Testimony of

John McNutt, President

National Pork Producers Council

Before the

Committee on Agriculture, Nutrition and Forestry

Unites States Senate

Concerning

The Structure and Authority of the

Grain Inspection, Packers and Stockyards Administration

Presented

February 1, 2000

Washington, DC

Mr. Chairman and Members of the Committee;

My name is John McNutt. I am a pork and grain producer from Iowa City, Iowa and the president of the National Pork Producers Council (NPPC). Today, I am here representing all of America's pork producers as we examine the critical issues of market structure and performance and how these issues can be impacted positively on behalf of producers by the Grain Inspection, Packers and Stockyards Administration (GIPSA).

Let me be perfectly clear that America's pork producers expect nothing less than a fair, transparent and competitive marketplace. Nothing less will suffice to provide us and those who follow an opportunity to earn a livelihood while supplying customers worldwide delicious, wholesome, safe and affordable pork products.

First, I want to point out how much pork producers appreciate the past work of the GIPSA and its forerunner, the Packers and Stockyards Administration, in ensuring that livestock markets and auctions were fair and open and that proceeds of producers' sales were safe. This organization has served us well within the range of its authorities under the Packers and Stockyards Act of 1921.

Pork producers realize and appreciate that just like the policeman on the beat, GIPSA has a big job to do. Yet just like the policeman, GIPSA is what pork producers must rely on to guarantee fairness and justice. We commendF and endorse its recent efforts to improve the performance of its far-ranging duties. Tthe recent re-organization of GIPSA into species-specific offices is one such positive move. The issues faced in each species' markets and systems are quite unique and this new structure should allow GIPSA management and staff to fully develop those talents needed for each set of unique circumstances. In addition, we have found have found the new staff of the pork- specific office in Des Moines, Iowa to be both cooperative and responsive to issues of concern to the pork industry. We look forward to a continuing productive relationship.

But we would not be here today if there were not strong sentiment that GIPSA has not lived up to its responsibilities or, at least, many people's perception of its responsibilities. My our real purpose today is to discuss problems faced by the pork industry and how the National Pork Producers Council believes GIPSA can better address them to ensure equitable treatment for producers, packers and, ultimately, consumers of pork.

The pork industry is changing at an accelerated pace. Concentration in the packing industry (as measured by the 4 firm concentration ratio) has grown from 32.2 percent in 1985 to 56.3 percent in 1998. Using the same measure, 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. As recently as 1994, 71 percent of the hogs were sold on the spot market and only 17 percent were sold using a price formula. In 1999, these percentages had changed to 36 and 44, respectively. The trend has probably carried them further still today. This kind of change raises serious questions about the effectiveness and efficiency of price discovery and the potential for manipulation and market power in hog markets.

Enhancing livestock market competitiveness for pork producers is a major objective for NPPC. In today's pork industry knowledge is power. Therefore, the following initiatives have been undertaken by NPPC in recent years to provide pork producers with the kind of information they need to make good business decisions. These initiatives include:

· Publication of several guides, such as "Production Contracting," "Pricing Early Weaned Pigs" and the just-completed "Guide to Marketing Contracts," a draft of which, though yet in print, I provide today for entry into the official record of this hearing.

· A voluntary packer price reporting system on the NPPC website. Farmland Foods is to be commended for their cooperation and assistance in this project. Unfortunately, they were the only packer that participated.

· The Mandatory Livestock Price Reporting Act of 1999. NPPC, along with this committee, led the effort to pass legislation that meets the needs of producers for information on spot market and contract prices. This legislation provides for a project to determine the Secretary of Agriculture's responsibilities, authorities and duties under the Packers and Stockyards Act. It also establishes a prominent role for GIPSA in providing a catalog of marketing contracts to help producers better understand what kinds of contracts are in force and available. We believe this role is very likely to raise GIPSA's visibility and stature in the eyes of producers.

· The NPPC Price Discovery Task Force, a committee of knowledgeable producers, consultants and academicians that studied a broad range of price discovery, price determination and risk management topics. This Task Force is still active and will remain so for the foreseeable future.

