Remarks for Under Secretary Michael V. Dunn
before the
Visions for the Millennium Conference

 

 

Good afternoon. It’s a pleasure to be with you today to talk about an important issue facing family farmers, industry, and the American consumer. The issue I refer to is the restructuring of American agriculture and the role regulatory agencies play in ensuring fair and open competition.

Why are we here?

The future of family farms in the changing market structure is one of the most critical issues of 21st Century.

This conference will bring to the table the many varying views of the livestock and grain markets. It is an important forum to debate and explore the challenges facing farmers and ranchers due to concentration, consolidation and mergers. And it is an important opportunity to work together to create the vision for tomorrow’s family farms.

It is crucial that the people most affected by these challenges be at the table to discuss them. That’s why we invited family farmers, livestock & grain industry members and public policy makers to participate in the conference.

And our speakers include everyone from family farmers to high-level government officials.

We want our audience to actively participate in the debate.

What do we want to accomplish at this millennium conference?

Through this conference, we want to provide a forum to voice our concerns about the critical issues facing farmers, and to create a vision of the future for them. We will serve as facilitators to this debate.

Trust Busting

Concentration and anti-trust issues are not new. Many of you may know about the origin of anti-trust laws, which occurred in large part through Teddy Roosevelt’s efforts to break up firms wielding enormous power over the market, and workers. At the turn of the millennium, economic concentration and consolidation are again occurring at an alarming rate, from railroads to seed and from biotechnology industries to food manufacturers.

These patterns of restructuring may alter the balance of market power between farmers and other sectors of the marketplace. Many farmers believe today’s low prices for agricultural products are caused, in part, by the consolidation and concentration in the industry. We share their concern.

The dynamics and volatility of the market can have devastating consequences to some sizes of farms, particularly small and medium farms. More and more common today in every sector of agriculture, we see a few firms dominating the market.

Today I am going to discuss the factors that lead to restructuring of agribusinesses, then touch on four key sectors of agriculture in various stages of structural change. These sectors are: transportation, grain, biotechnology, and livestock.

Finally, I will outline what may face agriculture in the future.

Factors Influencing Structural Changes

Many factors influence the structural changes occurring in agriculture. Producers need to be able to adapt to remain viable for the future.

The need to achieve greater logistical coordination, improve the efficiency of facility operations, or simply balance the market power of others, all affect the current market structure.

It’s important that agriculture become more productive, efficient, and competitive. But it is also important that these changes do not come at the expense of family farmers and ranchers who also deserve to share in the benefits of today’s technological advances.

They must be allowed to operate on a level field, without undue influence or impediments to fair competition. These are conditions that I am sure every one of you here today respects and works hard to maintain.

But What are Consequences?

What we have seen over the past decade is a significant movement of people out of the heartland of this country. As the slide shows, a significant number of rural counties lost population over the past 10 years.

Many of these people were family farmers and wanted the opportunity to pass on their family farm legacy to the next generation.

Farms Disappeared During Last Century

Regardless of where the farms have been located, we know that the number of farms has plummeted downward, from over 6 million at the turn of the last century to around 2 million at the end of the last century. An important question to consider is what role does concentration and structural change play in this out-migration and reduction in number of farms?

In fact, are the remaining small and medium sized farmers able to remain viable in the 21st century?

It is imperative that we at USDA ensure that our programs and policies do not discriminate against, and in fact protect, family farmers and we are working hard to that end.

Transportation

Rail service is critical to the economic well_being of this nation’s agricultural and rural economies. Reliable, cost_effective transportation of agricultural products is essential for U.S. agricultural producers and shippers to maintain competitive viability in domestic and export markets.

Nearly half of all grain produced in the United States moves to market by rail.

USDA has watched with mounting concern the consolidation of the Class I railroads the past five years. In 1982, shortly after railroad deregulation, the U.S. rail industry consisted of 32 Class I railroads; today there are only 7 Class I railroads.

