[Senate Hearing 107-943]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-943

 ENSURING COMPETITIVE AND OPEN AGRICULTURAL MARKETS: ARE MEAT PACKERS 
                         ABUSING MARKET POWER?

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                       SIOUX FALLS, SOUTH DAKOTA

                               __________

                            AUGUST 23, 2002

                               __________

                          Serial No. J-107-100

                               __________

         Printed for the use of the Committee on the Judiciary



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                            WASHINGTON : 2003
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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin              CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       JON KYL, Arizona
CHARLES E. SCHUMER, New York         MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington           SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina         MITCH McCONNELL, Kentucky
       Bruce A. Cohen, Majority Chief Counsel and Staff Director
                  Sharon Prost, Minority Chief Counsel
                Makan Delrahim, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Dayton, Hon. Mark, a U.S. Senator from the State of Minnesota (ex 
  officio).......................................................     5
Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................     1
Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota 
  (ex officio)...................................................     2
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    96

                               WITNESSES

Bierman, Timothy, President, Iowa Pork Producers Association, 
  Larabee, Iowa..................................................    32
Carstensen, Peter C., Young-Bascom Professor of Law, University 
  of Wisconsin Law School, Madison, Wisconsin....................    24
Connelley, Tom, Rancher, Independent Order Buyer, and Cattle 
  Feeder, Belle Fourche, South Dakota............................    25
Lilygren, Sara J., Senior Vice President, Legislative and Public 
  Affairs, American Meat Institute, Arlington, Virginia..........    33
Mack, Bob, Farmer and Livestock Producer, Watertown, South Dakota    28
Ross, Douglas, Special Counsel for Agriculture, Antitrust 
  Division, Department of Justice, Washington, D.C...............    11
Thune, Hon. John, a Representative in Congress from the State of 
  South Dakota...................................................     6
Van Der Pol, James, Independent Hog Producer, Kerkhoven, 
  Minnesota......................................................    30

                       SUBMISSIONS FOR THE RECORD

American Cowman's Association, Jim Strain, Executive Secretary, 
  statement......................................................    43
Bierman, Timothy, President, Iowa Pork Producers Association, 
  Larabee, Iowa, prepared statement..............................    47
Carstensen, Peter C., Young-Bascom Professor of Law, University 
  of Wisconsin Law School, Madison, Wisconsin, prepared statement    49
Center for Rural Affairs, Walthill, Nebraska, statement..........    73
Connelley, Tom, Rancher, Independent Order Buyer, and Cattle 
  Feeder, Belle Fourche, South Dakota, prepared statement........    80
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared 
  statement......................................................    94
John Morrell & Co., Steve Crim, Vice President, General Manager, 
  Sioux Falls, South Dakota, letter..............................    95
Lilygren, Sara J., Senior Vice President, Legislative and Public 
  Affairs, American Meat Institute, Arlington, Virginia, prepared 
  statement......................................................    99
Mack, Bob, Farmer and Livestock Producer, Watertown, South 
  Dakota, prepared statement.....................................   102
National Association of Manufacturers, Michael E. Baroody, 
  Executive Vice President, Washington, D.C., letter.............   105
National Farmers Organization, Dick Gors, South Dakota NFO 
  President and Eugene Paul, NFO Policy Analyst, Ames, Iowa, 
  statement......................................................   107
National Farmers Union, Dennis Wiese, South Dakota Farmers Union 
  President, Washington, D.C., statement.........................   111
Organization for Competitive Markets, Michael C. Stumo, Lincoln, 
  Nebraska, statement............................................   114
Ranchers-Cattlemen Action Legal Fund, United Stock Growers of 
  America (R-CALF USA), Leo McDonnell, Jr., President, statement.   124
Ross, Douglas, Special Counsel for Agriculture, Antitrust 
  Division, Department of Justice, Washington, D.C., prepared 
  statement......................................................   133
South Dakota Cattlemen's Association, Merrill Karlen, Jr., 
  President, Kennebec, South Dakota, letter......................   156
South Dakota Livestock Auction Markets Association, Jerry 
  Vogeler, Executive Director, Ft. Pierre, South Dakota, letter..   158
South Dakota Pork Producers Council, Ric Morren, President, Sioux 
  Falls, South Dakota............................................   159
South Dakota Sheep Growers Association, Jack Orwick, President, 
  statement......................................................   161
South Dakota Stockgrowers Association, Rapid City, South Dakota, 
  statement......................................................   163
Thune, Hon. John, a Representative in Congress from the State of 
  South Dakota, prepared statement...............................   168
Tyson Foods, Inc., Springdale, Arkansas, statement...............   171
Van Der Pol, James, Independent Hog Producer, Kerkhoven, 
  Minnesota, prepared statement..................................   175
Wellstone, Hon. Paul D., a U.S. Senator from the State of 
  Minnesota, statement...........................................   177
Western Organization of Resource Councils, Shane Kolb, Meadow, 
  South Dakota, statement........................................   179

 
 ENSURING COMPETITIVE AND OPEN AGRICULTURAL MARKETS: ARE MEAT PACKERS 
                         ABUSING MARKET POWER?

                              ----------                              


                        FRIDAY, AUGUST 23, 2002

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                   Sioux Falls, SD.
    The Committee met, pursuant to notice, at 1:30 P.m., at 
Sioux Falls Convention Center, 1211 North West Avenue, Sioux 
Falls, South Dakota, Hon. Richard J. Durbin, presiding.
    Present: Senators Durbin, Dayton, and Johnson.

  OPENING STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR 
                   FROM THE STATE OF ILLINOIS

    Senator Durbin. Good afternoon. Welcome to the Senate 
Judiciary hearing on the effects of concentration in the 
meatpacking industry and packer ownership of livestock. I'm 
Senator Richard Durbin of Illinois, a member of the Senate 
Judiciary Committee. And I am happy to be with you today and to 
be joined by my colleagues in the United States Senate, Senator 
Tim Johnson from the State of South Dakota, of course well 
known I'm sure, and Senator Mark Dayton from the neighboring 
State of Minnesota.
    Although they are not members of the Judiciary Committee, I 
have invited them to join me at the panel this afternoon to 
consider the testimony which we are about to receive. They are 
here because of their interest and leadership on this important 
issue.
    Let me assure you that although I come to this meeting as a 
very strong Bears fan, that I do not come with a hatred of all 
Packers. In fact, in my own callow youth, growing up in East 
St. Louis, Illinois, I worked four summers at the Hunter 
Packing Company pork processing facility owned by John Morrell. 
And that's how I paid my way through college. So I know a 
little bit about that part of the industry. But I readily 
concede, as you can tell by the gray hair on my head, that it's 
been many years since I have been personally involved in this 
industry. And I've spent some time trying to catch up with the 
progress and changes that have taken place.
    I also understand that what we are here today to discuss is 
an issue of great seriousness. It's an issue of economic 
concentration in the beef and pork industry. This is not a 
strange issue to federal government. At the turn of the last 
century, concern over our nation's largest meatpackers and 
their engaging in anti-competitive practices led President 
Theodore Roosevelt to enact the Sherman Antitrust Act, to sign 
that into law, along with the Clayton Act, and in part to the 
creation of the Federal Trade Commission. So this issue was 
well recognized over a hundred years ago.
    In the 1920s, when it was found that the beef industry 
needed even more specific protection, Congress passed the 
Packer and Stockyards Act. At the same time, the U.S. Supreme 
Court recognized the meat industry's vital importance to our 
nation's overall economy and affirmed Congress's ability to 
regulate under the United States Constitution commerce clause.
    More recently, due to concerns over the expansion of the 
nation's largest meatpackers, the Justice Department under the 
Clinton administration created a special council to assist in 
the oversight of merger and acquisition activities related to 
the industry.
    Today we hope to examine whether ownership of livestock by 
the nation's larger meatpackers is harming the industry, its 
members, and consumers, and if so, what we can do about it.
    Because of wide scale consolidation and vertical 
integration over the past 20 years, the major meatpackers are 
in a convenient and tempting position to exert their economic 
power in order to manipulate the prices paid to farmers. Recent 
data suggests that the major packers account for approximately 
80 percent of all U.S. beef slaughtered today; whereas the same 
packers accounted for only 35 percent of U.S. beef slaughtered 
20 years ago.
    Consumers, as well as producers, have responsibility in 
preventing, if not stopping, this trend. Rarely a day goes by 
when we don't read about how market manipulation and unfair 
practices have damaged consumers and market participants in our 
overall economy in other corporations. Take the cases of Enron, 
WorldCom as examples. The negative impact that market 
manipulation can have is just as true for our livestock 
industry and meat markets as it is for energy and the stock 
market.
    It's important to look how we can help the independent 
producer gain more access to the market. The bottom line is 
that our independent producers are being denied the value of 
their livestock because they don't have market access. We are a 
free market economy, but you cannot have a market where farmers 
are locked out of the marketplace and there is little 
competition and call it a free market. The purpose of this 
hearing is to ask some hard questions about those issues. At 
this point, let me turn to Senator Tim Johnson.

STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM THE STATE OF 
                          SOUTH DAKOTA

    Senator Johnson. Senator Durbin, welcome to South Dakota. 
Thank you for chairing today's Judiciary Hearing on livestock 
market and antitrust problems as well as my bill to ban packer 
ownership of livestock. Senator Dayton, welcome, and thanks for 
your participation as well. And we welcome Congressman Thune as 
well who will testify shortly.
    It's an honor to introduce two South Dakotans, Tom 
Connelley of Belle Fourche and Bob Mack of Watertown, who will 
testify later based on their experience as market participants. 
Mr. Connelley is a rancher and cattle feeder. During the 1970s, 
purchased cattle for meatpackers. His testimony will reveal the 
changes that have occurred to the market which make it 
difficult for independent producers to compete for a price. 
Tom's wife Dorothy is here as well.
    Mr. Mack is a five-generation farmer, livestock producer 
and feeder. He has been active in supporting legislation to 
restore competition to the livestock market and make 
improvements to mandatory price reporting.
    Thirteen other South Dakota agricultural groups have 
provided me with testimony in advance of this hearing, and I 
ask unanimous consent to add their testimony to the record.
    Senator Durbin. Without objection.
    Senator Johnson. Today we are here to discuss livestock 
market problems and revenues. One solution, one part of the 
solution, is my legislation which forbids packer ownership of 
livestock. Three years ago I first introduced bipartisan packer 
ban legislation. Senator Grassley, my Republican colleague of 
Iowa, and I reintroduced this legislation in 2001. We were able 
to pass the packer ban provision during consideration of the 
Senate farm bill. Unfortunately it was killed by the House 
conferees while the farm bill was pending in conference 
committee earlier this year.
    During debate of the farm bill, Senator Grassley and I were 
disappointed that packers challenged the truth by claiming our 
legislation would prohibit all forward contracting which gave 
lawmakers without the courage to support our amendment a 
convenient excuse to avoid taking a stand on the issue. Forward 
contracts have never been prohibited by this legislation, not 
three years ago, and not now. But the packers persisted in 
trying to dilute the Johnson amendment into a study of packer 
ownership.
    Therefore, I worked with Chairman Harkin and Senator 
Grassley to offer language in February to clarify without 
question that forward contracts were permitted under our packer 
ban farm bill amendment. We developed additional language which 
clarified the intent of the word ``control'' in our amendment. 
The Grassley-Harkin-Johnson change made it clear that the word 
``control'' did not apply to forward contracts, but rather to 
arrangements where the packer exercises control of livestock 
production, not the mere contractual right to receive future 
deliveries of livestock from a producer.
    After we offered our clarifying language, on a vote of 53 
to 46 our packer ban ownership--packer ownership ban remained 
in the Senate farm bill. Once in conference, Chairman Harkin 
and I developed a number of compromise alternatives to the 
packer ban for the House to consider. First, we discussed 
allowing packers up to four years to divest of their livestock 
rather than 18 months. The House rejected that offer.
    Second, we discussed a creative approach to require packers 
to procure a certain percentage of their daily slaughter needs 
from the cash market. This was Chairman Harkin's idea at the 
time. This compromise offer was also rejected by the House.
    Several months later some in Congress have now introduced 
bills requiring 25 percent of packers' daily purchases come 
from the cash market by 2008. I welcome the opportunity to 
discuss this issue again, but fear that if the House wouldn't 
accept a similar concept during the farm bill conference 
committee, there is no reason to believe that they would accept 
it now. Furthermore, a concern that the bills just now 
introduced on this topic were drafted in a rush and overlooked 
critical marketplace data.
    According to USDA mandatory price reporting information 
just last week, packers purchased 40 percent of their slaughter 
needs from the cash market, and 60 percent were captive supply 
or packer owned cattle. So it strikes me as ironic that someone 
suggested making packers enter the spot market in just 25 
percent of their slaughter needs. That may do significant harm 
to independent producers because it would allow packers to 
control up to 75 percent of the slaughter from captive supplies 
and captive ownership.
    Finally, Senator Harkin and I even suggested grandfathering 
existing packer ownership levels and making our legislation 
prospective rather than retroactive. Like all the rest, this 
compromise was rejected by the House.
    Today, 20 feedlots feed 50 percent of the cattle. And they 
are directly connected to the largest four beef processors who 
control 81 percent of the slaughter market. During this time, 
agribusiness profits have inflated. In fact, Cargill increased 
profits by 67 percent last year, Smithfield, the largest pork 
producer in the world, increased profits by 28 percent.
    Let's put it in context with the economic state of the U.S. 
cattle and beef market. One, retail beef prices--retail beef 
prices are at all time highs, so retailers are making money. 
Two, demand for beef remains very strong. Consumers want to eat 
beef. Three, U.S. cattle herd size has fallen to its lowest 
level in 40 years. Supply and demand economics suggests that 
that ought to be good news for cattle prices. Four, however, 
live cattle prices are abnormally low with producers losing as 
much as 250 dollars a head when they sell cattle. If this trend 
continues, Mr. Chairman how many cow/calf ranchers and cattle 
feeders will remain in business as independent entrepreneurs?
    I'm also discouraged by the common threads between 
corporate dishonesty on Wall Street and meatpacker influence 
over livestock markets. On Wall Street, earnings are a key 
indicator of success. Manipulative accounting strategies have 
been employed to cook the books, leaving shareholders and 
company employees feeling the economic pain.
    In livestock markets, cash prices are key indicators of 
success. Yet, when packers manipulate the marketplace, 
producers lose out due to less competition and lower prices.
    When investors lose confidence in Wall Street, it can 
result in panic selling of stocks. When producers lose 
confidence in livestock markets, they may engage in panic 
selling as well.
    This issue goes to the heart of what agriculture will look 
like in the future. Will it be controlled by a handful of 
powerful firms where farmers and ranchers are low-wage 
employees bearing all the risk but none of the gains in the 
market, or will it be a future of independent family farmers 
and ranchers contributing to rural communities that are diverse 
and economically strong?
    It's my hope, in addition to better enforcement of laws by 
USDA, the Department of Justice and Federal Trade Commission, 
Congress take the following steps:
    First, enact my legislature forbidding packers from owning 
livestock prior to slaughter. This time the House must act on 
this bill rather than avoid the issue all together.
    Second, enact legislation sponsored by Senators Harkin, 
Lugar and I, bipartisan legislation, which would permanently 
create a position within the Department of Justice to handle 
agriculture antitrust issues.
    And finally, I especially urge the committee to ensure 
action on legislation. S20 sponsored by Senator Daschle and 
myself requires USDA to review proposed mergers, calls on the 
Attorney General to create a special council for agriculture, 
increases penalties for antitrust violations, and creates a 
farmer and rancher claims commission so fines levied for unfair 
practices would be redirected back to the producers.
    Thank you, Mr., Chairman for conducting this hearing today.
    Senator Durbin. Thanks, Senator Johnson. Senator Dayton.

