Testimony of Bill Hawks

Under Secretary for Marketing and Regulatory Programs

U.S. Department of Agriculture

before the

United States Senate

Committee on Agriculture, Nutrition, and Forestry

July 16, 2002

Mr. Chairman, good morning and thank you for the opportunity to appear before this Committee to discuss the proposed ban on packer ownership and USDA enforcement of the Packers and Stockyards Act.

I am Bill Hawks, Under Secretary for Marketing and Regulatory Programs. With me is Donna Reifschneider, Administrator of the Grain Inspection, Packers and Stockyards Administration (GIPSA).

As you know, GIPSA is divided into two parts: the Federal Grain Inspection Service and the Packers and Stockyards Programs. The Federal Grain Inspection Service establishes Federal grain standards and oversees the official inspection of U.S. grain. Packers and Stockyards Programs administers the Packers and Stockyards Act of 1921 (the P&S Act), which prohibits unfair, deceptive, and fraudulent practices by market agencies, dealers, stockyards, packers, swine production contractors, and live poultry dealers in the livestock, poultry, and meatpacking industries.

GIPSA has an important role in protecting the interests of producers by helping assure integrity in the Federal grain inspection system and the markets for livestock, meat and poultry, and I am committed to ensuring that livestock and poultry producers are paid promptly and that livestock marketing firms, meatpackers, poultry integrators, and meat distributors face appropriate consequences if they engage in anticompetitive and unfair market behavior.

Packers and Stockyards Programs (P&SP) monitors the livestock, meatpacking, and poultry industries, estimated by the Department of Commerce to have had an annual wholesale value of $125 billion in FY 2001. At the close of 2001, there were 1,525 stockyards, 6,241 market agencies and dealers, and 2,050 packer buyers that were subject to the P&S Act and registered with P&SP. An estimated 6,000 slaughtering and processing packers are subject to the P&S Act. This included 249 slaughtering packers in FY 2001, each of whom purchased over $500,000 of livestock in 1999 and were required to be bonded and file reports with GIPSA. In addition, 205 poultry firms and a significant number of meat distributors, brokers, and dealers are subject to the P&S Act. To monitor these industries, P&SP has an annual budget of less than $18 million and less than 200 employees. Despite the small size of P&SP, P&SP's work in the regulated industries resulted in the recovery or return of about $20 million to producers or the regulated industries. The men and women who comprise P&SP are as committed as I am to enforcing the P&S Act, and are up to meeting the challenges of the rapidly changing livestock, meatpacking and poultry industries.

Last fiscal year alone, P&SP conducted 1,619 investigations in our three areas of regulatory responsibility: financial, trade practice, and competition. About 400 of these investigations resulted from complaints filed with P&SP, and the remaining investigations were initiated by P&SP as a result of monitoring industry behavior, following up on problem areas, responding to questionable items on reports to P&SP, and other activities revealing information about the industry. If you look at each of these areas, you will see that we are indeed enforcing the Packers and Stockyards Act.

In the area of financial protection, P&SP conducted 715 investigations in FY 2001 to investigate complaints and monitor the financial integrity of the livestock, poultry, and meatpacking industries. These investigations included alleged failure to pay for livestock or poultry; failure to pay when due for livestock or poultry; operating while insolvent; failure of market agencies to properly maintain custodial accounts; and enforcement of the packer trust provisions of the P&S Act.

We also provide financial protection in ways that are not measurable. For example, when Farmland Industries declared bankruptcy on a Friday, we made arrangements to have rapid response teams on site at every Farmland plant on the following Monday to conduct prompt payment investigations to ensure that producers were receiving payment and to ensure that Farmland had sufficient trust assets in the event of a complete financial failure. By doing this, we helped maintain stability throughout the hog market. Any time there is a financial failure by a packer or live poultry dealer, P&SP sends out rapid response teams to conduct a trust analysis so that trust assets can be distributed as quickly as possible. Although we do not have statutory authority to make the ultimate decision as to whether or not the claims are valid, we believe we have contributed to a more expeditious payout of trust assets.

