SPEAKERS CONTENTS INSERTS
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COMPETITIVE ISSUES IN AGRICULTURE AND THE FOOD MARKETING INDUSTRY
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
OCTOBER 20, 1999
Serial No. 67
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
Page 3 PREV PAGE TOP OF DOCHOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
October 20, 1999
Page 4 PREV PAGE TOP OF DOC Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary
Boyle, Patrick, president and CEO, American Meat Institute, Arlington, VA
Figueroa, Enrique, Ph.D., Deputy Under Secretary for Marketing and Regulatory Programs, United States Department of Agriculture
Gray, John, general counsel and president, International Food Service Distributors Association, Falls Church, VA
Hammonds, Tim, president and CEO, Food Marketing Institute, Washington, DC
Keith, Kendell, president, National Grain and Feed Association, Washington, DC
Kruse, Charles, president, Missouri Farm Bureau, Jefferson City, MO
Minge, Hon. David, a Representative in Congress from the State of Minnesota
Nannes, John M., Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice
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Piper, Odessa, chef-proprietor, L'Etoile Restaurant, Madison, WI
Pomeroy, Hon. Earl, a Representative in Congress from the State of North Dakota
Pyle, Nicholas, vice president for legislative affairs, Independent Bakers Association, Washington, DC
Stenzel, Tom, president, United Fresh Fruit and Vegetable Association, Alexandria, VA
Tom, Willard K., Deputy Director, Bureau of Competition, Federal Trade Commission
Thune, Hon. John R., a Representative in Congress from the State of South Dakota
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Bono, Hon. Mary, a Representative in Congress from the State of California: Prepared statement
Boyle, Patrick, president and CEO, American Meat Institute, Arlington, VA: Prepared statement
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Figueroa, Enrique, Ph.D., Deputy Under Secretary for Marketing and Regulatory Programs, United States Department of Agriculture: Prepared statement
Gray, John, general counsel and president, International Food Service Distributors Association, Falls Church, VA: Prepared statement
Hammonds, Tim, president and CEO, Food Marketing Institute, Washington, DC: Prepared statement
Hostettler, Hon. John N., a Representative in Congress from the State of Indiana: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
Jackson Lee, Hon. Sheila, a Representative in Congress from the State of Texas: Prepared statement
Keith, Kendell, president, National Grain and Feed Association, Washington, DC: Prepared statement
Kruse, Charles, president, Missouri Farm Bureau, Jefferson City, MO: Prepared statement
Page 7 PREV PAGE TOP OF DOC Lauck, Dr. Jon: Prepared statement
Minge, Hon. David, a Representative in Congress from the State of Minnesota: Prepared statement
Nannes, John M., Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice: Prepared statement
Piper, Odessa, chef-proprietor, L'Etoile Restaurant, Madison, WI: Prepared statement
Pomeroy, Hon. Earl, a Representative in Congress from the State of North Dakota: Prepared statement
Pyle, Nicholas, vice president for legislative affairs, Independent Bakers Association, Washington, DC: Prepared statement
Stenzel, Tom, president, United Fresh Fruit and Vegetable Association, Alexandria, VA: Prepared statement
Tom, Willard K., Deputy Director, Bureau of Competition, Federal Trade Commission: Prepared statement
Thune, Hon. John R., a Representative in Congress from the State of South Dakota: Prepared statement
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Material submitted for the record
COMPETITIVE ISSUES IN AGRICULTURE AND THE FOOD MARKETING INDUSTRY
WEDNESDAY, OCTOBER 20, 1999
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to call, at 10:15 a.m., in Room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, Howard Coble, Bob Goodlatte, Steve Chabot, William L. Jenkins, Asa Hutchinson, Edward A. Pease, James E. Rogan, Mary Bono, Robert C. Scott, Sheila Jackson Lee and Tammy Baldwin.
Staff Present: Thomas E. Mooney, Sr., general counsel-chief of staff; Daniel M. Freeman, parliamentarian/counsel; Joseph Gibson, chief antitrust counsel; Sharee Freeman, counsel; Sheila F. Klein, executive assistant to general counsel; Michele Utt, administrative assistant; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; Michael Connolly, press secretary; James B. Farr, financial clerk; and Sampak P. Garg, minority counsel.
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OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order. This morning the committee holds an oversight hearing on competitive issues in agriculture and the food marketing industry. The antitrust aspects of agriculture have long been a topic of interest, but this is the first opportunity we have had to air them since I have been chairman. Today's hearing will cover two separate but related topics. First, we will consider the antitrust implications of growing concentration in the meat-packing and grain-processing industries. Second, we will take a look at the issue of the slotting fees that retail stores charge to place grocery products on the shelves. Both of these competitive issues affect the price of food that we all consume.
With respect to the concentration issue, both the meat-packing industry and the grain-processing industry have experienced mergers and increasing concentration in recent years. Some argue this is a rational response to increasing global competition. Others argue that the packers and processors now have too much market power, and they use that market power at the expense of farmers and producers.
With respect to slotting fees, some argue that these fees are a normal market response to the proliferation of grocery and produce products. Others contend that the fees affect the retailers' market power, and they can use them to stifle innovation and squeeze out smaller manufacturers.
I come to both issues with an open mind. I don't have too many farms in my district. I think that I have a few, but not too many in my district, but we all eat what farmers produce, and we all shop in the grocery stores. Thus these are important issues to all of us. If there are competitive problems, we mean to find out about them.
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[The prepared statement of Mr. Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
This morning, the Committee holds an oversight hearing on ''Competitive Issues in Agriculture and the Food Marketing Industry.'' The antitrust aspects of agriculture have long been a topic of interest, but this is the first opportunity that we have had to air them since I have been Chairman.
Today's hearing will cover two separate, but related, topics. First, we will consider the antitrust implications of growing concentration in the meat packing and grain processing industries. Second, we will take a look at the issue of the slotting fees that retail stores charge to place grocery products on their shelves. Both of these competitive issues affect the price of the food that we all consume.
With respect to the concentration issue, both the meat packing industry and the grain processing industry have experienced mergers and increasing concentration in recent years. Some argue that this is a rational response to increasing global competition. Others argue that the packers and processors now have too much market power and that they use that market power at the expense of farmers and producers.
With respect to slotting fees, some argue that these fees are a normal market response to the proliferation of grocery and produce products. Others contend that the fees reflect the retailers' market power and that they use them to stifle innovation and squeeze out smaller manufacturers.
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I come to both issues with an open mind. I have only a few farms in my district. However, we all eat what farmers produce and we all shop in grocery stores. Thus, these issues are important to all of us. If there are competitive problems, we need to find out about them. So we look forward to the testimony of all the witnesses. With that, I will recognize Ranking Member Conyers for an opening statement.
Mr. HYDE. So we look forward to the testimony of all of the witnesses, and Mr. Pease, the gentleman from Indiana, would like to be recognized for an opening statement. Mr. Pease.
Mr. PEASE. Thank you, Mr. Chairman. Thanks to all who will be appearing before the committee today and for those many of us who have helped to make this hearing possible. We do have an extensive witness list, so my comments will be abbreviated.
I would like to ask, Mr. Chairman, unanimous consent to submit for the record a statement of my Indiana colleague, Representative Hostettler, who also serves as a member of the Agriculture Committee.
Mr. HYDE. Without objection, so ordered.
[The prepared statement of Mr. Hostettler follows:]
PREPARED STATEMENT OF HON. JOHN N. HOSTETTLER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF INDIANA
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Chairman Hyde, Ranking Member Conyers and Members of the Judiciary Committee, as a member who represents significant agriculture concerns in Indiana, I am pleased that you are conducting today's hearing, ''Competitive Issues in Agriculture and the Food Marketing Industry'', to oversee potential antitrust issues in agriculture and food marketing. As you are aware, earlier this year the Agriculture Committee, of which I am a member, conducted a similar hearing to review the effects of agribusiness consolidation on the agriculture sector.
Consolidation in the agricultural community is a real phenomenon. While some believe that consolidation is generally a positive trend for the agricultural community, many of my constituents have raised concerns that agribusiness consolidation puts farmers and ranchers at a unique, financial disadvantage. Pending approval of a mega-merger among two of the nation's largest grain processing companies, for example, the newly merged company will become the buyer of 10 to 15 percent of U.S. grain production and the seller of one-third or more of U.S. grain exports.
Many Hoosiers in my district are concerned that any potential benefits that result from agribusiness consolidation would likely be outweighed by the potential costs. They are concerned that the economic viability of small farms and rural communities dependent on agriculture could be significantly threatened, and that consolidated agribusinesses would engage in predatory practices.
Questions, like the ones that follow, should be addressed in order to properly assess the impact antitrust practices will have on the agriculture community. Have federal government regulations and the economies of scale they create had any bearing on agribusiness consolidation? Are the United States' anti-trust laws adequate to take care of any predatory practices and market power seizure? In past instances of agribusiness consolidation, how has technological advancement and other industry improvements allowed non-consolidated business entities (i.e., family farms) to successfully compete in other markets?
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Thank you for allowing these remarks to be submitted for the record.
Mr. PEASE. Mr. Chairman, I want to thank you for your willingness to address this subject. There is an increasing restlessness in the agriculture community about the consequences or possible consequences of consolidation and integration in their industry. Change is inevitable, and much change has been very positive in this industry. But given the challenges facing American agriculture and the nervousness about the potential consequences of trends that they see, it is appropriate, I believe, for us to address this issue in an oversight hearing.
I want to thank Congresswoman Bono and Congresswoman Baldwin, who both gave early support to the effort to have this hearing, and Congressman Boswell, as well as the three Members of Congress who are going to appear before the committee today, to make it possible for us to go forward with what I am sure will be an informative and very helpful hearing. Thank you, Mr. Chairman.
Mr. HYDE. Thank you.
The Chair is pleased to recognize the gentlelady from Wisconsin Ms. Baldwin.
Ms. BALDWIN. Thank you, Mr. Chairman. I, too, want to thank you for holding this hearing today and to recognize the efforts of the gentleman from Indiana, Mr. Pease, for advocating that this oversight hearing be held and being so inclusive in its planning.
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As I have noted very frequently in this committee, in the context of chapter 12 bankruptcy and in the context of looking at dairy compacts, small family-based farms are in jeopardy. Many are receiving historically low prices for their commodities and are facing debts that threaten to drive them out of business.
Concurrently it seems that almost every day that we also here about megamergers taking place in one industry or another. Consolidation in some markets may not necessarily be a bad thing. Sometimes it does serve to reduce costs to consumers. But in agriculture, we should be especially careful because while we may be able to live without a cheaper computer, we cannot live without a wholesome safe supply of food.
Consolidation is becoming a reality in almost every aspect of agriculture, from grains to livestock and everything in between. Mr. Chairman, pork producers in my State, just like elsewhere in the Nation, have been having a very hard time. After receiving Depression-era prices for their hogs last year, they are just now beginning to recover. But the debt they absorbed during this recent crisis still threatens to force many producers out of business.
There is a variety of reasons that the crisis occurred: Overproduction, the downturn in the Asian export market are just two reasons of a very complex situation. But we cannot ignore that packer-owned livestock operations may play a role. When a pork packer is also a pork producer and owns almost all of the product needed to fill its orders, the small farmer who is out of that loop is at a disadvantage to get a fair price for his or her livestock.
Mr. Chairman, I want my Wisconsin farmers to succeed and to profit from what they do so they can send their kids to college and pay for the health care they need. I want them to have fair market access and prices. I want my constituents in rural Wisconsin to have a stable economy based on the family farm so that it isn't a requirement that they need a city job in order to live in the country. I want all of my constituents to have access to a full range of quality wholesome, safe foods. Thank you. I look forward to hearing the witnesses today.
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Mr. HYDE. Thank you, Ms. Baldwin.
Now the gentlelady from California, Mrs. Bono.
Ms. BONO. Thank you, Mr. Chairman. I, too, want to thank you for scheduling this hearing. It is a hearing that is very important to my constituents in the 44th District of California. I would also like to thank all of the witnesses beforehand for their time in being here today.
Mr. Chairman, I would like to ask unanimous consent to place my opening statement in the record.
Mr. HYDE. Without objection.
Ms. BONO. Thank you.
[The prepared statement of Ms. Bono follows:]
PREPARED STATEMENT OF HON. MARY BONO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Chairman, I thank you for arranging for us to have this antitrust hearing today. Congress has recently examined antitrust as it affects shipping, airlines, telecommunication, computers, and the electric industry. This is also a worthy subject for us to consider as it affects the fundamental quality of life for all families in America.
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It is not my goal to mislead anyone about my expertise in this complicated area of the law. What I do know about antitrust law is that it is intended and designed to protect consumers. Its goal is protecting consumers against abuses of power by industry and unfair business practices that stifle competition.
Likewise, I can honestly say that I could not define a slotting fee for you right now. However, I am apparently in good company as I really haven't met anyone who can clearly define what is a slotting fee. The term refers to a variety of business practices in the industry that are often conducted in secret and remain mysterious to the public. At the same time there are two schools of thought on this subject. One school legitimately believes these fees help consumers by making the industry more efficient in the distribution or products. At the other side, and at worst believe, some observers believe that these fees are anti-competitive and a violation of federal law.
When I was growing up in California, the mom and pop grocery stores were the norm. Now we are have moved from the mom and pop to the supermarket to the hypermarket. I am sympathetic why people are either nostalgic about the past or are scared about the future and the trends of further industry consolidation. Consumers from across the country have voiced their sincere concern about the way that the market place in this area is evolving. My constituents from the 44th District have expressed their sincere concerns about some of the novel practices by the food marketing industry and their effect on the family farmer. We are justified in the need to scrutinize whether the law has kept pace with the marketplace's changes.
It is important for everyone in attendance to understand that I am here today with an open mind. I am here to learn. We are entrusted with oversight of the antitrust laws and the federal enforcement agencies. In my view, an open discussion of the facts concerning this industry is the best and most responsible course of action for this committee.
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It is my hope that the witnesses today will provide us with a greater understanding of the dynamics of the modern grocery store business. In addition, I am very pleased that all of the witnesses have come forward without fear of possible retribution and free of the need to shield their identity with hoods and voice scramblers. In my view, a free and open exchange has benefits for all participants and the public. Likewise, it is my hope that we gain understanding of how its evolution affects all consumers including parents, seniors, and other people on fixed incomes.
Again, I thank you Mr. Chairman, I welcome our witnesses and I yield back my time.
Mr. HYDE. If there are no further opening statementsMr. Jenkins, did you care to make an opening statement? Very well, thank you.
Our first panel consists of three membersreally twowe are not sure if our other colleague will be here, so we will keep a window of opportunity open for him if he does come. But our first panel consists of two of our colleagues who represent agriculture districts in the Midwest, and both of them have been very active on these issues for some time. Congressman John Thune represents the entire State of South Dakota, holding its at-large seat in the House of Representatives. He has an MBA from the University of South Dakota. Before coming to Congress, he worked for Senator Jim Abourezk, served at the Small Business Administration, headed the South Dakota Republican Party, and was State railroad director. He was first elected to Congress in 1996.
Page 18 PREV PAGE TOP OF DOC Congressman David Minge represents the Second District of Minnesota and is a graduate of St. Olaf College and the University of Chicago Law School. Before coming to Congress he practiced law in his home town of Montevideo, where he represented a wide range of clients and talked and lectured widely. He was first elected to Congress in 1992. I might point out that Montevideo is not in Uruguay, it is in Minnesota. They named their town after our Montevideo. I am sure of that.
We will adhere to our normal practice of not questioning congressional witnesses. As you all know, we have a long list of witnesses, and the quicker we can get to them, the better. We are very pleased to have your statements, and we will listen to them with interest, hoping you can confine your remarks to 5 minutes, and we will accept your statement in full. And so, Representative Thune.
STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. THUNE. Thank you, Mr. Chairman and members of the committee. Let me just say that I want to thank you for giving me the opportunity to testify before you today on what I think is a very important topic to our Nation. I also want to thank you, Mr. Chairman, for taking the bold step of calling this hearing. As you are aware, this is something that I have urged you in private conversations as well as written communication to do. This committee which oversees the Department of Justice and which has oversight over the questions of antitrust statutes is necessary if we are to move forward in congressional examination of recent activities in the agriculture business. Let me be clear in saying that I believe that Congress must start this process now.
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The chairman, too, should be recognized for deftly focusing the topic of this hearing on the question of competitiveness. In fact, competition truly is the goal we should have as a Nation for our economic system. It is competition that will ensure America's farmers and ranchers can continue to produce and hopefully thrive.
In South Dakota and across the heartland we are hearing that an important element of competition is missing or is rapidly disappearing in the agriculture sector. I fear that those who hold this view are right. Concentration across many sectors of the agricultural processing industry can be seen clearly by the numbers: Five firms control 80 percent of the beef-packing market; six firms conduct 75 percent of the pork processing; and the four larger grain buyers control nearly 40 percent of grain elevators and storage. These numbers considered in isolation may not be cause for alarm, but if you consider other trends, you likely will come to understand the growing concern over the growing trend of mergers and consolidation in agriculture processing.
I would like to have submitted for the record written testimony from Dr. Jon Lauck that headlights some of these concerns.
[The information referred to follows:]
PREPARED STATEMENT OF DR. JON LAUCK
American antitrust law has undergone great change within the last two decades. The change reflects a judicial embrace of the free market ideologies associated with the ''Chicago school'' of economics. Much of this change has proceeded on a neutral basis, without regard to the particular economic sector at issue. Such an approach fails to consider the uniquely agrarian origins of antitrust law and the wider social and statutory policies seeking to protect the economic interests of American farmers. Greater attention to these concerns, creating an agrarian antitrust law, would more effectively advance the policies embraced by lawmakers and bolster the bargaining power of American farmers.
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Throughout the 1990s, farmers have sought greater antitrust enforcement as a method of alleviating the alleged abuses of large buyers of agricultural goods. Farmers can draw on recent evidence of concentration to make their case for antitrust relief. During Congressional testimony in January 1999 farmer advocates presented the results of a recent compilation of concentration data. The study indicated, for example, that five firms conducted over 80 percent of beef packing and that six firms conducted 75 percent of pork packing, a much larger concentration rate than previous decades. Also, the four largest grain buyers controlled nearly 40 percent of the elevator facilities. Cargill, indicating the multiple product markets occupied by many large food firms, was among the dominant firms in all three markets. Congressional concern with such concentration levels, highlighted by the pending merger of Cargill and the large trader Continental Graintermed the ''mother of all mergers'' by one farm grouphas prompted calls for a moratorium on further mergers and acquisitions among large food firms. More generally, Congressional leaders have called on the Department of Justice to ''aggressively investigate concentration in agriculture.''
Some economic studies indicate a strong correlation between concentrated food firms and their profitability and market power. Compounding such concerns are widening gaps between retail and farm prices. From 1984 to 1998, consumer food prices increased 3 percent while the prices paid to farmers for the products plunged 36 percent. The impact of the price disparity is reinforced by reports of record profits among agribusiness firms at the same time that agricultural producers are suffering through a severe economic depression. This contrast in economic health between vertically related sectors, to many observers, indicates the existence of market power in the concentrated processing sector and the powerlessness of farmers. Unfortunately for farmers, the antitrust laws in recent years have not addressed such concerns, especially the disparity of bargaining power between individual farmers and large-scale corporate buyers.
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Antirust cases involving agricultural markets require a unique set of considerations. Unlike other industries that may not have existed at the time of the passage of the Sherman Act, agriculture maintains a special status as an industry that heavily influenced passage of such legislation. The Congressional response to agrarian concerns indicates that farmers were specifically considered as a group that suffered or could suffer antitrust injuries. Such a status partially explains the continued clamoring in agricultural circles for antitrust action to address the economic woes of the farmer.
Unfortunately, antitrust law in recent decades has failed to consider its agrarian grounding. By incorporating the economic theories of the Chicago school into judicial analysis, courts have failed to consider structure as a serious factor in decision-making. As a result, non-economic considerations advanced by Congress such as decentralization have been spurned, contributing to a persistence of economic concentration in many sectors of the American economy. Consequently, the monopsonistic relationship between some sellers and buyers, a structural consideration of particular importance to farmers, has not been widely recognized by the courts. Congress should seek legislation that requires courts to consider all of the impacts of agribusiness mergers on producers.
Such a consideration has particular relevance in merger analysis. The Sherman Act was motivated by a concern about mergers and their impact on levels of economic concentration. Similar concerns motivated passage of the Clayton Act twenty-four years later, which embraced merger regulation as a method of stopping economic concentration in its ''incipiency before consummation.'' Still concerned with concentration levels and the frequency of mergers that compounded concentration, Congress passed the Celler-Kefauver antitrust amendments in 1950, prohibiting corporate mergers the effect of which ''may be to substantially lessen competition.'' Congress again intended the merger provisions to serve as a ''prophylactic measure'' which could ''cope with monopolistic tendencies in their incipiency,'' choosing to focus on ''probable harm [to competition] rather than actual harm.'' The Congressional mood is even reflected in the title of the law, a self-proclaimed ''Antimerger Act.''
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In the 1960s, courts met Congressional hopes for a restrictive merger policy. In United States v. Philadelphia National Bank, for example, a merger was found to be presumptively illegal if it caused a ''significant increase in [market] concentration.'' In United States v. Von's Grocery, the Supreme Court disallowed a merger between firms that would have had a mere 7.5 percent market share. In Von's, the Court sought to ''prevent economic concentration in the American economy by keeping a large number of small competitors in business.'' In subsequent years, after the adoption of the merger guidelines by the Department of Justice, merger cases continued to focus on structural considerations such as market share.
Unlike the restrictive merger policies of an earlier generation of cases, however, the current inquiry does not end with the consideration of structural factors. Enforcement agencies now extend their analysis beyond concentration levels, weighing a ''variety of economic factors'' which could determine the anticompetitive effect of a merger. Such factors include the potential efficiencies generated by the newly combined firm and the ease of entry into the merged firm's market. Enforcement agencies do not adopt unique considerations for agribusiness mergers.
Despite greater sophistication in recent years, the economic analysis of mergers has never overcome the shortcomings outlined by Harvard Law professor Derek Bok in the earliest stages of section 7 commentary. In 1960 Bok maintained that the ''the problem of indeterminateness'' discussed earlier would undermine any attempts to assess the probable competitive consequences of a merger. More recent commentators have recognized this difficulty with particular reference to the efficiencies defense in merger cases. Despite alleged advancements in economic theory and the ubiquity of ''efficiency'' as a justification for business activities, it is still extremely difficult to predict the existence of efficiencies in a merged firm. As FTC chairman Robert Pitofsky has noted, the efficiencies defense is ''easy to assert and sometimes difficult to disprove.'' One court has termed efficiency claims by defendants in merger cases to be ''speculative self-serving assertions.'' Doubts about the competitive consequences of mergers and efficiency claims and the problems of proof that they both present has even crept into the analysis of Chicago school stalwarts such as George Stigler, Richard Posner, and Robert Bork. The most reliable source of doubt about efficiency claims is the poor economic record of mergers.(see footnote 1) The largest merger of the 1980s, for example, was recently reversed, earning a high rank in ''the century's pantheon of financial ignominy.''(see footnote 2)
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Debating the economic effects of mergers also crowds out the consideration of other policies undergirding the anti-merger provisions of the antitrust laws. In passing the Celler-Kefauver amendment in 1950, Congressional action was premised on concerns about economic concentration and the tendency of mergers to further increase concentration. Congress was concerned about the effects of concentration on personal freedoms, the disappearance of small businesses, and the impact of concentrated economic power on democratic institutions, and ''efficiency was of small concern.'' Failing to consider non-economic concerns undermines the broader purposes and concerns of the statute. The prominence of these considerations led courts in the 1960s and 1970s to condemn mergers, despite possible efficiencies. Judicial deference to Congressional concerns about mergers contributing to economic concentration was wise, especially in light of the inability to confirm or deny the presence of economic efficiencies.
A merger analysis that devolves into irresolvable economic theorizing and fails to weigh structural considerations undermines agrarian antitrust. By not considering concentration levels per se, the importance of the overall bargaining context is diminished. The calculation of economic outcomeswhich often solely involves a debate over the potential for price increasesand the consideration of efficiencies also indicates a decidedly pro-consumer bias in merger analysis, offering little or no opportunity to consider the negative impact of a merger on suppliers. A possible component of an efficiencies defense, for example, is that a merged firm will be able to maintain ''bargaining advantages'' over other economic actors. Such an argument implicitly recognizes that those who sell to a large firm resulting from a merger will often be at a disadvantage, but fails to consider the impact on suppliers as an autonomous factor in merger analysis.
Page 24 PREV PAGE TOP OF DOC A stricter merger policy in the past could have made a critical difference to the industrial structure of farm product buyers.(see footnote 3) In the early part of the century, the food industry was defined by numerous small firms that started to grow larger and more powerful in the 1920s, partly through merger.(see footnote 4) In the postwar period the concentration concerns became more pronounced as the number of food manufacturers dropped by over 50 percent from 1947 to 1972.(see footnote 5) In the mid-1960s ''an avalanche of mergers broke loose in the U.S. economy''''merger mania,''(see footnote 6) and from 19711975 food-tobacco manufacturing firms made 25 percent of all large manufacturing acquisitions.(see footnote 7) A.C. Hoffman, an early pioneer in the field of competition in the food industries, claimed that ''[n]ever before in the history of capitalism [had] such great aggregations of economic power been created.''(see footnote 8) The abandonment of Warren-era merger policies by enforcement agencies and the courts, which ''virtually [stopped] all but very small mergers by the leading ten food chains,''(see footnote 9) contributed to the ''record volume of food manufacturing acquisitions'' in the 1980s.(see footnote 10) One study concluded that two-thirds of the increase in concentration levels during the 1980s could be explained by mergers and acquisitions, many of which violated the Department of Justice's own merger guidelines.(see footnote 11)
The best approach would be a return to the Philadelphia National Bank (PNB) standard for mergers in the agribusiness sector. In PNB the Supreme Court stopped the merger of the second and third largest banks in Philadelphia, holding that the combination of large firms in a market created an inferential violation of section 7. Such a presumption, the court held, was particularly important in an economic sector where concentration was increasing. A similar presumption in the case of agribusiness mergers would address the historic and contemporary concerns of farmers with the concentrated power of their buyers, a consideration particularly important after the growth of concentration in the last decade. A presumption would begin to compensate for overlooking the impact on suppliers in recent cases. Moreover, the presumption would tip the balance in favor of farmers in merger cases which are prone to inconclusive determinations about economic effects, more faithfully addressing Congressional concerns about economic concentration and the bargaining power of farmers. Given the unwillingness of courts to embrace the PNB standard, Congress should amend the Clayton Act and create a statutory-based presumption against agribusiness mergers.
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Mr. THUNE. Dr. Lauck has written extensively on the history of concentration in the agricultural industry and points out there exists a widening gap between farm prices and retail food prices. Between 1984 and 1998, consumer food prices increased by 3 percent, while prices paid to farmers plunged 36 percent. Mergers and consolidation may not be the sole cause for this trend, but the mere existence of these two quantifiable factors should give us pause as protectors of the Constitution and of the American free enterprise system. With greater contrast, we are seeing how two so closely related sectors are performing so differently. As Dr. Lauck states, this contrast highlights, ''the existence of market power in the processing sector and the powerlessness of farmers.''
The American agricultural system is unique to other industries in our Nation. The system is based upon a number of small suppliers producing raw product and marketing that product to an increasingly concentrated number of processors who add a number of levels of value to that product. It is my strong belief, therefore, that Congress ought to consider existing antitrust statutes, how they are being applied, whether they are being applied consistent with past intent, whether agencies and courts are following the laws according to congressional intent.
The written testimony of Dr. Lauck also points out the agrarian roots of U.S. antitrust statutes. The very genesis of the Sherman Act, the Clayton Act, and amendments of those acts are based on the need to protect our suppliers from uncompetitive practices that result from market dominance. Over the course of time these important presumptions have been overlooked, and the relationship between supplier and buyer has been ignored. Lacking better enforcement by the Department of Justice and other agencies, I believe Congress and this committee must consider amendments to existing antitrust statutes that would consider the interests of farmers, our Nation's supplier of food products. Already we are hearing about different legislative actions that could take us down this road.
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Whatever we do, it must not be superficial and narrow. Congress should act liberally but also with broad and bold strokes. The net result should be a system that fosters true competition for all who are participating in it. I truly believe the interests of America's farmers, consumers, and the economic system depend upon us to act now.
Mr. Chairman, we realize these are not the days of Laura Ingalls Wilder. Times have changed, but we have to ensure that the modern day giants in the earth, our farmers and ranchers who tamed the prairie, have access to a free and competitive marketplace, or they will give way to the industrial giants of the future.
I want to thank the chairman and the committee for the opportunity to testify today and tell you that I look forward to working together with you on a matter that is so important to the future of this Nation.
Mr. HYDE. Thank you very much, Mr. Thune.
[The prepared statement of Mr. Thune follows:]
PREPARED STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH DAKOTA
Mr. Chairman, members of the Committee, I would like to thank you for giving me the opportunity to testify before you today on this most important topic to our nation.
Page 27 PREV PAGE TOP OF DOC I also would like to thank the chairman for taking the bold step of calling this hearing. As he is aware, I urged him to do so. This Committee, which oversees the Department of Justice and which has oversight over the questions of antitrust statutes, is necessary if we are to move forward in a congressional examination of recent activities in agri-business. And let me be clear in saying that Congress must start this process now.
The Chairman, too, should be recognized for adeptly focussing the topic of this hearing on the question of competitiveness. Competition truly is the goal we should have as a nation for our economic system. It is competition that will ensure America's farmers and ranchers can continue to produce and hopefully thrive.
In South Dakota and across the heartland, we are hearing that an important element of competition is missing or is rapidly disappearing in the agriculture sector. I fear that those who hold this view are right.
Concentration across many sectors of the agriculture processing industry can be seen clearly by the numbers: five firms control 80 percent of the beef packing market; six firms conduct 75 percent of the pork processing, and the four largest grain buyers control nearly 40 percent of grain elevators and storage.
These numbers considered in isolation may not be cause for alarm. But if you consider other trends, you likely will come to understand the growing concern over the growing trend of mergers and consolidation in ag processing.
I would like to have submitted for the record written testimony from Dr. Jon Lauck, Ph.D., which highlights some of these concerns. Dr. Lauck, who has written extensively on the history of concentration in the agriculture industry, points out that there exists a widening gap between farm prices and retail food prices. Between 1984 and 1998, consumer food prices increased by 3 percent while prices paid to farmers plunged 36 percent.
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While mergers and consolidation may not be the sole cause for this trend, the mere existence of these two quantifiable factors should give us pause as protectors of the Constitution and of the American free enterprise system. With greater contrast, we are seeing how two so closely related sectors are performing so differently. And as Dr. Lauck states, this contrast highlights the ''existence of market power in the processing sector and the powerlessness of farmers.''
The American agriculture system is unique to other industries of our nation. The system is based upon a number of small suppliers producing raw product and marketing that product to an increasingly concentrated number of processors who add a number of levels of value to that product.
It is my strong belief therefore that Congress ought to consider existing antitrust statutes, how they are being applied, whether they are being applied consistent with past intent, whether agencies and courts are following the laws according to congressional intent.
The written testimony of Dr. Lauck also points out the agrarian roots of U.S. antitrust statutes. The very genesis of the Sherman Act, the Clayton Act, and amendments to those acts are based on the need to protect our suppliers from uncompetitive practices that result from market dominance. Over the course of time, however, these important presumptions have been overlooked and the relationship between supplier and buyer has been ignored.
Lacking better enforcement by the Department of Justice and other agencies, I believe that Congress, and this Committee, must consider amendments to existing antitrust statutes that would consider the interests of farmersour nation's suppliers of food products. Already we are hearing about different legislative actions that could take us down this road. Whatever we do, it must not be superficial or narrow. Congress should act deliberately, but also with broad and bold strokes. The net result should be a system that fosters true competition for all those participating in it.
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I truly believe the interests of America's farmers, consumers, and economic system depend upon us to act now.
We realize these are not the days of Laura Ingalls Wilder. Times have changed. But we have to ensure the modern-day Giants in the Earthour farmers and ranchers who tamed the prairiehave access to a free and competitive marketplace, or they will give way to the industrial giants of the future.
I thank the Chairman and the Committee for the opportunity to testify today. I look forward to working together with you on a matter so important to the future of our nation.
Mr. HYDE. Representative Minge.
STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Chairman. Again, I would like to thank you for holding this hearing. It is badly needed. It does parallel a hearing that was held earlier in the year in the Agriculture Committee. I feel the two committees need to work together to complement our efforts and make sure that we have an effective response to unfolding conditions which I think are very troublesome for the economy generally and agriculture in particular.
I would like to make sure that my statement has been submitted for the record. I will not read it. I would simply ask that you as members of the committee note the perspectives that your colleagues from the Agriculture Committee bring to this hearing.
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There are some trends, which I know that many of you are aware of, but I would just like to briefly identify them, that are disturbing. Mr. Thune has already commented about the meat-packing industry. I point out that for the farmers in our country, it is not just those to whom they sell their products for processing or to whom they sell their grain, it is also the transportation systems in this country have gone through a remarkable degree of consolidation in the last few years. Similarly on the input side, there has been tremendous consolidation. If you are buying seed, you have to look and see where does the seed stock come from. We are down now to less than half a dozen companies in the world that control the majority of the seed stock that is used for agriculture. It certainly is not a competitive sector if you are looking at it from the farmer's perspective when he is buying or selling.
Competition among farmers is intense. If we look at the trends that we see in this country, they are disturbing. When I grew up, we talked about egg money. The farm wife had egg money. That was one of the ways that they handled some of the expenses and bills for the family. No longer is that true. There is not a farmer in my congressional district that I am aware of where the family has egg money to spend unless it is simply a hobby that somebody might have. Similarly we have seen the poultry industry generally go through a remarkable degree of consolidation, and it is no longer a part of normal farm operations.
Vertical integration has occurred in meat-packing and in hogs; it is occurring in the cattle sector. This vertical integration is threatening the ability of individual farmers to sustain these operations on their farms. We are in the midst of this trend now.
Something must take place. We have antitrust laws on the books. In your introduction you alluded to the fact that I went to the University of Chicago. I am well aware of the Chicago school. I studied at the Chicago school, but I wanted to assure this committee that not everyone that studied there came out and is committed to the principles that appear to have dominated the thinking of antitrust laws in this generation. I think that we need to revisit what has been advocated in the Chicago school and make sure that we have a balanced approach to antitrust policy in this country.
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This is really a difficult proposition when you look at the Federal Government. We have at least three agencies that have significant responsibilities here: The Antitrust Division of the Justice Department, the Federal Trade Commission, and GIPSA, which has responsibility with the Department of Agriculture for the enforcement of the Packers and Stockyards Act. I would like to be able to come to this committee and say that I know that all three of these agencies have been able to act vigilantly with respect to their sectors of responsibility, but just in one humble respect, I know that is not the case. They are so poorly funded through the appropriations process that they don't have the resources to do the type of vigorous enforcement action that I know they would like to do.
That is just a start. The laws have been interpreted by the courts in a very restrictive fashion. There are many other things that I feel we can do, and I have been preparing a legislative package. I would like to work with this committee in the development of this package and make sure that we have a product, a legislative product, that we can aggressively pursue with our colleagues in Congress. In this respect I would like to state that Mr. Pomeroy and I and others have been working on legislation, and we expect that before the end of this month, there will be legislation that will be introduced that addresses the problems of mergers that we have been facing in the agricultural sector and calls for a moratorium and a study on the problems that we face in agriculture so that we can develop a responsive policy before the consolidation process has reached the point where it is virtually irreversible.
Well, again, I would like to thank you for your work and your attention to this effort and assure you that those of us on the Agriculture Committee would like to work shoulder to shoulder with you on this task. Thanks again.
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Mr. HYDE. Thank you, Representative Minge.
[The prepared statement of Mr. Minge follows:]
PREPARED STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. Chairman and Members of the Committee:
I thank you for the opportunity to testify today. I have spoken with the Chairman and several Members of this Committee about my concern regarding mergers, consolidation and the resulting high levels of concentration in the economy generally and the agriculture sector in particular.
Many of us from agricultural states have been shocked at the rapid pace of consolidation in agribusiness. Farmers have no negotiating leverage and have little choice but to accept the prices that the large suppliers and distributers charge for production inputs. They find they must sell their farm products to huge processing companies or to elevators who are usually captive shippers on rail lines.
Over the past month, I have consulted with several attorneys and experts on possible antitrust legislation. While I am still in the preliminary stages of drafting legislation, I welcome comments and additional thoughts. The legislation I have pursued addresses the following points:
Page 33 PREV PAGE TOP OF DOC1) The current antitrust laws should be broadened to preclude combinations that result in a single firm having a market share that accords economies of scale or market dominance which significantly impedes the continuation or development of competition or of competitive market conditions.
In addition, anti-competitive conditions should not be limited to adverse effects on consumers and/or purchasers but should include those who sell or provide services to persons who are alleged to have engaged in anti-competitive conduct.
2) Antitrust violators should be liable to both persons who were directly and indirectly affected by antitrust violations. Violators should not avoid liability costs arising from violations because damages may have been passed to others. This would change the rule established in the Illinois Brick decision.
3) The maximum penalty that may be imposed in criminal antitrust cases should be increased from $10 million to $100 million.
4) With regard to deregulated or deregulating industries, Congress should assure that the Antitrust Division and the Federal Trade Commission have the primary jurisdiction over mergers.
5) The Hart-Scott-Rodino Premerger Filing law should be modified in order to facilitate a higher level of scrutiny for the largest mergers. (For example, the FTC/DOJ could annually determine a threshold transactional size for the largest 5% of reportable mergers.) These largest mergers frequently have the most dramatic impact on the public in terms of plant closings, layoffs, community desertions, etc., and they often (though not in all cases) require more governmental time and attention because of the diversity of markets and issues that must be analyzed.
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a. For this limited number of mergers, the merging companies should file information with the public as to the nature of the merger, the markets that are involved, and explanations for any claimed efficiency gains (including anticipated layoffs and plant closings).
b. Data that is filed with DOJ/FTC should also be available to states in which the merging companies do business.
c. A tier structure should be established for filing fees that increases with the size of the transaction. Today, all firms pay $45,000. This could be reduced somewhat for a category of small transactions, and increased quite significantly for the largest mergers.
d. The antitrust agencies should be allowed more time to analyze ''second request'' information. They should have a statutory right to 60 or 90 days for the largest mergers.
e. Absent trade secrets, the transparency of decisions should be increased for especially the largest mergers. The greater transparency will facilitate Congress' ability to evaluate situations where no action is taken and consider substantive revisions to the law, if needed.
6) Congress should fund an 18-month study of concentration in the agriculture sector of the economy. A two-year moratorium should be placed on mergers and acquisitions in agriculture sector to allow for the completion of the study and time for Congress to act. This moratorium should not apply to the mergers of cooperatives if the merger is approved by the patrons of each of the cooperatives that is a party to the transaction.
Page 35 PREV PAGE TOP OF DOC7) Persons having a significant ownership interest in any operation that slaughters cattle or hogs should not have an ownership interest in more than 20 percent of the cattle or hogs that are handled by the operation or in facilities that provide more than 20 percent of such cattle or hogs to the operation.
8) Congress should conduct a review of the Packers and Stockyards Act to determine what may be needed to strengthen the laws or improve enforcement.
9) Congress should increase funding levels for the Antitrust Division and the Federal Trade Commission to enable them to better deal with the responsibilities they have.
I have written letters to my colleagues, urging them to continue to support funding for the Antitrust Division and the Federal Trade Commission. I plan to join with my colleagues in sponsoring a bill that would place a moratorium on mergers in the agriculture sector, and plan to introduce my own comprehensive legislation. I am pleased the committee is holding hearings on this very important issue, as it continues to plague the already beleaguered agricultural sector of our economy.
Thank you for the opportunity to testify, and I look forward to working with this committee in the future.
Mr. HYDE. Let me say, I agree completely with you about the need to provide adequate resources for the antitrust agencies. I think the proliferation of mergers that are going on not only in agriculture, but elsewhere, call for an increased vigilance. I don't think that it is counter to our capitalist system to want to make sure that it works and thrives on the competition that does make it work. I appreciate what you have said.
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We have been joined by Congressman Earl Pomeroy, who represents the entire State of North Dakota, holding its at-large seat in the House of Representatives. He is a graduate of the University of North Dakota and its law school. Before coming to Congress he served in the State House of Representatives and as State insurance commissioner. He was first elected to Congress in 1992.
STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Mr. POMEROY. Thank you, Mr. Chairman. I appreciate very much your leadership in holding this hearing and the comments you have made regarding this issue. This is the first time that I have appeared before the Judiciary Committee as a Member of Congress, although I spent some of the longest mornings in my life here as a State insurance commissioner during efforts of the former majority to lucklessly change the McCarran-Ferguson Act, some hearings you may remember from those days.
Five points I would like to make. First, just comment briefly on the vital nature of freely functioning agricultural markets, the alarming trend toward consolidation, the appearance that the functioning of those markets has been disrupted already by the level of consolidation that has occurred, the adequacy of existing statutes to respond, and finally, other legislative remedies that I believe are urgently needed in light of this situation.
Page 37 PREV PAGE TOP OF DOC First, the vital nature of freely functioning markets. What we need from really the farm gate to the dinner plate is a competitive environment for the process, for the trail of our agricultural produce; agriculture producers competing to more efficiently produce products, processors competing to acquire quality product for their value-added processes, retailers competing among processors for the products that they ultimately provide consumer-ready at their retail venues.
Unfortunately, the agriculture sector has changed very dramatically in over a relatively recent period of time. I would cite the last 15 years as a critical period of time for consolidation of the marketplace. I am very concerned that the competitive dynamic that has produced quality produce at low prices in abundant supply has changed, has changed during this 15-year period of time, and no end in sight. The concentration is more prevalent than ever just looking at the recent acquisitions of Continental Grain by Cargill, of Smithfield Foods by Murphy Family Farms, are classic examples of what I think is really a trend that needs immediate response by this committee and this Congress.
For example, the Cargill-Continental merger will leave Cargill with nearly 40 percent of all of the Nation's export markets. To illustrate the level of concentration that has already occurred, no area illustrates it better, as Congressman Thune was talking about, than the livestock marketplace. Over 80 percent of beef cattle slaughtered by only four meat packers, 75 percent of sheep, 60 percent of hogs, yet only four firms dealing in the slaughtering. At the same time of this concentration, a farmer's share of the food dollar has decreased from 37 cents to 23 cents from 1980 to 1998.
I don't think an episode more clearly illustrates that these markets aren't functioning like they ought to than the price collapse in hog last December. We saw hogs at less than $10 per hundredweight. We have never seen prices like that, $20 below the break-even price. Thousands of independent hog producers were forced out of business and really placed on the verge of going out of business from that price collapse. IBP, one of the Nation's very largest processors, reported record earnings of $92 million in the fourth quarter of 1998. For the consumer, did they benefit from this price collapse? Not nearly to the dimensions that would be warranted. The price dip in 1998, the farm-to-retail price spread for pork, the difference between what farmers received and the consumer paid, was $1.79, the highest on record. The farms' share of the retail price, the record low of only 22 percent.
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I think an analysis of the ultimate retail pricing during this period of price collapse shows the consumer did not get the benefit of that. Therefore, the supply is not pulled out of the market, and the market again is not functioning.
I think that an evaluation of existing statutory remedies raises an issue that they are not adequate. The Packers and Stockyards Act of 1921 has simply not been vigorously applied by the U.S. Department of Agriculture. They maintain that it is not applicable. Some of us disagree with their rather restrained interpretation of that statute, but let's then take them at theiraccepting their version, then we need to strengthen the Packers and Stockyards Act.
The inability of the Justice Department to stop the Cargill-Continental merger raises certain questions about the other construct of the applicable antitrust remedies. In responding to these issues, I think that we need to take immediate steps admitting that more refined study and more finely tuned legislation in the long run is going to be required.
I will be introducing along with committee member Tammy Baldwin and David Minge an 18-month moratorium on agriculture mergers. We are rushing to disaster, and we need to put a stop to it and evaluate what is happening and understand the protections that the public needs. I think that a moratorium while this achieves is going to be utterly essential.
There is also legislation introduced in the Senate that I am evaluating to flat out prohibit processor-packer ownership of raw cattle supply. Now, whether or not this is overkill or not I am still evaluating. One of the things that has occurred, I believe, is that we have an untoward dimension of vertical control of supply by the processors changing the competitive dynamic of that industry.