STATEMENT OF HON. MARK DAYTON, A U.S. SENATOR FROM THE STATE OF 
                           MINNESOTA

    Senator Dayton. Thank you, Senator Durbin. Very pleased to 
be here. I'm a member of the Senate Agriculture Committee which 
I joined when I took office a year and a half ago because in 
Minnesota, as in South Dakota, as in Illinois, agriculture is 
so vital to our state's economy. And we share--and I know there 
are a number of Minnesotans who are part of this audience 
today, being just a stone's throw away from South Dakota--more 
with this state than just a common border. We share that 
recognition that agriculture is the life blood of our economy, 
that every business on main street Minnesota, as in South 
Dakota, depends on a healthy agricultural economy.
    And all I can say, Mr. Chairman, is Senator Johnson is a 
hero to Minnesota producers and farmers, as he is in South 
Dakota, because of the amendments that he has put forward and 
because of the efforts he has made in the face--I think 
heroically in the face of the kind of assaults and 
misrepresentations and distortions which occurred by the--the 
very powerful financial interests that opposed his amendments 
to do what we have to do if we are going to survive in rural 
Minnesota and elsewhere in this country, and that is put the 
price and the profit back into agriculture in the marketplace.
    I come from a business family. I was Commissioner of 
Economic Development for Minnesota back in the 1970s and 80s, 
and I traveled all over the state. And I learned my 
agricultural economics from farmers, producers in this region 
of Minnesota. And you can't make a price--if you can't get a 
profit in the marketplace with what you are producing, you 
can't survive. And that's what we have lost, whether it's the 
grain commodities or in livestock.
    And across southwestern Minnesota from Luverne to 
Pipestone, Worthington, Fairmont, Jackson, Albert Lea, where 
there used to be meatpacking operations, small size, medium 
size, a few larger ones, now it's almost entirely gone, and 
it's been taken over by the large processors, and the producers 
themselves have--have nowhere to turn. They are stuck. They are 
basically indentured to these firms that say it's our contract 
or you're out, and literally out of business. And we have seen 
the results of more and more producers have been squeezed out 
of the business.
    So, Senator Johnson, what you have done has been just to 
say not only heroic, but it's exactly what we must do in 
America to restore profitability in agriculture, to give 
people--restore competition, give people a chance to negotiate 
for prices, to keep farming in the hands of farmers and 
producers as independent economic entities, not as assembly men 
or women in a chain of corporate production and control and 
profiting from our nation's food supply.
    Mr. Chairman, I would like to also just request unanimous 
consent to introduce the testimony of my senator colleague from 
Minnesota, Senator Paul Wellstone, who has also worked with 
Senator Johnson on these issue, strongly supportive. And, 
unfortunately, he had commitments in Minnesota which prevented 
him from being here today.
    Senator Durbin. It's without objection. It's my 
understanding Senator Harkin would like to have a statement 
entered in the record which will done without objection.
    Also, for the record, the committee extended invitations to 
Smithfield, IBP, Tyson. However they declined the invitation to 
join us today. I will include the committee's letter to them as 
part of the record.
    We will have three panels. The first panel will be 
Congressman Thune, who I welcome to the stand. The second panel 
will be Doug Ross, Special Counsel on Agriculture from the 
Department of Justice. The third panel will be Profession Peter 
Carstensen from the University of Wisconsin at Madison, as well 
as two cattle producers from the State of South Dakota, two 
independent pork producers from Iowa and Minnesota, and finally 
on that panel a representative of the American Meat Institute 
who will speak on behalf of the meat industry and their 
perspective.
    Congressman Thune, thank you for joining us today. We 
welcome your testimony. Please proceed.

 STATEMENT OF HON. JOHN R. THUNE, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF SOUTH DAKOTA

    Representative Thune. Thank you, Mr. Chairman, and I want 
to welcome you and your committee to South Dakota. I appreciate 
the opportunity to testify today on the lack of competitive and 
open agricultural markets. As South Dakota's lone member of the 
House of Representatives, I want to welcome you. I know the 
farmers and ranchers of this state appreciate your willingness 
to come to South Dakota and hear from them.
    We have a series of challenges facing South Dakota farmers 
and ranchers right now. Some are immediate, some are long-term. 
One of the more immediate ones is a drought which I look 
forward to working with my colleagues in the House, as well as 
with you in the Senate, to addressing when Congress returns in 
September. It's something that is creating enormous economic 
impact and hardship for people, particularly in western South 
Dakota, but all across our state. And so I hope that we are 
able to address that with legislation that will provide direct 
assistance to our farmers and ranchers.
    A couple of other issues. I had the opportunity just 
recently to host a meeting in Rapid City on the issue of some 
of the environmental regulations. Prairie dogs have been 
proposed as a threatened species. That is something that has 
created also hardship for ranchers in the western part of our 
state. And in response to that, I have introduced some 
legislation that would reform the Endangered Species Act to 
require that sound science be used before that sort of thing 
can take place and, secondly, that landowners be given an 
opportunity to comment, that there will be local input before a 
decision like that is made.
    I think that is critical as well in terms of putting in 
place a framework that will allow independent, small family 
farmers and ranchers to survive in an increasingly competitive 
environment. But here today, I want to tell you that, as I have 
listened to South Dakota producers, they tell me that they want 
closer scrutiny of large agribusiness mergers. And I understand 
why.
    Farming, food processing and retailing industries are 
moving toward fewer and larger operations. Vertical 
integration, such as ownership or tight control of more than 
one phase of production and marketing by a single firm, is more 
common. Agribusinesses such as seed, chemical, transportation 
and biotechnology companies are also consolidating.
    The agricultural marketplace has changed rapidly in recent 
years. As members of Congress, it's our job to protect those 
who provide food for our country and the world. As I travel 
South Dakota talking to producers, I hear the concerns about 
the choke-hold that big business has on family farmers. In 
conversations with lawmakers, I've proposed that Congress 
thoroughly examine existing antitrust statues, and consider how 
those statutes are being applied and whether agencies and 
courts are following the laws according to congressional 
intent.
    There are laws on the books that prohibit monopolistic or 
anti-competitive practices. The very purpose of our anti-
competitive statutes, namely the Sherman Act and Clayton Act, 
is to protect our supplies from anti-competitive practices that 
result from market dominance. Unfortunately, these laws are 
failing our family farmers and are not preventing such 
activities from occurring. Congress needs to do more to stop 
anti-competitive practices.
    South Dakota farmers and ranchers have been a catalyst for 
legislative proposals to defend agricultural producers in this 
changing marketplace. I have worked with them to develop a 
four-point plan to foster more competition for South Dakota 
farmers and ranchers through country of origin labeling, 
banning packer ownership of livestock, modifying our antitrust 
laws, increasing spot market purchases.
    As you know, the 2002 farm bill included country of origin 
meat labeling legislation. This is enormously important to 
independent small farmers and ranchers in South Dakota and 
something that throughout my tenure in Congress I have worked 
toward. And I am happy that the Congress this year adopted that 
as part of the farm bill. I think it's important that we get it 
implemented in the quickest and most efficient way possible 
because we want to make sure that our farmers and ranchers, who 
raise the highest quality products in the world, that is 
recognized with the ``Made in the USA'' label.
    The second legislative solution to fostering competition 
for producers is banning packer ownership. I submitted for the 
record some testimony including tables. When you compare Tables 
1 and 2 at the end of my testimony, you will see that the 
largest producers of pork in this country are also the largest 
packers. In my opinion, the independent farmers and ranchers 
should be the producers of pork, beef and lamb.
    If we ban packer ownership of livestock, while continuing 
to allow forward contracting and other risk management tools, 
we empower our farmers and ranchers in the marketplace. This 
debate was ongoing through the course of the last several 
months. I introduced legislation with Congress Jim Nussle from 
Iowa that specifically exempted contracts from this ban, and in 
hopes that we would enable our farmers and ranchers to have as 
many competitive options available to them as possible.
    The Agricultural Competition Enhancement Act is my third 
proposal, and the most relevant to your committee. And I 
appreciate very much, Mr. Chairman, the fact that you are here 
today. This has also been referred to your counterparts in the 
House Judiciary Committee.
    The Agricultural Competition Enhancement Act, what I call 
the ACE Act, would prevent large agribusiness entities from 
merging with each other if it would reduce competition in the 
agricultural marketplace. Additionally, the ACE Act would 
require the Department of Agriculture, the department that 
knows agriculture, to review proposed mergers to determine the 
merger's effects on prices, and whether that merger would 
result in significantly increased market power.
    The USDA would also be assigned the task of determining 
whether the merger would increase the potential for anti-
competitive actions or predatory pricing. Producers would be 
allowed to comment on the merger, and USDA would incorporate 
those comments in a report detailing its findings. The 
Department of Justice, the agency ultimately responsible for 
enforcing the antitrust laws, would then consider the report in 
its review of the merger.
    The legislation would also require the Department of 
Justice have an Office of Special Counsel for Agriculture which 
would be responsible for handling agriculture antitrust issues. 
Our farmers and ranchers need someone at the Department of 
Justice looking out for them.
    When you look at Table in my testimony, you see the five 
top producers have almost 65 percent of the market share. This 
surely cannot be a competitive atmosphere for independent 
producers. It's clear we need to make changes to our antitrust 
laws to protect our farmers and ranchers and rural economies 
and preserve the rural way of life we all hold so dear.
    I would add, at a fundamental level, all the things we are 
talking about doing are good, but I really believe that the 
antitrust laws, that we need to strengthen and come up with a 
new framework. It's, in my opinion, very antiquated and these 
laws that were drafted a hundred years ago don't apply to the 
modern marketplace.
    Finally, right before the August recess, I introduced, 
along with Congressmen Lantham and Ganske of Iowa, a new and 
innovative approach to fostering competition for independent 
farmers and ranchers. This idea originated with South Dakota 
producers as well as with your colleague, Senator Grassley from 
Iowa.
    The Livestock Packer and Producer Fairness Act would 
guarantee that independent producers have a share in the 
marketplace while assisting the Mandatory Reporting Price 
system. The proposal would require percent of a packer's daily 
kill come from the spot market. As a result, the market would 
have consistent, reliable information, improving the accuracy 
and transparency of daily prices. In addition, independent 
livestock producers would be guaranteed a competitive position 
due to the packers need to fill the daily percent spot market 
requirement.
    The legislation is designed to complement banning packer 
ownership of livestock and price reporting. The intent of this 
proposal is to improve price transparency and hopefully the 
accuracy of the daily Mandatory Price Reporting data.
    Together these four proposals provide a comprehensive 
approach to protecting agricultural competition for South 
Dakota farmers and ranchers. The purpose of our current 
antitrust laws is to guard competition for the benefit only of 
consumers. Our antitrust laws are not intended to keep our 
agricultural producers in the market. We need to take these 
steps to ensure a marketplace for our independent producers.
    In closing, Mr. Chairman, I want to thank you again for 
bringing this hearing to South Dakota. My constituents and I 
share a concern for the future of the agricultural marketplace 
and our rural economy. I appreciate the opportunity to discuss 
my plan, some of the other issues that are out there, and fight 
an epidemic of growing concentration in agriculture.
    [The prepared statement of Representative Thune appears as 
a submission for the record.]
    Senator Durbin. Thank you, Congressman. Your full statement 
will be made part of the record. I would like to ask you just a 
couple of questions, if I might.You have talked about several 
pieces of legislation which you have introduced with other 
colleagues and some Senate counterparts. Can you tell us the 
status of any of these bills? Have they been brought to hearing 
in committee or are they pending on the calendar on the floor? 
Do you anticipate a vote on, for instance, any of the bills 
relating to packer ownership in the House of Representatives 
this year?
    Representative Thune. My guess is that we are going to have 
hearings. The House Agriculture Committee has agreed. Iin fact, 
there is a survey that has been sent around to the leaders of 
producer organizations asking for recommendations on the whole 
issue of concentration. The House Agriculture Committee will 
take this issue up. That is something that came out of 
discussion in the farm bill here recently. So we will be 
addressing packer ownership, we will be addressing the spot 
market legislation, ACE legislation. I think I have testified 
once on this in the 106th Congress. There has not been a 
hearing in the 107th Congress.
    But, frankly, again, I believe on a fundamental level that 
this is where we need to start in terms of improving the 
outlook for farmers and ranchers. Antitrust laws, in my 
opinion, are statutes that are a hundred years old, need to be 
updated and modernized, and I don't think are reflective of the 
current agricultural marketplace.
    Senator Durbin. If I could ask a follow-up question on 
that. Both Senator Johnson and I previously served in the House 
on the House Agricultural Committee, and so I am familiar a 
little bit with the dynamics of that committee.
    I really find this unusual in two instances here. When 
Senator Johnson put the amendment on the farm bill for labeling 
for meat, that survived in the conference committee. We were 
happy it did. And then when he also added the amendment on 
packer ownership, which he had 53 votes, that went into this 
conference committee on the farm bill, and did not survive. And 
he talked about some of his efforts there to try to hang onto 
it and to work out a compromise.
    What is the problem in the House of Representatives? Why 
are we running into such resistance to a measure that Senator 
Johnson passed with bipartisan support in the Senate? What is 
it about this packer ownership issue that makes it so difficult 
for congressmen from ag states to carry the day in the House on 
the farm bill?
    Representative Thune. Well, I think that, Mr. Chairman, 
having been experienced in the House and on the committee as 
well, it is a challenging job indeed to try and put together 
the votes not only in the House itself, but on the House 
Agriculture Committee as the members of the House Conference 
Committee and Senate Conference Committee meet. There was not 
support on either side of the political aisle among House 
members for a ban on packer ownership.
    Senator Durbin. Is that right? For instance, on your bill, 
do you have--you mentioned your own bill on packer ownership or 
any other bills on the subject. Do you have a strong bipartisan 
sponsorship in the House for the Johnson position or anything 
like it? Have you seen--seen that so far?
    Representative Thune. I drafted legislation along with 
Congress Jim Nussle from Iowa. We took the Johnson/Grassley 
language and ran it by a number of the producer organizations, 
individual farmers and ranchers, got their input as to how we 
might improve upon it. And one of the concerns that was raised 
is whether or not in fact the question of contracts was being 
adequately addressed in the Senate language. And so we drafted 
legislation that would address that, specifically exempting 
contracts. And then subsequent to that, brought it before a 
number of the members of the committee, the conference 
committee, as well as some of our other colleagues.
    Senator Durbin. Do you have a majority of the members of 
the Agriculture Committee supporting your bill or any bill on 
packer ownership?
    Representative Thune. There isn't at this point, I don't 
believe, a majority of members of the Agriculture Committee who 
have endorsed any specific position. I do, however, believe 
that as a result of the hearings that we intend to hold in 
front of the House Agriculture Committee coming up this fall, 
that we will settle on a course of action. And I think it's 
very encouraging to see that we are actually going to address 
this issue. This is the first time in my experience in the 
Congress, in my three terms, that we have had an opportunity to 
examine in comprehensive detail the issue of concentration in 
the agricultural marketplace.
    I know there have been hearings prior to my arrival here on 
the House Agricultural Committee, I think during your days. And 
my understanding is at that time there was not a consensus as 
well on which direction to move. The Livestock Subcommittee I 
think held hearings back in the early 1990s on the subject.
    But my hope is as we draw awareness to this issue, that we 
will be able to put together consensus in the House. And I view 
it as my responsibility, as well as others who represent states 
in this region who care about the subject, to continue to push 
the cause. And I believe that is what has led to the hearings 
that are going to be held this fall.
    Senator Durbin. Thank you. We will continue--the Senate 
will continue to pass the Johnson measure and others like it, 
and I hope we can persuade some of our colleagues in the House 
to join us in this effort.
    Senator Johnson.
    Senator Johnson. I welcome Congressman Thune here and 
appreciate his comments. They will be part of the committee 
record. And I have no questions at this point.
    Senator Durbin. Senator Dayton.
    Senator Dayton. No questions.
    Senator Durbin. Thank you for joining us.
    Representative Thune. Thank you, Mr. Chairman.
    Senator Durbin. Testifying at this point is Doug Ross who 
is the Special Counsel on Agriculture for the U.S. Department 
of Justice. Mr. Ross, thank you for joining us today. Your full 
statement will be made part of the record. If you would like to 
summarize it for us at this point, and then we will ask a few 
questions.

