Statement of Senator M. L. Dierks
Visions for the Millennium: Structural Changes
Facing livestock and Grain Markets in the 21st Century
Thank you. I am extremely grateful to be invited to speak at this conference and I am very pleased that GIPSA and USDA have taken the initiative to sponsor this forum.
Agriculture has more or less always been subject to structural change. At one time, there were more than 6 million farms in the U. S. and a third of the population lived and worked directly in agricultural production. Today there are fewer than 2 million farms, and less than 2% of the population makes a living directly from agricultural production. Some of the attrition is perhaps simply due to the fact some farms from the outset were not viable or located in marginal areas. Much of the reduction in agricultural production employment is a result of mechanization displacing the need for labor. Some may be explained by the efficient producers simply outcompeting less efficient producers.
But today, structural change in agriculture is taking on a whole new dimension. There is a marked distinction with what is taking place today from structural change that has occurred in the past. Much of today's restructuring of agricultural production is the result of the drive toward integration. This trend is aided and accelerated by current farm policy which has sent producers scrambling to processors for contracts, not because this is the producer's first choice, but because of the need for security and certainty. For the first time, the legitimacy and even the very existence of an open, competitive marketplace for agricultural commodities is jeopardized and questioned. There are even those who predict that the marketing institutions agriculture has relied upon will soon be an archaic relic of the past.
Many have written about the economic forces at play, some praising the move toward supply chain agriculture, others ambivalent and some outright skeptical. But one thing is certain, there is an overt attempt to impose an industrial, corporate model on agricultural production. Those who support such vision cite economic efficiency and ability to meet the dictates of the consumer as evidence of the superiority and inevitability of this mode of agriculture.
I would contend that the structure of agriculture is a matter of choice. It's a matter of what kind of vision we want for agriculture and rural communities, and how such choices are made. A short time ago, one of the items I came across in my e-mail was the text of a speech by Senator Byron Dorgan. Senator Dorgan began his talk by noting stark differences between the values of American and European diplomats at the recent World Trade Organization talks. "The European representatives," he observed "were talking about families and communities, while the Americans talked about markets. . . . If American trade representatives think these European values represent the problem, just what do they think represents the solution? If prosperous rural economies are not a worthy goal, then what is?"
The basic issue here goes beyond food. Are we a nation of citizens or just a nation of shoppers? The family farm today is the canary in the mine shaft of the global economy. It shows what happens to our communities and our values when we place economic efficiency above all else. It begs the question, "What is an economy for?"
And more and more, I suspect that Freedom to Farm has had the effect of removing what restraints there had been on the integrating forces that are rapidly shaping food production. I do not necessarily believe that the authors of Freedom to Farm envisioned or willed that producers would be forced to turn to food conglomerates for their survival. The 1996 Farm Bill intended to free producers from the restraints on productivity and dependence on federal subsidies and price supports that perhaps inevitably accompany farm policy. But I do believe that Freedom to Farm failed to understand a basic principle. Farming is an inherently risky business, and past farm programs were fundamentally a version of risk management. As pointed out in a recent report by USDA's Economic Research Service, contracting is a version of risk management, and with no other means to manage market risks, the pace of integration has accelerated.
Two developments have resulted. First, the effect of federal farm policy has increasingly conflicted with existing state policies to limit corporate participation in agricultural production. And secondly, the states have become interested in filling the gaps in federal anti-trust enforcement that we once thought were the ultimate barrier to creation of the food conglomerate.
Needless to say, the number of mergers, acquisitions, joint ventures and so forth announced over just the past year have been a shock to the system. States are quickly realizing that agriculture as an economic mainstay cannot be taken for granted. Where once, thousands of producers within state borders made production decisions, it is not inconceivable that those decisions may be made in corporate headquarters somewhere else. The nation's number 1 pork producer, already larger than any one producer ought to be, buys out the nation's second largest producer -- the combining of Continental and Cargill's grain operations, --- the recently announced alliance between Cargill, IBP, Smithfield Foods, Tyson Food, Gold Kist, and Farmland to create a web-based exchange, all signal that the food production is no longer an independent, localized undertaking.
