OCM-T-1 Written testimony of OCM, Senate Ag Committee, 6-10-98
OCM TESTIMONY AT CONGRESSIONAL AND ADMINISTRATIVE HEARINGS
WRITTEN TESTIMONY OF
THE ORGANIZATION FOR COMPETITIVE MARKETS
presented to the
UNITED STATES SENATE
COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY
June 10, 1998
THE DEMISE OF COMPETITIVE MARKETS IN AMERICAN AGRICULTURE
I. INTRODUCTION
Thank you Mr. Chairman for the opportunity to present this testimony today. The Organization for Competitive Markets is a nationwide organization of citizens dedicated to preserving competitive markets in American Agriculture. The mission of the Organization for Competitive Markets is:
To establish fair and competitive markets for agricultural products and to protect those markets from the concentrated power of large corporations;
By understanding and explaining to the public the threats to such markets; working for appropriate public policies and the enforcement of those policies; and organizing producers and other concerned citizens to take direct action in support of these goals.
II. COMPETITIVE INDUSTRIES/MARKETS
American agricultural producers know what they mean when we use the term 'competitive markets.' We also know what we don't mean. But it is still worthwhile to spend a few minutes considering the meaning of the term 'competitive market.'
There is often confusion over the use of the term 'market.' One common confusion is to confuse 'market' with 'industry.' This may be because many of the terms used to describe the characteristics of markets also are used to describe industries. So to avoid confusion let us begin with the definition of an 'industry' and look at characteristics of industries, then move to the definition of a 'market' and the characteristics of markets.
The table below defines 'industry' and summarizes some of the characteristics of industries.
When considering various industries in an economy, there is a spectrum of characteristics ranging from (perfect) competition on one end, to monopoly/monopsony on the other end. These are illustrated in the table.
DEFINITION OF INDUSTRY
TYPES/CHARACTERISTICS OF INDUSTRIES
DEFINITION: An 'industry' is the aggregation of economic units combining resources to produce similar outputs.
TYPES OF INDUSTRIES
Competitive Monopoly/Monopsony
CHARACTERISTICS
Number of
economic units many one
Ease of
entry easy impossible
exit easy may be difficult
Concentration
of power very low very high
Type of
product similar one
Examples agricultural public utilities
production government
The key element is the degree of competition. And what kind of competition? When economists look at an industry they are usually interested in price competition. If firm A can produce the same product as firm B but offer it for sale at a lower price than firm B then there is price competition between firms A & B. Price competition benefits consumers and helps insure the efficient use of resources.
The more firms there are in an industry the more likely there is to be price competition in that industry. The fewer firms in an industry the less likely there is to be price competition.
Most firms abhor price competition. You will often hear American industry leaders talking about how competitive their industry is, but they are often not talking about price-competition. They are talking about non-price competition.
Non-price competition occurs in dimensions of output other than price. For example: quality, packaging, advertising, appearance, etc. Non-price competition may or may not have value to the consumer. Of what value is it to the consumer to have more expensive breakfast cereal advertising on Saturday morning television?
An industry produces outputs--things people want or need to buy. These outputs are sold in a market.
The table below defines a 'market' and summarizes some of the characteristics of markets.
DEFINITION OF MARKET
TYPES/CHARACTERISTICS OF MARKETS
DEFINITION: A 'market' exists whenever the ownership (title) to something (anything) changes from seller to buyer.
TYPES OF MARKETS
Competitive Monopoly/Monopsony
CHARACTERISTICS
Number of
buyers many one
sellers many one
Ease of
entry easy impossible
exit easy may be difficult
Transaction
Costs low/known unknown
Concentration
of power very low very high
Type of
product homogeneous usually unique
Examples auction market public utilities
stock market government
The American markets for agricultural products have steadily moved from the competitive end of the spectrum to the monopoly/monopsony end of the spectrum over the last twenty years. This is true for most agricultural production. Today, I will focus on livestock markets because much work has already been done about competition in livestock markets, with the understanding that the problems are broader than these markets alone.
III. AGRICULTURAL MARKETS--THE PACKERS AND STOCKYARDS ACT
Agricultural markets are many and varied, from public auction markets to private one-buyer-one-seller contracts, with about every possible permutation in between. However, there is one piece of federal legislation that focuses on competitive agricultural markets, the Packers and Stockyards Act of 1921. It is useful to consider this law in some detail.
Consider the purpose and intent of the Packers and Stockyards Act of 1921. When the P&S Act was passed we didn't have "captive supplies," forward and formula contracting, or futures and options markets. Livestock were marketed through public stockyards at railheads such as Kansas City, Omaha, and Chicago.
In the beginning of the Twentieth Century there were some attempts by packers to bypass the public terminal markets. There was some direct purchasing of cattle by packers. But in large measure cattle were marketed through public auction markets.
So, when Congress wrote the P&S Act in 1921 the focus of attention was on packers because they were the principal buyers of livestock and on public stockyards because they were the markets where livestock were bought and sold.
Consider Section 307(b) of the P&S Act which states: "It shall be the responsibility and right of every stockyard owner...to require those persons engaging in or attempting to engage in the purchase, sale, or solicitation of livestock at such stockyard to conduct their operations in a manner which will foster, preserve, or insure an efficient, competitive public market."
Section 307 didn't envision the demise of efficient, competitive, public stockyard markets. In fact Section 307 seeks to preserve the efficient, competitive, public stockyard market. It's the opinion of the Organization for Competitive Markets that the entire P&S Act is based upon a Congressional intent of preserving the efficient, competitive, public stockyard markets.
Next consider Section 202, in light of Congressional intent to preserve efficient, competitive, public stockyards. Section 202 specifically prohibits packers from engaging in any unfair, unjustly discriminatory or deceptive practice or devise; making or giving any undue or unreasonable preference or advantage; subjecting anyone to undue or unreasonable prejudice or disadvantage in any respect whatsoever; apportioning supply; manipulating or controlling prices; creating a monopoly; or conspiring to do any of the above.
The key element of Section 202 with respect to today's markets is what is the definition of "any unfair, unjustly discriminatory or deceptive practice or devise?"
IV. CONCERTRATION IN STEER AND HEIFER SLAUGHTER
In 1980, the top four steer and heifer slaughters had 36% of the market. In 1990, the four-firm concentration ratio for steer and heifer slaughter was 72 percent. The four largest packers now have over 80 percent of the slaughter.
Share of total slaughter accounted for by four largest firms.
Percent of Slaughter
Steer and heifer Hog Sheep and lamb
Year
1980 36 34 56
1985 50 32 51
1990 72 40 70
1994 82 46 73
Economic studies show that when the four-firm concentration ratio gets over 40%, firms start to have enough market power to have some control over the price they pay for cattle.
When it gets over 80 percent, they have as much power as a monopoly would have. This trend toward increased concentration in meat packing is the largest, most rapid increase ever experienced in the history of any American industry. No other American industry has ever experienced such a rapid increase in the concentration of economic power among the four largest firms.