  STATEMENT OF DOUGLAS ROSS, SPECIAL COUNSEL ON AGRICULTURE, 
  ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Ross. Good afternoon, Mr. Chairman and members of the 
committee. I appreciate the opportunity to discuss the role of 
antitrust enforcement in the agricultural marketplace, and in 
particular in the livestock slaughter marketplace.
    Antitrust enforcement benefits consumers, producers and the 
economy by promoting better quality, increased innovation, 
lower prices and healthy business incentives. I would like to 
highlight a few points from my written statement. I understand 
it will be included in the record. Thank you, Mr. Chairman, for 
that.
    We take very seriously the concern you and others have 
spoken of, and we have been active in recent years in this 
sector, bringing a number of enforcement actions. In addition, 
we have met with numerous producers in Washington and traveled 
to a number of places around the country as part of an ongoing 
outreach effort. We are very much aware of the trends toward 
increasing concentration in some agricultural markets, 
including the steer, heifer, lamb and hog slaughter markets. We 
are monitoring these markets carefully. High concentration in 
the market is not in and of itself a violation of the antitrust 
laws, but it increases the potential for antitrust scrutiny.
    There are three basic antitrust violations. First, 
collusion or conspiracy to suppress competition; second, the 
use of predatory or exclusionary conduct to acquire or hold on 
to a monopoly; third, mergers that are likely to substantially 
lessen competition.
    The first one, collusion, violates Section 1 of the Sherman 
Act. Separate firms agree to cheat the competitive market 
process by joining forces against their consumers or suppliers 
to manipulate prices and deny choices such as by fixing prices, 
allocating markets, and boycotting particular customers, 
suppliers or competitors.
    Proving collusion requires evidence of an agreement among 
competitors. It is not enough to show merely that two 
meatpackers bid a similar price or that some packers go to some 
auction barns or feedlots and other packers go elsewhere.
    In recent years, we have brought criminal prosecutions 
against Archer Daniels Midland and others for fixing the price 
of the feed additive lysine, against F. Hoffmann-La Roche and 
others for fixing the price of vitamins used as animal feed 
additives, and under Assistant Attorney General James' 
leadership, against Akzo Nobel and others for fixing the price 
of herbicide ingredients known as MCAA. Participaing firms have 
paid stiff fines, including the largest fines in antitrust 
history. Participating executives have been sentenced to serve 
time in prison as well as pay fines.
    On a smaller scale, a few years ago we successfully 
prosecuted two cattle buyers in Nebraska for bid rigging after 
an investigation conducted with help from the USDA, which was 
investigating some of the same conduct under the Packers and 
Stockyards Act. This case differed from others that I have 
mentioned in that agricultural producers were victimized as 
sellers rather than as consumers. The structure of the 
agricultural marketplace presents more possibilities for this 
to occur, and we keep a lookout for it and will prosecute when 
the facts warrant.
    The second type of antitrust violation, monopolization or 
attempt to monopolize in violation of Section of the Sherman 
Act, might involve, for example, a packer with a monopoly 
attempting to drive rival packers out of business by illegally 
interfering with their ability to engage in the business. I 
should emphasize, however, how rarely we see a true case of 
monopolization. First, the firm's market share has to be 
extremely high. Even the lower threshold for attempt to 
monopolize is upwards of 60 to 70 percent, combined with a 
dangerous probability of going much higher. That is a single 
firm's share, not the four-firm combined share often discussed 
in agriculture.
    And merely having a monopoly is not an antitrust violation. 
There must also be illegal conduct to exclude competition, not 
just to disadvantage rivals. It is quite rare that we encounter 
monopolization, and I don't have any recent cases to cite you 
on agriculture. But if we ever did find it in agriculture, we 
would certainly take appropriate enforcement action as 
warranted by the facts.
    The third type of antitrust violation, a merger in 
violation of Sectionof the Clayton Act, has a different kind of 
legal standard. We are focusing not on whether the merging 
parties have engaged in wrongful conduct, but whether the 
merger would change the market structure to such a degree that 
competition would likely be harmed. If so, we sue to stop the 
merger or we insist that it be modified to remove the cause for 
concern. We analyze mergers pursuant to the Horizontal Merger 
Guidelines developed jointly by the Department of Justice and 
Federal Trade Commission to determine whether the merger is 
likely to create or increase market power or to facilitate the 
exercise of market power in the market. Market power is the 
ability of sellers to profitably maintain prices above 
competitive levels or the ability of buyers to depress prices 
below competitive levels and thereby depress output.
    After we determine the scope of affected markets, a 
complicated but necessary step explained more fully in my 
written statement, we then determine the various firms' market 
shares and predict how those markets would be affected. We look 
at the markets from both the buyer's and the seller's 
perspective.
    There is no magic threshold of market concentration above 
which the merger violates Section 7, but concentration is our 
starting point because as a market becomes highly concentrated, 
not only are price fixing and other collusion easier to 
coordinate, there is also a dampening effect on competitive 
rivalry even in the absence of collusion.
    In the recent past, the Antitrust Division has carefully 
reviewed a number of mergers in the agricultural sector, 
including mergers among meatpackers. In 1994, we stopped one 
meatpacker merger before it was even formally proposed. We 
heard that Cargill's Excel Division was looking into acquiring 
Beef America. Both packers were then in the top five. We opened 
an investigation, aggressively questioned Excel and others, and 
made clear our concern that it would harm competition. 
According to a Cargill executive, this convinced them to 
abandon the merger.
    Other recent agricultural merger challenges include 
Monsanto/DeKalb, Cargill/Continental, Case/New Holland, 
Monsanto/Delta & Pine Land, and just last December, Suiza/Dean 
Foods.
    In Cargill/Continental we required divestiture of grain and 
soybean facilities in several locations around the country to 
preserve competitive market outlets for farmers in a number of 
states, including South Dakota, Minnesota, and Illinois. In 
Suiza/Dean, we required modification of a supply contract to 
ensure that affected dairy processors would have the 
competitive option to obtain their milk from independent 
producers.
    We have a long-standing cooperative relationship with USDA. 
USDA has shared its wealth of information about agricultural 
markets and has also provided insights and leads such as the 
lead resulting in the Nebraska cattle buyer prosecution I 
mentioned. This working relationship is reflected in an August 
1999 memorandum of understanding, which was augmented last year 
when Assistant Attorney General James designated a special 
point of contact with the USDA for criminal matters.
    Let me close with a few caveats about antitrust 
enforcement. The responsibility entrusted to us as enforcers of 
the antitrust laws is not to design the best possible market 
structure for the marketplace. The antitrust laws are based on 
the notion that competitive market forces should play the 
primary role in determining the structure and functioning of 
our economy. Our job is to stop specific kinds of private 
sector conduct from interfering with those market forces.
    We are law enforcers, not regulators. We don't have the 
power to restructure any industry, any market, or any company, 
or to stop any practice except in a precise and focused fashion 
to prevent or remedy specific violations of the antitrust laws 
that we can prove in court. The Court ultimately determines 
whether there is a violation and whether the proposed remedy 
fits the violation.
    While the antitrust laws play an important role in helping 
keeping markets competitive, they are not going to address all 
the complex issues affecting American agriculture in this time 
of change.
    Mr. Chairman, we urge anyone who believes they have 
information that could be relevant to our enforcement 
activities to contact us. As a law enforcement agency, we treat 
conversations with us in confidence. And if the information 
leads us to conclude the antitrust laws have been violated, we 
will take appropriate enforcement action. We remain committed 
to protecting competition in this important sector.
    Mr. Chairman, I would be happy to try to answer any 
questions.
    [The prepared statement of Mr. Ross appears as a submission 
for the record.]
    Senator Durbin. Thanks, Mr. Ross. Thanks again for being 
here today. Let me ask you, how long have you been with the 
Department of Justice?
    Mr. Ross. Senator, I have been with the Antitrust Division 
in two phases--I was there from 1975 to 1982, and this time 
from January of 2000 to the present in the current position as 
Special Counsel.
    Senator Durbin. And could you give me an idea, in the--your 
particular responsibility, agriculture, the antitrust division, 
how many professional attorneys, investigators are involved in 
that work in the Department of Justice?
    Mr. Ross. In antitrust enforcement generally in the whole 
division--
    Senator Durbin. Agriculture.
    Mr. Ross.--or agriculture? Senator, that is a difficult 
question. It could be answered in the sense of taking a 
photograph at any particular instant that this many are working 
on agriculture, but it's important to understand that like with 
other sectors of the economy, the Antitrust Division will put 
the necessary resources behind agriculture-related 
investigations as they come up.
    And, for example, the Cargill/Continental merger was 
pending at the same time as the Case/New Holland merger, so a 
section within the Antitrust Division, which has the name 
agriculture in it--Transportation, Energy and Agriculture--
handled one matter and a different section altogether handled 
Case/New Holland. So it depends on the time.
    Senator Durbin. I understand that the question may not be 
as pointed as I wanted it to be, but what I'm trying to do is 
focus on and determine whether the Department of Justice has 
the resources in terms of appropriations and staffing to deal 
with an issue of this magnitude. We know the industry that we 
are overseeing is huge with great resources and great legal 
talent. The question I'm asking is on the side of the 
producers, livestock producers and consumers, how big is our 
team? Can we with deal with this challenge and the complexity 
of the economic issues that are involved?
    Mr. Ross. Senator, I welcome your question. I would not 
want the record to reflect when I get home to Washington that I 
rejected additional appropriations for the Antitrust Division.
    Senator Durbin. You would be the first.
    Mr. Ross. However, we are comfortable that the budget 
proposed by the administration is sufficient to address the 
problems in this area of the economy as well as other sectors.
    Senator Durbin. I'm going to ask a more specific question 
and give you an opportunity when you get back home to answer it 
with more detail. But in addition to resources, do you feel 
that you have the authority in the Department of Justice to go 
after what is clearly a very complicated situation in this 
whole livestock processing industry?
    Mr. Ross. Senator, we do. We think the antitrust laws, 
although enacted as early as 1890 and added to in 1914 with the 
Clayton Act, have accomplished the goals that they set out to 
in protecting a competitive marketplace. And the administration 
is not seeking any amendments at this time.
    Senator Durbin. Then let me take you to the next question, 
and this will not relate to your service in the Department of 
Justice, but just your observations that may be similar to my 
own.
    In 30 or 40 years, we have seen a dramatic change when it 
comes to meat and livestock processing in America. I've seen it 
where I grew up in the midwest. I'm sure my colleagues have as 
well. But there are clearly now fewer companies that are 
involved in processing slaughter. We also know for a fact that 
there are fewer livestock producers. The numbers are coming 
down rather substantially; the numbers of larger producers 
growing.
    In my own state, hog production is larger than beef and 
cattle. Twenty years ago we had 20,000 hog producers in 
Illinois; ten years ago, 6,000; today, 1800. And the size of 
these operations is just growing, what is left, expedientially. 
So we can see what is happening to the input side of this. We 
are losing more and more individual farmers and ranchers who 
were feeding the livestock processing industry.
    And we have also seen the processing facilities decline 
dramatically. The numbers that used to be just around the St. 
Louis area were a dozen or more major ones. And now people 
travel great distances with their livestock in order to have 
them processed.
    What I'm trying to get to is this. As we watch this trend, 
you said at one point it is not the Department of Justice's 
role to define the optimum, perfect economy and what it should 
look like, but to respond to changes as it goes along. What is 
it the Department of Justice is looking at now, if you believe 
that this trend is not good for us, that would stop it from 
progressing even further?
    Mr. Ross. Senator, as I said, the Division is hearing the 
same kind of concerns you hear from your constituents. In fact, 
I have met with a number of the people in the audience in 
Washington, and heard many of these concerns. We are keenly 
aware of how highly concentrated certain aspects of the 
agricultural marketplace are, and as a result, we will be 
watching extremely closely should there be any effort to change 
that.
    Senator Durbin. I guess specifically, will it take a 
merger? Is that when the Department of Justice will step in and 
say, now, that's where we play a role, as you mentioned here, 
with the Cargill/Excel/Beef America? Will it take that or are 
you reviewing the current situation and the current ownership 
to see if there are any antitrust violations?
    Mr. Ross. Well, Senator, as I note in my testimony, there 
are three kinds of antitrust violations. We could look at any 
one of those three. Mergers and acquisitions is certainly one 
of the most straightforward ways where we would certainly take 
a very close look were such a merger to be proposed. And as 
evidenced by the last horizontal merger among the top five, we 
acted very aggressively and stopped it in its tracks.
    The other areas, monopolization, which is single firm 
conduct as well as high market share, and the third area would 
be the Section 1 of the Sherman Act or collusive behavior. We 
are constantly looking for violations of the antitrust laws. 
And we have an open door. I'm happy to share with anybody--I 
brought plenty of cards--my phone number. The door is open. One 
of the reasons I've been appointed and the functions I perform 
is to be a public face and be available for people who want to 
bring to our attention considerations that might lead to 
uncovering a violation of the antitrust laws. And we welcome 
that.
    Senator Durbin. Thank you. My time has expired. Senator 
Johnson.
    Senator Johnson. Mr. Ross, welcome to South Dakota. Thank 
you for your participation in this hearing. Does Department of 
Justice policy agree that monopsony or buyer power is a 
legitimate antitrust concern? If it is, how has the DOJ 
addressed this issue specifically in the meatpacking industry?
    Mr. Ross. Senator, thank you for welcoming me to South 
Dakota. I'm pleased to be here, and I welcome your question.
    As you know, monopsony is an important concern for the 
antitrust laws, and is specifically mentioned in our horizontal 
guidelines as being of equal weight and concern to us when we 
investigate the anti-competitive potential effects of a merger 
or acquisition. We also look at it in other contexts. I don't 
have a specific meatpacking matter on which I can make 
reference for you, but suffice it to say that Assistant 
Attorney General James is committed to the importance of 
applying monopsony concerns in his antitrust enforcement 
efforts. And we will continue to do so.
    The Cargill/Continental matter is the latest example where 
we did actually apply that to protect the producers of grains 
from the anti-competitive impacts of the buyer power that would 
have been created through that merger if it had not been 
changed as we required.
    Senator Johnson. Well, if there was one buyer in a region, 
and that region then suffered lower prices in relation to other 
regions, would you recommend action be brought? Is that cause 
enough for Department of Justice action if that were to occur?
    Mr. Ross. Senator, you can appreciate that I would not want 
to speculate on what set of facts might be sufficient to open 
an investigation or to proceed. However, what I would say is if 
any of your constituents have that kind of information 
available, they should bring it to our attention and we will 
pursue it and evaluate it in terms of what anti-competitive 
violations there may be behind it.
    Senator Johnson. If a packer was a long-time buyer from a 
particular livestock producer, but the packer stopped buying at 
the feedlot because the producer chose to sell to another 
packer for a few weeks, does this amount to a boycott that 
would cause you to recommend any antitrust action?
    Mr. Ross. Again, Senator, that sounds like a hypothetical 
situation that we would be happy to hear from anyone who knew 
about it. But, again, a boycott in particular would probably 
require an agreement, more than one actor, to be involved. And 
so that's the kind of evidence, along with what I set forth in 
my written statement, that we would be looking for. But, again, 
I would welcome hearing from any producers who have information 
such as you suggest in your hypothetical.
    Senator Johnson. We know that the farm-to-wholesale spreads 
in beef have increased by 50 percent in the last eight years in 
inflation adjusted terms. These data have screened out value 
added products, focusing on the same cuts. Have you performed 
any investigation as to whether any or all of this increase in 
spread is due to market power? And if not, why wouldn't DOJ be 
investigating that issue?
    Mr. Ross. Again, Senator, we would investigate in order to 
develop sufficient evidence to take to court to establish one 
of the three kinds of violations that I mentioned in my 
testimony. The kind of concern that you mentioned is, again, 
one that we have heard about frequently from individual 
producers, and it would be relevant in many of the kinds of 
investigations that we conduct. And we would take it into 
account as one of many factors that would be evaluated in terms 
of the ultimate question we have in antitrust enforcement, what 
is the anti-competitive effect of the behavior or the merger 
before us.
    Senator Johnson. When you talk about mergers, not by 
themselves, being violative of anything unless it causes a harm 
to the competitive environment, are you talking about harm to 
the consumers or harm to the producers or both?
    Mr. Ross. Both, Senator, as the Cargill/Continental case 
most recently illustrates, where we were concerned specifically 
about the impact on producers. Ultimately, of course, the 
concern under the antitrust laws is for consumer welfare, but 
having effective antitrust enforcement means that both 
producers and consumers will benefit.
    Senator Johnson. Just in my small amount of time remaining, 
let me ask one--one last question, Mr. Ross. There have been 
reports indicating how packers can manipulate prices with 
captive supplies, including packer-owned livestock. There is a 
private suit, Pickett versus IBP, that focuses on that issue. 
Have you performed any independent investigation as to the 
motive or opportunity for packers to manipulate prices with 