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You are tackling a tough one, Mr. Chairman, and I wish you the best of luck. I do indicate again that I think we may need to put in some stopgap immediate measures while we take a longer look at this. The ground is changing all too rapidly. Thank you.
Mr. HYDE. Thank you very much, Mr. Pomeroy.
[The prepared statement of Mr. Pomeroy follows:]
PREPARED STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH DAKOTA
Good Morning and thank you Chairman Hyde and Ranking Member Conyers for allowing me to testify at this morning's hearing. I am pleased to join my Northern Plains colleaguesCongressman Minge and Congressman Thuneat this morning's hearing. Holding a hearing of this nature sends a strong message to the American public that the United States Congress is concerned about the impacts of market concentration on our nation's nearly 2 million family farmers and ranchers.
This morning, I will focus my testimony on 5 major points:
The elements of a free and competitive marketplace;
The lack of competition resulting from the massive consolidation of the agriculture industry;
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The impact of consolidation in terms of the relationship between the prices received by producers versus the prices received by processors and retailers;
The evaluation of existing anti-trust statutes;
Possible legislative remedies to address concentration.
In order for any free market to work effectively it must have fair competition among all players in the market. The marketplace works most effectively when all the players have the same access and ability to compete. In agriculture, a healthy market has competition at all levels''from the farm gate to the dinner plate.''
Both American consumers and farmers benefit when there is appropriate competition among producers, processors and retailers. When this occurs, farmers compete on cost-efficient production, processors compete to quality products, and retailers compete in the retail marketing of value-added, consumer-ready products. Ultimately, consumers benefit because they have access to top quality, abundant, competitively-priced groceries that are subject to pricing variations of supply and demand cycles.
Unfortunately, the agriculture sector of our economy over the past 15 years has greatly changed. I am concerned that rapid consolidation is disrupting the competitive dynamic in the function of the agriculture market place. Today, concentration is more prevalent than ever in agriculture as we have observed with the recent acquisitions of Continental Grain by Cargill and the Smithfield Foods with Murphy Family Farms merger. For example, if the proposed acquisition of Continental Grain by Cargill is allowed, Cargill will control nearly 40 percent of all of the nation's export markets.
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To illustrate the degree of concentration in agriculture processing, in 1999, 80 percent of beef cattle are slaughtered by only four meat packers, 75 percent of sheep are processed by only four firms, and 60 percent hogs are slaughtered by only four firms. At the same time concentration has been drastically increasing, a farmer's share of every food dollar spent decreased from 37 cents to 23 cents from 1980 to 1998.
Nothing more clearly illustrates the disparity between the prices farmers receive and the profits of processors and retailers than the hog market of last year. In December 1998, hog prices were less than $10 per cwt.nearly $20 below the break even price. While thousands of independent hog producers were forced out of business due to record low prices, the retail price spread of pork basically remained unchanged. Iowa Beef Processors (IBP), one of the nation's largest processors, reported record earnings of $92 million in the 4th quarter of 1998. Moreover, in 1998, the farm-to-retail price spread for porkthe difference between what the farmer received and what the consumer paidwas $1.79, the highest on record, while the farm share of the retail price was a record low of only 22 percent.
Since 60 percent of the hogs in the United States are processed by only four firms, did the lack of competition among processors contribute to the rock-bottom prices? There is reason to believe that it did. The lack of competition among processors creates a choke point in the market. This choke point limits the options producers have selling their hogs for slaughter. As a result, processors are able to hold down prices while at the same time maintaining current supplies without changing the prices they receive from the retailers.
By holding a hearing of this nature, Congress is taking a much needed step in getting its hands around this difficult issue. I believe that we, as federal lawmakers, must thoroughly evaluate if the legislative anti-trust tools in current law are strong enough to tackle this issue. Currently, the United States Department of Agriculture (USDA) works under the parameters of the Packers and Stockyards Act of 1921, which was created to prohibit price manipulation and price discrimination in the marketplace. Although I will continue to advocate that the Department be more aggressive in enforcing of the Packers and Stockyards Act, I believe Congress must take another look at the Act to see whether it addresses the modern day marketplace of high concentration and vertical integration.
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The inability of the Justice Department to prevent the Cargill/Continental merger raises questions as to whether existing anti-trust laws are adequate. While this Committee evaluates this highly complex and important matter, I believe steps must be taken immediately to stop the wholesale rush to consolidate in the meantime.
This week, Judiciary Committee Member Tammy Baldwin, Agriculture Committee Member David Minge, and I will introduce comprehensive legislation that imposes an 18 month moratorium on large agribusiness mergers and establishes a commission to review large agriculture mergers to determine their impact on concentration and market power. Similar legislation was introduced last Friday by Senators Wellstone, Dorgan, Feingold, Johnson, and Leahy.
Our legislation is motivated by the widespread concern over the announcements of mega-mergers like the Cargill, Inc./Continental Grain and Smithfield Foods/Murphy Family Foods. Because of these large mergers and their impact on family farmers and ranchers across the United States, we believe Congress must place a moratorium on additional mergers and acquisitions until all of their potential market impacts have been thoroughly reviewed. It is important to note that farmer-owned cooperatives are exempted from our legislation.
Additionally, I am closely evaluating legislation that would prohibit meat packers from owning cattle. This legislation, which is identical to the bipartisan legislation introduced by Senators Johnson, Grassley, Kerrey, and Thomas, strengthens and amends Section 202 of the Packers and Stockyards Act of 1921 by prohibiting meat packers from owning, feeding, and/or keeping livestock for slaughter. Whether an outright prohibition is an appropriate response or legislative overkill, one thing is clear, the degree to which packers have achieved vertical control of the market raises deeply troubling issues as to whether those markets can fully retain their essential competitive character.
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I view both of these legislative proposals as only stop-gap measures to the more pressing need for anti-trust legislative reform. I urge this Committee to roll up its sleeves and delve into the complex issue of agriculture concentration by strengthening the Packers and Stockyards Act and working with the Administration in providing the Department of Justice with the necessary tools to ensure a competitive and level playing field in American agriculture.
Mr. Chairman, as we enter the new millennium, it is ironic that Congress faces the same challenges our colleagues faced 100 years ago. To paraphrase one of North Dakota's favorite adopted sons, our nation's 26th President Teddy Roosevelt, ''We must carry a big stick to return fairness and freedom to the marketplace.''
Mr. HYDE. As I stated earlier, we will not question Members of Congress, as is our tradition. We will save all of our barbs for the other witnesses as they come up.
Our second panel consists of three witnesses who represent the various government agencies with expertise in the areas of agriculture and antitrust.
In the event that I forgot to mention it, without objection the full statements of the last three witnesses will be included in the record.
Our first witness is Dr. Enrique Figueroa, the Deputy Under Secretary for Marketing and Regulatory Programs at the Department of Agriculture. Dr. Figueroa has a bachelor's degree from California State University and has master's and doctor's degrees from the University of California-Davis. Before coming to the Department, he worked for the California Conservation Corps and with the staff of our House Agriculture Committee. He has also taught at Cornell University. He joined the Department in October 1997 as administrator of the Agriculture Marketing Service and moved to his current position last June.
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Our second witness is Mr. John Nannes, the Deputy Assistant Attorney General in the Department of Justice's Antitrust Division. He is a graduate of the University of Michigan law school, after which he clerked for Judge Roger Robb of the D.C. Circuit and Justice William Rehnquist of the Supreme Court of the United States. He spent 3 years with the Antitrust Division in the mid-1970's. After that he spent many years in private practice in Washington, and he took his current position last year.
Our third witness is Mr. Willard Tom, the Deputy Director of the Bureau of Competition at the Federal Trade Commission. Mr. Tom is a graduate of Harvard University and its law school. Before coming to the FTC, he served with the Antitrust Division of the Department of Justice and practiced law with the firm of Sutherland, Asbill & Brennan. He joined the FTC in 1995.
We welcome all of you and look forward to your testimony. We will start with you, Dr. Figueroa.
STATEMENT OF ENRIQUE FIGUEROA, Ph.D., DEPUTY UNDER SECRETARY FOR MARKETING AND REGULATORY PROGRAMS, UNITED STATES DEPARTMENT OF AGRICULTURE
Mr. FIGUEROA. Thank you, Mr. Chairman, members of the committee. I am pleased to be here this morning to discuss competitive issues as they apply in American agriculture and the food marketing system. Of particular interest to the USDA are competitive issues as they apply in the livestock and grain concentration arena. These patterns of restructuring and concentration tend to alter the balance of power between farmers and other sectors of the marketplace. The USDA has the responsibility to ensure that markets are competitive and open, and that farmers are able to sell their products at a fair price.
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Open, competitive markets foster an efficient and dynamic agriculture that is best able to compete in world economy. A healthier agricultural industry, in turn, is important for rural communities to remain vibrant and financially sound.
As requested by the committee, I will focus my remarks on the Grain Inspection, Packers and Stockyards Administration, known as GIPSA, and the Agricultural Marketing Service, AMS. Both of these agencies promote fair and competitive trading practices.
USDA has the authority to address issues relating to competition and unfair trade practices in the livestock, meat-packing, and poultry industries under the Packers and Stockyards Act of 1921, as amended. In the P&S Act, it makes it unlawful for a firm to engage in unfair, unjustly discriminatory, or deceptive practices. Manipulation of prices, market allocation, and the restraint of commerce are violations of the act.
USDA has undertaken a number of initiatives to investigate livestock procurement practices, strengthen oversight, and provide more information to producers.
Mr. HYDE. Dr. Figueroa, if you don't mind, we have a vote on. It is for approval of the Journal, but it is one that we are still obligated to go make, although few of us have read the Journal, speaking for myself. We will recess briefly while we dash over and register our approval of the Journal. Then we will be right back. So if you would just take a few minutes, we will stand in recess.
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Mr. HYDE. The committee will come to order.
Dr. Figueroa, if you could continue.
Mr. FIGUEROA. Thank you, Mr. Chairman.
As you may recall, I was beginning to describe some of the initiatives that we have undertaken. First, we established a rapid response team that we sent to South Dakota and Missouri in July and September of this year to respond to producers' concerns and to ensure adherence to the P&S Act in light of new price reporting laws enacted in those States.
Secondly, we filed a formal complaint against Excel alleging that the firm violated the P&S Act by failing to disclose to producers a change in the calculation of lean percent for hogs purchased on a carcass merit basis, and that as a result of this change in formula, Excel paid lower prices for hogs for the majority of hogs they procured.
Third, we filed a formal complaint against Farmland National Beef Packing Company alleging that the company violated the P&S Act by failing to make bids on or purchase cattle from Callicrate Cattle Company feedlot in St. Francis, Kansas, because the manager of the feedlot wrote an article that was not very complimentary of Farmland.
Fourth, we filed a case against IBP in which we alleged that they violated the P&S Act by entering into procurement agreements that guaranteed higher prices to a select group of feedlots in Kansas. The USDA's judicial officer rejected the greater part of our case, but entered an order requiring IBP to cease and desist from entering into agreements that contain a right of first refusal by which IBP may obtain livestock by matching the highest bid rather than raising the bid. IBP appealed the judicial officer's cease and desist order to the Circuit Court of Appeals. In August 1999, the court reversed the judicial officer's cease and desist order ruling that the right of first refusal was not anticompetitive as long as the seller can offer other competitors the opportunity to increase bids.
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Fifth, the Texas Fed-Cattle investigation. We conducted a broad investigation of fed steer and beef procurement in the Texas Panhandle. The investigation results will be released soon pending a peer review.
We are investigating hog procurement contracts, looking at their terms to determine whether individual contracts violated the P&S Act.
Finally, we have held a number of producer meetings throughout the country between January and May of this year to look at hog procurement issues. We will have another set of GIPSA employees in Indiana in November of this year.
In addition, the Secretary formed an Advisory Committee on Agriculture Concentration in 1996 and also the National Commission on Small Farms in 1997. They made a set of recommendations that we are implementing at the USDA.
As you are aware, the administration submitted to Congress a legislative proposal to provide for a mandatory price reporting system for livestock to ensure price transparency for livestock farmers. Congress included the Senate-passed version in the fiscal year 2000 agricultural appropriations bill. Unfortunately, we were not provided funds to implement the legislation, and we estimate that it will cost us about $6.3 million to do that. We are also concerned with some of the provisions in the legislation that do not give us enough flexibility for implementation in that we do not have sufficient authority to ensure that the industry maintains the necessary records for enforcement. The administration is committed to implementing an effective program that provides for transparent and timely market information to farmers and ranchers, and will work with Congress and the Agriculture Committees to achieve this goal.
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Let me just briefly turn to the slotting fees issues. The Perishable Agricultural Commodities Act, administered by the Agricultural Marketing Service that applies to commercial growers of fresh or frozen fruits and vegetables. We do not feel that under that slotting fees per se are a violation of the act. The USDA's Economic Research Service has embarked on a study to look at retail trade practices, including slotting fees.
In conclusion, competitive markets are needed to maintain an entrepreneurial-based agricultural system that has made the U.S. the world's leader in food and fiber production. Open, competitive markets have been and will continue to be essential to the Nation's overall well-being. The USDA is committed to monitoring structural changes in agriculture and is taking steps to ensure that U.S. agriculture remains healthy.
I look forward to answering your questions, and I am pleased that you have asked me to testify before you. Thank you.
Mr. HYDE. Thank you, Doctor.
[The prepared statement of Mr. Figueroa follows:]
PREPARED STATEMENT OF ENRIQUE FIGUEROA, PH.D., DEPUTY UNDER SECRETARY FOR MARKETING AND REGULATORY PROGRAMS, UNITED STATES DEPARTMENT OF AGRICULTURE
I am pleased to be here today to discuss competitive issues in American agriculture and the food marketing industry. The competitive issues the Department of Agriculture (USDA) is most concerned about are the current patterns of concentration and vertical coordination in the livestock and grain sectors of American agriculture. These patterns of restructuring tend to alter the balance of market power between farmers and other sectors in the marketplace. We have a responsibility to ensure that markets are competitive and open, and that farmers are able to sell their products at a fair price.
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Open, competitive markets foster an efficient, dynamic agriculture that is best able to compete in a world economy. A healthy agricultural industry, in turn, is important for rural communities to remain vibrant and financially sound. USDA is committed to maintaining a strong agricultural industry through enforcement of its governing statutes addressing competition.
As requested by the Committee, I will focus my remarks on programs administered by the Packers and Stockyards Administration (GIPSA) and the Agriculture Marketing Service which promote fair and competitive trading practices. GIPSA administers the United States Grain Standards Act that establishes the official grading standards for grain, develops standard testing methodologies to measure grain quality and quantity, and provides for the impartial application of the grades and standards through the official grain inspection and weighing system, a unique network of Federal, State and private inspection agencies. The U.S. Grain Standards Act provides for the mandatory inspection and weighing of all export grain and the voluntary inspection and weighing of grain moving in domestic commerce.
USDA has authority to address issues relating to competition and unfair trade practices in the livestock, meatpacking and poultry industries through the Packers and Stockyards Act of 1921, as amended (Act). The P&S Act makes it unlawful for a firm to engage in unfair, unjustly discriminatory or deceptive practices. Manipulation of prices, market allocation, and the restraint of commerce are violations of the Act.
The Secretary of Agriculture has delegated the responsibility to carry out and enforce the provisions of the Act to GIPSA/P&S. GIPSA utilizes its statutory authority to investigate alleged violations of the Act and to prosecute violations, either directly through administrative actions or in the case of criminal violations, through injunctive relief or collection of civil penalties litigated in the District Courts by the Department of Justice.
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GIPSA's Packers and Stockyards Program was restructured recently to improve its ability to monitor and investigate the increasingly complex and sophisticated financial transactions of the livestock industry. Eleven field offices were consolidated into three regional offices which are staffed with expanded economic and legal expertise.
USDA has undertaken a number of initiatives to investigate livestock procurement practices, strengthen oversight and provide more information to producers:
1. Rapid Response TeamsUSDA dispatched rapid response teams to South Dakota and Missouri in July and September to respond to producers' concerns about and to ensure adherence to the P&S Act in light of new price reporting laws enacted in those States that influenced the procurement practices of packers in the States.
2. Excel ComplaintUSDA filed a formal complaint against Excel alleging that the firm violated the P&S Act by failing to disclose to producers a change in the calculation of lean percent for hogs purchased on a carcass merit basis, and that, as a result of this change in formula, Excel paid lower prices for hogs.
3. Farmland ComplaintUSDA filed a formal complaint against Farmland National Beef Packing Company, alleging that the company violated the P&S Act by failing to make bids or purchase cattle at Callicrate Cattle Company Feedyard, St. Francis, Kansas, after an article critical of Farmland written by Callicrate Feedyard's sales manager was published in a livestock journal. The complaint further alleges that Farmland subjected Callicrate Feedyard to an undue or unreasonable prejudice or disadvantage.
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4. Case Against IBPUSDA brought a case against IBP, inc. alleging that the packer violated the P&S Act by entering into a procurement agreement that guaranteed high prices to a select group of feedlots in Kansas without making the same terms available to others. USDA's Judicial Officer rejected the greater part of USDA's case, but entered an order requiring IBP, inc. to cease and desist from entering into agreements that contain a right of first refusal by which IBP may obtain livestock by matching the highest bid, rather than raising the bid to purchase livestock. IBP appealed the Judicial Officer's cease and desist order restricting use of right of first refusal to the Circuit Court of Appeals. On August 13, 1999, the Court reversed the Judicial Officer's cease and desist order, ruling that the right of first refusal was not anti-competitive as long as the seller can offer other competitors the opportunity to increase their bids.
5. Texas Fed-Cattle InvestigationUSDA conducted a broad investigation of fed steer and heifer procurement in the Texas Panhandle. The investigation examined procurement areas, procurement methods, and pricing methods. The investigation is nearing completion, pending the results of a peer review.
6. Investigation of Hog Procurement ContractsUSDA is investigating the terms of hog procurement contracts to determine whether individual contracts violate the P&S Act.
7. Hog Producer MeetingsUSDA hosted a series of public meetings across the country between January and May of this year to discuss a recent hog procurement investigation and its potential implications for producers, changes in Market News reports, alternative marketing opportunities for hog producers, restructuring credit programs, and small hog operation payments.
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In addition to these activities, the Secretary formed an Advisory Committee on Agricultural Concentration in 1996 and a National Commission on Small Farms in 1997. Recommendations from these bodies include stepped-up reporting of information on prices, exports and imports, and other market information for producers, more aggressive analysis of possible anti-competitive effects of the use of forward purchase arrangements, and tougher enforcement of the Packers and Stockyards Act.
As you may be aware, the Administration submitted to Congress a legislative proposal to provide for a mandatory price reporting system for livestock to ensure price transparency for livestock farmers. Congress included a Senate-passed version of mandatory price reporting in the FY2000 Agriculture Appropriations Bill that has been sent to the President. Unfortunately, no funds were provided to implement the program. USDA estimates that $6.31 million additional funds would be required. USDA also remains concerned that the Act does not provide the necessary flexibility for the implementation of an effective program and may not provide USDA with sufficient authority to ensure that the industry maintains the necessary records for enforcement. The Administration is committed to implementing an effective program that provides transparent and timely market information to farmers and ranchers and will work with Congress and the Agriculture Committees to achieve this goal.
Now let me turn to the practice of slotting fees.
Under the Agriculture Marketing Service, USDA enforces the Perishable Agricultural Commodities Act (PACA), a fair trading law. It requires shippers, brokers, wholesalers, retailers, and others who deal in commercial volumes of fresh and frozen fruits and vegetables to live up to the terms of their agreements, maintain produce-related assets in trust for produce sellers, and to be licensed by the USDA. The law authorizes USDA to resolve disputes related to trade in perishable agricultural commodities and to enforce the law's fair trading provisions by suspending or revoking PACA licenses or by imposing civil penalties.
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There is concern about use of slotting fees that some buyers are demanding suppliers pay to secure a place for products in retail establishments. These fees are more commonplace for dry goods suppliers but are beginning to be used in the produce sector. The PACA has no case precedent involving slotting fees. However, the PACA was amended in 1995 to state that ''. . . the good faith offer, solicitation, payment, or receipt of collateral fees and expenses, in and of itself, [is not] unlawful under this Act.'' Although this amendment does not specifically mention slotting fees, the PACA defines collateral fees and expenses as ''. . . any fees paid, directly or indirectly, in connection with the distribution or marketing of any perishable agricultural commodity.'' Accordingly, slotting fees, in and of themselves, would not violate the PACA as long as the fee is disclosed.
The USDA's Economic Research Service, with input from other agencies including AMS, has already begun a study on retail trade practices including slotting fees.
In conclusion, competitive markets are needed to maintain the entrepreneurial-based agriculture that has made the United States the world's leader in food and fiber production. Our overwhelming efficiency advantage in agriculture has enabled the United States to free up resources for production of other goods and services and raise our standard of living. Open, competitive markets have been and will continue to be essential to the Nation's overall well being.
We at USDA are committed to monitoring structural changes in agriculture and taking steps to assure that U.S. agriculture remains healthy.
Page 54 PREV PAGE TOP OF DOC I appreciate the opportunity to discuss competitive issues in agriculture and the food marketing industry with the Committee and I will be happy to respond to your questions.
Mr. HYDE. Mr. Nannes.
STATEMENT OF JOHN M. NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. NANNES. Thank you, Mr. Chairman. I understand that we are under time constraints this morning. I would just like to make a few points within perhaps 4 or 5 minutes.
Mr. HYDE. If we could confine our remarks to 5 minutes. The entire statement will be put into the record. We won't be punctilious about the 5 minutes.
Mr. NANNES. Thank you, sir.
We know there are concerns about competitive conditions in the agricultural marketplace. I can assure this committee that the Antitrust Division has heard these concerns and takes them very seriously. The Antitrust Division has been spending a significant amount of time, energy, and resources on agricultural issues recently. These efforts have resulted in significant criminal and civil enforcement actions that are directly responsive to some of the concerns expressed by the committee members in their opening statements.
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With respect to criminal enforcement actions, two deserve particular mention. Beginning in 1996, we prosecuted Archer Daniels Midland and others for participating in an international cartel organized to suppress competition for certain products including lysine, an important livestock and poultry feed additive. ADM pled guilty and was fined $100 million, at the time the largest criminal antitrust fine in history, and four foreign firms were also successfully prosecuted. In addition, three former ADM executives were convicted for their personal roles in the cartel and sentenced to serve substantial prison terms.
This spring we prosecuted the Swiss pharmaceutical giant, F. Hoffmann-La Roche, and the German firm, BASF, for their roles in a decade-long, worldwide conspiracy to fix the prices that allocate sales volume for vitamins used as food and animal feed additives and nutritional supplements. Hoffmann-La Roche and BASF pled guilty and were fined $500 million and $225 million respectively. These are the largest and second largest antitrust fines in history. In fact, the $500 million fine is the largest criminal fine ever imposed in any Justice Department proceeding under any statute. Two former Hoffmann-La Roche executives from Switzerland also agreed to submit to U.S. jurisdiction, to plead guilty, to serve time in U.S. prisons, and to pay substantial fines. And our investigation is continuing.
We have also spent significant enforcement efforts on the civil side, particularly with respect to mergers. As this committee knows, the Antitrust Division and the Federal Trade Commission share merger enforcement responsibility at the Federal level. Pursuant to our clearance agreement with the FTC, the Antitrust Division has investigated most of the agricultural mergers with the prominent exception of grocery stores, which the FTC has handled.
Page 56 PREV PAGE TOP OF DOC The Division's recent enforcement activities in agriculture are perhaps best illustrated by two challenges within the last year, one of which sought to protect the interests of farmers as purchasers, and one of which sought to protect the interests of farmers as sellers. The first one arose when the Antitrust Division investigated Monsanto's acquisition of DeKalb Genetics Corporation. Both companies were leaders in corn seed biotechnology and owned patents that gave them control over important technology. We were concerned that the merger would adversely affect competition for seed, and to address our concerns Monsanto spun off its claims to a recently developed technology used to introduce new traits into corn seed, and also entered into binding commitments to license its Holden's corn germplasm to over 150 seed companies that could use it to create their own hybrids.
The Antitrust Division also comprehensively reviewed the proposed purchase by Cargill of Continental's grain business, which resulted in a suit last July to challenge the merger as originally proposed. Cargill and Continental operated nationwide distribution networks that annually purchased and sold millions of tons of grains and soybeans throughout the United States and the world. We looked at all of the markets that would have been affected by the merger and concluded that in a number of them, competition would be adversely affected if the assets of the two firms were combined. In this case our concern focused on competition among the two firms in so-called upstream markets, competition for the purchase of grain and soybeans from farmers and other suppliers. We concluded that the lessening of competition resulting from the merger would likely have led farmers to receive less money for these crops than they would have absent merger.
To resolve our competitive concerns, the parties agreed to divest port elevators in Seattle, Washington; Stockton, California; and Beaumont, Texas. We also required divestitures of certain river elevators along the Mississippi River and the Illinois River; and in addition, we required divestiture of certain rail terminals in Ohio, Kansas, and Missouri.
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I would like to note that in this investigation we received substantial assistance from the U.S. Department of Agriculture, with whom we work closely and frequently, and from the CFTC with respect to certain futures trading issues presented by the combination.
The Antitrust Division is investigating a number of other agricultural mergers that have been proposed. I am constrained in my ability to describe these investigations at this stage, but I can assure you that we are looking at each of them carefully and will bring enforcement actions if we believe them to violate the antitrust laws.
In summary, Mr. Chairman, we continue to enforce the antitrust laws with respect to the agricultural marketplace. We understand concerns that farmers and others have about competitive conditions, and we take our enforcement responsibilities very seriously.
Mr. HYDE. Thank you very much, Mr. Nannes.
[The prepared statement of Mr. Nannes follows:]
PREPARED STATEMENT OF JOHN M. NANNES, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE
I am pleased to have the opportunity this morning to discuss issues relating to competitive conditions in the agricultural marketplace.
There have been a number of occasions recently in which agricultural producers and others have expressed concerns about competitive conditions in the agricultural marketplace, about the impact on farmers of particular mergers and acquisitions, and about levels of concentration in agricultural industries generally. I can assure you that the Antitrust Division has heard these concerns and takes them very seriously.
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We know that the agricultural marketplace is undergoing significant change. We are seeing major advances in technology and productivity, changes in business relationships between producers and packers/processors and, in certain sectors, increasing concentration. In the midst of these changes, the Antitrust Division has a narrow but important role: we enforce the antitrust laws.
The consumer is the primary beneficiary of antitrust enforcement. Competition among producers of goods and services, at all levels in the production process, leads to better quality, more innovation, and lower prices. But proper antitrust enforcement also benefits producers seeking to supply products and services, by enabling them to do so free from anticompetitive interference.
By any measure, the Antitrust Division has been spending a significant amount of time, energy, and resources on agricultural issues recently. Sometimes these efforts result in enforcement actions, some of which I will describe for you today. In any event, we are very aware of the full range of competitive issues affecting the agricultural marketplace today.
I understand that the Committee is particularly interested in the role that concentration plays in assessing the competitiveness of the agricultural marketplace, and it is to that subject that I wish to turn.
I. The Role of Concentration in Antitrust Analysis
We have heard concerns expressed by various groups about increasing concentration in various agricultural sectors. The antitrust laws do not prohibit all increases in concentration. Increases in concentration may occur through internal growth or through mergers and acquisitions. Internal growth, in particular, is generally thought to be economically beneficial, as it most often reflects the success of producers in the marketplace in attracting and satisfying customers. So, too, mergers and acquisitions and can be economically beneficial, allowing the resulting entities to operate more efficiently, reduce costs, and better meet the demands of the marketplace.
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Nevertheless, we often consider concentration in making our enforcement decisions. In the past few years, the Antitrust Division has prosecuted a number of cases and secured convictions and multi-hundred million dollar fines in industries that are concentrated. Some of the most significant of those cases have involved products purchased by farmers.
For example, beginning in 1996, we prosecuted Archer Daniels Midland and others for participating in an international cartel organized to suppress competition for certain products, including lysine, an important livestock and poultry feed additive. The cartel had inflated the price of this important agricultural input by tens of millions of dollars during the course of the conspiracy. ADM pled guilty and was fined $100 millionat the time the largest criminal antitrust fine in history. Two Japanese and two Korean firms also were prosecuted for their participation in the worldwide lysine cartel and were assessed multi-million-dollar fines. In addition, three former ADM executives were convicted for their personal roles in the cartel; just recently, two of them were sentenced to serve two years in prison and fined $350,000 apiece for their involvement, and the other executive had 20 months added to a prison sentence he was already serving for another offense.
This spring, we prosecuted the Swiss pharmaceutical giant, F. Hoffmann-La Roche Ltd., and a German firm, BASF Aktiengesellschaft, for their roles in a decade-long, worldwide conspiracy to fix prices and allocate sales volumes for vitamins used as food and animal feed additives and nutritional supplements. The vitamin conspiracy affected over $5 billion in U.S. commerce. Hoffman-La Roche and BASF pled guilty and were fined $500 million and $225 million, respectively. These are the largest and second largest antitrust fines in historyin fact, the $500 million fine is the largest criminal fine ever imposed in any Justice Department proceeding under any statute. Two former Hoffmann-La Roche executives from Switzerland also agreed to submit to U.S. jurisdiction, to plead guilty, to serve time in a U.S. prison, and to pay substantial fines for their role in the vitamin cartel. These prosecutions are part of an ongoing investigation of the worldwide vitamin industry, in which there have been 14 prosecutions to date.
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We often find that, in order for such conspiratorial activities to succeed, conspirators need a mechanism to police one anotherto make sure that the members are adhering to the agreed-upon schemea prospect that is made much easier if the market is highly concentrated and there are only a few members that need to co-ordinate their conduct. You may have seen the recent article in the New York Times discussing the cases we brought against the vitamin manufacturers, which observed that most international cartels ''operate in concentrated markets with few players, making it easy to coordinate pricing.''
Of course, concentration levels are important to investigations of unlawful monopolization or attempted monopolization. In such cases, the Antitrust Division must prove that the defendant has monopoly power or a dangerous probability of obtaining such power, and market shares frequently provide a critical reference point in making such a determination.
On a day-to-day basis, however, the most frequent context in which we consider concentration levels involves our analysis of mergers and acquisitions (referred to collectively hereafter as ''mergers''). And, to the extent that agricultural producers and others have expressed concerns about levels of concentration in agriculture generally, they generally are referring to changes brought about by such transactions.
II. Merger Enforcement Standards
The principal statutory provision dealing with mergers is Section 7 of the Clayton Act, which prohibits the acquisition of stock or assets ''where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.'' Congress realized that, to be effective, merger enforcement should be able to arrest anticompetitive transactions in their incipiency, to forestall the harm that would otherwise ensue but be difficult to undo. Thus, merger enforcement standards are forward-looking and, while we often consider historic performance in an industry, our primary focus is to determine the likely competitive effects of a proposed merger in the future.
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While concentration levels are important to merger analysiswe look at both pre-merger concentration levels and at concentration levels that will result from the mergerthe ultimate test under Section 7 is whether the merger may tend substantially to lessen competition and, as a law enforcement agency, that is a showing that we must be prepared to make to the satisfaction of a court.
The Antitrust Division generally shares merger enforcement responsibility with the Federal Trade Commission (''FTC''), with the exception of certain industries in which the FTC's jurisdiction is limited by statute. The agencies jointly have developed Horizontal Merger Guidelines that describe the inquiry they will follow in analyzing mergers. ''The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.'' Merger Guidelines §0.1.
As suggested by the language of Section 7 itself, we seek to define the relevant product markets (''line of commerce'') and geographic markets (''section of the country'') in which the parties to a merger compete and then to determine whether the merger would be likely to lessen competition in those markets. The Merger Guidelines set forth the analytical framework we use to define markets. The purpose of this inquiry is to ascertain whether, with respect to a product or service offered by the merging parties, there are alternative products and services to which customers could reasonably turn if it were assumed that the merging parties were the only suppliers of the product or service and sought to increase prices. Once relevant markets are defined, we look at various factors in order to determine whether the merger is likely to have an anticompetitive effect.
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In performing this analysis, the Antitrust Division and the FTC consider both the post-merger market concentration and the increase in concentration resulting from the merger. We utilize the Herfindahl-Hirschman Index (''HHI''), which is calculated by summing the squares of the individual market shares of all the participants. We are likely to challenge a transaction that results in a substantial increase in concentration in a market that is already highly concentrated, although appropriate consideration will be given to other factors, such as the likelihood of entry by new competitors, that could affect whether the merger is likely to create or enhance market power or facilitate its exercise.
Of course, it is also possible that a merger will substantially lessen competition with respect to the purchase of products or services in a relevant market. The Merger Guidelines specifically address this possibility and provide that the same analytical framework will be applied:
Market power also encompasses the ability of a single buyer (a ''monopsonist''), a coordinating group of buyers, or a single buyer, not a monopsonist, to depress the price paid for a product to a level that is below the competitive price and thereby depress output. The exercise of market power by buyers (''monopsony power'') has adverse effects comparable to those associated with the exercise of market power by sellers. In order to assess potential monopsony concerns, the Agency will apply an analytical framework analogous to the framework of these Guidelines.
Merger Guidelines §0.1.
Additionally, it should be noted that the Antitrust Division has guidelines on non-horizontal mergers that address the circumstances in which a vertical mergera transaction between companies at different levels of productionmay be challenged.
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III. Procedures for Reviewing Mergers
The Antitrust Division and the FTC use a clearance process to work out which agency will review a particular merger. The primary determinant is agency expertise about the product(s) at issue, so that a merger will usually be reviewed by whichever of the two agencies is most knowledgeable about the relevant product(s).
We take concentration into account even at this very early stage. In determining whether or not to conduct an investigation, we consider the pre-merger concentration level in the affected industry. In those industries already characterized by high concentration levels, there is a substantially increased likelihood that a proposed merger will be subject to a formaland often quite extensiveantitrust review.
The Antitrust Division and the FTC have an array of investigatory tools from which to choose in conducting such an investigation. Parties to most transactions meeting certain size thresholds must provide the agencies with advance notice and observe a waiting period before consummation, during which time the reviewing antitrust agency may obtain relevant information and conduct an investigation. In circumstances in which such notice is not required, the reviewing antitrust agency may utilize other statutory powers to obtain information.
If the reviewing antitrust agency concludes that the merger is not competitively problematic, the investigation will end and the parties are then free to proceed, subject, of course, to review by any other agencies with jurisdiction over the transaction. However, if the reviewing antitrust agency does not resolve its competitive concerns, it is not uncommon for the parties to have substantial contact with the reviewing antitrust agency. In this way, the agency identifies the nature of its competitive concerns, and the parties have an opportunity to address them. The parties may make a proposal to address the competitive concerns that the reviewing antitrust agency has identified; for example, multi-product firms may have a competitively problematic overlap in a subset of their products, in which case divestiture may solve the problem, allowing the parties to proceed with the overall merger. There are times, however, when the parties' proposed curative relief is not sufficient, in which case the reviewing antitrust agency is likely to seek a preliminary injunction to prevent consummation of the merger pending completion of full judicial or administrative proceedings.
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IV. Application of Merger Standards to Agriculture
Section 7 of the Clayton Act applies in the same way to agricultural industries as it does to other industries in general. As a result of the clearance process with the FTC, the Antitrust Division has investigated the preponderance of mergers affecting agriculture, with a prominent exception being grocery store transactions, in which the FTC has substantial experience and expertise.
The Antitrust Division regularly reviews proposed agricultural mergers. As indicated previously, we take concentration levels into account. We are fully aware, for example, that the concentration level in the steer and heifer segment of the beef packing industry is very high, which makes it very likely that we would take a careful look even at transactions producing only a modest change in concentration. We also note and follow changing concentration levels among other livestock and grain processors, which will impact our merger review in those industries, as well.
Our recent merger enforcement activities in agriculture are perhaps best illustrated by two challenges within the last year to two proposed transactions, one of which sought to protect the interests of farmers as purchasers of corn seed and one of which sought to protect the interests of farmers as sellers of grain and soybeans.
In the biogenetics area, last year the Antitrust Division investigated Monsanto's acquisition of DeKalb Genetics Corporation. Both companies were leaders in corn seed biotechnology and owned patents that gave them control over important technology. We expressed strong concerns about how the merger would affect competition for seed and, to satisfy our concerns, Monsanto spun-off to the University of California at Berkeley its claims to agrobacterium-mediated transformation technology, a recently developed technology used to introduce new traits into corn seed such as insect resistance. Monsanto also entered into binding commitments to license its Holden's corn germplasm to over 150 seed companies that currently buy it from Monsanto, so that they can use it to create their own corn hybrids.
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The Antitrust Division also comprehensively reviewed the proposed purchase by Cargill of Continental's grain business, which resulted in a suit in July to challenge the merger as originally proposed. We were concerned that the proposed transaction would have depressed prices received by farmers for grains and soybeans in certain regions of the country. To resolve our competitive concerns, Cargill and Continental have agreed to divest a number of grain facilities throughout the Midwest and in the West, as well as in the Texas Gulf. The proposed consent decree remains pending before the court, which limits what I can say about the case, but a fair bit about the case is already in the public record from our court filings.
Cargill and Continental operate nationwide distribution networks that annually move millions of tons of grain and soybeans to customers throughout the U.S. and around the world. We looked at all the markets that would be affected by the merger and concluded that, in a number of them, competition would be adversely affected if the assets of the two firms were merged. In this case, our concerns were focused on competition among the two firms in so-called ''upstream'' marketscompetition for the purchase of grain and soybeans from farmers and other suppliers. We concluded that the lessening of competition resulting from the merger would likely have led to farmers receiving less money for these crops than absent the merger.
Among the required divestitures, we insisted on divestitures in three different geographic markets where both Cargill and Continental currently operate competing port elevators to preserve the competition that currently exists there: (1) Seattle, where their elevators competed to purchase corn and soybeans from farmers in portions of Minnesota, North Dakota, and South Dakota; (2) Stockton, California, where the elevators competed to purchase wheat and corn from farmers in central California; and (3) Beaumont, Texas, where the elevators competed to purchase soybeans and wheat from farmers in east Texas and western Louisiana.(see footnote 12)
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We also required divestitures of river elevators on the Mississippi River in East Dubuque, Illinois, and Caruthersville, Missouri, and along the Illinois River between Morris and Chicago, where the merger would have otherwise harmed competition for the purchase of grain and soybeans from farmers in those areas.
In the case of the Illinois River divestitures and an additional required divestiture of a port elevator in Chicago, the merger would also have anticompetitively concentrated ownership of delivery points that have been authorized by the Chicago Board of Trade for settlement of corn and soybean futures contracts. The delivery points would then have been under the control of Cargill and one other firm, which would have increased the risk that prices for CBOT corn and soybean futures contracts could be manipulated. These required divestitures will address this concern regarding adverse effects on competition in the futures markets.
In addition, we required divestiture of a rail terminal in Troy, Ohio, and we prohibited Cargill from acquiring the rail terminal facility in Salina, Kansas, that had formerly been operated by Continental, and from acquiring the river elevator in Birds Point, Missouri, in which Continental until recently had held a minority interest, in order to protect competition for the purchase of grain and soybeans in those areas.(see footnote 13)
I have provided information in more detail than usual because I believe it is important for the Committee to understand the thoroughness with which the Antitrust Division reviewed this transaction. With assistance from USDA and CFTC, the Antitrust Division looked at all potentially affected markets and sought relief in those markets in which we concluded that the transaction was competitively problematic.
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The Antitrust Division presently is investigating a number of other agricultural mergers that have been proposed. In accordance with statutory and agency confidentiality limitations, I am constrained in my ability to describe them at this stage, except to note that we are looking at each of them carefully and will bring enforcement actions if we believe that they violate the antitrust laws.
Mr. Chairman and members of the Committee, the Antitrust Division understands the concerns that have been expressed about changes in concentration in agricultural markets. We take concentration into account in enforcing the antitrust laws. We take seriously our responsibility to assure that the antitrust laws are enforced no less vigorously in agricultural markets than in other markets to which those same laws apply.
I would be happy to respond to whatever questions the Committee may have.
Mr. HYDE. Mr. Tom.
STATEMENT OF WILLARD K. TOM, DEPUTY DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION
Mr. TOM. Thank you, Mr. Chairman. I appreciate the opportunity to testify here today about competition in food marketing. I understand that the committee is interested in matters relating to competition and livestock markets, but as Mr. Nannes mentioned, because the Commission's jurisdiction is limited in that area, I will leave that subject to other witnesses and concentrate on food marketing, and particularly on the issue of slotting allowances. This is an issue that has received a great deal of attention in recent years.
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Let me just note up front that the Commission has a current nonpublic investigation under way in this area, and I therefore ask your indulgence if I am careful not to discuss the specifics of that confidential matter.
As you know, with rare statutory exceptions, the Commission is charged with maintaining competition in all areas of the economy so that consumers can reap the full benefits of a competitive marketplace. Discharging that duty often means scrutinizing mergers to ensure that they do not create market power and thereby restraining competition. But it also means looking at other conduct by participants in the marketplace that threatens to restrain competition. Slotting allowances are sometimes alleged to be such a practice.
The term ''slotting allowances'' covers an extremely broad range of conduct, some of it clearly unlawful, some of it clearly lawful, and a great deal of it in the gray area in between. Very often debates of the slotting allowances have assumed that all slotting allowances and all of the market conditions in which they are used are the same. I think life would be simpler for all of us if only that were true, but it is not.
At the clearly unlawful end of this spectrum is commercial bribery. If such instances come to our attention, we will promptly refer them for criminal prosecution. At the other end of this spectrum are payments from a manufacturer to a retailer that really constitute only an ordinary price discount. In between these two extremes is a gray area, and evaluating slotting allowances in that gray area calls for a very particularized analysis that takes a great deal of fact gathering because there are a lot of differences both in the terms of the allowances and the market conditions in which they are used.
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First of all, the terms of the slotting allowance are different. The allowances themselves are one side of the bargain, but the other side can offer really endless variety. It could be simply the right to be carried somewhere in the store. It could be the right to a fixed amount of shelf space, preferential display, or even the right to be an exclusive or nearly exclusive supplier in the product category. The length of time that these commitments are made for could be a long time or a short time. Those terms can have a major effect on how much room is left for other suppliers in the market and, therefore, whether the allowances are procompetitive or anticompetitive.
Secondly, the market circumstances in which the agreements take place can vary widely. The Supreme Court has told us that even outright exclusive dealing arrangements can be lawful in many circumstances, particularly where the relevant markets of both upstream and downstream levels are unconcentrated.
Given that slotting allowances can have such varying effects, how should an antitrust enforcement agency approach this issue? I think clearly the first and most important step is merger enforcement. When manufacturing or retailing become highly concentrated, the potential for these kinds of practices to have an anticompetitive defense is the greatest. Merger enforcement is an important way to prevent increasing concentration.
As everyone knows, we are in the midst of an enormous merger wave. Merger transactions increased from slightly over 1,500 in 1991 to over 4,600 last year, and with no end in sight. Although this has put an obvious strain on Commission resources, the Commission has maintained an active program of merger enforcement in grocery retailing. In the last 4 1/2 years the Commission has brought 10 enforcement actions in that area.
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In addition to the merger enforcement, we are vigilant with respect to distribution practices that may restrain competition. We currently have in litigation a case involving a powerful retailer demanding the kind of exclusivity that we sometimes see associated with slotting allowances. This was not in a grocery retailing area, it involved the retailing of toys. And that case is described in more detail in my prepared testimony.
So let me just emphasize in closing that the Commission is committed to pursuing evidence of the antitrust violations wherever it finds them and welcomes hearing from any of your constituents who may be aware of such evidence. We hold the names of complainants in confidence and they need not fear that they are going public by bringing information to our attention. And we also look forward to working with this committee as it continues to study this very complex issue.
Mr. HYDE. Thank you very much, Mr. Tom.
[The prepared statement of Mr. Tom follows:]
PREPARED STATEMENT OF WILLARD K. TOM, DEPUTY DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION
Mr. Chairman and Members of the Committee, my name is Willard K. Tom and I am the Deputy Director of the FTC's Bureau of Competition. I appreciate the opportunity to testify before you today about competition issues in agriculture and food marketing. I understand that other witnesses will address specific questions involving packers and stockyards, an area over which our jurisdiction is extremely limited in any event. I will focus instead on the way that slotting agreements are assessed under the antitrust laws. My written testimony states the views of the Federal Trade Commission on this subject, but my oral presentation and my answers to any questions that you ask will be my own. Let me add that the Commission has at least one nonpublic law enforcement investigation pending in this area, and so I respectfully request your indulgence if I don't reveal the investigative details.