How did it happen? Con Agra purchased Monfort, Swift, and Armour and became the second largest beef and hog packer, and the largest lamb packer. Excel purchased Spencer, Sterling Colorado Beef, and Emge Packing and is the third largest beef packer and the fourth largest hog packer. IBP built new plants and moved aggressively to expand its market share and remains the largest steer and heifer slaughterer and the largest hog packer.
V. IMPLICATIONS OF CONCENTRATION IN THE FOOD CHAIN:
COMMUNISM OR CAPITALISM?
In the opinion of the Organization for Competitive Markets, the food chain is one of the worst of all industries to have substantial concentration of economic power. Because food is essential to survival, any concentration of economic power has the potential to result in exploitation of both farmers and consumers. Food security is also an essential element of national security. Concentration of economic power in the food industry can thus endanger consumers, producers, and national security.
In 1945, the Noble prize winning economist Frederick Hayek pointed out that a free enterprise, market economy is most efficient as long as the economic decisions about what to produce and how to produce are made by those closest to the economic circumstances of time and place. In other words when economic decisions are disbursed among many independent resource owners, in the aggregate, their decisions will result in the most efficient use of resources. Hayek went on to say that the more resources and economic decisions are concentrated in the hands of a few, whether they be government bureaucrats, as in the former Soviet Union, or powerful corporate executives of large companies with substantial market power, the less productive and the less efficient the economy will be. I know of no stronger economic argument for the preservation of individual livestock producers' decision-making and the preservation of efficient, competitive, public markets.
VI. INDUSTRIAL FEUDALISM
Dr. Harold Breimyer of the University of Missouri calls the current trends in American agriculture "industrial feudalism." To put this characterization in historical perspective, during the age of European feudalism, land was owned by feudal lords in massive estates. These feudal lords had absolute power over the workers (serfs). Today, mergers, acquisitions, and consolidation is concentrating sector after sector of our economy, not only in the food system, but throughout most sectors of the American economy. These giant corporations, Dr. Breimyer points out, are today's counterpart of feudal lords.
To tie this back to Hayek, when a family farmer makes a bad economic decision only a few people may be hurt--the family, maybe a bank, or local suppliers. But when a large corporation makes a bad economic decision thousands can be hurt, possibly an entire industry. A good example is the US automakers' decision to continue to build large, fuel-inefficient cars in the 1970's during the oil embargo. It took two decades for America to recover from that bad decision and to once again be competitive with Japanese and European automakers. Millions of American workers and consumers were harmed by that one bad decision.
Today's increasing concentration of market power in the hands of fewer, larger companies violates the conditions necessary for a market economy to work. By definition, successful market capitalism must rest on a dispersion of resource ownership among many market buyers and sellers, all of whom may have some market power (bargaining power), but no one of which has any significant degree of market power. These ground rules of market capitalism are being violated today in America.
VII. THE CLOSING OUT OF CAPITALISTIC MARKETS
In today's livestock industry the trends are very clear. The squeeze on independent livestock operations is being brought about exactly as it was done in the poultry industry--by closing out markets. This is key to what has happened to public, competitive, capitalistic livestock markets, including cattle and other agricultural markets.
As concentration has increased the large corporations have closed out the competitive public markets. What is meant by closing out markets? The nemesis of those with market power over price is the free, public, capitalistic, competitive, auction market. To have to bid competitively, in a public, capitalistic market, to buy livestock is the last thing a packer wants to do. This is the packer's motivation behind the move to more and more direct contracting of livestock. As packers control larger captive supplies and use more forward contracts and more marketing agreements, they are less and less likely to have to bid competitively in the public, capitalistic markets. They are closing out the markets by avoiding them at all costs. By not using them unless they absolutely have to. Why buy in public if one can strike a deal in secret? As this phenomenon continues over the years, public, capitalist markets become thinner and thinner and usually end up essentially being residual markets where the lowest quality livestock, the culls, are disposed of.
An analogy is useful in understanding the effects of packers closing out the public markets. Consider what happens when a large buyer does not use a public market. Assume that the US Air Force decides to build a new Air Force Base in Indianapolis, Indiana. Now, what might we expect to happen to home prices in Indianapolis? They will most likely go up as new people move into the area to work at the Air Force base. New home buyers in the area are likely to bid up the price of homes, reflecting the demand for housing. But, suppose for a moment that the Air Force--the government--decides to prevent home prices from increasing by avoiding the public market for houses. Suppose they try to do this by telling the sellers of houses that anyone working at the Air Force Base who wants to buy a home will only pay the average Indianapolis home price from last year, before the base announcement was made. Sounds absurd. Sounds absolutely impossible. Indianapolis would never stand for such an absurd attempt to close out the public market for houses. But this is exactly what the meat packers are currently doing in the cattle markets.
VIII. THE HOG INDUSTRY
The trend in the hog industry is toward large corporate confinement facilities. What are some of the implications of this trend?
Dr. John Ikerd of the University of Missouri points out that the production environment in large-scale hog operations is controlled by utilizing buildings and equipment that require large capital investments but greatly reduces labor costs. Production technologies associated with large-scale, contract production also change the basic nature of the management function. Mass-production technologies (standardized genetic selection, breeding, feeding, herd health, standardized equipment, and marketing functions) transfer most of the management function from on-site hog producers to corporate production supervisors who travel among production units; and to an even greater extent, to production managers back in corporate headquarters who design and refine production strategies.
Remember what we learned from Hayek? Decentralized economic decision making by private property owners--capitalism--is more efficient than centralized decision making. What we have in America's livestock industries is just the opposite from decentralized capitalism. It is centralized decision making. Following Hayek's reasoning, the long run economic outcome for our centralized livestock industries is no different than the known outcome for Soviet Communism.
Dr. Ikerd concludes that contract hog units producing the same number of hogs as independent producers, displace two hog farmers for each new job created by the contract units. A new $5,000,000 investment in contract units generates 40-50 new jobs but displaces about three times that number of independent producers.
Those who argue in favor of large scale contract production point out that the gains are concentrated in the local community and the losses (displaced hog producers) are scattered over a much wider area. They also argue that if a specific area doesn't expand contract production, local producers will just be displaced by expansion elsewhere. This is clearly not true, as shown by the trends in North Carolina and Nebraska. North Carolina has been a leader in corporate hog production while Nebraska has a law against corporate hog production. From 1986 to 1993, the number of hog farmers in North Carolina dropped by 50 percent while the number in Nebraska remained unchanged (Ikerd, p. 10).
A University of Nebraska study found that if 10 percent of pork production is contracted by packers, the packers will buy 13.3 percent fewer hogs from independent hog farmers and pay 6 percent less for those they do buy. If 60 percent is contracted, they will pay 26 percent less for independent producer's hogs.
Hogs Today magazine reported that North Carolina hog packers were paying $51.00/cwt for hogs from large contract producers while they were paying $39.00/cwt for independent producer's hogs on the open market, 24% less.
IX. IMPACTS
What impact do these trends and practices have on rural communities? A Minnesota study concluded that smaller livestock operations (under $400,000 per year) make 79 percent of their business expenditures within 20 miles of the farm while larger operations only spend 49.5 percent. That's almost a 30 percentage point difference. Consider the impact of that on rural communities and on local businesses.
