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Hearing of the Senate Judiciary Committee - Concentration in Agriculture and an Examination of the JBS Swift Acquisitions

Statement

By:
Date:
Location: Washington, DC

SEN. KOHL: (In progress) -- with little choice regarding who will buy their products and under what terms. This hearing, we will focus on just the latest example of that trend. JBS Swift plans to acquire two other meat packing firms, a transaction that would reduce the number of major competitors in this industry from five to down just to three.

In 1890, our nation's fundamental antitrust law, the Sherman Act was passed in large part as a response to the consolidation in the meat packing industry. We now appear to have gone full circle, as the JBS Swift acquisitions will leave the meat packing industry even more concentrated than it was a century ago. If approved, the JBS Swift acquisitions will increase the market share of the top four firms to 91 percent. JBS Swift will also acquire Five Rivers, the nation's largest feedlot, marketing 2 million cattle annually.

This threatens to give JBS Swift a very strong lever over the nation's cattle supply, while leaving independent ranchers with little bargaining power. By reducing the number of major buyers for ranchers' cattle from five down to three and in some regions even two, this deal will give the remaining beef processors enormous buying power. With little choice to whom to sell their cattle, ranchers will increasingly be left in a take-it-or-leave-it position.

We should be equally concerned with the effects on millions of beef consumers across the country in this era of rising food prices. Will only three major national sellers of beef be enough to ensure competitive market for supermarkets, small grocery stores, and restaurants, or will consumers need to go on a diet while the giant meat packing firms grow ever fatter?

And so I urge the Justice Department to undertake a close and a serious examination of the effects of these JBS Swift acquisitions on both ranchers and consumers. Unfortunately, it appears that the Justice Department's antitrust enforcement efforts, both in the ag sector and generally, have been much too weak and passive in recent years. In the opinion of many experts, the Justice Department has often failed to take effective action as merger after merger in the pork, milk, and seed markets has sharply increased concentration as well as reducing competition.

Antitrust investigations in the dairy industry have languished with no resolution. While the Justice Department is largely on the sidelines, agricultural concentration rises, and increases in food prices rise.

Weak antitrust enforcement, of course, has not been limited to agriculture. Previously, unthinkable mergers among direct competitors and many other highly concentrated industries affecting millions of consumers have been approved by the Justice Department, often over the reported objections of career staff.

The most recent example was the department's approval of the XM- Sirius merger, a merger to monopoly in the satellite radio industry. This is not the time for the government to take a cramped or limited view of antitrust enforcement.

In this era of rising prices and ever-increasing consolidation, the need for vigorous enforcement of our antitrust laws has never been greater in agriculture and in all other key sectors of our economy.

Millions of consumers are depending on aggressive antitrust enforcement, and now is not the time for our antitrust enforcers to be asleep at the switch.

I'd like to call upon my colleague, Senator Grassley, now for his comments.

BREAK IN TRANSCRIPT

SEN. KOHL: Thank you, Professor Carstensen.

Mr. Ross, we often hear from farmers and ranchers that they have little bargaining power in comparison to the largest agribusiness conglomerates. Many of them claim that the Justice Department has not fulfilled its responsibility to prevent anticompetitive mergers and practices in the agriculture sector of the economy.

Do you believe that the farmers' concerns about increasing levels of consolidation among agribusiness firms are warranted, and if so why has the Justice Department permitted these consolidations to take place?

MR. ROSS: Senator, we hear the same concerns about market power and we take them very seriously. In fact, they have been important parts of each of the investigations that we have done. And I point, for example, to the Cargill-Continental matter in which the issue of market power was the key one.

We did an analysis and established that in nine regional markets, the buyer power of the merged firm would be anticompetitive. As a result, our relief required that 10 divestitures of port and grain elevators be done in order to preserve competitive alternatives for farmers to sell their grain and soybean.

SEN. KOHL: Well, Professor, what is your view of what you've just heard. Are the farmers and ranchers concerns warranted, and in your opinion has the Justice Department done enough to stop these consolidations especially among food processors?

