Neil E. Harl
Charles F. Curtiss Distinguished Professor in Agriculture
Professor of Economics
Iowa State University
Ames, IA 50011
First, though let me say that I appreciate the opportunity to participate in this Forum and I commend the Secretary for scheduling the event. The issue before the group is highly important to the agricultural sector and, ultimately, to consumers and is a complex one. It comes down to whether the Packers and Stockyards Act is being violated. Second, we should recognize the unique setting of this inquiry, not geographically but competitively. It was 110 years ago, July 2, that the Sherman Act became law. Although Congress was concerned about concentration in oil, steel, railroads and in several other areas, a major driving force behind the legislation was the 1888 report on competitive abuses in meat packing. The 1917 investigation by the Federal Trade Commission of the meat packing industry led directly to the consent decree in 1920 and the Packers and Stockyards Act of 1921. Moreover, the U.S. agriculture is now in the midst of the greatest, most far-reaching structural transformation of the past century. The transformation is characterized by the deadly combination of concentration (in input supply and output processing) and vertical integration, from the top down. The problem is much broader than anti-competitive practices in cattle slaughter.
The agricultural sector is more vulnerable than at any time in the modern era. Input suppliers and output processors seem bent on achieving unprecedented control over producers and over the production processes. One casualty, and a prominent one, is free, open and competitive markets.
In my view, competition is the genius of our economic system. Competition assures that economic growth (and per capita personal incomes) are maximized and that income is allocated fairly. It is incumbent upon all of us to work to maintain a high level of competition. Any practice which is destructive of competition should receive regulatory attention especially when the practice is carried on in the presence of high levels of concentration. We must make the markets work.
Breadth of the Act
Section 202 of the Packers and Stockyards Act provides broad authority to the regulator in proscribing any "unfair, unjustly discriminatory, or deceptive practice or device" or arrangements "to 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." That broad grant of authority is unprecedented.
It is important to note that Congress did not include efficiency as a criterion for intervention, nor did the Congress create a defense if practices benefit the packer. Therefore, it is irrelevant that certain practices benefit packers by fully utilizing capacity and thus maximizing packer profits. Moreover, the Congress, in this provision, unlike many regulatory provisions, did not couch the provision in terms of impact on consumers. Section 202 was clearly focused on harm to producers. Therefore, the question is whether captive supplies are reasonably expected to be "unfair, unjustly discriminatory, or deceptive." If the answer is yes, the Secretary has the authority to act.
Congress did not impose a requirement that the Secretary can act only if there is a showing of economic harm to producers. Section 202 was drafted to attack unfair, unjustly discriminatory, or deceptive practices in their incipiency. As with price fixing, a showing of actual harm is not required. As the courts have said, "the power to fix a reasonable price today is the power to fix an unreasonable price tomorrow." If a practice is "unfair, unjustly discriminatory or deceptive," it cannot be justified on the grounds that harm has not been proved.
Factors
The essential issue, therefore, is whether captive supplies are "discriminatory, or deceptive." Captive supplies foreclose access to markets by independent producers, contribute to thinness in markets which undercuts the market as a reliable allocator of resources and distributor of income and make possible manipulation of markets by packers in the presence of thinness of markets. On the face of it, captive supplies are discriminatory in effect. In my view, in light of the degree of concentration in meat packing today, captive supplies easily meet the test of being unjustly discriminatory. It is also reasonable to conclude that captive supplies are "unfair" to independent producers and that some features of captive supplies are "deceptive" in the operation and functioning of markets for cattle destined for slaughter. The negative effects of captive supplies that have been identified are consistent with common sense, economic theory and a respected body of empirical evidence. While the various research studies have been challenged on various bases, there is general agreement that increasing levels of concentration correlate with lower price levels.
The fact that there has been no judicial decision supporting the position that captive supplies are inherently anti-competitive begs the question. There is unlikely to be any litigation until the Secretary uses the authority in Section 202 to issue regulations specifically targeting captive supplies.
It is instructive to review the regulations which have been issued under Section 202. To date, so far as I can determine, regulations have not been subjected to empirical proof of negative effect on competition as a pre-condition to issuance of the regulations. The regulations issued by the Packers and Stockyards Administration contain extensive provisions, the violation of which constitute a violation of Section 202 including-
1. Proscribing a packer from having an ownership interest in, financing, or participating in the management or operation of a market agency selling livestock on a commission basis. 9 C.F.R. § 201.66.
2. Proscribing a packer or any officer, agent, or employee of a packer, or a person owning a substantial interest in a packer, from operating as a market agency purchasing livestock on a commission basis, or as a dealer or having an ownership interest in, financing, or participating in the management or operation of such a market agency or dealer. 9 C.F.R. § 201.67.
3. Requiring packers to conduct their livestock purchasing operations in competition with and independently of other buyers. 9 C.F.R. § 201.69.
4. Prohibiting a packer or an officer, agent or employee or person who owns a substantial interest in a packer from owning, financing or controlling a livestock custom feedlot. 9 C.F.R. § 201.70a.
The words "unfair, unjustly discriminatory, or deceptive practice or device," as used in Sections 202(a) and 312(a) of the Packers and Stockyards Act are not defined. Thus, according to the courts, "their meaning must be determined by the facts of each case within the purposes of the Packers and Stockyards Act." Capitol Packing Co. v. U.S., 350 F.2d 6776 (10th Cir. 1965). The courts look to the Secretary of Agriculture for insight into what is "unfair, unjustly discriminatory or deceptive."
