Washington, D.C. – U.S. Senator Mike Enzi, R-Wyo., introduced legislation aimed at ridding the livestock industry of meat packer pricing schemes that take advantage of hardworking ranchers.
Enzi's Captive Supply Bill would amend the Packers and Stockyards Act to reform livestock formula price contracts, require price contracts to contain a fixed base price and to be traded in open, public markets.
The legislation would also limit the size of contracts, but not the number of contracts that can be offered, to prevent small and medium sized livestock producers from being shut out of deals that contain thousands of livestock per contract.
Enzi said there are many benefits to the bill. It would give fair access to all producers to compete for contracts and would encourage public and electronic trading of greater numbers of livestock to provide for greater price transparency.
"All producers should have a fair chance to compete and an honest opportunity to get the highest price for their product," said Enzi. "This bill would help put livestock producers on an equal footing with packers in an open, honest forum where they seek to win contracts - no more secret deals for the packers."
Enzi's complete statement is included below.
Statement of Senator Michael B. Enzi on the Captive Supply Bill
Mr. President: I rise to introduce a bill that amends the Packers and Stockyards Act to reform livestock formula price contracts. This bill aims to rid the livestock industry of pricing schemes which take advantage of hardworking ranchers. It requires contracts to contain a fixed base price and to be traded in open, public markets.
Currently, four packers slaughter 80% of the cattle in the United States. They hold the supply of livestock captive in a number of ways.
Captive supply is when packers either own livestock or contract to purchase livestock more than two weeks before slaughter. Packers use captive supply to ensure their slaughter lines have consistent inventory. I won't argue that the original goal of captive supply makes good business sense. All businesses want to maintain a steady supply of inputs to ensure their production and control costs.
But packers go beyond good organization and business performance to market manipulation. With captive supply, packers can purposefully drive down the market price by refusing to buy in the open market. This deflates all livestock prices and limits the market access of producers that haven't aligned with specific packers.
Most of us haven't signed a formula price contract to sell a load of livestock, but many of us have sold a house. To illustrate the seriousness of the problem and make it easier to understand, let's explore how you would sell a house with a formula price contract in a market structured like the current livestock market.
It is March, and you know you will be selling your home in July. As a wise seller, you want to have a buyer for your home before that time. It turns out that other people don't really buy homes from each other anymore. In fact, four main companies have taken over 80% of all real estate transactions. You really have no choice but to deal with one of these companies.
One of them offers you a contract, stating you will receive $10,000 over the average price of what other, similar homes are selling for in your area in July. To manage your risk and ensure a buyer, you have just been forced to sign a contract that doesn't specify how much you will receive for your house.
That tingle of fear in the pit of your stomach matures to full-fledged panic when you close the deal in July. You see, the four real estate companies have been planning. They decide to pull away from the market. All the homes selling in July that aren't contracted to the companies flood the market and the price for homes in your area drops $12,000. By trying to manage your risk, you sold your home for $2,000 below average.
Livestock producers face the same problem. Last Friday, 86,450 head of cattle arrived at packing plants for slaughter. Forty-nine percent of those were bought by a formula price marketing arrangement. And now you know what that means. Just like the house example, the money that producers lose in formula price contracts adds up over the year.
When totaled, captive supply cost cattle producers an estimated average of $1 billion per year, according to a study by a Oregon State University professor. Another senator from Wyoming faced this same concentration of market power in the packing industry 80 years ago. Senator John B Kendrick said:
"[The packing industry] has been brought to such a high degree of concentration that it is dominated by a few men. The big packers, so called, stand between hundreds of thousands of producers on one hand and millions of consumers on the other. They have their fingers on the pulse of both the producing and consuming markets and are in such a position of strategic advantage they have unrestrained power to manipulate both markets to their own advantage and to the disadvantage of over 99% of the people of the country. Such power is too great, Mr. President, to repose in the hands of any men." This great power Senator Kendrick talked about resides in the hands of the packers once again.
My bill does two things to change this situation. It requires that livestock producers have a fixed base price in their contracts. It also puts these contracts up for bid in the open market where they belong.
Under this bill, livestock contracts must contain a fixed, base price on the day the contract is signed. This prevents packers from manipulating the base price at the point of sale. You may hear allegations that this bill ends quality-driven production, but this bill does not prevent adjustments to the base price for quality, grade or other factors outside packer control. It prevents packers from changing the base price based on factors that they do control. You also may hear that this bill ends traditional forward contracting. However, contracts that are based on the future's market are also exempted from the bill's requirements because the future's market is not controlled by packers.
My bill also limits the size of contracts to the equivalent of a load of livestock, meaning 40 cattle or 30 swine. It doesn't limit the number of contracts that can be offered by an individual. This key portion prevents small and medium-sized livestock producers from being shut out of deals that contain thousands of livestock per contract.