Four railroads now account for about 90 % of Class I traffic in the U.S., with only two major railroads serving the western U.S. and two major Class I railroads serving the eastern United States. The result is that a vast number of locations from which grain is shipped in the United States now have access to only one or two railroads.

How USDA is Responding

We are concerned about whether there is an adequate level of competition in those markets and on those routes.

As railroads continue to merge, the concern is that they gain additional market power which can be exercised in a manner detrimental to the interests of rural and agricultural shippers. I testified before the Surface Transportation Board (STB) and clearly stated that before any further mergers are approved, railroad service needs to improve.

While USDA doesn’t have direct regulatory oversight over transportation, we are making great contributions on the information front to help assess the impact of mergers. We are also facilitating discussions on the problems and actions needed to make sure our transportation systems meet the agriculture sector’s changing needs.

Structural Changes in Grain Sector

We see acquisitions, mergers, and joint ventures dominating the grain marketing industry. The recent acquisition of Continental Grain Company by Cargill, is one example. Their combined operations now account for roughly 40 percent of all U.S. grain exports, and they control 29% of storage capacity of the 10 largest U.S. companies. And there have been a variety of joint ventures and alliances such United Harvest, where Harvest States, with an emphasis on originating grain, joined up with United Grain Corporation, a well-established exporter, to market grains in the Pacific Northwest.

We also see horizontal arrangements between competing exporters, such as the October 1998 agreement between Zen Noh and Bunge to operate jointly Gulf Port grain facilities.

USDA Actions on Grain Concentration

USDA is also concerned about this growing concentration in the grain sector. Our role is limited under the Federal Grain Standards Act - which provides us authority to set grades and standards, and to provide inspection. But we are monitoring concentration and aggressively acting to protect the interests of American agriculture within the authority that we have.

For example, we asked the Department of Justice (DoJ) to review carefully the Cargill acquisition of Continental Grain Company’s grain trading business to determine whether the acquisition would notably increase concentration in agriculture and its allied industries, causing potential adverse economic effects on farmers and consumers.

USDA readily assisted DoJ in its review by providing information and advice. In the end, DoJ took the steps necessary to protect American farmers from the potential adverse effects of the acquisition. The consent decree called for Cargill to divest itself from those market locations where acquisition of Continental’s facilities would have resulted in excessive market power and would have limited farmer’s choices in marketing their crops.

You can expect that as grain firms continue to merge and vertically integrate, USDA will cooperate with DoJ to provide information for its consideration of acquisitions and mergers.

Structural Changes in Biotechnology

Great changes are also underway in the biotechnology area that are accelerating consolidation in the grain sector. The race is on to identify unique DNA sequences for specific traits before another company can claim ownership. Companies with scientific expertise are merging with those with capital strength and well-established marketing networks. Examples include DuPont’s acquisition of Pioneer Hi-bred International Corporation, Monsanto’s acquisition of DeKalb Genetics, and Dow Chemical’s acquisition of Mycogen Corporation.

Changes Due to Advances in Biotechnology

While competition and the intense focus on efficiency are not new to either the grain or biotech industries, a new trend is emerging - - alliances and partnerships are forming among all marketing segments, from seed companies to retailers. Complete supply chain systems are forming by combining input industries, producers, processors, distributors, and even retailers. The systems will be designed to deliver the right quantity and quality of grain at the right time to the processor, and ultimately the consumer, in an efficient and cost-effective manner.

An example is Optimum Quality Grain, a joint venture of the DuPont Company and Pioneer Hi-Bred International, Inc. Optimum has developed a partnership with Iowa State University and Hy-Vee Food Stores, Inc., to produce a low saturated fat oil from Optimum’s patented seeds and to market a trademarked product called LoSatSoy oil through Hy-Vee Stores. We see other examples of similar market partnerships and alliances both domestically and internationally, and we expect more to follow.

