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MANDATORY LIVESTOCK REPORTING
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
MAY 24, 2001
Serial No. 1078
Printed for the use of the Committee on Agriculture
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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
Page 3 PREV PAGE TOP OF DOCTOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
Page 4 PREV PAGE TOP OF DOCBARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
C O N T E N T S
Combest, Hon. Larry, a Representative in Congress from the State of Texas, prepared statement
Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, prepared statement
Page 5 PREV PAGE TOP OF DOCWitnesses
Clayton, Kenneth C., Acting Administrator, Agricultural Marketing Service, U.S. Department of Agriculture
Accompanied by Keith Collins, Chief Economist, U.S. Department of Agriculture; and Barry Carpenter, Deputy Administrator, Livestock and Seed Programs, Agricultural Marketing Service.
McNulty, James J., president and chief executive officer, Chicago Mercantile Exchange
MANDATORY LIVESTOCK REPORTING
THURSDAY, MAY 24, 2001,
House of Representatives,
Committee on Agriculture,
The committee met, pursuant to call, at 9:35 a.m., in room 1300 of the Longworth House Office Building, Hon. William L. Jenkins [acting chairman of the committee] presiding.
Present: Representatives Combest, Goodlatte, Pombo, Lucas of Oklahoma, Moran, Thune, Gutknecht, Simpson, Johnson, Osborne, Rehberg, Graves, Kennedy, Stenholm, Condit, Peterson, Etheridge, Phelps, Lucas of Kentucky, and Baca.
Staff present: William E. O'Conner, Jr., staff director; Pete Thomson, John Goldberg, Elizabeth Parker, Callista Gingrich, chief clerk; Brent Gattis, Susanna Love, and Andy Johnson,
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Mr. JENKINS [presiding]. This hearing of the House Committee on Agriculture to review mandatory livestock price reporting will come to order.
Good morning, ladies and gentlemen. I am Representative Bill Jenkins from the First Congressional District of Tennessee and this is a certainly an opportunity that I haven't had and probably won't have again to open this hearing for the chairman who is, I understand, in traffic this morning.
The Chair will take any statements for the record at this point.
[The prepared statements of Members follows:]
PREPARED STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Today's hearing is to review the implementation of mandatory livestock price reporting and examine recent problems associated with misreported data.
After visiting with members of this committee, it became clear that there was a strong interest in looking into this matter sooner rather than later. I would like to thank both Dr. Ken Clayton and Dr. Keith Collins for appearing on such short notice.
As many will recall, not all livestock producers were proponents of mandatory price reporting. Opponents predicted, for a number of reasons, that mandatory reporting would prove disruptive to the orderly marketing of livestock. As a committee, we have an obligation to determine if price reporting has merely hit a bump in the road or if it has fundamental flaws. In any event, the challenge will be in determining what to do about it.
- Since implementation on April 3, many AMS reports have had data missing as a result of the 3/60 rule. While the intent of this guideline is to ensure that proprietary data is not released, the unfortunate consequence is that the market is denied informationundermining the very intent of the legislation. I expect that today's testimony will enlighten the committee about the nature of this dilemma and potential solutions.
Page 7 PREV PAGE TOP OF DOC Last week, livestock markets were rocked by revelations that AMS reporting errors, apparently caused by faulty software, had understated prices of boxed beef since the beginning of April. Depending on whom you talk to, this has the effect of causing producers to be underpaid or overpaid. It may even have caused packers and processors to under-price products sold to their customers in food service and retail. I anticipate that it will take some time to sort out all of the economic consequences of this failure of the price reporting system. I look forward to hearing the Administration's plans to determine the level of loss, and more importantly, what they intend to do about it.
Our goal should be the return of credibility for the Agricultural Marketing Service's reporting function and the assurance of an orderly livestock market benefiting producers, packers, retailers, and consumers. I hope today's hearing will serve as a first step in that process.
PREPARED STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS
First, I would like to thank Chairman Combest for holding this hearing. Kansas produces and processes 20 percent of the Nation's beef. The livestock industry is the largest sector of the agricultural economy and on of the largest sectors of the Kansas economy as a whole.
In Kansas, people have strong opinions on both sides of mandatory reporting issue. Individuals and groups in Kansas firmly supported the mandatory price reporting law, and groups and individuals in Kansas firmly opposed mandatory reporting as it was being developed.
However, one thing is clear, everyone believe that the information provided must be accurate. This mistake by the U.S. Department of Agriculture has been costly for the livestock industry. It has been costly for livestock producers, feeders and may have even cost processors.
Page 8 PREV PAGE TOP OF DOC Obtaining accurate information is the goal of this committee hearing. I look forward to hearing from today's administration witnesses and learning more about this specific problem. Most importantly, I look forward helping all producers get the accurate information they need to market their livestock.
Again, I would like to thank the Chairman for holding this hearing. After requesting this hearing last week, it is great to be hear today working on this issue, investigating what went wrong and working on solving the problem. Thank you, Mr. Chairman.
PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, I want to thank you for holding this hearing and I want to thank Mr. Clayton and Mr. Collins for appearing before this committee on relatively short notice. This committee is understandably very concerned about the error that occurred with USDA's National Daily Boxed Beef Cutout and Boxed Beef Cuts reports. The potential impact that this error may have had on revenue to U.S. cattle producers is particularly worrisome.
I understand that USDA has already taken action to correct the error that led to the misreporting of this data, and I was pleased to learn that USDA has acted quickly in putting together a team to investigate the circumstances surrounding this error. Such a timely and public response is critical in order to maintain confidence in the quality of USDA market reports. Without widespread confidence in these reports we would be hard-pressed to maintain the functional, transparent markets that our industry needs and deserves.
This hearing will provide a useful opportunity for this committee to understand what went wrong, what has been done to correct the matter, and how we can work together to prevent a recurrence of these incidents. Given the many challenges currently facing U.S. agriculture, we certainly don't need to make things worse.
I look forward to this opportunity to hear from Mr. Clayton and, through a productive discussion, to better understand how we can move past this situation to get USDA's Market News program back on track in order to benefit all US livestock producers and consumers.
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Mr. JENKINS. We are happy to welcome this morning our panel and they are already seated at the table. We have Dr. Kenneth Clayton, the Acting Administrator of the Agricultural Marketing Service of the USDA, and he is accompanied by Dr. Keith Collins, the Chief Economist of the U.S. Department of Agriculture. Dr. Clayton, when you are ready, sir, proceed.
STATEMENT OF KENNETH C. CLAYTON, ACTING ADMINISTRATOR, AGRICULTURAL MARKETING SERVICES, U.S. DEPARTMENT OF AGRICULTURE
Mr. CLAYTON. Thank you very much, Mr. Chairman, and members of the committee. Let me thank you for the opportunity to discuss the implementation of the Livestock Mandatory Reporting Act of 1999 and the recent problem which we have experienced in implementing this new program. With me this morning at the witness table are as you indicate, Dr. Keith Collins, USDA's Chief Economist, also Mr. Barry Carpenter, who is Deputy Administrator for Livestock and Seed Programs within the Agricultural Marketing Service.
Mr. Chairman, let me assure you at the outset this morning that Secretary Veneman is fully aware of the concerns that Members of Congress, producers and others in the meat industry have expressed about the livestock and meat market reporting program since mandatory price reporting was implemented on April 2 of this year. As the Secretary has publicly indicated, she was extremely disturbed by the error discovered last week in the reporting Choice and Select boxed beef cutout and primal cut values, and she has taken action to ensure the integrity and accuracy of information being reported by USDA.
