Statement of J. Patrick Boyle

President and CEO, American Meat Institute

Senate Committee on Agriculture

January 26, 1999

Good morning. My name is Patrick Boyle and I am president and CEO of the American Meat Institute. AMI is the national trade association representing packers and processors of beef, pork, lamb, veal and turkey. I am here today to share AMI's perspective on structural changes occurring within the livestock and meat industry sectors of agriculture.

Agriculture Structure is Constantly Changing

This committee knows that agriculture is one of America's greatest success stories. Throughout our history it has been the bedrock of much of our country's prosperity, and continues to be so today. There are many reasons why U.S. agriculture has been so successful, but chief among them has been the ability of various sectors to change in response to market conditions, new opportunities, or technological improvements. This ability to change has characterized U.S. agriculture throughout our nation's history. It is a hallmark of America's great free market economy.

While the changes we have seen in agriculture have proceeded unabated in this country for 200 years, they have become especially pronounced in our lifetimes. In fact, today's systems for producing, processing and delivering food to consumers bears only the most superficial resemblance to those that existed as recently as two decades ago. Go back 40 years, or 60, and the differences between what our agricultural systems once were and what they are today are even more pronounced. Today we have an agricultural production base, and processing and distribution sectors, that are the envy of the world, and which provide standards of abundance, quality, affordability and safety to which virtually all other nations aspire.

Consumers Benefit from Changes in Agriculture

As Congress considers initiatives to address changes in agriculture's structure, I urge consideration of the history of change in U.S. agriculture, and I also urge recognition of the benefits and bounty that change has produced. No one who takes the long view can disagree that the changes in U.S. agriculture have brought tangible and impressive benefits to U.S. consumers. Not only do U.S. consumers have more food available to them than anywhere else in the world, but have the broadest variety, the highest quality and the safest food in the world. In fact, consumer dollars spent on food as a percent of disposable income is today lower in this country than anywhere else in the world or at any other time in history. And as consumers have benefited, so have producers - although those benefits have not come without a measure of pain and concern that prompted this hearing today.

Structural Changes Have Impacted Meat Packing Sector

The meat packing industry has not been exempt from the pressures that have produced change in the overall agricultural sector. In response to increased demand for poultry and declining demand for beef, and in pursuit of competitive opportunities and increased operating efficiencies, the market share of the top four beef packers began moving up about a point a year beginning in the late 1980s. The top four beef packers now account for 79.8 percent of our steer and heifer slaughter, and 67.6 percent of our total cattle slaughter. A similar, less pronounced, consolidation of hog packers that began in 1996 has resulted in the top four hog packers increasing their slaughter share by 10 points to 54.2 percent.

Concerns about increased consolidation in meat packing have resulted in a vast body of research over the past 20 years that attempts to quantify the impact on producer prices. Most of this research has been inconclusive - but significantly it has not identified any significant harm to producers caused by consolidation in meatpacking.

Recent research, however, suggests that there is a net gain to producer prices associated with larger packers' operating efficiencies. The most recent research to this effect comes from the University of Nebraska, was published in The Journal of Industrial Economics, and shows a net cattle price increase of 2 percent for every 10 percent concentration increase. I request that this research be entered into the hearing record.

Consolidation Occurring Throughout U.S. Economy - A Survival Tool

The consolidation of beef and pork packing businesses has not occurred in a vacuum. Our livestock suppliers are consolidating just as we have, and for many of the same reasons. So are our retail and wholesale customers. Consolidation in food wholesaling, for instance, has resulted in a 75 percent drop in the number of full-line food wholesalers over the last decade. Consolidation is also occurring in the retail food sector, as evidenced by several well-publicized mergers and acquisitions of food chains last year. What we are seeing in the food sector is occurring in virtually every other sector of the U.S. economy - because consolidation is one of many tools businesses are choosing to use in order to survive.

Not surprisingly, agriculture is consolidating. There has been a decline in the number of farms, but those that remain are larger, more efficient and more productive. This has been the trend of the past 100 years. Indeed, today's restructuring of American agriculture is no different from what started at the turn of the century; only the scale of change is different. And these changes are not limited to any one agricultural sector -- they are occurring throughout.

Paralleling the increase in the average size of agricultural operations, the market share of larger operations has grown. This is true throughout agriculture, including livestock production, where larger production units are accounting for an ever-increasing share of marketings. In cattle feeding, for example, commercial lots with one-time capacities of 8,000 head or more now account for 81 percent of fed cattle marketings, up from 67 percent in 1991.

