Filing of a Petition for Rulemaking: Packer Livestock Procurement Practices
Federal RegisterJan 14, 1997
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SUMMARY: The U.S. Department of Agriculture (USDA) has received a
petition for rulemaking from the Western Organization of Resource
Councils (WORC). The petition requests the Secretary to initiate
rulemaking under the Packers and Stockyards Act to restrict certain
livestock procurement practices by meat packers. USDA is soliciting
public comment on the petition and will utilize these comments in
assessing the need for the requested rulemaking. This notice provides
all interested parties an opportunity to participate in that process.
DATES: Comments concerning this petition are invited and must be
received on or before April 14, 1997.
ADDRESSES: Send an original and two copies of comments to the Acting
Deputy Administrator, Packers and Stockyards Programs, GIPSA, USDA,
Stop 3641, 1400 Independence Avenue, SW, Room 3039-S, Washington, D.C.
20250.
FOR FURTHER INFORMATION CONTACT: Tommy Morris, Director, Packer and
Poultry Division, (202) 720-7063.
SUPPLEMENTARY INFORMATION:
Background
In early 1995, prices for cattle dropped sharply and steadily
declined. Various groups in the industry, mainly cattle producers,
urged Congress and USDA to take action to improve conditions. USDA has
undertaken several initiatives to respond to the concerns of the
industry.
On February 14, 1996, USDA released a congressionally-mandated
study on concentration in the red meat industry.1 The study
included projects on the beef sector that included examining cattle
procurement markets, price determination, captive supplies, and the
effects of concentration on cattle prices. Although the study confirmed
the existence of concentration in the red meat industry, it provided no
definitive evidence that concentration had an appreciable effect on
cattle prices.
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1 Concentration in the Red Meat Packing Industry, Packers
and Stockyards Programs, Grain Inspection, Packers and Stockyards
Administration, USDA, February 1996.
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Following release of the study, the Advisory Committee on
Agricultural Concentration was appointed by the Secretary to review the
study and a number of other issues involving concentration in
agriculture. The Advisory Committee submitted its recommendations and
findings on June 6, 1996.2 The recommendations of the majority
report included increased monitoring and enforcement of antitrust and
regulatory policy, limiting packer activities regarding price
differentiation, improving collection and reporting of market data, and
value-based pricing. The Advisory Committee also submitted three
minority reports. The recommendations of the minority reports included
taking additional action to address the concerns of producers relating
to the adverse effect of concentration on the cattle industry,
increased reporting of export data, and educating producers about the
current market environment.
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2 Concentration in Agriculture: A Report of the USDA
Advisory Committee on Agricultural Concentration, Agricultural
Marketing Service, USDA, June 1996.
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On July 31, 1996, the Secretary announced the first in a series of
actions by USDA to improve competition in the livestock industry. These
actions address two of the major areas of recommendations made by the
Advisory Committee. These first actions, taken to immediately address
the concerns of many livestock producers, include price reporting
initiatives that will broaden the coverage of market transactions
reported and improve the timeliness and availability of information on
the growing international trade in livestock and meat products.
The Petition
Independent of USDA's activities, the Secretary received a petition
for rulemaking submitted by the Western Organization of Resource
Councils (Petitioner) on October 12, 1996. The Petitioner requests that
USDA issue rules under the authority of the Packers and Stockyards Act
that would prohibit packers from procuring cattle for slaughter through
the use of a forward contract unless certain specified conditions are
met and that would prohibit packers from owning and feeding cattle,
unless the cattle are sold for slaughter in an open, public market.
The Petitioner
The Petitioner represents that it is a federation of grassroots
organizations located in Colorado, Idaho, Montana, North Dakota, South
Dakota, and Wyoming that was formed in 1979. The various organizations
are composed of affiliated citizen groups in 42 communities across the
region. The 6,000 members of these groups are farmers, ranchers, small
business owners, and working people who seek to protect natural
resources, family farms, and rural communities. They include both
cattle ranchers and beef consumers.
Need for the Suggested Rules
The Petitioner has submitted this petition for rulemaking because
it believes that packers' direct ownership and feeding of cattle for
slaughter and their procurement of slaughter supplies through formula
or basis-priced forward contracts have decreased prices paid to cattle
producers. The Petitioner also believes that because cattle sold
through formula or basis-priced forward contracts are not traded
publicly and packer-fed cattle are not sold publicly, these practices
unjustly discriminate against some producers and provide unreasonable
preferences to others. According to the Petitioner, these practices are
in violation of Section 202 of the Packers and Stockyards Act and
should be restricted through rules.
Request for Comments
USDA is seeking public comment on the petition from academia, all
segments of the industry (including, for example, producers, marketing
firms, meat packing firms) and other interested parties, including
small entities that
[[Page 1846]]
may be affected by implementation of the Petitioner's proposal. Small
entities are defined as firms that meet the following standards: (1)
beef cattle producers, except feedlots, with annual receipts of
$500,000 or less for beef cattle sales; (2) beef cattle feedlots with
annual receipts of $1.5 million or less for beef cattle sales; and (3)
meat packing plants with 500 employees or less.
Comments received on the petition will provide the Secretary of
Agriculture with additional information to consider in determining
whether or not the rulemaking requested by the Petitioner should be
undertaken. The submission of comments that address the following
questions would be particularly helpful. These questions are suggested
merely as the framework for your comments.
1. What competitive or other economic effects would implementing
the rules that WORC is asking USDA to propose (hereinafter ``proposed
rules'') have on individual businesses and the cattle and beef industry
as a whole?
2. What are the competitive effects of formula or basis-priced
forward contracting and packer feeding on cattle producers, feedlots,
meat packers, meat wholesalers and retailers, and consumers?
3. What would be the effects of implementing the proposed rules on
the structure, conduct, and competitive performance of the cattle
producing, cattle feeding, meat packing, wholesaling and retailing
industries? What would be the effect on the structure, conduct and
competitive performance of livestock and meat markets? In answering
these questions, what do you consider to be the relevant markets and
how do you define them?
4. How do formula or basis-priced forward contracting and packer
feeding affect cattle prices? Do formula or basis-priced forward
contracting and packer feeding have adverse competitive effects or
other adverse economic effects? Are there competitive benefits or other
economic benefits associated with use of formula or basis-priced
forward contracting and packer feeding that would not support
implementing the proposed rules?
5. Do the research studies cited by the Petitioner support its
position that the formula or basis-priced forward contracting and
packer feeding practices outlined in the petition result in competitive
harm or other economic harm to cattle producers and that the practices
harm competition in beef packing? Are there other studies that USDA
should consider?
6. Does sufficient evidence exist to find that the formula or
basis-priced forward contracting and packer feeding practices outlined
in the petition violate Section 202 of the Packers and Stockyards Act?
If so, what is that evidence?
7. Is regulatory action needed?
8. Are the proposed rules too broad or too restrictive?
9. Do the proposed rules adequately address the concerns raised by
the Petitioner?
10. Are there alternatives to rulemaking that would address the
concerns raised by the Petitioner?
Please include any data, analyses, or other empirical evidence that
supports your position. USDA is also particularly interested in
receiving comments from the academic community on this petition,
including available theory, research and other information.
USDA has sought extensive public comment from all members of the
agriculture sector while addressing concentration in agriculture and
strongly encourages participation in this important process.
Done at Washington, D.C. this 8th day of January 1997.
James R. Baker,
Administrator, Grain Inspection, Packers and Stockyards Administration.
Petition Received
On October 12, 1996, USDA received the following petition asking
USDA to issue rules to restrict certain livestock procurement
practices. The appendices forwarded with this petition are available
for review at USDA, GIPSA, Packers and Stockyards Programs, 1400
Independence Avenue, SW, Room 3039-S, Washington, D.C. 20250. Copies
may be obtained by writing or calling that office at (202) 720-7063 or
720-7051. The petition is hereby published in order that USDA may
obtain public comment on this requested regulatory action.
Petition for Rule-Making on Captive Supply Procurement Practices Under
the Packers and Stockyards Act
Submitted by The Western Organization of Resource Councils
October 8, 1996.
Introduction
The Western Organization of Resource Councils (WORC) petitions
Secretary of Agriculture, Dan Glickman, to exercise his authority under
the Packers and Stockyards Act to issue rules restricting packers' use
of certain procurement practices to acquire captive supplies of
slaughter cattle. WORC requests that the Secretary issue rules that:
1. Prohibit packers from procuring cattle for slaughter through the
use of a forward contract, unless the contract contains a firm base
price that can be equated to a fixed dollar amount on the day the
contract is signed and the forward contract is offered or bid in an
open, public manner.
2. Prohibit packers from owning and feeding cattle, unless the
cattle are sold for slaughter in an open, public market.
Packers' direct ownership and feeding of cattle for slaughter and
their procurement of slaughter supplies through forward contracts have
decreased prices paid to cattle producers. In addition, because forward
contracts are not traded publicly and packer-fed cattle are not sold
publicly, these practices unjustly discriminate against some producers
and provide unreasonable preferences to others. Thus, these practices
are in violation of Section 202 of the Packers and Stockyards Act (7
U.S.C. Sec. 192) and should be restricted through rules.
The Western Organization of Resource Councils (WORC) is a
federation of grassroots organizations: the Western Colorado Congress
(Colorado), the Idaho Rural Council (Idaho), the Dakota Resource
Council (North Dakota), Dakota Rural Action (South Dakota), the
Northern Plains Resource Council (Montana) and the Powder River Basin
Resource Council (Wyoming). WORC was formed in 1979.
These six organizations are composed of affiliated citizens' groups
in 42 communities across the region. The 6000 members of these groups
are farmers, ranchers and small business and working people who seek to
protect natural resources, family farms and rural communities. They
include both cattle ranchers and beef consumers.
Language of Rules
This petition for rule-making is submitted pursuant to the
Administrative Procedures Act, 5 U.S.C. Sec. 553(e) and USDA regulation
7 CFR Sec. 1.28. The statute provides that ``each agency shall give an
interested person the right to petition for the issuance, amendments,
or repeal of a rule.'' \1\ In addition, the USDA regulations provide
that interested persons can petition USDA officials to issue, amend or
repeal a rule.\2\ WORC asks that the Secretary publish the following
proposed rule in the Federal Register and invite public comment both in
writing and at USDA-sponsored informal public hearings:
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\1\ 5 U.S.C. Sec. 553(e).
\2\ 7 CFR Sec. 1.28.
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[[Page 1847]]
Restrictions on the Use of Captive Supply Procurement Practices
1. Restrictions on Use of Forward Contracts
No packer shall procure cattle for slaughter through the use of a
formula or basis price forward contract. All forward contracts used by
packers for purchase of cattle slaughter supplies shall contain a firm
base price that can be equated to a specified dollar amount at the time
the contract is entered into and be offered or bid in an open, public
manner.
(a) The term ``forward contract'' means any contract, whether oral
or written, for purchase of cattle that provides for their delivery to
a packer at a date more than seven days after the date the contract is
entered into, without regard to whether the contract is for a specified
lot of cattle or for a specified number of cattle during a certain
period such as a week, month or year.
(b) The term ``formula or basis price'' means any price term that
establishes a base from which the purchase price is calculated by
reference to a price that will not be reported until a date after the
day the forward contract is entered into. For example: (1) ``formula
price contract'' would include a contract in which the base is the
average reported cash price for some day or week in the future, and (2)
``basis price contract'' would include a contract in which the base is
determined with reference to a futures market price that will not be
determined until some future date.
(c) This section permits the use of forward contracts under which
producers will be paid more or less than the firm base price, when the
adjustments to the base are for quality, grade or other value factors
that are readily verifiable market factors and are outside the control
of the packer/buyer.
(d) The phrase ``offered or bid in an open, public manner'' means
that the offer or bid is made in a forum (1) to which both potential
buyers and sellers in general have access, (2) designed to solicit more
than one blind bid, and (3) that allows sellers and buyers to witness
bids made and accepted. For example, a forward contract could be traded
in an electronic market to which both cattle sellers and buyers in
general have access.
2. Restrictions on Packer Ownership of Cattle
No packer shall own and feed cattle unless those cattle are sold
for slaughter in an open, public market.
(a) This provision does not apply to cattle owned by a packer for
fewer than seven days before slaughter.
(b) This provision applies to cattle owned by a packer without
regard to whether they are fed at a packer owned facility or on
contract at a facility owned by another.