In the area of trade practice, P&SP helps assure, among other things, that firms: Adhere to the terms of poultry production contracts, buy and sell on the basis of accurate weights, not misrepresent weights, animal or carcass quality or prices, have sufficient bonds to cover purchases of livestock and poultry, and not discriminate against or give undue preferences to certain sellers or buyers. P&SP also regulates Internet firms that serve as market agents in buying and selling livestock.

I would like to share with you some examples of investigations in the competition area that are currently underway. While I cannot go into much detail because these are ongoing investigations, it will give you an idea of the steps we are taking to enforce the P&S Act in the area of competition. An investigation in the poultry industry will examine whether there is a disparity between the way integrators treat growers who are geographically isolated and do not have a choice of integrators and those who have several integrators to choose from for contracting and if so, if there is a violation of the P&S Act. During the process of that investigation, we are going to look into poultry integrators' use of mandatory arbitration clauses. We are investigating how hog packers are using meat prices to price hogs. Following the event of September 11, there was a sharp decline in prices in the livestock market. We conducted an investigation to determine if packers were taking advantage of the situation in violation of the P&S Act. We have determined that they were not and that the price declines were due to other factors. We conducted that investigation in conjunction with the Commodity Futures Trading Commission (CFTC). With the CFTC, we also investigated whether rumors about an outbreak of foot and mouth disease in Kansas may have been used to manipulate market prices. Again, we determined that there was no evidence of violation of the P&S Act.

We have taken dramatic steps to improve our ability to handle competition cases. We have carefully considered all of the counsel that we have received from both the Office of the Inspector General within USDA and the General Accounting Office's recommendations that were made in its 2000 report to Congress on steps that USDA could take to improve GIPSA's ability to investigate anticompetitive activities.

In 1998, GIPSA completely restructured P&SP and consolidated more than 11 field offices into 3 regional offices with each one having primary responsibility for certain species--Atlanta for poultry, Des Moines for swine, and Denver for cattle and sheep. In addition, some 35 resident agents provide service in States that no longer have a regional office. Headquarters and regional offices were reorganized along functional lines, with separate units for trade practices, financial protection and competitiveness investigations. The restructuring was completed in 1999. Since then, P&SP has been working to recruit and train new economists and legal specialists, develop new operating procedures, and develop working relationships among the new offices and with the Office of the General Counsel. P&SP now has about 30 economists and seven legal specialists.

P&SP is now very different from the agency that existed in 1990. We have shifted the focus of our employees' skill sets and are moving beyond our traditional investigatory skills relating to failure to pay and unfair or deceptive practices, to undertake more complex investigations of possible apportionment of territory, manipulation or control of prices, and other behavior made unlawful by Section 202 of the P&S Act. These complex investigations require novel economic theories, econometric analyses and other sophisticated technical skills. Now in addition to auditors and marketing specialists, we have a contingent of economists having Master's and Ph.D. degrees. We have licensed attorneys who serve as legal specialists. We have one regulatory analyst and we are hiring more. We have increased the grade levels of all of our senior positions for economists, legal specialists, auditors, and marketing specialists so we can hire and retain more qualified employees.

We are working more closely with the Office of the General Counsel. We are developing work plans for every competition investigation and some other complex investigations. We have revised our employee manual and we continue to revise it on a daily basis as we develop and refine our policies. These are all changes that are not going to be readily apparent to the industry but that will make a significant difference in our efficiency and effectiveness.

We have undergone a dramatic internal shift in how we look at the industry, how we deal with the industry and how we present ourselves to the industry. We have identified concerns about industry practices in our annual assessment of the cattle and hog industries. This is an annual report that we provide to Congress and that we distribute when we go out to speak with groups and with individual firms. We are trying to make the industry much more aware of the requirements of the P&S Act. We are inviting industry participants to let us know what their issues are and to give us information about their new programs or practices before implementing them. This level of open communication with the regulated industry is a new step for us and it has been met with a great appreciation by the industry.

