Testimony of

Jon Caspers

National Pork Producers Council

Before the

Committee on Agriculture, Nutrition and Forestry

United States Senate

Concerning

The Impact of Agribusiness Concentration

On Producers and Consumers

Presented

April 27, 2000

Washington, DC

Mr. Chairman and Members of the Committee:

My name is Jon Caspers. I am a pork producer from Swaledale, Iowa and serve on the Board of Directors of the National Pork Producers Council (NPPC). Today, I am representing America's pork producers and am pleased to discuss with you the critical issue of agriculture concentration and its impact on pork producers and consumers. Agricultural concentration is a difficult and emotionally charged issue. Many pork producers are concerned about their ability to continue to compete and maintain market access in a hog market that is experiencing increasing levels of concentration.

Changing Pork Industry

Global competition, new technologies, and consumer demands are but a few of the factors that are rapidly changing the U.S. pork industry. Hogs are raised differently today than even just 20 years ago. Hog farms are managed in new and innovative ways. Hogs are marketed on a carcass weight-carcass merit basis verses the traditional live weight selling in the past. Both producers and the packing industry are vastly more efficient but much less flexible than in the past. Coordination of the production and processing chain with consumer demands is more and more critical to the success of all industry participants, but perhaps most critical to the future of producers.

Pork Industry Concentration

The pork industry is becoming more concentrated at every level, yet we continue to be less concentrated than the poultry industry or other livestock sectors. Consider these statistics:

Packing concentration: Concentration in the pork packing sector as measured by the 4-firm concentration ratio has grown from 32.2 percent in 1985 to 56.3 percent in 1998. Smithfield, IBP, Swift and Excel are the firms currently included in this measure of total market share. The eight-firm concentration ratio now stands in excess of 75 percent. While not a guarantee of conduct that increases consumer prices and/or reduces producer prices, these levels and their trends increase the possibility of such conduct and provide ample incentive for heightened vigilance.

Production concentration: Concentration in the production segment has grown from negligible levels in the early 1980s to about 18 percent following the recent acquisition of Carroll's Foods and Murphy Family Farms by Smithfield Foods. The four-firm ratio cited here includes the market shares of Smithfield, Premium Standard Farms, Seaboard and Prestage.

Vertical Integration: Vertical integration of packers owning hogs has grown from an estimated 6.4 percent in 1994 to roughly 24 percent today. Smithfield, Premium Standard Farms, Seaboard, Excel, Lundy and Farmland are the companies contributing the most to this total.

Hog Marketing Contracts: As recently as 1994, 71 percent of the hogs were sold on the spot market and only 20 percent were sold using a price formula. In January 2000, 74.3 percent were non-spot market purchases and 25.7 percent were spot market purchases. This trend has reduced the size of the negotiated hog market substantially and caused many concerns about the efficiency and accuracy of the price discovery process in use today.

Enhancing Market Competitiveness

In the last few years, NPPC has launched a number of new initiatives to help ensure that pork producers have a fair, transparent and competitive market for their hogs. Most of our efforts have focused on obtaining and disseminating more (and more accurate) information to producers and improving producers' abilities to make knowledge-based business decisions based on that information. Though more difficult and time consuming than legislation or regulation, we firmly believe that information and knowledge will be the main basis for long-term solutions to potential problems of competition in markets, especially in global markets for meat, protein and food.

A large number of these initiatives were designed and implemented by a broad cross-section of pork producers who serve on NPPC's Price Discovery Task Force which I currently Chair. These major initiatives included:

· Development of a packer price reporting system that focuses on actual procurement costs. Farmland Foods began participating in this system in the fall of 1998. It continues today.

· Passage of the Mandatory Livestock Price Reporting Act of 1999.

· The NPPC Producer Price Reporting initiative which encourages producers to negotiate their free supplies of market hogs with more than one packer and to report the price to USDA.

· Recent publication of the "Guide to Marketing Contracts" whose goal is to help producers make more informed decisions about marketing contracts and their terms. This guide updates previously-published guides to production contracts and pricing of early-weaned pigs (which is currently being revised).

· NPPC conducted, with the University of Missouri, comprehensive live hog marketing studies in 1999 and 2000.

In addition, NPPC facilitated the creation of a national producer-owned cooperative called Pork America. Pork America's goal is to find new opportunities for producers to participate in and capture value from the pork chain beyond the farm gate. Producers are interested in this activity because of the growing proportion of the consumer pork dollar that goes to the value-adding activities of the marketing sector and because of the success of producers in cooperatives in other countries such as Denmark. Danish pork producers control their own fate because they now own virtually all of their country's pork production and processing industry.

