MINUTES

LIVESTOCK PRODUCTION STUDY COMMITTEE

November 29, 1995
First of two meetings

MEMBERS PRESENT

Senator Berl Priebe, Co-chairperson
Representative James Meyer, Co-chairperson
Senator Merlin Bartz
Senator Randal Giannetto
Senator John Kibbie
Senator Lyle Zieman
Representative Sandra Greiner
Representative Dolores Mertz
Representative Norman Mundie
Representative Bill Salton

MEETING IN BRIEF

Minutes prepared by Kregg Halstead, Legal Counsel,
Organizational staffing by Doug Adkisson, Legal Counsel

Procedural Business.
Perspectives and Trends.
Perspectives from a Small Producer.
The Smithfield Opinion.
Production Contracting Task Force.
Livestock Marketing and Credit Issues
Perspectives from a Large Producer.
Perspectives from Producer Organizations.
Livestock Marketing Regulation.
Written Materials Filed with the Legislative Service Bureau.

COMMITTEE BUSINESS

1. Procedural Business.

Call to Order. Co-chairpersons Senator Priebe and Representative Meyer called the first meeting of the Livestock Production Study Committee to order at 9:10 a.m., Wednesday, November 29, 1995, in Committee Room 116 of the Statehouse in Des Moines, Iowa.

Preliminary Business. Senator Priebe and Representative Meyer were unanimously elected the permanent Co-chairpersons of the Committee. Committee rules were also adopted without objection.

Adjournment. The meeting recessed after the day's business on Wednesday, November 29, 1995, at 3:00 p.m.

Next meeting. The Committee tentatively set the date of its next meeting for after January 8, 1996. The Committee agreed to hold public hearings around the state.

2. Perspectives and Trends.

Presentation on the Beef Industry by Dr. Marvin Hayenga, Professor of Economics, Iowa State University. Dr. Hayenga stated that issues related to concentration and vertical integration in the beef industry are often incorrectly linked together. He explained that his presentation was limited to the issue of vertical integration in the beef industry.

Statistics and Recent Events Pertaining to Vertical Integration. Dr. Hayenga noted the following:

a. The top four firms accounted for 82 percent of steer and heifer slaughter in 1994.
b. The leading U.S. companies are also now the largest Canadian beef slaughter firms.
c. The largest farmer cooperative, "Farmland", has entered the beef slaughter industry.
d. Twenty to 30 percent of cattle slaughtered are produced by packers or received by packers under marketing contracts.
e. Studies show little negative price effect of captive supplies on spot market prices.

Litigation Against IBP. Dr. Hayenga discussed litigation that is currently pending against Iowa Beef Processors (IBP) involving discriminatory practices involving Kansas cattle feeders. The United States Department of Agriculture (USDA) has charged IBP with violating the Packers and Stockyards Act, 7 U.S.C. 181 et seq. The USDA alleges "undue or unreasonable preference and undue or unreasonable prejudice or disadvantage" in violation of the Act against IBP for not offering the same terms to similarly situated sellers of comparable livestock. IBP admits to contracting with a group of cattle producers and not offering the same marketing contract to two other feedlots, but denies allegations of legal violations and has requested a hearing.

Marketing Contracts. Dr. Hayenga addressed issues regarding marketing contracts. He stated that access to market contracts by small producers is likely to be adversely affected only if small feedlots become more costly to acquire. Dr. Hayenga stated that the most critical factors for producers in receiving contracts with packers are quality level and volume consistency. He stated that the existence of marketing contracts is not likely to affect spot market prices if there is adequate competition between supply and demand in the spot market. Dr. Hayenga stressed that the continued competitiveness of spot market prices relies on the existence of excess capacity within the packing industry. He expressed the belief that ultimately long-term marketing contracts offer both producers and packers more consistent volume, better quality, increased efficiency, and less risk.

Reporting of Marketing Contracts. Dr. Hayenga stated that marketing contracting should not be compared with the spot market because they are different pricing mechanisms. He added that many companies consider marketing contracts to be proprietary ways to compete. In addition, because many terms vary in contracts, they are almost impossible to report on comparable terms.

Presentation on the Pork Industry by Dr. John Lawrence, Livestock Marketing Economist, Iowa State University.

Statistics and Recent Events Pertaining to Vertical Integration. Dr. Lawrence noted the following:

The top 10 packers account for 75 percent of the nation's pork slaughter capacity.
IBP acquired a pork processing plant in Dubuque, and has announced plans to open a pork slaughter plant in North Carolina.
Tyson traded a slaughter plant in Missouri to Excel for more broiler processing operations.
Smithfield acquired Morrell slaughter plants in Sioux City and Sioux Falls, and is now approximately the same size as IBP.
The top four firms account for approximately 53 percent of slaughter, and all four are rapidly expanding.
Iowa had 200 buying stations in 1994 which is 40 fewer than in 1986.

