WRITTEN TESTIMONY OF
Grain Inspection, Packers & Stockyards Administration
Thank you Mr. Chairman and distinguished members of the Committee on Agriculture, Nutrition and Forestry for the opportunity to present this written testimony today for the record. My name is Michael Stumo, general counsel of the Organization for Competitive Markets. The Organization for Competitive Markets is a multi-disciplinary group dedicated to reclaiming competitive markets in agriculture for independent farmers, ranchers and rural communities. I am also a hog farmer in Massachusetts and am formerly an Iowa hog and cattle buyer.
Abstract
This testimony concludes that the Packers & Stockyards Act gave the Secretary extremely broad authority to preserve open and competitive markets for all farmers and ranchers. The Act was also designed to stop practices in their incipiency, before they cause harm, not after they cause harm. This testimony also asserts that the USDA Office of General Counsel has been the core source of the problem in restrictively and/or inconclusively defining the standard required to trigger the Secretary's authority. The OGC approach, or lack thereof, results in USDA-ERS and GIPSA involvement and activity which is unhelpful at best and destructive at worst.
Introduction
The Homestead Act of 1862 created the family farm system of agriculture. Today we are losing that system to an industry-controlled conglomeration of contracts and ownership arrangements. This new top-down system closes down the open market and allows corporate offices to go beyond merely affecting the market unduly to consciously picking and choosing who wins and who loses.
Feedstuffs magazine is the premier agribusiness weekly in this country. It primarily covers the packing, grain merchandizing, poultry, animal feed and animal drug sectors. The September 13, 1999 editorial stated, "American agriculture must now quickly consolidate all farmers and livestock producers into about 50 production systems." This closure of markets scenario is the antithesis of family farming and ranching and the antithesis of market competition. Open markets are replaced by internal complexity management in conglomerates who consciously choose who succeeds and who fails. The Packers & Stockyards Act was designed to prevent this transformation of family farmers into mere hog-house janitors.
The open market in hogs has become nearly a residual market. It may disappear in five years with all hogs under packer ownership or control. Packers pick and choose the winners and losers. In October, 1998, the top procurement people from Hormel and Excel told a group that the reasons they contracted was to guarantee supply for their plants. They consciously chose the best producers and offered contracts to them. Left unsaid is that they did not offer relationships to producers they supposedly believed were not viable. They choose the winners and losers.
Vertical integration is rapidly winnowing down the number of producers because, no matter how few producers, there will be some that packers want to contract with and others they will exclude. The Excel buyer admitted to having no contracts with small producers.
Once producers are under contract and the open market becomes a low-priced, residual market, the packer has even more power. First, the producer has no other options, witness the poultry industry contractors. The open market is essentially gone and other integrators are few. Second, the contract gives the packer more mechanisms to force risk and cost onto the producer in the so-called integrated production system. The producer has become a cost center, something the packer wants to and can reduce. One producer recently told an OCM member that Farmland was forcing a new contract upon him which would reduce his revenue by $109,000 per year. While he has not agreed to the new contract yet, his alternatives are few.
Rather than paying for quality in the open market, packers are forcing management decisions, risk and cost upon producers with the onerous terms of contracts.
The Packers & Stockyards Act (the Act) is one of the strongest competition laws ever written in this country. It is designed to preserve market competition and stop problematic practices at their incipiency, before they cause harm.
USDA has failed to use its authority under the Act, whether through regulation or enforcement. It is a truism that if you do not exercise authority, that authority will wither away and eventually cease to exist. USDA's failure to exercise its regulatory or enforcement authority has rendered it impotent in the face of the rapid consolidation of the industry which is presenting the "end game" for family farm agriculture. The source of these problems is in three USDA agencies: (1) Office of General Counsel; (2) Economic Research Service; and (3) Grain Inspection, Packers & Stockyards Division.
Purpose of the Act
Whereas general antitrust law has generally focused on harm to the consumer in recent years, the Packers and Stockyards Act clearly exists to prevent harm to producers. Harm to producers often means the risk of lower prices in the marketplace. But the means to protect producers was ensuring the most open and competitive markets possible. The structure of the market was considered of paramount importance.
This point is important because legislative direction to promote a competitive market structure is different than a mere mandate to prevent low prices for producers. Regulatory and enforcement authority then must focus on the conduct of market participants in making an open and competitive market. The need to make the complex case that prices have been lowered or producers have been hurt is not the burden required.