In addition to the structural changes occurring as a result of biotechnology, as you know, there are many other issues of concern to consumers and farmers. The Clinton Administration just announced on May 3, a number of initiatives to reinforce the strength of U.S. science-based regulation of biotech, and to enhance consumers’ and farmers’ access to information. One initiative is for USDA to assess the need for a quality assurance program for the production, handling, and processing of non-biotech crops. One key tool to help with this initiative is already underway. That tool is a GIPSA laboratory to evaluate and verify tests for biotech grains and accredit testing labs.

The testing will be conducted at a biotech reference laboratory at GIPSA’s Technical Center in Kansas City, MO. The reference laboratory will begin the process of evaluating and verifying analytical procedures used to detect and quantify biotechnology traits in grains and oilseeds, and establish sampling procedures for use in testing genetically enhanced grains and oilseeds.  

The reference laboratory will meet a market need to ensure reliability of biotech crop detection methods and to facilitate information exchange, which, in turn, will decrease transaction costs and increase overall market efficiency. The lab is scheduled to be operational in the late summer of 2000.

USDA will seek public comment later this year on other steps that could be taken to help support voluntary standards on biotech and non-biotech products.

How Concentrated is the Livestock Sector?

Increased concentration in meatpacking is another important structural change. Concentration in the meatpacking industry is high and has been growing.

Number of Plants Slaughtering Hogs 1984

Studies have shown that larger plants and firms enjoy size economies. But the disappearance of meatpacking plants and firms reduces the number of choices producers have to sell their livestock, and increases concerns that the remaining firms may have greater opportunities to engage in anticompetitive and discriminatory behavior.

In recent years, the number of slaughter plants and firms has continued to decline markedly. The number of hog slaughtering plants reporting fell

50 percent between 1984 and 1997, the latest year for which we have data. In 1984, according the map on the upper right, there were 439 hog slaughter plants and they were distributed fairly widely throughout the country.

Far Greater than Number of Hog Plants in 1997

By 1997, only 218 plants populated a handful of states. Far fewer states existed with multiple plants and they are likely to continue to concentrate. In Iowa, for example, Smithfield is buying Farmland’s Dubuque plant and closing its slaughtering operations.

Number of Plants Slaughtering Cattle Declines

The story is even more dramatic for cattle slaughtering plants. In 1984, there were 481 steer and heifer slaughter plants and they were distributed fairly widely throughout the country.

By 1997- Only 199 Cattle Plants

By 1997, again we lost 282 plants and the remaining 199 plants are concentrated in a handful of states, even though cattle production continues in many other states.

These kinds of changes do affect producers’ ability to remain viable. USDA joins producers in being concerned about increased concentration’s effect on the loss of farms and farm opportunities for the next generation.

Why are Producers Concerned?

What producers are particularly concerned about includes the following:

We at USDA strongly share these concerns. But USDA doesn’t have any authority to alter the structure of the livestock and poultry industries. Investigation of mergers and acquisitions resides with the DoJ and Federal Trade Commission.

GIPSA

USDA does address issues relating to concentration and unfair trade practices in the livestock, meatpacking and poultry industries through its authority to enforce the Packers and Stockyards Act of 1921, (P&S Act). And we are using this authority aggressively.

The P&S Act grants the Secretary of Agriculture the authority to regulate interstate and foreign commerce in livestock, livestock products, poultry, and poultry products. It grants the Secretary complete inquisitorial, visitorial, supervisory, and regulatory power over packers, stockyards, market agencies, livestock dealers, live poultry dealers, and all related activities. Important purposes of the Act include:

USDA Currently Is

Let me tell you about a number of recent initiatives USDA has undertaken to investigate procurement practices, strengthen oversight, and provide more information to producers:

Mandatory Price Reporting

USDA pressed Congress to pass, and is working rapidly to implement the Mandatory Price Reporting Act of 1999 in the expeditious time line given by Congress.

The proposed regulation that establishes a program of information regarding the marketing of cattle, swine, lambs and products of such livestock was published on March 17. The public comment period closed on April 17 and we received approximately 700 comments.

Is this the final word on livestock and meat mandatory reporting?

No. This is only a proposed rule. We will review the comments and take into consideration your suggestions and concerns prior to publishing a final rule.

