I thought this would have been posted to Sanet by now, but as I
haven't seen it yet, I'm passing it along. Thought it would interest
many of you. Anita
------- Forwarded message follows -------
From: "Bahn, Henry - CSREES/SERD/HEP" <HBAHN@intranet.reeusda.gov>
To: "'email@example.com'" <firstname.lastname@example.org>
Subject: AG-MKTG> FW: OCM Kansas testimony
Date sent: Wed, 8 Mar 2000 17:18:12 -0500
From: Stumo & Milleron, LLC [mailto:email@example.com]
Sent: Sunday, March 05, 2000 7:16 PM
To: Michael Stumo
Subject: OCM Kansas testimony
This testimony was orally presented by the Organization for Competitive
Markets on March 1, 2000 to the Kansas Judiciary Committee regarding a
bill (Senate Bill 590) which would ban packer ownership of livestock as
well as formula contracting of livestock. This, and other full text
writings on competition policy in agriculture, is available online at
TESTIMONY PRESENTED TO THE
KANSAS SENATE JUDICIARY COMMITTEE
By Michael C. Stumo
General Counsel, Organization for Competitive Markets
March 1, 2000
Thank you Mr. Chairman, and members of the Judiciary Committee, for
allowing me to speak before you today. My name is Michael Stumo. I am
general counsel for the Organization for Competitive Markets, a
multi-disciplinary group of farmers, ranchers, academics, attorneys,
legislators and businessmen focusing on competition in the agricultural
marketplace. Competition policy in agriculture is all we do. I am also
a former hog and cattle buyer.
Competition policy is the body of trade regulation statutes at both the
federal and state levels. It primarily includes general antitrust law,
unfair trade practices statutes and various common law doctrines.
Antitrust law applies to all economic sectors including agriculture.
Unfair trade practices statutes are present at the federal level,
through the FTC Act, as well as in most states.
Many competition policy rules have been designed specifically for the
unique characteristics of production agriculture. Why is this true?
Most non-agricultural economic sectors have an industry structure
characterized by relatively few firms in the supply, processing and
retail sectors. The consumer side is the focus of protection because
consumers are less sophisticated, have little bargaining power and are
very high in both numbers and diversity.
In agriculture, the supply - or production - side is similar to the
consumer side in that farmers and ranchers have little bargaining power
relative to agribusiness and are very diverse and atomistic. Further,
the economic, cultural and social health of most rural communities is
largely tied to independent agriculture.
Because of this industry structure and its rural community importance,
we have federal competition policy rules applying directly to
agriculture, such as the Packers & Stockyards Act and the Agricultural
Fair Practices Act. Many large agricultural states provide basic rules
of competition including prohibiting packer ownership of livestock
production. The policy is to preserve independent farms and ranches as
the basic agricultural production unit. These states include, but are
not limited to, Iowa, Minnesota, Missouri, Nebraska, and South Dakota.
In fact, research clearly shows that when a given number of livestock in
a community are owned by many independent farms rather than two or three
corporate-style farms, the proportion of dollars and employment staying
in the community is immensely higher.
Vertical integration through captive supplies has become the major
market structure problem in Kansas and elsewhere. Captive supplies
include packer owned livestock and forward contracts between producers
and packers. At low levels, captive supply may be innocuous.
However, at the high levels of today, it has reached the point of being
a severe market structure problem. Captive supplies are at least 42% in
cattle and 60 to 70% in hogs. Combine this with a four firm
concentration ration of over 80% in cattle and 65% in hogs and the
competition picture is dim at best.
If Kansas joins other states by enacting Senate Bill 590, you will lay
the structural framework within which market competition can flourish.
It is a rational and essential step to promote market competition in
response to the current closure of markets which is occurring due to
captive supply. Consider the market closure trend through horizontal
concentration and vertical integration:
While farmers have always been the weakest party in bargaining with
packers, 20 or 30 years ago packers had to compete with several other
packers to fill their kill lines. But by 1990, competition was less
rigorous because tremendous horizontal concentration left three or four
big packers. After 1990 we add the effect of vertical integration, i.e.
packers avoiding open market negotiations through widespread captive
supply. When a packer owns a large percentage of its kill requirements,
the volume and vigorousness of the open market is significantly
reduced. When a packer controls yet another large percentage of its
kill requirements through forward contracts, the volume and vigorousness
of the open market is reduced still further.
Yet the remaining, meager open market is still the main price discovery
point. But because the open market is now thin, the ability of dominant
firms to affect it has increased exponentially. For example, if the
market is trending upwards and livestock are becoming more profitable
for producers, a packer can call in its captive supply, avoid the open
market and either stem the price rise or depress prices. Further,
because captive supply fills the kill lines for much of the week, the
time duration of actual open market bidding is reduced from all
day-every day, to less than a few hours every week.
Ag economists and others predict that the open market in hogs will be
history in five years. The closure of competition in the cattle markets
is careening in the same direction. Feedstuffs magazine advocates that
"American livestock agriculture must consolidate into about 50
production systems." How many will be in Kansas?
While the positive impact of Senate Bill 590 on market competition and
livestock producers would be great, its impact on agribusiness would be
minimal. The big packers are deriving most of their growth and earnings
from branded products and downstream integration, i.e. buying companies
closer to the consumer, rather than upstream integration, i.e. owning
and controlling livestock. With this bill, IBP, ConAgra, and
Cargill/Excel would not be limited in their current trend of buying food
service companies, branding foods, finding new markets globally, allying
with other companies, and buying in other sectors.
Industries other than agriculture have limits on vertical integration.
* Network broadcasters are limited in local television and radio station
* Many local telephone companies are limited from providing long
* In many states, auto companies are limited in controlling local auto
* Movie production companies cannot own movie theatres.
* The current Federal Trade Commission suit to block the BP-Amoco
acquisition of ARCO is based on concerns that it is anticompetitive for
BP-Amoco to own so much oil production, distribution, storage and
* Barnes & Noble, the nation's largest bookseller, was recently
prevented from upstream integration through a proposed buyout of the
nation's largest book distributor.
By joining other states in passing this bill, Kansas will have taken a
great stride to promote agricultural market competition and preserving
the decentralized structure of agriculture. This independent structure
has more dimensions of community benefit than any other industry. By
laying the ground rules for capitalism to flourish, agribusiness will be
affected little. However, independent agriculture and rural communities
will have a renewed chance to persevere.
Michael C. Stumo
Stumo & Milleron, LLC
95 Main Street
P.O. Box 761
Winsted, CT 06098
Organization for Competitive Markets
P.O. Box 6486
Lincoln, NE 68506
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