese pork, that there was a disease and much of it had to be liquidated. How can women like me, homemakers, know for sure that any pork I get has not come from a country where they may have had to liquidate out? That is a tough question, but it is a question we women are beginning to ask.
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How do we know, when we go to that meat counter, where that meat came from? How do we know that—I mean we are secure in the fact that American pork is raised to the highest food standard and safety, environmental standards in the world.
Mr. COLLINS. Right.
Mrs. CHENOWETH. How do we know now?
Mr. COLLINS. Well, you have to have faith that the U.S. Government can identify countries were disease is prevalent. We then prohibit exports from those countries from coming into the United States. In the case of Taiwan, we do not take any pork products from Taiwan.
Mrs. CHENOWETH. That is very reassuring to hear, because the consumer doesn't know, the homemaker doesn't know. I understand that the 1.95 million head of live cattle that came across the border, two-thirds of which came from Canada, according to your number, only 1.6 percent of those were inspected. They were brought in in sealed trucks. Most of the trucks that you saw go back empty had been sealed when they came across the border.
Mr. COLLINS. I am sorry, I don't know the answer to that. I know, with respect to inspection, we certainly have equivalency agreements with other countries. We go through great pains to establish that their inspection systems are at least the equal of ours, and when that occurs, I don't think they are inspected by U.S. inspectors. So I don't have a statistic on that, but I will check that out for you.
Mrs. CHENOWETH. Mr. Collins, I would love to work with you on that.
Mr. COLLINS. Sure.
Mrs. CHENOWETH. We are very, very concerned in the northern border States about that.
Mr. COLLINS. If I could go back to one point, the point you made about carcasses coming in being branded by——
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Mrs. CHENOWETH. Stamped.
Mr. COLLINS. Stamped by country-of-origin. Just to sort of finish that thought, after we grade a carcass that has been so stamped, we have no requirement that stamp be retained on the product, and that is when the country-of-origin designation is lost. It comes in that way, but as the product goes through the marketing system, the country designation disappears.
Mrs. CHENOWETH. But it would not be that great a step to continue with that carcass, as it being processed, to continue that label, would it?
Mr. COLLINS. That would certainly reduce the costs.
Mrs. CHENOWETH. Yes.
Mr. COLLINS. I think with respect to country-of-origin, we have to figure out if we are talking about just carcasses, or we are talking about live animals in some form or another as well. I mean if an animal is born in Canada, but fed in the United States, is that a U.S. animal or a Canadian animal? I mean those are the kinds of things we have work out.
Mrs. CHENOWETH. Yes, I do understand that.
And I am very interested in that. With regard to President Clinton's proposed user fee for food safety inspection services, $504 million, I was startled when I saw that, until I realized that maybe some of that might go to greater inspection, greater than 1.6 percent of carcasses—or live cattle that are coming across the border. So I will reserve judgment on the President's recommendation there.
Mr. Chairman, I do have just a couple of more questions I would like to ask.
I understand that—well, first of all, I think a lot of people need to clearly understand what captive supply is.
I mean, once it gets to the point of being into the grid formula, the door is pretty well closed. And I am asking, does the Government really have a handle on where all of these critters have come from, and at what price they were acquired?
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I ask this for this reason, nobody is more free-market-oriented that this Congressman, but the fact is that one of the major packers, whose statement I was just reading today, made a 400 percent increase in profits this quarter, compared to last year at this time.
That CEO last year made a $5 million salary. Now, I am all for people making big salaries, even football players. If they can negotiate it with their people, that's great. But our cattle, hog and lamb producers are on their knees. And, Mr. Collins, you talked about predatory pricing and manipulation, you know, there was a case about two months ago where one of the big packers bought from another big packer a huge amount of cattle out of Colorado. Now, that was part of the captive supply that I am asking you, do you have a handle on? Because, certainly, those prices, where that cattle was acquired, has not been published. So the guys that have to follow after the marketplace has been torqued get a lower price, and that is what we are concerned about, and that is what is hurting our producers.
Mr. COLLINS. Mrs. Chenoweth, your points are well taken, and those are things we are concerned about as well. I would say, with respect to captive supplies, the captive supply data that we report is information that is fairly complete. It is acquired through Grain Inspection Packers and Stockyards Administration, it is not part of our market news reporting, and it is reported with quite a lag. I mean it comes out a year later after the packing companies have reported to GIPSA.
I think we have good data on captive supplies, but we do not illuminate all the details of the arrangements that are buried within captive supplies. The term ''captive supplies'' in and of itself, sounds kind of pejorative, and some people think it is, but what it refers to is packer owned and fed cattle, or forward contracted cattle, or cattle that is marketed under some kind of a marketing agreement, which may be sort of a version, like the one you spoke of, the grid, of a forward contract.
We do not provide a lot of details on that. We do not provide details in market news way on captive supplies because we are collecting that data under our regulatory authority of Grain Inspection Packers and Stockyards Act. On the other hand, we do report movement of cattle that is sold in a way where the price is not fixed today. That comes through our market news, and we refer to that term, less pejoratively, as additional marketings, and that is reported on a regular basis.
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Mrs. CHENOWETH. Isn't that primarily the cattle that are bought——
The CHAIRMAN. The gentlewoman's time has expired. We will let the gentleman finish the question, but we are not engaged in any additional ones on this round.
Mr. COLLINS. Let me say that we do provide this data on what we call additional marketings, which is all marketings where, at the date of sale, the price is not fixed, and that leaves an awful lot out there unexplained.
The CHAIRMAN. The gentleman from Texas, Mr. Stenholm, had a question.
Mr. STENHOLM. I want to ask the panel a question about country-of-origin labeling, and the process we now go through in which we have imported beef, pork, lamb rolled as USDA graded, which leaves the impression to consumers that this is USDA American-produced beef, lamb, et cetera.
What would it take to change that simple rolling process to where you would roll it Canadian beef, or New Zealand lamb? The important thing is that we do want to have it inspected for quality, et cetera, that is a given. In the case of processed meat, I recognize we do get into some real cost implications, what I call common sense implications. But imported product should be rolled to show what it is.
Mr. COLLINS. I think that is a good issue. I mean just an example of that is a Canadian animal that is brought in in a sealed truck, slaughtered, beef put in a box, it can be exported as U.S. beef, because the Canadian designation is lost. It can be Choice U.S. beef, exported in that form, even though that was an animal that was born, raised, fed in Canada, but slaughtered in the United States.
How hard that would be, and whether we could do that under our statutory or regulatory authorities, I don't know, and I would ask Mr. Carpenter, whose division in USDA does the grading, to answer that.
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Mr. CARPENTER. The country-of-origin label on the graded product is applied on the carcasses, for example, U.S Choice, product of Canada. As that product moves through the marketing chain and the fabrication, that identification is generally lost, and that product, as Mr. Collins said, is marketed as U.S. product. That is only on carcasses that are imported from Canada.
The live animals that come in are processed through the U.S. slaughter facilities and are not identified as country-of-origin through the inspection process.
Mr. STENHOLM. Under current process, do we label the carcass from the country from which it comes?
Mr. CARPENTER. When it is imported as a carcass.
Mr. COLLINS. But not a live animal.
Mr. STENHOLM. But it still gets the USDA grade?
Mr. CARPENTER. Yes, sir.
Mr. STENHOLM. What I am talking about is having a separate grade indicating that the beef is Canadian, Choice, whatever but use the USDA label for U.S. beef only. I am not attempting to eliminate Canadian beef coming into this country. We talk about the illusive term of a level playing field. I believe in brand name advertising and competition. If the Canadians have got better beef, put their label on it. I happen to think that a USDA label on the carcass will help it sell in the international marketplace. That is the spirit in which I ask the question.
Mr. COLLINS. Mr. Carpenter says he doesn't think we can do that under our current regulations. Is that correct?
Mr. CARPENTER. As far as designating a grade, right now we have the authority to put USDA Choice, for example, on a carcass. To come up with a grade, if I am understanding you, that would say USDA Choice Canadian beef would——
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Mr. STENHOLM. No, I am talking having it graded Canadian Choice beef, if that is what we believe it is.
Mr. COLLINS. It would be USDA grade, but identified as Canadian beef?
Mr. STENHOLM. Keep USDA off of it. We can indicate somewhere on the package that it has been inspected by us. I am asking is practical and what regulation would keep us from doing that?
Mr. CARPENTER. Our current grading regulation doesn't provide for retaining that country-of-origin labeling beyond the carcass.
Mr. STENHOLM. That is all I am asking right now, just the carcass. I understand it gets much more complicated when we get past the carcass.
Mr. CARPENTER. Right now the carcass reads, every 2 inches along the roller brand for the quality grade, it says product of Canada or whatever country it is from. So that is being placed on there right now. That gets lost when it goes into the marketing chain. We could change the regulations to make those two stay together and be a coupled designation, product of Canada, USDA Choice.
Mr. STENHOLM. And the same applies to lamb and pork?
Mr. CARPENTER. Yes, sir.
Mr. STENHOLM. OK.
The CHAIRMAN. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman.
Dr. Collins, you had, early in your comments, talked about the volatility of the prices for pork over the last couple of years and how low it was in December, the lowest it has been, based to the inflation rate, probably it has been ever, at 10 cents a hundredweight.
I happen to come from the State of North Carolina, which is the second largest pork-producing State in the country. My question is this, because it is a two part question, in North Carolina, as you well know, we are a grain-deficit State because of the number of hogs we have and other animals, poultry, et cetera, which places an unusual burden on us when we start to be competitive.
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But as we look at the production, as we grapple with this whole issue, my question gets back, since we are the second largest pork-producing State, and I want to commend USDA in their attempt in the last several months to try to alleviate some of these severe problems our producers felt with the $50 million. But when the formula came out, we found ourselves outside the fence looking in at the game, partly because we had a number of contract growers. But I hope you can explain to me why those independent growers, who lost just as much money if they sold a thousand hogs as if they sold 3,000 or 500, proportionately, were not allowed to participate in any portion in that game. I assume there is some thinking on that.
Mr. COLLINS. This is a good question. I can say I had the opportunity to present this proposal to the White House, and I walked in the door and, before I said anything, they said to me, whatever you are going to say, we want a payment program that is going to go to full-time hog farmers, people who make all their living from hogs. And I said, well, I think I had better go back to USDA, because I cannot do that.
Here is the constraint that we had, and to simplify this, we had two fundamental constraints. One was we wanted to make a payment to producers that was not totally negligible. In other words, it had to meet some significance threshold. We decided that was $5 a head.
Second, we had to figure out how much money we had. Well, we were using section 32 funds. Section 32 funds limit the amount of funds you can use for a particular commodity to 25 percent of available funds. We had already spent roughly $130 million buying pork. That left us $50 million of available funds to provide producers.
Well, if you divide $5 into $50 million, that means we could make payments on 10 million hogs. You have 10 million hogs, all right. How many hogs do we slaughter in the United States every year? A hundred million hogs.
We could make payments on 10 million hogs, we slaughter a hundred million hogs. That means we could make payments on one-tenth of the hogs that are out there. And since most of those hogs are produced by sort of middle-sized family farm operations, there was no way that we could direct the payments there unless we had more money. So it was simply a question then of starting at the bottom of the pile and going with the smallest. It was a financial constraint.
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If we had had more money, we would have paid larger-size producers. We would have liked to have paid producers who had 1,000, 2,000, 5,000 hogs in inventory. I mean those are operations that are marketing 2,000 to 10,000 hogs a year, and that is where commercial family farm-size operations are today. But we simply didn't have sufficient funds.
Mr. ETHERIDGE. But that doesn't—well, I won't get into that, because you said people who derive their income from it, and they are really the people who do derive their income from it.
Mr. COLLINS. I agree with you completely.
Mr. ETHERIDGE. And they got no money.
Mr. COLLINS. I agree with you.
Mr. ETHERIDGE. And they are the ones who wind up going to the banks and the banker peeks over his glasses, like I am peeking over at you, and he will say to them how much more of an asset can you put on this table, and all he has got is hogs.
And that leads to my second question, and I'm not so sure—that's why we are here, I know that is why we are here today, because you have just said that we are looking at, hopefully, in 1999, at a range of pricing for pork in the marketplace of somewhere between $25, maybe, and $35 per hundredweight. And depending on where you are, assuming it gets there, that raises the question, we still have producers who may not be able to make the threshold even at that. They are still losing money.
Mr. COLLINS. Oh, sure.
Mr. ETHERIDGE. Well, then that raises a broader question I hope you would talk about, because I think we are, at what point do we decide that—what can we do to help that situation? Because I think if we don't, at some point down the road, we are going to be facing the same situation with pork and other producers that we faced with shoes.
We don't produce shoes and I hope we don't get to where we don't produce pork and other things.
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Mr. COLLINS. That is a question in policy.
Mr. ETHERIDGE. I understand that.
Mr. COLLINS. What policy we would adopt to help these producers? Clearly between $25 and $35 a hundredweight there are going to be a lot of producers who are not breaking even. We don't do as good cost of production estimates as many of the land grant universities but we do follow farrow to finish operations and every month try to estimate their cost of production, and right now for January for our simulators it's 1,600 head farrow to finish operation, break even excluding capital costs is about $35 a hundredweight. That was the upper bound in the range I talked about for the first half of this year.
The losses for producers who were below that level started back last October, so we have been below that for several months now. We will probably continue to be below that and so there is no doubt there is great financial stress on a lot of producers. I don't have the answer to that, on how to alleviate that stress.
I mean we have lending programs, which is one alternative. It's up to the administration and the Congress to decide if they would want to do more, but right now the last available tool really is the lending programs because we have about exhausted what we can do on our hog purchase programs for food assistance programs, but we still have some opportunities on the export side and we are still looking at the export side, whether it be pork or whether it be live hogs.
Mr. ETHERIDGE. Thank you, sir.
The CHAIRMAN. We have about 9 minutes remaining in this vote. That will be followed by a second vote. I know Mrs. Chenoweth has a question, Mr. Pomeroy has one. Other members that had questions, if we could possibly then finish those up, short answers will be to your credit, Dr. Collins.
We will try to do that and try to get those in and then we could excuse this panel and reconvene with the additional panel. Mrs. Chenoweth.
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Mrs. CHENOWETH. Thank you, Mr. Chairman. A lot of what we are talking about is how to stabilize the markets for the producers. I have been interested in my colleagues' questions on that. I have got about a million cattle producers out there and a large number of hog and diminishing numbers of lamb producers but isn't it true that in about 10 days to 2 weeks USDA is going to tender some offers on large amounts of meat for sale to Russia?
Mr. COLLINS. I can't give you a timetable exactly, but within the next month or two we hope that there will be such tenders under P.L. 480, title I.
Mrs. CHENOWETH. And you know the producers look at that and how many producers out of that 1 million cattle producers and large number of pork producers can really be competitive in that? The only people who can be competitive are the packers who have the meat.
Now my question to you, Mr. Collins, or to Mr. Davis, is wouldn't it help stabilize the marketplace if USDA bought up the surplus and then offered it on the marketplace? Then the increase in price, which there will be a huge increase from what they bought the surplus for to what they'll sell to Russia, that increase in price then would more likely enure back to the producer rather than to maybe three or four big companies.
Mr. COLLINS. I don't know if that would be the case. I would say, first of all, there's limitations on what we can do in using Commodity Credit Corporation purchases in distribution overseas. Now it is very restrictive for us to use CCC to buy product and distribute it domestically. In fact, it is so restrictive it is almost impossible, so we focus on buying product using CCC funds and distributing it internationally.
To do so runs up against our export subsidy commitments under the Uruguay Round agreement. If we buy at this higher price you are talking about and make it available to the Russians at a lower price, the difference between those two prices counts as an export subsidy and racks up against our export subsidy commitments under the Uruguay Round agreement, and for pork those are very minimal, so there's very little that we can do in terms of buying pork at one price and giving it away at another price unless it is a bona fide humanitarian donation, in which case it is conceivable that Russia could qualify for that.
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I was not party to the Russian negotiations, so I don't know how they arrived at P.L. 480, title 1. Public Law 480, title 1 is a long term concessional sale which would essentially allow the Russians to tender, using export credit guarantees, long-term loans for beef or pork from commercial processors rather than from farmers. I mean they are not going to buy the live hog and then contract with a—I am violating the short response requirement here—they are not going to contract with a farmer and buy the live hog and then contract with a packer to have the hog killed. The Russians won't do that. They want the meat. They are going to buy the meat, so those are just a couple of the dimensions to this issue that you raise, but it is certainly something to think about—are there alternative ways to run these export programs so we'd have a bigger farm-level impact.
Mrs. CHENOWETH. Right.
Mr. COLLINS. And I think that is a good point.
Mrs. CHENOWETH. And that's my concern and you have laid out the problem. I think it's a challenge for both this committee and this Congress and you and the Administration, but we are concerned about a large number of farmers.
Mr. COLLINS. Agreed.
Mrs. CHENOWETH. Thank you.
The CHAIRMAN. Mr. Pomeroy.
Mr. POMEROY. Mr. Chairman, I am going to be brief. Three things I need to mention.
First, Mr. Davis and I spent an afternoon in southwestern North Dakota talking to livestock ring full of folks about this issue. I appreciated that trip. Nice to see you again.
Second, leading off the next panel will be Craig Jarolimek, who is the vice-president of the National Pork Producers Council, a diversified farmer in North Dakota. He and his wife run a 5,000 finishing hog operation in addition to growing wheat and all the other things. They have been selected Jaycee Family of the Year. I have known them for years. They are an absolute pleasure to work with and I think will give you a real bellwether about a diversified family farming operation on this topic. I am going to have to be gone as the next panel commences. I wanted to tell you that.
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Third, and I am going to submit for the record a Washington Post article, October 25, 1998, and it gets to the issue of the pilot market reporting project that you are on. It talks about an ongoing give-and-take between the American Meat Institute that was fighting this tooth-and-nail and Senator Daschle was determined to get it into the omnibus appropriations bill enacted in October. I will read to you from the article.
AMI hired prominent GOP lobbyists including former Republican Party Chairman Haley Barber, former House Minority Leader Robert Michel, and former Agriculture Secretary and U.S. Trade Representative Clayton Yeutter and joined forces with groups like Grocery Manufacturers of America, American Frozen Food Institute and National Food Processors.
They persuaded lawmakers to eliminate the 1-year pilot program. Daschle fought back . . . [but] ultimately language was crafted calling for a confidential 1-year Government investigation during which livestock prices would not be divulged.
So essentially the pilot that you are now doing was an American Meat Institute crafted diversion to force, stall and in fact stop the effort pushing for the price reporting legislation.
You have to think that if it wasn't so important—if this wasn't vitally important, giving the processors leverage versus the producers, they sure the heck wouldn't have spent the money to hire some of the heaviest hitters in town to weigh in behind closed doors at the last possible minute to stop price reporting legislation last year. In fact, Senator Daschle in the article is quoted as saying it is a sad commentary when special interests have more influence than any one Senator or Congressman.
I would hope, Mr. Chairman, and again I commend you for having this hearing, that this is a Congress where the special interests representing the American Meat Institute will not stop price reporting and that we will be able to proceed and get the legislation in.
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I notice in the third panel that a representative of Cargill is going to be testifying. I would be very interested in hearing from that witness the amount of money their particular firm spent—or maybe it was ConAgra—but I would be interesting in hearing from the processing industry the amount of money they devoted in their lobbying activities to stop price reporting last year and perhaps during the second panel they would have time, whoever is going to present that testimony, to get from the home office that price information, because I would be interested in finding out the amount you spent and why you felt it was worth that much to you to stop price reporting last year.
This year it would be better to write some big checks again because we are damned determined to get it passed.
I guess I don't have a question in there, Mr. Chairman.
The CHAIRMAN. Without objection, the article will be entered. The gentleman will be welcome to be here for the third panel to ask whatever questions he would like.
[The information appears at the conclusion of the hearing.]
The CHAIRMAN. The Chair would like to thank the panel, Dr. Collins, you and your colleagues for being with us in a fairly long morning, but as you can tell, this is an intense issue.
The committee will stand in recess until the end of this vote. [Recess.]
The CHAIRMAN. The hearing will reconvene, and we would like to now invite our second panel of witnesses to come to the table.
Mr. Sam Payne is vice chairman of the Dues Division for National Cattlemen's Beef Association; Mr. Craig Jarolimek is vice-president of the National Pork Producers Council; Ms. Cindy Siddoway is national vice-president of the American Sheep Industry Association. Ms. Siddoway is accompanied today by Mr. Jule Richmond, who is the secretary-treasurer for the Texas Sheep and Goat Raisers Association, and will take testimony in the order that people were introduced.
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I appreciate your patience and being here for the morning session. I realize it was long. The good news is you are not on panel three and have to wait that much longer, but I do think obviously there's a great deal of information that is learned from the ones who testified previously and afterward, and so we would start, Mr. Payne, with your testimony and all of your testimonies in their entirety will be entered into the record, and you may abbreviate those however you wish.
STATEMENT OF SAM PAYNE, VICE CHAIRMAN, DUES DIVISION, NATIONAL CATTLEMEN'S BEEF ASSOCIATION
Mr. PAYNE. Thank you, Chairman Combest, members of the committee, for this opportunity to discuss livestock prices and marketing issues. I am Sam Payne, vice chairman of the NCBA's Dues Division. I am a cow/calf producer from Calhoun, GA and I also own and operate a diversified farming operation.
I will say at the outset that the issues and factors affecting livestock prices are complex and controversial. There is a wide range of opinion throughout the beef industry about the effects of international trade agreements, packer concentration, and improvements in price discovery on beef prices.
The structural changes taking place in the beef industry have coincided with an international economic crisis, a strong U.S. dollar, changes in supplies and demand, and the influence of weather on production costs. Two things we know for sure—cattle prices are low. Break-even for fed cattle is around $65 per hundredweight. Prices have been hanging in the high fifties to the low $60 range for a long time. Currently we are struggling to get and stay above $60.
There is too much product on the market across all meat and poultry sections related to demand. NCBA believes that an open and frank discussion such as provided by this hearing on the issues facing the livestock industry is vital to efforts to address the financial stress producers are facing. Our advice is simple. We should focus on permanent solutions that will lead to long-term stability.
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The beef industry has gone through significant changes. Some of our feeders report that 25 years ago they had packer-buyers from nearly a dozen different companies visiting their feed yard. Now in most cases there are four or less. Our analysis suggests that it is costing us $1 to $2 per hundredweight with a captive supply situation costing another one to two dollars. Clearly packer concentration and captive supplies make some difference in the price of cattle.
The other clear factor is loss and demand and excess supplies. The question is what should Washington do? As a group we embrace market-oriented policies. While we have long-supported assistance to farmers and ranchers who suffer at the hand of Mother Nature, we believe that Washington can and should do little to manipulate the market of a private industry that is suffering from supply and demand situations that are out of balance.
We do not believe in direct payment to producers, either in the cattle industry or our competition. NCBA will continue its qualified support of efforts to reduce Government intervention and interference in the marketplace.
Our qualification is this. Our support for market-oriented policy is based on the expectation that as Government involvement is decreased, the partnership and cooperation among all segments of the beef industry should be increased. While some in agribusiness have taken steps to improve their relationship with beef producers, there are areas such as pricing and marketing information, expanded value-based marketing arrangements and trade barriers that must be recognized as legitimate concerns of cattlemen and addressed in partnership fashion.
There is widespread agreement that effective marketing, especially in situations with many sellers and few buyers require availability of accurate and timely information to assure that a competitive market does exist.
Fewer buyers cannot have undue leverage when market information is widely available to more sellers. NCBA is aggressively pursuing improved voluntary price reporting for cattle and mandatory price reporting for boxed beef, imports and exports as the beef industry goes through a difficult transition.
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We are also aggressively pursuing requiring country-of-origin labelling on beef in the retail meat cases. This will give consumers the ability to make informed decisions when purchasing beef and meet products and would ensure that the relative value of meat from different countries that is determined through competitive forces in the marketplace.
NCBA does not support limitations of any kind on marketing fed cattle nor actions that would alter or hurt trends towards private business arrangements among operators in the various sectors of the beef industry. A number of producers are finding innovative means to gain a greater share of the marketing dollar. One example is U.S. Premium Beef, Ltd., a closed beef marketing cooperative which was formed in 1996, consisting of 600 cattle producers in 26 States that have bought an ownership interest in Farmlands National Beef Packing Company. No longer are these producers' energies consumed by or concerned about marketing structure. Their efforts revolve around producing a better beef product that is marketed through their own beef company and resulting in better returns.
We recommend that meat inspected under State programs officially designated as being equivalent to Federal standards be allowed in interstate commerce. NCBA is supporting and creating consensus language, hopefully to create a dealer's trust and we urge this committee to take a leadership role in gaining approval.
There is general agreement that access to emerging markets is critical to the future of agriculture. Unfortunately, a perception exists among many in agriculture that other participants in these agreements, such as the European Union, are not willing to play by the rules. Many are asking why the United States continues to participate in a system that does not provide a clear and prompt resolution to trade disputes.
In the barrier picture, we want to make it clear that we are not expecting to restore producer profitability by bankrupting our industry partners or erecting unfair barriers against our foreign competition. This would be foolish. At the same time, we want to be treated as a full partner. Only through such a partnership can the beef industry meet consumer demands, improve prices, improve market opportunities, improve competition, and remove barriers that inhibit our ability to meet these goals.
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The National Cattlemen's Association is anxious to participate in the process of evaluating these critical issues throughout all of agriculture. We look forward to providing any additional input that would be useful to this committee as it works on these tough issues. Thank you, Mr. Chairman.
