United States General Accounting Office GAO Report to Congressional Requesters April 1997 PACKERS AND STOCKYARDS PROGRAMS USDA’s Response to Studies on Concentration in the Livestock Industry GAO/RCED-97-100 United States GAO General Accounting Office Washington, D.C. 20548 Resources, Community, and Economic Development Division B-276420 April 23, 1997 The Honorable Jeff Bingaman The Honorable Kent Conrad The Honorable Byron L. Dorgan The Honorable Bob Kerrey The Honorable Paul Wellstone United States Senate The effects of concentration in the meatpacking industry have been a subject of concern since the turn of the century. At that time, five firms controlled 55 percent of the market. This concern eventually led to the passage of the Packers and Stockyards Act in 1921. Among other things, the 1921 act was intended to ensure fairness and competitiveness in the meatpacking industry and created the Packers and Stockyards Administration, now part of the Grain Inspection, Packers and Stockyards Administration (GIPSA)1 within the U.S. Department of Agriculture (USDA). The agency’s mission is to ensure fair business transactions, such as prompt and accurate payment, and to detect and prevent anticompetitive practices. In the latter case, the definition of market boundaries is important to GIPSA for analyzing the effects of concentration on prices and monitoring for anticompetitive behavior. In 1991,2 we reported that the industry had become more concentrated than it was in 1921—four firms controlled 70 percent of the meatpacking industry.3 As we reported, greater concentration may increase opportunities for buyers to use anticompetitive practices that could lower the prices paid to producers to below the level that would be set in a competitive market. We recommended that the Secretary of Agriculture direct GIPSA to determine a feasible and practical approach for monitoring the activity in regional livestock procurement markets4 to address the questions of anticompetitive behavior. While generally national in nature, the livestock procurement market is made up of many smaller, regional 1 For purposes of this report, we use GIPSA to refer to the Packers and Stockyards Administration. 2 Packers and Stockyards Administration: Oversight of Livestock Market Competitiveness Needs to Be Enhanced (GAO/RCED-92-36, Oct. 16, 1991). 3 This level of control refers to steer and heifer cattle that were grass-fed as well as grain-fed. The practice of fattening cattle with grain did not become widespread until the 1960s. USDA began collecting data on “fed cattle” in 1969. (App. I presents an overview of the livestock and meatpacking industries.) 4 In this report, the livestock procurement market refers to the purchase of grain-fed cattle for slaughter and processing. Page 1 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 markets. However, at the time of our 1991 report, relevant market boundaries for monitoring anticompetitive behavior had not been defined. In response to our report and congressional concerns about the increased concentration in the livestock procurement market, the Congress directed USDA to study this issue. As a result, GIPSA commissioned seven research projects that resulted in a report entitled Concentration in the Red Meat Packing Industry, issued in February 1996. Since our 1991 report, the industry has become even more concentrated; four firms controlled 81 percent of the meatpacking industry in 1995.5 Consequently, you asked that we (1) determine whether USDA’s report on concentration in the red-meatpacking industry identified the geographic boundaries of livestock procurement markets; (2) determine whether the report provided guidance on how to monitor these markets; (3) determine whether, as a result of this report, USDA had identified additional data that GIPSA could use to enhance its monitoring of these markets; and (4) describe what actions GIPSA plans to take as a result of this report. You also asked us to describe the views of the Department of Justice on the usefulness of GIPSA’s data for conducting its regulatory responsibilities in the livestock procurement markets. The February 1996 concentration report commissioned by the Grain Results in Brief Inspection, Packers and Stockyards Administration indicated that the relevant boundaries of the livestock procurement market are not fixed. Instead, these boundaries vary, depending on the economic issue being considered. For example, when examining the basis for pricing fed cattle, the relevant market boundaries are generally national; when a proposed merger is being evaluated, the relevant market boundaries are generally regional. While the concentration report did not provide specific guidance for monitoring markets, it did provide extensive data that can serve as a baseline for future monitoring and analysis. These data, which are for nearly all fed-cattle slaughter plants nationwide, include, among other things, the types and volume of livestock slaughtered and the prices paid to producers. Most of these data existed previously only in aggregate form. 5 This figure refers to concentration among firms that slaughter steer and heifer cattle. The slaughter of steer and heifer cattle represents nearly 81 percent of all cattle slaughtered for beef consumption. In 1995, the four-firm concentration level for all types of cattle—steer, heifer, cow, and bull—slaughtered was 67 percent. Page 2 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 The concentration report did not identify the specific data that need to be collected for better market monitoring. However, an advisory committee, convened by the Secretary of Agriculture and established prior to the publication of the concentration report, used the report’s results to examine market concentration. In its own report, issued in June 1996, this committee recommended that additional data—such as information on the number of cattle contracted for future sale—be routinely collected on