The paper authored by Roger A. McEowen, Peter C. Carstensen, and Neil E. Harl is attached to this document.
"Concentration is one of the biggest challenges facing the family farmer trying to compete in the global marketplace," Grassley said. "Federal case law, underfunded enforcement and a reliance on unfounded efficiency claims have greatly diminished the competitive environment in the farm sector. This year's farm bill debate gives Congress the opportunity to respond, and the way I see it we have an responsibility to take action."
Grassley also released a paper prepared by John D. Lawrence of Iowa State University as a counterpoint to the same commentary addressed by McEowen, Carstensen and Harl. The Lawrence document says the word "control" in the Grassley/Johnson amendment does not necessarily affect forward marketing agreements and futures contracts.
In December, senators voted 51 to 46 for the bipartisan amendment for family farmers and independent livestock producers. The Grassley/Johnson amendment would prevent beef and pork packers from assuming complete control of the meat supply by making it unlawful for a packer to own, feed or control livestock intended for slaughter.
"The bipartisan amendment I sponsored with Sen. Johnson was drafted to ensure that vertical integration and captive packer supply don't push independent livestock producers out of business," Grassley said. "The amendment also protects important risk management tools for family farmers such as futures contracts or forward marketing agreements. All the amendment does is keep pakcers from competing with producers. As a practical matter, what we're trying to do is to chase the cow out of the calf creep."
The Grassley/Johnson legislation has been endorsed by the American Farm Bureau Federation, the Iowa Farm Bureau, the Iowa Pork Producers Council, and the Iowa Cattlemen's Association.
A copy of the McEowen, Carstensen, and Harl paper follows here.
-by Roger A. McEowen,* Peter C. Carstensen,** and Neil E. Harl***
Overview of the Problem
In a paper dated January 14, 2002, eight economists, none of whom is a lawyer, interpreted proposed legislation banning packer ownership of cattle as prohibiting pork and beef packers from making any arrangement with livestock producers to acquire their livestock more than two weeks prior to slaughter. The economists opined that the prohibition would include forward contracts, marketing agreements, contracts containing any promise of delivery, and would result in producers having no legally assured market for their livestock before the last two weeks preceding slaughter. The economists further assumed, based on their interpretation of the statutory language, that alliances in which packers participate with producers would also be banned. Based on their interpretations and assumptions concerning the statutory language, the economists predicted that the beef and pork sectors would become less efficient and less competitive due to the loss of contracting rights and alliances. This legal analysis is essential to all of their economic conclusions. Unfortunately, their interpretation constitutes a manifest misreading of the proposed statutory language. We write to correct the erroneous legal analysis of these economists.
On December 13, 2001, the United States Senate approved an amendment to the Senate Farm Bill making it unlawful for a packer to own, feed, or control livestock intended for slaughter more than fourteen days prior to slaughter. The amendment includes exemptions for packing houses owned by farmer cooperatives, and packers with less than two percent of national slaughter. The amendment was approved 51-46, and is now a part of the Senate Farm Bill.
The legislation amends 7 U.S.C. §192 (§202 of the Packers and Stockyards Act of 1921) by adding a new subsection (f) as follows:
It shall be unlawful for any packer with respect to livestock, meats, meat food products, or livestock products in unmanufactured form, or for any live poultry dealer with respect to live poultry, to:
(f)Own, feed, or control livestock intended for slaughter(for more than 14 days prior to slaughter and acting through the packer or a person that directly or indirectlycontrols, or is controlled by or under common controlwith, the packer), except that this subsection shall notapply to ?
(1)a cooperative or entity owned by a cooperative, if a majority of the ownership interest in the cooperative is held by active cooperative members that ?
(A)own, feed, or control livestock; and
(B)provide the livestock to the cooperative for slaughter; or
(2)a packer that is owned or controlled by producers ofa type of livestock, if during a calendar year the packer slaughters less than 2 percent of the head of that type of livestock slaughtered in the United States?
In their paper, the economists base their entire analysis, without any supporting documentation, on the assumption that the statutory prohibition of "control" of livestock will prohibit all types of marketing contracts, including forward contracts. They then focus their entire argument against the proposed legislation based on claims of harm to various kinds of contractual arrangements used in the livestock industry. Never once do the economists suggest that packers need to actually own or control livestock in order to accomplish any of the specific objectives that they identify as crucial to achieving economic efficiency and a competitive market. The clear implication of their argument is that the prohibition of actual packer ownership of livestock does not raise any significant efficiency or competition concerns.