Everyone here is also aware of the recent growth and the emerging importance of large hog producers. Let me share with you a statistic that puts into perspective the growth of these operations, their potential impact and what this means to the pork packing business.

There are approximately 114,000 hog producers in this country, most of whom are not large, at least as the term "large hog producer" is understood today. Large producers - those who market 50,000 hogs or more per year - only number 145 according to an Iowa State/University of Missouri survey released last year. But these producers, who make up only .13 percent of all hog producers, accounted for 38 percent of all hog marketings in 1997, up from 9 percent of hog marketings in 1991. I assume that their share of 1998 marketings was even higher, since these producers reported they planned to keep growing. That same Iowa State/University of Missouri survey shows these very largest of hog producers reported intentions of growing their operations by 64 percent by 2000. This survey was taken before the market crash, and producers' growth intentions have probably changed somewhat since then, but it points to a key dynamic that is changing this industry.

You might be interested to know that during the past year when these large hog producers were growing, hog slaughter capacity declined (after having increased over several years) due to a combination of poor business performances and regulatory burdens. This illustrates another component of the challenges in our industry: huge supplies of raw materials available during periods of decreased processing capacity.

Huge Hog Supplies Challenge Slaughter Capacity, But Packers Working Overtime

At its simplest level, the hog market collapse in December and its continuing weakness today reflects an unprecedented increase in the supply of hogs. Packers, producers, USDA and anyone who was reading pork trade publications this time last year knew a supply increase was in the works. The only surprise was how big it would be, and how poorly the hog markets might react.

Hog slaughter last year was up 10 percent and, based on USDA's December Hogs and Pigs report, hog supplies will continue to increase through the first half of this year. Industry's slaughter capacity is estimated at just about two million head per week, and we have been operating above that level since Labor Day, consecutively setting new records for weekly slaughter and daily slaughter, working overtime and six days a week, sometimes seven, to process the large supplies coming to our plants.

There is an economic saying that "the solution to low prices is low prices," meaning that producers take their production signals based on what the market - in the form of prices - is telling them. But given the production increases we saw in 1998, when profits to producers were all but nonexistent all year, one has to wonder what signals producers were listening to. I believe the answer is that they are repositioning themselves for a fundamentally different - and better - pork industry in the future.

But for now we have very large hog supplies and low - but improving - prices that some believe prove the system is out of sync. It is not out of sync - this is the way a fixed system works when confronted with supply surges. The packing industry is running overtime - literally - to accommodate these increases. But given the industry's fixed capacity, there is only so much that packers can do to work their way through these large supplies. Packers have very little experience with hog runs of this magnitude, and no prior experience at all with the sustained nature of what we are dealing with today.

If there is a bright side to this situation, and I believe there is, it is that as the industry goes through these changes, we are increasing pork's competitive position. Specifically we are doing a surprisingly effective job in moving pork through the channels to consumers. Pork demand had held up surprisingly well in the face of these large supplies, and pork is gaining market share over competing meats that will benefit both producers and packers once this current situation is behind us.

Until recently, hog production had been one of the more profitable enterprises in agriculture. That profitability, coupled with the realization that the meat industry is going global and most of the world prefers pork to other proteins, has resulted in the structure of the U.S. hog industry changing profoundly in response to what many continue to see as a promising and profitable future. The changes have also been spurred in some cases by a race to beat state-by-state production regulations. They have resulted in a hog industry characterized today by bigger and more efficient producers and - yes - fewer producers; and by changes in how hogs are bred, raised, priced and sold. Some observers are discomfited with many of these changes, but there is nothing irrational about what is occurring in hog production. There are only a few countries capable of producing for the growing worldwide demand for pork, and the U.S. wants to be the country that eventually does. So, over the last five years, we have seen new money and new players enter hog production, and the focus of both has been on volume and efficiency. They have been extraordinarily successful.