various elements of the livestock procurement market to provide a better understanding of how that market functions. The U.S. Department of Agriculture has begun to collect and disseminate these data. The concentration report was considered by the advisory committee in its recommendation that the Department review its surveillance, investigation, and enforcement practices within the livestock procurement market. As a result of this review, the Department has begun reallocating its resources to place more emphasis on detecting anticompetitive violations. Because the Grain Inspection, Packers and Stockyards Administration’s resources are limited, this shift in focus will come at the expense of its efforts to carry out other responsibilities, such as ensuring that financial transactions among market participants are conducted fairly and honestly. Department of Justice officials told us that Justice collects its own data when investigating issues that are under its regulatory purview. According to these officials, the Department of Agriculture regularly shares information with them on an informal basis. This information is useful to Justice as a background for its own investigations. Livestock production can be divided into four principal stages according Background to the growth phase of the cattle: (1) cow-calf production, (2) stocker feeding, (3) cattle feeding, and (4) fed-cattle slaughter, or beef packing. Cow-calf “operators” breed cows for the production and sale of young steers and heifers. Stocker/feeders nurture calves until they mature. Cattle-feeding operators then take over the primary feeding (or fattening) of the cattle for several months until they are ready for slaughter. Highly specialized commercial feedlots with capacities of more than a thousand head of cattle per year handle most of the cattle feeding. Feedlot operators may either purchase the cattle they feed or custom-feed the cattle for others, such as cow-calf producers or beef-packing firms. Since the 1940s and 1950s, commercial cattle feeding has evolved rapidly as producers have sought to increase the output of their herds by increasing the weight Page 3 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 of the cattle. At the end of the feeding stage, the cattle owners sell the fed cattle either directly to a beef-packing firm or to an agent acting on behalf of the beef-packing firm. Most of the large firms both slaughter the fed cattle and cut the carcasses into major sections, which are then packaged into large boxes for shipping—known as boxed beef. For the livestock procurement market, GIPSA has two primary responsibilities: (1) to monitor for anticompetitive practices, such as colluding to manipulate prices, and (2) to ensure that sales transactions are conducted fairly and honestly. GIPSA’s authority is limited to individuals and firms that buy and sell livestock and live poultry as well as those processing or marketing meat and meat products. GIPSA’s authority generally does not extend to retailers or to firms that market poultry products. Two other federal agencies are also involved in regulating the meatpacking industry. Justice’s Antitrust Division is responsible for reviewing all proposed mergers and acquisitions in the meatpacking industry. Unlike GIPSA, which has significant regulatory authority, Justice does not enforce the Packers and Stockyards Act, nor does it enforce potential violations of that act. GIPSA may, however, refer certain activity to Justice’s Antitrust Division for possible enforcement under the antitrust laws if it appears that a violation has occurred. According to officials at GIPSA, several suspected antitrust violations are forwarded to Justice each year. The Federal Trade Commission (FTC) also has enforcement authority for antitrust laws as they apply to the livestock industry. However, according to FTC officials, the Commission’s jurisdiction is limited to the retail segment of the meat industry in most situations. While both FTC and Justice are responsible for reviewing mergers, Justice has taken the lead on livestock mergers in recent years. According to officials at both agencies, this situation is a result of the fact that Justice has more experience and institutional knowledge on livestock issues. FTC maintains a cooperative working relationship with USDA through a liaison agreement, dating back to 1963, that is intended to resolve any jurisdictional questions between the two agencies. FTC officials stated, however, that there is very little need for the sharing of information between USDA and FTC. In describing concentration in the meatpacking industry, we concluded in our 1991 report that the industry had become more concentrated—four firms controlled 70 percent of the fed-cattle market—than it was when the Page 4 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 Packers and Stockyards Act was enacted. We concluded that GIPSA had not (1) adequately modified its monitoring process to keep pace with the changes in the industry and (2) defined regional livestock procurement markets, which in turn hindered its ability to monitor those markets for anticompetitive behavior. In response to our report and to congressional concerns about the increased concentration in the livestock procurement market, the Congress appropriated funds to USDA for further study of this issue. To respond to the Congress’s directive, GIPSA commissioned seven research projects; six were contracted out to teams of researchers, while USDA’s Economic Research Service conducted the seventh. The projects selected address concerns identified by the Congress as well as topics identified in our 1991 report. One of these projects examined livestock procurement markets within the continental United States. This project consisted of three separate studies. Our work focuses on the information found in these three studies—each seeking to define relevant markets for livestock procurement. In addition to the work conducted