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Packer Ownership Dispute Simmers

After months of debate on the 2002 Farm Bill, legislators still do not see eye-to-eye on the packer ownership of hogs issue.

The proposed ban on packer ownership has sparked a firestorm of controversy in nearly every livestock sector nationwide.

The Senate Agriculture Committee has kept the issue front and center despite House Agriculture Committee members' refusal to include it in the final farm bill.

On July 16, the Senate Agriculture Committee held a hearing on the proposed ban and USDA's enforcement of the Packers and Stockyards Act. Fourteen representatives from state and national producer organizations, universities, government agencies and packers reinforced their stand.

Sen. Tim Johnson (D-SD) asked the committee to restore competition, access and bargaining power to livestock producers. In his testimony, he stated, “simply put, the pork and cattle industries are in jeopardy of evaporating into the poultry model. If meaningful competition is not restored to cattle and hog markets, livestock producers in the U.S. will become low-wage employees on their own land, working for the packing firm and bearing all the economic risk, but none of the potential gain.”

Johnson and Sen. Chuck Grassley (R-IA) proposed Senate legislation in December 2001 to amend the Packers and Stockyards Act, making it unlawful for a meatpacker to own, feed or control livestock intended for slaughter for more than 14 days prior to slaughter. The Johnson Amendment, included in the Senate version of the farm bill, passed by a 51-46 margin. The amendment did not address the definition of “owning, feeding or controlling” livestock, however, and the word “control” was immediately controversial. A similar proposal, the Grassley-Harkin Amendment, clarified the definition “control” and was passed in a 53-46 vote in February 2002.

Packers argued that “control” prohibited processors from using forward marketing contracts with producers. Others argued control meant prohibiting packers from possessing the power to make operational production decisions.

Roger McEowen, professor of agricultural law at Kansas State University, explains that “the primary point is the legislation would not prohibit any marketing contracts. If the contract leaves the day-to-day decision-making process up to the individual producers, it is not in conflict with the legislation.”

Where the Debate Begins

The National Pork Producers Council (NPPC) and the National Cattlemen's Beef Association (NCBA) released a study conducted by Sparks Companies, Inc. of the potential impacts of the Johnson Amendment. Three potential impacts on the red meat industry were cited:

First, the revision of law could affect existing marketing contracts if packers determined the legislation impairs their ability to enter into long-term marketing arrangements.

Second, with only 18 months to divest packer herds, the proposed legislation could diminish interest in investment in the industry.

Finally, major litigation fees could result from challenges by packers and the exemption of poultry, possibly reducing the willingness to invest in the industry.

The opposition to the proposed packer ownership ban at the July 16 hearing was presented by the American Meat Institute (AMI), the nation's oldest and largest organization representing packers and processors. AMI President Patrick Boyle said the ban would turn back the clock on industry progress and the quality now available to consumers.

“The American Meat Institute strongly opposes efforts that would make it illegal for meat manufacturers to do what the rest of the global business community is doing, which is to form relationships with suppliers of raw materials in order to produce consistent quality, lowest-priced products that consumers will buy,” he stated.

Supporters of the ban released a number of studies challenging many of the claims of the Sparks study. Four agricultural economists and agricultural policy lawyers challenged the concerns pointed out by the study, contending the packer ownership amendment ad-dresses real problems in the competitive environment of the livestock industry. They concluded the potential benefit to the marketplace outweighed the negative market effects occurring from packers' control.

Grassley believes packers are able to manipulate the marketplace and use free shackle space when markets are high. “Packer ownership of livestock is one of the tools that enables strategic scheduling to affect the cash price, and derivatively, the price of livestock procured through contracts tied to the cash market,” he said.

Glenn Grimes, University of Missouri agricultural economist, pointed out the current cash market is at 16.7%, down from 17.3% in 2001. He says if packers were able to manipulate market power, their balance sheets should show that profit. “If they were able to pay themselves what they wish, their profits should be much higher than they are,” he notes. “We don't have objective information to quantify that.”

But as more and more processors and packers become vertically integrated, a smaller role is given to individual producers. Grimes said many packers become less efficient when forced to bring in hogs from other sources.

Flame of the Future

Robert Taylor, Auburn University professor of agricultural and public policy, testified that horizontal concentration combined with vertical integration through ownership or through supply chain management has occurred at an unprecedented pace in the beef and pork industries.

“The massive restructuring of the livestock industry was initially driven by the corporate efforts to capture private economic efficiencies. But in the last few years, it appears to be driven more by efforts to gain market power and economic power, than by efforts to capture economic efficiencies,” he said.

Several states currently have legislation restricting packer ownership of livestock including Iowa, Minnesota and Nebraska. In April, Iowa legislators unanimously voted to strengthen re-strictions on packer feeding of swine, closing a loophole that indirectly allowed packer/processors to own or finance pork production.

Iowa Pork Producers Association (IPPA) President Tim Bierman, testifying at the July hearing, encouraged agricultural leaders to follow Iowa's stance. “As the leader in pork production, we have often been the trailblazer. One such road we blazed is a ban on packer ownership of hogs, (which) Iowa has had on its books since 1975,” he testified. “A ban on packer ownership of livestock should not be a game of political football. It's what the independent farmers want.”

Grassley isn't giving up on future legislation, but admits the potential for a ban looks doubtful. “The chances of getting a stand-alone bill passed or even amendments are slim,” he said. “These issues were germane to a farm bill and are not to an appropriations bill.”

All 14 northern plain states' senators voted in favor of the bill as producers continue to plead for a more competitive marketplace with less vertical integration. Legislators are hopeful that more objective studies and further discussion on state and national levels will bring consensus on this hot issue.