(c) The term ``public market'' means a forum (1) to which both
potential cattle buyers and sellers in general have access, (2) which
is designed to solicit more than one blind bid, and (3) which allows
sellers and buyers to witness bids made and accepted. The term ``public
market'' includes, but is not limited to, live auction markets, video
auction markets and electronic markets.
Explanation of the Rule
A. Forward Contracts
The forward contract provision of this rule prohibits packers from
using ``formula or basis price'' forward contracts. This does not mean
that packers can no longer use forward contracts to procure slaughter
supplies. In fact, packers and producers could still enter into
contracts in which the price is set through a formula if there is a
firm base price which can be equated with a specific dollar amount when
the contract is entered into. The difference is that the base price
could not be the average reported cash price at some future date or a
reference to a futures price that will not be determined until some
future date. This part of the proposed rule attempts to eliminate the
problem identified by the minority report of the USDA Advisory
Committee on Agricultural Concentration:
The problem with formula pricing, as it is currently used, is
not a problem of value pricing. Rather, the problem lies in the base
from which the carcass value is calculated. In all the methods
currently used, the packer has the power to artificially lower the
base price from which premiums and discounts are calculated.
When the futures market is used to establish a base, the packers
are heavy players on both sides. Their futures market activities,
whatever the motivation and whether the packers are long or short in
the market, affect the price they pay for formula cattle and,
ultimately, for negotiated sales. . . .
When the formula is based upon the average spot price for the
preceding period, that base has three weaknesses which can be used
to artificially lower the price received by the producer. First,
formula producers and packers claim that the best cattle are sold on
a formula basis. That means that the pool of cattle sold on a spot
basis is below average in quality. Thus, the ``average'' market
price upon which the formula cattle are sold is, in reality, a
below-average price. Second, the base price is again determined in
large part by the packers' own market activities. They determine
what price is bid for non-contract cattle. If they bid low for non-
formula cattle, their price for formula cattle will likewise be
lower. Regardless of whether packers act consciously in this manner,
it is in their best interest to do so. . . . Finally . . . the use
of captive supply thins the market.\3\
\3\ Concentration in Agriculture: A report of the USDA Advisory
Committee in Agricultural Concentration, Agricultural Marketing
Service, USDA, June 1996, p. 31.
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As a result of this finding the minority report recommended that
``formula contracts as they are presently constituted should be
banned'' and ``value-based pricing must be based upon readily
verifiable market factors outside the control of the packer/buyer.''
\4\
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\4\Id. at 31.
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The proposed rule on forward contracts also requires that all
forward contracts for procurement of slaughter supplies must be
``offered or bid in an open, public manner.'' Under the proposed rule,
in addition to containing a firm base price, all forward contracts must
be offered or bid publicly to producers in general. This addresses
another recommendation of the Advisory Committee on Agricultural
Concentration minority report--that value-based pricing ``must be made
uniformly available within the limits of the packers' purchasing
needs.''
Requiring firm-base price, publicly bid forward contracts for
slaughter supplies is a constructive reform. It meets the packers' need
for orderly procurement and provides them assurance that their
competition is not ``stealing'' cattle (assurance that only public
bidding can provide). By allowing forward contracts with firm base
prices to continue, it meets the needs of the cattle producers'
lenders' for security and solid cash flow projections for their loans.
Further, it meets the entire industry's need for timely, accurate,
value-based, competitive price discovery.
A system of firm-base price, publicly bid forward contracts for
slaughter supplies is friendly to smaller feeders, who are at the
greatest disadvantage in direct ``negotiation'' and most easily
pressured into exploitative, captive supply contract arrangements. It
is friendly to custom feeders who have a hard time attracting investors
in today's manipulated market. And it is friendly to the basic cow/calf
and feeder cattle markets, because it would work against the current
severe discounting of feeder prices in response to the volatility of
the fat cattle market. Finally, it would make retained ownership by the
cow/calf or feeder operator throughout the fed cattle stage a viable
option. Currently, retained
[[Page 1848]]
ownership involves an intolerable and unnecessary degree of price risk.
Under this proposal feeders will not lose the ability to enter into
forward contracts. With the use of hedges and options, up-to-date price
reports from USDA and a public open-bid market for slaughter supplies,
feeders could forward contract at any point in the feeding process.
To make this system work, there needs to be a formally organized
market in firm-base price bid forward contracts--a bit like a NASDAQ
exchange for livestock. The able, ambitious people in the marketing
sector of the livestock industry certainly can provide this vital
market service. Several examples exist today of functioning electronic
markets for agricultural commodities. The most applicable of these is
BeefEx, or the Beef Exchange, an electronic exchange set up by the
operators of the cotton exchange in Lubbock, Texas. There is also an
electronic market for fed cattle in Canada (TEAM).
B. Packer Ownership of Cattle
Under the proposed rule setting restrictions on packer ownership
and feeding of cattle, packers could still feed their own cattle but
they would be required to offer them for sale publicly. This could be
done through a livestock auction yard, an electronic market or some
other equivalent method of soliciting blind, open bids. Presumably, in
most cases, a packer would outbid the other packers for its own
animals. By requiring the public sale of those cattle, their value and
impact on overall cattle prices would be properly reflected in the
market. The physical movement of cattle and the packers ability to
coordinate production and plan slaughter would be the same as now. The
only difference would be that market demand for cattle would be
publicly expressed and the true price discovered in the market.
As with forward contracts, packer-fed cattle can be publicly
offered through electronic exchanges or some other equivalent method.
There is widespread recognition that electronic markets could improve
competition and provide better price discovery if all parties would
participate. Historically, however, packers have been reluctant to do
so, especially when they have benefited from less than perfect price
discovery under the status quo.
C. Public Market
The requirements that packer-fed cattle and firm-base price forward
contracts be traded publicly means that they are traded in a market
forum in which both buyers and sellers have general access. It does not
mean that more than one bid must be made before the sale is completed.
Rather, it means that the bid is made in a forum designed to solicit
more than one bid and which allows other sellers and buyers to witness
the bids made and accepted. The proposed rule does not limit any
producer's ability to accept a bid, as long as it is a firm-base price
bid and the offer and acceptance are made openly and in such a way that
anyone can offer and anyone can buy.
Standards for Issuance of Informal Rules
Final agency rules are accorded and assumption of procedural and
substantive regularity.\5\ This deferential standard of review of an
agency's final rule decision ``presumes the validity of agency action
and prohibits the reviewing court from substituting its judgment for
that of the agency.'' \6\
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\5\ Colorado Health Care Ass'n v. Colorado Dept. of Social
Services, 842 F.2d 1158 (10th Cir. 1988); McLeod v. I.N.S., 802 F.2d
89 (3rd Cir. 1986); Diaz-Soto v. I.N.S., 797 F.2d 262 (5th Cir.
1986); Organized Fisherman of Florida V. Hodel, 775 F.2d 1544 (11th
Cir. 1985); Air Pollution Control District of Jefferson County,
Kentucky v. U.S. EPA, 739 F.2d 1071 (6th Cir. 1984); and National
Small Shipments Traffic Conference, Inc. v. ICC, 725 F.2d 1442 (D.C.
Cir. 1984).
\6\ Manasota-88, Inc. V. Thomas, 799 F.2d 687, 691 (11th Cir.
1986).
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Courts will defer to the agency's interpretation of statutory
language that it has been charged with implementing when: (1) the
action is within the agency's scope of authority, (2) the action is not
arbitrary and capricious, and (3) the agency has followed required
procedures.\7\
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\7\ Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402,
(1971); and Ethyl Corp. v. E.P.A., 541 F.2d 1 (D.C. Cir. 1976).
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The arbitrary and capricious standard of review is a narrow one.\8\
Under this narrow review standard, USDA's action to issue a rule need
merely be rationally based on an administrative record: the agency's
action can be set aside as arbitrary and capricious ``only where it is
not supportable on any rational basis.'' \9\ An agency decision which
demonstrates that the agency examined relevant data and articulated ``a
rational connection between the facts found and the choice made'' will
not be reversed under this standard.\10\
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\8\ Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S.
402, 416 (1971).
\9\ United States v. Means, 858 F.2d 404, 409 (8th cir. 1988),
cert. denied, 492 U.S. 910 (1989) (quoting Brotherhood of Railway
and Airline Clerks v. Burlington Northern Inc., 722 F.2d 380, 380
(8th Cir. 1983)).
\10\ See, Motor Vehicles Mfrs. Ass'n v. State Farm Insurance
Agency, 463 U.S. 29, 43 (1983).
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The following extensive discussion of economic studies, the Packers
and Stockyards Act's legislative history, the statutory language and
case law provides all of the necessary factual and legal bases for
issuance of this proposed rule. The numerous cited economic studies
present a substantial factual basis for the rules. The legislative
history and case law demonstrate that there is a rational connection
between the facts established in the studies and the decision to issue
the proposed rules pursuant to section 202 of the Packers and
Stockyards Act, 7 U.S.C. Sec. 192.
Economic Evidence Supporting the Proposed Rule
A. Impact of Concentration on Prices
Fifteen years ago the top four firms in steer and heifer slaughter
controlled about 35% of the market, five years ago the four-firm
concentration ratio for steer and heifer slaughter was about 70
percent, today it is over 80 percent.\11\ These figures are measured on
a national basis. However, when concentration is measured in smaller
geographic market areas it is often even higher than when measured on
such a broad basis. Two studies from Oklahoma State University
demonstrate this point, as the author of those studies reports:
\11\ Helmuth, John W., Buyer concentration in Livestock Markets:
Trends, Impacts, and Implications, Iowa State University, Address to
Dakota Rural Action, July 10-12, 1995, at 1.
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The four largest buyers of fed cattle in the Southern Plains
(Southwest Kansas, Oklahoma Panhandle, and Texas Panhandle) bought
81 percent of fed cattle purchases in a study using 1979 data and 96
percent of fed cattle purchases in a similar study ten years later.
Both percentages are considerably higher than the four-firm
concentration ratio of U.S. steer and heifer slaughter for the same
years, 34.5 percent in 1979 and 70.4 percent in 1989.\12\
\12\ Ward, Clement E., Meatpacking Industry Changes: Causes and
Consequences, Department of Agricultural Economics, Division of
Agricultural Sciences and Natural Resources, Oklahoma State
University, A.E. Paper 92137, December 1992, at 4, citing Ward,
Clement E. Relationship Between Fed Cattle Market Shares and Prices
Paid by Beefpackers in Localized Markets, Western Journal of
Agricultural Economics 7(1982): 79-86: and Ward, Clement E. Inter-
firm Differences Between Fed Cattle Prices in the Southern Plains,
American Journal of Agricultural Economics, 74(1992): 2 480-85.
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When just four packing firms have such a large share of the steer
and heifer slaughter market, their individual buying decisions may have
an effect on prices paid to cattle producers. Such effects may occur
whether or not the packers deliberately take actions to manipulate
prices. As Dr. John Helmuth has stated: ``Economic studies show that
[[Page 1849]]
when the four-firm concentration ratio gets over 40% firms start to
have enough market power to have some control over price. By the time
it gets to 80% they have as much power as a monopoly would have.'' \13\
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\13\ Helmuth, John W. (1995), supra note 9 at 1.
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The Center for Rural Affairs reports on a series of economic
studies examining concentration's effect on prices:
There is a large body of economic research establishing a high
positive relationship between the level of concentration among
sellers and prices buyers must pay. About three-fourths of the more
than 70 studies undertaken in this field in general conclude that
concentration is related to prices (Weiss 1988). Although this
research relates to situations in which the concentration level is
high among sellers (called oligopoly) rather than among buyers
(called oligopsonies), the basic theory is the same on both sides of
the market. Higher levels of concentration should result in price
levels that favor the more concentrated side of the market--higher
prices for concentrated sellers (oligopolies), lower prices for
concentrated buyers (oligopsonies).\14\
\14\ Strange, Marty, Nancy L. Thompson, Competition and the
Livestock Market: Report of a Task Force Commissioned by the Center
For Rural Affairs, Center For Rural Affairs, Walthill, Nebraska,
April 1990, at 10.
