SPEAKERS CONTENTS INSERTS
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COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FEBRUARY 11, 1999
Serial No. 1065
Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
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LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska
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
Page 3 PREV PAGE TOP OF DOCMICHAEL K. SIMPSON, Idaho
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
Page 4 PREV PAGE TOP OF DOCLEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
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
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
Smith, Hon. Nick, a Representative in Congress from the State of Michigan, prepared statement
Page 5 PREV PAGE TOP OF DOC Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Drabenstott, Mark, Vice-President and Director, Center for the Study of Rural America, Federal Reserve Bank of Kansas City
Pearson, Harry L., president, Indiana Farm Bureau Federation
Sims, Frank, president, North American Grain Division, Cargill, Inc.
Swenson, Leland, president, National Farmers Union
Christison, Bill, National Family Farm Coalition, statement
Continental Grain Company, statement
Florida Fruit and Vegetable Association
THURSDAY, FEBRUARY 11, 1999
House of Representatives,
Committee on Agriculture,
The committee met, pursuant to notice, at 9:30 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Barrett, Boehner, Ewing, Goodlatte, Smith, Lucas of Oklahoma, Chenoweth, Hostettler, Chambliss, Moran, Schaffer, Thune, Jenkins, Cooksey, Gutknecht, Riley, Walden, Simpson, Hayes, Fletcher, Stenholm, Peterson, Dooley, Clayton, Minge, Pomeroy, Holden, Baldacci, Berry, McIntyre, Stabenow, Etheridge, Boswell, Phelps, Lucas of Kentucky, Thompson, and Hill.
Page 6 PREV PAGE TOP OF DOC Staff present: Pete Thomson, senior professional staff; John Goldberg, professional staff, Christopher D'Arcy, Wanda Worsham, clerk; Chip Conley, and Anne Simmons.
The CHAIRMAN. The hearing of the Committee on Agriculture to review agribusiness consolidation 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 agribusiness consolidation.
Even a casual observer cannot help but be bewildered by the dizzying pace of mergers, acquisitions, and restructuring going on in our economy today. Overnight a Jeep becomes a Mercedes, and a Volvo becomes a Ford. But this activity isn't limited to automobile manufacturers, petroleum companies, or the financial world; similar activity is occurring in the agricultural sector. Since these changes will doubtless cause anxiety among farmers, ranchers, and residents in rural America, this committee has a responsibility to examine its potential impact.
Today's hearing is intended to help members of the committee arrive at a better understanding of the degree of consolidation in the agribusiness community and its consequences. I hope our witnesses will help describe exactly what is going on and catalogue both the opportunities and the pitfalls it presents producers, processors, and consumers.
It has been said so many times in this room and elsewhere that it has become a truism. American farmers and ranchers produce the highest quality, lowest cost food and fiber products in the world. We are rightfully proud of the food production system that has evolved in the United States. However, the competitive nature of the world economy will lead to continued changes in the farm sector, and this committee has the responsibility to monitor this change to ensure that truism remains true.
Page 7 PREV PAGE TOP OF DOC I look forward to today's testimony and the participation of my colleagues as we question our witnesses.
I would recognize Mr. Stenholm for whatever comments he would like to make.
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 scheduling this hearing today.
I have taken lately that all of my farm meetings back home to ask a simple question of those assembled; what do you want your rural community to look like 5 years from now and 10 years from now? And, then, what can we do to affect that desire? And that is kind of what this hearing is all about today.
Merger and consolidation is often good. We are seeing it happening. I am watching it beginning to happen now at home. The rural electric cooperative that I managed when I was back in real life has now merged with another because some merger and consolidation is necessary in order to do that which it was set up to do, and that is to deliver electric power the most efficient and cost-effective way that it could.
But I also think that there is a point where consolidation is not beneficial. We are seeing this today in the oil and gas industry, from the standpoint of the consolidation that has occurred in the international marketplace and the havoc that it is wrecking upon the domestic oil and gas industry, the small producers back home. We are seeing the same thing happen in that industry that is happening to our farmers and ranchers. At some point, that becomes a national security problem. At some point, if we, in fact, only have one business doing everything, it becomes a competitive problem, and we are having a difficult time, all of us, sorting out what do we do about it. Which ones do we want to do something about, and which ones do make good business sense? And that is where we are going to have a lot of discussion.
Page 8 PREV PAGE TOP OF DOC You know, cooperative effort, in order to maintain competition, has always been good for America. Another area that I am emphasizing is cooperative effort in which we, on the producing side, reach out to corporate America and say is there not some things you can do to help get more of the consumer dollar into the farmers' and ranchers' pocket. If there is, why don't we do it? We can't continually put the squeeze on those at the bottom of the production level and expect to have any kind of semblance of a rural community there 5 years or 10 years from now.
But the first thing we have to do, Mr. Chairman, is what you are setting out today, and that is begin to reach out and to find ideas. What do we do about it? How do we go about it? Which things do we attempt to change? Which things do we not? And the best way to do that is, as you have started this morning, and that is to begin reaching out and asking others what are some of the things we ought to do and how can we make sure that this tremendous progress that you mentioned, Mr. Chairman, in your opening remarks.
I always say, ''Aren't we blessed to live in a country that has the most abundant food supply, the best quality of food, the safety food supply, at the lowest cost to our people of any other country in the world?'' It hasn't happened by accident, and unless we do more things right in the future, future Congressmen and women will not be able to say that.
We have many challenges; I look forward to working with you to find some of those answers.
The CHAIRMAN. Thank you, Mr. Stenholm.
I would just comment at the beginning, we will try to be as thorough as necessary, but to be as expeditious as possible. We would like to try to finish this hearing today, if at all possible by around 2 o'clock, to prepare for a ceremony to receive the portrait of former Chairman Smith this afternoon. So, that will be the intent of the Chair, is to try to wrap it by 2 o'clock, if at all possible. We don't want to cut any witnesses off or cut any members off from questions.
Page 9 PREV PAGE TOP OF DOC Statements from Members will be accepted at this time.
[The prepared statements of Members follow:]
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 consolidation within the agricultural industry. Consolidation in American agriculture has been underway for most of the twentieth century but what is new is the type and speed that consolidation has taken over the last few years. Low commodity prices and changing export markets have led to a new wave of consolidation that is subtly changing the face of American agriculture.
Generally, consolidation in U.S. agriculture has been a positive trend, one that has lead to lower-priced, higher quality food products for consumers and a leaner industry better able to compete in the global market place. Yet, there is a point where concentration can give rise to monopoly power. To date, there is no clear evidence that we are at that point. In fact, the growth in food industry profits tend to be lower than most other industries.
Still, producers do have a legitimate reason to be concerned. Access to competitive buyers of their products is essential to overall success. Mergers like Cargill-Continental raise this issue, as the potential exists that some farmers in local areas will be left with only one option. Where this is the case, some divesting of operations where local monopolies might result from a merger may be appropriate. Another option for farmers is forming cooperatives that give then larger clout in the market place.
I understand that USDA and the Department of Justice are reviewing these issues and there ramifications on the American agricultural economy. I look forward to hearing from our witnesses today on this important subject and learning more on what it means for American agriculture in the future.
STATEMENT OF HON. HELEN CHENOWETH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IDAHO
Page 10 PREV PAGE TOP OF DOC Thank you, Mr. Chairman. I appreciate the committee for holding this very important hearing to review agribusiness consolidation. I cannot overstate the importance of this issue to my producers in Idaho.
Mr. Chairman, over the years I have become very, very disturbed with the high levels of corporate concentration and the many related problems resulting to agricultural producers, rural communities and consumers. Today, the increased concentration of capital resources and increased concentration of control in the food system has led to the decline of the family farm structure.
In fact, a modern-day David and Goliath battle has developed between Mr. Mike Callicrate, a northwest Kansas feedlot owner, and the meat packing industry. Specifically, Callicrate Feedyard of St. Francis, Kansas, has officially filed a complaint alleging unfair pricing practices, intimidation and a virtual boycott of its operation by the major meat packers. Mr. Callicrate says that over the last three years since he began speaking out against packer concentration, formula pricing, and the bidding practices of the major packers, his company has received lower bids from the major buyers sometimes receiving what he calls ''bids not to buy.''
It is easy to understand Mr. Callicrate's concerns when many producers are currently finding it hard to make ends meet while the packers turned in record profits in the last quarter in 1998. Clearly, the money is going somewhere and the producers seem to be left out.
Mr. Chairman, I believe in a free, fair and competitive marketplace. However, I am very concerned that the individual agricultural producers have been regulated and predatory priced out of the market. The time has come to restore the market balance between small producers and packers. Legislative measures such as H.R. 222, the Country of Origin Meat Labeling Act of 1999 (which I introduced), as well as other measures addressing anti-competitive practices by the packers and complete price reporting will help give hope and encouragement to the producer.
Page 11 PREV PAGE TOP OF DOC Thomas Jefferson upon leaving office in 1809 said, ''I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to laws of our country.'' Mr. Chairman, these are important words to remember as we work to restore economic fairness and equal opportunity in the agriculture community.
PREPARED STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Thank you, Mr. Chairman for holding this important hearing. I believe agribusiness consolidation is one of the most pressing issues facing American agriculture today. As we all know, American agriculture is at a crossroads. With family farmers facing near record low prices in almost every commodity produced, the future of family agriculture is in serious danger. As a Member of Congress, representing nearly 30,000 farmers, I want to work closely with my colleagues on the Agriculture Committee, in Congress, the U.S. Department of Justice, and the U.S. Department of Agriculture on providing a level playing field America' family farmers.
In today's global economy, it seems as though we hear daily announcements of mega mergers in all aspects our economy ranging from oil companies, automobile industry, computer technologies, banking interests, and railroads. In American agriculture, it seems as though, mega mergers are happening by the hour. During the 1990's, we have seen mergers occur in nearly every sector of the agriculture economyfrom seed companies, the biotechnology industry, banking, railroads, meat packers, and grain processing and handling companies.
In this era of rapid economic growth, mega mergers may seem in the short term the best way to make a quick dollar, but in American agriculture most corporate mergers occur at the expense of our Nation's family farmers. As we all know, American agriculture is heavily impacted due to captive supplies and volatile markets because commodities must be delivered and sold in a timely manner for the farmer to get paid. Especially, in my home State of North Dakotawhere farmers have suffered from the past five years of bad weather, bad prices, and a bad Federal farm policycaptive supply and volatile markets have hit extremely hard.
Page 12 PREV PAGE TOP OF DOC In North Dakota, we are serviced by only class I railroadBurlington Northern Santa Fe. Because of only one railroad, North Dakota farmers are easy targets for higher railroad rates. The impacts of higher railroad rates has a cyclical impact on nearly every North Dakota community. Railroads raise their rates because of the lack of competition, country elevators pass the higher fees along to producers forcing producers to have less money to spend in our small communities.
Concentration on the micro level is impacting North Dakota greatly. But for the purpose of this hearing, I would like to examine concentration impacts on a macro level.
Consolidation is prevalent throughout the agriculture sector. Currently, only four meat packers control more than 80 percent compared to 36 percent in 1980. Five packers control nearly 60 percent of the pork processing facility. Likewise, in grain marketing and processing, the top four firms control 59 percent of port facilities, 62 percent of flour milling, 74 percent of wet corn milling and 76 percent of soybean crushing. With competition being eroded so rapidly in the past twenty years, there seems to be a strong correlation between the recent rise of market consolidation and the steady decline of commodity prices.
With the recent trends of market concentration, I believe it is time for government to step forward to protect our Nation's family farmers. I have written Attorney General Janet Reno urging the Department of Justice to place an immediate moratorium on agriculture corporate mergers that may have market-altering impacts. I have also authored a House Resolution urging the United States Congress to thoroughly investigate mergers and acquisition that have market distorting impacts. I urge my colleagues both Republican and Democrat and city and rural to support this resolution because the fate of American agriculture is at stake.
The proposed acquisition by Cargill, Inc., the world's largest grain company, of Continental Grain Company, the world's second largest grain company, must be thoroughly examined by the Department of Justice because of possible anti-trust violations. If this acquisition is approved, Cargill would control more than 35 percent of the Nation's grain exporting capabilities.
Page 13 PREV PAGE TOP OF DOC American farmers and ranchers are the most efficient and cost productive in the entire world. However, the little guys cannot compete with the big boys when the playing field is not fair. Before, we move to quickly on approving mergers because of their short term impacts, I strongly urge my colleagues on the Committee to take a close look at the slippery slope we may be leading down in American agriculture.
PREPARED STATEMENT OF HON. MARION BERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARKANSAS
Thank you, Mr. Chairman. I appreciate you holding this hearing so that the Members can learn more about the concerns and realities of consolidation and concentration in American agriculture.
I believe it is important to hear both the concerns and realities in the same forumwe will often hear from just one side or another on this matter. To make effective policy, however, we need information from a variety of sources. The issue we are discussing today is of crucial importance to many, if not all, farmers in the country. They know that fair competition is their ally - and any force that threatens competition also threatens them. This could include unfair trade by our foreign competitors, or unfair trade created by concentration within a domestic industry. When the marketplace operates freely and with transparency, we should all be confident that America and its farmers will prosper. Anything that will cause the marketplace to malfunction is reason for alarm.
Given the dramatically low commodity prices and the continuing low prices affecting livestock, it is a matter of due diligence that we take this opportunity to examine concentration in agriculture to learn of its role, if any, in the situation.
Thank you, Mr. Chairman.
The CHAIRMAN. At this time, I would invite our first witness to the table.
Page 14 PREV PAGE TOP OF DOC Mr. Mark Drabenstott is the vice-president and director for the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City.
STATEMENT OF MARK DRABENSTOTT, VICE-PRESIDENT AND DIRECTOR, CENTER FOR THE STUDY OF RURAL AMERICA, FEDERAL RESERVE BANK OF KANSAS CITY
Mr. DRABENSTOTT. Thank you very much, Mr. Chairman. Good morning to you and to distinguished members of this committee.
My name is Mark Drabenstott, and I am director of the Center for the Study of Rural America at the Federal Reserve Bank in Kansas City.
Consolidation is certainly not new to U.S. agriculture, but the wave of consolidation now underway is redrawing the economic landscape of rural America. And I think it is being overlooked by many observers.
Consolidation in U.S. agriculture is of two distinct types; what I would call cost savings and supply chain. The cost-cutting variety has been around a long time, and it is driven by one simple principle, the low-cost player survives. The supply-chain type of consolidation is newer but may have bigger implications for the future. This consolidation is driven by a different principle, forging alliances to deliver better food products.
My testimony today will outline the two key questions that surround consolidation. First, what does it mean for U.S. agriculture and its participants? And, second, what issues does it pose for public policy?
Consolidation, as some members have already noted, is generally a positive trend for the U.S. economy. It leads to lower-priced, higher-quality food for consumers and a leaner, more competitive industry and global markets. That said, consolidation does highlight the need for farmers to be nimble and to adjust to new market realities. And perhaps most important, consolidation changes the geography and the nature of agriculture's impacts in rural America already beset by a league of other economic challenges, pointing to a make-or-break period ahead for many rural communities.
Page 15 PREV PAGE TOP OF DOC A pickup in voluntary farm exits in 1998 and mergers like Cargill-Continental are both part of a longstanding trend in U.S. agriculture. Decried by some and cheered by others, consolidation does have one clear economic impact; it lowers the cost of production by enabling the remaining farms and firms to capture more economies of scale. The farm exits that we saw in 1998, and which are likely to continue in 1999, are the companion to rising productivity.
Supply chain consolidation is quite a different matter. This trend describes the emergence of vertically coordinated supply chains that are typically forged by one dominant player. The broiler industry is a good example of fully-developed supply chains. A handful of firms now dominate broiler production, processing, and marketing, and they coordinate everything up and down the chain, from chicks to chicken strips.
Supply chains are bringing enormous change to agriculture, and their impact will grow in the next century. They change how agriculture does business by replacing spot markets with contracts. They change where agriculture does business by concentrating production near processing facilities. And they change who does business by concentrating production in the hands of savvy producers who can tightly manage production and negotiate alliances.
As supply chains become a more dominate structure, farmers face a simple test; build new relationships or be left out of the game. Those that do stand to reap new fields of opportunity in the new century.
The pork industry illustrates the powerful dynamics of both types of consolidation. Through a unique constellation of events, the pork industry is in a near-term crisis but is also at a long-run crossroads. The huge losses now piling up will lead to a wave of consolidation. But the emergence of supply chains may be the bigger force at work, leading to what some in the industry believe could be 40 or fewer dominate chains.
Perhaps the biggest, yet least understood, impact of the current wave of consolidation is that it holds strikingly different futures for rural America. Communities still tied to commodities will have fewer farms, fewer banks, and fewer businesses to keep their local economy vibrant. On the other hand, communities that hitch themselves to supply chains, have much brighter prospects but a very different local economy than in the past. These communities will benefit from the jobs and income that processing activity brings, but there may be fewer farmers, fewer suppliers, and fewer profits in the local area than in the past.
Page 16 PREV PAGE TOP OF DOC Notwithstanding these rural impacts, consolidation holds the promise of a more competitive industry bringing lower food prices to consumers and bigger exports to the Nation's trade balance. While consolidation will put strains on farm families and the communities in which they live, the economic forces behind it are so powerful and the benefits to consumers so substantial that it is neither possible nor desirable to legislate consolidation away.
Nevertheless, policymakers may want to pay particular attention to three policy issues that loom in the period ahead. First, the toll of consolidation on rural communities may lead some to want to slow the pace of agriculture consolidation. The best preventative will be efforts to restore growth in world food demand and, thus, boost U.S. exports and farm prices.
Second, the rise of supply chains will produce a new geography in U.S. agriculture andespecially in the case of livestock productionmay highlight the value of national environmental standards on which all can agree.
Third, and finally, consolidation will lead many rural communities to seek new engines of economic growth, pointing to the value of examining public policies likely to shape the outcome. These range from rural financial market issues, to telecommunications and infrastructure, to business assistance, to research and technology.
In closing, consolidation in U.S. agriculture brings into focus many policy issues in rural America. Many of these lie far afield of the traditional purview of this committee. Nevertheless, with no Federal rural policy to shape these decisions, this committee, I believe, is in a good position to both encourage and inform the debate on rural America's future.
Mr. Chairman, thank you very much, and I would be happy to address any questions at this time.
[The prepared statement of Mr. Drabenstott appears at the conclusion of the hearing.]
Page 17 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you very much.
Explain what you mean by supply chains.
Mr. DRABENSTOTT. A supply chain is a forging together of all the links in the food chain, from the input provider through the producer, through the processor, the handler, all the way through to the retailer.
Traditionally, we have thought of agricultural markets as being commodity markets where the producer produces something, takes it to market, leaves, and goes home with a check in his pocket, and the processor takes it on. Increasingly, what we find is that there is a much tighter coordination between the producer, the processor, and the retailer.
The forging of these links increasingly is done through contracts rather than relying on traditional spot markets. The net effect of this, as it has been in industries like the broiler industry, is that we now have very tight coordination of what chickens are produced, how they are produced, how they are processedall with the aim of bringing to market a food product that consumers find very attractive, both in terms of price and its characteristics.
The CHAIRMAN. We are seeing this in some of both ways, where you have got individual farmers that are totally self-owned, your processors and whateverbut through the process, what happens is that you go back to the producer and you contract for a specific type of an item that eventually makes it through the chain.
Are we also seeing where you got actual ownership through the entire chain, of someone who actually may own the input businessthe feed, in this casethat would actually own the production facility, that would actually own the processing facility, and the retailing facility, as well? Or, are some co-ownerships?
Mr. DRABENSTOTT. Yes; you do see both kinds. The farmer example that you cite, we would typically call vertical integration.
Page 18 PREV PAGE TOP OF DOC Where there is common ownership of all stages of productionprocessing, handling, and retailingthe more typical example is one in which you create and forge alliances through contracts that provide much greater specificity in terms of what is produced, how it is produced, and at what price the product changes hands. That is the more typical example that one sees in the pork industry today, for example.
The CHAIRMAN. Well, it seems to me what we are seeing is more and more of that, to that producer, who is, in fact, in that chain where there is a contracted price going on. Virtually, it is a guaranteeand as long as that is at an agreeable level in which that producer can make money. Maybe not, albeit, as much as they might if the market went up substantially, but if also the market fell, then they have got some protection.
To that producerand I think we all have them in our districts. We have people who produce corn for specific users and cattle and hogs and virtually everything else. But to that producer who is not part of that chain, then they are takingit would seem to me, it is much riskier because they are dependent upon whatever that market may be. And if you are fulfilling most of the market demand by the supply chain, then that producer, it seems to me, to be in a very uncomfortable position.
Mr. DRABENSTOTT. You are quite correct, Congressman, that supply chains are, in effect, a risk management strategy. They help to manage the risk of the processor, No. 1, in assuring them that they get a steady supply of the inputs they want. And No. 2, it also helpsand this is very important in today's consumer marketplaceit helps to assure that they get the right quality of product that they want.
For the producer, the risk management comes in the form of having a price agreed to up front. And so long as that is negotiated in such a way that the producer is able to achieve his long-run profit objectives, then, clearly, that producer has a risk management strategy that someone producing for the commodity market does not.
Page 19 PREV PAGE TOP OF DOC The CHAIRMAN. All right. During the dramatic decline in the pork process of the last quarter of 1998, considerable criticism was made regarding the tremendous spread between the retail price and prices that were received by producers. Does consolidation in the livestock sector help or hinder the market signals that should occur between consumers and producers?
Mr. DRABENSTOTT. There is no easy answer to that question. However, in general, I believe the evidence, to date, would suggest that the consolidation has largely resulted in greater economies of scale for the packers, and those have generally resulted in lower food prices to consumers. All of that said, there is a point at which, in any industry, where if you get too much consolidation, and the market players that remain have sufficient power and can exercise that power, one could imagine a circumstance in which profits rise for the packers without any benefit to either consumers or producers.
I don't think the fourth quarter pork price collapse is evidence of that taking place. I think what happened in the pork industry was that we simply had too many pigs chasing too few slaughter facilities. And now that we have seen some fallback in the number of hogs going to slaughter, we have already seen a substantial bump up in pork prices, albeit not yet to levels where many producers are turning profits.
The CHAIRMAN. Thank you very much, sir.
Mr. MINGE. Welcome to Washington.
Mr. DRABENSTOTT. Thank you.
Mr. MINGE. I appreciate the analysis that you provided us and the work that you and the Federal Reserve Bank at Kansas City are doing.
I would like to read a couple of statements from a report called ''Concentration in Agriculture,'' that was done by a USDA advisory committee and was printed in 1996. And the first is as follows Distrust is fueled by the great and increasing concentration in the meat packing industry. Every major antitrust law has been a result of packer concentration, and the previous levels of concentration which spawn governmental action were much lower than those that exist now
Page 20 PREV PAGE TOP OF DOC Meaning the 1990's.
While the pursuit of efficiency can lead to concentrated industries, competition may ultimately be sacrificed. Competition, in the long run, is more important than efficiency in the short run. Left unchecked, single-minded pursuit of efficiency can lead to concentration and market power that first destroys competition and then efficiency, itself.
That, to me, was a fairly powerful commentary on the risks that we face in concentration and an observation that historically what we see is much greater today than what led to the Sherman Act, the Clayton Antitrust Act, some of the landmark antitrust prosecutions in the early part of this century.
And I am interested in your observations on that interplay between competition, efficiency, and concentration. Would you basically agree with it?
Mr. DRABENSTOTT. I think that in answering that question, Congressman, it is very important to define what one means by a ''market.'' There are many analysts who are looking, for example, at four-firm concentration ratios in the beef packing industry. Others would cite the four-firm concentration ratio in the pork packing industry.
If you talked to retailers, they will tell you that if one is thinking about consumer demand for beef, that is really too narrow a concept of a market, that you have to think about consumer demand for protein. And that when consumers walk down the meat case aisle, they are interested in the relative price of beef compared to chicken, chicken compared to beef, and, for some consumers, yogurt and cheese enter the mix.
So, I think it is important to ask; do we still have competitive markets, and how does one define those markets?
What is different, I think, from the turn of the century is that I think it is much harder to find exercise of market power today than it was at the turn of the century. And I think it is far easier today to see the benefits of economies of scale being passed along to consumers. There has been a steady decline in the percentage of disposable income that the American consumer is spending on food. And, so long as that continues to be the case while, in theory, we might say there is the opportunity for the exercise of market power, it is difficult to make the case from the point of view of the consumer, I believe.
Page 21 PREV PAGE TOP OF DOC Mr. MINGE. One concern that has been expressed in this committeeand there was a hearing yesterday as wellis that there is an imbalance of power when you have concentration and especially when you have integration. And that if you take the red meat industry, again, that transportation costs would dictate that you not try to be shipping your livestock more than 150 miles. You begin to incur costs there that place you, as a producer, at a competitive disadvantage. And when you have one or two packing plants that dominate a radius of 100 miles, that places those people sellingespecially into the spot marketat a competitive disadvantage, and those that wish to contract at a disadvantage because they are many of them and one or perhaps two on the purchasers side. And that this provides an opportunity to both use and abuse market power, as this report states.
And I am wondering if you work with hogs or otherwise there at the Federal Reserve, and your study on rural economics, if you have any observations on that?
Mr. DRABENSTOTT. The concern you raise, I believe, is a valid one. That said, I think there are some market innovations that are helping to mitigate that concern. For example, television markets for the selling of beef cattle are at work in parts of the U.S. Westin many parts, in fact. That has helped to provide producers with another place to sell their beef.
The other issue that I think becomes very important in this discussion is the role of producer cooperatives. In the beef industry, one of the four firms that is the biggestranks among the biggest firmsis owned by a cooperative; National Beef. That, I think, becomes a very important part of the competition that one sees in the marketplace to ensure that producers have a means of forging an alliance amongst themselves and, thus, creating a certain counterweight to the other players in the market. I think it is very important from a public policy point of view think long and hard about the role that cooperatives may have in maintaining market access for producers.
Page 22 PREV PAGE TOP OF DOC Mr. MINGE. Thank you.
The CHAIRMAN. Mr. Lucas of Oklahoma.
Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman.
I couldn't help but note, Mark, in your section of your written testimony, about the geography of consolidation. You refer to my own State of Oklahoma as an example of some of the dramatic changes, the huge growth in the hog industry. Clearly, having served not only in this body for, I guess, 4 1/2 years, but having served in the State legislature there prior to that for 5 1/2 years, I have observed firsthand as we have gone from a few hundred thousand hogs 5 years ago, to a few 100,000 plus 2 million hogs today, mainly in western and northwestern Oklahoma, which has had a dramatic effect on a good many things in the northwest. And, ironically, part of what drove that change was, yes, the economics of the situation, but also political decisions. Because in 1991, the legislature, then, in a bill that I and five of my colleagues voted against and the Governor at that time supported, changed some of what were, at that point, the most rigid anti-corporate farming laws in the world, in the spirit of attempting to bring the poultry and hog industry people over from Arkansas into Oklahoma, in the spirit and name of economic development. And, instead, what happened, of course, they jumped on over to western Oklahoma and made the dramatic changes that we have seen.
I guess my question for you is; in the cases that you have studies out and observed, how many of these kind of considerations have taken place? Political decisions or actions by State or local Government that have created circumstances that have impacted things, perhaps as much as or more than the overall economics of the situation?
Mr. DRABENSTOTT. As the pork industry has undergone its dramatic changes in recent years, environmental issues have clearly risen in the list of things that firms consider when they decide where to locate. There is no question of that. I think that if you look at where the pork industry is headed, given the economies of scale that are there to be captured and the local impact that a operation of that scale can have, the industry is clearly going to move where it is welcome.
Page 23 PREV PAGE TOP OF DOC Have States and local communities made changes in their local laws to attract it or to deter it? I think there is no question they have. In an article that we published recently, it is clear that you find a patchwork of environmental regulations throughout the Nation, some of which the pork industry finds attractive, some of which it doesn't. I think it highlights this issue of: Do we need national environmental standards on which all can agree, including the industry? If we don't have uniform regulations, the industry is going to trade one set of regulations off against another. And, increasingly, that decision, in my opinion, will not happen only between States, it will also happen across borders.
Mr. LUCAS of Oklahoma. By the same token, if a region or a community or a State would determine that, by policy, they would prefer not to engage in these efforts, would the national standard, in effect, even the playing field and take away the ability, perhaps, of a particular region or community to, shall we say, not participate?
Mr. DRABENSTOTT. I think most parties would view national standards as a threshold, as a floor, above which local communities could enact higher limits, if they so chose. And in that respect, having a national standard might, in fact, put the decision at the local level where, perhaps, it may belong.