Hog Markets and Marketing Practices. Dr. Lawrence noted the following:

Iowa had excess packer capacity in 1994.
- Production was 24,800,000 head.
- Slaughter capacity was 31,100,000 head.
Iowa has 11 packing plants.
Five of the top 10 packers in terms of slaughter capacity are located in Iowa.

Marketing Contracts. Dr. Lawrence stated that producers are increasingly interested in securing long-term marketing contracts. He described the three most frequently used types of marketing contracts: formula contracts, which tie prices to the current or recent cash market such as the three-day rolling average of Iowa and Southern Minnesota; window contracts, which have predetermined upper and lower price boundaries in which producers receive cash prices between the boundaries and share the profit or loss outside the boundaries; and cost-plus contracts, which have a minimum price based on the standard cost of production with adjustments for corn and soy bean prices and debit lower prices to an account which are paid back during periods of higher prices. Cost-plus contracts split higher prices between the account and the producer.

1995 Grimes and Rhodes Study. Dr. Lawrence discussed a study conducted among American producers who marketed 1,000 or more head. According to the study, spot markets accounted for 62 percent of hog sales. However, the use of spot markets declined as the size of the producer increased. Formula contracts accounted for 26 percent of hog sales. However, the use of formula contracts increased as the size of the producer increased. In general, the larger the size of the producer, the less likely that producer sold at spot markets and the more likely that producer sold on formula contracts.

Iowa Pork Producers Association 1995 Market Survey. Dr. Lawrence explained the results of this survey:

Seventy-six percent of hogs are priced by producers one day prior to delivery to a packer.
Forty-seven percent of producers receive one bid prior to selling hogs to a packer.
Thirty-nine percent of producers receive two bids prior to selling hogs to a packer.
Twelve percent of hogs are sold on other than the spot market pursuant to various marketing contracts.

Sample by ISU Extension Service of Regional Buyer Competition. Dr. Lawrence explained the following sample of four different counties in Iowa, one county each being from Iowa's northeast, northwest, southeast, and southwest.

The sample showed a maximum of nine and a minimum of five different hog buyers within 100 miles of producers in a particular county.
The sample showed a maximum of six and a minimum of five different hog buyers within 50 miles of producers in a particular county.

Discussion. Dr. Lawrence informed the Committee that soon the ISU Extension Service will complete a study predicting the five year future of the Iowa pork industry.
Senator Kibbie stressed the need to have a "level playing field" to keep small producers from being driven out of the market. Dr. Lawrence responded to Senator Bartz's question about producers who market 1,000 hogs or less per year by stating that these producers account for 17 percent of the hogs marketed in Iowa.
Dr. Hayenga stated that there is more competition in Iowa than there was 10 years ago and that in order to compete producers must change their method of operating. He stressed that the availability of livestock will determine where new packing plants will be located.
Dr. Lawrence remarked that Iowa has sufficient slaughter capacity and also possesses enough competition. He predicted that efficient producers will remain competitive and that producers will need to sell more than 1,000 hogs per year. Dr. Lawrence stated that marketing by producers is not inhibited by current Iowa law. He expressed the belief that Iowa is a relatively open state for producers and packers.
Dr. Lawrence declared that maintaining Iowa's status of being number one in the nation in producing pork tonnage should not be the state's highest priority. Dr. Lawrence stated that it would be better for Iowa to lead in terms of pork quality and swine production.
Representative Salton expressed his concern about the pork industry declining in Iowa. He expressed his concern that the tax base of Iowa will be affected. Representative Salton noted that the pork industry supplies 90,000 jobs in Iowa. He suggested that the General Assembly should better promote the development of value-added products.
Dr. Lawrence stated that Iowa faces a choice of keeping its traditional markets open or join states like North Carolina and allow vertical integration by packers.

Dr. Hayenga remarked that competition is now international and that technology is changing. He stressed that Iowa producers must change production and marketing strategies to remain viable. Dr. Hayenga stated that economic realities favoring large-scale production will eventually intervene.
Representative Mundie commented that the current trend is hurting independent producers.
Co-chairperson Priebe commented that some Iowa farmers have elected not to raise livestock. He stated that these farmers prefer to grow crops. Co-chairperson Priebe added that he hopes that technology will offer solutions to the livestock odor problem. He stated that he is more concerned about the effect of livestock production on water quality.