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The Federal Trade Commission is an independent agency that has the mission of ensuring that consumers have the benefits of free and fair competition. We enforce a number of antitrust statutes, such as the FTC Act and the Clayton Act with its merger provisions, which ensure that the marketplace remains competitive. We also enforce a number of consumer-protection statutes, which ensure that customers can make their selections in the marketplace on the basis of accurate rather than of deceptive information. Working together, the two main missions of the FTC ensure that consumers are able to go into a competitive marketplace and make free choices there.
Today's hearing asks how slotting allowances should be assessed within this framework. The term ''slotting allowance'' typically refers to a lump-sum, up-front payment that a food manufacturer must pay to a supermarket for access to its shelves. The term has been used to cover an extremely broad range of conduct, some of it clearly unlawful, some clearly lawful, and a great deal of it in the gray area in between, the legality of which can be determined only in light of all the surrounding facts and circumstances.
At the clearly unlawful end of the spectrum is commercial bribery. This is an under-the-table payment to a purchasing agent of a retailer that goes straight into the agent's pocket, in violation of the fiduciary duties owed by the agent to his principal. Allegations of this sort have arisen in public discussions of the issue, such as the recent hearings held by the Senate Committee on Small Business.(see footnote 14) If such instances come to our attention, we will promptly refer the matter to the relevant state or local authorities for criminal prosecution. Only criminal sanctions can provide adequate deterrence for this sort of covert, blatantly illegal conduct, and it would not be appropriate for us to try to apply antitrust standards and remedies to conduct that is universally condemned for reasons wholly apart from antitrust.
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At the other end of the spectrum are payments from a manufacturer to a retailer that really constitute only an ordinary price discount. For example, a short-term agreement for advance payments that does nothing more than obligate the retailer either to buy a certain number of units of a manufacturer's product or to return a proportionate share of the advance payment may be little different from a simple price cut. In such a situation, the retailer gets, in effect, a certain per-unit discount off the nominal selling price. The only difference is that the retailer receives the discount at the outset of the contract. If the retail market is competitivea very important preconditionthe discount is likely to be passed through to consumers and competition will not ordinarily be harmed.
In between these two extremes is a gray area. We have heard on occasion from small manufacturers that complain about activity in this area. For example, they have reported that strong buyers, such as supermarket chains, are demanding large up-front payments not tied to volume. In some cases, we have been told, these allowances are so large that some small manufacturers cannot afford them and are dropped from the store.
When we evaluate this kind of conduct, the antitrust statutes require us to determine whether particular actions have harmed the overall level of competition in a market. If a market can be kept competitive, then consumers will receive the benefits of low prices and wide product selection, and businesses will receive the benefits of having many suppliers and many outlets.
In light of this principle, how do we determine when slotting allowances have actually put competition at risk? And what should an antitrust agency do to prevent or remedy such situations?
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Evaluating Slotting Allowances
The first question is how to determine when slotting allowances have actually had a harmful effect on competition. Unfortunately, the answer, as for many economic practices, is that it depends on the circumstances. Very often debates over slotting allowances have assumed that all slotting allowances, and all of the market conditions in which they are used, are the same. Life would be a lot simpler both for law enforcers and for legislators if only that were so. But in fact there are significant differences both in the terms of the allowances, and in the contexts where they are used.
First, there are differences in the terms of the slotting allowances themselves. The actual allowancesthe payment from manufacturer to retailerare one side of a bargain, the other side of which can offer tremendous variety. What does the retailer offer in exchange for the payment?
Is it a payment simply to be carried somewhere in the store?
Is it for a fixed amount of shelf space?
Is it for preferential displaythe end-caps or eye-level shelves?
Is it for the right to be the exclusive, or nearly exclusive, supplier in that product category?
Page 74 PREV PAGE TOP OF DOC Is it for the right to control what other products in that category will be allowed on the shelves?
And is it for a long or a short time?
The answers to these questions can have a major effect on how much room is left for other suppliers in the market, and therefore on whether the allowances are harmful or innocuous, procompetitive or anticompetitive.
Thus, if a dominant manufacturer, in exchange for slotting allowances, secures promises from a large number of retailers not to carry the products of its competitors, competition might be seriously harmed. Indeed, if so many retailers were tied up by these contracts that competing manufacturers could not secure enough distribution to stay in business, outright monopoly could be the result.
Similarly, if a dominant manufacturer or a small group of manufacturers were able to secure exclusive arrangements with all the desirable retailers, thus forcing other competitors to use only less desirable retailers, they might be able to raise prices because they would face less effective competition.
Even without 100% exclusivity, a manufacturer or a group of manufacturers might be able to marginalize their competitors and lessen the competition they face through partial exclusivity requirements that, for example, guarantee the manufacturer (or the group) a large percentage of shelf space or give it a veto right over other manufacturers' products.
Page 75 PREV PAGE TOP OF DOC On the other hand, payments of reasonable amounts to compensate the retailer for the costs and risks of stocking a new, unproven product, without exclusivity requirements, are unlikely to harm competition. This was the original context for the term ''slotting allowances.'' Taking on a new product confronts the retailer with not only the actual costs of restocking shelves, changing labels, and reprogramming scanner equipment, but also the potential costs of product failure and being left with unsold inventory. Moreover, taking on a new product often means that some other product must be dropped from a store. The average supermarket stocks 30,000 items, but fully 100,000 grocery products are available from manufacturers, and another 1015,000 new ones are offered each year. Supermarkets cannot stock all the available products, and when a new product comes in, that typically means an old product must go. Under those circumstances, it may be reasonable to ask the manufacturer, which has usually done the test-marketing and has the best information about the potential of each individual product, to bear some of the supermarket's risk if it wants to persuade the supermarket to try the product.(see footnote 15) Such an arrangement may be reasonable if the payments are roughly equal to the risk-adjusted costs involved.
So far we've been talking about the different kinds of slotting allowances and associated agreements. In addition, the market circumstances in which the agreements take place can vary widely, and with equally important consequences.
The Supreme Court has told us that even outright exclusive dealing agreements can be lawful and procompetitive where markets are relatively unconcentrated.(see footnote 16) Exclusive arrangements between a manufacturer and a retailer may help them work together to compete more effectively against other manufacturer-retailer pairs. The retailer that is specializing in the product of one supplier can become more familiar with it, better able to convince customers of its merits, more motivated to sell it, and better able to service it. And as long as there are many comparable manufacturers and many equivalent outlets for their products, and as long as only relatively few outlets are needed to reach nearly all of the end user customers, competition should be vigorous, notwithstanding the exclusive contracts. Consumers will still have multiple brands to choose from and manufacturers will have multiple routes to the marketplace.
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Conversely, when the market is highly concentrated in the hands of one or a few firms, or when one can compete only if one has access to most of the outlets in the market, anticompetitive effects become more likely. If one supplier has exclusive contracts with all or most of the outlets in a market, and especially if slotting fees are paid to maintain an existing product line rather than to introduce a new one, competition can be diminished in terms of both variety and price. Competition can be diminished in terms of variety, because other suppliers cannot easily find enough outlets to become an effective presence in the market, and because shoppers will have difficulty locating those products even if they are available somewhere. It can be diminished in terms of price, because all products are likely to be more expensive as a result of the lessened rivalry among manufacturers.
To see if these outcomes are likely, the Commission looks at concentration at both the manufacturer and the retail levels. Dominant manufacturers are more likely to have the ability to engage in the kinds of exclusive dealing strategies outlined above, even if retailing is fairly unconcentrated. Similarly, when a handful of companies dominate retailing of particular types of products, they are more likely to be able to impose terms such as slotting allowances, and also more likely to have only limited competition among themselves at the retail level, so that they are more likely to retain the slotting allowance as a bonus for themselves, rather than being induced by the competitive environment to pass it on as a cost saving to consumers.
Enforcement Approaches to Slotting Allowances
Given that slotting allowances can have such varied effects in various circumstances, how should an antitrust enforcement agency approach the issue, and how should it deal with those problems that do exist?
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The first and most important step is surely merger enforcement. It is when either manufacturing or retailing becomes highly concentrated that we see the greatest potential for practices such as slotting allowances to have anti-consumer rather than pro-consumer effects. Merger enforcement is one way of setting some limits on increasing concentration.
As everyone in this room knows, we have been in the midst of an enormous merger wave for some time now. Merger transactions reported under the Hart-Scott-Rodino Act have increased from 1529 in fiscal 1991 to 4679 last year, with no end in sight. The antitrust agencies have handled this dramatic increase in mergers with, at best, a modest increase in budget. Although this has put an obvious strain on Commission resources, the agency has been able to continue ferreting out the relatively few mergers that may harm competition, and has blocked or restructured them so that the interests of consumers are protected.
This merger program has been active at the retail level as well as at the manufacturer level. In recent decades the conventional wisdom was that retailing was characterized by a great deal of competition and low barriers to entry, so that few mergers there were likely to be anticompetitive. The retail world has been changing, however. When the agency investigated the proposed merger of Staples and Office Depot, the two largest of only three national office supply superstore chains, we learned that non-superstore retailers did not exercise a significant competitive constraint on these chains. Instead, we found that the chains were a market unto themselves. Consumer prices were higher in markets that had only two chains rather than three, and higher still in markets that had only one, regardless of what other types of outlets were present. Even the presence of Wal-Mart or other general merchandise discounters did not alter this fact. The Commission therefore successfully challenged the proposed merger in court.(see footnote 17)
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In grocery retailing, the agency maintains a very active program of merger enforcement. In the last four and a half years the Commission has brought enforcement actions in 10 major supermarket mergers. These cases have resulted in the divestiture of 277 individual supermarkets or building sites. One of the agency's most recent matters of this sort involved Albertson's acquisition of American Stores. The consent agreement in that one case alone calls for the divestiture of 144 supermarkets and 5 building sites, generally to smaller chains or to independent wholesalers.
In addition to merger enforcement, we also scrutinize agreementsincluding agreements on slotting allowanceswhere the restraints and market structure seem likely to produce anticompetitive effects. One such case involved a powerful retailer demanding the kind of exclusivity that we sometimes see associated with slotting allowances. This is the case against Toys 'R' Us, now on appeal before the Seventh Circuit.(see footnote 18) In that case, the Commission found, among other theories of violation, that Toys 'R' Us used its power as a retailer to orchestrate a conspiracy among large toy manufacturers to withhold the more desirable toys from the lower-cost warehouse clubs against which Toys 'R' Us competed. By enlisting the manufacturers into the conspiracy, it was able to weaken the warehouse clubs as competitors in the retail market. In reaching its conclusion, the Commission carefully examined, and rejected, a variety of efficiency defenses that Toys 'R' Us offered to justify its conduct. The evidentiary record gave the Commission a high degree of confidence that Toys 'R' Us's practices were what they seemed to bea way of cutting off supplies to rivals in order to relieve the competitive pressure that had produced benefits for consumers. Controlling practices of this kind can go a long way toward ensuring a competitive landscape.
Page 79 PREV PAGE TOP OF DOC The Commission is committed to pursuing anticompetitive practices vigorously. The Commission recognizes that competition is at least potentially harmed, not only in the commercial bribery situations alluded to earlier, but also in cases where the slotting payments are associated with predatory pricing, price and other forms of discrimination, monopolization, or raising the distribution costs of rivals in order to make them less effective constraints on a dominant manufacturer's pricing. We remain alert to the possibility of harm in all these circumstances.
To sum up, the term ''slotting allowances'' covers a wide variety of practices under a wide variety of market circumstances, and the competitive effects are not always clear-cut. But five specific points can be fairly made in closing.
First, the Commission, under its statutes, looks to determine whether particular conduct has harmed the overall level of competition; this means that harm to an individual competitor is not necessarily an antitrust violation. Second, in practical effect some slotting allowances can be discounts off of list price and beneficial to competition, particularly when they are passed on to consumers. Third, the FTC nonetheless considers complaints about particular slotting allowances very carefully, precisely because their market effects can be so different. Fourth, the FTC does not receive many complaints in this areaperhaps one every three months on average.
Fifth, however, the FTC remains committed to pursuing evidence of antitrust violations when it finds them, and welcomes hearing from anyone who may be aware of such evidence. We would like to affirmatively encourage this by assuring small manufacturers that we are aware of their concerns about the possible business repercussions of complaining to the government, and that, accordingly, we always hold the names of complainants in confidence. We also look forward to working with this Committee as it continues to study this complex subject.
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Thank you again for this opportunity to present the Commission's views.
Mr. HYDE. And now we will ask the members to confine their questions to 5 minutes and so we can get to the next panel. And so first I will ask the gentlelady from Wisconsin if she wishes to question any of the panel.
Ms. BALDWIN. Thank you, Mr. Chairman. First, a question for Mr. Nannes.
I come from a region of the country that has a lot of dairy farms. A couple of questions along those lines. I have been hearing that in the dairy industry one firm in the New England market holds about a 70 percent share of fluid milk distribution in the six New England States. I know that the Antitrust Division approved the consolidation of firms, creating this large firm very recently in January 1999. I guess I want to start by asking what is the allowable concentration that Antitrust permits for a single firm to hold in any particular region, and then how do you determine that sort of a threshold?
Mr. NANNES. Congresswoman, perhaps you will let me respond to the question a little more generally than the question suggests, because the particular transactions to which you refer occurred before I was at the Division, so my ability to comment on those specifics is limited.
Generally speaking, we look at mergers and acquisitions, and we have to define the relevant product and geographic markets. I use that only to suggest to you that there may be circumstances in which parties are combining that seem to have relatively high market shares, but if you look at the totality of the geographic market to which customers can turn to purchase those supplies, you have to take into account other regions, and once take into account all of the regions that customers can turn to, that 90 percent share turns out to be a much less significant share.
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But if you are talking generally about a situation where we have a geographic market that is defined, then depending on other concentration, we start to get concerned about transactions where the parties are resulting in shares that might be somewhat north of 25 or 30 percent. But there may be other circumstances in which the prospects of new entry or other factors would cause us to conclude that the historic market share is not a good predictor of their future market share or market power. So we use the market shares as a starting point rather than an ending point for our analysis.
Ms. BALDWIN. In follow-up, if you are not familiar with that particular company, I will try to put this in hypothetical terms. In this particular instance, a 25 percent owner of the resulting firm is a dairy cooperative. How would the Antitrust Division respond to the requirement by the co-op that producers had to join the co-op in order to continue shipping their milk to the parent company? How would you evaluate those sort of requirements?
Mr. NANNES. As you know from your question, the antitrust laws provide certain exemptions for farmer cooperatives, reflecting a congressional policy that goes back to the 1920's, that it was necessary for farmers to have some ability to offset what was perceived to be significant buying power from those down the processing chain. The nature of the exemption, though, is not unlimited. It may be that a group of farmers can form a cooperative, and maybe a substantial number of the farmers produce particular products for that cooperative, but it would also be the case that if the cooperative engages in anticompetitive practices that extend beyond the nature of the exemption, they would be subject to the antitrust laws, so that the exemption is important within its sphere of operation, but it is not unlimited by any means.
Page 82 PREV PAGE TOP OF DOC Ms. BALDWIN. I think I have a moment to ask a quick question of Dr. Figueroa. I know that the AMS uses an adjusted monthly average price for grade AA butter traded at the Chicago Mercantile Exchange to set the value for butter fat for farmers in the Federal milk system, milk order system. I have been hearing growing concerns about the events at the CME, and it didn't seem to appear to violate the free market logic. I am wondering if the AMS conducts oversight into cash trading of dairy commodities at the Chicago Mercantile Exchange, and if so, how, and if not, what Federal agency does have oversight to the cash trading of dairy commodities?
Mr. FIGUEROA. I believe, Congresswoman Baldwin, that the CFTC has oversight responsibilities over that. I will get back to you specifically, but I think that is the case.
Ms. BALDWIN. I would appreciate that, thank you.
Mr. HYDE. The gentleman from Indiana, Mr. Pease.
Mr. PEASE. Thank you, Mr. Chairman, and thank you again to the witnesses who took the time to be with us.
Dr. Figueroa, I was a little slower in getting back here than the chairman and missed your testimony. I am looking forward to reading it. However, I do have some questions. We have heard from some of our colleagues earlier today of concern about the adequacy of resources for enforcement of the Packers and Stockyards Act. If you are in a position to comment on that, I would appreciate hearing it even though that is an issue for our appropriators to address, number one.
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Number two, I am curious to know whether you believe, having enforced this law for some time, there are adjustments that need to be made in the law to address changing circumstances that would be within the purview of this committee regarding the possibility for anticompetitive consequences of some of the actions that we have seen in the last few years.
Mr. FIGUEROA. With respect to your first question, Congressman, the total staff of the Packers and Stockyard Program at GIPSA is 178 individuals. We have implemented a restructuring based on some of the recommendations, as I mentioned, from the Secretary's Advisory Committee on Agricultural Concentration. We feel that the restructuring has indeed increased GIPSA's capabilities to address some of the more complex issues that are developing in the marketplace. We have more economists and more legal folks. But clearly it is our position that the resources that we have before us, given the nature of the developments in the last 3 or 4 years, limits our ability to do it in a very effective way. I think that currently our resources are adequate, but the changes in the marketplace that are developing will strain our capacity.
With regards to your second question, it is certainly our concern that some of these consolidation and merger issues may be affecting the competitive marketplace, and we look forward to sitting down with individuals in Congress to look at some of the changes that may be needed or appropriate for the P&S Act. We have to look at those changes in the context of the responsibility of the Department of Justice and the responsibility that we have, but we will certainly be open to participating in those discussions.
Mr. PEASE. Thank you, Dr. Figueroa.
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Mr. Nannes, one of the issues that this committee has addressed in the last year is the whole issue of the change in marketplace from the time when the Sherman Act and others were adopted, which focused almost exclusively on U.S. markets, to the situation in the world today where on the one hand we want to make sure there is not so much consolidation within the United States that it has had anticompetitive consequences within the country, but acknowledging that for our American corporations to be competitive worldwide, they have to be a certain size and reach or they cannot compete with companies in Europe and Asia and elsewhere.
In a very general sense, does the Department have an opinion on finding the appropriate balance between those competing demands on American industry?
Mr. NANNES. Congressman, we certainly do in the sense that when we are looking, for example, at a particular merger or acquisition, we seek to determine the relevant geographic market in which the competition occurs. There may be circumstances even in a single transaction where both local markets and international markets are affected, and then we will do a separate analysis with respect to each of those particular features of the transaction. The Cargill-Continental transaction, is a good example.
On the input side, we took a very careful look at each river elevator, each railroad terminal, each port facility to ascertain the impact on the sellers of the grains and soybeans to Cargill and Continental, and at the same time we looked at the output markets which is where grains that we may purchase would be sold, and that tended to be more national than international.
Page 85 PREV PAGE TOP OF DOC So we very much do take into account precisely the factor you raised and even in the circumstances where it requires a multiplicity of analyses in a single transaction.
Mr. PEASE. Thank you very much. I have some more questions, Mr. Chairman, but I think I am going to get time from my colleague shortly.
Mr. HYDE. Thank you very much.
The gentlelady from California, Mrs. Bono.
Ms. BONO. Thank you, Mr. Chairman.
I want to begin by asking Mr. Tom, if you can explain where on a profit and loss statement slotting fees would show up? Is it a reduction in cost of sales or is it a line item all to itself? Where do slotting fees show up?
Mr. TOM. That is a question that I am probably not the world's expert on. I think the fees would normally be paid as an upfront paymentand, you know, I am not familiar with the accounting practices of different chains and whether they account for them uniformly the same way.
Where we would have a concern is where these fees restrict ability of competitors to compete in the market, of suppliers to find ways to get distribution and enter into the market, rather than the particular accounting practices that the firms use.
Page 86 PREV PAGE TOP OF DOC Ms. BONO. Thank you.
Actually, I have a brief little story. I sort of had a run-in with slotting fees myself earlier on when Sonny opened a restaurant, Bono Restaurant in Hollywood. We marketed Bono water. I took it to a grocery store that I worked at during college. I asked the grocer, ''How do we sell this and get this on your shelf?'' I guess that is when I learned about slotting fees in a sense. I guess Paul Newman worked harder because he got his stuff on the shelf and Sonny never did, but I sort of ran into that on my own case.
But my question to you also is that I hear from many of my constituents that they are afraid of the retaliation that they will face or what will happen if they come forward with their issues of concern to you. Can you tell me what you do in that circumstance if somebody comes forward and says they are afraid to come to you?
Mr. TOM. This is a concern whenever informants come to us, and as a result we make sure that their names are held in confidence. We do not disclose any details of our nonpublic investigations. And so they can feel secure that simply by coming to us, they are not subjecting themselves to public awareness of what they are doing.
There are FOIA exemptions that cover our investigative work and we are vigilant to safeguard the informant's privilege.
Ms. BONO. When we think about the hearing that the Small Business Committee on the Senate side had, we actually had people testifying wearing hoods. And I am happy to see that didn't have to happen today.
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Is retaliation or refusal to deal anticompetitive and/or a violation of the law?
Mr. TOM. Retaliation for providing truthful information to the government would be a serious concern and, you know, at some point if the requirements for an obstruction of justice count were present, we would refer that to the Justice Department for criminal prosecution. We are very concerned about safeguarding the integrity of our processes.
Ms. BONO. Thank you.
And my last question is to Dr. Figueroa. In your testimony, you talk about PACA being amended in 1995 to state that the good faith offer solicitation payment or receipt of collateral fees and expenses in and of itself is not unlawful under this act.
But when you listen to Mr. Tom's testimony or read it, you see that there is no generic slotting fee that you can assign that to. It can run the gamut from what we call kickbacks, I guess, to a business practice that makes perfect sense in assuring that the grocer has a protection against introducing a new product on the market.
With your definition in here, isn't that a little bit vague? I think the two of you are saying that it is not unlawful under this act, but you are hearing from Mr. Tom that it in fact can be unlawful under the act.
Mr. FIGUEROA. Clearly, bribery would be a violation under PACA. The language in my testimony is the interpretation from our legal counsel, which is that a slotting fee is more in the spectrum of how Mr. Tom defined it. For example, a discount that is transparent and where both parties are aware of what the discount is, or some other kind of advertising promotional funds, would clearly not be violations of the PACA.
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The understanding that we have of how some of these funds are provided or asked for, absent of bribery and things of that nature, would not be violations of the PACA as we currently interpret it.
Ms. BONO. All right. Thank you, Mr. Chairman.
Mr. HYDE. I thank the gentlelady.
The gentleman from Virginia, Mr. Scott.
Mr. SCOTT. Thank you, Mr. Chairman.
Looking at the list of witnesses we have, I think most of my concerns will probably be addressed by one of them, so I won't ask questions of this panel.
Mr. HYDE. You are indeed the gentleman from Virginia. I hope that has put sufficient pressure on the gentleman from Tennessee. Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman. I am a little bit pressure proof, though.
I would like to ask a question or two, but I will beI promise to be brief. As we consider the antitrust aspects on the top of this heap here and look to keeping the bigger companies from getting bigger, has anybody given any thoughtwe started out talking about strengthening the family farmers. Has anybody given any thought and consideration to relieving some of those regulations that apply to the family farmer that keep the competition down, that keep the family farmer from going directly to the consumer with products?
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Now, Representative Minge mentioned ag money and I am not sure what the answer to this question is, perhaps you can tell me; but would it be possible for a farmer to directly sell to the public eggs from their farm this day and time, or would they have to go through a regulatory process administered by USDA or the health department or somebody else? Can you go directly?
Mr. FIGUEROA. The number of farmers markets, for example, Congressman Jenkins, in this country has increased significantly. Some of these farmers markets now allow for the sale of meat and meat products directly to consumers. I know that for a fact it takes place in the State of New Mexico.
With respect to eggs specifically, I cannot tell you whether the USDA has any particular provisions. My judgment tells me that that is more of a State-based regulation rather than Federal regulation. But we certainly at the USDA encourage direct sales. We have a direct marketing initiative to allow farmers to capture all of the margins in the market chain so they can sell directly to consumers.
Mr. JENKINS. And you are thinking about making it a freer market from that standpoint?
Mr. FIGUEROA. Yes, sir.
Mr. JENKINS. Thank you.
Page 90 PREV PAGE TOP OF DOC Mr. HYDE. Mr. Rogan.
Mr. ROGAN. Mr. Chairman, thank you. Thank you for calling this hearing, and I am pleased to yield to my dear friend from Indiana, the distinguished gentleman, Mr. Pease.
Mr. PEASE. Thank you Mr. Rogan. Thank you, Mr. Chairman. Though I do have a number of questions that I would like to address, I also have a desire to remain in the good graces of the chairman, so let me ask just one of them.
Mr. Nannes, I ask you the same question that I asked Dr. Figueroa, and that is whether your experience in the administration of the current antitrust laws, which has been stunning in a number of casesthe ADM case, the BASF case and otherswhether your experience in those cases and others that you may not have come forward with, has led you to any conclusion about whether there are special needs in the agriculture industry that require amendment to the existing laws to support your efforts.
Mr. NANNES. Congressman, I think, if anything, the enforcement actions that we have initiated in the last 3 or 4 years have reinforced my view that the antitrust laws provide an appropriate framework for policing and enforcing our Nation's concern about the ability of markets to operate competitively.
Certainly we have seen a significant step up in sentencing both with respect to monetary fines and imprisonment in the hopes that that will convey to the business community the necessity for pricing independently and allowing customers to enjoy the benefits of competition.
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On the merger side, I think that some of the actions we have taken with respect to seed markets and distribution markets ought to be an indication that we are watching merger trends very carefully in the agriculture marketplace. There certainly are some segments that have substantially high levels of concentration, many of which go back some years now particularly into the eighties, but all of which suggest that any significant transaction in those highly concentrated industries are going to get a very careful review by the antitrust division.
Mr. PEASE. Thank you very much. Thank you, Mr. Chairman.
Mr. ROGAN. I yield back.
Mr. HYDE. Mr. Hutchinson do you have any questions?
Mr. HUTCHINSON. Mr. Chairman, I want to save the ammunition for the next panel, so I yield. Thank you.
Mr. HYDE. Very good. Well, thank you very much. That concludes this panel. It has been very instructive and we do appreciate your being here. And we are going to review your full statement as well as your testimony. Thank you very much.
Our third panel consists of eight witnesses who represent a variety of industry perspectives on the two issues we are considering; the first four will address the concentration issue, and the second four the address the slotting fee issue.
Page 92 PREV PAGE TOP OF DOC Our first witness will be Charles Kruse, the president of the Missouri Farm Bureau. Mr. Kruse is a graduate of Arkansas State University and the University of Missouri. He has long been active in agricultural issues, serving with an agricultural chemical company, the Missouri Department of Agriculture and the North American Equipment Dealers of America. He is also a retired general in the Missouri National Guard. He took his current position in 1992.
Our next witness is Ms. Odessa Piper. Ms. Baldwin has asked for the opportunity to introduce Ms. Piper and I am very pleased to yield to Ms. Baldwin.
Ms. BALDWIN. Thank you so much Mr. Chairman. It is my pleasure to introduce Odessa Piper of Madison, Wisconsin. For over 30 years, Odessa has been involved in promoting sustainable agriculture and regional produce by showcasing it in fine dining. Her restaurant, L'Etoile, continues to be a favorite destination within the local community, and celebrated 23 years in business this past August. Odessa has been written about in such magazines as Bon Appetit and is a frequent contributor to Wisconsin Public Radio and NPR.
Having heard her speak recently about her restaurant and her vision of an integrated school for farming and cooking, I know that she will bring us a unique perspective on the challenges of small family farmers in today's agriculture economy, and I welcome her to Washington. Thank you.
Mr. HYDE. Thank you very much, Ms. Baldwin.
Our next witness is Mr. Patrick Boyle, president and chief executive officer of the American Meat Institute. Mr. Boyle is a graduate of the University of Notre Dame and the Catholic University Law School. Before coming to AMI, he practiced law, worked for the United Fresh Fruit and Vegetable Association and the National Grocers Association, served with Senator Pete Wilson, and headed the U.S. Department of Agriculture's Agricultural Marketing Service. He took his current position in 1990.
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Our next witness is Dr. Kendell Keith, the president of the National Grain and Feed Association. Dr. Keith has bachelor's, master's, and doctor's degrees from Oklahoma State University. He worked for the National Cotton Council before joining NGFA in 1980. He rose through the ranks there, becoming president in 1992.
Our next witness is Mr. Tom Stenzel, president of the United Fresh Fruit and Vegetable Association. Mr. Stenzel is a graduate of the University of Richmond. He held public affairs positions in the soft drink and electric industries before becoming president of the International Food Information Council in 1985. In 1993, he took his current position with United.
Our next witness is Mr. Nicholas Pyle, vice president for legislative affairs for the Independent Bakers Association. Mr. Pyle is a graduate of the University of Southwest Louisiana and worked extensively in the petroleum exploration business. In addition to his work for IBA, he is also president of Robert M. Pyle & Associates, a Washington consulting firm.
Our next witness is Dr. Tim Hammonds, the president and chief executive officer of the Food Marketing Institute. Dr. Hammonds has bachelor's, master's and doctor's degrees from Cornell University. Before joining FMI's predecessor organization, he was a tenured professor at Oregon State University. He has been with FMI since its founding in 1977.
And our final witness is Mr. John Gray, general counsel and president of the International Food Service Distributors Association. He is a graduate of William & Mary, University of Virginia Law School, and the Wharton School of Business. Before taking his current position, he was in the private practice of law and also worked with the Grocery Manufacturers of America. He took his current position in 1994.
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And I would ask you, members of a distinguished panel, to try to confine your remarks to 5 minutes so we can hear everybody. And your full statement will be incorporated into the record by unanimous agreement.
Mr. HYDE. And so we welcome you, Mr. Kruse.
STATEMENT OF CHARLES KRUSE, PRESIDENT, MISSOURI FARM BUREAU, JEFFERSON CITY, MO
Mr. KRUSE. Thank you, Mr. Chairman, and members of the committee. I applaud you for holding this hearing today. My name is Charles Kruse, and while I am here testifying on behalf of Missouri Farm Bureau and our American Farm Bureau organization, I am enormously proud to say that I am a fourth-generation farmer from the State of Missouri. My family farming operation consists of corn, cotton, soybeans and wheat in Missouri.
Mr. Chairman, this Nation has been blessed with a climate and natural resource base that provides a remarkable array of agriculture products at a very low price. We are literally the envy of the world. Yet in many ways, we are victims of our own success. U.S. agriculture is suffering from the combination of extremely low commodity prices and, in many areas, low yields.
There are a number of reasons for our woes. However, we expect the result to be an acceleration of the trend toward fewer and larger farms. If we are to reverse this trend, we must take every opportunity to increase our competitiveness in an increasingly global environment. This issue before the committee today is one of the most important currently facing our Nation's farmers and ranchers. There is no single action that will keep our agricultural producers competitive.
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Today it will require a combination of many things, several of which are outside the jurisdiction of the Judiciary Committee. We must be a leader in world trade negotiations, demanding both free trade and fair trade. We must enhance our infrastructure and take advantage of natural resources, maintaining our highway systems, enhancing navigation and reviewing carefully the impacts of railroad consolidation.
We must resist the urge to further regulate production agriculture and amend regulations that are unnecessarily overly stringent. We must look for opportunities to revisit the Federal tax code to provide much-needed relief to farmers and ranchers. U.S. agriculture is not immune from the competitive pressures facing other sectors of our economy. Large mergers and acquisitions are leading to tremendous consolidation within the seed, chemical, processing and banking industries.
And the ongoing trend of vertical integration is making it more difficult for independent producers to find competitive markets. All told, these actions are necessary for companies to remain competitive. We remain skeptical.
Do these actions increase the competitiveness of agribusiness and agricultural producers of all sizes? Or are they simply a case of the big getting bigger?
U.S. agricultural producers are truly a modern day miracle. We have the ability to feed not only our Nation but much of the world. Yet we are facing a cost-price squeeze in which the price of our inputs is rising in real terms, while the price received for our products is actually declining in real terms.
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I think to put this perhaps in perspective, if you look at, for example, 20 years ago, the cost to a farmer for a brand-new tractor was about $15,000; today it is over $100,000. And today a big combine is selling for over a quarter of a million dollars. As a result, we see many farmers that are either holding on until they can afford to get out some way or the other, or simply hanging by a thread hoping something will change.
Competition is a difficult issue and can have many different meanings. As an organization, Farm Bureau is strongly supportive of competitive markets. Yet at what stage does consolidation eliminate competition, making it possible to dictate prices paid for inputs and prices paid to producers for commodities or prices paid by consumers for the final product?
It is really difficult to determine exactly what needs to be done to address consolidation in the agricultural sector. Several options warrant consideration by Congress, as well as organizations like Farm Bureau. There needs to be a thorough review of existing statutes to determine their ability to address the situation facing U.S. agriculture. We must also have a thorough review of agencies' existing authority under Federal statutes.
We need to gain a better understanding of what the Department of Justice's review processes entail. And we need to determine if existing statutory authority is sufficient to address today's huge financial transactions. While not in this committee's jurisdiction, the Packers and Stockyards Act is a real concern to livestock producers. It has already been mentioned here this morning.
We are advocating a thorough examination of this act to determine its ability to respond to the changes taking place in the livestock sector. Specifically, is the act working? If not, why? Are legislative changes necessary? Or is it possible that the act is simply not being enforced?
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In conclusion, I want to reiterate that we understand the complexity of issues involving competitiveness. Furthermore, we understand the fact that consolidation is not a trend found only in the agricultural sector; however, this Nation is losing family farms at an unacceptable rate and a decision must be made soon to do whatever is necessary to restore profitability to agriculture, our Nation's greatest success story.
Thank you very much.
Mr. HYDE. Thank you Mr. Kruse.
[The prepared statement of Mr. Kruse follows:]
PREPARED STATEMENT OF CHARLES KRUSE, PRESIDENT, MISSOURI FARM BUREAU, JEFFERSON CITY, MO
Charles E. Kruse is a fourth generation farmer from Stoddard County, Missouri where he and his family raise corn, soybeans and cotton. Mr. Kruse serves as President of the Missouri Farm Bureau Federation.
US agriculture is suffering from the combination of extremely low commodity prices and, in some places, low yields. There are a number of reasons for our woes, however we expect the result to be an acceleration of the trend towards fewer and larger farms. To reverse this trend we must take every opportunity to increase our competitiveness. We must:
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1. Be a leader in world trade negotiationsdemanding both free and fair trade;
2. Enhance our infrastructure and take advantage of natural resourcesmaintaining our highway systems, enhancing navigation and reviewing carefully the impacts of railroad consolidation;
3. Resist the urge to further regulate production agriculture and amend regulations that are unnecessary or overly stringent; and
4. Look for opportunities to revise the federal tax code to provide much-needed relief to farmers and ranchers.
As an organization, Farm Bureau is strongly supportive of competitive markets. Yet, at what stage does consolidation eliminate competition making it possible to dictate prices paid for inputs, prices paid to producers for commodities or prices paid by consumers for final products? When a good or service is controlled by only a few this is cause for concern. Concentrationthe ability to influence prices as a result of a lack of competitionclearly is not in the best interest of agricultural producers or consumers.
While the extent of consolidation can be quantified it is more difficult to determine the various impacts of a specific transaction. Absent sufficient data, many people and organizations feel compelled to oppose any merger or acquisition and legislation is pending that would place a moratorium on mergers or acquisitions that exceed $50 million. The bottom line is, as this trend continues, who is looking out for the producer?
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Several options warrant consideration by Congress as well as organizations such as Farm Bureau:
1. There must be a thorough review of existing statutes to determine their ability to address the situation facing US agriculture, including the Sherman Act, Clayton Act and Hart/Scott/Rodino;
2. There must also be a thorough review of agencies' existing authority under federal statutes;
3. We need to gain a better understanding of what the Department of Justice's review processes entail;
4. We must determine if existing statutory authority is sufficient to address today's huge financial transactions; and
5. We must assess how information and research conducted by the DOJ and other federal agencies relative to these financial transactions is being made available to the public. Are there adequate opportunities for public comment and participation?
While not in this committee's jurisdiction, the Packers and Stockyards Act is a real concern to livestock producers and must be subject to thorough review.
This nation is losing family farms at an unacceptable rate and a decision must be made soon to do whatever necessary to restore profitability to agricultureour nation's greatest success story.
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My name is Charles E. Kruse and I am a fourth generation farmer from Stoddard County, Missouri where my family and I raise corn, soybeans and cotton. I am pleased to testify this morning in my capacity as President of the Missouri Farm Bureau Federation.
Mr. Chairman, this nation has been blessed with a climate and natural resource base that provides a remarkable array of agricultural products at a very low price. We are literally the envy of the world. Yet, in many ways we are victims of our own success.
US agriculture is suffering from the combination of extremely low commodity prices and, in some places, low yields. There are a number of reasons for our woes, however we expect the result to be an acceleration of the trend towards fewer and larger farms. If we are to reverse this trend we must take every opportunity to increase our competitiveness in an increasingly global environment.
Mr. Chairman, the issue before this committee is one of the most important currently facing our nation's farmers and ranchers. There is no single action that will keep our agricultural producers competitive. Today, it will require a combination of many different thingsseveral of which are outside the jurisdiction of the Judiciary Committee, including:
1. We must be a leader in world trade negotiationsdemanding both free and fair trade.
2. We must enhance our infrastructure and take advantage of natural resourcesmaintaining our highway systems, enhancing navigation and reviewing carefully the impacts of railroad consolidation;
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3. We must resist the urge to further regulate production agriculture and amend regulations that are unnecessary or overly stringent; and
4. We must look for opportunities to revise the federal tax code to provide much-needed relief to farmers and ranchers.
US agriculture is not immune from the competitive pressures facing other sectors of our economy. Large mergers and acquisitions are leading to tremendous consolidation within the seed, chemical, processing and banking sectors. And the ongoing trend of vertical integration is making it more difficult for independent producers to find competitive markets. While told these actions are necessary for these companies to remain competitive, we remain skeptical. Do these actions increase the competitiveness of agribusiness and agricultural producers of all sizes or are they simply a case of the big getting bigger?
US agricultural producers are a modern-day miracle. We have the ability to feed not only our nation but much of the world. Yet, we are facing a cost-price squeeze in which the price of our inputs is rising, in real terms, while the price received for our products is actually declining in real terms. To give you an example, a tractor that cost $15,000 brand new 20 years ago now costs over $100,000. New combines are running over $250,000. As a result, many farmers are either holding on until they can afford to get out or are simply hanging by a thread hoping something will change.
Competition is a difficult issue and can have many different meanings. As an organization, Farm Bureau is strongly supportive of competitive markets. Yet, at what stage does consolidation eliminate competition making it possible to dictate prices paid for inputs, prices paid to producers for commodities or prices paid by consumers for final products? When a good or service is controlled by only a few this is cause for concern. Concentrationthe ability to influence prices a result of a lack of competitionclearly is not in the best interest of agricultural producers or consumers.
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Today, the agricultural processing sector provides a good case study on consolidation. According to a recent study by Dr. Bill Heffernan, a rural sociologist at the University of Missouri, the top four firms control 79 percent of beef processing capacity (compared to 36 percent in 1980), 57 percent of pork processing capacity, 62 percent of flour milling, 57 percent of dry corn milling, 74 percent of wet corn milling, 80 percent of soybean crushing and 67 percent of ethanol production. The highly-publicized acquisition of Continental Grain by Cargill would mean that Cargill ''would control more than 40 percent of all US corn exports, a third of all soybean exports and at least 20 percent of wheat exports.'' (Grainnet, 12/1998).
Consolidation is also a concern at the farm level. According to the 1997 Census of Agriculture, over the 19871997 period:
The total number of US farms declined 8 percent;
The total number of farms with cattle and calf sales declined 12 percent, hog and pig sales 57 percent, broilers and other meat-type chicken sales 13 percent and the number of milk cows declined by 42 percent;
The total number of farms with corn for grain or seed declined by 31 percent, wheat for grain 30 percent, soybeans for beans 20 percent and cotton 27 percent.
While the extent of consolidation can be quantified it is more difficult to determine the various impacts of a specific transaction. Absent sufficient data, many people and organizations feel compelled to oppose any merger or acquisition and legislation is pending that would place a moratorium on mergers or acquisitions than exceed $50 million. The bottom line is, as this trend continues, who is looking out for the producer?
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The Department of Justice (DOJ) is responsible for enforcing the Sherman and Clayton Acts for all sectors. The Sherman Act focuses on market allocation, monopolies and price fixing. The Clayton Act (Section 7) focuses on mergers that will substantially reduce competition.
Under the Clayton Act, key factors include the shape of the market, number of competitors and future expectations. The Department of Justice (DOJ) has the authority to seek to block a merger, or require modifications, although a final ruling is made through the court system. The Clayton Act looks at the impacts of a mergerdetermining if the proposed merger will make it easier for remaining firms to raise prices to customers or if remaining firms could depress prices paid to suppliers. The DOJ looks at each market, determines the scope of the market (geographically, substitute products) and decides how the combination of the two firms will affect prospects for competition.
The DOJ also administers the Hart/Scott/Rodino Act (HSR) which requires parties to bring information to agencies at the outset of a proposed merger. Under HSR, both parties to a merger (one party with assets or sales of $100 million and the other with assets or sales of at least $10 million with a minimum transaction value of $15 million) have to wait at least 30 days for a response from DOJ (the parties can seek an early release from the waiting period if DOJ verifies that no competitive pressure exists). The US Department of Agriculture (USDA) currently has no authority under HSR.
Page 104 PREV PAGE TOP OF DOC It is difficult to determine exactly what needs to be done to address consolidation in the agricultural sector. Several options warrant consideration by Congress as well as organizations such as Farm Bureau.
1. There must be a thorough review of existing statutes to determine their ability to address the situation facing US agriculture, including the Sherman Act, Clayton Act and Hart/Scott/Rodino (HSR);
2. There must also be a thorough review of agencies' existing authority under federal statutes;
Is the burden of proof too high for violations under the Sherman Act?
Should USDA be given authority to review agricultural transactions under Hart/Scott/Rodino?
Should DOJ be given authority to administer the Packers and Stockyards Act?
3. We need to gain a better understanding of what the Department of Justice's review processes entail;
Should the public be given access to research conducted by DOJ (and USDA) regarding the estimated impacts of actions associated with mergers, acquisitions and violations of the Sherman and Clayton Acts? If some of this information is proprietary, can a subset be developed that would provide information for public consumption that would allow for substantive comments by interested parties?
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Should the burden of proof be put on the companies proposing a merger or acquisition to illustrate the potential present and future impacts on suppliers or consumers?
4. We must determine if existing statutory authority is sufficient to address today's huge financial transactions; and
5. We must assess how information and research conducted by the DOJ and other federal agencies relative to these financial transactions is being made available to the public. Are there adequate opportunities for public comment and participation?
While not in this committee's jurisdiction, the Packers and Stockyards Act is a real concern to livestock producers. We are advocating a thorough examination of this Act to determine its ability to respond to the changes taking place in the livestock sector. Specifically, is the Act working? If not, why? Are legislative changes necessary? Is funding adequate? Or is it possible the Act is simply not being enforced?
In conclusion, I want to reiterate that we understand the complexity of issues involving competitiveness. Furthermore, we understand the fact that consolidation is not a trend found only in the agricultural sector. However, this nation is losing family farms at an unacceptable rate and a decision must be made soon to do whatever necessary to restore profitability to agricultureour nation's greatest success story.
Mr. HYDE. Ms. Piper.
Page 106 PREV PAGE TOP OF DOCSTATEMENT OF ODESSA PIPER, CHEF-PROPRIETOR, L'ETOILE RESTAURANT, MADISON, WI
Ms. PIPER. Good day, Mr. Chairman, and members of the committee. My name is Odessa Piper. I am the chef and proprietor of L'Etoile Restaurant in Madison, Wisconsin. I am from the heartland and I beg your indulgence to speak from the heart to you today.
I have operated this restaurant for 23 years and though my town is small as cities go, over the years I have prepared a tremendous number of meals for people who greatly appreciate the availability of foods served in season and grown nearby.
I have also employed a lot of people over the years who, like me, are drawn to cooking and hospitality in a search for meaningful work and sustainable careers. Our appreciation of good food, good community, and good work has given us a deep respect for the circumstances that make this possible.
At the heart of our sustainability are the nearly 200 local farmers, by last count, who supply our fruits and vegetables, poultry, dairy, and meat products all year round. They do it for all the right reasons, and they are my heroes.
They don't measure their profits quarterly. They measure their abundance by the number of generations that will continue to be sustained on their farms. For them, the ability to provide wholesome food directly to their communities is an act of love. Ironically, the people who give us all of this are fighting for their survival.
