"I'm not sure that the Justice Department has a full enough understanding the unique characteristics of agriculture, compared to other sectors of the economy, to ensure a competitive marketplace," Grassley said.
Grassley has been a leader in the fight to stop the trends toward vertical integration in agriculture and has introduced legislation that would ban packers from owning livestock seven days before sale, legislation that would require 25 percent of a packer's daily kill to come as a result of purchases made on the daily, open market or spot market, and legislation that would make it unlawful for any packer with an annual slaughter capacity of more than 20 million swine to slaughter more than 10 million packer-owned swine in any calendar year.
Grassley's statement from today's hearing follows here.
Thank you Mr. Chairman for providing us this important opportunity to discuss the negative impacts monopsonistic control can have on family farmers and rural America.
Monopsony is to buying as monopoly is to selling. When family farmers have limited options to market their commodities, they face potential monopsonistic conditions. For decades the government has agressively protected America's consumers through the Sherman and Clayton Acts from monopolistic activities. Unfortunately, the concept of monopsonies has not seemingly drawn as much attention.
Today I hope that we take this opportunity to focus on how DOJ attempts to identify monopsonistic practices. While I believe Justice attempts in good faith to remedy monopsonies when it finds a problem, I worry the calf isn't finding the creep when it comes to this issue.
I'm concerned DOJ doesn't have the agriculture specialists on board who understand the unique marketing dynamics farmer's experience and their relationship with industry. DOJ can't remedy the problem unless it understands the potential harm.
To the Department of Justice's credit, it has challenged or limited agri-business mergers in the past due to monopsonistic concerns. I know that Assistant Attorney General Pate has laid out many examples in his testimony of DOJ's interest in keeping markets competitive. One example of DOJ's commitment that Mr. Pate did not describe is the case United States vs. Rice Growers Association. Justice tried this case in 1986 and challenged the purchase of one rice milling firm buying another milling firm. DOJ found that within the regional market the new entity would control 60% of the rice purchased and that was unacceptable to DOJ.
Clearly DOJ has the authority to act, I'm just not certain this DOJ or any Justice Department in recent history has hired professionals with the expertise and background to identify the actual markets being affected.
For instance, 87% of all hogs are contract or packer-owned pigs. That means only 13% have the potential to be open or "spot market" pigs. Over 90% of hog marketing contracts are based on a composite "spot market" price to establish the base value.
Many hogs not bound to written contracts are sold under oral formulas. The value of these types of oral agreements do not necessarily track with spot market value. In addition, hogs sold outside of the western corn belt don't contribute substantively to mandatory price reporting data.
I've seen estimates that of the 13% of hogs deemed "open market" pigs, only 3-5% traded daily are actually legitimate spot market pigs. That 3-5% sets the price daily for 90% of pigs packers have under marketing contracts.
It should be easy to understand that as the actual spot market thins out, if packers choose not to participate in the spot market every day, packers potentially will be able to manipulate the spot market price and influence the worth of marketing contracts. I feel strongly we need to be on the look-out for this type of market manipulation.
Unfortunately, the potential for this type of manipulation grew considerably when Smithfield, the world's largest vertical integrator acquired Farmland.
DOJ staff informed my office that the Justice Department did not believe this transaction met any threshold to justify challenging the acquisition. Justice explained that there would still be multiple purchasers in the western corn belt after this merger took place.
I've tried to take a look at the packers participating in the Southern Minnesota, Iowa, South Dakota, and Nebraska region. Unless DOJ believes that a family farmer which produces 2000 hogs per year, selling 40 per week, using a trailer pulled by a pickup can reasonably be expected to deliver hogs up to 300 miles away from his farm, I think we have a problem.
On a related topic, I would be remiss if I did not take this opportunity to voice my concern not only for the spot market's impact on contracts, but for the construction of producer contracts. As the lead sponsor of the Fair Contracts for Growers Act (S. 91) I am very concerning about the abuse of arbitration clauses in "take-it-or-leave-it," non-negotiable contracts, such as those that are typical in the livestock and poultry sectors.
Certainly arbitration, if agreed to voluntarily by both parties involved, can be a useful tool for resolving disputes. But what we are now seeing in the livestock and poultry sectors is that arbitration clauses are being forced on farmers not as a legitimate alternative dispute mechanism, but as a mechanism to prevent farmers from challenging the abusive actions of large packers or integrators.
Farmers who are forced into arbitration proceedings are rarely, if ever, successful. In large part, this is because the process is stacked against them because arbitration does not allow for the right of discovery. If a farmer is attempting to prove that he has been treated unfairly or has been the victim of fraud, all the data that would allow him to argue his case is completely controlled by the company being accused of misdeeds. Without access to that data through the normal discovery process, it is impossible for a farmer or grower to prove his case.
And lastly, arbitration proceedings are not part of the public record. By forcing growers to sign away their rights to resolve disputes in court, livestock and poultry companies are able to limit public knowledge about any abusive practices they may use in their dealings with farmers.
So it's easy to understand why a large, vertically integrated livestock or poultry company might see the benefits of including a mandatory arbitration clause in their contracts with farmers. And unfortunately, we also understand that farmers are often put in a position where they either have to sign the contract presented to them, or face bankruptcy. But what I do not understand is why we allow this to happen.
The chairman of this committee was the lead sponsor of a bill in the last Congress which addressed concerns about the abuse of mandatory arbitration clauses in contracts between auto manufacturers and car dealerships. That legislation, which is nearly identical in structure to the bill that Senator Feingold and I have introduced, is now law.
Our legislation would simply specify that both parties in a livestock or poultry contract must agree in writing to pursue arbitration, AFTER THE DISPUTE ARISES, to assure that farmers chose arbitration voluntarily.
It is my hope that we will be comfortable affording farmers the same protections against abusive contract terms that we have provided for the car dealers of this country.
In conclusion, I want to thank the chairman for holding this hearing and I look forward to working with both the committee and DOJ to further explore this issue. I would also like to submit for the record the testimony of Dr. Neil Harl from Iowa State University who we invited to testify today but had a conflict.