Livestock: A Proposed Ban on Ownership and Control by Packers

Livestock: A Proposed Ban on Ownership and Control by Packers

Order Code RL31553
Report for Congress
Received through the CRS Web
Livestock:
A Proposed Ban on Ownership
and Control by Packers
January 2, 2003
Jerry Heykoop
Agricultural Policy Analyst
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Livestock: A Proposed Ban on Ownership and Control
by Packers
Summary
This report provides a discussion of the packer ownership ban that was proposed
in the Senate farm bill (S. 1731), but dropped in the finally-enacted law (P.L. 107-
171). The ban would prohibit packers from owning, feeding, or controlling livestock
to such an extent that the producer is no longer materially participating in the
production of livestock. Livestock producer-owned cooperatives and entities owned
by such cooperatives, and producer-owned packers that slaughter less than 2% of
U.S. totals were exempted from the ban.
Publicly available information indicates that three beef packers and nine pork
packers who currently own livestock would have had to divest, if the ban had been
adopted. Other packers that exceed the 2% threshold do not currently own livestock
and would have been unaffected.
The ban was first proposed during markup of the farm bill in the Senate
Agriculture Committee, where it was not adopted. In subsequent floor action, the
ban was adopted as a floor amendment and withstood another amendment to have it
removed. The ban was one of the more contentious issues during conference with
the House farm bill (H.R. 2646), with House conferees generally opposed to it. The
ban was dropped during Conference, with managers agreeing the issue warranted
further investigation.
Supporters of the ban believe it will limit packers’ ability to manipulate the
market, and would improve farmers’ prices and access to livestock markets. They
are concerned about the pace of vertical integration in the livestock industry and
believe the ban is a way to stop or slow down vertical integration. Opponents of the
ban argued that the ban would reverse many of the production efficiency gains made
by the livestock industry in recent years through closer packer-producer alliances.
At the least, they contend, it would create turmoil in the industry because packers and
producers would have to undo many relationships built over time.
Several economists and lawyers have written analyses of the proposed ban.
Those studies have added to the discussion, but did not provide conclusive answers
about the potential effects of the ban. Supporting papers argued the ban would
provide more control to producers and raise livestock prices, while opposing papers
argued that the ban would fail to raise livestock prices and would increase market
uncertainty.
Since the farm bill, the proposed packer ban continued to generate legislative
interest in the 107th Congress (H.R. 5247, S. 2021, S. 2867), with potential
amendments to the Agricultural Appropriations bill discussed. The Senate
Agriculture Committee held a hearing on this issue on July 16, 2002, and the Senate
Judiciary Committee held a field hearing on August 23, in South Dakota.
This report will be updated as warranted.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Specific Packers Affected by or Exempt from the Ban . . . . . . . . . . . . . . . . . . . . . 2
Cattle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Hogs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
In Conference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Supporters of the Ban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Opponents of the Ban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Defining “Control” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Material Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Current Legislative Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Senate Agriculture Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Senate Judiciary Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Agricultural Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Related Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
S. 2021 (Enzi) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
H.R. 5247 (Latham) and S. 2867 (Grassley) . . . . . . . . . . . . . . . . . . . . 13