Legislative history
The legislative history of the Act gives some insight into the breadth of the prohibition of practices intended by Congress. As Congressman Anderson of Minnesota, who was a member of the House Agriculture Committee and a prime sponsor of the bill, stated during the floor debates on the bill in the House of Representatives-
"Industry is progressive. The methods of industry and of 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".
"Now, I want to call attention to the fact that for the most part the bill does not deal with offenses essentially
criminal in character. It deals with offenses against good morals in business. That is the reason that the particular procedure adopted in this bill was adopted." 61 Cong. Rec. 1887 (1921).
The legislative history of the Packers and Stockyards Act squarely supports the assertion that Congress intended the Secretary to use the broad authority in Section 202 to proscribe packer practices that threaten free, open and competitive markets. As Rep. Jones of Texas observed in 1921-
"The producer must always sell in a market that he does not [email protected] only hope of securing a fair price lies in an open, competitive market." 61 Fed. Reg. 1861 (1921).
Results of litigation under the Act
It has been held that a practice which is violative of the Act does not become lawful merely because others engage in the same practice. Those who have engaged in a violative practice "must extricate themselves by purging their business methods of unfair, unjustly discriminatory and deceptive acts, and not by relying on the conduct or misconduct of others who may be equally guilty and who may find themselves in a similar [email protected]" Midwest Farmers, Inc. v. U.S. 64 F. Supp. 91, 97 (D. Minn. 1945).
Failure to compete. In a 1975 case, the Judicial Officer held that a packer had violated subsections (a) and (e) of Section 202 of the Act and Section 201.70 of the regulations by engaging in livestock purchasing practices which had the effect of restricting competition in the purchase of calves. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). The packer employed a person registered as a market agency and dealer to purchase calves. An official of the packer, who was in charge of livestock procurement, was at the markets at the time the purchases were made by the market agency-dealer. The Judicial Officer concluded that if the packer "had purchased its own calves, another regular and substantial buyer would have increased competition and would have added to the demand for the sale [email protected]" Id., at 984-85.
The Seventh Circuit Court of Appeals upheld a portion of an order of the Judicial Officer requiring a packer to cease and desist from an anti-competitive practice. In re Swift & Co., 20 Agric. Dec. 1120 (1961), aff'd sub nom. Swift & Co. v. U.S., 308 F.2d 849 (7th Cir. 1962). The packer entered into an agreement with a dealer under which the dealer would buy all the top grade hogs at a particular stockyard and would furnish to the packer whatever quantity of the top grade hogs the packer wanted at the same price at which the dealer purchased them plus trucking charges. Prior to this agreement, the buyer for the packer and the dealer competed for purchases of hogs at the market and that competition substantially increased the prices paid for top grade hogs. The court held that the "essential nature and the necessary result of this arrangement or practice was to eliminate competition." Id., 308 F.2d 853.
In a 1985 Eighth Circuit Court of Appeals case, an agreement between two registered dealers not to bid against each other at auctions for cows was an unfair practice violation. Farrow v. U.S.D.A., 760 F.2d 211 (8th Cir. 1985). The court held that there was no need to show actual damage to competition for an unfair practice to exist.
Under section 201.67 of the regulations issued under the Act, "[n]o packer, officer, agent, or employee of a packer or a person who owns a substantial interest in a packer, shall independently, or in combination with others, or through any corporate or other device, operate as a market agency purchasing livestock on a commission basis, or as a dealer, or have an ownership interest in, finance, or participate in the management or operation of any such market agency or dealer." The regulations also require each packer and dealer to "conduct his buying operations in competition with, and independently of, other packers and dealers similarly engaged." The Judicial Officer, in a 1975 case, held that section 202(a) of the Act and section 201.68 of the regulations were violated where a person registered as a market agency and dealer owned 50 percent of the stock of a packer, and where the market agency-dealer participated in the management or control of the packer. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). In another proceeding, the Judicial Officer held that the joint ownership of a dealer engaged in the cattle buying business and a packer was violative of the Act. In re Central Coast Meats, Inc., 33 Agric. Dec. 117 (1974). The Judicial Officer concluded that the practice of joint ownership and operation involved a restriction or lessening of competition. Id., 33 Agric. Dec. at 136-37. The Ninth Circuit Court of Appeals, however, reversed the decision and order of the Judicial Officer. Central Coast Meats, Inc. v. U.S.D.A., 541 F.2d 1325 (9th Cir. 1976). The court concluded that it is not a per se violation of Section 202(a) of the Act for a packer to act as a dealer. The court acknowledged that the packer and dealer operations were not conducted at all times as completely independent and competitive entities, it was the view of the court that "this in itself is not sufficient to constitute a violation of the Act under the circumstances presented here." The court held that the two entities each independently constituted a competitive force at the sales. The court stated, only after "considered balancing of the benefits and evils that their [joint owners] method of doing business may be shown to have presented to the producers" could it be said that it had been "shown that the consequences of the dual [email protected] likely to be injury to the producer of the sort the Act is designed to present" and that such an evaluation was not conducted by the Judicial Officer. Id., 541 F.2d 1327-1328. In a subsequent proceeding in which the respondents relied upon the court's opinion in that case, the Judicial Officer stated that "[t]he Court of Appeals divided two to one, and I have not changed my views as a result of that split decision. Accordingly, the views set forth in my opinion reflect the present policy of this Department." In re Sterling Colo. Beef Co., 35 Agric. Dec. 184 (1980).