Another component of the Act requires that GIPSA maintain a library or catalog of each type of contract offered by packers to swine producers. We are to make that information available to producers and other interested parties, subject to confidentiality requirements of the Agricultural Marketing Act.

It also requires that we obtain information from packers each month, and make the information available in a monthly public report. This report is to include information on:

  • the types of contracts available from packers,
  • the provisions in each contract for expansion in number of hogs delivered for the following 6 and 12 months,
  • the estimated total number of hogs committed for delivery for the following 6 and 12 month periods; and
  • the estimated total number of hogs that could be delivered for the following 6 and 12-month periods if all expansion clauses were exercised.

The proposed rule will be published this summer.

Reorganized GIPSA

P&S completed a major restructuring and restaffing to strengthen its investigations of anticompetitive behavior and increase its efficiency and effectiveness in enforcing the trade practice and payment protection provisions of the P&S Act.

P&S’ 11 field offices were consolidated recently into 3 regional offices in Denver, CO (cattle and sheep); Des Moines, IA (hogs); and Atlanta, GA (poultry). This resulted in the location of significantly larger staffs near the concentrations of beef, pork, and poultry production and slaughter.

We have added staff with economic, statistical, and legal expertise to strengthen competitiveness investigations. We are pleased that Congress provided additional funds last year to enable GIPSA to make these improvements.

MOU with Justice

We have taken steps to strengthen the informal ties that GIPSA has with both DoJ and the Federal Trade Commission.

On August 31, 1999, the USDA signed a Memorandum of Understanding (MOU) with them.

The MOU calls for the three agencies to cooperate on issues related to monitoring competitive conditions in the agricultural marketplace. The agencies will confer regularly to discuss and review law enforcement and regulatory matters to increase each agency’s understanding and to improve each agency’s effectiveness in carrying out its respective legal responsibilities.

And Efforts USDA Continues to Pursue

Rapid Response Teams

GIPSA has developed rapid response teams to conduct high priority and timely investigations to prevent or minimize major competitive or financial harm caused by violations of the Packers and Stockyards Act. Since July 1999, teams have been deployed in North and South Dakota, Missouri, Kansas, Nebraska, Mississippi, Pennsylvania, and Idaho to address a variety of situations in the cattle, hog and poultry industries.

GIPSA has Conducted Major Investigations

Complaint Against Excel CorporationOn April 9, 1999, GIPSA filed a complaint against Excel alleging that the firm violated Section 202(a) of the P&S Act which prohibits unfair, unjustly discriminatory, or deceptive practices by packers. The complaint alleges that Excel failed 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, Excel paid lower prices for the majority of hogs purchased on a carcass merit basis. According to the complaint, the alleged actions by Excel resulted in farmers being paid $1.8 million less in transactions involving more than 19,900 lots of hogs that were slaughtered at Excel’s three hog plants. A hearing is scheduled to begin later this year.

Complaint Against FarmlandOn July 20, 1999, GIPSA filed a complaint against Farmland National Beef Packing Company, L.P., Liberal, Kansas, alleging that the company violated the P&S Act. The complaint alleges that Farmland changed its bidding and buying practices at Callicrate Cattle Company Feedyard, St. Francis, Kansas, by failing to make bids on or purchasing cattle from Callicrate Feedyard after Callicrate Feedyard’s sales manager published an article critical of Farmland in a livestock journal. The complaint further alleges that by failing to make bids on or purchase cattle from Callicrate Feedyard, Farmland "engaged in an unfair and/or unjustly discriminatory practice and subjected Callicrate Feedyard to an undue or unreasonable prejudice or disadvantage."

IBP AppealUSDA brought a case against IBP, inc. alleging that the packer violated the P&S Act by a procurement agreement that guaranteed high prices to a select group of feedlots in Kansas without making the same terms available to others. IBP appealed the Judicial Officer’s cease and desist order, restricting use of right of first refusal, to the Circuit Court of Appeals. A court hearing was held April 22, 1999.

