Testimony

on behalf of the

NATIONAL CATTLEMEN'S BEEF ASSOCIATION

in regard to

Economic Consolidation in Agribusiness

submitted to the

Senate Committee on Agriculture, Nutrition & Forestry

submitted by

Paul Hitch

Chairman, Live-Cattle Marketing Committee

National Cattlemen's Beef Association

January 26, 1999

_______________________________________________________________________

Initiated in 1898, the National Cattlemen's Beef Association is the marketing organization and trade association for America's one million cattle farmers and ranchers. With offices in Denver, Chicago and Washington D.C., NCBA is a consumer-focused, producer-directed organization representing the largest segment of the nation's food and fiber industry.

Chairman Lugar, members of the Committee: Thank you for the opportunity to present the views and concerns of the National Cattlemen's Beef Association (NCBA) with regard to economic consolidation within the agribusiness sector. I am Paul Hitch, chairman of NCBA's Live-Cattle Marketing Committee. I am president of Hitch Enterprises headquartered in Guymon, Oklahoma.

NCBA remains committed to forging a marketplace in which government involvement is minimal, and more importantly, one where all cattlemen, from the rancher raising the calves to the feeder sending them to the packer are treated by agribusiness as equal partners in the industry. The structural changes taking place in the beef industry have coincided with international economic crises, changes in supply, declining demand and weather-influenced volatility in the cost of feedgrains and forage.

I would state at the outset that there is a wide range of opinions among individual producers about the effects of economic consolidation in agribusiness, whether it is in the beef packing/processing sector, the grain sector or input sector. How the various impacts -- both positive and negative -- of consolidation are inter-related is the basis of heated debates, emotional arguments and general consternation within the beef industry. Some producers have embraced new marketing opportunities to the benefit of their own operation. There also are cattlemen who believe the infrastructure changes are, at least in part, the cause of recent price declines and decreased competition within the input and market sectors of their particular situation.

Packer Concentration:

There is a perception among some in the beef industry that regulatory action is warranted. Packers and Stockyards Administration data show that the four largest packers slaughtered 80 percent of all steers and heifers marketed. Current concentration levels now exceed levels that triggered regulatory action during the 1920s. NCBA policy supports close monitoring of mergers and acquisitions in the packing sector because of increased potential for antitrust violations. Close evaluation of price movements and sector margins are also requested to assure that price changes are the result of market signals and not the exercise of market power or illegal pricing activities.

At the same time, the industry must remain pragmatic. Change in the beef industry, as in the rest of the economy, is a reality. Unfortunately, the current chronic low price situation makes dealing with that reality frustrating. We need more competition, not less. How we achieve that goal is the challenge. It is not clear why the beef industry is struggling to increase packer competition. New firms have entered into pork packing where the three largest beef packers are also major participants. To encourage and increase packer competition, we must first examine the barriers that inhibit entry into fed cattle beef packing.

For example, smaller plants that currently operate under state-inspected programs are prevented from taking advantage of expanding their markets if it would require interstate shipment of their products. To do so, they must first make the necessary, and often expensive, steps to become federally inspected. NCBA recommends that meat inspected under state programs officially designated as being "equivalent to" federal standards should be accorded the same freedom of movement in interstate commerce that is accorded meat imported (and inspected under similar "equivalent to" standards) into the U.S.

We are anxious to work with the Committee, your counterparts in the House, as well as the Administration to identify other conditions and/or constraints that are unique to the beef industry that inhibit an increase in the packing and processing sector. By addressing these factors, our industry can then work together to remove the barriers and increase the incentives for new entrants into beef packing.

New Marketing Systems:

In addition to increasing concentration, there has been a trend toward alignment between packers and cattlemen through contracts, marketing agreements and custom feeding of packer-owned cattle. NCBA policy is specific regarding these emerging business relationships.

· That NCBA not recommend the limitation of any method of marketing fed cattle.

· That NCBA supports a free market system.

· That no action is to be taken to alter or halt current trends toward private business arrangements among operators in the various sectors of the beef industry.

· That NCBA is to encourage producers -- individually and through cooperative efforts -- to take advantage of opportunities to increase profits through new marketing strategies, coordination, risk management and retained ownership.

A number of producers are finding innovative means to compete in the changing cattle industry. This includes gaining a greater share of the marketing dollar. For example, U.S. Premium Beef, Ltd. Mr. Chairman, I am very pleased that you invited Steve Hunt, President and CEO of U.S. Premium beef to tell you about the success of this innovative producer-driven program in person.