Livestock: A Proposed Ban on Ownership
and Control by Packers
Background
Increasing vertical integration in several key agro-food sectors has prompted
widespread concern about the effects on individual producers and the long-term
impacts on the U.S. agricultural system. The livestock industry, and the hog sector
particularly, has experienced an increasing trend toward consolidation and vertical
integration in recent years.1 This trend follows a path set by the poultry industry
since the 1950s, when the broiler industry grew rapidly and became vertically
integrated. Within the livestock industry, processors especially are consolidating and
becoming more vertically integrated. Processors seek to vertically integrate in order
to ensure a steady supply of consistent quality animals for their plants. To attain the
necessary control to achieve such a supply, processors may raise their own livestock
or contract with individual producers, rather than purchase livestock with varying
characteristics off the spot market. Thus, producers who sell on the spot market may
face lower demand and lower prices for their livestock.
Producers who face fewer marketing options and less competition for their
livestock have expressed concern about captive supplies.2 They believe packers are
using captive supplies to manipulate market prices that are more favorable to packers,
and less favorable to producers. That is, as packers buy fewer animals on the spot
market, reported prices no longer accurately reflect prices paid for a majority of
livestock. Many producers feel this reduction in price transparency works to their
increasing disadvantage relative to packers. Contract prices typically are tied to spot
market prices. Thus, a packer has financial incentive to buy or not buy on the spot
market not only to reduce spot prices, but also because livestock bought on contract
are priced indirectly through the spot market. Some producers have suggested that
one remedy to captive supplies and the perceived market manipulation is to ban
packer ownership and substantial control of livestock.
1 In agriculture and other economic sectors, consolidation usually refers to the trend from
numerous smaller-sized operations toward fewer and larger ones. Vertical integration
refers to the integrating of successive stages of the production and marketing functions
under the ownership or control of a single management organization. For example, much
of the broiler industry is highly vertically integrated in that processing companies own or
control the activities from production and hatching of eggs, through the growth and feeding
of the chickens, to slaughter, processing, and wholesale marketing.
2 There is no official definition for captive supplies, but the term generally refers to animals
that are committed to or are owned by a packer more than 14 days prior to slaughter.

CRS-2
In response to calls from some producers, the Senate-passed farm bill (S. 1731;
H.R. 2646 as amended; February 13, 2002) contained a provision (Section 1043;
Johnson amendment) that would have added a new section to the Packers and
Stockyards Act (P&S Act; 7 USC §181 et seq.) to ban packers from owning, feeding,
or controlling livestock for more than 14 days prior to slaughter. An additional
provision (Section 1072; Grassley amendment) aimed to clarify that the ban on
“control” applies to the extent that the producer is no longer “materially
participating” in the production of livestock. Cooperatives, or entities owned by
them, would have been exempt from the ban if a majority of the ownership interest
in the cooperative was held by active cooperative members who own, feed, or control
livestock and provide them to the cooperative for slaughter. The ban also would
have exempted producer-owned or controlled packers that slaughter less than two
percent of national annual slaughter of each livestock. The Senate provision required
that packers owning or controlling animals on the date of enactment had to be in
compliance within: (1) 18 months in the case of hog packers, or (2) 180 days in the
case of all other livestock (including cattle, sheep, horses, mules, and goats). The ban
did not apply to the poultry industry.
Specific Packers Affected by or Exempt from the
Ban
According to the U. S. Department of Agriculture’s (USDA) National
Agricultural Statistics Service (NASS), there were 881 slaughtering plants under
federal inspection on January 1, 2002. Of these, 723 slaughtered at least one head
of cattle during 2001 with 15 slaughtering almost 57% of the total cattle killed.
There were 699 plants that slaughtered hogs, with 12 accounting for 53% percent of
the total. There were 538 plants that slaughtered sheep or lambs, with 5 accounting
for 70% of the total head. (Plants may slaughter more than one type of livestock.)
According to NASS, total cattle slaughter in 2001, was 35,369,700 head; total
hog slaughter was 97,961,900 head; and total sheep slaughter was 3,222,100 head.
Thus, any producer-owned or controlled packer that slaughtered fewer than 2%, or
707,394 cattle, 1,959,238 hogs, or 64,442 sheep, would have been exempted from the
ban if it had been in effect in 2001.
The USDA’s Grain Inspection, Packers and Stockyards Administration
(GIPSA) collects data on packers’ business practices, but does not publish
proprietary information. Thus, the following information is based on trade
publications and conversations with producer groups and packing companies. This
is not necessarily an exhaustive list. It is possible that there are additional packers
not listed in this report that might have been affected by the ban or, exempt from it.

