The Agricultural Assessment Task Force was authorized by the Nebraska Legislature in 1999 (LB 730). In the legislation, the task force has been charged with studying "...the overall structure of agriculture, including the types and management forms of agricultural operations in the state; past, present and future trends of ownership of land, equipment, and capital in production agriculture; and agricultural product market dynamics."

Furthermore, the task force is .... to recommend state and federal legislation which will help to achieve a balance among various types of agricultural entities and, thus, serve the best interests of all the people of the state and nation." In response to this objective, the task force offers the following mission statement:

We will strive to make recommendations that have the potential to:

• increase net farm income;
• improve the quality of rural life;
• maintain or increase rural population;
• increase job opportunities in rural Nebraska;
• increase value-added agricultural processing;

• create a political, regulatory, economic, trade, tax, financial and natural resource environment in which Nebraska agriculture can compete in a global marketplace;
• maintain open, competitive markets;
• promote resource stewardship with respect to soil, water, and air; and
• provide the highest-quality and safest supply of food in the world.

The structure of agriculture has to do with how farms and agribusinesses are organized and how they relate to each other. Debate on structural issues embraces competition and efficiency on one hand but fears of market power and monopolistic profits on the other.

In response to increasing concerns about structural issues, the Nebraska Legislature passed LB 730, a bill creating an Agricultural Structure Assessment Task Force, in 1999.

The charge to the task force was to study structural issues and make recommendations for future state and federal policy. The report that follows is a product of the task force's deliberations.

Recommendations for the future are detailed on pages 16-20 of the report. Among the recommendations are these:

1.  The Nebraska Legislature should consider the adequacy and appropriateness of state law in:

• Allowing farmers to form assembly (or bargaining) cooperatives.
• Retaining adequate germ plasm and other life forms in the public domain.
• Reporting of prices and other terms of trade for crops sold under contract.
• Providing opportunities for beginning farmers to enter production agriculture.

2.  The majority report of a June, 1996 USDA Advisory Committee on Agricultural Concentration is attached in Appendix B. The task force believes the report can be a guideline for the Nebraska Legislature in defining structural problems and in proposing state responses.

3.  Studies and recommendations on several specific issues should be undertaken. In particular, questions abound regarding anti-trust law and its application to agribusiness.

4.  Other actions are proposed to enhance the general economic and social well-being of rural Nebraska.

It is hoped that this report will spark productive debate and, ultimately, sound public policy for Nebraska's most important industry, agriculture.

The structure of agriculture has to do with how farms and agribusinesses are organized and how they relate to each other.

Debate on structural issues embraces competition and efficiency on one hand but fears of market power and monopolistic profits on the other. It is not a new phenomenon.

For more than a century, there have been periodic concerns about a handful of non-farm businesses gaining too much power in the market place. In the late 1880s, four major meatpackers ­Swift, Armour, Hammond and Morris­accounted for two-thirds of the U.S. beef supply. The Sherman Antitrust Act (1890) was passed partly because of farmers' concerns over concentration in the packing industry. Later, in 1921, the Packers and Stockyards Act became law at a time when fears again mounted over packer concentration.

Structural issues periodically have returned to the top of the national agricultural policy agenda in subsequent years. For example, in the early 1960s, this time in response to wide-ranging concerns about concentration throughout the food sector, the federal government undertook a comprehensive study of competitiveness in food processing and retailing. Although no landmark legislation resulted from that study, it was symbolic of continuing vigilance regarding undue market power. Continuing this theme, as recently as the past congressional session, legislation was passed to require mandatory reporting of prices paid for livestock by packers (H.R. 1906). In addition, a bill was introduced in the U.S. Senate to prohibit packer feeding of livestock (S.1738).

Policy regarding structural issues has not always been limited to the federal government. In 1982, for example, citizens of Nebraska passed Initiative 300, a constitutional amendment that prohibits non-family corporations from engaging in farming, ranching or livestock feeding. In 1999 alone, the Nebraska Legislature passed three bills that have strong structural implications. LB 630 provides tax credits to retiring farmers who lease their assets to beginning farmers. LB 835 requires packers to report prices paid for livestock, prohibits certain kinds of price discrimination, and outlaws packer feeding. LB 730 created a task force to study structural issues and make recommendations for future state policy. This report is the product of the task force's deliberations.