at the Congress’s direction, several weeks before the concentration report was made public, the Secretary of Agriculture announced the formation of an Advisory Committee on Agricultural Concentration. While the committee was charged with investigating concentration in virtually all segments of the agricultural economy, it focused its efforts on the meatpacking industry. The committee based its subsequent findings and recommendations on the concentration report commissioned by GIPSA, information from trade associations and other industry experts, and the advice of farmers and others who testified in a public hearing. This committee’s findings and recommendations were summarized in a June 1996 report to the Secretary of Agriculture.6 The three studies contained in the GIPSA-commissioned concentration Studies Indicated That report that attempt to define livestock procurement markets did not Relevant Market explicitly state whether geographic boundaries for the markets were Boundaries Differ distinctly regional or national in nature. Nevertheless, the economists we spoke with generally agreed that these studies provided new insights into Depending on the the nature of market boundaries. In particular, the studies showed that Issues Analyzed boundaries are not fixed and that their precise delineation varies 6 Concentration in Agriculture: A Report of the USDA Advisory Committee on Agricultural Concentration (June 1996). Page 5 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 depending upon the aspect of the market under analysis. For example, these economists told us that when monitoring pricing information for potential anticompetitive behavior, it may be essential to examine the data presented on a national basis because the study results indicate that the prices paid for livestock are integrated nationwide. In other cases, such as assessing the impact of a proposed merger, more specific data from the regions affected by the potential merger may be more appropriate. The three studies did not provide specific guidance to GIPSA on monitoring Studies Provided markets. However, they did provide extensive data that can serve as a Baseline Information baseline for future monitoring and analysis. These data, which cover for Future Monitoring nearly all fed-cattle slaughter plants nationwide, include, among other things, the types and volume of livestock slaughtered and the prices paid to producers. According to GIPSA officials, these data are not standardized among packing plants and are voluminous. As a result, routinely collecting such data would be extremely resource-intensive and costly to both GIPSA and meatpackers. GIPSA officials told us that while the meatpacking firms voluntarily supplied the data for the concentration report, they would be less willing to do so on a regular basis. Most of these data existed previously only in aggregate form. The three studies did not identify the specific data that need to be USDA Has Identified collected for better monitoring of the market. However, the Advisory Additional Market Committee on Agricultural Concentration recommended to the Secretary Data to Enhance of Agriculture, among other things, a policy to support and improve market information as a vital component of a competitive marketplace. GIPSA’s Monitoring Specifically, it recommended that USDA more frequently collect data on the and Provide volume and types of cattle committed for sale at future dates—known as forward contracting—within the livestock procurement market. These Information to Market data include information on the formula used to arrive at a Participants price—including any premiums or discounts—specified in the contract between the buyer and seller. Other data that the advisory committee recommended be collected include information on the volume of cattle exported and imported and a report showing the distribution of cattle for slaughter by grade and by yield. The advisory committee recommended that these data be made available to market participants to improve competition within the marketplace. (App. II contains further details on the recommendations and their current status.) Page 6 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 USDA has begun to implement the advisory committee’s recommendations. For example, USDA’s Agricultural Marketing Service (AMS) began collecting and reporting more comprehensive data on boxed beef in September 1996. The following month, AMS began collecting and reporting data on premiums and discounts, and partial data on forward contracts. In February 1997, AMS began collecting and reporting additional data—specifically, the regional distribution of cattle by grade and by yield. Even more data, such as information on the volume of cattle imported into the United States, require additional coordination with other USDA agencies. The procedures for collecting and reporting this information have only recently been worked out among the contributing agencies—reporting began on March 31, 1997. GIPSA officials stated that the new data being collected would be particularly useful in conducting detailed investigations of market competition. In addition, they said that these data could better inform market participants about activities within the livestock procurement market, thus creating a level playing field. They said that these aggregate data can be used to provide a snapshot of the livestock procurement market for a specific day or week. The chairman of the Secretary’s advisory committee said that the new data being collected and disseminated will help to ensure fair competition in the marketplace because all participants in the livestock procurement industry will have the same information. He added, however, that the information deemed most important by the committee—information on the profits made by individual packing firms and individual feedlots and the costs incurred by packers and feedlots—is not being collected by USDA. GIPSA officials said