The intent of Congress in 1921 in passing the Act was to protect the producers of meat, reduce the power of the packers, and preserve a market structure which is open and competitive rather than the closed and controlled market we have today. The legislative history is instructive.
During the contemporary debate leading up to passage of the Act, Representative Tincher stated:
"It is my judgment that the passage of this bill, that its proper administration, will permit the meat producer to exist; that it will reduce the amount paid out between the producer and consumer to such an extent that it will make the business for the producer more profitable, and not be injurious to the consumer."
61 Con. Rec. 1809 (1921). Representative Voight of Wisconsin said:
"I think if this monopoly of the Big Five is done away with, and the laws of trade are given a chance to function, it is going to benefit producer and consumer alike; genuine competition will benefit both."
61 Cong. Rec. 1868 (1921). Representative Jones from Texas commented on the importance of preserving an open, competitive market structure for the producer:
"The producer must always sell in a market that he does not control. He buys at the other man's price. His only hope of securing a fair price lies in an open, competitive market."
61 Cong. Rec. 1861 (1921).
In fact, Congress viewed "unfair competition" as much broader under the Act than under the FTC Act, in contrast to the improperly limited view accorded to it by some today. Representative Anderson made this point:
"As to the intent of 'unfair competition' [in the FTC Act] it only includes acts which constitute a violation of the rights of the competitor, and it must be a method which is used by a competitor on the same plane. *** For instance the method of competition used be a manufacturer which we might think was a violation of the moral rights of the wholesaler would not be a violation of the Federal Trade Commission Act, because the interpretation of that is that it must be unfair as between competitors who stand on the same plane. This goes further than that, as it affects the public interest to a large extent, and the unfair competition or unfair practice as between a packer and the general public, the packer and the producer, or the packer and any other agency connected with the marketing of livestock."
61 Cong. Rec. 1805 (1921).
The legislators of the time viewed an open and competitive market structure to be in the public interest. This contrasts with the closed and controlled structure advocated by industry today. It also contrasts with recent views of the USDA that the Secretary must prove a strong likelihood of competitive injury - meaning lower prices - and/or predatory intent. These views exist despite the fact that subsections (a) and (b) of section 202 of the Act have no requirement of proving intent to harm competition or to prove that prices are manipulated, while subsections (d), (e) and (f) do include such requirements.(1)
This USDA position has resulted in court decisions which effectively codify the competitive injury and predatory intent burdens. See, IBP, Inc. v. Glickman, No. 98-3104 (8th Cir. 1999).
The Congress should reaffirm the original intent of the Act in that it is designed to produce an open and competitive market structure without regard to intent or proof of injury. This would give the Secretary and the courts proper guidance in protecting producers of meat.
Office of General Counsel
The Office of General Counsel is the primary source of the problem of nonexistent P&S enforcement. It has obstructed USDA-GIPSA from using its regulatory and enforcement authority under the Act by taking incorrect positions as to the scope of that authority and by failing to concretely define the factors as to what it believes constitutes violations of the Act. Thus, the meaning of the Act has become uncertain at best for producers and packers and irrelevant at worst. GIPSA does not know what type of case to build in order to enforce the Act. Further, OGC lacks the expertise to litigate complex anticompetitive practices case. The result is lack of a defined framework within which true competition can flourish.
Preserving open and competitive markets vs. proof of injury
If the original intent of the Act where pursued, the Secretary could utilize section 202(a) and (b) (7 U.S.C. 192(a) and (b)) to preserve open and competitive markets for producers without regard to proving harm or a likelihood of harm. As the Congress of 1921 recognized, preserving open and competitive markets is a policy goal in and of itself. The Congress made the connection between such a market structure and a likelihood of producer injury. It is redundant for either the Secretary or the courts to require such a connection before enforcement occurs.
But with the current judicial gloss on the Act, caused in part by USDA's improper view of its own authority, Congressional action is needed to return to its original purpose. Consider how the Act has been distorted.