Mr. LUCAS of Oklahoma. With these issues, as industries like the hog industry has grown and moved to different geographical regions, what have the impacts been? Have the traditional hog-growing areas continued to raise large numbers of hogs? Have we seen the production shift from one region to another? What kind of a background do you have on that?
Mr. DRABENSTOTT. Well, Iowa has been an important pork State for a long time, for as long as they have been growing corn, I suppose, and they continue to be a very important pork State. However, if you look at where the growth in the industry has occurred, the growth has really happened elsewhere in the country; first, in the southeast in the 1980's and more recently in States like yours, and even further west.
Page 24 PREV PAGE TOP OF DOC So, the geography clearly has shifted. I think the southeast has probably topped out. But I think one sees the opportunity for bigger expansion in places like the Great Plains, simply because you have a lower density of population. You have communities that are, perhaps, more eager to find new sources of economic growth. And, quite frankly, I think in some of the Corn Belt States, they haven't quite decided how much of the pork industries' future they want.
Mr. LUCAS of Oklahoma. And in those Corn Belt States, has their overall production levels maintained some level of general consistency for the last 20 years?
Mr. DRABENSTOTT. I don't have all the numbers with me, Congressman, but I think Iowa has probably held its own. Some of the eastern Corn Belt States have probably seen some decline, States like my home State of Indiana.
Mr. LUCAS of Oklahoma. So there has been some shift, then?
Mr. DRABENSTOTT. Yes.
Mr. LUCAS of Oklahoma. Thank you, sir.
Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Walden.
Mr. WALDEN. Thank you, Mr. Chairman.
I was just reading through your testimony, and on page 4, I noticed you said without any doubt, consolidation leaves some farmers and some companies behind to find new economic futures. Now, where I come from, that would be defined as ''going broke.'' And I guess as I go through this and hear from the folks at home about their concerns. They feel a bit like the trapped wild animal in the corner and don't quite know where to strike out to get away from this feeling of going broke.
And I am curious on two fronts: one, how much should they really be worried about consolidation? And, two, I noticed in your conclusions, that your consensus is that we ought to be at looking expanding markets overseas, which I fully am in agreement with. What recommendations would you have for us on this committee to effective open up those markets, given currency issues, given the problems in Asia?
Page 25 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. How much should producers be concerned? Well, obviously, that depends on what prices are going to be in the period ahead. I am one who thinks that we will probably have a relatively weak marketby relative, I mean relative to the mid1990's which were especially strong. I think we will have relatively weak prices over the next couple of years until we see a resurgence of growth in world demand.
I would hasten to add to all of that, however, that consolidation in agriculture is really not new. We have seen people backed into a corner going broketo use your phrasefor the last 60 years. It has been the companion, as I say in my testimony, to a rising tide of productivity. Is that good? Is it bad? One could debate that from a rural economic point of view. But it is an economic reality, and I think that it raises two issues for public policymakers. No. 1, I think in a period like this, it puts an added emphasis on attempts to restore market growth in world markets; and, second, I think it highlights, once again, how we help people make the transition out of agriculture and into something else.
Yes, perhaps, for some that comes about only through the painful reality of going broke. For others, it is a voluntary decision. I would add that in 1998, one of the most interesting things that I saw on the farm landscape was a substantial increase in voluntary farm exits. These were people who weren't selling because the banker said you have to. These were people who said ''You know, this just isn't working, and it is time to do something else.''
I think this really calls into question how Congress looks at the overall issue of rural economic growth, and how we help communities and peopleand these call for different policies. Communities and people find new economic engines. And I think it would be prudent for Congress to think about ways to make investments now that will help ease that transition in the period ahead.
With respect to your question on trade, I think the focus falls ever more on the issue of fast track and the need that we have to achieve even greater growth in trade, not just in agriculture, but in all the other categories. I think the Free Trade Area of the Americas is an idea that has a great potential for U.S. agriculture, but obviously is one that is going to be seriously hampered without fast track.
Page 26 PREV PAGE TOP OF DOC The legacy of the Uruguay Round of GATT negotiations shows that agriculture was a very substantial beneficiary of the progress marked, not just in the agricultural side of the agreement, but in the 14 other categories as well.
The biggest benefit agriculture has going for it in world trade, is that in many countries, every new dollar of incomeand in most cases, that extra dollar is only going to come about through tradeevery new dollar of income, 30 to 40 cents of new spending on food.
Mr. WALDEN. Thank you.
The CHAIRMAN. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Chairman.
Thank you, Mr. Drabenstott, for being here today and all the terrific work that you have done in the past and on the articles that I had the opportunity to read that you have authored.
We had Keith Collins up yesterday, and we talked about some of these same issues and as it related to concentration and the impact that it might have on producer prices. We talked at length about the captive supply issue and whether or not forward contracting was, in fact, thinning the spot market cash market to the point where it was creating a situation where that spot price might not be reflecting what true supply and demand conditions were, the artificial influence on that. He said in their studies that they have done, in terms of trying to define a correlation that was not consistent with what we would expect between contract price and the spot price that the results were ambiguous at best and that they didn't see any real influence in prices because of that captive supply issue.
Have you found anything contrary to that?
Mr. DRABENSTOTT. Congressman, I haven't done any specific empirical studies on that question. In general, the issue for a producer in an industry in which a growing portion of sales are with supply chains and under contract is this: Do they get left on the outside looking in? Or, do they become part of the game? The reality is, whether you are talking about the United States, or Europe, or many other parts of the world, producers need to find ways to create a cooperative alliance amongst themselves to either become part of a supply chain or to integrate a supply chain of their own. Increasingly, that will be a very important question for producers to address.
Page 27 PREV PAGE TOP OF DOC Mr. DOOLEY. And you cited National Beefand we had Farmland that spoke yesterday, which are, obviously, two excellent examples of co-ops that are maintainingwell, increasingmarket share, I guess, in many incidences in the livestock sector. They are almost at the size now that we are not seeing returns that they are generating or prices that their producers are receiving for product that they are deliver that are in any way all that muchor significantly or statistically different than what Cargill, ConAgra, or anyone else is providing to producers; right?
Mr. DRABENSTOTT. I think that suggests that it is a pretty competitive marketplace.
Mr. DOOLEY. Exactly. And that is where I get to this point that what I am a little bit concerned is, is that you know there are some folks that are making proposals to try to deal with this concentration that could, in fact, I guess, limit the efficiencies that we might gain in this sector. And, as you stated, our greatest market opportunities are international, in terms of market growth and potential. And, clearly, we have to be careful that in order that we maintain our position as being one of the low-cost competitors internationally where our greatest market opportunities lie, that placing policies in place which unduly impede a movement towards concentration, you know, some movement towards concentration which are driven primarily by efficiencies. I mean, is that not a danger that we ought to be concerned with on this committee?
Mr. DRABENSTOTT. Well, I think, in general, policymakers are a little bit like doctors; they need first to abide by the principle that they do no harm. But if I may make a general comment on your question, I think that we have to recognize one of the things that is going on in U.S. agriculture is this: Most agriculture producers are in the commodity business, and they have been for a long time. Moreover, I would argue one of the reasons they are in the commodity business is that we had commodity programs for a long time. Commodity prices have been falling through most of the 20th century, and they have fallen recently. Meanwhile, the price of value-added food products has risen. The trade in value-added food products has risen.
Page 28 PREV PAGE TOP OF DOC One of the basic issues facing American farmers today is this: How do they grab a bigger piece of the action? How do they capture a bigger piece of that value-added pie? Some of them are doing it through supply chains; some of them are doing it through niche markets. But whatever approach they take, I think it is going to be very important that farmers increasingly view themselves as being in the food business, rather than being in the commodity business.
Mr. DOOLEY. I couldn't agree with you more on that.
We are seeing consolidation in the processing side, but we are also seeing significant consolidation on the retail side of it. What impact, if anywith that consolidation of the retail sector, is that having any significant impact on producer prices? Or, is it so competitive now that it really doesn't provide any real opportunity for distortion in market prices?
Mr. DRABENSTOTT. This is something of an empirical puzzle to economists, in general. In beef and pork, for example, there has been a decline in real prices to the farmer. There has also been a decline in wholesale prices to the wholesaler, but there has been less of a decline to the retailer. Does that suggest that we have an exercise of market power on the part of the retailers? In a broad review of this whole area, most of the people that have done research on food retailing conclude that it is very difficult to show that we have an exercise of power by the retailers. Food retailers typically say that they have very little price power in the marketplace, that it is a very competitive marketplace and that they have a number of different sources of supply. Professor Jean Kinsey, at the University of Minnesota has written a very good review of this overall topic if you are interested. I would recommend it, and the overall she reaches is that it is hard to pinpoint an exercise of market power on the part of food retailers.
The CHAIRMAN. Mr. Smith.
Page 29 PREV PAGE TOP OF DOC Mr. SMITH. Thank you, Mr. Chairman.
I suspect, Mark, if we jump from where we were 20 years to where we are today, the agricultural community and all the farm organizations would be up in arms about antitrust and monopoly power. And I guess the evaluation in this long continuum or evolution or whatever we are undergoing, in terms of moving in closer and closer to that kind of monopoly control, and that is whether it is concentration in the people that buy the products from the farmers, or the concentration in those businesses that sell to the farmers or whether it is the lack of choice of where you can deliver your grain in many areas now, as there is simply one seller for a lot of farmers, at least in the Midwest, that deliver to.
At what point do we become concerned that the concentration has gone so far that the lack of choice is something that Congress and this country should address?
That is a broad question; you can give me an hour answer or
Mr. DRABENSTOTT. Well, we have until 2:00 o'clock, I believe the chairman said. [Laughter.]
Well, that is a tough call. It is a tough call for economists; it is a tough call for policymakers.
For economists, it is tough because it is very hard to answer this question empirically. With four firms controlling 80 percent of the market, answer this question. Would prices have been higher to producers if we had five firms with 60 percent of the market? It is very hard to answer that question.
From a public policy point of view, it is also very hard to answer the question: Is rural America better off or worse off with the consolidation that we have?
Moving forward into the 21st century, one has to be a little bit more pragmatic. I think one has to ask the USDA and other regulatory agencies to be on the watch for the exercise of market power. It is prudent for policymakers to asks: Do we find evidence of the exercise of market power, either in producer markets or in consumer markets?
Page 30 PREV PAGE TOP OF DOC But overarching that, I think the policymaker has to say ''Is our society, as a whole, better off with the consolidation we are seeing than without it?''
Mr. SMITH. Well, I hate to interrupt, but it seems to me that maybe part of the answer to that question is answering the other question. Is our country better off with fewer and fewer family farms, as we look at the concentration and the pressure on those farms?
I want you to react to a couple other questions, too. In terms of our area of the seventh district of the southern part of Michigan, our farmers have less choice of where they, for example, deliver their grain now. And you compound that problem with the decision of the Chicago Board of Trade to limit delivery points down in Toledo, so we are losing our ability to really hedge, in terms of farmers delivering and taking delivery, as a protection to bringing thosemake sure that the real market is there with the Chicago Board of Trade as we make those hedges. Are you concerned about the Chicago Board of Trade becoming more and more efficient as they limit the delivery points?
And, the other question you might react toand I won't ask any more is the financing. Are banks more and more apt to turn down the financing for that small farm that isn't part of that vertical integration, that isn't organized, and simply limit their lending to the more secure concentrated farmers?
Mr. DRABENSTOTT. If I may, let me answer the last question you posed, because that is the one on which I can provide more insight, based on my own experience and research.
I think that most rural lenders are very sensitive to the issue of the small farmer. I think they view them as a valuable part of the local economy and the social fabric of the local community. The reality is, throughout most of the Nation, that small-scale farmers get most of their income from off-farm sources. And that off-farm source of income is a very essential part of the calculus when the lender does his homework and makes his decision. That only underscores, I think, the point I am trying to make in my testimony, that we look very seriously at the broader issue of rural economic development and the public policies that shape that outcome, because for a growing portion of American agriculture, where they get those other dollars of income off the farm increasingly is far more important than the price of the commodity they produce. Now, that may be good; it may be bad, but it is a reality. And I think that the real question becomes; how do we find new economic engines for communities that have traditionally been dependent on a large number of commodity producers?
Page 31 PREV PAGE TOP OF DOC Mr. SMITH. Any reaction to the closing down, in terms of the hedging and reducing risk management?
Mr. DRABENSTOTT. I really am not expert on the whole issue of delivery. There are a number of economists who have specialized in that particular issue, so I would defer to their judgment on that one.
Mr. SMITH. Mr. Chairman, thank you.
The CHAIRMAN. Thank you, Mr. Smith.
Mr. GUTKNECHT. Thank you, Mr. Chairman. And I want to thank you especially for holding these hearings. I really do believe of all the issues we need to wrestle with in this committee, this is including one of the most important, and because it transcends a lot of issues.
Mr. Drabenstott, I certainly agree with your analysis. I don't completely agree with your conclusions. I come at this issue, I think, a little more like Teddy Roosevelt than perhaps you do in that. And I have really deep concerns. Part of the reason is, I have been in the auction business, and I know that you can have a lot better auction if you have more buyers and bidders than if you fewer buyers and bidders. And I am afraid that we are into a situation now where this consolidation has reached a point where it is a grave public policy concern. And I know, for examplewell, the example that was alluded to earlier. The northern Illinois River is the location for delivery against Chicago Board of Trade contracts, or at least it will be next year. Cargill-Continental and Archer Daniels Midland will, together, control about 80 percent of the barge-loading capacity after that acquisition, assuming the acquisition goes forward.
I don't see how, from a public policy standpoint, we avoid at least a potential ''occasion of sin'' as some theology sayswhen you have that much concentration in that few hands. And I understand efficiencies, but I think you reach some point where the tradeoff is simply too great.
Page 32 PREV PAGE TOP OF DOC Do you care to respond to that?
Mr. DRABENSTOTT. In answering that question, one has to ask is there evidence that market power has been exercised? Is there evidence that producers could have received higher prices at other parts of the Grain Belt, where there were more buyers in effect? I think the people who have looked at this issue have generally concluded that evidence of the exercise in market power is hard to come by.
Mr. GUTKNECHT. So your basic conclusion, then, is from a public policy standpoint, we should wait until a crime has been committed, rather than trying to create safer neighborhoods to prevent that crime in the first place?
Mr. DRABENSTOTT. I am not sure I would agree with your characterization that we have a crime-ridden neighborhood. [Laughter.]
Mr. GUTKNECHT. But my point is that is the difference between the two viewpoints.
Let me also ask you about transparency and mandatory price reporting. And this also goes back to the basic notionit seems to me there are people on this committee and people in Congress who think that we have a responsibility to guarantee the people a profit, and I, frankly, don't think we can do that. In fact, I am not even certain that is a good idea, because I think we are moving towards a market-oriented agriculture more and more every day whether we like it or not.
But it does seem to me that the Federal Government, this body, the United States Congress does have a role in terms of creating or policing orderly markets. And, in terms of mandatory price reportingyou touched on it just brieflybut it does strike me that we do need some transparency.
And let me compare this, for example, to the New York Stock Exchange or even the Chicago Board of Trade. Particularly, the New York Stock Exchange where virtually every trade is reported, and you can see online, second by second, when stocks trade hands and what the price was. We really don't have that, at least in the livestock industry today. And I am wondering what your view of the whole issue of mandatory price reporting would be.
Page 33 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. This is a very hard question to answer for the following reason. If we talk about Wal-Mart, Wal-Mart is, to a considerable degree, a supply chain. Every time you buy a bar of soap and it goes across the scanner, that places an order with the company that produced the soap. It also probably informs the transportation company that they have got another bar of soap coming onto their truck some time soon. We, as a public, have chosen not to ask Wal-Mart and the supplier of the soap, what price for soap they agreed to sell between themselves.
Similarly, General Motors is a supply chain. They have a variety of suppliers that provide them with auto parts on a ''just-in-time'' basis. They reach agreements with those suppliers on the price at which they will exchange GM's check for a car seat, for instance.
Now, as a public policy, should we know the price of that bar of soap and the price of that car seat? I think we would generally agree that that is a different matter than exchanging 100 shares of AT&T stock. But what is happening in agriculture, I would submit, is a lot more like the Wal-Mart soap and the GM car seat than it is 100 shares of AT&T stock.
And, for myself, the big question in the next century is this: Are we going to have producers organized in a fashion that they have sufficient clout to negotiate effectively with the Wal-Mart or with GM? In some cases, producers are, in effect, creating their own supply chain. One could argue that that is, in fact, the corporate strategy of Farmland Industries. And, in that way, they are trying to counterbalance the Wal-Marts and the GMs of the world. So, I would come at it, I think, a slightly different way than, perhaps, you might.
Mr. GUTKNECHT. Well, I would come back to my introductory remarks. I mean I agree with your analysis; I don't necessarily completely agree with your conclusions.
My time has expired. Thank you, Mr. Chairman.
Page 34 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you, Mr. Gutknecht.
Mr. MORAN. Mr. Drabenstott, a couple of questions come to my mind, just in your responses to other people's questions. You were asked earlier about the lack of decline in retail prices as we see commodity prices decreased. And, you indicated that there was no evidence of market power in the retail chain of providing groceries across the country. What is the explanation? If that is not that, why do we see at least what appears to be low commodity prices and, yet, rather slow declining prices at retail?
Mr. DRABENSTOTT. One has to remember that retail food prices are the combination of the price of the underlying commodity and a whole bunch of other stuff, including transportation, processing, marketing, the services that go into the sell and delivery of those products. I think this is a question worth asking of the economics community to provide a better explanation. But, again, if you look at the broadest reviews of the whole issue of whether or not there is long-standing evidence of the exercise of market power in the retail food market, the best reviews that I have read would suggest that, while there may be some slight indication, that is hard to counterbalance with the fact that consumers are spending a smaller share of their income on food over time.
Mr. MORAN. So, the ballpark answer is there are so many other factors that go into the retail price of food, so many more than just the commodity price?
Mr. DRABENSTOTT. Correct. And to put it another way, if we thought there were monopoly powers at work in the retail food market, one would expect to see exorbitant profits on the part of food retailers. Yet when you look at food retailers, compared with many other segments of the U.S. economy, it is hard to argue that their profits are substantially higher than those of other segments of the economy.
Mr. MORAN. You indicate that consolidation occurs in kind of two distinct types. You indicate cost savings and supply chain. In the supply chain, how far along are we in the agriculture economy toward where supply chain is dominant? Is that the case? Is that a few years away? Are we already there?
Page 35 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. It is happening at different rates of speed for different segments of the industry. Broilers are already there; turkeys are there; vegetables are a long way there. Sort of the last bastions of commodity production are many of the grain commodities. However, as one looks forward and you look at the special-use grains that are in the pipeline, I would argue that many of those will come to market only through supply-chain development.
Characterized another way, we still have a sea of commodities, but we have a growing number of islands of specialized production, and those islands are not only becoming more numerous, they are also getting bigger.
Mr. MORAN. In the areas and the sectors where the supply chain is dominant, do we see increasing a profitability for producers?
Mr. DRABENSTOTT. I think that would depend on which segment you are looking at. In the case of vegetables, there are many vegetable growers, I think, who have done very well. In the case of the broiler industry, there would be many who would suggest that producers have not done as well.
Mr. MORAN. Would one be able to expect increasing profits to producers as a result of the movement toward supply-chain economics?
Mr. DRABENSTOTT. Not necessarily. There are many models of the emergence of supply chains. In Europe, most supply chains are dominated by the retailer. In the United States, it has typically been the processor. In some parts of Europe you find producers being the integrator. So, it depends on really which model you pick, the type of product they are selling to the consumer, what the margin is in the production of that. There are a lot of things to consider.
Mr. MORAN. So we cannot necessarily assume, as this trend plays out, that there is more on-the-farm profitability by those who are participating?
Page 36 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. I think a very important piece of the puzzle that will answer your question is the extent to which producers have strong cooperative alliances that enable them to be effective negotiators in the process.
Mr. MORAN. So, once again, it comes down to entrepreneurial, managerial, the talents of that individual producer and their ability to participate in the proper way?
Mr. DRABENSTOTT. In the past, we have tended to think that a farmer's profit depends on his or her being a great producer. In the future, I believe the profit that a farmer earns will depend very heavily on their ability to negotiate alliances. Those are two very different skills.
Mr. MORAN. Let me ask a question. You indicate that, in order to prolong the life of the farmer today, that trade is awfully important. That is an opportunity we have, and certainly many, if not all of us, agree with that concept. What percentage of the problem with trade is related to, for example, sanctions and trade barriers? Is there a way to define what the level of hurdles are we have to overcome? If, tomorrow, we would pass legislation eliminating all trade barriers and sanctions, does that increase the market opportunities significantly? What role does that problem play?
Mr. DRABENSTOTT. I don't have any empirical research to provide a definitive answer, Congressman. In general, however, I think that the lifting of trade sanctions would probably have a marginal impact. The bigger driver is the economic growth problems that we see in many parts of the world.
Mr. MORAN. I assume you tell me those need to be reduced and eliminated for the time when those economic conditions are improved?
Mr. DRABENSTOTT. As I said earlier, the biggest thing agriculture has going in the international arena is the fact that, in many countries, a new dollar of income generates 30 or 40 cents of new spending on food.
Page 37 PREV PAGE TOP OF DOC Mr. MORAN. Mr. Chairman, thank you for my time.
The CHAIRMAN. Thank you very much.
Mr. HAYES. Thank you, Mr. Chairman.
In following up on the line of questioning that has been alluded to by a number of membersMr. Gutknecht in particularI have a real concern about the human element that underlies a much of what farming is all about.
We were in a hearing in our district in North Carolina 2 weeks ago, and we were on a dairy farm. And this was the third generationan 18-year-old young man who wanted to farm. Given the problems of farming and the difficulty they face, you wonder why. But once we lose that commitment, that element of connection between the land, then we are losing the environmental concern; we lose a person. I don't think science can ever replace that sense within a farmer: ''This is something that I love to do.'' I am concerned greatly about that.
I would like for you to touch on that from the standpoint of consolidationand I agree with your thesis, but not the conclusion it produces lower prices now. But as we get away from the human element, what is going to happen a little further downstream when we don't have that personal involvement?
I read a little story last night, and if you will indulge me for a moment. The boll weevil from Texas moved toward Alabama years ago. George Washington Carver developed the peanut. It was a person that wasn't a computer that came up with all these multiple uses for peanuts. And how are we going to develop an alternative for the desire, the commitment, and the love for farming that we have personally, that is being washed away with the whole consolidation effort?
Mr. DRABENSTOTT. Well, Congressman, as a farm boy from Indiana, I have a great deal of sympathy for people who are earning a living on the land.
Page 38 PREV PAGE TOP OF DOC I think it would be incorrect to conclude that the consolidation underway means the total end of family farms in the United States. To be sure, most of the consolidation underway at the production level is consolidation among farm families. And what we are seeing is exactly what we have seen for 60 years or more, and that is the passage of farm assets from the weak to the strong. Most farm production assets in this country are still in the hands of families. They may be subchapter S corporations; they may be partnerships; they may be single proprietorships, but most of them are family-run businesses. All of that said, they are increasingly much bigger family-run businesses than I was accustomed to when I was growing up on a farm in Indiana, when a farmer of 500 acres was considered a very large operation, but, today, would probably be considered a small operation.
I believe there will be a great opportunity for a new generation of producers to enter in the 21st century. We are going to have a lot of turnover in farm assets in the next 10 years, simply because of a generational issue. We have a substantial cohort of farmers that are reaching their late 50's, into their 60's, and those people are going to be turning over their assets. Now the question is, turning them over to whom? Increasingly, the answer is going to be very savvy individuals who are well equipped to handle the kind of economic environment we have been talking about this morning.
Mr. HAYES. Well, that is a very good point, and there seems to be a very strong bipartisan effort underway. Again, to respond to Congressman Gutknecht's concern, to help with the tax problem that occurs when the generation turns over so that the family farm can stay within the family.
But one more time back to how do we keep the human element involved? The farmers that I listen to every time I am in the district, they are not asking for protection; they are not asking for special treatment. But, what can we do as an agriculture committee, and as a Congress, to help give them access to markets and to keep them in a position so that they can be competitive and stay on the farm?
Page 39 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. As I have stated earlier, I think a critical question moving forward is fast track and the ability of out Nation's trade negotiators to strike new deals that will expand trade worldwide, expand economic growth worldwide. And, as I have said on a number of occasions this morning, that is the single biggest driver that will grow demand and lift prices here in the United States.
Mr. HAYES. I will agree with you on being better trade negotiators. I am not too sure about fast track, yet. Thank you very much. [Laughter.]
The CHAIRMAN. Mr. Boehner.
Mr. BOEHNER. Thank you for coming and bringing what I think has been very interesting testimony to the committee.
As we all have concerns and our constituents have concerns about consolidation in the agriculture industryand we have talked an awful lot about it todaythe agriculture industry, in and of itself, is not an island. I mean we have got other industries in the United States, and do we see any more or less concentration or consolidation in agriculture than we have seen in other industries?
Mr. DRABENSTOTT. I think the short answer is no. I think what is happening in agriculture is very much akin to what we see happening in other industries. It has proceeded at different paces, different rates in various industries. In some respects, I think one could argue that Federal policy in agriculture probably has slowed down some of the consolidation over time. But, if you look at what is happening in the 1990's, what is happening in agriculture is not at all unique from what is happening in other segments of the U.S. economy.
Mr. BOEHNER. As we look at market concentration in the United States, how would it stack up with the international market and other countries around the world?
Mr. DRABENSTOTT. I can't cite you specific numbers right now, Congressman, but certainly if one looks at Europe, you will find the same kind of supply-chain phenomenon occurring there that we see occurring in the United States. What tends to differentiate Europe is that the supply chains tend to be driven by the food retailers, the Sainsburys of the world, for example.
Page 40 PREV PAGE TOP OF DOC It is clear, I think, that the Common Agricultural Policy of the European Union has led to more small producers staying on the farm in Europe than has been the case in the United States. And the flip side of that coin has been that they have tended to have higher food prices in Europe than have we.
Mr. BOEHNER. Thank you.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.
Mrs. CHENOWETH. Thank you, Mr. Chairman.
Mr. Drabenstott, I am a farm girl from Kansas, and Ialthough I represent IdahoI have got to tell you I am very alarmed at the testimony that I am hearing today and the testimony I heard yesterday.
I think that my colleagues have addressed the concerns of the family farm quite eloquently, and I won't repeat what they have said. But, listen, these concerns, it ought to be quite notable to you and other people who will be testifying, these concerns are coming from the Republican-side of the aisle, too, and they have reached this level. And we are not passive about it.
I have become increasingly concerned and disturbed with the high levels of corporate concentration. I just heard today that Cargill is planning to buy the grain operations of Continental. And that presents more problems resulting to agricultural producers, rural communities, and consumers.
Today, the increased concentration of capital resources and increased concentration of control of the world's food supply has led to the decline of the family farm that we are so concerned about. It goes beyond science; it goes beyond economics. It is part of what has made America great.
Page 41 PREV PAGE TOP OF DOC In fact, today, just in your backyard, there is a modern-day David and Goliath battle that has developed with Mr. Callicrate, a northwest Kansas feedlot operatorand I am sure you are aware of thisand the meat packing industry. Specifically, Callicrate Feedyard of St. Francis, KS, has officially filed a complaint alleging unfair pricing practices, intimidation, and a virtual boycott of its operations by the major meat packers. And we are watching that case very, very closely. Mr. Callicrate says that over the last 3 years since he began speaking out against packer concentration and the formula pricing, as well as the bidding practices of the major packers, his company has received lower bids from the major buyers, sometimes receiving what he calls ''bids not to buy'' end quote.
It is easy to understand Mr. Callicrate's concerns when many producers are currently finding it hard to make ends meet while the packers turned in record profits in the last quarter in 1998. Clearly, the money is going somewhere, and the producers seem to be left out in this picture. It is not a happy picture, sir.
And, yesterday, we heard very interesting answers that came from some of the major companies about why certain information on pricing cannot be made available to the producers at certain given times. And it appeared to me to be almost planned chaos. We heard answers such as, ''Well, there is notwe can't package alike. And beside that, we may have to deal with 25,000 different pieces of information to be able to open up the marketplace to information regarding pricing practices at any given moment.''
You know, from your business, that in order to run a successful business, you have got to have all the information you can have. And what I heard yesterday did sound manipulative. What I heard yesterday did sound predatory. And the growers are on the small-and the short-end of this whole stick.
I am a free marketer; that is the genesis of my work here in this Congress. But the free market can't work unless everyone has equal access to information, and we are not seeing that.