[The prepared statement of Mr. Payne appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much.
The CHAIRMAN. Mr. Jarolimek please proceed, thank you.
STATEMENT OF CRAIG JAROLIMEK, VICE-PRESIDENT, NATIONAL PORK PRODUCERS COUNCIL
Mr. JAROLIMEK. Thank you, Mr. Chairman. My name is Craig Jarolimek. I am the vice-president of the National Pork Producers Council. I am here representing NPPC, its 44 member State organizations and America's pork producers.
My wife and I own and operate a farm near Forest River, ND. For pork producers, these are the best of times and also the worst of times. On the one hand, both domestic and international demand for wholesome, lean U.S. pork has never been better. Between 1987 and 1997 pork exports increased 700 percent by volume. Even with the collapse of the Asian and Russian markets in 1998, exports increased by 25 percent last year.
Domestic consumption exceeded 1997 totals on a per person basis by 8.4 percent. It's a record.
High prices in 1996 and 1997 led to a 10 percent increase in production in 1998. However, at the same time slaughter capacity fell by 37,000 head per day and Canadian hogs for slaughter increased by 37 percent. This volatile mixture caused the number of live hogs to exceed the 383,000 daily slaughter capacity of U.S. plants from September through December.
On December 14 hog prices dropped below $10 for the first time since 1955. Compared to the 5-year average for the hogs of $46.77 per hundredweight, farmers were losing almost $80 per pig they took to market.
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Had other commodities suffered such comparative price drops, milk would be sold at $5 per hundredweight instead of $16; cattle would be sold at $16.44 a hundredweight instead of $60; cotton would be up 22 cents a pound rather than 56 cents a pound; corn would be trading at 75 cents a bushel, wheat at 91 cents a bushel and soybeans at $1.50. By the way, the minimum wage would be $1.45 instead of $5.15.
Data from the University of Missouri suggests that the producer sector as a whole lost $2.6 billion in equity in 1998 and may lose another billion in 1999. While the assistance package announced in January was very welcome, it applied only to the smallest of producers. Independent, family producers are in the most danger of losing their livelihood right now. We feel these operations could become a seed stock for a massive vertical reorganization of the hog industry.
We need Congress to pass a one-time emergency direct payment program to help producers remain in business and independent. It would be based upon marketings for the last quarter of 1998 and would be capped at $50,000 per producer.
Second, we believe the USDA guaranteed loan program will require additional funding to be able to operate through the remainder of this fiscal year.
We urge you to support that as well. While increased production and decreased capacity tell part of the story of why our live hog prices fell, why they fell so far still remains a mystery.
Pre-eminent economists Glenn Grimes and Ron Plain point out neither increased production nor a change in industry structure can explain it, especially during a time of increased domestic demand.
The four largest pork packers process 57 percent of all hogs. Did this concentration contribute to the live hog price decline? We really don't know, but the issue needs to be examined. Also we believe that a study of the Packers and Stockyards Act is needed to establish USDA's power to investigate marketing contracts and any anti-competitive activities in the meat-packing industry.
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Pork producers need accurate and timely information in order to make sound business decisions. We feel this is the only way for independent producers to regain their position as a profit center of the industry. We believe that a change in the law is necessary and are calling on Congress to pass legislation that includes the following elements:
(1) Mandatory packer to producer price reporting;
(2) A mandatory swine marketing contracts reporting program;
(3) Improved monthly retail price reporting;
(4) Monthly, rather than quarterly, hogs and pigs inventory reporting;
(5) Uniform carcass measurement and transparent pricing; and
(6) Swine production building construction reporting.
NPPC does not make these requests lightly. We have always preferred voluntary rather than mandatory programs and have never before asked for Government assistance. However, we feel compelled to ask for these changes because there are thousands of professional, efficient, and conscientious port producers who are teetering on the edge of bankruptcy through no fault of their own. Their lives and the futures of many rural communities remain in jeopardy.
I appreciate the chance to come before you today, Mr. Chairman, and I'd be happy to answer any questions you may have.
[The prepared statement of Mr. Jarolimek appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much. Ms. Siddoway.
STATEMENT OF CINDY SIDDOWAY, VICE-PRESIDENT, THE AMERICAN SHEEP INDUSTRY ASSOCIATION
Ms. SIDDOWAY. Thank you, Mr. Chairman and members of the committee.
I am Cindy Siddoway, vice-president of the American Sheep Industry Association. My family, my husband and my children, operate a fourth generation ranch in Terreton, ID. On that ranch we run about 15,000 head of breeding stock.
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The U.S. sheep industry has survived the loss of the National Wool Act but we are at a critical stage, and as one producer mentioned to us at our convention last month, he wants to do more than just survive. He wants to thrive in the sheep industry.
Some changes have had to take place on our farms and ranges just to maintain some type of profitability. They had been drowned by the flood of an imported lamb product. In 1997 this flood of lower priced lamb meat has sent lamb prices into a downward spiral and has threatened the viability of our industry. Imports of lamb have skyrocketed 19 percent during the first nine months of 1998, compared to the previous year.
A recent study by the U.S. International Trade Commission found that the price of imported lamb undercuts domestic product in nearly 80 percent of the comparisons by an average of 20 to 40 percent and at times reaching as high as 70 percent. Imports now make up 30 percent of the domestic market. Due to this unrelenting pressure, domestic lamb prices at both ends of the supply chain plunged 40 percent between March 1997 and December 1998.
Packers and processors were hurt just as badly at one end of the supply chain as growers at the farm and range end of the chain. In some parts of the country last fall growers with lambs to sell couldn't even get a quote on their lambs.
Mr. Chairman, the U.S. market has become a relief valve for the over-production by other countries. Their producers don't want to sell to their own depressed markets or into Asia. They can't sell extra to the European Union because absolute quotas are in place, so they turn to the U.S. market. All segments of the U.S. lamb industry have banded together to fight this flood of imports.
In September we filed a section 201 trade action with the U.S. International Trade Commission. Yesterday, February 9, the Commissioners made their decision. It was unanimous—6 to zero in favor of the sheep industry's 201 petition. This favorable ruling is a tremendous message from the Commission. That proves our industry has been significantly injured and we believe it strongly supports trade relief.
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We ask for the committee's active support in securing a U.S. House Resolution supporting the implementation of trade relief. This is critical for my industry. As producers we can't control international currency exchange rates, we can't control other countries' sheep subsidies and trade subsidies, and we can't control the Asian financial crisis.
We believe that it is an important roll of our Government to assist industry in addressing the impacts of these issues.
We told this committee in 1998 that nearly 30 percent of the lamb traded in the United States is not reported through the USDA weekly market reports. Import companies have refused all industry and USDA requests for wholesale price reporting. Meat importers and foreign meat producers have also refused industry requests to identify their product's origin for consumers. We urge Congress to actively pursue labelling requirements so that the consumer may know the source of what they are buying.
At the same time, import companies are using the USDA quality grading system to confuse consumers. They look at a USDA grading symbol and believe the lamb is domestically produced when it may not be, so all segments of the lamb industry protest this deceptive practice and we urge every recourse be sought to end it.
Mr. Chairman, I wish other areas of the sheep industry were in a little better shape, but they are not. The wool market continues in a deep depression with fully half of last year's wool clipped still unsold due to devastatingly low prices.
As for lamb pelts, that market is heavily dependent on export, but the market collapsed this fall due to the Russian economic situation. Pelts that brought a producer $14 last August are now being salted, dried, and stored. Some pelts are simply being discarded in landfills.
Burlington Industries, the largest purchaser of domestic wool, recently announced that it was closing seven plants and laying off 3,000 workers due to the surge of Asian textile imports. ASI and the U.S. Wool Marketing Association in November requested USDA make available recourse loans for wool under the disaster legislation authorizing such loans for fiber.
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The USDA has yet to respond to this request.
The marketing loan provision for wool, as the Senate Committee on Agriculture, Nutrition, and Forestry debated in the 1996 farm bill, would be of more assistance to a broader range of producers. We urge consideration of livestock programs or safety net provisions include this marketing loan provision.
In conclusion, the American Sheep Industry thanks the committee for the opportunity and for their consideration of these critical issues. We ask for your continued support of the domestic lamb and wool industries' priorities in trade agreements. We can either open up the European Union's markets to remove some of the domestic pressure from imports, or we can establish equal measures for American producers. Thank you.
[The prepared statement of Ms. Siddoway appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much. Let me ask this of each of the organizations just for the record. Did any of your organizations spend resources to advocate your position regarding price reporting, country-of-origin labeling, or other issues before the House and Senate last year?
Ms. SIDDOWAY. Yes.
Mr. PAYNE. Yes.
Mr. JAROLIMEK. Yes, we did.
The CHAIRMAN. Were any of your efforts on other issues in concert with your colleagues in the packing industry?
Mr. PAYNE. Yes.
Mr. JAROLIMEK. Yes, it was.
Ms. SIDDOWAY. I do not know. I am sorry.
The CHAIRMAN. It is my understanding, and correct me if I am wrong on this, but the pork producers as an association are opposed to labeling.
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Mr. JAROLIMEK. That is correct.
The CHAIRMAN. And cattle and sheep are in support.
Mr. PAYNE. That is correct.
Ms. SIDDOWAY. Yes.
The CHAIRMAN. I think I know the answer to this, but let me ask you so I do not just presume this. What type of price impact, positive price impact do you feel that labeling would have, both to the cattle and sheep representatives?
Mr. PAYNE. Mr. Chairman, the cattle industry does not have a good answer for that at this present time. One thing we think it would do is give the consumer a basis to make a decision whether she wanted to buy imported beef or American beef, and we think it would be beneficial to our industry.
Ms. SIDDOWAY. As far as the lamb side, I agree also. It is very much a consumer issue to know where the product is coming from. But if we would have mandatory price reporting, we would also have the benefit of knowing the prices, both at the retail level and the wholesale level.
The CHAIRMAN. Both could be stated as being a consumer issue to just allow the consumer to identify the source of the lamb or beef.
Mr. PAYNE. That is correct, Mr. Chairman. Another thing is that we are promoting our own product here in the United States with our producer checkoff program. We are also promoting some foreign products, because they are coming in and being graded as USDA choice, and are considered as American product. And those countries, especially Canada, are not spending a dime to promote their product here. In turn, they are using their money in competition to us in overseas markets.
The CHAIRMAN. Explain the position that the Pork Producers have taken on that issue.
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Mr. JAROLIMEK. It is basically the same, Mr. Chairman. We would not really see any benefit to the producer costwise or income-wise to the producer. Our main imports come in as live animals, and my understanding is that once that animal is altered by 35 percent, the label is lost anyway. We have taken a pro-active stance and feel that by establishing the U.S. Pork label and promoting the quality of animal that we have under the U.S. Pork label that we have established that we accomplish the same goal. And the consumer then knows that the U.S. Pork is a lean and safe product.
The CHAIRMAN. This obviously is not a hearing on mandatory price reporting or on labeling, but the issues have come up a great deal and certainly would be expected to in a hearing on livestock pricing. It is anticipated that there will be legislation introduced to do both of those, probably in separate bills, and I have committed to the fact that we would have hearings. I have a lot of questions about those as we look at them in terms of keeping the identity, at what point does an animal have an identity of an American animal for the grading purposes or identification purposes, and how you keep that separate and who pays for it and all of these things that I think are legitimate questions. But I certainly am sure that there will be committee hearings on those subjects so that we can further discuss them and debate them.
Let me ask you a question that came up in a recent trip that I was on, a trade mission to South America, and we were talking a lot about American meat products and their access into certain South American countries that we were visiting with, and of course the whole trade picture comes into this as well. But just in terms of more specifically on the grading, one of the issues that we had some discussions on with South American governments and our counterparts there was on the grading issue, and there are some differences there. They will use maybe a different standard. And I understand the concerns that when we are talking about a purely strictly imported product that carries a USDA grading standard, but that is the standard that we use that does not have any identification purposes, but it basically grades the meat, there are some questions, we have differences in terms of our grading standards with South American countries. They use a different standard, many of them do. And the ability to have some kind of translation between other countries' standards and our country's standards is an issue I think that is going to have to be dealt with in the future, and very potentially if we can deal with that, it may open up some markets to us that do not exist today. And I know that we are certainly interested in exporting as much meat product as we possibly can.
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Have any of you given thought to how that issue might be addressed in terms of paralleling—I mean, it is not going to be fair for us to ask some other country that we want to export meat into that they use our grading standard, because we would not feel comfortable if some exporting country to us asked us to change our standard. But is there some way in which this problem can be addressed in terms of finding some equalities in those standards so that while they may use a different number or different grade or different letter of the alphabet or whatever it may be, there is some correlation between a U.S. grade choice versus some grade in another country? Have you all as industries given any consideration to whether or not a uniformity in terms of grading standards is something we would want to try to look toward or trying to get over that hurdle between countries on grading standards?
Mr. JAROLIMEK. Mr. Chairman, I will go first on that. As I said when you asked about the country-of-origin, we have established a U.S. Pork label. We feel that that is going to be a great marketing tool in the world market. The Japanese or whatever consumer in the world would recognize that symbol that we have. I do not know if you are familiar with it, but——
The CHAIRMAN. That identifies the product as American pork.
Mr. JAROLIMEK. Identifies the quality, and that it is actually above USDA standards, it is good-quality meat. It is a symbol of a pig with an American flag background. I do not know if you are familiar or not, but we view it as a great marketing tool in the world, and that is why we went ahead with this, and I think it is going to give us access to different markets once it is established.
Mr. PAYNE. Mr. Chairman, the beef industry has been working with the USDA and the USTR on this issue. We would like to try to keep the quality grade, which is U.S. choice or U.S. prime, as our quality grade, and we have been working on the other parts of the grade trying to come up with some equitable solution to this. But discussions are going on.
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Ms. SIDDOWAY. We have not spent a lot of time on this. We have had some brief discussions, and very similar answer to my companions here. We would not want to lessen our own quality standard. You know, that means a lot to the consumer out there, and we certainly would not want to diminish our quality standard that we have right now through USDA grading.
The CHAIRMAN. Nor would I. That is not implicit at all in that question.
Mr. Stenholm.
Mr. STENHOLM. Mr. Chairman, I want to commend you on the outstanding panel we have this afternoon, particularly the V.I.P. in the panel, a voter from the 17th Congressional District of Texas, Mr. Jule Richmond. I would be derelict in my duty and responsibility to not welcome you from Blanket, Brown County.
One of the difficulties that this committee is going to have in working with this industry, the livestock industry, is trying to bridge across differences of opinion and the natural competitiveness within the industry. But there is one area where we are going to have to spend a little more time, and that is in the area of trade.
As I mentioned this morning, I am pro-trade. Ninety-six percent of the consumers of the world live outside the United States; the future of all of your industries exists outside the United States. This is where the markets are. The levelness of the so-called playing field is the thing we are constantly looking at. Ms. Siddoway, you mentioned in your testimony the problems which occur when currencies devalue by 25 percent. I imagine the difficulties if farmers in Texas, and a farmer in Oklahoma and California all had a different currency.
The chairman has indicated his desire to spend a great deal of time on crop insurance, livestock insurance, revenue assurance, ways to protect producers against what has happened to the pork industry, what is happening now to the lamb industry, what has happened to the beef industry, to address circumstances beyond our control. I am very interested in looking at is can we design an insurance package that will provide the opportunity for producers to insure against these kind of catastrophic losses when currencies devalue or problems arise from weather or disease. I hope that each of you and your associations will spend considerable time addressing the challenges facing your industry.
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We heard, Mr. Payne, in your testimony you talked about when markets go bankrupt, when a producer has sold his cattle to an auction and there is no money to pay. We have chased that rabbit for many, many years, and I happen to believe we ought to catch him; I believe livestock producers ought to have as much assurance to be able to sell their product at a market and get their money as those who have money in a bank, and not worry about the bank going under. That is something that I think can be part of this.
Ms. Siddoway and Jule, you talk about the lamb industry. You look at the numbers the Department presented today and see it is very difficult when an industry is attempting to manage supply, and in this case by people going out of business. That is what is happening in the sheep and goat area, because we just flat cannot compete without the wool and mohair program unless we have price. When you have the reduction in the supply that is constantly made up by just a little bit more import, it gets very frustrating. That is why the section 201, 6–0 verdict yesterday by the ITC is going to provide us with another forum of discussion and debate and some of the answers that you have presented today.
Mr. Jarolimek, in your testimony you mention the need for improved monthly retail price reporting. Exactly what sort of improvement do you have in mind? I want each of you to talk a little bit about from the retail standpoint, about the kind of reporting do you believe would be helpful for your industry in this area.
Mr. JAROLIMEK. As we went through the crisis this fall, there was a perception that the retail market was taking a larger share than they should have, and that is true, they were. Many producers as they sit on the farm and they feel they get involved in value-added-type projects where they could also be from the packing and the retail, they like to get a grasp on what those margins are so that they can make business decisions, whether they would like to get involved in that type of operations or not. What we would like to see is follow the product all the way through the chain to see where the dollars are being generated so that we can then see where the discrepancies are, producers can make decisions on what part of the industry they want or if they want to be involved in all parts of the industry.
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Mr. STENHOLM. Have you analyzed to any degree what the costs might be?
Mr. JAROLIMEK. No, we have not. I cannot say we have.
Mr. STENHOLM. Mr. Payne.
Mr. PAYNE. One thing we would like to see done on a retail level is a little bit more in-depth analysis of where the dollar for beef is going, what cuts is it being spent for. Is it being spent for the steaks or the hamburger, the chucks or the rounds? And we are working with the retail industry to do that involving the use of the scanners more where they can control the meat case better, give us a better idea of what is moving and what ain't, and what is moving on specials on features, what they call. And that is the one item I think we do not have a very good handle on, what is featured, and I think with the use of the scanners we can do that and just give us a better picture of where the meat is moving. It also gives that retailer a better idea of what he needs to be buying to move in his store.
Mr. STENHOLM. Any comment, Jule, or Ms. Siddoway?
Ms. SIDDOWAY. Yes, the sheep industry would, similar to Mr. Payne, would like a monthly report on the retail pricing on different cuts of meat, both on the foreign product and on the domestic.
Mr. STENHOLM. Could we do this on a sampling basis?
Ms. SIDDOWAY. It would certainly be better than what we have right now.
Mr. STENHOLM. I will come back on a second round.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman.
Ms. Siddoway, we have seen what I believe is an alarming contraction of the American sheep industry over the past few years at the same time we have seen a substantial increase in the number of imports into this country of foreign lamb. And I understand that there are a number of factors that lead to that happening. But I would like you to take a few minutes to explain to the committee why that has happened in terms of competitiveness in this market, in the domestic market.
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Ms. SIDDOWAY. There certainly have been several things that have led to it. Certainly the loss of the National Wool Act was devastating. Back in 1993 we did lose a lot of producers. Coupled with that we have no promotion. We had to downsize considerably in our association. We could not go out and actively promote our product. At the same time there were continued imports coming in that have an experienced promotional program here, millions of dollars to put into this market. This is a very strong market for them.
With the devaluing of the currency and the loss of the pelt market, last year we would have received about $16 a pelt on our lambs, and this year they were worth nothing, absolutely nothing. So it was a combination of a lot of different things that have continued to weaken the industry.
But we are resilient. We will come back. This 201 action has been very supportive. We have a lot to do. We need to get out and promote our product. We are doing some quality assurance. We are finding some new alliances. Vertical integration. We have a lot that we need to do, and this 201 will give us the time frame that I think we can go through this adjustment period and still be a vital industry.
Mr. POMBO. What I would like to have for you, and if you do not have this information, I would like you to provide it, is that what are we looking at long-term in terms of price in the lamb market, and my concern is that even with the wool and mohair program going, and some of the other factors that you have described, that does not address what are we going to do in the future. How are you going to bring your numbers back up? How are you going to reclaim domestic market share?
One of the things that really concerns me about this, and it is not just the sheep industry, it is the pork industry and it is the beef industry as well, because I unfortunately can see a parallel between come of the things that went wrong with our domestic sheep industry and the future of other meat products in this country. And I am very, very concerned about the loss of domestic market share long-term, and what that means to our producers. I am also very concerned about your costs of production and what are we doing, what is the Federal Government doing, that is helping to drive up your cost of production, which does not help in terms of being competitive on the international market? That seems to be where the major concern is, but we are not just losing market share in that respect, we have lost market share in our own market where somebody else is having to ship into it.
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So one of the things that I would like you to do, if it is possible, is to look at how we stop this trend in terms of losing our own domestic market and what is necessary in terms of long-term policy changes in order to help you be more competitive, not just in our market, but internationally.
Ms. SIDDOWAY. You are very correct. It comes down to price. To maintain the competitiveness, we are going to have to have some stable prices. Those of us that are left are the ones that have readjusted our cost of production. So we are the ones that are still out there, because we have cut about every cost we can. But perhaps an insurance program as Mr. Stenholm referred to would be very helpful. I know that would be helpful with my banker at home. Because quite frankly——
Mr. POMBO. Yes; mine, too.
Ms. SIDDOWAY. Yes, it is getting pretty tough to meet with him each year. But we will certainly put different ideas together and get the information back to you.
Mr. POMBO. And I would like to have Mr. Payne comment on this, if I may, is that the trend that we have seen in the domestic market is not hugely reassuring in terms of market share and in terms of consumption demand on our product, and what I would like to know is what things can we do long-term in terms of policy that help to ensure that your cost of production is not higher than the Canadians or the Mexicans or anybody else that you are competing with on the international marketplace.
Mr. PAYNE. I guess the good news of that is I think we are going to have a presentation at our convention, which is going on currently, Dr. Wayne Percell said that for the first time in about 20 years the demand for beef has leveled, not going up, but at least has leveled out.
In our organization and the industry we are doing some things to try to help the demand. One thing we are doing is trying to promote new products, making it more convenient for the homemakers or for the meals at home, meals that are easier to cook, faster to cook, and they are adding value to the product. Those meals are coming mainly from the chucks and the rounds, and that is what we are concentrating on, because they make up about 67 percent I think of the carcass. The steaks are selling fine, the hamburgers are selling fine. They are the ones that are dragging the price down, so we are trying to use them in the new products.
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As far as what you can do from the Government, I think our regulatory burdens need to be looked at closely. That is what costs us money, and of course we are looking at CAFO coming on. I do not know where anybody knows exactly what that is going to do and how that is going to be spelled out. But those type of regulatory burdens that put additional cost of production on is something that our competitors in other countries are not facing. They are operating much cheaper than we are.
And I think another thing we need to concentrate on is food safety. That is another thing that is hurting the industry some. We think we have and we know we have got the safest product food in the United States of anywhere in the world, but we just need to keep assuring the American public that they are getting the safest food in the world.
Mr. POMBO. Mr. Chairman, just to wrap this up, if you could provide for me and for the committee a brief outline on what some of those regulatory burdens are and how we can change those, it would be a great benefit to me, and I am sure to other members of the committee. So thank you.
The CHAIRMAN. Mr. Payne, what is the current market outlook for cattle?
Mr. PAYNE. Well, we have been in a down market for about 3 years, and so the current outlook is looking a little better. Our numbers are decreasing, which will help the price go up. I think the only thing that is maybe a dark cloud on the horizon is our competition is increasing, pork and poultry is increasing, so that is going to hurt us some, but our numbers are moving in the right direction, which will help our market. And we are looking for that decline in cattle numbers to go through the year 2003 before we see a buildup in the herd.
I guess we are just too efficient for our own good, because we keep getting them bigger and bigger, and that just puts more meat on the market, even with less numbers. So if we can just encourage the feeders to quit feeding them as long, we would be in a little bit better shape.
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The CHAIRMAN. On the mandatory pricing reporting issue, last year the National Pork Producers opposed mandatory pricing, but obviously as conditions have changed, there is now a proposal that you have yourself. Even though obviously we still have a long way to go in terms of hog prices, it is coming back somewhat from some depressed prices of a couple of months ago. Do you feel that mandatory price reporting would have kept the price from doing what it did in December?
Mr. JAROLIMEK. I do not know if it would have kept the price from doing what it did, but I think what it would have done, it would have given the producer the chance to see what is out there, and they could have used if contracts would have been more exposed or more transparency, there would have been more light shined on different marketing aspects. Perhaps more producers would have taken advantage of those contracts or would have taken advantage of brisk marketing or risk management some way through relationships with packers or something. But they were not sure what was out there, they heard a lot of rumors of what their neighbors were doing, what other people were doing, and I think they were a little fearful of things. So that is why now we are calling for the mandatory price reporting, so that producers can have that tool to know what is out there, and they can make good, sound business decisions.
The CHAIRMAN. It is my understanding that—which has come a long way from 20 years ago—that over 50 percent of production in hogs is now under contract, and I think that this is a continually increasing number. Can you explain to the committee a little bit how some of these different contractual arrangements work?
Mr. JAROLIMEK. There are several out there. I think you could count the number of stars sooner than you probably could count the number of contracts. Some of the contracts work on a cost-plus basis where the producer has agreed to with the packer for a guaranteed price. Some work on a ledger contract where the producer, when the price is above an agreed price, he pays into a fund, and then when the prices fall below that, he draws from that fund. So some of those contracts. Some are just, like I said, cost basis, where you are guaranteed a price.
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To go into it all, Mr. Chairman, I think would be laborsome and time-consuming, but what we need is we need to know what the contracts are so that they probably become more familiar to producers, and producers can then make the choice of what they need.
The CHAIRMAN. Let me turn to Mr. Stenholm, who has a question. We will try to work this with this vote.