A Virginia study compared the impact of adding 5,000 sows through corporate farming versus independent producers. It concluded independent producers resulted in the creation of 10 percent more permanent jobs than corporate farms; a 20 percent larger increase in local retail sales; and a 37 percent larger increase in local per capita income. Once again the impacts of concentrated market power on rural America are becoming clear.
January 1998, Iowa State University data indicate similar results. When 23, 150 sow operations were compared with one, 3400 sow operation, it was found that the small operations in total create 21 more jobs and nearly $35,000 more in annual local revenue than one large operation.
Economists have continued to do studies of various trends in the cattle industry. Some results include increasing vertical coordination (packer feeding, forward contracting, formula pricing, and all forms of captive supplies) associated with lower prices paid to producers and fewer and fewer bids per lot of cattle.
Dr. Clem Ward at Oklahoma State University has found that the big three packers are consistently paying lower prices than their competitors and that there is a significant, recognizable weekly cattle price pattern with lower prices paid Tuesday through Friday.
Over the years there have been differing opinions on whether concentration is hurting the cattle industry. In 1989, the National Cattlemen's Association (NCA) released a task force report that concluded there was little solid evidence of harm. The NCA then commissioned a series of economic studies which essentially came to the same conclusion. But remember, economists doing these studies didn't have access to the relevant data, which are necessary to draw valid conclusions.
In 1989, the Center for Rural Affairs organized a task force to look at industry problems. This Task Force concluded among other things:
1. Competitive conditions in the cattle market are inadequate to meet the requirements of a free (capitalistic) market. (The same conclusion that Dr. Breimyer has reached.)
2. Any mergers by the Big Three (beef packers) should be challenged.
3. The Packers and Stockyard Administration's role should be expanded, but enforcement authority should be shifted to the Justice Department. (The Task Force came to this conclusion because of continued inaction by P&SA.)
4. Dominant packers should be required to disclose their operating costs.
5. Congress should prohibit packer feeding. The P&S has the power to do this right now. Supply contracts that give packers control over the delivery date should also be prohibited.
6. Contracts should come under increased regulation.
7. Congress should establish a mandatory and verifiable price reporting system.
8. Packers should either be prohibited from selling short in the cattle futures market, or should lose their status as hedgers if they have more short than long contracts.
In October of 1991, the Government Accounting Office concluded: "Because the meat-packing industry is now highly concentrated, packers are more able to engage in anticompetitive behavior to depress prices paid to livestock producers. Because livestock procurement markets are regional, P&S's current monitoring and analysis are not sufficient to identify anticompetitive practices such as price manipulation or the apportionment of territory."
Evidence of economic harm has continued to build.
In April, 1994 Dr. 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. Dr. Marion concludes: "The results in this article support the hypothesis that packer monopsony power had a significant negative effect on cattle prices during the 1971-1986 period...the presence of monopsony power is evident in regional live cattle markets throughout the period and is slightly stronger in the later half than in the first half of the period. For the seven 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."
Three percent is more than $20 per head on $70/cwt, cattle. That three percent is a tax, plain and simple. It's a monopsony tax collected at the producers' expense. Also remember the three percent is an average, there are times and places when it's higher, and times and place when it's lower, but it is still there.
In 1979 it was estimated that for all food items, consumers were overcharged $18 billion as a direct result of the exercise of monopoly power in the food industry. That is about 10 percent of what consumers spend on food. Imagine what that figure, that monopoly tax, is today.
How is such market power exercised? Economists would characterize the steer and heifer slaughter industry as a mature shared monopoly. What this means is that the days of the big packers competing with each other by bidding up prices in order to insure they have enough cattle to keep their plants running at maximum efficiency, appear to be over. And remember, Marion's data only went through 1986. Things could well be much worse today.
In a mature shared monopoly, large firms come to realize that it is in their own best interest to live and let live, so they do whatever they can to avoid price competition. Some economists feel this can be done with no overt communication. However, in the steer and heifer slaughter industry the big packers can talk to each other about price whenever they want through the mechanism of packer-to-packer trades. When packer A calls packer B and offers to sell a load of meat at $0.50 under the sheet, this is just as good as saying, "I'm buying cattle tomorrow, don't bid prices up against me and I won't bid them up against you, and we can both buy cattle for less." It is in packer B's own best interest to go along with packer A. When they trade meat at prices over the sheet, it is a signal that they want higher prices to sell their meat inventory, and not to undercut each other by offering meat at lower prices. We have no way of knowing if these practices are actually occurring. If they are it is a clear violation of the P&S Act. But only the P&SA or the courts have the power and authority to gather the telephone records and other data necessary to see if these practices are occurring. To my knowledge GIPSA has not done this.
Also keep in mind that the price motivation of a large packer changes from day to day. Whether they want higher prices to sell their meat inventory, or lower prices to buy cash cattle on any particular day depends upon their net inventory and what percent of their kill requirements they have already purchased. By net inventory position I mean what is the size of their unsold boxed and carcass beef inventory compared to unhedged live cattle they have purchased for slaughter. Of these two variables the percent of kill requirements purchased is probably the most important motivating factor. If this percent is greater than 100% it means they have plenty of cattle on hand and don't need to be buying in the cash market. If this percent is greater than 100% and their net inventory position is positive, meaning they own more cattle than they have unsold beef inventory, or if unsold beef inventories are large relative to their norms, than they definitely would be motivated not to buy cattle and to seek higher beef prices at which to sell their inventory. On the other hand, there will be times when their percent of kill requirements will be less than 100% and/or when their net inventory position is negative and or unsold beef inventories are small relative to their norms. During these times they will be motivated to buy cash cattle, and motivated to do so at lower prices if possible. Notice that these packer price motivations are contrary to normal supply-demand market forces. But if these motivations can be turned into market reality, the packer will clearly profit. The question is whether actions are being taken to move market prices, contrary to supply-demand, to the benefit of certain packers.
The Grain Inspection, Packers and Stockyards Administration (GIPSA) of the US Department of Agriculture commissioned a study of various economic issues in the meat packing industries. Before reviewing the results of those studies I would like to provide some background on the origin of the studies.
In 1990, Congressman Richard Gephardt, then Majority Leader of the US House of Representatives, requested that a team of researchers conduct a comprehensive analysis of the cattle, hog, sheep, and poultry industries. The team included: John Helmuth, Iowa State University; John Connor, Purdue University; Bruce Marion, University of Wisconsin; Andy Schmitz and Gordon Rausser, University of California at Berkeley; Dermit Hayes, Iowa State University; Jon Brandt, Bill Heffernan, John Ikerd, and Abner Womack, University of Missouri; Wayne Purcell, VPI; Clem Ward, Oklahoma State University; James Richardson, Texas A&M; and Leland Thompson, Stephen F. Austin University. The analysis proposed would have looked at: competition; futures trading; cash trading; forward contracting; inventories; packer-to-packer trades; captive supplies; packer efficiency, costs, and returns; technologies, research and development; concentration and vertical integration; international competitiveness; community, rural development, and worker impacts; analysis of antitrust laws; impact of concentration on farm size; and environmental impacts.