that these more detailed data are not publicly available and would be extremely difficult for USDA to report. Relying in part on the concentration report, the advisory committee GIPSA Plans to Place recommended that the Secretary of Agriculture review GIPSA’s current Greater Emphasis on practices to enforce the Packers and Stockyards Act. At the request of the Monitoring for Secretary of Agriculture, USDA’s Office of the Inspector General (OIG) recently completed a review of GIPSA’s surveillance, investigation, and Anticompetitive enforcement practices.7 As a result of this review, GIPSA has begun drafting Activities plans to restructure its organization within the constraints of its current resources. At the time we completed our report, GIPSA had under way four 7 Grain Inspection, Packers and Stockyards Administration: Evaluation of Agency Efforts to Monitor and Investigate Anticompetitive Practices in the Meatpacking Industry (Evaluation Report No. 30801-0001-Ch, Feb. 1997). Page 7 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 intensive regional investigations to monitor for potential anticompetitive practices and a fifth one planned for later in the year. However, GIPSA officials told us that this change in focus has curtailed the agency’s efforts to ensure that sales transactions are conducted fairly and honestly. As a result, they said, sellers would receive less financial protection. The OIG review concluded that GIPSA’s resources are not adequate to ensure proper monitoring of the livestock procurement market for anticompetitive behavior. As a result of this review, several recommendations were made to GIPSA suggesting ways to allocate its current resources to better monitor the market for anticompetitive behavior. These included (1) reorganizing the agency’s national and regional offices, (2) integrating its economics staff into the investigations of anticompetitive practices, and (3) developing procedures to consult with USDA’s Office of General Counsel prior to initiating and during investigations of anticompetitive practices. Further recommendations included that the Congress consider transferring USDA’s responsibilities for performing anticompetitive practices investigations to the Department of Justice. GIPSA officials told us that with the exception of the recommendation to transfer investigative authority to Justice, the OIG recommendations provide GIPSA with a framework for how the agency should be structured and where the agency should direct its resources in the future. GIPSA officials have begun to formulate a plan that will address these recommendations. At the time of our review, GIPSA’s plans included a restructured organization that will emphasize monitoring for anticompetitive practices. This emphasis will come at the expense of GIPSA’s efforts to ensure fair business transactions within the livestock procurement market. As required under the Packers and Stockyards Act, these efforts include checking for compliance with the requirements for prompt payment and solvency, bonding, maintaining certain bank accounts known as custodial accounts, holding livestock purchases by meatpackers in trust to protect against their failure to pay, and accurately weighing livestock. GIPSA’s Packers and Stockyards Program currently has 180 employees.8 Most of these employees—135—are located in its 11 field offices. Until 1997, when GIPSA began focusing on intensive regional investigations, most of its 8 The proposed fiscal year 1998 budget gives GIPSA’s Packers and Stockyards programs an additional 30 staff. Page 8 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 employees monitored the livestock procurement market for potential unfair business transactions rather than for market competitiveness. During fiscal year 1996, GIPSA conducted 2,265 investigations of alleged unfair business practices and identified over 800 violations of the Packers and Stockyards Act. These included, for example, payment or price manipulation, the manipulation of the weights of livestock or carcasses, the manipulation of grades on carcasses, and commercial bribery. GIPSA requested formal actions, alleging deceptive and unfair practices, in 84 cases and issued 62 complaints to bring firms into compliance with the act. Administrative decisions and orders were issued in 49 cases; however, most violations were corrected on a voluntary basis, and several resulted in livestock and poultry producers’ receiving additional funds from purchasers for the sale of their product. In keeping with its new efforts to emphasize monitoring for anticompetitive practices, GIPSA has recently undertaken several initiatives to increase enforcement against potential anticompetitive activities among the nation’s largest meatpackers. In 1996, GIPSA completed a major investigation of fed-cattle procurement practices in Kansas. The investigation examined over 15,000 purchase transactions and 2 million head of cattle. According to GIPSA, the results did not indicate any anticompetitive practices. Rather, supply and demand factors appear to have been the primary causes of price declines during 1995. In addition, an investigation currently under way will examine over 37,000 purchase transactions in Texas and over 6 million head of cattle sold during 1995 and 1996. GIPSA also plans several additional investigations into market competition, including a third investigation of potential anticompetitive practices in the Nebraska beef procurement market later in the year. Department of Justice officials told us that they rely primarily on their own Department of Justice data, rather than on GIPSA’s data, to carry out most of their responsibilities Does Not Rely on for evaluating proposed mergers and the extent of anticompetitive GIPSA’s Data to Carry behavior. Justice and GIPSA officials told us that, on occasion, Justice requests and receives data from GIPSA as a starting point for its own Out Its Regulatory investigations. They stated