MR. CARSTENSEN: I think the concerns are very much warranted, and as I referenced, that RTI study in the pork industry which is the most recent confirmation that we have very serious problems of buyer power that are being increased. And if you go back and look at the Justice Department's explanation for why they didn't object to the Smithfield Premium Standard Brand merger, they announced that finished hogs could be hauled 400 miles from North Carolina to Kentucky for processing, and that therefore the farmers of North Carolina were at no risk of being exploited. This is in the face of data that shows that they're at about a 10 percent discount in North Carolina whenever there is a full supply of hogs in the markets, because it's costly to haul your hogs anywhere.

So -- and I think the Continental-Cargill is another example of minimalist enforcement. It was a clearly bad merger. They did the least that they possibly could do. We've not seen a good follow-up on what the consequences of that merger are.

Anecdotally when I talked to grain farmers, what I hear is we went from having two or possibly three buyers to at most two buyers and in many more areas we're seeing only one buyer for our corn, for our soybeans et cetera. This is one of the things that's made ethanol really interesting because those plants do create a different kind of competition right now in corn markets. It doesn't do much for soybeans, doesn't do much for wheat. But it does change the dynamic because there are competitive buyers in the marketplace.

So we really need more focus on this. And again, something I said earlier, the analysis of buyer power is different. Buyers are different from sellers in terms of when they get leverage in the market, what kinds of market shares give you leverage. As a buyer, you are the decider. You're the decision maker with respect to whether or not you buy. That creates power at much lower levels of concentration. We simply have not seen from the Justice Department any recognition of that inherent economic fact.

SEN. KOHL: Professor Carstensen, at this time as you know, millions of consumers all across the United States are suffering from rising food prices in many basic commodities. Do you believe that increasing concentration that we are witnessing in agriculture is a big cause of the higher food prices paid by a consumer? And if that is true, do these higher prices find their way back into the farmers' and ranchers' hands?

MR. CARSTENSEN: The first part is, yes, the concentration has two levels. It has an effect downstream or I should say upstream on the farmers. And it has an effect down stream on the consumers. That is, both ends of this process are subject to exploitation by lower prices to farmers, higher prices to consumers. Best documentation of that comes from Professor Cotterel (ph) in a hearing, I think before this committee a few years involving New England dairy products.

And again, Mr. Bullard's written statement for the committee has a number of -- has a good deal of the documentation that shows that increasing spread between what's being paid at the farm-gate, which is constant or declining, and what's being charged to consumers. So what we are seeing is no, it's not coming back to the farm-gate, it's not coming back to the farmer, but the price to the consumer is going up, it's getting caught in those two levels of concentration.

One of the things I emphasize in my written statement is concentration of retail grocery markets, which is really where you get the leverage over the consumer, and then concentration at the production level.

SEN. KOHL: Thank you.

Mr. Ross, what is your view? Does reduced competition among agribusiness companies inevitably will lead to higher prices and isn't strong antitrust enforcement very important to prevent such loss of competition?

MR. ROSS: Senator, the antitrust laws couldn't be more important to protecting consumer prices and effective competition leads to all kinds of benefits like better quality of products, greater innovation, and the ability of farmers as consumers as well as producers to benefit from a competitive economy.

BREAK IN TRANSCRIPT

SEN. KOHL: Thank you, Senator Hatch.

I'd like to say that we are going to -- as a result of our concern about these mergers and their impact on higher food prices, we are asking the GAO to make a study to look at whether or not there really is a correlation between these two critical factors.

Professor Carstensen, Senator Grassley, and I have written a bill that would shift the burden of proof so that merging parties and agricultural mergers have to justify that their mergers do not harm competition rather than the other way round which is as it is now. Do you support this idea, and if you do tell us why?

MR. CARSTENSEN: I think it's a very good idea because it really requires not just the vague waving of hands in the Justice Department office saying that there are going to be no harms, but actual proof in a court of law where the defendant merging parties have to come in and genuinely justify the non-anticompetitive implication of the merger.

