REMARKS BY DEPUTY SECRETARY RICH ROMINGER

VISIONS FOR THE MILLENNIUM
KANSAS CITY, MISSOURI
MAY 10, 2000

 

 

A word of thanks to USDA's Grain Inspection, Packers and Stockyards Administration for sponsoring this timely conference. Having all the answers isn't what this meeting is about. It's about raising questions about structural change -- an issue that profoundly affects agriculture at this time. And it's about reflecting in this millennium year on the past century and considering the future.

It's the job of this panel to focus on one aspect of structural change - concentration and market power. Concentration is rising among leading firms in agribusiness. And more farmers are entering into production and marketing contracts that may include specifications like genetic characteristics, production conditions, and pricing terms. Concentration and vertical control of production and marketing raise serious concerns about loss of marketing institutions and use of market power.

My thanks to Moderator Ken Root and our four distinguished panelists - Luther Tweeten, Dennis Avery, Peter Carstensen, and William Heffernan -for taking on some of these complex questions.

REFLECTING ON PAST CHANGE

As Dr. Otto Doering of Purdue discussed yesterday, we've witnessed dramatic change over the past hundred years. In agriculture, developments like motorized farm equipment, chemical fertilizers, pesticides, hybrid seeds, and similar technology have altered the industry. And change outside of agriculture has greatly influenced the industry - change like mechanical refrigeration, the interstate highway system, communications and computer technology, more women in the labor force, shifts in consumer preference, and the opening of foreign markets.

In 1900, the average farmer and farm worker produced enough to feed about 7 people. Today that number is over 100. Americans now spend less than 11 percent of their income on food. American agriculture is a tremendous technological and economic success story. We have the most productive agricultural economy in the world. This productivity has made it possible for us to shift much of America's resources to producing non-agricultural goods and services, helping to make us the most prosperous Nation on earth.

The same technological forces that built a highly efficient and competitive agriculture have also altered the fabric of rural America and marketing institutions. Millions of family farms have disappeared. Farm numbers have dropped from nearly 6 million in 1900 to about 2 million today. Average farm size has increased from about 135 acres in 1900 to over 430 acres today. Not only have farms disappeared, but many of those remaining rely heavily on non-farm sources of income.

This parallels similar change throughout the economy... Mom and Pop stores replaced by convenience store chains ... hardware stores replaced by home improvement chains ... millions of small businesses replaced by large chains or other business organizations.

Public markets, such as auction and terminal markets, used to handle most spot market sales of farm products. But that role has diminished as more farm products are sold directly to processors. Vertical production and marketing arrangements continue to evolve, and the price discovery process - how prices are determined - has been altered as a result.

For years, market news programs, like those run by USDA's Agricultural Marketing Service, monitored and reported on prices paid at public markets. Now AMS must contact firms to determine prices paid in privately-negotiated transactions. Often information about prices paid for farm products sold through forward sales arrangements isn't available.

These developments have raised questions about the adequacy of the price discovery process and the potential for manipulation of price and other market information. As a result, last year Congress passed legislation requiring meatpackers to report prices paid for slaughter cattle and hogs. AMS is preparing to implement this mandatory price reporting program this summer.

It's possible that the whole concept of price discovery and market information needs could be altered by e-commerce and the potential for greater access to markets made possible by computers and new communications technology.

Many rural communities have been hit hard by changes in agriculture. The drop in farm numbers has meant a drop in rural population and income that has jeopardized the economic health of many communities. Rural communities have searched for ways to survive. Many have sought to attract non-farm employers, a move that benefits from the vast interstate highway system and the growth in communications and technology.

USDA'S ROLE

At USDA, we wrestle constantly with the implications of structural change. Although it affects virtually every program we administer, no agency feels the impact more directly than GIPSA, which enforces the Packers and Stockyards Act of 1921.

I won't recap the evolution of the Act and its enforcement, because previous speakers have already touched on that. By the early 80s, concentration in the meatpacking and poultry industries had begun to rise significantly. USDA and GIPSA have taken a number of steps to respond to this. In 1996, Secretary Glickman directed GIPSA to conduct a major study of concentration in the meatpacking industry. GIPSA reorganized and restaffed its Packers and Stockyards Program. It adjusted programs and strengthened capacity to address competitiveness issues like increased concentration and vertical arrangements. At the same time, it held to a strong commitment to prompt payment and trade practice concerns.

