Obstacles to Market Access for Family Farm Hog Producers

Final Report for LNC95-092

Project Type: Research and Education
Funds awarded in 1995: $50,180.00
Projected End Date: 12/31/1999
Matching Non-Federal Funds: $15,750.00
Region: North Central
State: Minnesota
Project Coordinator:
Mark Schultz
Land Stewardship Project
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Project Information

Summary:

Objectives:
1. Document farmers’ experiences with packer activity restricting access to markets and causing lower prices to farmers. Identify changes in packer procurement that adversely impact independent producers.
2. Identify economic impact of packer concentration and vertical coordination on family farm livestock production.
3. Complete a legal analysis of Packers and Stockyards enforcement.
4. Publish, disseminate and create discussion of the report, with recommendations.

Methods:
Objective 1: a) conduct 25+ in-depth interviews with independent hog producers
b) gather other information documenting farmers’ experience.

Objective 2: a) compile and review key economic studies on packer concentration and independent hog farmer market access and price issues.
b) identify specific packer practices that have a negative impact on prices paid to producers and producers’ access to markets.

Objective 3: a) summarize and analyze and evaluate the legislative, judicial, and administrative history regarding Packers and Stockyards Act.
b) describe procedures for obtaining administrative and judicial enforcement.

Objective 4 a) publish a report describing the findings from Objectives 1 – 3.
b) publicize the report’s release through media outlets, farm and agricultural meetings, organizational newsletters and websites.
c) distribute copies of the report to key policymakers and farm and rural leaders.
d) create and disseminate fact sheets featuring key data and findings.

Results: This project makes clear the pattern of meatpacker policies and practices that are resulting in vastly decreased market access and lower prices for independent hog farmers. In particular, meatpackers’ use of long-term production contracts with large-scale producers, as well as increasing expansion of packer production of finished hogs in their own facilities (or in joint ventures with large-scale producers), result in independent hog producers being reduced to residual suppliers, used by meatpackers to “fill in” the packers’ supply needs around their large captive supplies. Several changes in industry, producer, and government policy and practice are proposed in the report to address the issue of inequitable access and prices.

Impacts and Potential Contributions: The publication and dissemination of the report, along with the increased understanding of the issues by participating organizations and hog producers, has raised the awareness of hog producers, farm organizations, and policymakers of the problems and potential solutions related to market access for independent hog farmers. The project highlights the understanding that for a sustainable agriculture to advance in the region beyond the “niche” phase, independent family farm livestock producers must have fair access to markets, both conventional and alternative.

Introduction:

The findings about packer impact on market access suggest a clear trend toward preference for capital-intensive, large-scale hog production and captive supply purchasing mechanisms such as marketing contracts or direct ownership. If this trend continues at its present pace, significant expansion of the number of sustainable integrated crop and livestock production operations is highly unlikely, without policy changes that protect the livestock markets from being controlled by a particular sector of the industry, combined with new marketing strategies by family farm hog producers. This study found:

a) Packers’ practice of acquiring captive supplies through marketing contracts of various kinds, and through direct ownership, is reducing the number of opportunities for small- and medium-sized farmers to sell their hogs. Two major methods used by packers to restrict independent producers’ access to markets were identified: closing of buying stations, and packers simply not buying hogs (or offering competitive prices) off the open market. According to government estimates, nearly 70% of hog slaughter is of hogs that never appear on the open market, whose price is never known, and which are either directly owned by a packer or controlled (“held in captive supply”) by a packer through secret marketing contracts.

b) With fewer buyers and more captive supply, there is less competition for independent farmers’ hogs and insufficient market information regarding price. Inadequate price discovery results in lower prices, especially when one party (the buyer) knows the prices being paid, but the other party (the seller) does not. This situation is exacerbated in the hog market by the packers’ practice of paying price premiums through confidential marketing agreements with favored producers. Furthermore, hog packer concentration set historic highs, as the four-firm ratio approached 60% by the end of 1998. When the ratio exceeds 40%, firms start having enough market power to have some control over price, and increasing power to control prices as the ratio increases.