CRS-3
Cattle
In 2001, six packers slaughtered at least 2% of U.S. cattle: IBP (now owned by
Tyson), Cargill (Excel), ConAgra, Farmland National Beef, Smithfield, and Rosen’s.3
Of those six, three own cattle: Cargill (Excel), ConAgra, and Farmland National
Beef. Those three packers would have had to divest the animals they own. Cargill
and ConAgra also are two of the largest cattle feeders (ConAgra second and Cargill
(Caprock) fourth). Combined, the two companies account for almost 35% of cattle
slaughter and have feedlot capacity of more than 735,000 head. Under the packer
ban, packers would have been required to divest of either the packing facilities or the
feedlots within 180 days of enactment.
Producer-owned packers that slaughter less than 2% of U.S. total would have
been exempt from the ban. In 2001, there were three packers meeting that criteria:
Future Beef Operations, Brawley Beef, and Harris Ranch.4
U.S. Premium Beef (USPB) is a cattle producer-owned cooperative that buys
cattle from its members and then sells the cattle for slaughter to Farmland National
Beef under a contract agreement. USPB has 29% ownership in National Beef, while
Farmland Industries, another cooperative, owns 71%. It is uncertain how USPB
would have been affected by the packer ban since USPB is a cattle producer
cooperative that also owns a share of a packer, but not a controlling share.
Hogs
In 2001, nine packers owned hogs and slaughtered at least 2% of U.S. hogs:
Smithfield, Tyson (IBP), Cargill (Excel), Hormel, Farmland, Seaboard, Premium
Standard, Hatfield, and Clougherty.5 These nine packers would have had to divest
of packing facilities or animals within 18 months of the ban becoming law. There
had been some talk in the hog industry that packers would divest their packing
facilities rather than divest hog production facilities because companies might
achieve higher profit margins by raising hogs than by processing hogs.
Pork America was a new, hog producer-owned cooperative that slaughtered
hogs for a brief period, but since has shut down. Membership stock with full voting
privileges was available only to producers and to groups representing producers.
Thus, Pork America would have been exempt from the ban if it was operational
under its then-existing charter.
3Cattle Buyers Weekly.
4Future Beef was placed in bankruptcy on March 4, 2002, and reportedly will cease
operations in the near future. Cattle Buyers Weekly, August 5, 2002.
5Pork Facts Book. National Pork Board.

CRS-4
Legislative History
On November 13, 2001, Senator Wellstone first offered an amendment to
restrict packer ownership during Committee markup of the Senate farm bill (S.
1628), where it was defeated 9-12. On December 13, Senator Johnson offered the
measure as a floor amendment to the Committee-reported Senate farm bill (S. 1731),
where it was accepted 51-46.
On December 19, Senator Craig, who had voted in support of the Johnson
amendment, stated he was concerned that the ban would restrict certain types of
contracts commonly used and that he would oppose the ban adopted on the floor.
Much of the controversy surrounded the word “control,” which some had interpreted
as applying to all animals purchased under contracts. Subsequently, on February 7,
2002, Senator Craig offered an amendment to replace the Johnson amendment with
a USDA study (to be completed within 270 days of enactment of the farm bill) to
determine the impact of a ban, including effects on:
! producers, rural communities and employees of feedlots;
! joint ventures in packing facilities;
! market prices for livestock;
! the livestock industry’s international competitiveness;
! future investments of packers and location of packing facilities.
To clarify that “control” was not intended to ban all contracts, Senator Grassley
offered a second-degree amendment on February 8, that provided a complete
substitute for the Craig amendment and kept the ban. The Grassley amendment
banned packers from owning, feeding, or having “operational, managerial, or
supervisory control over livestock, ... to such an extent that the producer is no longer
materially participating.” The “material participation” language was intended to
clarify that the ban would not prohibit forward contracting or other such marketing
arrangements. On February 12, the Senate failed 46-53 to table the Grassley
amendment and subsequently it and the Craig amendment (as amended) were
adopted by voice vote.
The Johnson amendment was in Section 1043 of the Senate farm bill (H.R. 2646
as amended; passed February 13, 2002), and the Grassley amendment was in Section
1072. There were no comparable provisions in the House-passed version of the farm
bill.
In Conference
The packer ban was one of the more contentious issues debated in the
Conference Committee, with House conferees generally opposed. On April 18, 2002,
House conferees offered a proposal to establish a Presidential commission, to study
the issue of captive supply and market mechanisms, with a report to be completed by
December 31, 2004. In a counter offer, Senate Democratic conferees proposed to
extend the ban’s divestiture period to four years for all livestock. The packer ban
ultimately was deleted in conference, but language in the managers’ report stated that
“Managers recognize the importance of Congress holding hearings to address issues

