John Crabtree

Center for Rural Affairs, Walthill, Nebraska

Testimony before the Senate Committee on Agriculture, Nutrition, and Forestry

Mr. Chairman, Senators, thank you for inviting me here today. My name is John Crabtree and I lead the Market Structure Project at the Center for Rural Affairs in Walthill, Nebraska.

In December 1998 and January 1999 prices paid to farmers for their market hogs dropped to unprecedented lows, as I'm sure that we all remember all too well. Over the last year prices have risen to barely profitable levels, and family farmers have left or been forced out of hog production in droves.

Meanwhile, meatpackers have continued to expand their production, either by building more industrial-scale facilities or by acquiring other pork production companies. Nowhere has this consolidation binge been more breathtaking than in Smithfield Foods' effort to add approximately 630,000 sows to their production. Although this consolidation effort is now taking a slower road, due both to decisions internal to Smithfield Foods and to recent legal challenges by the Attorneys General of Iowa and Missouri, increasing packer ownership of livestock remains one of the most salient issues facing rural America today.

Livestock production in the Midwest and Great Plains has always been a family farm and ranch enterprise. Today, we are replacing those sustainable, efficient (yes, efficient) family farms with a virtual handful of industrial, vertically integrated operations. We are only at the beginning of the economic debacle that we face if we allow family farm livestock production to become a thing of the past. In a recent Des Moines Register editorial, Chris Petersen, a pork producer from Clear Lake, Iowa and a close personal friend, lamented that "You'll miss us when we're gone." He was right in more ways than most of us care to imagine.

A vision of the future of rural America dotted only with packer-owned, industrial hog operations is untenable. The doomsday predictions for family farm livestock producers also discounts the hopes and dreams of the very farmers who have built their lives around livestock production and created a livestock production system in this country that is the cornerstone of our agricultural economy. Why should we accept the destruction of family farm livestock production? Many tell us that it is inevitable. The truth is another matter. We have been told time and again that large-scale, vertically integrated livestock production facilities can do a better, more efficient job of raising livestock. Research tells us a different story. Iowa State University economist Mike Duffy's research analysis of farm records of actual Iowa farms demonstrates that economies of size run out at about 150 sows farrow-to-finish. The most efficient one-third of hog producers in the University of Nebraska Swine Enterprise Records Program sold 2,678 pigs in 1996, an average of 700 fewer pigs than the least efficient one-third.

There is another path. Farmers and ranchers over the last year have fought furiously to create the kind of future in livestock production that they want. They have asked for nothing more than access to a marketplace and the chance to compete on a level playing field, something that has consistently been denied them of late.

For years, the Center for Rural Affairs, other farm organizations, and the farmers and ranchers that support our work were told that mandatory livestock price reporting was outside of the political reality. Then, in 1999, something amazing happened. Farmers and ranchers from throughout rural America started coming together to change that political "reality." They found some state legislators who agreed with them about the need for competition in livestock markets and worked together to pass mandatory price reporting legislation in 5 states.

They didn't stop there. They changed long and closely held positions of key commodity groups, they lobbied Congress, and they kept the pressure on until mandatory livestock price reporting had changed from the impossible to a political imperative. This Committee responded by working diligently to create good, sound, strong livestock price reporting legislation which has become the law of the land. This action was not handed down from on high, it was demanded from the countryside. No single policy-maker, commodity group, or farm organization can claim credit for this effort because that honor is reserved for the farmers and ranchers that made it a reality.

The same farmers and ranchers that challenged the status quo, and won, know that the job is not done. If we are to create a future for family farm and ranch livestock production, there are more issues that must be addressed. Two needed reforms stand out.

1. Prohibiting price discrimination: When family farmers sell hogs, they get less than large-scale pork production companies for the same quality of animal just because they lack the economic power to demand volume premiums. USDA's 1996 Western Corn Belt Procurement Investigation demonstrated that prices paid to producers clearly increased with seller size. That was in 1996 when the spot market demand for hogs was probably triple what it is today. Volume-based premiums are undoubtedly more prevalent than four years ago. A clearer picture of the what actually happens in livestock markets and the extent to which family farmers are discriminated against in the market each day will become available when the mandatory livestock price reporting program is implemented. An effective price reporting program will provide important information for the Packers and Stockyards Administration to stop the routine price discrimination that occurs in livestock markets today. However, information alone will not suffice.

The Packers and Stockyards Act prohibits undue price preferences and grants USDA broad authority to stop unfair trade practices in their incipiency. That authority is unused. Secretary of Agriculture Dan Glickman recently said that USDA would "not allow farmers to become serfs on their own land" in reference to concerns about concentration and consolidation in the seed industry. This statement rings hollow when one considers that the Secretary has done little to stop the same thing from happening to pork producers. Secretary Glickman should rectify this inaction by issuing an administrative rule that clearly defines and aggressively prohibits undue price preferences in livestock markets. The reasons for USDA's inaction on this issue are unknown to me and that inaction is, to say the least, confounding.

I have attached to my testimony language that the Center for Rural Affairs has proposed as a starting point for such a rule. This proposal recognizes that packers should be able to pay premiums for measurable and definable differences in carcass quality and transactional costs but that volume-based premiums that simply reward economic power over hard work and efficiency reduce competition and diminish the marketplace. Ever farmer and rancher that I know would be more than happy to put their hard work and skilled management up against the largest corporate hog producer in the country if they knew that they had a marketplace that would judge their livestock on a level playing field and price them accordingly.

Issuing rules on undue price preferences is not only something that USDA can do but must do if they are serious about restoring competition in livestock markets. USDA officials have argued that by defining an undue price preference the authority under the Packers and Stockyards Act will be diminished. However, since that authority is virtually unused currently, what we have today is a livestock market that has virtually no rules whatsoever regarding price discrimination.

The Center for Rural Affairs sought the legal opinion of Professor Neil Harl of Iowa State University, in this regard. I have attached to my testimony his letter in response. In this letter Professor Harl clearly points out that USDA has not fully exercised the authority granted under the Packers and Stockyards Act to promulgate rules, especially in the area of discrimination in livestock pricing. Professor Harl has also pointed out in the past that the courts will give an administrative agency leeway in enforcing market regulations if they promulgate rules that fit within the authority of that law; and that the absence of rules that allow all participants in the market, buyers and sellers, to understand the playing field diminishes the enforcement ability of an agency like the Packers and Stockyards Administration. USDA seems to have adopted the stance that volume premiums that reward economic power over hard work and efficiency are the "American way." In truth, the "American way" has always been the belief that hard work and efficiency should be rewarded and that competition enhances the marketplace.

2. Prohibit packer ownership of livestock: Last fall Senators Charles Grassley, Robert Kerrey, Tim Johson, and Craig Thomas introduced legislation to ban packer ownership of livestock. I would like to take this opportunity to thank these Senators and others who have voiced support for this legislation. Clearly, the transparency that will be acheived in livestock markets through mandatory price reporting and a prohibition of price discrimination will not alone create a future for family farmers in livestock production if the doors to the marketplace are barred to them because meatpackers own all of the livestock that they kill, from birth to slaughter, as is rapidly becoming the case in the pork sector. Legislation that prohibits or limits packer ownership of livestock is needed to kept the door to the marketplace open for family farmers and ranchers.

Thank you for your time and consideration, I would be happy to answer any questions.