captive supply or have you performed any investigation as to 
whether captive supplies have actually resulted in depressed 
prices during specific time periods? I appreciate that this 
falls somewhat in the province of Packers and Stockyards, but 
it's my understanding that under Clayton and Sherman, the 
Department of Justice does have jurisdiction over--over these 
issues as well.
    Mr. Ross. Senator, you are correct. The case you refer to 
is brought under the Packers and Stockyards Act which is 
enforced in the first instance by the Department of Agriculture 
rather than the Department of Justice. And you are further 
correct that the kinds of concerns that you mention in your 
question are relevant to antitrust concerns. And we would 
certainly be interested in specific information that we could 
use as part of an investigation into the possibility that 
antitrust laws are being violated. But, again, we are talking 
about one of the three kinds of violations that I discuss in my 
written statement, and the evidence that we would need to take 
to court to prove that.
    Senator Johnson. My time has expired, but thank you, Mr. 
Ross.
    Senator Durbin. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman. Thank you, Mr. 
Ross, for the chance to visit with you here today. I appreciate 
the instances you cited here, the intervention of your 
department and the effects you've had. In gauging the scope, 
it's a little hard, though, without knowing how much--what the 
total number of possible interventions were to gauge the extent 
of your activities. Sort of like baseball; if you say you got 
hits at bats, that is 500. 12 hits at 100 bats, that is not so 
good.
    That is the part--I guess I would be interested to know how 
many of these cases did you decide not to get involved in, but 
particularly what, you know, the criteria are for one or the 
other. But I guess my question here, given the limits of time, 
is in terms of the industry, agricultural meatpacking process, 
agricultural commodities, processing like in the mergers, as 
you say, the Continentals, the Cargills, some very good 
companies in their own right, is that merger activity over the 
last ten years or so, in your experience, comparable to other 
sectors of our economy? Is it more active in that arena than 
elsewhere or less active?
    Mr. Ross. Senator, that is a good question, and I am not 
sure I have the facts to respond accurately to it. It's fair to 
say, I think, that we have gone through a very significant 
merger wave in the last few years, and agriculture has not been 
excepted from that.
    Senator Dayton. Maybe I will ask if you could go back and 
review your facts, your information, and give me a reply or 
give the committee a reply for the record, just in the future, 
just for the record--how it does measure with others, if you 
wouldn't mind.
    Your testimony regarding the Cargill/Continental merger, I 
was interested in this section here where you said, it goes to 
this issue of monopsony, this relief is designed to ensure 
that--you required some divestitures of Cargill/ Continental. 
You said that relief you required was designed to ensure that 
farmers in the affected market would continue to have 
alternative buyers to whom to sell their grain and soybeans. In 
this case the focus of the competitive problem was the so-
called monopsony concern, that is, that the merger would harm 
producers as sellers.
    And Senator Johnson probed into this area, but it interests 
me as well what the criteria are to get to intervene for that 
reason. That if farmers in an affected market would not 
continue to have alternative buyers to whom to sell their 
grain, their soybeans, their livestock, does that constitute 
the basis then for antitrust action?
    Mr. Ross. Well, Senator, you are right to focus on that 
kind of analysis because that is exactly what we did in the 
Cargill/Continental matter and what we do in any other 
investigation. In that particular investigation, you may be 
interested, and others in the audience as well, because we went 
through what is called the Tunney Act proceeding, filing our 
proposed final judgment, and the public had an opportunity to 
comment. We were required to respond to those comments. There 
were a number of comments that asked us did you look at this, 
why didn't you look at that, and so forth.
    And we laid out the scope of the investigation on what 
kinds of things we looked at, and specifics--we literally got 
maps out and drew circles around the grain elevators and the 
ports to figure out which farmers were going to be affected if 
this grain silo was no longer an option for other farmers. And 
so the concern was exactly who is going to be affected and in 
what markets, and that's--we determined that we needed relief 
in specific markets to protect farmers who would try to sell 
their grain, and they would have fewer options available. So 
that is the monopsony concern, and that's the kind of analysis 
we would do.
    Senator Dayton. If that has hypothetically occurred in some 
part of the country, such as South Dakota, such as Minnesota, 
if farmers in that area only have one source of--which they can 
sell their grain or their livestock, is that after the fact the 
basis to come in and look at that situation from the monopsony 
concern and take action accordingly?
    Mr. Ross. Well, again, Senator, we are not a regulator, so 
we can't just say, well, looks to us like South Dakota doesn't 
have enough opportunities for producers to sell right now, so 
let's do something about that. It would come instead in the 
context most likely of a particular merger or acquisition. And 
our ability to act in that context would be limited only to the 
impact on the markets of that particular merger or acquisition.
    Senator Dayton. So you can only do this at the time of a 
proposed merger, and in advance of the effect it's going to 
have, then evaluating what that effect would be. And if you 
think that it's going to be--have too much of an effect and 
this is a monopsony, you are going to stop it, you might 
intervene, but once it has--the merger has occurred if that 
same result occurs in terms of monopsony, it's too late. There 
is no recourse.
    Mr. Ross. Not necessarily, Senator. It would depend again 
on the facts. Technically speaking, as you are going to hear 
from another witness, there is no statute of limitations under 
the Clayton Act, so it's technically possible for us to reopen 
a matter that has been investigated before. However, I would 
point out that there are a number of practical considerations 
that would have to be taken into account before that kind of 
step could be taken.
    Senator Dayton. What was the trigger on the Cargill/ 
Continental situation there where you say the relief was 
designed to ensure that farmers in affected markets would 
continue to have alternative buyers to whom to sell their grain 
and soybeans? Where--where in--I'm not a lawyer, so forgive me. 
Where in, you know, law or regulations, whatever, is there the 
basis for going in and saying, you know, we are mandated to 
ensure that farmers in affected markets would continue to have 
alternative buyers, and if they do, we are going to allow this 
to go through, and if they don't, we are not. Where does that 
authority come from or that discrimination occur?
    Mr. Ross. If I understand your question correctly, Senator 
it's in the first instance, the hook, if you will, the catalyst 
that would get us involved in the first place, and in that 
instance it was the proposed merger between the two companies. 
We have under the statute the requirement to assess whether the 
effect of the merger would be to substantially lessen 
competition in any market or to tend to create a monopoly. As I 
mention in my written statement, the Justice Department and FTC 
have merger guidelines under which we analyze when we think 
that standard is satisfied to the Court's requirement.
    Senator Dayton. I'm sorry--we are running out of time. I'm 
sorry to interrupt. I will rephrase my question. I didn't 
phrase my question very well. If farmers only have one buyer of 
their products, is that a--I mean is that a monopsony such that 
you would act to prevent that?
    Mr. Ross. Well, Senator, that's the kind of concern that we 
are looking at when we do the kind of evaluation under the 
merger guidelines and elsewhere for the monopsony issue.
    Senator Dayton. If mergers have occurred in the past and 
the result has been after the merger is concluded at some point 
in time that that monopsony condition has occurred, your 
farmers and producers only have one buyer which to sell their 
product, then they should report that to you and you would look 
into that situation?
    Mr. Ross. Well, as I said, Senator, we would certainly want 
to hear from producers who have concerns that they think might 
establish a violation of the antitrust laws. And certainly, as 
you have correctly understood our testimony, monopsony is a 
concern that we--
    Senator Dayton. So only having one buyer--only having one 
available buyer is a violation of the antitrust laws?
    Mr. Ross. No, I wouldn't quite go that far, Senator. Again, 
antitrust enforcement is very fact-specific, and so it depends 
on the facts and on the particular circumstances that we have 
before us.
    Senator Dayton. It's a potential violation?
    Mr. Ross. It has the potential for raising concerns that we 
would certainly want to look at. Again, in terms of reopening a 
matter where several years later there is some concern about 
anti-competitive effects from that merger, I would just say 
that there are a number of practical concerns that would make 
it more challenging to prove to a court that the merger should 
be reopened and a change should occur. The passage of time 
makes it very difficult to draw cause and effect relationships. 
The Congress enacted the Hart- Scott-Rodino Act in order to 
avoid just this kind of problem. The difficulty of unscrambling 
the eggs is substantial, so for those reasons, I just suggest 
it's practically challenging.
    Senator Dayton. Thank you, Mr. Ross. My time has expired. 
That you, Mr. Chairman. I would add, Mr. Chairman, I think this 
is very fertile ground for some further inquiry and legislation 
because if the intent of antitrust is to prevent what is 
occurring here, which is the farmers are reduced down to one or 
barely two buyers to whom to sell, and we can't--there is no 
recourse, then it just means that the laws are no longer 
sufficient to have the effect that they were originally 
intended to have. (Applause.)
    Senator Durbin. Thank you, Senator Dayton.
    Mr. Ross, I guess my frustration here is as follows: What I 
hear you saying is that if someone suggested a merger, change 
in the players on the bench, so that there are fewer, the 
Department of Justice is going to take a hard look at this 
because it can clearly have antitrust implications. But we know 
from the facts that over the lastyears, a lot of the changes 
have taken place.
    Apparently this doesn't fall on your doorstep because you 
haven't been at the Department of Justice for that entire a 
period of time. I'm not pointing to you specifically, but just 
to the government in general. We have acquiesced in the 
creation of, Senator Dayton's description, monopsony or 
monopoly situations in this country to the detriment of many 
people who are gathered in this room. We now have fewer 
processors, we now have fewer bids being offered for the 
livestock. And from where these men and women are sitting, it 
appears that the government, which was supposed to be 
protecting them from this sort of monopoly situation creating, 
didn't do its job. Somewhere along the job we didn't step up. 
(Applause.)
    And I suppose what it comes down to is this. When we are 
proactively looking at the situation today and the bottom line, 
if we have seen a situation--and I think that that is correct, 
that the major meatpackers account for 80 percent of the beef 
slaughter, and years ago it was 35 percent, on its face there 
is a concentration of ownership here, and a negative impact on 
livestock producers who are trying to find markets and who are 
being closed out. They are given a price, take it or leave it. 
And that means no competition from their side, no free market 
from their side.
    So my question to you goes back to an earlier one. What are 
we doing proactively to look at the current market and saying--
don't give me an idea of a new merger, but take a look at what 
it is today and saying is this fair, should the government be 
stepping in to the current situation, changing the current 
ownership situation so that we can provide more competition and 
more opportunity for these livestock producers? Do you feel we 
have an obligation to do that, and if we do, are we doing it?
    Mr. Ross. Senator, let me start again by reiterating what I 
said in my testimony which is that concentration in and of 
itself, a high concentration level, is not a violation of the 
antitrust laws. There are three kinds of antitrust violations, 
and certainly concentration is an important factor that we look 
at. But, again, as law enforcers rather than regulators, we are 
not free to just decide we don't like the way a particular 
market looks, and therefore let's go change it. We have to 
operate within the confines of the antitrust laws. So there 
either has to be collusive behavior under Section 1 of the 
Sherman Act, single firm monopolization or attempt to 
monopolize, or a merger or acquisition.
    Senator Durbin. That doesn't give much comfort to the 
people who are gathered here today that what is currently 
existing, the status quo, has evolved into a position where it 
can't be challenged by our government if that is what you are 
saying.
    Mr. Ross. No, I'm not saying it can't be challenged. And I 
would encourage, again, anyone who is here who has an 
understanding of what the elements are the courts have required 
that we prove to make out a violation of the antitrust laws, 
who has information that might help us get to that point, to 
bring it on. We want to have it. We want to hear it. We want to 
look at it. But without evidence, we can't go to court and say 
there is a violation of antitrust laws here, we think the 
remedy is we have to divest the plant or break up this 
particular situation. We have to prove a violation of the law, 
and the remedy that the court structures has to fit that 
violation.
    Senator Durbin. I bet Senator Johnson can find quite a few 
ranchers and livestock producers in this state who can tell you 
about what has happened to their lives over the last years, if 
that is the evidence you are looking for, if that's the 
encouragement you need. Senator Johnson.
    Senator Johnson. Well, the Chairman is correct. I've 
listened to too many stories from people telling me how there 
was a time when there were multiple buyers at repeated times 
during the course of a week in which to negotiate a price for 
the sale of their livestock. That it increasingly has become 
fewer and fewer, now sometimes only one, and then only for a 
very select, small period of time, and there is no negotiation 
opportunity. It's simply take it or leave it. There is no 
negotiation, there is no leverage. And that is what has 
transpired over a relatively, in the larger scheme of things, 
short period of time.
    And it is distressing, I think to me and to a lot of people 
in my state, when we say the concentration is not in itself a 
antitrust violation, so there is really not very much we can do 
except wait for specific instances of tough-to-prove collusion 
or very rare instances where a single party has a complete 
monopolization. It doesn't take a rocket scientist to figure 
out if you havebuyers out there, that the seller has 
opportunities then to negotiate a better price, and pick and 
choose.
    And what we are talking about is trying to reinvigorate 
free enterprise in rural America. I think most South Dakotans 
would agree free enterprise is the best economic system in the 
world, bar none. The whole world wants more of it. But it only 
works if there is competition. So while there are those in 
Washington that say, well, if you act proactively that is 
interference in the market, the fact is, as we discovered with 
our--with Enron and with others in--WorldCom and so on, unless 
there is a cop on the beat for--to impose fair rules, the free 
enterprise system isn't going to work at all.
    And so if we find ourselves down to one buyer, take it or 
leave it kind of attitude, and then are told that that is not 
an antitrust violation, it seems to me that that is a real 
indictment of Congress and the administration both for not 
getting its act together and strengthening these laws because 
the status quo is wildly unacceptable. I believe in terms of--
(applause).
    So your testimony today I think is helpful. Unfortunately 
it's helpful in pointing out the inadequacy of current law and 
the necessity of Congress not simply saying we need to be more 
aggressive with enforcing existing laws, we need to do that, 
but frankly the law has got to be strengthened. The laws that 
were effective for Teddy Roosevelt no longer are getting the 
job done. And Congress is going to have to strengthen the law 
(applause) to give you the tools and the regulators the tools 
to proactively get involved in this.
    Otherwise it is not just a matter of the decline of farmers 
and ranchers; it is the decline of our free enterprise economy. 
The genius that has made America the wealthiest nation in the 
world is going to lose if we continue to have this 
concentration in sector after sector of the economy. And I 
think the agricultural sector is the canary that ought to be a 
warning to the rest of the world what is going to happen to 
them if we don't change our ways and significantly strengthen 
these antitrust laws.
    Thank you, Mr. Ross, for your testimony. (Applause.)
    Senator Durbin. Senator Dayton.
    Senator Dayton. Just one last observation, Mr. Chairman. We 
talk about the market concentration and the percentage of the 
market that one--or a handful of packers, processors, whatever, 
a sector they have, but that really overlooks the other side of 
this issue which I was really struck by today, the monopsony. I 
mean if we have a utility, electric utility, they don't have to 
be a monopoly in the larger scheme of the national utility 
market to have a monopoly by virtue of the fact that there is 
no where else that people can buy their electricity from except 
from that entity. We treat that as a regulated monopoly.
    In this case, you can have a meatpacker of any size--and 
what share of the national rural market it has when it sells, 
is one thing--but if it's the only one in that area, that 
region, that anyone can sell to, then it is a monopoly. It 
doesn't matter what its percent is. It has a monopoly. And 
given the costs of transportation and the time of delivery in 
many of these areas in Minnesota, and I assume South Dakota, 
there is only one place you can go, and you don't have a 
practical option to go anywhere else. And that is de facto a 
monopoly.
    And we need--as Senator Johnson said, as you pointed out to 
Mr. Durbin, we need to have some regulations with some teeth. 
Not just once in a lifetime when two entities merge, but every 
month, every year, ongoing to make sure that this does not 
occur, and break it up when it does.
    Senator Durbin. Thank you very much, Senator. Mr. Ross, 
thank you for joining us.
    The next panel is a large one, but we want to bring them 
all up at one time so we can ask questions and keep this 
moving.
    Professor Peter Carstensen is a law professor at the 
University of Wisconsin at Madison. Professor Carstensen was 
formerly an attorney at the Department of Justice Antitrust 
Division.
    Also on the panel we have two cattle producers, Tom 
Connelley and Bob Mack, both from Senator Johnson's home state 
of South Dakota. In addition we have two independent pork 
producers, Tim Bierman from Iowa and Jim Van Der Pol from 
Minnesota.
    Finally on the panel is Sara Lilygren. Did I pronounce that 
correct, Sara? Thank you. Sara Lilygren, vice-president of the 
American Meat Institute.
    We will start the panel with Professor Carstensen. If you 
would be kind enough--I've read your statement. It's good, and 
it's going to be included in the record in its entirety. And if 
you would be kind enough to summarize--for my benefit, if you 
would kind of react to what we just heard, I think you might be 
a good person to reflect on what Mr. Ross has said about the 
current state of antitrust laws.