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Everything in the food system these days it seems in the consolidation of agriculture is stacked against them. I know a farmer, Bill Moore, who takes enormous care for the health and welfare of his animals. He has to make a 3-hour round trip to the only processor left in the business in our area who will do the custom cuts for the restaurants and small stores that comprise his business space. Then it is another 3 hours back to pick up his product for fresh deliveries.
This man loves his calling but he works too hard and he has had to take a second job. I worry for him and his family. If his operation goes under, there will be no one to replace his level of dedication and the quality he has created, much less keep his land from the developers.
Another producer I know, Jim Goodman, says, ''When I started farming 20 years ago, I sold cows for $55 per 100 pounds live weight; today I would be lucky to get $35. But I ask you: Is the cost of that meat proportionately cheaper in the grocery store?'' No. Sadly, the answer is no.
He goes on to say, ''I have a choice of selling steers at five local markets, but they will still all end up at the same central plants. Who sets the price anyway? So do I really have a choice? I really don't know what I would do,'' he says, ''or how long I would survive if I hadn't started direct marketing and gotten certified organic.''
Jim works hard to get his meat to market. But, you know, the regular distributors in my area couldn't be bothered with it. So I joined up with some chef friends of mine in a group, Chefs Collaborative 2000. We formed a local buyers' group, so that we could place every usable part of his steers. And we ended up fighting over the soup bones because the stocks they made were so good, it was a completely different food.
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When I was able to finally offer my customers this beef from Jim, this beautiful beef that was raised on grass and brought to weight naturally, my customers loved everything about it. And when they learned that he didn't have to subject his cattle to hormones and antibiotics or stressful confinement and wasteful diets, and all this good husbandry resulted in meat with a far lower fat content, there was no turning them back.
My customers kept telling me that they didn't know they had a choice. What about all the people who still don't know they have a choice? Consolidation slows down the ability of the consumers to register choice or to know that they have one.
What about people with limited incomes and options? The challenges they face are often compounded by poor nutrition. When people have access to the means to produce their food, poverty can't take root. Small-scale agriculture is the science of the common man, it is built on intuition, intelligence and resourcefulness.
Large agriculture is eager to solve our problems all too quickly in order to stay ahead of the problems that it is also creating. It bases our dependence on technology and not each other. I am afraid it dumbs us down.
The global supermarket offers us any food, any time, anywhere, and we are inundated with food that is plentiful and cheap. But on closer inspection, this is misleading. Do we really need food to be so plentiful that we can continue to waste it at the rate we do in this country? Do we really want food to be so cheap that the farmers that care about future generations can't afford to stay in business? Do we want foods so devalued and distanced from their native soils and seasons that most Americans don't know how or where their food comes from? Do we want to continue to displace the native food traditions of other cultures in order for them to continue to grow cheap food for export to the U.S.?
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What do we gain about taking the culture out of agriculture? The great land-based cultures of the world enjoy everyday access to artisanal foods, noble cities and accessible countryside, all anchored in a sense of place and a cultural appreciation of limits.
There is something more valuable to these societies then short-term gains. Rather than to seek to dominate food production, we should take our lessons from them and from nature and from our farmers.
Thank you, Mr. Chairman, for allowing me to testify before you today.
Mr. HYDE. Thank you very much, Ms. Piper.
[The prepared statement of Ms. Piper follows:]
PREPARED STATEMENT OF ODESSA PIPER, CHEF-PROPRIETOR, L'ETOILE RESTAURANT, MADISON, WI
Good Morning, Mr. Chairman and members of the Committee.
My name is Odessa Piper. I am the Chef-Proprietor of L'Etoile restaurant in Madison, Wisconsin. I've operated my restaurant for 23 years, and though my town is small as cities go, I've served a lot of customers who want to eat regionally and seasonally. I 've also employed a lot of people over the years, who, like me, are drawn to cooking and hospitality in searchof meaningful work and sustainable careers. Our appreciation of good community, good food and good work has given us a deep respect for the people who make this all possible.
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At the heart of our sustainability are the nearly 200 local farmers who supply our fruits, vegetables, poultry, dairy and meat products all year round. They do it for all the right reasons, and they are our heros. They don't measure their profits quarterly, they measure abundance by the number of generations they will sustain on their farms. But they are having to fight for their survival. They are fighting for the right to supply clean, wholesome food directly to their communities.
I'm thinking of one farmer in particular who takes enormous responsibility for the health and welfare of his animals. He has to make a 3 hour round-trip to the only processor who will custom cut for the restaurants and small independent retail stores that comprise his business base. Then, it is another 3 hours back to pick his product up for fresh deliveries.
He loves his calling, but he works too hard and has had to take on a second job. I worry for him and his family. If his operation goes under, there is no one to replace his level of dedication or the quality he has created, much less keep his land from the developers.
Another producer I know says ''When I started farming 20 years ago I sold cows for $55 per hundred pounds live weight. Today I would be lucky to get $35. Is the cost of that meat proportionally cheaper in the grocery store?'' Sadly, the answer is no.
He goes on to say, '' I have a choice of selling steers at five local markets, but they'll still all end up at the same central plant, who sets the price anyway, so do I really have a choice? I really don't know what I would do, or how long I would survive if I hadn't started direct marketing and gotten certified organic.''
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This farmer worked hard to get his meat to market. The regular distributors couldn't be bothered with it. Through my organization Chefs Collaborative 2000, we formed a buyers group of other local businesses so that we could be sure that we bought all the meat that came from his steer. When I was finally able to offer my customers the beef from this producer; this beautiful beef that was ranged on grass and brought to weight naturally, my customers loved everything about it. When they learned that he didn't have to subject his cattle to hormones and antibiotics, or stressful confinement and wasteful diets, and all this good husbandry resulted in meat with a far lower fat content, there was no turning them back. My customers keep telling me they didn't know they had a choice.
Consolidation slows down the ability of the consumer to register choice.
What about all the people who still don't know that they have a choice? And what about people with limited incomes. The challenges they face are often compounded by poor nutrition. When people have access to the means to produce their food, poverty cannot take root. Agribusiness is all too eager to base our dependance on technology, not on our collective knowledge of how to feed ourselves.
The global supermarket offers us any food, anytime, anywhere; We are practically inundated with food that is plentiful and cheap. But on closer inspection this is misleading.
Do we really need food to be so plentiful that we can continue to waste it at the rate we do in America? Do we really want food to be so cheap that the farmers who care about future generations can't stay in business? Do we want foods so devalued and distanced from their native soils and seasons that most Americans don't know how, or where, their food comes from? Do we want to continue to displace the native food traditions of other cultures in order for them to continue to grow cheap food for export to the US?
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Why are we taking the culture out of agriculture?
The great land based cultures of the world enjoy every day access to artisanal foods, noble cities and accessible countryside, all anchored in a sense of place and a cultural appreciation of limits. There something more valuable to these societies than short term profit. Rather than seek to dominate food production, we should take our lessons from them, and from nature, and our farmers.
Thank you, Mr. Chairman, for allowing me to testify before you today.
Mr. HYDE. Mr. Boyle.
STATEMENT OF PATRICK BOYLE, PRESIDENT AND CEO, AMERICAN MEAT INSTITUTE, ARLINGTON, VA
Mr. BOYLE. Thank you very much, Mr. Chairman.
AMI is the trade association that represents the beef, pork, lamb, veal, and turkey packing and processing segments of our economy. I am here to share our perspective on structural changes occurring within the livestock and the meat industry.
This committee knows that agriculture is one of America's greatest success stories. Mr. Kruse commented upon that a moment ago. One of the reasons for U.S. agriculture's success is its ability to change in response to market conditions, new opportunities or technical improvements. In fact, this ability to change and to adapt is a hallmark of America's overall free market economy.
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Today we have an agriculture production base and a food processing and distribution sector that are the envy of the world. They provide standards of abundance, quality, affordability and safety to which virtually all other nations aspire, yet they bear little resemblance to the systems in place just 20 years ago.
In the meat and poultry sector, for example, the dollar sales value of our products in the last 20 years have increased from about $60 billion in 1980 to more than $100 billion this year. Beef and pork-slaughtering sales are up 25 percent in that 2-decade period; meat-processing sales up 100 percent; poultry dollar sales volume up 200 percent in just those 20 short years.
The reason for this growth? Fortunately, overall consumption continues to increase. In 1980, we as Americans consumed about 180 pounds per capita of meat and poultry, nearly half of it in beef. Today, we consume about 210 pounds of meat and poultry products, about one-third of it chicken, the remaining third in beef.
Although exports are increasingly important, Americans continue to consume about 90 percent of the meat and poultry that we produce in the United States here within our borders. Throughout this 20-year period, the industry has seen a restructuring and consolidation at all levels at the livestock production level, at the packing level that I represent within AMI and at the food wholesale and grocery retailing levels.
Among our supplier base in the livestock community, we have seen 10 percent fewer cattle producers and two-thirds fewer hog producers. In terms of cattle feeding, the number and market share of large feedlots have grown significantly from 77 feedlots 20 years ago, who provided 30 percent of the fed cattle to my beef packers, to the large feedlots today providing 40 percent of the fed cattle to beef packers.
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The most dramatic growth has been amongst the largest feedlots, those that have a one-time capacity of 50,000 head or more. Today there are 45 lots in the country of that size representing four-tenths of 1 percent of all the Nation's cattle feeding lots, and they provide nearly 25 percent of the fed cattle available for purchase in the United States.
We have seen similar consolidation within hog production. Larger producers in the hog industry that market 5,000 more hogsmore than 5,000 hogs a yearaccount for about 60 percent of the market volume in the live hog industry in the United States, yet they represent less than 2 percent of our total Nation's hog producers.
In the packing sector within the American Meat Institute, we have seen similar consolidation as well. Large cattle slaughter plants that slaughter more than 50,000 head per year have decreased from 90 in 1980 to 70 in today's marketplace. Similarly, on the pork-slaughtering side, the large hog-slaughtering plants that slaughter more than 100,000 hogs a year have dropped from 90 plants 20 years ago to 55 plants today.
Similarly amongst our customer base, the food wholesale industry has consolidated from more than 360 food wholesalers 20 years ago to less than 100 today, and I assume Mr. Gray will be talking about that development.
And similarly within the grocery retailing industry, they have seen significant mergers and acquisitions, particularly in recent years. Today, five retailers account for 40 percent of the market share, compared with 20 retailers who accounted for that marketshare just 5 years ago.
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Concerns about increased consolidation in the meat industry have resulted in a vast body of research in the past 20 years in an attempt to quantify the impact of these structural changes, the impact on prices to livestock producers and inspection prices to the American consumer. None have identified any significant harm to producers caused by consolidation in the meat-packing industry and, in fact, recent research suggests that the operating efficiencies achieved through consolidation can mean greater returns to livestock producers.
Moreover, studies have shown that the effect on consolidation on consumers has resulted in lower meat prices in the marketplace; on average 5 to 6 percent lower than they were 15 years ago. And despite these structural changes, I will tell this committee that it is still a diverse industry. There are more than 6,000 federally-inspected plants nationwide and an additional 3,000 meat and poultry plants doing business within our 50 States.
This diversity is consistent and representative of the membership of the American Meat Institute, Mr. Chairman, our 350-member companies are largely small, family-owned and operated businesses. More than two-thirds of them employ fewer than 100 employees, and more than half of them employ less than 50 employees. And in a labor-intensive business like this, those are truly small businesses. They have changed, they have adapted, and they continue to survive even in an evolving marketplace.
We look forward to working with the committee to address any concerns that you might have about the changes that have been occurring in our industry.
Mr. HYDE. Thank you, Mr. Boyle.
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[The prepared statement of Mr. Boyle follows:]
PREPARED STATEMENT OF PATRICK BOYLE, PRESIDENT AND CEO, AMERICAN MEAT INSTITUTE, ARLINGTON, VA
Good morning. My name is Patrick Boyle and I am president and CEO of the American Meat Institute. AMI is the national trade association representing packers and processors of beef, pork, lamb, veal and turkey. I am here today to share AMI's perspective on structural changes occurring within the livestock and meat industry sectors of agriculture.
Agriculture Structure in Perpetual Flux
This committee knows that agriculture is one of America's greatest success stories. Throughout our history it has been the bedrock of much of our country's prosperity, and continues to be so today. One of the reasons for U.S. agriculture's success is its ability to change in response to market conditions, new opportunities, or technological improvements. This ability to change is a hallmark of America's great free market economy.
Today we have an agricultural production base, and food processing and distribution sectors, that are the envy of the world, and which provide standards of abundance, quality, affordability and safety to which virtually all other nations aspire. Yet they bear little resemblance to the systems in place only 20 years ago.
And, in some agricultural production sectorsnotably chicken, turkey and hog productionthe structural changes in just the past 1015 years have been breathtaking. So too have the structural changes in the food processing, distribution and retailing sectors. Just think back 15 years: did you even know what a ''warehouse'' store or a ''wholesale club store'' was? Did you buy carryout dinners anywhere but Chinese restaurants and fast-food outlets? Did your pork chops have a brand name on them? And, looking ahead a few years, will you be buying your groceries over the Internet to save time and taxes?
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The pace of structural change has been a challenge for all players in the food and agriculture sectors, both small and large. But the competitive marketplace, consumers' demand for consistent quality and low prices and the advent of new technologies have driven all food and agriculture sectors to change.
Structural Change Can Create Stronger Businesses
In my industry, structural change has created some interesting hybrids. I'll give you a few examples. Usinger's, a 119-year old, old-world-style, family-owned sausage company in Milwaukee, Wisconsin, still uses recipes from the old country and still makes all of its sausages by hand. But it now sells its products to consumers over the Internet and to customers ranging from specialty delis to national supermarket chains, all of which has meant tremendous benefits to what was once a small, regional company. Usinger's is still family-owned, is managed by fourth generation Usingers, and employs about 125 people.
A dramatic small business example is Fresh Connections in Vermont. This 92-year-old, family-owned business slaughtered cattle and hogs until the mid-1960s, but economics forced the company to shift to processing only. Ten years later, in the late 1970s, economics drove the company to seek federal inspection so that it could sell its products outside of Vermont. By 1982, the company had built a new processing plant, gained federal inspection and shifted to processing only. In the 1990s, economics drove the company to move away from ''traditional'' products and concentrate on specialty meats and prepared foods. Today, Fresh Connections produces not carcasses, not steaks, not hot dogs, but freshly prepared entrees sold through restaurants and supermarkets along the East Coast. And it is still family-owned with about 60 employees.
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Companies, small and large, can survive and thrive in the wake of strong competition, tough consumer demands and rapidly changing technologies. And consumers can and do benefit. Testament to this is the fact that U.S. consumers still spend a smaller percentage of disposable income on food than anywhere else in the world or at any other time in history. And when it comes to beef and pork, for example, consumers spend less per pound in 1999 dollars than they have at any point in history.
Structural Changes Have Impacted Meat Packing Sector
The meat packing industry has not been exempt from the pressures that have produced change in the overall agricultural sector. Consumer demand for high quality and low prices, tough competition in the marketplace and the explosion of new technologies have led to consolidation in many U.S. industries. The October 11th Food Institute Report notes that food retailers are consolidating at a faster pace than their food manufacturing suppliers, with the five largest food retailers accounting for 40 percent of industrywide sales in 1998, compared to five years earlier when it took the top 20 companies to reach the same percentage.
There has been a 20 percent decline in the number of farms in the past two decades. There are 10 percent fewer cattle producers today than there were in the late-80s and two-thirds fewer hog producers.
In the beef packing industry, four companies processed 67.6 percent of all cattle slaughtered in the U.S. last year. In the cattle feeding industry, 45 feedlots accounted for 22.6 percent of all fed cattle marketings in 1998.
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In the pork packing industry, four companies processed 56.3 percent of all the hogs slaughtered in 1998. In the hog growing industry, operations with over 5,000 head (just over 1,900 in 1998) accounted for 42 percent of all hog marketings in 1998.
Concerns about increased consolidation in meat packing have resulted in a vast body of research over the past 20 years that attempts to quantify the impact of structural changes on producer prices. Dozens of studies funded by the federal government, universities and the private sector have been conducted, and none have identified any significant harm to producers caused by consolidation in meatpacking.
In fact, one effect of consolidation has been lower meat prices to consumerson average five to six percent lower than they were 15 years ago. Sadly, despite lower prices to consumers, beef's market share has still dropped 19 percent since 1980. But consumer demand for chicken, turkey and pork has been strong.
Recent research suggests that the operating efficiencies achieved through consolidation can mean greater returns to producers. A recent University of Nebraska study published in The Journal of Industrial Economics shows a net cattle price increase of two percent for every 10 percent increase in beef packing industry consolidation.
Investigation and Enforcement Powers of GIPSA and Justice Department Sufficient
The federal government is armed with an array of investigative and enforcement tools to ensure a competitive marketplace for food and agriculture. In that regard, not only do the Department of Justice and the Federal Trade Commission have authority to investigate the food and agriculture industry, but there is an agency within the Department of Agriculture, the Grain Inspection/Packers and Stockyards Administration (GIPSA), whose primary purpose is to ensure that business transactions and practices involving livestock and poultry, as well as meat and poultry products, are fair and competitive.
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The Justice Department and the FTC are charged with enforcing the Sherman Act and the Federal Trade Commission Act. In that regard, those entities are authorized to review transactions and practices, both at the time an acquisition or merger occurs, as well as day-to-day business operations. For example, the Justice Department and the FTC may issue civil investigative demands in order to investigate a particular practice. These agencies can, and often do, go to federal court seeking injunctions to prevent a transaction from occurring or to enjoin certain business practices. Justice and the FTC also can prosecute criminally companies and individuals, with significant sanctions in such cases that can run into the millions of dollars.
In addition to the scrutiny of the FTC and the Justice Department, the meat and poultry industry is subject to the regulatory requirement of the Packers and Stockyards Act. One of the core provisions of the P&S Act prohibits unfair, unjustly discriminatory or deceptive practices by packers. Indeed, the Secretary of Agriculture's powers under the P&S Act are extremely broad and extend even beyond those anti-competitive practices deemed unfair by the FTC.
GIPSA is authorized to conduct investigations and has subpoena authority to effect such investigations. The agency can file an administrative complaint seeking civil penalties of $10,000 per violation, and each day an event occurs constitutes a separate violation. The agency also can work with the Justice Department to seek an injunction if appropriate. Finally, the P&S Act authorizes private individuals to file a lawsuit to seek damages if they believes they have been subject to an unfair or deceptive practice.
Solutions to Low Livestock Prices Lie in Supply and Demand, Not Regulatory Constraints
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Most experts, including agricultural economists, agree that large world supplies of livestock and meat, combined with weak export markets and some unpredictably bad weather, were the key factors in recent low returns to cattle and hog producers over the past few years. Given this analysis, it seems unreasonable to contemplate helping farmers by adding new restrictions, regulations, investigations or penalties to the meat processing sector. The government clearly possesses ample powers to ensure fair competition in the meatpacking and processing sectors. AMI respectfully submits three solutions that will truly benefit livestock producers in the long term:
Solutions: Natural Market Correction in Livestock Production Cycle
A correction in the over-supply of hogs that crashed the hog market in late 1998 is occurring. USDA's latest Hogs and Pigs report shows that production this quarter is dropping and will continue to drop through the first three quarters of 2000. This is good news for hog farmers because lower supplies will lead to higher prices. A year ago, hogs were selling for about $28 per hundredweight (cwt.); today they are selling for about $34 per cwt. The trade and the futures market expects prices to continue strengthening into 2000. The cattle market has also improved. Cattle traded last week at more than $70 per cwt. in a surprisingly strong beef market. Last year at this time they traded at about $59 per cwt. This is good news for cattle ranchers.
Solutions: Expanded Export Markets and International Trade
Longer term, however, there remain many challenges the livestock and meat industry must overcome. Expansion of trade opportunities remains a top priority. Our future lies in trade, and fast track negotiating authority must be approved if we are to provide viable livelihoods for the producers upon whom we relylarge and small. By working with government, producers and packers have made rewarding, and in some cases significant, inroads over the last decade in moving pork and beef into Asian markets. Increased exports to Japan, Korea and other Pacific nations have meant more money in producers' pockets, but continuing access problems in several of these markets has precluded further gains. If there is any doubt about the importance of these markets to U.S. producers, consider what happened to our livestock prices when the Asian economy went into a freefall nearly two years ago and meat exports virtually dried up for several months.
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Solutions: Help Producers Manage Risk
As this industry changes and grows, so do its opportunities. But so too do its risks. The need for more producer knowledge about market-based risk management tools continues to be a challenge we must address. Some of these tools are available through producer/packer alliances, or in the growing use of production contracts. Most of these alliances and contracts are not as exclusive as commonly thought, and they are available to a larger number of producers than is generally appreciated.
Regulatory Burdens Can Drive Out Small Businesses, Promote Consolidation
I want to close by mentioning some other unintended consequences of recent legislative and regulatory actions that could make today's market and structure concerns even worse. Generally speaking, larger, ''consolidated'' companies are more able to withstand new, or expensive, or burdensome government regulations, with the net effect that the more the government tries to constrain industry practices or add costs to existing ones, the more small businesses fail and the faster the industry consolidates.
Mandatory price reporting legislation contained in the FY 2000 Agriculture Appropriations bill will be extremely hurtful to beef and pork packers, as it requires them to drain resources from other parts of their businesses to collect and report as many as 17 times per week the prices they have paid for every animal purchased and for all fresh beef sold. The benefit of this costly new mandate eludes me, because research shows this exercise will actually drive down the price of livestock, which will hurt producers. It will certainly curtail the ability of smaller packers to invest in new food safety technologies, for example. And it will do nothing to benefit consumers. Ultimately, it will trigger what other excessive regulatory burdens have triggered in our industry: further consolidation.
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Consider the impact of HACCP and other food safety policies on packing industry structure. One example was the well-publicized USDA recall of ground beef in 1997 that resulted in a state-of-the-art beef grinding facility closing its doors and its parent company going out of businessover record-keeping! The upshot of this was that industry concentration increased a little bit more when the country's largest beef processor purchased the beef grinding plant and the rest of the company was purchased by the country's largest chicken processor.
What consideration has been given to the implications to industry structure of USDA's zero tolerance policies for E.coli O157:H7 in raw beef or Listeria in ready-to-eat meat and poultry products? Both of these policies will likely lead to further consolidation of the industry. That's not their intent, or course, but that will be their likely result.
Similar arguments can be made about the implications of the Immigration and Naturalization Service's ''Operation Vanguard,'' or government environmental policies, or state initiatives like California's Prop 65. None of these government initiatives occur in a vacuum, and all have implications to industry structure.
In summary, AMI believes government has a legitimate role in monitoring the changes currently underway in agriculture and in ensuring competition. But government also has a responsibility to ensure that it understands the implications of policy initiatives it mandates. And the business communityboth in production agriculture and in processing and retailingdeserves government's diligent examination of all facts before new and costly mandates are applied through legislation or regulation.
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AMI looks forward to working with you all in this regard. Thank you.
Mr. HYDE. Dr. Keith.
STATEMENT OF KENDELL KEITH, PRESIDENT, NATIONAL GRAIN AND FEED ASSOCIATION, WASHINGTON, DC
Mr. KEITH. Mr. Chairman, and members of the committee, we appreciate the opportunity to present our views today. My testimony is going to be in two parts today. First I will discuss the major factors causing businesses in our industry to merge, and secondly I want to discuss why the structure of grain markets provides a number of inherent customer protections.
One of the major factors causing consolidation in our business has been the trends in rail shipping. Consolidation among the railroads has encouraged grain firms to own or manage facilities on multiple rail lines simply to protect against the loss of economic access to markets. In essence, grain firms are being compelled to expand to protect their interests and the business interests of their farmer customers.
The other factor in rail that has pushed companies to grow has been the growth in average shipment sizes. Railroads offer strong incentives to ship multicar-trains rather than single cars. Companies have been challenged to manage more locations to attract business volume to load the trains to both compete for the grain and to acquire low-cost freight for farmers.
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A separate factor causing firm growth has been the development of new services to meet more needs of farmers, including tailored risk management programs, custom work and recordkeeping. To afford the capital and human resource expertise to provide these services, it requires companies to be larger on average. Also government regulations have motivated larger business size.
It is challenging for all companies to have the expertise to comply with the myriad of regulations they face today. But it is most difficult for the small companies. One form of economic regulation in the form of government farm programs, while intended to help farmers, have also been a factor. Poor policy design, especially during the 1980's, caused huge shrinkage in export markets and expedited mergers.
A core question is, has consolidation affected competition? While concentration can raise legitimate concerns, there are a number of factors that offer inherent protection in the grain markets today. First is transparency. Grain prices are discovered in central public exchanges in Kansas City, Minneapolis, and Chicago.
The prices are communicated globally, minute by minute, during the trading hours. In addition, cash prices are reported in over 2,000 local markets on a daily basis through electronic means, giving farmers an instant measure of competitive cash commodity values.
Secondly, the commercial grain marketplace is disciplined by a set of uniform trading rules and an arbitration system that makes public its decisions. That sunshine and openness in the market has led to self-discipline and fairness among various sizes of competing companies.
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A third element protecting grain farmers is the competition provided by farmers themselves. Farmers often truck their grain many miles to find the best market. Larger farmers and larger trucks make grain more mobile and this expands the range of competition for the grain.
Fourth, the sectors of the grain industry, whether export processing or feeding, must each compete against all others for the available grain. While often these sectors are viewed in isolation when considering concentration issues, it is more appropriate to analyze the full range of competition that exists in commercial markets.
In conclusion, we think the factors driving growth and company size often work to the advantage of farmers such as more and better service and lower-cost transportation. While the potential for a lessening of competition should be reviewed seriously by government, there are a number of features in the grain markets that provide customer protection that should be accounted for in such review.
Mr. HYDE. Thank you, Dr. Keith.
[The prepared statement of Mr. Keith follows:]
PREPARED STATEMENT OF KENDELL KEITH, PRESIDENT, NATIONAL GRAIN AND FEED ASSOCIATION, WASHINGTON, DC
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Mr. Chairman and members of the committee, the National Grain and Feed Association (NGFA) appreciates the opportunity to present our views on concentration in the agriculture sector, its causes and impacts on competition in the industry. I am Kendell Keith, President of the NGFA.
The NGFA is comprised of 1,000 member companies engaged in all aspects of the grain and feed industry, including grain warehousing, processing, feeding of livestock, feed milling, exporting and grain-related industries. Our members include country elevators, terminal elevators, exporters, flour millers, soybean processors, corn processors, and feed milling operations.
While the theme of this hearing is competition throughout the U.S. agricultural economy, I will confine my remarks to areas where members of NGFA are most focused, and that being the merchandising, handling, warehousing and processing of grains.
WHY ARE FIRMS MERGING?
Not only are the largest firms in the industry growing, but also the small and moderate sized companies are increasingly looking to merge, and acquire more assets to manage through outright purchase, partnership, joint ventures or other means. A wide variety of market factors are pushing firms of all sizes in this direction.
1. Shrinking farmer customer base. While the number of total farms in the U.S. seems to have stabilized, the number of commercial farmers continues to decline. USDA estimates that the number of commercial U.S. farms (those with $100,000 in gross sales or more) is between 300,000 and 500,000. With a shrinking customer base, fewer firms are necessary to serve today's commercial farm enterprises.
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2. Shrinking buyer customer base. The customers for feed and grain, including feeding operations, processors, and food companies have also consolidated. As these numbers have declined, such companies are seeking grain marketing supply firms that can serve an increased proportion of annual grain needs.
3. Consolidation in rail transportation and increased rail shipment sizes. In areas not adjacent to water transportation and distant from consumption points, rail transportation tends to dominate as the low-cost mode. Overall, rail represents more than 40 percent of commercial grain movements. Consolidation in the rail industry has encouraged grain companies, even smaller companies, to own or operate multiple plant locations in order to preserve access to multiple destination markets. If a grain elevator operation has rail loading facilities on two separate rail lines within the same marketing region, there is an additional degree of protection in the event one railroad may have service interruptions (car shortage, logistical stoppages, force majeure, etc.) or uneconomic rates to certain destinations. In such situations, it becomes necessary for the elevator industry to consolidate to provide greater assurance of competitive economic alternatives for farmer customers' grain.
The average size of shipments in rail units has also encouraged consolidation. As the rail industry became less regulated, the trend toward lower rates for larger shipment sizes accelerated. The result is that we see more unit train loading stations at local grain origination points serving farmers. These locations have the capacity to load 15-car, 25-car, 50-car, and 100-car units, depending on the type of destination markets being served. The lower rates of larger units have benefited farmers by reducing average transport cost to destination markets. At the same time, elevator companies have been required to manage multiple facilities, some truck-to-rail ''feeder'' stations, to be able to justify the extensive multi-million dollar investment required to build such high-volume, rapid-loading plants. Again, consolidation was required to deliver lower-cost marketing services to farmers.
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4. Economic incentives to spread management expertise over more volume. A driving force toward consolidation in many mature industries, this has also contributed toward more consolidation in the grain-marketing sector as well. As firms consolidate and find ways to handle and market more grain with fewer human resources, other firms are challenged to do the same to remain in business.
5. Enhanced services to farmer customers. As farmers have grown in size, and grain-marketing firms compete to retain them as customers, firms are offering new services that require more management expertise and specialization. Many firms are offering farmers: 1) tailored risk management strategies; 2) farm input management consulting; 3) custom application services; and 4) record-keeping services. Such services require grain-marketing companies to hire new expertise, and also require the company to have adequate grain volume to justify such business expansion.
While some have argued that farmers somehow become captive to companies, agri-businesses are developing such services to create an affinity for their company, and as a customer-retention strategy. Firms will do what is necessary to assure a reliable source of supplies from the farming enterprises to which they are linked.
6. Government regulations. The growing number of regulations related to occupational safety and health, environmental concerns, employment, transportation, warehousing, and the many other areas of the business force companies to develop additional areas of expertise to stay in business. It is increasingly difficult for small companies with fewer resourcesboth human and capitalto stay current and in full compliance with this myriad of business regulation.
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In addition, the practical impact of federal farm programs has been to regulate the growth in the U.S. grain marketing sector. Previous analyses and studies sponsored by National Grain and Feed Foundation demonstrate that government policies, particularly during the 1980s, led to a dramatic shrinkage in grain export markets and declining grain industry asset prices, forcing additional consolidation than what otherwise might have occurred. (For example, an Iowa State University study found that the average annual return on investment for elevator companies for 1985 to 1990 was only 5.7%, which is considerably below average industry-wide returns on capital at risk. A private study found that companies specializing in export operations were ill equipped to manage the downturn and were compelled to exit the industry. Other studies by USDA confirmed low rates of return for farmer cooperatives handling and marketing grain.)
7. Segregation of grains required by specialty markets and biotechnology. Grains and oilseeds produced in the U.S. and globally have for the most part been marketed and handled as fungible commodities that can be commingled by grain type, i.e., corn, wheat (by class), soybeans, sorghum, barley, oats, rye, etc. However, within the last 10 years, we have seen steady growth in markets for ''specialty grains'' such as high-oil corn, waxy corn, and other grains that require segregation within the bulk handling system. In the last 3 years, we have seen substantial growth in biotechnology-enhanced grains. While many of these biotechnology-enhanced products have been approved by U.S. regulators as ''substantially equivalent'' to traditional varieties, some customers are now requesting segregation. The trend toward greater segregation may result in more incentives to consolidate to manage the intricacies of serving a wider range of specific end-use customer needs.
THE IMPACTS OF CONSOLIDATION ON GRAIN MARKETS
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There is no question that the number of competitors in a given marketplace can have an effect on pricing and market outcomes. The drive for higher service levels at lower costs has obvious benefits for the customer. But the same consolidations that lower marketing costs can raise legitimate concerns about how much competition is necessary to preserve customer protection and ensure a market will provide reasonable discipline in firm behavior.
While we offer no specific judgments on an adequate number of firms to preserve competition, we believe there are a number of features in the cash grain marketplace that provide inherent protections. These are noted below.
1. Market transparency. The pricing of grain in the U.S. is generally based upon the futures price, determined in a central location, with cash market differentials (basis) related to transport cost and local supply/demand factors. The U.S. has three public futures exchanges: Chicago Board of Trade; Kansas City Board of Trade; and Minneapolis Grain Exchange. Thousands of buyers and sellers within the U.S. and throughout the world openly participate and compete in these markets daily, with current price levels communicated on a global basis minute by minute. Opening and closing market prices are published widely in newswires and the printed press. This very public and highly competitive method of price discovery gives every farmer in the U.S. a strong indication of value of the commodity he/she produces or holds in storage on a daily basis.
In addition to the transparency of the futures market, daily prices from cash markets are widely distributed to thousands of farmers via commercial electronic means. This allows farmers to compare local cash prices and basis levels to those in nearby markets. In addition, USDA's Agricultural Marketing Service collects prices in major consumption and terminal markets, reports these prices to the press and maintains historical records of such prices. The transparency of the grain marketplace provides substantial protection to all participants that prices are fairly and competitively determined.
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2. Uniformity in trading terms/market self-discipline. Commercial grain markets in the U.S. generally trade on the basis of contracts referencing a uniform set of ''NGFA trade rules.'' In addition, disputes within the industry are generally handled by NGFA arbitration. The NGFA's arbitration system is one of the oldest and most successful commercial systems in the U.S. Unlike most commercial systems, all arbitration decisions reached under NGFA rules are published with the names of the disputant companies along with the names of the arbitrators. Thus, the nature of disputes, and the conclusions of the arbitration panels are completely open to review. This system has led to substantial market self-discipline and a fundamental fairness among the various sizes of competitors in the industry.
3. Expanding range of competition. As farmers grow larger, many own or lease large trucks. Even if the farmer doesn't have such transport equipment, trucking companies are readily available for hire. Grain can generally be hauled for 25 to 40 miles at commercial rates of $.10 to $.15 per bushel. Longer hauls of 100 miles can be done at a cost of $.25. Many larger producers operate or lease their own trucks precisely for this purpose. Thus, the farmers' marketing range has expanded. It is affordable to seek markets outside local areas. The farmer has used this increased mobility and flexibility to search for the highest-return markets including going directly to river terminals, processors or other points based upon a few cents difference in price. Open access to such trucking services for increasingly sophisticated farmers has the effect of expanding the range of competition for grain buyers. It has, in essence, provided additional competition to grain buyers from farmers themselves.
In addition to the expanded competitive range of markets for grain purchase/sales, the market for grain storage also confronts substantial competition from farmers. Commercial grain storage in the U.S. is estimated at about 8 billion bushels. But on-farm storage is more than 11 billion bushels, and has been growing at a faster pace than commercial space. In on-farm storage, farmers must manage the risk of quality deterioration and the costs of placing the grain in storage plus retrieval. But the effect of additional on-farm warehousing space is to give farmers a competitive alternative to either commercial storage or spot sales of the commodity. The growth in on-farm storage is another form of farmer competition directly with the grain handling industry.
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4. Competition among sectors in the grain industry. Within the range of companies that purchase grains from farmers, either directly or through intermediary elevators, increased concentration is occurring in each segment: grain elevators/warehouses; feed manufacturing; livestock feeding integrators; flour milling; soybean processing; corn refining; exporting; etc. While some observers point to concentration in individual segments as cause for concern, it is also important to recognize that each segment must face competition from the otherseach of which is competing to originate grain and serve customers. In the wheat industry, the grain elevators (who are interested in earning merchandising margins and storage revenue) compete head-to-head against the flour milling industry and export sector. Depending on the type and location of the wheat, livestock feeding operations may also actively bid on certain types and grades of wheat for livestock feeding rations.
The same conclusions can be reached about other grains, whether feed grains such as corn, sorghum and barley or the oilseeds such as soybeans and canola. The various segments of the industry all compete against each other for available bushels of grain production. To look at any segment of the industry in isolation is probably not a sound analytical approach to reach accurate conclusions about the nature or degree of competition in the business.
We appreciate the opportunity to provide input for this hearing.
Mr. HYDE. Mr. Stenzel.
STATEMENT OF TOM STENZEL, PRESIDENT, UNITED FRESH FRUIT AND VEGETABLE ASSOCIATION, ALEXANDRIA, VA
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Mr. STENZEL. Thank you, Mr. Chairman, and members of the committee. United Fresh Fruit and Vegetable Association is the trade association representing producers and distributors of fresh produce, ranging from the smallest family businesses to the very largest produce growers and marketers in the world.
I am also testifying today on behalf of several allied associations, including the California Grape and Treefruit League, California Citrus Mutual, Florida Fruit and Vegetable Association, Northwest Horticultural Council, the Texas Produce Association, and the Western Growers Association.
Food retailing, distribution, processing, and production are experiencing today probably greater change in consolidation than at any time in history. Our industry strongly believes in the free market in which produce suppliers and food retailers share the common goal of serving the consumer.
Yet congressional oversight is important to ensure that today's rapidly changing marketplace is functioning effectively. The three agencies that we heard from earlier on the panel all have an obligation to understand the changing business dynamic in food delivery today, and ensure that marketplace trade practices do not become marketplace abuses of power.
I would ask the committee to consider the impact of consolidation in changing trade practices in three areas: the impact on consumers first; on industry efficiency; and then on long-term food production. Your oversight must first look at the question of what impact does consolidation and changing marketing practices have on the consumer? How are consumer prices affected? Consumer choice? And in the case of produce, how might consumer health be affected?
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On these issues, our associations joined together last year to request the Department of Agriculture to conduct a study of produce marketing and trade practices to better answer these questions. Our members are concerned about new financial demands being made on them in the marketplace at a time when farm prices for produce are at rock bottom but consumer prices for produce seem at all-time highs.
A lack of knowledge and transparency in the industry has thus far left the debate over slotting fees and other off-invoice payments as a contentious and too often emotional battle.
We commend the USDA Economic Research Service for launching a comprehensive objective study of these issues with regard to the produce sector. And we also commend the supermarket industry for participating in that study.
Our industry's concern about slotting fees and off-invoice payments to secure business relationships is that consumer choice and access to produce will be reduced. Let me emphasize that I not only refer to fees for new product introductions, which are the traditional definition of slotting fees. Today, produce companies are being asked by some retailers to pay flat fees apart from any invoice costs just in order to do business. These rebates and allowances, which were once tied to promotions, advertising, or sampling programs, today are more likely to be flat fees unrelated to any incentive or performance. Small- to medium-sized grower-shippers are particularly vulnerable to these demands, but even the largest produce companies are concerned about such practices.
Page 136 PREV PAGE TOP OF DOC While this raises concern about fairness and the financial health to our industry, in some cases, these off-invoice fees paid in advance can leave a retailer with little incentive to move produce volume, if their profit is tied to buying produce rather than selling it.
Mr. JENKINS. [Presiding.] Continue, Mr. Stenzel.
Mr. STENZEL. Thank you. That raises serious questions about public health. As government authorities tell us, the simple step of eating at least five servings a day of fruits and vegetables is critical in preventing cancer, heart disease and a host of chronic diseases.
Second, let me mention the impact of consolidation and marketing practices on the overall economy of the produce industry. Similar concentration is what we are seeing in the retail and food service industry, leaving produce sellers with fewer and fewer markets for their perishable and price-sensitive commodities. The pressure on prices paid to growers is often pushing the price even lower while consumer prices seem to be remaining at the current level.
In the long run, we believe comparable market power is the key to economic parity in a fair and competitive marketplace. Our industry does not believe that big is necessarily bad. In fact, many large retailers refuse to ask for slotting fees or similar invoice payments.
Yet many traditional antitrust concerns have focused on regulating suppliers' behavior to ensure fair competition, rather than looking at the fair practices of buying groups. Today we are concerned that the Nation's suppliers of produce may be at greater risk under antitrust statutes for complying with these demands as opposed to those companies that are making the demands.
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Thank you, Mr. Chairman. And I would be glad to answer any questions.
[The prepared statement of Mr. Stenzel follows:]
PREPARED STATEMENT OF TOM STENZEL, PRESIDENT, UNITED FRESH FRUIT AND VEGETABLE ASSOCIATION, ALEXANDRIA, VA
Good morning Mr. Chairman and members of the Committee. My name is Tom Stenzel and I am President of United Fresh Fruit and Vegetable Association (UFFVA).
UFFVA is a nonprofit association representing producers and distributors of fresh produce products ranging from the smallest family businesses to the largest produce growers and marketers in the world. We conduct programs to promote the nutritional qualities and safety of fresh fruits and vegetables, industry efficiency in producing and delivering our products to consumers, and sound public policy in the legislative and regulatory arena.
I am pleased to testify today on behalf of our member companies, as well as several allied produce organizations from around the country. Those include the California Grape & Treefruit League, California Citrus Mutual, Florida Fruit and Vegetable Association, Northwest Horticultural Council, Texas Produce Association, and Western Growers Association. These organizations may also submit statements for the record. Our groups have worked together closely on the subject of industry consolidation and marketing practices as they affect our industry's health and our ability to provide Americans with a wholesome and abundant supply of fresh fruits and vegetables at the lowest possible cost.
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Food retailing, distribution, processing and production are experiencing today greater change and consolidation than at anytime in history. Companies are responding to marketplace forces to seek greater efficiencies that better serve our ultimate customersthe American and world consumer.
Our industry strongly believes in the free market in which produce suppliers and food retailers share the common goal of serving the consumer. Yet, Congressional oversight is needed to ensure that today's rapidly changing marketplace is functioning effectively. The Federal Trade Commission, the Department of Justice, and the U.S. Department of Agriculture all have an obligation to understand the changing business dynamic in food delivery today, and ensure that marketplace trade practices do not become marketplace abuses of power.
I ask the Committee to consider the impact of consolidation and changing produce marketing and retailing practices in three areas.
1. Impact on consumers
2. Impact on industry efficiency
3. Impact on long-term food production
Our nation's antitrust laws and public policy are designed to protect consumer welfare. Your oversight therefore must first ask the question what impact consolidation and these marketing practices have on the consumer? How are prices affected? Consumer choice? And in the case of produce, how might consumer health be affected?
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On these issues, our associations joined together last year to request the Department of Agriculture conduct a study of produce marketing and retail trade practices to better answer these questions. Our members are concerned about new financial demands being made on them in the marketplace, at a time when farm prices for produce are at rock bottom, but consumer prices for produce seem at all-time highs. A lack of knowledge and transparency in the industry has thus far left the debate over slotting fees and other off-invoice payments as a contentious and too often emotional battle.
We commend the USDA Economic Research Service for launching a comprehensive objective study of these issues with regard to the produce sector, and we also commend the supermarket industry for participating in that study. We believe there must be a constructive and open dialogue on these issues.
Our industry's concern about slotting fees and off-invoice payments to secure business relationships is that consumer choice and access to produce will be reduced. Let me emphasize that I don't only refer to fees for new product introductions, the traditional definition of slotting fees. Today, produce companies are being asked by some retailers to pay flat fees apart from the invoice costs just to continue to do business. These rebates and allowances were once tied to promotions, advertising and sampling programs; today they are more likely to be flat fees unrelated to any incentives or performance. Small to medium-sized grower-shippers are particularly vulnerable to these demands, but even the largest produce companies are concerned about such practices.
While this raises concern about fairness and the financial health of our industry, in some cases these off-invoice fees paid in advance can leave a retailer with little incentive to move more produce volume, if their profit is tied to buying produce rather than selling it. That raises serious questions about public health, as government authorities tell us the simple step of eating at least five servings of fruits and vegetables a day is critical in preventing cancer, heart disease and a host of other chronic diseases.
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Second, let me address the impact of consolidation and marketing practices on industry efficiency in the overall economy. Without doubt, retail consolidation that is occurring today is changing the food marketplace. The top five retail chains are estimated to control 35 percent of the food market today, and over 50 percent in the next few years. Similar concentration exists in the foodservice industry. In this environment, produce sellers have fewer and fewer markets for their perishable and price-sensitive commodities. The result is continued downward pressure on prices paid to growers, while prices paid by consumers at retail too often remain high.
Producers are also impacted in other ways as wellan erosion of payment terms away from industry standards under the Perishable Agricultural Commodities Act, take-it-or-leave it price adjustments on product after delivery, and off-invoice charges for everything from new store openings to warehouse construction.
In the long run, comparable market power is the key to economic parity and a fair and competitive marketplace. Our industry does not hold the philosophy that big is bad. In fact, in an article from Produce Merchandising magazine attached to my testimony, several large retailers describe their refusal to ask for slotting fees and similar off-invoice payments for produce. These retailers have found greater success in focusing on consumer satisfaction to increase their own profitability. Left to the free marketplace, we would like to think that these companies' success will ultimately rein in the worst abuses.