Growth and Consolidation in Hog Production Triggered Same in Pork Packing

Since the mid-1990s, U.S. hog producers have been aggressively positioning themselves as tomorrow's pork suppliers to the world. U.S. packers and processors responded to this new producer positioning by consolidating the industry, building new, larger and more efficient facilities and expanding the capacity of many existing ones. Over the last four or five years, an additional capacity of 47,000 head per day was added to the U.S. hog processing system. This did not come without a cost. Less efficient packers found themselves with operations that were no longer competitive, and that were losing money on a consistent basis. But as the packing industry geared up for the future, it still had to deal with the economic vagaries of the hog cycle (1996-97 average hog prices of $52-$53. Thus even the more efficient packers found themselves losing money for prolonged periods of time. In fact, for most packers slaughtering hogs, the history of 1996 and 1997 was written starkly in red. A shakeout was inevitable. The shakeout took the form of several plant closings over the last year and a half. Hard economics and competitive market forces took almost 37,000 head of slaughter capacity out of the industry in 1998 - the same year hog producers were offering unprecidentedly large supplies.

How Best to Address the Situation?

As Congress and the Administration examine the implications of the changes I have outlined today, and consider "remedies" to ease the transition into the future for some producers, know that the meat packing industry is as uncertain as anyone about the implications of change. But we accept change, and we are prepared to deal with its implications.

There is today pressure to mollify the changes we're seeing, and there is support among many in this room for doing "something." But what? What is the role of the federal government with regard to changes in agriculture? In meatpacking? Obviously, a very legitimate role is to ensure a competitive market environment and to ensure that new trade practices don't unfairly preclude any particular segment from participating in the market process. But I would argue that monitoring competition and trade practices are but parts of a broader government role.

There have been allegations over the last several months that the current hog market situation is somehow "unfair" because producers are today losing money after enjoying record profitability in recent years. The current market situation is not unfair, it's bad; and packers are justifiably concerned about the situation's implications to the viability of the tens of thousands of producers upon whom we rely for our livelihoods. But the punitive undercurrent to these allegations is wrong."

There is nothing unfair about the interplay of market forces like supply and demand. These same factors have since December resulted in a partial recovery of the market, and will in time - as they always do in livestock cycles - return profitability to producers.

Mandatory Price Reporting No "Solution"

There have been calls for mandatory price reporting as a "solution" to the current situation. Yet no one has specified what is wrong with our current price reporting system, or what aspect of it needs to be "fixed

AMI believes that before we move forward in fashioning a new reporting system to replace the one we have, we need a better understanding of how well - or not--our current system works. We believe that the way you do that is by looking critically and objectively at our current system's effectiveness in transmitting market information before you replace it with one that may not be as effective - and which may even cause more confusion than that which we have now.

Is the government capable of doing this? Yes. USDA's Grain Inspection, Packers and Stockyards Administration has been looking at the effectiveness of price reporting in transmitting the value of livestock to packers for the past several years as part of their ongoing investigations of the packing sector. They found and reported last year that in the case of cattle sold in the Texas Panhandle, the market reporting process is indeed effective in transmitting cattle values regardless of how those cattle were purchased. Another recent investigation of hog procurement practices in Iowa and Southern Minnesota found shortcomings in the current price reporting system. Those shortcomings were addressed with a new price-reporting format in January. Again, knowledge of the facts led to a remedy. The investigation didn't find anything wrong with the procurement practices of hog slaughterers, but it did identify industry practices that weren't adequately understood by USDA and incorporated into its market reporting.

Country of Origin Labeling Will Hurt U.S. Trade and is No "Solution"

Similarly, some people believe that country of origin labeling would improve the market for producers, or might have somehow prevented the market crash in December. AMI doesn't believe that -- rather, we believe such labeling will deal a devastating blow to our international trade and trigger actions against the U.S. within the World Trade Organization. We do, however, see merit in a study on the implications of country of origin labeling before we move forward on something that could wind up being a classic and disastrous case of unintended consequences for producers, packers and our meat trade surpluses.

AMI believes that calls for country of origin labeling and mandatory price reporting aren't solutions to a problem; they are reactions to a problem. Had we had them in December, we would still have had $9 hogs. Mandatory reporting or additional import labeling requirements will not stop the direction this industry is going, and they will not slow down the speed with which we're moving. These initiatives cannot change the fundamentals of supply and demand or negate the price effects of livestock cycles. What they can do - what they will do -- is add costs for everyone, and limit opportunities for many. Because of that, they would likely hasten consolidation in the meat industry.

Solution 1: Natural Market Correction in Livestock Production Cycle

The current hog market situation will resolve itself when the hog cycle turns and production resumes a more measured growth. USDA's December Hogs and Pigs report suggests the cycle has already turned, but while that report showed that our hog breeding herd declined in the last quarter of last year, it also pointed to increases in hog supplies continuing through the first half of 1999. Those increases will be more moderate than those we experienced last year, however, and by the second half of the year we can expect supplies to drop below year-earlier levels. Futures markets have for weeks now shown higher prices for producers as we move through the year. So the market, as it always has, has begun to correct itself.