CRS-5
affecting livestock producers, such as agribusiness consolidation, and livestock
marketing issues.”
Supporters of the Ban
Supporters of the ban argued the ban would limit packers’ ability to manipulate
the market, and would improve farmers’ access to livestock markets. Ban supporters
argued packer ownership stifles competition because packers who own livestock can
use their own animals to depress livestock market upturns. In their view, banning
packer ownership and control would force packers to compete against each other in
the open market and raise prices paid to producers. Supporters cautioned against
using strict economic efficiency when evaluating effects of the policy and instead to
focus more on market power of companies. They expressed concern about the pace
of vertical integration and the loss of open markets and feared that the end result will
be the loss of independent producers, with a market dominated by a few large
companies.
The ban was supported by such groups as the American Farm Bureau Federation
(AFBF), the National Farmers Union (NFU), the Livestock Marketing Association
(LMA), and some state associations of the National Cattlemen’s Beef Association
(NCBA) and the National Pork Producers Council (NPPC).6
Opponents of the Ban
Opponents of the ban argued that it would reverse many of the production
efficiency gains that had come about through closer packer-producer alliances.
Packers have pushed for consistent products to add value and meet consumer
demands. In this view, packers contract with producers to ensure a supply to meet
meat demands from retailers, who want forward pricing weeks and months before
delivery in order to improve their business planning. Opponents of the ban argued
that it would disrupt supply chains by making risk management and production
contracts for livestock illegal. Developing a branded market would be hurt in their
view, because genetics and management practices affect meat qualities, and packers
would have no control over such factors. Moreover, they contend that the ban
particularly may hurt the emerging “natural” or “organic” market for livestock
because packers would be prohibited from specifying veterinary care (e.g.,
administering —or not— certain drugs), animal handling practices, etc., in contracts.
Opponents of the ban further argued that producers legally could have no assured
market for their livestock until the last two weeks before slaughter. Further, they
believed the ban would hurt the livestock industry’s competitiveness domestically
and internationally because it did not apply to the U.S. poultry industry, which is
almost entirely vertically integrated, or to foreign livestock industries, which would
6AFBF and NFU are general agriculture groups, LMA represents livestock marketers and
producers. The NCBA and NPPC are producer groups for beef and pork, respectively, and
had mixed positions on this legislation.

CRS-6
be free to pursue economic efficiencies. Prohibiting various linkages between
producers and packers would result in reduced coordination, efficiency, and global
competitiveness of the U.S. beef and pork industries, they argue. Opponents also
expressed concern about the ban’s likelihood of forcing massive asset divestitures by
companies, flooding the market with livestock and other assets as packers divested
animals, feedlots, and other production facilities.
The ban was opposed by the American Meat Institute (AMI), the National Meat
Association (NMA), and the national organizations for NCBA and NPPC, among
others.7
Defining “Control”
Much disagreement stemmed from the definition/implication of “control” in the
proposed ban. At issue was whether the ban on control would ban all types of
contracts between packers and producers. Supporters of the Johnson amendment
argued the ban would not prohibit forward contracting, but would prohibit packers
from directing how livestock are raised.8 Operational control provides the packer the
ability to dictate nearly every detail of production and marketing, such as the
facilities, nutritional and veterinary decisions, as well as providing the packer 24-
hour access to the livestock. Forward contracts do not give managerial and
operational control to packers. Therefore, supporters argued, forward contracts
would continue to be allowed.
Opponents of the Johnson amendment argued the ban may prohibit livestock
producers from using forward or futures contracts and would prohibit producer-
packer joint ventures if producers commit their livestock to the operation because it
might constitute packer ownership or control. Opponents said the ban would create
a legal question/uncertainty at the least, and this uncertainty would bring in doubt the
future of such operations and negatively impact packer interest in such operations.
If the ban became law, opponents argued, there would be lawsuits alleging that some
arrangements give packers too much control, and that courts’ interpretation might be
different from legislators’ intent. Language that proponents offered to clarify their
intent regarding contracts included reference to “material participation,” but that did
not satisfy opponents.
7AMI and NMA are meat processor groups. AMI and NCBA both supported the study
proposed by the Craig amendment. (See “Legislative History” above.) The national
representatives of the NCBA and NPPC opposed the ban, while some of their state
organizations supported it.
8Several different types of contracts exist in the livestock industry with differences in
packer/producer control. Forward contracts are one type of contract and may allow a
producer the most control over the production of livestock. Forward contracts specify that
a producer will deliver to a packer a certain number of animals on a certain date.