Yet, many traditional antitrust concerns have focused on regulating suppliers' behavior to ensure fair competition, rather than focusing on fair practices of powerful buying groups. Frankly, we are extremely concerned that the nation's antitrust laws may place suppliers at greater risk today than their customers who demand these payments.
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Under the Robinson-Patman Act, sellers of products are required to offer the same terms to all competitive customers. When one retailer demands a special up-front deal to do business, a grower of produce is placed in a difficult position. What, from one side, looks like a demanded concession, may look like ''special terms'' to competing customers in a given market. As an observer of the stresses in the food retailing arena today, I see a real risk that grocers who imagine they are not getting the same ''deal'' as other retailers may be more likely to take action against growers under antitrust laws. In this case, our industry needs the protection originally envisioned in these laws, rather than being seen as the cause of such practices.
In addition, as produce suppliers begin to adapt to the marketplace size of their retail customers, they again face the risk of litigation if they even discuss slotting fee practices with other suppliers. Let me say that my association and our industry fully comply with antitrust laws regarding pricing. But, we also believe that many of the financial demands currently made in the marketplace should not be considered price negotiations, as they are off-invoice matters unrelated to the sale of any lot of produce. In these cases, we believe Congress and the regulatory agencies should recognize and protect the ability of produce suppliers to discuss such practices openly, without regard to antitrust concerns about price setting.
Finally, I would like to raise the issue of consolidation and marketing practices with regard to longer-term food production trends. In the fruit and vegetable industry, our products are highly perishable and must be sold immediately after harvest or packing. Our products are priced according to classic supply and demand forces, and prices can change hour to hour. In this environment, produce is inherently different from other manufactured food products, which are most often sold off a list price.
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Slotting fees are simply not applicable to fresh produce. Our growers cannot set arbitrary list prices for their commodities, then discount those prices to provide rebates and fees. Rather, our prices are set at the economic equilibrium point every day by an efficient supply and demand market. If consumers demand more of a certain commodity, price goes up. If good growing conditions result in oversupply, prices go down. Our suppliers simply do not have the capability long-term of providing slotting fees and similar expenses under these market conditions. This issue and the long-term health of U.S. fruit and vegetable producers needs to be addressed by the USDA in the context of overall agricultural policy.
In summary, let me say that growers throughout the country are increasingly concerned about what they see in the marketplace. Yet, we believe effective free market solutions for both produce suppliers and retail customers can best serve the ultimate consumer. To find those solutions, the changing nature of our food system today must be addressed by all parties openly and constructively. We appreciate the Committee's commitment to this process.
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Mr. JENKINS. Thank you, Mr. Stenzel. I thought for a minute you might have angered the gods and started all of those bells ringing. But I am informed that we have two votes on the House floor. So we will recess the committee while we make those two votes, and we will reconvene immediately after the two votes on the House floor. Thank you.
Mr. HYDE. The committee will be in order.
And the Chair recognizes Mr. Pyle.
STATEMENT OF NICHOLAS PYLE, VICE PRESIDENT FOR LEGISLATIVE AFFAIRS, INDEPENDENT BAKERS ASSOCIATION, WASHINGTON, DC
Mr. PYLE. Thank you, Mr. Chairman, members of the committee. The Independent Bakers Association is a national trade association of 400 mostly family-owned, small- to medium-sized wholesale bakers and allied industry trades.
Page 144 PREV PAGE TOP OF DOC The wholesale baking industry sells bread, rolls, and sweet goods to warehouse, grocery and convenience stores for retail sales. Popularity of the breads and other grain-based foods in recent years is so great, the typical bakery now offers bagels, pitas, and other regional ethnic variety breads. The growth of variety brands translates into many new items in the supermarket bread aisle, in-store bakery, and freezer case.
As far back as 1988, the Wall Street Journal recognized supermarket shelves as the most expensive real estate in America. Sliding fees are estimated at $9 billion a year, which we feel most grocery stores larger than $2 million annual sales charge slotting fees, and that will average out to about $300,000 per large grocery store. Slotting fees have many variations. There are presentation fees just to get an appointment with the supermarket buyer; pay-to-stay charges, which are annual fees; warehouse stocking fees; and the ubiquitous computer charge. In fact, a list of 47 various retail promotional efforts are attached to my written testimony.
There is a distinction between slotting fees and other promotional-type charges or allowances. Slotting fees are not tied to volume or wholesale price. Street money to raise a product to eye level or a valuable end cap of the aisle should not be mistaken for slotting. Another item to add to the lexicon of slotting fees is the failure fee, which is charged to manufacturers in the event that an item is discontinued for not meeting sales expectations.
Keep in mind that the failure rate for new products was the rationale for charging the slotting fee in the first place. Our bakers consider slotting fees payola, commercial bribery, extortion, and simply a shakedown. Recently, one of our members was advised that to continue to serve a certain chain, they would have to pay $1,500 for bread items and $1,250 for sweet goods per store and the chain had over 150 stores.
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The total charge amounted to more than $400,000. The independent bakers were advised that if they didn't meet the charge, there was another large baker ready to move in and take over that business. Needless to say, the baker paid the price in order to save the business and just 2 years prior, that same baker had gone to that chain and for $3,000, a one-time fee was able to launch a new product in all of the stores.
The escalation in slotting fees, as this illustrates, is in part due to the large number of retail consolidations in the Northeast and illustrates how these fees are getting out of control.
Slotting is clearly more than an entry fee for new products. It is a practice that hinders competition, it raises retail prices, and it limits consumer choice. Slotting is particularly an acute problem for bakers looking to expand product lines and to meet demand for new varieties, particularly in ethnic and seasonal baked goods.
Our purpose today is not to admonish retailers or blame big manufacturers. There is enough blame to go around for the practice today. Even independent bakers pay slotting charges. Why we are here today is because of major shifts in demand patterns. In the past few years, the supermarket has changed its role from a middleman buying goods at wholesale for retail sale to a lessor of shelf space. Consolidation in the retail trade typically leads to a new round of pay-to-stay charges for bakers to maintain existing product lines with the retailer.
Several recent high-profile slotting cases have been settled out of court, and there is current litigation pending in California. We feel that it would cost about $500,000 to bring a slotting case to trial if an independent were to pursue this. This is beyond IBA and our informal coalition's resources, and that is why we approached Congress in 1995 and testified before the Federal Trade Commission that year.
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In addition to the FTC, the Department of Justice, House Armed Services Committee, Bureau of Alcohol, Tobacco and Firearms, ITC, and several State attorneys general have considered, but did not pursue, formal administrative finding on slotting practices.
On a short-term basis, we suggest that our members concerned about paying slotting fees leverage the negotiation toward value-added services, including promotional product specific advertising, enhanced shelf placement, and rotation of seasonal products without additional fees.
In conclusion, Mr. Chairman, we look to the grocery trade to bring forth and self-regulate to a code of ethics of conduct that would meet a comprehensive review of slotting practices by the Federal Trade Commission or the Department of Justice, the Federal antitrust authorities. The reviewing authority should prepare a public report with an analysis of apparent anticompetitive effects and recommended enforcement guidelines. The agency guidelines must be exceptionally permissive to allow for the complexity necessary to retailer-supplier financial relationship. The code of conduct, however, must have clear limits on the kinds and sizes of discriminatory payments that power buyers may extract from suppliers.
Finally, it will be the task of the authority to use its powers to enforce the guidelines with a comprehensive review in the event a manufacturer or retailer gets out of line.
Mr. HYDE. Thank you very much, Mr. Pyle.
Page 147 PREV PAGE TOP OF DOC [The prepared statement of Mr. Pyle follows:]
PREPARED STATEMENT OF NICHOLAS PYLE, VICE PRESIDENT FOR LEGISLATIVE AFFAIRS, INDEPENDENT BAKERS ASSOCIATION, WASHINGTON, DC
Good morning Mr. Chairman and members of the Committee. My name is Nicholas Pyle and I am here today as the Vice President of Legislative Affairs for the Independent Bakers Association (IBA). IBA is a national trade association of over 400 small to medium sized mostly family owned, wholesale bakers and allied industry trades. Our association began in 1974 during an earlier storm of anti-trust activity to protect the independent segment of the baking industry.
The wholesale baking industry sells breads, rolls and sweet goods to warehouse, grocery and convenience stores for retail sale and to institutional food service for direct consumption. The increased popularity of breads and other grain-based foods in recent years is so great the typical wholesale bakery now offers bagels, pitas and other regional and ethnic variety breads. The growth of variety breads translates into many new items in the supermarket bread aisle, in-store bakery and freezer case. IBA's membership grows despite a consolidation of traditional white bread baking in the United States as ''niche'' and specialty bakers add to the ranks.
It is a pleasure to be here today to discuss slotting fees paid to retailers ostensibly as an entry fee for shelf space for a new product. As far back as 1988 the Wall Street Journal recognized supermarket shelves as the most expensive real estate in America. Slotting fees are estimated at $9 billion a year. Slotting fees have many variations, aside from just entry fees. Typical of what falls into the slotting realm are presentation fees just to get an appointment with the supermarket buyer; pay-to-stay charges which are annual fees; warehouse stocking fees and the ubiquitous ''computer charge.'' This is a far cry from the good old days when bakers supplied full racks of bread to the chain's new store at no charge strictly as a goodwill measure. By the way, this is still a common baking practice. In fact, a list of 47 various retail promotional efforts are attached.
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I must make a distinction between slotting fees and other promotional type charges or allowances. Slotting fees are not tied to volume or wholesale price. Typical promotions and payments or street money to raise a product to eye level or a valuable endcap of the aisle should not be mistaken for slotting. These charges provide the product manufacturer with some value beyond shelf space. The final item to add to the lexicon of slotting is the failure fee, which is charged to manufacturers in the event that an item is discontinued for not meeting sales expectations. Keep in mind that the failure rate for new products was the rationale for charging the slotting fee in the first place.
Slotting fees are a significant cost of business for our members and an area of focus leading to our testimony before the Federal Trade Commission Hearings on Global Competitiveness in 1995. Our bakers consider slotting fees ''payola,'' commercial bribery, extortion, and simply a shakedown. IBA members are regional bakers providing direct store delivery of products and typically pay slotting allowances to retailers based on the total number of outlets despite the inability to serve all stores in a chains' territory. Recently, one of our members was advised that to continue to serve a certain chain they would have to pay $1,500.00 for bread and $1,250.00 for sweet goods per store per year and the chain had over 150 stores. The total charge amounted to more than $400,000.00. The independent baker was advised that if he didn't meet the charge, he would lose the shelf business. Needless to say, the baker paid in order to save the business. Just two years prior, the baker had paid the chain a total of $3,000.00 to launch a new product in all stores. The recent escalation in slotting fees, in part due to the large number of retail consolidations, illustrates how these fees are getting out of control.
Slotting is clearly more than an entry fee for new products. It is a practice that hinders competition, raises retail prices and limits consumer choice. Slotting is a particularly acute problem for bakers looking to expand product lines to meet the demand for new varieties, particularly ethnic and seasonal baked goods.
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Slotting is systemic to most of the retail food industry. Slotting is also practiced in bookstores and magazine racks. Most convenience stores and gasoline outlets charge slotting or exclusivity fees. Our purpose today is not to admonish retailers or blame ''big'' manufacturers. There is enough blame to go around; even independent bakers pay slotting charges. We are where we are today because of major shifts in demand patterns. In the past few years the supermarket has changed its role from a middleman buying goods at wholesale for retail sale to a lessor of shelf space. Consolidation in the retail trade typically leads to a new round of pay-to-stay charges to maintain existing product lines with the retailer.
The legal challenges to slotting involve The Robinson Patman Act sections 2(a,b,c,d & e), The Sherman Act Sections 13, Clayton Actsections 3 & 7, Article V of the Federal Trade Commission Act, California Cartwright Act and the California Unfair Practices Act. Several recent, high profile slotting cases settled out of court and there is current litigation in California. In 1993, the Federal District Court in Richmond, Virginia ruled on a slotting case involving Atlantic Coast Vess Beverages, Inc., V Farm Fresh, Inc., Civ. Action 3:93 CV284 (E.VA.1993). The litigants settled in the time between the finding and the judgement, hence the case was never publicized. The pitfalls of mounting a legal challenge to slotting make it a double-edged sword since it could be illegal for a baker to make payments to one retailer and not offer the same payment to all other customers. There is a sinister secretive nature to slotting; a closed-door negotiation between a buyer and seller with outcomes that vary based on the size and scope of the retailer and manufacturer or product broker. In our review of slotting, we determined early on it would cost the association at least $ 500,000.00 to bring a case to trial. This is well beyond both IBA's and our informal coalition's resources and is why we approached the Congress in 1995 leading to the FTC hearing later that year.
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As recently as 1997 the FTC indicated an interest in six areas related to slotting, and in 1997 publicly suggested there was at least one pending investigation of slotting. IBA's Freedom of Information Request yielded hundreds of references to slotting practices as parts of over 20 mostly merger investigations. We identified several slotting concerns at the FTC: Horizontal Agreements, Predatory Pricing, Commercial Bribery, Illegal Brokerage, Exclusive Dealing Arrangements and Resale Price Maintenance. The pending investigation reportedly involves payments for exclusivity.
In addition to the FTC, the Department of Justice, House Armed Services Committee, Bureau of Alcohol Tobacco and Firearms, International Trade Commission and several state Attorneys General have considered, but did not pursue, a formal administrative finding of slotting practices. The United States Department of Agriculture is presently reviewing retail slotting and produce buying activities. The Senate Small Business Committee held hearings last month and called for six actions. Our membership urges the Judiciary Committee to consider comparable action following this hearing.
The academic arena recently studied slotting in terms of ''Efficiency'' of product delivery to market and ''Market Power'' with regard to the ability of one company (manufacturer or retailer) to foreclose rivals. This recent study, presented at the Senate hearing by Gregory Gundlach, Associate Professor of Marketing at the University of Notre Dame, indicates that both retailers and manufacturers are concerned about slotting practices. This study for the first time uses empirical research drawn from a large survey of manufacturer and grocery industry managers involved in slotting activities.
Page 151 PREV PAGE TOP OF DOC On a short-term basis we suggest that our members concerned about paying slotting fees leverage the negotiation towards value added services including promotional product-specific advertising, enhanced shelf placement and rotation of seasonal products without additional fees. The alternative to slotting is creating demand pull or consumer demand for a product. National slotting fees for a new product can cost millions of dollars with a few large chains able to command tribute payments as much as $1,000,000.00 per new item. These moneys take from the traditional advertising dollars necessary to create consumer awareness and demand. Despite the apparent institutionalization of the practice, a handful of chains purposely do not charge slotting or utilize everyday low pricing. Wal-Mart and Kroger stand out in this category.
For the long term, we look to the grocery trade to bring forth and self-regulate to a code of ethics or conduct that would meet a comprehensive review of slotting practices by the Federal Trade Commission or the Department of Justice, the federal anti-trust authorities. The reviewing authority should prepare a public report with an analysis of apparent anti-competitive effects and recommend enforcement guidelines. To briefly paraphrase attorney Robert Skitol, a long time student of slotting, the agency guidelines must be exceptionally permissive, to allow the complexity necessary in a retailersupplier financial relationship. The code of conduct must have clear limits on the kinds and sizes of discriminatory payments that power buyers may extract from suppliers. Finally, it will be the task of the authority to use its powers to enforce the guidelines with a comprehensive review in the event a manufacturer or retailer gets ''out of bounds.''
I thank the Chairman and the House Judiciary Committee for consideration of slotting practices today. This is a matter of considerable importance to the independent segment of the baking industry. I welcome your questions.
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Mr. HYDE. Dr. Hammonds.
STATEMENT OF TIM HAMMONDS, PRESIDENT AND CEO, FOOD MARKETING INSTITUTE, WASHINGTON, DC
Mr. HAMMONDS. Thank you, Mr. Chairman, and good afternoon. I am here primarily to talk about slotting allowances today, but I will tell youas someone who grew up on a family dairy farm, and the size of our Christmas actually did depend on egg money, eggs that I gathered, my mother soldthe first part of this hearing was very interesting. I have appreciated the chance to be here.
I would also point out as a parallel to the small family farms, fully half of our members of Food Marketing Institute are single-store family supermarkets. Although the big companies are members of ours, there still is a very large and very healthy group of small family supermarkets in the United States.
Although the practice called slotting allowances is new to many people, it has been around in one form or another for well over a decade. In fact, it was January 1989, over 10 years ago, that I appeared on the Today Show to explain the practice to consumers. Let me see if I can lend a little perspective to why this practice seems to be increasing over the last decade.
In 1968, when network television was king, manufacturers spent 72 percent of their total advertising and promotion dollars on direct consumer promotions of all types. They spent only 28 percent of that dollar on trade promotions designed to impact consumers once they were in the stores. By 1997, the most recent year for which we have data, trade promotion spending has risen from 28 percent to 50 percent of the total promotion dollar.
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As trade promotions rose over this period, general media consumer advertising as a share of the promotion dollar fell almost in half. The reason for this shift is clear: Manufacturers find it harder and harder to reach consumers through national television. As the networks' share of market declines, suppliers find it harder to cover the explosion of cable channels and Internet offerings, and they find it harder to cover an equally impressive explosion of magazines and specialty publications.
However, suppliers do know where consumers can be reached and reached effectively, and that is in stores where they are actually ready to buy. That is why trade promotions spending has almost doubled. Suppliers quite simply find it effective.
From the retailer's point of view, products are not placed in supermarkets on consignment as is in the case in many other industries. Instead, grocery stores pay for their products and then assume the risk that consumers will buy them. In the process of making room for new products, supermarkets have to discontinue existing items in hopes that the lost sales will at least be offset by the new products. If a product fails, the supplier is usually nowhere to be found, and the retailer quite literally eats the expense.
Because new product failure rates approach 90 percent, without the option of slotting fees, retailers would be unable or unwilling to take the risk of stocking many of today's new products. This would reduce variety available to consumers and could prevent many new categories from ever getting off the ground. Consumers would clearly be the losers if this were the case.
Page 154 PREV PAGE TOP OF DOC Too many items chasing too little shelf space is at the heart of the slotting fee issue. Even in produce departments, new items and popular new packaged value-added products have created an explosion of variety that has outstripped available shelf space. By way of illustration, I will leave with the committee an article that was on the front page of this week's supermarket news. The title is, ''Room to Grow: It Is What Produce Departments Need as Varieties, Value-Added Items, and the Vanishing of Seasons Turn Them Into Cornucopias.'' .
According to that article, ''Quite simply the roster of products vying for a spot in the produce section is growing faster than the amount of store real estate allocated to produce. It has made the retail produce executive's job one of the most challenging and at times one of the most frustrating in the store.''
By way of addressing the concerns of small suppliers who complain about slotting fees, let's consider a world where slotting fees are prohibited. What would it mean for the small supplier competing in the market with large national supplier rivals? It would mean the large companies could brand their items, advertise in all of the major media in the market, drop coupons into homes, supply retailers with free signs and in-store displays, and people to sample the products with consumers at point of purchase. There would be no way for small suppliers to match this market power, and they would be forced right off the shelf in many markets.
With slotting allowances, small suppliers can target the specific stores they serve with a promotional fee and survive the onslaught of larger competitors who have budgets to spend across an entire market area. Without the ability to significantly target their promotional spending against only the stores they serve, the small supplier would have no way to survive in many markets.
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Competition in the marketplace sorts all of this out in a way that works. Slotting allowances are neither uniformly requested nor offered. Well-tested, innovative products can and do reach consumers without slotting allowances, and many supermarkets waive any such fees for minority vendors or local suppliers in their same communities. Slotting allowances are a rational response in an industry where goods are not sold on consignment; where the proliferation of new value-added, increasingly branded products chase too little shelf space; and where the spending of promotional dollars in the store is often the most effective way of reaching consumers in today's increasingly fragmented media market.
Slotting allowances are a way for suppliers and retailers to share the risk of bringing a bewildering assortment of products to consumers in a world where shelf space is limited. Thank you.
Mr. PEASE. [presiding.] Thank you, Dr. Hammonds.
[The prepared statement of Mr. Hammonds follows:]
PREPARED STATEMENT OF TIM HAMMONDS, PRESIDENT AND CEO, FOOD MARKETING INSTITUTE, WASHINGTON, DC
My name is Tim Hammonds and I am President and CEO of the Food Marketing Institute (FMI). I am pleased to be here today to talk about slotting or product placement fees
The Food Marketing Institute (FMI) is a nonprofit association conducting programs in research, education, industry relations and public affairs on behalf of its 1,500 members including their subsidiariesfood retailers and wholesalers and their customers in the United States and around the world. FMI's domestic member companies operate approximately 21,000 retail food stores with a combined annual sales volume of $225 billionmore than half of all grocery store sales in the United States. FMI's retail membership is composed of large multi-store chains, small regional firms and independent supermarkets. More than half our members are one store operators.
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Slotting has been around for several decades. The term has become generic, referring to a variety of different programs relating to the placement or promotion of products in grocery stores. Whether they are called slotting fees or allowances, new product introduction fees, product placement fees or something else, for some time now it is has been a common and generally accepted practice for food and grocery manufacturers to offer these fees and for retailers to accept them.
There is a great deal of misunderstanding about slotting and I hope to be able to clear up at least some of the confusion that exists. Obviously, slotting allowances have become a lightning rod for a more fundamental problem. That is the pace and quality of new product introductions. Slotting fees, if properly structured, are a legal and rational approach to allocating the cost of new product introductions in a way that can benefit consumers. Without them, there might not be a way for smaller manufacturers to break the hold that large companies with their massive advertising budgets would have on shelf space.
SLOTTING ALLOWANCES ARE LEGAL
It is well settled that properly structured slotting programs and promotion allowances are lawful. As I have already noted, it was more than two decades ago when grocery manufacturers began offering fees to retailers for the placement of products in stores. Over the years the practice has become quite prevalent in the industry. This did not happen in a closed environment without government scrutiny. There have been complaints about slotting since the beginning. Understandable complaints that reflect the frustrations that smaller companies face in the marketplace. Federal and state antitrust enforcement agencies have been repeatedly asked to investigate the practice and they have. To my knowledge, no enforcement agency has ever concluded that these programs are inherently anti-consumer or that they should be condemned. Indeed, they have often noted their potentially pro-consumer impacts.
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The Federal Trade Commission in particular has addressed this issue on numerous occasions over the years. Each time it has looked at the issue, during Democratic and Republican Administrations, it has reached the same conclusion.
For example, in 1989, the Commission Chairman wrote on behalf of the Commission to Congress that, ''. . . slotting allowances and other promotional pricing may benefit consumers by facilitating the introduction of products desired by consumers and the reduction of retail prices.''
In 1991, the Director of the Bureau of Competition said, ''It is still perfectly permissible to pay an allowance to secure shelf space for its promotional value.'' Another official said that year, ''Some may not like it, but in and of themselves, they are perfectly legal.''
In 1995, the Director of the Competition Bureau appeared on ABC's 20/20 show and said that, ''They are legal in most situations. . . . The question is, do these slotting allowances really drive prices up for consumers? If they don'tand I am saying I don't see any evidence that they doalthough we are open to looking at itthen I am not sure there is a problem.''
In 1996, the FTC staff issued a report on public hearings that focused on slotting fees as a potential distribution problem for small businesses. The report stated: ''The hearing testimony did not provide any allegations of harm to consumers as a result of slotting allowances.'' It went on to say that ''though the FTC heard general complaints about slotting allowances, no small manufacturer to date has provided evidence that suggests the possibility of harm to consumers, although this agency remains open to receiving such evidence.''
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Similar conclusions have been reached by state antitrust enforcement agencies that have investigated slotting fees.
Individual programs that could be shown to substantially impair competition may, of course, be challenged under established antitrust principles. I will defer to the antitrust lawyers on the debate about when a particular program would run afoul of the law.
IS SLOTTING THE PROBLEM?
Yet this practice continues to generate complaints. That is why we are here today. But the complaints may reflect the fact that slotting has become the focus of the frustration and difficulties that smaller companies face in the marketplace. Those frustrations are very real and are shared by many retailers who compete with or buy from much larger companies that they might sometimes feel have unfair advantages. They compete by focusing on providing value to their customers through quality, variety, service, and competitive pricing.
The first way to do that is to make sure they have the items on the shelves that customers want. Simply put, if there is a demonstrated consumer demand for an item, they want to sell it. And, conversely, if no one wants the item, most companies don't want it taking up shelf space. Well-conceived products that are popular with consumers can and do make it to shelves without regard to the level of slotting or promotional allowances. Several factors come into play in determining whether a product should be carried, as I will set out in just a minute. Whether or not the retailer receives a slotting allowance often is not a determinative factor or even a principal one. Many retailers have special programs in which they waive slotting fees for local or minority vendors. The retailers are willing to take on more risk to try and encourage these suppliers.
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Sometimes vendors may believe their products are being rejected because of forces beyond their control, not because their product is just not needed. That's human nature. It's much easier to blame a common industry practice than it is to admit your product may not be a winner in the minds of consumers.
COMPETITION FOR SHELF SPACE
Slotting allowances and promotion allowances would not be an issue if shelf space was unlimited. But we have a wonderful problem in this country. We have too many choices. The typical supermarket carries about 30,000 items. There are more than 100,000 possible grocery products available and another 15,000 to 20,000 are introduced each year. Retailers and consumers are faced with a continuously increasing number of products, brands and even product categories.
The quantity of new products is growing, but not necessarily the quality. Innovative new products that create truly new markets are rare. Instead, most new products tend to be either market extensions or copycats of already popular products. It was reported several years ago that one manufacturer of facial tissue offered 22 different packaging options. A specialty coffee maker offered 600 different choices of flavors, packages and sizes. When a product category gets hot, new varieties proliferate. One year, more than 175 new alpha hydroxy acid skin care products were introduced. Another year saw more than 100 new salsa product entries.
So how is the retailer to choose among all these products. There are a number of factors and, of course, they vary from company to company. The first factor is the fundamental one. Will shoppers want the product? To determine that, buyers ask a series of questions. Does the product or manufacturer have a proven track record? Has it been tested; sold in other markets? What kind of consumer research has been done? Does the product offer a price-value relationship to the consumer or fill an unmet need? Do competitors carry the product? Does the manufacturer have a well thought out advertising program? Is there an introductory allowance program; if so, is it being offered to our competitors? Is the manufacturer able to supply enough product to meet projected consumer demand? Does it fit with the retailer's strategic objectives?
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More often than not, answers to the questions that relate to track records, market testing, and consumer research are not satisfactory. As new products proliferate, fewer manufacturers are doing the market testing and research necessary. As a result, more often than not, new products fail. While estimates vary, according to most experts, more than four out of five new products do not make through their first year.
THE COSTS OF PRODUCT INTRODUCTIONS AND FAILURES
There are significant costs associated with this whole process of new product introductions. One study has suggested that it costs a typical store almost a million dollars a year to introduce new products that ultimately fail. But whatever the amount, the costs of warehousing, transporting, stocking, altering scan files, and merchandising the new products and deleting the old ones from the system are considerable.
Even though every supplier believes every product will be a winner, it's the retailer who takes the risk of being stuck with a product that will not sell. Manufacturers, particularly the smaller manufacturers, are almost never around to buy back inventory that will not move. The retailer is ultimately faced with taking a steep markdown or donating the product to local food banks for a small tax writeoff. Since shelves are already full, some existing product that was selling had to be dropped or reduced in facings. The retailer, therefore, has absorbed the hidden costs of lost sales from the products dropped to make room for a new item with an eighty percent chance of failure. This is important because of the very narrow margins of about a penny on the dollar in the supermarket business. More than a few wrong choices and a company can easily move into the red.
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It is not simply a matter of showing up at the front door of the store and putting the item on the shelf. The term ''slotting'' itself actually refers not to shelf-space, but to warehouse ''slots.'' Most products in the supermarket are received from warehouses or distribution centers. It is at those distribution centers where products are received, stored and then consolidated for shipments to individual stores. Today this is a highly computerized and mechanized process and every addition and deletion adds cost to the system.
Similarly, there are costs associated with all the activities involved in getting the product on the store shelf. Category management and shelf space allocation today is a science with elaborate computer programs being used to optimize the use of shelf space. Each new product requires many changes to how shelf space is allocated. Of course, every time a new product is added, shelf tags must be created or changed and scanning systems adjusted to reflect the accurate price of the product being sold. Other costs involve changing information systems, financial and accounting systems, monitoring store level performance, implementing any new promotional programs involved, and monitoring product performance. Similarly, there are equivalent costs for every product deleted.
This is not meant to be an exhaustive list of costs, but rather an attempt to demonstrate that there are costs for the retailer that might not be apparent to the casual observer.
A slotting or introductory allowance or promotion allowance is one way to mitigate those retailer costs. The offering of such allowances tells the retailer that the supplier stands behind the product and is willing to share in the risk of failure. There are certainly other ways to do that. In other industries, the retailer may not actually take ownership of the product or it may not pay for product that doesn't sell. Items may be sold on commission and the manufacturer may be responsible for taking unsold products back.
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This is not the way the grocery business works. Slotting allowances or promotion allowances have become the more common approach to sharing risk between manufacturers and retailers. As one economist has put it, ''A manufacturer that has developed a new product faces the task of convincing retailers that its innovation will be preferred by consumers to existing products and that adopting the product will be in the retailers' interests. . . . A slotting allowance can serve as a signal from grocery manufacturers to grocery retailers about the likely success of the product.'' Another economist has put it this way: ''Slotting allowances thus provide a way for manufactures to convey their private information and about the likelihood their product will succeed to retailers. Those who are willing to pay . . . signal that their products . . . provide better value to consumers than the alternatives. Slotting allowances are crucial in helping the retailer discern the desirable products.''
It is important to note that the emergence of slotting has been accompanied by increasing numbers of new product introductions. This increase clearly contradicts the claim by some that slotting discourages innovation and new product introductions. Anyone who suggests that probably isn't doing their household shopping. New products are making it to the shelves of local supermarkets at a pace that far exceeds pre-slotting days.
Having said that, however, we do appreciate the frustrations that smaller companies face in trying to break their products into the marketplace. Sometimes slotting may seem as if it is a barrier to widespread distribution. However, think about what would happen if no one had ever invented slotting or if it was made illegal. A smaller company with no track record, or limited resources would likely be at an even greater disadvantage. It would be much more sensible for a rational retailer with limited shelf space to choose the product of a tried and true manufacturer with a huge advertising and promotion budget; or to choose a product that has been extensively market tested; or which is being offered by a company with an extensive distribution system already in place. Slotting allowances can, and do, have the effect of keeping incumbent suppliers with these inherent advantages from locking the new entrants right out of the market.
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Keep in mind also that the retailing segment today is far from monolithic. It has been reported in the trade press that some large retailers do not request slotting fees and that some manufacturers do not pay them. There are many, many different retail formats and concepts ranging from superstores, to club stores, to health stores and natural food operators and to gourmet stores. Drug stores, convenience stores, general merchandise outlets, coffee bars, juice bars and a host of other specialty shops sell food and groceries. Food and grocery products are sold on the internet, by mail order and through catalogues. Entrepreneurs with good ideas that meet consumer needs can succeed. It certainly isn't easy and there are no guarantees, but the suggestion that slotting is stifling innovation flies in the face of reality.
In conclusion, let me reiterate that slotting is a rational and natural marketplace response to the scarcity of shelf space and the proliferation of new products with very high failure rates. It is certainly not the only way to address that problem. But other approaches may create even more difficulties for smaller manufacturers.
We hope that by appearing here today, we have helped shed light on the grocery business from the supermarket point of view. When too many products chase too little shelf space, it's natural for misunderstandings between trading partners to develop. FMI pledges to continue to work with GMA, with our suppliers, and with our government officials to help everyone understand we share a common goal. That goal is to provide consumers with the products they want at the lowest possible cost.
Page 164 PREV PAGE TOP OF DOC Mr. PEASE. Mr. Gray.
STATEMENT OF JOHN GRAY, GENERAL COUNSEL AND PRESIDENT, INTERNATIONAL FOOD SERVICE DISTRIBUTORS ASSOCIATION, FALLS CHURCH, VA
Mr. GRAY. Thank you, Mr. Chairman and members of the committee. I am pleased to be before you today on behalf of the wholesale food distribution industry to share our perspective on slotting allowances.
Food Distributors International is a trade association comprised of food distribution companies supplying and servicing independent grocers and food service operations throughout the United States, Canada, and 19 other countries. The association and its food service partner, IFDA, have 234 member companies operating 800 distribution centers with combined annual sales of nearly $150 billion.
Slotting allowances are an important issue for all segments of the grocery supply chain. While other witnesses may have been critical of the practice, it is essential for the committee to understand that these allowances are an appropriate means of accomplishing the following goals: ensuring consumers are offered a wide variety of product, enabling wholesalers and retailers to recover costs associated with new product introductions, and spreading the risk of moving new products into the marketplace.
Prior to the 1970's, manufacturers generally employed a wide variety of market research and product testing tools to gauge consumer reaction to new products. With the pace of new item introductions quickening, however, manufacturers have moved away from the use of expensive market research to support new items in the marketplace. The need for speed and the high cost associated with actually test-marketing a product in limited geographic areas have led manufacturers to employ risky nationwide product rollouts. Today, new items come to the market with limited evidence of potential success. Thus, slotting allowances are a way for any manufacturer to support products that may not be thoroughly tested or researched. The allowances provide a way for small manufacturers to introduce new items avoiding the traditional and extremely costly methods of market research necessary to identify consumer needs and preferences.
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Meanwhile, however, the wholesale grocery distributors and their independent retail grocery store customers try to accommodate these new items in limited and ultimately finite store shelf and warehouse space. Unlike many other retail businesses, grocery retailers, as Dr. Hammonds has alluded to, and wholesalers, actually take legal title to products in their purchase from the manufacturer. They own what they buy and necessarily assume most of the risks whether or not consumers will actually purchase the product.
The process of adding and deleting items includes costs that wholesalers and retailers incur in warehousing, transporting, and stocking products as well as costs from making changes and scanning files. Most assuredly, without such reimbursement both wholesalers and retailers would have to pass along these costs to consumers as higher prices for groceries.
In addition to the actual costs incurred in handling added and deleted items, wholesalers and retailers are faced with the increased risk of product failure. Product failure leads to costs for spoilage, disposing of products, to price reductions. The risk of product failures can be particularly serious for wholesalers. As inventories of new and most untested items grow, wholesalers are faced with selling products to retailers that may have a limited life cycle in the market depending upon their acceptance by consumers. The risk is compounded for wholesalers because they service numerous and very independent retailers that demand a myriad of different products depending on their unique marketplace demographics. Thus, wholesalers carry a wider variety of products than traditional retail chains and a significantly broader array of products than mass merchandisers, thereby increasing the chance of new item failure compounded over many different retail customers.
Page 166 PREV PAGE TOP OF DOC The need for variety further complicates a wholesaler's consideration of adding and deleting items to make room for the new product. Slotting allowances in today's marketplace exist as a form of insurance paid by manufacturers to accommodate their desire to keep new, innovative items flowing in the supply chain while compensating wholesalers for handling the items and bearing the ultimate risk of their appeal to the consumer. While the legality of slotting allowances has been exhaustively and carefully scrutinized by regulatory authorities over the years, the concern still exists as to whether consumers are somehow disadvantaged when these fees are paid by and between trading partners.
There is no such evidence. What is certain, however, is that wholesalers and their independent retail customers are operating already on razor-thin profit margins. As new products fail and product failures proliferate, these margins can quickly erode. As such, the real dilemma is understanding how the industry can learn to manage the ever-increasing demand for new products to grow a manufacturer's business while at the same time finding the physical space for these items in the limited store and warehouse space that is already available. This is a very real challenge for all industry players, both large and small.
Thank you again for the opportunity to share these views, and I would be happy to answer any questions.
Mr. PEASE. Thank you, Mr. Gray.
[The prepared statement of Mr. Gray follows:]
PREPARED STATEMENT OF JOHN GRAY, GENERAL COUNSEL AND PRESIDENT, INTERNATIONAL FOOD SERVICE DISTRIBUTORS ASSOCIATION, FALLS CHURCH, VA
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Thank you, Mr. Chairman and members of the committee. I am John Gray, President of the International Foodservice Distributors Association (IFDA) and Executive Vice President/General Counsel of Food Distributors International (FDI)(see footnote 19). I am pleased to appear before you today on behalf of the wholesale food distribution industry to share our perspective on slotting allowances.
Food Distributors International is a trade association comprised of food distribution companies that supply and service independent grocers and foodservice operations throughout the United States, Canada and 19 other countries. The association and its foodservice partner, the International Foodservice Distributors Association (IFDA), have 234 member companies that operate 791 distribution centers with a combined annual sales volume of $150 billion.
Slotting allowances are an important issue for all segments of the grocery supply chain. While other witnesses today have been critical of the practice, it is essential for the committee to understand that these allowances are a legal and appropriate means of accomplishing the following goals: (1) ensuring consumers are offered a wide variety of products, (2) enabling wholesalers and retailers to recover costs associated with new product introductions, and (3) spreading the risk of moving new products into the marketplace.
Slotting allowances have been a part of the grocery industry in this country for several decades. They have evolved at the retail and wholesale level in direct response to the enormous influx of new products entering the marketplace each year. The steady stream of new items is driven by the desire of manufacturers to extend traditional brand lines and develop entirely new brands in the face of overall flat or declining sales in the retail grocery business. Prior to the 1970's, manufacturers generally employed a wide variety of market research and product testing tools to gauge consumer reaction to new products. With the pace of new item introductions quickening, however, manufacturers have moved away from the use of expensive market research to support new items in the marketplace. The need for speed and the high cost associated with actually test marketing product in limited geographic areas have led manufacturers to employ risky nationwide product rollouts. Today, new items come to market with limited evidence of potential product success. Thus, slotting allowances are a way for manufacturers to support products that may not be properly tested and researched.
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Wholesale grocery distributors and their independent retail grocery store customers try to accommodate these new items in limited and ultimately, finite store shelf and warehouse space. Unlike many other retail businesses, grocery retailers and wholesalers actually take legal title to products when they are purchased from the manufacturer. They own what they buy and, necessarily, assume most of the risks of whether or not consumers will actually purchase the product.
Every new product requires the elimination of existing items both at the store and warehouse levels. This process of addition and elimination layers added costs on both the retailer and their wholesaler. The costs that wholesalers and retailers incur include warehousing, transporting, and stocking products as well costs for making changes in scanning files. Consequently, slotting allowances are a means for retailers and wholesalers to recoup costs associated with adding and deleting products from the grocery supply chain. Most assuredly, without such reimbursement, both retailers and wholesalers would have to pass along these costs to consumers as higher prices for groceries. In addition to the actual costs incurred in handling these added and deleted items, wholesalers and retailers are faced with the increased risk of product failure. Product failures lead to costs for spoilage or disposing of products through price reductions.
The risk of product failures can be particularly serious for wholesalers. As inventories of new and mostly untested items grow, wholesalers are faced with selling product to retailers that may have a limited life cycle in the market depending on the acceptance by consumers. This risk is compounded for wholesalers because they service numerous, and very independent, retailers that demand a myriad of different products depending on their unique marketplace demographics. Thus, wholesalers carry a wider variety of products than traditional retail chains (and a significantly broader array of products than mass merchandisers), thereby increasing the chance of new item failure compounded over many different retail customers.
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Slotting allowances in today's marketplace exist as a form of insurance paid by manufacturers to accommodate their desire to keep new and innovative items flowing into the supply chain while compensating wholesalers for handling these items and bearing the ultimate risk of their appeal to consumers. While the legality of slotting allowances has been exhaustively and carefully scrutinized by regulatory authorities over the years, a concern still exists as to whether consumers are somehow disadvantaged when these fees are paid by and between trading partners. There is no such evidence. What is certain, however, is that wholesalers and their independent retail customers are already operating on razor thin profit margins. As new product failures proliferate, these margins quickly erode. As such, the real dilemma is understanding how the industry can manage the ever increasing demand for new products to grow manufacturers' businesses while finding the physical space for these items in the limited store and warehouse space available. This is a very real challenge for all industry players, both large and small.
Finally, Mr. Chairman, FDI would also like to commend for the Committee's consideration an editorial that appeared in the Wall Street Journal on September 22, 1999. This commentary, written by Holman W. Jenkins, Jr., correctly characterizes slotting allowances as an ''example of the relentless pressure for efficiency in a market economy.'' We believe Mr. Jenkins's editorial is a succinct and articulate justification of the role that slotting allowances play in the grocery distribution industry, and we respectfully request that you include it in the record along with our remarks.
Thank you again for the opportunity to share these views. I am happy to answer any questions.
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Mr. PEASE. Before I proceed to questions, excuse me, I would like to make an observation to Ms. Piper and Mr. Kruse. And Mr. Stenzel, I don't know if you are here at the request of Ms. Bono or some of your members are represented by Ms. Bono, but the people that represent each of you have been especially aggressive on this issue and incredibly helpful to me in our efforts to try to bring this issue to the forefront. Ms. Baldwin has been very helpful, very determined. Mrs. Emerson has been aggressive and very determined, and Mrs. Bono has as well. As an aside, I think that you are all fortunate to have them.
Having said that, Mr. Kruse, can you tell us a little bit about what effects that mergers between packers and processors have on farmers?
Mr. KRUSE. Mr. Chairman, I think one of the real concerns that we have is the whole issue of competition and competitive pricing. On the one hand we strongly believe, I think that we all do, that the free enterprise system is what made this country great, and yet we see the situation when you ultimately end up with the concentration of decision making or control in the hands of a few. It is cause for great concern. In the pork industry, for example, there is real concern that there is no price discovery anymore because of so much vertical integration. The trends are headed that way, as well in the beef industry.
And so I think there is a real fear factor, if you will, on the part of family farming operations today as you see what is going on and you wonder where all of this is going to end. And you just simply wonder if there is a way to continue to have a mechanism that reflects a true competitive pricing structure in the industry.
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Mr. PEASE. Thank you very much.
Ms. Piper, you bring a unique perspective to this panel, and I am grateful for it. You work a lot directly with local farmers. Have any of those farmers with whom you have dealt themselves been involved in mergers of operations, and if so, has that had any effect on you as a purchaser of their products?
Ms. PIPER. I am not sure if the word ''merger'' is correct, but I do work with a cooperative of hog farmers in Iowa who havea small group that are doing this slow form of agriculture with their hogs of hoop housing and bringing them to weight slower, higher price and greater value. They have formed a cooperative and have formed a brand through Nieman, who is a shipper in California. My understanding is that this is a pretty small-scale cooperative merger, if you will. But it has kept these farmers in business. It has allowed them to make a premium product.
I have also seen this with dairy farmers in the Kickapoo region of my State. The farms were really just bailing out right and left when I first came to the area 30 years ago. Now the area is prosperous again with a dairy cooperative. These are very small-scale mergers, though, and they do seem to be very effective in the marketplace.
Mr. PEASE. Thank you.
Mr. Boyle, I apologize that I missed your presentation, but I understand from your written statement that you believe the meat industry is still competitive notwithstanding the consolidation in the industry. Can you explain for us why you believe that is true and whether the farmers with whom the processors deal feel the same?
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Mr. BOYLE. Thank you very much, Mr. Pease. We have consolidated in the beef and pork-packing industry, the beef industry in the 1980's and the pork-packing industry more recently in this decade; but so, too, have the livestock suppliers that provide fat cattle and hogs to our packers.
I detailed in my testimony the consolidation of both the production side from the livestock sector as well as in the packing side in the beef and pork industry. I noticed a lot of what effect that has on prices and competition. But if you look at the cattle cycle, if you will, over the last 10 years, from the highs in the mid-1970's to the lows in the mid-1950's, while the cycle did go up and down as it historically has done over decades, the concentration level remained relatively unchanged amongst the beef-packing industry. So while there were factors at work affecting the value of cattle, one of the factors that one cannot suggest was at work was a change in the concentration level. This happened to remain unchanged.
I also mentioned during my testimony, Mr. Pease, while we do represent a number of large national packers and processors, two-thirds of our members are relatively small family businesses. It is on behalf of both the large and small member companies that we have always been strong advocates of antitrust oversight at the Federal level. You well know that we are subject to the laws of the Justice Department, Federal Trade Commission. Uniquely amongst the American economy, we also have a third antitrust agency, the Packers and Stockyards Administration, which is focused exclusively on the fair trade practices within the industry that we represent at AMI.
I have been with the American Institute for 10 years. We have been intensely investigated and heavily studied. As you recall from the USDA testimony earlier this morning, the Assistant Secretary enumerated three investigations into the beef-packing and pork-packing industries just within the last 3 years, none of which have revealed any anticompetitive practices amongst the packers as they procured their livestock in a competitive marketplace.
