oversight

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)

                  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.



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                   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.



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             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



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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



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                         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).



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                        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.)




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                       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).



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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.



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                        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.




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                  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




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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
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