While we have been repositioning P&SP to more effectively enforce the P&S Act, the P&S Act itself has not undergone any significant review in many years. Some intended beneficiaries of the P&S Act (including some feeders, producers, and ranchers) express their belief that consolidation and new marketing methods violate the P&S Act.

Despite our increased efforts to enforce the competition provisions of the Act more effectively, many believe that P&SP is not enforcing the Act because we have not taken any action against packers for consolidating or procuring livestock through the use of captive supply arrangements. However, the P&S Act does not prohibit consolidation or the use of captive supplies. Consequently, unless packers consolidate or use captive supplies in a manner prohibited by the Act (e.g., to apportion territory or manipulate or control prices), neither consolidation nor the use of captive supplies is unlawful.

Earlier this year, we published our Report on the Issue of Captive Supplies in the Cattle Industry. As you know, we reported several significant findings. First, despite its common usage throughout the livestock and meatpacking industries, there is no common definition of the term "captive supply." In general, we define captive supply as livestock that are owned or committed to a packer more than 14 days prior to slaughter. In follow-up discussions with six of the top beef packers, P&SP officials confirmed that packers have no common definition of "packer ownership." P&SP defines "packer ownership" as livestock in which a packer has any ownership interest.

Second, in 1999, the top four beef packers met 8 percent of their procurement needs through cattle that they had any ownership interest in; 24 percent of their procurement needs were met through other captive supply arrangements. We have recently completed a review of top four beef packers 2000 procurement data. Our preliminary analysis indicates that the top 4 firms met 9 percent of their procurement needs through packer owned cattle and 29 percent through other captive supply arrangements.

In addition to the findings of our Captive Supply Study, a significant number of economic studies have been conducted on the short-term effects of captive supplies of cattle on spot market prices. While these studies have shown a correlation between the levels of captive supply and lower spot market prices, they have not shown that captive supplies cause lower prices or that there would be any violation of the P&S Act from captive supply use. In the hog industry, there has been some research on the extent and reasons why parties enter into captive supply arrangements, but there is little research on the effects of packer feeding and forward sales of hogs or other types of livestock. Unfortunately, studies have not fully examined such critical issues as the incentives for entering into captive supply arrangements and the long-run effects of captive supplies on prices, efficiencies and other economic and market factors.

Packer ownership, like all forms of captive supply, has broad ramifications for the livestock and meatpacking industries. We know that a wide range of alternative marketing arrangements is emerging, and that the arrangements are being adopted because the participants believe they are beneficial. Other industries also are adopting similar marketing arrangements. Any actions that would limit participants' ability to enter into alternative arrangements could have profound implications, including possible unanticipated consequences, for market participants and consumers, and for the ability of the livestock industries to compete for consumer spending in the United States and export markets. It is difficult to make important public policy decisions about these arrangements in the absence of sound analyses of their use and implications.

Given the lack of information about why packers enter into packer feeding arrangements, why producers and others enter into other captive supply arrangements, and the implications of these arrangements for the livestock industry and downstream markets for meat, we are considering a comprehensive study on Livestock and Meat Marketing. We are in the process of developing plans for a study would provide Congress with information that would assist Congress, in a deliberative manner, determine whether the P&S Act should be amended to ban certain marketing practices. The study would need to be accepted as valid by the regulated industries and the market participants who benefit from the Act's protections. We would be committed to conducting the study in a timely manner without rushing to conclusions, but we would be committed to reaching conclusions.

It may be time for a review of the P&S Act to determine the best way for it remain vital in the 21^st century. P&SP is planning this comprehensive review and has started to reach out to various industry groups to incorporate them into this process. When the review is complete, it will provide relevant information for public policy formulation.

In conclusion, I want to iterate that we are committed to ensuring that producers are paid promptly and that firms subject to P&S Act jurisdiction do not violate the Act without facing appropriate consequences. We are taking steps to achieve this goal and look forward to working with the Congress to address these issues. I will be happy to respond to your questions.