And especially as the court decisions have accumulated of late, courts have really been putting an extraordinary burden on the Justice Department, the Federal Trade Commission, to establish that any particular merger will tomorrow result in serious harm. The statute actually only calls for evidence that the merger may substantially lessen competition or tend to create a monopoly, so that this restores in many respects the classic statement of what the standard should be, and I think it's a wonderful idea.

SEN. KOHL: Mr. Ross, I assume you agree. (Laughs.)

MR. ROSS: Senator, surprisingly enough, Professor Carstensen has also referred to me as his punching bag and here again we will disagree. (Laughs.) The Antitrust Division is satisfied that the burden of proof in all merger enforcement actions should be the same, whether for agriculture or any other part of the economy that it works effectively and I'm aware of no case in which we wouldn't decline to take a case to court because of the burden of proof.

BREAK IN TRANSCRIPT

SEN. KOHL: Thank you very much, Mr. Balto.

Mr. Batista, many independent ranchers are concerned that once this merger, if it is approved, occurs, they will have little leverage with respect to the enormous buying power of the three remaining large meatpackers and that the prices they receive will decline.

Why are they correct to be saying that?

MR. BATISTA: Mr. Chairman, basically our view about this, who'll define the market of the consumers, we -- this industry needs to work to expand demand -- to expand demand here in U.S. and outside in U.S.

This is the -- for us is the most important thing this industry needs to work, to expand demand for U.S. beef. U.S. beef, in 2003, had this problem about BSE.

We need to reopen all this -- these markets and to sell U.S. beef for -- different markets to have more option to aggregate value in U.S. beef.

SEN. KOHL: Mr. Bullard, what's your thought?

MR. BULALRD: Well, Mr. Chairman, the alarming irony behind the fact that during the period when our industry was contracting, both in terms of the number of cattle operations and the size of our cattle herd and the loss of our cattle cycle, that was happening at the same time that domestic consumption of beef was increasing dramatically.

After 1993, we saw a significant increase in the demand, the domestic consumption, and yet our industry was contracting. That's counterintuitive to competitive market signals.

That counters Mr. Batista's claim that all they need to do is increase more demand and that will improve conditions for cattle producers.

As was discussed earlier, the increased income does not fall back through to the cattle producers. It is captured by this highly concentrated marketing structure.

Until we can explain why in the past four years we've had the wider spread between U.S. production and U.S. consumption, these arguments are baseless.

SEN. KOHL: Mr. Stumo?

MR. STUMO: We hear and have heard justifications all the time, and I characterize them as happy thoughts without proof and for some reason people in decision-making positions, have just accept them.

We hear about the quality -- the vertical integration and the quality. We have seed producer members -- seed stock producer members that is.

They produce Angus beef, they produce natural beef, they produce lean beef. There is no sign on their farms or ranches that say these cattle must go to only this packer, or to this type of a contract arrangement.

Everyone sells -- every one of the benefits that has been mentioned today could be achieved through ways that are not anticompetitive, through better management, through better marketing, through genetics that aren't exclusive to any marketing method or any plant.

Swift -- JBS Swift has a plant sitting now in Grand Island, Kansas, with a good shell (ph) that burned -- part of it burned down a couple of years ago, but I know they've told livestock associations, it's a good plant, they could put it back into operation, that's the way they could expand in Grand Island, Kansas, right over there for cheaper than paying triple the value of U.S. Premium Beef shares, which is basically buying market power to shut out a competitor.

We're going to have no change in capacity, no change in plants, no change in plant size, no change in genetics, no change in consumer demand, but a decrease in competition and a market closure for many producers.

SEN. KOHL: Okay. Mr. Bullard, JBS Swift will also acquire, as we've discussed, Five Rivers, the nation's largest feedlot. It's one feedlot -- feeds and markets two million cattle annually.

Why does JBS' acquisition of Five Rivers concern you, Mr. Bullard?

MR. BULLARD: Right now, Five Rivers feedlot is owned by Smithfield and as Mr. Batista explained, Smithfield's slaughtering operations are far removed from the feeding area, where the feedlots exist.