Page 42 PREV PAGE TOP OF DOC America used to be the world's food basket. And now Americajudging from your testimony and testimony we heard yesterdayis being viewed for the future as the world's consumer. But, Mr. Chairman and Mr. Drabenstott, we cannot continue being the world's consumer if we cannot produce first.
I have got to say that we have heard in past generations similar testimony, similar statements; one by John D. Rockefeller, who said he would control the world's oil resources. And, you know, he could do it because he had control of all the refineries until this body stepped in.
And I am saying I don't believe that Government can be the solution to problems, but we are in a difficult situation right now, the concentration of information and huge mergers and concentration of the world's food supply.
I see my time is up.
I don't believe, necessarily, that future farmers are not really very, very sadly individuals. I believe, today, the farmers are very sadly, or they couldn't survive what they have had to survive.
I say this not to lecture you, sir; I am saying it because that is where the rubber meets the road as far as we are concerned. It is a deeply-held concern.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you.
I have got a lot of independent oil producers in my district, and at $9 a barrel, they wish Mr. Rockefeller had control of all of the energy resources. [Laughter.]
Mr. BARRETT. Thank you, Mr. Chairman.
Mark, I really appreciate your testimony today. I thank you for being here. I especially appreciated your written testimony which I did read this morning.
Page 43 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. Thank you, Mr. Barrett.
Mr. BARRETT. Of course, at 7 o'clock in the morning, it wasn't the most stimulating or exciting reading, perhaps. [Laughter.]
But I think you addressed this issue in a very interesting way and a very straightforward way and with recognition that it is a very complex issue.
I think if I can, perhaps, suggest to you that it seemed to me in the written testimony that you attempted to say that limiting consolidation through legislation would be extremely expensive and, perhaps, absolutely impossible to achieve.
Now, is that a fair generalization or not?
Mr. DRABENSTOTT. Yes.
Mr. BARRETT. Would you care to comment any further on that? Embellish it a bit or not?
Mr. DRABENSTOTT. Well, I think it is important to recognize that throughout the 20th century, public policy has been made on a foundation of family farming, that most farm bills got passed with a recognition that one of the goals they were aiming to achieve was to help lift the incomes and ensure the viability of family farms. Throughout that time period, there were some economists who argued that because payments were based on the quantity produced, in general, that those programs had almost a perverse effect in that they hastened the consolidation of agriculture, not preventing it. So, I would point that out as one possible exampleadmittedly different economists might take different views of thatas one possible example of an attempt to legislate and slow the pace of consolidation when, in fact, it may hastened it.
There are substantial economies of scale to be had in many of these mergers. Weighed against that is the impact that those changes have on rural communities and the possibility that they will give rise to market power that can be exercised to the detriment of producers and consumers.
Page 44 PREV PAGE TOP OF DOC I think it is awfully hard for public policy to lean against the kind of economic forces that are underway.
Mr. BARRETT. You are suggesting, if I am not mistaken, that consolidation through legislation, then, in terms of the Federal Government ought to butt out? Is that what you are saying?
Mr. DRABENSTOTT. I think the Federal Government has an important role as an overseer and an regulator of markets. And I think, as I suggested earlier, it will be important for the USDA and other Federal agencies to provide oversight to ensure that there is not an improper exercise of market power.
All of that said, my view is that if there is an ongoing concern about rural America, the time is now to start thinking about the range of public policies that are going to shape the economic futures of rural communities and assist them in finding other sources of economic growth, recognizing that this consolidation is underway and will continue.
Mr. BARRETT. Thank you.
Yesterday we had a hearing on livestock prices and, of course, the subject of consolidation was brought up regularly. Mr. Pombo, the chairman of the subcommittee, made a comment about making sure that we don't create a real unfriendly atmosphere, unfriendly regulatory and business environment, for agribusinesses. He is concerned that production does take place near the packing and processing facilities. And, if we do create that unfriendly atmosphere, businesses are going to go elsewhere.
Do you see that happening? Are businesses going overseas because we are too tough and because the regulation is too burdensome? Is the Federal Government a problem?
Mr. DRABENSTOTT. I think it would be hard to conclude, at this point, that the Federal Government is the problem. However, I think it is true, particularly in the livestock business, that as we see more of a supply-chain structure emerge, these supply chains are not going to stop at national borders. They are going to ask themselves, ''Where is the cheapest, most efficient place to produce this product, relative to the final markets in which we are going to sell?''
Page 45 PREV PAGE TOP OF DOC I think there is already evidence that the pork industry is looking very seriously north of the border and south of the border. And they are doing that because they are not sure that U.S. environmental regulations are going to be friendly to their industry.
Yes, I think there are environmental issues all around in large-scale confinement livestock production, but I think that the Federal Government will be involved in those location decisions moving forward.
Mr. BARRETT. Thank you very much, and thanks, again, for your excellent testimony.
Mr. DRABENSTOTT. Thank you.
The CHAIRMAN. Mr. Hill.
Mr. HILL. Thank you, Mr. Chairman.
I wasn't going to ask a question, but while listening to your testimony, I began to think about all the opportunities that young people have in this country to make it. They can become doctor, lawyers, business people. What would you advise somebody with no assets, just the desire to farm? He graduates from high school and, perhaps, goes to Purdue University. Would you advise that person to be a farmer? Can they make it?
Mr. DRABENSTOTT. Absolutely. I would, first of all, advise them not become an economist. [Laughter.]
I would advise my children not to become economists.
But, no; I think there are excellent opportunities in the future. The successful farmer, I think, will have the following profile. They will understand the science, because a lot of agriculture is going to be driven by the biological science. They will understand the business. They might well have a Harvard MBA. And, they will be very good at interpersonal skills. And those three characteristics might well define a successful businessman or woman in a whole number of industries. But in agriculture, the person that has those three characteristics will be very successful and will probably be right in the middle of one of these supply chains and managing state-of-the-art technology, all the way through to very successful business partnerships. And, that person will probably do very well.
Page 46 PREV PAGE TOP OF DOC Mr. HILL. OK.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Hill.
Mr. THUNE. Thank you, Mr. Chairman. I, too, want to express my appreciation for your insights and for your testimony this morning. I think you probably touched upon this in several ways, but I would like toand forgive me if I am belaboring a point that you have already made, but I have been in and outbut you elaborate a little bit on the role that you see Congress playing in assisting smaller producers and capturing or maintaining the significant share of the production and the processing, even the retail. I happen to sort of disagree with the notion that bigger is necessarily better, and that is a foregone conclusion in agriculture today. I was just wondering again if you would, for my benefit at least, what role do you see, what things can Congress do to assist smaller producers, or if at all? I mean, my impression was, from what you said earlier, that you think they are economic forces at work that public policy shouldn't try to shape.
Mr. DRABENSTOTT. I want to set aside the notion that the only farmers of the future will be big producers. There clearly are going to be a number of small producers who survive, some of whom are going to be relying on our farm income for the balance of their family income, but some of whom may find very successful niches. I can't answer all of the Federal issues that are going to come into play in this question, but here is one that I find particularly intriguing.
We have a whole new generation of agricultural technologies now in the pipeline related to genetically-engineered crops and livestock. The question really has never been asked, which, if any, of these new technologies hold particular promise for small producers; which, if any of them, hold particular promise for regions of the country where commodity production may be in decline? And there are many parts of the Nation where we are going to see traditional commodities in decline, particularly, if we stay in this relatively low-price environment.
Page 47 PREV PAGE TOP OF DOC So, there is one just example, I think, of a question that could be asked that might direct the efforts of the USDA or the land grant university research system that might be of some interest.
Mr. THUNE. What do you think of in terms of the greatest barriers to producers' entry into processing retail sectors? I mean, are we talking about credit issues, availability of capital, diversion of risks? You know, what are the barriers of entry for the small producers to get them to take advantage of some of the things that are happening out there that might make it more profitable?
Mr. DRABENSTOTT. In the 1990's, one of the most interesting developments in agriculture has been the emergence of a significant number of closed cooperatives, so-called new generation cooperatives. These have flourished throughout the upper Midwest and Northern Plains. Not all of these are going to survive, but I think it's evident that farmers are willing to take risks; they are willing to put their capital in place, and they are able to secure capital.
The Achilles' heel of most of these is the marketing skills that are brought to play. Most farmers, I think, by their own admission, would say that they are better producers than they are marketers. One of the keys to success, if farmers try to capture a bigger piece of the pie, is they need to enter into partnerships or they need to hire the expertise to become very effective marketers.
Mr. THUNE. I am a product of a small town, and I happen to believe that small town values help keep our country on a course of prosperity and peace. In my State of South Dakota, there are 310 cities and/or towns, mostly small towns, mostly extremely dependent upon agriculture. The town I come from has the benefit of being on a major thoroughfare, so the tourism can help sustain the economy as well. I guess, how do you think we ought to work at convincing our bigger city friends of how important small towns are, and how do we encourage an establishment of industry to ensure the viability of small towns?
Page 48 PREV PAGE TOP OF DOC I mean, you are looking at rural communities today who are literally dependent upon agriculture, and our concern that the rural way of life is going away and because of that strong linkage and connection, it seems to me, at least, that you know, we are not just talking about the producers themselves. We are talking about the entire economy in rural parts of the country.
Mr. DRABENSTOTT. I think that is an excellent question, Congressman, and I believe it goes to the heart of the issue, and that is, on what platform or on what principles do we write a rural policy for America? We have never really debated and answered that question, in my opinion. There are two places to start, however.
One is how the rural environment is stewarded, and whether we have sound stewardship of our rural resources and landscape. Is that something urban taxpayers will pay for? That is a political question.
The second one is to avoid urban problems to the extent that we see more people move out of rural areas and into the urban parts of Americathat places more strains on the urban infrastructure. At some point, those questions need to be answered, but I fully concur with you that we ought to look at this issue not just as an agricultural one, but we need to think about what it means for the rural economic future, and that brings into play, I think, some very fundamental questions.
Mr. THUNE. Well, I would look forward to working with you to try and answer some of those questions, but I do think it is clearly an issue which, if, in fact, the smaller, independent producers start going by the wayside, a lot of those small towns are, too, and that, in my judgment, is something that is not in the long-term best interest of our country. And that is why I think this whole issue of consolidation is so important, not only just again to the smaller producers, but to the entire way of life and the entire economic well-being of rural parts of the country. And that is why those of us who come from that part of the country are very concerned when we see the trend toward consolidation, toward further concentration, and what the implications of that in the long-term really are.
Page 49 PREV PAGE TOP OF DOC So, I thank you for your testimony. I see my time has expired. I yield back, Mr. Chairman.
The CHAIRMAN. Mr. Berry.
Mr. BERRY. Thank you, Mr. Chairman.
Mr. Drabenstott, you have said, I believe, that you think one of the things that we are going to have to do to raise prices is export lower, and have more market access to the world market. I wonder how you feel that the continued consolidation of the big grain companies will impact that price-raising effect of more exports to the actual producer?
Mr. DRABENSTOTT. Well, I think this relates to a number of questions that we have discussed this morning, and that is whether a shrinking number of companies in the grain business necessarily means that farmers are getting a lower price for their grain. To a considerable extent, I think that is a local question and whether you have a local community in which you have only one buyer for the grain. In general, however, economists would conclude that if you have a grain industry that is more efficient, all else equal, that should provide benefits both to those companies and to producers.
Put another way, one of the enduring advantages that U.S. agriculture has had in world markets is the very efficient infrastructure that takes that grain from farmstead to export ship, to foreign buyer. And to the extent that that infrastructure remains sound and efficient, that, I believe, over the long run is a benefit to U.S. producers.
Mr. BERRY. Also, I would like to ask you, I am of the opinion that we have done a poor job in this country of dealing with dumping issues, where we have had imports that come in below the cost of their production, and basically, I have just ignored it. I would like to hear your reaction to that and what you think we should do as public policy.
Mr. DRABENSTOTT. I am not an international trade economist, so I have not spent my career looking at issues of dumping. But, in general we have established groundrules for our regulatory bodies to consider when they go looking for cases of dumping. In agriculture, as in other industries, regulatory bodies are on the lookout for that. It is clear that we have seen a long-term rise in the percentage in our agricultural food imports, and I think most of us would probably conclude that that has helped keep our retail food markets competitive.
Page 50 PREV PAGE TOP OF DOC Mr. BERRY. Thank you.
The CHAIRMAN. Mr. Boswell.
Mr. BOSWELL. Thank you, Mr. Chairman. I was just reflecting on things that Mrs. Chenoweth said, and Mr. Hayes, and Mr. Gutknecht. I think they make some salient points, and I think you just finally touched on it when you used the word ''stewardship'' just a few moments ago as you were talking.
I would guess that all of us that are in this room that are hands-on farmers who are living in the rural areas that participate could probably bear testimony of the difference in the person that is out there, he or her, that are trying to farm the land, to pay for it, to look after it, to prepare it, to better it, and to pass it on to their heirs, and so on, compared to the absentee owner that hires somebody to come in there, and, wham, they come in and snap the crop in and they are gone, and then they come back in the fall and they are gone, and basically all the resources go somewhere else to that community.
The conservation of the land comes into play. I can tell you site after site after site where I have seen this, and it is a concern. And, I am not too sure that the consumer in the end is going to be better off. I think you made a comment earlier, and I wasn't here, but that so far the consumer gains about some of these consolidations by better prices. But, you know, it doesn't take a lot of imagination for me, and I think for some of the others, because of us following the impact on some of our European friends, that as things become more and more consolidatedand, you know, at what point, how much effort does it take when it gets so consolidated that, ah-ha, the prices are not meeting that quarterly report good enough to suit us? So let us just create a shortage for a short time and up goes the price. Then the price is established and then all the pipelines open up back up; the price doesn't come back down.
Now, the thing that I think we have got to emphasize, and all of usand I hope that you are looking at this, toois that we are talking about food and fiber here. We are not talking about soap; we are not talking about cars. We are talking about food and fiber which we all have to have. We have got to have it. And I think that is probably the reason that the American people are willing to divvy up and help us as long as they understand that. And I think it is incumbent of us all, and I appreciate some of the things that others have said, but we have got to be sure that we understand that.
Page 51 PREV PAGE TOP OF DOC During the 1980's farm crisis, I was meeting with some people in a farm home. We had some reporters from Europe there, and they said, ''Well, why are you allowing this foreclosure to go on to this particular farm family?''
I said, ''Well, what else can I do?'' I said, ''What would happen in your country? What would happen in France?''
He said, ''Well, the farmers would gather together, so that they would stop the traffic going in and out of Paris,'' and we know that has happened. He said, ''Well, I would think they would call out the militia, that is, to disburse them and that will be the end of that.''
I said, ''No, they wouldn't.
He said, ''Well, why not?''
I said, ''Because they have been hungry and they understand that. And we in this Nation have not been hungry in that sense.''
So, I am very concerned about these. I am not too sure that the consumer is going to benefit by this, and I hope that all of usand I know you obviously bring a lot of expertise for the things that you have said. I appreciate your being here. Thank you for coming.
But, to Mr. Chairman and to the rest of us, I think we are talking about something that may not impact our lives, those of us sitting here right at the momentat least in my age groupbut I think about my children and my grandchildren, I think there is going to be a potential of some pretty tough situations. So, I am very concerned, as Mrs. Chenoweth said, and others, about this consolidation and what the real impact of it is, and the fairness, the openness that this gentleman said.
I know of a couple of young families that I can think ofthere is morebut I would just like to put names on two right now that meet the profile that you talked about a few minutes ago: very well-educated, very conservative, very careful, husband their resources very carefully, and worked their heads off, and they are not making it, because they have got some debt from machinery; they have got some debt for some equipment, and they are paying cash rent.
Page 52 PREV PAGE TOP OF DOC And so, sometimes they say that the livestock would hold them up when the grain prices were down, or vice versa. But, you know what is going on right now. They are going to decide this week if they are going to try to go on or not. And if they don't go on, we, as a Nation, I think, have lost big time. And there is quite a few of those out there, at least in my State, and I know there are in the other States, because it is the same thing.
So, I don't know if I have any questions for you, but something for you to cogitate is, how do we reach out? We want to reach out and keep those, particularly, there on the land. There will be stewards of land, and so on. And it is just perplexing.
Now, I made a big long statement and used up all my time, but would you have any comment?
Mr. DRABENSTOTT. The trend you described has been underway a long time. The Europeans have taken a different approach. The scale of their production agriculture is much, much smaller than it is in the United States. We could debate all day whether they are better off or we are better off, but those are the choices we have made as a society. I know of no effective way, apart from the in-depth approach the Europeans have taken for public policymakers, to decide what structure U.S. agriculture will have.
Mr. BOSWELL. Well, I wasn't suggestingI hope that wasn'tthat I thought that the European approach was a better way. I don't know that. I just used that as an example, that I have something that touched me at that time in the mid1980's, as I have that contact.
But, my time is up. So, thank you, Mr. Chairman, and thank you for being here, Mr. Drabenstott.
The CHAIRMAN. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
Mr. Drabenstott, you touched on a couple of things earlier I want to try to build in a little bit with you. I agree with you that trade is critical, international trade is critical to agriculture. Our farmers are going to do all right in the domestic market, but that is about it. The future of agriculture, I am totally convinced, is supplying the best food and fiber that is grown in the world to places all over the world outside the United States, and that was the main reason that I supported the fast-track legislation, particularly, with the agricultural language in there.
Page 53 PREV PAGE TOP OF DOC But I am concerned, like everybody else, about the fact that one of our major markets is in Southeast Asia, and the financial crisis that developed down there a year, a year and a half ago, whatever it was now, has drastically affected our agricultural markets from pork to grains and probably everywhere in between.
Hopefully, the money that was put in the international monetary fund, even though I wasn't totally in favor of that, but I hope that the effect of that is going to go towards helping to stabilize that market. Where do you see the international markets over the next short period of time, months, years, whatever it may be, from a stability standpoint, and the capability of those folks to buy our agricultural products?
Mr. DRABENSTOTT. Congressman, you have touched on a very important issue, obviously, and there is no question that how the Asian and southeast Asian economic situation plays out will have a very important bearing on U.S. farm prices and the pace with which the consolidation we are talking about this morning proceeds.
M economists would agree that many nations in Southeast Asia, are dealing with some very substantial economic and financial challenges, and that while the long-term prospects are bright, it is going to take some time for them to come to terms with all of current problems and to get themselves back on their feet.
All of that said, I think it is very important for U.S. agriculture and for public policy to maintain some eye on the long-term gains that are still to be had. Asia is a region with relatively rapid population growth, with populations that are relatively low on the food ladder, and where every dollar of new income is going to lead pretty quickly to rising food demand.
A lot of U.S. food companies are sticking with those countries, and keeping their assets in place, because they know it is a relationship business, and because they know the long-term prospects are good. So, long-term, I think Southeast Asia and Latin America form two very substantial potential markets for U.S. agriculture.
Page 54 PREV PAGE TOP OF DOC Mr. CHAMBLISS. Getting off on another area that you touched on a little bit earlier, I, too, am concerned about the concentration of the agribusiness industry and to smaller hands or fewer hands, and the possibility of monopolistic transactions out there, and not just from an agribusiness standpoint, but where it is going from a farmer's standpoint? Because the backbone of American agriculture has always been the small family farmer. And that is basically what we have in my part of the world. And what we are seeing is that at the middle level, where obviously having a concentration of purchasers of products from the farmer, and that almost in and of itself, because of the requirement for that bottom line and the more efficient operation or what-not, is causing consolidation of farms, and we are getting more and more away from that small family farmer. And I don't know where those folks are going.
Somebody in my part of the world can have a quota of about 30,000 pounds of tobacco and a couple of hundred thousand pounds of peanuts, and not get rich, but can provide a living for their family. We are phasing out of that now over the next few years, and those farmers are going to be operating in a market where I think the direction we are going is that, because of the concentration of fewer purchasers of those products, we are probably looking at a direct contract arrangement between the middle man and the farmer. And, I am concerned about that, and you eluded to that a little bit earlier.
Where do you see that small family farmer going, if you agree that that is the direction in which we are going with respect to contracting for these products down the road directly?
Mr. DRABENSTOTT. I think it will be very important for those small producers to band together, and to create an arrangement with the buyers in which they agree to deliver the right product in the right quantities at the right time.
There are examples in the hog industry where you have a number of relatively small producers who come together and say: We will use the same genetics; we will use the same production techniques, and we will deliver semi-trailers of hogs on this date to a packer. They are able to forge a contract with that packer that individually they could not.
Page 55 PREV PAGE TOP OF DOC Now the price they pay for this arrangement is they have to give up some of their independence. And one of the things that small farmers have always prided themselves on is their independence.
So, one of the issues here is, can we think of new, innovative ways to get small farmers together into a cooperative alliance or network that enables them to then have a contract with a packer or processor? I think there are clear examples of that working now, but, again, the price that has to be paid is some giving up of traditional independence, and a growing level of cooperation with other small producers.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Mr. Drabenstott, it is my understanding that 80 percent of the cattle slaughtered is done by four companies. Is that an accurate figure?
Mr. DRABENSTOTT. Roughly, yes.
Mr. GOODLATTE. And what is the largest of those, what percentage does the largest one have?
Mr. DRABENSTOTT. I don't have those numbers with me, sir.
Mr. GOODLATTE. OK. I am interested in the geographic distribution of that work. In my district, poultry is the largest agricultural product, and we have lots of poultry slaughter houses in my district. But, I have thousands of small cattle farmers, and I am not aware of anything close by where cattle is slaughtered. Can you give me a picture of the
Mr. DRABENSTOTT. In general, the cattle industry looks very different from a geographic point of view than the broiler industry. And, in part, that is because of the production nature of the beef industry. Cows are a land-extensive proposition. That is, they take a lot of land, and thus, we have cattle ranches scattered throughout the Nation, but the feeding part of the business, which has much more economies of scales, has concentrated in the Great Plains and High Plains.
Page 56 PREV PAGE TOP OF DOC The hog industry is, in terms of its geography, turning into something more like the broiler industry and much less like the barnyard activity that it was 50, 60 years ago.
Mr. GOODLATTE. Is there any prospect of that changing for the cattle industry? Are there any slaughter houses in the East, other than very small ones?
Mr. DRABENSTOTT. I honestly don't recall the geography of the Nation's slaughter facilities for beef. But, I think it is clear that the facilities that one finds are in the Great Plains, are very large ones that have substantial economies of scale, and obviously, they strive very hard to keep those plants running at full capacity.
Mr. GOODLATTE. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. Ms. Stabenow.
Ms. STABENOW. Thank you, Mr. Chairman. I would just make a brief comment. We appreciate your comments here today. I would share the concerns of Mr. Boswell as it relates to the direction that we are going in. When we look at the family farms, as I am sure it has been stated earlier today, we are not just talking about operations or producing food; we are talking about a way of life and a set of values and the importance in commitment to preservation of the land and to unity in the rural communities. And, I am very concerned about the direction we are going and the fact that we are losing that sense of community and commitment, as well as the economics of the situation.
Mr. DRABENSTOTT. If I could just follow along, I think it segues with the Congressman's previous comment. The cow/calf business is a very good example of a small farm activity. The typical cow/calf enterprise in the United States has fewer than 50 cows, and Missouri is a good case in point. Missouri ranks among the top calf-producing States, but you will drive a long way before you find a cow/calf operation in Missouri that is really large.
Now, why do we find that kind of activity sprinkled throughout the United States? Well, it is because people enjoy that way of life. But, for almost all of those small cow/calf operators, the biggest portion of their total income comes from off the farm. And thus, if you want to help preserve that way of life and those cow/calf operators in rural Missouri, the issue of rural economic growth is far more important than the price of cattle.
Page 57 PREV PAGE TOP OF DOC Ms. STABENOW. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. A little side note: I wanted to remind myself what it was like, as 20 years ago, I was the 26th ranking Democrat out of 26, what it was like to wait until everybody else got through to ask a question. [Laughter.]
The CHAIRMAN. If the gentleman would yield, if the chairman had been as fair then as the current chairman is, if the gentleman was here whenever the gavel was sounded, he would get to ask questions a lot earlier. [Laughter.]
Mr. STENHOLM. Mr. Drabenstott, I have really enjoyed your testimony, and I have got to say that you have told it like it is. A lot of times we don't like to hear it the way you have told it. But, I, at least, believe you have told it like it is.
I have listened to you carefully in saying that trade market, foreign markets, is where our future is. I could not agree more. Ninety-six percent of the world's consumers live outside the United States. We have to keep that in mind, and we have to deal with that. And that is where things like fast track is something this committee, contrary to what we have been in the last couple of years, this committee has got to look at this with a very open mind and realize that, unless we can in fact open up those trade barriers that we have, that we are going to continue to have the same results we are experiencing.
I appreciate very much your constant and consistent answer to the questions regarding solutions as cooperative effort. That, to me, is one of the few answers there are. Therefore, those of us who do have a sincere concern for the family farmer, and recognizing the hand has been dealt, is one that we have got to play out.
I also appreciated your answer regarding what the Federal Government's role must be. As we look at these mergers and consolidations, we have to send the clearest message to those who are constantly in the merger and consolidation: We are going to be looking at you every day. We have got to do this, and we have got to make certain that these efficiencies that we have, in fact, experienced as a result of the merger and consolidation continue, that we do not get into the monopolistic happenings that can happen when the big get too big and forget aboutagain, my concern isthe producer.
Page 58 PREV PAGE TOP OF DOC It is troubling, and I use one example of one industry in which you have a sheep industry that is trying. They have, in fact, put together a cooperative effort. They have done everything. But every time our production goes down, our friends and competitors increase their imports into this country, and we seeminglyunder the rulescannot do anything about it or should do anything about that. I have trouble with that because that guarantees there is no solution. No matter how cheap our prices get, somebody is going to drive them down, and nobody in this efficient chain of agricultural industry is willing to do anything about it.
Inventory management, the chairman mentioned a while ago, back in the days the Texas Railroad Commission was the monopoly and managed the price of oil. That was the good old days for the oil patch. Now, it is out of our hands; it is in OPEC.
But, you know, it seems to me as I have listened to you and I have listened to all of our concerns, there is one message that somehow we have got to get over to the general public and to our colleagues off of this committee and some of our colleagues on this committee. We are saying that this just has to happen, that consolidation, the continued merger, all of these concerns, just has to happen because that is the way the hand has been dealt.
I am afraid that that is kind of like throwing our family farmers out into the lake with weights around them and saying, ''You have got to swim.'' Because when you start analyzingand I looked at some of your charts that you put init is fascinating to me to look at 1990; net farm income was $46.8 billion. In 1999, it is estimated that it will be $44.8 billion. No inflation in this. These are real dollars, and it says that net farm income, which is the problem that we farmers are having, it is price. All the rest of this is immaterial; it is price. Unless we get price, you are not going to stay in business, period.
The Dow Jones Industrial average in 1990 was 2,678. The Dow Jones today is approximately 9,100, a 240 percent increase. Net assets in agriculture have gone from $841 billion to $1.140 billion, a 35 percent increase. How can it be, or what is the significance, or is there any significance to an industry that feeds America and a good part of the World as efficiently as we do, is not participating in the economic growth and the euphoria that has caused this country to do as well as we have done over the last 6 years? What is it about agriculture that says, we somehow have got to do more with less while everybody else seems to be smart enough to figure out how to make more with less?
Page 59 PREV PAGE TOP OF DOC Mr. DRABENSTOTT. I think the bottom line, Congressman Stenholm, is thatit comes back to the point I made earliermost farmers are in the commodity business. And, if you have been in the commodity business in the 1990's, be it oil or computer chips, which have become a commodity, or Hard Red Winter wheat, you have seen your prices decline. I think the issue for most producers is, how do you become part of the better market? How do you grab a better piece of the pie?
Mr. STENHOLM. Why shouldn't that also be a responsibility of these companies that continue to merge and consolidate and get bigger at efficiency? Why should they, or should they not worry about what can we do to help get a little more of the consumer dollar in the producer's pocket, rather than constantly looking at efficiency, efficiency, efficiency, in which the end result guarantees that farmer swimming in the lake is going to go down? Because you can't push it down without the results that are now happening that Mr. Boswell mentioned, that real-life experience, a moment ago.
Mr. DRABENSTOTT. I acknowledge the lake metaphor that you have used, Congressman. I think the real issue is, in a supply chain world, how do you create a win-win for producers? That is really the question you have posed. And, I think cooperatives are a very important part of the solution. New technologies are also an important part of the solution.
As I mentioned earlier, I find it interesting that no one has really asked which of the new technologies, if any, may be very beneficial to the smallest-scale producers. Maybe that is a question that the people who spend Federal research dollars want to ask. But I don't think that we are going to arrive at a conclusion that says we can simply suspend all further consolidation, or that we can simply suspend the emergence of supply chains, because I am not convinced that U.S. consumers want that to happen, and I am not sure that the economic forces can be stopped.