In contrast to the voluntary reporting program, the mandatory program requires that larger packers report not only negotiated sales but also forward contract and formula arrangement transactions. In fact, of the 90-plus reports to be issued under mandatory livestock price reporting, some 41 provide information that was not available under the voluntary reporting system. To process the substantial volume of information now being received under the mandatory program within the time frames prescribed by the Act, a new database and software and electronic data transfer system with appropriate security features was developed.
Page 10 PREV PAGE TOP OF DOC Since the mandatory reporting program's implementation on April 2, several computer software and data transfer problems have been experienced. These problems have been dealt with as they have surfaced. Where technical problems have prevented the launch of a few reports, voluntary reporting has been continued to ensure the availability of important market information. Confidentiality restrictions also have played a role preventing the release of some information gathered.
As I'm sure, Mr. Chairman, you and other members of the committee are aware, a computer program error was discovered last week that affected the calculation of beef cutout and primal cut values. These calculations involve the construction of carcass values based on individual meat cut prices. I think it is important to note that individual meat cut price data were properly reported to the Department by packers, and were correctly released to the public. The problem arose in the database software that aggregates these individual meat cut price data into primal or carcass component values and then into full beef carcass values.
Basically what happened was that ungraded boxed beef cut information was incorrectly being brought into the calculations for choice grade carcasses and select grade carcasses. This computer programming error then did affect the Choice and Select grade carcass cutout values over the period of April 3 through May 11. When the problem was discovered we moved immediately to suspend publication of our box beef reports. We did that on Monday, May 14, pending review of the situation.
By Wednesday, May 16, we had determined that a computer programming error had occurred. We immediately made arrangements to utilize the spreadsheet system that had previously been used under the voluntary reporting program allowing the reporting of beef cutout primal values to resume on the afternoon of May 16. Late yesterday afternoon we released corrected values for the Choice and Select boxed beef cutout and primal cut values. Corrected calculations for the daily Select cutout values for the period April 3 through May 11 averaged something under half of 1 percent higher per hundredweight than the values originally reported.
Page 11 PREV PAGE TOP OF DOC The corrected Choice cutout values averaged something more than 2 percent per hundredweight higher than values that we had previously reported. To ensure that the mandatory price reporting system provides reliable and accurate market information, Secretary Veneman, on Friday, May 18, ordered a top to bottom review of the program. Dr. Keith Collins, the Department's Chief Economist, was designated to lead an independent review team that is conducting a thorough review of the mandatory price reporting system.
Their charge is to examine the mandatory system processes and procedures, review the performance of the system to date, assess the consequences of the misreporting of the boxed beef cutout values, and recommend to the Secretary actions that can be taken to enhance the integrity of the system and ensure accurate reporting into the future. Mr. Chairman, before closing I would like to touch briefly on the issue of confidentiality. As you know, the act requires that information obtained through this program be protected from disclosure. To ensure confidentiality, we employed, adopted the so-called 3/60 guideline, which has received a good deal of attention.
That guideline is the same guideline which is used widely throughout the Federal Government by statistical reporting agencies. Basically it requires that there always be at least three reporting entities and that no reporting entity provide more than 60 percent of the information collected. Given the limited amount of information available to us at the inception of mandatory price reporting on packers purchasing patterns, we felt that a very strict application of the 3/60 guideline was appropriate.
Now that we have several weeks of operating experience with the system, more importantly we have had now several weeks opportunity to review purchasing patterns as they are being reported to us, we believe that a review of the confidentiality guideline is possible. Mr. Chairman, in closing let me just say that we truly do regret the error that occurred in our calculation of the Choice and Select beef cutout and primal values.
Page 12 PREV PAGE TOP OF DOC We believe that mandatory price reporting is and will be an important tool for producers and others involved in the marketing system for livestock. There is important new information which is being generated through this system. I assure you that we will work expeditiously to resolve remaining technical issues and we will certainly keep you and the committee informed of our progress. Mr. Chairman, this completes my testimony. I would be pleased to respond to any questions.
[The prepared statement of Mr. Clayton appears at the conclusion of the hearing.]
Mr. JENKINS. Thank you very much, Dr. Clayton. I would remind you that even Members of Congress are entitled to one mistake so if no others are made everything is going to be just fine. We have been joined by the ranking member, the gentleman from Texas, Mr. Stenholm. Mr. Stenholm, do you have any questions?
Mr. STENHOLM. No, Mr. Chairman, not at this time. Thank you.
Mr. JENKINS. All right. We have the gentleman from Kansas, Mr. Moran, do you have any questions?
Mr. MORAN. Dr. Collins is not testifying, he is just here for questions?
Mr. COLLINS. Yes, sir, just for questions.
Mr. MORAN. Thank you, Dr. Collins, for being here for questions. Dr. Clayton, you indicated that there is a limited amount of information available. Let me first say that mandatory price reporting versus voluntary price reporting has as you know been controversial. It is certainly debatable in my State as to what is advisable, desirable, but under either scenario we expect accurate information. It is important, it matters, and it affects the livelihood of many Kansans and many cattlemen across the country. How was the error discovered?
Mr. CLAYTON. Basically it was discovered by our staff as they were reviewing the data that we were reporting. There is a seasonal pattern that ought to show up particularly for Choice graded meat and ought to be reflected in the Choice grade carcass value that we report. Basically it has to do with the run up to Memorial Day and the grilling season but one would expect to see the value for a Choice carcass increasing and certainly increasing relative to the value of a Select carcass.
Page 13 PREV PAGE TOP OF DOC As our staff was reviewing data that we had been reporting really through May 11 it struck them that the degree of increase that we were reporting on the Choice carcass did not seem to be consistent with what we would have seen historically. As they began to delve into it a bit more deeply they began to realize that some of the individual meat cut price data that had been provided to us seemed to be going up at a more rapid pace than was being reflected once it was aggregated back into a carcass value. And it was at that point that they concluded that something had to be amiss and it was also at that point then that we ceased publication of the report.
As you may be aware, we do not issue the boxed beef report containing these carcass values on Monday or Tuesday, 14th and 15th of May, or Wednesday morning, the 16th of May. During that time we really rolled up our sleeves, went back into the data, went back into the software that we were using and realized that there had been a computer coding problem. At the same time, we brought back into operation the old spreadsheet process that we had used prior to mandatory price reporting, basically the same calculations that are in the new system but are much more transparent when you sit them out on a computer and a spreadsheet and begin running the numbers, the basic data that we had back through that spreadsheet we realized we were coming up with different answers.
But also very importantly put that spreadsheet into operation so that we could again begin making correct calculations and providing them to the interested public.
Mr. MORAN. Did the legislation requiring mandatory reporting set a time frame for mandatory reporting to be implemented?
Mr. CLAYTON. It did. I believe we exceeded that. We were fully cognizant of the great interest which existed certainly in industry, particularly the producer side but I think also on the packer side that we get the system up and running. And we also were very interested in trying to make available to those decision makers this whole new array of information which would be available under mandatory.
Page 14 PREV PAGE TOP OF DOC Mr. MORAN. I thought perhaps your testimony suggested that part of the problem was the time constraints you were placed under by the legislation which I thought was slightly disingenuous because the Department of Agriculture rarely meets those time requirements placed on legislation.
Mr. CLAYTON. I did not mean to imply that in my testimony and I fully admit that we missed the congressional deadline. We were trying to be sufficiently deliberate in our actions that the system would operate when we put it up.