In a 1980 case, a custom feedlot, held by the Judicial Officer to be subject to the Act as a dealer or market agency, owned approximately 22 percent of the stock of a packer and its president was an active member of the packer's board of directors and served for a period as chairman of the board. Customers for whom the feedlot fed cattle, frequently sold their cattle to that packer. The Judicial Officer held that this arrangement constituted a "conflict of interest involving the ownership and management of" the packer and custom feedlot. Noting that divestiture was not sought in the case, the Judicial Officer held that "it is appropriate to issue a cease and desist order in this respect only to minimize the likelihood of future violations resulting from the conflict of interest situation." In re Sterling Colo. Beef Co., 39 Agric. Dec. 184, 239.
Policy statements. The regulations contain a policy statement as to packers engaging in the business of custom feedlot operations. 9 C.F.R. § 203.18-
"(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) has sought to promote and maintain open and fair competition in the livestock and packing industries, and to prevent unfair or anticompetitive practices when they are found to exist. It is the opinion of the Administration that the ownership or operation of custom feedlots by packers presents problems which may, under some circumstances, result in violations of the Packers and Stockyards Act.
"(b) Packers contemplating entering into such arrangements with custom feedlots are encouraged to consult with the Administration prior to the commencement of such activities. Custom feedlots are not only places of production, but are also important marketing centers, and in connection with the operation of a custom feedlot, it is customary for the feedlot operator to assume responsibility for marketing fed livestock for the accounts of feedlot customers. When a custom feedlot is owned or operated by a packer, and when such packer purchases fed livestock from the feedlot, this method of operation potentially gives rise to a conflict of interest. In such situations, the packer's interest in the fed livestock as a buyer is in conflict with its obligations to feedlot customers to market their livestock to the customer's best advantage. Under these circumstances, the packer should take appropriate measures to eliminate any conflict of interest. At a minimum, such measures should insure:
"(1) That feedlot customers are fully advised of the common ties between the feedlot and the packer, and of their rights and options with respect to the marketing of their livestock;
"(2) That all feedlot customers are treated equally by the packer/custom feedlot in connection with the marketing of fed livestock; and
"(3) That marketing decisions rest solely with the feedlot customer unless otherwise expressly agreed.
"(c) Packer ownership or operation of custom feedlots may also give rise to competitive problems in some situations. Packers contemplating or engaging in the business of operating a custom feedlot should carefully review their operations to assure that no restriction or competition exists or is likely to occur.
"(d) The Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) does not consider the existence of packer/custom feedlot relationships, by itself, to constitute a violation of the Act. In the event it appears that a packer/custom feedlot arrangement gives rise to a violation of the Act, an investigation will be made on a case-by-case basis, and, where warranted, appropriate action will be taken."
Statement with respect to packers engaging in the business of livestock dealers or buying agencies. 9 C.F.R. § 203.19-
"(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs) has sought to prevent conflicts of interest and to maintain open and fair competition in the livestock and meat packing industries. The ownership or operation of livestock dealers or buying agencies by packers, under some circumstances, may result in violations of the Packers and Stockyards Act.
"(b) Traditionally, livestock dealers and buying agencies purchase livestock for resale or to fill orders for farmers, ranchers, producers, other livestock firms and packers. When a livestock dealer or buying agency is owned or operated by a packer, and when such packer is also buying livestock for its own operational requirements, there is a potential conflict of interest. Furthermore, the purchase and sale of livestock by meat packers may result in control of markets and prices which could adversely affect both livestock producers, competing packers, and consumers.
"(c) Arrangements between packers and dealers or buying agencies which do not normally create a conflict of interest or result in a restraint of competition include:
"(1) Operations utilizing different species or classes of livestock; (2) operations where the business activities are widely separated geographically; and (3) operations where tie-in purchases or sales are not involved. Packers contemplating engaging in the business of a livestock dealer or a buying agency are encouraged to consult with the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) prior to the commencement of such activities.
"(d) In the event a packer/dealer or a packer/buying agency arrangement appears to give rise to a violation of the Act, an investigation will be made on a case-by-case basis and, where warranted, appropriate action will be taken."
Other significant cases. Courts have found 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 practices by packers. 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).
In a 1999 case, IBP, Inc. v. Glickman, the plaintiff purchased cattle under a "Beef Marketing Agreement" which was proposed by a group of Kansas feedlots. Under the agreement, the plaintiff would make an initial bid on a pen of cattle. The initial bid was based on the mid-point between the highest purchase price reported by the U.S.D.A. in a given week in Kansas for at least 2,500 cattle and the highest price the plaintiff paid for the same number of cattle in Kansas during the week. This was called the "Kansas High Price." The feedlot could then accept or reject the bid. If the bid was rejected, then other cattle buyers could bid. But, as long as the plaintiff's initial bid was no less than 50 cents below the Kansas High Price, the plaintiff had a right of first refusal on the cattle. Thus, once other buyers had completed bidding, the feedlot had to offer the pen of cattle to the plaintiff at the highest bid price. If the plaintiff opted to exercise the right of first refusal, the feedlot could go back to the high bidder in an attempt to get a higher bid. But after all bidding was complete, the plaintiff could still get the cattle by matching the highest bid. The U.S.D.A. argued that the right of first refusal violated the Packers and Stockyards Act, which makes it unlawful for a packer to engage in "any unfair, unjustly discriminatory, or deceptive practice" or "make or give undue or unreasonable preference or advantage to any particular person or locality." The Judicial Officer had concluded that the plaintiff did not have to participate in bidding after its initial bid and could obtain a pen of cattle by matching, instead of exceeding, the highest bid. The appellate court disagreed and said the right of first refusal did not have the effect of suppressing or reducing competition. Indeed, the court said that the plaintiff paid a higher price for cattle under the agreement than for cattle bought in transactions with other feedlots. IBP, Inc. v. Glickman, 187 F.3d 974 (8th Cir. 1999).