that the data available from GIPSA, such as Responsibilities aggregate data on the number of cattle slaughtered each year, are useful in providing background information. However, they collect much more detailed data, such as proprietary data specific to the individual firms being examined, in conducting their investigations. Page 9 GAO/RCED-97-100 Concentration in the Livestock Industry B-276420 We provided USDA with a draft copy of this report for review and comment. Agency Comments We met with USDA officials, including the Administrator for GIPSA and the acting Deputy Administrator for Packers and Stockyards Programs, who agreed with the facts presented and provided technical comments that we incorporated into the report where appropriate. We performed our work from October 1996 through March 1997 in accordance with generally accepted government auditing standards. Appendix III contains detailed information on our objectives, scope, and methodology. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from the date of this letter. At that time, we will send copies of this report to the House and Senate Committees on Agriculture, other interested congressional committees, the Secretary of Agriculture, and other interested parties. We will also make copies available upon request. If you have any questions about this report, I can be reached at (202) 512-5138. Major contributors to this report are listed in appendix IV. Robert A. Robinson Director, Food and Agriculture Issues Page 10 GAO/RCED-97-100 Concentration in the Livestock Industry Page 11 GAO/RCED-97-100 Concentration in the Livestock Industry Contents Letter 1 Appendix I 14 The Livestock Industry 14 Overview of the Location of Livestock Procurement Markets Has Changed Over 16 Livestock and Time Livestock Procurement Practices Have Changed 16 Meatpacking USDA’s Role in Monitoring for Anticompetitive Practices in the 17 Industries Livestock Industry Appendix II 20 USDA’s Actions Taken in Response to Advisory Committee’s Recommendations on Improvements to Fed-Cattle Data Appendix III 23 Objectives, Scope, and Methodology Appendix IV 25 Major Contributors to This Report Figures Figure I.1: Stages of Livestock Production and Marketing 15 Channels Figure I.2: Concentration in the Cattle Slaughter Industry Since 18 1910 Page 12 GAO/RCED-97-100 Concentration in the Livestock Industry Contents Abbreviations AMS Agricultural Marketing Service CFTC Commodity Futures Trading Commission CME Chicago Mercantile Exchange FTC Federal Trade Commission GIPSA Grain Inspection, Packers and Stockyards Administration OIG Office of the Inspector General P&SA Packers and Stockyards Administration USDA U.S. Department of Agriculture Page 13 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries This appendix describes changes in the livestock and meatpacking industries and concerns about concentration in the red-meatpacking industry. Livestock production consists of four stages—breeding, stocker/feeding, The Livestock feeding (or fattening), and slaughtering (packing). Livestock may be Industry marketed before slaughter through a variety of channels. Breeders/producers (also known as cow/calf producers) may sell to stocker/feeders where the calves mature before they are sold to feeding operations (feedlots) that fatten the cattle for slaughter; in turn, feedlots may sell directly to packers; breeders who fatten their livestock may also sell their animals directly to packers. In addition, individuals referred to as market agencies and livestock dealers may serve as intermediaries in the marketing of livestock between the breeding, feeding, and slaughtering stages. Market agencies, which chiefly include public auction facilities that buy and sell livestock on a commission basis, and livestock dealers may purchase animals from either breeders or feeding operations. Market agencies and dealers may also buy and sell livestock among themselves prior to the eventual sale. Figure I.1 illustrates the livestock production stages and various marketing channels. Page 14 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries Figure I.1: Stages of Livestock Production and Marketing Channels General Fed-Cattle Marketing Cow/calf Feedlots producers Stocker/ fatten with Meatpackers Retailers sell breed feeders raise grain slaughter to consumers Livestock dealers/ marketing agencies/ public auctions buy and sell Producer Fed-Cattle Marketing Cow/calf producers breed Retailers sell Meatpackers and fatten with grain to consumers slaughter Livestock dealers/ marketing agencies/ public auctions buy and sell Meatpacker Fed-Cattle Marketing Cow/calf producers Stocker/ Meatpackers fatten with Retailers sell breed feeders raise grain and slaughter to consumers Livestock dealers/ marketing agencies/ public auctions buy and sell Page 15 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries The meatpacking industry in the United States has evolved over the last Location of Livestock 150 years in response to technological changes—moving from small, local Procurement Markets butchers to central terminal stockyards to slaughterhouses located far Has Changed Over from the nation’s urban areas. Prior to the 1880s, the meatpacking industry primarily slaughtered pork because beef tended to spoil before it could be Time transported to consumers and retailers, even with the advent of the railroad. As a result, packing houses were situated close to consumers in small towns and cities throughout the eastern United States. With the advent of the refrigerated railcar, cattle carcasses could be slaughtered centrally and shipped to the consumer. By the 1880s, meatpacking had shifted from the East to central terminal markets in the Midwest, most notably the Chicago Stockyards. At this time, concentration in the meatpacking industry first gained national attention. Around World War II, improvements in the trucking industry, the creation of a national highway system, and the widespread use of the radio