Testimony

on behalf of the

NATIONAL CATTLEMEN'S BEEF ASSOCIATION

in regard to

Pending Legislation on Agriculture Concentration and Competition Issues

submitted to

Senate Committee on Agriculture, Nutrition and Forestry

The Honorable Richard G. Lugar, Chairman

submitted by

John Greig

Estherville, Iowa

National Cattlemen's Beef Association

April 27, 2000

____________________________________________________________________________

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.

Statement by John Greig, Estherville, Iowa

National Cattlemen's Beef Association (NCBA)

Senate Committee on Agriculture, Nutrition and Forestry

Pending Legislation on Agriculture Concentration and Competition Issues

April 27, 2000

Thank you Chairman Lugar, Senator Harkin and Members of the Committee for holding this hearing to discuss pending legislation on agriculture concentration and competition issues and related issues of concern to cattle producers. NCBA commends your leadership and continuing efforts to examine the ongoing and dynamic changes in beef cattle industry and for working with us to find ways to improve our ability to more effectively market U.S. beef. I am John Greig, President of Greig Company, a diversified farming and cattle feeding operation from Estherville, Iowa, past president of the Iowa Cattlemen's Association and a member of NCBA.

NCBA and the 250,000 cattle producers we represent are encouraged by the open and honest discussion of the issues facing the livestock industry. Today's hearing provides the opportunity for discussion and debate on these issues, which is vital to the democratic policy development process -- both within NCBA and to the nation at large. As evidenced last year, such debate afforded our producers the chance to work with members and staff of this committee to improve availability of market information and enhanced competitiveness through market forces. As we await the implementation of the new price reporting law, we again thank you for that initiative.

A Changing Industry:

As with your hearing in early February, this hearing is a continuation of the ongoing process to closely examine the marketing structure changes occurring in the livestock industry and the concerns of livestock producers seeking to maximize their returns in a very competitive domestic and international marketplace. There is a broad range of opinions among cattle producers about the effects on the beef industry of new marketing systems and structures, international trade agreements and packer concentration/competition.

The structural changes taking place in our industry have coincided with volatility in international economies, changes in supply, improvement in beef demand and tough market conditions for feed grain and forage producers, and are the basis for heated debates and general consternation by virtually livestock producers. Some individuals have embraced new marketing structures and systems for their own advantage, while some believe they are, at least in part, responsible for the price declines during the mid to late1990s.

As USDA data shows, the four largest beef packers slaughter approximately 80 percent of all steers and heifers marketed, which has not changed appreciably since 1990. Nonetheless, NCBA supports close monitoring of mergers and acquisitions and aggressive enforcement of antitrust laws and regulations to ensure a fair, competitive marketplace for all participants. We also support thorough evaluation of price movements and margins to assure that price changes are the result of market signals and not the exercise of market power or illegal pricing activities. To this end, the new price reporting system developed by this Committee will provide additional data to aid in this process.

The toughest challenge is to remain pragmatic as these issues are analyzed. USDA's GIPSA has conducted several investigations, both broad and focused, relative to the beef industry structure and marketing practices, and has taken enforcement actions when necessary to address infractions. However, repeated anti-trust investigations by GIPSA and the Justice Department have not uncovered broad, industry-wide illegal activities. Part of the frustration in the country is that many marketing practices and industry concentration levels that are perceived to be illegal are not.

NCBA supports cooperative efforts by USDA and Justice to ensure that marketing practices and mergers and acquisitions that could lead to further concentration in our industry are closely monitored and examined. We also would encourage USDA to assist Justice in their anti-trust efforts by providing data on the impact of these activities, especially in areas where Justice officials may not have ready access to such data.

In addition, NCBA has long supported strong oversight and enforcement of existing anti-trust and market protection laws. NCBA's 1988 Beef Industry Concentration and Integration Task Force spent a year evaluating this issue in anticipation of ongoing industry restructuring. The GAO has conducted repeated studies going back to the 1980s including "Beef Industry Packer Market Concentration and Cattle Prices," December 1990 and P&SA Oversight of Livestock Market Competitiveness Needs to Be Enhanced," October 1991.

These and other studies coupled with industry input have resulted in GIPSA restructuring and modifications in enforcement and investigative activities. The studies also could lead one to conclude that oversight and enforcement of anti-trust laws and market protection initiatives would benefit most from additional funding to ensure there is adequate personnel and resources to bolster these efforts.

Change in the beef industry, as in the rest of the economy, is a reality. The global market is a reality. And these realities have necessitated changes by cattle producers and other sectors of our industry to maintain competitiveness in the international marketplace. Efforts to inhibit or roll back change in the cattle/beef industry will only result in policy-imposed inefficiencies and decrease competitiveness. This is especially true if other U.S. meat and poultry industries, not to mention foreign beef producers, have the freedom restructure and modify marketing practices to meet the needs of the changing marketplace.