CRS-7
Material Participation9
The packer provision used the term “material participation,” but did not include
a definition in the legislation. In floor statements, Senators Grassley and Harkin
contended that the use of the term “materially participating” was meant to be the
same as used in the IRS code 1402(a), which refers to payment of self-employment
taxes.
“Material participation” is a concept used often in the Federal tax laws, but not
with a universal definition. For instance, material participation for Self-employment
taxes (IRC § 1402(a)), for Estate taxes (IRC §2032A), for Social Security taxes (SSA
§ 211(a)) and the rules governing passive loses (IRC § 469), all utilize the term
“material participation,” but have different definitions.
The most important factors in finding material participation for purposes of the
Self-employment tax and the Social Security Act are assumption of economic risk,
significant financial commitments to the capital requirements of the business, and
final decision making authority. The Estate tax emphasizes regular consultation and
substantial participation in final management decisions, a pattern of on-site
inspection, and financial contributions. The most restrictive definition is used for
determining passive losses and sets out very specific hourly and yearly requirements
that must be met to be found to be materially participating. The least restrictive is
the definition used in the Social Security Act. The different uses of this term suggest
that it might be prudent for authors of any future proposal of a packer ban to
incorporate a definition of the term or at least specifically refer to what other
definition is intended.
Studies
Several analyses were done on the packer ban. Four studies in particular
received considerable attention in the press and from lawmakers during farm bill
debate. These four studies are summarized below and are listed in the order they
were released. A fifth study, performed by Sparks Companies —a private
agricultural policy firm— was a more in-depth analysis that attempted to place a
dollar value on the effects of the ban. This study also is summarized below.
1. Comments on Economic Impacts of Proposed Legislation to
Prohibit Beef and Pork Packer Ownership, Feeding, or Control of
Livestock.10 Eight agricultural economists from seven universities interpreted the
Johnson amendment as “prohibiting pork and beef packers from feeding, and from
making any arrangement with livestock producers to acquire their livestock more
than two weeks prior to slaughter (including contracting, marketing agreements, and
any promise of delivery).” These economists concluded that livestock prices would
9CRS contact: John Luckey 7-7897, in the American Law Division.
10 D. Feuz, G. Grimes, M.L. Hayenga, S.R. Koontz, J.D. Lawrence, W.D. Purcell, T.C.
Schroeder, and C.E. Ward. January 14, 2002.