Mr. MORAN. Thank you, Doctor.
Mr. JENKINS. We will return now to the ranking member, the gentleman from Texas.
Mr. STENHOLM. Mr. Clayton, as mentioned at the end of your testimony, I understand that USDA initially applied the 3/60 rule in a very stringent manner due to a lack of information on the number of buyers in several regions across the country. You now state that USDA has the benefit of additional data that clarifies that situation that you intend to evaluate options to improve on the present 3/60 guideline. Could you briefly outline for the committee the specific options you were considering, and also has there been opposition expressed to any of these options and if so from whom?
Mr. CLAYTON. Thank you, Mr. Stenholm. You are correct in that we have been closely examining our confidentiality guideline. As I indicated in my testimony, I think the legislation was clear that we had an obligation to insure that we did not disclose the identity of reporting entities, moreover, that we insure that there was no disclosure of proprietary information. In approaching that issue of confidentiality our first pass on it I guess was to do what a lot of people did, I am sure, and sit down and take out a map and begin to put dots on the map in terms of where the packers were that were required to report under the legislation.
Page 15 PREV PAGE TOP OF DOC Having done that, however, it came to us fairly quickly that while it is certainly necessary to know where their plants are physically located from the standpoint of where purchases take place those purchases may take place six States away and so that what really was critical in all of this was to have a feel and understanding of where the packers-buyers were actually operating. That information was not available to us prior to mandatory reporting. We knew that purchasing did take place on a fairly wide scale but we had no good way to know exactly what the pattern of that buying behavior was.
As a result of that we felt that we really had no choice but to take a very strict application of the 3/60 guideline which again says that you should have at least three entities reporting no one of which represents more than 60 percent of the information that you are gathering. Our problem was going inideally what you would like to do is just identify up front particularly at the sub national level, you would like to identify up front how many potential respondents you might have in a given area. That lets you then sort of draw the line in terms of particularly what kinds of sub national reports you might be able to issue.
As I have indicated in this case, we didn't really know where these buyers were. We didn't know when they operated and so it was necessary we felt to put a very strict application of the 3/60 guideline to the point that basically we would for each issuance of each report and for each type of data within each report we would apply this confidentiality guideline. We wanted to, if anything, err on the side of making sure that we were not the cause of any unwarranted disclosure.
Now having had several weeks operating experience having had a chance to observe the purchasing behavior as it takes place out across the country side, we do believe we have a better feel for where companies are actually operating. For example, in the case of hogs in our western Corn Belt area we know that there are 21 plants owned by 10 companies but after observing purchasing behavior we know that in fact rather than 10 companies operating in our western Corn Belt there are really 13 even though they may not have plants that are physically located in that piece of geography.
Page 16 PREV PAGE TOP OF DOC And there are other examples of that sort which have become apparent to us. Given that then it seems that perhaps we can take another look at in essence the strictness with which we have been applying this 3/60 guideline. I should hasten to add too that we have also been exploring variations on the 3/60 guideline, for example, what happens if you make it 3/50. Also, there are some other confidentiality guidelines which some statistical agencies use which allow them to extract a bit more data from data coming in to them than is the case with 3/60.
So all of those are being looked at. We believe now with some experience we have a much better perspective on what the actual buying patterns are and it is on that basis that we have been actively reviewing options that might be available to us. At this stage we have just begun conversations really with interested parties to let them know basically what I have just said to you and to seek their feedback. And I guess there may be some organizations that have officially gotten back to us but certainly that is somewhat limited at this point and we are anxious to get feedback to see how various industry segments view this situation.
Mr. JENKINS. Thank you, Dr. Clayton. We have now been joined by the Chairman of the House Agriculture Committee and so I relinquish this position and authority to its rightful owner, the gentleman from Texas.
The CHAIRMAN [presiding]. Mr. Gutknecht.
Mr. GUTKNECHT. Mr. Chairman, I am going to yield to Mr. Rehberg. He has to leave real quickly so I will yield my 5 minutes to him but I do want to come back and I hope I get a chance to make comments and question.
The CHAIRMAN. Sure.
Mr. REHBERG. Thank you, Mr. Chairman, and thank you, Mr. Gutknecht. I will make mine very quickly. I apologize for having to leave. Since the initiation of the mandatory price reporting there has been very limited direct slaughter lamb sales reported, no lamb cutout values reported, and no imported boxed lamb cuts reported. Recognizing that the sheep industry is unique Congress left USDA great discretion and flexibility in the development of a price reporting system for lamb also recognizing that one lamb producer admits that they control over 60 percent of all the purchases.
Page 17 PREV PAGE TOP OF DOC My question is please explain why the 3/60 rule was applied to the sheep industry understanding that one purchaser purchases 60 percent.
Mr. CLAYTON. That is a very fair question. And certainly we have been struggling with our sheep and lamb reports as you indicate. I think you do have to go back to the authorizing legislation which makes abundantly clear that, as I have already spoken to, we do have a responsibility to ensure that identity of reporting entities as well as proprietary information should be protected and should not be disclosed.
What you I think outlined is sort of the fundamental dilemma then that we have in the case of sheep and lamb. We are, I think, about at the point at the Department where we believe we do need to step back and take a hard look at how we are approaching this question of gathering information on sheep and lamb. It is a bit of a vexing problem. Certainly it is impacted by our application of the 3/60 confidentiality rule but at the end of the day there still will be a responsibility to protect confidentiality and the structure of that industry is such that it does create a difficult dilemma for us.
Mr. REHBERG. I guess the follow-up then question, Mr. Clayton, would be understanding the imminent or perhaps imminent sale of IBP and the continual consolidation of the packing industry do you have contingency plans within the administration to deal with other variations of the 3/60 rule?
Mr. CLAYTON. If I may ask, with respect to other species of animal are you suggesting?
Mr. REHBERG. Well, probably more particularly beef.
Mr. CLAYTON. Beef.
Mr. REHBERG. As there get to be less players your 3/60 rule then is going to get more flexible.
Mr. CLAYTON. Yes, that certainly is an issue I think that we will all have to face. Understandably, the authorizing statute here was pretty explicit in terms of protecting confidentiality and certainly one can envision at some point down the road, and I certainly don't want to forecast necessarily when that might be, but at some point down the road if concentration in the packing industry were to continue you do run into a dilemma in terms of protecting confidential information. I think at that point that becomes a broader public policy question which you and your colleagues I think are particularly well situated to grapple with.
Page 18 PREV PAGE TOP OF DOC Mr. REHBERG. Thank you, Dr. Clayton. Mr. Chairman, if I am allowed I would like to yield back the balance of my time to Mr. Gutknecht if you so wish.
Mr. GUTKNECHT. Thank you, Mr. Rehberg. Yes, I would take that back. This is an important issue to a lot of producers because my sense is that and the way it has been described to me is these farmers or ranchers essentially go into the casino and the casino knows the rules and they know a lot more about what is happening with markets than the individual producers. And part of the reason we passed this bill was to begin to level the playing field so everybody has a little more information.
I have a memo here from a cattle buyer actually from the State of Kansas and in it he says psychology is always a market factor but especially big in a declining market. He claims in this memo, and I think he speaks for an awful lot of people, that there is at least evidence that the packers knew that some of the reporting that was coming out was not accurate and that in the process, and I would like to get Dr. Collins perhaps to respond to this, that as this began to become more evident that something was wrong they withheld that information. Would you comment on that one way or the other?