Page 60 PREV PAGE TOP OF DOC Mr. STENHOLM. Would you agree or disagree that the more of these transactions that occur in the sunlight, in which we can see the pricing mechanisms, that we can see who is making what determinations, the better off every one of us will be, or are the proprietary concerns something that we ought to consider over and above the sunshine of an open market?
Mr. DRABENSTOTT. I think that is a very tough question, because how does one balance the proprietary right of two companies to form an agreement against the desire that we have to allow producers to participate in the system? We don't do it in most other industries, as I suggested earlier. Is food so special that we want to do it in food, and are we willing to pay the price of requiring firms to report proprietary business transactions? I think that is a very tough question to answer, and I don't, frankly, have a ready answer.
Mr. STENHOLM. You know my final comment, and this hearing yesterday begins the challenge that this committee has; we have a year 2000-K2 problem, 2002. And it is when there was a general philosophy that the best thing for our family farmers was to eliminate farm programs, let the market take over, get the Government out of our business and we will all prosper. Well, it is not quite working out that way. And when you look at that net farm income figure, $10.9 billion of this $44 billion this year is Government payments. And look at the criticisms that we have gotten, and will continue to get over those, but ask ourselves, where would we be were it not for that additional net farm income?
And the final point for us on this committee to think about, you know, if you take that $44.8 billion in net farm income and assume that every dime of that net income pays income taxes of 30 percent, that is $13.4 billion in taxes, which is a ridiculous number, but I just want to make a point, because we are talking about policies that this Congress needs to make. Thirteen point four billion, if you get a 10 percent income tax cut straight across the board, that will benefit agriculture to the tune of $1.3 billion. If you take our debt of $169.1 billion and assume a 1 percent cut in interest rates, that means $1.7 billion.
Page 61 PREV PAGE TOP OF DOC It is far more important to the future of agriculture for us to keep interest rates down than to worry about paying taxes when we are not making any moneythe majority of us. That is something that this committee needs to take into consideration as we deal with budget matters coming up a little bit.
I thank you very much. Your written testimony and your answers have been extremely educating to all of us, for giving us thoughts to think about. We don't always agree with it, but when it gets to be pretty much the truth, you have got to appreciate it and having it articulated. Thank you.
Mr. DRABENSTOTT. Thank you very much.
The CHAIRMAN. Mr. Drabenstott, I have a number of additional questions that come to your area of expertise. But, rather than going into those in a second roundand I will see if any other members have commentsif it will be agreeable with you, I think I would like to submit those to you, if it will be agreeable, and all members can do that.
I just would like to end my part of this with a comment: One of the things that sometimes I even find that people who are not around agriculture a great deal don't always understand, most products in this market, when they are manufactured and go to the shelf, have a price on them. Now, they may go on sale occasionally, whether they are televisions, or stereos, or computers, or whatever they are. Commoditiesoil, gas, agricultural commoditiesare unique in the fact that, and I think require a little different viewpoint in how is it that the impact of what is happening in a normal course of business is viewed, and that is, farmers don't set their prices; they get whatever price is at the elevator or is at the gin, or whatever the market is bearing that day.
I think, because of that, and because of the structure of the way that the producerthe rest of the way through the line, pretty much the prices are determined by the person handling that product, except at the production end. And, I think in order to make sure we preserve that production end, that it does require that sometimes there are things in place that are not always in place for other types of products that are sold.
Page 62 PREV PAGE TOP OF DOC I would ask any of the members if there any other questions.
We thank you very much for your time and your insight, and you have been very helpful to us, sir.
Mr. DRABENSTOTT. Thank you.
The CHAIRMAN. I would like to invite now our second panel of witnesses to come to the table. Mr. Harry Pearson is president of the Indiana Farm Bureau Federation and is here on behalf of the American Farm Bureau; Mr. Leland Swenson is president of the National Farmers Union and is accompanied by Dr. William Heffernan, who is from the Department of Rural Sociology at the University of Missouri.
And, Mr. Pearson, you may begin at any time.
STATEMENT OF HARRY L. PEARSON, PRESIDENT, INDIANA FARM BUREAU FEDERATION, ON BEHALF OF THE AMERICAN FARM BUREAU FEDERATION
Mr. PEARSON. Thank you, Mr. Chairman, for the opportunity to provide testimony on this hearing on economic concentration. I am Harry Pearson, the president of Indiana Farm Bureau and also a board member of the American Farm Bureau. I am a fifth generation farmer. I farm a partnership with my wife and brother, and we are assisted currently by our sons in the operation.
As I visit with Farm Bureau members across the country, there is an increasing concern about the current state of U.S. agriculture, low commodity prices, and resulting impact on farm income and the economies in rural communities. Even as the prices that farmers receive continue to decline, they are faced with over time escalating cost of inputs, an increasing stranglehold of taxes and regulations, particularly, environmental regulations. So it is in this context that I talk to you today about concentration.
Page 63 PREV PAGE TOP OF DOC Two major developments have occurred in recent months. First, that Cargill is contemplating the purchase of Continental Grain Division, and second, the devastatingly low prices for hog farmers and the structural changes facing the hog industry as a result.
To start, we do have concerns about the Cargill-Continental merger. First, the farmers are concerned about the impact on local competition. Prices are influenced by the international supply-and-demand forces of each local and regional area, which, in turn, are influenced by supply-and-demand conditions as the commodity moves closer to the ultimate consumer, either domestic or international markets.
Another concern is the potential impact of the merger insofar as it affects delivery points of grain and soybeans. The delivery is a process where the futures price and the cash price must converge. All three future exchangesChicago, Kansas City, and Minneapolishave delivery points for contracts that involve some Cargill and some Continental facilities.
The futures markets are a major source of market information, as well as global price discovery. So, a delivery mechanism has a potential to exert significant influences on the prices. We understand that there is over-capacity within the grain industry that may limit through logistical efficiencies, so we have advised the Government officials from both the USDA and the Justice Department to carefully review the issues I have outlined with respect to potential monopoly power.
Just as U.S. farmers are most competitive and efficient in the world, we need a grain-gathering and shipping industry that is equally efficient, but also competitive. The Farm Bureau is very concerned that concentration within the livestock and grain industries could lead to inadequate market access. We encourage the proper Government agencies to examine proposed mergers that have the potential to limit market access.
At the same time, however, we don't want a system to perpetuate the very problem we are trying to avoid. For this reason, we urge the Government to consider what may happen if the merger is permitted and to consider the long-term view of the entire marketplace. Some industries in agriculture may need a more watchful eye than others; that has already been mentioned this morning. The poultry and beef industries already are concentrated. Any proposed merger in these areas would need extreme scrutiny. The pork industry may experience unprecedented structural changes in the next few months, and I would say, that it already has. The Farm Bureau has concern that this will quickly reduce market access for smaller and medium-sized producers.
Page 64 PREV PAGE TOP OF DOC The Farm Bureau has been very active in working with administration and other farm groups in identifying opportunities to help hog farmers face an extremely low-price situation. I believe that immediate assistance to hog producers could be provided without distorting the free market. Such assistance could be provided by increasing the amount of loan guarantee funds through the Farm Service Agency. These loans should be available to all producers; that would assist farmers experiencing cashflow difficulties. This would allow producers to sit down with their lenders to work out a plan to get through the next several months as prices continue to recover.
With the changes in the industry, it is vitally important that proper data is collected and disseminated in a timely manner by USDA. The Farm Bureau continues to work with the Economic Resource Service as resources to continue the short-term commodity situation and outlook forecasting.
There are several legislative initiatives that we support to assist farmers and ranchers during this time of increased concentration. These are country-of-origin labeling, interstate shipment of State-inspected meat, livestock dealer trust, and mandatory price reporting. All these initiatives speak for themselves and are items that we have been working on for several years.
With regard to trade, we applaud the introduction of Senate bill 101 by Chairman Lugar, which would create market access and ensure that our trading partners comply with international trading rules. Also, fast track trade authorization must be passed during the 1999 session of the Congress. We look forward to future export markets in order to sell. We must look forward to those markets.
In closing, there is no doubt that consolidation within agribusiness will continue. Producers will continue to face challenges and opportunities presented by the economic concentration of agribusiness. These challenges are highlighted when we are faced with low prices for long periods of time. These low-price situations force us to evaluate the marketplace and seek new opportunities for producers. We are committed to work with Congress, the administration, and my colleagues here on the panel today, regarding the direction that agriculture is going and determine a process that will enable our farmers and our ranchers to compete in the global marketplace.
Page 65 PREV PAGE TOP OF DOC Mr. Chairman, I appreciate the opportunity to share my views today.
[The prepared statement of Mr. Pearson appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much, Mr. Pearson.
Mr. Swenson, please proceed.
STATEMENT OF LELAND SWENSON, PRESIDENT, NATIONAL FARMERS UNION, ACCOMPANIED BY WILLIAM HEFFERNAN, DEPARTMENT OF RURAL SOCIOLOGY, UNIVERSITY OF MISSOURI
Mr. SWENSON. Thank you, Chairman Combest, and thank you for calling today's hearing to examine the impacts of agricultural concentration. And on a personal note, thank you, Mr. Chairman, for sharing some of your thoughts with our membership in our latest publication of NFU News, through your interviewing. We appreciate that.
Distinguished members of the committeeand I especially want to recognize Congressman Minge. I will let my mother know that he was here doing his dutiful duty, as one of his constituents.
But, I believe that it is critical that this committee collects the best information available on this subject, as it will be a significant factor in the future structure and direction of U.S. agriculture, as well as the global food and fiber supply.
As president of the National Farmers Union, I appear before you today on behalf of our 300,000 farm and ranch families who comprise our membership. Besides prices that have been mentioned by members of this committee, no other issue in agriculture today raises more concern among our members and hundreds of additional rural families than concentration. And most feel that the two are linked.
National Farmers Union, along with Farmers Union Enterprise, commissioned Dr. William Heffernan from the University of Missouri and his associates to prepare a study to show how concentration is occurring in all segments of the agricultural system, as well as around the globe. Dr. Heffernan is present with me today and would be available to answer any questions on the study that the committee members may have, and Mr. Chairman, I submit for the record a complete copy of not only my testimony, but of the study.
Page 66 PREV PAGE TOP OF DOC The study points out that there is a small number of dominant food chain clusters that appear to be merging. I think that was shared by our last witness. But we believe there is a cluster of about four or five that are appearing, not 40 or 50. And that occurs by alliances, joint ventures, partnerships, mergers, acquisitions, that enable the clusters to impact production agriculture from inputs, to local market opportunities, to processing, retailing, and global trading structure and opportunities.
The control of biotechnology may put the producers, independent family farmers, and ranchers at the mercy of food clusters, and the corporations within, for the seed to plant and for the livestock to raise. Some of the impacts of concentrationand they are defined in greater detail in my written testimonyare in the area of predator business practices, loss of local control, market manipulation, loss of sustainability, unequal bargaining power, vulnerability to foreign currency fluctuations, and the loss of independent producers.
And I would share with you, one of the things that we have talked to in the financial community is that in the 1980's there was a lot of equity financing within the agricultural community. In the mid1980's, because of the economic crisis, it moved to cashflow financing. Now cashflow financing doesn't work, and so we are now going back to equity financing.
I raise that because that eats away at asset equity that is growing since the mid1980's, as we use the structure of cashflow for financing, but it results in less financing availability for independent producers, and now forcing us, as we look at the next millennium, into the structure of contract financing.
The concerns of producers of the proposed acquisition of Continental's Grain Division by Cargill, lie in, No. 1, a level of concentration in the upper Illinois river area; second, the share of grain export market that they would control; and the increased concentration of specific terminals, including those in Louisiana and the Texas Gulfport areas; and also ,the concern of the level of global control of the grain market.
Page 67 PREV PAGE TOP OF DOC Actions that the National Farmers Union urge Congress and the administration to consider are: First of all, a moratorium until an economic impact study on farm income can be included within the proposed mergers or acquisitions.
Second is the examination of the relationship established through alliances and marketing agreements and their effect on competition.
Third is congressional review to consider whether existing law, and the level of appropriations to give the Justice Department and the Federal Trade Commission adequate authority and resources to evaluate and act on the proposed mergers and acquisitions.
Fourth is to repeal the study investigation of the price reporting passed last session, and for Congress to adopt now mandatory price reporting and country-of-origin labeling, and to establish an effective agricultural safety net program.
You know, one of the ideas that came to me during the last discussion was, if we are going to go to contracting and have producers share in that added value up the supply link or that cluster link, how about in that contract a mandatory requirement of a share in the uplink profits that would go back to the producer rather than just a price that they receive for their serf labor?
I would share with you, and I comment that the testimony offered by C. Robert Taylor, who is with Auburn University, offered before the Senate Agriculture Committee about 2 weeks ago, where he quotes, ''Since 1984, the real price of a market basket of food has increased by 2.8 percent while the farm value for food has fallen by 35.7 percent.'' Now, we may say that the consumer spends less dollars on food, but the real price of food baskets have gone up. The farm value of that food basket since 1984 has declined by 35.7 percent.
Mr. Chairman, I look forward to working with the committee in addressing the complex issue of concentration and would be glad to address and answer any questions the committee may have. Thank you.
Page 68 PREV PAGE TOP OF DOC [The prepared statement of Mr. Swenson appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Mr. Swenson. All of the information which was submitted will certainly be made a part of the record, and I appreciate your abbreviated testimony. In addition to your testimony, as mentioned, Mr. Swenson, we do have a report that was done by Dr. Heffernan, who is accompanying you, and the Farm Bureau also has an extensive report, ''Looking at the Trends in Farm Structure in the 21st Century,'' and we appreciate those, and they will be a part of the record.
Yesterday, we had a hearing on livestock pricing and, obviously, got into somewhat the consolidation issue. I would only reiterate what I had mentioned yesterday, hoping that you had something more important to do than read the testimony from yesterday's hearing. We will be having hearings in this committee on the price reporting question and on the labeling question. Those are issues that there is a variety of opinions on and a lot of questions, but we will certainly be having hearings on those issues and trying to delve into those.
In your testimony, Mr. Swenson, in the discussion of the last day-and-a-half, primarily the discussion of the labeling issue was on meat. I noticed in your testimony, in your action plan, that on No. 7, on labeling, should adopt country-of-origin labelingare you including all products in that, vegetables, fruits, meats, everything?
Mr. SWENSON. Yes, Mr. Chairman.
The CHAIRMAN. OK. I wanted to ask you, also, in your suggestion of the moratoriumthe good things about you all, you all can make suggestions and then we have to figure out how to do them. But in the moratorium, what kinds of limitationsI am trying to see exactly, I am trying to find the page which you saidwhat kind of limitations would you propose on that, a moratorium on consolidation between corporations, of private partnerships? Two, what limitation would you put on those areas of consolidation that would come under your moratorium?
Page 69 PREV PAGE TOP OF DOC Mr. SWENSON. Thank you, Mr. Chairman. The context of our moratorium is those mergers, acquisitions, which are under review by either the Federal Trade Commission or the Justice Department, mainly because of the desire to include an economic impact study. The Federal Government currently requires any type of Federal regulation which has a $50 million impact, any regulation has to have accompanying it an economic impact study.
Yet, we are looking at mergers today significantly different than what we saw 10 years ago, 20 years ago, 30 years ago, in that they are in the billion dollars of merging or acquisition of companies. And what is the economic impact that is going to happen on producers to make sure that there is a time period in which those inclusions can occur?
The CHAIRMAN. We know of certainly some today that are being proposed mergers that are under review, but that would also include future mergers? And if so, what would trigger whether or not that moratorium would be imposed to them?
Mr. SWENSON. I would hope that, if there is a benefit that is derived under those that are under consideration todaybecause some of those are very, very significant, especially if you take a look at Monsanto's proposed acquisition of Delta Pine Land Company and the control of the terminating gene, and those things that will impact in genetics, as well as the Cargill proposed acquisition of Continental grain division, we are having two different significant areas that will come back to impact production agriculture on both ends, the inputs as well as the area of market opportunities domestically, as well as globally.
So, I think, then, if you take a look at what may be needed in the future as a broader timeframe of review, those are the elements that Congress would have to consider and the nature of how it deals with adequate resources, as well as the timing structure for reviews to occur in the future.
The CHAIRMAN. I am going to ask this of all of you, and it may not be a question that you have an answer to, both of you as representatives of large farm organizations and to Dr. Heffernan in terms of the studies that he may have done: Do you have any idea or approximation of how many farmers generally utilize the opportunity to contract product? I mean, maybe I can tell you a little bit of what I am looking for.
Page 70 PREV PAGE TOP OF DOC One of the earlier discussions was that, to those farmers that traditionallyI know in my district in Texas, generally, the people who contract to a company to produce corn, or whatever, that is ongoing; every year they do that. They have to do some unique and sometimes different things to their fields and crops in order to make sure that they comply with those contracts. So it is an ongoing thing.
Obviously, in a major downturn of commodity price, those farmers do much better. So, the farmers who don't haveand as we were talking in the supply chains earlier, those farmers who do that are much better offthose who don't have the opportunity to do that are the ones that obviously bear the brunt of low market prices. And again, there may not be an answer to that, but I was just wondering, if any of you had any ideas about how many farmers are usually able to take advantage of a contracting situation in any commodity?
Mr. SWENSON. Mr. Chairman, I don't have a specific number, but I think producers use a variety of contracts, and some have used futures contracts, hedging contracts, a number of ways in which to try to have the independence in marketing a portion of their income, trying to take some of that volatility risk out by using some of those contracts. And then we see contracts that are in the nature of speciality contracts for certain seeds of commodities, as well as multi-barley contracts, and then a number of other varieties of contracts.
I don't know the number, but I would just say that the varieties of types of contracts that are out there are just tremendous. There is no consistency in many of the contracts. And that is one of the areas of concern of our members that are dealing with looking at the means of obtaining financing for the future, and the opportunity to stay on the farm under their contracts, is what to look for in these contracts, how to protect, you know, their economic viability and contracts, and that is another major challenge facing us in representing our constituents' needs.
The CHAIRMAN. Dr. Heffernan.
Page 71 PREV PAGE TOP OF DOC Mr. HEFFERNAN. Well, I think that Mr. Swenson said it very well. Of course, because it varies by commodity, basically, all the broilers, turkeys, and, for most part, eggs, are produced under what we call the production contracts where the integrating firm owns the animal, if you will, and the feed, and the growers, we now call them, really is paid on a piece-rate basis. So, we really need to be clear when we are talking about contract, what type of a contract we really mean.
Then we talk about the marketing contract, as Mr. Swenson was indicating, and those are really very much vary greatly. And, I think that if there is anything we are going to learn out of the hog, what is happening in the hog industry right now, is that there are lots of different kinds out there in the hog industry, and in some cases, as you have indicated, they really do help to protect the farmer from a downturn in the future. One of the big problems on contracts, though, is that when a farmer gets their long-term investments in buildings or equipment and then they end up with a long-term payoff, a 10-year payoff, a 5- to 10-year payoff on their investments and their contract may only go from year to year. And so, that is when they really can get in a bind, and we have seen that on the production contracts and we are seeing some of that now even happen, of course, on marketing contractsyou can't get them out there for the length of that asset you have, and that is when farmers really begin to get in trouble.
But, we really need to get some work done on understanding these contracts and the various types there are and duplications for everyone involved.
The CHAIRMAN. I didn't want to pass you up.
Mr. SWENSON. No, Mr. Chairman. In Indiana, I would guess on crops, it is probably far less than one-third, but when you look at that, we are looking at popcorn as two major processors in the State, so that all that corn is under contract. That is some waxy corn that is under contract with processors; there is some white corn, some soybean, but they are very small at this point, primarily, for tofu and some organically-grown beans. There are some vegetable crops, but it is still a small percentage and, in total, it is growing. The CHAIRMAN. Thank you.
Page 72 PREV PAGE TOP OF DOC Mr. Minge.
Mr. MINGE. Well, thank each of you for being here, and, Mr. Swenson, please do tell your mother that I was here doing my job.
I am interested in the comments that all three of you made and the materials that you have submitted, and I would like to first ask about contracts and whether or not there ought to be some Federal standard that is established as to what are the minimum features of a contract that are necessary for fundamental fairness. And there is a report that was done that I alluded to when I raised questions earlier that was called ''Concentration on Agriculture: Report of the USDA Advisory Committee in Agricultural Concentration'' that was submitted in June 1996, and one of the comments that they make is that rules similar to those used in a State such as Minnesota, which indicate the penalties if a contract is breached without cause might be implemented and standards that were established in the State of Minnesota for contracts for the sale of farm commodities, and basically, I think it is livestock in Minnesota, there must be certain requirements in order to be a valid enforceable contract, but we do not have a national standard, to the best of my knowledge. At this point, a few of the States have done this.
Do you have any recommendations with respect to whether this ought to be pursued at a national level? Building on that, if it is done at a national level, what do we do about contracts, then, that might be entered into between processors and producers in other countries that would be competing with U.S. producers? And maybe, Mr. Heffernan, since you have done this exhaustive study here, we could draw on your expertise first.
Mr. HEFFERNAN. Well, I don't claim to be an expert on the contracts. I am an expert on raising a lot of the questions that I hear right now about these concerns, and of course, Minnesota and Iowa, the attorneys general up there have been very aggressive in terms of pursuing some of these, and I really applaud what they are doing. I guess I would have to think through the implications of whether we do this at the national level. I am delighted to see some of the States taking a lead in it. One of the advantages, of course, of keeping it at the State level is they can deal with some differences between commodities that might exist.
Page 73 PREV PAGE TOP OF DOC But, as Dr. Drabenstott said earlier, I think there probably is a role at the national level for some minimum standards on that, but leaving the door open for States to sort of add some things to that, if they thought it necessary for their particular circumstances. But, I really would be going well beyond my level of expertise to say that I could really begin to lay those out right now.
Mr. MINGE. Mr. Swenson and Mr. Pearson, do either of your groups have positions on this?
Mr. SWENSON. Well, Congressman, that is an excellent point. One action that I think Congress should take immediately is to establish whistleblower protection under the nature of how contracts are existing today and how people who are impacted by those contracts can step forward to address what they feel are abuses of those contracts. Because right nowand we can look in the poultry businessindividuals are unwilling to step forward and address concerns because of a threat of which to lose, additional contracts or additional birds. We see the same thing happening in the beef industry. If people step forward and express a concern over what is happening under existing laws of packers and stockyards that you have already passed, there is retribution. So, that is one action that I believe Congress should take immediately.
Mr. MINGE. Does the Farm Bureau have a position on it?
Mr. PEARSON. Well, we don't, Mr. Congressman, as it relates to contracts and how those are managed at this point. The thing, though, is we look at the discussion taking place in the State in the last few weeks. Of course, on everybody's mind is the hog situation at this point. But it has been estimated there are probably 100 different contracts out there of all different types. Quite often, those contracts will be marked confidential to the producer, and if you share this information, then it is null and void. We think that something needs to be done so that those contracts are made public. We have talked to the Attorney General about it. Some States are looking at that if they have to be recorded with the attorney general or some agency, so they can be made public. The ledger contracts, which when they were put in place probably seemed pretty benign, you know, if you put that minimum in at $30 and probably will get down to $10 or $15 for a certain period of time, it didn't take very long for the producer to have a big debit with the processor. So, those are concerns that we are finding at this point.
Page 74 PREV PAGE TOP OF DOC Mr. MINGE. Well, I would urge that both of the groups look at this. We have had this discussed in Congress on several occasions; nothing has happened. One complaint I hear in Minnesota is, well, if we do this in Minnesota, we will not be a competitive State in agricultural production because producers will say we can't afford to deal with Minnesota farmers, given the context in which we have to operate under the laws of that particular State.
You have raised several points here, comments about mandatory reporting. I would like to just bring those of you that are here today up-to-date. Congressmen Thune, Emerson, Boswell, Evans, Pomeroy, Clayton, myself, and I think several others, introduced legislation yesterday for mandatory reporting, and we worked with the National Pork Producers, particularly, in formulating the bill that would apply to the red meat industry, cattle and hogs.
I would like to make one other comment on this intimidation question. I notice in this report that they make some side references to intimidation, and I can just tell you that, from dealing with railroad shippers, especially captive shippers, there is a fear of retaliation. To my severe disgust, I learned that one of the elevator managers that was dealing with our office in connection with problems that he was having with the railroad was threatened with retaliation if he didn't just hold his peace, and it got to the point where he didn't even want to disclose that this had happened. And, I thought we perhaps had made a violation of Federal law because we were attempting to have him as witness before this committee.
So, I recognize that risk, and I think that is something that we have to be diligent on, as we move ahead to ensure that, when there is concentration, that this is one of the factors that the Justice Department considers as anti-competitive behavior. Thank you.
The CHAIRMAN. Thank you, Mr. Minge.
The gentleman from Michigan, Mr. Smith.
Mr. SMITH. Mr. Chairman, thank you. Thank you for being here today and offering us your insight. It seems to me that there is a great opportunity for farm organizations and farm cooperatives to help in this dramatic transition that we are seeing in agriculture, and few have been as aggressive in helping in the marketing, and certainly, Farm Bureau, with your affiliate co-ops, has traditionally assisted farmers.
Page 75 PREV PAGE TOP OF DOC But it seems to me, and I would suggest, that there is even a greater opportunity to expand what you can contribute to our traditional family farm operation in this country by moving into the areas of production contracts, marketing contracts, to be an additional force to make sure that the existing commercial markets out there stay honest. I think too often, it is my opinion, that our agricultural cooperatives have been a little reticent to move ahead in terms of offering that kind of competition. We have the kind of laws on the books that seems to me would open the door to allow our agricultural cooperatives to add a great deal to the competitiveness and to develop the kind of environments where that farmer-producer becomes more than just a hired hand of a commercial marketing or production contract.
I would enjoy all three of your reactions.
Mr. PEARSON. Congressman, I certainly wouldn't disagree with your comments and your suggestions that we need to look at that. I think, at the same time, it is important that, whether there is a contract there or not, that the producers that are doing an excellent job of producing a commodity, or maybe it is a value-added commodity and has the quality that that buyer or processor is looking for, should have the opportunity to have a market for that product as well.
I realize that the situation with pork in the last few weeks has been different. But, I have a neighbor who raises about 50,000 head of hogs a year. His quality is good, very good. In fact, one processor said it was better than what they had really wanted, which sounds a little surprising, but he has then been told that maybe he should have a contract. He said, ''I would rather not have a contract, I would rather just stay on the open market.''
My neighbor was told, then, that, ''We can't take your hogs for a week because we have to take a contract on hogs.'' He delivers over 1,000 head a week, so he delivers a lot of hogs.
It just seems that there ought to be some way to do that. Michigan livestock, I had an agreement with Thorn Apple Valley, which is a cooperative, a livestock cooperative, that, as you are familiar with in Michigan and Indiana and parts of Ohio and now with Kentucky, had a good agreement until Thorn Apple Valley, had to close their doors because of the competition. So, some of those alliances are being put in place, and sometimes they work and sometimes they don't work. I am sure there could be others through Southern States and that alliance that I have with them, I will try to open some of those doors again.
Page 76 PREV PAGE TOP OF DOC Mr. SMITH. Well, what I am suggesting, to make my thoughts clear, is that our ag co-ops could be on a regional basis, and it seems like the potential is there to offer farmers the assurance that there is going to be competition in this new concentration of buyers and sellers to farmers.
Mr. SWENSON. Congressman, if I may, I agree, and we are going to continue that aggressive effort. But, I think the role of Congress to ensure that opportunity comes in two places especially. One is the access to the technology. If, by the nature of concentration that goes unquestioned, the control of the technology is held over here, and not allowed to be spread among the different independent producers and used by them as it has been in the past, then you begin to restrain their opportunity. So, that begins in the opportunity just to have that technology.
Second is you move past that. If you take a look, for example, in Michigan, the Farmers Union is working with a group of soybean producers in the tofu area. Once you have that opportunity, but then to go to the retail market and have access, where again, the concentration in that area limits the access to shelf space, limits the access to the retail outletsI know that the Indiana Farm Bureau and the National Farmers Union, we formed an export cooperative to try to give producers that opportunity to go to the export global market ourselves, and find ourselves with tremendous obstacles because of the market power that is out there in gaining that access. And so, there are some real roles that I think Congress can play in making sure that this entrepreneurial opportunity that you talk about is able to thrive. Thank you.
Mr. SMITH. Mr. Heffernan, new challenges for farm co-ops?