On August 13, 1999, the Court reversed the Judicial Officer’s cease and desist order. It ruled that it was not anticompetitive for IBP to employ a right of first refusal in that case as long as the seller can return to the processor’s competitors and offer them the opportunity to increase their bids for the livestock. USDA is considering alternative actions to address unresolved issues raised by this case.

Investigate Potential Hog Price ManipulationGIPSA is conducting a major investigation of hog pricing behavior and the potential for market manipulation. The investigation will:

 

Cooperation on Sherman Act Indictment A criminal indictment for violating the Sherman Act and Federal mail fraud statutes was handed down on December 17, 1997, in Federal District Court, Omaha, Nebraska, alleging that a salaried packer buyer conspired with a feedlot owner and his employee to defraud a cattle feeder out of $23,000 on one transaction involving 468 head of cattle. The feedlot owner and packer were sentenced. The action was the result of the cooperative investigative efforts of GIPSA, the Federal Bureau of Investigation, DoJ, Antitrust Division and the Nebraska Brand Committee.

Outlook for the Future

Concentration may result in lower costs due to economies of size, but it also may bring excessive market power to agribusinesses, and thus reduce producers’ marketing choices. Producers enter into production and marketing arrangements to improve product quality, increase efficiency, secure a market, reduce price risks, and so forth. But vertical arrangements can reduce producers’ flexibility and independence, and lead to contract disputes.

What should the agribusiness sector expect in the future on these crucial competitive marketplace issues? You should expect USDA and DoJ to continue efforts to investigate concentration to prevent vertically integrated processors from taking advantage of small independent farmers and ranchers.

While no laws prevent firms from growing or entering into vertical production and supply arrangements, it is illegal for firms to use market power to manipulate market prices, unfairly drive out competitors, or engage in predatory or other anticompetitive behavior. USDA is addressing concentration by investigating possible anticompetitive practices and aggressively enforcing laws against such behavior.

The Department also can monitor changes in the structure of agriculture and examine their effects on farmers, farm families and rural communities. Shared with DoJ and the Federal Trade Commission, this information can help in developing appropriate public antitrust policy through administrative and legislative proposals.

Political Atmosphere

A number of proposals have been introduced in Congress to address market concentration and mergers. A major piece of legislation was recently introduced by Senators Daschle and Leahy, "Farmers and Ranchers Fair Competition Act of 2000," to safeguard farmers, ranchers and rural communities from negative impacts of market concentration. Senator Grassely also has legislation addressing this. If either of these is enacted, USDA will enjoy new authorities to ensure fair and competitive markets for farmers.

Members at a recent Senate hearing on Agricultural Consolidation expressed their concerns about the issue and questioned whether current antitrust laws are adequate for agriculture.

DoJ has testified that it is committed to addressing concentration concerns in agriculture, antitrust enforcement does not normally deal with monopsony (buyer market power) issues, but that agricultural cases often include such issues. But DoJ has pointed out that the antitrust laws were designed to protect against monopoly power and to contribute to greater economic efficiency.

DoJ believes they have effectively met the competitive objective, thereby enabling the U.S. to remain very competitive in the world economy. However, while concentration in agriculture is not necessarily a violation of antitrust laws, DoJ also recognizes it as a potential threat to family farms. DoJ has appointed a Special Counsel to address agricultural antitrust enforcement issues.

USDA’s Role (Summary)

At every link along the food production chain, there are concentrated markets, clusters and alliances, relationships both formal and informal, that may present serious challenges to the small and medium-sized producer trying to move goods to market. Concentration can force producers into accepting lopsided contractual terms, simply because there's no ability to shop around for the best deal. This situation has the attention of farmers, regulators, enforcement entities, and the Congress. We expect that there will be continued and mounting pressure for legislative action to address concentration and its impact on America’s small farmers and rural communities.

Agriculture’s interests are broad. USDA’s job is to ensure that family farms and rural economies remain viable and healthy. I’ve just told you much about what we doing so far. I look forward over the next two days to hearing what other actions we can take together.

#


| GIPSA Home