CRS-8
not increase with the ban because there is almost no scientific research concluding
that packer ownership or control hurts producers. They speculated that the ban
would block producer access to new branded product lines that offer producers a
larger share of the consumer dollar. Other benefits of contracting, in their view,
include reduced price risk, enable producers to obtain (more favorable terms on)
financing, ensure a timely market outlet, and reduce costs of price discovery.
2. Proposed Legislative Ban on Packer Ownership of Livestock
Mischaracterized by Economists.11 Responding to the first paper, three
agricultural economists and lawyers argued that the Johnson amendment would not
ban all agreements between packers and producers so long as the packer did not
exercise control over the manner in which livestock are produced. In their view,
packers still would be able specify in contracts the characteristics they want in the
livestock they buy. Forward contracts and pricing agreements typically do not give
the integrator managerial or operational control of the farming operation, or control
of the production-to-marketing cycle, according to their analysis. Instead, such
contracts commonly provide the packer with only a contractual right to receive
delivery of livestock in the future.
3. Implications of Banning Packer Ownership of Livestock.12 A
paper written by three agricultural economists at Purdue University, argued that
vertical coordination in the livestock industries is driven by changes in consumer
demand, and producers’ desire to improve the risk/reward sharing between
themselves and packers. The authors contended that the ban could increase packers’
market power since it likely would lead to an increase in contracting, and the new
market would be one for contracts rather than for live animals. With more producers
seeking those contracts, the potential for packers to extract price discriminating rents
from the producers is not likely to decrease, according to this assessment. The
Purdue economists predicted that a ban is likely to make only marginal changes in
the structure of the pork and beef industries, with a few large producers creating
tighter coordination linkages with packers and a few limited geographical production
areas being eliminated.
4. The Ban on Packer Ownership and Feeding of Livestock: Legal
and Economic Implications.13 Four agricultural economists and lawyers wrote
a more extensive paper debating the economic and legal implications of the packer
prohibition. According to their analysis, consolidation has led to an imbalance of
power between meatpackers and independent producers. Similar concerns in the late
1800s and early 1900s, led to passage of the Sherman and Clayton Antitrust Acts and
the 1921 P&S Act. The authors argued that Congress was in an analogous position
during the farm bill debate due to the structure and conduct of the contemporary meat
industry. The authors expressed concern that, as industry structure consolidates
11 R.A. McEowen, P.C. Carstensen, and N.E. Harl.
12 A. Gray, K. Foster, and M. Boehlje. Purdue Agricultural Economics Report. March
2002.
13 J. Connor, P.C. Carstensen, R.A. McEowen, and N.E. Harl.

CRS-9
vertically and horizontally, efficiency gains are less likely to be passed on to either
farmers or consumers. Concerns of market power, thus, rise in importance.
When packers have guaranteed supplies for which they need not bid, they have
far less incentive to bid aggressively in the open market, according to the authors.
More significantly, packers have an incentive to schedule the processing of packer
owned and contracted livestock in order to negatively affect price trends. Since
contract prices are tied to market prices, this provides an incentive for packers to
manipulate the market to which their contracts are tied.
Packer-to-packer trades also can be a method of collusion, according to the
paper. When packers own and raise livestock, they can sell that livestock to other
packers thereby influencing the market price as well as communicating that price to
each other. By limiting packer ownership, the authors contend that the ban would
have removed the ability of packers to manipulate the market in such a manner.
The authors argued that there was no evidence that packer ownership of
livestock is either the best or even a necessary method to achieve efficiency gains.
Contractual arrangements and other kinds of alliances can contribute significantly to
the development of efficient and competitive livestock production, in their view.
Contracts that do not strip the producer of material participation still can provide all
the benefits of coordination and end-product specification that are commonly
identified as desirable elements of current arrangements.
The authors believed the divestiture periods in the ban would allow an orderly
exit from the feeding business. Because cattle require a maximum of six months to
feed from feeder cattle weight to slaughter weight, packers would merely consume
their own product during the divestiture period while refraining from restocking. The
same is true for hogs, which require five to six months from birth to slaughter.
With regard to competitiveness in the export market, the authors argued there
is no credible evidence linking packer ownership to export successes. The dominant
economic factors in exports are monetary policy (strong or weak dollar), subsidies,
tariffs, and the quality of private company marketing staff, according to the authors.
5. Potential Impacts of the Proposed Ban on Packer Ownership
and Feeding of Livestock.14 The “Sparks study” was commissioned by the
NCBA and the NPPC, whose national organizations opposed the ban. According to
their report, the findings were based on extensive reviews of economic studies and
reports, and on interviews with meat packers, livestock feeders, livestock breeders,
agricultural lenders, and others across the industry. The study included a review of
vertical integration and structural changes in the livestock industry, and potential
impacts of the ban on packers, producers, lenders, domestic demand, and exports.
According to Sparks, expected impacts of a ban across the sector likely would
be large, would begin immediately upon implementing the ban, and could severely
damage the sector’s competitive position in U.S. and overseas markets. Losses for
14 Sparks Companies, Inc. March 18, 2002.