Mr. STENHOLM. Mr. Pombo was talking about regulations. The NCBA recommends that meat inspected under State programs officially designated as being equivalent to Federal standards should be accorded the same freedom of movement in interstate commerce that is accorded meat imported and inspected under similar equivalent standards into the United States. Does the pork industry, the sheep industry agree with that?
Ms. SIDDOWAY. Yes, the sheep industry does.
Mr. JAROLIMEK. Yes, we do.
Mr. STENHOLM. Would you briefly put a human face on what is happening to the sheep industry in Texas? What things are you doing to survive?
Mr. RICHMOND. OK. Thank you, Congressman Stenholm. Thank you to the committee for the opportunity to be here, share some of the plight of our sheep and goat industry. Obviously being a goat producer, I am probably much more able to share in that area.
We in the mohair side have been struggling, very difficult situation since the end of the Wool Act. I feel like not only did it destabilize our industry, it had a severe impact on the wool industry and the sheep industry as well.
As all of you all know, you all helped us get through the mohair loan program in the latter part of last year to address not only the drought situation that existed in Texas but also the lengthy period of time that producers had gone without any income. Most of us have got 4 years' clipped mohair in the warehouses or in barns as I speak, which is putting a tremendous stress on the industry. Many people are shifting over to meat goats, which in the long run could actually be devastating to us if we do not get some sort of a price back in the next year to 18 months. We feel like if we could somehow get the mohair loan program out of the regulatory process that it seems to be hung up in today would be a real asset to our industry to somewhat give producers hope down our way.
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Also, I know from the wool side we are suffering. I mean, we do have sheep also. We likewise I think as Ms. Siddoway said, you know, very little of the wool was sold in 1998. We likewise sold absolutely none of ours with an even less hope of selling wool in this particular year. I feel like if we could get some assistance out of this committee on a market loan program that would be a much bigger picture that would be a revolving loan that would help the producer have cash flow during the time of the year that he is seeking out markets, I think that would help.
And backing over into another area that I think would be a great help to us, the Sheep Improvement Center that has been failing to get out of the regulatory process also, I think it needs to be funded. It would be a great help to stimulate the economy and provide value added to the products that we have.
Mr. RICHMOND. We obviously look forward to the day that that comes about. And that might pretty well share the way I see it at the present, you know. Obviously the price of lambs has been devastating in our area. It has driven many producers out of business, and by that we are very eager to see something happen that would bring about people with enthusiasm to get back in business. We were very pleased with the ruling of the ITC yesterday too.
The CHAIRMAN. The Chair will assume that there may not be any other questions now, and you are certainly welcome to stay around when we return from this vote. If there are, we will entertain them at that time. What we will plan on doing would be to move to the third panel when we return. So you all just stretch your legs and be comfortable.
[Recess.]
The CHAIRMAN. The hearing will resume.
We will now invite our third panel to the table. Mr. Greg Page is corporate vice-president and sector president of the red meat Group, Cargill, Inc.; Mr. Gary Evans is vice-president for meats, Farmland Industries, Inc.
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We appreciate your being here, and, Mr. Page, please proceed.
STATEMENT OF GREG PAGE, CORPORATE VICE-PRESIDENT, SECTOR PRESIDENT, RED MEAT GROUP, CARGILL, INC.
Mr. PAGE. Thank you, Mr. Chairman.
I am also here as a representative of the American Meat Institute. I serve as their vice-chairman, and have submitted written comments from our executive director, Patrick Boyle. Thank you.
I would like to make three points today in my comments. First, that consolidation is not the cause of low prices. Second, that some of the proposed legislation may cause unintended harmful consequences. And, finally, that there are several positive actions that the Government can take in this situation.
Obviously conditions in the pork markets have given rise to questions about the future direction of U.S. livestock production. The hog business is a notoriously cyclical business, but nothing prepared us for the harshness or the crushing impact of the prices that we saw in the last 100 days of 1998.
A combination of factors created this crisis. First, a 10 percent expansion in pork supplies, something that was very well covered by Dr. Collins. Second, increased supplies of competing meats created a price-sensitive market with retailers and food service operators. And, third, a failure of our export markets to meet what were some very rosy projections for a variety of reasons, some of those the Asian and Russian financial crises, the failure to achieve veterinary equivalency with the European Community was certainly negative, and finally, restricted access to a number of markets in Asia.
In our view these supply-and-demand factors, not consolidation, caused weak prices. Many elements impact the structure of the packing industry in the United States. In fact, several packing plants have closed in the past two years. Operating losses, inappropriate location, and age of facilities caused these closures. And we would expect, due to reductions in livestock supplies, the need to invest significant amounts in food safety, worker safety, environmental enhancements, the capability to serve more export markets, and new retail customer requirements will combine with the hypercompetitiveness in our industry to cause more packing plants to close in the coming year.
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For Excel and its employees, the enemy in this battle to survive is not our suppliers, it is not the producers, and it is certainly not our customers, the retailers, the food service operators, and the export clients that we have cultivated over the years. The threat to our survival comes from Farmland Industries or from IBP or Morrell and their employees. We continually remind all of our team members that each of them has an exact counterpart at our competitors, and it is their individual challenge to outperform that counterpart each and every day if we are to hope to survive.
Turning to my second point, legislation has been proposed that we feel will have unintended harmful consequences. Country-of-origin labeling is a serious threat. All producers and packers agree that exports are critical to a dynamic business. Exports rely on broad market access. Erecting a nonscience-based barrier in our own market is not the way to get others to reduce their barriers.
Yesterday I heard a radio commercial paid for by Chilean producers of fruits and vegetables, probably with the assistance of their government. The ad extolled the virtues of fruits and vegetables produced in Chile, particularly grapes. The labeling legislation would only force Canadian producers to advertise the virtue of their more uniform cattle supplies and the benefits of their advanced food safety inspection system to U.S. consumers. Raising the retailer's costs will be a burden for food buyers. Giving other nations a new excuse to exclude our products from their markets will only hurt producers and packers alike.
Likewise, mandatory livestock price reporting legislation is not needed. The Packers and Stockyards Administration comprehensive studies referred to as Kansas 95 and Texas 96 reviewed each and every fed-cattle transaction in the States of Kansas and Texas for an entire year. These studies showed a high degree of participation and a high degree of accuracy with the current system. On the pork side, Excel reports 100 percent of its purchases to the Packers and Stockyards Administration.
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Another legislative initiative calls for mandatory meat price reporting. Excel currently reports 100 percent of the commodity beef and pork sales requested by the USDA. However, we oppose mandatory reporting of our branded product sales. First of all, they represent less than 10 percent of our total sales. And, second, we have invested and continue to invest millions of dollars in creating and sustaining these emerging brands. At a time when many producer groups, including the National Cattlemen, are calling for more branding to restore consumer loyalty and confidence in beef, it is counterintuitive that legislation would be passed that would damage those efforts to create brands.
A fourth item on the legislative agenda concerns contracts and formula sales. The Grain Inspection, Packers and Stockyards Administration has access to all this information currently. They have the information on all of Excel's programs. These programs are a great tool for the industry. They allow for the communication of value-based marketing signals from packers to producers. They allow packers and producers to align themselves to provide a more comprehensive offering to retailers and food service operators. They also allow for risk sharing and for the mitigation of risk.
Recently in South Dakota legislation was passed that prohibits producers in that State from using these marketing options. And just this week we began informing our suppliers, the livestock producers in South Dakota, that we would no longer be able to offer such programs to them. One of our suppliers said, and I quote, my banker won't stand for this. And another one told us he was going to get a post office box number in Nebraska so he could continue to use this important option to market his livestock.
I will make only two comments on direct subsidies. If such legislation passes and leads to the loss of a single export opportunity or the imposition of countervailing duties, more harm will have been done to the livestock industry than any benefit provided by a short-term or short-lived subsidy. Second, it is a harsh fact that 100 percent of producers suffer while the market determines which 4 percent will leave the industry. My grandfather had an adage. He would say there is nothing worse than a slow hanging. And a subsidy that merely prolongs the suffering as the industry seeks to readjust to the proper size is inappropriate.
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Finally, there is much the Government can do, and I would speak to just four items. New trade agreements, please help us get access for our meat and meat byproducts around the globe.
Second, ensure adequate export credit guarantees are available.
Third, continue to fund the market development program. I talked about the Chilean fruit ad. Ads like that about the virtues of American meat need to be on the airways in Europe and in Latin America and in Asia.
And, finally, fourth, fund food safety research. Maintaining and building on consumer confidence both here and abroad is critical to the success of our industry.
In conclusion, we would urge the committee to approach the current situation carefully and with a long-term view. The risk of unintended harm is present in a number of the proposals. We appreciate the difficulty of the issues this committee faces, and thank you for the opportunity to share our thoughts and to answer any of your questions.
[The prepared statement of Mr. Page appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Mr. Page.
Mr. Evans.
STATEMENT OF GARY E. EVANS, EXECUTIVE VICE-PRESIDENT AND CHIEF OPERATING OFFICER, FARMLAND INUSTRIES, INC.
Mr. EVANS. Thank you for the opportunity to be here and appear before the committee. I am Gary Evans, and I represent Farmland Industries, which is a regional cooperative made up of 1,500 local cooperatives and 600,000 farmers and ranchers that own the cooperative system, and so essentially I am representing producers, both farmers and ranchers, in my presentation today.
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I think that the thing that I wanted to do was talk a little bit about what we as a cooperative have done to aid our membership during this tough period of time, particularly focused on the meat side of the business. Certainly we have gone through, and it has been well documented, some very depressed livestock prices, both on the beef and on the pork side, and more so on the pork side than the beef side. But a challenge on both sides.
But essentially, in working with our membership we had a meeting in December where we met with a number of our producers that supply pork to our operations, we looked at what we could do to turn this market around. That was when the market was in that $8 to $10 range. And so we came out with first a $15 floor; where we said we would not pay our producers any less than $15. And this was again at a time when hogs were in that $8 to $10 range. Now we knew, and our pork producers knew, that certainly that was not the answer to the crisis that they were in. It was way below production, but we had to get this market turned, and we had to get this market moving back up in the right direction. And so we think that certainly through our efforts and through the efforts of our producers hopefully we were able to accomplish some of that, and to get this market moving back.
And I think that also this move has helped the cattle market move back up just a little bit too, because we saw a little bit of a bounce in that beef market when we introduce this floor price.
The other thing, working with our producers we looked at capacity. Plant capacity, running our plants as hard as we could, we were running our plants 10 hours a day, and since about the middle of July we have been running 6 days a week and working our employees fairly hard during this period of time. We have increased our plant capacity or our plant output by 10 to 20 percent over this period of time, and as we keep this level of operation running, we will process over a million additional head of hogs over what we did this last year.
The other thing too that our producers were concerned about was the retail side of the business and what was happening with the retail pricing, and certainly it has been a concern to a lot of people, but as—and I am not here to defend the retail industry, but a thing I wanted to comment on was or what I have commented to our producers is the retailer is our friend, the food service operator is our friend. This is how our product is going to be moved, and this is how our product is going to be positioned with our consumers.
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We have stepped up our advertising and promotion. We are more heavily brand-oriented than Greg and his company over here. And so this was very important to keep our products positioned and to keep our products moving through the system out here for our producers.
We took a very aggressive role as far as our advertising and promotion. We increased our advertising budget by 46 percent during the first 3 months of our fiscal year. Our fiscal year starts in September. So we were very aggressively promoting and advertising products and working to move products through the system. We have also increased our couponing of product and working to move product through and pulling the product through the marketplace on behalf of the producers, with the consumers coming in and demanding the various types of products that we produce.
I think the thing that is really interesting is that 40 percent of pork is normally featured, or what the retailer calls featured, is discounted in some fashion to where it is sold on a feature ad over a weekend type of thing to where they reduce the price and move the product through. We saw a major increase in featuring, and I think that the retailers have done a tremendous job in moving through this glut of product that we had, and I think that they are to be complimented for what they have done.
To give you an example, Eagle Foods in Chicago, had a million-pound ad, they were going to move a million pounds of pork in 10 days. They moved 18 truckloads, over a million pounds of pork, during this period of time. And so—and I have got other stories that we can relate to that go on and on about that.
New product development, it is important to keep our products moving through the meat case. We have just come up with a line of products that shows on the label an endorsement by the American Heart Association. And I think that this is also a compliment to our pork producers as to the type of pork they are producing today, and that it can command a logo of this stature and an endorsement of this type to keep product moving through. And so new product development, Greg has mentioned the food safety issue, and the need to continue to research the food safety issue, very critical for the movement, the continued movement of our product.
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The last thing is on price reporting. Last spring we sat down with the National Pork Producers Council to talk about what we could do to help them, so producers could have more information on price reporting. We came up with a price reporting program. That is a Web-based program where we report our cash prices that we have paid to producers on the previous day, and that information is put out every morning, and I think that that has been very helpful to many producers in making purchasing decisions that they have to make.
One last thing I would like to just mention, U.S. Premium Beef was mentioned today by an earlier panelist. I would say that this is a partnership that we have with 765 producers located in about 25 States where they actually own part of our beef packing company, the Farmland National Beef Company. I think that this is an excellent move on these beef producers' part to take an active role in the cattle industry that is out here through the packing operation on to the consumer.
My concern is that with the talk of captive supply, with the talk of restricting packers from owning livestock, what does this do to a closed cooperative like U.S. Premium Beef to where they are owners in a packing operation, they are also owners in feedlot operations, and U.S. Premium Beef can be termed a marketing program or a captive supply program on the part of those producers.
I appreciate the opportunity to be here and appear before this committee, and ask if there are any questions.
[The prepared statement of Mr. Evans appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much, Mr. Evans.
It is my understanding that Farmland has not taken a position on country-of-origin labeling. Is that correct?
Mr. EVANS. As far as country-of-origin labeling, we are doing a lot of visiting with some of our producers out there right now trying to get their feel as to what their concerns are. We have some concerns about the country-of-origin labeling. I think that about 25 percent of our beef products are exported that we produce through our packing operations, about 15 percent of our pork products. We have expressed concern to our producers, would there be retaliatory impacts on us as far as moving to that, and I think that this is something that is being studied by the USDA, and I think that we need to wait to see what the result of that USDA study shows us.
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The CHAIRMAN. OK. Thank you very much. This is going to obviously be an issue that is going to get some hot discussion, and I would hope that as it does move forward that efforts will continue to try to work through this in the most beneficial and the least destructive way.
Mr. Page, obviously—or I think it is obvious that when livestock prices are down, that your operating margins improve. What will happen when livestock prices increase? Are you able simply to pass this on to your consumer?
Mr. PAGE. We have not in the past been able to do that unilaterally. I think Gary would confirm that the margins in the packing industry this week versus what they were in the early weeks in December are dramatically reduced. I think most public reporting agencies would argue that for basic kill-cut margins that there are no margins or slightly negative margins in the packing industry today. I think Dr. Collins reflected on the reduction in slaughter from the levels of December, and as the industry has dropped back from being close to capacity, the natural competitive instincts have taken over and the margins have dramatically compressed.
I guess the other comment I would make, while not here as a defender of Iowa Beef, but someone made a comment about the increase in their earnings. A couple of publicly available facts. One is they still earn less than 1 1/2 percent on sales, which against all American industries would show it to be rather competitive, even in what is described to be a good environment. And I think the second comment would be its stock trades at about 11 times earnings, or one-third of what the S&P 500 trades at, which is hardly a signal that the financial community thinks they have created an uncompetitive situation or a great opportunity to exploit some kind of monopolistic power.
The CHAIRMAN. Much has been made about the impact that concentration has had on the current price situation. In fact, we are having a hearing tomorrow on concentration, and I am sure we will hear a lot more about it. In the meantime, could you tell us what percentage of the slaughter market was controlled by the Big Four in 1996 when pork prices were at or near all-time record highs?
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Mr. PAGE. The Big Four would be 60 percent——
The CHAIRMAN. About 60 percent?
Mr. PAGE. Twenty, 20, and two 10's. That is 60.
The CHAIRMAN. What about today?
Mr. PAGE. I do not think it is dramatically changed. Iowa Beef closed its plant at Council Bluffs. The new plant built by Seaboard in Oklahoma has come to full two-shift capacity. It is my understanding that the Tarheel plant owned by Smithfield is running fewer hogs due to some water constraints than they would have been running in 1996. So I guess I would be surprised if the percentages had changed very much.
The CHAIRMAN. So you think today it would be about 60 percent as well?
Mr. PAGE. No, actually I think it is about 56 percent.
The CHAIRMAN. Thank you.
In the area of the mandatory price reporting, and recognizing the positions, are there things that—areas that you can agree on do you think with the livestock industries that are supporting mandatory price reporting?
Mr. PAGE. Absolutely. I had some conversation with Craig last night and again today after his testimony. I had some conversation with Mr. Davis and Mr. Carpenter, who testified in the first panel.
I believe there are a number of things. One of the things that was interesting to me, I know what we report, and I do not pay attention to what we report to the AMS and what we report to the Grain Inspection, Packers and Stockyards. Apparently there are some statutory constraints that do not allow them to share information with each other. So we tend to look at it as the USDA.
Well, we told the USDA this, and so there is information we are reporting today that could be commingled and perhaps presented in a more usable form back to producers in a more timely way. We report and gather the information. It is not being disseminated as I thought it was.
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The CHAIRMAN. I appreciate you all being here today. You hear and read the same thing that we hear from our constituents, and obviously when you have got people that are looking at their livelihood and whether or not they can stay in business, that is some very highly emotional and desperate times. For us to look at who the culprit is or what the problem is.
What I think our role is is to make sure that we look at this from a concern but not do something stupid. And Congress has a tendency to do that on occasion. We want to try not to be ones that help further that myth. And I think it is important, and that is why I think these hearings are good, because it does give some opportunities obviously for everyone to lay out the facts and the concern. And the goal was to try to reach an accommodation that does not have unfair disruptions or does not create unfair situations, but at the same time does possibly improve the transparency or gives us an opportunity to possibly negate some of the contentions that are out there as to the causes. And I do not know what they are, but that is part of what we are trying to do.
And so any efforts that can be made throughout this in order to try to, if nothing else, alleviate with the facts some of the concerns and fears that are out there, we would certainly appreciate that cooperation, because again getting at the end result and really trying to decide what we can do as to where we want to be, and we do not want to do something just for the sake of doing it if it does not make any sense. And again I know that is kind of unusual for Congress occasionally to do that, but we are going to try.
Mr. Dooley.
Mr. DOOLEY. Thank you, and I apologize to the gentleman from the Pork Producers Council as well as the Cattlemen's Beef Association. I was not here. I really want to thank you for the terrific work that you folks have done in terms of expanding trade opportunities, and really you have built a lot of credibility certainly with me and others on your commitment to expanding markets.
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I guess to the panel here, Mr. Page, I am kind of interested, there is a lot of concern on the forward pricing and contracting there. When you approach somebody to consign or have them consign to sell you, you know, so many cattle, how do you determine that price? I mean, is there—are you looking at futures markets, are you making—how is that price point arrived at?
Mr. PAGE. Certainly a number of elements would go into it. Specifically in the case of cattle, most of the contracts are more of an understanding nature, whereas in the pork industry we tend to have actual legal contracts that may last 3 to 7 years and have more components. But in the case of cattle, it can be as simple as we merely guarantee a basis to a published market for them. It could involve a flat price forward where we would look at the futures but also at our forward sales.
We have a lot of restaurant customers that would—they put out a menu, they do not want to change it. We have cruise lines that book cruises for the spring, and so in October every year they would come to us and want to know what their food prices will be. Next to fuel, it is their single largest expense. So we will guarantee them prices across their menu for 9 to 12 months forward. So we take that information and try to work back to what kind of a flat-price cattle purchase offering we can make to the grower.
Mr. DOOLEY. In terms of past experience, you know, if you are using it off of some base price, is that base price then in many ways going to be reflective of the cash market at that time when the sale is actually——
Mr. PAGE. The base price will be determined by the cash market.
Mr. DOOLEY. And so in terms of—I guess I am having a little trouble understanding with this captive supply issue how that really distorts or puts someone at a disadvantage if you in fact are using the spot price or the cash price as the primary basis for your contract price.
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Mr. PAGE. We are disappointed that that word was chosen. I do not think it reflects the relationship at all. You have a cattle producer who believes he raises cattle that are above typical cattle, more valuable either by the way in which they will grade or by size, by eating attributes, and he comes forward and he says I would like to know that I can bring my cattle to your plant week after week and receive some kind of reward for the fact that I feel I have a better breeding program and a better animal husbandry program than my neighbors.
Mr. DOOLEY. Yes.
Mr. PAGE. So if you will start at the public market as the base price and give me some premium for attributes delivered, that is a relationship I want to enter.
Having voluntarily come forward, sought this relationship, then he becomes deemed in public discourse as somehow captive of the packing plant. In fact, he actually benefits from it in my opinion in managing his livestock operation. In virtually every one of our alliance or captive relationships, they get back carcass-by-carcass data so they can tie out to their eartags and to their breeding programs and in fact go back and look at their genetics and any other part of their program to improve their performance. That is the real information that we find to be more interesting versus yesterday's price.
Mr. DOOLEY. Mr. Evans, as I was reading the testimony from the National Cattlemen's Beef Association, they have a proposal to require the reporting of boxed beef sales, prices and volume, on a daily basis by AMS. Reports should include forward sales beyond the delivery period currently reported, and then also prices for branded products, sales delivered as price-based to a futures contract, such and such.
If you were required to report those prices, what does that mean to Farmlands? How many different products, branded products and others do you have?
Mr. EVANS. On the pork side, it would be somewhere greater than 5,000 as far as the number of various products that we do produce. And then on the beef side, it would be something greater than 500.
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Mr. DOOLEY. So, the mandatory price reporting, if it goes to the point where they are actually talking about branded products, it has some pretty significant components in terms of just for Farmland, you are talking about 5,500 products.
Mr. EVANS. Absolutely. And it is actually more than 5,500 products, and I can't tell you specifically, but I know that we have been working on this to try to get our SKUs down in our operations, and I know that it has been somewhere around that 6,000 range we have been looking at that has been running through our operation.
But I think that the comment that was made of sitting down with pork producers, the beef producers, I think it is certainly something that I think that is what we have tried to do, from the standpoint of our company, sitting down with NPPC, and specifically asking, can we work together to find out what you would like to have, and then put this information out. And, certainly, they were hoping that other packers would follow in that particular situation.
I still think that the right route to go, the right way to go is for the industry to come together. I am talking about the packing industry and the pork producers, and the beef producers, to come together and decide what needs to be reported and try to compromise as to what can be reported and what kind of information they need to help them make their marketing decisions.
Mr. DOOLEY. A follow-up on that same point. On this, the price reporting that would be required on your branded products, and all these products, I understand are very competitive. What does that do in terms of proprietary information and in terms of your interaction with retailers?
Mr. EVANS. Well, I think the thing is that we have tried to—we are a fairly small packer in the whole sum of the end game. And so what we have done is we have taken some very specific niche markets that we have gone after, and that we have concentrated on. And what we try to do is, and what we do do is, is that we go out and we work with the retailer, we work with the food service operator to be their sole supplier of pork or their sole supplier of beef. And these are based upon specific types of cuts, specific types of items, specific colors that they are looking for, specific PHs, it gets fairly technical to a certain extent. But then to take that back to our individual producers that are members of our organization than can supply those types of animals and put those contracts together to work all the way through the system, what we call our farm-to-table system, to provide that product 24 hours a day, 7 days a week, to those retailers that are out there, or food service operators that are out there, to provide this product.
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And so I think if we have to go out and specifically state what we are doing and how much we are charging, and how much we are pricing, I think that is proprietary information that would certainly allow the competition to know where we are targeting, what we are targeting, and what we are doing and what our price levels are, and I think it would hurt us in the long run as a industry serving those particular markets. That has been our tendency to kill one another off, is by lowering prices and that is difficult.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. Mr. Page, you talked about one of your, I believe, competitors and working off a 1 1/2 percent margin. Would you believe that that is fairly typical for your industry as a whole, to have such a slight margin?
Mr. PAGE. I think that Iowa Beef has held up as a leader, certainly, they have the largest market share of red meat in the country. I think they are a good operator. I would think that they are at the high end of the range.
Mr. POMBO. So you believe they are at the high end of the range. If we start looking at the mandatory reporting requirements, country-of-origin labeling requirements, those both will carry some cost associated with them, whether it is a large cost or a small cost. I have heard estimates all over as to what they could possibly be, and I think that the jury is still out on that, as well as user fees on mandatory Federal inspection. Do you intend on absorbing those costs or would they be passed on to the consumer or come off of the other end in terms of the producer?
Mr. PAGE. I think any cost that is applied uniformly across all companies gets passed either to customers or to producers. I don't know the answer to it, but I believe some companies——
Mr. POMBO. Well, let me ask you this way then. Could you raise the price of your product across the board a couple of cents, 5 cents a pound, to make up the cost of mandatory requirements?
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Mr. PAGE. I think for the packing industry to continue to attract capital to invest in the things that we have talked about, it can't have returns on investment much lower than what it has experienced, the last 3-year average, 5-year average, or 10-year average. The stock market is not enthralled with equity invested in meat packing, and, in that regard, if we all have the same added cost, we will pass it to someone, because to absorb the cost would take the returns on investment below where they are today, which, I think by any measure, would be barely described as adequate.
Mr. POMBO. Let me ask you about imports that are coming in. What is the concern that you have or that your company has in competing in the domestic market against imports, and how is that affecting your decisions today?
Mr. PAGE. I think in the case of beef, we are a packer in Canada, so we participate both with a processing plant in Alberta and one in the United States. For our plants here in the United States, we are extremely comfortable with their cost capability, for their byproduct harvesting capability, their proximity to our customers, which is important. So I would say, on the beef side, we have very few concerns.
