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Market
Structure Challenges for the U.S. Live Cattle Industry Testimony Ranchers-Cattlemen
Action Legal Fund, United Stockgrowers of America (R-CALF USA) Before the Hearing on
the Proposed Ban on Packer Ownership of Livestock and USDA’s Enforcement of
the Packers and Stockyards Act Box 67 Mr. Chairman and Members of the Committee: I
am here today representing the Ranchers-Cattlemen Action Legal Fund, United
Stockgrowers of America R-CALF USA. I
am a Director of R-CALF USA and I represent the states of North Dakota, South
Dakota, and Nebraska. I am also a
cow/calf producer, feedlot operator, owner and operator of Herreid Livestock
Auction in Herreid, South Dakota, and an auctioneer.
R-CALF USA is a national non-profit cattle association that represents
only cow/calf producers and independent stockers and feeders.
Our mission is limited to representing the U.S. live cattle industry in
trade and marketing issues to ensure the continued profitability and viability
of U.S. cattle producers. In
1999, less than three years ago, R-CALF USA moved from a foundation to a
national membership organization and is now the fastest growing U.S. cattle
association in America, with 1100 new members just since the first of the year.
We now have a national membership of over 6000 cattle producers in 42 states.
We also have 30 affiliated organizations including 10 statewide cattle
associations, 18 county cattle associations, and 2 general farm associations. Our
association’s rapid growth is a direct reflection of the growing awareness and
concern among U.S. cattle producers for the chronic and severe problems
associated with our cattle markets. I
commend Chairman Harkin and this Committee for holding this hearing today.
As evidenced by the many individual and joint association letters
received by this Committee, cattle producers all across America greatly
appreciate the Senate’s earlier passage of Senator Johnson’s packer
ownership ban. Cattle producers
also appreciate the Chairman’s leadership in working to include the
Competition Title in the recent Farm Bill.
I am pleased to address the proposal to ban packer ownership of livestock
and USDA enforcement of the Packers and Stockyards Act. INTRODUCTION
The
importance of the live cattle industry alone, not including the beef processing
sector, both to agriculture in the United States and the overall U.S. economy is
difficult to overstate. The single
largest sector in agriculture for more than 40 years, the live cattle industry
currently has more than one million operators and has generated more than $30
billion in agriculture revenues annually for the last dozen years.
During the past several years, however, this vitally important sector of
the overall beef industry, and the American economy has been in a state of
substantial economic crisis, a condition that persists today.
Financially, the live cattle industry overall has incurred more than
seven consecutive years of substantial losses. Our
markets are affected by numerous factors from convenience, quality, and consumer
trust to export demand, import volumes and supply levels.
These are not new to us. What
is new, however, is the irrational relationship between both retail prices and
packer’s boxed beef prices, and our fed cattle price. Much
has been said about the market share beef has lost to competing meats such as
poultry, pork, and imported beef and cattle.
However, the most damaging lost market share cattle producers suffer
today is the lost share of the consumers’ beef dollar from the packers and
retailers. No industry segment can
continue to survive the losses U.S. cattle producers have sustained.
USDA reported in April of 1999 that the nominal farm-to-retail price
spread has widened from $.40 to over $1.40 per pound since 1970.
That is a loss to cattle producers of over $500 per head – more than
the value of calves today. Some
of this loss is normal; it represents cost increases for downstream packers and
retailers. But, what we’ve seen
since the early 90s is not normal. In
the mid-90s the Cattlemen’s Beef Board commissioned Cattle Fax, a leading
industry resource for cattle prices and market information, to do a study on
price discovery. Cattle Fax
reported that historically retail prices and fed cattle prices have moved up and
down in close synchrony. The same
statement could be made for the relationship between boxed beef values and fed
cattle prices. However, neither has
been the case since the early 90s. There
is no greater evidence that something is wrong than to witness the record retail
prices that you as consumers are paying and the tremendous losses producers are
experiencing. There
is no greater evidence that something is wrong than the high number of feeders
exiting this industry. There
is no greater evidence than simply to look at the relationship between both
retail and boxed beef prices and fed cattle prices. The
rest of this testimony will reference many reports that help document the loss
of producers’ market share to the highly concentrated packers through captive
supplies. MARKET STRUCTURAL CHALLENGES
It
is important to note that there are two functioning production models within the
U.S. meat industry. The first
production model is best represented by the U.S. poultry industry.