STATEMENT OF PETER CARSTENSEN, GEORGE H. YOUNG-BASCOM PROFESSOR 
        OF LAW, WISCONSIN LAW SCHOOL, MADISON, WISCONSIN

    Mr. Carstensen. Thank you very much, Senator. And I 
appreciate the opportunitY to be here. For a guy that is used 
to 55 minute lectures, this is going to be a challenge because 
they whispered in my ear we are down to 45 minutes for the 
whole panel.
    So markets are important. We all agree about that. We have 
got problems of market manipulation. I think it's very 
important to look at the Enron experience, the WorldCom 
experience, where we had regulators on the beat. They missed 
there because the regulations weren't well thought out in 
energy, they were not properly implemented in securities 
markets. In both cases we now have to go to the next level of 
doing important changes in the law and ratcheting up the level 
of enforcement.
    In livestock markets, we start with the serious problem of 
concentration that everybody has referred to. Concentration is 
much worse. Those 80 percent and 65 percent figures are on the 
selling side into the retail market. As you have all pointed 
out, on the buying side we have got monopsony or another word I 
love, oligopsony, a handful of buyers. And buyer power is a 
serious problem. It leads to many of the issues that we have in 
livestock markets today.
    My cousins who farm in eastern Iowa, when I used to go back 
there to visit, family picnics, would be talking about having 
four or five, six buyers coming out to their farms to look at 
their hogs or their cattle. We don't have that anymore. We 
don't have the benefits of--of competition.
    I'm not going to go through the various particular kinds of 
problems that exist--I've laid them out in my written 
presentation--other than to point out one very major problem as 
we move towards a world in which we are going to be using 
contracts more and more for the sale of livestock, and that is 
discriminatory access to contractual opportunities. If we are 
going to use contracts, then all feedlot operators, all feeders 
of hogs, need to have access to those contracts. That's a 
(applause)--that's a market organization requirement to make 
these markets achieve the benefits of the market economy.
    Since my--my good friend and sparring partner, Doug Ross, 
has talked to you a little bit about antitrust, and referenced 
the fact that, yes, indeed as I point out in my paper, mergers 
law has no statute of limitation, those mergers back in the 
1980s could be reopened. The IBP/Tyson merger could also be 
looked at. Again, there is no legal limit. Even I, moderate 
bomb thrower that I am, have many reservations about reopening 
closed matters. It's not something you do lightly.
    The interesting point here is that the administration at 
the Federal Trade Commission, Tim Muris, has at least suggested 
that he wants to revisit a bunch of hospital mergers which seem 
to have greatly inflated health care costs. If we are going to 
do it in hospitals, let's do it in meatpacking as well.
    Other good news, you have been concerned about whether 
oligopsony and monopsony are recognized as antitrust problems. 
In addition to Assistant Attorney General James' commitment, we 
have had three recent opinions from courts of appeal around the 
country, all recognizing this problem and highlighting--
something that I disagree with Mr. Ross about--highlighting 
that market share analysis when you are looking at buyer power 
is different. The kind of leverage you get even with fairly 
modest market shares can be sigificant. In one case--Toys R Us, 
it only had a percent market share, but they were directly able 
to influence their suppliers' willingness to sell toys to Toys 
R Us competitors in the marketplace.
    So one of the problems that we have right now is to get the 
antitrust enforcers to rethink the measure of buyer power as 
they look at and analyze various kinds of situations.
    Another piece of pretty good news, I think, the Microsoft 
opinion in the D.C. Circuit is a pretty good antitrust decision 
forcing us to think about how to approach abuse of market 
power. There are some other decisions that reinforce that, and 
would make it easier if the antitrust division wants to be 
vigorous, as you have all been suggesting. There are more ways 
of looking at what is going on, many of these kinds of problems 
that we have can be addressed.
    That said, again, as Doug Ross pointed out, antitrust is 
very case specific. It's very much focused on particular 
offenses. For the problems that face agriculture today, we need 
market constituting, market facilitating, regulation. That is 
law that helps the market work better, more efficiently. 
Fairness, access, equity, transparency. Those are the kinds of 
goals. And so there is, I think, a real need today for more 
legislation and its effective enforcement in addition to 
keeping Doug Ross and company under the gun to enforce the 
antitrust laws.
    [The prepared statement of Mr. Carstensen appears as a 
submission for the record.]
    Senator Durbin. Thank you very much, Professor.
    Tom Connelley is an independent order buyer, rancher, 
cattle feeder, and has a statement which will be made part of 
the record in its entirety. And if you would be kind enough to 
summarize a few thoughts for us, we would appreciate it.