c) Despite some recent indications of growing interest in addressing the impact of packer concentration and vertical coordination in the livestock markets, as of May 1999, the USDA had taken no significant action to reform its trade practices regulations. In particular, the Grain Inspection and Packers and Stockyards Administration (GIPSA) of the USDA is not fulfilling its obligation of enforcing the Packers and Stockyards Act and other laws enacted to protect producers’ interests and ensure open, competitive markets for livestock.

d) 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. Whether in the mainstream ag media or Extension-organized conferences, farmers pointed to the constant message that independent hog production will give way to contract production and packer-owned facilities as a major factor impacting their hog production plans and outlook.

These findings are described in the report, Killing Competition with Captive Supplies, which also recommends federal and state policy action, as well as producer and consumer action, that could be taken to address the situation, and make it possible to keep hog production as a viable strategy for family farmers working towards sustainability.

Project Objectives:

1. Document farmers’ experiences with packer activity restricting access to markets and causing lower prices to farmers. Identify changes in packer procurement that adversely impact independent producers.
2. Identify economic impact of packer concentration and vertical coordination on family farm livestock production.
3. Complete a legal analysis of Packers and Stockyards enforcement.
4. Publish, disseminate and create discussion of the report, with recommendations.

Cooperators

Click linked name(s) to expand
  • John Bixler
  • Hugh Espey
  • Lynn Hayes
  • Jim Kliebeustein
  • Mark Schultz

Research

Materials and methods:
Methods / Approach

Objective 1:
a) conduct 25+ in-depth interviews with independent hog producers;
b) gather other information documenting farmers’ experience.

The purpose of conducting interviews with hog farmers as part of this study was to document the problems family farm hog producers are experiencing in finding competitively-priced markets for their livestock. Because this study deals with market access and price, the interviews were designed to focus on packer activity and its impact on which markets are available to independent hog farmers and the prices they receive, along with other issues impacting their market access.

Objective 2:
a) compile and review key economic studies on packer concentration and independent hog farmer market access and price issues;
b) identify specific packer practices that have a negative impact on prices paid to producers and producers’ access to markets.

In order to identify the economic impact of packer concentration and vertical integration on family farm hog producers, we compiled and reviewed key economic studies on packer concentration and independent hog farmer market access and price issues. We consulted with economists in the field, including Dr. James Kliebenstein, Dr. John Helmuth, Dr. Katherine Durham, and Dr. Azzadine Azzam, regarding economic impact and the studies that have been done. We identified specific packer practices that have a negative impact on prices paid to producers and producers’ access to markets. Dr. Kliebenstein reviewed this segment of the report prior to publication.

Objective 3:
a) summarize, analyze and evaluate the legislative, judicial, and administrative history regarding the Packers and Stockyards Act;
b) describe procedures for obtaining administrative and judicial enforcement.

The Farmers Legal Action Group (FLAG) conducted the legal analysis of Packers and Stockyards Act enforcement. Attorneys at FLAG completed legal research, including legislative history and case law. They conducted a literature search of pertinent economic and legal issues, analyzed and evaluated economic research by reviewing studies conducted by the Packers and Stockyards Administration (P&SA) and by university economists, and consulted with academic authors and P&SA personnel. FLAG, which is expert in these areas, also described procedures for obtaining administrative and judicial enforcement.

Objective 4:
a) publish a report describing the findings from Objectives 1 – 3.
b) publicize the report’s release through media outlets, farm and agricultural meetings, organizational newsletters and websites.
c) distribute copies of the report to key policymakers and farm and rural leaders.
d) create and disseminate fact sheets featuring key data and findings.

In April 1999, LSP published a 47-page report entitled Killing Competition with Captive Supplies. We decided on a published report in order to document our findings in a format that could be used by farmers and others to analyze what was happening in the hog industry, and suggest actions they could take to address some adverse trends. Following an executive summary and an introduction, Chapter 3 is called “Farmers’ Experiences — Patterns of Market Discrimination.” The following chapter is entitled “Economic Impact of Packer Concentration and Vertical Coordination on Family Farm Livestock Production.” Chapter 5 deals with “Legal Authority for Regulating Packer Practices and Price Reporting.” The report concludes with a short chapter on recommendations, followed by references and notes.
We targeted our release and dissemination plan to reach hog farmers, reporters and editors, researchers, farm organizations, policymakers at the state and federal levels, and law enforcement officials.