As stated within the Sparks study commissioned by the National
Cattlemen’s Beef Association (NCBA) and National Pork Producers Council (NPPC): “Over
time, these independent [poultry] businesses [including independent feedmills,
hatcheries, farms, and processors] were combined by ‘“integrators,”’ who
reduced costs by coordinating the production of each stage.
As a result, an industry once characterized by tens of thousands of
small, specialized businesses became characterized by hundreds of vertically
integrated firms. Through
horizontal integration, however, the number was reduced to about 50 by the
1990’s.” It is highly questionable whether chicken producers have benefited from this level of integration. In the poultry production model, competitive market signals no longer reach the producer as the integrator dictates both the terms of production and the prices for live birds. The
second production model is best represented by the U.S. cattle industry.
Here, the production system is characterized by approximately 1 million
independent cattle producers, whose cattle are fed by thousands of independent
feeders prior to being marketed to the beef processing industry.
When cattle industry markets function properly, consumer driven
supply/demand signals determines both the terms of production and prices for
cattle. But today our cattle
markets are not functioning properly. Instead,
the economic power exerted by the highly concentrated beef processing industry
upon the live cattle industry is becoming alarmingly similar to the poultry
model I just described. Mr.
Chairman and Members of the Committee, I’m here today to tell you that both
sides of the packer ownership ban issue can draw upon economic studies to
support their respective positions. The
beef industry, as indicated by the NCBA’s and NPPC’s Sparks study, is well
underway in its efforts to vertically integrate the feeding sector with the
already horizontally integrated processing sector.
If this integration is allowed to continue, the outcome will be, like in
the poultry model, that fed cattle prices will be determined not by competitive
market signals, but rather, by the integrators.
Again, the Sparks study admits this outcome when it states “Vertical
integration often attracts investors because of the negative correlation between
profit margins at the packing stage and the feeding stage.”
The risks that feeding margins may become higher and packer margins lower
are the very risks the Sparks study says packers control through captive
supplies. The study states,
“Thus, efforts to control risk are one of the most important drivers of
increased vertical integration and coordination in the meat packing industry.”
Once our feeding sector is so controlled, the prospects of maintaining an
open and competitive market for our cow/calf producers will be lost. Because
it is true that both models are obviously supportable, the challenge for
Congress is to do what we citizens have elected you to do – apply our values
along with America’s vision for our future to today’s problems so America
will continue looking the way we want it to.
The choice between the two models requires no further study.
We all know the implications. In
the vertically integrated model, production sector profits, along with the
profits earned by the industries that support the production sector, are
transferred to the integrated sector. This
model cannot and will not support the current economic and social infrastructure
necessary to support America’s rural communities in every state of the Union. I
urge you to choose to promote and preserve an open and competitive marketplace,
free of undue influences and manipulation by the packing sector.
With this choice, our independent cattle producers will be assured of
both economic opportunities and choices within our free enterprise system. The
organizations that brought you the Sparks study are not representing the
interests of actual livestock producers. Instead
they have brought you a meat processing industry wish list that masks the
benefits of moving toward an open and competitive market structure by predicting
catastrophic industry losses should packers be prohibited from owning and
feeding cattle. This, despite the
fact that the data contained in GIPSA’s January 18, 2002, captive supply
report indicated that the packer fed cattle owned by the four largest firms in
1999 totaled only 2 million head, or about 8 percent of that year’s total
slaughter. Despite
the obvious and very real concern for economic retaliation by the packers, over
125 independent feedlot owners from the states of Texas, Kansas, Nebraska, and
Colorado cosigned a joint letter to each member of the Farm Bill Conference
Committee. The letter said, “We
the undersigned feedlot operators and feeders urge you to support the packer
ownership portion of the Senate version of the Farm Bill.”
R-CALF USA has promised these feeders that their names would not be
publicly released so I cannot share this letter with this Committee.
However, the Farm Bill Conference Committee did receive a copy. Today,
the same organization that presented Congress with the Sparks study, replete
with admissions that packers are using and enjoying the benefits of captive
supplies to help manage their number one input cost - live cattle - are calling
upon Congress to conduct yet another study.
These opponents to the packer ownership ban argue that no studies have
definitively established that packers’ use of packer-owned cattle causes
cattle prices to fall. As one
Kansas feedlot owner recently said, “This is just another big packer stall
tactic to keep their unfair profits flowing.”
