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Ensuring Open
and Competitive Markets: Are Meat
Packers Abusing Market Power? Testimony Ranchers-Cattlemen
Action Legal Fund, United Stockgrowers of America (R-CALF USA) Before the Sioux Falls,
South Dakota August
23, 2002
Leo McDonnell,
Jr. P.O. Box 30715 Mr. Chairman and Members of the Committee: I
am testifying today as the President of the Ranchers-Cattlemen Action Legal
Fund, United Stockgrowers of America R-CALF USA.
R-CALF USA is a national non-profit cattle association that represents
only cow/calf producers and independent stockers and feeders.
Our mission is focused on representing the U.S. live cattle industry in
trade and marketing issues to restore profitability and viability to independent
U.S. cattle producers. In
1999 R-CALF USA became a national membership organization and is now the fastest
growing U.S. cattle association in America, with over 1450 new members joining
just since the first of the year. We now have a national membership of over 6100
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 Leahy and this Committee for holding this hearing.
The preservation of an open and competitive cattle market is of paramount
concern to my membership and the Senate Judiciary Committee’s initiation of
this investigation reveals the Committee’s concern that our markets may no
longer be competitive. 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. The
live cattle industry is an integral sub-sector of the three-sector U.S. beef
industry. The three sectors include
the live cattle industry, beef processing industry, and beef retailing industry.
If the market is competitive, product value is progressively added within
each independent sector, beginning first with the production sector – the live
cattle industry.
Historically,
our live cattle markets have been responsive to various forces impacting each of
the three beef industry sectors. Live
cattle markets have responded both positively and negatively to such beef retail
sector factors as consumer perceived convenience, quality, and trust.
Live cattle markets have also responded both positively and negatively to
such processing-sector factors as domestic supply levels, export demand, and
import volumes. Finally, live
cattle markets have been responsive to factors within its own industry such as
domestic supply levels, quality and consistency attributes, and breed
preferences. Of utmost importance
in this discussion is the fact that our live cattle market has historically
responded, both positively and negatively, to all of the aforementioned factors.
While these factors persist today, new forces have recently entered the
marketplace and these new forces are undermining the competitiveness of our
markets and are threatening the very survival of the independent U.S. cattle
producer. Historical Indicators of a Competitive Live
Cattle Market
As
shown in Figure 1, retail beef prices and live cattle prices shared a
synchronous relationship for the 24-year period from 1970 through 1993.
This synchronous relationship was substantiated by a mid-90s study
commissioned by the Cattlemen’s Beef Board and conducted by Cattle Fax.
The significance of this synchronous relationship is profound.
Because retail beef prices are predicated on consumer buying preferences,
the harbinger of competition, the value attached to beef is known to be
attributable to legitimate market forces. Although
the beef processing industry is sandwiched between the consumer and the live
cattle industry, so long as the live cattle market rose and fell in synchrony
with the retail beef market, the live cattle industry had confidence that
competitive market signals were the controlling factor in the pricing of live
cattle. According to data
reported by the USDA-ERS, the spread between live cattle prices and retail
prices increased from $.36 in 1970 to $1.29 in 1993. In
Figure 2, the progressive addition of profits, beginning with the value received
by the live cattle producer, then the value captured by the beef processor, and
finally the value attributable to the retailer is shown.
Consistent with Figure 1, the relationship between the respective values
captured by the three industry sectors for the 24-year period from 1970 through
1993 can also be characterized as synchronous.
Notable, however, is the ever-widening spread between the respective
values captured by each sector. According
to data provided by the USDA-ERS, in 1970, for example, the percentage share of
the consumers’ beef dollar captured by the live cattle industry was 64
percent. By 1993, the live cattle
industry’s share had decreased to 56 percent, an 8 percent decrease over this
24-year period. The
foregoing two indicators: a synchronous relationship between live cattle prices
and retail beef prices and a dominant live cattle industry share of the
consumer’s beef dollar, are the historical indicators evincing that
competition was the controlling factor in the progressive addition of value
within each sector of the beef production chain, albeit with a recognizable
trend suggesting that the sectors downstream of the live cattle industry were
progressively capturing greater value than was the live cattle industry. Several
factors can be identified as contributors to this trend marked by the capture of
greater value by the beef processing and retailing sectors during this period
including increasing imports, increasing concentration (the General Accounting
Office reported in March of 2002 that the four largest packers already
controlled 36 percent of the market by 1980), and increasing concentration in
the retail sector. However, it is
R-CALF USA’s belief that during this period, from 1970 through 1993, market
competition was still the predominant force influencing live cattle prices. Figure 1
Figure 2 Anti-Competitive Forces Accelerated After 1994
R-CALF
USA believes that 1994 was the year in which the packing industry’s exercise
of considerable buying power became manifest within the U.S. live cattle market.