Research results and discussion:

Objective 1: Document farmers’ experiences with packer activity restricting access to markets and causing lower prices to farmers. Identify changes in packer procurement that adversely impact independent producers.

We conducted 28 in-depth interviews with independent hog producers in three states (Iowa, Minnesota, and South Dakota). Sixteen questions were asked in interviews conducted by phone in November and December of 1997, by staff of Dakota Rural Action, Iowa Citizens for Community Improvement, and the Land Stewardship Project. The farmers were chosen based on their status as independent hog producers. Their hog-raising practices cover a broad range, including total confinement, pasture farrowing, antibiotic-free systems, farrow to finish, feeder pig operations, deep-bedded straw systems, breeding stock, etc. After completing the interviews, we summarized and reviewed the results with a smaller group of hog farmers to clarify and note patterns of response.

In addition, we compiled other information, such as articles, letters to the editors, and interviews in the print and electronic media, to document hog farmers’ experience with packer market access, and to identify the policies and practices of hog packers that affect family farm hog producers.

The main problems identified by the hog farmers interviewed and substantiated by other information sources were: (a) captive supplies (hogs under marketing contracts or owned directly by packers), which close access to markets for independent sellers of hogs; (b) Premium prices paid to producers who provide packers with a guaranteed volume, meaning lower prices received by smaller producers who don’t guarantee such volumes; (c) closure of buying stations; (d) concentration of the pork processing industry means fewer buyers of hogs — combined with the increase in exclusive contracts and packer-owned hogs, this results in lower prices to independent family farms. Farmers also talked about the frequent statements (in the media, in person, at conferences, etc.) made by lenders, Extension personnel, suppliers, and others (in addition to packers) that independent hog production is a thing of the past, calling it a pervasive “mind game” that also impacted independent producers’ ability to make plans for their farming future.

Objective 2: Identify economic impact of packer concentration and vertical coordination on family farm livestock production.

Much of what has been written about the economic impacts of concentration and vertical integration in the hog industry becomes swiftly outdated. We frequently were updating the report as new mergers were announced and as the percentage of captive supplies increased. Even since the report was released in April 1999, Smithfield has announced plans to purchase the hog operations of industry leader Murphy Farms and top ten hog producer Tyson, making Smithfield the largest hog producer in the U.S. as well as the largest hog packer, and greatly increasing the percentage of Smithfield’s hogs that are in captive supply (to about 70%).

Nonetheless, our study made two factors very clear: (a) Packer concentration and use of captive supplies are high enough to have significant control over market prices paid for hogs; (b) the use of secretive marketing contracts to such a high degree makes accurate price discovery impossible for producers, leaving them at a further disadvantage to an increasingly small set of very large packers. In addition, prior to this report, it was poorly understood how high the levels of captive supply in the hog industry had advanced — to nearly 70% in April 1999.

Objective 3: Complete a legal analysis of Packers and Stockyards enforcement.

The legal analysis completed during this project by the Farmers Legal Action Group (FLAG) demonstrates that USDA is directed by the Packers and Stockyards Act to take action against livestock buying practices that lock independent livestock producers out of the marketing system. This analysis is based on legislative history, case law, and policy analysis. Despite some recent indications of growing interest in addressing the impact of packer concentration and vertical coordination in the livestock markets, as of May 1999, the USDA had taken no significant action to reform its trade practices regulations. In particular, the Grain Inspection and Packers and Stockyards Administration (GIPSA) of the USDA is not fulfilling its obligation of enforcing the Packers and Stockyards Act and other laws enacted to protect producers’ interests and ensure open, competitive markets for livestock.

Objective 4: Publish, disseminate, and create discussion of the report, with recommendations.