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There is now also a considerable amount of research on the
relationship of packer concentration and prices paid to livestock
producers. This research strongly suggests that significantly depressed
market prices have accompanied increases in concentration in regional
markets. The Center for Rural Affairs reported on several of these
studies that used data from periods when the meatpacking industry was
much less concentrated than it is today:
One study (Quail 1986) analyzed the impact of market
concentration on fed cattle prices in 13 regional markets between
1971 and 1980. Among the study's conclusions:
For every 10 percentage point increase in market share held by
the top four firms in a market, fed cattle prices dropped $.14 per
cwt.;
In the four major regional markets, the four leading packers
controlled from 67% to 97% of the market in 1980 and in each case
there was a statistically significant negative correlation between
concentration and market prices;
The increase in packer concentration between 1971 and 1980 is
estimated to have cost cattle feeders $.19 per cwt., or $45.2
million in 1980 alone;
The price-depressing effect of buyer concentration averaged
about 1.7% over the period 1976-1980;
If the four leading packers in the four leading regions had had
only 40% of the market between 1976 and 1980, instead of the 55% to
85% they actually averaged, average cattle prices would have been
$.47 higher and cattle feeders would have had $82 million more
income.
Another study (Menkhaus et al 1981) analyzed the impact of
concentration on fed cattle prices in twelve major cattle feeding
states in 1972 and 15 states in 1977. It found that in both years
more concentrated markets yielded lower fed cattle prices. In 1972,
for each 10 percentage point increase in the share of the market
procured by the top four packers, the price of choice steers fell
$.145 per cwt., and in 1977, $.22 per cwt. This amounts to a price
depressing effect of about 1.2% in 1972 and 1.6% in 1977.
Ward (1981) considered the relationship between number of buyers
and prices paid for fed cattle in 31 feedlots or marketing agencies
in six regional markets in July, 1979. He found such a relationship
in one of the four markets. In that market, each additional bidder
raised prices $.22 to $.28 per cwt.
Not all studies reach such clear conclusions. Using the same
data from July, 1979, Ward (1982) analyzed the relationship between
market shares held by packers in local markets and prices paid for
fed cattle in those markets. He concluded that larger packers were
not depressing prices in local markets and found no evidence of
lower prices in more concentrated markets.
But Ward (1983) did find that when there was a sudden change in
the local hog market structure caused by the closing of Oklahoma's
only pork plant, prices at the Oklahoma City terminal market in the
year following the plant closing averaged $.63 to $1.05 lower per
cwt. than in Kansas City and Omaha terminals and direct trade
markets in interior Iowa-Southern Minnesota in the year following
the plant closing.\15\
\15\ From Competition and the Livestock Market: Report of a Task
Force Commissioned by the Center for Rural Affairs, Walthill,
Nebraska, Wes Sandall et al., Center for Rural Affairs, Walthill,
Nebraska, April, 1990, at 10, 11, citing (1) Quail, Gwen, Bruce
Marion, Frederick Geithman, and Jeffrey Marquardt, 1986, The Impact
of Packer Buyer Concentration on Live Cattle Prices, Working Paper
89, NC-117, University of Wisconsin-Madison; (2) Menkhaus, Dale J.,
and James S. St. Clair, and Zahedi Ahmaddaud, 1981, The Effects of
Industry Structure on Price: A Case in the Beef Industry, Western
Journal of Agricultural Economics, 6(1981): 147-53; (3) Ward,
Clement E. 1981, Short-Period Pricing Models for Fed Cattle and
Impacts of Wholesale Carcass Beef and Live Cattle Futures Market
Prices, Southern Journal of Agricultural Economics, 13(1981): 125-
32; (4) Ward, Clement, E. 1982, Relationship Between Fed Cattle
Market Shares and Prices Paid by Beefpackers in Localized Markets,
Western Journal of Agricultural Economics, 7(1982): 79-86; and (5)
Ward, Clement E. 1983, Price Impacts of a Structural Change in Pork
Processing: A Case Study in Oklahoma, Oklahoma State University,
Current Farm Economics, 56(1983): 3-9.
---------------------------------------------------------------------------
Two more recent studies, one published in December 1990 by Bruce W.
Marion, Frederick E. Geithman and Gwen Quail, and one published by John
R. Schroeter and Azzeddine Azzam in 1991, on the relationship between
regional fed cattle prices and meatpacking concentration, also
demonstrate that higher levels of concentration were associated with
lower prices paid for fed cattle.\16\
---------------------------------------------------------------------------
\16\ Ward, Clement E. (1992) supra note 12 at 7, citing Marion,
Bruce W., Frederick E. Geithman, and Gwen Quail, Monopsony Power in
an Industry in Disequilibrium: Beef Packing, 1971-1986, University
of Wisconsin, WP-96, December 1990: Azzam, Azzeddine M. and John R.
Schroeter, Implications of Increased Regional Concentration and
Oligopsonistic Coordination in the Beef Packing Industry, Western
Journal of Agricultural Economics. 16(1991): 374-81.
---------------------------------------------------------------------------
In addition, in April, 1994, Bruce Marion of the University of
Wisconsin released an update of his earlier study which found that as
concentration increases prices paid to farmers decrease. This study is
worth quoting:
The results of this article support the hypothesis that packer
monopsony power had a significant negative effect on cattle prices
during the 1971-86 period * * * the presence of monopsony power is
evident in regional live cattle markets throughout the period and is
slightly stronger in the latter half than in the first half of the
period.
For several regions on which most of our analysis was done,
cattle prices were estimated to be about 3 percent less in the most
concentrated region/year compared to the least concentrated region/
year.\17\
\17\ Marion, Bruce W. and Frederick E. Geithman, Concentration-
Price Relations in Regional Fed Cattle Markets, Food Marketing
Policy Center, Research Report No. 25, April 1994, University of
Connecticut, Department of Agriculture and Resource Economics, pp.
19-21.
---------------------------------------------------------------------------
As John Helmuth has pointed out in reference to this study, such a
``three percent difference is more than $20 per head on $70/cwt
cattle.\18\
---------------------------------------------------------------------------
\18\ Helmuth, John W. (1995) supra note 11 at 4.
---------------------------------------------------------------------------
A study conducted by Clement E. Ward after a series of mergers and
acquisitions in 1987 found that the Big Three packers paid
significantly lower prices for fed cattle in the Southern Plains and in
subregions of the Southern Plains (Southwest Kansas, North Texas and
Oklahoma Panhandle, and South Texas Panhandle) than did their
competitors as a group. However, there were differences among the Big
Three in how much they paid for fed cattle. Each firm did not pay lower
prices than competing firms.\19\
---------------------------------------------------------------------------
\19\ Ward, Clement E., (December, 1992) at 7 citing Ward,
Clement E., Timm J. Bliss, Forward Contracting of Fed Cattle:
Extent, Benefits, Impacts, and Solutions, Blacksburg, VA: Research
Institute on Livestock Pricing, Research Bulletin 4-89, November
1989).
---------------------------------------------------------------------------
Additional recent studies have found that packers do exercise
monopsony powers to distort prices paid to livestock producers. These
studies are described in a November 1995 report issued by the Center
for Rural Affairs:
Azzam and Pagoulatos (1990) found that packers exercise market
power to both raise the prices they receive for meat and to lower
the price they pay for livestock, but that the
[[Page 1850]]
degree of market power they had was significantly higher in the
livestock procurement side of the market than in the wholesale meat
market.* * *
Azzam and Schroeter (1991) next considered regional procurement
markets for beef. They found that packers used market power to
depress prices an estimated one percent, considerably less than
other studies in this field. But they noted that even a half percent
decline in cattle prices would increase packer profits about 35
percent and reduce cattle feeder profits about $4.40/head, or nearly
9 percent. Using a different methodology for data over the same time
period 1988-91, Azzam (1992) also found that beef packers have
market power to lower cattle prices, but not to raise meat prices in
the wholesale market.
Stieger, Azzam, and Brorsen (1993) found that packers typically
price cattle on the difference between the wholesale price they
receive for boxed beef or carcasses and their average processing
cost. That difference is called the marketing margin. As anticipated
supply of cattle decreases, making it more difficult for packers to
keep their plants fully operating and therefore raising their
average processing costs, they ``markdown'' cattle bids--that is,
they increase their marketing margin in order to cover their
increased cost. They may be paying more for cattle in an absolute
sense, but not as much more as they are worth in the short supply
situation. In effect, they are pricing the cattle below their
marginal value. The statistical analysis indicated that between 1972
and 1986, fed cattle were priced significantly below their marginal
value during 31 of 59 quarters. On average, this markdown was 1.31
percent, or 17 percent of the marketing margin, and amounted to
$1.54 per hundredweight of retail meat. The authors estimate that
was worth about $62 million to the packers.\20\
\20\ From From the Carcass to the Kitchen: Competition and the
Wholesale Meat Market, Strange, Marty and Higby, Annette, Center for
Rural Affairs, Walthill, Nebraska, November 1995, citing (1) Azzam,
Azzeddine, and Emilio Pagoulatos, 1990, Testing Oligopolistic and
Oligopsonistic Behavior: An Application to the U.S. Meat-Packing
Industry, Journal of Agricultural Economics 41(3): 362-370; (2)
Azzam, Azzeddine, and John Schroeter, 1991, Implications of
Increased Regional Concentration and Oligopsonistic Coordination in
the Beef Packing Industry, Western Journal of Agricultural Economics
16(2): 374-381; (3) Azzam, Azzeddine, 1992, Testing the
Competitiveness of Food Price Spreads, Journal of Agricultural
Economics 43(2): 248-256; and (4) Stieger, Kyle W., and Azzeddine
Azzam and B. Wade Brorsen, 1993, Markdown Pricing and Cattle Supply
in the Beef Packing Industry, American Journal of Agricultural
Economics 75:549-558.
---------------------------------------------------------------------------
These studies provide a sufficient basis for USDA to find that
monopsony power of the packers is likely to have the effect of
manipulating prices by depressing the prices paid to cattle producers.
B. Impact of Packer Feeding on Prices
Other studies have examined whether particular slaughter cattle
procurement practices effect prices paid to producers. One Packers and
Stockyards Division study that examined the price impacts from packer-
feeding in the mid-1960s explains how an oligopsonistic packer that
feeds its own cattle can adversely affect prices paid to other
producers for slaughter supplies: \21\
\21\ Aspelin, Arnold and Gerald Engelman, Packer Feeding of
Cattle; its volume and significance, Packers and Stockyards
Division, Consumer and Marketing Service, USDA, Marketing Research
Report No. 776, Nov. 1966.
---------------------------------------------------------------------------
It is the oligopsonistic packer that is able to utilize its
packer feeding operations to influence the price of fed cattle in a
local market. Only the oligopsonistic packer can do that, and the
possible effects of packer feeding on the price of cattle are
confined largely to the markets where oligopsony exists.* * * [W]hen
a degree of oligopsony exists, a packer's own supply of fed cattle
can be used to restrict market purchases and exploit the market by
paying lower prices than otherwise would have been paid. The amount
of the price effect will depend on the extent of the packer's
oligopsony influence as well as on how readily suppliers and local
feeders can divert their marketings to other markets.
An oligopsonistic packer that has a supply of cattle in its
feedlots can use those cattle as a bargaining tool. Its fed cattle
serve as a standby reserve in its price negotiations. Livestock
sellers know that such a packer can fulfill his slaughtering needs
at a particular time by transferring his own cattle to his plant,
instead of buying cattle on the market. And since such a packer is--
by definition--large enough to exert an influence on the local
market, its management of its fed cattle during the price
negotiations has an effect on the local market price. Stated simply,
in the short run, packer feeding can confer an extra degree of
market power on an oligopsonistic packer.\22\
\22\ Id. at 10.
---------------------------------------------------------------------------
This study found that packer-fed cattle caused a significant
decline in the local market price when the packer had some
oligopsonistic power:
Packer-fed cattle transferred to the plant of the sample packer
had a persistent depressing effect on the local price for Choice
steers compared with prices at other markets. During the first five
or six months of the year, the local price was consistently below
the average for other markets, about in proportion to the number of
packer-fed shipments to plant. As Packer-fed shipments to plant
declined from a level of about 1,100 head a week early in the year
to about 100 head in the 15th week, the local price approached the
level of prices at other markets. From mid-year until the 38th-42nd
weeks, packer-fed shipments generally declined to a low level (zero
in the 40th week) and prices at the local market improved to the
point that they exceeded the seven-market average by about $.50 per
cwt in the 40th week. Then, as packer-fed shipments to plant
increased during the last 10 or 12 weeks of the year, the price
situation at the market deteriorated in comparison to other
markets.\23\
---------------------------------------------------------------------------
\23\ Id. at 13.