Simply put, we support more competition, not less. How the beef industry achieves this goal is a major challenge. There are indications that new processors and alliances are poised enter the beef industry. "Quality Beef," an alliance of producers and a major U.S. retail firm formed to supply specification branded products to consumers has announced plans to open a state-of-the-art packing plant in Kansas with a future goal of adding an additional three processing plants. The objective of this system is control quality and product safety from "DNA to Dinner." To encourage and increase additional packer competition, we must first examine the barriers that inhibit entry into fed cattle beef packing and assure that legislative and regulatory restrictions do not inhibit innovation and investment.

Smaller plants that currently operate under state-inspected programs are currently 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 should be accorded the same freedom of movement in interstate commerce that is accorded foreign-inspected imported meat.

NCBA recognizes the Committee is considering legislation in this regard and appreciated the opportunity to testify at the Committee's recent hearing on interstate shipment. Again, we commend you and your colleagues for your leadership moving this initiative forward. We are anxious to work with the Committee, your counterparts in the House and the Administration in identifying and addressing other conditions and/or constraints that inhibit an increase of participants in the packing and processing sector.

New Marketing Systems:

An increasing trend in the beef sector are the alignments between packers and cattle producers through alliances, joint ventures, cooperative agreements, contractual and formula arrangements, and custom feeding of packer-owned cattle. NCBA policy is specific regarding these emerging business relationships.

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

· NCBA supports a free market system.

· 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.

· 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 ways to compete in the changing beef industry including gaining a greater share of the marketing dollar. There are several examples representing different approaches by groups of cattle producers, such as:

· U.S. Premium Beef, Ltd.

· Western Beef Alliance

· Ranchers' Renaissance

· Iowa Cattlemen/Excel joint venture

· Angus Alliance

· Five-State Beef Initiative

· Harris Ranch

· Nichols Farms Alliance

These are just a few of the innovative marketing systems available. There are many more, particularly in areas where producers are teaming with other segments of the industry to take advantage of national, regional and/or niche market opportunities. A unique opportunity is evolving in my home state of Iowa as follows:

A Memorandum of Understanding was signed by Iowa Cattlemen's Association (ICA), Excel and the State of Iowa on October 27, 1999 to finalize a feasibility study for constructing a new beef packing plant in Iowa. The agreement originally had a February 28, 2000 maturity date, but by agreement from all parties, has been extended 90 days. Under the agreement the Iowa Cattlemen's Association will be responsible for securing minimum commitments from cattle producers for the 200,000 head (40%) of committed cattle required for this facility. These producers are also to become members of the Iowa Quality Beef Supply Network (IQBSN), who will be the partner with Excel on this project. Currently, IQBSN has approximately 925 members from 98 of Iowa's 99 counties and 12 other states and more than 330,000 cattle commitments have been received.

Excel will furnish estimates of staffing needs for the project, engineering specifications for the site including highway and rail access, water supply and wastewater discharge, project development costs, as well as cattle purchasing and beef marketing strategies.

The State of Iowa, through the Iowa Department of Economic Development (IDED), will continue to work closely with ICA and Excel in providing labor availability assessments, coordinating community involvement and working with other state and local government entities in the site selection process. In addition, IDED is assisting in funding mechanisms and legislative and regulatory issues.

The $100 million dollar plant will focus on high quality, high yielding cattle that perform well under the Beef Quality Assurance and Beef Safety Concerns. The plant will utilize the latest in technology, including tracking electronically identified (EID) cattle through the plant visual scanning system and other new technologies. The plant will have 1,100 employees on a single shift, with the potential to expand to a double shift of 2,200 employees. Approximately 637,500 animals will be processed annually, with the potential to increase that number as the plant size increases.

The Iowa Quality Beef Supply Network is the producer investment arm of the facility created to secure annual commitments of approximately 40% of the plant's capacity, for five years. In order to become a member, producers have paid a registration fee of $500 and a $2 per-head delivery fee pre-payment, as well as join their state cattlemen's association. Cattlemen who joined IQBSN prior to December 31 are considered founding members. The membership opportunities are still open and IQBSN is accepting increases in cattle commitments. In addition to conventional financing options for producers through their individual lenders, three new financing programs have been announced to assist cattlemen in financing their final delivery fee prepayments,

An interim grid is now available to members of the Supply Network for those cattle that are EID tagged, through the Iowa Quality Beef program. This grid is for the Schuyler, NE, Excel facility and is limited to 2,000 head per week from these sources. During the month of February, 1,500 head of cattle were sent and received an average premium of $24/head.