There are tremendous implications at both the state and local level. Will property tax support of rural governments become more volatile if continued production in a certain area become just another corporate management decision. We are also concerned with how mega production might change the demographics and character of rural areas. It is increasingly evident that many of the larger livestock facilities are utilizing cheap, imported labor and that trend is likely to continue.
There is also the concern over market power, and how that translates into political power. In the last session of the Nebraska legislature, I attempted to develop an amendment to a bill that would have prohibited packers from unilaterally changing key terms of production contracts without negotiating the change with the producers. One of the larger packers in the state was able to defeat the attempt simply by raising the specter that it would no longer be able to offer production contracts. It sent out a legislative alert to all its contract producers warning that my legislation could eliminate some marketing agreements. My legislation didn't do that, it simply attempted to tell packers you couldn't write contracts that promised one thing and then completely changed the terms in the middle of the contract. But the alert was enough to generate hundreds of calls and letters. It is discouraging, because now pork producers are so dependent on packers that they are forced to do the packer's lobbying for them. I heard from some producers who said they didn't like IBP manipulating them that way, but they had no other choice. The experience demonstrates that it will be increasingly difficult for states to impose, for instance, reasonable and needed livestock waste management regulations. The major packers will just threaten to take their contracts elsewhere.
The point is that states have ample reasons to be concerned with the trends in agriculture and I believe the combination of factors I've alluded to have led states to be more proactive in combating the corporate farming trend.
There are five major areas where states have taken the lead. First, for a number of years, states have attempted to outright ban corporations from owning farmland or engaging in farming and ranching. In Nebraska, the ban was placed into the constitution by citizen initiative in the early eighties. This anti-corporate farming amendment, known as Initiative 300, has withstood a number of court challenges. In one case, where the constitutionality was challenged on equal protection arguments, a court found legitimate grounds for a state to discriminate against corporate ownership of farmland.
The judge recognized in his opinion, that "the citizens of Nebraska have a common, profound interest in the stewardship of their productive natural resources -- the land, the water and the soils. . . there is an inherent incompatibility between the legitimate public goals of protecting the land and in maintaining patterns of ownership that help sustain rural communities, and farming conducted by business entities that enable owners who have little social connection to their communities to escape personal liability for environmental harm and legal debts of the enterprise."
While that opinion was written in the mid 1980's, its reasoning is still sound today. To a large extent however, the major threat to independent, small-scale family farms is not the danger that corporations will buy up huge swaths of land and begin farming directly. The 1990s have shown that the corporate presence is achieved indirectly through private production contracts which bypass the traditional marketplace. Thus, the states have begun to turn their attention to this area. As it has been said, "Why own the farm when you can own the farmer." Because farmers have fewer and fewer marketing options, and are increasingly economically dependent on processors, they are increasingly vulnerable to potential contract abuses, particularly when only one or two processors are active in an area.
I believe we will see a wave of legislative activities in the area of production contracts as states respond to the creeping control contract production brings. One area where we have scored a major success is in bringing about mandatory price reporting. If contracting is to be basic marketing method, it is essential that we bring transparency to prices established under contract arrangements. It is needed to reconstruct market signals that tell producers what and when to produce, but it also serves as a means to enable producers to compare prices and other terms of their own contracts.
As you are aware, Congress enacted the Mandatory Livestock Price Reporting Act last fall after five states had enacted state price reporting laws. The states finally forced packers to come to the table and agree to one national price reporting system.
Another major legislative arena is in setting minimum standards of production contracts themselves. This past year, legislation often referred to as contract producer's bill of rights were introduced in several states. Many of the laws were patterned after legislation enacted in Minnesota in the early 1990's. The bills recognize that fulfillment of contract terms often require producers to make significant investments in facilities and equipment and attempt to prevent premature, ungrounded termination of contracts which leave producers with large debts but little ability to contract elsewhere to recover the cost of their investments. States have also looked at accrediting marketing associations to bargain on behalf of producers with contractors.
A third major area is in fighting price discrimination. Nebraska and other states enacted legislation prohibiting packers from paying "different prices" to producers of livestock unless the discrepancy was based on legitimate differences in carcass quality or acquisition costs. Primarily, this legislative effort was prompted by failure of the Packers and Stockyards Act to prohibit price differentials between large and small producers under the "undue preference" standard.
