TESTIMONY OF LELAND SWENSON

PRESIDENT OF THE NATIONAL FARMERS UNION

REGARDING LIVESTOCK ISSUES

PRESENTED TO THE

SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE

JUNE 10, 1998

TESTIMONY OF LELAND SWENSON, PRESIDENT OF THE NATIONAL FARMERS UNION, REGARDING LIVESTOCK ISSUES, PRESENTED TO THE SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE, ON JUNE 10, 1998.

Thank you for convening a hearing to address the state of the livestock industry. I appear on behalf of the 300,000 farmers and ranchers of the National Farmers Union. We would like to start by thanking Chairman Richard Lugar for holding this hearing. Cattle producers have been plagued by low prices for the past 3 years. We believe there are structural weaknesses within the marketplace that must be addressed.

My testimony today will discuss three areas: 1) improving the U.S. market; 2) improving consumer information; and 3) improving trade.

IMPROVING THE U.S. MARKET

Reducing Concentration and Increasing Competition - Livestock producers and feeders face several challenges in selling their livestock. First, concentration within the meat packing industry has reached a level at which there is little competition. While three packers control over 80 percent of the beef slaughter within the United States, competition within a particular region is even more limited. Concentration within the pork industry has grown at a particularly rapid rate in the past few years.

Expanding the agriculture secretary's authority to define and prohibit anti-competitive practices is a good first step in reducing concentration. Congress should also encourage the Justice Department to enforce existing antitrust laws, and give close scrutiny to proposed agricultural mergers. We are concerned that new joint ventures between existing food and feed giants could ultimately lead to even less competition in existing slaughter operations.

Congress can also promote competition by supporting funding to encourage the formation of value-added, producer-owned cooperatives, and by allowing interstate shipment of state-inspected meat.

Providing Price Transparency - Second, in a world where knowledge is power, without price transparency, the buyer rules. The buyer knows the value for cattle based on wholesale and retail sales, while the producer or feeder can only guess. Lack of price transparency decreases the seller's price. In a typical transaction, the seller has a half hour or less to accept or reject the buyer's offer. If the seller rejects the offer, he must hold his cattle for another week, incurring additional feeding costs and risking that the cattle will be past their prime sale condition.

Price transparency will allow the seller the information he needs to make a good market decision. In order to achieve price transparency, Congress and the administration must call for mandatory and prompt price reporting of all live cattle and meat sales of the major packers. Producers also need access to better export sales and shipping information.

Reducing Captive Supply - A third challenge comes from the use of captive supply. Captive supplies, which packers obtain through several types of arrangements, including formula pricing or packer ownership, allow packers to dampen any market price increases by slaughtering animals under their control. As a result, each time the market should justify higher cattle prices, captive supplies limit any advance. Price data shows that cattle prices were effectively capped at $70 per cwt. for the past 18 months. We ask Congress and the administration to investigate whether captive supply was the reason for the price cap.

Packers claim captive supply, including formula feeding, allows them a steady supply to keep their packing plants running at levels near full capacity. However, it has been harmful to producers. Formula arrangements have been particularly harmful because while at the same time the formula removes cattle from the competitive cash market, the price is based on this declining market.

Past studies by U.S. Department of Agriculture (USDA) and its Packers and Stockyards Administration report noncompetitive captive supplies at levels around 20 percent of the total cattle slaughter, even though recent industry reports show captive supplies as high as 78 percent. What are cattle worth in the cash market if the packer does not need them? The pricing of formula and contract cattle is based on the cash market. Cattle feeders continue to be forced to these agreements due to lack of market access, limiting their ability to sell their cattle at the appropriate time.

In some cases, feeders who use formula contracts receive a special premium. However, the formula still has the effect of lowering the price for everyone else, placing feeders in a "Catch-22" situation: use of the formula may appear to help the individual contractor but lowers the market price overall. As a result, even the contractor's "premium" is negated by the lower base price.

Two actions are needed to remove the market depressing impact of anti-competitive captive supply: 1) In the absence of price transparency and open, competitive markets, members of the National Farmers Union and others are calling for a ban on open-ended formula contracting; and 2) Captive supply through packer ownership of animals can also suppress competition. Therefore, Congress should pass legislation which strictly limits the packers' ability to own or control animals beyond the immediate time needed for slaughter. Exceptions should be made for small, producer-owned cooperatives which increase market competition.

Enhancing Market Credibility - A fourth challenge is to improve market credibility. Producers have stated that at times they receive a premium for "grade," which measures quality. However, they then receive severe deductions on animals not meeting the packers' specifications. Premiums and discounts should not be arbitrary and should reflect true economic value.