In other words, Smithfield is not presently able to use the cattle produced in Five Rivers, in order to satisfy their demand needs, or slaughter capacity of the plants.

Instead, we believe Smithfield operates that Five Rivers feedlots presently as an independent feeder, probably selling to Cargill, Tyson, and National.

However under this merger, JBS will be in close proximity to all of those feedlots. Those feedlots produce about two million cattle a year, which is about seven percent of the steer and heifer slaughter every year.

So JBS is going to be able to capture two million head and to use those animals strategically to keep from entering the competitive marketplace, to purchase cattle from other producers.

In addition to that, with that level of vertical integration that will occur within our industry, JBS is going to have a distinct advantage, because it's going to have what would be -- essentially be insider information.

It's going to know that future orders for beef, when it's out competing in the market for feeder cattle, lighter cattle from the independent cow/calf producers and stockers and backgrounders.

So JBS is going to have information about the value of those animals long before independent producers will have and as a result of that producers will be disadvantaged again by the exploitation of market power by the major packers.

Thank you.

SEN. KOHL: Thank you. Mr. Stumo and then Mr. Balto, what is your response and reaction?

MR. STUMO: The post-merger company -- if this -- yet another anticompetitive merger is allowed will have 43,500 head-per-day capacity.

If you multiply that times 250 kill-days per year, you're at 10.6 million head. Smithfield's website advertises Five Rivers as 2 million per year capacity.

If you figure each animal has a $1,000 value as a thumb rule, that's $2 billion. Smithfield right now has an incentive to maximize value, has an incentive that the market be a proper market.

Those cattle are relatively free agents, though they may be contracted and partially a problem in some areas.

If they become part of this final JBS Swift, they become nearly 20 percent of their full capacity, but as far as they're fed cattle subset of capacity, excluding the Holsteins and the cow/calf, which are directly tied to the fed cattle market, but yet a different market, they're sort of a basis spread there.

We are basically taking one-and-a-half plant equivalents offline in the Midwest. So not only do you lose one buyer, in the Great Plains fed cattle base-price-setting region, you're not only losing 25 percent of the buyers in the region, you're also taking another plant and a half out of the markets.

You're almost going -- instead of four to three in that region -- you're almost going four to two in many ways. And that's assuming -- which, please do not assume that those -- there's buyers from every one of those plants in every feedlot, when there's feedlots begging for one buyer.

So it's a major problem, and a major additional shift beyond a mere horizontal merger.

SEN. KOHL: Okay. Mr. Balto?

MR. BALTO: Well, Mr. Bullard and Mr. Stumo, as always hit the nails on the head. Let me just give you a real-world example in another industry. It's the exciting market of paper label stock.

And it's actually a merger case where I've represented the defendant and lost to the justice department. The -- several years ago, UPM, a Finnish company wanted to acquire an American paper label stock manufacturer.

And what happened in this market was that Avery was vertically -- Avery had been vertically integrated and through it -- because it was a large supplier of paper label stock and also a competitor of those firms, it was able to facilitate actually relatively explicit collusion that eventually was attacked by the European Commission.

In other words, the agencies -- Senator Hatch's question suggested whether or not vertical integration was generally innocuous. No, in this setting and many other settings, it's not.

It provides a very useful tool to facilitate either tacit or explicit collusion and that should be a serious concern, investigated by the justice department.

SEN. KOHL: All right. Mr. Batista, the Department of Justice ordered you to divest the Five Rivers feedlot as a condition of approving the deal, would you agree to do that, the divestiture as a condition of approving the deal?

MR. BATISTA: Senator, this is not our intention because we -- we have this deal with the Smithfield, Five Rivers and the Smithfield plants.

Only I would like to comments on -- about Five Rivers here. The numbers in Five Rivers is around 1.4 and 1.5 million heads per year, it's not $2 million -- two million heads per year.

Five Rivers represents around five percent in the top of U.S. cattle slaughter. When are Five Rivers running this -- around this number, we represent around 10 percent in our slaughter per year.