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^1. Report prepared on behalf of the task force by Roy Frederick, Professor of Agricultural Economics and Extension Economist-Policy, University of Nebraska-Lincoln. See Appendix A for listing of task force members.

Over the years, dozens of studies have been conducted on agricultural structural issues, mostly by economists and lawyers associated with universities or the federal government. The purpose of these studies generally has been to determine why changes are occurring and to assess the impact of changes on various individuals within the sector, especially beginning or mid-size farmers. Among other factors, our capitalist economic system, technology, tax policy, and federal price- and income-support policy are thought to have contributed to structural change.

As for impacts, the studies reach no clear conclusions. Some research concludes that structural change has improved production efficiency and brought lower prices to consumers. However, roughly an equal number of studies worry, at least to some degree, about monopoly or near-monopoly profits on the part of the largest firms. Few researchers dismiss structural change as something that is not even a potential concern.

In particular, many producers worry about an increasingly concentrated agribusiness sector. Furthermore, it has been suggested that such a trend is damaging to most producers and to rural communities.

This report focuses on changes in production agriculture that appear to be driven by changes in the agribusiness sector. Perhaps more importantly, it offers suggested public-policy responses to underlying trends, including specific actions for state government.

During the course of its deliberations, the following speakers addressed the task force: Roy Frederick, Professor of Agricultural Economics, University of Nebraska; Michael Turner, Professor of Agricultural Economics, University of Nebraska; John Allen, Associate Professor of Rural Sociology, University of Nebraska; Gary Bredensteiner, Director, Extension Farm Management Operations, University of Nebraska; E.G. Nadeau, Director, Cooperative Development Services, Madison, Wisconsin; Michael Boehlje, Professor of Agricultural Economics, Purdue University, West Lafayette, Indiana; Ronald Knutson, Regents Professor of Agricultural Economics, Texas A & M University; Neil E. Harl, Charles F. Curtis Distinguished Professor in Agriculture, Iowa State University; and Theodore L. Kessner, Attorney at Law, Lincoln, Nebraska..

While the report that follows is, in effect, the composite observations of leading experts on structure issues, including those who addressed the task force, and task force members, an attempt will be made to identify specific contributions wherever possible.

Shepherd says "effective competition" is a desired standard for any sector of the economy. By that, he means that an industry should have numerous competitors, and they should be able to apply mutual pressures on each other. No one firm dominates, and entry by new competitors is relatively easy. Importantly, he suggests that competition can be quite ineffective when an industry begins to move away from these standards.

The core issues of effective competition can be summarized concisely as follows:

1. All firms seek higher market shares in order to gain higher profits.
2. When these firms' struggles hold each other in check, effective competition exists. It yields low costs, low prices, rapid innovation and wider benefits.
3. If one or more firms come to dominate, competition may be ineffective. The market power causes higher prices and restricted output, and it imposes social costs: inefficiency, slower innovation, unfair shifts of income and wealth, reduced freedom of choice and still others.
4. These monopoly costs may be offset if there are large scale economies or superior performance by the dominant firms.

We normally think of a firm's structure as influencing its conduct and performance. In a monopoly, one firm dominates. Unless it is a benevolent monopoly (described in item 4 above), it is a concern for the reasons outlined in item 3. Collusion among 2-3 leading firms can be equally disconcerting, because they take on many of the same characteristics as monopolists.

Sometimes the linkage between structure, conduct and performance is reversed. A firm that is highly efficient or innovative may also be highly profitable. Its market share increases. Other firms have difficulty competing, because the performance of the market leader is so dominating. The Wal Mart phenomenon is a case in point. Wal Mart has come to dominate retailing, mostly because its performance as a retailer has been exceptional.

• Policies in place to deal with cost externalities such as odors and stream and groundwater pollution, and
• A system of market protection (antitrust) to penalize collusion and to prevent undue concentrations of economic power.

A major challenge in the present environment is to determine whether there is (or is likely to be in the future) an "undue concentration of economic power" in the farm input supply, food processing and marketing sectors. More importantly, if the evidence is convincing, what policy tools would be appropriate for reducing such power?

Producers, however, must deal with input suppliers, processors and handlers that are much fewer in number, especially within a local trade territory. While this does not automatically mean that competition is lacking among agribusinesses or even that they are profitable in the short-run, few producers doubt the ability of these firms to dictate at least some terms of trade. At the heart of current structural concerns is the fear that long-term profit opportunities in the food sector will tilt mostly toward agribusinesses, not producers.