Conclusion
The broad scope of the Packers and Stockyards Act and its legislative history are unique in U.S. regulatory law. The Congress clearly intended to empower the Secretary of Agriculture to take the necessary steps to counter the anti-competitive practices of meat packers, which even then, in 1921, were long-standing. Nearly 80 years have passed since enactment of the legislation. While the names of the players have changed during the period, the meat packing industry has continued to become ever more concentrated.
It is noted that the Act does not require actual damage to competition for an unfair practice to exist. Moreover, there is no defense to Section 202 on the grounds that benefits may flow to packers as a result of the practice. Indeed, there is no defense to Section 202 on the grounds that the practice might conceivably benefit consumers. Section 202 was designed to preserve free, open and competitive markets for the benefit of producers. In my considered view, packers should be prohibited from achieving captive supplies in a setting of high levels of concentration, as now exist in steer and heifer slaughter. This is a defensible and appropriate position to take regardless of how accomplished and regardless of contemporary evidence of competitive damage. It is an unfair practice and should be subject to regulation to eliminate the aspects of current procurement practices with specific regard to use of packer-fed cattle and forward contracts which violate the Packers and Stockyards Act. Regulations should eliminate the aspects of forward contracts which have a significant discriminatory effect or negative effect on competition. Moreover, issuance of the regulations should be followed by aggressive enforcement of the regulations. In a broader sense, what is at issue here is the deadly combination of concentration in processing coupled by vertical integration from the top down. Captive supplies, however, arranged, are a form of vertical integration. With the high levels of concentration existing, captive supplies and contract marketing contribute to a thin market which is easily manipulated by packers.
The outcome of this regulatory decision will help to determine whether producers are independent entrepreneurs or serfs. Congress clearly intended that the Packers and Stockyards Act be administered to prevent the loss of competition to the detriment of producers.
The practice of allowing captive supplies in light of the extremely high level of concentration in steer and heifer slaughter is indefensible in light of the clear focus of the Packers and Stockyards Act on producers.
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Suggested Incipiency Factors
(Section 202 of Packers and Stockyards Act)
The Secretary is under a duty to exercise the vast authorities under Section 202 reasonably. It is, I believe, helpful to focus on how to evaluate reasonableness. What are the factors? I would suggest five:
1.Concentration in the target sector-creates both the opportunity and the incentive to engage in anti-competitive practices.
2.Nature of the sector on the other side of the table-the beneficiary group, in this case producers-is it atomistic or is it concentrated?
3.What do we know about contemporaneous behavior in terms of economic analysis?
4.What is the history of competitive behavior by the target group?
5.What can we learn from analogous situations? Evidence of manipulation, long term.
*
cheese (Mueller study)
*
Board of Trade
*
1933 Securities Act
We must made the markets work. It is in everyone's best interest that they work.
Question 1-
1.Common sense and economic theory plus a significant set of empirical observations.
2.Ownership of cattle contributes to thinness of the markets and enables packers to manipulate the thin markets. As spot markets become thinner, spot prices are less and less reflective of the forces of supply and demand. Schroeter and Azzam.
3.In the extreme, with all cattle owned, there would be no price, no market and no access to slaughter by independent producers.
4.Empirical evidence shows, I believe conclusively, that higher levels of captive supply result in lower price. As Schroeter and Azzam analysis found, "the average price in the region's spot market for cattle tends to be relatively low in weeks in which delivery of cattle from non-cash sources are relatively high, other things equal." Schroeter and Azzam, Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle 46 (Nov. 1999). The authors conclude that "the impact of non-cash procurement methods on price is reasonably substantial." Schroeter and Azzam point out that captive supplies lead to less active bidders in the market and, therefore, a lower price. Captive supplies remove bidders from the market and, therefore, the price is weaker.
5.There is no public policy defense to packer feeding of livestock.
Question 2-
1.All that a forward contract without a firm base price tied to a fixed dollar amount does is to assure shackle space for the producer. Packers use the fear of lack of access to shackle space to coerce producers into signing such contracts.
2.Such contracts contribute to thinness in the market, making it possible for packers to manipulate prices.
3.To increase aggressive bidding on all livestock, and to reduce the likelihood of market manipulation, all supplies should be traded on the open market with all players having access and all packers under pressure to be active bidders.
4.The incentive to depress prices is there.
5.Formula pricing can be done without moving away from competitive pricing; price can certainly be reflective of quality attributes.
Question 3-
1.A good indicator of manipulation of prices and control of prices is the degree of concentration in the market. The degree of concentration in steer and heifer slaughter is truly awesome.
2.The degree of regional dominance of a packer is another indication of the likelihood of price manipulation and price control.
Question 4-
1.Certainly history shows that any time there is a level of concentration comparable to what now exists in steer and heifer slaughter, there is a significant probability of anti-competitive practices.
2.Beating in the breast of every good capitalist is the heart of a monopolist.
3.The market is much thinner than would be the case if all acquisitions were through open, competitive transparent markets.
4.There is a substantial disparity in prices paid by producers for like quality livestock. Numerous producers, who are receiving premiums, have admitted that to me.
5.We're talking potential. That raises the question of incipiency, which is what Section 202 is all about.
Question 5-
1.Lack of openness and competition in markets, with the degree of concentration existing, depresses prices and profits. That means less economic buoyancy for rural communities.
2.Lower packer prices mean a lower price for feeder calves so reduced profits are experienced in rural areas where calves are produced.
3.A completely integrated controlled system would be likely to leave less of the consumer dollar in the producer'' hands.
4.Those who control the critical elements of the process tend to exact all they can. That critical element, now, is access to packers.