Mr. COLLINS. I have no information to enlighten you on that. I do not know what the packers knew. There is no doubt that what we report, this carcass cutout value is an average. It is an index. Every packer no doubt computes their own carcass cutout value based on their own sale prices for their meat cuts. And so it seems likely to me that there was probably a discrepancy that some packers were observing between their own proprietary carcass cutout value and what we were reporting. But I have not had anyone report that to me personally or I don't believe it has been reported to us at the Department and I do not know how packers would have reacted to that information.
I would say that there are some contracts that packers have with sellers. They use their own proprietary carcass cutout value to determine the transaction price and so in cases like that in fact the misreporting of the carcass cutout value by USDA probably wouldn't have affected those transaction prices on contracts that would be constructed that way.
Page 19 PREV PAGE TOP OF DOC Mr. GUTKNECHT. But if I could, Mr. Chairman.
The CHAIRMAN. The gentleman's time has expired. The Chair would like to try to hold this to 5 minutes and we will do another round.
Mr. STENHOLM. Mr. Clayton. In my opening statement which was submitted for the record, you stated mistakes were made and they have been corrected and now we are looking to help avoid it in the future and this committee has oversight responsibility to work with you and we want to do that. The 3/60 rule, and I am going to ask this and a question which I don't want you to respond but I think it is for a lot of folks that are very concerned about this whole question and that is when a mistake like this were made there were some lawsuits that occurred that were depending upon this information to be accurate. It was not accurate and therefore we had some folks took some pretty good hits in the marketplace I have heard reports of.
This has not been confirmed as yet but I pretty well conform some of my constituents believe they have had losses and that is for us to work through on another day. But this whole question of proprietary information in the marketplace it was part of the controversy. There were those that were absolutely totally opposed to this legislation and in doing so it got written in a way that maybe it wasn't as helpful as it could have been otherwise. I don't know.
But the bottom line is we in agriculture, we are fast moving to where theoretically at least we can have one buyer for some of these commodities in the very near future, one buyer. And so I hope that to those who have been opposed to sharing information of the marketplace will begin to rethink that position in light of what is actually happening now in the international marketplace, the competitive marketplace, the non-competitive marketplace that has led so many of our producers to say we really don't think there is a market anymore.
How many times I have heard and calls coming from home now from cattlemen saying to me with four major buyers buying 85 and killing 85 percent of the cattle that are killed. We really don't think there is a market anymore and they ask us to get involved to this degree. Well, I think we got to think this one through a little bit further. I am in the cotton business. When I sell my cotton it comes across a computer screen. I offer it for sale. Somebody buys it. I am not sure, I am trying to check out because I do not know from memory whether I can find out who bought my cotton instantaneously but I know somebody bought it.
Page 20 PREV PAGE TOP OF DOC I know what they paid. I know what the quality was. All of that is public information for every buyer in the world to look at. I think that is good. I think in this modern agriculture that we are in now, I really question the value of this proprietary argument that is made by those on the buying side. I am saying this as a question and I would like to think we are going to probably stir up a little answer to that question. That is what I am hoping to do right now because if you are truly going to have a market then you have got to have some idea of who is paying what and why.
And as a producer that is selling, I would kind of like to know that information even though when we started the so-called Telecot system in cotton most producers were opposed to it because they didn't want others to see what they were selling their cotton for. Well, suddenly they found out that the buyers knew and therefore the more information we have the better off everyone is. And I suspect that is what contributed to this error that occurred. I think that we have not yet quite arrived at a satisfactory answer as to in a marketplace how do you determine that.
In the old days you would take your cattle to the auction and you could sit up there and you could watch and you would know the buyers and who was buying and you can still do that at auctions today but we don't have many of those left. We are doing it differently. And I think therein is the question for us working with you is how do we really truly design a reporting system so that we have accurate information.
And in this modern technological age there is no reason why it cannot be instantaneous 24 hours a day. There is also no reason why we need to make it too complicated and that is part of the problem that I have heard from the other side on this is that the regulations that occurred on this are too complicated and it is too difficult and it particularly puts a burden on the smaller guys, et cetera, all of which perhaps have some validity.
But in the end how we answer this is the 3/60 rule, we could have a 100 rule in the not too distant future the way some of our markets are going. So I would say this again not for a response from you but from the folks that are very interested in this question. I look forward to working with you to help resolve. And the first question I ask you I think is one that we would like to work with you on determining that. And I hope I am speaking for everybody on the buying and the selling end of our industry or the beef industry and the sheep industry and the hog industry and all that we can develop a little better attitude towards some of the answers to the questions that we have been getting.
Page 21 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Osborne.
Mr. OSBORNE. Thank you, Mr. Chairman. Thank you for being here this morning. I only have one question and that is as I talk to people in the cattle industry where I am from there are really only maybe three packers and so on a given day there are seldom more than one, maybe at the maximum two people, two packers who are buying. So what these people are telling me is the 3/60 rule does them no good.
And there is almost always one buyer or the other that has got more than 60 percent of the market. I guess philosophically I am interested in knowing why don't we have full disclosure. I mean what is the protection issue here. Why does somebody have toand I think Mr. Stenholm was getting at this too, and I realize you are just enforcing the rules, you are not making them, but maybe we need to have a better rule because so many people I am talking to are saying we are probably worse off than we were before and this is not helping us at all. So do you have any comments on that as to
Mr. CLAYTON. Thank you, Congressman Osborne. Maybe a couple of points. One is that as you point out the law is fairly clear in terms of our need to protect confidentiality. That may be a subject that you all want to debate, that would be fine, but for the moment I have the statutes and I have got to enforce them. One of the things we have been doing a couple of things to try to deal with the situation that you have described. In an operational sense we have been looking at ways that we can accumulate information over a slightly longer period of time.
For example, there are some areas where we are reporting cattle prices. You face precisely the situation you are talking about. It may prevent you from issuing a morning report and then an afternoon report but it may be that if you accumulate enough sales across the course of the day you can release a report at the end of the day at least that doesn't run afoul of the confidentiality requirements.
Page 22 PREV PAGE TOP OF DOC We are also finding ways to take data that we might not be able to release individually, if you will, and aggregate it with other data that has the disadvantage of the original identity of the data and its most immediate value to those in a particular geographic area may not be fully realized but at the same time the larger market value of that information is not totally lost at least and provides some larger benefit.
With respect to the 3/60 guideline itself, I think one of the issues that we have to work through is does one apply that guideline in the very strict sense that if there is only one buyer at a point in time who actually is engaged in the transaction is that the most critical issue or if in fact you know that in reality there is a pool of four, five,or six buyers who regularly participate in that market perhaps not on that given morning but could have, would that view coupled with the fact that we do not report the number of entities reporting to us could one marry those notions together in a way that you could still protect confidentiality but you wouldn't have to be doing it on such a stringent sort of a basis.
And that is one element, I guess, of the discussion which is ongoing at the moment as to whether that is a defensible interpretation of confidentiality protection.
Mr. OSBORNE. Well, thank you for that answer and just speaking to people in the field, they would really appreciate it if you could interpret the ruling in such a way that they got data on a daily basis even if it was only one packer or two. And I realize you have to read the guidelines and determine that but it does sound to me like there is somewhat of a matter of interpretation here like with so many rules and regulations. So I am just telling you what we are hearing and I am sure you have heard it too. Thank you, Mr. Chairman, and that is the end of my questions. Thank you.
The CHAIRMAN. Mr. Kennedy.