The term "concentration" is often used in the context of how much of the market for a certain product is controlled by a relative handful of firms. A market where the four largest producers account for 50 percent of the market is much more concentrated than one where the top four account for 10 percent of the market.

Concentration occurs in a competitive economy because firms often realize cost reductions in the production or marketing of products as their operations expand. Firms may grow (and industries become more concentrated) through either internal growth (reinvesting profits in the firm) or by mergers and acquisitions. In turn, cost reductions can be passed along to consumers (thereby increasing the firm's share of the market), profit margins can be increased, or both.

In reality, firms in concentrated industries generally can't convert all their reduced costs to higher profits. Unless there are very high barriers to entry (patent protection, for example, can temporarily be such a barrier), another firm or firms will enter the industry or expand their operations to take advantage of profit opportunities. Competition in the personal computer industry during the 1990s is a case in point. Even with only a relative handful of major manufacturers (Dell, Gateway, Compaq, Packard Bell), computer prices have continued to fall. Bottom line: Competition among computer manufacturers has been sufficient to result in cost reductions being passed along to consumers.

Ron Knutson presented data to the task force from the 1992 Census of Manufacturers (comparable data from the 1997 Census of Manufacturers are not yet available), which showed four-firm concentration ratios in selected manufacturing industries. In general, some degree of concentration is apparent throughout the economy. The following are examples for both the food and non-food sectors of the economy:

Importantly, Knutson's data were for only one year. Trends in concentration tell more of a story. Take meat packing, for example. Data from USDA's Grain Inspection, Packers & Stockyards Administration (GIPSA) shows that concentration in meat packing has increased significantly since 1985:

Notwithstanding review (and frequent approval) of mergers by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice, many producers are offended by mergers that increase concentration. At best, they see less competition among those who supply them with inputs or buy their commodities. At worse, they fear they will pay more for inputs or receive less for their commodities in the future.

The recent acquisition of Continental's grain operations by Cargill is a case in point. Even if such mergers benefit those to whom Cargill sells farm commodities, many producers don't see greater efficiencies coming back through the market chain for their benefit.

Harl reviewed recent merger developments in the seed industry for the task force. He estimated that $15 billion in industry mergers have occurred over the past three years. The driving force is the ownership of germ plasm with certain desired (or presumed to be desirable) characteristics, such as Bt corn and Roundup Ready soybeans. The high-profile merger between DuPont and Pioneer Hi-Bred International and the Monsanto acquisition of DeKalb and Delta and Pine Land Company are recent examples of how the ownership and control of genetic material in crops is falling into the hands of relatively few. At the beginning of the 1990s, there were dozens of seed firms, each competing on the basis of production potential and price. Now there are only five majors left, and as of mid-November, 1999, speculation circulated that Monsanto and Norvatis would soon merge, reducing the number to four.

In the case of genetically-engineered seeds, Harl pointed out that the ownership of the precise characteristics of genetically-modified seeds is one thing. But in this case, it goes beyond the final product. Only two or three firms also have control over the processes by which genetic manipulation occurs. Without knowledge of these processes, it will be difficult for other firms to enter the seed business. Harl sees the seed business ultimately concentrating in no more than two or three firms. (Perhaps this could change if genetic engineering turns out to be less profitable than originally thought.)

Obviously, the seed business is critical because it's where all crop agriculture begins. That's why Harl and others express concern about the trends currently underway. The barrier to entry represented by having control over the process of genetic manipulation deserves special attention.

In a supply-chain structure, all stages of production, processing and distribution are bound tightly together. Whoever controls the supply chain ostensibly does so to ensure consistent, efficient delivery of high-quality products to consumers. Profit for the "integrator" is, of course, a motivating factor.

For example, integrators in the pork sector­typically processors­say they want to give consumers a consistent, dependable product that is identified with a particular brand name. The only way to do this, they argue, is to control all aspects of pork production­from breeding to branded retail product. Control can be exercised by outright ownership of livestock or tight production contracts with producers. Either way, producers have less control over production and prices than they have been accustomed to.

Neil Harl worries much more about structural change. He fears predatory market power ultimately will be harmful to consumers and all but a relative handful of producers.

Additional allies can be found for both sides of the argument among professional agricultural economists. But rather than to recount endless arguments or attempt to assign numbers to those on each side of the argument, perhaps it would be more helpful to briefly review two wide-ranging reports completed at the national level during the 1990s.