GIPSA,
has cited numerous studies indicating a correlation between captive supply
volumes, including packer-owned cattle, and cash cattle prices.
According to the referenced 2002 GIPSA report, economists Schroeder,
Mintert, Barkley, and Jones found a negative statistical relationship between
fed cattle prices and captive supplies in 1992; that same year economist Elam
found a negative statistical relationship between captive supplies and monthly
average fed cattle prices; GIPSA’s 1992 study found that packers use captive
supplies, including packer owned cattle, strategically; economists Parcell,
Schroeder, and Dhuyvetter found that a one percent increase in captive supply
shipments was associated with a reduction in basis in Colorado and Texas in
1997; GIPSA, in cooperation with economists Schroeter and Azzam, found a
negative statistical relationship between weekly captive supply and the weekly
average spot market price in 1999. These
studies, beginning in 1992, are uncontested with respect to showing a negative
statistical relationship between levels of captive supply and spot market
prices. Where there is disagreement
is whether or not captive supplies are the cause of lower spot market prices.
Our economists have gone as far as they can go in helping Congress, the
Administration, and the industry to identify a correctable problem.
If you combine these economists’ studies with the admissions contained
in the NCBA and NPPC Sparks study describing how packers use packer-owned cattle
to minimize their risk, the causal relationship is clearly revealed and you will
know what every seller of live cattle in America knows – packers are using
their own cattle to depress cattle prices.
GIPSA
states in its 2002 report that it may not prohibit packers from using captive
supplies without evidence that the use of captive supplies causes harm or is
likely to result in the type of harm that the Act was intended to prevent.
Yet, according to GIPSA, its own study was conducted without having
audited the reporting information submitted by the packers since 1988.
This certainly raises the question of whether GIPSA or any other
researcher has access to the critical information needed to determine the extent
of harm that captive supplies are inflicting upon the competitive marketplace. But
while USDA is unable to determine if packers are unduly influencing the market,
as early as 1999, it was clear to then-Chair of the International Trade
Commission Lynn M. Bragg, who said, “The concentration of packers increases
the packers’ leverage relative to cattle prices.”
Fellow ITC Commissioner Carol T. Crawford wrote in the ITC’s November
1999 Final Determination on Live Cattle from Canada, “ . . . there is
considerable concentration in the packing industry . . . which can and does
exert influence over prices for cattle.”
In 1988, Bob Peterson, than Chairman of IBP stated: “Procurement
practices are changing and this concerns me.
There is a quiet trend towards packer feeding and it is much, much bigger
than you think it is. We cannot
stand by if the competitive playing field is unlevel.
Our competitors are promoting contracts and seeking more.
These forward contracts coupled with packer feeding could represent a
significant percent of fed cattle at certain times of the year.
Do you think this has any impact on the price of the cash market?
You bet! We believe a
significant impact.” The
severity of the problem with our markets has reached catastrophic proportions.
The ban on packer ownership will provide immediate relief from the forces
that have driven a wedge within our production chain that prevents
consumer-driven market signals from reaching live cattle producers.
Retail beef prices remain at near record highs; demand for beef is
strong; our population is growing; our herd size has fallen to its lowest level
in nearly 40 years; our production this year is below the record production year
of 2000; and yet, our live cattle prices are at $62.00, the lowest level since
1998; and our independent feeders are losing more than $100 per head.
A competitive marketplace would not produce these results.
According
to the respected Doane’s Agriculture Report on October 26, 2001, “The
farm-to-retail spread has topped $1.90/lb – If the spread were in line with
normal, current retail prices would translate to live cattle prices in the
mid-$80s rather than the mid-$60s.” Winter
Feed Yards in Dodge City, Kansas, reported in December of 2001, “As of
November 30, 2001, retail beef prices were 9 percent above one year ago.
Fed cattle prices were 18.2 percent below one year ago – this
represents a $300 per head loss to producers.” While
we are losing money and equity, packer margins have literally skyrocketed.
According to data compiled by the Livestock Marketing Information Center,
packer margins climbed 133 percent since 1992.
The per head margin for packers in 1992 was $62.28.
In 2001 it was $145.20. Meanwhile,
live cattle producers have experienced shrinking margins, with prices failing to
recover even to 1992 levels. According
to the ERS, the producers’ share of the retail beef dollar in dropped from 56
percent in 1994 to 46 percent in 2001. In
May of this year, it fell to 42 percent. This
translates to a loss of around $300 per fed steer.