IMPROVING CONSUMER INFORMATION / MAKING THE CONSUMER KING

U.S. producers have spent millions on mandatory livestock checkoffs to advertise U.S.-produced meat, in recognition of the need to reach consumers. And yet, advertising to the consumer is not enough. Since livestock producers are ultimately producing for consumers, it is essential that consumers are given what they want. This can be improved in three ways.

Labeling Meat - First, all meat and meat products should be labeled by country of origin. Labeling provides several benefits. U.S. producers, processors, and taxpayers have made a substantial investment in assuring U.S. meat production meets rigorous health standards. Labeling gives the consumer the right to choose U.S.-produced meat. Labeling also allows the consumer to support U.S. producers. And, labeling can provide necessary trace-back assistance in the event a particular meat supply presents a problem.

Providing Technical Assistance - Second, USDA, USDA's Cooperative, Research, Education and Extension Service (CREES), and the land-grant university system should provide assistance to producers and packers to better produce for the market.

Improving Inspection and Enforcement - Third, consumers should be confident that they are receiving a high-quality, safe food product. It is important that the budget for inspecting meat is adequate to ensure proper inspection within our country. Congress should also provide adequate funding for inspection of imported meat, meat products and live cattle. In addition, the agriculture secretary should be given mandatory recall authority for any contaminated product.

IMPROVING TRADE

Enhancing producer exporting opportunities - Too often, the U.S. focus has been on expanding trade volume, instead of ensuring that trade opportunities benefit the individuals producing the product, in this case, the livestock producers and feeders. We believe trade policy should require USDA and the Commerce Department to consider the impact on U.S. producers and farm income when they negotiate export sales.

National Farmers Union is also taking action to increase opportunities for producers to benefit from exports. National Farmers Union has developed an export cooperative to help farmer- and rancher-owned businesses and cooperatives become exporters.

Stabilizing Foreign Markets - U.S. markets have also been affected by events in other countries--most recently, the Asian financial crisis. National Farmers Union has supported providing assistance through use of the International Monetary Fund. However, while stabilizing foreign markets is important, additional action is needed to enable producers to share in the benefits of increased trade.

Rejecting Imports which Fail to Meet Domestic Standards - The United States should reject food products that are produced in other countries using methods of production and processing not allowed in this country. This will also enhance consumer confidence in meat. In addition, it is critical to ensure that truckloads of meat that have been rejected, do not enter our country on a second or third attempt to cross the border.

Achieving Import Price Transparency - In addition, we must improve import and export information, regarding price and volume. Price transparency is critical on both the domestic and international markets, and will provide our best opportunity for improved market competition. Price and volume data should be made available to the public at the end of each week. Data should also include information about any subsidies.

CONCLUSIONS / SOLUTIONS

Low prices are more than the "unfortunate, inevitable cycle" reported by the industry. They are caused by structural deficiencies within our market system. There are proactive steps that Congress and the administration can and must take to address these problems.

1. Price reporting by the major packers of live cattle and meat sales must be mandatory, and prices should be reported within 24 hours to provide price transparency within the United States. Congressional action is necessary to give the secretary authority to require such reporting.

2. The agriculture secretary should have enhanced authority to take action against anti-competitive practices. Open-ended formula pricing should be eliminated.

3. Packers should be prevented from owning animals for longer than the immediate time needed for slaughter, unless they can show that their activity increases the competition in the marketplace.

4. USDA and the Commerce Department should work together to provide accurate and timely import and export information to provide price transparency at the international level.

5. USDA, the extension service and the land grant university system should work with producers and packers to assist them in producing for the market.

6. Congress should require country-of-origin labeling.

7. Congress should provide the agriculture secretary mandatory recall authority for any meat product which becomes contaminated.

8. Congress should increase funding for inspection of both domestically produced and imported meat products.

9. Congress should encourage the formation of farmer-owned cooperatives.

10. Congress should increase competition by allowing interstate shipment of state-inspected meat.

There are several bills which have been introduced in the Senate which will improve the situation for livestock producers. National Farmers Union supports S. 16, legislation to expand the agriculture secretary's authority to prohibit anti-competitive practices, promote domestic labeling, and protect whistleblowers. We also support S. 716, legislation which would establish a joint United States/Canada Commission on Cattle and Beef. In addition, we support S. 617, legislation which requires imported meat to be labeled as to country of origin. And, we support legislation to give the agriculture secretary authority to require companies to recall contaminated products from the market

Once again, thank you for holding this hearing. We look forward to working with you to find solutions to improve livestock prices.