· NPPC's Producer Price Reporting initiative. A direct outgrowth of the Price Discovery Task Force, this initiative encourages producers to negotiate their free supplies of market hogs with more than one packer and to report the price to USDA's Livestock Market News Service. I provide a card that NPPC prepared to help producers in this effort.

· Facilitating the creation of "Pork America," a national producer-owned cooperative designed to assist producers and producer groups in marketing value-added products and thus capturing a larger percentage of the consumer dollar spent on pork.

Now, I would like to turn my attention to the topic at hand. We see the problems currently faced by GIPSA as four-fold.

1. Misunderstood Responsibility and Authority

You will likely hear testimony today that GIPSA needs more authority and the Department of Justice (DOJ) needs more resources or some combination of the two. Both may be correct. But the over-riding need is for an all-encompassing federal strategy to address the problems of agricultural markets in general and livestock markets in particular and the capability of communicating this strategy to the public.

GIPSA's authorities and responsibilities are not well understood by producers and many other pork value chain participants. Many simply expect GIPSA to do things it is not empowered to do. Others expect GIPSA to do things that it cannot do without due process. Yet others expect it to do things which, in our opinion, it does not have the resources to do. All of these add up to unmet expectations and, ultimately, disappointed constituents.

No one would propose that GIPSA carry out its duties without affording anyone his/her constitutional rights to due process, but the first and third "expectations" alluded to can be solved.

GIPSA and USDA need to must do a better job of educating the public about the provisions of the Packers and Stockyards Act and what it empowers GIPSA to do. Furthermore, they need to must help delineate GIPSA's market behavior regulatory responsibilities fromthose the market structure and performance regulatory responsibilities of the Antitrust Division of the Department of Justice. The appointment of a Special Counsel within the Antitrust Division with responsibility for oversight and coordination of antitrust matters which affect agriculture should help clarify these responsibilities. Many call for DOJ to act "because GIPSA won't" when concentration is not within GIPSA's purview. The current investigation ofbeing conducted by the General Accounting Office (on behalf of the Senate Agriculture Committee in response to one provision of the Mandatory Livestock Price Reporting Act of 1999) may go far in accomplishing this goal.

GIPSA should have a plan toget the word out informto its constituency about its statutory responsibilities and authorities, what it can and cannot do and what other government agencies are charged to do. In addition, GIPSA must communicate clearly what it is doing and has done, in instances when it finds violations, as well as when it does not. To accomplish these tasks, GIPSA needs a dedicated communications department staffed with trained communications personnel.

to design and execute these plans.

2. Insufficient Resources

As was pointed out earlier, tThe hog market has gone from one in which virtually every hog was traded in an easily observable, public setting to one in whichvirtually no virtually no hogs are so traded. Information and data which was once easily gathered is now proprietary and frequently only available via subpoena. Many hogs are priced beyond the scope of negotiation through contractual relationships whose effect on the entire market is not well understood. It is likely that both of these changes require significantly more manpower to adequately monitor market conditions and discover any problems which may occur.

GIPSA personnel have no doubt increased their efficiency due to technological innovations over the past 20 years. However, like many other organizations, they may be finding there is only so much a computer can do. We believe, mainly from anecdotal evidence, that GIPSA does not have the human resources to fully accomplish its mission at the present time. Furthermore, it is our impression that GIPSA is likely to be uncompetitive in its salary and benefit offers to the highly trained professionals it needs to fulfill its mission. We urge Congress to solve this problem immediately and give GIPSA management the flexibility it needs to hire the best people. The market is tight for attorneys, economists and others knowledgeable about agriculture and the livestock industry. Standard government pay scales may leave GIPSA short of salary levels necessary to hire needed people and far short of the levels necessary to get the best people available.

It is paramount that GIPSA have the people on hand to make its presence known to both producers and packers. GIPSA's market performance monitoring must be constant, not sporadic. Market participants should be completely aware of GIPSA's presence, which must serve simultaneously as reassurance to the worried and a warning to the potential opportunist. This cannot be accomplished without adequate numbers of qualified, trained and, hopefully, experienced personnel.