I think that we are concerned that people continue to perceive beef as safe to eat. Irregardless of its origin, if the USDA or APHIS allows it to come into this country, it needs to be food that can be consumed with confidence, because I don't think a little label is sufficient to change consumer perceptions. They need and should be able to trust their food without the need to scrutinize each square inch of the back of the package. And so I think as long as we are very careful that we have a good system of food quality inspection for overseas suppliers, that we, as an industry, both the producers and the packing plants are going to be able to compete.
Mr. POMBO. I don't disagree with you. In fact, I think that that is one of the inherent risks that we run is to insinuate that somehow the food supply is not safe, and I think we have to be extremely careful about where we go in terms of making those kind of statements. At the same time, I do have a very deep concern that our regulatory policy and long-term Federal policy could lead to the point where it is uneconomic or inefficient to produce, or to continue to produce and expand on a large scale in this country, and companies such as yours make the decision that it is to your benefit, and the benefit of your stockholders, to produce in another country and export into what is now our domestic market. That is a big concern of mine. I don't want you to go anywhere. I want you to stay right where you are, producing what you are producing.
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But if we tip the balance too far, you have an obligation to your stockholders to make a decision, and that decision is not going to be in our favor in terms of domestic production. That is what I am concerned about and would like to have a comment from you on that in terms of—are we making it more and more difficult for you to continue to run your business in this country, and making it more attractive for you to make decisions to locate in the Far East or to locate in Canada or other places that your company has already made that decision?
Mr. PAGE. First, there is a lot of regulation, in my opinion, that is very good and very necessary. We live on the back of consumer confidence, and, if anything, I think the American public under-appreciates the quality of regulation that meat is produced under, that at any one time we have a minimum of 20, and I think as many as 28 full-time Federal employees stationed in our plants. And I daresay a survey of the people outside this building wouldn't turn up a public perception that their meat is being produced under that careful a scrutiny.
To your comment, to me, the biggest competitive advantage that America has is its domestic market, which, hopefully, won't go away if Americans continue to be confident in meat and eat it. A lot of comments get made that we export the equivalent of so many million hogs or so many million cattle, that is not true.
We don't export any cattle, and we don't export any hogs. We export very small and specific parts to different countries. We send omasums to China and we send culottes to Brazil. And that is why broad market access is so important, there is no one country on earth that is the best market for every piece. And Gary talked about 500 or 600 products that he produces one beef animal into. All of those head to a different destination. And that is our great strength, because we have this enormous domestic market, and we can sell overseas customers huge quantities of single, small pieces out of any one animal, and it creates an enormous incentive to keep our industry here. We just have to be careful that we don't so load that industry with regulatory costs, be they environmental at the producer level, or unnecessary and unhelpful food inspection costs. But we have a great opportunity, a huge comparative advantage, and it is all the consumers in America that trust our food.
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Mr. POMBO. I understand exactly what you are saying, and the marketing of beef, of meat products, in general, has become an international business. And as someone that has been in that business my entire life, I understand it as well as probably anybody.
But at the same time, I have a great concern for where that plant is located. And where you are marketing your final product, whether it is ending offal to the east or whether it is sending steaks to the South, whatever you are doing, my concern is where it is produced. And I am interested in what we can do long-term that is going to ensure that that plant is going to be located here and not located somewhere else. And that is, I think, the essence of consumer—or of producer prices, is where the demand is. And if your plant is here, the demand is greater here, and it gives our producers the ability to produce a product that goes into your plant. If that plant is located in Southeast Asia, then I am sorry, but my cattle probably aren't going to end up in that plant.
In long-term, what do we have to do that is going to keep those plants here? And those are the kind of things I think that the committee needs.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Pombo. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. Would each of you comment regarding the proposal to allow State-inspected plant that are deemed to be equivalent to Federal plants, to have the same competitive opportunities as Federal-inspected plants?
Mr. EVANS. As far as State-inspected plants, as long as they are meeting the same restrictions and qualifications that our plants are meeting, I don't have any problem with that. I mean my major concern is that the—we have gone through a major HACCP expansion, or a major HACCP program in our facilities, it has cost us money to do that. I think, certainly in the long-term, if it puts—I think it will cause our consumers, both domestically and internationally, to gain confidence, increase confidence in our product we will supply, I think it will assure our consumers a greater food supply. My major concern on State-inspected plants is that—can they assure that product safety, maintain the confidence of the consumer, both domestic and internationally, those are that best products for her.
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Mr. STENHOLM. Speak briefly about the very real fact that all imported meat comes in from inspection systems that are certified to be equivalent. We certify them to be equivalent and we believe the imported meat is, in fact, safe. How do you rationalize your answer regarding State-inspected systems when we accept imported meat without worrying about whether foreign processors are doing exactly everything we do in U.S. plants?
Mr. EVANS. I think that imported meat should be under the same specifications as we are.
Mr. STENHOLM. Mr. Page.
Mr. PAGE. I think one of the big challenges of the food safety inspection system, as it exists today, is uniformity across regions and across plants, that there is an enormous human element. Where we operate 13 different plants, we can see that. And our answer would be very similar to Gary's, if it meets all of the requirements and has every assurance of being something that is acceptable to the American consumer, and doesn't in any way shake consumer confidence, we don't oppose it.
We are concerned, knowing the lack of uniformity that exists today, that to add a whole other set of regulatory agencies into this will only further reduce the amount of uniformity across plants. To me, the great tragedy would become if people started to site their processing plants to choose what States to locate them in based on some judgment of which State's system would be more amenable.
Mr. STENHOLM. I believe we are going to find that all State-inspected systems will have in place HACCP systems by early 2000. Mr. Evans, I think the criteria you mentioned will be there, and I appreciate your answers.
Any comment regarding your support for or against dealer trust?
Mr. PAGE. I am not well-versed in the issue, but I think most packing plants are bonded, and I did not realize that dealers were able to operate without bonds. I think the ability—you talked about the FDIC equivalent, I don't see any reason why that shouldn't be made available to the sellers of livestock.
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Mr. EVANS. I am not knowledgeable enough to comment.
Mr. STENHOLM. Thank you.
The CHAIRMAN. Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Page, I wasn't able to hear most of the second panel, but there is some confusion in my mind about mandatory price reporting. It was my understanding that the pork producers' position was simply that they had reluctantly decided to support mandatory price reporting, is that a fair statement or not? I need to clear that up.
Mr. PAGE. I was looking to see if Craig was here. I know they had not supported it in the past.
Mr. BARRETT. Right.
Mr. PAGE. But now are a party to some legislation.
Mr. JAROLIMEK. We support it now.
Mr. BARRETT. You support it now. Not reluctantly, go for broke?
Mr. JAROLIMEK. We support it.
Mr. BARRETT. Thank you. I was about to say that the producers in my area certainly favor it as well.
Excuse me. Go ahead, Mr. Page.
Mr. PAGE. I think I could bring quite a number of producers in that don't. I mean I think they are democracies within the producer groups, and they do have to accommodate their positions to the wishes of the majority, but there are many producers that have expressed to us concerns about this, particularly mandatory livestock reporting.
Mr. BARRETT. I understand that. What types of reporting does Excel do, and why hasn't Excel adopted a voluntary system? Or have you now?
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Mr. PAGE. A couple of comments. First, we report 100 percent of our pork sales, about 90,000 hogs a day are reported to AMS, of which 35,000, which is our total slaughter, are reported by us out of a 360,000 head total slaughter. The NPPC has put forward a program which Gary's organization, Farmland, has participated in. It is our bias that we don't need more sources of information, we need ones that people trust and that meet all their needs, and that having duplicative systems that raise people's costs, that may gather the information under different protocols, are not helpful to anyone.
And so our concern further would be that if mandatory reporting also means mandatory disclosure of individual companies' purchasing practices versus aggregated data, if they are going to collect all the data from all of the packers in the western Cornbelt and aggregate that data so producers can get a feel for high, low, weighted average, we support that. But the idea of posting on the Internet each individual company's proprietary information, in our opinion, is not helpful, it is not appropriate, and we would certainly oppose it.
Mr. BARRETT. Too expensive, too cumbersome?
Mr. PAGE. It is so cumbersome, I mean Gary, when Gary turns in his 5,000, if he sells bacon in 12 ounce packages and we sell in 14, or he puts six New York strips in a box and we put three, you turn in all these prices, who is going to sort through that pile and see how much of this price difference reflects differences in packaging, difference in trim, difference in grade? His numbers, in my opinion, I would think they are on the low side. And so by the time you take eight or ten packers, you are looking at 25 or 30,000 bits of data every day, much of it explainable by nothing other than differences in packaging, size, or trim.
Mr. BARRETT. It is essentially true that a large part of the cost would be passed through to the producer anywhere, is that not true?
Mr. PAGE. I think we have gone at that several times, and Dr. Collins did, as well. I honestly don't believe the packer would end up absorbing it. Certainly, in the near-term, we probably would, but over time I think it would become built into the cost structure of the industry.
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Mr. BARRETT. Mr. Evans, you have been fairly successful with a voluntary reporting system, haven't you, Farmland?
Mr. EVANS. Well, we have had a voluntary reporting relationship with the NPPC since October of this last year. It would probably be better to ask them as to how successful it has been. We have heard some very positive reports out of them, though, yes. But ours, essentially, is just the cash basis, the live hog basis and so forth that we are reporting in our particular program. We are not reporting any boxed or pork cuts or primal cuts, along this line.
I don't know whether you were in the room when Mr. Dooley asked the question, but in our pork side of our business, that would be somewhere around 6,000 different products that we would have to report on the way it is talked about when we talk about our branded programs.
Mr. BARRETT. Well, there might be some pretty interesting lessons that others could learn then from your experience. And would you be willing to share them?
Mr. EVANS. Well, I think it is not very complicated, and I think that Greg understands, and I think the other packers understand what we are reporting. It is laid out on the Internet and, as I indicated earlier, when we sat down with the pork producers, it was their desire and their hope that other packers would follow, and they have not had that success of other packers following. And I think that part of the reason for their change is because of that.
At the same time, I think, too, that—I still think the best mode to solve this problem, or solve this issue, is for the NPPC and the NCBA to sit down together, along with the industry, and resolve as to how we go about doing this. I think it is much better if we do it ourselves than to let the Government help us do it.
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Mr. BARRETT. That makes much sense. Mr. Chairman, my time has expired. Thank you.
The CHAIRMAN. Thank you, Mr. Barrett. Mrs. Chenoweth.
Mrs. CHENOWETH. Thank you, Mr. Chairman.
Mr. Evans, you mentioned earlier how you felt about country-of-origin meat labeling. As I understand it, you are concerned about retaliatory impacts. I wonder if you could specify what type of retaliatory impacts you are worried about.
Mr. EVANS. Well, I think that the major thing is if some of the foreign countries that we are shipping product into would retaliate through tariffs, increased costs of getting our product in there that would cause our products to be non-competitive. That is the major focus that I have as far as looking at that. And, again, I stated that the USDA, I think, has a study underway at the current time. I think, it is going to interesting what that study has to say.
Mrs. CHENOWETH. Are some of the specifics—I have heard it talked about, you are worried that maybe the industry is worried about having to report hormonal content in meat, say, in Japan, and we are worried about that. But don't they already have to do that? Isn't that a requirement of labeling in Japan?
Mr. EVANS. I don't think it is, no.
Mrs. CHENOWETH. It was reported to me that it is. And I wonder if we could work together to find that information out, because, certainly, I am the sponsor of country-of-origin meat labeling, and I don't want to charge in and do something that would create huge retaliatory impacts, but I need to know the specifics.
Mr. EVANS. We will get back to you on that.
Mrs. CHENOWETH. Would you? All right.
Mr. PAGE. I am 100 percent sure it is not the case, but we will get it for you.
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Mrs. CHENOWETH. All right. I would love to get that information.
[Mr. Page responded for the record:]
. . . Japan's requirement is the same as the U.S. requirement: that we label on the shipping box that the meat is a product of the United States. We are not required to label hormones.
Mrs. CHENOWETH. Mr. Page, how does your company feel about country-of-origin meat labeling, the legislation?
Mr. PAGE. I haven't read all of the legislation, but, certainly, we see the erection of non-scientific barriers to anybody's product as being long-term harmful to our need, which is to have access to as many countries around the world as we can for our meat. To give people who want to erect non-scientific barriers against our product an easy excuse by erecting barriers to theirs seems to work against our best interests.
I think there is a broad consensus amongst producers and packers that we need the export markets. We buy an entire animal, we sell hundreds of different products, each of which has interesting markets in countries as small as Taiwan. And if we start to use non-tariff barriers that we so dislike, for instance, with the Europeans, if we begin to act in that manner, it seems that we only arm our foes as we try to get these markets open.
Mrs. CHENOWETH. Countries as small as Taiwan and as small as Croatia and Uruguay. That is a long way to bring meat. And I think you know that it would not have reached—our concerns would not have reached the level of this committee if this hadn't been a festering issue that I know some of you have been dealing with, and NPPC and NCBA. We haven't resolved the problem, and that is why it is here now. So I was hoping we could voluntarily resolve the problem.
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But non-scientific barriers are interesting to me because a lot of consumers who go to the meat case feel that maybe a consumer's right to know where their meat came from may be termed a non-scientific barrier, but it is a pretty important ingredient in making an informed choice for the consumer.
And so I come at this wanting to see the cooperation between the packers and the growers, but we haven't seen it so far. And, in fact, in the Nebraska legislature, it was testified to at a legislative hearing, where one of the larger companies who have packing plants testified that they spent $200,000 last year to stop—in 1998, to fight the country-of-origin meat labeling issue, as well as price reporting. How much did your company spend to fight this issue? Are you aware?
Mr. PAGE. I don't know the amount. We certainly didn't hire any external lobbyists. We have a staff here in Washington. Mike Mullins is here with me today. It was certainly an issue that we weighed in on, along with many other issues, and so whatever the proportion of Mike's time last year that was utilized on that specific issue would have been our expenditure.
Mrs. CHENOWETH. I imagine Mike would just hope that a portion of his time would be worth $200,000, but I don't think it is the case. But I do want to say that we really do want to work cooperatively. But this issue has reached a level because of the frustration of price reporting, and women and consumers really do want to know where their meat comes from. You know, Mr. Page and Mr. Evans, if you go down to K-Mart or a pet store, you can pick up a dog bone and it tells you the country-of-origin. I mean you can tell whether that hide has come from Brazil, or there is one brand that says made from the finest American beef hide. But yet we can't—are not labeling the meat we are putting in our body.
Mr. PAGE. There are products being sold in the United States today that clearly say they are a product of the United States.
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Mrs. CHENOWETH. Yes.
Mr. PAGE. Including fresh meat, including entire supermarket chains that advertise repeatedly that they only sell U.S. produced beef.
Mrs. CHENOWETH. I understand that one of the major food chains, markets, that sells hamburgers used to advertise that they had 100 percent American beef hamburgers and now they can't do it because of regulations and adherence to the Truth in Labelling and so forth. I know that there are some markets that advertise that they sell U.S. beef, but by and large as I understand it, it is not possible under the definition of what U.S. beef is to do that. I think——
Mr. PAGE. I disagree fully with that. That is totally possible. Any package of beef produced under the current definitions are anything that we would slaughter and package in Canada would come to the United States and in bold letters on each and every package it says ''Product of Canada'' that I don't know which of the fast-food hamburger chains made or didn't make the comment, but certainly there are chains that continue to say that they use only U.S. beef and all of the programs are in place to allow a person that wants to buy grinding raw materials or trimmings to use in the production of hamburger patties to ascertain without fear of being found wrong that it is U.S. beef. That's system exists today.
Mr. EVANS. And I would agree with Greg on that particular situation.
In fact, I could take care of that retailer's needs right now.
Mrs. CHENOWETH. That is good to hear. I will remember that.
Mr. Chairman, I thank you. I have many more questions but I will ask them in writing or I will meet with the gentlemen. Thank you.
The CHAIRMAN. Thank you, Ms. Chenoweth.
Mr. Thune.
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Mr. THUNE. Thank you, Mr. Chairman.
Just a couple of questions and perhaps observations. I think one of the reasons that we are talking about price reporting today isn't because Members of Congress just conceived of this thing and thought it was a really neat idea. We are hearing from producers out there and the producer groups today have come out in support of this, and you indicated earlier that there are a lot of producers out there who don't favor it.
I don't know one in South Dakota that doesn't favor it. Now there may be some in other parts of the country, but frankly we are at this point because there is a serious credibility problem I think out there and the producers don't believe and don't trust and have no confidence in the pricing system, and I think that is why we are where we are.
Now one of the concerns that you raised with respect to legislation that we have drafted has to do with some of the proprietary information, the privacy concerns, which I understand, but—I don't have the language in front of me, but our legislation doesn't disclose, there isn't any identity there. Essentially the USDA is going to collect data and you are not going to be identified by Cargill or Farmland or IBP or anybody else and I guess I would be curious to know what your objection would be to legislation given that, if that is the primary reason why you would have a problem with it.
Mr. PAGE. I have not seen the entire legislation. I read a brief summary of what I understand to be Mr. Pomeroy's proposed bill, and it does not clearly say that only aggregated data will be disseminated. If that is the clear intent of the legislation, certainly that would reduce our anxiety.
I think we would like to work together to come up with a program that gets usable information that doesn't make Gary report 5,000 products that merely confuse the issue rather than clarify it, and so I think there is a lot that can be improved and if in fact the intent is to provide aggregated data by States or by region, certainly that would allay some of our concerns.
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Mr. THUNE. Well, and again without having the language in front of me, my understanding is that's the way that we have it drafted and we did work in consultation with producer groups in putting that together and I think that there is unanimity among the livestock groups on this subject and perhaps that is different than what it has been in the past, and I am sure there are individual producers out there who might take issue with that, but at least in my State it is a clear slam-dunk.
I mean this thing has gotten to a level where there's just a tremendous amount of pressure to address it.
I would just be curious to know for either of you what percentage of your product do you purchase in the open market as opposed to that which you acquire through your own, and maybe you have answered that already, I don't know—your own captive supply, your own feed lot production.
Mr. EVANS. About—of the 8 million hogs we'll kill this year, approximately 20 percent of them are contracted hogs and 5 percent of them will be hogs that we own where we work with family farmers to raise those hogs.
Mr. THUNE. And the balance are in the——
Mr. EVANS. The balance would be in some form of either cash or futures or primal type of activity.
Mr. PAGE. Since Gary answered for pork, I'll do it for beef. Ours is 25.63 percent of our cattle came from relationship suppliers, so 75 percent roughly in the open market in 1998, and in 1997 the same number was about 18.5 percent.
Mr. EVANS. On the beef side for us it would be about 40 percent. And a big part of that is the ownership of the U.S. Premium Beef group.
Mr. THUNE. How about in the area of imports, percentage of product imported versus purchase of domestically produced or grown beef? Do you have an idea of how much of your slaughter, how much of your kill is imports?
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Mr. EVANS. We import none. We import no Canadian hogs or Canadian cattle.
Mr. THUNE. Do you know at what level or amount? You said you import no?
Mr. EVANS. We don't. It's by location of our plant.
There were times a couple of years ago before additional packing capacity existed in Alberta that we maybe purchased 1 or 2 percent of our cattle from Canada but with the increase in the size of the packing industry in Canada that has dropped to virtually nothing—well, it was nothing in the last fiscal year.
Mr. THUNE. All right. Those are all the questions I have, Mr. Chairman. I thank you for your answers.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman.
I just have one other general area I wanted to discuss a little bit with you. If there was value in you putting a product out with ''Produced in the USA'' and retailers were willing to pay for that, that would increase your profits, wouldn't it?
Mr. EVANS. I certainly think it would but I think at the same time when I say that I think if we positioned our Farmland labelled product, ''Proud to be Farmer-Owned'' I think it is perceived and rightly so perceived on the part of the consumer that it is U.S. produced product.
Mr. DOOLEY. I guess my point is that I don't quite understand, you know, why we think we have to mandate country-of-origin labelling. If there is value in having a product labelled in the U.S.A., then why isn't the marketplace doing it now? I mean if you can gain, you know, half a cent additional profit on every product that you are retailing out there or selling with a U.S.A. label on it, why do we have to have the Government come in and mandate it? Mr. Page, how come you guys aren't labelling your product?
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Mr. PAGE. First, we do, and so is it important to the retailer and would it help him? The boxes that leave our plant not only show that they are produced in the United States, they show what State they are produced in and in what community, so the label disclosure laws of the USDA are such that it is easy for all of our customers to see exactly what State their product was produced in for them then in turn to advertise it, and we have a few, a small minority of our retailers, that do in turn put up flags in their meat case and try to sell that as a distinguishing feature for their location.
Mr. DOOLEY. So if the retailer—and the retailer's returns are basically going to be some percentage of retail price so that there was value there and them getting a premium on a product there then it would make financial sense for them to do it.
Mr. PAGE. Exactly.
Mr. DOOLEY. And I guess that's where I get a little bit frustrated. I mean we see the industry thinking that we have to have legislation on this country-of-origin. I mean we have in the United States, you know, California pistachios, we have Florida oranges, we have examples of States as well as products that if they think there is a perceived value there they use it, and I guess I question whether or not, you know, we really need to go down the path of actually requiring a label on the retailers and putting again another mandate in place. I am going to sound like a Republican when it is mandated. [Laughter.]
The CHAIRMAN. Hey—keep going. [Laughter.]
We'll continue to yield to the gentleman.
We appreciate very much your being here and there may be additional questions and in fact, Mr. Evans, if you need to catch your plane hopefully you still have a chance, but the Chair would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material, supplemented and written responses from witnesses to any questions posed by members of the panel. Without objection, so ordered.
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I want to thank all the witnesses and the members for their attentiveness. It's been I think a very productive hearing.
At this time the hearing of the Committee on Agriculture is adjourned.
[Whereupon, at 3:10 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Testimony of Hon. Kenny C. Hulshof, a Representative in Congress from the State of Missouri
Mr. Chairman, I would like to thank you for the opportunity to submit testimony to the Committee on Agriculture. Your leadership in calling hearings to review low livestock prices and consolidation in agribusiness is greatly appreciated, especially in light of the hardship farmers and ranchers have felt in the past year. I can assure you that my home State of Missouri and the Ninth Congressional District which I represent is no exception.
I am committed to working with you, Mr. Chairman, and my colleagues on the Agriculture Committee to craft long term solutions that will benefit agriculture in the United States for decades to come. I am excited about the opportunity to reevaluate and examine issues like crop insurance and the farm safety net from a fresh perspective. As a member of the Committee on Ways and Means, I am particularly interested in lowering the tax burden on U.S. producers and pursuing trade policies that allow our farmers and ranchers to compete better in the world marketplace.
While I have several thoughts regarding possible long term solutions to maintaining net farm income which I intend to mention later in my testimony, I must first address short term problems for agriculture, the most dramatic of which is the crisis facing our Nation's hog producers. In recent months, as you are all too well aware, our pork producers have been plagued with the lowest prices for live hogs, adjusted for inflation, since the Great Depression. This represents a decline in the United States market for live hogs of 75 percent since July 1997. University of Missouri livestock economist Dr. Glenn Grimes has estimated that hog producers lost $2.6 billion in equity last year and has projected an additional loss of $1 billion this year.
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Mr. Chairman, this crisis is of such great magnitude, that I am stepping forward today to throw my full support behind what I call the ''Missouri Plan'' providing direct economic assistance to our Nation's pork producers. The Missouri Plan was developed January 20, 1999 by the Pork Advisory Committee of the Missouri Farm Bureau. I can assure you, the decision to seek direct assistance to pork producers for a portion of their financial losses was not made lightly. Also, it is important to note that the American Farm Bureau Federation has approved policy stating it supports an economic disaster assistance package that includes loan guarantees as well as emergency, direct economic assistance payments.
Most pork producers in Missouri and people like myself would have considered direct payments made to livestock producers unthinkable just a year ago. However, extraordinary circumstances warrant unique measures. Mr. Chairman, I am providing this testimony today to tell you that I believe the financial disaster facing our pork producers is so great and the effect upon the agriculture economy so large, that these extraordinary circumstances have been met and that it is both appropriate and necessary to depart from longstanding U.S. policy.
As you know, Vice President Gore recently announced that the U.S. Department of Agriculture would provide direct cash payments to American hog producers. While I agree that direct assistance to individuals producers is necessary, I believe the $50 million plan put forth by the Administration is too small to address the magnitude of the current hog crisis. The Missouri Plan represents a more equitable approach to providing direct payments to producers. The plan proposes a one-time economic disaster payment for pork producers in the spring of 1999.
Under the Missouri Plan, economic disaster payments are based on a price ceiling determined by the respected Food and Agriculture Policy Research Institute (FAPRI). FAPRI has the capability to analyze agriculture data and determine what the price per hundred weight for live hogs would have fallen to under normal market conditions. The economic disaster payment would be made directly to producers only on the those hogs that received less than the price determined by FAPRI's analysis. The total economic disaster payment would be capped at $75,000 per producer including all USDA farm program payments received in the 1999 fiscal year.
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Other ideas which emerged from the January 20, 1999 meeting of the Pork Advisory Committee of the Missouri Farm Bureau include the appointment of a national panel to study the future of U.S. hog production. Congress needs to examine the emerging trends in the hog industry and predict what will occur over the next 5 years. The study should include insight on the role of independent hog producers in the future and the viability of producer-owned processing facilities. The serious deficiencies in slaughter capacity, which may have more to do with the current crisis than any other single factor, make a moratorium on Federal regulations extremely important. Great care is also needed to ensure that direct payments from the Government do not result in additional red tape. Burdensome regulations are the last thing producers need in their time of trouble. It is also important that we review the obstacles facing our Nation's smaller processing facilities that essentially prevent local niche markets.