There are a number of benefits accompanying this bill. It effectively increases buyer competition without resorting to increasing buyer numbers through a messy packer breakup. It gives fair access to all producers to compete for contracts on a level playing field with big producers. This bill encourages public and electronic trading of greater numbers of livestock, providing greater price transparency. Simply put, this bill makes packers and livestock producers bid against each other to win a contract....no more secret deals. And we know the packers are engaging in secret deals.
Mr. President, I ask unanimous consent that this advertisement be included in the record. This ad was run on February 3, 2002 in the Sioux Falls, South Dakota newspaper, the Argus Leader, in response to an amendment banning packer ownership of livestock. It was paid for by Smithfield Foods, Inc., a large hog producing and pork processing company. The advertisement claims that the company wants Senator Johnson to understand the true impact of his ill-conceived amendment. I also supported this amendment along with fifty of my colleagues. The advertisement states:
"If the Johnson Amendment becomes law, Smithfield Foods will neither rebuild the Sioux Falls plant, or build a new plant in South Dakota, nor will we make any further investment in South Dakota, or for that matter in any other state whose public officials are hostile to our ongoing operations and our industry."
If the packers are dealing fairly, why would they resort to scare tactics like this? Does this mean my state will be black-listed too? Packer ownership of livestock is only a small portion of the packer captive supply problem. My bill would put an end to the rest of the packers' manipulative power.
I think it is important to remember why we are doing this. All producers should have a fair chance to compete against each other and an honest opportunity to get the highest price for their product. Cattle grown on family ranches in Wyoming help to feed the entire United States.
I value the small and medium-sized producers's ability to provide quality products for consumers. Big business may be more efficient, but it lacks the loyalty to a locale that our small producers have. We can see this in the advertisement I have just added to the record. The packers are threatening to leave an area that has been economically dependent upon them for over 90 years. That isn't loyalty to a community. This is the behavior of a bully.
In Wyoming, we must encourage our small producers to remain in business and compete. The loyalty to small communities that our small and medium-sized businesses have ensure that they will continue to enrich our main streets.
Some of my colleagues may be wondering why this bill is needed after we passed the amendment banning packer ownership of livestock. The ban on packer ownership of livestock would address one small section of captive supply, but it would not address the large number of contracts based on formula prices. Formula contracts provide the packers with monopolistic power over the livestock market.
I ask my colleagues to rid the livestock industry of pricing schemes which take advantage of hardworking ranchers. End the secret deals and the unfair contracts. Give your constituents the opportunity to compete on a level the playing field. Thank you, Mr. President. I yield the floor.
Enzi's Captive Supply Bill would amend the Packers and Stockyards Act to reform livestock formula price contracts, require price contracts to contain a fixed base price and to be traded in open, public markets.
The legislation would also limit the size of contracts, but not the number of contracts that can be offered, to prevent small and medium sized livestock producers from being shut out of deals that contain thousands of livestock per contract.
Enzi said there are many benefits to the bill. It would give fair access to all producers to compete for contracts and would encourage public and electronic trading of greater numbers of livestock to provide for greater price transparency.
"All producers should have a fair chance to compete and an honest opportunity to get the highest price for their product," said Enzi. "This bill would help put livestock producers on an equal footing with packers in an open, honest forum where they seek to win contracts - no more secret deals for the packers."
Enzi's complete statement is included below.
Statement of Senator Michael B. Enzi on the Captive Supply Bill
Mr. President: I rise to introduce a bill that amends the Packers and Stockyards Act to reform livestock formula price contracts. This bill aims to rid the livestock industry of pricing schemes which take advantage of hardworking ranchers. It requires contracts to contain a fixed base price and to be traded in open, public markets.
Currently, four packers slaughter 80% of the cattle in the United States. They hold the supply of livestock captive in a number of ways.
Captive supply is when packers either own livestock or contract to purchase livestock more than two weeks before slaughter. Packers use captive supply to ensure their slaughter lines have consistent inventory. I won't argue that the original goal of captive supply makes good business sense. All businesses want to maintain a steady supply of inputs to ensure their production and control costs.
But packers go beyond good organization and business performance to market manipulation. With captive supply, packers can purposefully drive down the market price by refusing to buy in the open market. This deflates all livestock prices and limits the market access of producers that haven't aligned with specific packers.
Most of us haven't signed a formula price contract to sell a load of livestock, but many of us have sold a house. To illustrate the seriousness of the problem and make it easier to understand, let's explore how you would sell a house with a formula price contract in a market structured like the current livestock market.
It is March, and you know you will be selling your home in July. As a wise seller, you want to have a buyer for your home before that time. It turns out that other people don't really buy homes from each other anymore. In fact, four main companies have taken over 80% of all real estate transactions. You really have no choice but to deal with one of these companies.
One of them offers you a contract, stating you will receive $10,000 over the average price of what other, similar homes are selling for in your area in July. To manage your risk and ensure a buyer, you have just been forced to sign a contract that doesn't specify how much you will receive for your house.