3. Perspectives from a Small Producer.

Mr. Harlan Meyer, Family Farmer, Sac City, Iowa, presented the following recommendations:

a. Packer Pricing. The prices paid by packers to producers should be based on the quality of the carcass rather than on production methods.

Rationale: Production methods such as volume, genetics, and feeding methods have less to do with meat quality than they do with convenience to the processors.

b. Meat Quality Standards. Make public knowledge of the standards for distinguishing between carcass meats.

Rationale: This change would allow independent producers and consumers to have a better understanding of the quality of meat produced.

c. Price Reporting System. The creation of a price reporting system that includes disclosure of all prices paid for the purchase of livestock.

Rationale: This change would discourage unfair competition and ensure openness in livestock selling.

d. Price Discrimination. Amend chapter 551 of the Iowa Code by prohibiting packers from discriminating in the prices that they offer to different producers. Price differences would be permitted based on differences in quality, acquisition costs, and delivery times.

Rationale: This change would provide small, independent producers with access to markets at competitive prices.

e. Co-op Contracting. Amend section 9H.2 of the Iowa Code by eliminating the exception allowing packers which are cooperative associations to contract for the care and feeding of swine. In addition, increase the punishment for violations of this prohibition from $25,000 to $100,000.

Rationale: This change would close loopholes in the corporate farming law that have allowed large corporate farms to operate in Iowa, including packers or processors producing their own livestock.

4. The Smithfield Case

Presentation by Mr. Tim Benton, Assistant Attorney General. Mr. Benton explained the findings of the Attorney General's Office after investigating an out-of-state processor (Smithfield) which was entering into contract feeding arrangements with Iowa swine producers. He noted that Iowa's corporate farming law (chapter 9H of the Iowa Code) which restricts processors from entering into contracts for the care and feeding of swine, could not be used to prevent the practices by Smithfield. Specifically, Mr. Benton discussed the definition of "processor" included in section 9H.1 of the Iowa Code, concluding that Smithfield could not be considered a processor under the section. He also noted that the prohibition appears only to apply to processors located in Iowa.

5. Production Contracting Task Force.

Presentation by Mr. Eric Tabor, Assistant Attorney General. Mr. Tabor explained that the Iowa Attorney General's Office has established a check list for producers to follow before they enter into a contract with a packer. The check list recommends that prior to contracting a producer should:

Consult with an attorney.
Calculate the costs of production.
Consider the following operational issues:
1. Who is responsible for providing feed?
2. What will be the quantity of feed?
3. Is the health of the hogs guaranteed?
4. Who is responsible for paying a veterinarian?
5. Who decides if bonuses will be paid?
6. Is alternative dispute resolution an option for settling disputes?
7. Which state's law shall apply if the parties to a contract are from different states?
8. What will the effect of the contract be on neighbors?
9. What is the long-term outlook for producers entering into contracts?

Mr. Tabor added that the Iowa Attorney General's Office considered but ultimately rejected the idea of regulating contracts between producers and packers.

6. Livestock Marketing and Contract Issues.

Mr. Larry L. Reding, Vice President Agribusiness Finance Division, Farm Credit Services of the Midlands, made the following recommendations:

Farmer Pooling Arrangements. Amend section 9H of the Iowa Code by allowing groups of farmers of more than 25 persons to pool their investment and production capabilities.

Rationale: Chapter 9H has built a legal fence around Iowa that allows large private individuals an unfair advantage in adopting the techniques which meet consumer driven demands. Chapter 9H should be changed to allow farmers to create legal entities with equity levels and size capabilities that can compete with large, sole proprietor, family farms. More than 50 of the type of legal entities that would be allowed by this change are already operating successfully in Minnesota, North Dakota, and Wisconsin. Known as "new generation value-added cooperatives", these entities are marketing their member producers' commodities into pasta, potatoes, and dairy products, and further processing member producers' eggs and meats.

1995 Legislation. Preserve the livestock regulatory system established by 1995 Iowa Acts, Chapter 195 (House File 519), enacted during the 1995 legislative session.

Rationale: House File 519 is the best, most comprehensive, and balanced livestock legislation that has been adopted by any Midwestern state. House File 519 should be allowed to work so that producers may make investments in the technology necessary for them to be competitive. Producers will only make these investments with the protection and assurance that regulations pertaining to their operations will be maintained and not be modified without adequate reflection.