We published our report, Killing Competition with Captive Supplies, in April 1999. Media coverage of the report’s release included radio, newspaper, and magazine stories. WCCO Radio (Minnesota’s largest radio station and one which many farmers listen to) ran a good story and interview. The Hog Industry Insider (a semi-monthly supplement to the nationwide agribusiness journal Feedstuffs) ran a story which began “A report by the Land Stewardship Project (LSP) of Minnesota this spring has fueled the debate on hog industry concentration.” The article concluded, “In laying out a case for mandatory reporting of cash and contract prices and enforcement of federal regulations, the report concluded that USDA and land grant researchers should analyze the influence of rising captive supplies on the cash market and packer competitiveness, as well as the impact of consolidation on community infrastructures.” Several rural and agricultural weeklies and dailies also ran stories. Many organizations ran excerpts and ordering information in their newsletters, and/or placed them on their websites.

We released the report to farmers and policymakers at a large farm meeting LSP organized on April 18, 1999 in South St. Paul, attended by more than 800 farmers and rural citizens from 10 states. At the meeting, copies of the report were given to interested farmers, media, and policymakers from USDA, Department of Justice, MN Department of Agriculture, MN Attorney General’s office, and state and federal lawmakers from Minnesota, South Dakota, Iowa, Kansas, Wisconsin, and Nebraska. Iowa Citizens for Community Improvement and Dakota Rural Action (South Dakota) also sent out press releases and conducted interviews in their states as part of the project. A commentary discussing key findings and recommendations ran in several papers during the summer, and was widely distributed, along with the report. The report was submitted as part of the State of Minnesota’s Generic Environmental Impact Study on animal agriculture. To date, we have distributed more than 400 copies of the report, as well as many more times that copies of the commentaries and fact sheet drawn from it.

Research conclusions:

This study, Obstacles to Market Access for Family Farm Hog Producers, has contributed to and has the potential to further contribute to several areas of inquiry and work. Specifically,

A) Farmers
The report, by clearly uncovering the meatpackers push for captive supply as it was gaining momentum, spurred several farmers involved in the project to pursue new marketing alternatives. In particular, Dennis Timmerman, a Minnesota hog farmer involved in the study as an interviewee, and also as a reviewer during the process, led the development of Prairie Farmers Cooperative. Prairie Farmers began the groundbreaking in November 1999 for a new pork processing plant in Dawson, MN, to be owned by 70 family farm hog producers, who will sell the pork they produce under their own label. Other farmers who were interviewed or otherwise involved in the project have also joined Prairie Farmers Co-op, and some have become producers of Niman Ranch pork. Others have started or expanded direct marketing opportunities. All of these marketing strategies are based on principles or practices of sustainable agriculture that many consumers are calling for, such as antibiotic-free production, humane treatment of animals, no use of hormones as growth promoters, family farm production, local marketing, and excellent environmental stewardship. In addition, nearly all have been active as citizens in calling for open and fair access to livestock markets, as required under the Packers and Stockyards Act.

B) Researchers
The report, Killing Competition with Captive Supplies, that resulted from this project, is prominently cited in the ongoing Generic Environmental Impact Study (GEIS) being conducted by the Environmental Quality Board (EQB) of the State of Minnesota. The purpose of the GEIS is to identify the characteristics of animal agriculture as it exists and as it is changing in Minnesota, and to make recommendations regarding future development to the policymakers and researchers of the state. Our report indicates needed further research, which is represented now in the GEIS.

In addition, economists who were consulted in the project have been given copies of the report, serving to add to their information about the field. The report, for example, was one of the first (if not the very first) to identify that captive supplies were reaching 70% of all hog supply, at a time when industry analysts had predicted it would be expanding to about 33% (see page 21 of Killing Competition).