Mr. KENNEDY. Thank you again for your testimony. As a former finance guy myself I know how easy it is to miss something like that but also as I hear from our cattlemen there is always a nervousness, am I getting everything I should be, is this the right number, and mistakes like this do have bubble effects that have long waves on them so it is unfortunate and we do appreciate your efforts to make sure it doesn't really happen again.
Page 23 PREV PAGE TOP OF DOC I just want to follow up a little bit on Congressman Stenholm's comment about that obviously somebody did have an economic loss here and that it is something we may need to address soon. Either Dr. Clayton or Dr. Collins, if you could comment on who had the economic loss. I am not sure whether that was ultimately the seller, and if you could expound on that, that would be great.
Mr. COLLINS. I would say the review team that we have created to look at this whole program is looking at that question right now. We are going to look at the consequences of the misreporting for cow-calf operators, for feed lots, for packers, and for packer-buyers and look across those four categories of market participants and see what we can discern. With respect to the sale of cattle, cattle are sold a lot of different ways. It is a pretty complicated market.
You have about two-thirds of the sale are negotiated or spot market sales and they are roughly split between a live animal price and a carcass price. About 20 percent of the sales are contract sales and these contracts can be of all kinds. They can be contracts that are based off of this price series that we have misreported. We think that is a pretty small percentage. They can be contracts that are based off of packers own carcass value cutout series. They can be contracts that are based off of future prices. They can be contracts that are based off of cost plus.
There are many different ways of structuring a contract. So for those transactions that are specifically tied to this misreported data series obviously there is a direct impact and a loss. Again, we think that is a pretty small percentage of the total sales so that leaves all the other sales. In those, take for example the negotiated spot sales which accounts for most of the volume, you got a buyer and a seller coming together negotiating back and forth and agreeing on a price.
The question is to what extent did this misreported data impact the tenor of the marketplace. To what extent did it affect what the seller was willing to take and what the buyer was willing to bid and that is something that there is no direct answer to that. We don't have a direct answer. We know there are certainly relationships. I have gone back and I have looked at the relationship between the Nebraska fed cattle price and the boxed beef carcass cutout value, the series that we misreported.
Page 24 PREV PAGE TOP OF DOC And roughly from January through March the cattle price or the cutout price was roughly 60 percent of the cattle price but it ranged from 58 to 63 percent so it moved around a little bit but that says that there is a pretty good relationship between this boxed beef cutout value and the price of live cattle. The difficulty here though is that you got a very few direct connections between our series in the actual settlement of a transaction. You have a lot of indirect connections.
The second complication is that not everybody was operating off of misreported data. We were misreporting an average of the carcass cutout value but we were reporting cut values precisely and accurately over this whole period of time and so the packers making decisions about buying in my view were probably not looking at our cutout value, they were looking at their own cut prices and determining what they were willing to bid based on that. So it seems to me that they had information, accurate information, and so if someone was at a loss it would have been those producers who didn't have access to the packers proprietary cutout value and were using our cutout value as sort of an indication of the strength of demand, of the strength of the marketplace.
And so how that ties directly into the transaction price is less than fully clear. So this is a long-winded answer to tell you that there is a lot of different structural relations in the cattle market and there is both a direct linkage between our price and some transactions but largely it is an indirect effect and so how we are going to estimate that precisely is unknown to me at this time but we are working on that.
Mr. KENNEDY. Well, I would just say that as you work through that we would love to hear your output of that deliberation and it would also be I think educational for us to better understand exactly how these prices are arrived at in the marketplace as well. Thank you.
The CHAIRMAN. Mr. Simpson.
Page 25 PREV PAGE TOP OF DOC Mr. SIMPSON. Thank you, Mr. Chairman. Mr. Collins, wasn't the mandatory price reporting substantially to help producers and not packers? I mean that was the purpose behind the writing of that.
Mr. COLLINS. I would say absolutely.
Mr. SIMPSON. So you would anticipate that if there was misinformation given that it would hurt the producers that it was intended to help rather than hurt the packers.
Mr. COLLINS. I think that is right. I think there is no question that losses were incurred here. I think the question is how big they are and how do you estimate them.
Mr. SIMPSON. If you can estimate them, is there any liability?
Mr. COLLINS. In the sense of producers suing the Department, I have asked the General Counsel's office to give me a legal opinion on that. While I have not received a written opinion yet they have advised me that they think the chances of us having a liability are quite remote. There has been many court cases. Even the Supreme Court has ruled on cases of mistakes that Government employees have made when they have been performing their duties in a workmanlike way and have not been held liable. I would mention an example we had a couple years ago at USDA and the Federal Grant Inspection Service where we had a miscalibration where we were reporting protein content of grain and that caused a substantial financial loss.
There was a class action suit against the Department and that suit was thrown out. So at the moment I think that chances are highly unlikely that we would be liable under the Federal Tort Claims Act.
Mr. SIMPSON. So if there is any remedy to this it will probably have to be a congressional remedy?
Mr. COLLINS. Well, there are two other options. One would be a discretionary action that the Department could take if we had legal authority, and the second would be a legislative remedy.
Page 26 PREV PAGE TOP OF DOC Mr. SIMPSON. Thank you.
The CHAIRMAN. I apologize if I may ask something that has been asked and I have not been here which is kind of unusual for me but I was detained this morning.
As we go forward and particularly as your task force has an opportunity to look at this whole question, we will be very interested in seeing that report. We would also be very interested to see if in fact there are some legislative remedies or some legislative areas that we need to deal with further.
This committee has spent a great deal of time on this issue early on and the process that Mr. Stenholm and I had elected to move forward with and letting the interested parties try to work out an agreeable solution, this was added on an appropriations bill. We didn't fully have the chance to vent this in a hearing process as we would like to have had. We will do that if need be and we will have hearings on that subject and would probably look at that in terms of a farm bill which this committee would hope to report out by around the 3d of August so if we could work within that time frame.
If there are legislative suggestions we would appreciate very much because we want this thing to work and obviously the confidence in it is very important if it does what we want it to do. That was to address a problem that there was some concern, as you know, primarily starting during the period of time the hog and cattle process were so low about transparency, so we do want it to work.
When there is a transaction that is made that is not correct, there is a winner and a loser. The initial reports were that the losers were the producers, the cattlemen selling. Do we know who was the loser? Did it go both ways? Were there cattle bought for more contracts at higher levels than there should have been as well?
Mr. COLLINS. It seems to have gone a number of ways. We met with the industry on Monday.
Page 27 PREV PAGE TOP OF DOC The CHAIRMAN. The industry being?
Mr. COLLINS. Being the cattle producers, the hog producers, the sheep producers, and the meat packers, the main protagonists in this reporting
The CHAIRMAN. The affected parties.
Mr. COLLINS. The affected parties. And the cattle producer representatives indicated to us that they had specific examples of producers that had incurred losses both because of contractual specifications and because of the way I mentioned before that spot markets are transacted and producers indicated that they were willing to accept a lower price because the boxed beef price was lower than what they otherwise thought it would be, otherwise what it was.
We also had the packers tell us that they had packers that incurred losses and I have asked them to provide us with such information because on sort of an intuitive level they seem less likely to have incurred losses than producers. We also in looking at the data see that depending on the series we were reporting four series. We were reporting choice boxed beef cutout values both lightweight and heavyweight and Select both lightweight and heavyweight so there are four data series here.
And if you go through those four series you will see there were a number of days when the data that we reported was actually higher than the data that actually prevailed in our revised or corrected data so most of what we have been talking about here has been underreporting but there were a number of days in which we over-reported so one would conclude if producers suffered losses on the days that we underreported then some producers incurred gains on the days that we over-reported. So you have got that situation so there is a number of pluses and minuses going on which we are going to try and identify more fully.