Mr. HEFFERNAN. My greatest alarm, probably, at what has happened this past year are the number of joint ventures between some of our major regional cooperatives. Now, the fact that they are joining together, working together, is very positive, I think. But many of them are also forming joint ventures with these very food clusters that we are laying out here.
Page 77 PREV PAGE TOP OF DOC ADM has a very explicit policy of trying to join up with cooperatives, and they have joint ventures with Country Mart, Pro-Mart, Rice Land, Minnesota Corn Processors, which has a new generation cooperative and such. So, as you watch them, they simplyand if you look, and I have listed in the paper some of the comments of the heads of these cooperativesthey simply see that the system, as Mr. Swenson was just defining, is so formidable that they basically have to join that. So, rather than being an alternative, they are starting to join that. When you see farmland industry bring together a joint venture with ConAgra to deal with wheat, of all things, in the global market, you say, something is changing pretty drastically.
So, as I listen to the discussion we had here earlier and I am a great believer in some of the cooperative endeavorswe have to remember that when we start moving into that sector where these firms are already well established, they are not going to move out of those markets for us very easily.
So, I guess one of my urgings would be to talk with some of the heads of these major cooperatives that are beginning to form these joint ventures to find out what suggestions they might have in terms of how Congress might help a bit. I will guarantee you that they didn't put those joint ventures together because that is what they wanted, and many of them are having a very difficult time trying to explain that to their members right now. But, I have to think they probably did about all they could do.
So, there is a key information source that I would hope you might try to gather some information from, and maybe they have some additional suggestions of what Congress might have done to help them along, so they didn't have to do this.
So, we have got to be careful. There are some small niches out there for sure. But, when we go up against these major firms who have already been established and have this system basically, as Mr. Swenson said, from the gene all the way down to the supermarket shelf now, they have almost got to be a part of that seamless situation they think, or they will be left out.
Page 78 PREV PAGE TOP OF DOC The CHAIRMAN. The gentleman's time has expired. Mr. Boswell.
Mr. BOSWELL. Well, thank you, Mr. Chairman.
First of all, thank you for being here, all of you, and your comments so far. I appreciate it. I was a little bit intrigued by the statement that you made that the Farmers Union and the Indiana Farm Bureau have co-op'ed together.
Mr. SWENSON. No, we each have our own effort.
Mr. BOSWELL. Oh, I thought you said you have co-op'ed together. Well, I was kind of intrigued with the thought that you have co-op'ed together. [Laughter.]
Mr. SWENSON. And we may have to look at that. [Laughter.]
Mr. BOSWELL. I would suggest that might be a good idea.
I was a little involved with our State and four or five other States on a clean grain compact to try to specially grain and so a few years ago, and there are a lot of obstacles, let me tell you. I could tell you lots of stories.
But, I think you have already answered in different ways. Maybe you might want to elaborate a little bit more. What do you see as the impact on the producer as these consolidations take place? I was going to talk to you about the value-added, and so on, and if time doesn't run out, and maybe it will. But, what do you see the impact on your membership as far as market availability, and so on, as these consolidations take place? Anybody? All of you?
Mr. PEARSON. Congressman, I think Lee has touched on it pretty well, but when you take the genetics that are there and then you see alliances of the companies and what they put together in the way of a product, whether it is BT or whether it is some genetically-engineered or the round-up of products to the end-user, then there are ways they don't suggest that, well, if you buy our product, we will take care of you, but these are the things that you have to do in the process. So, you almost are caught in the middle in that system. At least, I see that coming down the road. So that either you are going to have a contractI mean, we go to get our fertilizer; we get our seed; we get our chemicalsthey are all different. And, today that may be all the same company and then there are reasons why you should do it all with the same company.
Page 79 PREV PAGE TOP OF DOC Mr. SWENSON. I see the issue of concentration threatening the structure and the future of independent family farmers. on. It could take off, but it is not.
It has a lot of challenges.
The CHAIRMAN. The gentleman's time has expired. Mrs. Chenoweth.
Mrs. CHENOWETH. Thank you, Mr. Chairman.
Mr. Swenson, I have great respect for you, but you are sure backed up by a couple of heavy-hitters. I am aware of their work and/or their publications. I thank you for being here, all three of you.
You know, I would like to point out that over 50 years ago Nobel Laureate Frederick von Hyak stated that the core strength and flexibility of market capitalism as being the making of economic decisions by many relatively small resource owners who are close to the economic circumstances of time and place; and that such a market structure results in the efficient use of resources and competitive markets.
Hyak clearly pointed out that the concentration of economic decisionmaking in a relatively small number of individuals, regardless of whether these individuals are government bureaucrats, as in the former Soviet Union, or corporate executives in large companies, the result is the same. It is the inefficient use of resources and noncompetive markets.
Mr. Swenson, do you agree, or how do you feel, that if Cargill acquires Continental, economic decisionmaking clearly will become more concentrated, and therefore, the efficiency of our capitalistic grains markets is very likely to decline?
Mr. SWENSON. I think there does reach a point at which you have a reduction in the efficient operation, and I am very concerned that the drive, as we look at many of these entities, not just Cargill, but many of the other entities,
entities, their drive is not necessarily efficient use of resources or what kind of return do they give their stockholders, or what kind of market power controls does it take in which to satisfy that goal and that objective?
Page 80 PREV PAGE TOP OF DOC Mrs. CHENOWETH. Mr. Swenson, I'd like to ask you or Dr. HeffernanI have introduced H.R. 222 in the 106th Congress to provide for a country-of-origin labeling for meat and meat products. Do any of you agree that country-of-origin labeling will provided a vehicle for American producers to compete more fairly in the open marketplace? Not by barriers or sanctions, not imposing on free trade, but by giving the consumers the right to choose how they will buy their meat and giving them the knowledge of where the meat has been grown and produced.
Mr. SWENSON. We strongly support your legislation. We believe, as producers who contribute millions of dollars every year to promote our products, that putting the label on there will enable us to promote it, not only domestically but globally in the free market. And so we're strong supporters. We think it complements the market initiative.
Mr. HEFFERNAN. I spend considerable time working with consumer groups in urban areas these days, and, increasingly, the consumers are beginning to raise the questions about how things are produced, where they are produced, and these kinds of things. And they think they have the right to know that. I think is just simply opening up, not putting any other constraints, other than to simply say, where is it produced? There are some real major issues out there.
The faith community, for example, is very concerned about the fact thatI mean, after all, we are the No. 1 importer of beef in the world, that in fact we have people here consuming beef that's produced in countries where, in fact, the people have at least inadequate diets. So there is a whole host of concerns of that type that people want to have a better idea about where their food is coming from, who might be deprived of it because the are eating it in this country.
I think I sometimes become uneasy because we keep talking about food safety in this country, and we keep putting on more rules and restrictions and regulations in terms of food safety, on meat products, for example. The interesting thing is, in beef, the major problems have been, the only one of really in the last few years has been with hamburger. And of course we know that much of that hamburger is coming in from other countries of the world. I'm not at all saying that's where the problem is, but I think it is worth noting. And I think the people may raise some questions about that. So sure I think the consumers have a right to know this. But in the process, I'm pretty sure that some them, for a variety of reasons, and I won't go into all those right now, would pick products that are raised by farmers in this country. Certainly they have the right to know that, at least.
Page 81 PREV PAGE TOP OF DOC Mrs. CHENOWETH. For my remaining time, Mr. Pearson, you heard my question about the country-of-origin meat labeling. Would you care to comment on that?
Mr. PEARSON. Congresswoman, first of all, our policy does state very clearly that we do support country-of-origin labeling. I think that with that goes the responsibility to make sure that our products are the best and what the consumer wants. But I believe they are. So I think the consumer would like to know if it's from the United States or someplace else. It's for that reason that we feel it would be beneficial to U.S. producers.
Mrs. CHENOWETH. Thank you. Thank you, Mr. Chairman. I have a number of other questions. May I submit them through the staff in writing?
The CHAIRMAN Without objection, absolutely.
Mr. DOOLEY. Yes. Thank you, Mr. Chairman.
Reading your testimony, Mr. Swenson, you make a statement about the concern on the concentration and development of food clusters. You say, ''While these connections have profited corporate shareholders, they have severely reduced market competition to the detriment of our nation's producers and ultimately to the detriment of the consumers.''
I guess what you're inferring to there has been price impact, and I guess, if so, then are you contending that you have information that market prices to producers would be higher in the absence of some the concentration that we've seen?
Mr. SWENSON. Thank you, Congressman. I believe that we would see that market prices will be higher by some of the points raised earlier.
Mr. DOOLEY. Have you any evidence of any analysis by any reputable economist that has been able to demonstrate that, you know, based on empirical information? Because we have had several economists here earlier that have been testifying the last few days, and nobody has made that contention.
Page 82 PREV PAGE TOP OF DOC Mr. SWENSON. I would look at it in this way: I don't have any economic model or study, no, but when you take a look at producer increased costs of transportation, of moving the commodity outside, what was discussed earlier, that region of market, that reduces the economic returns to the producer per commodity.
In a number of those factors, which can be documented, of costs that have increased for producers, that is the result of loss of local market opportunity.
Mr. DOOLEY. I'm a farmer, myself, but if I have closer proximity to a market, that is giving me, basically, an advantage. And why should not I benefit by that proximity, if that is in fact one of the resources that, you know, is a factor of production? I mean, are you saying that we should have the Federal Government stepping and saying that, you know, location and cost associated with trucking a product to marketplace, that we should provide an additional level of compensation to producers in a particular region?
Mr. SWENSON. No. But you asked the question, Congressman, if there was a economic impact on producers because of what unfolds with concentration. In my own State of South Dakota, there was two packing plants, one at Huron, SD, and one at Sioux Falls, SD owned separately by corporations. Smithfield bought the one in Sioux Falls, SD; proceeded, during the day, to purchase the one in Huron, and that night shut it down, did not open it the next day.
So the producers there are now required to go to Smithfield's in Sioux Falls, without question, a 120-mile difference in hauling their pork. Attempts were made to acquire the ownership of that plant by a cooperative, by the community, which were absolutely resisted by Smithfield.
For what reason? They can control the market within that region, and eliminate that competition. What I'm saying is that is an economic impact on producers because of that trend in concentration.
Mr. DOOLEY. You also make a statement that some of these changes in terms of the structure of the agricultural sector are the result of notoriously shortsighted market forces. Can you explain to me how market forces today are any different than they were 10 years ago, 20 years ago?
Page 83 PREV PAGE TOP OF DOC Mr. SWENSON. I think there is a difference in the nature of a number of factors within, not only the production sector, but the market sector. You have, first of all, capital. Its movement is significantly quicker today as to where it can be moved, and its impact in the structure of the market and its benefit. When you take a look at what we can do in the area of control of technology and what it's going to lead to, there are just many factors that are affecting decisions
Mr. DOOLEY. I guess so. My family has been farming for four generations. My major objective in my farming operation is to maximize my bottom line. That is the result of utilizing all management decisions and input that allow me to do so. Now, that wasn't any different 20 years ago, or 50 years ago by my grandparents and my father; we used the latest in technology at that point, made the investments accessed the capital at the cheapest rate possible in order to maximize our bottom line. Now I don't understand how that has changed.
Mr. SWENSON. I think there are a number of factors that have changed. First of all is the access to capital has changed dramatically from where we were 20 years ago.
Mr. DOOLEY. My grandparents were a good credit risk and could show that they could have return on equity; they could get capital. That hasn't changed today.
Mr. SWENSON. The financing mechanism, I pointed out earlier has changed, and the financing has changed. In the 1980's we were equity-financing. We switched to cashflow financing. Cashflow financing doesn't work today, and so we're back to equity-financing because we've had some increase in equity. Now we see the future for financing for many tied to required-on-contracting to be able to get the access for the capital.
Mr. DOOLEY. My experience, at least with the agriculture in California is, if you're a good credit risk, if you can demonstrate your investment-on-capital assets you have, and you can show a return on those, you can get capital. On your production financing, which is cashflow, if you can demonstrate you are going to be able to repay, there is capital available there. I guess I really don't understand what has changed. I mean, that is the same way it was 50 years ago.
Page 84 PREV PAGE TOP OF DOC Mr. SWENSON. I would think, Mr. Congressman, there are some that in varying parts of the country, as well as commodities, it is going to vary. In the case we represent, a lot of them are some general commodities, and the nature of financing has changed dramatically from that of financing for some of the fruits and vegetables in the cooperative system as well as even for peanuts and tobaccothose that have a solid program behind themselves.
Mr. DOOLEY. I would also just have one other comment. My concern is another statement that you make, because I really believe that the future of U.S. agriculture is accessing international markets. And we only do so by being a low-cost competitor, which means adopting the latest in technology that allows me to produce a crop cheaper and more efficiently.
You make a statement that biotechnology and the terminator genes have put the farmer at the mercy of the food cluster for seed to plant his crops, and you also go on to say, ''In addition, precision farming's global positioning system separates management from the production of agriculture.''
I'm using biotechnology in my crops. I mean I'm buying seeds that have some advantages. You know how I'm making my decision, which I think is probably true with every farmer? On what's going to maximize my bottom line. Does the added investment going to show me a greater return? And I think that's a good thing because it's making me more profitable.
This comment about precision agriculture, we are actually doing some experiments with that on our farm now. That is allowing us to be a better manager, to show an increased rate of return in production on our crops. I guess I'm a little concerned when one of the larger farm organizations in this country make a statement that these might be bad things.
Mr. SWENSON. I appreciate that. I'm going to ask Mr. Heffernan to address this because it is an area that they have been evaluating as part of the concentration study, if I may.
Page 85 PREV PAGE TOP OF DOC Mr. HEFFERNAN. I, too, am a farmer, as a matter of fact, a weekend farmer, but the point we are really trying to make on that is that precision farming, in the sense that it begins to remove us a bit, if we do it all basically in your office, if you do not have to be out on that land as much, is you begin to move back, you get your yield; you get that particular information. Now that's not to say that some parts of that aren't very good. Please don't misunderstand me. I think the yield monitor and some of those things are terribly important. But to accept the whole thingthe point I'm trying to make is that as we begin to move back away from having to be out on that land, if you can make the decision in your office based on the material that is accumulatedthat is, of course, after you get the soil samples and suchand you can make it there, they can make it anywhere else. It doesn't have to be just in your office. Monsanto begins to collect that data, they could make the decisions back in St. Louis in terms of what had to go on that land.
So all I'm saying is, once again, see the whole thing we're moving toward is moving a lot of that management away from the people who actually do the labor and work on as in your farm, when you're not here, you'd be out on the farm doing it, moving it farther away. And we're setting up the stage we're going to have, you know, those who really do the labor, those who do the management, and then you have the stockholders involved.
That was the point we're really trying to make. You team those two things up, it really sets the cluster up so they can have major control on, in a sense, what happens on the land where you are farming at this point. And you as a farmer, one of the reasons you probably want to do that is because you do like making those managerial decisions and being on topthat's probably one the things that attracts you to the farm.
Mr. DOOLEY. Well, just my closing statement is, I enjoy being a farmer because I can make money at it. I guess I'm a little bit concerned about, you know, proposals that could, in fact, restrict access to technology that can allow myself and other farmers to maximize their profitability and viability.
Page 86 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you. The gentleman's time has expired. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. I deeply regret having had to miss a major portion of this hearing. I have a markup going on in International Relations Committee.
I was very interested, tooat the time I left we were still hearing from Dr. Drabenstott, and I want to direct the panel to a point that he made in his statement. He talks about the supply chain consolidation that has occurred in agriculture. And writes on page 2 and 3
Supply chains are highly effective at delivering low-cost, high-quality food products to consumers, but they also bring enormous change to agriculture. They change how agriculture does business by replacing spot markets with contract production. They change where agriculture does business by concentrating production near processing facilities. And they change who does business by concentrating production in the hands of savvy producers who can manage tight production controls and negotiate sturdy, long-term alliances. The firms that forge the supply chain, what some analysts call the integrator, simply coordinating fewer rather than many players. It's a matter of keeping transaction costs low.
It would seem to me that he sees the ongoing emergence of supply chains as directly at odds with the history of production agriculture in this country with its preponderance of independent, family-size production units. Now I'd like the panel to discuss whether or not they believe that the notion of the independent family farm production unit has an ongoing place in the supply dimension of the nation's food supply and the various attributes that it brings.
Mr. PEARSON. Congressman, I'd give an example, and I think it does if the playing field is level for the independent producer. And some of the things we've talked about, market information, and price reporting, and price discovery, and information and contracts, the availability of those type of things. But one of the things a lot of producers fear as you look at the whole food-supply system, vertically integrated structures, is there a place for them in that structure, or are they going to left out completely? Or can they compete with it?
Page 87 PREV PAGE TOP OF DOC And if you look at where we were with rules, with the regulations and Sherman anti-trust and some of those things back in the 1920's, I think we've probably gone beyond that today. When you couldn't vertically integrate today like we now see taking place. You talk about the family farmer and his ability to compete, and how good he is, and whether they have MBA's or college degrees, and I'm suggest today the majority of production is coming from of the very best, well educated, the most technical people out there. Cause they adapt the technology and the GPS, that type of technology that's coming. You get creative, innovative, and if they have an opportunity to compete, they will be able to do that. But if you look at the verdict on the structure, for example, where you now have a processor or a company can own 300,000 or 400,000 sows, and that's a part of the system that the small producer cannot be a part of, you've quickly replaced 300 or 400, maybe 500, good family operations that are efficient because they no longer can be part of that system.
That is a concern we have, and with the whole food system. Where does the person that maybe even has the contract, could he fit in, or if he doesn't have a contract, does he have a place today to still be a producer in this country?
Mr. POMEROY. That's a very interesting point. Gaining leverage for the production side of the business, to gain leverage, or the processing side of the business, to gain leverage over the independent production component of the industry, that isn't necessarily efficiency. It certainly is going to improve their profitability at the expense of the independent producer, but it doesn't necessarily mean we've suddenly got a better-functioning market.
Mr. SWENSON. Congressman, if I might follow up on that, 30 years ago we tried to work with tomato producers in Indiana, where we had the structure to bargain with processors. In the process of bringing those processors together, it wasn't uncommon for the field men of the processors to ride the parking lots of those producers at night. And a lot of those processors knew next year they would not have a contract.
Page 88 PREV PAGE TOP OF DOC Today in the meeting, working with some of the best pork producers in the State, we'll be recognized nationally, they're now taking of bargaining rightscollective bargainingsome of those type of things, what's in contracts, that six months ago they wouldn't even consider. That's the concern we have today.
Mr. SWENSON. Congressman, I would endorse what Mr. Pearson has said as to the challenge that the independent producers today face in the future. As we see this trend, that you just read, unfolds. We have the most savvy producers because, as Congressman pointed out, we've had the access, we've been able to individually apply that technology, that entrepreneurship, all those initiatives. We were able to do that. And as we see this trend unfold, our concern is, will we make sure that we still have that access? That was the point of our testimony, was to raise the question, are we going to make sure that the savvyness of the independent is still having an opportunity.
That's what the debate of the concentration is all about. You see the trend line.
Mr. POMEROY. You're not resisting change; you're not resisting innovation; you're not resisting technology.
Mr. SWENSON. No.
Mr. POMEROY. You are resisting, however, marketplace restructuring that ultimately leverages out the independent producer. Is that correct?
Mr. SWENSON. That's absolutely correct. We would not be where we are at today if it hadn't been the entrepreneurs applying all those technologies. And it goes beyond just technologies. The nature of conservation plans, going back to a lot of activities that individuals took and applied to their operations, made us what we are today.
The CHAIRMAN. Mr. Stenholm
Mr. STENHOLM. Both of you mentioned concern about the impact of the proposed continental acquisition regarding delivery points and delivery systems. Mr. Sims, in his testimony coming up, addresses that in believing that the new system the Chicago Board of Trade initiated the year 2000 will answer those concerns. Do you agree or disagree?
Page 89 PREV PAGE TOP OF DOC Mr. SWENSON. Good afternoon, Congressman. We have some concerns, and we don't know at this point whether it's all good or whether it's bad. We know that there's an over-capacity in the grain storage and exporting facilities. We'd hate to you ever get to the point that you could use 100 percent of it because then the flexibility would be gone. We know that there are some locationsyou look at that merger that brings Continental and Cargill facilities that are currently close together. What happens to those facilities? And we've already talked about delivery points as it relates to the futures markets, and will those future points still be there. Basis becomes pretty important to producers.
Mr. STENHOLM. You have not as yet analyzed the proposed changes in the delivery system?
Mr. SWENSON. Not at this point, but we just expressed concerns as to what the ramifications are, and what it does to the marketplace and access.
Mr. PEARSON. I would agree.
Mr. STENHOLM. Both of you, in discussing the Cargill-Continental proposal mentioned the importance of price discovery. If you could have a perfect world in regard to price discovery, what would you envision the market situation looking like in both commodities and livestock?
Mr. SWENSON. The perfect world. Thank you, Congressman.
I think as we take a look, we make sure it's timely reporting, even into as contracts, not necessarily when they are signed but at the time at which the productin a timely manner in which the product is going to move to the market, at which the spot market, the open market, is in direct competition with. So that we have, you know, a broader discovery, bigger discovery system.
I think, if we're going to, in our global initiatives, fight for price transparency, and that's been one of our Government's initiatives for years, is to make sure we have true transparency in the global market. Then we need to make sure we have price transparency in the domestic market as well.
Page 90 PREV PAGE TOP OF DOC Mr. PEARSON. Congressman, as I look at grains, where we're situated, I wouldn't say it's perfect, but it's adequate. We have terminal locations within 25 miles, at least three terminals. We can see what the river market is doing in the southern part of the State. The Board of Trade has opened, we can see what's taken place with those future transactions everyday. We know what the basis is. We know whether we want a price or whether we don't want a price.
So I think from a grain standpoint, it's pretty good at this point. I hope that doesn't change. Livestock, I say, is probably a little different because we are seeing less of access to markets, at least to country markets, for delivery points. Price reporting is still somewhat of a problem, and we discussed this with the Secretary in December, and they indicated they had done a study in the western Corn Belt on corn prices using 1996 data and found that the average price was $1 to $1.50 above the top quotes of the day. It would indicate that something is still wrong if you look at livestock reporting, price reporting.
Mr. STENHOLM. Thank you.
The CHAIRMAN. And thank you, gentlemen, for appearing before the committee today. We appreciate it very much. Excellent testimony. I know that there is some concern about catching an airplane, so again, thank you so very much.
Well, right now, the third panel of the table. Mr. Frank Sims is President of the North American Grain Division for Cargill. Mr. Sims, you can begin when you are ready. We appreciate your being here.
STATEMENT OF FRANK SIMS, PRESIDENT, NORTH AMERICAN GRAIN DIVISION, CARGILL, INC.
Mr. SIMS. Thank you very, Mr. Chairman and Members of the committee.
I am Frank Sims, president of Cargill's North American grain business, and I'm here today to discuss Cargill's acquisition of Continental's U.S. grain business. With me today, also, is Don Hilger, who is an assistant vice-president in our North American Grain Division, and who is our senior economist.
Page 91 PREV PAGE TOP OF DOC We have filed a written statement explaining Cargill's acquisition of Continental Grain in more depth. Let me summarize the three main points of that submission.
No. 1, and explanation of why Cargill's purchase of Continental's grain business makes sense. Two, this acquisition will not hurt competition nor harm farmers. And, lastly, our acquisition should end up helping to create opportunities for farmers.
The agriculture marketplace is changing, and we must change with it. For example, seven of the 10 largest U.S. grain handlers in 1995 were not on the list 15 years ago. Three of the new entrants on the list are cooperatives. Most of the top grain handlers by 1995 had integrated their grain-handling activities with value-added processing businesses. Today, domestic demand sets the pattern for grain flows. This reverses the situation 20 years ago when the pull of export demand set the tone for the whole market.
Since 1980, domestic grain use is up 50 percent while grain and oilseed exports are down 25 percent. Grain exporters must compete for grain, for transportation, and for elevation services against a domestic market that is three times larger.
There are also more players and more transparent export markets. The collapse of centrally planned economies and privatization in many developing countries have combined to replace a few big, State-controlled buyers with many small buyers. Export sales are smaller in quantity, more numerous, and more transparent to the marketplace.
Farmers are also more demanding. Our farmer-customers are looking for more information from business partners to help them make planting decisions and manage their business risk better.
So this acquisition makes sense in that it is a constructive response to the forces of change reshaping the grain industry. The combined business we will build with the Continental acquisition will serve more effectively the emerging customer-focus marketplace while extending to more farmers Cargill's agronomic risk management and market services.
Page 92 PREV PAGE TOP OF DOC This acquisition did not cause today's low grain and oilseed prices. Those low prices stem from sagging demand broadened by recent financial problems in key markets in the face of back-to-back good crops worldwide.
In time, these forces will reverse and our investment in Continental's grain business will align our interests even more closely with those of our U.S. farmer-customers. The same demand growth that is needed to lift commodity prices also is the key to restoring profitability in the grain-handling industry. We hope to work with farmers to accelerate that recovery.
Government also has a role in improving U.S. agriculture's prospects. It should not slip back into managing supplies or setting price ranges; rather, it should strengthen the tools that Fair Act gave farmers for those tasks.
In particular, Government should encourage the development of private, individualized risk management and marketing tools. It should help educate farmers to use existing and new decisionmaking tools better, and it should keep open our markets so foreign customers can afford our agriculture exports. And it should also break down the often high barriers that still wall out U.S. agriculture exports from key foreign markets.
The grain industry is not a concentrated industry. A combination of Cargill's 243 U.S. grain facilities and Continental's 83 U.S. grain facilities will total less than 3 percent of the number of licensed grain-handling facilities in the United States, and only about 6 percent of total commercial storage space. Our combined business should handle about 10 percent of the U.S. grain moving off farm.
This acquisition will not damage the delivery process, relative to future markets. Futures markets do not result in large-scale delivery of cash grain. Only 1 to 2 percent of futures contracts result in delivery. What is important is the possibility or the threat of deliveries. With as many as 10 elevator companies along the Illinois River with facilities that could be designated regular for delivery and the ability to use shipping certificates for delivery, the Chicago Board of Trade futures markets will have ample deliverable supplies and market liquidity.
Page 93 PREV PAGE TOP OF DOC The grain export industry will continue to be highly competitive. An exporter like Cargill must compete with all grain buyers, not just exporters, in attracting grain to export. Substantial excess capacity in export handling facilities, the presence of different types of competitors, and the need to draw past domestic users to put it in export position, all result in very aggressive competition for export business.
Areas to entry in exporting are extremely low, and market share is a vulnerable to quick erosion. Country elevators and other sellers-exporters have a rich range of options in an industry where margins are small and subject to intense competition. The U.S. farmer will continue to enjoy access to a large, diffuse and high competitive grain marketplace.
Continental's 83 grain-handling facilities in North America are predominantly in communities we do not serve. This will enable us to extend service packages to additional farmers in new regions. Under our Cargill agri-rising initiative, we will offer such services as agronomic advice on input and application techniques that optimize performance while minimizing unit cost. We will offer risk-management tools that include both standardized marketing options and customized risk-management tools designed to meet a customer's unique needs.
And we will also offer the ability to use country facilities more efficiently to minimize waiting times and to use terminal facilities more flexibly to avoid congestion or to leverage transportation opportunities.
The combined business also will extend farmers reach to new markets in a variety of way. By investing in grain-handling facilities, processing plants, seed mills, and other end-users in overseas markets, Cargill has positioned itself to be a better sales representative of U.S. grains abroad.
We have met with the leadership of many farm and commodity organizations in recent weeks to discuss our purchase of Continental's grain operations. As in our testimony today, we have discussed both their concerns and their opportunities in this development. And we have emphasized one other point, on which I would like to conclude. Farmers success and ours is increasingly bound up in achieving fair and open access to growing demand for food in the rest of the world. Today, only 10 percent of global food consumption is served through trade. If we could double that share to 20 percent, we would have a much healthier environment for all of U.S. agriculture. That is not an unrealistic goal; it is what trade liberalization has achieved for industrial goods. We hope we can all work together toward that goal.
Page 94 PREV PAGE TOP OF DOC Thank you very much.
[Due to its length, the prepared statement of Mr. Sims is on file with the committee.]
The CHAIRMAN. Thank you, Mr. Sims. I understand we may be on top of a vote shortly. So I'll keep my questioning brief and let my colleagues have their shot.
But I noticed in your written testimony that you said that the Cargill-Continental merger should not be compared to other mergers that are, perhaps, larger. What is the difference?
Mr. SIMS. I think the difference deals with the issue of concentration in some of those industries relative to the concentration in the U.S. grain business. As I pointed out in my testimony, the Continental assets83 assetsalong with the assets we currently operate will represent a fairly small number of total grain-handling assets in the United States. Actually, there are some 10,000 grain-handling assets in the United States. We'll operate 243 of those plus 83 from Continental.