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Finally, I have as an example another investigation, it was mandated by Congress in the early 1990's, here in front of me. This is a $500,000, 4-year investigation that Congress directed the Packers and Stockyard Administration to conduct on competition in the meat-packing industry.
The conclusionif I could simplify it, because I don't think I would want you to go through this, although I am happy to insert this for the recordthe conclusion in a nutshell is this is a complex and dynamic industry. I think that is a healthy situation for packers to compete with each other within my membership, and for the producers from which we procure our livestock and for the customers for whom we provide our products.
Mr. PEASE. Thank you, Mr. Boyle.
The gentlelady from Texas, Ms. Jackson Lee.
Ms. JACKSON LEE. Thank you, Mr. Chairman. Let me as well thank the members of this committee, Ms. Baldwin and others, as well as the chairman for actively bringing this matter to our attention, but also representatives from your respective communities. Many people would question the presence of agriculture issues in the Judiciary Committee. Might I, as I offer my thoughts and maybe a question, apologize for being detained on the floor and not hearing all of the testimonies of all of the panelists, but might I say to you that I was the deputy commissioner of Agriculture for the State of Texas. My jurisdiction had organic farming, the emerging wine vineyards that we were trying to doif you have any Texas wine or any interest, I will get you someand some of the emerging industry that we were attempting to develop with producing flowers, vegetation, if you will. I was involved or have been involved for a period of time with looking at smaller entities and trying to encourage their development and survival, certainly not on the scale of the meat industry, not on the scale of the milk industry, grain, et cetera, but it sort of formulated my philosophy, which is that big is not always the best.
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Though I am cognizant of where we have moved in the agriculture industry, I have always been bothered, maybe it was by the emotional connection to family farms, and maybe I spent a lot of time looking at those old movies, and it looked so much as part of America. My question would be and my sense is that we now may be called upon to redeem some of these both virtues, but also the survival of some of the aspects of agriculture, though we certainlyI think some of the questions or some of the focusforgive me if I am somewhat detoured from itbut some of the focus is to help some of the major and large industries with antitrust concerns.
But my question would be along these lines: Frankly, are you ready for strong government intervention on the antitrust aspect of it; and then secondarily, let me go to the slotting question, which I know that the Senate has already had a hearing. It has got a great interest over there. Doesn't that by its very nature track back to almost eliminating and extinguishing the smaller competitors because as it tracks up, it is really going to be all of the big guys who ultimately play into slotting, and then ultimately the product line, that can afford those high prices? So possibly my organic farmers could not even compete. I guess they could compete in specialty markets, but, frankly, maybe could not compete in a slotting scenario.
I would appreciate the response from Mr. Kruse of the Farm Bureau. Are you calling now for the need for intervention into the food processors more so than what has been by the Federal Government, in particular on the antitrust issues? And I might raise a question with slotting right after you finish. I think that I will have some more time. Thank you.
Mr. KRUSE. Thank you.
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As I mentioned in my testimony, I think a lot of the issues that concern us in agriculture today are certainly beyond the jurisdiction of this committee. But I might make one suggestion that I think could fit well into this committee, perhaps something to think about. In USTR, we have a person that is dedicated to agriculture. That has worked extremely well, a person and a staff who are very knowledgeable about agriculture and agricultural issues. It has been very helpful, I think, to all of us in agriculture to be able to go to somebody in USTR and discuss issues of importance with us. Perhaps that is something to think about in the Department of Justice, to have someone in the Department of Justice who is very knowledgeable, first of all, about agriculture, and who can perhaps put a focus, if you will, on these issues that we are talking about here this morning to really take a look at what is going on, because I think there is a real need to have a focus on just how this merger concentration, consolidation, antitrust, all of these things come together. I would just throw that out for this committee to think about.
I say the pattern there with USTR has been very positive for agriculture, and I think it might be helpful in Justice.
Ms. JACKSON LEE. If I could, with what I hear from you, I am just focusing on the antitrust aspect, greater utilization or expertise in the Justice Department to see how the laws can be effectively used to be helpful in this changing agricultural market.
Let me just go to Mr. Gray very quickly to say on the slotting we have been working for a long time with the black farmers. We have seen a devastation in that population that used to be dominant some many, many years ago. Doesn't the slotting just trickle down to impact all of the smaller entities negatively in terms of paying those fees and taking that space up on those shelves?
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Mr. GRAY. As I alluded to in my comments, the problem is an industry issue over a limited amount of shelf space and the amount of items that the physical grocery store or warehouse can carry in a given time. With the number of items coming into the marketplace every year, as a wholesaler and independent grocery store operator, you have to look at what is going to sell in that slot and what is going to take up per-square-foot dollar sales.
As I said, traditionally they used to have much more reliance on pretested, well-tested products coming into the market, but the industry has changed a lot in the last 10 years. There was a rush of many new entrepreneurs creating new items. The manufacturers within the industry are pouring new items into the system weekly. There is one publication that just deals with tracking new items in the grocery industry that comes out every month.
I would suggest particularly for smaller farmers or smaller manufacturers and producers, it is easier to access capital in the marketplace to pay a slotting fee than engage in expensive market research.
It might be easier if the retailer/wholesaler making a product choice said, ''I have to have detailed product information and market-testing; I have to know what consumers, what demographics are going to purchase this product,'' which used to be the case in the 1960's and the 1950's as the supermarkets were growing and there were far fewer items in the marketplace. Manufacturers used to have the time and the resources to do that. Today it is a rush, a rush to market, because consumers are demanding it, and manufacturers need the new items to keep the business growing in an otherwise flat and declining industry in terms of overall sales.
Page 177 PREV PAGE TOP OF DOC So it is a matter of how does a wholesaler then, in turn, allocate their best resources to know say product A will sell and product B won't sell? What information do I get from the suppliers that these products are going to move? Clearly, a small manufacturer or a small grower will have less ability to do the kind of market research that these larger companies used to do. The question is do they have a better chance of getting the money necessary to pay a fee or negotiate a fee with a retailer as a risk assessment of their product since they don't have the money to do market research to get their product into the marketplace. It is simply a balancing act.
Ms. JACKSON LEE. Mr. Chairman, thank you very much. I would ask unanimous consent to put my statement in the record. I would simply say that there in Mr. Gray's comments may lie the basis of remedying this committee.
Thank you very much.
Mr. PEASE. Without objection the gentlelady's request is granted.
[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Good Morning Mr. Chairman, I would like to first extend my appreciation to you and Ranking Member Conyers for holding this oversight hearing on the important topic of competition in the agriculture and food marketing industry. I look forward to the testimony of the impressive array of witnesses assembled here today. I will keep an open mind and ear as I listen to various points of view.
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We are here this morning to discuss two separate, but related, issues that concern agriculture and the food marketing industry. The first issue will be increasing concentration in industries like meat packing and grain processing. The second issue is the growing practice of fees (known as ''slotting fees'') that retail stores (primarily grocery and drug stores) charge product manufacturers to place those products on their shelves. Both are competitive issues affect the food that comes to our tables.
The first area of concern that this hearing addresses is that of the meat packing and grain processing business. These related industries directly impact meat producers and grain farmers, because these businesses buy the producers' and farmers' products in the first instance. Meat producers and grain farmers contend that both industries are so concentrated (e.g., four meat packing companies control almost 80% of the meat packing market) that processors and packers can pay lower prices to producers and farmers. Accordingly, they favor government intervention in the form of antitrust action and mandatory price reporting to address their concerns.
Packers and processors, on the other hand, argue that globalization forces them to consolidated their businesses to cut costs and to meet foreign challenges. Instead of government intervention, packers and processors, believe that oversupply and the concentration of producers are the root of low prices. They posit that producers would be better off if they responded to the market pressures of low prices rather than government intervention.
The second issue concerns that of the slotting fees that both small grocery manufacturers and produce growers have to pay. Today's hearing asks how slotting allowances should be assessed within this framework. The term ''slotting allowance'' typically refers to a lump-sum, up-front payment that a food manufacturer must pay to a supermarket for access to its shelves. The term has been used to cover an extremely broad range of conduct, some of it clearly unlawful, some clearly lawful, and a great deal of it in the gray area in between, the legality of which can be determined only in light of all the surrounding facts and circumstances.
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At the clearly unlawful end of the spectrum is commercial bribery. This is an under-the-table payment to a purchasing agent of a retailer that goes straight into the agent's pocket, in violation of the fiduciary duties owed by the agent to his principal. Allegations of this sort have arisen in public discussions of the issue, such as the recent hearings held by the Senate Committee on Small Business. If such instances come to our attention, we will promptly refer the matter to the relevant state or local authorities for criminal prosecution. Only criminal sanctions can provide adequate deterrence for this sort of covert, blatantly illegal conduct, and it would not be appropriate for us to try to apply antitrust standards and remedies to conduct that is universally condemned for reasons wholly apart from antitrust.
At the other end of the spectrum are payments from a manufacturer to a retailer that really constitute only an ordinary price discount. For example, a short-term agreement for advance payments that does nothing more than obligate the retailer either to buy a certain number of units of a manufacturer's product or to return a proportionate share of the advance payment may be little different from a simple price cut. In such a situation, the retailer gets, in effect, a certain per-unit discount off the nominal selling price. The only difference is that the retailer receives the discount at the outset of the contract. If the retail market is competitivea very important preconditionthe discount is likely to be passed through to consumers and competition will not ordinarily be harmed.
In between these two extremes is a gray area. We have heard on occasion from small manufacturers that complain about activity in this area. For example, they have reported that strong buyers, such as supermarket chains, are demanding large up-front payments not tied to volume. In some cases, we have been told, these allowances are so large that some small manufacturers cannot afford them and are dropped from the store.
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When we evaluate this kind of conduct, the antitrust statutes require us to determine whether particular actions have harmed the overall level of competition in a market. If a market can be kept competitive, then consumers will receive the benefits of low prices and wide product selection, and businesses will receive the benefits of having many suppliers and many outlets.
In light of this principle, how do we determine when slotting allowances have actually put competition at risk? And what should an antitrust agency do to prevent or remedy such situations?
It is my desire to have these important questions answered during today's testimony. Again, I thank all the participants.
Mr. PEASE. The gentleman from Virginia.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Mr. Gray, along the linesthe slotting fees, are they extensively done for existing products or new products, or are basic commodities now slotted in most grocery stores?
Mr. GRAY. I don't know about basic commodities. Dr. Hammonds may have a better answer on that. I have known fees to have been paid on obviously new items coming into a marketplace. In some cases existing items, particularly if it is a line extension, it is the same product, but a new size or new flavor of a product, sometimes fees associated with that kind of introduction, because the fee relates toin my member's casethe actual physical place that you put the product in the warehouse slot. A new product comes in with a new bar code, and a new item in inventory has to be slotted in a particular given place. It is the cost of that real estate for that particular box. Whether it is just a matter of whether you have new, old, or whatever getting into that particular warehouse slot, there is a square footage allocation to it in terms of costs and everything and
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Mr. GOODLATTE. How long do you pay it?
Mr. GRAY. In most cases, my understanding it is a one-time fee up front when the item comes in.
Mr. GOODLATTE. Mr. Hammonds, is that your understanding as well?
Mr. HAMMONDS. For your mentioned basic commodities, the most popular products in supermarkets today are the value-added products that take work out for consumers. So many of these are branded now, branded value-added
Mr. GOODLATTE. Let me get to my point. Is there a slotting fee in those grocery stores to put milk on the shelves or flour or sugar?
Mr. HAMMONDS. It certainly would be much less common there than for a new kind of product coming in. I don't know if you could find a store somewhere in the U.S. that had fees for milk or sugar, but certainly these are commonly thought to be for new products coming in.
Mr. GOODLATTE. It is a one-time?
Mr. HAMMONDS. It may be annual if a product survives for a year and is renegotiated the following year.
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Mr. GOODLATTE. If it survives for a year, it has justified itself in the marketplace, then it obviously has some consumer support for it. And that is a little different than the initial issue, which I think is a legitimate one. We have limited amount of shelves in our store, and there has got to be some way of picking the winners and losers who gets that limited shelf space for new products that can't obviously be just flooded onto the marketplace. But if you are going to continue to do it over a period of time, it is a little different.
Mr. HAMMONDS. If it survives for a year, it has some level of demand. Then the question the retailer would have is: Would there be another new product or new category coming in that perhaps would have an even higher level of demand and greater potential for the future? So you are always balancing the potential for products that are on the shelf versus the new ones coming in. That is why it is an art, not a science.
Mr. GOODLATTE. I understand.
Let me shift over to the other issue of concentration in the meat-packing and grain-processing industries. I would like to have Mr. Boyle's comments. But also maybe, Mr. Kruse, in the appropriations bill that was just passed, Congressman Latham was successful in getting some language including requiring more transparency, more reporting regarding prices paid for cattle and so on. I have some concerns about that. I would like to have both your comments.
The concern that I have is this: I got complaints from some of the smaller meat processors that this was a significant competitive disadvantage. If they are competing in a niche market that they have carved for themselves in a very competitive environment, and they suddenly have to give up information that is available to their competition, that that might be harmful to cattlemen and hog producers and others in terms of competition. It alsoI wonder what cattlemen and others can do with that information relative to what the meat packers can do with it? If you are in a significant position where you have 15, 20, 25 percent of the market, it seems to me that kind of information is very useful, and it is something that you can act upon. But if you are one cattle farmer out of a million, I am not sure what you can do with that information.
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I wish you would respond to that, and then I would like to hear Mr. Boyle's comments, too.
Mr. KRUSE. We support price reporting. I think that you raised some good points. I think the reason we as farmers in this country have gotten to the point where we think some type of mandatory price reporting is a positive aspect is because of the lack of transparency and because it is very difficult today for many farmers to understand how the prices are actually set.
Mr. GOODLATTE. Are you concernedand the reason that you want the price reporting is that prices are being set, that there is collusion amongst the industry, amongst the meat packers?
Mr. KRUSE. I think that is a legitimate concern.
Mr. GOODLATTE. It seems to me the more information available to them, the easier it would be for them to accomplish that without even having to communicate with each other. If the information is required to be reported and made public, all they need do is read those reports. They don't have to do any of the things that you are concerned about you doing. I am concerned about that as well. If indeed it was taking place, it would in my opinion be a serious antitrust violation, but I am not so sure the solution is geared up to what you are trying to achieve.
Mr. KRUSE. Let me give you a real quick example. One of the concerns, there are people in the cattle business, I will use that as an example today, who may get a call on Monday morning and say that we are offering you X number cents a pound for your cattle, and you have 20 minutes to let us know if you want to sell or not; if not, you can wait until next week. Certainly, this isn't a cure-all for the whole problem that we see, but it is demonstrative of the frustration that the people feel, that there is no transparency in the marketplace and not perhaps a real mechanism for price discovery as there used to be. I think it is a real frustration that people feel in terms of how the prices are set and what they are offered for the livestock they produce.
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Mr. GOODLATTE. I understand the frustration.
Mr. Chairman, I wonder if I might have leave to allow Mr. Boyle to answer the question.
Mr. BOYLE. I will try to be brief. In summary, we share your concerns, Congressman Goodlatte. As an organization we oppose mandatory price reporting. We are strong proponents of the voluntary system that we thought worked well. Obviously it works better on the beef side because there is a greater percentage of transactions of live cattle and boxed beef voluntarily reported than on the pork side, but that is because an increasingly large percentage of hog procurement is through contractual arrangements between the grower and the packer. While it may create some suspicions in the minds of some people that don't participate in those contracts, I don't think there is anything necessarily wrong about two parties mutually pursuing their economic self-interest in the form of a contractual relationship.
To the extent that the fears and concerns exist, as I said in the hearing today, we have been investigated extensively. The Packers and Stockyards Administration in terms of cattle procurement in the State of Kansas looked at 15,000 procurements amongst five large competing packers in that State that account for 25 percent of the Nation's cattle slaughter. They reviewed 10,000 cellular telephone records of cattle procurers out in the marketplace competing for the livestock. They have done nothing wrong. They have done nothing anticompetitive.
While we are going to work with producers to allay their concerns, we hesitate to be supportive of additional government regulatory requirements that I think would impose larger costs upon the smaller producer, whereas the larger packer would probably be able to better absorb them. I suppose in the long run the packers that I have the pleasure and honor of representing would make very sophisticated use of that data as it is being required by this new law.
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Mr. PEASE. The gentlelady from Wisconsin Ms. Baldwin.
Ms. BALDWIN. Thank you. I also want to thank you again for bringing this issue to the committee. It has been very valuable for me to hear the thinking of colleagues, and also the challenges faced by the regulatory authorities, and certainly hearing from State associations. I find oftentimes, though, I learn the most when I get a chance to spend a couple hours or a half day on one of my family farms in the district or a local business who meets on a day-to-day basis the challenges that we are talking about.
So I want to particularly appreciate the testimony of Ms. Piper, who brings a real human face to this issue and describes articulately how this impacts our local economy. I know that you have given a lot of thought to the viability of producers in our area and others that you depend upon and rely upon in your business. You talked in your testimony about some of the challenges in this day and age of increasing market concentration. I know that you have also given a lot of thought to the opportunities created by your own small business and other ventures. I wonder if you could talk in particular about some of those opportunities, especially job creation.
Ms. PIPER. Thank you.
As I sit here and listen to all of this expertise, I become so aware of how interconnected we all are, and the decisions made on these very large levels do really filter down to very small communities and networks of small businesses such as mine. If we looked at the image, we would see a sort of a star of business after business that is so linked up. So when we worked with some of the small farmers who have been struggling with not being able to fit their quality of products into the large agricultural system, we tended to band together, and we tend to start to operate our businesses in the way that many of these individuals farms do. We look at sustainability; we look at long-term development.
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So one of the things that we are doing in our community to address what we think is a fairly serious problem for agriculture and for the economy and for the ecology as the years go on, we are terribly concerned that we are puttingthat society is putting too many eggs in one basket, and that if we make big mistakes with agriculture, if we have difficult weather or unanticipated problems as a result of how we are husbanding the land, we need to have solutions. We need to have the think tanks there in place. And do you know where they are? They are on these little farms and in my kitchen and in these small stores where we have to be a very heady bunch. We have to solve a lot of problems.
We are creating, I believe, a whole infrastructure. It is not obvious right now. It is going to be there offering solutions for how we are going to feed ourselves in the next century. We are working on a school actually, and hoping that we will be able to talk more about it, but it would actually teach the curriculums of farming and cooking as integrated skills among other things, because there is an enormous opportunity for job creation here. We are very much proponents of slow food. We think that is okay. Thank you.
Mr. PEASE. The gentleman from Tennessee, Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman.
Mr. Kruse, I, like you, come from generations of farmers. I am still there. I appreciate your comments because I think you are absolutely right, that the solution ultimately is way beyond the jurisdiction of this committee. But you mentioned something, and I think your suggestion that everybody who is involved in it have somebody on the farm there to fully understand these problems, I think that would help us as a Nation. But helping in that understanding today, you mentioned basically that you have no control over neither prices nor costs, and that a $15,000 tractor is now $100,000. What period of time did it take for that to go from 15,000 to $100,000?
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Mr. KRUSE. Well, I could tell you real-life experience. My father retired in 1976. I at that point took over our farming operation. I remember very well that year, 1976, I bought a new combine that year, and it cost $26,000. Four years ago I bought a new combine, and it cost $168,000. As I mentioned in my testimony
Mr. JENKINS. So that is about
Mr. KRUSE. Twenty years.
Mr. JENKINS. What's the multiplier there? Not two, but three times?
Mr. KRUSE. Probably four times.
Mr. JENKINS. All right. How much was a bushel of beans in 1976?
Mr. KRUSE. Higher than it is today.
Mr. JENKINS. That is the point. So the cost has not kept up. Now, the threat to this Nation of a situationand fertilizer has gone up in addition to the machinery. Fuel has gone up. Seed has gone up. Everything has gone up. The threat to this Nation is that this ultimately will lead to so few producers that they will ultimately be able to control prices, and then the cost to the consumer will spiral in a way that none of us would be able to believe. So we needI agree with you, we need to do what we can in this area to be helpful, but we need to reach out beyond, because there are an array of remedies that are going to be needed.
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If we gonot only to look at the bushel of beans, but if a bushel of beans had kept up price-wise with the cost of that combine, how much would you be getting for a bushel of beans today?
Mr. KRUSE. I am going to guess. In 1976, a bushel of beans might have been $6 a bushel. That might be on the low side.
Mr. JENKINS. So you pay four times more for your combine. If your beans had kept up, what you are getting today, $5?
Mr. KRUSE. Right around $5.
Mr. JENKINS. So you would be getting $20 a bushel for your beans. And Ms. Piper and everybody down the line here and the ultimate consumer would be screaming to high heaven if we had kept up with our prices. Isn't that right?
Mr. KRUSE. Yes, sir.
Mr. JENKINS. We have done a tremendous job, but your idea about understanding, there are times that the last 2 years have just beenbecause of dry weather, wet weather, bad marketsbeen unbelievable years for the farm community in this country. Even though we may not likeeven as farmers, we may not like some of the remedies that have to come and some of the help that has to come and some of the assistance that has to come, most nations in this world around this globe are much better to their farm community than we are in the United States of America when it comes to direct assistance to that farm community.
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Mr. Chairman, I see I am going to quit preaching and start meddling here if I don't let you end me here when my time has ended, but thank you very much.
Mr. PEASE. Thank you, Mr. Jenkins.
The gentlelady from California, Mrs. Bono.
Ms. BONO. Thank you, Mr. Chairman.
Backing up a little bit to Mr. Hammonds, I think that I am following along with the line of questions that Congressman Goodlatte asked when he talked about flour and milk. It is my understanding from a number of growers in my district that fruitthat slotting fees are being charged for things like tomatoes and grapes. I understand the reasoning and the rationale behind slotting fees based on weak products or a continued product line, whatever it might be, but how can you justify that for tomatoes and grapes?
Mr. HAMMONDS. Clearly, the article I introduced makes the point that the products available today for the produce market outstrip the shelf space that is available. That is a rational response for the grocery industry with fixed shelf space, and often in the produce department it is also shelf space that is refrigerated or wet-racked. So it is not as easy as just buying another gondola and wheeling it in. It is a rational response for an industry with too little shelf space and too many products to sort that out.
Ms. BONO. Let me jump in here. You are saying it is a rational way of doing business now. But this has been business for years and years and years, this is not a new practice. There is nothing new about selling tomatoes and grapes or whatever the produce might be. So you are saying it is new refrigeration and new cases and new space, when, in fact, it is not. Correct?
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Mr. HAMMONDS. No. What is new is two factors that are very different today than even a few years ago. The first is the advent of a value-added, processed, branded, packaged product
Ms. BONO. Loose grapes and loose tomatoes
Mr. HAMMONDS. Well, loose tomatoes also competing with bagged salad and cut carrots and other products that have been processed and packaged to save the consumer labor in the home. It is all competing for the same space.
The second issue that is a major new competitive force today, that we didn't see years ago, is the explosion of products aimed primarily at ethnic markets from overseas, imported products and varieties that we have not seen in the supermarket before.
Ms. BONO. Reclaiming my time here, I can understand if you are dealing with star fruit from Thailand or something exotic, but tomatoes and grapes specifically, againand I am not talking about prepackaged sliced and diced produce, but simply loose produce. If we can just talk about simply loose produce. Again, I know in the markets in southern California perhaps the packaged produce is taking up 1/15th of the entire produce section when it is not really fighting that much for shelf space, is it, compared to tomatoes and grapes, or grapefruit, whatever it might be?
Mr. HAMMONDS. Well, the growth is in value-added branded packaged products, and even with loose tomatoes, because it is competing for that space. The new space has to come from somewhere. You heard the USDA and Federal Trade Commission this morning say there is adequate authority to address issues if growers feel there is a specific problem. There is adequate authority and adequate places for them to raise their concerns and have it addressed.
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Ms. BONO. Mr. Stenzel, if I could move on to you, sir, are you aware of letters sent to suppliers demanding charges to reimburse costs not associated with the selling of fresh fruit and vegetables to the consumer, such as the construction fees for new warehouses, development, and fees for the merging or buying of computer systems?
Mr. STENZEL. Yes, Congresswoman, you raised a very important point. That is the difference between the fresh produce industry and manufactured food products. The fresh produce industry has not had the experience with slotting fees that other manufactured goods have had over the last 10 to 20 years. We really are seeing a migration from the grocery side of the business in these types of demands for payments simply in order to continue to have your tomatoes sold in the store. We use the term slotting fees very broadly, but it no longer means to get your brand of product into the store. There are numerous cases of requests for payments for warehouse construction, new store openings. Most often these are simply demands, you must meet these payment terms, or we will buy somebody else's tomatoes. It is not a case of which brand or a new product that is being introduced, but simply playing one provider or one grower against his competing grower down the street.
Ms. BONO. Why would some retailers charge a slotting fee and others not then?
Mr. STENZEL. This is a very important point also, I think. Within the industry only some retailers are charging these types of practices, and other very large retailers have chosen to price produce much more competitively. We all know that eventually when rebates and allowances are added on, that manufacturer adds the cost in. So slotting fees truly don't result in lower costs to the consumer being passed on. Those fees get passed on to all of us as shoppers. For those retailers who are not demanding extra off-invoice payments, they are able to price produce items at a much lower rate and provide a greater gain in the marketplace.
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Ms. BONO. Thank you.
Thank you, Mr. Chairman.
Mr. PEASE. Thank you, Mrs. Bono.
I want to thank the members of the panel again for the time that you have spent in preparation for being with us today. We understand as members of the committee that this issue is much larger than the jurisdiction of this committee; however, there is a piece of the larger puzzle that is within the jurisdiction of this committee, to assure competition in this industry and to assure both quality and good prices for American consumers. We thank you for helping us better understand the issue.
The meeting is adjourned.
[Whereupon, at 1:43 p.m., the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF HON. LEONARD BOSWELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA
Thank you, Chairman Hyde and Ranking Member Conyers for holding today's hearing on consolidation in agriculture. It is a very important issue to the people of my district and I appreciate you taking the time to thoroughly examine the effect these large consolidations are having on American agriculture.
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Each weekend when I go back to my district in Iowa, I go back to the farm and to my neighbors who also farm for a living. As you know, there is a crisis facing the farm economy and people out on the land are hurting. The reasons for this crisis are numerousthe collapse of the Asian market and record over-production are two of the most prevalent reasons. But each time I go back to the district and talk to the farmers at the coops and at the town cafes, they often bring up another issuethe of mega-mergers happening in agriculture which seem to be taking place with increasing frequency. These mergers have set up a David vs. Goliath situation for America's family farmers. I believe it is our job as Members of Congress to assure the Davids in this scenario have more than just a rock to fight Goliath, but tough, useful anti-trust laws with teeth that put a stop to potentially monopolistic agriculture mergers.
Recently, Smithfield Foods, the nations largest meat packer, announced the purchase of Murphy Family Farms, the nation's number one port producer. This merger sent a shock wave through the agricultural community. Many producers said, ''Surely there are laws that would stop such a merger of two giants.''
Consolidations are nothing new to American business. It seems today every aspect of business and industry is being consolidatedbanks, super markets, etc.all done in the name of convenience. Believe me, I do not have a problem with making life more convenient, but we must stop and ask ourselves what price are we paying for this convenience and who is bearing the greatest cost? In agriculture, it's the farmers out on the land, being squeezed out of business because they cannot compete with the mega-farm operations. But in the long run, it is the consumer who will ultimately pay the price for the lack of choice. Currently Americans pay between 10%14% of their disposable income for food as compared to other modern countries who spend 25% or more. Many underdeveloped countries pay as much as 100% of their disposable income for food. Those figures may dramatically change when and if food production is controlled by a few conglomerates and the competition provided by family and independent farmers is gone.
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Years ago I used to tell a story about a day when there might only be two farms left in America, one on the east side of the Mississippi and one on the West side of the Mississippi. If those two operations wanted to raise the price of food, all they would have to do was create a shortage (whether real or by design) and the price would subsequently rise. At the appropriate moment, the food pipe line would refillhowever, the price would remain artificially high and consumers would continue to pay more and more for food. With all of the recent consolidations in agriculture, that story is becoming more and more trueit sounds more like a prediction for the not too distant future than a fictional story.
I have called the Department of Justice to inquire what can be done to more closely examine these consolidations taking place in agriculture. The answer I receive from the Department of Justice is an honest one, they are a law enforcement agency, not a regulatory agency. It is not the job of the Department of Justice to construct the laws, it is their job to enforce the ones that are on the books. I believe this committee, along with the House Committee on Agriculture is faced with the serious task of providing the Department of Justice with the tools it needs to vigorously examine and investigate potentially monopolistic mergers. I would like to offer my help to the Committee in any way possible to assure that future consolidations in agriculture do not create monopolistic conditions in agriculture.
Many people would say we have already crossed a line and we are well on our way to corporate farming, the days of the family farmer are long gone. I do not share the pessimistic view . . . After all I'm a farmer. If I wasn't an optimist I wouldn't be in farming. But, as we head into the new millennium, we must answer important questions about what we want the future of farming to look like.
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Chairman Hyde and Ranking Member Conyers I would like to thank you for holding this hearing and I look forward to working with the rest of the members of the committee on finding solutions to the problems facing our agricultural economy. Thank you.
PREPARED STATEMENT OF THE NATIONAL FARMERS UNION
This testimony is on behalf of the 300,000 farm and ranch families who are members of the National Farmers Union. Because concentration is such a key concern for farmers and ranchers, NFU commissioned a study on concentration from Dr. William Heffernan, rural sociologist at the University of Missouri, and one of the foremost experts on the impacts of concentration. The study was released on February 12, 1999, and a copy of the study is included for the hearing record.
In 1996, Congress passed a farm bill called ''Freedom to Farm''. A central component of the legislation was expanded planting flexibilityhence the catchphrase, freedom to farm. However, farmers and ranchers attempting to sell their commodities in today's markets are finding a distinct lack of freedom, i.e., there is no freedom to market. Much of this is attributable to the fact that there are too few buyers left to compete for commodities. Instead, buyers are consolidating at an ever-increasing pace.
One of the leading examples of the race to consolidate is in the pork production and processing industry. In the space of less than a year, Smithfield has purchased Carroll Foods, and announced its intention to purchase both Murphy Family Farms and Tyson's Pork Group. Smithfield is the largest producer and largest processor of pork. Smithfield's 48 plants processed 20 percent of the nation's hogs last year.
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If these additional acquisitions are allowed, Smithfield will be vertically integrated at an incredible 70 percent, that is, 70 percent of the animals slaughtered by Smithfield will be animals the company owns. As a result, Smithfield would have little need to buy animals in the open market at competitive prices. The attached chart shows the largest hog producers in the United States, and how that level has increased during the past five years.
Concentration is high throughout the livestock sectors. Four of every five beef cattle are slaughtered by the four largest firms. Three of every four sheep are processed by the four largest firms. Three of every five hogs are slaughtered by the four largest firms. Half of all broilers (chickens produced for meat) are slaughtered by the largest four firms. A table from the Heffernan concentration study is attached.
Agricultural in-put suppliers are also consolidating at a rapid pace. Consequently, farmers and ranchers are left with fewer choices of seed, fewer machinery makers, fewer machinery dealers, and fewer companies from which to buy herbicides, pesticides, and fertilizer.
The Justice Department is currently considering the merger between Case-International Harvestore and New Holland. If this merger occurs, farmers and ranchers in many areas will have one company left from which to buy machinery. It will eliminate ''dealing'' for the best price. It will also eliminate many local dealerships, leaving producers with less service and long distances to travel when that critical part is needed at harvest time. The loss of the dealerships will be losses to rural communities as well.
Page 197 PREV PAGE TOP OF DOC While small-scale mergers have always occurred, today's mergers are worth hundreds of millions of dollars. If given final approval, Cargill's acquisition of Continental Grain Company will merge the largest grain company with the third largest grain company. Cargill and Continental rank number one and two as the leading grain exporters. This merger has been referred to as the ''grand-daddy'' of all mergers in agriculture.
Producers are encouraged to engage in niche marketing and to increase their profitability by adding value to their commodities. However, even those opportunities are shrinking, as the competition between processors and retailers gives way to alliances between the two sectors.
In order to position themselves for the future, some large processors are using special marketing agreements with large retailers. Processors are testing ''scan-based trading'' a process which allows the processor to deliver products to the store and then the store directly deposits funds into its account as consumer purchases are made. There is no inventory record prior to the sale. This allows the processor to deliver the product at any time of day. However, it has the potential to harm consumers by diminishing price transparency and is likely to prevent smaller firms, including most producer-owned cooperatives from even getting their product to the retail shelf.
While many of the impacts of these mergers and alliances hit farm and ranch families first, they have dramatic repercussions for consumers. The landscape changes as family farms are forced out of business and replaced by either urban development or factory farms. The workforce changes as private businesses change to contract production. The food supply changes as local production shifts to international production. The environment is challenged as more and more animals are raised in large confinement operations, producing literally mountains of animal waste. The food delivery system, especially in rural and inner city areas, is destroyed as small grocery chains are forced out of business by large chains.
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The loss of family farms and ranches and other independently owned businesses is not inevitable. The accelerated march toward a totally vertically integrated production system can be turned around. However, that action will not happen unless Congress takes immediate steps to reactivate the regulatory system and revitalize independently owned businesses.
1. Congress should enact a moratorium on agricultural mergers, to provide time enough to review what is happening with mergers and take appropriate action if needed. Last week the Senate introduced a bill calling for an 18-month moratorium on large agricultural mergers, i.e., mergers involving companies with assets of $100 million acquiring companies with assets of $10 million or more. The bill also provides for the appointment of a 12-member panel to study concentration and make recommendations within a year as to appropriate action.
2. Congress should pass legislation that would allow farmers and ranchers to hold retailers responsible for price gouging. Under current case law, farmers and ranchers cannot sue retailers due to legal precedent set by Illinois Brick, a case where the court held that farmers and ranchers have no legal standing for recourse against retailers since they do not deal directly with retailers. As the retailers gain more and more power within the marketplace, it is vital that they should at least be liable for damage they cause due to market manipulation.
3. Congress should prohibit packer-ownership of livestock. Ownership allows the packer to control supply in a way that results in the packers manipulating the market so that farmers and ranchers receive less for livestock. The Senate introduced legislation last week that would limit packer ownership to 14 days prior to slaughter. This is a step in the right direction.
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4. Congress should continue to strengthen mandatory price reporting legislation. A good start was made in the fiscal appropriation for Agriculture for 2000. However, price reporting should be extended to cover all purchases and contracts for all livestock and all beef, pork, and lamb. This will help farmers and ranchers receive fairer treatment within the market place.
5. Congress should require USDA to collect concentration information. Currently, the University of Missouri collects information to show the top 4 firms in many different commodity areas. However, the problem is that some of the information is not readily available to the university. USDA is in position to have the best access to the information.
6. The Justice Department (DOJ) and the Federal Trade Commission (FTC) should require firms to submit information on joint ventures and alliances that are between firms above a certain size. In many cases, firms that are participating in joint venture arrangement behave just like firms that have merged. Yet, joint ventures and alliances have not been subject to any scrutiny.
7. Congress should consider enacting a level of concentration that triggers an automatic antitrust violation to make it easier for the Justice Department and the Federal Trade Commission to prevent high levels of concentration.
8. Congress should require the Justice Department and the Federal Trade Commission to detail why mergers that are subject to antitrust review are okay, if the decision is made not to oppose the merger. This would improve accountability.
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9. Congress should require an economic impact statement detailing the expected impact a deal will have on farmers and ranchers prior to allowing an agricultural merger.
10. Congress should enact country of origin labeling to allow consumers to know where their food supply is being produced.
11. Congress should ensure that publicly-funded research is benefiting family-sized agricultural businesses and surrounding communities.
12. Congress should prohibit the use of rural development grants for creation of factory farms.
13. Congress should enact legislation to bring poultry under the jurisdiction of USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA). Legislation has been introduced by Rep. Marcy Kaptur.
14. Congress should enact legislation to authorize contract producers to form collective bargaining units to negotiate with integrators. Legislation has been introduced by Rep. Kaptur.
15. Congress should prohibit slotting fees. Slotting fees provide windfall profits to retailers and create an expensive barrier for new firms and new products.
Mergers within the agricultural sector are bigger than ever and occurring at a very rapid pace. Our concern is that some of the activity will destroy infrastructure that will be nearly impossible to rebuild or replace. Therefore, we urge Congress to thoroughly examine what is happening and how these transactions are affecting our nation's consumers, producers, and other entrepreneurs. We appreciate the opportunity to submit our statement and look forward to working with members of Congress to meet these challenges.
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LARGEST HOG PRODUCERS IN THE U.S.
OCTOBER 19, 1999
Rank Name of Operation Headquarters Sow Base # Sows 1999 # Sows 1994
1 Smithfield Foods/Murphy/Tyson Smithfield, VA NC, VA, UT, MO, OK, IL, AR 785,000* 65,000
2 ContiGroup Companies Kansas City, MO MO, NC, TX 162,000 20,000
3 Seaboard Corporation Shawnee Mission, KS KS, CO, OK 145,000 20,000
4 Prestage Farms Clinton, NC NC, MS 121,000
5 Cargill Minneapolis, MN NC, AR, OK 110,000 77,000
* If Smithfield buys Prestage and Goldsboro, the total sow numbers would be 972,000 sows.
CONCENTRATION OF AGRICULTURAL MARKETS
Page 202 PREV PAGE TOP OF DOC ''CR4'' is the concentration ratio (relative to 100%) of the top four firms in a specific food industry. Fifth and sixth top companies are occasionally shown as supplemental information.
BEEF PACKERS [CR4 = 79%]* Capacity/Day* / Plants* 1990 1995 1998
1. I B P Inc. 38,800 13 72% 76% 79%
2. ConAgra Beef Companies 23,600 8
3. Excel Corporation (Cargill) 21,800 5
4. Farmland National Beef Pkg. Co. 8,700 2
5. Packerland Packing Co. 4,750 3 CR5 = 83%
Source: *Beef Today (Nov-Dec 1998)
CATTLE FEEDLOTS* Head Office Capacity / Feedlots
1. Continental Grain Cattle Feeding Boulder, CO 405,000 / 6 lots
2. Cactus Feeders Inc. Amarillo, TX 350,000 / 6 lots
3. ConAgra Cattle Feeding Greeley, CO 320,000 / 4 lots
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4. National Farms Inc. Kansas City, MO 274,000 / 7 lots
5. Caprock Industries (Cargill) Amarillo, TX 263,000 / 4 lots
Source: *Beef Today (Nov-Dec 1998)
NOTE: At end of 1998, the top 30 operations had pen space to feed 4.89 million head of cattle.
PORK PACKERS [CR4 = 57%]* 1987 1989 1990 1992**
1. Smithfield (Gwaltney, Cudahy, Morrell, Lykes) 37% 34% 40% 44%
2. IBP Inc.
3. ConAgra (Swift) **Packers & Stockyards Programs
4. Cargill (Excel) GIPSA, USDA; February, 1996
5. Farmland Industries
6. Hormel Foods CR6 = 75% (NYTimes, 1/7/99)
Source: *National Hog Farmer (March 1998)
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# of Sows
PORK PRODUCTION In 1998* Production Base
1. Murphy Family Farms 337,000 NC, MO, OK, IL
2. Carroll's Foods 183,600 NC, VA, IA, UT
3. Continental Grain (inc. PSF) 162,000 MO, NC, TX
4. Smithfield Foods 152,000 NC, VA, UT
5. Seaboard Corporation 125,500 KS, CO, OK
NOTE: The 50 largest producers (assuming their sows each produce 20 pigs a year) market half of the pigs in the U.S.
Source: *Successful Farming (October 1998)
BROILERS [CR4 = 49%]* *Weekly Production (mil.lb) CR4 1990 1995 1998 *1986 1990 1994 1998
1. Tyson Foods 74 90 155 35% 44% 46% 49%
2. Gold Kist 24 45 55
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3. Perdue Farms 24 42 47
4. Pilgrim's Pride 16 25 35
5. ConAgra Poultry 32 35 30
6. Wayne (Continental Grain) 11 20 25 CR6 = 58%
Sources: *Feedstuffs (Annual Reference Issues)
TURKEYS [CR4 = 42%]* Million lbs live *1988 1990 1992 1994 1996
1. Jennie-O Turkeys 891 31% 33% 35% 38% 40%
2. Butterball (ConAgra) 846
3. Wampler Turkeys 650
4. Cargill Turkeys 514
5. Shady Brook (Rocco) 489 Sources: *Turkey World (Jan-Feb issues)
ANIMAL FEED PLANTS
Page 206 PREV PAGE TOP OF DOC1. Cargill (Nutrena)
2. Purina Mills (Koch Industries)
3. Central Soya
4. Consolidated Nutrition (ADM + AGP) Sources: Feedstuffs, 10/28/91 and 2/21/94
MULTIPLE ELEVATOR COMPANIES [CR4 = 24%]* Control by Top Four:
1. Cargill Capacity in Bushels = 24%
2. ADM (ADM Milling Co.) Number of Facilities = 39%
3. Continental Grain Port Facilities = 59%
Source: *1997 Grain & Milling Annual (Milling & Baking News)
FLOUR MILLING [CR4 = 62%]* Mills / Daily Capacity
1. ADM Milling Co 30 311,300 cwts **1982 1987 1990
2. ConAgra, Inc. 29 264,900 cwts 40% 44% 61%
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3. Cargill Food Flour Milling 18 223,000 cwts
4. Cereal Food Processors, Inc. 9 82,900 cwts
Sources: *1997 Grain & Milling Annual; **Milling & Baking News, 12/1/92
DRY CORN MILLING [CR4 = 57%] Plants / 24hr. Grind
1. Bunge (Lauhoff Grain) 2 120,000
2. Cargill (Illinois Cereal Mills) 2 95,000
3. ADM (Krause Milling) 2 70,000
4. ConAgra (Lincoln Grain) 3 52,000
5. Quaker Oats 3 45,000
Sources: Corn: Chemistry & Technology (1989)
WET CORN MILLING [CR4 = 74%]* Plants
1. ADM 4 1977 1982 1987
Page 208 PREV PAGE TOP OF DOC2. Cargill 4 63% 74% 74%
3. A.E. Staley (Tate and Lyle) 4 (Census of Manufacturing)
4. CPC 3
Source: *Milling & Baking News, 1990 Milling Directory
SOYBEAN CRUSHING [CR4 = 80%]*
1. ADM 19 12 1977 1982 1987
2. Cargill 16 12 54% 61% 71%
3. Bunge 8 5 (Census of Manufacturing)
4. AGP 6 3
Source: *Feedstuffs (9/22/97)
ETHANOL PRODUCTION [CR4 = 67%]*
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1. ADM 750 IA, IL, ND
2. Williams Energy Services 130 IL, NE
3. Minnesota Corn Processors 110 MN, NE
4. Midwest Grain Products 108 IL, KS
5. Cargill 100 IA, NE
REPORT TO THE NATIONAL FARMERS UNION
CONSOLIDATION IN THE FOOD AND AGRICULTURE SYSTEM
REPORT PREPARED BY DR. WILLIAM HEFFERNAN, DEPARTMENT OF RURAL SOCIOLOGY, UNIVERSITY OF MISSOURI, COLUMBIA, MO
WITH THE ASSISTANCE OF DR. MARY HENDRICKSON, DR. ROBERT GRONSKI, UNIVERSITY OF MISSOURI-COLUMBIA
FEBRUARY 5, 1999
Page 210 PREV PAGE TOP OF DOC The organizational structure of the national/global food system is dynamic. New firm names emerge, often the result of new joint ventures, and old names disappear. 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 of much of the agricultural policy developed over the past couple of decades. These structural changes, often referred to as ''the industrialization of agriculture,'' have progressed to the point that some agricultural economists now refer to the agricultural stage of the food system as ''food manufacturing.''
No longer can agricultural policy be discussed apart from the food system, because major engines of change that are impacting agriculture and muting the impact of agricultural legislation come from the larger food system. As one who has been studying the changes in the structure for over three decades, I am delighted the Congress has chosen to include a dialogue on the structure of the food system as part of the agricultural policy debate. Concentration of the food system must be a part of that debate, if the policy is to address some of the problems faced by farmers and the relatively few remaining rural communities that still depend heavily on an agricultural base.
One often hears the statement that agriculture is changing and we must adapt to the changes. Few persons who repeat the statement really understand the magnitude of the changes and the implications of them for agriculture and for the long-term sustainability of the food system. 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.''