---------------------------------------------------------------------------
* * * * *
Regression analysis of the data * * * confirmed the conclusion
that packer-fed shipments to plant depressed the local price
relative to prices at other markets. A 100-head increase in packer-
fed shipments to plant, on average, lowered the local average price
for Choice steers relative to other markets for the entire week by
about $.06 cwt. Or, a 100 head decrease in packer-fed shipments to
plant allowed the local price to improve by about $.06 per cwt.
compared to the other markets. Since packer-fed shipments varied
from zero to over 1,000 head per week, packer feeding affected the
local weekly price by as much as $.50 per cwt.\24\
\24\ Id. at 16.
---------------------------------------------------------------------------
This study went on to find that in a competitive market ``feeding
done by an individual packer can have no appreciable effect on the
price of cattle.'' \25\
---------------------------------------------------------------------------
\25\ Id. at 22.
---------------------------------------------------------------------------
This study provides sufficient basis for USDA to find that packer
ownership and feeding of its own slaughter supplies is likely to have
the effect of manipulating prices by depressing the prices paid to
cattle producers.
C. Forward Contract Impact on Price
Other recent studies have found that forward contracting for fed
cattle supplies has a depressing effect on prices. A study that
estimated the short-run price impacts of forward contracting in the
southwest Kansas marketing region during six months of 1990 found:
Over the six months, for the level of contracted cattle,
contract deliveries were associated with $0.15/cwt to $0.31/cwt
reduced transaction prices. When forward contract shipment levels
were relatively high, changes in forward contract shipments had a
larger impact on transaction prices than during periods when
shipments were low.\26\
---------------------------------------------------------------------------
\26\ Schroeder, Ted C., Rodney Jones, James Minert and Andrew P.
Barkley; ``The Impact of Forward Contracting on Fed Cattle
Transaction Prices'', Review of Agricultural Economics, Vol. 15, No.
2, May 1993, pp. 326-337, at page 335.
---------------------------------------------------------------------------
The authors of this study point out that these results may be
related to the market condition during the data collection period of
May through November 1990, during which time cattle supplies were very
low. They suggested that ``the relatively small supplies of cattle when
compared to existing slaughter capacity are providing a safety net
against any market power levied by the larger packing firms.'' \27\
---------------------------------------------------------------------------
\27\ Id. at 335.
---------------------------------------------------------------------------
A recent report issued by the Grain Inspection and Packers and
Stockyards Administration show that from April 5, 1992 to April 3,
1993, the packers' use of forward contracts and marketing agreements to
procure slaughter cattle
[[Page 1851]]
---------------------------------------------------------------------------
had a depressing effect on prices to producers.\28\ The report states:
\28\ Concentration in the Red Meat Packing Industry, Grain
Inspection and Packers and Stockyards Administration, USDA, February
1996, pp. 25-31.
---------------------------------------------------------------------------
Increased deliveries of forward-contracted cattle were
associated with reduced prices in the cash market while increasing
inventories of forward-contracted cattle were associated with
increased cash-market prices.
Daily increases in the rate of deliveries of forward-contracted
and marketing agreement cattle had a slightly negative effect on
daily cash-market prices. . . .
Prices paid for cattle delivered under forward contracts on a
given day were about $3.00 per cwt lower (dressed-weight basis) than
prices for similar cattle on the cash market.
Increases in cash market price were found to lead to increases
in the monthly quantities of the volume of forward-contracted, and
marketing agreement cattle used by large plants. Cash-market price
variability is positively associated with the volume of forward-
contracted and marketing agreement cattle used by large plants.
This report demonstrates that when cash-market prices increased,
packers increased their inventories of forward-contracted cattle. When
deliveries of that forward-contract inventory increased, the cash-
market price for cattle declined.
These statistics provided sufficient basis for the USDA to make a
finding that the current use of forward contracts is likely to have the
effect of manipulating prices by depressing the cash-market prices paid
to cattle producers.
D. Use of Formula-Priced Forward Contracts
Forward contracts generally are not traded publicly. In practice
they are often offered only to certain producers providing those
producers with preferential treatment over other producers. The recent
GIPSA report, Concentration in the Red Meat Packing Industry, does not
directly address whether forward contracts and marketing agreements
(marketing agreements as defined by the report are included in the
definition of forward contract in the proposed rule) are offered by
packers on a preferential basis to certain cattle producers. However,
it does provide some insight into who actually enters into forward
contracts.\29\ The report states:
\29\ Concentration in the Red Meat Packing Industry, Grain
Inspection and Packers and Stockyards Administration, USDA, February
1996, pp. 15-23.
---------------------------------------------------------------------------
Small firms use spot markets almost exclusively, whereas the Big
Three packers are more likely to use alternative procurement
methods. Con Agra, Excel, and IBP account for 73 percent of spot
market transactions, but [for] 88 percent of marketing agreements
and 95 percent of forward contracts. * * *
The largest feedlots are also more likely than small feedlots to
use alternative procurement strategies. Feedlots handling more than
32,000 cattle per year accounted for 26 percent of spot marketing
transactions, but [for] 39 percent of forward contracts, 64 percent
of marketing agreements. * * * Most forward contracts (73 percent)
were priced on the basis of carcass weight, while formula pricing
was used for most marketing agreements. * * * The Big Three firms
handled 93 percent of the formula-priced lots and 83 percent of the
carcass-weight arrangements.\30\
\30\ Id. at 16-17 [emphasis added].
---------------------------------------------------------------------------
The report clearly demonstrates that the Big Three packing firms
and the largest feedlots account for the vast majority of the formula-
priced agreements. This is particularly important given the study's
finding that ``market agreement cattle brought prices about 54 cents
above spot market prices.'' \31\
---------------------------------------------------------------------------
\31\ Id. at 22.
---------------------------------------------------------------------------
This data suggests that in practice the largest feedlots have
preferential access to marketing agreements--and therefore to an
assured market for their cattle. And that this preferential status does
not only ensure market access in the long term but also provides a
price advantage not available to producers not offered the marketing
agreements.
This study provides sufficient basis to find that current use of
the marketing-agreement types of forward contracts is likely to result
in an undue and unreasonable advantage for certain large-scale
producers, providing them over the long term with preferential access
and a higher price than are afforded other producers.
E. Captive Supply Decisions and Impact on Price
The Concentration in the Red Meat Packing Industry report issued by
the Grain Inspection and Packers and Stockyards Administration in
February 1996, despite its many flaws, does demonstrate that the use of
captive supply procurement methods in the cattle industry causes a
decline in the cash-market price for cattle. It shows that packers
increase their captive supply inventories when cash-market prices
increase. The report also demonstrates that as packers increase the
deliveries of captive supplies, the cash-market prices decline. The
report states:
The overall effect of captive supplies on prices paid for cattle
in the cash market was negative but small * * *.
Increases in cash market price were found to lead to increases
in the monthly quantities of packer-fed, forward-contracted, and
marketing agreement cattle used by large plants. Cash-market price
variability is positively associated with the volume of forward-
contracted and marketing agreement cattle used by large plants * *
*.
The findings indicate that expected higher prices increase the
volume of packer feeding and other captive supply used, whereas
expectations of falling prices lead to decreases * * *.
The overall effect of increased use of captive supply on
shortrun prices paid for cattle in the cash market appears to be
negative but small.\32\
\32\ Concentration in the Red Meat Packing Industry, Grain
Inspection and Packers and Stockyards Administration, USDA, February
1996, pp. 30-31.
---------------------------------------------------------------------------
This study provides sufficient basis for USDA to find that current
practices with regard to captive supply use by packers, including
formula-priced forward contracts and packer ownership and feeding of
its own slaughter supplies are likely to have the effect of
manipulating prices by depressing cash-market prices paid to cattle
producers.
F. Impact of Number of Buyers on Price
Clement E. Ward has also recently summarized another line of
relevant research designed to determine the effects which number of
buyers had on livestock prices. He states:
A number of studies of the experimental electronic livestock
markets have given us additional insight into the relationship
between concentrated market structure and prices for livestock.
Holder (1979) found that slaughter lamb prices were $.70 per cwt.
higher after introduction of a telemarket. Ward (1984) studied the
relationship between the number of bidders in an Oklahoma
teleauction and prices paid for slaughter lambs between 1979 and
1982, and found that each additional bidder added $1.10 per cwt. to
prices paid and widened the price difference between the teleauction
and live auction at San Angelo, Texas, by $.60 per cwt. Finally,
Rhodus et al. (1985) analyzed the impact of an electronic market on
hog prices in Ohio compared with direct trade markets in Indiana,
the market in Peoria, Illinois, and a major order-buying company
operating in Ohio. They concluded that average prices paid through
the electronic market were $.94 higher than order-buyer prices at
Peoria and $.99 higher than Indiana direct trades by order-
buyers.\33\
\33\ From Competition and the Livestock Market: Report of a Task
Force Commissioned by the Center for Rural Affairs, Walthill,
Nebraska, Wes Sandall et al., Center for Rural Affairs, Walthill,
Nebraska, April 1990, citing (1) Holder, David L., Benefits of a
Sheep and Lamb Teleauction in Virginia and West Virginia, U.S.
Department of Agriculture, Economics, Statistics, and Cooperatives
Service, selected paper for the Southern Agricultural Economics
Association meetings, February, 1979; (2) Ward, Clement E., An
Empirical Study of Price Discovery and Competition for Slaughter
Lambs, Western Journal of Agricultural Economics, 9 (1984): 135-44;
and (3) Rhodus, W. Timothy, E. Dean Baldwin, and Dennis R.
Henderson, Pricing Accuracy and Efficiency in a Pilot Electronic Hog
Market, American Journal of Agricultural Economics, 71 (1989): 874-
82.
---------------------------------------------------------------------------
[[Page 1852]]
The Center for Rural Affairs also has reported on studies designed
to determine the effects which number of buyers had on livestock
---------------------------------------------------------------------------
prices:
Generally, fewer buyers mean less demand for slaughter livestock
and less buyer competition, both of which lead to lower livestock
prices * * *. Three independent studies (Love and Shuffett; Ward
1983; Hayenga, et al.) found that when hog slaughtering plants were
closed in Kentucky, Oklahoma, and Iowa, slaughter hog prices in
markets adjacent to the plants declined either absolutely or
relative to other markets. In some cases, markets adjusted after a
period of weeks to price levels close to those existing prior to
plant closing.
Conversely, more buyers generally mean more demand for slaughter
livestock and more buyer competition, both of which lead to higher
prices * * *. Hayenga, et al. found that slaughter hog prices
increased for a time when new hog slaughtering plants opened in
Iowa. The adoption of electronic markets, giving more buyers better
access to livestock offered for sale, has typically resulted in
higher livestock prices. Such studies include electronic markets for
slaughter lambs in Virginia and Oklahoma (Holder; Ward 1984), hogs
in Ohio (Rhodus, et al.) and feeder cattle in Texas (Sporleder and
Colling). Number of buyers bidding on fed cattle was found to have a
positive effect on fed cattle transaction prices in three separate
studies (Ward 1981, 1992; Schroeder, et al.).\34\
\34\ From Meatpacking Industry Changes: Causes and Consequences,
December 1992, Agricultural Economics A.E. Paper 92137, Department
of Agricultural Economics, Division of Agricultural Sciences and
Natural Resources, Oklahoma State University, citing (1) Love,
Harold G. and D. Milton Shuffett, Short-Run Price Effects of a
Structural Change in a Terminal Market for Hogs, Journal of Farm
Economics, 47(1965): 803-812; (2) Ward, Clement E., Price Impacts of
a Structural Change in Pork Processing--A Case Study in Oklahoma,
Oklahoma Agricultural Experiment Station, Current Farm Economics, 56
(1983): 3-9; (3) Hayenga, Marvin L., Ronald E. Deiter, and
Christobal Montoya, Price Impacts Associated with the Closing of Hog
Slaughtering Plants, North Central Journal of Agricultural
Economics, 8 (1986: 237-42; (4) Holder, David L., Benefits of a
Sheep and Lamb Teleauction in Virginia and West Virginia, U.S.