That tingle of fear in the pit of your stomach matures to full-fledged panic when you close the deal in July. You see, the four real estate companies have been planning. They decide to pull away from the market. All the homes selling in July that aren't contracted to the companies flood the market and the price for homes in your area drops $12,000. By trying to manage your risk, you sold your home for $2,000 below average.
Livestock producers face the same problem. Last Friday, 86,450 head of cattle arrived at packing plants for slaughter. Forty-nine percent of those were bought by a formula price marketing arrangement. And now you know what that means. Just like the house example, the money that producers lose in formula price contracts adds up over the year.
When totaled, captive supply cost cattle producers an estimated average of $1 billion per year, according to a study by a Oregon State University professor. Another senator from Wyoming faced this same concentration of market power in the packing industry 80 years ago. Senator John B Kendrick said:
"[The packing industry] has been brought to such a high degree of concentration that it is dominated by a few men. The big packers, so called, stand between hundreds of thousands of producers on one hand and millions of consumers on the other. They have their fingers on the pulse of both the producing and consuming markets and are in such a position of strategic advantage they have unrestrained power to manipulate both markets to their own advantage and to the disadvantage of over 99% of the people of the country. Such power is too great, Mr. President, to repose in the hands of any men." This great power Senator Kendrick talked about resides in the hands of the packers once again.
My bill does two things to change this situation. It requires that livestock producers have a fixed base price in their contracts. It also puts these contracts up for bid in the open market where they belong.
Under this bill, livestock contracts must contain a fixed, base price on the day the contract is signed. This prevents packers from manipulating the base price at the point of sale. You may hear allegations that this bill ends quality-driven production, but this bill does not prevent adjustments to the base price for quality, grade or other factors outside packer control. It prevents packers from changing the base price based on factors that they do control. You also may hear that this bill ends traditional forward contracting. However, contracts that are based on the future's market are also exempted from the bill's requirements because the future's market is not controlled by packers.
My bill also limits the size of contracts to the equivalent of a load of livestock, meaning 40 cattle or 30 swine. It doesn't limit the number of contracts that can be offered by an individual. This key portion prevents small and medium-sized livestock producers from being shut out of deals that contain thousands of livestock per contract.
There are a number of benefits accompanying this bill. It effectively increases buyer competition without resorting to increasing buyer numbers through a messy packer breakup. It gives fair access to all producers to compete for contracts on a level playing field with big producers. This bill encourages public and electronic trading of greater numbers of livestock, providing greater price transparency. Simply put, this bill makes packers and livestock producers bid against each other to win a contract....no more secret deals. And we know the packers are engaging in secret deals.
Mr. President, I ask unanimous consent that this advertisement be included in the record. This ad was run on February 3, 2002 in the Sioux Falls, South Dakota newspaper, the Argus Leader, in response to an amendment banning packer ownership of livestock. It was paid for by Smithfield Foods, Inc., a large hog producing and pork processing company. The advertisement claims that the company wants Senator Johnson to understand the true impact of his ill-conceived amendment. I also supported this amendment along with fifty of my colleagues. The advertisement states:
"If the Johnson Amendment becomes law, Smithfield Foods will neither rebuild the Sioux Falls plant, or build a new plant in South Dakota, nor will we make any further investment in South Dakota, or for that matter in any other state whose public officials are hostile to our ongoing operations and our industry."
If the packers are dealing fairly, why would they resort to scare tactics like this? Does this mean my state will be black-listed too? Packer ownership of livestock is only a small portion of the packer captive supply problem. My bill would put an end to the rest of the packers' manipulative power.
I think it is important to remember why we are doing this. All producers should have a fair chance to compete against each other and an honest opportunity to get the highest price for their product. Cattle grown on family ranches in Wyoming help to feed the entire United States.
I value the small and medium-sized producers's ability to provide quality products for consumers. Big business may be more efficient, but it lacks the loyalty to a locale that our small producers have. We can see this in the advertisement I have just added to the record. The packers are threatening to leave an area that has been economically dependent upon them for over 90 years. That isn't loyalty to a community. This is the behavior of a bully.
In Wyoming, we must encourage our small producers to remain in business and compete. The loyalty to small communities that our small and medium-sized businesses have ensure that they will continue to enrich our main streets.
Some of my colleagues may be wondering why this bill is needed after we passed the amendment banning packer ownership of livestock. The ban on packer ownership of livestock would address one small section of captive supply, but it would not address the large number of contracts based on formula prices. Formula contracts provide the packers with monopolistic power over the livestock market.
I ask my colleagues to rid the livestock industry of pricing schemes which take advantage of hardworking ranchers. End the secret deals and the unfair contracts. Give your constituents the opportunity to compete on a level the playing field. Thank you, Mr. President. I yield the floor.
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