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For well over a decade, several of us at the University of Missouri have been reporting the concentration ratios of the largest four processors of most of the major commodities produced in the Midwest. We liken the food system to an hour glass in which farm commodities produced by thousands of farmers must pass through the narrow part of the glass that is analogous to the few firms that control the processing of the commodities before the food is distributed to millions of people in this and other countries.
We focus on the largest four processing firms because the economic literature in the mid-1980's indicated there was general agreement that if four firms had 40 percent of the market, that market was no longer competitive. We realized that this selection was somewhat arbitrary, but it has provided a useful benchmark.
When we began collecting the data in the mid-1980's, this information was relatively easy to obtain in trade journals, government reports, annual reports from corporations and other secondary sources. Over time, this information has become more difficult to obtain. Trade journals have come under pressure to not publish some of this information and government agencies often say that to reveal the proportion of a market controlled by a single firm in such a concentrated market is revealing proprietary information.
I once appeared on a panel to discuss the concentration of the beef sector with three others. Each of us had a different percentage of the market controlled by the largest four beef slaughtering firms. We agreed on the largest four firms and their ranking, and differed only slightly on the percentage of the market the four controlled. The range of difference was only about six percent and probably not really significant because we all agreed the top four had at least 75 percent of the market. Yet as a social scientist, I am uneasy about such differences. Differences of this magnitude can (and should) raise questions about the legitimacy of such research. We work hard to get these numbers and I'll defend the trends we highlight from the data, but I cannot defend each percentage.
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The fact that these ''CR 4 Tables'' (see tables attached to this report) have become popular indicates that most people have not found information on market share to be very accessible. In a democracy where we expect the citizens to be involved in setting national policy, it is absolutely necessary that they have accurate information on some of the major drivers of change. At times I have appeared publicly with persons from some of the firms listed in our tables. My initial comment is that if my data differ from the data of the representative of the large firms, the audience must accept the data from the firm because primary data always trump secondary data and I only have access to secondary data. The public must have better data. I would urge Congress to seek better data and make it available to the public as it begins to debate the relationship between concentration and agricultural policy and rural issues.
Data in the table indicate that four firms control over 40 percent of the processing of the major commodities produced in the Midwest. In addition, a few firms appear in the list of the top four processing firms for several commodities. For example, ConAgra is on the list of top four processing firms for beef, pork, turkeys and sheep, as well as seafood, a commodity not listed in the tables. This year it has slipped to fifth place in broiler production and processing. The data also begin to suggest the vertical integration in the food system. For example, Cargill ranks in the top four firms producing animal feed, feeding cattle and processing cattle.
The data do not reveal the extent of vertical integration in the food system in the United States or the complex web of interactions among the top firms. This data cannot even attempt to address the global nature of the food system. In an effort to communicate the complicated interaction between the firms and reveal the structure of the food system, we have attempted to diagram some of the formalized working relationships between the dominant firms in the global food system. This information does not begin to exhaust the list of mergers, joint ventures and side agreements. We have only scratched the surface. These data are exploratory, but suggest the type of information needed to understand the concentration of the global food system.
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We have already noted the difficulty of getting information in this country. Getting global information is far more difficult. To understand the U.S. food system, one must understand the global food system; to understand the global food system, one must understand the operations of the major global firms such as Cargill, ADM, and ConAgra. Cargill has operations in 70 countries and is a privately held firm. How do we get all of the necessary information? We have exposed the tip of the iceberg, but exposure only indicates the type of information needed to understand the global food system.
The major concern about concentration in the food system focuses on the control exercised by a handful of firms over decision-making throughout the food system. The question is who is able to make decisions about buying and selling products in a marketplace. The focus of economic power is usually placed on the individual firm and its market share. For some of the global firms, this is still somewhat appropriate. However, decision-making can also be exercised through the various relationships in which a firm is involved even if it does not hold a majority share. The changing nature of the food system suggests that relationships among the firms are becoming much more complex and much more important.
In the past, most of the global grain firms were family-held operations that tried to maintain low visibility and were quite secretive about their transactions. These firms operated in one or two stages of the food system and in a very few commodities. Today the system is becoming much more complex starting with involvement in biotechnology, extending through production, and ending with highly processed food. Increasingly, these firms are developing a variety of different alliances with other players in the system. Acquisition is still a common method of combining two or more firms, but mergers, joint ventures, partnerships, contracts, and less formalized relationships, such as agreements and side agreements, are also utilized. We will use the concept ''cluster of firms'' to represent these new economic arrangements.
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We have chosen to organize the information around the emerging clusters of firms that control the food system from gene to supermarket shelf. The term ''alliance'' is frequently used to suggest the ''seamless system'' which describes the emerging, fully vertically integrated food system from gene to shelf. Within this emerging system, there will be no markets and thus no ''price discovery'' from the gene, fertilizer processing and chemical production to the supermarket shelf. The only time the public will ever know the ''price'' of animal protein is when it arrives in the meat case. As this system evolves, even the price of the livestock feed and its ingredients, such as the corn, will not be known to the public, because like today's broilers the product will not be sold. The firm owns the chick and sends it to their processing facility from which it emerges, perhaps in a TV dinner. However, the prices along the line of production are never discovered until the chicken is sold to the consumer. In a food chain cluster, the food product is passed along from stage to stage, but ownership never changes and neither does the location of the decision-making. Starting with the intellectual property rights that governments give to the biotechnology firms, the food product always remains the property of a firm or cluster of firms. The farmer becomes a grower, providing the labor and often some of the capital, but never owning the product as it moves through the food system and never making the major management decisions.
The system is still evolving and it is not yet possible to determine how many clusters may evolve, but experiences in other economic sectors, like the auto industry, suggest we seldom see monopolies evolve. Even at the global level, where there are no anti-trust regulations, oligopolies, not monopolies, tend to emerge. We are predicting the development of four or five food clusters, because the number of clusters will be heavily influenced by the number of firms who have access to the intellectual property rights. The underlying assumption here is that biotechnology will be accepted by most nations of the world, an assumption that may not be valid, because this acceptance is still in question in some countries. We will make this assumption here because the monopoly power that accompanies the intellectual property rights that leads to control of the gene pool will be most difficult for any new or emerging cluster to obtain. We are certainly open to a critique of our starting point. Disagreeing with our point of departure for the sake of organizing the data should not influence the relevance of the data we use to describe the evolving system.
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The Food Chain Clusters
Monsanto is one of the leading biotechnology firms. The joint venture between Monsanto and Cargill announced in 1998, clearly established one of the clusters. Cargill had already established its own food chain over the past several years by planned acquisitions. It was one of the largest seed firms in the world with seed operations, including research operations, in twenty-three countries of the world. However, Cargill did not have access to biotechnology and the new genetic products it would produce. As the Wall Street Journal (9/29/98) pointed out, ''most seed companies have either aligned themselves with, or been acquired by, crop-biotechnology juggernauts such as Monsanto Co., DuPont Co. and Dow Chemical Co.'' Thus, they sold their international seed operation to Monsanto and their domestic seed operation to AgrEvo, a Berlin-based joint venture between Hoechst and Schering (Wall Street Journal 9/29/98). Cargill then formed a joint venture with Monsanto, the company that had the intellectual property rights to develop the genes and had a very comprehensive array of seed firms (Knight-Ridder/Tribune 7/28/98).
Perhaps most importantly, the Cargill/Monsanto cluster is now in the process of obtaining control of the ''terminator gene'' that can be inserted into plants to cause all of their seeds to be sterile. No longer will Monsanto have to depend on access to farmers' fields for collection of tissue samples to make sure farmers do not keep any seed from one year's crop to plant the following year. Use of the terminator gene will mean that all crop farmers must return each year to obtain their seed from seed firms, just as corn producers have done for the past half-century.
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There are two points to be made from the above scenario. The first point is that the reorganization of the food system is very dynamic and new technologies and other changes coming from outside the system can greatly disrupt the plans and organizational structure that a firm or cluster has developed. The second point is that a firm the size of Cargill has access to such large sums of capital that it can usually acquire whatever assets are necessary to survive. In addition, they are recognized as such formidable firms in the system that they can easily find other partners eager to join with them because the new partner is also eager to remain an active player in a food chain cluster. The Cargill/Monsanto cluster brings together giants in their respective stages of the food system. They needed each other to be a part of a complete cluster. They have a complete food chain, but they realize that very few clusters will survive so they continue to actively pursue other firms through acquisitions, joint ventures or other arrangements to increase their economic power.
The most recent proposed acquisition is the grain merchandizing division of Continental Grain. This acquisition brings with it almost 70 inland grain elevators and seven export terminals (Wall Street Journal, 11/10/98). The acquisition of Continental's grain division would appear to be relatively inconsequential if one examines the elevator capacity in bushels or the number of facilities, two items that are often used as indicators of ''point of first purchase of grain'' (purchase of grain directly from farmer). In certain regions of the country, such as along the Illinois and Ohio rivers, Cargill's acquisition does limit a farmer's choice to either Cargill or ADM. The largest four firms (Cargill, ADM, Continental Grain and Bunge) only have 24 % of the elevator capacity in bushels and 39 % of the facilities.
The importance of the merger becomes more obvious when the data show that the four firms control almost 60 % of the port facilities. The Cargill acquisition of Continental would mean that Cargill ''would control more than 40 percent of all U.S. corn exports, a third of all soybeans exports and at least 20 percent of wheat exports.'' (Grainnet, 12/1998). At the global level, the merger combines what was reported at the start of the decade to be the largest two global grain traders (Knight-Ridder/Tribune Business News, 11/10/98). The emergence of ADM as a major global grain trader came through the acquisition of parts of Louis Dreyfus (originally a joint venture involving ADM leasing elevators) and Pillsbury (a part of Grand Metropolitan, a British firm that merged with Guiness). Bunge was third for a time, but a joint venture to share wheat handling facilities between ConAgra and Farmland Industries and the alliance between Cenex-Harvest States directly to ConAgra (through Peavey), and indirectly to Farmland, has reduced the number of global grain traders during the past decade.
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The pressures causing a firm like Cargill to continue to seek to enlarge its cluster is perhaps best summarized in a quote from the Wall Street Journal (11/10/98 p. A3):
As grain handlers go, Continental Grain is at a big disadvantage because it doesn't have the facilities to mill and refine crops into higher-value products, such as flour and high-fructose corn syrup. When U.S. exports slow, as they have this year , Continental Grain can't shift crops to domestic uses in the same way that Cargill and Archer-Daniels-Midland Co. can. Cargill and Archer-Daniels are major grain processors . . .
For Cargill, a deal with Continental Grain would increase the number of its grain-gathering facilities all along the Mississippi River and in important exporting ports such as New Orleans. In 1996, Continental Grain operated 70 inland grain elevators and seven export terminals. It isn't clear whether Cargill would close some overlapping operations.
Cargill's interest in Continental Grain follows several moves by Archer-Daniels of Decatur, Illinois, to increase its grain-storage capacity through joint ventures and acquisitions. Industry officials said Archer-Daniels can top about 500 million bushels of grain world wide. A pact with Continental Grain would allow Cargill to directly access more grain than Archer-Daniels currently can.
Continental was also feeling the pressures of a changing food system. According to the Wall Street Journal (11/11/98, pA10), Continental CEO Paul Fribourg was convinced that his company could not continue as a grain handler because of competitors expanding into ''the more-profitable businesses of milling and crop biotechnology.'' In fact, the company considered merging with a commodity processor before selling the business to Cargill. The deal raises some interesting questions. What does ContiGroup, the remainder of Continental, plan to do for access to grain for feeding its hogs, cattle and poultry and where does it plan to get its cattle slaughtered? Does ContiGroup feel it can add to its processing capacity to meet its growth projections and compete with Smithfield, IBP, ConAgra and Cargill and the clusters it is joining? Is there some side agreement that has not yet been made public which will include ContiGroup within the Cargill/Monsanto cluster? What happens to the alliances Continental had with Harvest States (Tacoma Export Marketing Co.), Optimum, a joint venture with DuPont/Pioneer, ContiPasz, a feed company in Poland, and its venture with Quincy Soybean Company, now owned by ADM?
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Industry analysts suggest one of the reasons Cargill needs more facilities is to position the company as a major grain trader as identity-preserved products come on line. Those promoting value-added opportunities for farmers have suggested that small, single facility firms, like new generation cooperatives, might find a niche in the handling of identity-preserved products because the big grain traders could not or would not come into such small markets. With the additional facilities Cargill has just acquired, it is in position to utilize a facility in the center of a farming region that could produce the new product and contract with surrounding farmers for the product. Cargill could use marketing contracts or production contracts much like it does in the poultry sector.
Reports suggest Cargill paid about one billion dollars for Continental (Wall Street Journal, 11/11/98 p. A10). That is only about half of their 1998 income. Cargill could buy two operations the size of Continental's global grain division with one year's earnings. That is economic power. There is freedom of entry into the global food system for those firms that can match that level of purchasing power. Cargill's corporate goal is to double in size every five to seven years that it says it has achieved for the past 40 years. Since the major firms in these clusters expect to make at a 20 percent return on their equity, the Cargill goal is very similar with other such firms.
With diversified interests ranging from ''farm gate to dinner plate,'' a ConAgra subsidiary can be found along most links of the food chain. ConAgra is one of the three largest flour millers in North America and ranks fourth in dry corn milling in the U.S. The company produces its own livestock feed and ranks third in cattle feeding and second in cattle slaughtering. It ranks third in pork processing and fifth in broiler production and processing. In its 1997 Annual Report, ConAgra explained that its United Agri Products (UAP) business is a leading distributor of crop protection chemicals, fertilizers and seeds in the U.S., Canada, Mexico, Chile and U.K. UAP is moving into new markets around the world, such as through a joint venture with Zeneca Agrochemicals (now AstraZeneca) in the Cape region of South Africa which will establish a base for UAP growth on the African continent. ConAgra's annual report also noted that UAP is a leader in the distribution of new biotechnology products, principally seeds. As part of ConAgra, UAP identifies new applications for biotechnology in the food industry and provides links to other ConAgra companies, which can capitalize on the application potential for consumers.
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In the handling and transportation of grain, ConAgra owns about 100 elevators and 1,000 barges and 2,000 railroad cars. ConAgra's grain trading company, Peavey, is ranked third in ownership of U.S. covered barge fleet. American Commercial Barge Lines, Inc., is number one, followed by Artco, a company owned by Archer Daniels Midland. According to the trade journal Feedstuffs (9/95), these top three controlled 53% of the nation's covered barge fleet.
Despite ConAgra's long history of being a company from ''seed to shelf'', we are unsure of the direction of their food chain cluster, although hints are to be found in their annual report. One indication is ConAgra's Agri Products division teaming with DuPont in a group of joint ventures, about a dozen developmental businesses. According to a New York Times article (10/30/97), ConAgra's range of expertise may make it especially attractive to potential business allies like DuPont. For example, DuPont has relied heavily on ConAgra for the initial commercialization of its new high-oil corn. Once United Agri Products found farmers to grow the corn under contract, ConAgra's chicken operations bought the grain.
Relationships that exist between the food chain clusters also complicate any kind of explanation of the food system. For example, ConAgra and ADM formed a joint venture in mid 1998 to operate the Kalama grain export facility in Washington State. The new company, owned 5050 by the two giants, is known as Kalama Export and operates one of the most efficient export facilities on the West Coast. The facility was built by ConAgra and operated under its auspices from 1983 until the joint venture formed. In another grain-based alliance, ConAgra and Farmland Industries have linked together to improve both companies' services to farmers and grain marketing and export activities. The new alliance will consist of two entities, Concourse Grain and Farmland-Atwood. Concourse Grain will operate two ConAgra export elevators and two Farmland elevators (one export, one interior) and will market wheat originated by the two companies. This alliance will enable domestic and wheat customers to access multiple classes of wheat, and international customers to be served from multiple U.S. export points. Prior to these grain ventures, ConAgra created a joint venture with Harvest States Cooperatives in 1994 to operate three elevators in Iowa and two export grain terminals in Louisiana. The 5050 partnership, called HSPV, was expected to improve efficiency and flexibility in grain origination, shipment and handling of grain exports for both Harvest States and ConAgra's grain export company, Peavey (Feedstuffs 9/12/94).
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ConAgra follows the processing of food farther down the food chain than Cargill and ADM, ultimately selling labeled food items that most consumers would recognize such as Armour, Monfort, Swift, Butterball, Healthy Choice, Peter Pan Peanut Butter, Hunt's, and many others. It currently ranks second behind Philip Morris as the leading food processor in the U.S. In its 1998 Annual Report, ConAgra noted 18 consecutive years of earnings per share growth at a compound rate of 15 percent. Fiscal 1998 sales totaled $23.8 billion and fiscal 1998 operating profit, $1.6 billion. Chief executive Bruce Rohde, who succeeded Philip Fletcher in September 1997, has set a goal of making ConAgra the world's largest and most profitable food company by the year 2005. This means passing not only Philip Morris, but also world-leader Nestle of Switzerland.
ConAgra's growth during the 1990s has been accomplished through a strategy of acquisitions, divestitures and adding value to their products. Under the leadership of Philip Fletcher, the company's practice was to have 80100 acquisition candidates in screening at all times. ConAgra was able to report in 1998 that it had acquired or created joint ventures with approximately 150 companies during the past 10 years.
Novartis is a Swiss firm formed by the merger of CIBA-Geigy and Sandoz in late 1996. According to their 1997 Annual Report, the company has agribusiness operations in 50 countries worldwide. Their ''agriservices'' are primarily in crop protection chemicals, seeds and animal health. The merger of the two large chemical firmsplus the acquisition of Merck in 1997puts Novartis in the leading position in the global agrochemical field with sales of $4 billion in 1997 (Chemical Week, 5/21/97). This left Monsanto (not including its recent buying spree), Zeneca (a British firm that recently merged with a Swedish firm to create AstraZeneca) and DuPont all vying for second place in the global agrochemical field. In 1997, Europe Chemical News (4/28/97) estimated that Novartis had 15% of the global agrochemical market. Moreover, the company ''has the largest R & D budget in the life sciences industry'' according to their own press release in May 1997. Their emphasis on R&D is also reflected in their collaboration with the University of California-Berkeley, where they recently signed a 5-year $25 million research agreement to work ''in all areas of functional genomics related to agriculture, including gene-library construction, sequencing, mapping and bioin-formatics.'' (Chemical Market Reporter 11/30/98)
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The Novartis/ADM connection is established through Novartis joint venture with Land O' Lakes to develop specialty corn hybrids for the food and feed markets. Novartis purchased a 50% interest in Wilson Seeds Inc., a subsidiary of Land o' Lakes. The joint venture will also acquire genetics from Sturdy Grow Hybrids, already in a venture with Novartis to introduce a white corn hybrid with the Bt trait (PR Newswire, 10/14/98). Land O' Lakes maintains an alliance with Growmark (energy products) and recently took over Countrymark, a major eastern Corn Belt cooperative, both of which are in joint ventures with ADM. The link between Novartis/ADM is somewhat tenuous because Countrymark did not include their grain marketing division in the joint venture, a division that is already in a grain joint venture with ADM. However, the point is that the Novartis/ADM cluster, unlike Monsanto/Cargill, is really predicated on relationships with farmer cooperatives.
Though some might dismiss this Novartis/ADM connection as insignificant, one must raise the question of what these relationships could indicate in the future as firms jockey for position in these food chain clusters. First, 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 recent ones with Countrymark, Riceland, and United Grain Growers. The Growmark and Countrymark joint ventures, for instance, give ADM access to 50% of the corn and soybean market region, and 75% of Canada's corn and soybean market region (Feedstuffs 8/12/96). The 42% share ADM gained in United Grain Growersa former cooperative that is now publicly owned with major stakeholders also being the Alberta and Manitoba wheat poolsgives ADM widespread access to farmers in western Canada.
For the cooperatives who lacked the muscle of large firms in downstream processingas in the case of Minnesota Corn Processors, a new generation wet corn milling cooperative that sold a 30% non-voting share to ADMADM offered a far-flung global network in which to sell their grain. No one put it more succinctly than the president of Harvest States, who said when the Cenex-Harvest States merger was announced, that ''agriculture cooperatives must operate today 'in a land of giants' where capital and scale 'are absolutely necessary' . . . in a market where corporate multinationals rule.'' (Feedstuffs 11/24/97) ADM's own partner, Growmark's CEO Norm Jones, commented that the joint ventures with ADM positioned Growmark and Countrymark in the global agricultural industry, which represents the only expansion possibility for most cooperatives. (Feedstuffs 8/12/96) ADM has also used joint ventures with cooperatives such as Goldkist and Ag Processing Inc. (AGP) in the feed business. A spokesperson for Consolidated Nutrition (ADM's joint venture with AGP) said that cooperatives ''recognize the importance of partnerships as instruments to be competitive in an industry consolidating as substantially as the feed industry.'' (Feedstuffs 12/22/97)
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The Novartis/ADM connection is also important because Novartiswhile a truly global and powerful company with substantial sales in chemical, seed, animal health and human nutrition productslacked access to further processing in either grain commodities or food products. Novartis will need ADM's grain handling and processing web to be able to guarantee producers using their seed stock a downstream market. ADM, on the other hand, lacked access to biotech and needs Novartis' genetics, seed stocks and chemicals. As spokesman Martin Andreas of ADM said in a Feedstuffs interview (1/12/98) '' 'If you're not plugged into the global market today,' a company will have limited opportunity to prosper. . . . An international network 'is critical [and] if you are not tied into an international system, then you are not a traveler.' ''
Novartis' genes, seeds and chemicals compliment ADM's far-flung grain collection and processing network, created through the aggressive pursuit of joint ventures and alliances in Europe and Latin America. ADM's stake in A. C. Toepfer, one of the world's largest grain trading firms, and Dwayne Andreas' claim that ''my partners in the EU are 12 of the biggest farmers' cooperatives in the world . . .''(see footnote 20) allowed ADM to process 45% of the commodities entering Eastern Europe from the West in 1993. ADM has also pursued joint ventures and acquisitions in Latin America in the last few years. Just their purchase of parts of Glencore's holdings in Brazil and Paraguay generated a 4% increase in their share of the world's soybean trade (Feedstuffs 6/9/97). Moreover, they maintain joint ventures in a variety of different commodity processing and feed operations in Brazil, Paraguay, Bolivia and Mexicoand these are the alliances that are most easily documented. ADM has also advanced into the Chinese market through its oilseed refining, feed and broiler processing operations, where ADM is the junior partner with the Chinese government and a local processor. In discussing China's dilemma of balancing the need for food security or economic security, Martin Andreas, ADM's spokesman, commented ''It means that China is resigned to importing food and paying for it with products made from their overabundant supply of cheap labor.'' (Journal of Commerce 2/17/98)
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While ADM appears to be firmly networked at the commodity processing level, what is not so apparent is how they are going to substantially enter branded food productsas ConAgra has doneor production and processing in the livestock sector. ADM's venture into production and processing of livestock has been undertaken through their joint venture with AGP, Consolidated Nutrition, which has sow production on line, as well as ADM's steady increase of its stake in IBP, the largest U.S. beef packer and second largest U.S. pork packer. Although data are not readily available, IBP appears to have contracts with large feeding operations to guarantee captive supplies of beefand some pork although not as widespread as beef contracts. In a more surprising move, ADM has chosen to decrease its holdings in Pilgrim's Pride to 6.4%, a firm in which they had an almost 20% stake in 1992 according to Feedstuffs (7/13/92), at the same time they maintain a broiler processing plant in China. IBP has also moved into the Chinese market, bringing a fully integrated pork production and processing facility on line in 1997 (IBP Annual Report). We are not sure what this means in terms of the food chain cluster for beef, pork, turkey or broiler production and processing. Are Smithfield and Tyson poised to join this chain? Or will they move somewhere else while ADM pursues its relationship with IBP?
It is clear that we have only scratched the surface of the Novartis/ADM/IBP cluster. Data are very difficult to obtain, particularly reliable data about global operations. For instance, who are ADM's EU cooperative partners, besides the ones we have listed? How do ADM's operations in China impact farmers in the United States? What role does ADM's own brokerage firm, among the top 40 largest in the US, play in currency and grain futures trading, particularly when ADM is a major grain handler and processor in Europe, North and South America and Asia?
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Finally, the development of feed additives and other derivatives from wet corn milling remains a fascinating and potentially lucrative market as shown by Cargill's interest in entering the additives market through joint ventures with firms like Degussa. ADM is quite powerful in the production of lysine and citric acidas evidenced by their recent legal troubles in the U.S. and EU in regards to both productsand is gaining ground in such new products as Vitamin E and soy isoflavones. The key question, which none of the major cluster firms has yet addressed, is what happens with further processed branded food products and supermarket sales? Novartis has their Gerber baby food, ADM has Haldane foods in Britain and their continuing production of Harvest Burger vegetarian alternative for Worthington Foods in the U.S., and IBP acquired institutional processor and supplier FoodBrands Inc. However, none yet have the presence of ConAgraor Philip Morris for that matteron the shelf or in the cooler in supermarkets. These questions still remain and are particularly relevant to public policy debates.
Moving Beyond the Data
There are a host of major players in the food system which are not included in our three food chain clusters. Some have already begun to form alliances and others are still acting in a rather individualistic manner. Most likely, some of these will join together to form new food chain clusters, while others may join the clusters we have identified. Pioneer and Mycogen can form the anchor for other chains. Firms like American Home Products, DuPont, Dow, AstraZeneca, and Aventis, a recent joint venture of Rhone-Poulenc and Hoechst-Schering, are likely to join a cluster, as are some of the fertilizer firms. Bunge, a major grain trader, and some major animal production and processing firms like Tyson, Perdue, Smithfield and its alliance members Carroll's Foods and Murphy Family Farms, might well develop a working relationship. There are already relationships between many of these firms for which we have not indicated a cluster and some of them have or have had relationships with firms in the three clusters we have identified.
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Watching the clusters develop by forming new relationships and breaking some of the old and speculating on what other relationships might develop is like watching a chess match and trying to anticipate the players' next moves. In this game, there can be four or more winners. The system is very dynamic. However, a look at the list of acquisitions and mergers during the past decade, or as we have shown within the last five years, suggests far more names were lost as firms joined another management unit than new names emerged. Many of these new names are simply the realignment of existing firms.
The diagrams help to communicate three points. The first is that a very small number of dominant food chain clusters appear to be emerging. Some are organized around one or two dominant players as exemplified in the cases of Cargill/Monsanto and ConAgra, which is only loosely connected to a biotechnology firm. The Norvartis/ADM/IBP case suggests another method of building a food chain cluster that is probably the path many of the major key players not yet involved in a cluster will follow. At least during the formative period, a dominant firm from the biotechnology area, one from the grain trading and processing area, and one from the meat production and processing develop a working relationship that is a bit more tentative than a merger. We are not suggesting these relationships are set in stone, even acquisitions can be sold. But the freedom of entry is restricted.
The second point is that the food system is becoming very complicated and difficult to describe. The complication in describing the system results from the fact that there is not a group of individualistic firms out there competing with one another. We are especially interested in all the relationships that exist within the clusters and those crossing from one food chain cluster to another. Some of these are the result of firm A having a relationship with firm B, and then developing a new relationship with firm C. But some of the relationships crossing cluster boundaries are new. The whole system is woven together by a host of working relationships between firms and, at least for the short run, the system looks pretty fluid. One is left asking the question: just how much competition is there in the system? We know there are examples of rivalry between firms and in some cases the firms are spending millions of dollars in court to settle their differences. Maybe the society would benefit most if the differences were to be settled in a competitive market! Knowing that Nippon Meats of Japan has a twelve to fifteen year joint venture with Cargill producing broilers in Thailand makes it hard to believe there are not some constraints in the competition they exercise in this country as Nippon becomes a hog producer and processor in United States.
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The third point is that 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. The experts, even the leaders of cooperatives, are telling farmers they must give up their independence and join an alliance. This is another way of saying ''give up your decision-making prerogatives to the food chain cluster if you want to maintain an economically-viable farming operation.''
In most of the livestock commodities, the production stage is integrated into the larger food system. Ninety-five percent of the boilers 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. The food product does not sell at these stages. Basically there is no national market for live broilers. (There are niche markets emerging for range poultry and other specialty poultry, but processing is emerging as a major problem.) The production system is about the same for turkeys and eggs. At the end of low hog prices, which may last for at least another year, there will be few independent hog producers remaining. The issue is not who can produce the hogs the most efficiently. The issue is who has the deepest pockets and market share. Even now, the issue of market access for producers who do not have special relationships with feed or slaughtering firms has become obvious. Twenty feedlots feed about half of the cattle in the US and these are either owned by the slaughtering firms or have contracts with the processing firms. Operators of ''independent lots'' tell us that they seldom see buyers from more than one firm. Dairy farms are being consolidated, leaving only the cow/calf sector out of the integrated system. The cow/calf sector is the most highly subsidized sector of agriculture, subsidized by non-farm income. The cow/calf producers without access to non-farm income are facing economic hard times.
Page 227 PREV PAGE TOP OF DOC The movement toward increasingly differentiated products is bringing more contracts into field crop production. Two recent technologies will hasten the process of vertical integration in the crop sector. The first is biotechnology and the terminator gene that places 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, he/she has no market access. The second technology is precision farming's global positioning system. It is no longer necessary for the farmer to have personal contact with their land and crop to make appropriate management decisions. Most of the decisions can now be made in the farmer's office. Any decisions that can be made without contact with the land and the crop can be made in an office in a distant city. In the not too distant future the person operating the corn planter will not know much about the genetic material of the corn being plantedjust like the broiler grower does not know about the genetic stock of the birds he/she feeds. As the ''farmer'' watches the big truck with the computer on board reading from a satellite, he/she will not know much about the fertilize or chemical being applied to the fieldjust like the grower does not know much about the feed fed to the birds he/she cares for but does not own. The crop farmer will be paid on a piece rate basis just like the grower.
Increasingly we hear about the need for only 20,000 to 30,000 farms in the United States to produce for the global food system. The next question becomes what is a farm? In business administration literature, firm usually applies to a management unit. Traditionally the term farm has also referred to a management unit. If the integrating firm becomes the management unit as is implied in the case of broiler production, how many farms will there be in the United States in the future?
Concerns about the Food System
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Many different groups and individuals in this and other countries are raising serious concerns about the globalizing food system. One concern focuses on the consequences for rural communities of this restructuring.
Today, most rural economic development specialists discount agriculture as a contributor to rural development. The major reason why agriculture contributes so little to the community is because of the emerging structure of the food system. In a family business, such as family farm, a family grain elevator, or a family grocery store, the family subtracts its annual expenses from its income to determine profits that are then allocated among labor, management and capital. For the economic well-being of the family and the rural community, it makes little difference how the profits are allocated among the three costs of labor, management and capital. The local family spends much of the ''profit'' in the local community. In addition, when the rural community retained all of income related to the three factors of production, the funds circulated more in the community. Not just the family farms, but all of the family businesses providing the agricultural infrastructure contributed to the economic well-being of the community. In the past when family businesses were the predominant system in rural communities, researchers talked of multiplier effects of three or four. Newly generated dollars in the agricultural sector would circulate in the community, changing hands from one entrepreneurial family to another three or four times before leaving the rural community. This greatly enhanced the economic viability of the community.
Large non-local corporations, whether hiring labor as wage earners or piece rate workers as in the case of growers, see labor as just another input cost to be purchased as cheaply as possible. The ''profits'' then are allocated to return on management and capital and are usually taken from the rural community. They go to the company's headquarters and are then sent to all corners of the globe to be reinvested in the food system. One can ask the question, why were agriculturally based rural communities, with an ample natural resource base, more economically viable than mining based rural communities which also had an ample natural resource base? The answer lies primarily with the economic structure of the major economic base. Increasingly, our agriculturally based communities, like regions with major poultry operations, are looking like mining communities.
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Increasingly, the major decisions in the food system are being made by an ever-declining number of firms, a growing number of which are involved in the food system clusters. They are primarily concerned with maximizing their profits. That is the purpose of such corporations. ConAgra says its major mission is to increase the wealth of its stockholders. But, these firms are in position to decide which people in the world will eat. Their decisions are based on whether one has the money to buy food. We hear a lot about the growing population of the world and how feeding the increasing millions will provide great opportunities for farmers in the United States. The problem is that much of the population increase is in the ''have-not'' nations of the world, in countries where the people earn only a few hundred dollars a year. These families cannot afford to buy imported food! The global firms travel the world ''sourcing'' their products from those countries where they can get the product the cheapest and selling them into the countries that will pay the most. This raises the question of whether the countries with rapidly growing populations will be our farmers' customers or their competitors.
One hears a lot about agri/food exports from the United States and the potential benefits for our farmers. Much less attention is given to United States food imports. On a dollar basis, the exports and imports have been growing at about the same level for the past two decades. This means that on a percentage basis, imports have been increasing more rapidly, because imports started at a lower dollar value. For example, about one-third of the vegetables consumed in this country are imported. The United States is also a net importer of beef.
Issues of food quality and especially food safety are also receiving increased attention. Perhaps the bigger issue is whether the global food system is sustainable. The production, processing and distribution stages have all been built on cheap petroleum. Considerable debate exists on when the world's petroleum resources will be depleted, but most agree the price will begin moving up in the not-too-distant future. Will the resulting price shocks cause the whole food system to restructure again?
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Another question being asked, given the financial problems faced by some nations, is: What would happen if the United States were to experience a depression like that of the 1920's and 1930's? A depression is a major disorganization of the economic system. Think for a moment what that would mean in a system of ''just-in-time delivery.'' Will food products get to the stores on a regular schedule? Will my neighbor be able to get a replacement engine from England for his new New Holland combine if it breaks down during harvest? Will the seed, chemicals and fertilizer, coming from all parts of the world, get to the farmer in time? A shutdown of the agricultural production system for a few weeks can have quite different consequences than shutting down an automobile assembly plant for the same amount of time. A lengthy delay in agricultural production could mean the loss of the year's crop.
The control of the animal genetics pool is also concentrating and the genetic base for domestic animals is narrowing. For example, over 90 percent of all the commercially produced turkeys in the world come from three breeding flocks. The system is ripe for a new strain of avian flu to evolve for which these birds have no resistance. Similar concerns exist in hog, chicken and dairy cattle genetics.
These are food issues and not just agricultural and rural issues. The global food system is becoming more like many of the other economic sectors. But food is different from all other goods and services exchanged in the international market. Food is a human necessity and it is needed on a regular basis. Those who control the global food system have the ultimate in economic power. As Dwayne Andreas, former chairman of ADM, said:
The food business is far and away the most important business in the world. Everything else is a luxury. Food is what you need to sustain life every day. Food is fuel. You can't run a tractor without fuel, and you can't run a human being without it either. Food is the absolute beginning. (Reuters, 1/25/99)
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One hears much about ''niche markets'' as new opportunities for farmers. Such opportunities do exist. There is a major rebirth of farmers' markets, local food routes, subscription sales and other forms of direct marketing between farmers and consumer, with small processors involved when needed. As the food firms get larger and cover wider geographic and cultural areas, they leave behind a growing number of small markets they do not serve. The more consumers learn about the ways their food is grown in far away places, the more many of them are concerned with where their food is produced, who produces it, and how it is produced. The structural vulnerability of the emerging food system is called into further question when one remembers the situation in the former Soviet Union. The Western world began to realize there were major problems in the centralized food system of the former Soviet Union when it was learned that small farm plots were producing a significant proportion of the country's food. Large centralized organizations have problems adapting to change. They commonly have problems with management, with coordination, and with worker satisfaction.
These are good reasons to predict that the evolving system is vulnerable. It will probably be restructured again in the future. A vulnerable food system will most likely be ''restructured'' numerous times in the futurebut at what social and economic cost to whom? When ''restructuring'' occurs, some people pay a very high price for the changes. It is highly questionable whether society as a whole really benefits.
If the number of farms is reduced to about 25,000 in the next decade, there will be many farm families who will be involuntarily removed from their land. In the mid 1980's, Congress allocated funds for helping the families who followed the advice of the experts and by doing so lost all of their assets. These funds were used wisely and they helped many families during their transition from the farm. The motto then was ''We may not be able to save every family farm, but we can save every farm family.''
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Perhaps the policy emerging from this dialogue on concentration in the food system can lead to a new system that will save both. Just a quarter of a century ago, our decentralized system of agricultural production was held up as a model for the world.
The centralized food system that continues to emerge was never voted on by the people of this country, or for that matter, the people of the world. It is the product of deliberate decisions made by a very few powerful human actors. This is not the only system that could emerge. Is it not time to ask some critical questions about our food system and about what is in the best interest of this and future generations?
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STRUCTURAL CHANGE AND MARKET PERFORMANCE IN AGRICULTURE: CRITICAL ISSUES AND CONCERNS ABOUT CONCENTRATION IN THE PORK INDUSTRY
BY PHILIP PAARLBERG, MICHAEL BOEHLJE, KENNETH FOSTER,
OTTO DOERING, WALLACE TYNER
DEPT. OF AGRICULTURAL ECONOMICS, PURDUE UNIVERSITY
We have witnessed profound changes in the pork sector over the last several years. These involve integration and concentration that raise issues of competitiveness in both input and product markets as well as issues of who bears risk and who reaps rewards. We see clear evidence of increased concentration, by several measures, to the point where public vigilance is warranted. Two major policy options are anti-trust action and increasing the market power of hog producers through institutional arrangements new to the hog industry. Better information in specific areas of concern is needed before informed public policy can be made with respect to either policy option, and the option of increasing producer market power will require active public support.
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Copyright by Philip Paarlberg.. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Structural Change and Market Performance in Agriculture:
U.S. agriculture is in the midst of major structural changechanges in product characteristics, in worldwide production and consumption, in technology, in size of operation, and in geographic location. Production is changing from an industry dominated by family-based, small-scale, relatively independent firms to one of larger firms that are more tightly aligned across the production and distribution chains. The sector is becoming more industrialized, more specialized, more integrated, more managerially intense, and the pace of change is increasing.
Agricultural Sector Issues
Competitiveness of product and input markets
The development of tighter linkages in the food production and distribution industries may have a major impact on market access in both the input and product markets. The development of larger scale firms raises questions about concentration and oligopolistic if not monopoly power in negotiating terms of exchange.
How will the structural changes in agriculture impact access to product and input markets?
Page 235 PREV PAGE TOP OF DOC Do we now have markets in contracts rather than products or inputs?
What are the implications for producers, consumers and competitive markets? More specifically, is concentration in the poultry, pork and beef industries sufficiently high to warrant antitrust or other government intervention?
What are the consequences of such intervention (or of not intervening) in terms of incentives to innovate, efficiency, externalities and the distribution of returns and risks?
And what are the intervention alternatives? Should we restrict consolidation in buyers and sellers, or should we encourage producers to develop networks and alliances to negotiate from a position of more economic power than would occur otherwise.
Captive suppliers and other forms of vertical integration and coordination are potentially detrimental to both competition and price discovery. The degree to which these effects occur varies by region and time of the year. These arrangements have a tendency to thin market price reporting (reduce the volumes on which reported prices are based) and shorten the weekly marketing ''window,'' which can disadvantage suppliers who do not have a packer arrangement. Further, they distort reported market prices downward. It is widely agreed that equal and accurate market information improves the price discovery and determination process. Poor information can lead to unnecessary price volatility or slow adjustment to changing supply and demand conditions. Inadequate or uneven information can cause some market players to be disadvantaged relative to others, and price levels could be biased for an extended period.
Risk and value chains
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Who bears the risk and captures the reward in the increasingly more tightly aligned food chain? The common perception is that vertical linkages or alliances through ownership or contract production will reduce price, quality and quantity risk. But the implications for financial and strategic risk are less clear. The dispersion and/or concentration of financial risk as one moves from independent firms to vertical linkages is a critical issue that merits detailed analysis from a policy perspective.
Tighter alliances in the food chain are likely to reallocate the risk and uncertainty relative to accurate messages concerning prices, quantities and qualities of products and attributes. Messaging is likely more precise, timely, and generally more accurate for participants in the chain than might be provided by market forms of coordination. But what about the risk faced by those who are not part of the tightly aligned supply chaini.e., are not qualified suppliers? Is there more volatility in the prices they receive because of thin markets? Do they have access to a market, or are they closed out because only qualified suppliers can participate? If those who cannot participate in the qualified supplier systems can only sell in commodity markets, and these markets take on the characteristics of a salvage market, do those left out incur more of the risk of more tightly aligned chains without the potential of receiving any of the rewards? If markets become sufficiently concentrated that only one or possibly two qualified supplier arrangements are available in a particular locale, how can the participants even be assured that their share of the risk and rewards of participation are equitable? The fundamental issues of access to information, transaction transparency, equitable sharing of risk and rewards by nonparticipants as well as participants in tightly aligned supply chains, and the risk associated with market access are all important market risk and performance issues.
Page 237 PREV PAGE TOP OF DOCPrivatization of intellectual property and innovation
The agricultural sector is confronted with new questions like: What role does intellectual property rights law play in encouraging more tightly aligned supply chains and monopoly or oligopoly power? How does the privatization of research and development (R&D) and information markets impact the distribution of the benefits of innovations, the rate of innovation, access to markets, and the competitive rivalry in markets? How important are property rights and rent-seeking behavior in encouraging firm growth or in stimulating economic development?
As more and more of the R&D effort, and thus new innovations, come from private sector firms rather than traditional public sector sources, and as more of the information dissemination system becomes privatized, individual firms have more potential to capture value from intellectual property. They have the potential to restrict access to new ideas and information to particular users, thus favoring some and excluding others from the ideas, technology or information necessary for them to be competitive. Initial concepts of intellectual property rights, including patent and copyright law as applied to agriculture, were developed in an era of domestic markets and national firms; a relatively large public sector research, development and information dissemination system; and a limited role of information as a critical resource. Rules of the game have changed, and concepts may need to be reevaluated in the context of global markets and multi-national business firms; the shrinking role of the public sector in research, development and disseminating information; and the increasing importance of information compared to other resources as a source of strategic competitive advantage.
Concentration Issues for the Pork Industry
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Evidence of increased concentration in hog slaughter
Like many industries, the hog slaughter industry is characterized by a small number of firms producing most of the pork, and a fringe group consisting of a large number of small slaughtering firms contributing little to total pork supply. All standard measures of market concentration suggest that the hog slaughter (packing) industry has become more concentrated since 1985. Packing plant and firm numbers fell by 46 percent from 1985 to 1997. Concentration indices which give the percent of total slaughter accounted for by the top 4 and 8 firms have also risen. In 1985, the 4-firm concentration index was 32.2 and the 8-firm index was 50.8. By 1997, the indices had risen to 54.3 and 75.7, respectively. Traditional classification rules used by economists would label an industry with the 1997 concentration indices found for hog slaughter as a moderately concentrated industry. Another measure of industry concentration is the Herfindahl-Hirschman (HH) index, which is the sum of the squared market share of all firms. In the HH index the influence of firms with larger market shares is assigned a greater weight. The HH index for the hog slaughter industry has more than doubled between 1985 and 1997.
The Herfindahl-Hirschman index can be used to estimate the equivalent symmetric number of firms in an industry. That is, if instead of an observed industry with a few large firms and a host of little ones, all firms in an industry were the same size, how many would there be? This symmetric firm number gives a sense for how ''competitive'' an industry behaves overall. In the case of hog packing the symmetric firm number for 1985 is 22. That means the industry behaved as if there were 22 equal sized firms in 1985. This is a number sufficiently large enough to avoid most pricing distortions associated with oligopoly and oligopsony. By 1997, the symmetric firm number for hog packing had fallen to 10. There is no specific value that serves as the threshold where we can say serious pricing distortions due to market power arise. However, once an industry drops to a symmetric firm number of 10, concern is warranted.
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Limited information for 1998 and 1999 suggests that increasing concentration continues. Calculation of the 4-firm concentration index shows an increase from 54.2 to 56.3 in 1998. Recently, Smithfield moved to acquire Murphy Farms and Tyson's hog operations. If completed, this will consolidate several of the largest players and further increase the captive supply.
Economic implications of increased concentration
While every industry has unique characteristics, economic theory offers some general conclusions about the factors affecting pricing under oligopoly and oligopsony (imperfect competition). Economic theory for perfectly competitive markets gives straightforward predictions, but the conclusions under imperfect competition are unclear and depend on the interaction of several factors which determine pricing rules for outputs and inputs.