Several factors culminated in the early 90s to provide this buying power
to the meatpacking industry: 1.
According to the March 2002 GAO report “Economic Models of Cattle
Prices” the packing industry achieved a concentration level in which the four
largest meatpackers accounted for 72 percent of all steer and heifer slaughter
in the U.S. in 1990, and by 1999, this level increased to 81 percent.
The GAO reported “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.” 2.
By the mid-90s, the meatpacking industry had introduced new tools into
the market place that provided it with both alternatives to procuring their live
cattle inventories from the open, cash market, and the ability to control
ever-increasing numbers of live cattle inventories.
These new tools included formula pricing, forward contracts including
basis the board forward contracts, marketing agreements, joint ventures, and
alliances. In addition, packers
began purchasing and feeding their own light-weight cattle (packer-owned cattle) 3.
According to the January 11, 2002, GIPSA report “Captive Supply of
Cattle and GIPSA’s Reporting of Captive Supply,” cattle procured using the
above-mentioned procurement tools but not delivered to the packer within 14 days
were “captive supply” cattle. GIPSA
generally refers to cattle that are committed to or are owned by a packer before
they are ready for slaughter as captive supplies.
While a relatively new procurement practice, GIPSA reported that by 1990,
over 20 percent of all the steers and heifers slaughtered by the four largest
packers were captive supply cattle. This
percentage increased to over 25 percent in 1999.
However, following its review of its 1999 data, GIPSA announced it had
underreported the captive supply levels of 1999 and issued a corrected
percentage of 32.3 percent. R-CALF USA’s analysis of GIPSA’s data indicates
that by 1999, packer-owned cattle, a form of captive supplies, accounted for 25
percent of all captive supplies and approximately 8 percent of all the steers
and heifers slaughtered by the four largest packers, accounting for
approximately 2 million head of cattle. As
reported by the Data Transmission Network (DTN), Cattle Fax, and other reporting
entities, packers sometimes own or control 40 to 50 percent of the cattle they
kill during various weeks of the year. Last
week, for example, the DTN reported that formula cattle in the Kansas, Nebraska,
and Texas markets totaled 181,601 head. The
live cattle purchased in these markets during the same period was reported at
169,865 head. Thus, 52 percent of
the cattle slaughtered last week in these three markets were captive-held
inventories, and 48 percent were cattle purchased in the cash market.
Because they control such a large portion of the cattle they need, they
don’t need to be as aggressive in their efforts to obtain the remaining 50 to
60 percent of the cattle they need. 4. The supply sensitive domestic cattle industry was subjected to a significant increase in imported beef and live cattle, contributing to increased domestic supplies. In 1980, imports of live cattle as a percentage of total cattle slaughter were approximately 2 percent. By 1993, the percentage grew to over 6 percent. In 2001, live cattle imports represented approximately 7 percent of the 26.1 billion pounds of U.S. production. These imports of live cattle, particularly the imports of Canadian fed cattle directly to domestic packing plants (numbering approximately 1 million head in 2001) afford U.S. packers with inventories having similar affects on the domestic cattle market as domestic captive supplies. For example, industry analysts are telling U.S. producers that heavy slaughter weights and record U.S. supplies are the causal factors for today’s depressed cattle prices. However, as Figure 3 reveals, the record U.S. production of beef reported by USDA in 2000 occurred despite a significant decline in domestically produced beef from 1999 levels, and the near record U.S. production of beef in 2001 occurred with domestic production declining to a three-year low. It makes little sense to U.S. cattle producers that during a period characterized by price-depressing supplies, Canadian cattle imports increased 22.5 during January-May, 2002, from year-earlier levels (USDA-ERS Livestock, Dairy, and Poultry Outlook, July 23, 2002). Figure 3
Indicators of a Disruption in the Competitive
Functioning of the Cattle Market
By
1994, the effects of the forgoing radical changes that occurred in the structure
of the U.S. cattle industry: an
unprecedented market concentration level, the deployment of new cattle
procurement tools leading to captive supplies, and an increase in imported live
cattle that function similar to captive supplies, culminated to reveal a
significant disruption in the competitive functioning of the U.S. live cattle
market. This significant disruption
can be detected using the following four indicators: 1.