Department of Agriculture, Economics Statistics, and Cooperative
Service, selected paper for the Southern Economics Association
meetings, February 1979; (5) Ward, Clement E., An Empirical Study of
Price Discovery and Competition for Slaughter Lambs, Western Journal
of Agricultural Economics, 9 (1984): 135-44; (6) Rhodus, W. Timothy,
E. Dean Baldwin, and Dennis R. Henderson, Pricing Accuracy and
Efficiency in a Pilot Electronic Hog Market, American Journal of
Agricultural Economics, 71 (1989): 874-82; (7) Sporleder, Thomas L.
and Phil L. Colling, Competition and Price Relationships for an
Electronic Market, Texas A&M University, Department of Agricultural
Economics, selected paper for the American Agricultural Economics
Association meetings, August 1986; (8) Ward, Clement E., Short-
Period Pricing Models for Fed Cattle and Impacts of wholesale
Carcass Beef and Live Cattle Futures Market Prices, Southern Journal
of Agricultural Economics, 13 (1981): 125-32; (9) Ward, Clement E.,
Inter-firm Differences Between Fed Cattle Prices in the Southern
Plains, American Journal of Agricultural Economics, 74 (1992): 2
480-85; and (10) Schroeder, Ted, Rodney James, James Mintert, and
Andrew Barkley, Short-Run Price Impacts of Packer-Controlled Cattle
Supplies, Manhattan, KS: Invited Paper, Western Agricultural
Economics Association meetings, July 1990.
---------------------------------------------------------------------------
These studies regarding the impact of the number of buyers on
livestock prices provide sufficient basis for a finding that use of a
public market, where buyers and sellers in general have access for
trading of forward contracts and packer-fed cattle, will improve prices
paid to cattle producers.
G. Conclusion From Economic Studies
The economic studies discussed above provide substantial evidence
supporting findings that the current use of forward contracts and
packer-owned cattle to procure captive slaughter supplies are likely to
have the effect of manipulating prices by depressing those prices paid
to cattle producers. These studies also support a finding that the
trading of forward contracts and packer-owned cattle in a public market
designed to encourage more bidders on cattle is likely to improve
prices paid to producers.
The following discussion of the legislative history, statutory
language and case law interpretation of the Packers and Stockyards Act
establishes that this evidence is sufficient basis for issuing the
proposed rules restricting packer feeding of its own slaughter supplies
and use of forward contracts.
Legal Authority To Issue Proposed Rule
Under the Packers and Stockyards Act, the Secretary of Agriculture
clearly has the authority to issue rules regulating packer captive
supply livestock procurement methods to ensure compliance with Section
202 of the Act (7 U.S.C. Sec. 192). In fact, the legislative history of
the Act demonstrates that he has the obligation to issue rules
necessary to ensure that packers continue to comply with Section 202 as
the industry structure and procurement practices change.
A. Legislative History of the Packers and Stockyards Act
1. Context of the Packing Industry at the Time the Act was Passed
Legislative history shows that the concentration levels in the beef
packing industry at the time the Packers and Stockyards Act was enacted
75 years ago were lower than the concentration level today.
Representative Voight, in the debate on the House bill, cited the
concentration figures from the Federal Trade Commission report:
It appears from the report of the Federal Trade Commission that
in 1916 the Big Five's percentage of interstate slaughter was as
follows: cattle 82.2, calves 76.6, hogs 61.2, sheep and lamb 86.4. *
* * In view of the steady growth of the business of the Big Five it
is reasonable to assume that at this date these figures should be
raised from 5 to 10 percent. I conclude, therefore, that at the
present time the Big Five's percentage of interstate slaughter is
between 75 and 80 per cent * * * the monopoly of the Big five
becomes very apparent.\35\
\35\ 61 Cong. Rec. 1863 (1921).
---------------------------------------------------------------------------
In contrast, today, four firms, rather than five, control well over
80 percent of the steer and heifer slaughter.\36\
---------------------------------------------------------------------------
\36\ Helmuth, John W., (1995), supra note 10 at 1.
---------------------------------------------------------------------------
At the time the Act was passed Congress was also very concerned
about the fact that the packers were continuing to charge wholesalers
increasingly higher prices even while prices paid to producers were
low. Representative McLaughlin and Senator Kendrick introduced figures
in their respective houses that demonstrated that despite the fact that
the packers were paying producers the same price for cattle in April
1921, as they had paid in February, 1916, they were charging the
wholesalers 52.6 percent higher prices in 1921 than in 1916.\37\
Similarly, over the last twenty-five years we have seen a steady climb
in the percentage of the retail meat dollar that goes to packers. The
annual average percent of the retail dollar going to packers in 1970
was 12.7. This figure fluctuated over the following twenty-five years,
with a general trend upward, until in 1995 the packers share of the
retail dollar was 25.5 percent. During this same period producers'
share of the retail dollar dropped from 64 percent in 1970 to 49
percent in 1995.\38\
---------------------------------------------------------------------------
\37\ 61 Cong. Rec. 1877-1878, and 2618-2619 (1921).
\38\ ``Beef Price Spread Data'' Table 10--Estimated Historical
Series for Beef, Choice Yield Grade 3: Retail, Wholesale and Farm
Values, Price Spreads, and Farmers' Share. USDA, Economic Research
Service, Stock No. 90006.
---------------------------------------------------------------------------
Seventy-five years ago when Congress recognized trends in the
packing industry that virtually mirror those we see today it acted to
pass the most comprehensive anti-trust legislation ever enacted in this
country. The powers granted under that Act should be vigorously
administered today to prevent the kind of harm to producers that the
Act was written to address.
[[Page 1853]]
2. Extraordinarily Broad Rule-making Power
Upon thorough review of the legislative history of the Packers and
Stockyards Act there can be no doubt that Congress meant to grant the
Secretary the broadest possible rule-making authority over the
livestock procurement practices of the packers.
The extraordinarily broad scope of the regulatory authority granted
to the Secretary under the 1921 Act was expressed in the House report
as follows:
A careful study of the bill, will, I am sure, convince one that
it and existing laws, given the Secretary of Agriculture complete
inquisitorial, visitorial, supervisory, and regulatory power over
the packers, stockyards and all activities connected therewith; that
it is a most comprehensive measure and extends farther than any
previous law in the regulation of private business, in time of
peace, except possibly the interstate commerce act.\39\
\39\ House Report No. 77, 67th Cong., 1st Sess. 2 (1921)
(emphasis added).
---------------------------------------------------------------------------
The Congressional intention to give the Secretary of Agriculture
complete regulatory powers over the packers and all their activities
was emphasized throughout the debate on the bill.\40\ Similarly, the
intention to pass the ``most far-reaching measure and extend further
than any previous law into the regulation of privates business'' was
also an often repeated point in the debate.\41\
---------------------------------------------------------------------------
\40\ See also 61 Cong. Rec. 1799, 1801, 4738, 8310 (1921).
\41\ See also 61 Cong. Rec. 1801, 1805-1806, 1887-1888 (1921).
---------------------------------------------------------------------------
The conference report on the bill emphasized, in the strongest
terms possible, the Congressional intent to grant the Secretary
extraordinary regulatory powers--``Congress intends to exercise in the
bill, the fullest control of packers and stockyards which the
Constitution permits''.\42\
---------------------------------------------------------------------------
\42\ Conference Report, H.R. Rep. No. 324, 67 cong. 1st Sess.,
at 3 and 5-6. Statement of the Managers on the Part of the House; 61
Cong. Rec. 4778, 4779 (1921).
---------------------------------------------------------------------------
3. Authority to Regulate to Prevent and Compel
The legislative history also makes it clear that Congress intended
that the Secretary use his regulatory powers aggressively to prevent
packer practices made illegal by the Act. Repeatedly the bill was
described as giving the Secretary the authority ``to prevent packers *
* * from engaging in an unfair, unjustly discriminatory, or deceptive
practice or device.'' \43\ Representative Voight of Wisconsin, who
strongly favored the bill, stated that it could be used to prevent
unlawful practices by the packers and to compel them to employ lawful
business practices:
\43\ H.R. Rep. No. 77, 67th Cong. 1st Sess. 2 (1921); 61 Cong.
Rec. 1799 (1921).
---------------------------------------------------------------------------
The bill is sufficiently broad so that, if vigorously
administered, the Secretary can prevent combination among packer and
can compel them and all others connected with the industry to do
business in a lawful and proper way. * * * the Secretary under this
bill is given the power to make rules that will make them [packers]
do business on the level.\44\
\44\ 61 Cong. Rec. 1868 (1921) (emphasis added).
---------------------------------------------------------------------------
The legislative history makes clear that Congress intended the
Secretary to exercise his extraordinarily broad regulatory powers to
prevent conditions under which packers could gain control of the
livestock market, and, thereby, induce healthy competition. The report
on the Hearings on several of the bills debated states that the Act
seeks ``to prohibit the particular conditions under which monopoly is
built up, and to prevent a monopoly in the first place and to induce
healthy competition.'' \45\
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\45\ Hearings on H.R. 14, H.R. 232, H.R. 5032, and H.R. 5692
Before the House Committee on Agriculture, 67th Cong. 1st Sess.,
ser. D, 26 (1921).
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4. Authority to Issue Substantive Rules
There was extensive debate in the Senate over whether the
regulatory body should be allowed to issue rules or regulations for
which the packers could be held civilly and criminally liable. This
debate was ultimately resolved when the Senate amended the House bill
by adding a second provision granting the Secretary authority to issue
rules and regulations necessary to carry out the provisions of the Act.
The conference report on the bill explains how the two houses dealt
with this double grant of authority to issue rules and regulations:
On Amendment No. 17: This amendment adds to the House bill a
provision empowering the Secretary of Agriculture to `make such
rules, regulations, and orders as may be necessary to carry out the
provisions of this act.'. The House bill did not contain this
specific provision, but did make applicable to the jurisdiction and
powers of the Secretary of Agriculture in enforcing the act the
powers given to the Federal Trade Commission by section 6 of the
Federal Trade Commission Act, one of the provisions of which
authorized that commission to make rules and regulations for the
enforcement of the act, the two being substantially the same; and
the House recedes.\46\
\46\ 61 Cong. Rec. 4780 (1921).
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Representative Haugen, the chief author of the bill that eventually
was enacted, also similarly references this amendment in his comments
on the conference report.\47\
---------------------------------------------------------------------------
\47\ 61 Cong. Rec. 4782 (1921).
---------------------------------------------------------------------------
Maybe as significant as the double grant of authority to issue
rules, for purposes of determining Congressional intent with regard to
the type of rules proposed in this petition, is the fact that the
Senate defeated an amendment that would have limited the Secretary's
authority to issue rules only ``as to procedures.'' \48\ During the
debate on this proposed amendment Senator Walsh from Montana clearly
stated that the intent of the bill without this amendment was to allow
the Secretary to issue substantive type rules that are consistent with
the act's provisions. He also emphasized that courts would have the
full authority to review such rules through a review of any order
issued by the Secretary requiring a packer to comply with the rule.
\48\ See 61 Cong. Rec. 2674-2675 (1921).
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I may say that a further examination of the general statutes
does not reveal any statute making criminal the act which is
denounced as unlawful. Accordingly the only procedure which can be
instituted on charges of having violated an order, rule, or
regulation is the procedure recited in the proposed act. If the
Secretary * * * believes that the rule, regulation or order comes
under the act, of course he will make the order; but that will be
ineffective until it is passed upon by the court, and the court will
pass upon the question as to whether the rule, regulation, or order
falls under the provisions of this act so as to make disobedience of
its contempt.\49\
\49\ 61 Cong. Rec. 2675 (1921).
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Senator Walsh's reference to procedures for bringing charges for
violations of the Act is to the provision of the bill that is now
codified at 7 U.S.C. Sec. 193. This is the statutory provision the
Secretary uses to bring charges against packers for violating the
unfair and deceptive trade practices section of the Act, 7 U.S.C.
Sec. 192. Senator Walsh's statement, thus, indicates that Congress
intended that the Secretary would issue substantive rules defining what
packers must do to comply with this provision of the Act, and that
packers would be adequately protected from arbitrary rule-making by
having access to review of the rule by the courts. Senator Walsh's
statements demonstrate that Congress clearly envisioned that the
Secretary would be issuing precisely the type of substantive rule that
is proposed in this petition.
5. Purpose to Protect Producers Interest
A primary purpose for passage of the Packers and Stockyards Act was
to protect the interest of the producer. This intention is clearly
expressed in the
[[Page 1854]]
legislative history. Representative Tincher stated:
It is my judgment that the passage of this bill, that its proper
administration, will permit the meat producer to exist; that it will
reduce the amount paid out between the producer and the consumer to
such an extent that it will make the business for the producer more
profitable, and not be injurious to the consumer.\50\
\50\ 61 Cong. Rec. 1809 (1921).