3. New Problems, Old Methods, Insufficient Knowledge

All government agencies charged with enforcing America's antitrust laws are using economic theory and analytical tools, which were generally developed in the first half of this century. While some new econometric estimation techniques have been applied, most analytic and enforcement work still depends upon structural characteristics as indicators of firm behavior and market performance. And yet, the industries which GIPSA and DOJ regulate have changed dramatically. Do 4-firm and 8-firm concentration ratios and the Herfindahl-Hirschman Index mean the same thing they used to mean in a world with such rapid and extensive communications systems? Should the criteria used to trigger concern and investigation be different in agriculture due to the seasonality and non-storability of its products? Answering these and related questions can probably be done only through basic, often theoretical, research.

Herein lies a quandary: Much of the basic research at universities is supported, either directly or indirectly, by the private sector. I ask you how many private firms or even foundations care much about the state of knowledge and basic research in industrial organization economic theory? Few private groups will benefit from such research but the public may collectively benefit greatly. Developing new theory and analytical methods for the investigation of antitrust violations is a perfect example of a subject area which must be supported by public research funding. And it is quite possible that a modest amount of funding will go far and accomplish more than one goal. It may both attract graduate students (who will then occupy some degree of time and talent of a major professor) and yield trained analysts for the job market. We urge Congress to fund fund and GIPSA and DOJ to immediately initiate a competitive research grant and research fellowship program in industrial organization and antitrust economics..

Another One new tool which should benefit GIPSA is the coming mandatory price reporting system. This system should will provide more standardized and accurate data for GIPSA monitoring and enforcement efforts than has frequently been available in the past. Yet this system will provide only market-wide data. There still may be a need to prescribe some basic, standardized data formats for which packers must keep records in order to facilitate the monitoring, research and enforcement process. Furthermore, GIPSA's role in providing a catalog of marketing contracts under provision of this act will help producers better understand what kinds of contracts are in force and available and, we believe, raise GIPSA's visibility and stature in the eyes of producers.

Finally, it is important that the pork industry get more attention in GIPSA- and USDA-funded research regarding market structure and performance. We find ourselves reciting the refrain of "Not much is known for sure about the hog market but a significant amount is known about cattle markets" far too often. We need specific research to determine relevant markets for hogs, determine the effect of contracted hogs and other captive supplies and estimate the impact of vertical acquisitions which have been so newsworthy in recent months. Pork producers have real concerns about these issues, but have to rely on implications from beef industry research to make important policy and strategic decisions. It's likely inaccurate to draw such conclusions and patently unfair to ask pork producers to do so.

The last point we offer on research or investigations is this: Any pork industry research must be executed and published in a timely manner. Past delays of GIPSA investigations and reports have done much to cloud the results and invite criticism. We believe this is largely a matter of resources and we understand that care must be taken, but a higher sense of urgency in completing necessary work is badly needed.

4. Insufficient or Under-Defined Authority

It appears to us that GIPSA and DOJ face several areas in which they have insufficient authority or in which current law is not clear enough to provide them effective marching orders. One example is the focus of antitrust legislation on monopoly power by sellers and its relative silence regarding monopsony power by buyers. Another is the need for GIPSA to test through court procedures any new interpretation of the broad prohibitions of Section 202 of the Packers and Stockyards Act. Might there be a way of spelling out a few acts which constitute per se violations of the act and thus save time and money in ensuring fair and competitive markets? Aren't there some specific requirements which GIPSA can employ to clearly delineate what packers must and must not do on subjects such as lean prediction equations, payment matrixes and the relationship between the two? Can't basic requirements be established to ensure that carcass information or kill sheet information is understandable and re-producible by a producer with some reasonable level of math skills? Our impression is that GIPSA does not feel it has the clear authority to answer these questions affirmatively.

The aforementioned GAO study of the Secretary's authorities, duties and responsibilities will address this topic specifically. In addition, we suggest that Congress actively seek the input of these agencies regarding items that would better enable them to do the job expected of them by the public.

Closing

In closing, the NPPC is committed to a fair, transparent and competitive marketplace. We have developed and implemented a number of initiatives to enhance the knowledge of producers and the transparency of pricing as well as competition in the marketplace. We also recognize that GIPSA must play a significant role in providing market information and oversight that pork producers have a high level of confidence in.

Mr. Chairman, thank you for holding this important oversight hearing and for giving me the opportunity to address the committee. The National Pork Producers Council stands ready to assist you in your work in any way possible.