Discussion. Mr. Reding responded to Representative Mundie's question by stating that the "playing field" would be more level if Chapter 9H had never been adopted. Representative Mundie interjected that he hears support among producers not for weakening but for strengthening Chapter 9H.
Mr. Reding responded to a question by Representative Greiner by stating that agricultural lenders readily lend money to financially-sound pork producers.
Senator Kibbie stated that House File 519 has resulted in a situation whereby a producer can build a confinement facility of less than 5,000 hogs without obtaining a permit, near neighbors who have lived there all of their life. He added that neighbors have no legal recourse to prevent construction.

7. Perspectives from a Large Producer.

Presentation by Mr. Conley Nelson, Iowa Operations Manager, Murphy Family Farms ("Murphy"). Mr. Nelson described the Murphy operation. This North Carolina-based entity has 45 employees in Iowa and contracts with 100 Iowa producers. According to Mr. Nelson, Murphy is hoping to increase contracts with Iowa producers.

Selling Procedures. Mr. Nelson reported that Murphy began selling hogs in 1988 on a carcass-merit basis trying to capitalize on packers' increasing demand for leaner hogs. Murphy does not have any long-term contracts with packers, nor does Murphy receive premium prices based on volume. In addition, according to Mr. Nelson, Murphy has no risk-sharing contracts and is instead subject to daily market fluctuations. He stated that Murphy sells to numerous packers and receives a premium for quality.

Observations. Mr. Nelson expressed the belief that losing packers would severely impact Iowa producers. He stated that efficient pork producers probably will need to pressure packers for long-term contracts which ensure financial stability. Mr. Nelson declared that if producers make correct business decisions, they will fare well, regardless of their size. He stated that a producer's aggregate numbers are not an advantage because there are too many hogs slaughtered in Iowa for the hog numbers of one producer to make a difference.

8. Perspectives from Producer Organizations.

Mr. Jon Caspers, Past President, Iowa Pork Producers Association, made the following recommendation:

Federal Level. The issue of long-term access to competitive markets for hogs should be dealt with at the federal level.

Rationale: Action at the federal level will not damage the competitive position of Iowa producers and packers.

USDA Study. USDA Secretary Dan Glickman should conduct a comprehensive study of market access, price discovery, and effective market reporting.

rationale: The results of such a study would better inform producers of the competition that they are facing. In addition, the results would inform the USDA of its proper course of action in dealing with these issues.

1995 Market Access Survey. Mr. Caspers reported the following preliminary results of this survey:

Most producers consistently sell to one packer.
Most producers sell in volumes which equal the number of animals which can be transported in a trailer.
Virtually all packers discount the price if the producer has not sorted the animals.
Virtually all producers are eligible to receive some type of carcass-merit premium.

Warning Signs. Mr. Caspers states that a comparison of the June United States Department of Agriculture (USDA) report from 1993 to 1995 indicates a decline of 200,000 sows in Iowa breeding herds. However, Mr. Caspers noted that over the same time period, North Carolina's breeding herds increased by 320,000 sows.

Discussion. Senator Kibbie stated that the three most important issues that concern pork producers are:

The process of obtaining permits for confinement feeding operations.
Lawsuits based on nuisance law.
Zoning regulations.

Representative Mundie criticized 1995 Iowa Acts, Chapter 195 (House File 519) stating that the law's nuisance protection encourage a bad neighbor policy.
Mr. Caspers responded by advising members to take a deliberate, unemotional approach to the law.

Mr. Tim Kampstra, Iowa Poultry Association, addressed the following:

Observation. Mr. Kampstra noted that the broiler industry has been vertically integrated for many years and expressed the belief that vertical integration in the poultry industry has proven beneficial for Iowa producers.

Separate Treatment. Legislation should address poultry as a separate entity distinct from beef and pork.

rationale: Poultry production has developed as an entirely unique industry with its own specific characteristics.

Corporate Farming Law. He suggested that the General Assembly should amend the corporate farming law (Chapter 9H) to encourage broiler production in the state.

rationale: Iowa needs more processing facilities to handle increased broiler needs.

Mr. Wythe Willey, President, Iowa Cattlemens Association, made the following recommendations:

Observations. Mr. Willey expressed the belief that the beef industry is currently not vertically integrated and that concerns about the issue should be addressed at the federal level. Mr. Willey reported that beef cattle produce 25 percent of all agricultural revenue earned in Iowa.

Marketing Contracts. Marketing contracts are necessary for some producers to stay in business but price reporting is, nevertheless, important to the beef industry.

Rationale: Price reporting is part of the effort to prevent collusion and retain open markets.

Beef Processing. The General Assembly should encourage beef processing plants to locate in Iowa. In addition, new technologies of smaller, high tech packing plants should be supported with legislative funding.

