STATEMENT OF
MR. PAUL JACKSON
ON BEHALF OF
THE NATIONAL FARMERS UNION
BEFORE THE
SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE
JULY 16, 2002
Statement of Mr. Paul Jackson
On behalf of the National Farmers Union
Before the Senate Agriculture, Nutrition and Forestry Committee
July, 16, 2002
Mr. Chairman, members of the Senate Agriculture Committee, it is an honor to appear before you today to testify on behalf of the National Farmers Union and Oklahoma producers. I am Paul Jackson, a fourth generation agriculture producer from south central Oklahoma.
I farm and ranch with my father and brother and we each contribute equipment and labor to the operation. Our operation consists of 3,000 acres of mostly rented land, over 200 cow-calf pairs and, on average, about 1,800 stockers per year. In addition to our own calves, stockers are purchased from local auction barns in eastern Oklahoma. The remainder of the farm is in wheat, rye and alfalfa production.
At the outset, let me commend you, Chairman Harkin and members of the committee, for your efforts in developing comprehensive farm policy, the Farm Security and Rural Investment Act of 2002, that provides a better economic safety net for producers and addresses numerous other needs of farmers, ranchers and rural communities. We are independent and would prefer no government support, unfortunately we can't live without it. Without the help of the government in recent years, it would have been impossible to survive. I would also like to thank you for including mandatory country-of-origin labeling in this legislation. This was a big win for U.S. cattle producers.
While the recently enacted farm bill will help relieve symptoms of the economic distress in the countryside, the farm law alone cannot stop the hemorrhaging that is occurring in Oklahoma and across the nation. A key component in restoring the economic health and vitality of independent producers and rural communities is making structural changes in the agricultural sector that halt the negative effects of vertical and horizontal integration and revive competition and transparency in the marketplace.
America's livestock producers are living through - and we hope to survive - some tough times. The last time my father's tax return showed a profit was in 1989 which was near $11,000 -- well below the national poverty level. Last month, my brother started to work off the farm joining my wife, sister-in-law and myself in the endeavor to keep the farm afloat. Our operation is typical in that I have a full-time farm operation while needing also to maintain a full-time off-farm job to support my family. I do not take any living expenses from our agricultural proceeds. As I struggle to make it work, imagine other producers, like my father, who try to make their livelihood from farm proceeds alone.
The 2002 cattle price crash essentially resulted in my working an entire year for nothing and entering further into debt. It took me 25 years to pay-off a 45 acre tract of farming land. In one year the market wiped out the equivalent of what I had paid during that 25-year period. This becomes very frustrating when at the same time feedlots and packers make record profits year after year at our expense.
The spring market slide has been linked to an array of issues, including 1) the tragedy of September 11; 2) the false report of a Foot and Mouth Disease case in Kansas; 3) the British woman in Florida diagnosed with Creuztfeld-Jakob Disease; 4) McDonald's interest in purchasing foreign beef for their restaurant chain; 5) and the influx of wheat-pasture cattle to market during this period of time. While these events may have contributed to market downward fluctuations, the market slide really began in earnest on February 19, 2002.
Our operation received active bids from buyers on the farm through Monday, February 18, 2002, with bidders promising in excess of $0.84 per pound for approximately 625-pound weight heifer cattle. The market was closed on that Monday for President's Day. The following day the market opened down and proceeded to plunge in the days and weeks following. Little or no interest was given in purchasing cattle unless we effectively gave them away. When inquiring about the lack of interest compared to that demonstrated by the cattle bidders in the previous week, one bidder replied that buyers were staying out of the market for a few weeks because of the packer ban amendment pending in the House-Senate Farm Bill Conference Committee. The Senate had passed their version of the farm bill containing the packer ban language only a week earlier on February 13th.
We continued to hold our cattle that cost us more money each day and week hoping for a price recovery. It wasn't long before the price disparity from the February date had grown to $10 per hundredweight, a decline of $70 on each head. From February through April each animal's weight increased another 100 pounds. At the February 18 price we would have received $525 per head. On April 3, 2002 at $0.74 per pound for the larger cattle, we received only slightly more at $534. This price is seven weeks later after investing thousands of dollars of feed into the cattle and foregoing wheat pastures that could have been baled for use as forage or harvested.
I ended the year as one of the lucky ones in that I cleared my note borrowed for the purchase of the stocker cattle, however I lost all of the other input costs related to my cattle operation. I am now in the hole by $50,000. My first purchase cost of the cattle was $406 per head average. The cattle sale average was $480 per head. After deducting the cattle cost, interest, additional feed costs, medicine and associated veterinary supplies, the end result was $30 per head left on the table - a far cry from the $100 average annual projection of return. While the packers' profit margins have been enhanced by $70 per head from the stocker producers' pocketbooks, cow-calf producers will realize lower prices and the brunt of the spring market crash next fall. Another great packer train robbery has occurred without a single shot being fired.