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Similarly, Representative Voight of Wisconsin expressed the sincere
belief that this bill would benefit producer and consumer alike:
I think if this monopoly of the Big Five is done away with, and
the laws of trade are given a chance to function, it is going to
benefit producer and consumer alike; genuine competition will
benefit both.\51\
\51\ 61 Cong. Rec. 1868 (1921).
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In an early case interpreting the Act the U.S. Supreme Court
recognized that one of its primary purposes was to protect producers'
from the packers' control over prices paid for livestock:
The chief evil feared is the monopoly of the packers, enabling
them unduly and arbitrarily to lower prices to the shipper, who
sells, and unduly and arbitrarily to increase the price to the
consumer, who buys.\52\
\52\ Stafford v. Wallace, 258 U.S. 495, 515-516, 42 S. Ct. 397,
401 (1922).
---------------------------------------------------------------------------
The Eighth Circuit Court of Appeals has more recently stated
One of the purposes of the Packers and Stockyards Act is to
safeguard farmers and ranchers against receiving less than the true
market value of their livestock.\53\
\53\ Bosma v. USDA, 754 F.2d 804, 808 (8th Circuit 1984), citing
H. Rep. No. 1048, 85th Cong. 2d Session, reprinted in 1958 U.S. Code
Cong. and Admin. News, 5212, 5213.
---------------------------------------------------------------------------
Courts have held that the Act should be liberally enforced in order
to accomplish its purpose of protecting producers interests:
The Act is remedial legislation and is to be construed liberally
in accord with its purpose to prevent economic harm to producers and
consumers at the expense of the middleman.\54\
---------------------------------------------------------------------------
\54\ Swift & Co. v. United States, 393 F.2d 247, 253 (7th Cir.
1968); citing Stafford v. Wallace, 258 U.S. at 521; and Safeway
Stores, Inc. v. Freeman, 369 F.2d 952, 956 (1966); see also, Farrow
v USDA, 760 F.2d 211, 214 (8th Circuit 1984).
---------------------------------------------------------------------------
6. Authority to Regulate to Ensure Open, Competitive Markets
Congress recognized that to protect producers' interests the
Secretary must be granted the authority to regulate packer practices to
ensure open, competitive markets for livestock. When the Act was passed
in 1921 virtually the sole source of supply for slaughter cattle was
through the stockyards. So Congress not only emphasized regulation of
the packers but also of the stockyards as the public market of that
day.
Congress, however, did make clear its intention was to ensure open,
competitive markets for buying and selling livestock no matter where
those markets occurred. Rep. Haugen of Iowa, whose bill was ultimately
enacted with only minor modification, introduced the conference report
to the House on August 9, 1921. In his discussion of the rejected
Senate amendments he indicated that buying or selling ``in commerce
live stock at the stockyard'' was equivalent to being a buyer or seller
of ``live stock in commerce''.
Representative Jones from Texas, a strong supporter of the Act,
most clearly stated the importance of open, competitive markets for the
producer:
The producer must always sell in a market that he does not
control. He buys at the other man's price. His only hope of securing
a fair price lies in an open, competitive market.\55\
\55\ 61 Cong. Rec. 1861 (9121).
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Congress knew well that the only way open, competitive markets for
livestock and meat could be maintained was if the Secretary was given
the authority to regulate practices of one sector of the industry that
could adversely affect other sectors. Congress recognized that one of
the most significant aspects of this legislation was that it authorized
regulation of unfair practices as between the packer and the producer
and between the packer and the consumer. In response to a question as
to how this Act strengthened the authorities under the Federal Trade
Commission Act, Representative Anderson stated:
As to the intent of ``unfair competition'' [in the FTC Act] it
only includes acts which constitute a violation of the rights of the
competitor, and it must be a method which is used by a competitor on
the same plane. * * * For instance, the method of competition used
by a manufacturer which we might think was a violation of the moral
rights of the wholesaler would not be a violation of the Federal
Trade Commission Act, because the interpretation of that is that it
must be unfair as between competitors who stand on the same plane.
This goes further than that, as it affects the public interest to a
large extent, and the unfair competition or unfair competition or
unfair practice as between the packer and the general public, the
packer and the producer, or the packer and any other agency
connected with the marketing of livestock.\56\
\56\ 61 Cong. Rec. 1805 (1921).
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Congressional commitment to maintaining open and competitive
markets for livestock was reemphasized throughout the amendments to the
Act in later years. In 1924 the Act was amended to increase the
authority of the Secretary to sanction violators. The House Report
notes that the Secretary personally appeared to the committee and urged
strengthening the law to enable him to confront ``conditions that are
detrimental to the open, competitive marketing of livestock.'' \57\
---------------------------------------------------------------------------
\57\ H.R. Rep. 77 on Packer Act Amendment of 1924 at 3.
---------------------------------------------------------------------------
When enacting the 1958 amendments Congress noted significant
changes in the meatpacking industry and the environment in which it
operates. The House report stated ``[e]qually significant (as the
development of 1400 to 1500 country auctions and markets) is the growth
which has taken place in country buying--buying by packers or livestock
dealers direct from the producer * * * today a common practice in
almost every part of the country and more than 40 percent of all
livestock sold moves in this manner.'' \58\ This report also makes
clear that Congress intended the 1958 Act amendments to ensure that the
Secretary had jurisdiction over ``all livestock marketing involved in
interstate commerce including country buying of livestock.'' \59\
---------------------------------------------------------------------------
\58\ H.R. Rep No 1048, 85th Cong., 1st Sess 3 (1957).
\59\ Id. at 5.
---------------------------------------------------------------------------
In 1976, Congress again strengthened the Act to give the Secretary
greater powers in regulating the packers. Further changes in the
pattern of livestock marketing between 1958 and 1976 led to these
amendments. Following the 1958 amendment, ``packers continued to push
to acquire slaughter livestock at its source,'' and by 1976 it was
estimated that ``well over 80% of all slaughter livestock is purchased
by the packers directly from producers and custom feedlots.'' \60\
---------------------------------------------------------------------------
\60\ Sen. Rep. No. 94-932, 94th Cong, 2d Sess. 4 (1976).
---------------------------------------------------------------------------
In 1978, when Congress amended the Act with regard to rates and
charges at auction markets, it again expressed the importance of
securing competitive livestock markets for producers. ``The continued
availability of competitive, reasonably priced, and conveniently
located livestock marketing channels is essential, particularly for
small producers.'' \61\
---------------------------------------------------------------------------
\61\ 1978 USCAAN 2204, Senate Report.
---------------------------------------------------------------------------
The legislative history clearly establishes that Congress intended
to grant the Secretary the authority to regulate packer practices
necessary to ensure open, competitive markets for livestock. When
marketing conditions changed over time, Congress amended the Act to
ensure the Secretary would continue to be able to address packer
practices even in the context of country
[[Page 1855]]
buying direct from feedlots or producers.
7. Obligation to Adjust Rules to Changes in Industry Structure
While in 1921 the stockyards were the public market which Congress
wanted to ensure would be made open and competitive, Congress had the
foresight to recognize that in the long-term industry marketing
practices might change. It structured the Act to grant the Secretary
authority to take action that would ensure open, competitive markets as
the industry changed over time. In doing so Congress intentionally
placed the obligation on the Secretary of Agriculture to monitor the
packing industry and adjust regulatory controls to ensure compliance
with the purposes of the Act as industry structure changed. Congress
recognized that enacting a statutory list of specific prohibited packer
practices would not further one of its primary goals--to structure an
act that would keep pace with the changing structure of the livestock
industry. Congressman Anderson of Minnesota, a member of the House
Committee on Agriculture and a sponsor of one of the bills that led to
the Act, stated during the debates in the House that:
Industry is progressive. The methods of industry and the
manufacture and distribution change from day to day, and no positive
iron-clad rule of law can be written upon the statute books which
will keep pace with the progress of industry. So we have not sought
to write into this bill arbitrary and iron-clad rules of law. We
have rather chosen to lay down certain more or less definite rules,
rules which are sufficiently flexible to enable the administrative
authority to keep pace with the changes of methods in distribution
and manufacture and in industry in the country.\62\
\62\ 61 Cong. Rec. 1887 (1921).
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Congressman Anderson later noted that ``the provisions of this
legislation as to the packers must be more or less elastic in order
that they may keep pace with the state and development of the
industry.'' \63\
---------------------------------------------------------------------------
\63\ 61 Cong. Rec. 1888(1921).
---------------------------------------------------------------------------
8. Legislative History Conclusion
The legislative history establishes that Congress intended that the
Secretary use his authority under the Act to protect the interests of
livestock producers through regulation of packer practices that
threaten an open, competitive markets for livestock. It also shows that
Congress intended that the Secretary do this in part through issuance
of substantive rules that will prevent packer practices prohibited by
the Act and compel lawful action by packers. Congress expected the
Secretary to vigorously enforce the Act according to these principles,
adjusting the rules and enforcement policies to keep pace with the
state and development of the industry even as numbers of cattle
purchased directly from feedlots and producers increased. The
legislative history demonstrates that Congress clearly intended the
Secretary to issue substantive rules of the nature proposed in this
petition.
B. Statutory Authority for Rule Making
The statutory language granting the Secretary of Agriculture these
extraordinarily comprehensive regulatory powers, including the
authority to issue substantive regulations regarding packer practices,
is found at 7 U.S.C. Secs. 228(a) and 222. Section 228 states:
The Secretary may make such rules, regulations and orders as may
be necessary to carry out the provision of the Act * * *.\64\
\64\ 7 U.S.C. Sec. 228(a) (emphasis added).
---------------------------------------------------------------------------
Section 222 grants the Secretary of Agriculture all of the
enforcement powers held by the Federal Trade Commission under Title 15
Section 46, 48, and 50.\65\ Section 46(a) authorizes the Secretary ``to
make rules and regulations for the purpose of carrying out the
provisions'' of the Act.
---------------------------------------------------------------------------
\65\ 7 U.S.C. Sec. 222.
---------------------------------------------------------------------------
When issuing regulations in 1974, the Packers and Stockyards
Administration acknowledged that these two statutory sections granted
it the authority to issue substantive rules:
The position of the Administration is that the general rule-
making authority contained in section 407 of the Packers and
Stockyards Act (7 U.S.C. Sec. 228) and section 6(g) of the Federal
Trade Commission Act (15 U.S.C. Sec. 46) authorizes the Secretary to
issue substantive as well as procedural and advisory regulations
necessary to carry out the provisions of the Act.\66\
\66\ 39 Fed. Reg. 17529, 17537 (May 17, 1974) (emphasis added.)
---------------------------------------------------------------------------
Courts have also recognized that the Secretary has the authority to
issue legislative rules under the Packers and Stockyards Act. These
legislative rules have the force and effect of law. See, e.g., United
States v. Marshall Durbin & Co., No. CV 84-PT-1920-S (ND Ala Sept. 11,
1985), where the court recognized that the Secretary has the authority
to issue legislative rules having the force and effect of law, but held
that a poultry weighing regulation should be regarded as an
interpretive rule, since the Secretary did not comply with the notice
and comment procedures of the Administrative Procedure Act.
One court has specifically addressed the Secretary's rule-making
authority under Section 202 of the Act. In Central Coast Meats v. USDA,
541 F.2d 1325 (1976), the court held that USDA did not have the
authority under Sec. 202(a) to enforce a rule that made it a per se
violation for a packer to own a dealer or vice-versa. The court based
this holding on its understanding that 202 (c) and (d) specifically
addressed the evils of packers' acting as dealers and it clearly
contemplated that packers could act as dealers in certain
circumstances.\67\ This decision would not prohibit the issuance of the
rules proposed in this petition. The rules proposed here do not create
the type of per se prohibition the court was concerned with in the
Central Coast Meats decision. These proposed rules do not make packers'
use of forward contracts a per se violation. Nor do they make packer
feeding a per se violation. Rather, these rules identify the
circumstances under which forward contracts and packer feeding result
in violations of the Act.
---------------------------------------------------------------------------
\67\ Id. at 1327.
---------------------------------------------------------------------------
Forward contracts that are formula-priced fail to establish the
value paid for an animal on the day it is committed. This allows an
opportunity for the manipulation of the price between the day the
livestock is committed and the date it is delivered. Forward contracts
which are not traded publicly create preferences for those producers
offered those contracts over those not offered such contracts. Such
preference of one producer over others is likely to injure the
competitive position of those not receiving the offer and this violates
Section 202(b) of the Act.