In addition to economic disaster payments for individual pork producers, Congress must provide additional funding for the USDA's guaranteed loan programs available for all farmers and ranchers like the Guaranteed Operating Loan program, the Interest Assistance program, and the Guaranteed Farm Ownership program. These operating loans help producers get through the tough times until commodity and livestock prices bounce back. They also allow producers to restructure Testheir debt in order to keep their family farms in business.
Regarding long term solutions, I want to restate my excitement with many of the opportunities and challenges that lie ahead. Reevaluation of the Nation's crop insurance policies may provide us with an opportunity to consider policies that not only protect producers from losses due to lower yields, but also losses due to lower prices. Pilot programs for revenue insurance such as Crop Revenue Coverage, Income Protection and Revenue Assurance show some promise for possible policy changes that would benefit producers.
I also have a proposal that would add to the farm safety net by providing an additional risk management tool for farmers and ranchers. As you know, Farm and Ranch Risk Management accounts, or FARRM accounts, empower U.S. producers to set aside 20 percent of their annual farm income in good years into ''rainy day'' accounts. These contributions to a FARRM account would be tax deductible and could be left in the account for up to 5 years. During hard times, farmers and ranchers would then have access to their own funds to supplement their income.
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Nothing is more empowering and uplifting than allowing individuals to have the opportunity and the tools to help themselves. That is exactly what my FARRM accounts legislation is designed to do. I am pleased that this legislation has won widespread support in the agriculture community and has been cosponsored in the past by many Members of the Agriculture Committee, including yourself, Mr. Chairman.
While the items listed here in my testimony are certainly not exhaustive, I do hope they provide some benefit as the committee moves forward with its effort to address agriculture issues during the 106th Congress. I look forward to working with the U.S. House Agriculture Committee for the betterment of the agricultural and rural areas of our country.
Statement of Keith Collins
Mr. Chairman and members of the committee, I appreciate the opportunity to appear at this hearing to discuss livestock prices. My comments examine the recent performance of livestock markets, concentrating on the key factors affecting recent farm-level prices as well as price prospects in 1999. My statement also examines the relationships between farm, wholesale and retail prices. Lastly, I will describe structural trends in the livestock industry, including production, processing and marketing arrangements, and their relationships with prices.
Livestock is a major part of U.S. agriculture. In 1998, 1.116 million farms raised cattle and calves, including 116,000 operations with milk cows, and 114,000 farms raised hogs. In 1998, farmers and ranchers received an estimated $93 billion for their livestock and livestock products, 47 percent of total farm market receipts. In some regions, the importance of livestock is much greater; for example livestock and livestock products generally account for over 60 percent of total receipts in many states in the Northeast; Southeast; Upper Mid-West; Southern Plains, including Texas; and the Mountain states, such as Colorado, New Mexico, Wyoming, and Utah. With the exception of dairy, wool and mohair, and limited disaster assistance, Government programs, such as price and income support, have not existed for livestock, making the prosperity of livestock producers entirely dependent on their success in the market place.
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CURRENT LIVESTOCK PRICE SITUATION AND PROSPECTS
The market was rough for most livestock producers during 1998; record-large per capita meat and poultry supplies and weaker export markets reduced livestock prices-see data in the appendix. The index of prices received by producers for meat animals during 1998 was nearly 15 percent below the average of the 1990's, and for the month of December 1998, it was 30 percent below the average of the 1990's. The drop in hog prices was especially severe, as average slaughter hog prices fell nearly 40 percent in 1998 below their 1997 level. Prices received for cattle fell 6 percent, averaging the second lowest level in the 1990's. In contrast, broiler prices rose 7 percent in 1998, as the rate of growth of broiler production was slowed because of low profitability and hatchery flock problems.
For 1999, the Department of Agriculture predicts that red meat and poultry production will remain at record levels again, with declines in red meat production offset by increased poultry production. Lower cattle slaughter will support recovery in cattle prices in 1999. USDA expects hog prices to show modest improvement, but USDA forecasts that broiler prices will fall in 1999. Pork production will remain high, poultry production will recover but poultry exports will remain weak.
Cattle. Fed cattle prices (Nebraska direct) averaged $61.50 per hundredweight (cwt) in 1998, down from $66.30 in 1997, and the lowest in the 1990's. Feeder cattle prices (Oklahoma City) averaged $71.80 per cwt in 1998, down from $76.19 during 1997, but above 1995 and 1996. USDA had expected cattle prices to strengthen during the second half of 1998 and early 1999 following herd liquidation since late 1995; however, despite declining U.S. cattle numbers, now at 98.5 million head, the lowest since 1992, cattle prices fell again in 1998 and remain weak.
Why the drop and continuing weakness in cattle prices?
Low cattle prices and drought in the southern U.S. caused producers to continue to reduce their herds and not retain heifers for herd expansion, increasing cattle available for placement into feedlots.
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With good northern forage supplies and producers trying to keep animals on grass longer in hopes of higher prices, producers placed heavier animals into feedlots, helping to boost the average dressed slaughter weights to 723 pounds in 1998, up from 699 pounds in 1997. The continuing liquidation and heavier weights led to a 1 percent increase in U.S. beef production in 1998 compared with 1997, despite fewer animals slaughtered in 1998.
The economic problems, in Asia as well as herd reductions in many major beef exporting countries, caused the U.S. beef trade balance to worsen in 1998. U.S. beef imports increased about 11 percent, as world trade slowed and more product was moved into the strong U.S. economy. In comparison, U.S. beef exports rose only 1 percent, slower sales of higher value cuts to Asian countries were only partially offset by higher beef exports to Mexico. On a carcass weight basis, though, net imports (imports minus exports) were less than 2 percent of U.S. beef production.
Large pork supplies and a near 6 percent drop in the Consumer Price Index (CPI) for pork from December 1997 to December 1998 raised pork use and restrained beef prices.
What are the prospects for 1999? Beef production will likely decline, as slaughter levels and weights fall and prices increase. However, the decline will take longer in coming and be less than previously thought based on USDA's Cattle Report released on January 29, 1999. Cattle inventories have declined since 1996, and the 1998 calf crop was the lowest since 1952. This will result in lower placements in feedlots during the year. Prior to the January Cattle Report, USDA estimated the combination of fewer slaughter cattle and lower dressed weights would reduce beef production in 1999 by about 5 percent.
However, the Cattle Report showed a larger U.S. inventory and 1998 calf crop and a smaller 1998 death loss than expected. During early January, producers indicated that the number of heifers over 500 pounds they are retaining for beef cow replacement was 4 percent below a year earlier. This, coupled with the larger-than-expected inventory, will make almost the same number of heifers available for placement into feedlots as a year ago. Consequently, much of the year-to-year decline in beef production will not occur until later in 1999 when heifers are retained for the breeding herd rather than put on feed.
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USDA expects U.S. beef trade to be more in balance in 1999, as import growth slows and U.S. Government donations of beef increase. USDA projects that U.S. beef exports will increase about 8 percent, largely the result of food aid to Russia. In comparison, declining beef supplies in Canada and Oceania are expected to reduce the annual increase in U.S. beef imports to 7 percent in 1999, compared with 10 percent in 1998.
New production, use, and price forecasts for 1999 were released this morning at 8:30 a.m. in USDA's World Agricultural Supply and Demand Estimates report.
Hogs. For all of 1998, slaughter hog prices (Iowa-Southern Minnesota) averaged $31.74 per cwt., down from over $51 in 1997 and $53 in 1996 and the lowest since 1972. In December, hog supplies strained processing capacity causing hog prices to drop to the $10 per cwt. range but have bounced back to the $25–30 range since then.
What caused the unprecedented drop in hog prices?
The strong hog prices in 1996 and 1997, declining feed prices, and successive years of strong export growth provided incentives for producers to expand production. Producers began expanding inventories so that by September 1, 1998, there were 63.5 million hogs on farms, the highest since 1980.
Large productivity increases and structural change also fueled the inventory expansion. Increases in pigs per litter, litters per sow per year, and weight per animal slaughtered have combined to raise pork produced per breeding animal by 20 percent since 1988. Productivity gains have been greater on large operations which have been expanding rapidly. In 1998, 63.5 percent of the U.S. hog inventory was on 6,700 operations having 2,000 or more head in contrast to just 6 years earlier when 3,800 such operations had 28 percent of the inventory.
Pork production increased by 10 percent in 1998, reflecting strong returns the past 2 years and expansion of large hog operations.
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The abnormally large year-to-year increase in hog slaughter caused hog prices to tumble. During the fourth quarter of 1998, when the price drop was greatest, weekly hog slaughter frequently reached 2.2 million head, with daily kills of almost 400,000 head and Saturday kills of over 200,000. Total fourth quarter slaughter was 27.6 million head, more than 1 million greater than the fourth quarter of 1994, the last time hog prices plunged. These slaughter levels represent very high capacity utilization in hog packing plants, where total U.S. capacity has declined over the past 3 years. Packers reduce costs up to the optimum capacity utilization; but beyond that point, slaughter costs go up, they reduce their bid price for hogs, and producers have less leverage in negotiating price.
Greater hog imports were a factor in overall price declines in 1998, but not a major factor. The strong U.S. dollar relative to the Canadian dollar, large hog production and low prices in Canada, and labor problems at a Canadian hog packing plant led the U.S. to import 4.1 million head in 1998, about 4 percent of U.S. pork production, compared with 3.2 million head imported in 1997. Importantly, the surge in imports began in late 1997 and early 1998. Imports jumped to a higher level and maintained that level so that weekly imports during the very price-weak fourth quarter were not much different than during the third quarter, although there were several weeks in December and early January when weekly barrow and gilt imports from Canada moved up somewhat.
To help address the financial problems faced by hog producers, USDA initiated several actions: (1) accelerating the pseudorabies eradication program, (2) purchasing increased pork products for food assistance programs, (3) issuing $50 million in direct cash payments to small hog operators, (4) issuing a moratorium on Farm Service Agency loans for new hog facilities, and (5) issuing a notice of guaranteed loan program availability for hog and other producers.
Despite the weak world economy, exports continued to be a bright spot for the hog industry. In 1998, U.S. pork exports increased by 18 percent, while U.S. pork imports increased by 10 percent. Through November 1998, pork exports were about 1 billion pounds. Major U.S. export markets in 1998 were Japan, Russia, Mexico and Canada. At the same time, the strength of the U.S. dollar and large production in Canada and Denmark provided an incentive for increased pork imports. Pork imports totaled 635 million pounds through November.
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What are the prospects for 1999? USDA expects continued large pork supplies will pressure hog prices during the first half of 1999. Because of biological production lags, the market hog inventory on December 1, 1998, was 2 percent above a year earlier. USDA expects pork production to be up about 5 percent during the first half of 1999, keeping prices in the $25–$35 per cwt range. As hog slaughter begins to decline in the second half of 1999, prices are expected to rise above last year, particularly in the fourth quarter.
Producers have already responded to the exceptionally low prices in the last half of 1998 by reducing the breeding herd. On December 1, the breeding herd was 4 percent below a year earlier, the first reduction in the quarterly year-over-year hog breeding inventory since March 1997. In addition, December 1 farrowing intentions for March-May were 7 percent lower than last year. This implies a fractional decline in third quarter pork production but a 10 percent drop for the fourth quarter. For all of 1999, USDA expects hog prices to average $33–35 per cwt., about 7 percent higher than 1998.
USDA expects pork exports to increase about 10 percent in 1999, while imports remain steady. The Russian economic crisis will limit their pork imports mainly to donations under food aid programs. Exports to Canada may also trend downward as restructuring and expansion of the Canadian pork industry reduces the demand for U.S. pork products. However, increased pork exports to Mexico, Japan, and other markets are projected to more than offset the decline in exports to Canada and Russia. U.S. pork imports may remain at about the 1998 level in 1999.
Poultry and other livestock. The rate of growth in broiler production slowed in 1998, as production was negatively affected by below normal egg hatching rates. The 2 percent growth in production in 1998 helped strengthen broiler prices, which for all of 1998 averaged 7 percent above 1997, although weakening during the fourth quarter with loss of the Russian market and increasing production. In response to higher prices overall for the year, USDA projects broiler production will be up about 5 percent in 1999, causing prices to fall from the average wholesale price (12 city) of over 63 cents per pound last year to 57 cents–61 cents per pound in 1999.
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USDA forecasts broiler meat exports to remain weak through much of 1999. The loss of the Russian market is not expected to be offset by gains to other markets, and first-half exports could be 20–25 percent lower than 1998. However, exports in the second-half of 1999 may increase relative to 1998. The recent inclusion of poultry in the Russian assistance package will help boost sales opportunities.
Farm-level milk prices were record-high in 1998, averaging $15.39 per cwt., compared with $13.34 last year. Producer milk receipts totaled a record-high $24 billion, up 16 percent from 1997. The sharp increase in milk prices reflected modest growth in milk production and strong demand for milk products. In 1998, milk production was adversely affected by weather in California, Texas and the Southeast. In addition to high milk prices, lower feed prices boosted dairy producers incomes in 1998.
Dairy farmers appear to be reacting to the record-high milk prices and low feed costs over the past year by expanding milk production, which USDA projects to average about 2 percent higher in 1999. After being up only fractionally for most of the year, milk production increased by nearly 3 percent during the last 2 months of 1998. In response to the increase in milk production, which supported higher cheese production, wholesale cheese prices fell sharply in January dropping by about $0.65 per pound. The sharp decline in wholesale cheese prices in January will lead to a substantial drop in farm-level milk prices over the next few months. For all of 1999, USDA projects farm-level milk prices will average about $1 per cwt. lower than last year—putting them halfway between 1997 and 1998—but the decline could be even steeper if recent increases in milk production are maintained through much of the year.
The U.S. sheep and wool industry continues to contract. On January 1, 1999, there were 7.24 million head of sheep on farms, down 8 percent from 1998 and the ninth straight year of decline. Lamb prices were weak in the early 1990's, but shot up in 1996 and 1997 as U.S. lamb production fell. USDA estimated that lamb farm prices during 1998 were $73 per cwt, down from $90.49 in 1997. Wool markets have also been weak as U.S. wool consumption is declining and both raw wool and wool textile and apparel imports are estimated up for 1998. For 1999, lamb prices may strengthen a little as U.S. lamb production declines. However, declining lamb consumption, weak textile markets and continuing lamb imports will limit price recovery.
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RELATIONSHIPS BETWEEN FARM, WHOLESALE AND RETAIL CATTLE AND HOG PRICES
Low livestock prices, particularly hogs, have increased attention to the transmission of farm prices to retail, with focus on the farm-to-retail price spreads. For example, the farm value of a hog was only 10 percent of its equivalent retail value during December, the latest month for which USDA has data. That was the lowest on record and compares with 30–35 percent typical during 1996 and much of 1997. The drop in farm value is raising concerns that rigidity in wholesale and retail prices is limiting demand growth for pork, aggravating the hog price decline.
Two points are important when examining price spreads. First, their definition. Price spreads are the differences in imputed values for a consistent equivalent quantity and quality of product as it is successively measured at the farm, wholesale, and retail levels. Price spreads are not measures of profitability, and they are not perfectly accurate. In fact, data used in estimating the spreads may understate farm value, due to a failure to fully account for contract prices and spot prices that do not reflect average quality traded, and may overstate retail prices due to lack of information on volumes of pork moving on sale at retail outlets. Second, nominal price spreads may increase over time simply because of inflation. Therefore, when assessing their long run trends, it is important to adjust spreads for inflation.
Long-term trends for the nominal, farm-to-wholesale spread for choice beef have been fairly stable, with the spread in the range of 18–25 cents a pound since 1980. On a deflated basis, this spread has trended down over time, indicating that costs for slaughtering, cutting the carcass to wholesale or primal cuts, and transporting the beef to wholesale markets have fallen on a real basis. The nominal spread from wholesale to retail has grown significantly since 1980, standing at $1.23 for 1998 compared to 62.5 cents in 1980. However, if adjusted for inflation, this spread appears fairly stable over time.
Turning to pork, the nominal, farm-to-wholesale spread has been fairly stable since 1980, running 28–35 cents per pound. However, as for choice beef, the inflation-adjusted farm-to-wholesale spread has decreased over time. The trend of the wholesale-to-retail pork spread is similar to that for beef, where the nominal spread has grown but, adjusted for inflation, the spread is stable. The long-term trends in pork and beef spreads do not suggest any specific biases in pricing at the packer or retail level. Efficiencies gained in meat packing over the past two decades appear to more than offset inflation in packer input and other wholesale costs, and efficiencies appear to be passed on to buyers over time. However, the stable wholesale-to-retail spread suggests production efficiencies in that sector are being offset by the general inflation of input costs and by the costs of adding value to products.
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The farmers share of the retail price indicates the percentage of the retail price that goes to the producer. For Choice beef, this share has slipped from 63 percent in 1980 to 47 percent in 1998. The decline observed for Choice beef may be in line with the increased value added in marketing from farm to retail. The monthly farm value for Choice beef ranged from 44–49 percent during 1998, compared with 48–50 percent during 1997. For pork, however, the farmers share fell from 45 percent in 1980 to 22 percent in 1998 and was only 10 percent during December. The very low farmers share for 1998 reflects an unusually rapid drop in live hog prices in 1998 that out paced downward adjustments in retail prices. The 1997 share was 35 percent and more reflective of price relationships in the late 1990's.
A low farm share of retail value with a lengthy adjustment lag is typical when livestock prices drop sharply. When hog prices plunged in November 1994, the farm value fell to 23 percent from about 34 percent 3 months earlier. Three months after the drop, the farm value rebounded to about 33 percent. While the 1998 pattern is similar to what happened in 1994, the drop to 10 percent is unusually steep. Retailers argue that the retail prices used in the spreads, which include CPI data, do not accurately reflect large volumes of pork moving at sale prices. They argue the CPI for pork in December 1998, which was down 5.8 percent from a year earlier, would have been down even more if it was volume weighted.
What retail price would be expected if there were no lags at retail, supplier contracts, and so on? A 10 percent increase in pork production, using established price-quantity demand relationships, would be associated with a 14 percent decline in retail pork price, which would still imply a sharp decline in the farm share of retail value, since hog prices fell about 40 percent.
USDA's Economic Research Service is in the process of revising procedures for calculating pork price spreads to account for changes in hog genetics, such as larger and leaner animals; hog processing; pork merchandising; and data availability. New series are expected to be published in several months.
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EFFECTS OF CONSOLIDATION AND CONCENTRATION IN THE MEAT INDUSTRY
Overview of change. Consolidation of farms into very large production units is sometimes called industrialization, raising concerns over the level of economic opportunity for smaller farms. Similarly, as meat packing became more concentrated with few firms dominating the market, concerns have been raised over the degree of competition in markets.
Major causes of consolidation in U.S. agriculture include economies of scale from technical change, which increases labor productivity and reduces production costs over larger volumes of production; pecuniary economies related to size, such as volume-based input price reductions; the exit of operators to retirement or more attractive income opportunities in off-farm occupations; knowledge and skills of entrepreneurs and what is needed to stay competitive; and various Government programs.
The desire for increased coordination or production control in the farm-to-consumer chain has also led to increased contractual arrangements, alliances and vertical integration. Consumers increasingly demand higher quality products offering nutritional benefits, convenience and taste, rather than simply homogenous commodities purchased for home meal preparation.
Increased consolidation and coordination is accompanied by potential benefits and costs. Benefits include uniform, higher quality products being available at lower consumer prices and more efficient use of production resources enabling resources to move to production of other products thus increasing national living standards. Costs include issues related to environmental quality, economic viability of small farm and firm operations, and effects on rural communities dependent on agriculture. If consolidation results in highly concentrated markets, costs include the potential exercise of market power in unduly discriminatory or predatory ways.
Finally, when assessing the costs of consolidation or coordination, economists usually consider several factors. Consolidation does not necessarily mean concentration. For example, while farms have become larger, and some very large, there are still sufficient operations to ensure competition in the supply of farm production. However, if high concentration does occur, the potential for adverse effects on competition depends importantly on the level of barriers to entry of new firms, the ability of consumers to switch to substitute products, and the speed with which competitors react to one anothers price changes.
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Cattle. The number of farms with cattle and calves totaled 1.116 million during 1998, down 3 percent from 1997 and 5 percent from 1996. The pace of concentration for cow-calf operations has remained well below that of other livestock sectors, as production has remained spread throughout much of the country and is tied to the land. On the other hand, fed cattle has become one of the more concentrated livestock sectors, although the location of the industry has remained relatively stable in recent decades. There were about 110,000 feedlots in 1997, but the largest 2 percent market 85 percent of the fed cattle.
Cattle slaughter is highly concentrated. The four largest steer and heifer slaughter firms accounted for 80 percent of commercial steer and heifer slaughter in 1997. Although the four-firm concentration ratio is high, it has not increased since 1993. The rapid concentration took place in the 1980's and early 1990's with the four-firm ratio growing from 36 percent in 1980 to 81 percent in 1993. One measure of concentration used by the Department of Justice and the Federal Trade Commission in evaluating mergers is the Herfindahl-Hirschman Index (HHI). The HHI value for steer and heifer slaughter in 1996 indicated a highly concentrated industry.
Consequently, USDA is paying close attention to the methods packers use to procure slaughter cattle, including purchasing cattle on the spot market, procuring from their own inventories, forward contracting, or other marketing agreements. Transactions outside the spot market have become important in cattle producers, marketing strategies and in slaughter firms procurement plans. Arrangements include using forward contracts, with either a fixed basis or price, and trades through marketing agreements with price established through a negotiated formula, which typically includes a base price with premiums or discounts for quality differences.
Data from the Grain Inspection, Packers and Stockyards Administration (GIPSA) for the four largest firms slaughtering steers and heifers, show that in 1997, 3.8 percent of supplies were acquired from packer-fed cattle and 16.0 percent from forward contracts or marketing agreements. These figures have varied by only a few percentage points since 1988 with no evidence of an upward trend in the use of these procurement arrangements.
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Hogs. In 1967, there were 1.047 million hog operations. This figure fell to 667,000 in 1980 and to 114,000 in 1998, declining by over one-third every 5 years. Large operations account for the majority of the hog inventory. Operations with more than 2,000 hogs accounted for only 5.9 percent of the operations in 1998 but 63.5 percent of total inventory. In just the past 6 years, the percent of total inventory accounted for by these operations has grown from 28 percent to 63.5 percent. In 1998, there were 1,915 operations with over 5,000 head in inventory, accounting for 42 percent of total U.S. hog inventory. Over 62,000 small operations have less than 100 head and account for 62 percent of all operations. These small producers account for only 2 percent of the U.S. hog inventory and are usually operated in conjunction with other farm enterprises, such as grain production and with off-farm employment.
Hog production continues to be concentrated in the north central States—Iowa, Illinois, Minnesota, Indiana, Missouri, and Nebraska. Production has spread to other areas, notably North Carolina, now the second largest hog producer, and Oklahoma, and Colorado. Growth in these and other states has been characterized by a relatively few but very large operations.
U.S. hog production has been becoming more efficient in general with larger operations tending to have higher litter rates and more litters per year than smaller operations. For example, operations with more than 5,000 hogs in 1998 had 24 percent more pigs per litter than operations with less than 100 head. Feed conversion to useable meat has been improving and the quality of hogs marketed has improved. Producers are using improved genetic stock to produce more standardized hogs with carcass characteristics desired by meat packers and consumers. It is this ability to produce and deliver large lots of desirable quality hogs which explains in large part the trend seen in increased marketing and production contracting.
The four largest hog slaughter firms accounted for 54 percent of total commercial hog slaughter in 1997, up from 40 percent in 1990 and 34 percent in 1980. The eight largest firms accounted for 73 percent of total slaughter in 1996—the latest year of available estimates—up from 58 percent in 1990 and 51 percent in 1980. The HHI for hog slaughter in 1996 indicated a relatively unconcentrated industry.
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On a regional basis, there are fewer packers in the Southeast (NC, SC, VA), Southwest (TX, OK, NM), and West (CA, UT) than in the Midwest. The four largest firms in these regions slaughtered more than 90 percent of the total federally-inspected hog slaughter in the region in 1997. However, a large share of the hogs produced in these regions is produced by packers or through contracts with growers. USDA's 1996 study, Concentration in the Red Meat Packing Industry, found no correlation between regional concentration and price; rather, geographic hog pricing patterns were consistent with a single national market for slaughter hogs.
A large and growing proportion of hogs is produced and marketed under some form of contractual arrangement, with the volume of spot market trades declining. Production contracts often specify production practices and genetics that help assure that hogs will conform to a packer's product requirements. Contract producers provide packers a steady supply of uniform quality hogs, which leads to efficiencies in plant utilization. Contract arrangements have enabled producers to enter or expand in the hog industry and to reduce some price risks for hogs and feed.
Contract terms vary. A few pay on the basis of cost of production but most pay on a formula with hog prices based on the spot or futures market prices at time of delivery. Many hogs are sold through long-term contractual arrangements that provide price risk sharing if market prices fall outside a specified range. Producers who enter into these contracts give up some opportunity for high prices for protection against very low prices. Packers in turn provide the enhanced price when prices fall to protect themselves against very high prices and assure a steady supply of hogs when the market tightens. With some marketing contracts, called ledger contracts, some or all of the difference between the market price and the guaranteed price is recorded as a loan. Producers incur a debt to the packer when the guaranteed minimum price is above actual market prices. Packers incur a debt to the producer when the guaranteed maximum price is below actual market prices.