The CHAIRMAN. Is there in place a remedy that would provide an opportunity for those harmed parties to look to?
Page 28 PREV PAGE TOP OF DOC Mr. COLLINS. I am not sure I know the answer to that at this point. I think what we are talking about is a private contractual arrangement between a buyer and a seller and so one avenue of recourse would be what are the specifications of this contractual arrangement did they have, can they go back to the buyer and seek redress in some way and I don't know the answer to that.
The only remedies I have been focusing on in the last day or two have been sort of the ones we already talked about, litigation, discretionary action, or legislation. But certainly the heart of the matter here is this is a private contractual arrangement between a buyer and a seller and so you could take recourse that way through the normal way you would under a contract.
The CHAIRMAN. Thank you very much. Mr. Chairman, Mr. Stenholm.
Mr. STENHOLM. I may have misspoken regarding my description of the cotton market system that I am familiar with and I want to clarify that all sales are instantaneously reported but the buyer and the seller are in fact confidential and totally confidential. Only the employees are aware of who is buying and who is selling and they are prohibited from disclosing that information. But the actual sales are instantaneously recorded and so it I misspoke about the identities then I want to correct that for the record. There is no identity but the actual sale is reported.
The CHAIRMAN. Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman. I don't have any questions.
The CHAIRMAN. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman. I guess right now the only question I have as far as fixing the problem, do you have everything that you need at your disposal now to make sure that the problem is fixed and that we are now accurately reporting and will be in the future? Is there something that we need to do to change the system so that this doesn't happen again?
Page 29 PREV PAGE TOP OF DOC Mr. CLAYTON. Mr. Pombo, if I could, let me answer that a couple of ways. One, I think having now identified the problem it ought to be a relatively minor fix in computer code. Our contractor should be able to accomplish that within resources that we have available in the interim as that fix is being made. We are engaged in a somewhat more labor intensive process in generating these carcass values but I do believe we have adequate staff to manage that for a period of time.
And I would say obviously when we go back live with that element of the new mandatory software you can believe that we will be running both the old spreadsheet along with the new system for a period of time to be sure but I think resource wise we are OK. The second observation I was going to make though in response to your question is it probably does make sense at some point in time to sort of step back and take a look at what we have got here with this mandatory program, what is working and what is not working, where are the constraints. Are there legislative constraints, are there administrative constraints, are there budgetary constraints.
We talked some about the application of 3/60 guideline. That may or may not enter into that discussion on down the road depending on what we can do within our current operating parameters but certainly one thing which has occurred to us is that after passage of some time so that we have had experience with producer groups, packers, others have had experience with this, that it would make great sense to take a look at what we have got here.
I think it is very interesting when you look at this mandatory program because in some ways not unlike the voluntary program you have to divide the world, I think, into a couple of pieces. On the one hand there is an information collection action or function that we are involved with and then there is also the processing and reporting of the information that has been gathered. And obviously the problem that we encountered last week was on the piece of equation having to do with the processing and reporting of information.
But I think in some ways it is helpful to kind of conceptualize what we are up to here. The two clearly are interrelated. On a busy day the larger packers may send us for a morning report or an afternoon report up to 10,000 data items. You are not going to run those through a calculator. You got to have a system that will process those and allow you to particularly within the 1-hour time frames we have got get that information out.
Page 30 PREV PAGE TOP OF DOC I guess my point is we are all learning and gaining experience as we go through this because we are talking volumes of data that we have never dealt with before. We are talking about types of data that we have never seen before, that industry has never seen before, and at some appropriate time here I think it would be useful to just take a look at what we have got. Do we have the right information? Is it being presented in ways that is most helpful to those who want to use it and are there fixes of one sort or another that ought to be considered.
Mr. POMBO. Finally, I guess, and I apologize if you have answered this already but should we expect some kind of a full breakdown on where you were wrong and if so, when?
Mr. COLLINS. Well, Mr. Pombo, that is the job that the Secretary has charged our task force to do and we are deeply in a detailed way reviewing these procedures right now. We will be meeting with the contractor this afternoon and we are hoping to get through a review of the processing procedures and of course in doing that we made some recommendations already to AMS and they are undertaking some of the things we have talked about. We will have some other recommendations for the Secretary as well. We hope to do that in the next couple of weeks.
Mr. POMBO. OK. Thank you.
The CHAIRMAN. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman. I appreciate getting another chance here because I want to go back to something that Mr. Stenholm talked about earlier. Maybe it is because I am an auctioneer and I do believe in the auction method of selling things. And the reason is it is full disclosure. I mean people can go to the auction barn and 15 years ago 80 percent of all the livestock were sold in some form of an auction format. Today that number is reversed. About 80 percent are sold in some kind of a contractual relationship.
And that is the problem, and it seems to me we have done a miserable job of helping producers understand what really is happening in the marketplace. And with all due respect to the Department it just seems to me this is not all that difficult. I know for example in my district there is a software company that works with credit card companies and businesses. They do an unbelievable job of tracking sales. In fact, they track sales patterns. If someone, your spouse or somebody, your teenage son, gets your credit card and is all of a sudden buying a whole lot of stuff don't be surprised if you get a phone call. They track those things.
Page 31 PREV PAGE TOP OF DOC And so I guess my real question is why is it so difficult for the Department to do this or maybe the real problem is maybe this is an issue that ought to be contracted out. Now I understand that the industry was very concerned about this confidentiality but even within that framework it doesn't seem to me that that is a rational excuse for not being able to tell the producers how many hogs were sold today, what did they sell for in terms of the hogs actually going across the scales or the cattle, whatever.
It just seems to me this is not as difficult as some people would try to make it out to be. And then I guess the real question is have you explored the possibility of contracting out. There are private vendors out there that could put together this program very simply, give you very accurate information literally minute by minute. If you can do it for WalMart we can certainly do it for the farms of the United States.
Mr. CLAYTON. Congressman Gutknecht, the development of the system was farmed out. We do have a contractor that built the system for us. One of the interesting dimensions to this information collection and reporting activity, I think, is that some expert judgment does need to be interjected to review the data that is being sent in to us and to look at the calculations that result from it to make sure that they withstand reasonable scrutiny from a standpoint of folks who participate in the marketplace.
Mr. GUTKNECHT. Could you explain that? That doesn't quite make sense to me.
Mr. CLAYTON. Sure. In particular, early on in a process I suppose it is more important maybe than it will be later but certainly early on in the process one has to look at incoming data to make sure decimal places are in the right spot and those kind of things, not that it is a discretionary authority that I would suggest we would use in any large degree but the statute itself provides that the Department should be reviewing this data before it puts it out and that there is some discretion that in the event that something that is reported to us just looks funny, that it just seems out of keeping with what we know to be going on in markets that we have both a responsibility and some discretion in terms of what we do with that data.
Page 32 PREV PAGE TOP OF DOC So it is not simply a matter of just punching a key and having data spit out the other end. There is a human element which does need to be fitted into this thing as well. But certainly the mechanical part of it has been farmed out and we will continue to be supported by contractors in the actual operation of the program.
Mr. GUTKNECHT. Are you saying a big part of the problem is that the contractor made a mistake?
Mr. CLAYTON. I will leave it to Dr. Collins to determine who, if anybody, made a mistake as a part of his review. I would simply say thought that there was in reality a relatively simple programming error that was made. As data is reported to us by packers, the packers are required to indicate, we are talking here meat cut price data, are required to report to us a little code number for each data line they send, which indicates whether that was a Choice graded product, a Select graded product, or an ungraded product.