Rationale: Unlike the pork industry, most Iowa cattle must be delivered out- of-state to be processed. The law needs additional processing and slaughter capacity to preserve beef production in Iowa.

Environment. Any future legislation regarding environmental impacts of animal feeding operations should concern swine production.

Competitiveness. Legislation should not be passed that limits the competitiveness of Iowa beef producers in relation to beef producers in other states.

Tax Credit. The General Assembly should enact a pasture tax credit.

Rationale: Iowa beef producers pay more in property taxes per cow than beef producers pay in neighboring states.

Corporate Farming Law. The General Assembly should not reduce the competitiveness of Iowa beef producers by amending provisions in Chapter 9H which apply to vertical integration.

The Future of the Beef Industry. Mr. Willey predicted that expansion will continue among beef producers of moderate size who are profitable. He stated that growth is already occurring in the 500-head to 2,000-head feedlots. Mr. Willey concluded by commenting that improved access for Iowa products to the domestic and international markets is very important.

9. Livestock Marketing Regulation.

Mr. Keith Kienow, Regional Supervisor Omaha Office, Grain Inspection, Packers, and Stockyards Administration, USDA, presented the folloiwng:

Function of the Packers and Stockyards Programs. Mr. Kienow explained that his agency is responsible for administering the Packers and Stockyards Act of 1921.
Mr. Kienow stated that the principal purpose of his agency is to assure the integrity of the livestock, meat, and poultry markets and the market place. This includes fostering fair and open competition and guarding against deceptive and fraudulent practices which affect the movement and price of meat animals and their related products. According to Mr. Kienow, the goal of the agency is to protect consumers and members of the livestock, meat, and poultry industries against unfair business practices which unduly affect meat and poultry distribution and prices. The Packers and Stockyards Act. Mr. Kienow described the principal activities in administering the Act:

a. Investigating packer meat merchandising and retailer buying in order to maintain prices established by fair and competitive marketing practices.
b. Investigating the financial condition and payment practices of market agencies, dealers, packers, and live poultry dealers subject to the Act to determine if they are financially sound and capable of meeting their obligations.
c. Maintaining the integrity of the statutory trust for cash sellers of livestock and poultry.
d. Surveillance of marketing at public markets and geographical area markets to foster and maintain fair and effective competition and avoid conflicts of interest.
e. Obtaining adequate surety bonds from auction operators, commission firms, dealers, and packers to assure payment for livestock purchase.
f. Investigating poultry marketing practices to identify and correct practices which are injurious to producers.
g. Check weighing at auction markets, terminal stockyards, and at packer and dealer buying stations to foster and maintain their integrity.
h. Maintaining a surveillance program at stockyards to assure livestock are subject to proper care and handling.

10. Written Materials Filed with the Legislative Service Bureau.

a. Beef Industry. Submitted by Dr. Marvin Hayenga, Professor of Economics, Iowa State University.
b. Hog Markets and Marketing Practices. Submitted by Dr. John Lawrence, Livestock Marketing Economist, Iowa State University.
c. The Changing Hog Slaughter Industry and Buyer Competition in Iowa. Submitted by Dr. John Lawrence, Livestock Marketing Economist, Iowa State University.
d. Long-Term Hog Marketing Agreements. Submitted by Dr. John Lawrence, Livestock Marketing Economist, Iowa State University.
e. Market Hog Purchase Agreement Example. Submitted by Dr. John Lawrence, Livestock Marketing Economist, Iowa State University.
f. Agriculture Hearing on Livestock Industry. Submitted by Mr. Harlan Meyer, Family Farmer, Sac City, Iowa.
g. Letter of Testimony. Submitted by Mr. Jim Braun, Family Farmer, Latimer.
h. Corporate Farming Law Prohibition on Contract Feeding. Submitted by Mr. Doug Adkisson, Legal Counsel, Legislative Service Bureau.
i. Letter to the Secretary of Agriculture. Submitted by Mr. Doug Adkisson, Legal Counsel, Legislative Service Bureau.
j. From a Lenders Perspective - Inequalities in Livestock Production and Marketing in Iowa. Submitted by Mr. Larry L. Reding, Vice President Agribusiness Finance Division, Farm Credit Services of the Midlands.
k. Remarks of Jon Caspers, Past President, Iowa Pork Producers Association. Submitted by Mr. Jon Caspers, Past President, Iowa Pork Producers Association.
l. Testimony Outline. Submitted by Mr. Wythe Willey, President, Iowa Cattlemens Association.
m. Packers and Stockyards Explanatory Statement. Submitted by Mr. Keith Kienow, Regional supervisor Omaha Office, Grain Inspection, Packers and Stockyards Administration, USDA.

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