In the proposal for the study the point was made that you cannot fully understand what impact packer's actions have on livestock prices by looking at separate segments of the market in isolation. You cannot just look at forward contracting, or captive supplies, or at concentration, or at cash or futures prices. In order to understand these markets you have to look at all segments of the marketing chain simultaneously. In other words, to understand packer's market impact you have to simultaneously look at each packers inventory positions and buy and sell actions in feeder cattle, fat cattle, boxed beef, carcasses, and other meat products, offal and hides, options, futures contracts, forward contracts (both fixed price and non-fixed price), formula contracts and agreements, transactions with meat wholesalers and retailers, and all offers to sell and bids to buy in packer-to-packer trading on a daily basis over a significant time period of several years or more. No one, outside the large packers, has ever done this and no one will ever understand livestock markets until it is done and it has not been done, and is not being done by P & S (now called GIPSA).
After the research proposal was presented to Congressman Gephardt, he along with Congressmen Robert Wise, Charles Stenholm, Harold Volkmer, David Nagle, Dan Glickman, and Pat Williams requested that the Appropriations Committee provide three years of funding to conduct the study. In response to this request, the meat packing industry lobbyists contacted the Appropriations Committee in opposition to the funding. Eventually the Committee came up with a compromise. They provided funding to the Packers and Stockyards Administration (GIPSA) to decide on and oversee studies to be done by Land Grant Universities. Unfortunately, what was lost in this approach was the ability to look at all segments of the market simultaneously. We were back to business as usual, each researcher looking at one small part of the elephant, no one looking at the entire elephant. They also dropped the analysis of poultry and sheep; of technologies, research and development; of international competitiveness; of community, rural development, and worker impacts; of antitrust laws; of the impact of concentration on farm size; and of environmental impacts.
The studies they did commission, done at various Land Grant Universities, in isolation without looking at the market segments simultaneously, include: identifying regional markets; the effects of concentration on price; how prices are determined; the role of captive supplies; vertical coordination in hogs; hog procurement in the eastern corn belt; and a review of livestock literature. The studies are handicapped by relying on 1992-1993 data and thus do not provide an understanding of the 1994-1998 markets. Results from these studies were released to the public in February 1996.
First, notice the report was issued in February 1996, over five years after Congressman Gephardt first requested information on potential problems in the meat packing industry. The report covered the period April 1992 through March 1993. The question that occurs to me is: If it took your local police 5 years to analyze evidence in a murder case, would you wonder about the validity of their analysis and their commitment to finding the perpetrator?
In what follows I will quote extensively from the GIPSA report and add comments from time to time.
"There is a long history of concerns about the effects of concentration in the meatpacking industry. Concentration has increased sharply in recent years. For example, the four largest packers accounted for 82 percent of steer and heifer slaughter in 1994, versus only 72 percent in 1990 and 36 percent in 1980. Packers have also increased their use of vertical integration and coordination arrangements, reducing the role of public markets where the terms of trade are openly visible to all."(GIPSA, p. 2)
"At the least, vertical coordination arrangements reduce the prevalence of open-market transactions, thereby restricting the availability of market information." (GIPSA, p. 2)
What this means is that the closing out of public livestock markets is clearly underway.
"Those who believe concentration and integration present no threat argue that livestock prices are higher due to increased efficiency and lower costs realized by large packers and by vertical coordination arrangements." (GIPSA, p. 2).
This argument that increased efficiency and lower costs realized by large packers will, ipso facto, be passed back to livestock producers in the form of higher prices paid for cattle and on to consumers in the form of lower meat prices, can only be true if large packers have no market power whatsoever. It is contri-logical to think that large packers would voluntarily pay higher prices for cattle or charge lower prices for meat. It makes no economic sense for them to do so. This fallacious argument also ignores the reality of whatever market power is exercised by wholesalers and retailers vis-a-vis retail meat prices. Wholesalers and retailers determine retail meat prices, not meat packers.
"The projects conducted in this study examined issues that were considered most pressing at the time the study was initiated. Many of the analyses needed detailed confidential data drawn from meatpackers' records. The study, and data upon which it is based, cover only a limited period of time--mostly April 1992 through March 1993--because of the costs and time required for collecting, processing, and analyzing such detailed data. The study did not address longer-term patterns in packer behavior, costs and returns, or changes in livestock prices over a full cattle(about 10 years)or hog(about 4 years) cycle."(GIPSA,p.3).
"Market definitions are important for analysis of the effects of concentration on prices, for monitoring competitive behavior, and for antitrust analysis. The objective of this project was to define relevant regional cattle procurement markets. Three approaches were used. One examined the degree to which regional cattle markets are linked as reflected in prices reported by the U.S. Department of Agriculture's Agricultural Marketing Service's Market News. Another examined packing plants' geographic procurement patterns and volume responses to price changes at other plants. The third examined how prices paid by individual packing plants were related to each other over time.
Only cash market purchases were examined. The omission of captive supply purchases from the analyses may influence results if geographic purchase patterns differ for captive supply cattle. (Captive supplies are defined as livestock controlled by or committed to a packer more than 2 weeks prior to slaughter through a forward contract, marketing agreement, or packer feeding program.) Some of the key findings of the project were:
* On average, packers obtained 64 percent of their cattle within 75 miles of their plants, 82 percent within 150 miles, and 95 percent within 270 miles. Cattle procurement areas showed considerable overlap among plants.
* Cattle prices among plants tend to move together, maintaining long run spatial equilibrium. Arbitrage costs among the various geographic regions were relatively small. This suggests that price information flows readily among plants and geographic regions."
This result raises serious GIPSA enforcement questions. If price information is flowing readily among plants of different firms, violations of the P & S Act may be occurring. To my knowledge, GIPSA has not investigated these possible violations which were documented by its own study.
"* In general, fed-cattle prices in all U.S. regions are linked, suggesting a broad national market for fed cattle."
As mentioned above, this also suggests possible violations of the P & S Act.
"* Some regional differences exist. Plants in the Middle region (MN, IA, NE, CO, KS, and TX) generally appear well-linked, while links among plants in the West and East are not as strong. Differences in the West and East regions may not be strong enough to consider them separate markets.
* Identification of geographic boundaries as prescribed in the Department of Justice and Federal Trade Commission merger guidelines would require separate analysis for each proposed merger or acquisition. Application of the guidelines could result in narrower geographic markets for cattle procurement.
* Due to insufficient data on cow and bull procurement, no analysis was done to determine whether "cows and bulls" and "steers and heifers" are in the same market.
* The results provide strong evidence that measurement and analysis of concentration in beef packing need to focus on relatively broad geographic markets. Rigid regional boundary lines cannot easily be identified because arbitrage and livestock movements create considerable overlap among areas. Market areas identified in this study are much broader than in many previous studies." (GIPSA, p. 3-4).
"Some of the key findings of the research were:
* The spot market remains the predominant procurement method, and over 83 percent of cattle are priced by either liveweight or carcass-weight pricing methods. Few firms rely on other methods for procuring or pricing a large proportion of cattle slaughtered.
* Cattle purchased through forward contracts bring lower prices than cattle delivered on the spot market, while cattle purchased using marketing agreements bring higher prices. This finding is consistent with the findings of the captive-supply project discussed below.