What gets a little complicated in this carcass calculation is that while the bulk of the data that would go into a Choice carcass that we are constructing upwards from these cuts, that while the bulk of the data that goes into that is the Choice cut data which packets have reported to us there in fact is some ungraded data for things like trimmings and bone and fat and things which are not sold as cuts that you need to bring into the calculation.
That stuff gets a particular code number as it comes in. Under mandatory reporting though not only are we picking up that kind of ungraded information, which is necessary for this calculation, we are also getting ungraded information on cuts which are precisely the same type which are typically graded Choice or Select. And apparently what happened with this programming error is that the program was set up to go retrieve ungraded data which in part it needed to to make this calculation but it didn't distinguish between the portion of ungraded data necessary for the calculation and the portion that shouldn't have been in there. It was a coding error.
Page 33 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Thank you.
The CHAIRMAN. Are there other members who want to have questions?
Mr. MORAN. Yes.
The CHAIRMAN. That will be fine. I just was trying to get some kind of sense of timing. We will allow that to occur in just a moment. I do want to say that to make sure the industry understands, we will be following up, I am sure, at some point with a hearing with them as well. The main purpose today was to have you in and hopefully be able to restore the confidence in the system recognizing the problem which occurred. But I do want the industry to know that we will be pursuing this further with them as well. Mr. Moran.
Mr. MORAN. Thank you, Mr. Chairman. Perhaps with the time constraints, I assume you don't want to bring the committee back after the vote.
The CHAIRMAN. I was going to say that is what I was trying to determine.
Mr. MORAN. Perhaps you can answer these in writing. I was interested in your response to Mr. Gutknecht earlier, Dr. Collins, about the Tort Claims Act protecting the Department. Is there any precedent where the Department has voluntarily agreed to make compensation? You mentioned the precedent in which you have been not liable.
Mr. COLLINS. Obviously the Department has made compensation in certain instances but generally I am not aware of one in this case of misreporting. I have asked our General Counsel's office to tell me whether we have discretionary authority to make compensation. They have indicated to me thus far that they think that that is unlikely but they have not given me a written response yet.
Mr. MORAN. Does the Tort Claims Act protect the private vendor?
Mr. COLLINS. The Tort Claims Act would protect a private vendor, yes.
Page 34 PREV PAGE TOP OF DOC Mr. MORAN. The complaint by my agricultural broadcasters which I take seriously kind of just as the neutral party reporting information indicates that they are unable to report as much information as they were back as compared to when we had the voluntary system. One of the continual requests is can we have the voluntary reporting system information as well as the mandatory information side by side. Are those two compatible?
Mr. COLLINS. No. They are mutually exclusive. We cannot do that. And it is true that there are reports that we are not making that we used to make but those are because of the disclosure difficulties that Mr. Clayton has outlined.
Mr. MORAN. And you mentioned earlier, Dr. Collins, about there were days in which the price was reported higher than it should have been and days in which it was reported lower than it should have been. Could you tell us the number of days in each category?
Mr. COLLINS. I can tell you that it is roughly about a third of the days in the Select lightweight and heavyweight, a fourth to a third of the days in the Select light and Select heavy, none of the days in the Choice.
Every day we underreported the actual price for Choice lightweight animals and Choice heavyweight animals. We over-reported in a quarter to a third of the days for Select lightweight and heavyweight.
Mr. MORAN. Perhaps if you would follow-up in writing or just with me about why the voluntary and the mandatory are mutually exclusive so I can explain that. Thank you. Thank you, Mr. Chairman. Thank you for having this hearing.
The CHAIRMAN. Thank you very much for coming down on pretty quick notice and I appreciate it very much. There may be additional questions or information that would need to be and without objection we will keep the hearing record open for 10 days to receive that information. The hearing is adjourned.
[Whereupon, at 10:45 a.m., the committee was adjourned, subject to the call of the Chair.]
Page 35 PREV PAGE TOP OF DOC [Material submitted for inclusion in the record follows:]
Statement of Kenneth C. Clayton
Mr. Chairman and members of the committee, thank you for the opportunity to discuss implementation of the Livestock Mandatory Reporting Act of 1999 and the recent problem the Agricultural Marketing Service (AMS) has experienced in implementing this new program.
Let me assure you at the outset that Secretary Veneman is fully aware of the concerns that Members of Congress, producers and others in the meat industry have expressed about the livestock and meat market reporting program since mandatory price reporting was implemented on April 2, 2001. As the Secretary has publicly indicated, she was extremely disturbed by the error discovered last week in the reporting of Choice and Select boxed beef cutout and primal cut values, and has taken action to ensure the integrity and accuracy of information being reported by USDA.
Before discussing the error that was discovered last week, I would like to first provide some brief background on the new mandatory price reporting program. The Livestock Mandatory Reporting Act of 1999 (act) was passed in October 1999. It required that a program of information collection be developed regarding the marketing of cattle, swine, and boxed beef. Authority was also provided to develop a mandatory reporting system for sheep and lamb.
Prior to passage of the act, AMS obtained information on negotiated or cash sales through voluntary cooperation by packers and other industry members. However, information on livestock and meat sold through formula and forward contracting arrangements was not generally provided to USDA. With the growing importance of these marketing arrangements, a serious gap was emerging in publicly available market information for cattle, swine, and sheep.
The act is intended to address this deficiency. In contrast to the voluntary reporting program, the mandatory program requires that larger packers report not only negotiated sales, but also forward contract and formula arrangement transactions. In fact, of the 90-plus reports issued under mandatory livestock price reporting, some 41 provide information that was not available under the voluntary reporting system.
Page 36 PREV PAGE TOP OF DOC To process the substantial volume of information now being received under the mandatory program within the time frames prescribed by the Act, a new database and electronic data transfer system with appropriate security features was developed. Industry standard data processing packages were identified to facilitate the timely transfer of data from packers to the Department.
Since the mandatory reporting program's implementation on April 2, several computer software and data transfer problems have been experienced. These problems have been dealt with as they have surfaced. Where technical problems have prevented the launch of a few reports, voluntary reporting was continued to ensure the availability of market information. Confidentiality restrictions also have prevented the release of some information.
As you know, a computer program error was discovered last week that affected the calculation of beef cutout and primal cut values. These calculations involve the construction of carcass values based on individual meat cut prices. It is important to note that individual meat cut price data were properly reported to the Department by packers, and were correctly released to the public. The problem arose in the database software that aggregates the individual meat cut price data into primal or carcass component values and beef carcass values. Basically, ungraded boxed beef cut information was incorrectly brought into these calculations. This computer programming error affected Choice and Select grade carcass cutout values over the April 2 through May 11 time period.
The problem became apparent after reviewing the data reported through May 11. Expected seasonal trading patterns should have resulted in more significant increases in Choice-graded carcasses relative to Select-graded carcasses than were being reported. We immediately suspended publication of boxed beef reports on Monday, May 14, pending review of the situation. By Wednesday, May 16, we had determined that a computer programming error had occurred. We immediately made arrangements to utilize the spreadsheet system that had previously been used under the voluntary reporting program, allowing the reporting of beef cutout and primal values to resume on the afternoon of May 16.