made central terminal markets obsolete. The truck and the paved highway made decentralization of the handling of carcass meat physically possible, and the increased use of the radio made that decentralization economically feasible by widely disseminating market news. In step with this decentralization, USDA expanded its news reporting system, using the press, the telegraph, the telephone, the radio, and most recently, the Internet. By 1970, the Chicago Stockyards had closed and slaughterhouses had relocated near the feedlots in the western High Plains. In obtaining fed cattle for slaughter, packers choose among several Livestock alternative methods of procurement and pricing. The most common Procurement methods used are buying cattle on the open or spot (cash) market; Practices Have establishing marketing agreements—that is, long-term purchasing agreements in which the packer agrees to purchase a specified number of Changed cattle in a specified time period; forward contracting with individual feedlots; and buying directly from cow/calf operators and putting the cattle in packer-owned feedlots. The most common pricing methods are pricing based on the animal’s live weight; pricing based on the animal’s carcass weight; and formula pricing based on the packer’s weekly averaged prices paid, or on an average of two or more publicized price reports. Forward contracting and futures trading began in the mid- to late 1960s by the Chicago Mercantile Exchange (CME). Futures contracts on live cattle provide a way for producers to hedge their production and feeding Page 16 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries operations and thereby remove some of the price uncertainty that normally exists. Historically, futures markets have been used by dealers and processors rather than farmers. These markets typically have been used to provide price protection on purchases of products for shipment, storage, or processing. They offer a way of removing much of the uncertainty resulting from price changes during production—the feeding period for cattle. The decentralization of the cattle procurement market required the standardization of grading and weighing and caused the centralization, or nationalization, of selling and buying over the telephone. It required the standardization of grades so that buyers and sellers could accurately describe the lots of cattle. It also required the centralization of price and demand and supply information, since it is the supply and demand over the country that determines the price. Competition in the livestock procurement market has been a source of USDA’s Role in public concern since it became technologically viable to transport cattle Monitoring for across the country. Figure I.2 depicts the rise of concentration in the Anticompetitive red-meatpacking industry since the turn of the century. Practices in the Livestock Industry Page 17 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries Figure I.2: Concentration in the Cattle Slaughter Industry Since 1910 100 Percentage of market controlled by the four largest packers 81 80 72 67 59 60 49 48 43 38 39 40 36 29 28 24 22 20 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 1995 Cattle Fed cattle Notes: 1910 represents the percent controlled by the five largest meatpackers. “Fed cattle” are steers and heifers fattened with grain prior to slaughter—a practice that became widespread in the 1960s. “Cattle” include grass-fed and grain-fed cattle. USDA began collecting data on fed cattle 1969. As early as 1888, the federal government authorized an investigation into the business practices of the largest meatpacking firms, which were accused of colluding to (1) fix beef prices to consumers and (2) apportion territories for livestock purchases and meat sales. The results of the investigation were partly responsible for the enactment of the Sherman Antitrust Act of 1890, which made any such agreements or combination in restraint of trade illegal. To circumvent the Sherman Antitrust Act, several packers formed a nationwide holding company in 1903—the “Beef Trust”—that expanded their interests to affiliated businesses, such as those engaged in transporting and retailing meat, groceries, and livestock by-products. Further investigations ensued, culminating in the passage of the Packers and Stockyards Act of 1921. Page 18 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix I Overview of the Livestock and Meatpacking Industries The Packers and Stockyards Act was enacted to ensure fairness and competitiveness in the livestock, meatpacking, and poultry industries by preventing fraudulent, discriminatory, or monopolistic practices. Although antitrust laws, including the Sherman Antitrust Act, already prohibited monopolistic practices, the Congress provided the Secretary of Agriculture with the authority to more closely regulate the livestock and meatpacking industries. The Packers and Stockyards Act has been amended several times since 1921 in an effort to enhance the Packers and Stockyards Administration’s (P&SA) ability to regulate the changing structure and nature of these industries. For example, amendments increased the agency’s authority to protect livestock producers financially by requiring that buyers pay promptly and that they be adequately bonded. In 1994, P&SA was merged with the Federal Grain Inspection Service to form the Grain Inspection, Packers and Stockyards Administration (GIPSA). Packers and Stockyards programs within GIPSA have an annual budget of over $12 million and a staff of approximately 180 full-time employees. Page 19 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix II USDA’s Actions Taken in Response to Advisory Committee’s Recommendations on Improvements to Fed-Cattle Data Frequency of Agency Geographic basis Recommended action Report issued/action taken report responsible of report Forward contracting Improve forward-contracting price New report, Forward Contract Weekly AMS National reporting