Availability of Market Information:

While the beef industry continues to debate concentration and marketing systems issues, there is widespread agreement that efficient markets, especially in situations with many sellers and few buyers, require greater availability of accurate and timely information. Information availability helps ensure that competitive market forces exist. Fewer buyers cannot have undue leverage when market information is widely available to more dispersed sellers. The National Cattlemen's Beef Association is aggressively pursuing action to improve price reporting for cattle, boxed beef, imports and exports and to assuring competitive pricing as the beef industry goes through a difficult transition.

In addition, there are other actions that can and should be taken to improve the availability of market information and to assure that competitive market forces are expressed. NCBA is concerned over recent proposals by USDA Economic Research Service (ERS) to reduce the number and frequency of market reports at a time the industry is struggling to obtain improved information during this period of structural change and competitive challenges. If ERS does not want this responsibility, NCBA urges Congress and the Administration to consider re-allocating resources from ERS to the Livestock Marketing Information Center in Lakewood, Colorado, or to the USDA World Outlook Board to continue providing this information and these reports.

In addition to resolving ERS's continued service to production agriculture, NCBA specifically requests the following improvements in beef reporting:

· Require the reporting of boxed beef sales, prices and volume on a daily basis by the Agricultural Marketing Service/Market News Service. Reports should include forward sales beyond the delivery period currently reported, prices for branded products, sales delivered as priced basis to a futures contract, sales of less than carlot volume and formulated sales. And, in addition to the currently reported Choice/Select price differential, report the price differential for USDA Prime and the upper 2/3 of USDA Choice.

· Direct the Secretary of Agriculture to compile and publish sales volume information regarding all exports of beef, veal, pork, lamb, chicken, turkey and products thereof. Require the information to be reported not later than one week after the end of the week during which exports occurred.

· Explore alternative technologies for collecting and reporting retail scanner data to develop a retail price series that reflects both volume and price of all beef, veal, pork, lamb, chicken, turkey products sold at retail. Develop a carcass-equivalent retail price from aggregated retail cut prices.

Import/Export Reporting:

The list of industry studies in the next section highlights a strong desire for information and understanding of competitive forces that are resulting in changes in agriculture as individuals adapt to survive in a competitive environment. The absence of accurate and timely data from the U.S. trade sector has been a source of long-term frustration throughout the beef industry. Information inequities provide a competitive disadvantage for the U.S. beef industry relative to other major beef exporting countries and contribute to an information disadvantage for cattlemen relative to packers.

NCBA has long supported improving timeliness of export and import information. Generally, USDA and the Commerce Department have been providing timely import information. USDA/APHIS provides live cattle import numbers every other week and Commerce/Customs issues its (import) Quota Threshold Status report on a weekly basis.

However, export data reports are fewer and farther between, often coming up to eight weeks after the product clears customs, and steps to correct this problem appear stalled. More than a year ago, USDA published an advanced notice of rule-making requesting public comments on a proposal to require mandatory reporting of export sales of meat and meat products. The comment period closed February 12, 1997. A final decision is reported to be in USDA approval channels, but has not yet been made public. It is our hope that USDA adheres to its initial proposal which would mandate reporting of export information for all beef, veal, pork, lamb, chicken, turkey and their respective products inspected for export. This information would be made public not later than one week after the end of the week during which export certification was issued.

Openly assessable current information about export demand is necessary to keep exporting companies (primarily packers) from having insider or privileged information that could give them a significant advantage over sellers or others in the beef trade. Grain exporting companies are required to report export business on a weekly basis so that the entire grain trade can remain fully informed about overall export market activity.

Congress mandated export sales reporting for most of the major grains during the mid-1970s to ensure that all parties involved in the production and export of U.S. grain have access to up-to-date export information. Prior to establishment of the export reporting system, it was impossible for the public to obtain information until grain exports were actually shipped. This frequently resulted in a considerable delay in obtaining information (much like conditions in the beef industry today). NCBA believes that this rule is long past due and that USDA should immediately adopt and implement export sales reporting for meat.

On-going Industry Evaluation:

This is not the first time that the beef industry has addressed changes in the industry structure and the underlying economic forces driving those changes. Considerable financial and human resources have been spent in addressing and educating the industry about these issues. Following are examples of some of the major initiatives:

1. Rapid changes in the number, size and make-up of firms in the beef industry and shifts from traditional ownership and marketing patterns raised many questions about the future structure of the beef industry during the mid-1980s. Concerns were raised about the competitive position of beef relative to other meat sources domestically and internationally and how individual producers might adapt and fit into the evolving structure. The NCA (predecessor to NCBA) Beef Industry Concentration/Integration Task Force was appointed October 6, 1988, to address these issues, questions and concerns. Task force members represented all geographic areas and all segments of beef cattle production. The final task force report projected many changes that are now under discussion and identified the competitive economic forces that would drive the industry to change.