* Large packing plants obtained nearly half of their cattle from large feedlots while small plants obtained less than one-quarter from large feedlots.
* Prices vary, as expected, with cattle quality characteristics such as type, average weight, quality grade, and yield grade. After controlling for such factors, there is evidence that larger plants pay higher prices than smaller plants, although the evidence was inconsistent across regions. Prices were not significantly different in the region including Colorado, Kansas, Nebraska, and Texas.
* The study found that prices in local areas are affected very little by differences in concentration in those regions for the time period studied." (GIPSA, p. 5).
"Three objectives were addressed in this analysis of captive supplies: (1) determine the purpose and extent of captive-supply use; (2) determine whether use of captive supply affects prices paid for fed cattle; and (3) estimate supply and demand for captive supply and determine how changes in market conditions affect long run use of spot markets and captive supply. The main findings are as follows:
* Packers simultaneously decide the number of cattle to obtain through forward contracts and through cash markets on a day-to-day basis.
* Increases in cash market prices led to increased use of packer-fed, forward-contracted, and marketing agreement cattle by large plants, consistent with theoretical expectations. Increases in variability in cash market prices led to increased use of forward-contracted and marketing agreement cattle.
* As plant utilization increases, the use of captive supply also increases. This suggests captive supplies could be used to enhance plant utilization.
* The use of forward contracting, marketing agreements, and packer feeding varied widely, and with no systematic relation to specific firms, plant locations, or geographic regions.
* Some, but not all, plants use captive supply to help maintain slaughter levels at full capacity, with packers' price expectations determining their specific use of captive supplies. Expectations of rising prices increase the volume of captive supply used, whereas expectations of falling prices lead to decreased use of captive supply.
* Based on analysis of individual transactions, forward-contracted cattle appear to be priced lower than cattle sold in the cash market on the same day, while marketing agreement cattle are priced slightly higher.
* The overall effect of increased use of captive supply on short run prices paid for cattle in the cash market appears to be negative but very small."
Note that this study is based on 1992-1993 data. It does pick up a significant relationship between captive supply and lower prices paid to cattle producers. The question becomes, not whether the relationship exists, but what is meant by "very small" in 1992-1993, and what is the effect in 1998?
"* The study provides an overall description of the role of captive supply in the industry that suggests, at most, rather modest net effects for the period analyzed by the study." (GIPSA, pp. 5-6).
"Concentration increases the potential for firms to use market power. This project used plant-level data to examine whether large beef packers exert market power." (GIPSA, p. 6).
"Cost and revenue data were analyzed for 15 steer and heifer slaughter plants. The research was based on a model of packing plant behavior that assumed plants maximize profits given fixed plant capacity.
* The research encountered several data and methodological difficulties and did not obtain definitive results about the possible use of market power, an outcome consistent with the findings of the literature review project.
* The results of econometric analysis were not consistent with assumptions necessary for the models to produce valid tests for market power. Further tests using different statistical methods provided additional evidence that the data were inconsistent with critical assumptions of the model chosen for the research.
* The data already collected could be analyzed further, and perhaps additional data collected, to develop better models of slaughter plants' procurement behavior and perform valid tests of competitive behavior." (GIPSA, p. 6).
In other words, this part of the GIPSA studies produced no useable results.
The GIPSA Literature Review concluded:
"Major findings were:
* Economic factors, especially technological change, have been critical to most of the structural changes in commercial meatpacking since the 17th century.
* Research literature, on balance, suggests that conduct in the red meat packing industry is not consistent with perfect competition as defined by economic theory. However, limitations in analytical methods and problems in interpretation and measurement rendered empirical assessments of competition in the meatpacking industry inconclusive.
* Further understanding of the meatpacking industry depends on workable models of firms' pricing conduct (for short-term monitoring) and on the study of competitive dynamics in the industry. This requires appropriate price data for short-term monitoring as well as longitudinal data at the firm and plant level to describe how entry, exit, mergers, market shares, and other factors change the industry over time." (GIPSA, p. 8).
GIPSA's summary conclusions were as follows:
"* The projects used different research models and methods yet produced consistent findings in those areas where the projects overlapped.
* The findings showed that different pricing and procurement arrangements (including captive supplies and contracting), and structural characteristics affect conduct and performance in the meatpacking industry. Given the persistence and importance of these issues, and rising concentration, there is a continuing need to monitor and analyze behavior and structural changes in the industry, and to take corrective action when necessary.
* Areas identified as having promise for future surveillance and analysis include procurement and pricing practices of individual firms; rivalry and cooperation among firms; and contracting arrangements and other forms of coordination.
* Follow-up research is needed to resolve significant modeling and data issues to address the effects of concentration on prices paid for cattle.
* Monitoring and analysis could be strengthened with development of improved methodological capabilities and models that better describe firm behavior and industry outcomes and with improved procedures to obtain confidential plant- and firm-level data on procurement transactions, operating costs and revenue, and contractual arrangements.
* The study has shown that quick answers to complex market structure and behavior issues are not available. Steady sustained monitoring and analysis provide the best opportunity to obtain timely, meaningful information as the industry evolves and market conditions change." (GIPSA, pp. 8-9).
"The role of public markets (auctions and terminals), where the terms of trade are openly visible to all, has been waning for several years as packers have moved to purchasing livestock directly from producers. Recently, packers have increased their use of vertical integration and vertical coordination arrangements that further reduce the role of public markets." (GIPSA, p. 9).
Note that these GIPSA studies did not look at the daily or weekly inventory positions of packers, which form the basis of packer's buying decisions.
Continuing, detailed GIPSA conclusions include:
"For most analytical purposes, the relevant geographic procurement market for fed cattle appears to be the entire United States." (GIPSA, p. 22)
"Only two States were examined, Nebraska and Texas." (GIPSA, p. 22). Why were only two states examined?
The following results, at pages 23-27 of the GIPSA Report, as mentioned above, raise serious questions about enforcement of the P & S Act. The GIPSA results imply that competing packers may be communicating price information among themselves on a daily basis. If this is occurring, it would be equivalent to competing oil companies communicating retail gasoline prices, and planned price changes, among themselves.
"This result suggests that price effects are strong with considerable information flowing across plants. Regionally, 80 percent of the paired comparisons for plants in Nebraska, Colorado, Kansas, and Texas were strongly related. For all 28 plants, 77 percent of the paired comparisons were strongly related." (GIPSA, p. 25).
"For first-differenced prices, no plants affected prices at 90 percent of the other plants, but four in Nebraska and Kansas affected prices at 80 percent of the other plants. In both VAR models (price levels and first-differenced prices), the High Plains (NE and KS) was a geographic center of price discovery." (GIPSA, pp. 25-26).
"The cointegration tests suggest that nearly all of the plants' prices were cointegrated with each other. Over 96 percent of the 756 plant paired comparisons were significantly cointegrated. This indicates that on a daily basis for the study period, a long run spatial equilibrium price existed among the different plants; that is, prices across plants did not significantly diverge from each other." (GIPSA, p. 26).
This is a strong indication that competing packers may be communicating among themselves about live cattle purchase prices on a daily basis.