When I spoke with my local banker whose bank serves eight south central Oklahoma counties and lends $15 million to $20 million in ag loans annually, he said it was typical this year for producers to barely recover their first purchase cost of the cattle. This means they lost their investment of time, interest, feed, veterinary supplies and other costs associated with the stockers. As a result there is little or no operating debt service capacity for stocker producers in Oklahoma. Some were not able to even recover the cost of their initial investment in the cattle.
In prior years we purchased options for price protection so at the very least we would not lose money. This year it was impossible to purchase that price protection because the cost of the option would have been equal to any marginal price protection provided.
Our family's experience is not unique. It has happened to Farmers Union, Farm Bureau and Cattlemen members whom I have spoken to in my state-- Democrats, Republicans and Independents alike. There was a slaughter in Oklahoma this spring but it did not involve cattle. It involved the equity of producers. I have heard estimates that between 25 percent to 50 percent of our state's stocker producers are not able to pay back their cattle loans and service their operating debt.
I cannot provide hard data that there was a concerted effort by packers to drive cattle prices down in order to eliminate the packer ban provision from the farm bill, but the circumstances strongly suggest that this was more than an isolated market event. In fact, I believe it is evidence of the need for the very legislation the packers were trying to thwart. I find it ironic that the packers accomplished their goal to eliminate the packer ban provision - while jeering the ultimate insult to producers who received lower prices - because of their ability to manipulate and control the market. Packers doubly triumphed. They defeated the packer ban provision disadvantaging producers and consumers, and then scored gains on their ledger sheets by taking advantage of the lower cattle purchases costs without corresponding a reduction in retail prices.
POLICY RECOMMENDATIONS
Ban on Packer Ownership of Livestock and Captive Supplies
One of the first outcomes of today's hearing must be the passage of the ban on packer ownership of livestock. Distrust of the packer industry by cattlemen is analogous to the distrust that many citizens are feeling towards corporate America's accounting abuses. This legislation should be the top priority in helping to improve market performance, increase competition and enhance market access and opportunities for livestock producers.
The trend toward captive supplies and packer ownership has dramatically increased market power among the large agribusinesses. Captive supplies refer to livestock that are committed to a specific buyer two weeks or more before slaughter. A 2002 USDA Grain Inspections and Packers and Stockyards Administration (GIPSA) report estimated captive supplies to be 32.3 percent of the total slaughter of the four largest packers in 1999.
Packer ownership and captive supplies allow packers to stay out of markets at strategic times to influence the prices paid for open market cattle. To the extent packers prefer their company owned supplies over that of independent producers, those cattlemen had far less access to markets. Major feeders, many directly related to packers, compete on the local level to purchase stocker cattle that they make available to other producers on contract. Two years ago in one northwest Oklahoma county over 30,000 stocker calves were under contract with one feeder as the owner of the cattle. This is not just a regional problem. Producers in the Upper Midwest are experiencing the same anti-competitive, market depression effects of packer ownership of livestock as hundreds of truckloads of packer-owned cattle are being shipped to their local processing plants competing with local supplies.
Producers will not benefit from more economic or academic studies concerning the effects of the packer ban. We need prompt action by Congress. In addition to enacting the ban on packer ownership of livestock, Congress should address the issue of captive supply. We recommend legislation that place restrictions on the percentage of captive supply a processor may have and require that firm bid pricing be established in forward contracts.
Competition Title
In addition to addressing packer ownership, we strongly recommend the passage of the Senate farm bill's original competition title in its entirety. The competition title developed and debated in this committee during the reauthorization of the farm bill encompassed provisions premised upon ensuring fairness, transparency, access, and enhanced competition in agricultural markets. While some provisions within the competition title, such as mandatory country-of-origin labeling and certain provisions concerning confidentiality clauses in contract production, were included in the Farm Security and Rural Investment Act 2002, we urge enactment of the following provisions:
· Prohibiting processors from engaging in unfair or deceptive acts in the marketing of any agricultural commodity;
· Prohibiting agribusinesses from retaliating against producers by terminating their contracts;
· Prohibiting secrecy clauses and arbitration clauses in producer contracts;
· Establishing within the U.S. Department of Agriculture an Office of Special Counsel for Competition to investigate, enforce and regulate competition matters.
The USDA Office of Special Counsel for Competition should aggressively investigate anti-competitive practices and market manipulation occurring in the agricultural sector and streamline and increase the effectiveness of USDA's enforcement of competition laws. The Special Counsel for Competition should have the authority and subpoena power to collect concentration-related information. For example, firms that account for a significant percentage of the market share at the regional level should be required to disclose information concerning mergers, strategic alliances and other joint venture arrangements.
