Testimony of John McNutt

On Behalf of the National Pork Producers Council

Before

The Senate Agriculture, Nutrition and Forestry Committee

LIVESTOCK PRICE REPORTING

May 26, 1999

Chairman Lugar and Members of the Committee:

My name is John McNutt and I am the President of the National Pork Producers Council (NPPC). I am here representing the NPPC, its 44 member state organizations and America's pork producers. My wife and I run a family-owned, farrow-to-finish hog operation that markets 5,000 pigs per year. We also grow corn and soybeans on our farm near Iowa City, Iowa. I very much appreciate the opportunity to appear on behalf of U.S. pork producers to express our views on livestock price reporting.

U.S. Pork Industry

According to a recent Iowa State University study conducted by Otto and Lawrence, the U.S. pork industry supports an estimated 600,000 domestic jobs and generates more than $64 billion annually in total economic activity. With almost 11 million litters being fed out annually, U.S. pork producers use 1.065 billion bushels of corn valued at $2.558 billion. Feed supplements and additives represent another $2.522 billion of purchased inputs from U.S suppliers which help U.S. soybean prices, the U.S. soybean processing industry, local elevators and transportation services based in America's rural areas.

Economic Outlook

In early February, NPPC testified before the House Agriculture Committee that hog prices dropped below $10 on December 21st for the first time since 1955. Adjusted for inflation, hog prices were lower in December of 1998 than they were during the Great Depression. Pork producer financial losses were staggering in 1998. Data from the University of Missouri suggest the producer sector as a whole lost $2.6 billion in equity in 1998 and may lose another $1 billion in 1999.

The current economic outlook is for some price improvement with expected market hog prices generally in the mid-to-upper $30s on a live weight basis this year with a few $40 hogs as seasonal supplies fall and seasonal demand picks up. A reduction in pork production in 1999 does offer us a chance for measurable price improvement in 2000.

New Livestock Market Reporting System

Pork producers believe that to be able to make knowledge based business decisions for the future, pork producers must have a transparent, accurate and timely livestock market reporting system. That system is not available today. We believe it is time to demand real and meaningful market transparency in the livestock marketplace. This is the only way that pork producers, regardless of size, can re-establish their position as the profit center of the pork industry.

A year ago, we tried to establish a voluntary reporting system to achieve those three essential elements but only one packer was willing to participate in such as system.

Pork producers are now in agreement that USDA must institute a mandatory livestock market reporting program for meat packers reporting prices paid, volume, and the terms of sale for the procurement of domestic and imported livestock. A change in law is necessary on livestock market reporting and pork producers are calling on Congress to pass legislation this year mandating the following five swine specific provisions.

Mandatory livestock price reporting;

Mandatory swine marketing contracts reporting;

Improved monthly retail price reporting;

Monthly, rather than quarterly, hogs and pigs inventory reporting;

A determination of the Secretary's jurisdictions, powers, duties and authorities.

On May 21 we made available our suggested legislative language that embodies these principles. It is for the sole purpose of helping pork producers make knowledge-based choices in the marketing of their hogs. This proposal is the product of more than 100 hours of negotiations between pork producers and packers.

Swine Specific Provisions

I will highlight for the committee the principles behind the five swine specific provisions that pork producers believe must be included in any meaningful legislation.

Mandatory Livestock Price Reporting

Eight of the 65 resolutions that pork producers acted on at our recent annual meeting, dealt with mandatory price reporting. Pork producers support USDA implementing a comprehensive mandatory livestock price reporting system that will provide timely, accurate and reliable market information to swine producers to help them make more informed marketing decisions. This means daily reports must be available by 8 a.m. each day of packer operations for the previous day. These reports should include all buy data for all swine purchased or committed to delivery to a packer the previous day. This information should be grouped by purchase type, to include all spot sales, formula contracts, risk managed contracts, future contracts and related data, and packer-owned kill-data should be broken out and listed on the report.

Further, we believe there must also be a mid-morning and mid-afternoon report capturing the estimated volume and base market value for all negotiated sales.

Mandatory Swine Marketing Contracts Reporting

A University of Missouri study conducted this year for the National Pork Producers Council shows that for all hogs slaughtered in January, 1999, 64.2 percent were sold under some type of prearranged marketing arrangement, not on the cash price market. Conversely, 35.8 percent of all market hogs sold, were sold on the spot (cash) market. The study represented plants processing 81 percent of all market hogs going through federally inspected plants during January.

The largest share of all contracted hogs, 44.2 percent, were sold using a formula price contract, according to Glenn Grimes, Ag Economist at the University of Missouri. A formula price contract sets a sale price according to some reported price and a formula established by a previous agreement between a producer and a packer. An example would be $1 per hundredweight above a reported price.

The complete details of the hog market contract study are as follows:

44.2 percent -- Formula Price. A price set by a previous agreement,

Usually based on a quoted cash price.

3.4 percent -- Cash Contract. A fixed price set by previous

agreement tied to the futures market.

2.9 percent-- Fixed, no ledger. This is a fixed price set by a previous agreement tied to a feed price or history with no ledger maintained.

6.9 percent -- Fixed, ledger maintained. This is a fixed price set by

a previous agreement tied to feed prices or history with a ledger

maintained.

3.6 percent -- Window, no ledger. This is a window contract with a risk sharing deal where the packer absorbs some loss below a designated market price and the packer shares some gain with a price above a certain level. No ledger is maintained.

1.0 percent -- Window, ledger maintained. This is a window contract which is a risk sharing deal where the packer absorbs some of the loss below a designated market price and the packer shares some gain with a price above a certain level. A ledger is maintained.

2.3 percent -- Other. This includes packer-owned hogs.

35.8 percent -- Spot (cash) market.

Pork producers support the Grain Inspection, Packers and Stockyards Administration (GIPSA) maintaining a library or catalogue for each type of marketing contract currently being offered by packers who slaughter in excess of 250 swine per day, or 1250 swine per week. The contract listings should be plant specific and should contain the price determination method being used for the swine covered by the contract including non-carcass meat premiums. Copies of such contracts should be made available to swine producers and other persons, either by mail or electronically via the Internet.

Improved Monthly Retail Price Reporting

Pork producers support USDA compiling and publishing an improved monthly report on retail sales of meat products that includes total sales volume in pounds and dollars. In addition, USDA should continue the existing Meat Price Spreads Report for 24 months after the inception of the new monthly retail price reporting program as a phase-in effort.

4) Monthly Hogs and Pigs Inventory Reporting

Pork producers support USDA implementing a new simplified monthly hogs and pigs inventory reporting system in the 17 leading pork producing states through the use of modern technology, such as the Internet, with the goal of improving the accuracy of pig crop estimates. USDA should continue to maintain and publish the current quarterly Hogs and Pigs Inventory Report for a period of not less than eight quarters after the inception of the new monthly report.

5) Report on the Secretary's Jurisdictions, Power, Duties and Authorities

Pork producers support a new report by the General Accounting Office, or another objective and respected entity, setting forth the Secretary's jurisdiction, power, duties and authorities as set forth in the Packers and Stockyards Act of 1921, and all other relevant laws and precedents, such as the Federal Trade Commission Act.

Conclusion

The National Pork Producers Council is anxious to work with Congress and pass meaningful and effective price mandatory reporting legislation this year, ensuring that accurate and timely information is available to assist pork producers in making the marketing decisions appropriate for their hog operations. Information and knowledge are power in today's marketplace. Their disclosure is critical to pork producers' ability to grow, be profitable and compete globally in the 21^st century.

Mr. Chairman, this completes my testimony. I will be happy to respond to any questions.