North Dakota Department of Agriculture



	ND Department of Agriculture Comments, Speeches and Testimony Commissioner Johnson's submitted the following comments in support of the petition for rulemaking from the Western Organization of Resource Councils to USDA April 14, 1997 Acting Deputy Administrator GIPSA, USDA, Stop 3641 1400 Independence Ave, SW, Room 3039-S Washington, DC 20250 Dear Mr. Acting Deputy Administrator: The North Dakota Department of Agriculture respectfully submits the following comments in support of the petition for rulemaking from the Western Organization of Resource Councils (WORC) published in the Tuesday, January 14, 1997 Federal Register, Vol. 62, No. 9, pages 1845-1859. The petition proposed on these pages requests the Secretary to initiate rulemaking under the Packers and Stockyards Act. We support the petition and its request for the following reasons: The current livestock market structure is uncompetitive; The Secretary has responsibility to implement rules; and The WORC petition promotes competition. 1. The current livestock market structure is uncompetitive The current livestock marketing system is highly concentrated and vertically integrated. The top four steer and heifer slaughter firms now account for 82% of slaughter compared to 36% in 1980. [See Graph #1] Producers are not receiving a fair return for their production and price savings are not being reflected at the retail counter. According to figures compiled from the North Dakota Farm Business Management Education program, North Dakota cow-calf producers lost $28 per cow in 1995 and nearly $50 per cow in 1996. [See Graph #2]. We are in the midst of a ten year cattle cycle, however, as you can see in graph #1, 10 years ago, during a high inventory cycle, the return per cow was a positive $50 per cow, while in 1996, it is nearly a minus $50 dollars per cow. A large problem is the lack of fairness in distribution of the retail dollar. The farmers share of the retail dollar is less than 50% and it is at its lowest point in over 26 years. [See Graph #3]. This lack of price fairness is due to a few major reasons above and beyond an increase in cattle inventories. Lack of price fairness is occurring because of the lack of price reporting and market information combined with a highly concentrated and heavily integrated packing industry. 2. Secretary has responsibility to implement rules The Secretary of Agriculture convened an Advisory Committee on Agricultural Concentration to address market concentration and unfair pricing. The Committee outlined their recommendations in a Concentration in Agriculture report to the Secretary, dated June 7, 1996. The recommendations describe the powerful authority of the Secretary to maintain a competitive and fair marketplace. On page 10 of the report, the Committee found that the Secretary has a mandate under Section 202 of the Packers and Stockyards Act of 1921 to "address abuses of market power 'in their incipiency', before harm has been done or can be documented by studies." [June 7, 1996 Concentration in Agriculture Report, Page 10]. Additionally, courts have found that "proof of a particular injury is not required" to permit regulation of packer practices. Daniels v. United States., 242 F. 2d 39, 42 (7th Cir. 1957), Bowman v. United States Dep't of Agric., 363 F. 2d 81, 185 (5th Cir. 1966), quoting Daniels. [ Federal Register, Tuesday, January 14, 1997, Vol. 62, No. 9, Page 1857]. The Advisory Committee also found that the authority of the Secretary to address market power and pricing problems is proactive: Even more important, that mandate is proactive; it is to induce healthy competition, not merely to react to unhealthy competition. It is to assure fair trade practices, not merely to prevent unfair trade practices. Such a mandate provides more authority to protect and enhance marketplace competition than can be found in the more limited areas of antitrust and unfair trade practice law. [June 7, 1996 Concentration in Agriculture Report, Page 10]. The WORC petition addresses the problem with formula pricing, which the Advisory Committee describes on page 31. 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 their 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. USDA has great deference under the act to implement rules that safeguard the price paid to producers. The Act is remedial legislation and is to be construed liberally in accord with its purpose to prevent economic harm to producers and consumers... [Swift & Co. vs. United States, 393 F. 2d 247, 253 (7th Cir. 1968); citing Stafford vs. Wallace, 258 U.S. at 521; and Safeway Stores, Inc vs. Freeman, 369 F. 2d 952, 956 (1966); see also, Farrow vs. USDA, 760 F. 2d 211, 214 (8th Circuit 1984). [Federal Register, Tuesday, January 14, 1997, Vol. 62, No. 9, page 1854]. 3. WORC petition promotes competition The WORC petition addresses both unfair pricing and price disclosure. It opens the lines of market communication which will benefit all sectors of the livestock market chain. With more price disclosure, everyone will have access to market information and accordingly, the ability of the packing industry to manipulate prices will be less. The petition does two things: Prohibits packers from procuring livestock for slaughter through the use of forward contracts, unless the contracts contain 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; and Prohibits packers, from owning and feeding livestock, unless the livestock are sold for slaughter in an open, public market. By requiring forward contracts to be based on a fixed price that is disclosed to the public, both parties work from the same level and the public knows what is being offered other parties. This rule would prevent undue and unreasonable preference toward certain parties. In fact, USDA has taken action against IBP for marketing preference (USDA vs. IBP. P&S Docket No. D-95-49). Accordingly, USDA should promulgate rules to prevent market preferences and to promote fair and open cattle pricing. Preventing packers from owning and feeding livestock, unless they are sold in an open, public market creates more market disclosure. This practice is not unduly burdensome or anti-free market, rather it could be accomplished by requiring the posting of all cattle owned, fed and offered for sale by a packer on an electronic market. Most packers will buy back their own feedlot cattle, however they are forced to compete with other packers on the market for these cattle. Establishing an electronic market or pricing clearinghouse will provide more market information that will be accessible to everyone. Price discovery will be much easier and packers will be discouraged from attempting to manipulate prices or from offering preferential prices. North Dakota's legislature has just passed a resolution supporting this petition, with two minor changes. [See Attachment #1]. The changes added by the legislative resolution would prevent the rules from restricting cooperatives and smaller packing plants. We support the petition with these changes. The changes to the petition are: "Prohibiting packers, who process more than five percent of the national daily slaughter of a given species, from procuring...." "Prohibiting packers, other than farmer-owned cooperatives, from owning...." I would urge USDA to publish the rules outlined in the WORC petition with the changes described above. We need fairness and competition in the livestock industry. Sincerely, Roger Johnson Commissioner of Agriculture Back to the Comments, Speeches and Testimony
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ND Department of Agriculture Comments, Speeches and Testimony