GIPSA is also keeping an eye on structural and other changes in the grain industry. GIPSA establishes grades and standards and provides inspection services for grain. With more and more contract production and marketing arrangements, and greater demand for grains with specific end-use qualities, GIPSA wants to stay up with industry change by adding, for example, new grain quality measurement capabilities. We're also looking at ways to identify and measure genetically-modified grains. And we're monitoring mergers and concentration in the grain industry.

Other USDA agencies are working in similar ways to determine how best to meet the changing needs of agriculture, consumers and the Nation.

A group especially hard hit by structural changes in agriculture is small farmers. From 1910 to 1990, as industrialization spurred the growth of processors, packagers and marketers, the share of the ag economy going to farmers dropped from 21 to 5 percent. And small farmers got the shortest end of the stick. They owned 94 percent of all farms and ranches, representing 72 percent of all land in production, but only took in 41 percent of all agricultural receipts.

In 1997, Secretary Glickman formed the Commission on Small Farms to recommend ways to help family farms survive and prosper. The Commission made 146 recommendations to explore questions like: How can we ensure that small and beginning farmers have ready access to new production technologies, business and management skills and expertise?

The Commission has completed its job. And now the Small Farms Advisory Committee moves forward with the recommendations. The Committee has met twice so far to lay out short and long-term goals and look at disturbing trends reported in "A Time to Act," the report of the Small Farms Commission.

QUESTIONS FOR DEBATE TODAY

The forces of change - from biotechnology and vertical alliances to global supply and demand -- provide challenge and opportunity. We can't stop technological change. And even if we could, we'd risk our prominence in world markets. What we can do, though, is strive for a better understanding of the forces for change. We can determine if we want to try to affect these changes, or how to address concerns stemming from these changes. This is the best way to position ourselves to take advantage of new opportunities and minimize adverse effects.

We need public debate precisely because structural change in agriculture is complex with far-ranging implications for farmers and ranchers, rural communities, agribusiness firms, marketing institutions, government programs and consumers. We need all parties to step up to the plate to make their views known.

Decisions and policy options have consequences. We need to put our heads together to try to strike a balance between immediate and long-range interests.

Let me open the discussion by raising just a few of the questions that need debate.

How big is too big? In other words, can we establish criteria that would let us say that a particular firm is too big, that it possesses too much market power?

What is the source of economies of size enjoyed by large firms? Are there meaningful ways for small firms to capture these economies?

We seem to assume that firms should be prevented from using excessive market power. But are there also social reasons why firm size should be restricted? For example, what are the merits of preventing a merger of agricultural firms if the merger would adversely affect small farms or rural communities?

What effect would limits on firm size have on our competitiveness in world markets and our progress in developing improved products and production methods?

For those who argue for structural changes, what do you say to those who are hurt by change? Consider the social costs of change and the merits of identifying steps to help others adopt new technology or find economic alternatives.

For those who want to prevent change, what do you say to those who have made sacrifices to adopt new technology and who want to take advantage of assured markets, greater efficiency or improved product characteristics associated with industry consolidation and coordination? Be specific about imposing restrictions. It's important to determine the limitations they would put on the economic freedom of others.

We're not in the business here of forecasting the economic and structural implications of technological innovations. We know that whole new ways of doing business tend to result from major innovations. We know that large firms often enjoy economies of size. Economic gains are often realized through coordination in the vertical supply system. But large firms also have the potential to use market power to lower prices paid to farmers or raise prices to consumers.

How do we find ways to take advantage of the benefits of economies of size and vertical coordination without allowing firms to abuse market power or engage in unfair business practices?

With that, I'd like to turn to our panelists who will debate the implications of concentration for farmers, ranchers, and consumers. Should we try to affect the speed or direction of change? Make the best case possible for large firms on the one hand and why we should control them on the other. What should our economy look like in 10, 20, or 50 years? Thank you.

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