2. The NCA Beef Industry Concentration/Integration Task Force also requested that a group of experienced professionals take an "arms length" look at some of the difficult issues facing the U.S. cattle industry. The report, "Competitive Issues in the Beef Sector: Can Beef Compete in the 1990s?" addressed competitive forces in the domestic and international markets that would lead to increasing change in the U.S. beef industry. The analysis was conducted by an elite team headed by D. Gale Johnson, University of Chicago and G. Edward Schuh, Humphrey Institute of Public Affairs, University of Minnesota. Other research team members included John M. Connor, Purdue University; Timothy Josling, Stanford University; and Andrew Schmitz, University of California, Davis, all recognized leaders in their respective areas.

3. In response to many of the competitive issues raised in the above reports the beef industry began to evaluate the prevailing cattle and beef marketing systems at the time. The Value-Based Marketing Task Force was a joint effort by NCBA predecessor organizations (NCA and the National Live Stock and Meat Board) and recommended changes in the beef production/marketing system that would better align the production and merchandising practices of cattlemen, packers, purveyors and retailers with the beef product preferences of consumers. The task force determined that consumer needs could be better targeted simultaneously with cost reduction if the industry would reduce waste fat production. The Value-Based Marketing Task Force Report, The War on Fat! was released August 1990 and is included in the attached supporting documentation.

4. The beef industry was slow to adopt recommended changes and beef continued to lose market share. In 1993, the Long Range Planning Task Force recognized the decade of the 1990s as a time of challenge and change for the beef industry. The long range plan was adopted by the major beef industry organizations. Organizational restructuring was undertaken with the primary objectives of achieving the vision statement and implementing the Beef Industry Long Range Plan.

5. Issues of price discovery have received increased focus as evolution of the beef industry structure continues. A comprehensive study of price discovery as it evolved on other commodities and as it is expected to evolve in the beef industry was begun by Cattle-Fax during 1995.

These private sector initiatives have been supplemented by the extensive 7-part analysis of Concentration in the Red Meat Packing Industry competed by the Packers and Stockyards Administration in 1996 followed closely by the USDA Advisory Committee Report on Agricultural Concentration.

Dealers Trust:

The livestock industry has for several years supported the concept of amending the Packer and Stockyards Act to authorize establishment of a dealer's trust. A dealer's trust would provide protection for producers and livestock markets who sell livestock to dealers and would operate in much the same manner as the packer trust and the poultry trust currently authorized within Packers and Stockyards Administration (P&SA) regulations.

P&SA records show that, on average, during the past five years 16 dealers have defaulted and the livestock industry has suffered $3.5 million in losses due to those defaults. Those losses have huge impacts on individual cattlemen and local communities because dealer activity tends to be concentrated in small geographic regions. If enabling legislation is approved, the accounts receivable of a dealer who defaults will be held in trust for the benefit of the seller of the livestock until the seller receives payment in full for the livestock. NCBA is aggressively working to develop consensus legislative language to create a dealer's trust and we urge this Committee to take a leadership role in gaining its approval.

Change has not come easy in the beef industry. Today's cattlemen and women are striving to carry on a rich tradition of rugged individualism and fierce independence. As a group, we embrace the concepts of market-oriented policies. We know Washington can and should do little to manipulate the markets of a private industry. In fact, NCBA has a long history of supporting efforts -- including those developed by this Committee under Chairman Lugar's leadership -- to reduce government intervention and interference in marketplace.

In the context of today's hearing, it is important to point out that our support for these efforts was -- and remains -- based on the expectation that as government involvement was decreased, the partnership among all segments of the beef industry would be strengthened through increased cooperation. Certainly there is evidence that agribusiness has taken steps to improve their relationship with beef producers.

However, there are areas, such as pricing and marketing information, expanded value-based marketing arrangements, and trade barriers that need to be recognized by agribusiness as legitimate concerns of the rancher and feeder that must be addressed.

We are not expecting to restore producer profitability by bankrupting our industry partners. That would be foolish.

But we do expect to be treated as full partners in the process of discussing, developing and implementing solutions that will help us build a bridge to a beef industry that is not only profitable, but one poised for expansion as we work to improve beef demand. To put it another way, if our agribusiness partners will shoot straight with us, if they will ensure we are seated at the table as equal partners and not treated as contract employees, then we will shoot straight with them -- as opposed to simply shooting.

The National Cattlemen's Beef Association is anxious to participate in the process of evaluating this critical issue, not only within the beef industry, but also throughout all of agriculture. We look forward to providing any additional input that would be useful to the Committee as it continues its work on these tough issues. Thank you for the opportunity to present these thoughts, and I will be glad to address any questions now or at the end of formal presentations.