Referring again to Figure 1, it is readily discernable that the
synchronous relationship historically shared by retail beef prices and live
cattle prices was ended. Cattle
prices fell precipitously from 1994 until hitting a 12-year low in 1998.
Meanwhile retail beef prices, although faltering slightly, did not
experience a price decline any way near the magnitude experienced by the cattle
industry. This 1994 through 1998
disruption represents an “Adjustment” in the historical relationship between
retail beef prices and live cattle prices.
Although both retail and live cattle prices began strengthening again
after 1998, the “Adjustment” effectively severed the live cattle market from
receiving the consumer demand signals reflected by the retail price of beef.
This is evidenced by the profuse spread between live cattle prices and
retail beef prices, which in 1998 reached $1.46 per pound.
In just the six-year period following 1993, the live to retail spread
increased by 88 percent. By July of
2002, this spread has increased to over $1.93 per pound.
If the spread between live cattle prices and retail beef prices were the
same as it was before the 1994 “Adjustment,” fed cattle prices in July would
have been $83 per cwt., not the $63 per cwt actually received as reported by
USDA-ERS. Using this indicator
alone, this equates to a loss to U.S. producers of over $240 per head on a
1200-pound animal. 2.
Referring again to Figure 2, it is readily discernable that from 1994 on,
both packers and retailers captured a disproportionate share of the consumers
beef dollar when contrasted with the competitive, pre-“Adjustment” period.
As stated earlier, in 1993 the live cattle industry’s share of the
consumer beef dollar was 56 percent, representing the dominant share.
The appropriateness of this dominant position can be readily justified by
the relative costs and corresponding value that a competitive market previously
assigned to the live cattle industry prior to the market disrupting
“Adjustment” occurring in 1994. Today,
the USDA-ERS reports that the live cattle industry’s share of the consumer
beef dollar had fallen to less than 42 percent in July of this year,
constituting a complete reversal of the respective share of the consumers’
beef dollar. Using this
indicator alone, this equates to a loss to U.S. producers of $245 per head on a
1200-pound animal. 3.
Since the mid-90s, while both domestic and export demand for beef began
strengthening, the U.S. live cattle industry has been in a significant state of
decline, a situation that has adversely affected numerous rural communities
across the nation. According to the
June-July, 2001 USDA Agricultural Outlook, domestic cattle inventories have been
falling since 1996 as cattle producers have been liquidating their herds.
The report estimated the calf crop for 2001 was likely the lowest since
the 1950s, and USDA projects that the calf crop for 2002 will probably be even
smaller. Ironically, between 1996
and 2000, a period marked by a decline of U.S. inventories, cattle imports into
the United States grew by 11 percent as reported by USDA in their August, 2001
Agriculture Outlook. 4.
Since 1992, the packers’ per head margin has increased an incredible
133 percent. As revealed by Figure
4, meatpackers not only avoided the substantial losses experienced by U.S.
cattle producers, they have profited tremendously.
According to data generated by the Livestock Marketing Information
Center, per head margins for the beef packing industry increased from $62.28 in
1992 to $145.20 per head in 2001. 5. Consumers have not seen a reduction in the price of retail beef that a competitive market would predict when input costs associated with the final product are drastically reduced. Referring again to Figure 1, from 1993 to 2001, live cattle prices fell from $.77 per pond to $.72 per pound, a $.05 per pound decrease. During the same period, retail beef prices climbed from $2.93 per pound to $3.38 per pound, a $.45 per pound increase. Based on USDA-ERS data, live cattle prices for July 2002 had fallen to $.63 per pound, a decline from 1993 prices of 18 percent. Retail prices for July 2002 were $3.29 per pound, an increase over 1993 prices of 12 percent. Again, a competitive market would not predict this outcome, especially not in the long-term. Figure 4
The Meat Packing Industry Readily
Admits it is Acquiring Greater Control over the Live Cattle Industry
In
written testimony before the July 16, 2002 United States Senate Agriculture
Committee hearing on the packer ownership ban, the meatpacking industry’s
trade association, the American Meat Institute, testified, “Demand for
consistent quality product has led many firms to exert greater control over the
supply chain.” In its written
testimony before the hearing, the National Cattlemen’s Beef Association (NCBA)
testified that the Sparks study was the only known “empirical evaluation of
the proposed ban on packer ownership,” and it attached the executive summery
of the Sparks study to its testimony. The
NCBA along with the National Pork Producers Council commissioned the Sparks
study which is replete with admissions that the beef packing industry is
acquiring greater control over the U.S. live cattle industry through vertical
integration. Specifically, the
Sparks study commissioned by the NCBA admits: 1.