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Charles F. Curtiss Distinguished Professor in Agriculture
Professor of Economics
Iowa State University
Ames, IA 50011
First, though let me say that I appreciate the opportunity to participate in this Forum and I commend the Secretary for scheduling the event. The issue before the group is highly important to the agricultural sector and, ultimately, to consumers and is a complex one. It comes down to whether the Packers and Stockyards Act is being violated. Second, we should recognize the unique setting of this inquiry, not geographically but competitively. It was 110 years ago, July 2, that the Sherman Act became law. Although Congress was concerned about concentration in oil, steel, railroads and in several other areas, a major driving force behind the legislation was the 1888 report on competitive abuses in meat packing. The 1917 investigation by the Federal Trade Commission of the meat packing industry led directly to the consent decree in 1920 and the Packers and Stockyards Act of 1921. Moreover, the U.S. agriculture is now in the midst of the greatest, most far-reaching structural transformation of the past century. The transformation is characterized by the deadly combination of concentration (in input supply and output processing) and vertical integration, from the top down. The problem is much broader than anti-competitive practices in cattle slaughter.
The agricultural sector is more vulnerable than at any time in the modern era. Input suppliers and output processors seem bent on achieving unprecedented control over producers and over the production processes. One casualty, and a prominent one, is free, open and competitive markets.
In my view, competition is the genius of our economic system. Competition assures that economic growth (and per capita personal incomes) are maximized and that income is allocated fairly. It is incumbent upon all of us to work to maintain a high level of competition. Any practice which is destructive of competition should receive regulatory attention especially when the practice is carried on in the presence of high levels of concentration. We must make the markets work.
Breadth of the Act
Section 202 of the Packers and Stockyards Act provides broad authority to the regulator in proscribing any "unfair, unjustly discriminatory, or deceptive practice or device" or arrangements "to 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." That broad grant of authority is unprecedented.
It is important to note that Congress did not include efficiency as a criterion for intervention, nor did the Congress create a defense if practices benefit the packer. Therefore, it is irrelevant that certain practices benefit packers by fully utilizing capacity and thus maximizing packer profits. Moreover, the Congress, in this provision, unlike many regulatory provisions, did not couch the provision in terms of impact on consumers. Section 202 was clearly focused on harm to producers. Therefore, the question is whether captive supplies are reasonably expected to be "unfair, unjustly discriminatory, or deceptive." If the answer is yes, the Secretary has the authority to act.
Congress did not impose a requirement that the Secretary can act only if there is a showing of economic harm to producers. Section 202 was drafted to attack unfair, unjustly discriminatory, or deceptive practices in their incipiency. As with price fixing, a showing of actual harm is not required. As the courts have said, "the power to fix a reasonable price today is the power to fix an unreasonable price tomorrow." If a practice is "unfair, unjustly discriminatory or deceptive," it cannot be justified on the grounds that harm has not been proved.
Factors
The essential issue, therefore, is whether captive supplies are "discriminatory, or deceptive." Captive supplies foreclose access to markets by independent producers, contribute to thinness in markets which undercuts the market as a reliable allocator of resources and distributor of income and make possible manipulation of markets by packers in the presence of thinness of markets. On the face of it, captive supplies are discriminatory in effect. In my view, in light of the degree of concentration in meat packing today, captive supplies easily meet the test of being unjustly discriminatory. It is also reasonable to conclude that captive supplies are "unfair" to independent producers and that some features of captive supplies are "deceptive" in the operation and functioning of markets for cattle destined for slaughter. The negative effects of captive supplies that have been identified are consistent with common sense, economic theory and a respected body of empirical evidence. While the various research studies have been challenged on various bases, there is general agreement that increasing levels of concentration correlate with lower price levels.
The fact that there has been no judicial decision supporting the position that captive supplies are inherently anti-competitive begs the question. There is unlikely to be any litigation until the Secretary uses the authority in Section 202 to issue regulations specifically targeting captive supplies.
It is instructive to review the regulations which have been issued under Section 202. To date, so far as I can determine, regulations have not been subjected to empirical proof of negative effect on competition as a pre-condition to issuance of the regulations. The regulations issued by the Packers and Stockyards Administration contain extensive provisions, the violation of which constitute a violation of Section 202 including-
1. Proscribing a packer from having an ownership interest in, financing, or participating in the management or operation of a market agency selling livestock on a commission basis. 9 C.F.R. § 201.66.
2. Proscribing a packer or any officer, agent, or employee of a packer, or a person owning a substantial interest in a packer, from operating as a market agency purchasing livestock on a commission basis, or as a dealer or having an ownership interest in, financing, or participating in the management or operation of such a market agency or dealer. 9 C.F.R. § 201.67.
3. Requiring packers to conduct their livestock purchasing operations in competition with and independently of other buyers. 9 C.F.R. § 201.69.
4. Prohibiting a packer or an officer, agent or employee or person who owns a substantial interest in a packer from owning, financing or controlling a livestock custom feedlot. 9 C.F.R. § 201.70a.
The words "unfair, unjustly discriminatory, or deceptive practice or device," as used in Sections 202(a) and 312(a) of the Packers and Stockyards Act are not defined. Thus, according to the courts, "their meaning must be determined by the facts of each case within the purposes of the Packers and Stockyards Act." Capitol Packing Co. v. U.S., 350 F.2d 6776 (10th Cir. 1965). The courts look to the Secretary of Agriculture for insight into what is "unfair, unjustly discriminatory or deceptive."