Unfortunately, the state's attempts to define a discriminatory standard have been set back by separate court decisions in South Dakota and Missouri which found the effect of the discrimination statutes on packer behavior, not the statutes themselves, to be an undue burden on interstate commerce. It is apparent that many states will have to go back to the drawing board and that the ultimate answer might be enactment and enforcement of state versions of the Packers and Stockyards Act.
Another major area of state legislation being contemplated is in prohibiting packer ownership of livestock. It is increasingly difficult for feeders to find competitive bidders for cattle. As an example, a feedlot owner in Kansas testifying on legislation which would have banned packer ownership said that only a short while ago, he got bids from packers on a daily basis, sometime 2 or 3 competing offers in a day. Now, with packers able to keep chain space full through their own livestock, there may be only a 1 or 2 hours a week when packers bid, on a take it leave it basis.
We were successful in Nebraska in banning livestock ownership, in part because of constitutional prohibitions against corporations owning or keeping livestock. The ban on packer ownership merely reinforced this constitutional protection. However, the bill met considerable resistance from feeders themselves who had been feeding packer owned cattle. When I met with these feeders, they acknowledged that the practice ultimately undermined their own survival in the long run, but they felt it necessary to remain in business.
But banning packer ownership is only part of the picture. Captive supplies also include other types of contractual arrangements by which packers are able to commit livestock well in advance of slaughter without having to competitively bid to assure plants are operating at capacity. Thus, banning ownership only goes so far. It is necessary to also address the control of livestock through contracting arrangements.
Of course, this type of legislation is always controversial, and opponents will raise three major points: Contracting enables packers to control the quality of livestock, that contracting helps assure maximum plant efficiency, and that contracting is a risk management tool for producers as well.
There are some holes in that argument, in my view. First, a recent study by the Packers and Stockyards Administration did find a correlation between captive supplies and price. Further analysis of the P&S Data by the Western Organization of Resource Councils (WORC) found that each percentage increase in captive supplies translates into about an 8 cent / hundredweight drop in average prices. In other words, captive supply does not benefit the producer overall. We are finding that any benefits in market penetration, i.e. satisfying consumer demands in quality consistency and price, accrue to the consumer, not the producer.
I think its fairly easy to predict where supply chain agriculture is leading us. It is conceivable to foresee a day when there will technically only be, as advocated by Feedstuffs magazine, 40 - 50 food producers in this country, and perhaps even fewer. A handful of corporations will control the food system from seed to dinner plate while individual farms and farmers would simply be production units within gigantic food chains. Actual commodity production would take place on 40-50,000 mega-operations. It is possible to make an argument that consumers might benefit from this arrangement. It is possible that such a system might consistently deliver cheap food in convenient packages.
But is the Walmarting of the food system really what we want? Certainly, economists can admire the success of the Walmart retail model -- reasonably priced name-brand products conveniently available to shoppers. However, ask just about any community where Walmart has entered, and you will find that the presence of a Walmart has often undermined the commercial character of the community. Can we really say that life in those communities is better because of Walmart.
There are ample studies comparing the relative economic health of rural communities which differ according to farm ownership patterns. Those communities where agriculture remains in many diverse, family farms tend to be more prosperous and livable than those where farmland is owned by a few, large operations.
In the long term, states can only chip away at the problem. It is difficult for states to act on their own since corporate agribusinesses can easily move to states with less restrictive laws. It is imperative that the federal government take a proactive stance. And I believe that the states acting on their own have finally sent the message to Congress that the states do not necessarily desire the corporate farming takeover of agriculture, nor do we see it as inevitable. I am encouraged by some of the legislation which has been introduced, including the Farmers and Ranchers Fair Competition Act introduced by Senator Daschle and Leahy.
One of the key features of this legislation is that it would change somewhat the mentality employed when reviewing mergers and acquisitions for anti-trust violations. Specifically, the bill requires USDA to conduct pre-merger community impact analysis, to assess whether the proposed mergers would negatively impact family farms and rural communities. It seems that much of our analysis has been concentrated on the impact to the consumer side. I hope that I have made a point that anti-trust enforcement should take into account both sides of the ledger and include the study of how concentration affects the quality of life in communities and participants on the production side.
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