Testimony of

J. Patrick Boyle

President and CEO, American Meat Institute

Before the

Senate Committee on Agriculture, Nutrition and Forestry

May 26, 1999

Good morning. My name is Patrick Boyle, and I am president of the American Meat Institute. AMI is the national trade association representing meat and poultry packers and processors who account for the majority of the beef, pork, lamb, veal and turkey produced in the U.S. About two-thirds of AMI's member companies are small businesses with fewer than 100 employees. The rest are mid-to-large firms, including some major international food processing companies. Earlier in my career, I served as administrator of USDA's Agricultural Marketing Service (AMS), the federal agency which oversees numerous marketing orders and agricultural marketing initiatives.

COUNTRY-OF-ORIGIN LABELING

Country-of-origin labeling means many things to its proponents. For some, it is a means to limit competing imports. Frustrated by growing Canadian or Mexican imports, some see such labeling as a way to discriminate against other North American agricultural products and thereby improve the position of U.S. products in the domestic marketplace. For others, country-of-origin labeling is a way to promote U.S. products to consumers. If Americans only knew how to choose U.S. meat products, these proponents reason, they would prefer to purchase them and thereby support American agriculture.

AMI shares the goal of those who seek to promote U.S. products, so I will focus my comments today on how best to promote the sale of U.S. meat. Last month, AMI concluded its 15^th annual Meat Marketing Conference in Anaheim, CA. We have co-sponsored this one-of-a-kind conference for the past decade and a half with the Food Marketing Institute, and this year expanded co-sponsorship to include Food Distributors International and the National Chicken Council. This conference is the largest meeting we know of that is totally dedicated to meat marketing.

In 15 years of these conferences, participants have met to discuss the marketing issues, production and promotion requirements and consumer demographics that drive U.S. consumer meat purchases. The need to create a brand identity for fresh meat and poultry industry has come

Testimony of J. Patrick Boyle, AMI

May 26, 1999

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up repeatedly in these conferences as a way to communicate to harried consumers that a particular product will meet their expectations consistently for quality, price, convenience or whatever attributes that brand conveys. Meat case evidence to-date - with products as diverse as Perdue chicken, Certified Angus Beef or Smithfield's Lean Generation Pork - suggests that a successful brand identity works to the benefit of producers, manufacturers and their customers.

One of the ways to establish something similar to brand identity is what we would call geographical identity - something akin to country-of-origin labeling, but more focused. Examples of this would be the "Go Texan" program launched this month by that state's agriculture department, as well as the "Florida Orange Juice" and "California Strawberry" promotion programs. A hallmark of these programs is that they have a targeted market message and producers participate in them voluntarily. U.S. meat producers have a similar choice about whether to participate in a market-targeted, voluntary "Certified U.S." meat-labeling program created by Secretary Glickman last year. That program was developed for producers who want to promote their products as originating in the U.S. To date, no U.S. livestock producers, meat companies or supermarkets have chosen to participate.

Mandatory country of origin labeling, as contemplated in a number of bills introduced in the 106^th Congress, is an attempt to force the meat industry to do what none of its various segments - including producers - have so far chosen to do voluntarily. In the current debate about making country-of-origin labeling mandatory, I believe the lack of industry participation in a voluntary labeling system that lends itself to a clear marketing message is telling.

COSTS WOULD BE SIGNIFICANT

Mandatory country-of-origin labeling will be harmful to the U.S. livestock, meat and retail industries. I would like to outline just some of the cost implications of mandating country-of-origin labeling:

Hundreds of millions of dollars in costs to livestock producers: With various country-of-origin bills already introduced in Congress, and ongoing discussions in the producer community about what products should be labeled, which marketing channels should require labeling, and even how "U.S. product" should be defined (Born in the U.S.? Raised in the U.S.?), there are quite obvious differences in the various proponents' approaches to country-of-origin labeling. From a packer's perspective, however, there is one constant to all of these various approaches: a verifiable audit trail that can provide meat buyers or consumers a guarantee of labeling accuracy.

If country-of-origin labeling requirements were not applicable to all meat products, or were restricted to just one type of meat product, or limited to just one marketing venue, then requirements for that audit trail might be relatively minimal. But if such labeling were to truly address what its proponents espouse (i.e., identifying for consumers the origin of all of their meat purchase choices), then a rigorous audit trail will be required from all sectors of this industry.

A rigorous audit trail would require individual animal I.D. for those species - primarily cattle - where cross-border trade flows are common and growing. AMI has estimated that if every head of cattle were required to carry a unique I.D. eartag capable of providing meaningful

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May 26, 1999

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traceback information, the cost today would be at least $246 million (eartag cost of $2.50 multiplied by the national herd size).

You can be sure that meat packers, who would face criminal prosecution for mislabeling their products, would demand very clear and credible evidence from their livestock suppliers as to the country of origin of their livestock.

Hundreds of millions of dollars in costs to meat packers and processors: An AMI member survey of costs associated with foreign and domestic product segregation, recordkeeping, inventory management, labeling and other operational logistics necessary for verifiable country-of-origin labeling identified a program cost for packers and processors averaging ¾ of a cent on every pound of beef and pork produced in this country. That ¾ of a

cent per pound is the total cost of country-of-origin labeling compliance by packers and

processors averaged out over all the meat we produce annually, and it totals $324 million per year.

Companies currently using imported product to augment domestic supplies - whether livestock or meat - report to us that their per pound costs to comply with a country-of-origin labeling mandate would run from four to eight cents per pound on their own production. One pork processing member of AMI, for example, currently produces more than 8,000 separate items, or SKUs; another beef and pork slaughterer produces more than 5,000. Country-of-origin labeling would result in a doubling of the number of SKUs these companies produce. There would be no offsetting sales benefits associated with selling twice as many products - or more correctly, the same number of items in twice as many labeled forms -- just higher costs associated with increased demands on inventory management, storage capabilities, distribution flows, etc.