"Larger plants also may have more influence over prices because they purchase more cattle over larger regions." (GIPSA, p. 27).
"In general, fed-cattle prices in all U. S. geographic regions are linked, suggesting a broad national market for fed cattle. Plant prices tend to move together, maintaining long run spatial equilibrium, and arbitrage costs among the geographic regions are relatively small. This suggests that price information flows readily between plants and across geographic areas. Within the national fed-cattle market, price linkages are strongest within the Midwest and Plains regions, with the leading price discovery points in Nebraska and Kansas. Plant prices in these two regions were strongly cointegrated, responding quickly to changes in price movements. However, the analyses using the 5-percent rule from DOJ/FTC merger guidelines suggest that Midwest and Plains regions may be in the same market, but the East, Southwest, and Northwest regions may not have the strength or reaction speed to be considered part of the same market." (GIPSA, p. 27).
"Twenty-three of the 28 plants in the analyses are owned by the 4 largest firms, which slaughtered approximately 78 percent of the cattle in 1992." (GIPSA, p. 28).
"* What were the characteristics, nature, and patterns of slaughter cattle procurement activities of the packing plants? This part of the analysis provides descriptive data summaries (means, standard deviations, and ranges) on cattle costs, seller characteristics (such as feedlot location and size), procurement and pricing methods, transaction characteristics such as lot size, yield, and quality, and plant characteristics such as size, location, capacity utilization, and ownership." (GIPSA, p. 29).
"On average, larger plants, whether operated by Big Three firms or not, paid more for cattle. The largest plants (more than 4,000 head per day capacity) paid 2.7 percent more per head ($883 versus $860) than smaller plants (under 2,000 head per day). The differences also were apparent in the liveweight and carcass prices computed from delivered costs. Price per cwt, liveweight, was 5 percent higher at the large plants, and price per cwt hotweight (after slaughter), was 3 percent higher. As discussed later in the chapter, regression analysis showed that much of the difference in liveweight prices could be explained by differences in cattle and lot characteristics. Plants with higher levels of capacity utilization also paid higher prices on average." (GIPSA, p. 30).
"On average, prices received for cattle offered under forward contracts were about 3 percent lower than those offered under other methods. In this case, lower prices likely reflect an adjustment for reduced risks that the method offers the sellers. There were no significant price differences among the three other methods." (GIPSA, p. 31).
On pages 34-36, notice that the regression equation does not take into account the inventory position of the packers (a direct measurement of the packer's need to buy cattle) or the packer's slaughter needs in order to operate their plants close to capacity. These are the two most important variables affecting a packer's decision to buy cattle, and what price the packer is willing to pay. The GIPSA study reported below attempts somewhat to look at these variable in isolation.
"In each relevant analysis, temporal shifts were the most important determinant of differences in cattle prices.
Prices also varied with cattle characteristics." (GIPSA, p. 38)
This result says that the most important determinant of cattle prices was time. This tells us absolutely nothing and confirms that the study was not seriously looking at the relevant determinants of prices paid for live cattle.
"If a slaughter plant became the sole buyer in a region and sharply reduced its offer prices for slaughter cattle, the prices that local feedlots could offer for feeder cattle would also fall." (GIPSA, p. 41).
"Respondents identified three impacts from use of captive supplies: (1) captive supplies benefit packers who use them; (2) captive supplies ensure a given supply of cattle to packers; and (3) captive supplies reduce market information since fewer prices are reported publicly. Cattle feeders additionally believed that captive supplies benefit feeders who use them but benefit packers more, and that captive supplies result in lower cash market prices." (GIPSA, p. 42).
"Packers made decisions to purchase cash-market cattle and to take delivery of forward-contracted and marketing agreement cattle, but not packer-fed cattle, simultaneously. Changes in the percentage of a packer's inventory of captive-supply cattle purchased on a given day affect the prices packers pay for cattle in the cash market. An increase of 1 percentage point in a packer's inventory of forward-contract cattle that the packer purchased on a given day was associated with lower prices (3-5 cents per cwt) paid for cattle in the cash market on that day. For marketing agreement cattle, the same increase was associated with even lower prices (10-41 cents per cwt) paid for cattle in the cash market on that day. An increase of 1 percentage point in a packer's inventory of packer-fed cattle that the packer purchased on a given day was associated with changes in cash-market prices varying from 30 cents per cwt lower (14-day inventories) to 20 cents per cwt higher (28-day firm-level inventories)." (GIPSA, p. 44).
"The impacts on cash-market prices from the absolute inventory of captive-supply cattle were consistently negative and small." (GIPSA, p. 44).
"A 1,000-head increase in inventories of marketing agreement cattle was associated with prices in the cash market 1-4 cents per cwt lower." (GIPSA, p. 44).
For a packer slaughtering 10,000,000 head per year, for 300 days, this is 33,333 per day. Assume a 333 head per day increase in the slaughter of marketing agreement cattle (a one percent increase). Based on the 1992-1993 data of the GIPSA study, this increase in the slaughter of marketing agreement cattle would be associated with a lower cash market price of 10 to 40 cents/cwt. Using the midpoint of this range (25 cents/cwt.) for an 1,100 pound steer, this lower price equals $2.75 per head in 1992-1993. Is this a small amount for a cattle producer? For the 10,000,000 head per year packer, this would equal $27,500,000 per year if it applied to all cattle slaughtered. Not a small amount.
From the packers' point of view, in 1992-1993 the relationship between marketing agreement cattle and lower cash prices was clear. The only question for packers was how they might drive cash market, public prices even lower. The answer is more and more marketing agreement cattle. The method for obtaining lower cattle prices was already clear in 1992-1993, it was only a question of how much lower?
"On balance, a relatively weak relationship was found between cash-market prices and deliveries of cattle from inventories of captive supplies, and between cash-market prices and inventories." (GIPSA, p. 45).
Again notice that this analysis and this conclusion does not look at all the inventory positions that enter into a packer's decision. It does not look at meat inventories, futures market positions, hide and offal inventories, etc.
"Prices paid for forward-contracted cattle were significantly lower than for cattle purchased in the cash market. Prices paid for marketing agreement cattle were significantly higher than prices paid in the cash market, and prices paid for packer-fed cattle were not significantly different from those paid for cash-market cattle. In conclusion, captive supplies had a small price reducing impact in the cash market over the 1-year study period." (GIPSA, p. 45).
GIPSA Study: Effects of Concentration on Prices, (GIPSA, p. 50). "The model required data on individual plants' costs and revenues for each period in which cattle purchase decisions are made, assumed to be 1 week." (GIPSA, p. 51, Purcell).
"Plants provided volume and value data on weekly shipments of nonfabricated carcasses; fabricated whole-carcass equivalents; fabricated primals; fabricated subprimals; other fabricated cuts; and trimming, boneless beef, and grinding material from the fabrication line.26 These categories distinguish products by the amount of processing required to produce them." (GIPSA, pp. 51-52, Purcell).
Note that these inventory data were available, but not used by GIPSA in its study of the effects of captive supplies on the prices paid for live cattle, reported above. It should be obvious that these inventory data and weekly sales of beef has to be a major factor in packers' decisions about plant capacity use and the need to buy cash cattle on the open, public market.