But more importantly, there is a very diverse demand base that producers have to market their grain to. And we don't believe that by combining the Continental assets with the Cargill assets that we will in any way make it detrimental to prices paid to producers.
The CHAIRMAN. Is there a relationship, in your opinion, between concentration in agribusiness and the low commodity prices today?
Mr. SIMS. I don't think there is anydon't that there is any way that we can tie those two together. As a matter of fact, if you go back over the last 20, 30 years and look at the cycles, we have high prices, we have low prices. They tend to be more tied to large supplies of grain and/or weak demand as opposed to concentration in the marketplace.
As I also stated earlier in my testimony, we've had a complete revolution of the makeup of entities involved in exports. Today we have a very vibrant export marketplace. We had a very vibrant export marketplace 20 years ago. And I don't think there is anything that has occurred from a concentration standpoint that has negatively impacted that.
Page 95 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you. Mr. Minge.
Mr. MINGE. Thank you.
I too would like to welcome you, Frank. It's great to have you here.
Mr. SIMS. Thank you.
Mr. MINGE. I can almost see the chateau from this Second Congressional District and I appreciate the opportunities to visit with Cargill executives.
I do believe that much of the analysis that you provided us is helpful in understanding the advantages both to your firm and to American agriculture from the combination. On the other hand, I also recognize that there are some areas where there is a higher level of concentration than say if you just at the number of elevators, the amount of grain you purchase from farms, the storage capacity, and so on. And I'd like to focus for a moment on the export trade.
As I understand it, if this combination goes through as has been proposed, the Cargill-Continental combined operation would account for 42 percent of the corn exports in 1998, 31 percent of the soybean exports in this country, and 19 percent of the wheat exports. And the figures that I have indicate that if you go back a year before, or something like that, that Cargill had 14.5 percent and Continental had 13.1 percent. So, how much this changes from year to year, I don't know, but it would indicate that Continental is making a very substantial contribution to this level of concentration that would result with respect to exports.
And that if you look nationally, 81 percent of the corn exports are now accounted for by the top four firms, Cargill, Continental, ADM and Zennoh, which is a firm I'm not as familiar with. But could you speak to how this level of concentration is not a cause for concern because to my way of thinking, we're then in the same position we are now with hogs, red meat, and livestock packing. And instead of the existing four top firms having, what, 81 percent of the corn exports, the top three three firms would have 81 percent of the corn exports.
Page 96 PREV PAGE TOP OF DOC Mr. SIMS. And on the surface, I can understand why those type numbers would cause so concern. But I think as you peel this onion back a little bit and better understand the makeup and the structure of the export markets, I think that you can better understand why this really shouldn't be cause for concern.
First of all, there are some 13 to 15 different exporting companies involved in the export markets day in and day out. The fact that only four grain elevators represent some 70 to 80 percent of the grain that gets handled, I think speaks more the efficiency of those facilities, the fact that those companies have been prepared to invest dollars to make certain they have competitive assets. I think it's also because several of those companies also have grain-handling assets that most of the ranges involved in exports today.
So there are a combination of factors around that, that explain why you've ended up with 70 percent or so of total grain exports being funneled through four or five elevators.
You still have some 13 to 15 different grain companies, though, accountable for that grain getting sold.
Mr. MINGE. But my concern is, and I think one of the concerns that is being expressed more generally in the agricultural community, is that given the investment one must make in a good facility and rail links that have to be established, that if, if you and if Continental had figured out how to put together good facilities, and you combine as a firm, or as firms, it becomes more daunting for someone else to make that investment in hopes that they could compete effectively because they will respect you as a very good business operation. And going beyond that, the other elevators that are originating this traffic and using your facilities to load their grain into ships, will be forced to sort of choke point, where there are a handful of firms that have to deal with. And it will affect the competitiveness of that particular point in the grain export business.
Page 97 PREV PAGE TOP OF DOC Mr. SIMS. There are a number of public export facilities that are operated out of the Texas Gulf and the Gulf of Mexico, that are available to any exporter who chooses to get involved in physically handling grain as opposed to paying a Continental or Cargill or Zennoh to do that. So there is a sufficient amount of physical elevators as well as physical elevator capacity if those exporters choose to do that.
They've simply made the decision that they don't believe the financial rewards are sufficient enough for them to get involved in managing physical elevators.
Mr. MINGE. Let me raise another issue that's come up. As I understand it in the Far East, Continental has been a marketer of soy-bean products, and so they have a sales operation there, and they are sourcing most of their soybeans from the United States, if not all of them. And they've become quite an advocate for the advantage of U.S. soybeans. And I'm not sure what all these advantages may be, but apparently, according to some of the folks in the soybean association, this has been something they have really appreciated from Continental.
As a company, Cargill sources from several different parts of the world when it's selling soybeans, and you would not have the same incentive to market U.S. soybeans as having some advantages as compared to soybeans coming from other countries. And a concern that the loss of that Continental soybeanAmerican soybeanless effort will affect American soybean sale opportunities.
Mr. SIMS. Well, first of all, Congressman Minge, Continental had a worldwide grain business, not just a U.S. grain business. So Continental was involved in the export of beans from the world, not just from the United States, just as Cargill is. And I don't think that Continental had the U.S. producer in mind any more so than Cargill has or Cargill will.
I think the issue is simply economics. I think economics govern where soybeans will get produced. The economics govern where and how soybeans will get transported. And economics will govern which origin is likely to be the best source to satisfy a given sale. And I don't think that we have looked at the market any differently than Continental had, and I don't think that we'll look at in the future any differently.
Page 98 PREV PAGE TOP OF DOC Mr. MINGE. Well I would urge that you meet with some of the soybean folks because I think this is a simmering issue. And there is even some reluctance to confront Cargill as a company on it because they say, ''Well gee, if this goes through, we're going to have to make sure that we are viewed more favorably, and we don't want to irritate the company.''
So there is some of this sort of reluctance to step up and
Mr. SIMS. And we will be more than happy to sit down and talk to them about this.
Mr. MINGE. Good. Thank you.
The CHAIRMAN. Mrs. Chenoweth.
Mrs. CHENOWETH. Thank you, Mr. Chairman. Thank you, Mr. Sims for being here.
I wanted to ask you about the importance of gathering information. Isn't it true that in your business detailed, accurate, daily information on literally hundreds of variables impacting the worldwide supply and demand of grain is absolutely essential for your company, or any company, engaged in grain marketing? Isn't that true? You must have all the information.
Mr. SIMS. Well, we certainly try to. Yes.
Mrs. CHENOWETH. Also, is it not true that there are two sources of such information: the public source and the private source?
Mr. SIMS. That's correct.
Mrs. CHENOWETH. And isn't it true that public information generally gathered and disseminated by governments, is disseminated by governments around the world?
Mr. SIMS. That is not true. There are several entities that are involved in the public dissemination of information. As a matter of fact, there are a lot of companies who survive, make their living, simply based on pulling together, assimilating, and disseminating information.
Page 99 PREV PAGE TOP OF DOC Mrs. CHENOWETH. But basic sources usually are of public information or governments.
Mr. SIMS. I don't know that I wouldI don't know that I
Mrs. CHENOWETH. You don't know that you would agree with me on that. But by definition, is not public information available to everyone and has as one of its goals to provide a level playing field for anyone buying and selling grain? Isn't that its goal?
Mr. SIMS. I don't know that I could argue against that.
Mrs. CHENOWETH. But on the other hand, is not private information gathered by companies and/or individuals, and usually not disseminated to others, or is disseminated usually selectively? Now by that, let me give you an example by what I mean. And this is where the rubber meets the road, which are concerns that you've heard expressed here.
If a company like yours, or one of the largest firms in the industry, makes a large sale of U.S. wheat for export, public knowledge of such a sale is likely to result in higher United States and worldwide wheat prices. It is very much in the exporting firm's best interest to buy the U.S. wheat and possibly large numbers of U.S. wheat futures contracts before knowledge of the export sale becomes public and before wheat prices increase.
Now such transactions based upon this kind of knowledge are not prohibited in cash or futures markets for agricultural commodities as they are in the securities market. I would hope that it could remain that way, but I'm beginning to wonder. Don't you agree that large grain trading companies have access to the same public information everyone else has plus they have knowledge of their own transactions and information gathered by their worldwide offices and subsidiaries in information gathered by their privately owned reconnaissance satellites. Isn't that the case?
Mr. SIMS. Well sure. I mean we have proprietary information that we make use of every day. I don't think there is anything improper, unethical with that.
Page 100 PREV PAGE TOP OF DOC Mrs. CHENOWETH. How would you define the proprietary information for the committee?
Mr. SIMS. Well proprietary in the sense that we may take a look at the same set of public variables that any entity may look at, but we may draw a different conclusion from that, simply because of the different mindset we bring to that. That decision would then be of a proprietarythat conclusion we draw should then, or would then, be of a proprietary nature. And I don't know that we had to be precluded from having an opportunity to make those type decisions.
In order for us to operate on a global market and to maintain some reasonable competitiveness, I think we have to have the ability to do those type things. And to the extent that we have to share at all times any and everything that we do, know, or think, I think we eventually put ourselves at a disadvantage. And I think longer term, that is not in the best interest of the U.S. agriculture.
Mrs. CHENOWETH. Do you have any other examples of proprietary information that you would like to share with the committee?
Mr. SIMS. No. I think what I just defined for you is more of a general nature of what we would reference as proprietary information.
Mrs. CHENOWETH. Mr. Sims, I'm concerned, sincerely concerned, that by combining the No. 1 and No. 2 companies in the grain-marketing industry not only aggregates their physical facilities, it also aggregates the inside information that I referred to, and the gathering capabilities and increases, at least proportionately, their information advantage in the United States and world grain markets.
And basically, I think that you can pick up from the questions, generally, that's our major concern. And I think we're going to have to look very carefully at that. Do you care to comment, sir?
Page 101 PREV PAGE TOP OF DOC Mr. SIMS. I think it's a valid issue for you to raise, but as I stated earlier, the type of information that Cargill gathers and dissects today, will likely be unchanged once we acquire or assimilate the Continental assets into the Cargill base of assets. So I don't think how we go about gathering information, how we go about interpreting that information, and how we go about making use of that information will change at all as a result of the Continental acquisition.
Mrs. CHENOWETH. Thank you very much.
The CHAIRMAN. Mr. Stenholm.
Mr. STENHOLM. Mr. Sims, Cargill is a privately owned corporation. Correct?
Mr. SIMS. That's correct, sir.
Mr. STENHOLM. If I were to ask you what the return on equity for your company was, could you or would you answer that question?
Mr. SIMS. I think Cargill would be prepared to make that information available. Yes. I mean, the reason I wouldn't answer is because I don't have, right at the tip of my tongue, exactly what that has been by year for the last 2 or 3 years.
Mr. STENHOLM. You're experienced in international trade exports. Correct?
Mr. SIMS. We like to think that we are. Yes.
Mr. STENHOLM. What's the biggest problem that you have selling the grain that you buy from our farmers at a higher price in the international marketplace?
Mr. SIMS. I would say that market access is probably one of the greatest issues we face country by country and
Mr. STENHOLM. Describe for me, give me one example, perhaps, of market access which you have a difficult time.
Page 102 PREV PAGE TOP OF DOC Mr. SIMS. Well, it's more in the form of trade policy, state rules that are in place by country, be it Japan, be it China, where various attaches may be involved, or certain barriers maybe erected that make it more difficult for certain U.S.-produced commodities to compete with locally grown commodities. And I think if we have the ability through world trade discussions or what have you, to level the playing field, such that the U.S. producer had fair access to that demand
Mr. STENHOLM. I guess I haven't asked the question right. When you sit down, or you attempt to make a salewho are you competing with? I'm the buyer, and you're one of the sellers. Who are some of the other sellers that you have to compete with?
Mr. SIMS. There are two issues that we face from a competitive standpoint. One would be other domestic exporters involved in the business. In the written submission that we made, we laid out an example of a typical tender that would be held by a Taiwanese importer. I think there were 13 different U.S. domestic exporters who competed for that business on any given night. As a matter of fact, the Taiwanese buyer took the top five, came back, rebid for that grain, and there was like 16 cents a ton that separated the difference between the seller and the next cheapest price.
So we have that type of competition that we face. On the other hand, we have other origins that compete for that same base demand. Argentina is a large producer of maize. So when we're trying to sell corn into certain markets, we have to compete with maize produced
Mr. STENHOLM. Describe Argentine competition to me. Are we talking about another proprietorship, another individually owned business competing with Cargill?
Mr. SIMS. Yes. We're talking about private entities involved in the procurement and trading of Argentine maize who compete in world markets. Same for South African maize. These are all private entities who are involved in the gathering, procurement, and the sale of maize worldwide.
Page 103 PREV PAGE TOP OF DOC We compete with that day in and day out.
Mr. STENHOLM. What percent of the competition that Cargill faces is individual proprietary type free-enterprise businesses versus government-controlled or government intervening in some shape, form, or fashion? Would you have a ballpark figure?
Mr. SIMS. I would say the vast majority of what we face is basically privatized trade. Now let me qualify that by saying that you have countries like Canada, Australia, where you have government boards that are involved on the export side of commodities grown in those countries. But for the most part in the global marketplace, we're competing with other private entities or other private companies involved in the export of commodities.
Mr. STENHOLM. Canadian wheat farmers contend that their board does not give them an advantage over sales that you or other companies in the United States are involved. Do you agree or disagree with that? Is it fair competition?
Mr. SIMS. Well, I don't think that it is totally fair competition, and it's not totally fair in the sense that a good deal of what occurs in the pricing mechanism in the Canadian system is not transparent. You know, whereas in the U.S. marketplace, a great deal of what occurs, be it the trade of barge freight, the trade of ocean freight, or the trade of the outright commodity, is fairly transparent. You don't have a system such as that in Canada, and to some degree in Australia. And I think it provides the board somewhat of an advantage relative to the other private entities involved in the export of commodities.
Mr. STENHOLM. In the so-called free-market system where you're competing, the lowest bid is going to get the business. Correct?
Mr. SIMS. The lowest offer. That is correct.
Mr. STENHOLM. The lowest offer is going to bet the bid.
Mr. SIMS. That's correct. The lowest offer with the proper quality around it will get the bid. That is correct.
Page 104 PREV PAGE TOP OF DOC Mr. STENHOLM. This is one of the things that's bugged me for years, it is in your testimony, you encourage us to produce more so we can be a reliable supplier. It makes sense. If you don't it to sell, you can't compete for the market, somebody else is going to get the market. But if we're constantly having more supply than there is demand, then you're going to have constant pressure on downward on price. And in a true market system, ultimately somebody doesn't produce it. But so far we haven't found that true market system in which we have no production because somebody, someplace is going to produce it, and you're going to constantly have that downward pressure.
I don't ask for an answer today, but one of the concerns, and I've spoken it twice today, is that somehow, some way we have got to get a little more cooperation between the Cargills of the world and others to stop this constant downward pressure on the producer because it matters not whether you're a producer in Canada, or Australia, or Argentina, or the United States, we're finding that the prices that we're receiving under this market system is not adequate.
And that's why I would like to see the return on equity of Cargill to see the relationship between what it takes for you to stay in business. And I say this not as an anti-Cargill, but from the standpoint of this market system that rhetorically have to argue time and time again over in the bid dome, the philosophical arguments. I think it's relevant to the question of what's called this hearing today.
Mr. SIMS. And, Congressman, let me just make one comment that specifically, as you address Cargill's return. I manage Cargill's North American grain business. I've been involved in the grain business for 26 years, and I can tell you that if you go back over those 26 years that I've been involved in the grain business, that the net margin we make handling commodities today is less than it was when I started in the business 26 years ago.
That is how competitive the business. And its a function of excess capacity in this industry. And so when we talk about promoting exports, we're talking about something that we is good for producers as well as Cargill. Not just for Cargill. The way we're going to go about generating better prices is by creating more demand for the goods and services that we produce.
Page 105 PREV PAGE TOP OF DOC Mr. STENHOLM. And I absolutely agree with that philosophy, and struggling for some answers of a difficult problem.
Mr. SIMS. I know. It's a very complex issue.
Mr. STENHOLM. Thank you.
The CHAIRMAN. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman.
Twenty-six years ago, by my math, 1973, there was a considerable amount of grain being purchased at the time, as I recall, by the Soviet Union. And Cargill was all over that one. I'm not surprised your margins were better than they were now. We remember some of the history of that deal.
Mr. SIMS. Well, if you want to go beyond that, and say from 1980 until 1990, for the last 18 years. The point I was attempting to make, Congressman, is that the margin structure in the grain business has been bad. And it is tied more to demand than anything. And so what we need to focus on is some way to try and build consistent and better demand for U.S.-grown agriculture.
Mr. POMEROY. You make your point well. But if that's true to Continental and Cargill, two of the largest entities out there, what might we draw from that, as committee Members, looking at this relative to every smaller entity in your grain-handling business? Are they under the same pressures, and will there likely be surge toward merger activity?
Mr. SIMS. Well, I think that what is occurring at Cargill is no different in the industry in general, but I also think that that is exactly why you're seeing the type of rationalization occur in the industry. You know, country elevators, farmers, co-ops, commercials are saying, there's excess capacity, their facilities are no longer in the normal flow of the movement of grain. That has to change, and we must do something about it if we are to survive in this business.
Page 106 PREV PAGE TOP OF DOC And so you're seeing consolidation occur at the farm level, all the way through the marketing chain. And it will continue to occur because the economics are driving that.
Mr. POMEROY. Well, so, if I can understand what you're telling me, we're looking at what this merger would accomplish, and it's ultimately producing about 35 percent of all U.S. grain and oilseed export handling capacity would be represented in this new entity. And you're telling us essentially you ain't seen nothin' yet. This rationalization, as you call it, is going to continue to produce fewer and fewer entities, probably leaving Cargill with larger and larger capacity.
Mr. SIMS. No. What I'm saying, yes, what I am saying is that there is excess capacity in almost every segment of that marketing chain, from where grain is produced to the point of where it is exported from the United States.
Mr. POMEROY. Not to interrupt your answer, but the excess capacity is not a constant. I mean that is directly related to
Mr. SIMS. Demand. Exactly.
Mr. POMEROY. And then we can have, in fact, wild fluctuations in demand. Is that what you see?
Mr. SIMS. Exactly.
Mr. POMEROY. And so it's inherent there's going to be some excess capacity built into the system because we can't go flat out every year. Wish we could, but we can't.
Mr. SIMS. No, that's correct, but there clearly needs to be some semblance of utilization that is consistently higher than it has been. And until that occurs, the marketplace will have to continue to react to that. And the way they will react to that is by the less efficient not staying involved in the business.
Mr. POMEROY. At some point, that leaves independent producers with a near-monopoly horizon in terms of shippers. Wouldn't it?
Page 107 PREV PAGE TOP OF DOC Mr. SIMS. I'm not quite certain how you get to thatI think what would happen
Mr. POMEROY. Well you just said we are going to continue to economically rationalize, and there's going to continue to be consolidation as a natural consequence of what we are seeing in the market. At what point do you have, really, what might be inevitable marketplace efficiencies reaching a point of changing the face of the marketplace by giving an untenable degree of control in an entity or a handful of entities in the grain-export potential of this country?
Mr. SIMS. But you see, I think that the margin structure and/or the profitability of the business will never allow us to get to that because once you start to creep toward that, as what you describe as a near-monopolistic type situation, you're going to have fewer entities controlling the business, larger margins, more profitable businesses, and so you will then attract people into the marketplace. People will increase capacity, they will build new elevators, and all of sudden things will get out of balance again.
Mr. POMEROY. We've got some considerable experience out my way with consolidation. We sure haven't seen new airlines coming in, even though the margins of Northwest Airlines, our captive airline, is superb. We haven't seen new railroad coming in, even though from the shipping rates we're paying we're certain they're making money, at least on our end of their operations.
In fact, when you have that level of dominance in a marketplace, it has been my observation that the surviving entities can pretty well bludgeon out little newcomers into the business. And so I think that the Justice Department would have a very legitimate concerns to look at, which gets me to my final point as my time's about to expire.
In light of the things that agriculture has seen, in terms of shipping capacity in rail, in terms of market consolidation on the livestock area, which we were talking about yesterday in this committee, there is great concern, especially in these dire times, to look at a proposed merger leaving 35 percent of export capacity in one new entity's control.
Page 108 PREV PAGE TOP OF DOC I think it
Mr. SIMS. Please, let me clarify that because that is a misquote. We won't have 35 percent of the export capacity. That is not the case. As a matter of fact, the industry as a whole is operating at maybe 35, 40 percent of capacity
Mr. POMEROY. How about corn? Let's just break it down. How about corn?
Mr. SIMS. Well, I think what the number represents is if you take Continental's historical market share and Cargill's historical market share, you get that percentage. It doesn't say that the capacity that we would control is equal to that.
Mr. POMEROY. OK, that's a helpful answer. So that's your historic, that's what your historic market position's represent, and you've just told us that this marketplace rationalization is going to be driving a lot of other entities out of business. I think it's going to be bigger than that, given the trends that you've spoken of so well this morning.
But my point is, in light of what we're seeing relative to this, a flat-out rush to consolidation
The CHAIRMAN. I would remind the gentleman that we are down to 5 minutes.
Mr. POMEROY. I'm getting to my question, Mr. Chairman. Why in the world would Cargill ask that the Justice Department complete its reviewI think it was March 15. Cargill has requested review of this proposed merger in a time frame that seemed to me utterly irresponsible and unrealistic, relative to the complexities that need to be evaluated.
Mr. SIMS. Well, I think the Justice Department will tell you that Cargill has been more than cooperative in working with them in terms of time lines and/or in terms of supplying data. And we have asked nor requested any time lines from the Justice Department that would not allow them adequate time to review the case. As a matter of fact, the Justice Department has basically said to us what the time line will be, not Cargill telling the Justice Department telling the Justice Department.
Page 109 PREV PAGE TOP OF DOC Mr. POMEROY. Although you requested a time line of March or May, did you not?
Mr. SIMS. Yes, but keep in mind, we made our submission on the 10th of November.
Mr. POMEROY. Believe me, this market, if this is approved, will be forever changed. So I think that considerable review is warranted.
Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman's time has expired. Mr. Sims, thank you so much for your excellent testimony.
Mr. SIMS. Thank you.
The CHAIRMAN. Thank you for being with us. The Chair would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a Member of the panel. Without objection, it so ordered.
The hearing of the House Agriculture Committee is adjourned.
[Whereupon, at 1:30 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Mark Drabenstott
The views expressed are strictly those of the author, and do not necessarily represent those of the Federal Reserve Bank of Kansas City, or the Federal Reserve System.
The year just past was one of turbulent markets and unmet expectations for most of U.S. agriculture. Public and private attention focused mainly on the steep drop in farm commodity prices, and when the soggy markets might show signs of recovery. Yet while they captured most of the headlines, weak prices were also contributing to subtle, and some not so subtle, changes in U.S. agriculture. Taken together, these changes amounted to a new wave of consolidation that spread throughout the industry. Consolidation is certainly not new in agriculture it has been underway for most of the twentieth century. What is new is the type and speed of the consolidation. The consolidation is receiving widespread attention, but many observers overlook how it will redraw the economic landscape in rural America, posing formidable new challenges for many rural communities.
Page 110 PREV PAGE TOP OF DOC The consolidation now underway in U.S. agriculture is of two distinct types cost-savings and supply-chain. The cost-cutting variety is driven by one simple principle the low-cost player survives. While this principle has been leading to bigger farms and bigger agribusiness firms for generations, what was striking about 1998 was the widespread acknowledgement of its primacy. From family farms to a firm that had witnessed the birth of modern grain trading, there was agreement that the race goes to the strong and the one with the lowest cost. The wide scope of this recognition is clearly a telling indicator of further change to come.
The supply-chain variety of consolidation is newer but may have bigger implications for the future. This consolidation is driven by a different principle building innovative alliances to deliver new and better food products to consumers. Also known as supply chains, these new powerhouses bring substantial consolidation in order to ensure high-quality consumer products, capture economies of scale, and minimize risk. The new pork industry is a dramatic and timely example of this new type of consolidation, but supply chains are spreading throughout a broad sweep of agriculture, a range that will only expand in the years to come.
After reviewing these two types of consolidation, my testimony will address the two key questions that surround this critical topic. First, what does consolidation mean for U.S. agriculture and its participants? And second, what issues, if any, does the new wave of consolidation pose for public policy?
My testimony will show that consolidation in U.S. agriculture is generally a positive trend, one that leads to lower-priced, higher quality food products for consumers and a leaner industry better equipped to compete in global markets. That said, consolidation does highlight the need for farm producers to be nimble and adjust to new market realities. Finally, consolidation changes the geography and nature of agriculture's impact in rural communities already beset by a league of other economic changes.
Page 111 PREV PAGE TOP OF DOCA NEW WAVE OF CONSOLIDATION
The low-price environment of the past year set off a new wave of consolidation in U.S. agriculture. This wave can be usefully divided into the cost-saving and supply-chain categories mentioned above. While low prices spur both types, the consolidation is driven by somewhat different factors, and the long-term impacts are somewhat different. The pork industry, it turns out, provides a powerful example of both types of consolidation at work at the same time.
Cost-saving consolidation in U.S. agriculture should be no surprise, especially now when agricultural commodity prices are low. When agriculture is viewed as a commodity business, the current wave is not much different that the quest for cost savings underway in nearly every other commodity business. The Exxon-Mobil merger in the oil industry is a good example. Low prices always spur mergers aimed at moving cost structures lower. In exactly the same way, Cargill and Continental are seeking new economies in an environment of low prices.
What was perhaps more surprising in 1998 was a marked pickup in voluntary exits from production agriculture. A pronounced hike in farm auctions accompanying the deep slump in farm prices led to many comparisons with the mid1980's farm crisis. Yet the differences were many, not the least of which was the fact that most farm auctions in 1998 were voluntary, and not the result of foreclosure. How many farmers exited agriculture in 1998 is impossible to determine at this time. However, anecdotal information along with news accounts from the Farm Belt suggest that a sizable group decided to sell out, especially in areas where crop yields are marginal (Kilman).
Why did these producers sell? Partly because prices were low, but also because they anticipated low prices into the future without the same Federal safety net provided in the past. Many farmers also remembered that producers who sold out last in the 1980's ended up leaving with less than those who got out early. In short, profit margins are thin in the farm commodity business, and there is steady pressure to cut costs or leave the business.
Page 112 PREV PAGE TOP OF DOC Farm exits in 1998 are part of a longstanding trend that leads to fewer, bigger farms (Chart 1). Decried by some and cheered by others, this trend does have one clear economic impact it lowers the cost of production by enabling the remaining farms to capture more economies of scale. Over the long run, capital and technology have steadily boosted the productivity of production agriculture, but they have also encouraged bigger operations (Tweeten). The farm exits seen in 1998and which are likely to continue in 1999are the companion to this beneficial rise in productivity.
While Cargill-Continental captured the consolidation headlines in 1998, the more interesting development may have been the onward march of supply chains. In a supply chain structure, all stages of production, processing, and distribution are bound tightly together to ensure reliable, efficient delivery of high-quality products. The glue that binds together neighboring links of the chain ranges from production contracts to outright ownership, or vertical integration. The trend to supply chains has been underway for some time in U.S. agriculture, but it proceeds largely unnoticed by most of the American public. This trend describes the emergence of vertically coordinated supply chains that are typically forged together by one dominant player in the chain (Barkema, Drabestott and Welch). The broiler industry provides an example of fully developed supply chains. A handful of firms now dominate broiler production, processing, and marketing, and they coordinate everything up and down the chainfrom chicks to chicken strips.
Supply chains are now spreading well beyond broilers. Pork is the latest segment to undergo a major shift, but the trend is underway in grain production, too. In short, this trend is driven by the industry's desire to combine the best genetics and the best production practices to deliver products that meet or exceed the expectations of more demanding consumers.
As it turns out, supply chains are highly effective at delivering low-cost, high-quality food products to consumers. But they also bring enormous change to agriculture. They change how agriculture does business by replacing spot markets with contract production. They change where agriculture does business by concentrating production near processing facilities. And they change who does business by concentrating production in the hands of savvy producers who can manage tight production controls and negotiate sturdy long-term alliances. The firms that forge the supply chain (what some analysts call the integrator) simply prefer coordinating fewer rather than many players its a matter of keeping transaction costs low.