CRS-10
hogs across categories, and including both temporary and continuing costs were
estimated to range between $1.6-7.4 billion. Losses for cattle across categories could
be between $2.7-3.5 billion.
The study concluded that primary competitive pressures among products are at
the consumer level, driven by basic changes in society and domestic and international
demands for quality, convenience, and services as lifestyles evolve. The ban would
intervene at the processing and livestock production levels where product
competition is mainly reflected, not where it originates, according to Sparks. It
would impose unwarranted costs where they would benefit no one, without
strengthening demand, efficiency, technology, or competition. In this analysis, the
end results likely would be lower producer prices, higher costs, smaller markets, and
diminished returns for the foreseeable future.
According to Sparks, impacts likely would include: A higher-cost, less efficient
meat packing industry; reduced packer-processor investment would reduce
competitiveness of red meat products in the U.S. market and in export markets;
higher-cost, less efficient feeding and breeding industries; a smaller meat packing
industry (as lower margins cause less-efficient packers to cease operations and reduce
industry capacity); smaller breeding and feeding industries; increased vulnerability
for producers in isolated production areas; and continuing advantage for poultry.
The Sparks analysis contended that during the transition period, effects of the
ban would include divestitures of packer-owned livestock and packer-owned feeding
facilities, curtailment of new marketing contracts by packers, curtailment of financing
by lenders, revision of existing marketing contracts, corporate restructuring, and
litigation.
A Sparks examination of the top 20 pork-packing companies as of 1994,
according to their degree of direct ownership of livestock, indicates:
! Traditional packers (little or no direct ownership of production) declined in
importance, from owning most of the sector’s capacity to about one-third
during the last two hog cycles.
! The “medium” direct ownership group grew until the late 1990s, but also has
been declining the past two years.
! The top 20 companies in 1994 declined to 12 firms. The eight that
disappeared, with one exception, did not own livestock. They have left the
industry or been assimilated by one of the 12 remaining firms.
In nine of the ten rapid-growth states, there was a significant component of
packer ownership of hogs while in the remaining state a strong contracting linkage
was permitted between producers and packers. In the ten states that had sharp
declines in hog production, none had extensive packer investment in herds, and only
two of the ten had even a modest degree of packer investment. Thus, it appears that
over the past decade, swine breeding growth in the U.S. has come only in areas where
packer investment is encouraged while breeding herds in states with little or no
packer investment in production have declined, according to the Sparks study.

CRS-11
Sparks reported the growth in poultry as an illustration of the benefits of vertical
integration. Rapid growth in demand for broilers was fueled by the capacity of
poultry to compete with beef and pork for consumers’ dollars. A major factor was
production efficiency and the capacity to offer better and better price values
compared with other meats. The single most defining characteristic of the U.S.
broiler industry is its high degree of vertical integration. Processors control the
production process, either by owning or contracting each stage from breeding stock
to market-ready products. While chicken producers have benefitted extensively from
integration themselves, they also have benefitted indirectly from the lack of
integration in the beef and pork industries in the past and, according to the Sparks
analysis, a livestock ban would turn back progress made by the livestock industries.
Discussion
While these studies add to the debate, they do not provide conclusive answers
about the potential effects of the ban because the authors have a variety of
backgrounds, initial assumptions, and analytical perspectives. Thus, the studies
arrive at varying and sometimes contradictory conclusions as to effects of a ban. This
point, maybe more than any other, serves to illustrate the difficulty of saying with
certainty whether livestock producers will be helped or harmed by the ban. Even if
supporters and opponents of a ban could agree that concentration and market power
are harming producers, they may be likely to disagree on the proper methods to
address those issues. Additionally, it is uncertain how packers would react to a ban.
In the hog sector there has been talk that packers may divest of processing facilities
and remain as hog producers, since they generate more profits as producers than as
packers. Even though the poultry industry would be unaffected directly by the ban,
some in that industry are concerned about a ban’s future implications for them. They
are concerned that if a ban is placed in the livestock industry, the poultry industry
may receive a ban in the future.
Current Legislative Activity
Senate Agriculture Committee
The Senate Agriculture Committee held a hearing on July 16, 2002, to review
the proposed packer ban.15 Supporters urged action on a packer ban, arguing as they
did in the past, that widespread consolidation and vertical integration had increased
packers’ market power to manipulate livestock and meat markets. In the past,
structural changes were aimed to improving economic efficiencies, while, in their
view, current changes serve only to increase companies’ market and economic power.
Supporters cautioned against single-minded pursuit of economic efficiency, and
urged preservation of a way of life. Prohibiting packer ownership would reduce
concentration and allow access to a competitive market place for independent
producers, in this view. Additionally, supporters stated that many studies had been
15For a list of witnesses and testimony, please visit:
http://agriculture.senate.gov/Hearings/Hearings_2002/July_16__2002/july_16__2002.html