In 1968, the Court in Armour & Company v. United States stated:
"The clearer the danger of the [likelihood of competitive injury], as when competitors conspire to eliminate the uncertainties of price competition, the less important is proof of [predatory intent]. Conversely, the likelihood of injury arising from conduct adopted with predatory purpose is so great as to require little or no showing that such injury has taken place."(2)
The position of OGC is that:
"In order to prohibit activities of the packers through regulation or [enforcement], the Department must develop evidence that the packers have either predatory intent or that there is the likelihood that the complained of activity will result in injury. (OGC Memorandum to the Chief Economist, June 20, 1996, p. 5 (Attachment 2)."(3)
The OGC position results in lack of historic regulatory activity which defines unfair and unjustly discriminatory practices or undue or unreasonable preferences. Thus, without such definition, the Courts have filled the void and placed more restrictions on the Secretary's authority. These restriction include importation of a "predatory intent" requirement from general antitrust law, and a more stringent and narrow reading of the "likelihood of harm" approach.
Rulemaking
Administrative rulemaking would have been the proper way to keep up with the industry and stop unfair trade practices "in their incipiency, before harm has been suffered." Farrow v. USDA, 760 F.2d 211, 215 (8th Cir. 1985). Preventing the closure of the open market decades ago would have enabled today's independent producers access to markets regardless of their size or connections.
The key here is the "likelihood of harm" standard. While OCM believes that the Act is focused on open and competitive markets and that Congress has already made the connection between that goal and harm to the producer, the present view of that standard is now important.
The spectrum of views on "likelihood of harm" ranges from the "incipiency" view on one end and the "proof of past harm" on the other end. The OCM and others subscribe to the forward looking "incipiency" view, i.e. that a practice must be stopped at the outset if proliferation would be likely to cause harm to open and competitive markets in the future. The OGC and some courts have taken a position nearing backward looking "proof of past harm" view. This restrictive view requires tremendous economic analysis of past data to show that an established practice is making prices trend lower. Thus, the central role of USDA-ERS in these issues.
While the USDA-OGC view is quite restrictive, but amorphous. While OGC often states what is not a violation of the Act, it never states what is a violation of the act.
But the lack of a departmental position - whether through rulemaking or through internal guidelines - has resulted in USDA struggling to define violations of the Act on a case-by-case basis through enforcement. This ad hoc approach has, in turn, resulted in conflicting caselaw. For example, in the Eighth Circuit alone, the legal standard for USDA authority under the Act can be read to range from no requirement to prove injury (Farrow v. USDA, 760 F.2d 211, 215 (8th Cir. 1985), (stating that the act does not require the USDA to prove actual injury before a practice may be found unfair)) to statements appearing to require actual proof of injury (IBP, Inc. v. Glickman, No. 98-3104, pp. 4-5 (8th Cir. 1999) (finding no evidence to show actual harm to producers in that case)).
The Western Organization of Resource Councils recently submitted a Petition for Rulemaking to the USDA. OGC took the position that the economic evidence did not meet the standard for showing likelihood of injury.(4) Not only did the OGC's position border on requiring proof of injury, but, in meetings with WORC staff, OGC failed and refused to give information as to what does meet their opinion as to the standard. GIPSA has the same problem with OGC - "Don't just say what does not meet the standard, tell us what does meet the standard."
Because OGC appears entirely reluctant to support expansive rulemaking to preserve an open and competitive market for all producers, Congress should strongly consider enacting legislation specifically defining violations. Congress should also consider experts in administrative law and trade regulation in non-agricultural contexts to determine the regulatory power of USDA under the Act.
Enforcement
While the Department of Justice has the primary litigation expertise in representing federal agencies in court, OGC does little in the way of complex business litigation. However, enforcement of the Act is an exception. Under the Act, OGC prepares and litigates very resource intensive and complex cases. Unfortunately, OGC is not very good at litigating these specialized, resource intensive and complex claims involving anticompetitive practices.
It is fact that most OGC work does not involve anticompetitive practice issues. It is fact that OGC does not hire people with the requisite training and experience in such matters. In fact, the P&S Acting Deputy Administrator told the USDA's Office of Inspector General that he believed that OGC had limited expertise in these issues.(5) P&S officials told OIG "that OGC does not want to litigate anticompetitive cases because they are complicated and time consuming."(6)
The fact that OGC lacks the expertise and the desire to enforce the Act combined with the fact that OGC has a poor track record when it chooses to do so, strongly suggests that enforcement should be transferred to the Department of Justice. This is more fully explored below.