Page 113 PREV PAGE TOP OF DOC Thus, supply chains are in fact a major driver in the new wave of consolidation, though their influence is often overlooked. Moreover, the impact of supply chains will only grow into the next century. Agricultural scientists are bringing a whole new generation of products to the production pipeline that probably will come to market only through supply chains. Consumers, if anything, are becoming even more finicky about their food, spurring new efforts by food companies to make their products better and more consistent and these are hallmarks of the supply-chain trend.
The pork industry illustrates the powerful dynamics of both types of consolidation. Through a unique constellation of events, the industry is in near-term crisis but also happens to be at a long-run crossroads. The collapse in pork prices in late 1998 brought huge losses to producers and has set off a wave of liquidations, with high cost operators the first to sell. With the industry still posting big losses in early 1999, this consolidation will probably continue and leave substantially fewer pork producers by year-end. While a painful prospect for those who exit, the consolidation will lead to a lower cost structure in the industry.
A dramatic shift to supply chains is also remaking the pork industry. Pork was once the quintessential family farm enterprise with hogs in every barnyard from coast to coast. But the industry is increasingly the province of big supply chains, a trend marked by a sharp jump in the number of hogs produced under contract. Researchers now estimate that more than half of all hogs sent to market move under some type of marketing contract (Lawrence and others). That compares with less than 5 percent 20 years ago. Some in the industry now believe that the pork industry is headed to a structure where 40 or fewer supply chains will dominate hog production, a structure much like the broiler industry (Drabenstott).
IMPLICATIONS OF CONSOLIDATION FOR U.S. AGRICULTURE
The first question that surrounds the new wave of consolidation is what it means for U.S. agriculture and its participants going forward. Four implications stand out. First, consolidation will lead to lower costs in the industry. Second, these lower costs should have two beneficial effectslower food prices for consumers and improved export sales in global markets. Third, the emergence of bigger players means producers must be much more nimble and savvy in adjusting to new market realities. Finally, consolidation points to dramatic changes ahead for rural America.
Page 114 PREV PAGE TOP OF DOCLOWER COSTS
Few will debate that the consolidation now under way whether driven by cost-saving or supply chains will cut costs in U.S. agriculture. There is a strong list of supporting evidence. In the pork industry, for instance, costs of production on farms with more than 3,000 head are estimated to be roughly a third less than on farms with less than 500 head (Drabenstott). In the cattle industry, costs of producing calves is roughly 50 percent less on ranches with 500 cows than on ranches with fewer than 50 cows (Lamb and Beshear). The cost economies clearly extend into food processing. In the meat packing industry, for instance, operating costs for the four largest firms are three full percentage points less than for smaller plants a huge spread in a high volume business (Lamb and Beshear). These kinds of cost gains apply equally to supply chains, but these chains have the added advantage of delivering products much closer to consumer desires.
CONSUMER AND COMPETITIVE BENEFITS
Lower costs will almost certainly translate into lower food prices to consumers, as they have throughout most of this century. One telltale indicator of this longstanding trend is the portion of the consumer dollar spent on food. From 21 cents in 1950 to just 11 cents today, consumers have been a major beneficiary of consolidation in production, processing, distribution, and retailing (United States Department of Agriculture).
There is a point, of course, where concentration can give rise to monopoly power. At such a point, any increase in concentration would only boost industry profits without benefiting consumers. There is no clear evidence that we are near that point. The growth in food industry profits, for instance, is not higher than in other industries, and in fact appears to be lower than most (Chart 2). At the retail level, one factor that helps to keep markets competitive is the rising tide of food imports. To a very considerable extent, the food market is global. All that said, with the pace of consolidation now under way, the potential for monopoly power in the food sector is an issue that bears watching in the new century.
Page 115 PREV PAGE TOP OF DOC Lower costs will also have a salutary effect on the competitiveness of U.S. agriculture in world markets. The benefits will extend from lower cost production on the one end to leaner agribusiness firms and lower transportation costs on the other. The pork industry again provides a useful example. Apart from the recent slump in world demand stemming from the Asian economic problems, pork exports were growing briskly, averaging a gain of 22 percent a year in the 1990's (excluding 1998). While Asian economies will take some time to get back on their feet, long-term prospects for selling pork to the rest of the world are bright. It is a low-cost source of meat protein for a huge slice of the world's population eager to move up the food ladder. There will almost certainly be far fewer producers in the pork industry both due to the current crisis and due to the emergence of powerful supply chain. But the producers that stay stand to be very competitive sellers in a strong market.
NEW BUSINESS CHALLENGES FOR PRODUCERS
What consolidation means for agricultural producers is one of the most complex and challenging aspects of the current wave of consolidation. Without any doubt, consolidation leaves some farmers and some companies behind to find new economic futures. In the case of farmers who leave production agriculture, there is always the challenge of finding productive entry elsewhere in the economy. This has been a primary goal for the Nation's land grant universities for more than a century.
Looking ahead, the bigger issue is what consolidation means for the producers who remain. Two challenges confront them one old, one new. The old challenge is pushing costs down to survive in a market with thin margins. The new challenge is to stay in the game when the players are getting much bigger. As supply chains become a more dominant structure in U.S. agriculture, farmers face a very simple test build new relationships or be left out of the game.
Producers are well equipped to handle the first challenge. There is a whole new generation of new technology based on genetics and information that promises to boost productivity and slash costs. Critical to overall success, however, will be access to competitive markets. Indeed, in mergers like Cargill-Continental, the biggest question is probably whether such mergers leave farmers in local areas without competitive buyers of their products. In some localized markets, the divesting of operations where local monopolies might result from a merger may be in order. Moreover, farm cooperatives may be a very helpful way of supplying additional competitive yeast. Nevertheless, such divestitures should not distract attention from the overarching benefits of a leaner industry which agribusiness mergers normally create.
Page 116 PREV PAGE TOP OF DOC Staying in the game in an agriculture increasingly dominated by supply chains may be more difficult. Supply chains mark a clear shift from commodity markets to product markets, and most farmers still see themselves in the commodity business. To compete in the future, farmers must either be big enough to forge sturdy alliances with the integrators who will be much bigger and stronger than most farmers or they must become a viable partner by banding together in creative ways. In short, the key to staying in the game for many producers may be cooperatives that can either become part of a supply chain, or be the integrator in a new chain.
Cooperatives will not be a perfect avenue for all farmers. Cooperatives are often more adept at production than marketing, and capital tends to be a limiting factor in growing the business. But the growth of traditional cooperatives, such as Farmland Industries and the proliferation of new generation closed cooperatives are still healthy signs that farmers are exploring collective ways to stay abreast of a consolidating agriculture.
A CHANGING RURAL LANDSCAPE
Perhaps the biggest, yet least understood, impact of the current wave of consolidation is a dramatic redrawing of the rural economic landscape. Obviously, with fewer farms comes a corresponding decline in agriculture's impact on many rural communities. The trend to supply chains will have an even bigger impact in many places.
Supply chains redraw the rural economic landscape. Production tends to concentrate in fewer places, creating winners and losers in the process. Integrators source production inputs, including capital, far from where products are produced. This diminishes what has traditionally been a strong link between agriculture and local suppliers. Finally, profits do not all stay in the local area, again reducing the local impact.
In short, consolidation points to strikingly different futures for parts of rural America. Communities still tied to commodities will have fewer farms, fewer banks, and fewer businesses to keep their local economy vibrant. Consolidation simply means that far fewer farm communities will be viable in the future.
Page 117 PREV PAGE TOP OF DOC On the other hand, communities that hitch themselves to supply chain production and processing have much brighter prospects but a very different local economy than in the past. These communities will benefit from the jobs that processing activity will bring, as well as the prospect of higher per-farm income for large local producers. That said, there may be fewer farmers, fewer suppliers, and fewer profits in the local area than in the past.
CONSOLIDATION AND PUBLIC POLICY ISSUES
Along with significant implications for the industry, consolidation also poses new issues for public policy. Three issues loom large in the new century: the pace of consolidation, the geography of consolidation, and the rural impact of consolidation.
THE PACE OF CONSOLIDATION
In a period of low farm prices, consolidation will accelerate, either from the exit of high-cost firms or the spread of supply chains seeking fatter profit margins. Either way, consolidation will put some strains on farm families and the communities in which they live. This is not a new trend, but it may be somewhat more pronounced in the period ahead.
The economic forces behind this trend are so powerful and the benefits to consumers so substantial that it is neither possible nor desirable to legislate consolidation away. Still, farm-dependent rural communities will feel the effects. With that in mind, policymakers may want to pay particular attention to efforts to return world food demand to a strong growth path. Stronger export growth would help lift prices of agricultural commodities, and thus appears to be the policy option of choice if policymakers wish to slow the pace of consolidation and thereby mitigate rural impacts.
THE GEOGRAPHY OF CONSOLIDATION
Supply chains will bring a new geography to U.S. agriculture, shifting production away from traditional patterns and concentrating it in newfound places. While this is most likely to occur with livestock production, it may also be true of grain production, especially once a new generation of genetically altered crops comes to market. Certainly, this trend is manifestly evident in the pork industry.
Page 118 PREV PAGE TOP OF DOC The hog industry once made its home in the Corn Belt amid a sea of cornfields. The emergence of supply chains changed all that. While there are still a lot of hogs in States like Iowa, the real growth has happened elsewhere. Huge hog farms sprouted in the Southeast in the 1980's, and then headed west to the Great Plains in the 1990's. Oklahoma, for instance, has seen its hog production jump nearly 1,000 percent growth in the 1990's. These geographic shifts have mainly been the result of a bigger, more concentrated pork industry responding to concerns about its environmental impact and its access to key markets.
The pork industry now stands at a crossroad and asks, Where to next? While this $28 billion industry has long been a staple of U.S. agriculture, it can no longer be taken for granted that future growth will be in the United States. Indeed, Canada, Mexico, and Brazil are all possible sites for future expansion, especially if large hog producers find a more attractive business and regulatory climate elsewhere (Drabenstott).
National environmental standards for the livestock industry will be an important factor in shaping the new geography of livestock production. Currently, there is a patchwork of hog regulations across States with extremely wide variation. National guidelines agreed to by the industry would appear to provide a much more level playing field on which location decisions could be made. In essence, such a step would push location decisions to the local level, where they probably belong. National threshold standards might also provide a more stable business climate, and encourage more investment in the United States rather than in other countries.
THE RURAL IMPACT OF CONSOLIDATION
As consolidation unfolds, many of the unsung impacts will be felt in rural America, in the communities that long prospered from surrounding farms. As farm numbers shrink, and as supply chains redraw the geography of agricultural production, many rural communities must find new economic engines. Measured by the people affected, this will be a much bigger economic issue than the transition facing the farmers that will exit in coming years. Put simply, many rural communities face a make or break period in the years ahead.
Page 119 PREV PAGE TOP OF DOC Ultimately, boosting their economic future falls to the rural communities themselves. That future is shaped by many public policies, however, and this may be an opportune time to re-examine the policies most likely to influence future economic growth in rural areas. A number of policy issues fall under this heading.
Financial markets. Rural borrowers continue to face a shorter menu of capital options than their suburban or urban counterparts. This points to the opportunity for market innovations that increase the availability of equity and other forms of capital (Drabenstott and Meeker).
Telecommunications. Digital telecommunications are often held out as economic salvation for remote rural areas. Viable rural communities in the future almost certainly will need more than modern telecommunications to be viable. Still, access to the digital world will remain a critical issue for rural America. The regulatory framework will have a big impact on where and perhaps whether private companies choose to invest in rural America.
Infrastructure. Highways, bridges, waterways, and water and sewer systems all will have a major impact on sustaining new economic initiatives in rural America. This brings a wide mix of Federal, State, and local programs into focus. With a declining tax base in many rural communities, tough decisions lie ahead.
Business assistance. Rural capital issues are receiving growing attention, but the technical assistance that often helps business plans succeed goes mostly overlooked. The Extension Service has been enormously successful in providing such assistance to production agriculture over the past century. Yet in many parts of rural America there is no counterpart for the rural businesses that may define the future of their communities.
Research and technology. Substantial Federal dollars are at work exploring new products and uses for U.S. agriculture. Yet this research mostly overlooks the impact of new technologies on rural America, or whether some technologies might offer particular promise for farm areas in decline. Adding this dimension to the research efforteither in USDA or in land grant universitiesmay be worth considering.
Page 120 PREV PAGE TOP OF DOC From this list, it is clear that consolidation in U.S. agriculture brings into focus a wide range of policy issues in rural America. Most of these lie far afield of the traditional purview of this committee. Nevertheless, with no Federal rural policy to shape these decisions, this committee is in a good position to encourage and inform the debate on rural America's economic future.
A new wave of consolidation is under way in U.S. agriculture, spurred by low farm prices and an ongoing structural shift to supply chains. The pace of consolidation is likely to pick up so long as commodity prices stay low. While a painful transition for the farms and firms that exit, consolidation is generally favorable for U.S. agriculture and the U.S. economy. It will yield a lower cost structure, which in turn will lead to lower food prices and more competitive U.S. food and farm products in world markets. Perhaps the biggest impact of the consolidation may be a redrawing of the rural economic landscape, producing geographic shifts and dramatically changing agriculture's linkages to local communities.
Three policy issues loom in the period ahead. The toll of consolidation on rural communities may lead some to want to slow the pace of agricultural consolidation. The best preventative will be efforts to restore growth in world food demand and thus boost U.S. exports and farm prices. The rise of supply chains will produce a new geography in U.S. agriculture, and, especially in the case of livestock production, may highlight the value of national environmental standards on which all can agree. Finally, consolidation will lead many rural communities to seek new sources of economic growth, pointing to the value of examining a wide range of public policy issues likely to shape the outcome.
"The Official Committee record contains additional material here."
Testimony of Leland Swenson
Page 121 PREV PAGE TOP OF DOC Thank you, Chairman Combest, for calling today's hearing to examine the impacts of agricultural concentration. It is critical that Congress collects the best available information on a subject that will be the controlling force in the future structure and direction of U.S. agriculture, as well as the global food and fiber supply. I serve as president of the National Farmers Union and I appear before you on behalf of the nearly 300,000 farm families who comprise our membership.
Besides price, no other issue in agriculture today raises more concern among our members than concentration, and most feel that the two are closely connected. In recent months, we have called on Congress and the administration to better scrutinize the trend of concentration in agriculture and its effect on producers. We do not make these requests lightly. But we have deep concerns about the long-term implications for our country's food and fiber system. We believe concentration will do more to influence the future structure of agriculture in the United States than the next farm bill.
National Farmers Union has commissioned Dr. William Heffernan of the University of Missouri, and his associates to prepare a study to show how concentration is occurring in all segments of the agricultural system, as well as around the globe. The study also indicates key questions and concerns that we, as a nation, should consider. The study shows that a very small number of dominant food chain clusters are emerging. While these connections have profited corporate shareholders, they have severely reduced market competition to the detriment of our nation's producers, and ultimately to the detriment of consumers. I will discuss the study's findings, the impacts of concentration on producers and rural communities, and National Farmers Union's action plan. A full copy of the study will be submitted to the committee.
FINDINGS IN THE HEFFERNAN CONCENTRATION REPORT
The organizational structure of the national/global food system is truly dynamic with new firm names emerging, often the result of new joint ventures, and old names disappearing. But underlying these changes is a continuing concentration of ownership and control of the food system. These structural changes are so strong that they often undermine the desired and expected outcomes from much of the agricultural policy developed over the past couple of decades.
Page 122 PREV PAGE TOP OF DOC It is almost heresy to ask if these changes are what the people of our country really want or, if they are not what is desired, how we might redirect the change. The changes are the result of notoriously short-sighted market forces and not the result of public dialogue, the foundation of a democracy. Neither are the changes the result of some mystical figure or an invisible hand.
The major concern about concentration in the food system is the control exercised by a handful of firms over the decision-making throughout the food system. A proliferation of alliances, joint ventures, partnerships, mergers and other relationships among corporations have produced cluster of firms. The clusters impact production inputs, local commodity market opportunities, processing, retailing and the global trading structure and opportunities. The concentration of firms into clusters decreases the ability of producers to receive a fair return, and reduces the opportunity for communities to benefit from the goods they produce. Information about who controls our food and fiber production system is crucial. Yet, over time, information has become more difficult to obtain, even for trained researchers.
Technological developments will hasten the process of vertical integration in agriculture. Biotechnology and the terminator gene have put the farmer at the mercy of the food cluster for seed to plant the crop. If the firms in the processing stage of the cluster require specific genetic material and the farmer cannot get that seed, the farmers has no market access. In addition, precision farming's global positioning system separates management from the production of agriculture. With this technology, it is no longer necessary for the farmer to have personal contact with their land and crop to make appropriate management decisions. In the future, farmers may simply become laborers, while managers in distant offices have access to crop information and make management decisions from afar.
THE BIG FOUR
Dr. Heffernan and colleagues at the University of Missouri have been reporting concentration ratios of the largest four processors of most of the major commodities since the mid1980's. Research focused on the largest four processing firms because the economic literature in the mid1980's indicated there was general agreement that if four firms had 40 percent of the market, the market was no longer competitive. The latest figures reveal concentration levels for many commodities exceed 40 percent, and show the extent to which the same companies dominate in many different commodities.
Page 123 PREV PAGE TOP OF DOC Figures for meat processing reveal a stark picture for competition:
Four of every five beef cattle are slaughtered by the four largest firms; the firms include IBP, Inc; ConAgra Beef; Excel (owned by Cargill); and Farmland National Beef. (See Chart I.)
Three of every four sheep are processed by the four largest firms; the top four include ConAgra; Superior Packing; High Country; and Denver Lamb;
Three of every five hogs are slaughtered by the four largest firms; the top four include Murphy Family Farms; Carroll's Foods; Continental Grain; and Smithfield Foods. (See Chart II.)
Half of all broilers (chickens produced for meat) are slaughtered by the largest four firms; the six largest firms include Tyson Foods; Gold Kist; Perdue Farms; Pilgrim's Pride; ConAgra Poultry; and Wayne (owned by Continental Grain).
The livestock industry demonstrates how the production chains remove the decision-making process from the producers. Ninety-five percent of the broilers are produced under production contracts with fewer than 40 firms. Essentially, there is no price discovery for chicken feed, day old chicks or live broilers. There is no national market for live broilers. The production system is about the same for turkeys and eggs.
Hog production is following close behind, in the same direction. As low hog prices continue, there will be few independent hog producers remaining. The key to survival is not who can produce the hogs the most efficiently. The key is who has the deepest pockets and market share. The problem of market access for producers who do not have special relationships with feed or slaughtering firms has become obvious.
A review of the top cattle feedlots shows further overlap: Continental Grain Cattle Feeding has the largest capacity, followed by Cactus Feeders Inc., ConAgra Cattle Feeding; National Farms Inc.; and Caprock Industries (owned by Cargill).
Page 124 PREV PAGE TOP OF DOC In the grain sector, 5776 percent of the corn, wheat, and soybeans is processed by the four largest firms. In the United States, the four largest firms (Cargill, ADM, Continental Grain, and Bunge) have 24 percent of the elevator capacity and 39 percent of the facilities. Furthermore, data suggest that those four firms control almost 60 percent of the port facilities. (See tables in the Heffernan report.)
ACQUISITIONS AND ALLIANCES
It is difficult to reveal the extent of vertical integration in the food system in the United States or the complex web of interactions among the top firms. In order to show these connections, Dr. Heffernan and his associates have diagramed the formalized working relationships between the dominant firms in the global food system. While the data and diagrams are exploratory, they suggest the types of information needed to understand the concentration of the global food system. (See diagrams in the Heffernan report.)
The diagrams show three food chains that dominate the global food production system. Those chains include: 1) Cargill/Monsanto; 2) ConAgra; and 3) Novartis/ADM.
Cargill/Monsanto has developed primarily through a series of acquisitions that allow the chain to control the food process from the gene until the food reaches the consumer's plate.
In the cases of the Novartis/ADM chain, the networks are comprised of alliances with farmer cooperatives. ADM, with its vast network of processing facilities, lacked access to farmers, a problem the firm remedied through a long-standing joint venture with Growmark and the more recently, with Countrymark, Riceland, and United Grain Growers. Growmark and Countrymark give ADM access to 50 percent of the corn and soybean market region and 75 percent of Canada's corn and soybean market region.
Farmer cooperatives that were formed to provide alternatives to private companies have found themselves lacking the muscle of large firms in downstream processing, and consequently, some have joined the alliance and acquisition game. Minnesota Corn Processors (a new generation wet corn milling cooperative), has sold a 30 percent non-voting share to ADM, in order to be part of ADM's wide-reaching global marketing network. No one put it more succinctly than the president of Harvest States, who said when announcing the Cenex-Harvest States merger, ''agriculture cooperatives must operate today in a land of giants where capital and scale are absolutely necessary . . . in a market where corporate multinationals rule.''
Page 125 PREV PAGE TOP OF DOC The Heffernan diagrams communicate three points:
1. A very small number of dominant food chain clusters appear to be emerging. While these relationships are not set in stone, freedom of entry is restricted.
2. The food system is becoming very complicated and difficult to describe. One is left asking just how much competition is there in the system. In addition, who is controlling the information farmers receive?
3. As the food chain clusters form, with major management decisions made by a small core of firm executives, there is little room left in the global food system for independent farmers. Farmers are given the message, ''give up your decision-making prerogatives to the food chain cluster if you want to maintain an economically-viable farming operation.''
IMPACTS OF CONCENTRATION
Loss of Independent ProducersProducers lose the ability to earn a reasonable return on their investment when market competition disappears. Consequently, the producers' share of the retail dollar has gotten smaller and smaller. No where has this been better illustrated than in the pork industry. This winter, as pork prices continued to drop, there was a very small decline at the retail level, and while producer prices fell below $10.00 per cwt., IBP posted 4th quarter earnings that were quadruple their last year's level. Lack of competition has been a key factor in widening the gap in the producer-retail price spread, resulting in an ever smaller share of the consumer dollar going back to the actual producer.
Predatory Business PracticesCompanies that dominant several different industries can afford to operate at a loss in one area in order to eliminate the competition. Once the competition is gone, the company is able to earn higher returns and then subsidize another operation to repeat the process in another industry.
Decay of Community InfrastructureMultinational corporations take their profits out of the communities in which they were earned, unlike locally owned farms and businesses.
Page 126 PREV PAGE TOP OF DOC Loss of Local ControlThe remaining firms are increasing market share and political power to the point of controlling the governments that once regulated the firms. The firms have benefited in many ways. Some of the largest corporations have gotten tax breaks or other government-incentives (unavailable to the average business person) in order to build and operate plants within a community. Yet, once the tax benefit is gone, the company has relocated the plant to another area of the country. Corporate interests have also called on the government to weaken environmental standards and immigrant labor protections in order to allow them to reduce production costs. It is time to look at who benefits and who loses. Too often, the residents of communities that have compromised their standards pay a high price in loss of quality of life.
Market ManipulationMultinational corporations can use their ability to control supplies in more than one country as an opportunity to drive down price, to the detriment of the producers in both countries. An example of this occurred 18 months ago when Cargill announced its intention to purchase soybeans from Brazil for processing in the United States. The price to American producers immediately dropped, before any actual purchases occurred.
Vulnerability to Foreign Currency FluctuationsProducers are particularly vulnerable to currency fluctuations. When Brazil floated the real last month, U.S. producers immediately saw lower soybean prices. Multinational corporations, such as Bunge, which operates both in the United States and Brazil are able to take advantage of these occurrences, with no protection for producers.
Unequal Bargaining PowerAs corporations increasingly control the market, they dictate the conditions their suppliers must meet without having to guarantee service in return. Concentration within the transportation and grain sectors has resulted in strict requirements being placed on local delivery points for grain. Elevators that used producer money to build facilities for 50 unit trains, are now being required to build facilities for 100 unit trains. They are also being required to bid for cars, take them whenever they arrive, and have them ready for pick up or face fines for not being ready. However, the rail companies give no guarantee that the cars will be delivered or picked up on time.
Page 127 PREV PAGE TOP OF DOC Loss of SustainabilityConcentration in the supply of genetics is also growing while our genetic base is narrowing. For example, 95 percent of all commercially produced turkeys in the world come from three breeding flocks. Recent testing at the Ohio State University reveals a very narrow base. The system is ripe for a new strain of avian flu to evolve for which there is no resistance.
Mergers are rampant, and yet, often difficult to see. The food industry provides an excellent example. When the average consumer goes into a grocery store, it appears there are many brands from which to choose. Yet, once one is able to connect the corporate ties, it is apparent that many of the choices are owned by Philip Morris, ConAgra, or Cargill. The same type of concentration is true at the processing level. Many predict that we will soon have a system where three or four companies control the food and fiber system at every level, from the seed supply until the time it reaches the consumer.
CARGILL / CONTINENTAL GRAIN MERGER CONCERNS
The pending acquisition of Continental's grain division by Cargill will further concentration both within the United States and on the global market. Dr. Heffernan warns that concentration at the global level may exceed concentration within the United States.
Cargill announced its intention to purchase Continental Grains in November of 1998. National Farmers Union and several key members of Congress sounded a warning and called on the government to examine the impacts of the merger before allowing the merger to move forward. Agriculture Secretary Glickman also called for careful scrutiny of the merger and the Justice Department is currently in the process of investigating the merger.
In letters to President Clinton, the Department of Justice and members of Congress, National Farmers Union enumerated several concerns, regarding the erosion of competition caused by the merger, at the local elevator level, the regional terminal level, and the exporting level.
Page 128 PREV PAGE TOP OF DOC The importance of the merger becomes more obvious when one considers that four firms, Cargill, ADM, Continental Grain, and Bunge, control almost 60 percent of the port facilities. Grainnet reports that the Cargill acquisition of Continental Grain would mean that Cargill would control more than 40 percent of all U.S. corn exports, a third of all soybean exports, and at least 20 percent of wheat exports (Grainnet, 12/1998). It is critical to make an assessment of the export concentration impact on price.
In addition to the analysis of the merger's impact on price, we believe there should be a moratorium on all agricultural mergers until there is a comprehensive study on the economic impact of mergers on farm income. Further, each merger proposal should contain an economic impact statement that shows projected impact on net farm income.
A study team consisting of members from Iowa State University, Oklahoma State University, and North Dakota State University, gathered information from Cargill, as well of the Chicago Board of Trade, regarding the merger's likely impact. Their preliminary findings cite some areas of concern:
The merger will significantly add to the level of concentration in the upper Illinois River area, which are the key delivery points for Chicago Board of Trade contracts.
The merger will significantly increase Cargill's share of the grain export market.
While the merger may have a small impact on overall U.S. storage, it could have a big impact at specific terminals, including those in the Louisiana and Texas Gulf port areas.
We believe there are additional concerns, including the impact on the global market. Dr. Heffernan points out that we should be very concerned about the merger's impact on global concentration, which may even exceed U.S. concentration levels. Based on the available information, Dr. Heffernan estimates that Cargill's purchase of Continental Grain would give Cargill 45 percent of the global grain trade. With ADM controlling about 30 percent of the global grain trade, the merger would result in two firms handling three-fourths of the grain that moves in the international arena. And, whether one argues that the United States is a price-setter, such as for corn, or a price-taker, such as for wheat, prices in 1998 prove that a depressed world price has severe negative consequences for U.S. producers.
Page 129 PREV PAGE TOP OF DOC Admittedly, it is very difficult if not impossible to make an accurate assessment of all the players at the international level. The task becomes even more complicated as one starts to examine all the alliances between corporate entities. This is the very reason Congress should act to collect the information necessary to get an accurate picture.
Without action by Congress and the administration to help halt and reverse market concentration, levels of concentration will continue to grow. There are many things Congress can do. As a country, we need accurate information, as well as laws that prohibit anti-competitive behavior. We believe the following actions provide a good place to start:
MoratoriumThere should be a moratorium on any further mergers until there is an impact study on farm income.
Alliances and Marketing AgreementsExamine the relationships between corporations, corporations and cooperatives, and cooperatives with other cooperatives. Are the entities linked by an alliance or marketing agreement that works to eliminate or reduce competition? The formation of such alliances and agreements should be subject to anti-trust action and considered during anti-trust investigations. In the case of the Cargill acquisition of Continental Grains, members of Congress should encourage the Justice Department to examine whether Cargill has an alliance with any of the companies which are being considered as competitors in the grain market.
Law and FundingCongress should consider whether existing law, as well as the level of appropriations, give the Justice Department and the Federal Trade Commission adequate authority and financial resources to halt mergers which diminish market competition. If the law is inadequate to address concentration, Congress should establish a percentage of concentration that automatically triggers anti-trust action.
GAO ReportCongress should ask the General Accounting Office to conduct an investigation on the impact of the Cargill/Continental merger on producers.