CRS-12
performed on the concentration issue and a further study on the proposed ban would
only delay action and cause additional losses for producers.
Witnesses opposed to the proposed ban urged caution and suggested a federal
study to report on potential effects of a ban. They argued that increased coordination
and vertical integration have come about as the industry strives to meet consumer
demands. Additionally, they contend that contracting allows consistent pricing and
shared risks between segments (i.e., between packers and producers). Thus, banning
packer ownership would force the livestock industry to dismantle what is a successful
system. Additionally, ban opponents argued it would be unfair to single out the
livestock industry from forming relationships with raw material suppliers, while the
poultry industry and the rest of the global business community continue to do so.
Senate Judiciary Committee
The Senate Judiciary Committee held a field hearing on August 23, 2002, in
Sioux Falls, SD, on “Ensuring Competitive and Open Agricultural Markets: Are
Meat Packers Abusing Market Power?”16
Agricultural Appropriations
The House Agricultural Appropriations bill for FY2003 (H.R. 5263; H. Rept.
107-623), directs the Secretary to conduct a study of a packer ownership ban,
particularly as to the economic impacts on the United States as a whole, and on
individual states. The bill would provide $4.5 million for the study, and would
require a report to the House and Senate Appropriations Committees within two
years. The study would be required to include, but not be limited to:
! examination of alternative procurement and transfer methods for livestock in
the farm to retail chain, including producers that participate with packers in
vertically-integrated livestock or meat production;
! agricultural credit for livestock producers; and
! livestock and grain prices and the quality and consistency of meat products
and livestock under a ban.
The Senate Agricultural Appropriations bill for FY2003 (S. 2801) contains no
comparable provision. However, during subcommittee markup on July 23, 2002,
Senator Craig offered an amendment to require a study to be completed within one
year. Senator Johnson opposed the amendment because he believed a study is
unnecessary and would only provide Congress an excuse not to act on the proposed
ban. Subsequently, Senator Craig withdrew his amendment and stated he may offer
it again at a later time.
A proposal under discussion for addition to the FY2003 Agricultural
Appropriations bills would require packers to increase the percentage of livestock
they buy on the spot market. Specifically, packers would have to purchase on the
16For a list of witnesses and testimony, please visit:
http://judiciary.senate.gov/hearing.cfm?id=382

CRS-13
spot market at least 5% of their slaughter needs by 2004, and at least 25% by 2008.
(Please see discussion on H.R. 5247 and S. 2867 below.)
Related Legislation
S. 2021 (Enzi). Amends the Packers and Stockyards Act respecting livestock
producer-packer forward contracts to: (1) require the inclusion of fixed dollar amount
base pricing and public bidding; (2) prohibit formula pricing; (3) limit individual
contract size; and (4) exclude from the definition of “formula price” futures-based
prices and base adjustments resulting from factors outside packer control.
H.R. 5247 (Latham) and S. 2867 (Grassley). Would require packers that
are required to report to USDA under the livestock mandatory price reporting
(LMPR) law (beef packers that slaughter at least 125,000 head annually, hog
processors that slaughter at least 100,000 annually, and lamb packers that slaughter
at least 75,000 annually), to purchase a minimum of their daily slaughter needs on the
spot market. Specifically, packers would have to purchase at least 5% of their daily
slaughter needs on the spot market during 2004 and 2005, 15% during 2006 and
2007, and 25% during 2008 and after. Cooperatives’ purchases on the spot market
must be at least 5%, 7.5%, and 12.5% during the respective time periods.
This legislation is intended to address diminishing sales on the spot market.
Producers have complained that LMPR has failed to improve pricing information and
in some cases has reduced marketing information due to confidentiality reasons. This
legislation would ensure independent producers have a share in the market, and
improve accuracy of LMPR data.