The first of these was a multi-project research effort, which was undertaken as a result of a congressional mandate. It was conducted under the auspices of the federal Grain Inspection, Packers and Stockyards Administration (GIPSA) and was directed specifically at the red meat packing industry.

The second report came from a USDA-convened Advisory Committee on Agricultural Concentration. It is more wide-ranging than the GIPSA study, although many references to the red meat packing industry are made in this report, as well. It is also more subjective, focusing heavily on the recommendations of the Advisory Committee.

The reason for brief review of these reports is that they touch on many issues that the Task Force has addressed during the course of its deliberations.

As implied by the listing of projects, horizontal concentration and vertical coordination both received attention. In the executive summary to the overall study, USDA concluded that the structure debate always involves a few fundamental questions:

Do large firms possess and use market power? Do potential efficiency gains of larger firms offset potential adverse market power effects of concen- tration? How do vertical coordination arrangements affect production costs, livestock and meat quality, price discovery, market access? What is the role of Federal regulation in preventing large firms from abusing market power, and in monitoring the industry?

With respect to price determination in slaughter cattle procurement, researchers found that the spot market remains the predominant procurement method. Over 80 percent of the cattle are procured by either current liveweight or carcass-weight pricing methods. Few packers rely on other methods for procuring or pricing a large proportion of cattle slaughtered.

Fed cattle purchased by packers through forward contracts (price determined 14 days or more prior to slaughter) tend to bring prices that are about 2.5 percent lower than cattle delivered on the spot market, while cattle purchased using marketing agreements (buyer determined but not the price) bring prices that are up to 1 percent higher than cattle sold on the spot market .

Prices vary, as expected, with cattle quality characteristics such as type, average weight, quality grade, and yield grade. After controlling for such factors, larger plants tended to pay slightly higher prices than smaller plants, although the evidence was somewhat inconsistent across regions. Extensive analyses of prices paid showed little evidence of market power, based on price differences across regions where buyer concentration varied.

In a project relating to the role of captive supplies in beef packing, researchers found that daily increases in the rate of deliveries of forward-contracted and marketing-agreement cattle had a slightly negative effect on daily cash-market cattle prices. The overall effect of captive supplies on prices paid for cattle in the cash market was negative but small.

There were no significant differences in daily prices paid in the cash market as the number of cattle transferred from packers' own feeding operations fluctuated. An increase of 1 percentage point in a packer's inventory of packer-fed cattle that the packer purchased on a given day was associated with changes in cash-market prices varying from 30 cents per cwt. lower to 20 cents per cwt. higher.

A third project, this one focusing on the effects of concentration on prices paid for cattle, encountered several data and methodological difficulties and did not obtain definitive results regarding the possible use of market power. This authors of this study, including lead researcher Wayne D. Purcell of Virginia Polytechnic Institute and State University, concluded that their results were like most other studies of concentration: It is difficult to document market power.

Related to the findings of the Purcell team, another project within the GIPSA study was an exhaustive literature review of research completed on the structure and conduct of firms in the red meat packing industry. Led by Azzeddine Azzam and Dale Anderson of the University of Nebraska, they concluded that the research literature, on balance, "suggests that conduct in the red meat industry is not consistent with perfect competition as defined by economic theory."

Subsequent work by Azzam suggests that consumers and producers would be slightly better off if there was more competition in the packing industry. But should structure or behavior (conduct) be targeted to accomplish this objective?

The latter query is perhaps partially answered by still other work completed by Azzam. Based on studies published in 1995 and 1997, he concluded that during the 1970-1992 period, "the cost-efficiency effect of concentration of the farm-wholesale beef margin were twice the market power effect. This suggests that a double dividend of lower cost and higher cattle prices from surgically lowering industry concentration is unlikely."

In other words, the implication is that there may be a net loss to society from simply reducing concentration in the red meat packing industry. However, this should not keep the public from seeking ways to maintain, even enhance "effective competition," as referred to earlier in this report. In part, that's because the past never offers a precise road map for the future.

The project which addressed vertical coordination in hog production concluded that "survey participants" are realizing economic benefits from vertical coordination. Additionally, the report says that "long-term marketing contracts benefit packers and producers by improving product quality and reducing transaction costs."