   STATEMENT OF TOM CONNELLEY, INDEPENDENT CATTLE PRODUCER, 
        DEALER, AND FEEDER, BELLE FOURCHE, SOUTH DAKOTA

    Mr. Connelley. Thank you, sir. I appreciate this 
opportunity.
    In the 1970s, I was a cattle buyer for American Beef 
Packers. At that point in time, they were a packer that would 
probably kill from seven to nine thousand head a week, and we 
were one of the larger packers at that time. Later on I went to 
work for Flavorland, a smaller plant in Denver, Colorado. We 
didn't kill but about seven, eight hundred head a day in that 
plant. But at the time that I was buying cattle for these 
packers, I was actively competing against other companies in my 
weekly rounds at feed yards. We bought cattle every day, we had 
a beef order every day, we had a hot beef--what we call a hot 
beef order.
    Any of the phrases, if you don't understand, please ask me 
later because I will explain it to you. I want you to know 
exactly what I'm talking about.
    Anyway, as I was traveling around in the feed yards or 
farmers' places, my job was to evaluate these live cattle, 
estimate the weight, estimate the grade of select, choice, 
estimate the percentage of yield, and deliver them to that 
packing house at a hot weight hanging in the cooler. For 
instance, if I had a hot beef order of a dollar. and the cattle 
would yield 63 percent, I had to deliver them to the packing 
house for 63 dollars cwt. That was the equivalent, into the 
cooler, of a dollar.
    Okay. This has all changed. I wish it was still that way. 
But since then, the market for slaughter cattle has totally 
changed. Monday and Tuesday by noon the grid and the formula 
cattle are committed to the packers. And from--from Tuesday 
noon the packer, having these grid and formula cattle 
committed, he knows exactly how many cattle he has got for the 
week's kill. There is no question about it. He also knows how 
many cattle he has available in his own feed yards that he is 
feeding.
    There is one question left. How many cattle will he have to 
buy Thursday or Friday to finish his kill. If he hasn't got 
enough cattle coming in, he is going to have to buy a few. But 
for some reason, he will wait until Thursday afternoon at the 
earliest, after the futures closes, in order to procure the 
cattle for the rest of that week. And if he doesn't need them 
by Thursday, he will probably wait until Friday.
    And if you'll look at the longer statement that I gave you, 
you will see where I've showed you a typical week in the 
futures market of the way the thing acts, and as the week goes 
on, how the packer uses the market to depress the feed yard 
optimism to buy cattle cheaper. And when you read what I said 
there, you will find that if they don't buy them on Thursday, 
the market will be down on Friday, the futures market.
    Well, about a half hour before the close today, it was down 
a dollar. So we will get some cattle traded this afternoon, and 
we will probably get them traded at no better than steady 
money. And today they were buying cattle at a dollar two in 
Nebraska, where the cut out value for a 50 percent choice steer 
as of last night was a dollar nine. We are buying--they are 
buying cattle at a dollar two today, and the cut out value is a 
dollar nine. That's on a steer that is 50 percent choice.
    Okay. Today there is a lot of cattle priced on the basis 
contract, and there has been for the last, I don't know, seven, 
eight years. Basis contract has been pretty popular. Those are 
contracts basis the board that a producer can sign up his 
cattle to a packer four, five, six month ahead of time, and 
they agree on a basis to board contract which means whatever 
the futures board is trading at, they can sell them at. Maybe 
he will give two dollars over the board at sometimes, maybe he 
is offering two dollars under the board.
    The producer has the opportunity to price his cattle at any 
time prior to that delivery month. So while the futures trade 
is operating, the board is open. If I was a cattle feeder and I 
had a contract like that, I could call up this packer and say, 
okay, price my cattle today, I will sell them at whatever the 
board price is. That is how a basis the board contract works.
    But too many times, especially into a downtrending market--
and if you'll look at the addition that I have put on there of 
the charts, it showed that well. In a downtrending market, many 
times the futures is driven down right into that contract 
pricing period to a low. And as soon as we get those cattle all 
priced, you will normally see in the first two weeks of this 
delivery month, you will see a three or four dollar rally up.
    Now, that looks pretty much like there is some huge control 
being exercised over our market through whoever is trading 
those futures, and I suppose packers got a lot to do with it. 
But they are driving that thing right down into where producers 
have got to price those cattle, and then we see the rally.
    A little example that I've given is if--if for some reason 
a packer or three or four packers can hold that price down by 
just three dollars a hundred going into this pricing period, if 
they have got 50,000 cattle committed to them--and these are I 
think very low numbers, I think the numbers are much greater 
than this--but a three dollar per hundred weight depression in 
prices is 36 dollars a head. 50,000 cattle amounts to 1.8 
million in gross proceeds that they could obtain by just 
controlling this market a little bit. So, gentlemen, I think 
you can see how a little bit of leverage can make a lot of 
money for a few big corporate entities.
    Today, if I have got cattle on the show list in a 
commercial feed yard, that show list would be put out on Monday 
morning, there may be three, maybe four packers come pick it up 
if I am in an area where the big three are and maybe one little 
one. By late Thursday or Friday, maybe I'll get a bid on those 
cattle, and maybe I won't. And if I do get a bid, it could be a 
take it or leave it. You are telling me now, you sell them. If 
you don't, we will pass and go to next week. Or I may have an 
hour to make up my mind. But what good is an hour to make up my 
mind when there is only two or three big packers that is going 
to bid me anyway because they are all going to bid the same 
money.
    And if--when you watch your market reports, you will find 
if 62 dollars is buying the cattle in Kansas and Texas today, 
that is the price. I don't care how good they are or how--if 
they are extremely inferior, they will bring less, but the 
average cattle is going to bring 62 dollars. You are not going 
to pry 62 and a half out of them as I did back in the days we 
had competition. But the average price is where they will sell.
    I have had to resort to selling most of my cattle on the 
grid, and I do that because I feel I get a little better than 
the average Kansas, Texas, Nebraska price if I do that because 
my cattle are mostly all northern cattle. The genetics are 
good. I keep them hormone and implant free. And those cattle 
out-grade the implanted cattle by approximately 30 percent.
    When I say the grid market, they are price--a base price 
that is set on the average prices for the week. If the Kansas 
high is 64 dollars, that's the base. I get a premium for prime 
and a premium for choice. If you have grades one and two, if 
they are three, it's the base price. But I get premiums and/or 
deductions from that grid price. And if there is anything you 
don't understand about a grid price, please ask me.
    [The prepared statement of Mr. Connelley appears as a 
submission for the record.]
    Senator Durbin. Mr. Connelley, I will ask you if you'd 
please wrap up at this point. We want to make sure everybody 
gets a chance here.
    Mr. Connelley. It won't be but a second. What I want--what 
I want to stress to you is this. Through all these ways that 
I've told you about, the packers learn to reduce competition. 
He gets commitments early in the week to keep a large inventory 
of packer-owned cattle, and he forward contracts basis to the 
board. Depressed futures forces feeders to sell lower, which 
probably happened today. Line up grid cattle early in the week, 
set the base price late in the week. When I sell my cattle on 
the grid, I don't know what they are going to bring until that 
basis price is set late in the week. That is not the way to 
sell cattle, but I have no better alternative.
    Senator Durbin. Thank you very much.
    Mr. Connelley. I appreciate it.
    Senator Durbin. Mr. Mack, Bob Mack from Watertown, South 
Dakota.

STATEMENT OF BOB MACK, INDEPENDENT CATTLE PRODUCER AND FEEDER, 
                    WATERTOWN, SOUTH DAKOTA

    Mr. Mack. Thank you, Senator Durbin, and also thanks to 
Senators Johnson and Dayton for this opportunity to address 
competition in the livestock industry and how it affects myself 
and my friends and neighbors.
    I operate my family's farms and have spent most of my life 
raising crops and livestock. Our farrow to finish hog 
operation, cow herd and feedlot allows us to add value to our 
pasture, grain and hay, and to more fully utilize our equipment 
and labor.
    When faced with the loss of the largest hog packing plant 
in the State of South Dakota, Smithfield was convinced to 
purchase the plant after the State of South Dakota contributed 
millions of dollars in incentives. Not long after this 
purchase, Smithfield bought the only other pork processing 
plant in the state and shut them down. This eliminated the only 
competition we had locally, and took at least five dollars off 
the value of every hog we sold. The rapid consolidation and 
subsequent collapse of the hog market nationwide forced nine 
out of ten hog producers in my area out of business and led us 
to focus more on our cow herd and feedlot operation.
    At one time by working with several other feedlots we could 
receive bids on a regular basis from three or four packers, and 
could usually get--or occasionally get bids from a couple of 
other packers, depending on the type of cattle we had for sale 
and if they were in the market. Today we can usually get 
regular bids from a couple of packers with occasional bids from 
a couple of more. It also means shipping cattle as far as 700 
miles to get them slaughtered. Many farmer feeders are lucky if 
they have one packer they can get a bid from. One bid from a 
packer--from one packer isn't competition.
    Part of the problem, in addition to having less buyers 
available, the rules keep changing. The buyers used to buy 
hanging, now want us to sell on a grid. One packer that we sold 
cattle to on a negotiated grid for years now refuses to buy 
cattle on that same grid unless we contract the cattle to them 
months in advance. When you figure out what the rules are, they 
change them. Most cows that are standing out there with the 
bulls right now will not--their offspring will not go and get 
to market for two or three years. We are always aiming at a 
moving target, a long ways out.
    What can be done to ensure competitive and open markets in 
the livestock industry? Forbid large packers from owning and 
feeding their own livestock. The livestock they feed are used 
to leverage influence over feedlots and to leverage control 
over cattle they don't even own. I would like to commend 
Senators Johnson and Grassley for taking the lead in addressing 
this issue in the Senate.
    Restrict capital supplies by requiring forward contract, 
formula and marketing agreement cattle to have a base price 
established at the time they are committed to the packer. In 
addition, require that forward contracts are offered in an open 
public manner to any producers that choose to take advantage of 
them. I believe Senator Enzi addresses this with his recently 
introduced Senate Bill 2021.
    Revise the confidentiality provisions of mandatory price 
reporting to provide additional information and investigate the 
information that has already been collected by the program, but 
never made public, for competition and antitrust violations.
    Tougher restrictions on future agribusiness mergers. The 
packing industry is one of the most concentrated industries in 
the country. Because they purchase a perishable commodity (fed 
livestock), they are able to exert a higher degree of influence 
than concentrated industries dealing in non-perishable 
commodities. Give equal weight to the effect mergers will have 
on suppliers to the industry instead of just the effect on the 
consumers of the industry.
    When Packers and Stockyards violations occur, involve the 
injured party in any negotiations or plea bargains and require 
that injured parties are compensated for the damages caused by 
the violation.
    Require that investigations of the industry are done by 
economists and investigators who do not have a history of 
working for the same companies they are supposed to be 
investigating.
    Review what effect the rapid consolidation of the food 
retailing sector is having on prices paid to producers and 
charged to consumers. Are slotting fees and other methods being 
used to prevent smaller packers and producer-owned alliances 
from getting access to consumers? Why aren't retail prices 
reflecting the prices being paid to producers? Producers have 
always relied on lower retail prices to help clear out surplus 
production. This no know longer seems to be happening.
    We talk about packer profits. I would just like to quickly 
put this into a little perspective. And it's using figures 
quoted by Wayne Purcell in an article he wrote for the American 
Meat Institute. An industry analyst went and figured that the 
average cattle packer's profit during the 1990s wasdollars and 
38 cents a head profit which seems to be a fairly modest 
profit. But now I want to put this in perspective. At that 
rate, they have got that animal for five days, and the meat is 
gone. Well, I sell fat cattle. I'm happy if I see a check 
within a week, so I guess I go and finance the raw material.
    Let's look at a cow/calf guy that goes and runs his calf 
seven months. Just the time he has that calf on the ground, at 
a dollar seven cents per head per day, he should be averaging a 
profit of 225 dollars a head. A background or a stocker running 
them five months should be realizing a profit, an average 
profit, of 160 dollars a head. A cattle feeder feeding for 180 
days should be realizing a profit of 190 some dollars a day. 
The cow/calf producer who feeds his cattle all the way out, 
retains ownership for 428 days, should be realizing an average 
450 dollar profit to be receiving the same modest profit that 
the packer industry says they are earning.
    Let's put this in a little more perspective though. 
Producers out here control, maintain, finance and pay the taxes 
on 85 percent of the assets needed to get that steak from the 
pasture to the plate. So at that rate--and the packers and the 
retailers, they support 50 percent of the assets. You know, 
maybe we need to go and adjust those numbers a little further.
    Cattlemen have an innate ability to look at an animal that 
appears healthy to a layman and know that animal is off feed, 
sick or has some other problem. The ability is part intuition, 
part experience. It's something they feel in their gut. They 
know if they don't correct the problem, the animal will 
probably die.
    They have this same feeling in their gut when looking at 
what is happening in the packing industry. Without strong 
enforcement of the laws already on the books and steps to 
assure that the livestock industry maintains open, competitive 
markets, they know the livestock industry for independent 
producers will die. Thank you, Senators.
    Senator Durbin. Thank you, Mr. Mack. (Applause.)
    [The prepared statement of Mr. Mack appears as a submission 
for the record.]
    Senator Durbin. Jim Van Der Pol from Minnesota.

   STATEMENT OF JAMES VAN DER POL, INDEPENDENT HOG PRODUCER, 
                      KERKHOVEN, MINNESOTA

    Mr. Van Der Pol. That is going to be a hard statement to 
follow. I am going to tell you, though, a little bit about my 
farm today. I made the majority of my livelihood since I begin 
farming in 1977 with hog production. For the first years, I 
never lost money on hogs, though sometimes it was close. But 
things changed. In the mid 1990s, Dakota Pork of Huron, South 
Dakota, which was buying most of my production, was bought by 
Smithfield Foods which immediately closed it when there was 
talk of state ownership and keeping the processor open for 
small farmers.
    My son and daughter-in-law joined us on the farm in 1997. 
Consequently, we built two hoop houses for hog finishing and 
tripled the hog production from 60 litters per year to 180. 
Most production was done in pastures seasonally, while the 
hoops enabled us to produce a certain number of hogs year 
round. Our first full year of production was 1998.
    In the fall of 1998, when most of our first year of 
expanded production was ready, hog prices dropped to eight 
cents a pound. Now, it takescents worth of feed, even at corn 
prices we have now, to produce a pound of pork. Every pound 
those pigs put on was costing us seven cents out-of-pocket just 
on feed. We were hemorrhaging money.
    We started calling everyone we knew or ever heard of that 
bought pigs to try to get rid of them. We finally found a Hmong 
butcher in South St. Paul interested in light weight hogs who 
bought most of what we had left, market price, eight cents.
    And what did the industry have to say? It's not us, they 
said. We are innocent, they said. It's the shortage of shackle 
space, they said. That's what drives the price down. As long as 
I live, I will remember that series of excuses out of the 
industry in 1998 in the light of what they had done to my hog 
buyer a few years earlier. We should have seen the handwriting 
on the wall when Dakota Pork closed.
    We now operate under the assumption that the commodity 
market is the enemy. We do whatever we can to minimize that 
commodity market's access to our farm's production. In 1999, we 
started direct marketing our hogs, purchasing a trailer and 
freezers with which to run a monthly delivery route into the 
Twin Cities, 130 miles distance. In 2000 we started moving into 
a few small grocery stores with our own pork label. We have 
built this meat business to the point where it uses about 40 
percent of the hogs, of the farm's hog production. The 
remaining 60 percent is sold to a specialty company which pays 
a premium for our husbandry methods and the meat quality of our 
animals. Only the cull sows are exposed to the commodity market 
now, and we are working to fix that.
    We didn't stop there. We are converting the farm from row 
crops--the farm, by the way, is 300 acres. We are converting 
the farm from row crops to grass for our replacement heifer 
grazing business, replacement dairy heifer business. We are not 
interested in selling commodity corn anymore than commodity 
pork.
    1998 was a very expensive lesson for us. At age 50, my wife 
and I lost at least ten years of worth of equity and work in 
several weeks' time. Any hope of a conventional retirement is 
gone for us at this point. My son and daughter-in-law had a 
very rocky start to their farming careers and are angry and 
suspicious of everything and everyone connected with farming. 
We are all exhausted, having worked seven day weeks for four 
years now to try to build our meat company's sales in a very 
adverse environment.
    Even though our dependence upon commodity production is not 
what it was, we know very well that if the meat industry is not 
brought under some kind of control, they will do to our meat 
licensing and our meat business just what they are doing to 
commodity producers. We are pleased with our two senators, Mr. 
Dayton and Mr. Wellstone, as well as very pleased with our 
senator from South Dakota, Mr. Johnson, for their moving 
against packer ownership of livestock. This bill needs to pass.
    I appear before you today a very angry man. I am angry 
because my government fails in what should be a central task 
for a democratic government in a market economy. It has failed 
and it is failing to restrain the power so that others might 
survive. It is this failure that is decimating rural America. 
We should not have to think in rural America of our own 
government as an enemy. You folks have the power to do 
something about that. Please use it. Thank you for your time. 
(Applause.)
    [The prepared statement of Mr. Van Der Pol appears as a 
submission for the record.]
    Senator Durbin. Tim Bierman from Iowa.