The proposed rule's requirement that all forward contracts contain
a firm-base price and be traded in an open, public manner eliminates
the circumstances under which forward contract use violates Sec. 202 of
the Act. Similarly, packer feeding of its own slaughter supplies can
have the effect of reducing prices paid to producers on the cash
market. Such practice also provides a preference to the persons owning
the packer as well as owning the cattle. Thus a packer's feeding of its
own slaughter supplies is likely to affect a manipulation of price and
also likely to injure the other cattle producers' ability to compete
with the packer. The proposed rule that packer owned and fed cattle be
sold in public markets eliminates the circumstance in which packer
feeding results in violations of the Act. Rather than establishing a
per se violation of the Act, the proposed rules are explicitly designed
to address the specific circumstances under which forward contracts and
producer
[[Page 1856]]
ownership and feeding of cattle result in violations of the Act.
Both the legislative history and the statutory language of the
Packers and Stockyards Act make it clear that the Secretary has
extraordinarily broad authority to issue substantive rules regulating
packer practices.
C. Statutory Authority for Captive Supply Rules
The types of packer practices that are to be regulated through the
Secretary's rulemaking authority were set out in Section 202 of the
Act, 7 U.S.C. Sec. 192. This section establishes that:
It shall be unlawful with respect to livestock * * * for any
packer * * * to:
(a) Engage in or use any unfair, unjustly discriminatory, or
deceptive practice or device; or
(b) Make or give any undue or unreasonable preference or
advantage to any particular person or locality in any respect
whatsoever, or subject any particular person or locality to any
undue or unreasonable prejudice or disadvantage in any respect
whatsoever; or * * *
(e) Engage in any course of business or do any act for purpose
or with the effect of manipulating or controlling prices, or of
creating a monopoly in the acquisition of, buying, selling, or
dealing in, any article, or of restraining commerce.
D. Assertion That Secretary Lacks Rule-making Authority Is Wrong
Despite the Congressional grant of extraordinarily broad rule-
making authority and its intent that the Secretary amend its rules as
necessary to ensure packer compliance with the Act as industry
structure changes, the Secretary has asserted that he has no authority
to issue rules prohibiting packer captive supply procurement practices.
In Secretary Glickman's letter dated October 3, 1995, to Representative
Pat Williams, he asserts that the Grain Inspection and Packers and
Stockyards Administration's policy is ``to promote fair and open
competition among packers and not to dictate or regulate the specific
methods and terms of sale to be utilized.'' The Secretary cites Swift &
Co. v. Wallace, 105 F.2d 848 (7th Cir. 1939), to support this policy.
He states that the court in that case noted that Section 202 ``does not
purport to confer upon the Secretary of Agriculture any authority
directly to regulate prices, or discounts, or sales methods; and
clearly does not contemplate the exercise of any authority to establish
uniformity of practice with respect thereto.''
This was the Secretary's response to a request from several
congressmen to fully consider the Western Organization of Resource
Council's request that rules of the nature proposed in this petition be
issued.
The Secretary's reliance on the Swift case as justification for not
issuing rules prohibiting these practices is misplaced. The Swift
decision does not support his assertion that he has no authority to
regulate these packer practices. In fact, the court in Swift explicitly
states that the Secretary has the authority to restrict packer
practices that violate Section 202 of the Packers and Stockyards
Act.\68\ This decision makes clear that the only limitation on the
Secretary's authority to regulate packer practices is that restricted
practices must be in violation of the Act.
---------------------------------------------------------------------------
\68\ Swift & Co. V. Wallace, 105 F.2d 848, at 853 and 863.
---------------------------------------------------------------------------
1. Swift Case Analysis
a. Holdings in Swift Decision
In the Swift case, Swift had been granting longer credit terms and
better discounts to the institutional trade (hotels, restaurants,
clubs, steamship lines, and public institutions) than it offered to
purveyors (those businesses which buy meat products from packers and
then resell them to the institutional trade). USDA issued a cease and
desist order that required Swift to:
[C]ease and desist from engaging in the unfair, unjustly
discriminatory and deceptive practice and device of denying to any
buyer of packer products the same terms of credit that are extended
to any other buyer, of substantially the same credit rating
purchasing packer products of like kind, quantity and quality, under
substantially the same circumstances.\69\
\69\ Swift & Co. v. Wallace, 105 F.2d 848, at 862 (7th Cir.
1939).
---------------------------------------------------------------------------
The Court of Appeals found a problem with the form of the cease and
desist order issued by USDA. It held that USDA acted outside its
authority under the Packers and Stockyards Act in issuing an order that
required Swift to grant uniform terms of credit and discounts to all
customers.\70\
---------------------------------------------------------------------------
\70\ Id. at 863.
---------------------------------------------------------------------------
2. Legal Analysis
a. Swift Decision is Not Controlling Law in Most of the Country
The Swift decision cited by the Secretary is controlling law only
in the Seventh Circuit, which includes Wisconsin, Illinois, and
Indiana. While other courts may consider the Swift decision when
deciding similar issues, it is not controlling law in other federal
circuits. Other federal courts may decide the issue differently.
Since the Swift decision was issued by 1939, it has been cited only
once by the Seventh Circuit for the proposition the Secretary uses it
for.\71\ However, the Armour decision does not give any more insight
into what the Swift court meant by the quote Secretary Glickman now
cites. No other courts have cited the case for this specific
proposition. However, the case is cited often to support other
principles regarding the Packers and Stockyards Act.
---------------------------------------------------------------------------
\71\ See Armour & Co. v. United States, 402 F.2d 712 (7th Cir.
1968).
---------------------------------------------------------------------------
b. In Context, the Quote Does Not Support the Secretary's Position
When the quote cited by the Secretary is read in its proper context
in the Swift decision, it is clear that it does not support the
Secretary's general refusal to prohibit the packer practices as
requested. Two important principles expressed by the court shed light
on the intent of the quoted language. First, the court of appeals
recognized the Secretary's authority to prohibit and restrict practices
that are found to violate Section 202 of the Packers and Stockyards
Act. Second, the reference to the lack of authority to establish
uniformity of practice is to the court's finding that the form of the
cease and desist order in that case was improper because the Act does
not authorize the Secretary to change an unjustly discriminatory or
unreasonable preferential practice into a fair practice through an
affirmative mandate that the practice be applied uniformly to all
affected.
(1) USDA Has the Authority to Restrict Unlawful Packer Practices
The quote cited by the Secretary is as follows:
The foregoing language does not purport to confer upon the
Secretary of Agriculture any authority directly to regulate prices,
or discounts, or sales methods; and clearly does not contemplate the
exercise of any authority to establish uniformity of practice in
respect thereto.\72\
\72\ Swift & Co. v. Wallace, 105 F.2d 848, at 853 (7th Cir.
1939).
---------------------------------------------------------------------------
The sentence immediately following this quote recognizes that the
Secretary does have the authority to regulate practices if ``in fact''
they constitute unfair, unjustly discriminatory, or deceptive
practices, or if they provide undue or unreasonable preference or
advantage as between persons or localities. The court states:
Differences of variations in prices, or in the terms of credit,
or amounts of discount, or in practices do not come within the ban
of the act unless they in fact constitute engaging in or using an
unfair or unjustly discriminatory or deceptive practice or device in
commerce or unless they constitute a making or giving, in commerce,
of an undue or unreasonable
[[Page 1857]]
preference or advantage, or result in undue or unreasonable
prejudice or disadvantage as between persons or localities.\73\
\73\ Id. at 853.
---------------------------------------------------------------------------
Later in the decision, the court makes clear that the Secretary has
the authority to restrict packer practices that violate Section 202.
The court states:
If a practice in respect to the giving of discount or terms of
credit in fact constitutes an undue and unreasonable preference or
advantage, or subjects some person or locality to undue and
unreasonable prejudice or disadvantage, then clearly the Secretary
of Agriculture has the power to restrict the practice to the point
where it is fair and reasonable * * *\74\
\74\ Id. at 863.
---------------------------------------------------------------------------
Clearly, the court recognized that once USDA finds that a
particular packer practice violates Section 202, it has the authority
to restrict that practice until it is fair and reasonable. The economic
studies discussed above demonstrate that current use of formula-priced
forward contracts and packer ownership and feeding of its own slaughter
supplies likely affect a manipulation of prices paid to producers and
provide certain producers competitive advantages and preferences that
are in violation of Sec. 202 of the Act. The proposed rule restricts
these practices only to the extent necessary to make them fair and
reasonable and to prevent violation of the Act.
(2) Regulating Uniform Packer Practices
The court in the Swift case also held that the cease and desist
order issued by the Secretary went beyond his authority because it was
in effect an affirmative command to require ``uniformity'' of discount
terms, terms of credit, and trade practices.\75\ The court interpreted
the cease and desist order issued by USDA to affirmatively require
Swift to give discounts and particular terms of credit to any customer
as a condition to being permitted to continue giving terms of credit or
discounts that were found unreasonable and prejudicial. The court held
that once a discount, term of credit, or practice was found to be undue
or unreasonable preference, or unjustly discriminatory, the Secretary
did not have the authority to change the practice into a proper
practice by requiring it to be extended to all others who may be
affected thereby. It held that the Secretary does have the power to
restrict a practice to the point where it is fair and reasonable but
does not have the power to change the unreasonable preference into a
fair practice by affirmatively mandating that it be applied uniformly
to all affected.\76\ The court states:
\75\ Id. at 862-63.
\76\ Id..
---------------------------------------------------------------------------
If a practice in respect to the giving of discount or terms of
credit in fact constitutes an undue and unreasonable preference or
advantage, or subjects some person or locality to undue and
unreasonable prejudice or disadvantage, then clearly the Secretary
of Agriculture has the power to restrict the practice to the point
where it is fair and reasonable; but we do not believe that the
Secretary has the power to change a practice, which is assumed to be
unreasonable and to create an unreasonable preference, into a proper
practice by requiring it to be extended to all others who may be
affected.\77\
\77\ Id. at 863.
---------------------------------------------------------------------------
The reference to the lack of authority to establish uniform
practices in the quote used by Secretary Glickman is explained by this
statement. All that the Swift court meant was that the Secretary does
not have the authority to affirmatively mandate that for an unlawful
practice to become lawful, it must be applied uniformly.
The Secretary's assertion that the Swift case supports his decision
not to issue rules prohibiting the packer practices requested by the
Western Organization of Resource Councils is wrong. The proposed rule
restricts packer captive supply procurement methods only to the extent
necessary to stop violation of the Act. The proposed rule does not
mandate terms of sale through forward contracts or packer-owned cattle.
Unlike the cease and desist order in the Swift case which required
offering the same terms of credit to all buyers, the proposed rule does
not require packers to buy all cattle on the same price terms. Forward
contracts must be traded publicly, but the firm-base price does not
have to be the same for all cattle. Similarly, packer-owned and fed
cattle must be sold in a public market, but the cattle do not all have
to be sold on the same terms.
E. Incipiency Theory of Enforcement
The legislative history of the Packers and Stockyards Act indicates
that the Act seeks ``to prohibit the particular conditions under which
monopoly is built up, and to prevent a monopoly in the first place and
to induce healthy competition.'' \78\
---------------------------------------------------------------------------
\78\ Hearing on H.R. 14, H.R. 232, H.R. 5032, and H.R. 5692
Before the House Committee on Agriculture, 67th Cong, 1st Sess.,
ser. D, 26 (1921).
---------------------------------------------------------------------------
Such legislative history has been interpreted by courts to mean
that one of the purposes of the Packers and Stockyards Act is to
prevent ``potential injury by stopping unlawful practices in their
incipiency'' and that ``proof of a particular injury is not required''
to permit regulation of packer practices.\79\
---------------------------------------------------------------------------
\79\ Daniels v. United States, 242 F.2d 39, 42 (7th Cir. 1957),
cert. denied, 354 U.S. 939, reh'g denied, 355 U.S. 852 (1957);
Bowman v. USDA, 363 F.2d 81, 185 (5th Cir. 1966), quoting Daniels.
---------------------------------------------------------------------------
Several courts have affirmed the principle that the Secretary has
the authority to prevent unlawful practices in their incipiency but
require that before doing so he must find either some non-competive
intent or some likelihood of competitive injury.\80\ These cases do not
require the Secretary to find actual injury. He is only required to
demonstrate a likelihood that injury of the sort the Act is designed to
prevent will occur. As the Court of Appeals for the Ninth Circuit has
stated:
\80\ See Armour & Company v. United States, 402 F.2d 712, 717
(7th Cir. 1968), which describes how several previous Seventh
Circuit opinions incorporated this concept, including Swift & Co. v.