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While there is consensus that the share of hogs sold through spot markets has declined in recent years, estimates of the current size of the spot market vary from a low of 10 percent of trades to 50 percent. USDA data indicate larger producers market a larger proportion of their hogs under marketing contracts than smaller producers.
Pricing issues. A number of pricing issues relate to methods used to sell and buy animals. For example, attention has been directed at the procurement of cattle by packers through forward contracts and marketing agreements and with cattle that are packer-owned or fed. These methods of procurement, often collectively referred to as captive supplies, accounted for about 20 percent of steer and heifer procurement in 1997, about the same as in 1988.
A concern of producers about captive supplies is that as more animals are procured through captive supply arrangements, the thinner cash or spot markets may make it more difficult for a producer to find a spot buyer, diminishing access to competitive markets. Similar concerns have been raised for hogs as marketing and production contracting has grown. Some small, independent producers worry that they may not have access to contracts and be left with a thin, potentially less competitive and more volatile spot market. Some cattle producers have alleged that the spot price may be influenced by the supply of cattle being delivered under contract, which may be under the control of packers. On the other hand, captive supply arrangements are voluntary agreements common to other industries to manage risk on the part of both the buyer and the seller. These methods ensure a market for the seller and provide the buyer more control over delivery of animals to use packing capacity to maximize production efficiency.
The concern over the potential effects on competition in concentrated markets led Secretary Glickman to appoint a USDA Advisory Committee on Agricultural Concentration. In response to the Committee's report, the Report of the National Commission on Small Farms, and USDA's ongoing programs to ensure competition prevails in livestock slaughter markets, USDA has taken a series of actions to help ensure more transparent markets.
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For example, since 1996, we have expanded coverage of boxed beef sale commitments; initiated a weekly report of premiums and discounts being offered by packers; started reporting beef grading results on a regional basis; started reporting the number of hogs produced under contract; started reporting weekly the number of cattle produced under contract for future delivery and reporting the basis difference from a futures price, if part of the contract; started reporting daily live cattle, hog and sheep crossings from Canada and Mexico; expanded the Missouri hog price reporting project to other states; started a new weekly report on meat imports; announced the intention to propose a rule to require mandatory reporting of export sales of meat by volume and destination; and in January 1999 started reporting a range of hog spot prices based on quality. Last year, Secretary Glickman indicated his desire to have discretionary authority to require that livestock price information be reported to USDA. In addition, the Economic Research Service has expanded its reporting of commodity-specific market supply and demand outlook and situation reports from six times a year to twelve times.
To deal with issues related to the potential exercise of market power, USDA has restructured the Grain Inspection, Packers and Stockyards Administration to strengthen enforcement against anticompetitive practices and improve the ability of the agency to enforce other provisions of the Packers and Stockyards Act. The agency has added economic, statistical and legal expertise to its field investigative staffs and recently completed an assessment of hog procurement practices. The agency is also The agency has asked for increased funding in its year 2000 budget to continue to expand its enforcement capacity.
That completes my testimony. I will be happy to respond to questions.
[The accompanying charts of Mr. Collin's testimony follow:]
Offset folios 1–10 insert here
Testimony of Craig Jarolimek
Chairman Combest, Congressman Stenholm, members of the committee, my name is Craig Jarolimek and I am the vice-president of the National Pork Producers Council (NPPC). I am here representing the NPPC, its 44-member State organizations and America's pork producers. I own and operate a farm near Forest River, ND. I appreciate the opportunity to update the committee on the economic status of pork producers and what we believe are the steps necessary to reverse the current situation.
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In some ways, looking at U.S. pork producers is like reading the Charles Dickens classic ''A Tale of Two Cities.'' These are the best of times and the worst of times.
On one hand, both domestic and international demand for the quality, consistency and leanness of U.S. pork has never been better.
Between 1987 and 1997, pork exports increased 700 percent by volume. Even with the collapse of the Asian and Russian markets in 1998, through November exports were up 25 percent by volume, including a 7 percent increase in exports to our biggest customer, Japan.
Domestic consumption exceeded 1997 totals on a per person basis by 8.4 percent. Based on USDA data, this consumption occurred at retail prices that were only slightly lower than in 1997. That's the largest increase on record.
The average American consumed 5 pounds more of pork in 1998, the only meat protein registering any significant increase in consumption.
An expanding export market sent average wholesale prices for hogs above $50 per hundredweight in both 1996 and 1997. High prices in turn sent a signal to U.S. producers to increase production, which they did by 10.1 percent in 1998. Hog slaughter in 1998 exceeded 100 million head and pork production exceeded 19 billion pounds, both records.
Pork producers of all sizes were responsible for the increase in production. A study by researchers at the University of Missouri and Iowa State University found that, as of April, 1998, producers selling less than 50,000 head per year and those selling more than 50,000 head per year planned to increase production by 7.99 and 5.44 million head, respectively. The actual total increase was not as much as the planned 13.43 million. Which group carried out their plans more completely is unknown, but it is probable that the two groups were equally responsible for the increased production in 1998.
On the other hand, higher production, coupled with negative trends in several other areas, sent prices to all time lows in December. And while prices have rebounded a little, they remain stuck like a ship in a frozen lake at well below the cost of production.
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Since June, 1997 37,000 head of daily slaughter capacity has been lost due to the closure of three packing plants (IBP, Council Bluffs, IA; Dakota Pork, Huron, SD; and Thorn Apple Valley, Detroit, MI) along with the permanent loss of one shift at the Smithfield, Bladen County, NC plant. Coupled with a large number of Canadian hogs (65,000–100,000—a 37 percent increase from 1997) trucked to the United States for slaughter each week, the number of live hogs exceeded the 383,000 daily slaughter capacity of U.S. plants from September through December. The slaughter capacity utilization rate was the highest on record in 1998, exceeding even those of 1994.
On December 14, hog prices dropped below $10 for the first time since 1955. Adjusted for inflation, prices were lower in December than they were during the Great Depression. The average for the entire month of December was $15 per hundredweight. Compared to the five-year average price for hogs, $46.77, farmers were losing almost $80 per pig they took to market.
Had other commodities suffered comparable price drops, milk would be selling at $5 per hundredweight instead of $16; cattle would be selling for $16.44 a hundredweight instead of $60; corn would trade at 75 cents a bushel, wheat at 91 cents a bushel and soybeans, $1.50. By the way, the minimum wage would be $1.45 instead of $5.15.
Day after day of brutal, rock-bottom prices quickly took their toll. Producer losses were staggering in 1998. Data from University of Missouri suggest that the producer sector as a whole lost $2.6 billion in equity in 1998 and may lose another $1 billion in 1998.
Today, thousands of independent producers are hanging on by their boot strings. Prices have recovered only to the point where losses have fallen to about $30–$35 per head. Equity for many producers has either evaporated or will in the next few weeks.
This situation applies to producers of all sizes, not just small ones. While many large producers had marketing arrangements with packers, these were almost entirely priced from the cash market, so they have seen about the same price as un-contracted producers.
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Even the producers who had marketing contracts were not completely protected because those contracts with ''ledgers'' do not manage price risk; they only manage cash flow. In other words, the packer replaced the banker as the provider of operating capital. But the bottom line is the same. The money losses must be repaid.
While the $50 million in assistance announced by Vice President Gore in January was welcome, it applied to only the smallest producers. Independent family producers whose primary income is derived from pork production are the most in danger of losing their livelihoods right now. These operations, we fear, could become the seed stock for a massive vertical reorganization of the hog industry if something is not done quickly.
We hope that you will support and Congress will pass a one-time emergency direct payment program to help pork producers recover a portion of the equity they lost and be able to remain in business and independent. It would be based upon marketings for the last quarter of 1998 and be capped at $50,000 per producer. Secondly, we believe the USDA guaranteed loan program will require additional funding to be able to operate through the remainder of this fiscal year, and urge you to support funding for this purpose as well.
While increased production and decreased capacity tell part of the story why live hog prices fell, why they fell so far still remains a mystery. As pre-eminent ag economists Glenn Grimes and Ron Plain point out, neither increased production nor a changing industry structure can explain it, especially during a time of increased domestic demand.
They report that for the four production cycles from 1978 to 1992, the average annual increase in production for the biggest growth year was 10.3 percent. So 1998's production increase was not unusual compared to other hog cycles. Yet prices fell much farther. The four largest pork packers process 57 percent of all hogs. In the beef industry, the four largest packers slaughter 84 percent of the cattle. Yet the question remains. Did this concentration contribute to the sharp live hog price decline? We really don't know, but the issue of why prices dropped so low needs to be examined. Also, we believe a GAO study of the Packers and Stockyards Act is needed to determine what authority USDA has to investigate pricing issues such as marketing contracts and any anti-competitive activities in the meatpacking industry.
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Pork producers believe that to be able to make sensible business decisions will take accurate and timely information, more information than they current have available. It is time to demand real transparency in the marketplace. We feel this is the only way for independent producers to regain and maintain their rightful position as the profit center of this industry.
We believe that a change in the law is necessary and are calling on Congress to pass legislation that includes the following 6 elements:
1. Mandatory packer to producer price reporting;
2. A mandatory swine marketing contracts reporting program;
3. Improved monthly retail price reporting;
4. Monthly, rather than quarterly, hogs and pigs inventory reporting;
5. Uniform carcass measurement and transparent pricing, and;
6. Swine Production building construction reporting.
NPPC, in concert with Farmland Industries, began a voluntary, daily price-reporting program in September. We have always maintained a preference for voluntary, rather than mandatory programs. However, after months of meetings, NPPC has failed to recruit other packers into the program. We cannot wait any longer.
In addition to transparency, uniformity and accurate data regarding how much product is being sold at what price is essential so that producers can compare apples to apples in making production and marketing decisions.
NPPC does not make these legislative requests lightly. Pork producers have never before received direct Government assistance. However, there are thousands of professional, efficient, conscientious pork producers who are teetering on the edge of bankruptcy through no fault of their own. Their lives and the future of many rural communities, remain in jeopardy.
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I appreciate the chance to be before you today and would be happy to answer any questions you may have.
Statement of Gary E. Evans
Thank you, Mr. Chairman, and Members of the committee for the opportunity to appear before you today. My name is Gary Evans. I am currently the executive vice-president and chief operating officer of Farmland Industries' Meats Group. Farmland Industries' producer-owned meats group includes two beef slaughtering facilities in Kansas, four pork slaughtering facilities in Nebraska, Illinois, and Iowa, and a catfish processing facility in Mississippi. Additionally, we have processing and packing facilities in Minnesota, Kansas, Ohio, Iowa, and Massachusetts. In the next few minutes, I'd like to share Farmland's perspective on the meat and livestock market and what we are doing to help producers through this difficult time.
Farmland is the largest farmer-owned cooperative in North America. We are owned by 1,500 local cooperatives, which in turn are owned by more than 600,000 independent family farmers. It is these producers and their local cooperatives throughout North America that Farmland has been in business to serve since 1929.
MARKET CONDITIONS
Today, the livestock industry and our producer-owners are going through what is clearly one of the toughest economic periods ever. Pork producers are facing the lowest prices in four decades. Some pork producers received less than $10 per hundredweight for market hogs in December and beef prices have been weak for several months. Looking at the current situation, there are many factors which may help explain how the present market conditions were arrived at. Among them include:
A significant rise in production: many large and mid-size producers expanded in response to strong 1996–97 prices and concerns over possible regulations on farm expansion permits.
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A slight loss of domestic and Canadian processing capacity contributed to the overall North American packing industry's ability to process a growing herd.
Savings from lower feed and grain prices provided financially secure producers with more money for breeding and herd expansion.
The combination of low feed and livestock prices provided incentives for farmers to retain animals, therefore, increasing the amount of product on the market when the time came to bring the animals to market.
The currency difficulties of the Asian and Russian markets during 1997–98 lowered demand for pork globally and contributed to excess supplies in the domestic market and in protein producing countries outside the United States.
FARMLAND'S EFFORTS
As one of Nation's few producer-owned meat processors, we at Farmland feel a moral obligation to help our producers weather difficult market conditions. We are deeply concerned about the independent farmers who supply us with market hogs and cattle. We are committed to doing the right thing for our producer-owners. Let me share some of the steps we've taken to bring direct relief to our producer-owners on the hog side.
Floor Price: In December, when live hog prices fell to $8–10 per 100 pounds, we established a first for Farmland—the setting of a floor price for live hogs. Farmland agreed to pay our producers no less than $15 per 100 pounds (live weight) for hogs that met our weight and quality specifications. Producers eligible to receive this price, which became effective December 22, 1998, are those who sold hogs to us between September 1, 1997 and December 19, 1998.
The concept of establishing a price floor was developed after our cooperative's leaders studied several ideas put forth by our farmer-members during our annual meeting in Kansas City this past December. Farmland typically buys hogs at competitive prices, markets pork products under the Farmland brand, and then pays out its profits to livestock producers and local cooperatives in the form of patronage refunds.
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We recognize that a price floor is not the total solution, but we believe it helped change the direction in which the price of live hogs was moving. Establishing a price floor was an essential step to help our farmer-owners through one of the toughest economic periods in the history of the pork industry. We felt compelled to help producers contain their losses until we could work through the over supply of hogs. We are hopeful our action helped the overall industry, by retaining a valuable future supply of hogs from independent producers.
Plant Capacity: Another step that we have taken to help move hogs through the market is significantly increasing our plant operating levels. Since August, our four packing plants and nine processing facilities have been operating at approximately 110 to 120 percent compared with last year's levels. Since August we have been operating our facilities six days a week. This means we are processing nearly 32,000 head a day and moving an additional 70,000 to 100,000 each month.
Consumer/Retail: Farmland is also working hard to stimulate consumer demand for pork by offering coupons, running specials on pork, and urging retail and food service businesses to feature pork and pork products. An excellent example of our special promotions on pork is Eagle Foods of Illinois' million pound pork sale. Eagle Foods and Farmland coordinated a sales promotion to move 1 million pounds of Farmland pork products in ten days. They met their goal and moved an additional 18 truck loads of loins and other cuts to their stores. This was eight times more than their normal sales.
To prevent a backup of pork products in freezers and warehouses across the country, we have turned up our promotions and advertising several notches. In fact, from September to November of 1998 we invested 146 percent of what we did last year to promote pork products. We have worked with retailers in several markets to run full and half page advertisements featuring Farmland pork products. Farmland also issued over $2 million in coupons to help pull product through the market.
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Farmland is also working to develop new products to meet changing consumer demand. These new products will help add value to pork for the future. This past summer the American Heart Association (AHA) approved Farmland's Extra Tender branded pork for use of the AHA logo. Currently, several Farmland Extra Tender pork products carry the American Heart Association logo on their label. Consumers and retailers have responded positively to a leaner pork product and are purchasing more.
To date, these promotional efforts are working extremely well. We are moving percentages well above last year. Product is moving quickly through retail without backing up.
Price Reporting: Farmland has also taken steps to help producers market their hogs more effectively. Last October, Farmland and the National Pork Producers Council launched a voluntary market hog price reporting service on the Internet. This Web-based service, reports the plant price received on cash sales on the previous marketing day. Other quality factors are also included in the report, such as percent lean and carcass weight. The expanded information offered by the service helps producers make better informed marketing decisions. You can find this service on our homepage at www.farmland.com and at the National Pork Producers Council's homepage at www.nppc.org.
Farmland's price reporting system provides timely and valuable information to producers. Our voluntary system allows us the flexibility to respond to producer request for information which may assist them in making their marketing decisions. While we are proud of our price reporting system, we share concerns about the disclosure of certain proprietary information on our branded products. Disclosure of specific sales and volumes may limit our competitive ability to capture premiums on branded products and it also may disproportionately provide greater leverage to the purchasers of our products.
HELPING BEEF PRODUCERS
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Let me share with you about what Farmland is doing on the beef side to help beef producers receive a greater return for their marketing dollars. In December of 1997, Farmland Industries agreed to sell up to 50 percent of the Farmland's National Beef Packing Company to U.S. Premium Beef. U.S. Premium Beef is a new generation cooperative with over 765 producers in 25 states. Their producers committed both capital and production to seek out the most economically feasible inroad to greater returns for their marketing dollars.
Producer of U.S. Premium Beef are paid on an aggressive quality based grid. Current, premiums for their producers is averaging $10–12 per head. Additionally, they receive free carcass data, nutrition and marketing services, and transportation credits. Farmland is proud to be a co-owner with U.S. Premium Beef's producers. By taking an active role in the marketplace they have an opportunity to gain a greater share of their marketing dollars by aligning themselves closer to the consumer and doing this from the bottom up.
Currently, U.S. Premium Beef has delivered over 450,000 head of cattle to their packing company and paid out over $4 million in premiums to its owners. While U.S. Premium Beef is made up of producers from all segments of the industry, some of their greatest beneficiaries are its small and mid size producers who have the potential to realize premiums from management changes quicker than the larger producers can.
For years producers have witnessed devastating erosion of market share and loss of independent cattlemen and women. Some have suggested actions be taken that would limit cattle marketing options, by defining ownership terms and regulating captive supplies. However, concerns over ownership and captive supplies may make ventures like U.S. Premium and Farmland's National Beef Packing Company more difficult to realize and actually, may remove marketing options for producers. As a producer-owned organization, we work each day to develop new and innovative ways for producers to market their products and gain a greater return on their marketing dollars. Additionally, at the end of each year Farmland's pays out dividends to livestock producing-owners in the form of cash patronage refunds.
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TRADE
One way which Congress may help livestock producers and agriculture in the future is by aggressively pursuing market and trade expanding initiatives, granting negotiating authority, renewing normal trade relations with China, and reforming sanctions and embargo policies. Farmland and our producer-owners have benefited from past trade agreements. An example of our success is our trading relationship with Mexico. Prior to the North American Free Trade Agreement (NAFTA) our sales to Mexico were roughly $50 million per year at best. Today, our gross sales and business operations with our Mexican customers is nearly $500 million per year for the entire Farmland System. The expansion of our business in Mexico and other markets has added value to the many products our farmer-owners produce. Recently, we added offices in Tokyo, Japan, and Seoul, Korea to expand and strengthen meat marketing operations.
CONCLUSION
Farmland will continue to work with producers, consumers, industry, retailers, and the USDA to identify areas where we may help independent producers through this difficult period. We will be persistent and thorough in our efforts to identify additional strategies to benefit livestock producers on all fronts—from production and processing to retail and consumer sales. Our intention is to help producers weather this economic storm, whatever way we can. If we succeed in doing that, we've done our job as a producer-owned company.
Statement of Sam Payne
Thank you Chairman Combest, Members of the committee for holding hearings regarding the current state of livestock prices and marketing conditions. NCBA commends your vigilance and efforts to improve the economic outlook for cattlemen and women. I am Sam Payne, vice chairman of the National Cattlemen's Beef Association Dues Division. I am a cow/calf rancher from Calhoun, Georgia.
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I would state at the outset that the issues and factors affecting livestock prices are complex and controversial. There is a wide range of opinions among individual producers throughout the beef industry about the effects of international trade agreements, packer concentration and improvements in price discovery on the beef industry. This is not just true at the producer level. You will likely hear comments from other segments of the beef industry that fall on either side of my testimony in terms of defining the problems and developing workable, permanent solutions. Short-term issues in the quest for long-term stability should not sidetrack us. NCBA believes that an open and frank discussion—such as is provided by this hearing—of all issues facing the cattle industry is vital to this effort.
The structural changes taking place in the beef industry have coincided with international economic crises, increased regulatory burdens, the weather and the normal cyclical nature of agriculture. How these factors are inter-related is the basis of heated debates, emotional arguments and general consternation by many within the beef industry. Some producers have embraced new marketing techniques for their own advantage while others believe structural changes are, at least in part, the cause of recent price declines.
OUTLOOK
NCBA is constantly monitoring the economics of the beef industry. Our economists work with their counterparts at USDA, the universities and other segments of our industry to ensure our members have access to reliable and objective forecasts. The current outlook is for some price improvement over the course of the year—but then, that was our outlook for 1998. In this business, you quickly learn not to hold your breath.
Beef production will decline during 1999, a trend that likely will continue through 2003. Drought concerns have re-emerged in the Southwest and Northern Mexico, but generally improved forage prospects, favorable moisture and planting conditions and low grain export prices will hold down feed costs during next year. Last year's weather pressure and price situation contributed to high total beef supplies as cattlemen culled more cows and sent more heifers to the feeders (rather than retain them for herd replacements). Increased heifer retention this year, coupled with smaller calf crops during 1997 and 1998 will begin to be reflected in smaller numbers of cattle on feed and slaughter data.
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According to USDA's January Cattle on Feed report, there are 5 percent less cattle on feed than last year—the fifth month in a row the cattle on feed inventory was smaller than the corresponding time in the previous year. The ''on feed'' inventory was still larger in the seven primary feeding states than the five-year December average. U.S. placements ''on feed'' during January declined 4 percent below year earlier levels. The reductions in placements indicate that fed cattle supplies during in the first half of 1999 will fall substantially below 1998 levels. If that turns out to be the case, it should prove positive for fed cattle prices in 1999.
USDA optimistically projects beef production during 1999 to decline by more than 6 percent to less than 24 billion pounds. The estimated 1998 beef production totaled nearly 25.59 billion pounds, reflecting larger imports and a slowing of beef exports. Although 1999 beef production is likely to decline to 23.9 billion pounds, it will remain large by historical standards.
While the projected decline in beef production during 1999 may lead to higher slaughter cattle prices, a continued huge increase in competing meat supplies—especially from the pork sector—will have a dampening effect on cattle prices. Seasonally, hog slaughter tends to decline during the first quarter. If that takes place, slaughter cattle prices could climb back into the mid-$60's by late winter, with prices reaching the upper $60's, possibly low $70's by early spring. If that happens, you will see some easing of the grimaces on cattlemen's faces.
Analysts project this year's highest fed cattle prices will occur in the fall quarter with feeder and stocker prices following fed cattle price movement by early winter. While this should cause a hint of a smile, beef producers have been battling this price situation for more than 3 years. Another 10 months is a long time to hope, particularly if you are sitting across from your banker.
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In spite of record sales to Mexico, a slowdown in beef exports, particularly to South Korea, will also dampen price gains. Reduced demand in Asia and a strong U.S. dollar relative to Australian, Canadian, and New Zealand currencies has resulted in increased imports that force more beef into the domestic market. Some of this could be mitigated as cow culling slows causing some tightening of processing beef supplies. If the Australia-U.S. exchange rate remains at its current level, imports from Australia will remain large. Given the increased price of domestic processing beef, the U.S will likely act as a market alternative for product squeezed out of Asia.
PACKER CONCENTRATION
There is a perception among some in the beef industry that regulatory action is warranted. Packers and Stockyards Administration data show that the four largest packers slaughtered 80 percent of all steers and heifers marketed. Current concentration levels now exceed levels that triggered regulatory action during the 1920's. NCBA policy supports close monitoring of mergers and acquisitions in the packing sector because of increased potential for antitrust violations. Close evaluation of price movements and sector margins are also requested to assure that price changes are the result of market signals and not the exercise of market power or illegal pricing activities.
At the same time, the industry must remain pragmatic. Change in the beef industry, as in the rest of the economy, is a reality. Unfortunately, the current chronic low price situation makes dealing with that reality frustrating. We need more competition, not less. How we achieve that goal is the challenge. It is not clear why the beef industry is struggling to increase packer competition. New firms have entered into pork packing where the three largest beef packers are also major participants. To encourage and increase packer competition, we must first examine the barriers that inhibit entry into fed cattle beef packing.
For example, smaller plants that currently operate under state-inspected programs are prevented from taking advantage of expanding their markets if it would require interstate shipment of their products. To do so, they must first make the necessary, and often expensive, steps to become federally inspected. NCBA recommends that meat inspected under State programs officially designated as being ''equivalent to'' Federal standards should be accorded the same freedom of movement in interstate commerce that is accorded meat imported (and inspected under similar ''equivalent to'' standards) into the United States.
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We are anxious to work with the committee, your counterparts in the House, as well as the administration to identify other conditions and/or constraints that are unique to the beef industry that inhibit an increase in the packing and processing sector. By addressing these factors, our industry can then work together to remove the barriers and increase the incentives for new entrants into beef packing.
NEW MARKETING SYSTEMS
In addition to increasing concentration, there has been a trend toward alignment between packers and cattlemen through contracts, marketing agreements and custom feeding of packer-owned cattle. NCBA policy is specific regarding these emerging business relationships.
That NCBA not recommend the limitation of any method of marketing fed cattle.
That NCBA supports a free market system.
That no action is to be taken to alter or halt current trends toward private business arrangements among operators in the various sectors of the beef industry.
That NCBA is to encourage producers—individually and through cooperative efforts—to take advantage of opportunities to increase profits through new marketing strategies, coordination, risk management and retained ownership.
A number of producers are finding innovative means to compete in the changing cattle industry. This includes gaining a greater share of the marketing dollar. For example, U.S. Premium Beef, Ltd. is a closed beef marketing cooperative formed in July 1996. This venture is based in Kansas City, Missouri and consists of more than 600 cattle producers in 26 states who bought an ownership interest in Farmland's National Beef Packing Company.
The founding members and current shareholders of U.S. Premium Beef are cattlemen who came together to address the change in the beef industry by developing a bold new marketing strategy. No longer are these producers' energies consumed by concerns about market structure.
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Their efforts revolve around producing a better beef product that is marketed through their own beef company. As owners, these cattlemen receive rewards from a value-based pricing system, individual carcass data and earnings from the company at year-end.