Would a car dealer ignore weekly car sales by his dealership when deciding on how many cars to order from the factory for next month? Of course not, yet this is exactly what the GIPSA study reported above did.
"When the profit-maximizing condition was added to the system, results suggested that the test for market power was positive and statistically significant." "The behavioral model originally proposed for the test for the exercise of market power was rejected because the firms did not meet the requirement of profit-maximizing behavior, as incorporated in the model." "The analysis did not support any conclusions about the exercise of market power by beef packers." (GIPSA, p. 56-57, Purcell).
"At the national level, higher concentration was associated with higher prices to producers (Multop and Helmuth, 1980). In smaller geographic areas, prices to beef and pork producers tended to be lower as packer concentration increased (Quail and others, 1986; Marion and Geithman, 1995; Heyneman, 1992; Menkhaus and others, 1981; Miller and Harris, 1981). (GIPSA, pp. 77-78).
"The basic question addressed by this project was whether the evidence from Structure-Conduct-Performance and New Empirical Industrial Organization studies is persuasive enough to warrant the conclusion that competition in the meatpacking industry is deficient. Taken as a whole, the literature review led to the conclusion that the answer is no." (GIPSA, p. 82, Azzam).
"The findings of the extensive literature reviewed were inconclusive about the effects of concentration, primarily because of limitations in the methods or data, or both, in the research reviewed. While the body of evidence from the literature was insufficient to support a finding of noncompetitive behavior, it also cannot conclude that the industry is competitive. Recommendations for future work stress a need to focus more directly on data disaggregated to the firm and plant level to provide a better understanding of the dynamics of individual firm behavior and rivalry between firms." (GIPSA, p. 83, Azzam).
GIPSA Summary:
"The economic market in which fed cattle are purchased for slaughter is essentially national in scope. While some regional differences exist, especially west of the Rocky Mountains and east of the Mississippi River, cattle movements and price adjustments among areas are strong." p.83.
Is it not logical to ask, how can the market be national in scope, when over two-thirds of the nation is excluded--the area east of the Mississippi River and the area west of the Rocky Mountains?
X. MORE IMPACTS
With falling cattle prices we have seen the following: During the period April to June, 1994 the live to cut-out spread for cattle increased from $60 per head to $110 per head. It then worked its way back down. Then from February to April, 1995 it increased again from $60 per head to $80 per head. While this spread has been increasing to the benefit of packers, we have had captive supplies reported to have climbed from about 20 percent of slaughter needs in 1994 to as high as 50 to 75 percent during 1995. One has to question whether this dramatic increase in captive supplies isn't in part responsible for low cattle prices.
Also, from April 1994 to April 1995, the live to retail spread increased about 10 percent. The packer's share of retail value increased from 4 percent to 6 percent. Most of these spread increases have come at the expense of producers in the form of lower cattle prices, since retail beef prices are essentially unchanged.
From October, 1994 to October, 1995, packer margins widened by $5.00/cwt, retailer margins widened by $3.50/cwt, and producer prices were down on average by $2.50/cwt.
In 1973, the farmers' share of the retail meat dollar was 60 percent, the highest it has been in three decades. By 1980, it was down to 51 percent. It is now at 47 percent. From 1980 to 1995, retail beef prices have increased 213 percent and cattle prices are down 5.3 percent. How much of these drastic trends are the result of captive supplies?
A Kansas State University study found a statistically significant negative relationship between higher captive supplies and lower prices paid to cattle producers. Using 1990 data the study found lower prices ranging from $0.15/cwt to $0.31/cwt.
Another Kansas State University study using 1990 Kansas feedlot data found captive supplies were associated with lower average prices by from $0.14/cwt to $0.31/cwt.
Using 1988-1989 data, an Iowa State University study got mixed results when looking for a relationship between captive supplies and prices paid to producers. The study did find a significant negative relationship between larger captive supplies and lower prices paid to producers in the state of Kansas, but not in other states.
Since we know captive supplies have increased, perhaps substantially, in 1994-1995, it is reasonable to conclude that producer prices are lower as a result, and possibly lower by a substantially larger amount then estimated in the studies cited above which were done in the late 1980's and early 1990's.
A University of Nebraska studyconcluded that meat packers exercise market power to both increase the price of meat they sell and to decrease the price they pay for livestock. The packers' power to decrease livestock prices was found to be much greater than their power to increase the selling price of meat.
A 1995 comprehensive review of the livestock, meat packing, processing, wholesaling, and retailing industries reached the following conclusions: (1) packers have considerable market power to lower prices paid for livestock, and some power to increase wholesale meat prices; and (2) retailers have considerable market power to raise retail meat prices and to lower wholesale buying prices. The report recommended mandatory price reporting, computerized buying and selling, Congressional repeal of the Illinois Brick decision, and reform of antitrust laws.
XI. FUTURES MARKETS
I would now like to turn to the cattle futures market.
Textbook examples of how traders might hedge in the live cattle futures market would lead one to expect that meat packers would be long hedgers, buying live cattle futures to lock in a portion of their input costs. As net buyers of live cattle futures, meat packers' trading activities would put upward pressure on live cattle prices and reflect the fundamental demand for beef. The timing of meat packers' purchases (and subsequent sales) of live cattle futures could be expected to be primarily dependent upon the packers' needs for and ownership and control of slaughter cattle.
However, studies have shown that meat packers who trade live cattle futures tend to be net short the live cattle futures, that is sellers, not buyers, of cattle futures. The House Committee on Small Business Staff found the packers trading the short side of the market when it studied their trading back in 1978-1979 In a Commodity Futures Trading Commission (CFTC) report on the cattle price drop of 1994, meat packers were also found to be trading the short side of the live cattle futures market. Why would meat packers be on the short (selling) side of the live cattle futures market?
In general, meat packers are short the live cattle futures because they are selling live cattle futures as hedges against the cattle on feed which they own and against fixed-price forward contacts for cattle which they have entered into. What impact does the ownership of cattle on feed and fixed price forward contracts by meat packers, that is captive supplies, have on cash and futures prices? The answer to this question is very important in understanding the current determination of cash cattle prices.
The ownership of cattle on feed and the use of fixed price forward contracts reverses the traditional cash and futures price impacts of meat packers' market trading activities. If meat packers were not trading on the short side of the live cattle futures market, their demand for slaughter cattle would be reflected by their bidding for slaughter cattle in the public cash market, putting upward pressure on prices. However, when meat packers become owners of cattle on feed and when they enter into fixed price forward contracts, they become sellers of live cattle futures contracts which puts downward pressure on both futures and cash prices. By controlling the timing of their sales in the live cattle futures markets, packers can also control (to some unknown extent) the impacts of their transactions on cash cattle prices. Thus on days when meat packers have to buy slaughter cattle on the cash market, one could rationally expect that the same packers would be selling live cattle futures to put downward pressure on cash prices, thereby reducing their costs of procuring slaughter cattle. Or at least not buying live cattle futures contracts.
On April 8, 1994 the April live cattle futures contract peaked at over $77.50/cwt. On April 12, 1994 the Texas Panhandle/Western Oklahoma feedlot cash cattle price peaked at about $77.30/cwt. From April 12, 1994 to June 7, 1994, cash and futures cattle prices declined more than $12.00/cwt.