Wallace, 105 F.2d 848 (7th Cir. 1939); Wilson & Co. v. Benson, 286
F.2d 891 (7th Cir. 1961); Swift & Co. v. United States, 408 F.2d 849
(7th Cir. 1962); see also Corona Livestock v. USDA, 607 F.2d 811,
815 (9th Cir. 1979).
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Unfair practices under Section 202 are not confined to those
where competitive injury has already resulted, but include those
where there is a reasonable likelihood that the purpose will be
achieved and that the result will be an undue restraint of
trade.\81\
\81\ De Jong Packing Co. v. USDA, 618 F.2d 1329, 1336-37 (9th
Cir. 1980) (emphasis added).
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In Bosma v. USDA, the Ninth Circuit Court of Appeals quoted its
Central Coast Meats, Inc. holding that the department must show that
the challenged conduct ``is likely to produce the sort of injury the
Act is designed to prevent.'' \82\ The court found that actual harm
resulted when an auction operator purchased livestock from consignments
for speculation.\83\ However, the court also held that the failure of
the auction operator to inform consignors that he was the actual
purchaser of the livestock was ``inherently unfair'' and ``it may be
considered an `unfair' or `deceptive' practice absent a more specific
showing of actual harm.'' \84\
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\82\ Bosma v. USDA, 754 F.2d 804, 808 (9th Cir. 1984), (emphasis
added).
\83\ Id. at 808-809.
\84\ Id.
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Similarly, in a case involving an agreement by two competitors not
to compete for certain cows at an auction market, the Eight Circuit
Court of Appeals held that ``actual injury'' need not be proven because
the ``purpose of the Act is to halt unfair trade practices in their
incipiency, before the harm is suffered.'' \85\ The court stated that
``the Secretary need only establish the likelihood that an arrangement
will
[[Page 1858]]
result in competitive injury to establish a violation.\86\ The court
agreed with the judicial officer that ``a practice which is likely to
reduce competition and prices paid to farmers for cattle can be found
an unfair practice under the Act.'' \87\ The court concluded that
``this is so even in the absence of evidence that the participants made
their agreement for the purpose of reducing prices to farmers or that
it has that result.'' \88\
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\85\ Farrow v. USDA, 760 F.2d 211, 215 (8th Cir. 1985).
\86\ Id.
\87\ Id. at 214.
\88\ Id.
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These cases firmly establish that the Secretary may take action to
prevent unlawful packer practices in their incipiency if he finds that
these practices are reasonably likely to produce the sort of injury the
Act is intended to prevent. The economic studies discussed above
provide a sufficient factual basis for finding that the packers current
use of forward contracts and packers' feeding of their own slaughter
supplies in today's concentrated markets are likely to cause reductions
in prices paid to producers and result in undue preferences for certain
producers over others.
The incipiency theory of enforcement of the Packers and Stockyards
Act can be applied in the rule-making process as well as in an
administrative complaint proceeding. In the rulemaking process the
Secretary makes the necessary findings with regard to the packer
practices in general, whereas in an administrative complaint proceeding
the necessary finding would be made as to a particular situation. The
captive supply procurement practices addressed by the proposed rule are
so widespread that restrictions on USDA's resources will not permit
them to be addressed effectively through individual administrative
complaints. These practices can only be addressed effectively through
issuance of a rule.
F. The Relevance of Competition in an Undue Preference Case
The Seventh Circuit Court of Appeals has held that when considering
whether a packer practice provides an undue and unreasonable preference
or is unjustly discriminatory, the effect on competition as between the
party alleged to have obtained the preferential treatment and the party
alleged to have been discriminated against is of primary importance.
Even good faith competition between packers will not prevent a finding
of discrimination or unreasonable preference if the parties preferred
or discriminated against are not other packers.\89\
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\89\ See, e.g., Swift & Co. v. Wallace, 105 F.2d 848, at 855-857
(7th Cir. 1939).
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In this Seventh Circuit case, Swift had been granting longer credit
terms and better discounts to the institutional trade (hotels,
restaurants, clubs, steamship lines, and public institutions) than it
offered to purveyors (those businesses which buy meat products from
packers and then resell them to the institutional trade). The Seventh
Circuit Court of Appeals set aside USDA's ruling that the discounts and
terms of credit at issue were in violation of Section 202 of the
Packers and Stockyards Act.\90\ The court found that USDA had not
properly taken into account the issue of competition when making its
decision.\91\ Under the court's analysis, the purveyors that claimed
they were being discriminated against were competitors of the packer,
not competitors of the institutional trade. Both the packers and the
purveyors sold meat to the institutional trade. The preferential credit
terms and discounts, however, were given to the institutional trade.
The court found that an important aspect of ``competition'' to be
concerned about in an unjustly discriminatory or unreasonable
preference case would be that between the party preferred and the party
claiming prejudice. The court stated:
\90\ Id. at 857.
\91\ Id. at 854-57.
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Normally the lack of competition between the parties preferred
and the parties claiming to be subjected to discrimination would be
a fact of substantial significance for the determination of the
existence of ``any undue and unreasonable preference or advantage.''
\92\
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\92\ Id. at 857.
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Because the purveyors were not competing with the institutional
trade, the court found no discrimination between competitors. Thus, it
found that USDA had not provided an adequate factual basis for holding
the practices to be violations of the Act.
When considering whether the packers' captive supply procurement
methods result in undue and unreasonable preferences or unjust
discrimination, their effect on the competition between livestock
producers must be considered. Because captive supply agreements are
offered selectively to livestock producers and provide preferential
access to slaughter plants for those who enter into them, they injure
the ability to compete of those producers who are not offered such
agreements for the sale of their livestock. The proposed rule is
designed to restrict use of forward contracts and packer owned and fed
cattle only to the extent necessary to prevent unjust discrimination or
undue preferences between competing producers. It does so by requiring
forward contracts and producer owned and fed cattle to be traded in a
public market.
G. Secretary Has the Authority to Issue the Proposed Captive Supply
Rules
The legislative history discussed above demonstrates that a primary
purpose of the Packers and Stockyards Act was to ensure that producers
received full value for their livestock. The Secretary was granted the
authority to regulate packers to ensure open, competitive livestock
markets and, thereby prevent arbitrary depression of prices through the
oligopsonistic powers of the packers. See pp. 25-29. This history and
the language of the Act also demonstrates that the Secretary has the
authority to issue substantive rules to prevent packers from taking any
actions prohibited by Section 202 of the Act. See pp. 23-25. The courts
have held that Congress intended to give the Secretary the authority to
regulate packers' activities so as to stop practices that are likely to
cause the type of harm to producers that the Act is designed to address
in their incipiency--before the harm is suffered. See pp. 37-39 above.
The above described economic evidence provides a substantial
factual basis for finding that the current use of formula-priced
forward contracts and direct packer feeding of cattle for slaughter in
today's highly concentrated markets is likely to cause the type of harm
to producers that Congress intended to prohibit under Section 202 of
the Act.
Section 202(e) expressly prohibits packers from engaging in ``any
course of business'' or doing ``any act'' with ``the effect of
manipulating or controlling prices.'' \93\ Numerous economic studies
cited above indicate that, in general, when packer concentration levels
increase producers prices decrease. See pp. 8-13 above. Recent studies
support a finding that packers' oligopsonistic power does have a
negative impact on producers' prices, costing producers millions of
dollars a year. See pp. 8-13 above. For example, one important study
found, through statistical analysis that, between 1972 and 1986, fed
cattle prices were significantly below their marginal value during 39
of 51 quarters. On average the mark-down was 1.31 percent, or 17
percent of the marketing margin, amounting to $1.54 per hundredweight
of retail meat. The authors estimate that this was worth
[[Page 1859]]
about $62 million dollars to the packers. See p. 13 above. While these
studies do not identify any specific practices that cause the reduction
in prices, they do demonstrate that oligopsonistic packer buying
practices, in general, have the effect of manipulating prices paid to
producers. These studies establish a substantial factual basis for
finding a strong likelihood that general buying practices of
oligopsonistic packers will result in producers receiving less than the
full value of their livestock. They provide substantial evidence for
finding that oligopsonistic packers' buying practices should be
restricted under Section 202 of the Act.
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\93\ 7 U.S.C. Sec. 192(e).
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Economic studies have also attempted to isolate specific livestock
procurement practices to determine their effect on producer prices. One
study found that packers' feeding of their own cattle for slaughter has
a depressing effects on prices other producers are paid for their
livestock. See, pp. 13-15 above. Other studies have shown that packers'
use of forward contracts also has depressing effect on prices paid to
producers for their livestock. See pp. 15-19 above. Concentration in
the Red Meat Packing Industry, issued by the Grain Inspection and the
Packers and Stockyards Administration in February, 1996, demonstrates
that the use of captive supply procurement methods in the cattle
industry is associated with a decline in cash-market price for cattle.
It shows that packers increase their captive supply inventories when
cash-market prices increase, and as they increase captive supply
deliveries from these inventories, cash-market prices decline. See p.
18 above. These studies provide sufficient evidentiary support for a
finding that packer feeding of their own slaughter supplies and their
use of forward contracts are likely to have the effect of manipulating
prices paid to producers in violation of Section 202(e) of the Act.
Such practices should, thus, be restricted by regulation.
Section 202(a) of the Act prohibits packers from engaging in any
``unjustly discriminatory'' practice or device.\94\ Section 202(b)
prohibits packers from giving any person an ``undue or unreasonable
preference or advantage'' ``in any respect whatsoever.''\95\
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\94\ 7 U.S.C. Sec. 192(a).
\95\ 7 U.S.C. Sec. 192(b).
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When considering whether packers' feeding of their own slaughter
supplies and use of forward contracts constitute undue preferences or
unjust discrimination in violation of Section 202 (a) and (b) of the
Act, the effect of these practices on competition between livestock
producers must be considered. See pp. 39-40 above. Packer feeding of
their own slaughter supplies and use of forward contracts are very
likely to injure competition between livestock producers. By
definition, packers that own and feed cattle for their slaughtering
plants provide preferential treatment for their stockholders over other
livestock producers. Packer-owned cattle enjoy preferential access to
the slaughtering facility; thus the packer-owned cattle are guaranteed
a market. This type of activity does injure competition between, the
packers and their shareholders on the one hand, and other livestock
producers on the other. Similarly, forward contracts which are not
traded publicly but offered to certain livestock producers selectively
also provide preferential access to slaughter plants for those who
enter into them. Livestock producers who are not offered the forward
contracts are at a significant competitive disadvantage. That these
practices may make the packers more competitive with each other does
not control the determination of whether they violate the ``undue and
unreasonable preference'' or ``unjustly discriminatory'' language of
the Act. Packer feeding of its own cattle for slaughter and forward
contracts as they are used today are likely to result in undue
preferences and unjust discrimination in violation of Sections 202 (a)
and (b) of the Act. Their use should thus be restricted through
regulation.
This discussion demonstrates that there is substantial factual and
legal basis for issuing rules under Section 202 of the Act restricting
the use of forward contracts and packer feeding of its own slaughter
supplies. The rules proposed in this petition offer the least intrusive
form of restriction on these practices that will ensure compliance with
the purposes of the Act. These proposed rules do not prohibit the use
of forward contracts, but merely require that the contracts contain a
firm-base price and be traded in an open public market. The proposed
rules also do not prohibit packers from owning and feeding cattle. The
proposed rule only requires that packer-owned cattle be traded in a
public market.
These restrictions are designed to protect producers' interests by
encouraging open, competitive markets for livestock. They are designed
to take advantage of what economic studies suggest encourage
competitive markets for livestock--that more bidders for livestock mean
higher prices to producers and that electronic or telemarkets markets
also increase prices paid for livestock. See pp. 18-20 above. They are
designed to provide equitable access to markets for all livestock
producers preventing unjust discrimination between livestock producers
by packers.
For these reasons WORC requests that Secretary Glickman issue the
rule set out above at pp. 2-4.
Attorneys for Western Organization of Resource Councils.
Lynn A. Hayes,
Attorney at Law. Farmers' Legal Action Group, Inc., 1301 Minnesota
Building, 46 East Fourth Street, Saint Paul, Minnesota 55101-1109,
(612) 223-5400, (612) 223-5335 (fax).
[FR Doc. 97-739 Filed 1-13-97; 8:45 am]
BILLING CODE 3410-EN-M
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.