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Report: Packers are killing competition
with contracts, other ‘captive supply’ arrangements

USDA & Dept. of Justice should “immediately” begin
enforcing antitrust laws, conclude authors

by Brian DeVore
White Bear Lake, Minnesota

Meat packers are robbing the pork industry of its competitiveness through the use of exclusive contracts, formula pricing and other “captive supply” arrangements, according to a new report released by the Land Stewardship Project (LSP) today.

The report, Killing Competition With Captive Supplies, also found that the federal government has failed to implement the legal authority it has to prevent meat packers from shutting independent farmers out of the market. This is particularly troubling considering that between 64 and 70 percent of all hogs sold are no longer part of the open market, and almost 60 percent of the pork slaughter is controlled by four firms (Smithfield Foods, IBP, ConAgra and Cargill), concluded the report.

The report is based on interviews with hog farmers from Minnesota, Iowa and South Dakota, as well as an extensive review of the economic literature. LSP was assisted in the interviews by Dakota Rural Action and Iowa Citizens for Community Improvement. The report also includes a legal analysis of the Packers and Stockyards Act.

The main findings of Killing Competition With Captive Supplies include:

  • Packers’ practice of acquiring captive supplies through contracts and direct ownership is reducing the number of opportunities for small- and medium-sized farmers to sell their hogs. Fewer than 30 percent of U.S. hogs are marketed on the open cash market.
  • With fewer buyers and more captive supply, there is less competition for independent farmers’ hogs and insufficient market information regarding price. Lower prices result.
  • Packer control of the market is pervasive.
  • Farmers reported facing daily what they call a mind game, which they describe as pressure from agricultural leaders to conform to the new factory farm system of hog production.
  • Despite some recent indications of growing interest in addressing the impact of packer concentration and vertical coordination in the livestock markets, the USDA has taken no significant action to reform its trade practices regulations.

This last point is particularly troubling to Lynn Hayes, an attorney with Farmers Legal Action Group (FLAG) who wrote the report’s legal analysis. For almost three-quarters of a century, the USDA’s Grain Inspection and Packers and Stockyards Administration, as well as the U.S. Department of Justice, have had the authority to prevent industries like pork from becoming controlled  by a handful of packers, she said.

“We don’t need new laws on the books. We already have ones that address this issue,” said Hayes. “But the government’s failure to use them is making antitrust enforcement a joke.”

In recent years, Sacred Heart, Minnesota, hog farmer Rodney Skalbeck has run into the “mind game” described in the report by other independent producers. For example, in 1994 he received $30 per hundred pounds for a load of hogs he had sold to a local buying station.

“The manager of the buying station told me that a particular mega-hog operation in the county was receiving $42 per hundredweight at that same time,” said Skalbeck.  “My hogs graded 90 percent number ones, the rest number twos. The manager said some of their hogs graded number threes. They wouldn’t even buy number threes from me.”

Dave Serfling, a crop and livestock farmer from Preston, Minn., said he can produce hogs as efficiently as mega-contract producers, but it’s frustrating to see larger operators receive significant premiums based on nothing but their size.

“If I don’t have a competitive market to sell those hogs in, it doesn’t matter how cheaply I produce quality pork,” said Serfling, who markets 700 pigs a year. “I simply have to have a place to sell them.”

Paul Sobocinski, a Wabasso, Minnesota, farmer who conducted interviews for the study, said he was amazed at the amount of market access independent farmers reported losing just within the past few years.

“I heard story after story of buying stations being closed without notice and packing plants narrowing the time frame within which they would accept hogs from independent producers,” said Sobocinski. “Contract hogs from large corporations are filling more and more of the kill slots at these plants.”

Based on the report’s findings, the authors make several recommendations, including:

• The USDA and the Department of Justice should immediately develop and make public a coordinated plan for consultation, communication, investigation and enforcement of all antitrust laws in the livestock packing and production industries.

• Regulations should be issued that identify the circumstances under which volume premiums, inconsistent application of grade and yield, use of captive supply contracts and other terms of purchase violate Section 202 of the Packers and Stockyards.

• The USDA should require packers to report all packer purchases of hogs, including all details of those purchases.

• USDA and land grant researchers should increase investigation of the impact captive supply procurement has on family farmers.

• State policy makers should specifically prohibit packers from owning hogs or hog operations in the state.

“The big packers are using every means at their disposal to take absolute control of the U.S. hog industry,” said Mark Schultz, LSP’s Policy Program Director. “The USDA, under the Clinton-Gore administration, has left the door wide open for this to happen. This has got to change.”

For a copy of Killing Competition With Captive Supplies, send a check or money order for $6 ($6.39 for Minnesota residents) to: LSP, 2200 4th Street, White Bear Lake, MN 55110; phone: 651-653-0618. That price covers shipping and handling; make checks payable to Land Stewardship Project.

Brian DeVore is editor of the Land Stewardship Letter, which is published by the Minnesota-based Land Stewardship Project, a private, nonprofit organization dedicated to fostering an ethic of stewardship for farmland and to promoting sustainable agriculture. DeVore has written about agriculture for Sierra, Whole Earth, Successful Farming, the Des Moines Register and Farm Futures. He was born and raised on a southwest Iowa crop and livestock farm, and served as a Peace Corps volunteer in Lesotho.

Published in In Motion Magazine May 3, 1999.