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 o