Legislative history
The legislative history of the Act gives some insight into the breadth of the prohibition of practices intended by Congress. As Congressman Anderson of Minnesota, who was a member of the House Agriculture Committee and a prime sponsor of the bill, stated during the floor debates on the bill in the House of Representatives-
"Industry is progressive. The methods of industry and of 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".
"Now, I want to call attention to the fact that for the most part the bill does not deal with offenses essentially
criminal in character. It deals with offenses against good morals in business. That is the reason that the particular procedure adopted in this bill was adopted." 61 Cong. Rec. 1887 (1921).
The legislative history of the Packers and Stockyards Act squarely supports the assertion that Congress intended the Secretary to use the broad authority in Section 202 to proscribe packer practices that threaten free, open and competitive markets. As Rep. Jones of Texas observed in 1921-
"The producer must always sell in a market that he does not [email protected] only hope of securing a fair price lies in an open, competitive market." 61 Fed. Reg. 1861 (1921).
Results of litigation under the Act
It has been held that a practice which is violative of the Act does not become lawful merely because others engage in the same practice. Those who have engaged in a violative practice "must extricate themselves by purging their business methods of unfair, unjustly discriminatory and deceptive acts, and not by relying on the conduct or misconduct of others who may be equally guilty and who may find themselves in a similar [email protected]" Midwest Farmers, Inc. v. U.S. 64 F. Supp. 91, 97 (D. Minn. 1945).
Failure to compete. In a 1975 case, the Judicial Officer held that a packer had violated subsections (a) and (e) of Section 202 of the Act and Section 201.70 of the regulations by engaging in livestock purchasing practices which had the effect of restricting competition in the purchase of calves. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). The packer employed a person registered as a market agency and dealer to purchase calves. An official of the packer, who was in charge of livestock procurement, was at the markets at the time the purchases were made by the market agency-dealer. The Judicial Officer concluded that if the packer "had purchased its own calves, another regular and substantial buyer would have increased competition and would have added to the demand for the sale [email protected]" Id., at 984-85.
The Seventh Circuit Court of Appeals upheld a portion of an order of the Judicial Officer requiring a packer to cease and desist from an anti-competitive practice. In re Swift & Co., 20 Agric. Dec. 1120 (1961), aff'd sub nom. Swift & Co. v. U.S., 308 F.2d 849 (7th Cir. 1962). The packer entered into an agreement with a dealer under which the dealer would buy all the top grade hogs at a particular stockyard and would furnish to the packer whatever quantity of the top grade hogs the packer wanted at the same price at which the dealer purchased them plus trucking charges. Prior to this agreement, the buyer for the packer and the dealer competed for purchases of hogs at the market and that competition substantially increased the prices paid for top grade hogs. The court held that the "essential nature and the necessary result of this arrangement or practice was to eliminate competition." Id., 308 F.2d 853.
In a 1985 Eighth Circuit Court of Appeals case, an agreement between two registered dealers not to bid against each other at auctions for cows was an unfair practice violation. Farrow v. U.S.D.A., 760 F.2d 211 (8th Cir. 1985). The court held that there was no need to show actual damage to competition for an unfair practice to exist.
Under section 201.67 of the regulations issued under the Act, "[n]o packer, officer, agent, or employee of a packer or a person who owns a substantial interest in a packer, shall independently, or in combination with others, or through any corporate or other device, operate as a market agency purchasing livestock on a commission basis, or as a dealer, or have an ownership interest in, finance, or participate in the management or operation of any such market agency or dealer." The regulations also require each packer and dealer to "conduct his buying operations in competition with, and independently of, other packers and dealers similarly engaged." The Judicial Officer, in a 1975 case, held that section 202(a) of the Act and section 201.68 of the regulations were violated where a person registered as a market agency and dealer owned 50 percent of the stock of a packer, and where the market agency-dealer participated in the management or control of the packer. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). In another proceeding, the Judicial Officer held that the joint ownership of a dealer engaged in the cattle buying business and a packer was violative of the Act. In re Central Coast Meats, Inc., 33 Agric. Dec. 117 (1974). The Judicial Officer concluded that the practice of joint ownership and operation involved a restriction or lessening of competition. Id., 33 Agric. Dec. at 136-37. The Ninth Circuit Court of Appeals, however, reversed the decision and order of the Judicial Officer. Central Coast Meats, Inc. v. U.S.D.A., 541 F.2d 1325 (9th Cir. 1976). The court concluded that it is not a per se violation of Section 202(a) of the Act for a packer to act as a dealer. The court acknowledged that the packer and dealer operations were not conducted at all times as completely independent and competitive entities, it was the view of the court that "this in itself is not sufficient to constitute a violation of the Act under the circumstances presented here." The court held that the two entities each independently constituted a competitive force at the sales. The court stated, only after "considered balancing of the benefits and evils that their [joint owners] method of doing business may be shown to have presented to the producers" could it be said that it had been "shown that the consequences of the dual [email protected] likely to be injury to the producer of the sort the Act is designed to present" and that such an evaluation was not conducted by the Judicial Officer. Id., 541 F.2d 1327-1328. In a subsequent proceeding in which the respondents relied upon the court's opinion in that case, the Judicial Officer stated that "[t]he Court of Appeals divided two to one, and I have not changed my views as a result of that split decision. Accordingly, the views set forth in my opinion reflect the present policy of this Department." In re Sterling Colo. Beef Co., 35 Agric. Dec. 184 (1980).