Hundreds of millions of dollars in costs to supermarkets and grocery stores: According to the Food Marketing Institute and the National Grocers Association, who represent collectively more than 156,000 large and small retail food businesses nationwide, costs for product segregation, storage, labeling, documentation and signage would be $2,400 per store. Total annual costs of mandatory country-of-origin labeling to retailers would be $375.1 million.

Sixty million dollars estimated annual cost to USDA to monitor compliance: According to a July 1998 internal USDA memorandum, regulatory costs at USDA for monitoring and ensuring compliance with mandatory country-of-origin labeling would be about $60 million annually. This is about 10 percent of the entire FSIS budget for food safety inspection.

WHERE ARE THE BENEFITS?

Proponents of country-of-origin labeling for meat are now characterizing its benefits as a "consumer right to know" issue. It is not a marketing issue, a food safety issue, a promotional or brand identity issue - it's a "right to know" issue. AMI believes that characterizing it this way is a politic attempt at avoiding having to admit that there are no concrete, quantifiable benefits associated with labeling.

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May 26, 1999

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AMI has looked at both sides of the labeling question, and we have been unable to identify any benefits whatsoever. We have, however, identified significant costs associated with country-of-origin labeling. So, too, have the Government Accounting Office and USDA's Food Safety and Inspection Service, who both characterized labeling's costs using just that word -- "significant"-- at last month's House hearing on this subject. Another analysis of labeling's costs and benefits released last month from Montana State University's Trade Research Center characterizes country-of-origin labeling as a "two-edged sword" that could work to the detriment

of U.S. producers' interests. Proponents need to be aware of this two-edged sword, and so does this committee. I would like to enter that analysis into today's hearing record.

In summary, AMI supports constructive and voluntary efforts to market U.S. meat products in many ways - through brand promotion or geographical identification, for example. But we oppose mandatory country-of-origin labeling legislation as a costly and harmful requirement that has no clear marketing purpose and for which no benefits have been identified.

Thank you for your time this morning. In the testimony I am submitting for the record today, I have included a statement on AMI's policy on price reporting.

Attachment

MANDATORY PRICE REPORTING

AMI policy has historically opposed mandatory price reporting. That policy was reaffirmed by AMI's Executive Committee in April after price reporting negotiations commenced with producer groups, and was reaffirmed by its full Board of Directors two weeks ago.

There is no evidence from the producer community or any research from universities or other independent sources suggesting that mandatory reporting would improve producer prices. It is a terrible precedent, and would replace a 50 year old voluntary reporting system that continues to work surprisingly well.

AMI supports voluntary reporting of prices and believes the current voluntary system accurately reflects market conditions and the value of livestock to producers. Any system can be improved, however, so as AMI reconfirms its opposition to mandatory price reporting let me also reconfirm AMI's commitment to work with producers and government in improving the voluntary system in ways that do not compromise any sector of the U.S. livestock and meat industry.

Mandatory price reporting would impose substantial recordkeeping and compliance costs on industry with no offsetting benefits. It would also compromise legitimate business interests of packers, their suppliers and customers. In so doing, mandatory reporting can be expected to impede the development of strategic alliances and branded beef programs between producers, packers and their customers that are increasingly necessary to ensure red meat's strategic competitiveness

Mandatory price reporting will also have a price settling, "lowest common denominator" effect that will result in lower average prices paid to producers. This belief is widely shared by U.S. packers, and has been confirmed by the findings of a recent major cattle procurement investigation conducted by USDA's Grain Inspection Packers and Stockyards Administration. The GIPSA investigation of 6.2 million head of cattle purchased in the Texas Panhandle over a 66 week period by the top 4 packers showed USDA's voluntary reporting system accurately captured the value of 93% of these cattle. Of the 7 percent of these animals that sold outside USDA's reported daily price range, 7.7 sold below USDA's reported low for every animal that sold above the reported high. Further, during the investigation period there were 3 times as many days that cattle sold below USDA's reported low than above the reported high.

The GIPSA Texas Panhandle investigation confirms the packing industry's belief that it is the livestock seller who most frequently does not report the prices for cattle bringing below-market prices. Further, the GIPSA investigation proved that had all prices been reported during the investigation period, the value of livestock as reported by USDA would have been lower than what was actually reported. This is not what any sector of the industry wants, but this will be the result of mandatory price reporting.

AMI supported a House request for packers and producers to work together in seeking resolution of what continues to be a divisive industry issue. We supported that request because we believed there were clear and attainable improvements that could be made to the current reporting system that would not compromise the interests of either producers or packers or require an Act of Congress. However, a patchwork quilt of state reporting mandates convinced several large packers to accept invitations from producer groups in late March to meet to fashion a federal reporting mandate that could preempt conflicting reporting mandates emerging from some states. It should be understood by this committee that these large packers were brought to the table because they sought a federal reporting preemption, not because they thought mandatory reporting would benefit any sector of the industry.

The so-called compromise legislation developed by the National Cattlemen's Beef Association and the National Pork Producers Council that will soon arrive in Congress does not reflect any consensus position of the meat packing industry on price reporting. Virtually all packers, including many of those in the discussions with producer groups, continue to oppose federal and state reporting mandates. The process through which the compromise was developed has caused resentments among those not party to the discussions, and has further exacerbated the tensions surrounding this issue.

The reporting compromise was reached with the packers in the discussions because of concerns about the disastrous implications of individual state reporting mandates. If Congress must consider passing legislation on price reporting, concerns about these state mandates must be addressed and a federal preemption must apply. More importantly, the process through which Congressional legislation is developed must be more open than the discussions that resulted in the producers' compromise legislation.