A major limitation of this project is that it focused only on contractual arrangements by the largest pork packers, hog producers and feed companies. Little attention is given to producers who are excluded or do not desire to be a part of vertically-coordinated hog production.

Still, the fact that both producers and packers who participate in vertically-coordinated production seem to like it may say a great deal about the future of the industry.

The committee completed its work and made its report in June, 1996. While the committee generally agreed on a range of findings and recommendations for the future, agreement was not unanimous. Three minority reports were filed. One such report carried the signatures of six members of the committee. The remaining two represented the viewpoints of single members of the committee.

Overall, the committee concluded that concentration and vertical integration in agriculture are generally associated with positive results, including more efficient production, risk management, international competitiveness, product quality improvement, and food safety advantages.

At the same time, however, the committee identified numerous concerns relating to concentration and vertical integration: distorted price discovery, unequal access to vital market information, environmental degradation, and, perhaps most disturbing, dysfunctional interactions between producers, handlers, packing plants, and retailers and distributors.

The committee made the following overarching recommendation: Major policy efforts should be directed to creating an atmosphere of open disclosure of basic operating facts, including many aspects of price discovery, earnings levels of packers and feeders, environmental management concerns, and contract terms between integrators and producers. (Emphasis added.)

Stated more simply, the committee made a strong pitch for better, more timely market information, which is vital to a competitive marketplace.

Correctly pointing out that the issues are complex and highly charged, the committee expressed some frustration regarding the lack of definitive studies regarding industry behavior. A dearth of conclusive studies contributes to distrust and hostility toward large entities, whether they're firms or producers.

An issue that often is not resolved in concentration studies is the relative trade-off in benefits between consumers and producers. The committee concluded, however, that many, though not all, of the benefits of large firms accrue to consumers, not producers.

As the potential market for foodstuffs has grown outside the United States, the drive to satisfy an expanding market becomes ever more important. Large firms bring advantages in competing in the global market. They can supply huge volumes of product. They have the resources to engage in product development and extensive promotion and advertising. In a word, they may be more efficient than smaller firms.

Within food industries, product innovation has grown in importance. The costly reality of introducing new products into food markets means that most new products­whether food or manufactured goods­are introduced by large, and more often than not, multinational firms.

The committee concluded that "...in commodity markets particularly, where farmers face these large multinational firms, concentration is likely to have its most significantly adverse consequences. Farm producers find themselves facing processors or manufacturers in very concentrated markets, who have incentives to expand because of scale economies in consumer products. This situation offers incentives for collusive price behavior at worst, and for diminished information flows at best."

Incentives for food processing firms to grow internationally may also reduce the effectiveness of U.S. regulatory agencies. U.S. antitrust provisions, for example, generally would not apply to anticompetitive behavior that is applied to a multinational firm's operations outside the United States.

Food processors also argue that the domestic marketplace is changing. Less food preparation with basic foodstuffs­e.g., flour, sugar and eggs­is being done in the home. Consumers, instead, expect consistent, quality processed products that essentially are table-ready. This places a premium on various contracting arrangements from the food processor all back to the producer. Processors argue that the consistency necessary to meet the demands of today's domestic consumers simply cannot be met with competitive price signals alone.

Notwithstanding that food processors may have legitimate arguments regarding the nature of the international and domestic marketplaces, an argument can be made that growth and dominance by a few firms (in the name of efficiency and consistency) will destroy competition in the long run. As the committee put it, "..left unchecked, single-minded pursuit of efficiency can lead to concentration and market power that first destroys competition, and then efficiency itself."

If the processor is the integrator or coordinator, as is normally the case, the impact on producers will vary. Initially, the producer with a may feel good about it, or he/she would not have accepted it in the first place. Those without contracts may feel at a disadvantage in the marketplace. But as implied in the previous paragraph, even a producer who feels good about a contract initially may come to loathe it over the longer term. That could particularly be the case when it is time to renew the contract and the producer finds himself with less leverage than when the contract was signed initially.

The Glickman committee received differing testimony from contract growers. Some producers said that various forms of vertical integration or contracting provided financial stability and reduced risk. In addition, an alliance with a processor may make it possible for producers to attract loans from financial institutions that allowed them to stay on the farm or to enter the production market for the first time.

On the other hand, vertical integration trends raise at least two very important long-term issues: 1) Does vertical integration ultimately result in an imbalance of power between integrator and producers? 2) Does vertical integration encourage concentration in the livestock industry and, with it, environmental problems associated with animal and processing waste?