In a 1980 case, a custom feedlot, held by the Judicial Officer to be subject to the Act as a dealer or market agency, owned approximately 22 percent of the stock of a packer and its president was an active member of the packer's board of directors and served for a period as chairman of the board. Customers for whom the feedlot fed cattle, frequently sold their cattle to that packer. The Judicial Officer held that this arrangement constituted a "conflict of interest involving the ownership and management of" the packer and custom feedlot. Noting that divestiture was not sought in the case, the Judicial Officer held that "it is appropriate to issue a cease and desist order in this respect only to minimize the likelihood of future violations resulting from the conflict of interest situation." In re Sterling Colo. Beef Co., 39 Agric. Dec. 184, 239.
Policy statements. The regulations contain a policy statement as to packers engaging in the business of custom feedlot operations. 9 C.F.R. § 203.18-
"(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) has sought to promote and maintain open and fair competition in the livestock and packing industries, and to prevent unfair or anticompetitive practices when they are found to exist. It is the opinion of the Administration that the ownership or operation of custom feedlots by packers presents problems which may, under some circumstances, result in violations of the Packers and Stockyards Act.
"(b) Packers contemplating entering into such arrangements with custom feedlots are encouraged to consult with the Administration prior to the commencement of such activities. Custom feedlots are not only places of production, but are also important marketing centers, and in connection with the operation of a custom feedlot, it is customary for the feedlot operator to assume responsibility for marketing fed livestock for the accounts of feedlot customers. When a custom feedlot is owned or operated by a packer, and when such packer purchases fed livestock from the feedlot, this method of operation potentially gives rise to a conflict of interest. In such situations, the packer's interest in the fed livestock as a buyer is in conflict with its obligations to feedlot customers to market their livestock to the customer's best advantage. Under these circumstances, the packer should take appropriate measures to eliminate any conflict of interest. At a minimum, such measures should insure:
"(1) That feedlot customers are fully advised of the common ties between the feedlot and the packer, and of their rights and options with respect to the marketing of their livestock;
"(2) That all feedlot customers are treated equally by the packer/custom feedlot in connection with the marketing of fed livestock; and
"(3) That marketing decisions rest solely with the feedlot customer unless otherwise expressly agreed.
"(c) Packer ownership or operation of custom feedlots may also give rise to competitive problems in some situations. Packers contemplating or engaging in the business of operating a custom feedlot should carefully review their operations to assure that no restriction or competition exists or is likely to occur.
"(d) The Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) does not consider the existence of packer/custom feedlot relationships, by itself, to constitute a violation of the Act. In the event it appears that a packer/custom feedlot arrangement gives rise to a violation of the Act, an investigation will be made on a case-by-case basis, and, where warranted, appropriate action will be taken."
Statement with respect to packers engaging in the business of livestock dealers or buying agencies. 9 C.F.R. § 203.19-
"(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs) has sought to prevent conflicts of interest and to maintain open and fair competition in the livestock and meat packing industries. The ownership or operation of livestock dealers or buying agencies by packers, under some circumstances, may result in violations of the Packers and Stockyards Act.
"(b) Traditionally, livestock dealers and buying agencies purchase livestock for resale or to fill orders for farmers, ranchers, producers, other livestock firms and packers. When a livestock dealer or buying agency is owned or operated by a packer, and when such packer is also buying livestock for its own operational requirements, there is a potential conflict of interest. Furthermore, the purchase and sale of livestock by meat packers may result in control of markets and prices which could adversely affect both livestock producers, competing packers, and consumers.
"(c) Arrangements between packers and dealers or buying agencies which do not normally create a conflict of interest or result in a restraint of competition include:
"(1) Operations utilizing different species or classes of livestock; (2) operations where the business activities are widely separated geographically; and (3) operations where tie-in purchases or sales are not involved. Packers contemplating engaging in the business of a livestock dealer or a buying agency are encouraged to consult with the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) prior to the commencement of such activities.
"(d) In the event a packer/dealer or a packer/buying agency arrangement appears to give rise to a violation of the Act, an investigation will be made on a case-by-case basis and, where warranted, appropriate action will be taken."
Other significant cases. Courts have found 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 practices by packers. 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).
In a 1999 case, IBP, Inc. v. Glickman, the plaintiff purchased cattle under a "Beef Marketing Agreement" which was proposed by a group of Kansas feedlots. Under the agreement, the plaintiff would make an initial bid on a pen of cattle. The initial bid was based on the mid-point between the highest purchase price reported by the U.S.D.A. in a given week in Kansas for at least 2,500 cattle and the highest price the plaintiff paid for the same number of cattle in Kansas during the week. This was called the "Kansas High Price." The feedlot could then accept or reject the bid. If the bid was rejected, then other cattle buyers could bid. But, as long as the plaintiff's initial bid was no less than 50 cents below the Kansas High Price, the plaintiff had a right of first refusal on the cattle. Thus, once other buyers had completed bidding, the feedlot had to offer the pen of cattle to the plaintiff at the highest bid price. If the plaintiff opted to exercise the right of first refusal, the feedlot could go back to the high bidder in an attempt to get a higher bid. But after all bidding was complete, the plaintiff could still get the cattle by matching the highest bid. The U.S.D.A. argued that the right of first refusal violated the Packers and Stockyards Act, which makes it unlawful for a packer to engage in "any unfair, unjustly discriminatory, or deceptive practice" or "make or give undue or unreasonable preference or advantage to any particular person or locality." The Judicial Officer had concluded that the plaintiff did not have to participate in bidding after its initial bid and could obtain a pen of cattle by matching, instead of exceeding, the highest bid. The appellate court disagreed and said the right of first refusal did not have the effect of suppressing or reducing competition. Indeed, the court said that the plaintiff paid a higher price for cattle under the agreement than for cattle bought in transactions with other feedlots. IBP, Inc. v. Glickman, 187 F.3d 974 (8th Cir. 1999).