Five Rivers -- today we will continue running the same way we run today. Five Rivers -- not selling the spot market. It all is contract. In our view sincerely, Five River is -- we have different view about Five Rivers, is our opinion.

SEN. KOHL: What about you, Mr. Balto? Do you think we ought to place that as a minimum condition on the deal?

MR. BALTO: Oh, I think if you really -- thank you, I think if you really carefully study the testimony of Mr. Bullard and Mr. Stumo, you see this is a fragile market, that to permit any kind of acquisition, you know, should receive extremely serious scrutiny.

And I don't at this moment whether a divestiture of Five Rivers and you know, some of National's -- all of National's plants in the plain states, would be sufficient to remedy all those competitive concerns.

SEN. KOHL: Mr. Bullard, if the meatpacking firms gain lower prices for cattle because of their increased buying power, do you think it is likely that these price savings will be passed onto consumers?

MR. BULLARD: We've in fact seen evidence to the contrary. In my written testimony, and if I need to, I would ask that it be submitted into the official record as well.

SEN. KOHL: It will be.

MR. BULLARD: But in that testimony you will find a chart that shows, for example, the hog industry. It shows the price spread between the price that producers receive for hogs versus what consumers are paying for pork, in an industry that is even more vertically integrated than is the U.S. cattle industry.

There we see an inverse relationship, a ever increasing cost to consumers for pork and a decreasing price paid to U.S. hog producers.

The cattle industry, at this point in time, in the charts and my written comments, shows that U.S. consumers are paying more for beef and that while live cattle prices have indeed increased since 2003, the spread between what the producer receives and what the consumer pays is ever widening, indicating in economic terms that the market is becoming inefficient and inequitable for both consumers and producers.

So the answer to the question is, no. If the meatpacker pays less for cattle as we have seen over time, U.S. consumers will continue to pay whatever the retailer can charge and is accepted by consumers, and prices will continue to increase.

We've lost the relationship -- the direct relationship between the price of the raw commodity and the price of the commodity eventually sold to the consumer.

SEN. KOHL: Mr. Batista, you agree with Mr. Bullard?

MR. BATISTA: Basically, Senator, we -- this market is very dynamic. This market is drive to supply and demand. We -- when the price have -- hits cycle, we have seasonal -- here in U.S., in this time the demand is better.

We -- in our view the market is following the cattle price and the beef price, following the same structure, both.

SEN. KOHL: Anybody want to comment on this statement? Dr. Feuz?

MR. FEUZ: Comment on a couple of things that have been discussed. One, the chart here on the right only shows half the picture in terms of we have had declining cattle numbers, but pounds of beef has actually -- was at a record level in 2006, so when you look at the consumer market, they have seen more product.

In my opinion, the price level is not established at the packer level. The price level is established at the retail level.

We can increase cattle numbers, we can increase beef production, we can force consumers to eat more, but it will be at a lower price.

The packers work on a margin, they pass it down. Certainly that margin has widened because the cost has increased, as well as, what we've asked packers to do with that product has changed drastically in the last several years, from going to producing simply -- or harvesting the animal and leaving the plant with carcass beef to all the value-added processes.

Even if you look at how we sell hamburger in the retail industry today, lot of that is in patty form, not in bulk. We already have the seasoning put in for taco meat, fajitas, et cetera.

All those processes have been aimed at hitting consumer demand, increasing consumer demand, but one of the results of those will be a wider spread between the retail price and the farm-level price.

Certainly that can happen without packers or the retailers extracting an excessive margin due to market power.

SEN. KOHL: Thank you.

MR. STUMO: Sir?

SEN. KOHL: Yes, sir, Mr. Stumo.

MR. STUMO: Sir, that's untrue, what was just said. The data series excludes the further processing. We've heard for years that all this consolidation is necessary to become more efficient.

If it has been so, we would have seen lessened margins with the same data series excluding adding seasonings to fajita meat. That's not part of it.

We've seen widening margins because of margin -- market power. It is a poorly performing sector and the consolidation apologists were wrong.

MR. FEUZ: Mr. Chairman?

SEN. KOHL: Yes, Doctor?