As owners of a major beef processor, these cattle producer-owners of U.S. Premium Beef, Ltd., have direct representation on the Board of National Beef. In addition these cattlemen are working side-by-side with the processor and consumer to identify products that are more valuable and to develop systems to economically reward producers for improved products.
AVAILABILITY OF MARKET INFORMATION
While the beef industry continues to debate concentration and marketing systems issues, there is widespread agreement that efficient markets, especially in situations with many sellers and few buyers, require greater availability of accurate and timely information. Information availability helps ensure that competitive market forces exist. Fewer buyers cannot have undue leverage when market information is widely available to more dispersed sellers. The National Cattlemen's Beef Association is aggressively pursuing action to improve price reporting for cattle, boxed beef, imports and exports and to assuring competitive pricing as the beef industry goes through a difficult transition.
In addition, there are other actions that can and should be taken to improve the availability of market information and to assure that competitive market forces are expressed. NCBA is concerned over recent proposals by USDA Economic Research Service (ERS) to reduce the number and frequency of market reports at a time the industry is struggling to obtain improved information during this period of structural change and competitive challenges. If ERS does not want this responsibility, NCBA urges Congress and the Administration to consider re-allocating resources from ERS to the Livestock Marketing Information Center in Lakewood, CO or to the USDA World Outlook Board to continue providing this information and these reports.
In addition to resolving ERS's continued service to production agriculture, NCBA specifically requests the following improvements in beef reporting:
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Require the reporting of boxed beef sales, prices and volume on a daily basis by the Agricultural Marketing Service/Market News Service. Reports should include forward sales beyond the delivery period currently reported, prices for branded products, sales delivered as priced basis to a futures contract, sales of less than carlot volume and formulated sales. And, in addition to the currently reported Choice/Select price differential, report the price differential for USDA Prime and the upper 2/3 of USDA Choice.
Direct the Secretary of Agriculture to compile and publish sales volume information regarding all exports of beef, veal, pork, lamb, chicken, turkey and products thereof. Require the information to be reported not later than one week after the end of the week during which exports occurred.
Explore alternative technologies for collecting and reporting retail scanner data to develop a retail price series that reflects both volume and price of all beef, veal, pork, lamb, chicken, turkey products sold at retail. Develop a carcass-equivalent retail price from aggregated retail cut prices.
IMPORT/EXPORT REPORTING
The list of industry studies in the next section highlights a strong desire for information and understanding of competitive forces that are resulting in changes in agriculture as individuals adapt to survive in a competitive environment. The absence of accurate and timely data from the U.S. trade sector has been a source of long-term frustration throughout the beef industry. Information inequities provide a competitive disadvantage for the U.S. beef industry relative to other major beef exporting countries and contribute to an information disadvantage for cattlemen relative to packers.
NCBA has long supported improving timeliness of export and import information. Generally, USDA and the Commerce Department have been providing timely import information. USDA/APHIS provides live cattle import numbers every other week and Commerce/Customs issues its (import) Quota Threshold Status report on a weekly basis.
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However, export data reports are fewer and farther between, often coming up to eight weeks after the product clears customs, and steps to correct this problem appear stalled. More than a year ago, USDA published an advanced notice of rule-making requesting public comments on a proposal to require mandatory reporting of export sales of meat and meat products. The comment period closed February 12, 1997. A final decision is reported to be in USDA approval channels, but has not yet been made public. It is our hope that USDA adheres to its initial proposal which would mandate reporting of export information for all beef, veal, pork, lamb, chicken, turkey and their respective products inspected for export. This information would be made public not later than one week after the end of the week during which export certification was issued.
Openly assessable current information about export demand is necessary to keep exporting companies (primarily packers) from having insider or privileged information that could give them a significant advantage over sellers or others in the beef trade. Grain exporting companies are required to report export business on a weekly basis so that the entire grain trade can remain fully informed about overall export market activity.
Congress mandated export sales reporting for most of the major grains during the mid–1970's to ensure that all parties involved in the production and export of U.S. grain have access to up-to-date export information. Prior to establishment of the export reporting system, it was impossible for the public to obtain information until grain exports were actually shipped. This frequently resulted in a considerable delay in obtaining information (much like conditions in the beef industry today).
IMPORT LABELING
Beef imports and beef from cattle imported for immediate processing represent about 10 percent of the total U.S. beef supply. Although all of the value-added production on this beef takes place in a foreign country, it is sold to consumers as U.S. product. NCBA has adopted policy that calls for requiring that imported meat and meat products be labeled as such. In addition, the NCBA Country-of-Origin Task Force an NCBA task force examined the challenge this policy poses to various segments of the beef industry and made the following recommendations:
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The definition of ''U.S. Beef'' should include all beef produced from cattle slaughtered in the United States, except those cattle brought into the United States in ''sealed'' trucks for slaughter. In addition, this definition will not include imported beef trimmings, imported-boxed beef, or beef produced from imported carcasses.
All fresh muscle cuts offered for sale at the retail meat case, and not meeting the definition of U.S. beef, will be labeled as ''imported.'' The imported label will be required regardless of whether the product is graded with USDA Quality Grade and that identity will be maintained to the retail meat case.
The ''U.S. Beef'' label should be available for use on ground/processed beef products if individuals or firms wish to meet the criteria established for the domestic label beef and market the products accordingly. Otherwise it would be labeled ''blended product,'' or ''blended with imported beef.''
Due to the unique complexity of labeling ground beef, a pilot study of significant scope and magnitude should be conducted to test consumer response to, and costs of, labeling ground beef as ''imported,'' ''U.S. Beef,'' or percentage of ''imported and U.S. Beef.'' Additional research funds should be directed to developing additional information about potential improvements in source verification and accountability—and consumer acceptance of ground beef—through labeling.
Consumers demand quality and consistency, and producers are continually working to meet consumer demands. With the current system, there is limited ability to identify the source of product that does not meet consumer demands. Country-of-origin labeling will give consumers the ability to make informed decisions when purchasing meat and meat products and the relative value of meat from different countries would be determined through competitive forces in the marketplace.
INDUSTRY STRUCTURE
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NCBA has maintained an ongoing evaluation of changes to the beef industry structure and the underlying economic forces driving those changes. Considerable financial and human resources have been spent in addressing and educating the industry about these issues. These private sector initiatives have been supplemented by the extensive 7-part analysis of Concentration in the Red Meat Packing Industry completed by the Packers and Stockyards Administration in 1996 followed closely by the USDA Advisory Committee Report on Agricultural Concentration. Examples of our major initiatives include:
Rapid changes in the number, size and make-up of firms in the beef industry and shifts from traditional ownership and marketing patterns raised many questions about the future structure of the beef industry during the mid–1980's. Concerns were raised about the competitive position of beef relative to other meat sources domestically and internationally and how individual producers might adapt and fit into the evolving structure. In late 1988, the NCA Beef Industry Concentration/Integration Task Force began working on a report that projected many changes that are now under discussion and identified the competitive economic forces that would drive the industry to change.
The Task Force also had a group of experienced professionals take an ''arms length'' look at some of the difficult issues facing the U.S. cattle industry. The report, ''Competitive Issues in the Beef Sector: Can Beef Compete in the 1990's?'' addressed competitive forces in the domestic and international markets that would lead to increasing change in the U.S. beef industry.
In response to many of the competitive issues raised in the above reports, the beef industry evaluated the prevailing cattle and beef marketing systems at the time. The Value-Based Marketing Task Force recommended changes in the beef production/marketing system that would better align the production and merchandising practices of cattlemen, packers, purveyors and retailers with the beef product preferences of consumers. The Task Force determined that consumer needs could be better targeted simultaneously with cost reduction if the industry would reduce waste fat production.
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In 1993, the Long Range Planning Task Force recognized the coming decade as a time of challenge and change for the beef industry and developed a long range plan that was adopted by the major beef industry organizations. This plan laid the groundwork for organizational restructuring.
Issues of price discovery have received increased focus as evolution of the beef industry structure continues. A comprehensive study of price discovery as it evolved on other commodities and as it is expected to evolve in the beef industry was begun by Cattle-Fax during 1995.
DEALERS TRUST
The livestock industry has for several years supported the concept of amending the Packer and Stockyards Act to authorize establishment of a dealer's trust. A dealer's trust would provide protection for producers and livestock markets who sell livestock to dealers and would operate in much the same manner as the packer trust and the poultry trust currently authorized within Packers and Stockyards Administration (P&SA) regulations.
P&SA records show that, on average, during the past 5 years 16 dealers have defaulted and the livestock industry has suffered $3.5 million in losses due to those defaults. Those losses have huge impacts on individual cattlemen and local communities because dealer activity tends to be concentrated in small geographic regions. If enabling legislation is approved, the accounts receivable of a dealer who defaults will be held in trust for the benefit of the seller of the livestock until the seller receives payment in full for the livestock.
TRADE-RELATED ACTION
There is general agreement that future growth in trade and access to emerging markets is important to the future well being of U.S. agriculture. One of the underlying premises of the Freedom to Farm bill was that aggressive pursuit of growing export markets would be critical as part of the strategy to replace the safety net of traditional farm programs. Secretary Glickman has been quoted as saying, ''for American agriculture, it is export or die.''
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The key to our export outlook is an aggressive strategy to remove unfair barriers to U.S. beef and other agricultural commodities. A perception exists among many cattlemen that the United States does not have the will to retaliate against or to demand enforcement subject to repercussions from countries violating international trade agreements. Many are asking why the United States continues to participate in a system that does not provide a clear and prompt resolution to trade disputes. This growing loss of confidence is contributing to increased distrust and declining grassroots support for trade and trade negotiations in general.
There has been some progress. Last December, pressure from Congress and the Administration enabled USDA and USTR to improve access to markets and information regarding Canada. More work needs to be done to ensure a true two-way trading relationship relative to cattle and beef. Congress and the Administration also provided some market relief via the Russian assistance package that included beef. We believe this is the kind of short-term assistance to our industry that will help alleviate supply pressures.
We also are cautiously optimistic and appreciative of the aggressive attacks by Members of this Committee, other Members of Congress and the Administration regarding efforts to force the EU to live up to their responsibilities as a WTO participant and lift the ban against U.S. beef. For over a decade, the EU has used bogus science and general foot-dragging to keep our product out of their market. The irony is that the EU has lately been calling on non-EU countries around the world to stop using unfair trade barriers to bar or limit the flow of EU exports.
In the bigger sense, we need to ensure the United States has all the tools it needs—such as fast track negotiating authority—to address situations such as the EU's blatant stonewalling. In the upcoming 1999 round of WTO negotiations, the U.S. goal must be to maintain and expand access in emerging agricultural markets. NCBA and other meat industry groups support the following specific points to be addressed during the 1999 negotiations:
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Assure that the EU is not successful in rolling back progress achieved during the previous GATT agreement negotiations.
Ensure that science remains the only method for resolving SPS issues and that issues like environment, labor and social issues (including the structure of agriculture) are addressed in side agreements separate from trade.
Assure acceptance of scientifically validated and approved safe technologies, most recently Genetically Modified Organisms (GMOs), but also including beef growth promotants and other technologies that enhance production efficiency or food safety.
Negotiate elimination of State Trading Entities (STEs) and increased access to wholesale and retail trade in importing countries (especially relevant in China, but this issue also applies to the Australian and Canadian Wheat Boards).
Negotiate reduction and eventual elimination of production-distorting price supports and export subsidy programs.
Negotiate continued reduction of tariffs and expansion of Tariff Rate Quotas (TRQs).
Change has not come easy in the beef industry. Today's cattlemen and women are striving to carry on a rich tradition of rugged individualism and fierce independence. As a group, we embrace the concepts of market-oriented policies. We know Washington can and should do little to manipulate the markets of a private industry. In fact, NCBA has a long history of supporting efforts—including those developed by this Committee in previous Congresses—to reduce Government intervention and interference in marketplace.
In the context of today's hearing, it is important to point out that our support for these efforts was—and remains—based on the expectation that as Government involvement was decreased, the partnership among all segments of the beef industry would be strengthened through increased cooperation. Certainly there is evidence that agribusiness has taken steps to improve their relationship with beef producers.
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However, there are areas, such as pricing and marketing information, expanded value-based marketing arrangements, and trade barriers that need to be recognized by agribusiness as legitimate concerns of the rancher and feeder that must be addressed.
We are not expecting to restore producer profitability by bankrupting our industry partners. That would be foolish. But we do expect to be treated as full partners in the process of discussing, developing and implementing solutions that will help us build a bridge to a beef industry that is not only profitable, but one poised for expansion as beef demand improves.
To put it another way, if our agribusiness partners will shoot straight with us, if they will ensure we are seated at the table as equal partners and not treated as contract employees, then we will shoot straight with them—as opposed to simply shooting.
The National Cattlemen's Beef Association is anxious to participate in the process of evaluating this critical issue, not only within the beef industry, but also throughout all of agriculture. We look forward to providing any additional input that would be useful to the Committee as it continues its work on these tough issues. Thank you for the opportunity to present these thoughts, and I will be glad to address any questions now or at the end of formal presentations.
Testimony of the American Sheep Industry Association
Mr. Chairman and members of the committee, on behalf of the Nation's lamb and wool producers we applaud your leadership in holding today's hearing on the serious situation facing the livestock industries.
The U.S. sheep production base that has survived the loss of the National Wool Act is at a critical stage. Industry adjustments taking place since 1993 to attain profitability have been drowned in a flood of imported meat primarily from Australia and New Zealand. In March 1997, feeder lamb prices were at $122.75—by December 1998 prices had plummeted 40.9 percent—to $72.50. In some areas of the country last fall, growers with lambs to sell couldn't get a single quote. Prices for slaughter lambs declined from $102.75 in February 1997 to $61.50 in December 1998—or by 40.1 percent.
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The U.S. lamb market has faced unprecedented volatility during the last year with periods showing live lamb prices as low as 58 cents per pound in spite of declining domestic production. The equity of the lamb-feeding sector has been wiped out.
In 1993, approximately 56.5 million pounds of imported lamb meat entered the domestic market. By 1997, the amount had risen by 49 percent—to 84.4 million pounds. It's risen even higher since then. From January to September 1998, 76.9 million pounds of imported lamb meat entered the United States—a 19 percent increase from the first 9 months of 1997. Imports have taken market share from domestic producers, increasing from 20.7 percent of the market in 1996 to 30 percent of the market during the first 9 months of 1998. In addition to the exploding volume of imports, the investigative report of the U.S. International Trade Commission concluded that in eight product categories such as rack, ribs, loins, legs and shoulders, imported lamb prices undercut U.S. prices 79 percent of the time by margins averaging 20 percent to 40 percent.
In short, the United States has become the relief valve for excess lamb production from other countries. The Australian dollar declined by 24.4 percent and the New Zealand dollar dropped by 27.8 percent between January 1997 and September 1998. The recent devaluations have encouraged Australia and New Zealand producers to export their production of lamb meat to the United States rather than sell to their own depressed markets or to Asia.
The U.S. market is also attractive because—unlike the European Union, which has absolute quotas on lamb meat—an unlimited amount of lamb can be sent to the American market. The surge of imports now swamping the market threatens to capsize the U.S. sheep industry. Australian producers told the International Trade Commission that exports of fresh chilled lamb meat are projected to increase 21 percent in 1999—and by another 24 percent in 1999. New Zealand's figures are even higher. Their exports of fresh chilled lamb meat were projected to increase 83 percent in 1998 and another 36 percent in 1999.
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Mr. Chairman, our industry has united key members of all segments of the lamb industry from producers, feeders to packers and processors in addressing the flood of cheap imported product. On Sept. 30, 1998, representatives of the U.S. lamb industry filed a section 201 trade action with the U.S. International Trade Commission. On January 12, the U.S. ITC conducted a hearing on injury and heard of the financial devastation experienced from lamb producers through all segments of the industry. The U.S. International Trade Commission's determination on injury from lamb imports scheduled for February 9, 1999 is crucial to the domestic lamb industry. We ask for the Committee's active support in securing trade relief implementation. There is no question among the petitioners that the lamb industry case meets the 201 trade provisions. For the Commission to rule otherwise would signal agriculture and livestock producers that there is little recourse on trade problems through the Administration.
I wish I could speak on a better situation for the other products of sheep production, but unfortunately, I cannot. The wool market continues in a deep depression with fully one-half of last year's U.S. wool clip remaining unsold due to devastatingly low prices. We are now entering the 1999 wool shearing season with a bleak outlook for wool prices. Burlington Industries, the largest purchaser of U.S. wools, recently announced that the company is restructuring with the closure of seven plants and layoff of nearly 3,000 workers due to the surge of Asian textile imports. Finer wool might bring 35 cents a pound today, with coarser wool at 5 cents a pound! ASI and the U.S. Wool Marketing Association in November requested USDA make available recourse loans for wool under the disaster legislation authorizing recourse loans for fiber. USDA has yet to respond to the request and it is our understanding they have yet to finalize the mohair recourse loans. This program would be a temporary measure Mr. Chairman, to help producers' cash flow during this market depression. It is an important step to help but not adequate for all producers. The marketing loan provisions for wool as debated in the Senate Committee on Agriculture for the 1996 farm bill would be of more assistance to a broader range of producers. We urge that consideration of livestock programs or safety net provisions include this marketing loan proposal supported by the wool producers.
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Another key source of revenue is lamb pelts, which is heavily dependent on export. However that market collapsed this fall due primarily to the Russian economic situation. Pelts that brought $14 in August are now being salted, dried and stored, or worse, discarded to landfills. The pelt credit has disappeared for lamb and we now understand companies may be charging producers and feeders fees to dispose of pelts. Pelts are included under the GSM credit program but the industry has no response to this program. We urge the USDA to provide the committee with additional options that could be made available to the pelt market.
LAMB MARKET REPORTING
As the industry testified before this committee in 1998, nearly 30 percent of the lamb trade in the United States is not reported through USDA. Importing companies have refused all industry and USDA requests for wholesale price reporting. It is clear that mandatory price reporting is the only avenue left to have imported lamb prices reported similar to the reports made available weekly on domestic lamb. The pilot program approved last fall is a first step but obviously does not meet the full need of the industry. We urge the committee to press forward with reporting measures to bring equity between U.S. and foreign interests for price discovery in this market.
LAMB LABELING
ASI policy continues to actively support labeling of lamb cuts at retail. The mixing of imported and domestic lamb cuts in the meat case continues to increase in frequency. Brand names are now in use that clearly aim to indicate the product may be domestic when it is not. Again, meat importers and foreign meat producer organizations have refused industry requests to identify their product to accurately inform the consumer. We urge Congress to actively pursue labeling requirements.
GRADING IMPORTED LAMB
The practice of USDA Quality grading of imported carcasses continues to increase. This practice blatantly utilized by companies to sell imported lamb as USDA Graded. Since nearly ninety percent of domestic lamb is consistently quality graded, customers infer that graded lamb is domestic. This practice of grading foreign lamb carcasses Mr. Chairman is widely protested by many producers, feeders, lamb packing and processing companies and we urge every recourse be sought to end this deceptive practice.
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The National Sheep Industry Improvement Center awaits final approval for funding disbursement from USDA. This program is a critical tool in the domestic lamb industry's adjustment plan as filed with the USITC and must be put on a fast track.
We encourage the Committee in it's consideration of crop insurance reform that livestock be included. We urge the Committee to consider revamping the existing crop insurance program and establishing a ''revenue insurance program'' that would provide insurance based on income not production losses.
We urge the Committee on Agriculture to continue in support of the domestic lamb and wool industries' priorities in trade agreements under consideration. In addition to the trade relief already outlined, the European Union maintains absolute quotas on lamb imports as well as over $ 2 billion annually in subsidies to its sheep industry. We can either open up the European markets to remove some of the pressure from Australian and New Zealand's over production on the U.S. market or we can establish equitable measures for American producers.
On wool trade issues we urge the Committee members to carefully consider the ramifications on the domestic wool production and the textile industry under the proposed Caribbean Basin Initiative, African Growth and Opportunities Act, and the importer led effort to single out wool fabric tariffs for reduction/elimination. Thank you.
Testimony of Greg Page
Mr. Chairman and members of the Committee, thank you for inviting me to speak before you today on conditions in the livestock industry. My name is Greg Page. I oversee Cargill's red meat businesses, the largest of which is Excel Corporation, headquartered in Wichita, Kansas. Excel operates beef slaughter plants in Colorado, Kansas, Nebraska and Texas, and hog slaughter plants in Illinois, Iowa and Missouri. We operate further processing plants in Arkansas, California, Indiana, Iowa and Nebraska. We also operate a beef plant in Alberta, Canada, and two smaller plants in Australia.
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Our role in the meat industry is to disassemble, as efficiently as possible, a beef or pork carcass into approximately 500 beef and 650 pork product codes and to ship those products to their respective best markets. To the extent that we are successful, we increase producers' returns in two ways:
increasing efficiencies in our slaughter and fabrication processes, and;
raising the value of the products that can be made from the animal.
THE MARKETS
Conditions in recent pork markets have given rise to questions over the future direction of U.S. livestock production: What happened? Will it happen again? What can be done to survive this kind of rollercoaster ride? And what role should the Government have in this kind of circumstance?
As we all know, there are always cycles in production agriculture. Fortunately, these cycles are rarely so pronounced.
Chart I (attached) highlights the average weekly slaughter hog price from January 1998 through January 1999. The hog market collapse began in earnest about October 10 of last year, when the spot market was at about $29.00 cwt, and bottomed out in mid-December in the $10.00 range. As the chart shows, the worst has now passed, and markets are rapidly recovering. Today, in all the major production regions, hogs are above $28.00. We expect prices in the $28-$32.00 range in the next 30 days, above $35.00 by May and in the $40's by mid-summer.
Like pork producers, cattle raisers also have faced less-than-ideal returns in the past year. But these price pressures were more predictable—following the traditional 7–10 year cattle cycle. Projections for this year show the beginning of an upswing in cattle prices. In other words, this cycle has probably bottomed out. Chart II (attached) outlines the high, low and average Texas/Oklahoma slaughter steer price from 1974 through today, presenting long term, clear picture of the cattle cycle.
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HOW WE GOT HERE
I thought it might be helpful to spend a few moments outlining the factors we believe led to the current market conditions.
The pork situation can be traced to several events:
1. High hog prices in 1996 and 1997 led to an unprecedented expansion in production (Chart III attached).
2. Extremely promising export projections added to the enthusiasm for increasing hog numbers (Chart IV attached). Importantly, producers of other animal species read and followed the same signs (Chart V attached). The collapse in Asian markets and in Russia meant that those demand projections could not be met.
3. Cheap grain encouraged farmers to feed animals longer than usual as they waited for markets to improve. When large numbers of producers adopted this strategy, the problem of too much meat was exacerbated—hogs were finishing out as much as 5–7 pounds heavier. They also were losing the leanness the market demands, which weighed down further on prices.
4. The race to expand hog operations before a host of State and Federal environmental control measures or anti-corporate farming campaigns took hold resulted in expansion that otherwise would not have occurred in the same period.
5. The closure of several unprofitable or antiquated packing plants in the last 2 years left the packing industry without the capacity to meet the mountain of supplies that were pressuring the market in a very short period this past Fall. Nearly all packers ran at peak for weeks (Chart VI attached). Excel's slaughter increased by 17 percent in 1998, largely through the expansion of our Ottumwa, Iowa plant from one shift toward a goal of two shifts (Chart VII attached).
The beef market experienced some similar, but far less pronounced, events.
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1.The most important of these was the Asian market collapse. The loss of Korean hide sales alone reduced the per head value of a steer $25.00. The Russian collapse destroyed America's top market for beef offal, again reducing the value of beef byproducts. Chart VIII (attached) highlights the growing dependence on export markets for the U.S. beef industry.
2. Cattle producers also took advantage of cheaper feedgrains and fed their cattle longer, increasing average slaughter weights 24 pounds per head. This put additional meat onto a market already overburdened. To put this into perspective— each additional pound in the national slaughter average is equivalent to 1000 extra head of cattle per week—a total the of 24,000 extra head. In 1998, total U.S. slaughter numbers were actually down 2.8 percent, but carcass weights were up 3.6 percent. Without this increase, we believe we would have seen cattle prices about 5.5 percent higher.
3. A series of food safety steps that regulators probably could have implemented more smoothly caused some consumers, particularly international customers, to question product quality.
CONSOLIDATION
In our view, these supply and demand factors, not consolidation, caused the weak prices experienced in the livestock sector. While it is correct that the packing industry has experienced significant consolidation over the past 20 years, the market share of the top four packers has actually declined slightly in the last 4 years. There are many factors that influence the structure of the packing industry. Some reflect long term market changes; others are short-term in their character and effects. Among the many factors are these:
1. Several major pork processing plants closed in the past 2 years because they were not profitable, were antiquated or were in locations that no longer had access to adequate supplies of pork (Chart IX attached).
2. New food safety advances have led to an incredible series of changes in the business environment. Customers are requiring suppliers to take on more and more food safety programs, leaving some unable to cope, and therefore unable to compete.
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3. Growth in per capita consumption of poultry at the expense of beef has helped push some packers to exit the business (Chart X attached).
4.Changes in consumer demands for more customized rather than commodity products have caused others to exit the business.
5. Economies of scale have made it possible for large packers to make investments in technology that can harvest products and by-products that used to go to the rendering plant, raising the value of the animal but also making those who fail to make these kinds of investments less competitive (Chart XI - XI-A attached).
6. Meeting the challenges of serving foreign markets, where great demand potential lies, proves increasingly difficult for smaller packers.