   STATEMENT OF TIMOTHY BIERMAN, INDEPENDENT PORK PRODUCER, 
                         LARRABEE, IOWA

    Mr. Bierman. Good afternoon. I am a pork producer from 
Larabee, Iowa. I am the president of the Iowa Pork Producers 
Association. I am an owner/operator of a hog farm that markets 
over 10,000 hogs a year. I also farm nearly 500 acres of corn 
and soybeans. I appreciate this opportunity to present our 
views on competitive and open markets.
    The Iowa Pork Producers Association is the oldest and the 
largest state pork producer group in the country. IPPA 
represents over 6500 pork producer-leaders proactively on 
issues ranging from international trade missions, pseudorabies 
eradication, ag policy and environmental regulation. In Iowa, 
the pork industry accounts for over 86,000 jobs, contributing 
nearly three billion dollars in payroll to our state's 
residents. If you look at the total economic impact to the 
State of Iowa, our pork production affectsbillion dollars in 
the state.
    Our organization has previously testified on the issue from 
a different perspective, specifically on the proposed ban on 
packer ownership. While we strongly support this concept, today 
I would rather focus on a new proposal to require a percentage 
of the livestock to be purchased on the spot or cash market.
    This new concept was apparently discussed during the 
conference deliberations of the farm bill which was sidelined 
until further review. This approach appears to be--appears to 
have bipartisan support, including South Dakota Senator Johnson 
and Representative Thune. The proposal has been introduced by 
Senator Grassley in the Senate and in the House by a number of 
co-sponsors.
    Just this week our board of directors voted to endorse the 
legislation and to devote resources toward its passage. Our 
board took this action because farm--livestock farmers are 
concerned about the availability of competitive livestock 
markets. This approach would guarantee that independent pork 
producers have a share in the marketplace while assisting the 
mandatory price reporting system. Requiring negotiated sales 
ensures that processors will provide for public shackle space 
for all hog farmers.
    Available shackle space has become critical for independent 
farmers because promises of new slaughtering plants will not 
benefit farmers if the slaughter is only for packer-owned hogs 
and the new plant results in the closing of another plant. The 
legislation would improve the accuracy and the transparency of 
all livestock markets. As our national organization correctly 
stated in a 1999 press release, more negotiated sales would 
help ensure prices reported for the spot market reflect the 
current value of hogs.
    Furthermore, we think that this approach makes sense for a 
number of specific reasons, including both packers and 
producers need accurate market information from negotiated 
livestock sales. While the information will be used to 
determine daily cash purchases, this approach will also impact 
animals purchased on the contract and formula basis because 
most of the marketing contracts are tied directly to the cash 
market.
    The legislation phases in the required spot purchases and 
is not fully implemented for six years. This will allow farmers 
and packers time to fully implement and adjust to the 
legislation.
    Smaller packers and single plant entities are exempt from 
the law.
    Most, if not all, packers are currently in compliance with 
the five percent purchase requirement.
    Farmers who form and operate cooperative packers would also 
be required to purchase spot and cash markets--market animals, 
but at half the percentage compared to the traditional packer.
    These are a few reasons to support legislation, and I'm 
sure there are many more. Pork producers throughout the country 
need more competitive markets. We urge Congress to give the 
producers an opportunity for success by enacting this 
legislation.
    And another market issue facing farmers is the full 
implementation of the federal Mandatory Price Reporting law. 
USDA started in the right direction, but continued market 
oversight is now crucial.
    In closing, IPPA is committed to a fair, transparent and a 
non-competitive marketplace. Our producer members constantly 
remind us of our duty. Mr. Chairman, thank you for holding this 
important hearing, and giving me the opportunity to address the 
committee.
    Senator Durbin. Thank you.
    Mr. Bierman. The Iowa Pork Producers Association stands 
ready to assist you in the work you are facing.
    [The prepared statement of Mr. Bierman appears as a 
submission for the record.]
    Senator Durbin. Thank you very much, Mr. Bierman.
    Our last witness on this panel is Miss Sara Lilygren with 
the American Meat Institute. Miss Lilygren.

 STATEMENT OF SARA J. LILYGREN, VICE PRESIDENT FOR LEGISLATIVE 
    AND PUBLIC AFFAIRS, AMERICAN MEAT INSTITUTE, ARLINGTON, 
                            VIRGINIA