to include formula trading Slaughter Cattle Summary, first information collected for regional issued in October 1996. Includes markets. price information on cattle traded on the basis of the futures market. Provide timely, accurate information New report, Forward Contract Weekly AMS National on the numbers (volume) of Slaughter Cattle Summary, first forward-contracted cattle committed issued in October 1996. Includes for delivery in all out months. information on the volume of cattle traded on the futures market. Provide timely, accurate information AMS has stated that it cannot collect on all captive supplies committed for this information from packers and delivery at the start of each week to suggests using Forward Contract assist producers in estimating Slaughter Cattle Summary instead. demand. Encourage the development of a The Chicago Mercantile Exchange 2 times daily CFTC/CME National close-trimmed boxed beef futures (CME) has submitted a proposal for (proposed) (proposed) contract as an additional means of a Boneless Beef Futures Contract price discovery. report to the Commodity Futures Trading Commission (CFTC ) for approval, with planned issuance date of June 1997. Premiums and discounts Improve premiums and discounts New report, National Carcass Weekly AMS National price reporting to reflect quality Premiums and Discounts for factors based on carcass merit. Slaughter Steers and Heifers, first issued in October 1996. Includes quality factors on yield grade, weight discounts, and dark cutters. Develop a standardized list of New report, National Carcass Weekly AMS National premium or discount categories for Premiums and Discounts for carcass merit purchasing and an Slaughter Steers and Heifers, first additional list of premium or discount issued in October 1996. Includes categories based on marketing range as well as averages for agreements and forward contracts. premium/discount categories for Consider reporting range as well as livestock. AMS has stated that it averages for each appropriate cannot standardize because of premium/discount category for variations in quality, nor can it report livestock. on the additional lists of marketing agreements or contracts. There is no standard marketing agreement or contract. (continued) Page 20 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix II USDA’s Actions Taken in Response to Advisory Committee’s Recommendations on Improvements to Fed-Cattle Data Frequency of Agency Geographic basis Recommended action Report issued/action taken report responsible of report Create a computerized value matrix AMS states that it cannot develop a grid for pricing to help producers value matrix because the base price compare price bids among packers is different for each feedlot. in different geographic regions. Suggests using National Carcass Premiums and Discounts for Slaughter Steers and Heifers. Cash market Provide timely, accurate information Direct Slaughter Cattle Report 1-3 times daily AMS Regional/ state on the number of cattle purchased in revised by AMS in October 1996 by the cash market on a daily basis. expanding their collection and reporting efforts to include additional packers. Improve reporting of the numbers New report, National Summary of Weekly AMS National and regional and prices of cattle slaughtered on a Meats Graded, first issued in daily basis to better reflect actual February 1997. Provides grading grades. percentages of cattle slaughtered by quality and yield. Increase volume of boxed beef USDA Central U.S. Boxed Beef 1-2 times daily AMS National reporting beyond the current 36% of Report revised September 1996 to total steer and heifer boxed beef include 45% of boxed beef volume, reported by AMS in 1995. Include extended delivery period to 15 days. reporting of forward sales beyond Includes information on branded the 10-day delivery period already products and sales of less than reported, branded products, sales car-lot value. AMS stated that it delivered as price basis to a futures cannot obtain information on contract, sales of less than car-lot formulated sales or price basis to volume, and formulated sales. futures contracts. Report differential for USDA Prime AMS has stated that these data are and upper two-thirds of USDA Choice not obtainable from packers because much of the high-quality product goes to export and exporters are unwilling to share proprietary information. In addition, AMS states that Prime represents less than 2 percent of cattle carcasses in a given week. Exports and imports Provide timely, accurate information AMS has stated that it cannot collect at the start of each week on the this information from packers. prices and volume of Canadian or Mexican cattle contracted for delivery for that week. Provide broad access to current USDA is in the process of export sales data on packer meat determining if such a report is exports on a weekly basis. feasible given the current available data. (continued) Page 21 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix II USDA’s Actions Taken in Response to Advisory Committee’s Recommendations on Improvements to Fed-Cattle Data Frequency of Agency Geographic basis Recommended action Report issued/action taken report responsible of report Improve timeliness and accuracy of Foreign Agricultural Service Weekly Foreign Global information on exports of meat and developed report to provide (proposed) Agricultural (proposed) products thereof, similar to the daily information on export commitments Service reports on grain export sales. of meat and products thereof. The agency submitted proposal to Secretary of Agriculture for approval. USDA should report on price and Report on the volume of imports and Weekly AMS/Animal National volume of imports and exports of exports of livestock first issued (proposed) and Plant (proposed) livestock. March 31, 1997. AMS has stated that Health it cannot report on prices. Inspection Service Other USDA should report on USDA is issuing a request