One factor affecting pricing is the nature of the strategic interaction among firms. That means, how a firm expects its rivals to react when its behavior changes. Do firms determine price or output quantity? Do rivals match a firm's price change or not? Is one firm dominant and leads the industry while other firms act as followers? A related issue is whether the goods produced by different firms are different or alike. If the goods are different, firms are more able to compete on a price basis. If goods are the same, quantity competition seems more plausible. The extent of product differentiation is linked to the issue of price elasticity facing a firmthat is, the extent to which demand changes as price changes. Under perfect competition, the demand facing a firm is perfectly elastic and a single firm cannot itself affect the price. Under imperfect competition that is not the case. The firm recognizes that it can affect the price and/or its rivals' behavior and uses that information in its decisions. More elasticity in output and input markets reduces the ability of a firm to manipulate prices or outputs. If consumers are price sensitive or have substitutes available, firms' ability to drive up the price and hold their market is limited. International trade also affects the exercise of market power. A nation that cannot affect the world price must behave as a price taker if domestic and world prices are linked. Domestic firms with market power cannot raise their prices if they face either the threat of import competition or the loss of export markets to other nations when they raise their prices. Whether inputs are traded in international markets also affects the use of market power. An industry may take the output price as given, but use its market power in influencing the price of a non-traded input.
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There is limited information on all these factors for the hog packing industry. There is evidence of product differentiation as hams, shoulders, bacon, and ribs are not perfect substitutes. Yet, the aggregate demand elasticity for pork is estimated to be high compared to other foods, and the elasticities for the various pork cuts should be even higher. In addition, the United States both imports and exports pork, and pork prices in the U.S. and the world appear integrated. Thus, it is likely that packers have limited market power for pricing their pork products. On the other hand, imports of live hogs for packers is not very large relative to slaughter. These features suggest an industry which sets slaughter and meat output with limited control over the pork price, but with potentially substantial influence over the live hog price paid to the producer of hogs.
The cost structure of an industry also affects pricing under imperfect competition. Does the industry have large fixed costs? Are there economies of scale, other barriers to entry, or capacity constraints at the firm or industry level? Large fixed costs and entry barriers limit potential competition and enhance market power, which results in higher product prices. Fixed capacity constrains the reaction of rival firms. This tends to result in higher prices as well. Economies of scale drive unit costs lower as output rises, and thus reduces firm numbers. These effects work in opposite directions. Falling unit costs lowers output prices if the mark up is constant, but falling firm numbers increases mark ups on output. The hog packing industry is perceived as having large fixed costs and economies of scale. (The argument is made that the Fall 1998 hog price collapse was partially due to industry capacity constraints.)
Vertical relationships between input suppliers and manufacturers become critical under imperfect competition. Vertical integration and coordination may occur for several reasons including stable supplies and quality control. They are methods that can be used to exercise market power and extract excess profits. In general, as vertical coordination in a market increases, volatility in spot markets increases because those markets become thinner. Spot markets become the buffer for vertically coordinated firms. Unanticipated rises in demand are met by purchases of inputs in spot markets. Unanticipated reductions in demand end up with unwanted inputs dumped in spot markets.
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There is evidence that increasingly large numbers of hogs move under direct ownership or contracts. As concentration and integration increases, problems of volatile spot markets and market foreclosure for independent growers are likely to increase. This was a concern in 1998 when the spot market was seen by some as having to absorb the full impact of excess supply and limited slaughter capacity. Thus, ''independent'' producers faced a precipitous price decline.
An illustration of what may be occuring
We constructed a model to illustrate how these factors of concentration might affect the hog market price as the number of packing firms declines. Because much of the critical information necessary to construct an accurate model of the industry is not available, we had to make some assumptions. First, it is assumed that pork is a homogenous good, and each packer sets its slaughter (output) believing that rival packers will not change their behavior. The industry consists of identical packing firms. For the model results, the number of packing firms is varied from 1 to 20. Because the United States is both an importer and exporter of pork products with few trade barriers, the model assumes the price of pork is given. Hogs are treated as non-traded, despite the small inflow from Canada. This gives the packers the ability to mark down the price they pay for animals. Although there is evidence of economies to scale in hog slaughter, the extent of these is unknown, and the model assumes no economies of scale. As mentioned, there is also evidence of vertical coordination through contracting and kill capacity constraints. Lacking solid numbers on contracting, these are also ignored in this illustration.
Figure 1 shows how the mark down, or price gap, from the perfectly competitive hog price changes in response to changes in symmetric firm numbers. This mark down represents potential market power of processors to pay less for inputs than would have been the case if both sides were fully competitive. If there are 20 symmetric firms, similar to the situation in the late 1980s, according to this illustration, the price paid to producers for hogs is 95 percent of the perfectly competitive level. As the number of packers falls from 20 to 19 and beyond, the gap on the price paid to suppliers increases. At first the gap remains small. That is, starting from 20 firms, reduced firm numbers do not initially lead to much larger mark downs on the competitive price. When there are 14 firms instead of 20, the hog price is 90 percent of the competitive level instead of 95 percent. As the number of firms falls, the gap increases. Starting from 20 firms, a loss of 6 firms increases the mark down from 5 percent to 10 percent. Going from 14 firms to 8 firms increases the mark down from10 percent to 18 percent. Once firm numbers drop below 5 the mark down or gap increases sharply.
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The Herfindahl-Hirschman index indicates that in 1997 the industry consists of 10 symmetric firms, and subsequent observation suggests currently lower values. The illustrative results in Figure 1 show that the range of 810 equal sized firms is a critical transition for the magnitudes of the mark downs. Above 10 symmetric firms a change in firm numbers does not cause much change in the mark down. Below 8 symmetric firms, the increases in mark down accelerate. From a public policy perspective it is critical to identify where the industry lies along this relationship. In the case of the model used here, if the industry is presently at 10 firms, policy designed to increase firm numbers may be less critical than policy designed to maintain firm numbers. However, if the industry has the equivalent of 5 or fewer symmetric firms, like the lamb and beef packing industries, then policy may want to focus on increasing firm numbers.
Missing information is critical
Knowing the precise shape and location of the relationship depicted in Figure 1 is critical to making informed policy choices. The relationship in that figure can only serve as an illustration because critical pieces of the puzzle are missing. To construct the figure, assumptions are made which may incompletely reflect the hog/pork sector. These pieces must be inserted to accurately analyze the consequences of increased packer concentration.
One set of critical information covers the role of vertical integration and coordination. To accurately consider public policy, data on the numbers of hogs contracted and owned as well as the contract terms are required. Such estimates exist, but the quality of this data is suspect. A realistic model would need to divide the market into coordinated and independent hogs. Further, data on costs of packing firms is required because the nature of the cost schedule is critical to the relationship depicted in Figure 1. These include the extent of fixed costs, of economies of scale and of capacity constraints. A particular issue is whether contracting improves the production process and so results in a cost efficiency for vertically coordinated packers.
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A major weakness is limited knowledge of the extent of product differentiation and supply-use data by product. Whether packers set quantity or price is critical to the impact of increased concentration. The ability of packers to use their market power hinges on the elasticities of domestic and export demand. These depend on the degree of product differentiation. We do not have those values and the data to determine them is not currently available. However, with additional data and analysis, it will be possible to narrow the uncertainty of what is occurring in this critical area. Providing that analysis should be a high priority so that public policy can be based on better information.
What are Some Possible Options?
Both consolidation and increased vertical integration pose a threat to competitive pricing of live animals. We have shown that greater consolidation in the meat packing and processing industry creates a markdown effect on the prices farmers receive for live animals. Likewise, increased captured supplies, via vertical integration and contracting, has the potential to lower prices on average and increase the variability of prices.
Packers are motivated to coordinate their supply of live animals by the large fixed costs associated with a slaughter plant, and the large transactions cost of purchasing thousands of animals on a daily basis. In order to reduce their cost per unit of wholesale meat, packers need to slaughter as many animals as possible. For modern plants, this means thousands of animals each day. The risk of ''coming up short'' motivates the use of company owned animals and contracted purchases to ensure the appropriate quantity and quality of animals arrive as needed. Transaction costs are reduced by not having to haggle over the price of each load of animalsthus an added attraction to contracting with pre-set prices and quality standards. As the number of providers declines, the packer's transactions costs also decline.
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Logically, packers attempt to capture the highest quality animals via contracts and vertical alliances. This can leave the lower quality animals to establish prices in the open market that is not as quality specific. Because payment schemes for most of the packer contracted animals are based on either a spot market price or the Chicago Mercantile Futures price, substantial vertical coordination may create a downward bias in the prices received by most livestock producers.
Offsetting the consolidation and integration effects
Mitigating the downward biases in live animal prices will not be an easy task. The strongest public policy instrument available is anti-trust. Clearly, breaking up the larger packers would help mitigate markdown pricing due to consolidation. However, sound economic rationale, could motivate contracting, vertical integration, and consolidation, so the anti-trust approach might not be justified if monopsony power is only moderate. It is our opinion that alternative public policies do exist that could offset the price impacts of these business structures under moderate monopsony without foregoing their benefits. The focus of these would be on increasing the power of the hog producers. Unfortunately, the livestock producing community has little experience and expertise in using these alternatives and will likely need public policies and assistance to get them functioning.
Cooperation and pooled production and marketing appear to be key to offsetting the impacts of consolidation and integration in today's pork industry. Any strategy that places livestock producers in a more symmetric bargaining position will make it difficult for packers to exploit prices or contract terms if there is at least a moderate number of packers. It should be more difficult for a packer to terminate a contract without cause (or when more favorable terms can be forced on the producer). Alternatively, the packer in need of animals to fill a daily kill will be compelled to negotiate a more competitive price if producer power is more symmetric. That is, if the amount and quality of animals on the bargaining table is crucial to the full capacity operation of the plant and cannot be replaced easily from another source.
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What is critical is the number of hogs that a single supplier (or allied group of suppliers) must control in order to maintain bargaining power with a packer. It appears to be at least 300 thousand to 500 thousand head per year, or approximately the single day double-shift kill for a modern sized slaughter plant each week. This control of numbers also would have to be coincident with a control in quality as well. This is a large number of animals and would require a sizable network (25 to 50 farms) of today's large independent producers. Forming such networks or cooperatives must be nurtured by public policy. Our research at Purdue has demonstrated that there are a variety of ways to structure these entities that may also allow the producers to capture cost reductions and gain access to new (and possibly proprietary) technologies that individual farms would not be capable of obtaining by themselves.
Tax incentives or deductions for members of production and marketing networks, corporations, cooperatives and alliances could provide incentives not only for producers to enter such arrangements, but such policies could also be fashioned to provide disincentives for producers to break away from the group and capture short term gains as a ''free rider''. Current exemption from anti-trust constraints provides some benefit for cooperative formation. A serious commitment of technical and financial support above that currently available will be needed to develop and encourage new production systems and marketing strategies at the wholesale and retail level to facilitate the building of symmetric power on the part of producers.
The approach needed by these cooperatives and alliances is fundamentally different from traditional livestock marketing cooperatives. In the past, farmers independently produced the animal type of their choice and marketed them on the day of their choice. These marketings were pooled into larger groups and then shipped to a packer. In the cooperative alliances of the future, if they are to be able to increase the bargaining power of producers, the production systems of the cooperating farmers must be coordinated in a way as to provide a steady supply of hogs of uniform quality. The supply chain must be closely managed to deliver animals on a daily basis. Fluctuation in supply is not attractive to a packer and reduces producer leverage. Managing the supply chain in this way will take innovative production practices that may require greater specialization of activities by farm and standardization of mating systems, feeding strategies and genetics.
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Marketing orders that set base prices at a particular location with premiums and discounts from that basis for other locals and regulate quality and/or quantity have been popular for several other agricultural commodities. It would be essential for such marketing orders to allow quality premiums to be paid for better quality animals if such a system were adopted for hog production. Otherwise, there would be a disincentive for quality production and the lack of quality hogs would encourage packers to further increase vertical integration and effectively exclude the independent producers from the market.
Finally, any mechanism that ensures that marketing contracts are enforceable, transparent, and ''fair'' to both sides should be encouraged. This may require legislation that mandates vetting of contracts, bonding of contractors and disclosure of contract terms. Overall, though, caution should be exercised against blanket condemnation of strategies adopted by packers or producers that enable them to compete successfully in an increasingly international marketplace.
Summary and Conclusions
We are witnessing the industrialization of agriculture. The structural changes this involves have been especially pronounced in the pork sector over the last several years. This has involved both integration and concentration which raises important questions about competitiveness of both product and input markets in the pork industry. In addition, there is the issue of who bears risk and who reaps the rewards of the new system as compared with the old one where independent hog producers received returns to managementreturns that move up the chain in contracting. Those left outside the new system appear to bear increased risk as independents in the remaining more volatile spot market. They may also be excluded from new technology critical to production and product quality as this becomes increasingly proprietary.
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We see evidence of increased concentration to the point where public vigilance is warranted. Concentration indices are high and may be reaching a point where markdown pricing on hogs will be significant and place producers at a clear disadvantage. It is important to have the required information and analysis as soon as possible to properly assess where we are in this respect.
Two major policy options are anti-trust activity on the one hand and increasing the market power of hog producers on the other. In the current free market climate, we cannot realistically expect the breaking up of existing packer concentration. Such actions also can be extremely contentious. However, it may be critically important to prevent further concentration that would greatly increase the markdown of prices paid to producers. Public policy also can assist producers in gaining more market power through highly structured cooperation and tightly pooled production, both of which are foreign to independent hog producers at present.
PREPARED STATEMENT OF FLORIDA FRUIT & VEGETABLE ASSOCIATION
Florida Fruit & Vegetable Association (FFVA) appreciates the opportunity to provide input to the House Judiciary Committee in its review of competitive issues in agriculture and the food marketing industry. FFVA is an organization that represents producers of fruits, vegetables, sugar cane and other crops. Its members range in size from single-commodity growers of less than 100 acres to large, highly diverse grower/shippers.
Page 248 PREV PAGE TOP OF DOC FFVA members are deeply concerned about the consolidation of retail food marketers in the United States, and the impact of this consolidation on those who supply fruits and vegetables to these mega-retailers. According to The Food Institute Report, the five largest food retailers in the United States accounted for a whopping 40% of industry-wide sales of $270.7 billion in 1998 compared to five years earlier, when it took the top 20 companies to reach the same percentage.
As supermarket chains in the United States become fewer and larger, these retail giants enjoy a considerable bargaining advantage over their suppliers. This is especially alarming for fresh fruit and vegetable growersmany of whom are small to medium sized family businesses. As buying power concentrates within the retail grocery industry, fresh produce growers have fewer customers 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 increased global competition.
Unfortunately, consumers rarely see the benefit of these lower producer prices at the supermarket. For the past several years, the Florida Department of Agriculture and Consumer Services (FDACS) has conducted weekly surveys of average farm and food retail prices in major metropolitan areas in the state (attachment A). The data generated by these surveys show a wide disparity and a general lack of relationship between farm and retail prices for selected fruit and vegetable commodities. When this happens, consumers get no relief at the supermarket, and growers see no increased sales of their products.
It's not likely that U.S. consumers will ever benefit from the continued consolidation of food retailers in this country, if consumers' experience in the United Kingdom is any indication. A 1998 study by the Office of Fair Trading in Great Britain, a country now dominated by four grocery chains, suggests that British retailers are increasingly able to retain the greater profits from their increased bargaining power rather than passing them to consumers. More specifically, a November 17, 1998, article in Britain's International Express estimated that the average family in Britain pays over u1,000 more a year for food than those on the European continent. An article in the December 14, 1998, issue of Forbes cited profit figures for Britain's four largest chainsprofits that were 50 percent higher than U.S. grocery chains.
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In addition to heightened pricing pressures, fruit and vegetable growers and shippers are increasingly being asked to provide trade promotion payments such as allowances or rebates to retailers, ostensibly to support the marketing costs of the growers' crops. In practice, however, growers report that these ''pay to play'' payments rarely result in visible benefits and may only serve to boost profit margins for retailers. Many of these requests for payments come in the form of per package ''rebates'' that have no relation to product performance. One request by a large retailer involved a per package contribution in order to fund the construction of its new produce distribution center (attachment B). So, in addition to growers having to finance their own operations, they are also being asked to make direct payments to pay for capital improvements for their customers.
Slotting fees have been a mainstay in the dry goods sections of retail supermarkets for many years, but are now finding their way into the produce department. These are fees charged by some retailers to place an item in store-level distribution. They can consist of a slot in a retailer's warehouse or for space on a store shelf. We would argue that slotting fees have no place in the produce department of a supermarket. The highly perishable and seasonal nature of the industry makes it impractical. Because fruits and vegetables are priced at the farm gate based on supply and demand forces, these are costs that cannot be passed along to the ultimate customerthe consumer. Small to medium sized fruit and vegetable growers simply cannot compete for limited shelf space with large, multinational food companies. Finally, these fees are not related to new product development and marketing.
The bottom line is that growers cannot recover the costs of slotting fees, allowances or rebates in the marketplace. Ultimately, the cost of this ''pay to play'' practice comes from growers' profit margins, which in today's environment are very slim and in some cases non-existent. Consumers suffer, as well, with fewer choices at the supermarket and higher prices.
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Growers tell us other marketplace issues have developed as consolidation in the food retailing industry has increased over the past several years. The Perishable Agricultural Commodities Act (PACA) establishes fair trading rules for fruit and vegetable sellers and buyers in the United States, including terms on prompt payment. In recent years, retail buyers have put increasing pressure on growers to agree to terms outside PACA regulations (attachment C). The net impact of this for a grower is not only the loss of the use of his money, but also the potential loss of his rights under the trust provisions of the PACA. This could prove disastrous to a grower should his customer file for bankruptcy protection. In order to keep business, growers also report that they more frequently have to accept ''take-it-or-leave-it'' price adjustments on product after delivery, even though there are no defects that would warrant such a reduction.
These are but a few of the marketplace issues and trading practices that growers face. These demands have increased in frequency and variety as consolidation has occurred within the food retailing industry. We believe the House Judiciary Committee should thoroughly review the antitrust implications of the rapid consolidation of food retailers and its impact on consumers. We also believe the committee should examine the competitive relationship between food retailers and their suppliers, including growers and shippers of fresh produce, and take appropriate action to ensure a fair trading environment exists in the marketplace.
Finally, we believe this committee should request that the Justice Department, the Federal Trade Commission, and the Department of Agriculture review their existing policies and statutes to determine their applicability and effectiveness in dealing with these emerging agricultural marketplace issues.
Page 251 PREV PAGE TOP OF DOC FFVA appreciates the committee conducting an oversight hearing on this important issue. We look forward to working closely with you to ensure a competitive and fair trading system that benefits both industry and consumers.
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PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF CHAIN DRUG STORES
The National Association of Chain Drug Stores (NACDS) is pleased to present this statement of our views on slotting allowances.
The National Association of Chain Drug Stores (NACDS) membership consists of 136 retail chain community pharmacy companies. Chain community pharmacy comprises the largest component of pharmacy practice employing over 97,000 pharmacists. The chain community pharmacy industry is comprised of more than 19,000 traditional chain drug stores, 7,000 supermarket pharmacies and nearly 5,000 mass merchant pharmacies. The NACDS membership base operates more than 31,000 retail community pharmacies with annual sales totaling over $158 billion including prescription drugs, over-the-counter (OTC) medications and health and beauty aids (HBA). Additionally, NACDS membership includes over 1,400 suppliers of goods and services to chain community pharmacies. NACDS international membership has grown to include 105 members from 26 foreign countries.
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A slotting allowance is a trade promotion agreement between retailers and manufacturers appropriately allocating the costs and risks associated with the introduction of new products into commerce, ultimately resulting in lower prices to the consumer.
Not all retailers accept slotting allowances. Those retailers that do accept slotting allowances use them to cover a number of significant costs born exclusively by the retailer and with the retailer assuming all risk.
Some retailers also use slotting allowances as a barometer for the manufacturer's confidence that the new item will generate a solid return on its inventory investment. To demonstrate all the costs associated with a new product introduction, we would like to describe the process by which a new product is introduced into the marketplace.
The fundamental role of a retailer
For retailers to be successful, they must always focus on satisfying the needs of the consumer. The fundamental formula to succeed is to have the right product in the right place at the right price at the right time, all the time. The formula sounds simple. In reality, it is extremely complex.
In a static world, a chain drug retailer operates a store that is about 12,000 square feet. An individual store carries between 18,000 to 23,000 unique items on its shelves. It should also be known that there are at least 75,000100,000 additional items being offered by manufacturers for sale any given time. So even if there were no new products being introduced into the marketplace, a majority of existing products would not be available for sale.
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New Products . . . Generates Sales, Complexity
There is not a retailer in America that would disagree with the statement that new products are the lifeblood of the industry. In fact, when retailers feel that a new product is going to be a blockbuster, they compete with one another to see who can get it on the shelf first.
The ability to be the first retailer to have the product available for sale is a huge competitive advantage for a retailer. Unfortunately, relatively few products are of such significance that a retailer is willing to ''bet the farm'' on it being successful.
As reported by Information Resources, in the 19989 period, over 77,000 new UPC codes (which identify individual products) were introduced on to store shelves. Yet of that total, only 10 brands can be classified as blockbuster new products (annualized sales exceeding $100 million or more in sales).
Manufacturers are quick to add new items to categories that are growing. In drug stores, the fastest growing category for the past two years has been natural care (vitamins, herbals, and nutritionals). In the first nine months of 1999, over 1,000 new items have been introduced. In a category that is experiencing relatively little growth, cosmetics, 849 new lipstick items have been introduced. Are all these new products successful?
According to Marketing Intelligence Services, only 1 in 671only .15% of new products actually make it to market and hit the manufacturer's sales targets. And of the products that do survive, only one-third of the ''successful'' items last more than two years according to ACNielsen.
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The retailer has no control over how many new items are introduced or who introduces them. A retailer's job is to select those items that our customer wants to buy. A good retailer has a higher success rate of selecting the ''winning'' new items. A good retailer cannot afford to select too many losers.
How a Retailer Decides to Buy a New Item
There is no single template for how a retailer decides whether or not to buy a new item. However, each retailer looks for a manufacturer to provide the following information. Product information . . . is it a new item or a line extension? Is this product in a new category or an existing category? If in an existing category, will it expand category sales and profitability or cannibalize an existing product?
Consumer information . . . what are the demographics of the target consumer group that will purchase this product? Does this targeted group meet with my target customer base? What kind of market research has been performed on this product? Which of my competitors is currently carrying the product?
Marketing support . . . How is the supplier planning to market the product? How much advertising is the supplier planning to run? Where will it be advertised? Will a coupon drop support the new product introduction? What is the projected gross margins? How quickly will the merchandise sell? Does the new product need to be heavily promoted?
What are our sales targets? What happens if we don't meet these targets? Does the retailer own all risk? What are the supplier's distribution capabilities? What are the supplier's technical capabilities?
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Generally speaking, after the retailer's buyer is ''sold'' on an item, they must present the item to the retailer's buying committee to gain their support of the item. The retailer's buying committee generally consists of senior merchandising executives within the company. This practice allows the committee to weigh the high costs of adding a new item with its potential for success.
The Steps Involved in Introducing a New Product
Once the retailer agrees to purchase a new item, several activities must occur.
At the retailer's headquarters, several factors are considered.
Finance . . . if it is a new vendor, the company will perform a credit check of the vendor, to ensure that the vendor has the ability to supply the retailer and provides the appropriate level of product liability insurance.
Information Systems . . . the company must be entered into the retailers' computer system as a legitimate vendor and entering the terms for which that vendor does business and also enter the items that the retailer has agreed to purchase.
Marketing . . . Review the promotional calendar to determine if the product should be advertised (may depend on the level of support from the manufacturer, either through direct advertising or through advertising funds paid by the supplier).
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Merchandising . . . Identify the appropriate stores and location within the stores for the product to be merchandised. Additionally, the merchandiser must also identify which product(s) to delete in order to get the new product on the shelf.
Distribution Center(s) . . . receive data to enable the receipt of the merchandise, including the expected date of delivery, how it is to be delivered, when it is expected to be shipped to stores, where it is to be stored in the distribution center, how it is to be shipped to the stores, either by case, inner pack or individual piece, and determining which stores will receive the product.
Store Operations . . . Collect the items that are to be deleted, create and change shelf tags, reset shelves, send obsolete product to return center for processing, update item price files, depending on product, and provide associates with product training (especially if the product is an OTC item) and determine and train for any age restriction for the sale of the product, such as an alcohol or tobacco product or product that contains certain precursor ingredients such as pseudoephedrine that are used in the manufacturing of methamphetimines.
System Constraints . . .
In a static environment, most retailers would be able to meet and exceed their customer's expectations. Unfortunately, just about the only static environment a retailer operates is the size of its stores. For a chain drug retailer, that size is about 12,000 square feet. A typical chain drug store caries between 18,000 and 23,000 unique items. With this explosion of new products and the increasingly rapid change of pace in consumer trends, it is difficult for retailers to keep pace with the constantly changing consumer and the explosion of new products by the suppliers.
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Most retailers operate with a net after tax profit margin of 3% or less, thus leaving little margin for error. Therefore, the financial risk of new product introductions is often shared.
How Consumers Purchase has Changed
An additional trend worth mentioning is the decreasing value of advertising. Traditional advertising costs suppliers more today and is less effective than ever before. Consumers have more choices on where they get new product information, television, the Internet, in retail stores. They also use the remote control on their television in order to switch channels during commercials. This has led to a majority of consumers, estimated to be about 66%, to make their product buying decision while they are in a retail outlet rather than based on advertising they see on television or in print. Manufacturers have recognized this trend and have increased their trade promotion budgets.
According to the 1998 Cox Direct 20th Annual Survey of Promotional Practices, trade promotion accounts for nearly 50% of all manufacturer promotional dollars, media spending is about 26% and consumer promotion (coupons and sampling) is about 24%.
A slotting allowance is one example of a trade promotion. In this instance the slotting allowance is used by the retailer to defray the costs associated with entering this new item into commerce thereby allowing the retailer to provide the consumer with a lower overall price. Retailers have demonstrated that they can spend the promotional dollars more efficiently and drive manufacturer sales more effectively than traditional promotional strategies by manufacturers. According to an ACNielsen survey, retailers indicate that the number one use of trade promotional money is to lower cost to the consumer.
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The Federal Trade Commission (FTC) has reviewed this issue on a number of occasions over the past decade, in 1989, 1991, and 1995 and again in 1996. In each instance, the FTC has determined that slotting allowances are not anti-consumer, that the consumer is not adversely affected by this practice, and, indeed, may be paying a lower price in general for their products because the promotional money.
Based on the ACNielsen study, and numerous investigations by the FTC, the answer to the question ''Do slotting allowances hurt the consumer?'' must be ''No''.
The next question, ''Do slotting allowances limit or inhibit innovation?'' also must be answered in the negative. The pace of new product introductions is increasing.
We share the concerns of small manufacturers. It is often through their efforts that we find new and innovative products and categories of merchandise. Our industry is filled with success stories of small companies who have made it big based on one or two unique items, companies like Sarah Michaels, Rembrandt, MET-Rx, Breath Assure, CNS, PowerBar, Rayovac, Ricola, Safety 1st, Tom's of Maine, Weider Nutrition International to name a few.
For new and innovative companies that do the proper homework in understanding how their products will sell and that know who their/our target customer is and how the product will help both manufacturer and retailer meet the ever changing needs of our mutual customers, there is great opportunity in the retail industry.
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For the reasons outlined above, we believe that slotting allowances promote efficiency through the product supply chain, do not stifle innovation or competition and help bring high quality merchandise to American consumers at a lower cost than would otherwise be available.
PREPARED STATEMENT OF THE NATIONAL GROCERS ASSOCIATION
This statement on slotting allowances is submitted to the Committee on behalf of the members of the National Grocers Association. The National Grocers Association (N.G.A.) is the national trade association representing the retail and wholesale grocers that comprise the independent sector of the food distribution industry. An independent retailer is a privately owned or controlled food retail company operating in a variety of formats. Most independent operators are serviced by wholesale distributors, while others may be partially or fully self-distributing.
The independent retail members of N.G.A. and the grocery wholesalers that supply them have a vital interest in the slotting allowance issue. We appreciate this opportunity to express their views as part of the Committee's examination of this industry business practice.
Slotting allowances, like other allowances granted by grocery manufacturers to their customers in connection with the sale or resale of their products, are justified operational practices and costs of doing business. The practice of manufacturers offering allowances to competing customers is one that has existed for decades, and the practice of slotting allowances has existed for at least two or three decades.
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In fact, all such allowances are subject to the requirements of the Robinson-Patman Act, as well as Section 5 of the Federal Trade Commission Act. The Robinson-Patman Act was enacted in 1936 to curb and prohibit all devices by which large buyers gain unjustified preferences over small ones by virtue of their greater purchasing power. It was largely because of the threat of competitive harm posed by large grocery chains that the Robinson-Patman Act was enacted over 60 years ago.
The primary issue for N.G.A. and its members, therefore, is whether all pricing allowances and other services generally are being made available on a proportional and equitable basis. The more specific issue is whether demands made on manufacturers by power buyersthe handful of retail chains that today represent nearly half of all retail grocery salesare adding to the discrimination problems faced by the independent sector and the American consumer.
The impact of power buyers is one that has been of increasing concern in the trade and before government agencies. Dr. John L. Stanton, professor of Food Marketing at St. Joseph's University, in the February 1999 issue of Food Processing in 'Support the independent grocer-or else'' analyzed the effect the top five retailers could have by controlling 40 percent or more of the all category volume (ACV). ''By controlling so much of the ACV in this country, they are also in a position to demand so much more than the food processors. They will be able to ask for more promotional money, more slotting, higher charges for unsaleables, and have more unauthorized deductions . . . To date, many of the food processors have taken the bait. They have wooed the giants while significantly reducing support of the independent grocers and the small chains.''
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In the February 1999 edition of Grocery Headquarters, ''Consolidation: Out of our Hands'', John Gray, executive vice president/general counsel of Food Distributors International and formerly an executive with the Grocery Manufacturers of America, reinforced the magnitude of the problem: ''There are huge implications to this [buyer consolidation] because they're [grocery manufacturers] facing powerful concentrated customers. They used to be afraid of Wal*Mart, but now there are maybe four or five customers, each large enough to dictate trade terms.'' In response, manufacturers face the choice of raising their prices to all customers in order to maintain profit levels, or violate the law by not offering allowances, on a proportional and equal basis to smaller customers. Ultimately, the effect is the same: consumers lose.
David Balto, FTC Assistant Director, Bureau of Competition's Office of Policy and Evaluation, has recognized the concern over power buyers and their negative impact on consumers, in his recent article on ''Supermarket Merger Enforcement'' in the Antitrust Report. ''One of the more controversial issues is whether the increased size of the supermarket chains, which makes the merged firms more powerful buyers, will ultimately benefit consumers. This is hardly a new controversy. After all, concerns over the power of supermarket chains led to the enactment of the Robinson-Patman Act. The recent spate of mergers has led to renewed concerns.''
A respected industry expert helps draw the conclusion that, ultimately, consumers are being harmed. Gene Hoffman, former president of Kroger and former chairman and president of SUPERVALU, analyzed the level of concentration and the high consumer grocery prices in Britain in the March 1999 issue of Progressive Grocer, ''Sounding a warning''. He posed the question of what the trends in America portend: ''Will U.S. supermarkets install higher pricing policies after the current consolidation and subsidies? Moral: an 800-pound gorilla rarely shares its bananas.''
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For a number of years, N.G.A. has consistently urged a sensible, vigorous program of Robinson-Patman enforcement by the F.T.C. In 1988 N.G.A. commented to the F.T.C. on its proposed revisions to the Fred Meyer guides for advertising allowances concerning the ''purchase of display or shelf space, whether directly or by means of allowances.'' N.G.A.'s position then was the same as it is today. All allowances must be offered and paid in full compliance with the Robinson-Patman Act.
Allowances of various types, including slotting, are not being made available to all competing customers on proportionally equal terms as required by the RP Act. All too often, the independent retail/wholesale system is not receiving its fair share. Years of enforcement inaction by the Federal Trade Commission because of budget constrictions and priorities devoted to other enforcement, together with the demands of power buyers, whose demands cannot be ignored by the manufacturers, have resulted in a tremendous competitive disadvantage for the independent sector of the grocery business. The competitive playing field is all to often unleveled when power buyers can demand allowances, prices, special packaging and other terms of sale that are not readily made available to competing independent retailers and with no legal justification. As other witnesses have suggested, there is also reason to believe that the current level of power buyer demands has also resulted in higher consumer prices.
N.G.A. has asked the FTC to intercede on numerous occasions to assure that prices and allowances are not offered to independents in a discriminatory manner. Nearly a decade ago, the FTC revised its guidelines for promotional allowances under the Robinson-Patman Act. The FTC has brought no case to enforce its revised rules, lending additional support to the belief that government enforcement of the law is no threat. Just as the policeman has to park along the highway to deter speeding, the F.T.C. needs to devote enforcement resources and oversight to Robinson-Patman Act requirements. It is little wonder, then, why discrimination under that Act appears to be at an all-time high: the existence of the statute and the FTC's rules have lost all of their deterrent effect.
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The grocery industry is in the midst of an unprecedented wave of mergers and acquisitions. Mega retail grocery chains have grown largely through acquiring other chains. That growth is publicly acknowledged as a means of forcing better terms from suppliers. Because these power buyers represent such a large share of sales, manufacturers have no choice but to accede to their demands. This will lead to further consolidation among manufacturers, as they seek to regain the bargaining power that has been lost to their customers. As retail concentration has increased, so have the demands for higher allowances. Caught in the middle of this tug of war is the independent sector, which seeks only its lawful fair slice of the allowance pie. The only federal law that specifically prevents power buyers from unlawfully using their power is the Robinson-Patman Act. Until merger theory advances to the point of dealing effectively with retail concentration on a national level, and the creation of power buyers through mergers and acquisitions, RP enforcement by the FTC is the only real protection consumers have against the loss of competitive vigor in the production and distribution system that puts food on their tables.
The record before this Committee contains numerous criticisms of slotting allowances. It is not N.G.A.'s intention to evaluate or pass judgment on those comments. Some argue the statute is difficult to interpret. Others contend inappropriate enforcement policies have led the courts to make it more difficult for plaintiffs to prevail in private suits. But those are not reasons to totally abandon enforcement of the statute. When the effects of discriminatory allowances are reducing consumers' choices and raising their cost of food, it is time for a major resumption of enforcement by the FTC. N.G.A. hopes that this Committee will play a leading role in that regard by seeing to it that the FTC is given additional funding earmarked for Robinson-Patman enforcement. A case based upon discriminatory allowances, demanded and received by power buyers, would be a perfect starting point.
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(Footnote 1 return)
Claudia H. Deutsch, The Deal Is Done. The Work Begins, N.Y. Times, April 11, 1999, at section 3, page 1 (explaining that ''researchers routinely say that anywhere from one-half to three-quarters of mergers never provide the low costs, added market share or other benefits that management promisedor that they take much longer than expected to do so''); Peter Passell, Do Mergers Really Yield Big Benefits? N.Y.Times, May 14, 1998, at C2 (reporting that the ''most comprehensive study of conglomerate mergers . . . found that the profitability of acquired companies on average declined''); Peter Passell, When Mega-Mergers Are Mega-Busts, N.Y.Times, May 17, 1998, at 18 (Week in Review Section) (reporting that ''most of the hard evidence from past mergers, along with the anecdotal evidence from the current wave, suggests that mergers do as much harm as good''). Passell notes that mergers ''are too often the progeny of executive megalomania and deal makers's dreams of year-end bonuses.'' Id. Francis Declerck, Did LBOs Create Value in US Food Industries in the 1980s? 11 Agribusiness 523, 536 (1995) (concluding that leveraged buy-outs in the food industry during the 1980s produced companies that ''could not service their debt and have tried to reduce their debt either by divesting, restructuring their debt, or returning to public ownership'').
(Footnote 2 return)
Bryan Burrough, RJR Nabisco, an Epilogue, N.Y.Times, March 12, 1999 (explaining the spinoff of R.J. Reynolds tobacco from Nabisco); See also, A Disastrous Merger (editorial), N.Y.Times, Feb. 12, 1999 (explaining the failure of the BMW-Rover merger: ''The lesson of BMW should remind them that mergers often do not work out as planned, and that savings are easier to anticipate than to realize''); Albert A. Foer, Making Antitrust Tougher; Playing Monopoly, THE NEW REPUBLIC, April 12, 1999, at 16 (noting that in 1995 ''when the Union Pacific and Southern Pacific Railroads wanted to merge, they projected huge efficiency gains. Within a year after the merger, however, the new railroad was plagued with logistical problems'').
(Footnote 3 return)
Bruce W. Marion, Government Regulation of Competition in the Food Industry, 61 AMERICAN JOURNAL AGRICULTURAL ECONOMICS 178, 180 (February 1979) (''There is rather convincing evidence that the Celler-Kefauver Amendment has affected and can still significantly affect the structure of markets if it is vigorously enforced''). Marion also notes that most antitrust activity in the chain from farmer to consumer takes place in manufacturing and food retailing, with ''little interest until recently in producer-first handler markets.'' Id., at 181; Willard F. Mueller, Market Power and Its Control in the Food System, 65 AMERICAN JOURNAL AGRICULTURAL ECONOMICS 855, 858 (1983) (''Given the modern corporation's insatiable appetite for growth by merger, the absence of strict prohibitions on horizontal mergers would doubtless have led to much greater concentration in most food retailing and manufacturing markets'').
(Footnote 4 return)
A.C. Hoffman in Bruce Marion (ed), THE ORGANIZATION AND PERFORMANCE OF THE U.S FOOD SYSTEM (1986), xix-xxv.
(Footnote 5 return)
Marion, ''Government Regulation,'' at 181.
(Footnote 6 return)
Russell C. Parker, Antitrust Issues in the Food Industries, 58 AMERICAN JOURNAL AGRICULTURAL ECONOMICS 854, 856 (1976) (''The increase in aggregate concentration with the largest food manufacturers is strongly related to mergers. When food company mergers were examined in 1966, it was found that were it not for mergers the combined share of assets of the fifty largest food manufacturers would have declined between 1950 and 1965 . . . Since 1965 . . . mergers have eliminated a significant percentage of the remaining number of independent medium-sized and larger food manufacturers''). Russell also notes that ''FTC analysis [in 1966] of detailed product data for the twenty-five largest food manufacturers indicated that nearly 90 percent of the product areas entered by the companies were directly traceable to merger.'' Id., at 856. Russell concluded that ''Merger enforcement policy probably has more impact on industry structure and performance than any other single area of enforcement.'' Id., at 858. Part of the problem with using merger policy to slow the growth of food companies is that so many food industry mergers were product extension mergers instead of horizontal mergers. Id., at 856. By the mid-1970s, however, the ''principal conglomerate merger theories of deep pocket and cross-subsidization, reciprocity, and entrenchment of leading firms [had] fallen on hard times with respect to enforcement activity.'' Id., at 859.
(Footnote 7 return)
Marion, ''Government Regulation,'' at 181. During this period, profitability in food manufacturing was 13.2 percent of stockholder's equity, 11 percent higher than the rest of manufacturing. Id., at 182. Marion worries about the market power of the food firms that emerged in the 1970s, noting that their ''market powerwhich is more heavily based upon product differentiation and conglomerate-derived economic power than in previous periodsappears much less vulnerable to erosion.'' Id.
(Footnote 8 return)
A.C. Hoffman in Bruce Marion (ed), THE ORGANIZATION AND PERFORMANCE OF THE U.S FOOD SYSTEM (1986), xix-xxv; Bruce W. Marion, Government Regulation of Competition in the Food Industry, AMERICAN JOURNAL AGRICULTURAL ECONOMICS 61 (February 1979), 181.
(Footnote 9 return)
Willard Mueller and Thomas Paterson, Policies to Promote Competition, in A.C. Hoffman in Bruce Marion (ed), THE ORGANIZATION AND PERFORMANCE OF THE U.S FOOD SYSTEM (1986), 387; Marion, Government Regulation of Competition in the Food Industry, 180.
(Footnote 10 return)
Bruce W. Marion, Government Regulation of Competition in the Food Industry, 61 AMERICAN JOURNAL AGRICULTURAL ECONOMICS 178, 180 (February 1979) (explaining that ''[s]ince the mid-70s, the antitrust agencies have relaxed their posture on food industry mergers. A recent surge in mergers by large grocery chains appears to be a direct response''); Sandra O. Archibald, Alex F. McCalla, and Chester O. McCorkle, Jr., Trends in the U.S. Food-Processing Industry: Implications for Modeling and Policy Analysis in a Dynamic Interactive Environment, 67 AMERICAN JOURNAL AGRICULTURAL ECONOMICS, 1149, 1153 (1985) (''In recent years, the dominant form of mergers have been conglomerate and concentric facilitated in part by less stringent enforcement of antitrust laws''); The New Food Giants; Merger Mania Is Shaking the Once-Cautious Industry, BUSINESSWEEK, Sept. 24, 1984, at 133 (explaining how food processing companies in the 1980s ''took advantage of the antitrust environment, more tolerant of big deals than it has been in decades, to increase their size and marketing clout''); Jon Lauck, Competition in the Grain Belt Meatpacking Sector after World War II, 57 Annals of Iowa 135, 1478, 1512, 158 (Spring 1998) (detailing the raft of mergers which contributed to concentration in the meatpacking sector and noting that the ''slowing of antitrust activities in the 1980s, together with the conglomeration of food processing, remains a concern for farmers given potential abuses of market power and the often disorganized nature of farmers marketing''). See generally, William G. Shepherd, Causes of Increased Competition in the U.S. Economy, 19391980, LXIV REVIEW OF ECONOMICS AND STATISTICS, 613, 613 (November 1982) (concluding that ''[a]ntitrust policies emerge as the strongest single cause of rising competition'' in his study of market structure from 1958 to 1980).
(Footnote 11 return)
Bruce Marion and Donghwan Kim, Concentration Change in Selected Food Manufacturing Industries: The Influence of Mergers vs. Internal Growth, 7 AGRIBUSINESS, 415, 427, 429 (1991); Adesoji Adelaja, Rodolfo Nayga, Jr., Zafar Farooq, Predicting Mergers and Acquisitions in the Food Industry, 15 AGRIBUSINESS, 1, 13 (1999) (noting the continuation of significant merger activity in the food industry). Consumers are also affected by greater concentration. A recent study concluded that welfare losses due to oligopoly power totaled $15 billion in 1987. Sanjib Bhuyan and Rigoberto A. Lopez, Oligopoly Power and Allocative Efficiency in US Food and Tobacco Industries, 49 AMERICAN JOURNAL AGRICULTURAL ECONOMICS 434, 441 (September 1998).
(Footnote 12 return)
In addition to benefitting farmers and other suppliers in the above-mentioned stateswho can be said to be captive to the elevators involvedthe required divestitures may also benefit farmers and other suppliers in Illinois, Iowa, Nebraska, Missouri, Kansas, Oklahoma, Colorado, and New Mexico, who, while not necessarily captive to the elevators involved, nevertheless rely on them as competitive alternatives.
(Footnote 13 return)
We are also requiring Cargill to enter into what is called a ''throughput agreement'' to make one-third of the loading capacity at its Havana, Illinois, river elevator available for leasing to an independent grain company, and are imposing restrictions on Cargill in the event it seeks to enter into a throughput agreement with the operator of the Seattle facility.
(Footnote 14 return)
''Slotting: Fair for Small Businesses & Consumers?,'' Hearings before the Committee on Small Business, United States Senate (Sept. 14, 1999).
(Footnote 15 return)
Another way this has been expressed is that the manufacturer's willingness to ''put its money where its mouth is'' signals a greater likelihood that the product actually will succeed.
(Footnote 16 return)
See, e.g., Standard Oil Co. v. United States, 337 U.S. 293 (1949).
(Footnote 17 return)
FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997). In recent years the Commission has also devoted significant enforcement resources to mergers of consumer product manufacturers. See, e.g., S. C. Johnson, FTC Dkt. No. C3802 (acquisition of DowBrands conditioned on divestiture of ''Spray 'n Wash,'' ''Spray 'n Starch,'' and ''Glass Plus'' brands) (consent order) (1998).
(Footnote 18 return)
FTC Dkt. No. 9278 (Opinion and Final Order, Oct. 13, 1998) (Comm'r Swindle concurring in part and dissenting in part), appeal filed, Dkt. No. 984107 (7th Cir., filed Dec. 7, 1998).
(Footnote 19 return)
In accordance with Rule XI, clause 2 (g) (4), I certify that neither FDI, nor IFDA has received a federal grant, contract or subcontract in the current or preceding two fiscal years.
(Footnote 20 return)
Bovard, James. 1995. ''Archer Daniels Midland: A Case Study in Corporate Welfare.'' Cato Institute Policy Analysis #241.