MR. FEUZ: If you would look at figure 3 in my written comments, you would find that his depiction of the production in the U.S. is wrong as well, that in fact in the last few years, the production of domestic beef, produced from domestic cattle, is about the same as it was back in the early 1980s, mid-1980s.

We have not seen a consummate increase in the production of beef, while we've witnessed an alarming contraction in the number of cattle producers and the loss of our herd.

It simply isn't true and the chart is documented with USDA data to show it. Thank you.

MR. : And just to tie the loop on one other thing, just so nobody in this room is mistaken. These prices aren't set, I mean, in a -- retailers don't exercise some kind of market power. That's not where the margin's coming in.

And as you well know and everybody knows, the supermarket retailers are an intensely competitive market, where they've extremely small margins and if there were increases in prices, it's not substantially on the retail level.

MR. HUNT: Mr. Chairman?

SEN. KOHL: Yes, sir, Mr. Hunt?

MR. HUNT: I frankly don't know where to start, but I'm not a practicing economist, but my family still is in the business for the cow/calf producers, farmer feeders, we run feedlots and certainly we're involved in processing.

But I have a problem with the assumption -- of leaving out the assumption that droughts had anything to do with our supply of cattle within the United States. In addition to that we have seen record cow/calf prices in the last 5 to 10 years.

You know what, I'm happy for that. That's good for my family, that's good for our industry. Our goal is to add value to the top line.

We also know that our costs are going up dramatically, the cost of our inputs, the cost of our transportation -- the only way that we as an industry can grow back is to add dollars to the top line.

Additionally, I'm not -- I may have misunderstood the answer, but what I thought I heard was the retailer wasn't taking the margin, with the assumption the packer was.

It is very documented that we have seen the packer margins in probably the last 30 years, in the last three years since BSE was discovered.

SEN. KOHL: All right.

Mr. Batista, is it true that the Brazilian government has subsidized your acquisitions of National and Smithfield, of Swift?

MR. BATISTA: No, Senator, we -- JBS today is public company. We have investments from BNDES in Brazil, is the -- is normal bank in Brazil. It's public bank, but is normal invest in JBS and not related -- nothing in subsidized JBS to invest in U.S.

It's normal invest from BNDES is -- part in the BNDES Bank is normal. It's public offer in BOVESPA in São Paulo is -- in the stock exchange in Brazil.

We are public company and BNDES have some participation, but the markets have a lot JBS shares -- a lot U.S. investors have JBS shares.

SEN. KOHL: Yes, true. Mr. Stumo, Mr. Hunt in his testimony made the point that investment is needed in beef processing and only JBS is willing to make that investment.

Do you believe that there's merit in that argument?

MR. STUMO: If this were a mere asset purchase of a company that was in trouble, it would be asset value plus may be a premium, which is the opportunity cost, the investment.

We -- my understanding is, and I'm not going to die on this word, but my understanding is that the premiums, USPB shares which are trading at ($)1.10, ($)1.20 among producers, it was nearly, you know, two-and-a-half to three times the price.

It's a typical premium you will see when you're procuring market power, not merely buying assets of a firm that's in trouble.

You see this causation argument between, well, firms are changing hands with other companies thus the market is competitive.

I don't know where that comes from. There's no economic text that would even support such a theory. You have firms changing hands if they're doing well, if they're doing worse.

If you have a new firm coming in they'll buy at an asset price plus a little bit of premium, but if they're buying market power its worth a lot more because you're closing down on a competitor.

And that's what's happening here in my view.

SEN. KOHL: Well, thank you gentlemen. It's been a good hearing. We'll leave the record open for a week. After hearing all the testimony, I remain concerned about the sharp consolidation in the meatpacking industry caused by this acquisition.

I believe that these deals run the risk of substantially harming the cattle market. I hope very much that the Department of Justice continues to look at this and decides in a manner unlike what I believe that they're heading in the direction of.

But then anyway, it's been good to have you. I think you've shed a lot of light and we'll do all we can to see that justice is served.

Thank you all for being here.


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