Conclusion
The broad scope of the Packers and Stockyards Act and its legislative history are unique in U.S. regulatory law. The Congress clearly intended to empower the Secretary of Agriculture to take the necessary steps to counter the anti-competitive practices of meat packers, which even then, in 1921, were long-standing. Nearly 80 years have passed since enactment of the legislation. While the names of the players have changed during the period, the meat packing industry has continued to become ever more concentrated.
It is noted that the Act does not require actual damage to competition for an unfair practice to exist. Moreover, there is no defense to Section 202 on the grounds that benefits may flow to packers as a result of the practice. Indeed, there is no defense to Section 202 on the grounds that the practice might conceivably benefit consumers. Section 202 was designed to preserve free, open and competitive markets for the benefit of producers. In my considered view, packers should be prohibited from achieving captive supplies in a setting of high levels of concentration, as now exist in steer and heifer slaughter. This is a defensible and appropriate position to take regardless of how accomplished and regardless of contemporary evidence of competitive damage. It is an unfair practice and should be subject to regulation to eliminate the aspects of current procurement practices with specific regard to use of packer-fed cattle and forward contracts which violate the Packers and Stockyards Act. Regulations should eliminate the aspects of forward contracts which have a significant discriminatory effect or negative effect on competition. Moreover, issuance of the regulations should be followed by aggressive enforcement of the regulations. In a broader sense, what is at issue here is the deadly combination of concentration in processing coupled by vertical integration from the top down. Captive supplies, however, arranged, are a form of vertical integration. With the high levels of concentration existing, captive supplies and contract marketing contribute to a thin market which is easily manipulated by packers.
The outcome of this regulatory decision will help to determine whether producers are independent entrepreneurs or serfs. Congress clearly intended that the Packers and Stockyards Act be administered to prevent the loss of competition to the detriment of producers.
The practice of allowing captive supplies in light of the extremely high level of concentration in steer and heifer slaughter is indefensible in light of the clear focus of the Packers and Stockyards Act on producers.
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Suggested Incipiency Factors
(Section 202 of Packers and Stockyards Act)
The Secretary is under a duty to exercise the vast authorities under Section 202 reasonably. It is, I believe, helpful to focus on how to evaluate reasonableness. What are the factors? I would suggest five:
1.Concentration in the target sector-creates both the opportunity and the incentive to engage in anti-competitive practices.
2.Nature of the sector on the other side of the table-the beneficiary group, in this case producers-is it atomistic or is it concentrated?
3.What do we know about contemporaneous behavior in terms of economic analysis?
4.What is the history of competitive behavior by the target group?
5.What can we learn from analogous situations? Evidence of manipulation, long term.
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cheese (Mueller study)
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Board of Trade
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1933 Securities Act
We must made the markets work. It is in everyone's best interest that they work.
Question 1-
1.Common sense and economic theory plus a significant set of empirical observations.
2.Ownership of cattle contributes to thinness of the markets and enables packers to manipulate the thin markets. As spot markets become thinner, spot prices are less and less reflective of the forces of supply and demand. Schroeter and Azzam.
3.In the extreme, with all cattle owned, there would be no price, no market and no access to slaughter by independent producers.
4.Empirical evidence shows, I believe conclusively, that higher levels of captive supply result in lower price. As Schroeter and Azzam analysis found, "the average price in the region's spot market for cattle tends to be relatively low in weeks in which delivery of cattle from non-cash sources are relatively high, other things equal." Schroeter and Azzam, Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle 46 (Nov. 1999). The authors conclude that "the impact of non-cash procurement methods on price is reasonably substantial." Schroeter and Azzam point out that captive supplies lead to less active bidders in the market and, therefore, a lower price. Captive supplies remove bidders from the market and, therefore, the price is weaker.
5.There is no public policy defense to packer feeding of livestock.
Question 2-
1.All that a forward contract without a firm base price tied to a fixed dollar amount does is to assure shackle space for the producer. Packers use the fear of lack of access to shackle space to coerce producers into signing such contracts.
2.Such contracts contribute to thinness in the market, making it possible for packers to manipulate prices.
3.To increase aggressive bidding on all livestock, and to reduce the likelihood of market manipulation, all supplies should be traded on the open market with all players having access and all packers under pressure to be active bidders.
4.The incentive to depress prices is there.
5.Formula pricing can be done without moving away from competitive pricing; price can certainly be reflective of quality attributes.
Question 3-
1.A good indicator of manipulation of prices and control of prices is the degree of concentration in the market. The degree of concentration in steer and heifer slaughter is truly awesome.
2.The degree of regional dominance of a packer is another indication of the likelihood of price manipulation and price control.
Question 4-
1.Certainly history shows that any time there is a level of concentration comparable to what now exists in steer and heifer slaughter, there is a significant probability of anti-competitive practices.
2.Beating in the breast of every good capitalist is the heart of a monopolist.
3.The market is much thinner than would be the case if all acquisitions were through open, competitive transparent markets.
4.There is a substantial disparity in prices paid by producers for like quality livestock. Numerous producers, who are receiving premiums, have admitted that to me.
5.We're talking potential. That raises the question of incipiency, which is what Section 202 is all about.
Question 5-
1.Lack of openness and competition in markets, with the degree of concentration existing, depresses prices and profits. That means less economic buoyancy for rural communities.
2.Lower packer prices mean a lower price for feeder calves so reduced profits are experienced in rural areas where calves are produced.
3.A completely integrated controlled system would be likely to leave less of the consumer dollar in the producer'' hands.
4.Those who control the critical elements of the process tend to exact all they can. That critical element, now, is access to packers.
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