The Office of Special Counsel should have the authority to seek outside counsel when conducting complex competition litigation. The Department of Justice already exercises this type of authority, such as when it retained David Bois to lead the Department of Justice's trial against Microsoft.
Some suggest conducting a study or forming a commission to review market concentration and to analyze the effects of proposed legislation before taking action. A key problem with academic reports or studies and commissions is the difficulty of obtaining specific data and information. Often the data that is available does not reveal the extent of the vertical integration occurring in the agriculture and retail sectors or the complex interactions among the top firms. One of the duties of the Office of Special Counsel for Competition would be to obtain such information and monitor the changes. Additional studies delay meaningful action. Every day as we wait the situation becomes worse in the countryside. The time for studying is past. It is time for action.
Modernize GIPSA's Models and the Packers & Stockyards Act
USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) has not adequately protected farmers from the unfair packer and processor conduct that has accompanied the structural changes occurring in the agricultural sector.
A 2002 GAO report, "Economic Models of Cattle Prices: How USDA Can Act to Improve Models to Explain Cattle Prices" reveals that USDA does not incorporate market concentration, marketing agreements or forward contracts in their livestock models. Moreover, the GAO review reports that USDA's entire model has not been revised in more than a decade, even though much of the data used to make estimations predates the rapid rise of concentration in the processing sector.
Congress should take action to require USDA to develop comprehensive and updated data and modeling frameworks in order to provide a complete representation of the cattle and beef industry. Accordingly, Congress should provide funding to assist USDA in making these changes.
A GAO report released in 2000 highlighted deficiencies within GIPSA and recommended actions for GIPSA to improve its investigations of competitive practices. Thereafter, Congress appropriated funding to enable GIPSA to reorganize. Yet, this has not translated into positive results in terms of the number of cases filed by GIPSA.
Congress should reform the Packers & Stockyards Act (P&S Act) to provide real protections to farmers, ranchers, and poultry growers. The legislation is over eighty years old and we do not market cattle in the same way as we did in the 1920's. The P&S Act worked. It led to divestiture within some highly concentrated markets, particularly in the auctions and stockyards. Stockyards are not allowed to own or control buying stations, packing plants, or livestock feeding operations. The basis of the P&S Act was that such ownership or control would create conflicts of interest, access problems for other producers, and opportunities for market manipulation which distort the market. In today's livestock sector, packers are similarly situated to the stockyards and auctions at the time of the enactment of the P&S Act in terms of their control over the market. The same rules should apply to them within today's market structure.
PUBLIC POLICY CAN REVERSE MARKET CONCENTRATION
The growing levels of concentration in agricultural markets are dramatically changing the ownership and control of the food system. Producers' abilities to make decisions concerning their farm and ranch operations are in jeopardy as a handful of firms exercise more and more control over decision-making throughout the food system. In 1999, the National Farmers Union commissioned a study authored by Drs. William Heffernan and Mary Henderickson entitled, "Consolidation in the Food and Agricultural System." The study identified that in the meat processing industry alone, the top four processing firms for beef, pork, and chicken control from 55 to 87 percent of the U.S. market.
In February 2002, Heffernan and Hendrickson updated the concentration ratio numbers from the 1999 report. The results revealed that concentration continued to increase in the major agricultural processing industries, except in ethanol production, in which levels of concentration actually decreased (1999: 67%, 2002: 49%). The decrease in concentration levels in ethanol production was directly the result of public policy decisions to encourage investment of new farmer-owned ethanol facilities around the country. Today, farmer-owned ethanol plants are the largest producer of ethanol in the country. The industrialization of agriculture is not the inevitable course for our food system as some would have us believe. Public policy has made a difference and can continue to make a difference.
CONCLUSION
Nearly one-third of the country's available feed-calf supplies can be found in the states of Oklahoma, Nebraska, Colorado and Kansas. The combined effects of low prices and the lack of competition are intensified by the severe drought pervading the countryside. I once heard a minister say that as long as there was life there is hope. The hope is fading and so is the lifeblood of the family cattleman. My grandfather used to say that as long as you held on to the ol' cow's tale, she would drag you through during the difficult times. Well, I am here to tell you that tail is a nub and we are slipping fast.
Policies, such as the packer ban on livestock, provisions in the competition title and the modernization of the Packers & Stockyards Act, are critical to halt the rapidly increasing vertical and horizontal integration occurring in the livestock sector and allow producers to share in the market value. Livestock producers, better than anyone, know how to produce top quality cattle, but they require open, transparent and competitive markets to benefit from their production.
Let me leave the Committee with one thought. Why in a market economy such as ours would we believe that companies seek to increase their market power and then fail to use that power for their own selfish objectives?
Thank you Mr. Chairman for holding this hearing and for the opportunity to testify today. We look forward to working with Congress and the Administration to restore competition and transparency in the marketplace and improve enforcement in the livestock sector.