Importantly, the amendment's primary sponsor, Senator Tim Johnson (D-SD), offered a formal clarification in the Senate that the word "control" contained in subsection (f) of the proposed amendment is to be interpreted in the context of ownership. The amendment is not designed to prohibit contracts for future delivery of livestock, but is designed to prevent packers from owning cattle outright, through a subsidiary, or through arrangements (contractual or otherwise) that give them operational control over livestock except within the last two weeks before slaughter.
From a legal standpoint, "control" issues arise frequently in an agency context in situations involving the need to distinguish between an "independent contractor" and an "employee" for reasons including, but not limited to, liability and taxation. Typically, the existence of an agency relationship is a question of fact for a jury to decide. At its very essence, whether a relationship is an independent contractor relationship or a master-servant relationship depends on whether the entity for whom the work is performed has reserved the right to control the means by which the work is to be conducted. Under many production contract settings, the integrator controls both the mode and manner of the farming operation. The producer no longer makes many of the day-to-day management decisions while the integrator controls the production-to-marketing cycle. The integrator is also typically given twenty-four hour access to the producer's facilities. Conversely, forward contracts, formula pricing agreements and other types of marketing contracts typically do not give the integrator managerial or operational control of the farming operation or control of the production-to-marketing cycle. Instead, such contracts commonly provide the packer with only a contractual right to receive delivery of livestock in the future. While it is not uncommon that livestock marketing contracts contain quality specifications, most of those contract provisions relate exclusively to the amount of any premium or discount in the final contract payment for livestock delivered under the contract. Importantly, the manner in which quality requirements tied to price premiums are to be satisfied remains within the producer's control. Accordingly, such marketing contracts would likely be held to be beyond the scope of the legislation's ban on packer ownership or control of livestock more than two weeks before slaughter. Thus, a packer would still have the ability to coordinate supply chains and assure markets for livestock producers through contractual arrangements provided the contracts do not give the packer operational and managerial control over the livestock producer's production activities.
The proposed federal legislation is also comparable to existing state legislation in several significant livestock producing states. For example, an Iowa statute prohibits any processor of beef or pork from owning, controlling or operating a feedlot in Iowa in which hogs or cattle are fed for slaughter. The legislation, however, does not prevent a processor from contracting for the purchase of hogs or cattle. The provision has never been held to prohibit packers from entering into forward contracts, formula pricing agreements or other types of marketing arrangements with livestock producers so long as control of the farming or ranching operation remains vested in the producer.
Nebraska law prohibits direct or indirect packer ownership of livestock more than five days before slaughter, and has not been held applicable to any type of livestock marketing agreement. Again, the key to understanding the scope of the statutory provision lies in determining whether the producer remains in decision making control of the farming operation.
Importantly, the dire consequences the economists predict will occur if the Johnson amendment passes have not arisen in the livestock sectors of either Iowa or Nebraska since enactment of the comparable legislation in those states.
Application to Cooperatives
Whether the statutory language applies to packer "alliances" with producers would also be judged under the same standard. If a packer merely provides marketing expertise and advantages to producer-members of the alliance, but does not exercise control over the manner in which the livestock are to be produced, insufficient control would be present to subject the activity to the ownership ban under either an agency or partnership theory. Indeed, Senator Grassley (R-IA) stated in debate over the Johnson amendment that "it has never been our intent to prevent cooperatives from engaging in relationships with packers, and the amendment does not do that?. Co-op members?can freely commit all or a portion of their cattle for slaughter without violating this amendment. The reason is that the packer?exercises no operational control over livestock production." (emphasis added)
Contractual arrangements and various kinds of alliances can contribute significantly to the development of efficient and competitive livestock production. The proposed legislation in fact protects such arrangements in several ways.
Importantly, the legislation exempts small firms slaughtering less than two percent of any type of livestock so that small firms and new entrants can experiment and develop their products without having to be concerned about the legal details of the relationship. The legislation also exempts farmer cooperatives where the members are themselves feeders. This expands the range of opportunity for developing new and creative solutions to the challenge of developing improved meat products. In addition, large packers still would have available a full range of contractual opportunities to obtain specific types of livestock designed to meet specific needs. Moreover, such contracts could be drafted to include future delivery times and other elements that facilitate the coordination of the packer and the producer. Contracts that do not impose control over the producer can still provide all the benefits of coordination and end product specification that the economists identify as desirable elements of current arrangements. Indeed, most contracts and marketing agreements would not necessarily have to be changed at all.