    Ms. Lilygren. Thank you, Senator Durbin. AMI is the 
nation's oldest and largest organization representing 
meatpackers and processors whose business practices, as we 80 
have noted today, are governed not only by the Sherman Act, the 
Clayton Act, the Robinson-Patman Act and the Uniform Commercial 
Code, but also by the Packers and Stockyards Act, a statute 
that is unique to our industry alone and clearly prohibits 
meatpackers from engaging in unfair or deceptive business 
practices. To my knowledge, there is no other sector of the 
U.S. economy in which the federal government plays such a watch 
dog role with respect to raw material suppliers.
    And yet, ironically, we are here today to discuss whether 
meatpackers should receive yet additional scrutiny, enforcement 
or business restrictions in order to protect or benefit 
livestock producers.
    While some suggest our laws and the enforcement of them are 
inadequate, I would suggest another theory, which is perhaps we 
have not done a good job of pinpointing the real problems and 
coming up with effective and constructive solutions.
    You know, it's interesting we have spent about 95 percent 
of our time today talking about the supply side of the chain 
with very little mention of what is equally, if not more, 
important which is the demand side of the chain. Someone asked 
earlier who is going to control agriculture in the future. And 
I would say that the consumer, who hasn't gotten a lot of 
attention here today, plays a very large role in that.
    AMI's members have one common objective; to make things 
consumers will buy. We know that U.S. consumers have diverse 
tastes, and 95 percent of them eat meat and poultry regularly, 
so there is ample room in the marketplace for many different 
kinds of products with different attributes. And we also know 
there is a robust global appetite for our meat and poultry 
products. We now export about percent of our beef, about 
percent of our pork products, principally to Japan, Mexico and 
Canada.
    In fact, livestock producers, many of you in this room, 
have raised and spent hundreds of millions of dollars in the 
past decade to build consumer demand through check off 
programs, both domestic and international consumer demand. All 
of these efforts have had many benefits, including improved 
communications throughout the meat chain, among retailers, 
packers and producers. This has led to increased vertical 
integration.
    AMI's own members have increased their coordination with 
both livestock producers and retailers to try to produce the 
products consumers want to buy. In fact, sometimes AMI's 
members have changed their management or operations in order to 
meet their customers' needs.
    Now, this vertical cooperation has some positive benefits 
you are all familiar with. One I would cite is the reduction in 
fat content in the average serving of beef and pork. That was 
clearly the result of working together with the retail, packer 
and producer elements of the chain.
    Another is improved risk management options for producers. 
And I would just cite contracting, as others on the panel have 
cited, as one of the risk management tools that helped some hog 
producers when the bottom fell out of the hog market in 1998. 
Those hog farmers who had contracts are doing a lot better than 
those who did not. At the same time, packers were obviously--
who had the contracts were obviously paying far over the market 
value for hogs, but both parties ultimately benefit from the 
certainty provided by a steady, consistently priced, contracted 
supply of hogs.
    Before I leave the topic of benefits of coordination and 
integration, I just want to mention that this is a trend 
throughout the manufacturing and service economy, and it's 
driven largely by consumers who are demanding consistent 
product quality at the lowest possible price. This demand for 
low prices has led to fewer and larger retail chains in every 
arena. The consolidation at the retail level has driven 
consolidations at the manufacturer level, not just for 
agricultural products, but for tools, appliances, and other 
consumer goods. The demand for consistent product quality has 
led many firms to exert greater control over their supply 
chain.
    Just ask anyone who supplies products to Wal-Mart or 
McDonald's what that means. It means you must meet their 
standards or you can't sell to them. It often means you must 
subject your products and your plants to periodic customer 
audits. That's the way business is done today, and the meat 
industry should be no exception.
    Against this backdrop, I hope you can understand why AMI 
strongly opposes efforts that would make it illegal for meat 
manufacturers to do what the rest of the global business 
community is doing, which is to form relationships with 
suppliers of raw materials in order to produce consistent 
quality, lowest priced products that consumers will buy. In our 
view, the proposed ban on packer ownership, control or feeding 
of livestock would do just that. Further, we will oppose any 
effort to restrict meatpackers who comply with existing 
antitrust and fair business practice laws from sourcing their 
raw materials in anyway.
    If there is a consensus that the livestock market is not 
working properly, then we would advocate a thoughtful, 
reasoned, fact-based approach that will help all businesses--
farms, ranches, processors and retailers--pinpoint problems, 
and develop targeted and effective solutions.
    Thank you.
    [The prepared statement of Ms. Lilygren appears as a 
submission for the record.]
    Senator Durbin. Thank you for your testimony. Let me ask 
the first question of you then. What is the American Meat 
Institute's position in terms of the traditional source of 
meat, the independent owner, operator and producer, do you feel 
that that is just a thing of the past like the shops on the 
downtown square that went away when Wal-Mart showed up on the 
outskirts of town? Is that a vanishing phenomenon?
    Ms. Lilygren. It appears to be a shrinking part of the 
market. Are you asking me if it's a dying source that is going 
to become extinct, I don't think we can predict that. We don't 
have a point of view advocating for that or not.
    Senator Durbin. Would you not say that the policies of your 
members are moving that extinction along faster by your own 
ownership of production and by the lack of competition 
available for prices for these producers?
    Ms. Lilygren. What I would say is that the policies of the 
federal government have made it more and more difficult for the 
independent meatpacker to stay in business. Many of the packers 
that have sold to larger packers in recent years, who may or 
may not have chosen to continue those plants' operations, have 
done so because they cannot tolerate the risk associated with 
meeting federal food safety and other requirements on a day in, 
day out basis, particularly single plant operations.I21Senator 
Durbin. So you are saying that we have got to make a choice 
here, whether we want to have safe food--
    Ms. Lilygren. No.
    Senator Durbin.--or we want to have these ranchers and 
livestock producers?
    Ms. Lilygren. No. I'm saying that one of the motivating 
factors for much of the consolidation in the packing sector 
that has occurred over the last ten years, one of the strongest 
motivations for that, has been tougher federal regulations that 
make it difficult for the small independent packer to comply.
    Senator Durbin. Let me go to particular points you raise 
here. You were arguing that in order to get quality control you 
have to control much more than you did in the past, and perhaps 
the conclusion is you have to own a lot more than you did in 
the past. So you are suggesting that if you went to a pork 
producer or beef or cattle producer and said to them this is 
what we are looking for in terms of leanness and fat content, 
that they would ignore you?
    Ms. Lilygren. No.
    Senator Durbin. Well, then, why do you need to own so much 
more on the front end of the process to get the quality that 
you are looking for? If you establish a standard, don't you 
believe that men and women in South Dakota and Minnesota will 
be producing cattle and hogs to meet that standard?
    Ms. Lilygren. And that's why--I'm sorry, I may have 
misunderstood your original question, Senator. The need for the 
food manufacturer to have some degree of control, or let's call 
them product specifications for their raw materials, drives 
them to enter into some sort of arrangement, whether it's 
contracts, forward contracting, a marketing agreement, or 
outright ownership of the supply. That is quite--that is quite 
a spectrum of different arrangements whereby the manufacturer 
and the raw material are in some way connected.
    So, now, your question is do I think an independent 
producer can't for some reason meet the requirements of a 
packer who wants to control certain attributes. The answer is 
no.
    Senator Durbin. I don't believe it either. In fact, I think 
history says otherwise. I think that these gentlemen here with 
us today can tell you what has happened in pork and beef 
production over the years in terms of standards that they are 
meeting and that the industry is demanding, and they are doing 
it. And they don't have to be paid employees of any major 
packing company in order to produce the hogs and cattle that 
are going to meet those standards.
    I also think that the fact that you are eliminating risk, 
as you say it here, you can eliminate risk by giving them a 
price that they are going to go out of business on. That is 
quite an elimination of risk. It's also an elimination of their 
livelihood.
    Senator Johnson.
    Senator Johnson. I want to thank this panel. In the limited 
time we have here, I want to say, Professor Carstensen, I want 
to thank you for your--a lot you did in your testimony here, in 
your statement. I can't agree with you more that--when you note 
that restoring greater balance in the market, the government 
taking an aggressive role to make that happen, is not some sort 
of radical interference with the market. In fact, it is 
consistent with what we do in many areas, including the 
regulation of credit, insurance, product safety, job safety, 
franchising energy and securities markets. So that we have 
numerous examples of where we have in fact stepped in to our 
free market economy to ensure that it in fact remains a free 
market and free enterprise type of economy. And I think it's a 
very important observation that you have made.
    Let me ask Tom Connelley, again, just observe--what you are 
telling us that the packers schedule blocks of captive supply 
livestock for slaughter over a period of time, then they pull 
out of the market during that time, and watch the open cash 
price for livestock fall, then they can take advantage of 
that--of that fall. Is that--is that the process that you were 
driving at?
    Mr. Connelley. Yes, sir. When they have a large captive 
supply, whether it be through contracts or through their own 
feedlot-owned cattle, maybe through one of the big feeders that 
is packer-oriented or packer-tied, where they go in there and 
have access to those cattle at any point in time, and they can 
stay out of the cash market until the individual independent 
cattle feeder or the independent feed yard, until he finally 
comes down to their price. That price is sometimes determined 
by the way that the commodity futures board acts. A big sell 
off on the board, you will definitely buy cattle cheaper. In an 
uptrending market, they will be trying to buy them at steady 
prices or less, depending on how many of their own cattle they 
have got to kill.
    Does that answer your question?
    Senator Johnson. I think that does, Tom. I think that is a 
valuable contribution here.
    Let me ask Mr. Mack, it seems to me that market power is 
often mistaken for efficiency in livestock markets. In your 
opinion, if a meatpacking firm generates more profit, is it 
because that packer is efficient or is it because the packer 
has exercised market power to increase its profit margins, 
doing that by driving commodity prices below what would 
otherwise be competitive levels?
    Mr. Mack. I would say in many cases it is a matter of 
market power. I think that many of our smaller packers were not 
driven out of business due to lack of efficiency. It was just 
that they did not have equal market power to their competitors. 
It's much the same thing in livestock production.
    A farmer feeds, whether you are a hog producer or you're a 
cattle producer--and I'll just try to put some round numbers on 
it--but it would cost that producer cents a bushel to haul the 
corn to market. If he was going to buy it out again to use it 
as a feeder, it would cost another cents a bushel mark-up for 
handling. You got cents a bushel to haul it back to the farm. 
You add that up, that's 32 cents a bushel. Well, much of the 
time in the last few years, we have had corn at a dollar and a 
half or less. That farmer feeder already increased his 
efficiency on the price he got on the grain by percent just by 
utilizing it on the farm. At the same time they utilize 
equipment and labor that they utilize in other production 
practices, those costs spread out greater.
    There is significant research out there showing that once 
you would get over about a 150 farrow to finish unit, and even 
on cattle feedlots and things like this, that you can be as 
efficient as the largest lots in the country. No one can get 
beat on efficiency.
    The thing is, I'll go up against any feedlot or any other 
production, I don't care what size they are, on efficiency. But 
I have got to go and have access to the same comparable market 
for the same quality of livestock that they have got. And if 
I'm squeezed out just because I only market one or two pot 
loads of cattle at a time instead of, you know, having control 
over an entire lot, then I'm in trouble.
    Too much of the packer ownership in livestock, when it 
comes to cattle feedlots and things, is going in and putting--
agreeing to put a few head of livestock into a lot, and then 
using those few head to leverage control over cattle that they 
may not even own. Maybe some rancher, they were his cattle. But 
that feedlot operator, the only way he goes and makes money is 
to keep his. And if you don't think a packer in there with ten 
percent of the cattle in there, and at the same time one 
providing you a market, doesn't have a lot of influence over 
his choices and his recommendations to his customer, you have 
got another thing coming.
    Senator Johnson. Thank you. My time has expired. The 
Chairman.
    Senator Durbin. Senator Dayton, I know you have to catch a 
plane.
    Senator Dayton. One last stop. I appreciate that. Miss 
Lilygren, you mentioned, if I heard you right, the consumer is 
going to control the food markets of this country when your 
industry and others in the food industry have done everything 
possible, it seems to me, to prevent that from happening. 
Irradiation of meat is not something consumers have control 
over that has been pressed, to ferment opposition to the 
country of origin labeling, opposition to content labeling, you 
know, pushing for higher retail prices that are unrelated to 
lower prices for producers.
    I see just the opposite. I see consumers being kept away 
from having the kind of control that they ought to have, the 
kind of choices, the kind of information to make those choices 
and decisions. And I think that is the whole reason we are 
talking here, is because the economic power is being 
concentrated in the hands of those who are in between the 
producers, the farmers, the growers, and the consumers. And 
that's--not to put people out of business, but just to restore 
a balance so that people are getting better quality, they are 
getting--know what they are getting and they have choices, and 
they are reasonably priced and farmers and producers get paid 
enough to survive. And that means, you know, that people--
everyone else takes something less in order for that to be 
possible. I just don't see that that is the way it's unfolded 
in this country or is even headed in that direction.
    I would like to go to your testimony here where you talk 
about that American Meat Institute strongly opposes efforts 
that would make it illegal for meat manufacturers to do what 
the rest of the global business community is doing which is to 
form relationships with suppliers of raw materials in order to 
produce consistent quality, lowest priced products that 
consumers will buy. What are you talking about here?
    Ms. Lilygren. Senator Dayton, our view is that a ban, in 
other words, making it illegal for a meatpacker to own or have 
substantial managerial supervisory or operational control over 
or to feed his or her livestock supply, would be tantamount to 
making it illegal for that manufacturer to have supply chain 
management which is a term people use in manufacturing, and you 
see it in the retail sector. I mentioned McDonald's and Wal-
Mart as just two blatant examples of others further down the 
chain that want to have some control over their supply.
    Senator Dayton. Illegal for manufacturers to form 
relationships with suppliers of raw materials. That presumes 
that the suppliers are entities which produce that product and 
supply that product. I mean that's--and you are saying that is 
going to be made illegal?
    Ms. Lilygren. It would be illegal.
    Senator Dayton. To do what?
    Ms. Lilygren. For a manufacturer to have substantial 
managerial, supervisory or operational control. Now, there is 
some debate about what exactly that ends up meaning. Our 
interpretation and our attorney's interpretation of that is 
that it would make contracting which you stipulate--
    Senator Dayton. You must pay your attorney a lot of money 
to misunderstand the legislation. We went through in 
Washington--really. No, I mean the kind of obfuscation that 
your institute put forward and, you know, just fundamentally 
misrepresenting what the language stated. And then we even went 
back and restated it again, Grassley and Johnson went back, 
restated. You don't want to understand what it really is 
because you don't want what it does.
    Ms. Lilygren. With all due respect--
    Senator Dayton. I'm not done yet. (Applause.)
    Ms. Lilygren. With all due respect, Senator Dayton, neither 
you or I are attorneys, so we can blame the attorneys maybe for 
the obfuscation.
    Senator Dayton. I'm not blaming the attorneys. I am blaming 
the institute. I think you are the ones whose obfuscating 
because you wanted to try to muddy the waters. And you were 
actually fairly effective for a while doing so. Now you are 
trying the same thing here; to say it would be illegal for you 
to do what the rest of the global business community is doing 
which is to form relationships with suppliers.
    The legislation is intended to preserve suppliers so there 
will be suppliers. It's saying you can't become the suppliers, 
you can't take over the suppliers, you can't run the whole 
show, become the whole show. It's exactly the opposite of what 
you are saying.
    Ms. Lilygren. Let me ask you a question. Under this law if 
you were the--if you were the livestock producer and I'm the 
packer, and I want to buy your cattle, but I want--I only sell 
to the consumer hormone-free cattle raised having listened to 
Beethoven their entire lives and fed on clover flowers, and I 
put that into my specifications, our attorneys have said--my 
purchase specifications--let's say I have a contract with you, 
I need to market that, I have Sara's Special Beef. My attorneys 
say that under the packer ownership ban, the latest version of 
it, that it would illegal, that that would constitute 
substantial operational, managerial or supervisory control 
because I'm telling you what I need you to do to the animals 
before I buy them.
    Senator Dayton. I have to disagree with your attorneys.
    Ms. Lilygren. You disagree.
    Senator Dayton. I don't know. I honest--I honestly don't 
know.
    Senator Johnson. Will the gentleman yield?
    Senator Dayton. I'm not going to yield so much as I'm going 
to leave the room.
    Senator Johnson. I would observe for the gentleman from 
Minnesota that your position and my position relative to this 
legislation not forbidding contracting was agreed to by three 
of the leading economists, analysts in America, including Mr. 
Neil Harl of Iowa State University. So it isn't just a matter 
of you and I arguing about what this language means. It seems 
that we have had some of the best agriculture and legal minds 
in the world examining this and agreeing that the meat 
institute is wrong, we are right; the legislation does not 
prohibit--forbid contracting. (Applause.)
    Senator Dayton. One last question. Mr. Van Der Pol, when 
you talk about the 130 miles to market, what is the cost factor 
of that? Was this round trip? What does that add to your costs 
of production?
    Mr. Van Der Pol. It's a little difficult to say since it's 
not our entire production. I will say that our transportation 
costs are by far the largest cost involved in our meat 
marketing. And on the order of, in terms of gross meat sales, 
to percent.
    Senator Dayton.15 to 18 percent. So we are talking about 
monopsony being a monopoly in a region where you only have one 
buyer to sell to. I mean the transportation costs really are 
limited in terms of where else you can transport a product, 
especially an animal, to be--to have another place to sell it.
    Mr. Van Der Pol. Oh, absolutely. We--on the other side of 
my testimony, which is the specialty market, I would like to 
point out to the committee that I spent the first years of my 
hog production delivering my hogs miles to one packer or buyer, 
or miles to another buyer, or miles to a third buyer. And then 
there was another one at 20, which I never used. I am now 
transporting that specialty production 170 miles into Iowa, and 
it's up to me to arrange the trucking. And I think--any farmer 
in the audience, and we have got a few by the sounds of it, 
knows what that means, especially at my level of production.
    Senator Dayton. I have got to go catch a plane.
    Senator Durbin. Thank you. I would like to ask a couple 
more questions. I thank Senator Dayton for joining us.
    Miss Lilygren, one of the points you made at the outset of 
your testimony is you have to listen to your customer, the 
American Meat Institute has to listen to the customers. I would 
like to make a proposal to you. I would like to ask your 
customers--and let's agree on the pollster who is going to ask 
this question so we both understand that it's someone 
reputable--whether or not they agree or disagree with Senator 
Johnson's proposal for labeling country of origin of meat. And 
if it comes back that your customers agree with Senator Johnson 
for labeling the country of origin so that people know when 
they are buying American beef or American pork as opposed to 
other countries, will the American Meat Institute then support 
Senator Johnson's amendment?
    Ms. Lilygren. Are you going to ask retail and our food 
service customers--
    Senator Durbin. No, the people, the consumers.
    Ms. Lilygren. The consumers, oh. That--we use the term 
``customer'' to mean our accounts. Yeah, we should talk about 
that. I thought--let me just--I'm not dismissing it. I'm saying 
we should talk about that.
    But let me ask you another question. Could we agree that in 
future discussions about the marketplace and the prices that 
producers and packers receive for the sale of meat products, 
that we include the retail and food service customers in the 
discussion because they are an important piece of the economic 
chain here.
    Senator Durbin. I'm sure there is no objection to that. We 
tried to invite a number of your members and they decided they 
didn't want to come and testify.
    Ms. Lilygren. But no one from the retail or food service 
sector, which is an important piece of this, has been involved 
in these discussions, and I think it would add information that 
would be useful to all.
    Senator Durbin. We are going to send a little letter along 
to the American Meat Institute and ask them--in fact, I think 
we can probably find some people to ask this question about 
country of origin, which I believe the American Meat Institute 
has been opposed to.
    Ms. Lilygren. Yeah.
    Senator Durbin. I think that the consumers across America, 
I think your consumers that drive your decisions, want you to 
change your policy, so let's find out. (Applause.)
    Ms. Lilygren. I think our customers in the middle would 
disagree.
    Senator Johnson. Let me just close this session here. It's 
an honor for me to have an opportunity to serve with Senator 
Durbin on the Judiciary Committee. The Senate Judiciary 
Committee is not normally a committee on which I serve. And I 
am very appreciative of Senator Durbin coming to South Dakota, 
appreciative of Senator Dayton for his participation as well, 
and appreciative of all the panel members, of the diverse 
points of view. I think this has been a very positive 
interchange that we have had here today for the Judicial 
Committee, also for me, and it's something that we are going to 
take back to Washington with us.
    Clearly we are dealing with an issue that is of absolute 
fundamental importance to the South Dakota economy, but I think 
to the economy of the nation as well, to the interests of 
consumers all across this country. It seems to me that--that 
from what I can hear now, and what I have been listening to has 
confirmed what I have always felt, and that is the consumers 
ultimately are best served by a broad network of independent 
livestock producers, that the free enterprise system requires 
competition, and that we have fallen down on the job in 
Washington in terms of assuring the fact that a high level of 
competition exists.
    And what has happened is that the benefits of free 
enterprise have in too many instances been lost, and 
independent producers find themselves with fewer and fewer 
options, find themselves in a take it or leave it circumstance. 
And as has been the case in other countries, whether it's the 
former Soviet Union or otherwise, where they have chased 
independent private agricultural producers off the land and 
replaced them with corporate employees, collectivized employees 
and then found out they couldn't feed their people and they 
want to come back and restore private agriculture and family 
farmers, and found that once they have been pulled up by the 
roots, they can't be brought back.
    Well, that is what this county is going to learn if we 
continue to stay on the current track, chasing independent 
family producers off the land. We are going to wind up 
ultimately damaging not only them and the economies of these 
rural areas, but the consumers themself. So it's in the 
interest I think of all of us that we continue to create a 
situation where decent competition exists, where a fair price 
for the product exists, rather than having this race to the 
bottom to see which country in the planet--on this planet can 
impoverish its farmers and ranchers the fastest. That is what 
we are doing right now. That has got to change.
    Thank you, Senator Durbin. (Applause.)
    Senator Durbin. As is our custom on the Judiciary 
Committee, we will keep the record open for one week for 
senators to submit questions and statements to the witnesses.
    I want to thank all the witnesses for participating today. 
I especially want to thank Ms, Lilygren for coming under 
adverse circumstances. Your employer owes you a steak dinner. 
Let's hope it's from an independent producer. (Applause.) I 
also want to thank Senator Dayton, and a special thanks to 
Senator Johnson who has really been the leader in the Senate on 
this issue.
    Assuming there is no further business before the committee, 
the Judiciary Committee stands adjourned. (End of proceedings 
at 3:50 p.m.)
    [Submissions for the record follow.]
    [Additional material is being retained in the Committee 
files.]

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