Page 130 PREV PAGE TOP OF DOC Repeal Study/InvestigationRepeal the 18-month study/investigation of price reporting, which prevents immediate implementation of price reporting.
Price ReportingCongress should adopt mandatory price reporting, which improves the producers ability to earn a fair return on their commodities through timely and accurate market information.
LabelingCongress should adopt country of origin labeling laws, which increase consumers' ability to voice their preferences in the market place.
Safety NetRe-establish an effective agricultural safety net. Government policy should enable producers to earn their cost of production and a reasonable return on investment from the market.
Concentration and an inadequate safety net have taken a heavy toll on producers. We are appreciative of your call for this hearing and look forward to working with you to develop action to allow producers and consumers to regain access to fair competitive markets.
Statement of Harry L. Pearson
Thank you, Mr. Chairman, for the opportunity to provide testimony for this hearing on economic concentration. I am Harry Pearson, president of the Indiana Farm Bureau, and am representing the American Farm Bureau Federation, the nation's largest general farm organization representing more than 4.8 million member families. I am pleased to have this opportunity to discuss with you our concerns and hopes for agriculture during this time of increased concentration within the industry.
As I visit with Farm Bureau members, there is increasing concern about the current state of U.S. agriculture. Those concerns center around low commodity prices and the resulting impact to farm income and the economies in rural communities. Even as the prices that farmers receive continue to decline, they are faced with escalating costs of inputs and the increasing strangle hold of taxes and regulations, particularly environmental regulations. So it is in this context that I speak to you today about economic concentration.
Page 131 PREV PAGE TOP OF DOC Farm Bureau policy on monopoly is clear.
''Monopoly powerwhether it arises in industry, labor, finance, agriculture or governmentis a threat to our competitive enterprise system and the individual freedom of every American.
''We oppose mergers, acquisitions or leveraged buyouts which tend to create a monopoly of production, marketing and transportation situations or reduce competition in acquiring, pricing or transportation of commodities and products.
''We believe Congress should continue to monitor the agriculture industry for antitrust abuse.''
Two major developments have occurred in recent months that bring me here today to discuss this issue. First was the announcement that Cargill was contemplating the purchase of the Continental Grain Division. Second, is the impact of the devastatingly low prices for hog farmers and the structural changes facing the livestock industry as a result.
Let me start by outlining our specific concerns about the Cargill/Continental merger. First and foremost, farmers are concerned about the impact on local competitiveness. Price discovery is
an important component of our free market system. It takes place at each stage where the ownership of commodities changes hands. Prices are influenced by the interaction of supply and demand forces at each local or regional area which, in turn, are influenced by supply and demand conditions as the commodity moves closer to the ultimate consumer, either domestic or international.
Clearly there are some areas where the local markets served by Cargil/Continental facilities overlap. These overlaps may also occur at the subterminal level, within the terminal (rail and river systems)and at the export terminal level. We suggest that this should be an important focus of inquiry in the government review.
Another area of concern is the potential impact of the merger insofar as it affects the delivery points of grain and soybeans. Delivery is the process where the futures price and the cash price must converge. All three futures exchanges (Chicago, Kansas City and Minneapolis)have delivery points for contracts that involve some Cargill and Continental facilities. The futures markets are a major source of market information, as well as global price-discovery, so the delivery mechanism has the potential to exert significant influences on the prices. Consequently, the delivery process is absolutely crucial to the efficacy of our pricing system.
Page 132 PREV PAGE TOP OF DOC The third area of concern is the potential impact on the export markets. The combined Cat-gill and Continental grain facilities accounted for approximately 35 percent of total U.S. grain and oilseed exports last year. This varies by location and commodity but is an important consideration that should be thoroughly evaluated.
While these are areas of concern that need review, we do not wish to prejudice that review process by assuming the proposed merger is either good or bad. We recognize and acknowledge that the world is shifting to a dynamic global marketing environment. Just as farmers have had to grow and consolidate to remain efficient competitors, so do other businesses (Note attached study on ''Trends in Farm Structure into the 21st Century'' by Renee Drury and Luther Tweeten, Department of Agricultural Economics, the Ohio State University.)
We understand that there is overcapacity within the grain industry that may be limiting their logistical efficiencies. So we would advise our government officials from both the USDA and the Justice Department to carefully review the issues I have outlined with respect to potential monopoly power. Once those issues are raised, it is up to the companies to address them in a satisfactory manner. Just as U.S. farmers are the most competitive and efficient in the world, we need a grain gathering and shipping industry that is equally competitive and efficient.
Farm Bureau is very concerned that concentration within the livestock and grain industries could lead to inadequate market access. We encourage the proper government agencies to examine proposed mergers that have the potential to limit market access. At the same time however, we do not want the system to perpetrate the very problem we are trying to avoid. For this reason we urge the government to consider what may happen if the merger is prevented, to consider the long-term view of the entire marketplace.
Some industries in agriculture may need a more watchful eye than others. The poultry and beef industries are already concentrated. Any proposed merger in those areas would need extreme scrutiny. However, we are also seeing other segments in agriculture become more concentrated. The pork industry may experience unprecedented structural changes in the next few months. Farm Bureau has concern that this could quickly reduce market access for smaller and medium size producers.
Page 133 PREV PAGE TOP OF DOC The Farm Bureau has been very active working with the administration and other farm groups in identifying opportunities to help hog farmers face the terrible low price situation. I believe that immediate assistance to hog producers could be provided without distorting the free market. Such assistance could be provided by increasing the amount of loan guarantee funds for States through the Farm Service Agency. These loans should be available to all producers and would assist farmers experiencing cash flow difficulties. This would allow producers to evaluate their financial obligations and sit down with their lenders to work out a plan to meet the needs of both parties to get through the next several months as prices continue to recover.
To address more long-term needs of livestock producers, there are existing authorities under the Packers and Stockyards Administration making it unlawful to engage in any unfair, unjustly discriminatory or deceptive marketing practice. This is of great concern to all producers, especially during a time of low prices. With the consolidations and mergers that we are discussing today, we urge Congress and the administration to closely monitor these mergers and acquisitions so that the producers' interest is kept in the forefront. Likewise, we urge Congress to adequately fund the Grain Inspection Packers and Stockyards Administration (GIPSA) so that they have the resources necessary to do their job.
Comprehensive collection and reporting of marketing information is critical. It is important to improve the collection, timeliness and reporting of all transactions. Farm Bureau policy states that livestock packers who process more than five percent of the national daily slaughter should be required to report all cash and contract price and terms of sale to the Federal Market News Service. We urge the industry to provide such requested information voluntarily, but will support mandatory price reporting if the voluntary efforts are inadequate.
With the changes in the industry, it is vitally important that the proper data is collected and disseminated in a timely manner by USDA so that all segments of the industry can make appropriate and informed business decisions. Market information is vital if independent U.S. producers are to be competitive in the world marketplace.
Page 134 PREV PAGE TOP OF DOC Farm Bureau continues to urge that the Economic Research Service (ERS)within USDA be adequately funded and has the resources to continue short-term commodity situation and outlook forecasting. The number of commodity reports has been drastically reduced and commodity analysts are being told to minimize their situation and outlook work. It is vital that producers have frequent market information during this time of structural change within the livestock industry.
There are several legislative initiatives that we support to assist farmers and ranchers during this trend of increased concentration, specifically with regard to the livestock industry. One is country-of-origin labeling which would require that imported meat and meat products be labeled so that the United States consumers would be able to identify the country of origin at the retail sales point. Not only would this legislation provide consumers with information that they want, but it would also help bring U.S. labeling laws into uniformity with requirements of most of our trading partners around the world.
We also support legislation that would allow for the Interstate Distribution of State Inspected Meat. Farm Bureau believes allowing meat that has been processed and inspected by a State inspection facility, which by law must already provide for a food safety level at least equal to a federally inspected facility, to move in interstate commerce makes good sense. I want to emphasize the fact that by coordinating the efforts between the State and Federal inspection facilities, the small and mid-size processing plants could expand their operations.
Farm Bureau strongly supports the incorporation of livestock dealer trust provisions into the Packers and Stockyards Act. We support the establishment of a trust fund for the benefit of the seller of livestock until the seller receives payment in full for the livestock. The American Farm Bureau has been working with other industry organizations to formulate language that would be beneficial to the industry. We look forward to working with this Committee in passage of legislation to establish a dealer trust.
Page 135 PREV PAGE TOP OF DOC The future of agriculture depends on expanding trade opportunities and foreign market development. We applaud the introduction of S. 101 by Chairman Lugar, which would create foreign market access for U.S. agricultural exports and ensure that our trading partners comply with international trade rules. Also, fast track trade authorization must be passed during the
1999 session of Congress. Our goal as producers is to expand and grow with the industry. We cannot curtail domestic growth at these times of low prices. We must look to future export markets in order to sell and develop our products to maintain strong demand and prices that are reflective of the market value. We look forward to working with you on these important initiatives.
In closing, there is no doubt that consolidation within agribusiness will continue. Driven by technology and market forces, producers will continue to face challenges and opportunities presented by economic concentration in agribusiness. These challenges are highlighted when we are faced with low prices for long periods of time such as we have within the livestock industry. These low price situations force us to evaluate the marketplace and seek new opportunities for producers. I am committed to working with Congress, the administration and my colleagues here on the panel today to continue to seek input regarding the direction that agriculture is going and determine a process that will enable our farmers and ranchers to compete in a global marketplace.
Mr. Chairman, I appreciate the opportunity to come before you today. I will be happy to respond to any questions.
Statement of Bill Christison and Jim Potts
With hog prices at Depression-era levels, independent hog farmers can see why their prices have fallen so dramatically. In order of importance, these factors are: (1) concentrated and rapidly
Page 136 PREV PAGE TOP OF DOCincreased hog production; (2) a concentrated and anti-competitive packing industry; and (3) increased imports from Canada. This testimony will briefly review the connections between concentration, overproduction, lack of competition, and low prices. We till then review hog price crisis proposals currently floating in Washington, and offer a few ideas of our own.
Concentrated Production: Hog production has increased at an obviously unsustainable rate, and the production glut is a direct result of concentrated production. According to Successful
Farming magazine, the 50 largest pork producers (i.e. corporations and processing Cooperatives ) produced I, 740,700 sows in 1996, and increased to 2,599,600 sows in 1998. That is a 49.4 precent production increase in two years. Appallingly, there is no end in sight to this
destructive, calculated expansion in hog production. Even with $25 per head hogs, the top 50 producers will likely expand just as rapidly in the next two years. Members of Congress who want to see family farmers in the 21st century hog industry are advised that any actions the
Federal Government may take regarding imports, exports, noncompetitive hog markets, lack of market information, short-term payments to hog farmers, or debt restructuring will ultimately be futile unless hog production is reduced in this country.
In the short run, Congress can begin to address the hog overproduction problem by prohibiting all subsidies that encourage increased hog productionincluding phase out of export subsidies.
In the long run, the Federal Government can look to the States and local communities for direction in this issue. In South Dakota, for example, voters approved constitutional Amendment E last November, prohibiting corporate ownership of farm and thereby discouraging rapid expansion in hog production. In Missouri, Attorney General Jay Nixon issued an injunction to shut down Premium Standard Farms facilities that repeatedly violated State laws in its production practices.
Page 137 PREV PAGE TOP OF DOCNFFC is open to any ideas Congress may have with an eye to curtailing production. But let's agree on one point: the Federal Government must act to reduce hog production if we are really serious about maintaining a hog industry with independent family farmers.
Packer Concentration: According to a January 7, 1999 New York Times article, the top six pork packers now control 75 precent of the hog market. The lack of competition for hogs, while not as severe as seen in the beef industry, does depress bids for hogs and results in lower prices. Even more importantly, concentration in the packing industry makes it possible for the major packers to adopt nearly uniform procurement practices that discourage competitive bidding and upward pressure on prices.
Across the country, independent hog farmers tell us that the packers are offering them farm prices roughly 20 precent, or $5 per head, below the prices that packers offer to factory hog farmers under contract. Recent preliminary USDA studies on the difference between spot prices for independents and factory hog farm prices suggest a smaller price gap, roughly 10 precent, with variations depending on the market studied. Either way, the gap is large enough to show that packer procurement practices are discriminatory and depress prices.
This discrimination through contracts is similar to the effect that the packers have had on the beef industry, where captive supply contracts have depressed prices for independent ranchers (Not coincidentally, the beef industry is controlled by three packersIBP, Cargill, and ConAgra that happen to be the second, third, and fourth largest packers in the hog industry). According to the USDA ''Role of Captive Supplies in Beef Packing'' study, 1993 cattle market data indicate that each 1 precent increase in the utilization in captive supplies (Market Agreement/Formula Priced Cattle)was associated with markets that were 10 cents to 4l cents/cwt. lower than prices set by the unfettered forces of supply and demand. This amounts to $1.20 to $4.92 per head. We expect that similar results would be found if the effects of factory hog farm contracts were studied in a similar manner. With almost half of all hog production now being made with these contracts, the effects on price would be staggering.
Page 138 PREV PAGE TOP OF DOC Many farm organizations and Members of Congress have suggested that the problem of unfair contracts could be resolved by legislation that requires mandatory price reporting by the packers. We agree that price reporting is a necessary first step that would expose further discrimination in the industry against independent producers in the pork, beef and sheep industries. But price reporting will not save the struggling family hog farmer. The fundamental problems of uncompetitive markets will not be solved unless Washington takes steps to require competitive bidding by packers on all hogs, including those raised under contract. This step also needs to be taken in the beef industry, where the same problems with packer behavior exist.
We have heard this committee remark in previous hearings that it would be inappropriate to require competitive bidding because it would effectively curtail the forward contract system that has become prevalent in the beef and hog industries. This contract system is defended because it offers a higher price to the contract producers in the short run, and supposedly offers risk protection for farmers in the long run. Yet if we do not reverse the ''chickenization'' of the hog industry, that is the elimination of all independent farmers through megaproduction contracts, we will be left with a food production system that also fails the farmers under contract. Contract hog operators are starting to see this: 12 North Carolina contract operators with Murphy Family Farms lost their contracts last month even as the company expanded its operations in the Midwest. Other hog producers saw their 30-day revolving contracts changed repeatedly in late 1998 as prices plummeted, and will have no bargaining leverage to raise the terms of their contracts when prices rise. As farmers in the NFFC-affiliated National Contract Poultry Grower Association can verify, a farmer has no leverage to improve the terms of a contract when he/she is over $500,000 in debt from constructing his/her production facilities. In short, concentration offers no long-term risk and price protection for its contract growers. Contracts with companies are no substitute for competitive bidding by companies.
Page 139 PREV PAGE TOP OF DOC Hog Imports: U.S. hog imports from Canada have risen from 670,000 head in 1992 to 5,000,000 head in 1998, an increase of over 700 precent. In his October, 1998 testimony before the House Agriculture Committee, Food and Agricultural Policy Research Institute economist Patrick Westhoff estimated that this increase accounted for ''a third or more of the increase in U.S. pork production.'' NFFC agrees with all farm organizations that view increased hog imports as a major problem and a contributor to the decline in hog prices. We also agree that it will be necessary to use existing USDA tools to export some of our excess pork. With hog prices rising slightly over the last month, there is evidence that hog farmers have been helped by the 50,000 metric tons of pork included in a USDA food aid package to Russia, and the series of export guarantees prepared for South Korea and elsewhere. Pork has been approved in nearly every allocation of GSM102 credit guarantees, millions are being spent on export promotion, and USDA estimates that pork exports will be up again in 1999.
While this export activity sounds positive, none of this makes up for the overwhelming increase in imports that led the governors of South Dakota and five neighboring States to initiate inspections on pork imports from Canada for several cancer-causing chemicals that are legal in Canada but illegal in the United States. These trade problems result from the North American Free Trade Agreement (NAFTA), negotiated and approved under fast track trade authority. 199899 hog export increases to Asia and elsewhere were, in contrast, the result of export subsidy programs and bilateral negotiations that were accomplished without fast track authority.
In this light, NFFC seriously questions the wisdom and, in many cases, the motives of the hog corporations and cooperatives that lobbied strenuously for passage of NAFTA and, through the National Pork Producers Council, now lead the Ag for Fast Track Coalition. NFFC was proud to lead farmer efforts to deny extension of fast track trade authority in 1997 and 1998. In 1999, we strongly urge Congress to develop an alternative to fast track that establishes the parameters for trade negotiations that would actually benefit family hog farmers rather than Smithfield Foods. Legislation providing an alternative to fast track would require a stronger role for the House Agriculture Committee, such as the ''Ag Committee Veto'' amendment offered by Rep. Collin Peterson (D-MN)in last year's fast track debate. Stronger language is also needed on antidumping provisions and dispute resolution mechanisms, chemical harmonization and food safety issues, currency devaluations, and provisions for slap back tariffs.
Page 140 PREV PAGE TOP OF DOC NFFC is heartened by the International Trade Commission's (ITC) recent decisions to find in favor of Ranchers-Cattlemen Action Legal Fund Section 301 petition that Canadian cattle dumping had damaged the U.S. cattle industry. Similarly, we are encouraged by the ITC's decision in favor of the Section 201 case against sheep imports from New Zealand and Australia. These are positive first steps that indicate the Clinton Administration recognizes that NAFTA and other existing trade agreements have created problems for family farmers and ranchers.
While the goodwill is appreciated, these positive steps only highlight the need for a progressive replacement for fast track trade authority. NFFC members want to expand our markets; all farmers want to expand their markets. But trade agreements are only useful if they increase family farm net income, and trade must not be used as a fig leaf to cover for predatory overproduction of hogs, as is happening presently.
Short Term Policy Suggestions Our solution for concentration will be difficult to enact, but it is straightforward: reduce hog production and restore competitive markets by making the packers bid for all hogs (and cattle) they acquire. The first point -reducing production -is a battle that farmers fight largely at the local and State level. The appropriate Federal role in this effort is unclear, apart from prohibiting Federal funding or subsidization of expanded hog production. The second point -restoring competitive markets through bidding -is much more relevant at the Federal level. Within the next few months, NFFC will be releasing a much more detailed explanation of how competitive markets should be renewed through Federal legislation and administrative action.
Following is a short critique of other Federal pork policy suggestions that are currently circulating before Congress and USDA regarding short-term cash flow for independent hog farmers. NFFC salutes Secretary of Agriculture Dan Glickman for his decision to target Federal income assistance to independent hog farmers and cap the assistance at a reasonable level of production.
Page 141 PREV PAGE TOP OF DOC Ledger Contracts: Congress should investigate ledger contracts, with an eye toward revoking these contracts and reprimanding packers for offering them. Ledger contracts -which are offered exclusively to smaller independent farmers -are sending farmers deeper into debt. We are concerned that when these multi-year contracts expire, farmers will have no way to escape debt, leading to loss of farms and causing legal battles similar to 1996's hedge-to-arrive disputes. It is estimated that between 5 and 10 percent of hogs marketed last year were under some form of ledger contract, and the percentage is expected to be higher this year.
USDA Hog Purchases: Any proposed Federal response to the hog price crisis must be judged based on whether it puts money back into farmers' pockets and reduces hog supplies in the long run. USDA's traditional method of purchasing commodities when prices are low does not meet this criteria. USDA purchased over $80 million worth of pork in December, with Vice President Gore declaring that ''these are incredibly difficult times for America's small-and medium-sized pork producers.'' Unfortunately, the purchases were made from corporations such as Murphy Family Farms, Farmland Industries, and Cargill, which are responsible for the 49 precent production increase. The contract farmer who raises hogs for these corporations only gets money back if the corporations improve the terms of the contract, which they never do. By making purchases from big corporations whenever prices fall, USDA encourages agribusiness to keep increasing production keeping prices low. In the future, USDA is advised to make purchases only from
farm operations that will not use bailouts as an incentive to expand production. We still have small, independent packers and producers out there; USDA should buy from them.
Credit and Cash Flow: NFFC commends Secretary Glickman for halting USDA guaranteed loans for new hog production, since these loans had been fueling the spread of factory-style contract hog farms. This step will help limit hog supplies, and we appreciate USDA's prompt action on the matter. We also note that USDA is preparing to issue further FSA loan guarantees and to begin rescheduling FSA farmer debt. NFFC suggests the following additional steps be taken by Congress and USDA with regard to credit access:
Page 142 PREV PAGE TOP OF DOC (1) USDA should use the $250 million in its fiscal year 1999 allocation to make lower interest guaranteed loans available to family farmers, as opposed to issuing low interest loans to shore up banks' commercial portfolios. We are very concerned that the increase in allowable guaranteed FSA credit, raised from $400,000 to $700,000 in the 1998 agriculture appropriations bill, will mean fewer loans for the family farmers who need it the most. We urge Congress to restore the lower limit due to increasing demand for this limited credit;
(2) Congress needs to change the 1996 farm bill so that a hog farmer who has previously received a debt write-down under 1951(s) for either direct or guaranteed loans retains eligibility for FSA credit. The 1998 agriculture appropriations bill only restored FSA credit eligibility to those who had received a debt write-down prior to April 4, 1996;
(3) 4,622 farmers who rescheduled their debts through the 1987 Agricultural Credit Act will see their low-year shared appreciation agreements trigger this year. This means they will owe the government 50 precent of the appreciated value of their farm, up to the level written down in 1989. For almost every farmer caught in this trap, the result could be bankruptcy or foreclosure unless swift administrative and legislative changes are made. We urge USDA to adjust appraisals to subtract the value of improvements made by the farmer during the last ten years from the appraisal value. Currently, the farmer pays twice: once for the improvement, and second for the appreciated value. Legislatively, we urge a change so that the trigger is postponed for five years, and that it is waived if the farmer remains farming for an additional five years.
(4) Aggressive USDA outreach in the implementation of the 195 1-T deferral for loan payments. On December 3 1, 1998, USDA announced that farmers suffering from economic disaster would be eligible for this deferral, which had previously only been available to provide assistance for farmers suffering from natural disasters.
Checkoffs. Lastly, we turn your attention to the national petition drive carried out by family hog farmers to end the mandatory pork checkoff. The National Pork Board, which shares office space and subcontracts primarily with the National Pork Producers Council, will collect over $50 million from farmers in checkoff dues this year. NPPC, in turn, is encouraging producers with deep pockets to keep expanding operations and seizing market share. 60 precent of U.S. hog farmers (207,000)have gone out of business since 1986, when the mandatory checkoff was initiated.
Page 143 PREV PAGE TOP OF DOC Family hog farmers have gathered over 14,000 signatures on the referendum petition. According to Federal checkoff legislation and USDA rules, petitioners need to sign 15 precent of all hog farmers paying the checkoff within a one year time frame. In less than nine months, we are now at the threshold of reaching this goal. The referendum will be held shortly, giving family hog farmers the opportunity to regain control of their hard-earned dollars.
Thank you for the opportunity to submit this statement. We look forward to working with Congress and USDA to help family hog farmers overcome this perpetual crisis.
Statement of Continental Grain Company
Continental Grain Company has announced plans to sell its worldwide commodity marketing business to Cargill, Incorporated. This transaction includes the company's grain storage, transportation, export and trading operations in approximately 50 countries throughout North America, Europe, Latin America and Asia.
Continental will change its name to ContiGroup Companies, Incorporated but will continue to be a leading factor in global agribusiness as a supplier of added-value products through its AgriIndustries division and, indeed, as a major purchaser of agricultural commodities. ContiGroup Companies (CGC) will include domestic and international poultry, pork, cattle feeding, aquaculture, flour milling, animal feed and nutrition businesses, as well as liquefied petroleum gas trading and financial services businesses.
The decision to sell the commodity marketing business was taken after extensive review of a wide range of strategic alternatives. There is no question that agriculture and agribusiness are undergoing tremendous change driven by new technology and consumer demand. The grain business has been transformed from a bulk commodity trading business into a processed specialty products business. These changes in the marketplace have greatly diminished the historic role of the grain merchant as a middleman. The link from seed to farmer to processor to consumer is becoming increasingly integrated. This means that there are increasingly new opportunities for producers to work directly with processors in meeting consumer demand.
Page 144 PREV PAGE TOP OF DOC Today, U.S. producers supply the raw materials for food, fiber, medicines, consumer and industrial products sold around the world. It is to their advantage that the system which originates and delivers those materials into the value chain be flexible, responsive and efficient. Growing domestic demand for grain, and the shift of demand into grain producing areas previously in surplus, are major factors contributing to producers' ability to receive a larger percentage of what users pay for grain. The ''market'' for corn grown in Iowa is much more competitive today as compared to years ago simply because the number of outlets for that corn has expanded to include an increasing number of domestic users, some possibly hundreds of miles away from production areas, as well as exports from Gulf and Pacific ports. Lower transportation costs and more efficient handling facilities allow Iowa corn to ''compete'' with production from other areas instead of being limited to usage in a local area. This is also the case with spring wheat grown in North Dakota. Previously, this wheat moved almost exclusively to millers in Minneapolis, whereas today outlets are to mills in Texas or to exporters on all coasts. The sale of Continental's grain operations will be an important addition to enhancing Cargill's ability to serve farmers, suppliers and customers efficiently and reliably in meeting consumer demand in the marketplace.
We request that the following study, ''Trends in Economic Coordination in U.S. Agriculture'' be entered into the record of the recent hearings on agribusiness consolidation. In recognition of the importance of this issue to us and to all of U.S. agriculture, we have worked with the distinguished agricultural economists of PROMAR International to outline some of the leading trends and new opportunities developing in the U.S. agricultural system.
The ''Trends in Economic Coordination in U.S. Agriculture'' is on file with the committee.
Page 145 PREV PAGE TOP OF DOCStatement of the Florida Fruit and Vegetable Association
I commend you for holding this hearing on agribusiness consolidation. Our members have growing concerns about consolidation among retail grocers in the United States. In the past 3 years, the number of major grocery chains merging or being acquired by other chains or investor groups has increased substantially. The Food Institute reported last year that merger activity among supermarket chains in 1997 was the highest since 1989. And, with the mega-mergers announced this past year, it's likely that 1998 will be a record setter as well.
As supermarket chains in the US. become fewer and larger, these newly-merged retail giants enjoy a considerable bargaining advantage over their suppliers. This is especially alarming for fresh fruit and vegetable growersmany of which are small to medium sized family businesses. As buying power concentrates within the retail grocery industry, fresh produce growers have fewer stores to whom they can sell their highly perishable and price sensitive commodities. The
net result is continued pressure to reduce prices paid to growers. This comes at a time when growers are already facing depressed prices as a result of global competition and the Asian economic crisis. Unfortunately, American consumers rarely benefit at the supermarket during these periods of low producer prices.
In addition to heightened pricing pressures, U.S. fruit and vegetable growers are increasingly being asked to provide payments such as slotting fees, allowances or rebates to retailers, ostensibly to support the marketing costs of the growers' crops. In practice, however, these payments have rarely resulted in visible benefits to growers and may only serve to boost profit margins for retailers.
Looking ahead, it is not likely that U.S. consumers will benefit from the continued consolidation of food retailers in this country, if consumers' experience in Great Britain is any indicator. A 1998 study by the Office of Fair Trading in Great Britain, a country now dominated by four grocery retail chains, suggests that British ''retailers are increasingly able to retain the benefits from their increased bargaining power rather than passing them to consumers.'' More specifically, a November 17 article in Britain's International Express estimated that the average family in Britain pays over L1,000 more a year for food than those on the continent. An article in the December 14, 1998 issue of Forbes cited profit figures for Britain's ''big four'' supermarket chainsprofits that are 50 percent higher than U.S. grocery chains. The swell of consumer and media clamor about food prices in Great Britain has sparked another investigation by the Office of Fair Trading into the profitability of that country's major grocery chains.
Page 146 PREV PAGE TOP OF DOC We are pleased that Secretary of Agriculture Dan Glickman has also spoken up about his concerns. We hope your Committee and the Department will jointly work on this important issue.
The Department has directed the Economic Research Service (ERS)to conduct a review of retail trade practices in regard to fresh fruits and vegetables. We're hopeful that the ERS 'report will shed much-needed light on trends that potentially threaten the fair market relationships between growers and supermarket chains and, perhaps then proceed to look at whether retail and wholesale concentration coupled with increased imports are responsible for the trend in adverse trade practices.
We would argue, that these trade practices are a symptom of the continuing consolidation of the buying-side of the marketplace and we strongly urge your Committee and the Department to carefully investigate the effects of retail consolidation on growers and shippers of fruits and vegetables. The potential impact of supermarket mergers on both consumers and growers could have consequences equal to or greater than consolidation in other sectors of the food industry. After all, could it not be argued that ample competition helps ensure choice and fair trade practices through the entire marketing chain, including food retailers and their relationships with fresh product suppliers? We believe the answer is yes.