The recently-announced closure of the Farmland Foods packing plant in Dubuque, Iowa puts U.S. daily slaughter capacity at about 380,000 per day; very near its level during the disastrously low prices of the fall of 1998. As the U.S. pork industry contemplates the need for new, efficient pork packing and processing capacity within the next 5 years, producers believe that effective competition from producer-owned entities or alliances may be another antidote to the tide of concentration in the pork-marketing sector.

Agriculture Concentration Issues

Until information systems are fully operational, the ability of producers to use the information is increased and producers become more involved as competitors in the marketing/value adding system, concerns about concentration and its potential for non-competitive conduct will remain. Concerns such as these led producer delegates to the recent 2000 National Pork Industry Forum to consider several agriculture concentration resolutions from member states and pork producers. After considerable discussion and debate, producer delegates agreed to support the following positions on agriculture concentration and market regulation issues. They include:

1. USDA Hog Market Structure & Competitiveness Study - The Department of Agriculture should conduct studies on hog market structure and competitiveness issues within the pork industry, outlining present realities, future scenarios and the implications for producers' economic wellbeing and our nation's food supply.

2. Price Discrimination -- The definition of price discrimination should be clarified, a prohibition on price discrimination should be established, and the Secretary of Agriculture's authority to challenge price discrimination should be reiterated.

3. USDA Study of Justifiable Price Differentials - The Department of Agriculture should study the factors that comprise economically justifiable price differentials, including factors such as volume, time of delivery, carcass specifications, etc.

4. Study of DOJ Concentration Threshold Levels -- A study should be conducted of the threshold levels of standard concentration measures (Herfendahl-Hirshman Index, Concentration Ratios, etc.) which are used by the Department of Justice to trigger scrutiny or investigation of the livestock and livestock slaughter sectors. We believe the study should focus on the current threshold levels, why they are used and whether they are applicable to a highly perishable product such as livestock.

5. Adherence to Antitrust Laws - Continued scrutiny of the packing and processing industry on the national level to assure adherence to relevant federal antitrust laws.

6. New Antitrust Laws -- New antitrust laws should be considered that ensure opportunities for independent hog producers.

7. USDA Merger & Acquisition Reviews -- The Department of Agriculture should be given new authority to recommend to the Department of Justice approval or disapproval of agricultural mergers, acquisitions and consolidation of agricultural input suppliers and processors and sufficient funding to properly discharge these activities.

8. USDA Corporate Structure Report -- The Department of Agriculture should be given new authority to require agribusinesses with more than $100 million in sales to annually file information related to corporate structure, strategic alliances, joint ventures and the like. The Department would publish a corporate structure report based upon these data.

9. Deputy Attorney General for Agriculture -- A Deputy Attorney General for Agriculture position should be created at the Department of Justice.

10. Packers and Stockyards Act Enforcement - Press for aggressive enforcement of the Packers and Stockyards Act prohibition of discriminatory practices under current authority.

11. Packer Ownership - Pork producers recognize a packer's right to own swine and oppose any current legislation that restricts or limits alliances, cooperatives, ownership or joint ventures. Producers also oppose any legislation that differentiates the pork industry from other protein species with regard to alliances, cooperatives, ownership or joint ventures.

12. Producer Bargaining Rights - Endorse the concept of new legislation that requires processors to bargain with producer cooperatives.

Summary

NPPC realizes that guaranteeing U.S. agricultural producers a fair, transparent and competitive market for their products is a huge and continuing challenge. NPPC is ready and willing to work with you and the Committee on agriculture concentration issues. We hope that the Committee will approach this important issue using the highly successful formula employed on issues like mandatory price reporting and the interstate shipment of state inspected meat.

I hesitate to stress this cooperation point because neither Congress nor the Administration has yet to provide the remaining $1.35 million for the Mandatory Livestock Price Reporting Act to ensure that USDA can carry out its full legislative mandate in a timely manner. Funding for monthly Hogs and Pigs Inventory Reports, Improved Retail Price Data, and Swine Packer Marketing Contract Reports still has not been provided. This somehow must be done soon.

Mr. Chairman, cooperation driven by information and knowledge, rather than confrontation, is the key to finding reasonable long term solutions to the complex issues impacting American agriculture. Such cooperation can help the industry avoid the negative "unintended consequences" of legislative and regulatory actions that, in the long term, could harm producers in particular and the agricultural industry in general.

That concludes my comments. Thank you for the opportunity to share pork producers views on this important issue.