C) Policymakers and Citizens
The report, as indicated in the Hog Industry Insider published by Feedstuffs, “fueled the debate on pork industry concentration.” We gave copies to many key policymakers, beginning at the April 18th public meeting organized in South St. Paul by LSP and other organizations, in which more than 800 farmers participated. The meeting, called “Taking Action on Concentration and Monopoly in Agriculture,” led Minnesota Attorney General Mike Hatch to look into the issues raised by this project. His 1/2 inch thick report, entitled “Attorney General Review of Certain Agricultural Issues Raised on April 18, 1999 at the South St. Paul Farm Summit” has been widely circulated among farm and rural organizations in Minnesota, as well as among state legislators and public officials. Removing obstacles to market access and fair pricing practices are the Attorney General’s objectives.

The report also served to give much needed information to state and federal public servants and lawmakers in debating mandatory price reporting legislation in several states (Minnesota, Iowa, South Dakota, Nebraska, Missouri, and Kansas) and federally. The co-organizers of the April 18th meeting included state legislators from 5 states looking into the factors that are driving the current crisis of low prices in both crop and livestock agriculture. The Killing Competition report was presented to USDA Undersecretary for Marketing and Regulatory Programs Mike Dunn by hog farmer and LSP staff member Paul Sobocinski in an hour and a half long meeting with Mr. Dunn and staff in June. Mr. Dunn was complimentary of the report and additional materials presented to him, indicating it was what he had been looking for. Subsequently, Congress passed with USDA cooperation a mandatory price reporting bill. The important factor here is that the project allowed researchers and analysts to compile the information and indicate patterns that served policymakers to make important decisions.

D) Media
The release of the report to key media — and a widely distributed press release about the report that was sent out in South Dakota, Iowa, Minnesota, and to key national and regional agricultural media — educated the ag media about the obstacles to market access for family farm hog producers. That meant more informed coverage of the issue, and will have longer-lasting results, as media covers hog farmers working to penetrate new markets through strategies based on sustainable production practices and structure.

Farmer Adoption

As stated elsewhere, 28 farmers participated in the report as interviewees for the first objective of documenting farmers’ experiences and identifying packers’ practices that adversely impact independent hog producers. Four hog farmers served as ongoing consultants and reviewers during the project.

But the biggest impact was on farmer attitudes towards market access — both in terms of farmers organizing alternative strategies to market their hogs, and in terms of increased advocacy of public policies to remove obstacles to market access and fair pricing. Please see this report under “Potential and Actual Contributions” (Section VI above), subsection A) Farmers for a further description of farmer adoption, impact and involvement.

Participation Summary

Educational & Outreach Activities

Participation Summary

Education/outreach description:

See the Results section above, under Objective 4.

Project Outcomes

Recommendations:

Areas needing additional study

The published report resulting from this project, Killing Competition with Captive Supplies, makes recommendations for further research on page 42 of the report. That section is reprinted here.

Recommendations for Economists and other Researchers (government and land grant):

USDA and land grant researchers should increase investigation and study of the impact of contract production, captive supply procurement, and vertical coordination practices in the hog industry on independent, family farm hog producers’ access to markets and fair prices. Examples of research needing to be conducted (in some cases, furthering studies already begun) are:

1. Analyze the impacts on cash market prices that result as the percentage of packers’ slaughter inventory that is categorized as captive varies and the impact on cash prices as the percentage of total slaughter that is categorized as captive varies.

2. Analyze the pattern of buying station closures, packing plant closures, packer mergers, and packer purchases, and evaluate their impact on access to markets for independent hog producers. Analyze whether the patterns of consolidation of the industry result in a division of market turf among the major packers.

3. Conduct research on how the level of prices for slaughter hogs differs in the cash market and under forward contracts or marketing agreements, including how volume premiums and grade and yield standards affect these price terms.

4. Conduct research on how packers’ joint ventures, direct ownership, and alliances with production facilities affect independent family farm producers’ access to markets and cash market prices.

5. Conduct research on cash market and contract prices paid for slaughter hogs, with an emphasis on how these prices vary by size of producer.

6. Analyze which producers are offered or obtain forward contracts and/or marketing agreements with packers based on size of operation, methods of production, and location.

7. Conduct socio-economic research that describes the impact the consolidation of market and production share in the hog industry has on agricultural communities. This research should also investigate the impact reduction in market access for family farmers has on agricultural communities.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.