“Packers use ownership of livestock to help control unit costs in a
variety of ways. If this management
tool is restricted, unit costs can be expected to increase (without increasing
the value of the final product).” 2.
“The pressure to reduce costs force [sic] the search for low-cost
livestock supplies (often at the expense of producer returns).” 3.
“For many meat packers, integration between the packing and feeding
stages of livestock production is seen as an effective vehicle to reduce market
risk exposure and loss of such a valuable tool increases their costs . . .” 4.
“Vertical integration often attracts investors because of the negative
correlation between profit margins at the packing stage and the feeding
stage.” The Packers and Stockyard Act of 1921 Prohibits
Meat Packers From Controlling Prices
The
Packers and Stockyard Act of 1921 (Act) enumerates unlawful practices of meat
packers. It appears to specifically
prohibit any actions that would have the effect of controlling prices.
Relevant unlawful practices enumerated in the Act include:
It
would appear that the NCBA commissioned Sparks study provides documentation that
“Packers use ownership of livestock to help control unit costs in a variety of
ways . . . “ If the Committee
believes as I do that the unit costs that Sparks refers to is the price packers
pay for live cattle, then I would urge the Committee to cause the packing
industry to immediately halt all practices that help them control the unit costs
of live cattle. Are Meatpackers Abusing Market Power?
I have attempted to demonstrate
to the Committee that competitive market forces are no longer the controlling
factor in the establishment of prices received by U.S. cattle producers under
the current structure of the U.S. cattle market.
I have further attempted to demonstrate that a wedge has been driven
within the beef industry that effectively excludes both consumers and cattle
producers from participating in and enjoying the benefits of a competitive
marketplace where consumer demand signals drive both the production and price of
our cattle. Although GIPSA is the
responsible agency for helping to guard against unfair and anticompetitive
practices by meat packers, the March 2002 GAO report cited a 1996 GIPSA study in
which GIPSA reportedly could not conclude that our industry was competitive.
And, I am unaware of any subsequent attempts by the agency or any other
agency to determine if it is. I am testifying today that our
markets are not competitive, that packers have and are interfering with the
competitive forces in our markets to control the unit price of their number one
input cost – the live cattle raised and marketed by my members.
And, I have identified the tools presently used by the meat packing
industry to accomplish this objective. There
is no greater evidence that our markets are not competitive 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 our markets are not competitive than to look at
strong consumer demand for beef on the one hand while witnessing the high number
of cattle feeders exiting this industry on the other. There
is no greater evidence that our markets are not competitive than to look at the
relationship between both retail and boxed beef prices and fed cattle prices. There
is no greater evidence than that our markets are not competitive than to look at
the U.S. cattle producers lost share of the consumer’s beef dollar. Mr. Chairman and Members of the Committee, on behalf of the thousands of cattle producing members of R-CALF United Stockgrowers of America, I’m here to tell you that meatpackers are abusing market power and they are threatening the independence of our U.S. cattle producers. I urge you to take decisive and immediate action to correct this situation. Recommendations R-CALF
USA firmly believes there is ample evidence that our markets are not
competitive. We are convinced that
the use of packer-owned cattle, formula 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.
Senator Charles Grassley’s amendment that would protect our cash cattle
market from further thinning. c.
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. d.
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. e.
Restricting use of the USDA quality grade stamp to only meat derived from
animals born, raised, and slaughtered in the United States. f.
Need for increased price transparency in cattle markets. g.
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 Stockards 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. 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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