Economic Research Service
Under the present regulatory approach, i.e. past harm must be shown to trigger regulation or enforcement, ERS must show that packer concentration or captive supply reduces prices to producers before regulations or enforcement commence. If OGC took the position that preserving an open and competitive market was the policy goal, or at least adopted the incipiency test, the onus on ERS would not be so large. But, given this onus, ERS has failed.
In order to find a connection between industry structure and lower prices, the right data must be available, the right questions must be asked, the right models must be used, and the right people must interpret the models. ERS does not ask the right questions. ERS cannot or does not procure the right detailed data. ERS does not perform the proper econometric studies to isolate cause and effect between various factors, including concentration and captive supply, and price. ERS has failed to define geographic market areas from which to determine market concentration and harm to regional producers. ERS has failed to perform forensic economic investigations, with subpoenaed data, into packer practices.
Rather ERS, and its contracted outside researchers, have relied upon voluntarily disclosed packer data, plus aggregate publicly available data, to repeatedly conclude that they find no evidence of packer concentration affecting prices. A controversial ERS report released May 4, 1999 and entitled "US Beef Industry: Cattle Cycles, Price Spreads and Packer Concentration," concluded that there was no evidence that packer concentration did not affect prices. Yet it had no data or methodology designed to answer such a question. In fact, the original purpose of the study included no mention of monopoly pricing. Nonetheless, somebody decided, at the last minute, to throw in false conclusions about the effect, or lack thereof, of packer concentration on market prices. A more reasonable conclusions would be to state that "there is no evidence to show that packer concentration did not affect prices." ERS credibility is waning on industry structure and pricing issues.
Congress should ask the Department of Justice what type of data and methodology is needed to determine anticompetitive practices or market power. It is likely they will find the ERS approach lacking. For ERS to do a competent study, they at least need date pricing (price of cattle on date of agreement, not date of delivery) and time pricing (time of day cattle are priced). Without date pricing, there are gaping holes in short term price trends which have major impacts on packer profitability. Time pricing is needed to determine whether packers such IBP are price leaders - as many in the industry believe - with other packers following when the market is set by that price leader. Additionally, though overt captive supply(7) livestock percentages are very high, many marketing agreements (a form of captive supply) are oral - not written - and thus not taken into consideration.
With the ERS position that concentration and captive supply does not hurt prices, GIPSA and OGC must hew to that position in administering the Act. It is difficult for USDA to allege, in an enforcement action, that certain practices are anticompetitive when ERS says the industry is competitive. Especially given the OGC belief of some amorphous, but high, standard requiring nearly proof of actual past harm to trigger the Secretary's authority under the Act.
GIPSA
Since the 1997 OIG report recommending reorganization of GIPSA into fewer and bigger specialized offices, GIPSA has done so. However, when GIPSA investigative staff respond to producer complaints, they tell producers that it is unlikely they can do anything because they lack the resources to act quickly and effectively. GIPSA is rumored to have difficulty hiring econometricians because quality people achieve higher wages in the private sector. Further, OGC still has not given GIPSA specific guidance on what factors to look for in order to prove a violation of the Act.
Further, GIPSA has put no internal guidelines in place for collecting the right information for an anticompetitive practices case. It has no guidelines or standards which would create "red flags" if certain information came to them indicating a violation of the Act. Thus, they are adrift, perhaps irrevocably so.
Transferring enforcement jurisdiction to the Department of Justice
The aforementioned barriers to effective enforcement of the Act by USDA are institutional and persistent. Congress is unlikely to correct them merely through legislation or brow-beating, although these approaches are helpful. The Department of Justice has the expertise to perform the investigation, economic analysis and legal analysis necessary to enforce trade regulations. A separate office within Justice is likely the best possibility for quality enforcement in the public interest.
The potential problems with such a change in jurisdiction is that agriculture could be forgotten in the shadow of "sexier" issues such as competition in technology, health care, airlines, etc. Also, importation of a general antitrust law mentality into enforcement of the Act could dilute its significance. (Court decisions reading antitrust principles into the Act have served to weaken, rather than strengthen it).
But if Justice could provide the multidisciplinary expertise and enforcement, while giving agriculture the special attention it deserves, competitive markets are more likely to be preserved for independent agriculture. The experience of nearly 80 years of jurisdiction under USDA has been a tragedy.