What Do We Do? My belief is that the most important step that must be taken is a step back. Lawmakers must look beyond the symptoms of problems—like low prices or industry consolidation—to recognize the conditions that are creating changes in the livestock industry. They need to do that with an eye on the goal of enabling the whole U.S. industry—producers and processors—to compete and win. We see tremendous opportunities for growth. Quick fixes must be avoided so that the long term potential of this dynamic industry can be realized.
An effective, winning policy strategy should first be to ''do no harm.'' Already this session, a number of ideas have surfaced that would have very negative consequences for our industry—and especially for producers. These include:
1. Country of Origin Labeling. A restrictive labeling regime is one of the greatest threats to the expansion of the U.S. livestock industry. We need to recognize the golden rule of trade—do not do to others what you don't want done to you. Country of origin labeling would cost the United States dearly in two of our three largest beef export markets, Mexico and Canada. Chart XII (attached) highlights the U.S. balance of trade in beef products.
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As the world's largest exporter of agricultural goods—especially meats—the United States has far more to lose than it has to gain in adopting this kind of protectionist approach. No major meat export market has embraced a labeling concept as restrictive as some of those introduced in the last congressional session. Further, this policy would undermine America's ability to oppose the move by some countries to label growth hormones or genetically modified grains and oilseeds or the resulting food and fiber products.
2. Mandatory Livestock Price Reporting. Several legislative proposals in this area were advanced in the last congressional session. The committee should note that cattle price reporting was studied under two of the most comprehensive Government investigations in USDA history. These are generally referred to as ''Kansas '95'' and ''Texas '96.'' Conducted by the Packers and Stockyards Administration, those studies reviewed every single cattle transaction over a one-year period in the two states. The studies concluded that there is a high degree of participation in the current voluntary reporting structure, and that voluntary reporting is truly representative of overall market conditions.
On the pork side, the voluntary system is not quite so transparent. Only about 90,000 head are reported each day, and Excel represents 35,000 of those. We believe that the pork reporting program could be improved upon simply by more packers participating in it.
It is also our observation that producers of fed cattle and hogs generally oppose this proposal. A better alternative would be to have the Packers and Stockyards Administration periodically conduct studies similar to the Kansas and Texas reviews.
3. Mandatory Meat Price Reporting. This proposal is unnecessary for many of the same reasons listed above. We already report every day 100 percent of our boxed commodity beef and pork sales that USDA officials ask for. The only sales we do not report are those USDA doesn't ask for.
We would oppose reporting on our branded line of products. Excel has invested millions of dollars in developing a branded beef market. Here in the Washington area, our Sterling Silver and Angus Pride lines of branded beef products are beginning to grow. Telegraphing our sales prices and volumes to our competitors would damage this market and harm the producers who are raising the top quality cattle for which we pay premiums to it.
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4. Producer/Packer Contract and Formula Disclosure. Some have voiced opposition to the use of formula pricing as a tool in purchasing livestock. This is probably one of the most misunderstood aspects of our business. Using cattle as an example, let me run through a typical formula pricing agreement.
First, we gather data to establish last week's average spot market (or cash market) price per pound. We then apply an equation that calculates the level of premium or discount to a producer who chooses to market under the formula. The premium or discount is based on the grade and yield performance of his cattle. A great percentage of these producers are earning premiums because they are producing the kinds of cattle the market values. To take away this tool for improving beef quality is likely to cede more of the meat market to poultry or other products that can be contracted to meet buyers' specifications.
5. Producer Subsidy Payments. This approach would be the single greatest threat to livestock producers. As painful as it is to let markets clear, the pain would only be prolonged and deepened by subsidies designed to offset market signals. Additionally, such a plan would have severe trade implications. Subsidized competition in a world that is seeking to eliminate trade-distorting practices will meet swift, tough responses. If the United States were hit with countervailing duties on pork exports to Mexico or Japan, for example, the consequences would be severe, costing U.S. producers some of our most important markets. This is a step the Congress and the industry must strenuously oppose.
6. Processing Capacity Expansion. There has been considerable discussion in some circles about the need to expand packing capacity, or to have the Government help create more competition in the processing industry. We would recommend against this strategy for several reasons.
First, margins in the packing industry have been very low, especially when averaged over livestock cycles. Second, cost of entry is not prohibitive, and venture capital abounds. Third, new capacity that is built for uneconomic reasons will tend to remain in place, turning over through various owners, disrupting development of a healthy packing industry. Finally, subsidizing excess capacity will force weaker or less well-financed competitors to close, so the ultimate effect may be to change the players, not expand the industry. None of these consequences is a good use of taxpayer resources.
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THE ROLE OF GOVERNMENT
While I have cautioned against several of the ideas that have been advanced, that should not be taken as a blanket statement that there is no role for Government. To the contrary— the industry has significant needs and is looking to Congress and the Administration for leadership. Some of these helpful initiatives include:
1. New Trade Agreements—Fast track—China. U.S. domestic beef and pork consumption has been fairly flat since the 1960's (Charts XIII–XIV attached). Our growth potential clearly lies beyond our own shores. Looking at the past 20 years, our successes have been in Japan, Mexico and Canada. In the next 20 years, the best growth potential lies in increasing sales into Japan, other Pacific Rim markets, Russia and, the biggest prize of all, China. China represents 1.2 billion potential consumers of Iowa or Missouri pork and South Dakota or Oklahoma beef. The single biggest action Congress can take to help U.S. livestock producers is to extend trade negotiating authority that will empower the United States to challenge all barriers to two-way trade flows. Putting purchasing power in the hands of foreign consumers and giving them open access to U.S. agricultural products is the real key to sustainable market growth.
2. Export Credit Guarantees. Another important role for Congress is in supporting GSM credit programs. These credit programs are particularly valuable to the U.S. livestock industry because they create buying power in those countries where per capita income growth is triggering demand for animal protein. These programs rarely if ever see such borrowers default; they preserve commercial trade channels; and they can be used to respond quickly to financial problems like those recently experienced in key Asian markets.
3. Market Development Funding. Through the U.S. Meat Export Federation, the USDA cooperators program has given our representatives around the world weapons and information for fighting non-tariff trade barriers, highlighting the quality and value of U.S. livestock products and advising the industry of opportunities to expand sales. This program is consistent with U.S. trade obligations and has helped us make great inroads into emerging markets. It should continue to be funded generously.
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4. Food Safety Research. Nowhere is the livestock and meat industry more challenged than in the area of food safety. Excel has invested tens of millions of dollars in the past several years modernizing plants and developing and installing the most modern food safety technology available. But none of us can rest on our laurels as long as there is any question about the safety of our products with pathogens like E. coli 0157:H7, Salmonella and Lysteria monocytogenes. Producers, processors and distributors must work together and with Government regulators to ensure that all necessary steps are taken to ensure safe food supplies and consumer confidence in food production and handling systems.
5. Educational Effort. There are a number of risk management tools the private sector can offer producers. For example, we work with any number of producers every day to help them hedge their livestock on Chicago futures markets. But many producers still need to learn more about valuable risk management tools. Congress can provide the resources needed to expand knowledge of these tools so that more producers use them effectively to mange their business risks. USDA extension offices, land grant colleges, and even packers, can play an important role in this effort.
6. Revenue Assurance. We understand that risk management is a top priority for the Committee this year. Producers need new and better options to cope with inevitable market swings, and we would appreciate the opportunity to work with you to support additional market-based, private sector tools. It is important, however, that producers have tools that do not distort production or marketing decisions and do not subject the industry to challenges of subsidization. That would negatively impact us in export markets.
7. Support Current Farm Program. The FAIR Act has been a great benefit to livestock producers. Any return to the old-style supply management approach would set back efforts to make U.S. livestock products globally competitive.
CONCLUSION
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In summary, I would urge the Committee to approach the current situation in the livestock and meat industry carefully and with a long term view. Some proposals before the Committee will likely do more, albeit unintended, harm than good. The kinds of policies most likely to help may take longer to work but will do much more good for producers.
Again, Mr. Chairman, and members of the Committee, thank you for the opportunity to express our views. I appreciate the challenges you face in dealing with these issues. I hope my comments have been helpful and would be happy to try to answer any questions you might have.
Statement of J. Patrick Boyle
My name is Patrick Boyle and I am president and CEO of the American Meat Institute. AMI is the national trade association representing packers and processors of beef, pork, lamb, veal and turkey. I am here today to share AMI's perspective on structural changes occurring within the livestock and meat industry sectors of agriculture.
AGRICULTURE STRUCTURE IS CONSTANTLY CHANGING
This committee knows that agriculture is one of America's greatest success stories. Throughout our history it has been the bedrock of much of our country's prosperity, and continues to be so today. There are many reasons why U.S. agriculture has been so successful, but chief among them has been the ability of various sectors to change in response to market conditions, new opportunities, or technological improvements. This ability to change has characterized U.S. agriculture throughout our nation's history. It is a hallmark of America's great free market economy.
While the changes we have seen in agriculture have proceeded unabated in this country for 200 years, they have become especially pronounced in our lifetimes. In fact, today's systems for producing, processing and delivering food to consumers bears only the most superficial resemblance to those that existed as recently as two decades ago. Go back 40 years, or 60, and the differences between what our agricultural systems once were and what they are today are even more pronounced. Today we have an agricultural production base, and processing and distribution sectors, that are the envy of the world, and which provide standards of abundance, quality, affordability and safety to which virtually all other nations aspire.
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CONSUMERS BENEFIT FROM CHANGES IN AGRICULTURE
As Congress considers initiatives to address changes in agriculture's structure, I urge consideration of the history of change in U.S. agriculture, and I also urge recognition of the benefits and bounty that change has produced. No one who takes the long view can disagree that the changes in U.S. agriculture have brought tangible and impressive benefits to U.S. consumers. Not only do U.S. consumers have more food available to them than anywhere else in the world, but have the broadest variety, the highest quality and the safest food in the world. In fact, consumer dollars spent on food as a percent of disposable income is today lower in this country than anywhere else in the world or at any other time in history. And as consumers have benefited, so have producers—although those benefits have not come without a measure of pain and concern that prompted this hearing today.
STRUCTURAL CHANGES HAVE IMPACTED MEAT PACKING SECTOR
The meat packing industry has not been exempt from the pressures that have produced change in the overall agricultural sector. In response to increased demand for poultry and declining demand for beef, and in pursuit of competitive opportunities and increased operating efficiencies, the market share of the top four beef packers began moving up about a point a year beginning in the late 1980's. The top four beef packers now account for 79.8 percent of our steer and heifer slaughter, and 67.6 percent of our total cattle slaughter. A similar, less pronounced, consolidation of hog packers that began in 1996 has resulted in the top four hog packers increasing their slaughter share by 10 points to 54.2 percent.
Concerns about increased consolidation in meat packing have resulted in a vast body of research over the past 20 years that attempts to quantify the impact on producer prices. Most of this research has been inconclusive—but significantly it has not identified any significant harm to producers caused by consolidation in meatpacking.
Recent research, however, suggests that there is a net gain to producer prices associated with larger packers' operating efficiencies. The most recent research to this effect comes from the University of Nebraska, was published in The Journal of Industrial Economics, and shows a net cattle price increase of 2 percent for every 10 percent concentration increase. I request that this research be entered into the hearing record.
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CONSOLIDATION OCCURRING THROUGHOUT U.S. ECONOMY—A SURVIVAL TOOL
The consolidation of beef and pork packing businesses has not occurred in a vacuum. Our livestock suppliers are consolidating just as we have, and for many of the same reasons. So are our retail and wholesale customers. Consolidation in food wholesaling, for instance, has resulted in a 75 percent drop in the number of full-line food wholesalers over the last decade. Consolidation is also occurring in the retail food sector, as evidenced by several well-publicized mergers and acquisitions of food chains last year. What we are seeing in the food sector is occurring in virtually every other sector of the U.S. economy—because consolidation is one of many tools businesses are choosing to use in order to survive.
Not surprisingly, agriculture is consolidating. There has been a decline in the number of farms, but those that remain are larger, more efficient and more productive. This has been the trend of the past 100 years. Indeed, today's restructuring of American agriculture is no different from what started at the turn of the century; only the scale of change is different. And these changes are not limited to any one agricultural sector—they are occurring throughout.
Paralleling the increase in the average size of agricultural operations, the market share of larger operations has grown. This is true throughout agriculture, including livestock production, where larger production units are accounting for an ever-increasing share of marketings. In cattle feeding, for example, commercial lots with one-time capacities of 8,000 head or more now account for 81 percent of fed cattle marketings, up from 67 percent in 1991.
Everyone here is also aware of the recent growth and the emerging importance of large hog producers. Let me share with you a statistic that puts into perspective the growth of these operations, their potential impact and what this means to the pork packing business.
There are approximately 114,000 hog producers in this country, most of whom are not large, at least as the term ''large hog producer'' is understood today. Large producers—those who market 50,000 hogs or more per year—only number 145 according to an Iowa State/University of Missouri survey released last year. But these producers, who make up only 0.13 percent of all hog producers, accounted for 38 percent of all hog marketings in 1997, up from 9 percent of hog marketings in 1991. I assume that their share of 1998 marketings was even higher, since these producers reported they planned to keep growing. That same Iowa State/University of Missouri survey shows these very largest of hog producers reported intentions of growing their operations by 64 percent by 2000. This survey was taken before the market crash, and producers' growth intentions have probably changed somewhat since then, but it points to a key dynamic that is changing this industry.
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You might be interested to know that during the past year when these large hog producers were growing, hog slaughter capacity declined (after having increased over several years) due to a combination of poor business performances and regulatory burdens. This illustrates another component of the challenges in our industry: huge supplies of raw materials available during periods of decreased processing capacity.
HUGE HOG SUPPLIES CHALLENGE SLAUGHTER CAPACITY, BUT PACKERS WORKING OVERTIME
At its simplest level, the hog market collapse in December and its continuing weakness today reflects an unprecedented increase in the supply of hogs. Packers, producers, USDA and anyone who was reading pork trade publications this time last year knew a supply increase was in the works. The only surprise was how big it would be, and how poorly the hog markets might react.
Hog slaughter last year was up 10 percent and, based on USDA's December Hogs and Pigs report, hog supplies will continue to increase through the first half of this year. Industry's slaughter capacity is estimated at just about two million head per week, and we have been operating above that level since Labor Day, consecutively setting new records for weekly slaughter and daily slaughter, working overtime and 6 days a week, sometimes seven, to process the large supplies coming to our plants.
There is an economic saying that ''the solution to low prices is low prices,'' meaning that producers take their production signals based on what the market—in the form of prices—is telling them. But given the production increases we saw in 1998, when profits to producers were all but nonexistent all year, one has to wonder what signals producers were listening to. I believe the answer is that they are repositioning themselves for a fundamentally different—and better—pork industry in the future.
But for now we have very large hog supplies and low—but improving—prices that some believe prove the system is out of sync. It is not out of sync—this is the way a fixed system works when confronted with supply surges. The packing industry is running overtime—literally—to accommodate these increases. But given the industry's fixed capacity, there is only so much that packers can do to work their way through these large supplies. Packers have very little experience with hog runs of this magnitude, and no prior experience at all with the sustained nature of what we are dealing with today.
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If there is a bright side to this situation, and I believe there is, it is that as the industry goes through these changes, we are increasing pork's competitive position. Specifically we are doing a surprisingly effective job in moving pork through the channels to consumers. Pork demand had held up surprisingly well in the face of these large supplies, and pork is gaining market share over competing meats that will benefit both producers and packers once this current situation is behind us.
Until recently, hog production had been one of the more profitable enterprises in agriculture. That profitability, coupled with the realization that the meat industry is going global and most of the world prefers pork to other proteins, has resulted in the structure of the U.S. hog industry changing profoundly in response to what many continue to see as a promising and profitable future. The changes have also been spurred in some cases by a race to beat state-by-state production regulations. They have resulted in a hog industry characterized today by bigger and more efficient producers and—yes—fewer producers; and by changes in how hogs are bred, raised, priced and sold. Some observers are discomfited with many of these changes, but there is nothing irrational about what is occurring in hog production. There are only a few countries capable of producing for the growing worldwide demand for pork, and the United States wants to be the country that eventually does. So, over the last 5 years, we have seen new money and new players enter hog production, and the focus of both has been on volume and efficiency. They have been extraordinarily successful.
GROWTH AND CONSOLIDATION IN HOG PRODUCTION TRIGGERED SAME IN PORK PACKING
Since the mid–1990's, U.S. hog producers have been aggressively positioning themselves as tomorrow's pork suppliers to the world. U.S. packers and processors responded to this new producer positioning by consolidating the industry, building new, larger and more efficient facilities and expanding the capacity of many existing ones.
Over the last 4 or 5 years, an additional capacity of 47,000 head per day was added to the U.S. hog processing system. This did not come without a cost. Less efficient packers found themselves with operations that were no longer competitive, and that were losing money on a consistent basis. But as the packing industry geared up for the future, it still had to deal with the economic vagaries of the hog cycle (1996–97 average hog prices of $52–$53. Thus even the more efficient packers found themselves losing money for prolonged periods of time. In fact, for most packers slaughtering hogs, the history of 1996 and 1997 was written starkly in red. A shakeout was inevitable. The shakeout took the form of several plant closings over the last year and a half. Hard economics and competitive market forces took almost 37,000 head of slaughter capacity out of the industry in 1998—the same year hog producers were offering unprecidentedly large supplies.
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HOW BEST TO ADDRESS THE SITUATION?
As Congress and the administration examine the implications of the changes I have outlined today, and consider ''remedies'' to ease the transition into the future for some producers, know that the meat packing industry is as uncertain as anyone about the implications of change. But we accept change, and we are prepared to deal with its implications.
There is today pressure to mollify the changes we're seeing, and there is support among many in this room for doing ''something.'' But what? What is the role of the Federal Government with regard to changes in agriculture? In meatpacking? Obviously, a very legitimate role is to ensure a competitive market environment and to ensure that new trade practices don't unfairly preclude any particular segment from participating in the market process. But I would argue that monitoring competition and trade practices are but parts of a broader Government role.
There have been allegations over the last several months that the current hog market situation is somehow ''unfair'' because producers are today losing money after enjoying record profitability in recent years. The current market situation is not unfair, it's bad; and packers are justifiably concerned about the situation's implications to the viability of the tens of thousands of producers upon whom we rely for our livelihoods. But the punitive undercurrent to these allegations is wrong.
There is nothing unfair about the interplay of market forces like supply and demand. These same factors have since December resulted in a partial recovery of the market, and will in time—as they always do in livestock cycles—return profitability to producers.
MANDATORY PRICE REPORTING NO ''SOLUTION''
There have been calls for mandatory price reporting as a ''solution'' to the current situation. Yet no one has specified what is wrong with our current price reporting system, or what aspect of it needs to be fixed.
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AMI believes that before we move forward in fashioning a new reporting system to replace the one we have, we need a better understanding of how well—or not—our current system works. We believe that the way you do that is by looking critically and objectively at our current system's effectiveness in transmitting market information before you replace it with one that may not be as effective—and which may even cause more confusion than that which we have now.
Is the Government capable of doing this? Yes. USDA's Grain Inspection, Packers and Stockyards Administration has been looking at the effectiveness of price reporting in transmitting the value of livestock to packers for the past several years as part of their ongoing investigations of the packing sector. They found and reported last year that in the case of cattle sold in the Texas Panhandle, the market reporting process is indeed effective in transmitting cattle values regardless of how those cattle were purchased. Another recent investigation of hog procurement practices in Iowa and Southern Minnesota found shortcomings in the current price reporting system. Those shortcomings were addressed with a new price-reporting format in January. Again, knowledge of the facts led to a remedy. The investigation didn't find anything wrong with the procurement practices of hog slaughterers, but it did identify industry practices that weren't adequately understood by USDA and incorporated into its market reporting.
COUNTRY OF ORIGIN LABELING WILL HURT U.S. TRADE AND IS NO ''SOLUTION''
Similarly, some people believe that country-of-origin labeling would improve the market for producers, or might have somehow prevented the market crash in December. AMI doesn't believe that —rather, we believe such labeling will deal a devastating blow to our international trade and trigger actions against the United States within the World Trade Organization. We do, however, see merit in a study on the implications of country-of-origin labeling before we move forward on something that could wind up being a classic and disastrous case of unintended consequences for producers, packers and our meat trade surpluses.
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AMI believes that calls for country-of-origin labeling and mandatory price reporting aren't solutions to a problem; they are reactions to a problem. Had we had them in December, we would still have had $9 hogs. Mandatory reporting or additional import labeling requirements will not stop the direction this industry is going, and they will not slow down the speed with which we're moving. These initiatives cannot change the fundamentals of supply and demand or negate the price effects of livestock cycles. What they can do—what they will do—is add costs for everyone, and limit opportunities for many. Because of that, they would likely hasten consolidation in the meat industry.
SOLUTION 1: NATURAL MARKET CORRECTION IN LIVESTOCK PRODUCTION CYCLE
The current hog market situation will resolve itself when the hog cycle turns and production resumes a more measured growth. USDA's December Hogs and Pigs report suggests the cycle has already turned, but while that report showed that our hog breeding herd declined in the last quarter of last year, it also pointed to increases in hog supplies continuing through the first half of 1999. Those increases will be more moderate than those we experienced last year, however, and by the second half of the year we can expect supplies to drop below year-earlier levels. Futures markets have for weeks now shown higher prices for producers as we move through the year. So the market, as it always has, has begun to correct itself.
SOLUTION 2: EXPANDED EXPORT MARKETS AND INTERNATIONAL TRADE
Longer term, however, there remain many challenges the livestock and meat industry must overcome. Expansion of trade opportunities remains a top priority. Our future lies in trade, and fast track negotiating authority must be approved if we are to provide viable livelihoods for the producers upon whom we rely—large and small. By working with Government, producers and packers have made rewarding, and in some cases significant, inroads over the last decade in moving pork and beef into Asian markets. Increased exports to Japan, Korea and other Pacific nations have meant more money in producers' pockets, but continuing access problems in several of these markets has precluded further gains. If there is any doubt about the importance of these markets to U.S. producers, consider what happened to our livestock prices when the Asian economy went into a freefall this time last year and meat exports virtually dried up for several months.
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SOLUTION 3: HELP PRODUCERS MANAGE RISK
As this industry changes and grows, so do its opportunities. But so too do its risks. The need for more producer knowledge about market-based risk management tools continues to be a challenge we must address. Some of these tools are available through producer/packer alliances, or in the growing use of production contracts. Most of these alliances and contracts are not as exclusive as commonly thought, and they are available to a larger number of producers than is generally appreciated.
As the livestock production sector changes, a better understanding is also needed of what these changes mean for traditional supply projections. Projecting supplies—or at least providing accurate production indicators from which the private sector can make its own supply projections—is a traditional and, in the case of hogs, exclusive role of USDA's. But the rapid pace with which the hog sector has been expanding seems to be moving faster that USDA's ability to track it. The magnitude of last year's increase in hog supplies was unexpected, as were the sharp and devastating supply increases in December. Since the fall of 1997, USDA's Hogs and Pigs reports were pointing to much more moderate supply increases than those we actually experienced. Had more of us known what was coming, adjustments could have been made that would have minimized some of the damage.
Developing these solutions will take time. The nature of the current hog market, however, mitigates for many against the long view of what is required, and we have today initiatives being discussed, and legislation already introduced, that could change the direction of this industry—and not for the better
REGULATORY BURDENS CAN DRIVE OUT SMALL BUSINESSES, PROMOTE CONSOLIDATION
I want to close by mentioning some other unintended consequences of recent regulatory actions that could make today's market and structure concerns even worse. Generally speaking, larger, ''consolidated'' companies are more able to withstand new, or expensive, or burdensome Government regulations, with the net effect that the more the Government tries to constrain industry practices or add costs to existing ones, the more small businesses fail and the faster the industry consolidates.
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Consider the impact of HACCP and other food safety policies on packing industry structure. One example was the well-publicized USDA recall of ground beef last year that resulted in a state-of-the-art beef grinding facility closing its doors and its parent company going out of business—over record-keeping! The upshot of this was that industry concentration increased a little bit more when the country's largest beef processor purchased the beef grinding plant and the rest of the company was purchased by the country's largest chicken processor.
Yesterday, the second wave of HACCP implementation went into effect for thousands of mid-sized meat and poultry companies. AMI understands that USDA has concerns that as many as seventy of these companies may not be able to comply with the new regulations, and well-respected industry analysts have voiced concerns that the inability to comply with HACCP could cause an even larger number of plants than this to exit the industry in the coming year. These wouldn't be bad operators who deserve to go out of business, but companies who don't have the resources or staying power to deal with a fundamentally new and still-evolving regulatory regime for food safety.
What consideration has been given to the implications to industry structure of USDA's zero tolerance policies for E.coli O157:H7 in raw beef or Listeria in ready-to-eat meat and poultry products? Both of these policies will likely lead to further consolidation of the industry. That's not their intent, or course, but that will be their likely result.
Similar arguments can be made about the implications of the Immigration and Naturalization Service's ''Operation Vanguard,'' or Government environmental policies, or State initiatives like California's Prop 65. None of these Government initiatives occur in a vacuum, and all have implications to industry structure.
In summary, AMI believes government has a legitimate role in monitoring the changes currently underway in agriculture and in ensuring competition. But government also has a responsibility to ensure that it understands the implications of policy initiatives it mandates. And the business community—both in production agriculture and in processing and retailing—deserves government's diligent examination of all facts before new and costly mandates are applied through legislation or regulation. AMI looks forward to working with you all in this regard. Thank you.
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"The Official Committee record contains additional material here."