Page 37 PREV PAGE TOP OF DOC The mandatory reporting system's database software that calculates the beef cutout and primal values had been tested prior to implementation. Data files were constructed and run through both the new system and the voluntary spreadsheet system. Unfortunately, these data files included only the data that should have been used in these calculations and did not include the extraneous data of ungraded box beef cuts, which had been incorrectly coded into the calculations. Although we encouraged packers to submit data in advance of program implementation, only some did so, primarily for purposes of testing electronic data transfer and data format requirements.
Late yesterday afternoon we released corrected values for the Choice and Select boxed beef cutout and primal cut values. Corrected calculations for the daily Select cutout values for the period April 3 through May 11 averaged 71 cents or 0.60 percent higher per hundredweight than the values originally reported, ranging from a 1-day low of -$1.10 to a 1-day high of $1.72. The Choice cutout values averaged $2.85 or 2.26 percent per hundredweight higher, ranging from a 1-day low of 73 cents to a 1-day high of $7.69. Choice and Select boxed beef cutout and primal cut values reported since Wednesday afternoon, May 16, have been correct.
To ensure that the mandatory price reporting system provides reliable and accurate market information, Secretary Veneman, on Friday, May 18, ordered a top to bottom review. Dr. Keith Collins, the Department's Chief Economist, was designated to lead an independent review team that is conducting a thorough review of the mandatory price reporting system. The team consists of six Departmental officials from outside the marketing and regulatory program area with expertise in economics, statistics and large database management. Their charge is to examine the mandatory reporting system process and procedures, review the performance of the system to date, assess the consequences of the misreporting of the boxed beef cutout values, and recommend to the Secretary actions that can be taken to enhance the integrity of the system and ensure accurate reporting in the future. The team has been meeting with AMS staff and the mandatory reporting system contractor and expects to complete its work quickly.
Page 38 PREV PAGE TOP OF DOC Before closing, I would like to touch briefly on the issue of confidentiality. As you know, the act requires that information obtained through this program be protected from disclosure. We adopted the so-called ''3/60'' guideline that is widely used throughout the Federal Government. It requires that there be at least three reporting entities and that no reporting entity provide more than 60 percent of the information collected. Given the limited amount of information available on packers' purchasing patterns at the outset of mandatory reporting, we felt the 3/60 guideline was appropriate. Now that we have a better feel for purchasing patterns, we believe a review of the confidentiality guideline is possible. Given this possibility, we want to assure you that any change in the guideline or its application will continue to provide the same level of confidentiality protection. We hope to complete this review as quickly as possible.
Mr. Chairman, we truly regret the error that occurred in our calculation of the Choice and Select beef cutout and primal values. We believe that the mandatory price reporting program can provide important market information. I can assure you that we will work expeditiously to resolve remaining technical issues. We will continue to keep you informed of our progress.
This completes my testimony. I would be pleased to respond to questions.
Statement of James McNulty, Chicago Mercantile Exchange
Mr. Chairman and members of the committee:
Chicago Mercantile Exchange Inc. (CME) appreciates this opportunity to share its views on the performance to date of livestock and meat price reporting under the Livestock Mandatory Reporting Act of 1999. CME is the national marketplace for livestock and meat-related futures and options contracts, which the industry relies upon for price discovery and risk management.
Page 39 PREV PAGE TOP OF DOC CME's market participants formulate strategies and implement trading decisions based on reports published by the Agricultural Marketing Service (AMS). In addition, many of these same reports are essential to the delivery and final settlement of CME futures and options contracts. At the present time, these contracts represent more than 6 million slaughter cattle and more than 12 million slaughter hogs.
CME has encountered a number of problems since mandatory reporting began on April 2, 2001. Many market participants have complained to CME about the limited amount of information in the new AMS reports and have questioned the merits of the 3/60 rule, particularly when they encounter the message stating:
This mandatory report is not being released due to technical procedures that resulted in the transmission of an inadequate volume of data to compile the report. Releasing the report at this time could distort market conditions.
For its part, CME has postponed for several months the listing of any new Lean Hogs contracts while it waited for AMS to publish the necessary reports. A far more serious problem resulted from the recent revision of the Boxed Beef Cutout values, which forced CME to re-calculate the final settlements for every one of the April 2001 Live Cattle deliveries. These and other events have seriously damaged public confidence in the mandatory reporting process. As a result, this is an opportune time to review the program and its underlying assumptions.
It should be noted that converting from a voluntary to a mandatory reporting system that meets the requirements of the act is a complex task, and AMS staff should be recognized for their accomplishments.
Beyond that, it is important to understand that the purpose of market reporting has changed dramatically in recent years. A decade ago, market reporting involved little more than determining the range of prices, estimating the predominant (mostly) and highest (top) prices within that range, and assessing the tone (steady, firm, et cetera) of the market. The purpose of those efforts was to give livestock producers a general sense of the level and near-term trend of prices, just as a weathervane shows the general direction of the wind.
Page 40 PREV PAGE TOP OF DOC Today, AMS prices are widely used to establish the benchmark or base prices for livestock and meat products, as well as the premiums and discounts for various attributes. This demands much greater accuracy and precision than the traditional market reporting model, just as a modern weather station must do more than simply show which way the wind is blowing. It also requires a different philosophy and attitude among AMS staff toward collecting and reporting prices. In the past, market reporters often served as 'editors' to eliminate the extreme prices that can result from unusual market conditions. Now, market reporters must be 'accountants' to confirm the veracity of the data, provide the full spectrum of pricing information and allow market participants to interpret the data for themselves.
These new roles and responsibilities require the following changes to current AMS procedures:
(1) Eliminate the 3/60 rule and report all transactions with the corresponding quantities traded. This could be accomplished by publishing the volume traded at each price, similar to the sales by price data published by CME and other exchanges. This information would show the distribution of transactions, immediately draw attention to any outliers, and illustrate any skew in the prices. For the most part, the identities of the participants in many transactions are already known to industry insiders. Furthermore, it is unrealistic to expect that identities can be disguised in an industry as concentrated as meat packing.
(2) Release to the public the mathematical formulas for the Boxed Beef Cutout and other AMS calculations. Had these formulas been available, the errors in the Cutout and Primal values would have become apparent immediately, and would not have been allowed to continue for 6 weeks. CME has employed this policy successfully for many years with its CME Feeder Cattle Index and CME Lean Hog Index, even to the point of posting each day's calculations on CME's web site. Making these calculations completely transparent has created widespread acceptance and confidence in these indexes, and CME strongly urges AMS to adopt similar procedures. In addition, AMS should publish the definitions of the various reporting categories, geographic regions and transaction types, and provide explanations of what is included and what is excluded for each.
Page 41 PREV PAGE TOP OF DOC (3) Pursue mandatory reporting of pork products, modeled after the mandatory reporting of beef products. This oversight was noted in CME's comment letter to AMS dated April 17, 2000 on the proposed rules for mandatory reporting. CME continues to believe that by requiring part, but not all, of each reporting entity's purchase and sales activity to be reported, the quality of the non-mandatory data can be expected to deteriorate. The AMS Estimated Pork Carcass Cutout value is calculated each day based on reported sales of pork cuts averaging fewer than 50 loads per day, while enough hogs are slaughtered each day to produce in excess of 1,300 loads of pork. The difference between these two numbers underscores the need for mandatory reporting of pork products.
In conclusion, CME urges AMS to adopt these recommendations and to take any other steps it deems necessary to correct these serious problems. For those recommendations with which CME has had first-hand experience, we are willing to meet with AMS personnel and share any information that AMS might require to improve the performance of livestock and meat price reporting under the act.
Thank you for this opportunity for CME to share its views on this matter.