Cattlemen, concerned by such a sharp drop in cattle prices, requested a government investigation of what caused the drop. Congress requested the Commodity Futures Trading Commission (CFTC) to investigate the cause of the price drop. On June 20, 1994, the CFTC issued a report on the price drop. The CFTC concluded: there was no evidence of manipulative trading activity; meat packers as a group were net buyers of futures during the period of the steepest price declines (April 25 to May 25) but not throughout the entire price decline; and commodity funds comprised a significant portion of the total speculative net short positions. The CFTC report reached no conclusions as to the cause of the price decline. Congress had asked for the cause; the CFTC did not answer the question it was asked.
The CFTC report leaves much unanswered. It was not a thorough investigation of the situation. Some of the report's shortcomings include:
*The futures positions of meat packers were not investigated until April 25, 1994--nine business days after the price decline began. A thorough investigation would have studied packer positions on the days preceding and throughout the price decline. No explanation is given for omitting packer futures trades during the first 9 days of the price decline.
*Only the futures positions of meat packing companies were investigated. A thorough investigation would have also studied the positions of officers and employees of meat packers, and the positions of the brokers placing trades for the meat packers and their officers and employees, and the positions of cattle feeders, feedlots, and their officers, employees, and brokers.
*The investigation made no attempt to correlate the trading activities of various cattle futures traders to determine if groups of traders were making similar trades at similar times, which could have caused the price drop.
*Because of complaints about this report, the CFTC looked at intra-day trading in cattle futures. They also backed up and looked at trading prior to the price drop, but they came to essentially the same conclusions.
Why didn't the CFTC look for the cause of the price drop when they were specifically asked to do so by the Congress? Instead they limited themselves to only looking at certain accounts (packers, commodity funds). The proper way to find out what causes a price drop is to find out who was selling, when, and at what prices. Were the officers and employees of the packers, feedlots, and brokerage firms selling? The CFTC didn't bother to find out. Were there groups of traders all selling at the same time? The CFTC didn't bother to find out.
As reported by George Anthan in the Des Moines Register (Sunday, November 26, 1995, page 1J): "The CFTC's new chairman, Mary Schapiro, acknowledged at a House Banking Committee hearing, 'I knew our enforcement record wasn't any good and said so.' Schapiro earlier this year ordered an internal review of CFTC practices, and this was cited by (Congressman Jim) Leach (Chair of the House Banking Committee) as depicting 'serious and disturbing deficiencies...managerial shortcomings and misplaced priorities.' The CFTC, Leach said, was 'on the brink of default on its responsibilities.'"
XII. FEDERAL ENFORCEMENT
The Packers and Stockyards Act is a very strong law. Among other things, it prohibits packers or livestock dealers from engaging in or using any unfair, discriminatory, or deceptive practice or device. It prohibits engaging in any course of business which would have the effect of manipulating or controlling price. The problem is GIPSA has had no way of knowing if violations are occurring because they don't look at regional markets and they haven't looked at packers' actions and inventories in all markets simultaneously. Until they do, they will not understand what is happening in the livestock markets.
What about the US Department of Justice? Is not this agency charged with enforcing the antitrust laws? Yes they are, but it is my opinion that they are not enforcing these laws and they do not have the enforcement techniques and expertise necessary to enforce these laws.
For example, when the Justice Department was doing their lamb investigation in the early 1990's, they came out west and held hearings. What they said at these hearings was if producers and other industry participants show them how the packers are violating the law then they will consider taking action. This is the enforcement equivalent of your local police telling you that if you dust your home for fingerprints and match fingerprints to a suspect they will consider arresting that suspect for the murder of your spouse. Absurd!
There is no way individual livestock producers, alone, can produce evidence of violations of the law. Only the federal government, or the courts, have access to all the packers' records necessary to find out if violations are occurring. Only the federal government has the resources to analyze the necessary records. This is not being done.
XIII. CONCLUSION
To tie this all together let me return to the fact that livestock auction markets are being closed out. In the opinion of the Organization for Competitive Markets, the only way this trend can be reversed is if producers recognize that it is in their own best interest to market their output through efficient, competitive, public markets.
Also, the closing out of competitive markets is not only occurring in
livestock. It is a pervasive problem in most, if not all, agricultural
markets.
postXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXcate vuL-û< ntry(w!X ?jrsBuoT ;/Vurl 7http://www.competitivemarkets.com/images/oMcbanner.gifbsrl>http://www.competitivemarkets.com/library/testimony/ocmt1.htmmime
image/gifhntt"ba29256588cbf1:afbf"hvrsdataGIF89aXd!!)!)!1)1)1)11919199J9J9JBRBRJZJZJZR^VcZscZRcZsZsZ!scsc{k{k{sws{{c{ks{c!k!s!k)s){{)!%)!))!ê&!)1)19)9B1BJ=VVJckRksRs{Z{cks{{{ƌƌΔΔ֜{1֥֜1֭111Ɯ9ƥ1֔ޜޥޭޜޥޭޜޭޥƵ
ε! έ)ֽ)!%Υ9έ1έ9ֵ9519)%!)1199!!)))1199))ΥB֭BֵBBBBJRBBJ9BJRBJRRBJBFJR^Vccksku,Xd@PBe`A"\xB JHʼn+bܨcƏ Az IrɋS\IJ+0cj2S͛`ɳN2?ꓧΛHk3fK
S,)*իSZՊu`OFR2iĘIfbԔQs6[bE;7.\cҠڼf,x/]tU7ྐղM,wqˎ GLdžIwܘpfɜ~n95ҳO|{mnF5kԱΞ;CN;vʉ+T"Uj(Q":ޔHg??(+W?ꕂ+88Î:֥G:a v,qéQ\`e&XhW}X-"b6X#&;Έ#~颎E
٣?29UL@f&؍WbZgk]Ɔp}ɚnY҈ۘa#>9Z8 uu1 }H;3'~z'jj7:*ڧ z2J|K6s; s0F naag%gEo]vXg\lmݶV[Rٚ_bkcf;/^^/%c^PJYfqf,DF\g]d91$jg|m-f_Iə4X[lek,w Nz8ٸJyt$'*j5%b Xsx]MIaamVW"+pZjxN* -c Ma \ ff6p[cKd @Mx'QVSFRI!46Ҝwf9I HJ)fs77jUsKYv*<+7mص%lv/7q2[ ;HW
G R. uTW+3t^'mɀS#۴.6] h+]˂& cM=չ=Xao=18c+k5uQ rqT
y;uGz~{ThN)eTQ_qUvIx 6gPs'ZP-|vNpWvw.nScWls@Em -KXQx m.2+
ל$ ʯ fBwU8"FɇGA wtӛtO3TQy'3THTBSj $QBSr #a{6۔vGxF7a7(BlՕ@r ey>i'99Pn
NJTfcbHDZ+YlQ @ NI=(41:L&40䥍jtK̈|̲3 n0 \( FSs| ؘ=9D>+A K (@-1ЃTh?I:>Fz`,_ T4m