Producers are losing their market share from the packers and retailers at
an alarming rate. This is a clear
indication that forces other than competition are influencing our markets.
(See Attachment.) The
March 2002 report completed by the GAO reminds us that over six years ago, in
1996, GIPSA could not conclude that the cattle industry was competitive.
But no action has been taken. The
responsibility to act has now been passed to you, our Congress, and we urge you
to take decisive action including, the first but important step of preventing
the large packers from owning livestock. The
deck is stacked against cattlemen when they are forced to compete against the
same packer for feeder cattle that they later have to sell to when their fed
cattle is ready for market. Attached
to my written testimony is an issue brief on Senator Johnson’s packer
ownership ban. Also attached is a
chart depicting the relationship between retail beef prices and live cattle
prices since 1979. This chart
reveals that until 1994, our industry had confidence that consumer-driven retail
prices were translating to live cattle prices – both retail and live cattle
prices moved in synchrony. But
since 1994, the correlation between retail prices and live cattle prices was
disrupted and continues to be disrupted today.
This radical disruption is evidence that our live cattle prices are no
longer responsive to the competitive market signals driving retail prices.
Finally, I am including a chart that shows the disparate relationship
between live cattle prices and packer margins.
The
second issue is that of USDA enforcement of the Packers and Stockyards Act.
As mentioned earlier, GIPSA indicated as far back as 1996 that it could
not conclude that the industry was competitive; yet, it is the agency charged
with guarding against unfair and anticompetitive practices.
Producers have become frustrated with the inaction on the part of USDA to
take any meaningful steps to address the unprecedented concentration of the
cattle processing industry, and to prevent packers from exerting undue and
market distorting influences with their captive supplies.
To
compound matters, the previously mentioned March 2002 GAO report reveals that
USDA has not properly maintained and updated the economic models used by it and
the ITC for determining the potential impacts of public policy decisions, trade
implications, and structural changes within the beef and cattle industries.
Despite the radical structural changes that occurred within our market
structure since the 80s, including the concentration of the packer sector and
the use of new tools like forward contracts and marketing agreements, USDA has
not properly re-estimated, documented, or validated its models, and much of the
data used in the original estimation was from the 1960s and 1970s.
The
GAO said in regard to a 1996 ERS study of the causes and effects of
consolidation and concentration in the meat packing industry, “While this
analysis did not support conclusions about the exercise of market power by beef
packers, even though no other manufacturing industry showed as large an increase
in concentration since the U.S. Bureau of the Census began regularly publishing
concentration data in 1947, it also concluded that the models need to be
improved to more fully incorporate relevant determinants of company behavior.”
But the models were not improved. The
GAO said of the ITC models that neither type of model used by the ITC “ . . .
is detailed enough to project cattle prices or address the effects of structural
changes associated with market concentration, marketing agreements, and forward
contracts in the cattle and beef industries.”
It said the primary model used by USDA is equally deficient.
How
can Congress or the industry reasonably rely upon USDA to properly assess and
then address the impacts of captive supplies, packer concentration, and growing
volumes of both beef and live cattle imports when it has for so long neglected
the analytical infrastructure needed to make such critical assessments and take
such needed enforcement action? This
long-term regulatory neglect has rendered USDA ineffective in addressing
today’s cattle industry challenges. This
is not unlike the regulatory neglect now being blamed for the significant
shareholder losses caused by the inappropriate conduct of companies like Enron
and WorldCom. Our live cattle
industry is silently suffering the same consequences – in the form of lost
money and equity in our rural communities where our one million producers, our
thousands of feeders, and all their supporting industries reside. Importantly,
consumers are being equally harmed by this neglect, as they have not realized
any economic savings from the significantly lower prices packers are paying for
cattle. In the months of April and
May of 2000, a record-breaking production year, Choice retail beef prices were
$3.07 per pound and fed cattle prices were $.72 per pound.
During the same period this year, production was down 2 percent below
2000, Choice retail beef prices increased to $3.30 per pound and fed cattle
prices fell to the mid-$.60s. Where
are the consumer benefits from this market structure? USDA
has demonstrated its ineffectiveness in regulating the major packers.