Transferring regulatory jurisdiction to the Federal Trade Commission?
Justice does not propound regulations, it enforces and litigates. The USDA has proven a better promoter of agricultural industrialization than a regulator of it. FTC has decades of experience in propounding regulations under trade statutes. Perhaps further thought should be given to placing the regulatory authority under the Act with the FTC.
What can Congress do?
Congress could modify the Act in the following ways:
Amend the Act to clarify that:
packer ownership and control (direct or indirect) is inherently preferential and a per se violation of the Act;
price discrimination is unfair except as to quantifiable differences in quality and transportation costs;
forward contracts and marketing agreements are per se preferential unless traded on an open, publicly reported market;
no proof of intent is required to show a violation of 7 U.S.C. 192(a) or (b);
the policy goal is to maintain the most open and competitive market possible for all producers of all sizes and locales;
the intent is to halt unfair practices in their incipiency, before harm has been suffered;
antitrust laws do not impact the interpretation of the Act.
Transfer anticompetitive practices enforcement jurisdiction under the Act from USDA-GIPSA to the Department of Justice.
Consider the transfer of regulatory jurisdiction under the Act to another agency such as the FTC.
Direct the Secretary to propound regulations:
defining violations of 7 U.S.C. 192(a) and (b) under the newly clarified standards and with a finite deadline. Enforce the deadline with a significant cut in program funds if the deadline is not met;
requiring public trading of forward contracts so they are open for bidding and not preferentially offered.
Thank you for your time and attention. I am happy to answer any questions. My contact information follows.
Michael C. Stumo
Stumo & Milleron, LLC
95 Main Street
P.O. Box 761
Winsted, CT 06098
Tel: 860-379-6199
Fax: 860-379-6196
Email: stumo.and.milleron@snet.net
Organization for Competitive Markets
P.O. Box 6486
Lincoln, NE 68506
Tel: 662-476-5568
www.competitivemarkets.com
1. 1 Sec. 192. Unlawful practices enumerated
It shall be unlawful for any packer with respect to livestock, meats, meat food products, or
livestock products in unmanufactured form, or for any live poultry dealer with respect to live
poultry, to:
(a) Engage in or use any unfair, unjustly discriminatory, or deceptive practice or device; or
(b) Make or give any undue or unreasonable preference or advantage to any particular
person or locality in any respect whatsoever, or subject any particular person or locality
to any undue or unreasonable prejudice or disadvantage in any respect whatsoever; or
(c) Sell or otherwise transfer to or for any other packer or any live poultry dealer, or buy
or otherwise receive from or for any other packer or any live poultry dealer, any article
for the purpose or with the effect of apportioning the supply between any such persons, if
such apportionment has the tendency or effect of restraining commerce or of creating a
monopoly; or
(d) Sell or otherwise transfer to or for any other person, or buy or otherwise receive from
or for any other person, any article for the purpose or with the effect of manipulating or
controlling prices, or of creating a monopoly in the acquisition of, buying, selling, or
dealing in, any article, or of restraining commerce; or
(e) Engage in any course of business or do any act for the purpose or with the effect of
manipulating or controlling prices, or of creating a monopoly in the acquisition of, buying,
selling, or dealing in, any article, or of restraining commerce; or
(f) Conspire, combine, agree, or arrange with any other person
(1) to apportion territory for carrying on business, or (2) to apportion purchases or
sales of any article, or (3) to manipulate or control prices; or
(g) Conspire, combine, agree, or arrange with any other person to do, or aid or abet the
doing of, any act made unlawful by subdivisions (a), (b), (c), (d), or (e) of this section.
2. 2 402 F.2d 712, 717 (7th Cir. 1968).
3. 3 "Review of Western Organization of Resource Councils (WORC) Petition for Rulemaking," Grain Inspection and Packers and Stockyards Administration, Packers and Stockyards Programs, August 29, 1997.
4. 4 Id.
5. 5 "Grain Inspection, Packers and Stockyards Administration, Evaluation of Agency Efforrts to Monitor and Investigate Anticompetitive Practices in the Meat Packing Industry," USDA-OIG, Evaluation Report No. 30801-0001-Ch, pg. 19, February, 1997.
6. 6 Id.
7. 7 "Captive supply" includes packer owned livestock as well as livestock deliveries controlled by packers through forward contracts and marketing agreements.