for No report USDA line-of-business profits for packers proposal for a research project on planned and feedyards. the implications of collecting line-of-business cost and profit data. USDA should develop better retail Economic Research Service stated Monthly Economic National price reporting in order to more that it is working with Bureau of (proposed) Research (proposed) accurately reflect the farm-to-retail Labor Statistics to develop an Service/Bureau price spread. average retail price of meat based of Labor on retail sales weight and plans to Statistics include the new data in its Livestock, Dairy, and Poultry Monthly report around January 1998. Page 22 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix III Objectives, Scope, and Methodology On October 3, 1996, five Senators requested that we follow up on a recommendation we made in a 1991 report.9 After discussions with the requesters’ offices, we agreed to (1) determine whether the U.S. Department of Agriculture’s (USDA) February 1996 report on concentration in the red-meatpacking industry identified the geographic boundaries of livestock procurement markets; (2) determine whether the report provided guidance on how to monitor these markets; (3) determine whether, as a result of this report, USDA has identified additional data that GIPSA could use to enhance its monitoring of these markets; and (4) describe what actions GIPSA plans to take as a result of this report. We also agreed to describe the views of the Department of Justice on the usefulness of GIPSA’s data in carrying out its regulatory responsibilities in the livestock procurement markets. To respond to this request, we met with staff from GIPSA to obtain an overall perspective on the steps that agency has taken to respond to our 1991 recommendation. We reviewed the congressionally requested report entitled Concentration in the Red Meat Packing Industry as well as the report prepared by the Secretary of Agriculture’s Advisory Committee on Concentration in Agriculture. In addition, we met with economists from USDA’s Economic Research Service, the Commodity Futures Trading Commission, and the National Cattleman’s Beef Association. We also met with representatives from the Department of Justice’s Antitrust Division and the Federal Trade Commission. Finally, we interviewed the authors of the three studies on regional market definition and seven of the reviewers from the Interagency Working group charged with providing technical support and comments to USDA on those studies. To address the first and second objectives, we reviewed the three studies from the Concentration in the Red Meat Packing Industry report that were to define the regional cattle procurement markets in order to determine if they were conclusive on the delineation of market boundaries and if they provided any guidance to GIPSA for monitoring. We also met with GIPSA officials to obtain their interpretations of the studies’ results. In addition, we reviewed written comments provided to GIPSA by members of a committee formed to review the objective, methodology, and results of all the studies contained in report. Finally, we interviewed the authors of the three studies as well as seven of the reviewers. 9 Packers and Stockyards Administration: Oversight of Livestock Market Competitiveness Needs to Be Enhanced (GAO/RCED-92-36, Oct. 16, 1991). Page 23 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix III Objectives, Scope, and Methodology To determine whether USDA has identified additional data that GIPSA could use to enhance its monitoring of these markets, we reviewed the report prepared by the Secretary of Agriculture’s Advisory Committee on Concentration in Agriculture to identify recommended data. In addition, we met with representatives of the response team—including USDA’s Chief Economist and Deputy Assistant Secretary for Marketing and Regulatory Programs—established by the Secretary to implement the recommendations of the advisory committee. We also met with officials from USDA’s Agricultural Marketing Service, National Agricultural Statistical Service, and Economic Research Service to obtain details on the types of data each of these organizations gathers and disseminates and to discuss new efforts to collect and report additional data on livestock procurement practices. Finally, we met with GIPSA officials to determine if and how these new data would be used in its monitoring of the livestock procurement industry. To describe what actions GIPSA plans to take as a result of this report, we met with GIPSA officials and members of the response team. In addition, we met with staff from USDA’s Office of the Inspector General to discuss that office’s recent review of GIPSA’s investigative, surveillance, and enforcement activities. Finally, to describe the views of Department of Justice officials on the usefulness of GIPSA’s data in carrying out Justice’s regulatory responsibilities in the livestock procurement markets, we interviewed staff from Justice’s Antitrust Division. In addition, we met with an attorney from USDA’s Office of General Counsel to obtain information on how cases are coordinated between USDA and Justice. We also met with officials from the Federal Trade Commission to discuss how they coordinate data and antitrust enforcement activities with Justice and USDA. Page 24 GAO/RCED-97-100 Concentration in the Livestock Industry Appendix IV Major Contributors to This Report Jerilynn B. Hoy, Assistant Director Tracy Kelly Solheim, Project Leader Mary C. Kenney Carol Herrnstadt Shulman Michelle Knox-Zaloom (150071) Page 25 GAO/RCED-97-100 Concentration in the Livestock Industry Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. 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Packers and Stockyards Programs: USDA's Response to Studies on Concentration in the Livestock Industry
Published by the Government Accountability Office on 1997-04-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)