Solution 2: Expanded Export Markets and International Trade

Longer term, however, there remain many challenges the livestock and meat industry must overcome. Expansion of trade opportunities remains a top priority. Our future lies in trade, and fast track negotiating authority must be approved if we are to provide viable livelihoods for the producers upon whom we rely - large and small. By working with government, producers and packers have made rewarding, and in some cases significant, inroads over the last decade in moving pork and beef into Asian markets. Increased exports to Japan, Korea and other Pacific nations have meant more money in producers' pockets, but continuing access problems in several of these markets has precluded further gains. If there is any doubt about the importance of these markets to U.S. producers, consider what happened to our livestock prices when the Asian economy went into a freefall this time last year and meat exports virtually dried up for several months.

Solution 3: Help Producers Manage Risk

As this industry changes and grows, so do its opportunities. But so too do its risks. The need for more producer knowledge about market-based risk management tools continues to be a challenge we must address. Some of these tools are available through producer/packer alliances, or in the growing use of production contracts. Most of these alliances and contracts are not as exclusive as commonly thought, and they are available to a larger number of producers than is generally appreciated.

As the livestock production sector changes, a better understanding is also needed of what these changes mean for traditional supply projections. Projecting supplies - or at least providing accurate production indicators from which the private sector can make its own supply projections -- is a traditional and, in the case of hogs, exclusive role of USDA's. But the rapid pace with which the hog sector has been expanding seems to be moving faster that USDA's ability to track it. The magnitude of last year's increase in hog supplies was unexpected, as were the sharp and devastating supply increases in December. Since the fall of 1997, USDA's Hogs and Pigs reports were pointing to much more moderate supply increases than those we actually experienced. Had more of us known what was coming, adjustments could have been made that would have minimized some of the damage.

Developing these solutions will take time. The nature of the current hog market, however, mitigates for many against the long view of what is required, and we have today initiatives being discussed, and legislation already introduced, that could change the direction of this industry - and not for the better

Regulatory Burdens Can Drive Out Small Businesses, Promote Consolidation

I want to close by mentioning some other unintended consequences of recent regulatory actions that could make today's market and structure concerns even worse. Generally speaking, larger, "consolidated" companies are more able to withstand new, or expensive, or burdensome government regulations, with the net effect that the more the government tries to constrain industry practices or add costs to existing ones, the more small businesses fail and the faster the industry consolidates.

Consider the impact of HACCP and other food safety policies on packing industry structure. One example was the well-publicized USDA recall of ground beef last year that resulted in a state-of-the-art beef grinding facility closing its doors and its parent company going out of business - over record-keeping! The upshot of this was that industry concentration increased a little bit more when the country's largest beef processor purchased the beef grinding plant and the rest of the company was purchased by the country's largest chicken processor.

Yesterday, the second wave of HACCP implementation went into effect for thousands of mid-sized meat and poultry companies. AMI understands that USDA has concerns that as many as seventy of these companies may not be able to comply with the new regulations, and well-respected industry analysts have voiced concerns that the inability to comply with HACCP could cause an even larger number of plants than this to exit the industry in the coming year. These wouldn't be bad operators who deserve to go out of business, but companies who don't have the resources or staying power to deal with a fundamentally new and still-evolving regulatory regime for food safety.

What consideration has been given to the implications to industry structure of USDA's zero tolerance policies for E.coli O157:H7 in raw beef or Listeria in ready-to-eat meat and poultry products? Both of these policies will likely lead to further consolidation of the industry. That's not their intent, or course, but that will be their likely result.

Similar arguments can be made about the implications of the Immigration and Naturalization Service's "Operation Vanguard," or government environmental policies, or state initiatives like California's Prop 65. None of these government initiatives occur in a vacuum, and all have implications to industry structure.

In summary, AMI believes government has a legitimate role in monitoring the changes currently underway in agriculture and in ensuring competition. But government also has a responsibility to ensure that it understands the implications of policy initiatives it mandates. And the business community - both in production agriculture and in processing and retailing - deserves government's diligent examination of all facts before new and costly mandates are applied through legislation or regulation. AMI looks forward to working with you all in this regard. Thank you.