Unlike cattle dealers and sale barns that are closely regulated by the
Packers and Stockyards Act, packers are not required to compensate parties they
have injured. The Act also
doesn’t provide for legal fees in a civil action when a packer is found to
have broken the law. So even though
the USDA was successful in their recent Farmland/National retaliation case
involving the Callicrate feedyard, Callicrate was not compensated for his
damages, he continues to be boycotted, and has now decided to close his feedyard
after feeding cattle for 24 years. New
rulemakings could correct these problems. U.S.
cattle producers have become so frustrated with USDA’s inaction that they are
seeking relief from the judicial branch of government.
I am a plaintiff in the pending class action lawsuit, Picket versus IBP.
I am also involved in the recent class action lawsuit stemming from
USDA’s misreporting of boxed beef prices last April.
While USDA was misreporting boxed beef prices, all four of the major
packers kept bidding artificially low prices for live cattle.
We believe the packers who were selling the boxed beef were fully aware
of USDA’s mistake, yet they continued to underbid for cattle.
As soon as the mistake was publicly announced, live cattle prices
rebounded $2-$4 per cwt. U.S.
feeders, backgrounders and cow/calf producers lost millions as a result of this
incident. USDA took no action to
assist producers. Farmland/National,
the fourth largest packer, has already voluntarily offered compensation to its
suppliers. The other three packers
have not. When packers behave this
way, doesn’t this conduct ring of insider trading?
RECOMMENDATIONS R-CALF
USA firmly believes there is ample evidence that our markets are not functioning
according to competitive market fundamentals.
We are convinced that the use of packer owned cattle and other captive
supply sources are the tools used by the concentrated packing industry to
strategically disrupt the competitiveness of our markets, and, we are convinced
that the problem has grown beyond the capabilities of USDA to address.
We, therefore, believe Congress should immediately take the following
steps: 1.
Prohibit packers from owning livestock. 2.
Conduct an immediate investigation into the additional cause or causes of
why our markets are unresponsive to competitive market signals.
Include the following issues as topics for the hearings held in
conjunction with the investigation: a.
Senator Mike Enzi’s captive supply amendment that would require a fixed
base price in formula contracts and would require contracts to be traded in
open, public markets. b.
Packers’ use of imports and their affect on the cattle market in light
of then-ITC Chair Lynn M. Bragg’s 1999 statement that packers are using
imports to suppress domestic live cattle prices. c.
Interstate shipment of state inspected meat, along with the need to
establish minimal performance standards, so state inspected packing plants can
expand their presently constricted marketing area. d.
Restricting use of the USDA quality grade stamp to only meat derived from
animals born, raised, and slaughtered in the United States. e.
Need for increased price transparency in cattle markets. f.
Needed reform of the Commodities Future Markets. 3.
Re-introduce the Agriculture Competition Title including the following
provisions: a.
Establishment of an Office of Special Counsel for Competition Matters,
whose duty would be to investigate and prosecute violations of the Packers and
Stockyards Act. b.
Provide for the appointment of outside counsel for claims arising from
the Packers and Stockyards Act. c.
Prohibit unfair or deceptive acts or practices in agricultural commerce. d.
Prohibit confidential contracts. e.
Provide for recovery of attorney fees to enforce the Packers and
Stockyards Act. 4.
Direct USDA and ITC to update and improve the economic models used to
explain and forecast cattle and beef prices, and provide assistance to through
necessary funding. R-CALF
USA distributed a joint letter calling for an immediate Senate Judiciary and
Agriculture Committee investigation into the functioning of the U.S. cattle
market. Originally, 27 local, state
and regional cattle associations joined R-CALF USA in calling for this
investigation on June 18, 2002. Since
that time, many more cattle, general farm and consumer organizations have joined
onto the letter. I would like to
hand each of you a copy of this updated request. Let
me close by saying the producers in North Dakota, South Dakota, Nebraska, and
many other western states are suffering from a severe drought.
My grandfather weathered droughts in South Dakota because he had a
competitive market with which to recover a fair value for his cattle.
The last severe drought we went through in our state was 1988.
We culled our herd and sold cull cows for $50 per cwt.
Retail beef prices that year were $2.50 per pound.
In today’s drought we are selling our cull cows into a market that will
only return $35 per cwt ($180 less per head than in 1988).
But today’s retail beef prices are $3.31.
America’s
cow/calf producers, independent stockers and feeders, and consumers are being
unjustly excluded from the benefits our free market economy promises.
I respectfully urge this Committee to immediately and decisively remove
the known barriers preventing our participation. Thank
you for your consideration. |
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