These innovators are long-term professional cattlemen who came together in a proactive way to address their desire for a growing, viable beef industry through bold new marketing strategies that enable them to capture a larger share of the retail beef dollar. No longer are these producers' energies consumed by concerns about market structure. Their efforts revolve around producing a better beef product marketed through their own beef company at their direction. As owners, these cattlemen receive rewards from a value-based pricing system, individual carcass data and earnings from the company at year-end. In addition, the data received by cattle producers from these efforts enable them to continuously improve the quality of their livestock, which in turn can lead to additional market returns.

It is critical that Congress ensure that legislative and regulatory policies continue to encourage these types of solutions and do not limit a producer's ability to gain a greater share of the marketing dollar. Much of the discussion and debate among thought-leaders in the industry has been about how to foster new marketing systems that meet consumer needs and increase beef demand. While we recognize the concerns that have lead to development of proposals regarding industry structure and competition, NCBA remains concerned about unintended consequences and urges a thorough analysis of the potential impacts of these proposals.

As we noted earlier, the Committee followed such a process in developing the mandatory price reporting legislation to ensure it would increase information flow and market transparency without unintentionally placing new and innovative marketing systems at a competitive disadvantage. Clearly, there is widespread agreement that efficient markets require greater market transparency that is achieved by the availability of accurate and timely information -- especially in situations with many sellers and few buyers. Information availability helps ensure that competitive market forces exist and that few buyers do not have undue leverage when market information is widely available to more dispersed sellers. With this in mind, we encourage the Committee to follow the example it set last year in determining how to best proceed on the proposed competition bills.

On-going Industry Evaluation:

NCBA remains committed to addressing changes in the industry structure and the underlying economic forces driving those changes. Over the years, NCBA and its predecessor organization have devoted considerable financial and human resources to examine our industry and educate cattle producers regarding 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 released its final report in August 1990. The task force 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.

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 increasing beef demand consistent with the vision statement and objectives of the Beef Industry Long Range Plan.

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.

Improving Market Conditions:

The beef industry and other livestock sectors are in many ways a bright spot among many depressed agricultural commodities. In part, this is because we have resisted asking the government to "fix" industry conditions caused by market forces. It is our hope that through this backdrop, it may be easier for the Committee to understand why there is a great deal of caution and reluctance among cattle producers to call for dramatic expansion of government intervention in the beef industry marketplace.

We do empathize with current low prices experienced by grain producers. It is only recently that beef demand improvements have boosted prices for calves and yearlings, enabling cattle producers to begin recouping losses incurred during our own market crisis that began in early 1996. Prices for all classes of cattle are significantly improved from the cyclical lows established during 1996, and prices for calves are now higher than cyclical high prices of the early 1990s. During March and April 1996, the monthly average prices for steer calves averaged less than $60/cwt. and feeder cattle prices averaged less than $54/cwt. These prices were a major decline from prices experienced during the late 1980s and early 1990s and were directly related to cyclical increases in cattle numbers and record high grain prices during the mid 1990s.

Conditions have improved dramatically since the doldrums of the mid-1990s. Prices for steer calves have generally ranged above $90/cwt. since January 1999 and averaged record high prices during

the first quarter of this year. Fed cattle prices averaged nearly $70/cwt. during November 1999 and are currently in the mid-$70s/cwt. Higher cattle prices are primarily due to declining numbers of calves and feeder cattle, improving beef demand after a 20-year decline, improvements in Asian financial conditions resulting in improved beef demand and by-product values and general improvement in export markets.

As stated at the outset, of this testimony NCBA and the beef industry support Justice Department and USDA enforcement of the Packers and Stockyards Act (PSA) as amended and other anti-trust laws and regulations. We support timely and complete USDA implementation of mandatory price reporting legislation passed last session. We urge that USDA be involved in pre-merger evaluation of proposed packer mergers in coordination with evaluation by the Justice Department and support adequate funding for GIPSA and the Justice Department to accomplish their investigative functions.

NCBA supports a free market system and we trust in the ability, adaptability and innovating skills of the US cattleman to be able to prosper in a relatively unregulated domestic and international marketplace. We rely on federal regulators to ensure that the marketplace is free from anti-trust, collusion, price fixing and other illegal activities that damage the viability of the market and interfere with market signals, but also to keep the playing field level for cattle producers. If allowed to work the market will recover with a minimum of government intervention and cost of regulatory inefficiency. To remain competitive in a global market, this is absolutely a necessity.

We are prepared to work with you and your staff to provide additional information and direction. Again, we certainly appreciate the leadership the Committee has shown in addressing the tough issue of an evolving competitive industry structure and the appropriate role of government oversight.

Thank you for the opportunity to present this information.