The central challenge for the very competent lawyers for those buyers that currently use agreements to manage the actual day-to-day operation of producers will be to develop contracts that define the characteristics that are to be delivered without unlawfully limiting the freedom of the producer to select the methods and means of producing those results. The packers, if they are not engaged in strategic conduct or manipulative behavior, should not have any problem in defining the objectives they seek and leaving it to the producer to achieve the desired result. Indeed, a result oriented system of contracting will free producers to substitute livestock from third parties when that is more efficient and practical within the context of the contractually required results. This would enhance competition and fairness in the production of livestock because the packers would not be as able to play one seller against another by refusing to buy directly.
Conclusion
Our goal is to correct a manifest error in legal analysis. The economists "assumed" that the prohibition of "control" would extend to all future contracting and alliances. Our position is that this is a misreading of the statutory language and contrary to the actual history of comparable state legislation. Irrespective of the merits of the economic argument that contracting and alliances in livestock production are essential to efficiency and competition, the ban on packer ownership will not bar producers and packers from entering into such agreements.
A copy of the Lawrence paper follows here. A copy of the 11- page Jan. 14 comments made by eight collaborating authors is available upon request.
Implications of Banning Packer Ownership of Livestock, Iowa and the U.S.John D. Lawrence, Iowa State University
Recently a group of Land Grant University agricultural economists (including me) prepared an analysis of possible implications of an amendment to the Farm Bill passed by the Senate that would prohibit packers from owning, feeding or controlling livestock for more than 14 days prior to slaughter. We identified several concerns that we viewed as possible unintended consequences of the bill, many of which hinge on the interpretation of the word "control" in the amendment. While the authors of the amendment did provide exemptions for cooperatively owned or smaller packers, the interpretation of "control" is less clear. A question and answer exchange on the floor of the Senate attempted to clarify the amendment. The author of the amendment said that it would allow contracting between producers and packers and that it was similar to state laws that ban packer ownership. There is concern that while the discussion about the intent of the amendment was discussed it is not clearly defined in the amendment itself.
Iowa has legislation that makes it unlawful for packers to own, control or operate a feedlot or contract for the care and feeding of the swine in this state. Yet, Iowa''s law doesn''t appear to have caused the market disruptions identified in the analysis of the federal bill. How, do the laws differ and can the Iowa law serve as a model for the federal law.
Why the concern?
The pork and beef sectors are increasingly coordinated regarding scheduling, quality attributes, production processes, and food safety. These traits are increasingly complex and in some cases not detectable visually or at line speed in processing plants. This coordination is driven by branded product development and demand for more predictable quality from retailers and final consumers. Therefore, formal relationships that specify desirable traits and the values placed on them are needed to assure the process and product. Producers have also been able to secure better financing terms by having a formal marketing agreement. If "control" is interpreted to limit the packer'' s ability to coordinate supply chains and assure markets for producers the amendment would slow further product development or reverse the trend back to a commodity market and jeopardize financing opportunities for many producers.
How is Iowa's Law Different?
First, Iowa is only one state and the influence of its law is limited to its borders. Second, the Iowa legislation limit ownership by packers but specifically allows for marketing contracts thus allowing for formal coordination between producers and packers. Many different types of marketing contracts are used in Iowa today. Under Iowa''s law packers are able to develop branded products, prescribe production practices, schedule animals to their plants, and pay value-based premiums. Producers have access to a wide range of risk management tools and can secure competitive financing terms. If "control" in the Senate amendment is interpreted to be like Iowa''s law some of the concerns identified by the ag economists are lessen.
Would Iowa''s Law Work at the Federal Level?
The necessary scheduling, quality, and coordination functions can occur through contracts rather than ownership contracting is not restricted. Packers could sell their production companies to other businesses and enter into a contract to secure the coordinated supply. Research has not shown a negative impact on livestock prices due to packer ownership, and thus higher prices are not expected to result from the ban. But, other outcomes are possible. First, a rushed sale of production assets by packers may lower the value of other production assets owned by producers causing balance sheet problems. Second, if there were economic advantages to vertical integration that can't be duplicated with contracts, the US beef and pork industries would be at a competitive disadvantage to foreign companies and poultry producers. Third, many packers in fringe areas of production have relied on some degree of livestock ownership or contracted supply to insure enough livestock to keep their plant viable. Blocking these ownership or contract agreements will jeopardize these plants that are important to many producers in the region and during times of large supplies important to all producers.
If the amendment is interpreted define who can or cannot own livestock but allow formal contract agreements between packers and producers the impact on the marketplace will be less than if it bans such marketing agreements. The intent of the agricultural economists that wrote the analysis was to raise the questions of what could arise from the amendment if the wording is not clarified. Hopefully, these details will be clearly defined before the amendment becomes law.