It appears that in those regions of the country where integrators are in competition for contract growers, the terms of production contracts are more generous than in areas where a single integrator dominates. As for environmental problems, the issue takes on significance anywhere there are large numbers of animals, especially hogs. Whether or not the offending operation is vertically integrated may be less important than the simple fact that there are large number of animals in a localized area.

Do smaller sellers receive lower prices than large sellers? The study provides an inadequate basis for answering this question because it is focused on the general state of competition in the market, not the extent of price competition. What price discrimination may exist is likely limited and not more than a 5 percent difference, because the price data collected appear to be narrowly distributed around the average. Still, it is possible that some sellers are receiving prices that are below those received by better informed sellers.

It should be acknowledged that every penny received by a producer matters. A 5 percent price differential could be the difference between profit and loss. Moreover, price differentials may change over time.

Keep in mind, however, that some price discrimination may be justified because of greater administrative costs associated with handling many small-volume lots as opposed to one or two large lots.

The committee pointed out that Section 202 of the Packers & Stockyards Act provides the Secretary of Agriculture with a mandate to address abuses of market power "in their incipiency." That may be interpreted to mean before harm has been done or can be documented in studies.

Equally important, the mandate is proactive: The Secretary is to use his resources to induce healthy competition, not merely react to unhealthy competition. Moreover, it is to assure fair trade practices, not merely to prevent unfair trade practices.

An important distinction exists between Section 202 and other areas of antitrust and unfair trade practice law. While many provisions of antitrust law require proof of intent to monopolize, Section 202 clearly addresses behavior that has either the purpose or merely the effect of controlling prices.

Moreover, the Secretary's authority to devise ways and means of achieving the Act's objectives are sweeping. The legislative history of the Act suggests that the Secretary has enormous discretion to devise regulations to achieve the Act's purposes, regardless of technology, market structure, or other conditions that might develop. This section gives the Secretary authority to mandate reporting and disclosure to the public of vital market information without additional congressional action. (However, HR 1906, the recently-passed 2000 Agriculture Appropriations bill, mandates price reporting.)

Although it appears that the Secretary of Agriculture has much authority under the Packers & Stockyards Act, use of that authority is dependent on having sufficient investigatory and legal resources to pursue apparent violations (and the political will to do so). Typically, such resources have not been available. Moreover, the Secretary of Agriculture has no subpoena authority. The practical result is that vigorous investigation under Section 202 would often require the cooperation of the Antitrust Division of the Justice Department, which does have subpoena powers.

The 1997 Census of Agriculture indicated that Nebraska had 51,454 farms. (A farm is a place from which $1,000 or more of agricultural products are sold annually.) This is the smallest number of farms since early in the state's history. In general, the number of farms increased in Nebraska through 1935, peaking at 134,000. The total has been going down ever since.

What may be of more interest is the pattern in farm numbers over the past 30 years. Contrary to the assumption of many, net farm numbers seem to decline more rapidly when economic conditions are good. For example, from 1969 to 1978, farm numbers dropped by 12 percent. In contrast, in the more difficult period that followed, from 1978 to 1987, the number dropped by only 5 percent. Then, as incomes improved in the late 1980s and first half of the 1990s, we again saw a big drop. The 1997 total is 15 percent less than in 1987.

Perhaps these patterns can be explained to some extent by the actions taken by aggressive farmers when farm profitability is good. That's when they want to expand, in some cases taking two farms and making it one. Significantly, they have the financial capability to do so, out-competing beginning or not-well-established farmers in the process.

The other possibility is that attrition from farming during poor economic times is just not as extensive as we're sometimes led to believe. When farm income falls, many families seek additional off-farm income. As the same time, they may cut back on their farm operations. However, they don't leave farming entirely. They still qualify as farmers by producing $1,000 worth of products annually, even though they are no longer full-fledged "commercial" farmers. Understanding the differences among farmers becomes increasingly important, whether times are good or bad in production agriculture.

In 1997, the average farm in Nebraska sold agricultural products worth $191,074. This compares to $155,125 in 1992 and $29,725, going back to 1969.

What's really striking, however, is the sales variance around the average. In 1997, of all the farms in Nebraska, 866 (1.7 percent of the total) had sales of $1,000,000 or more. With average sales of just over $5,000,000, these farms accounted for 44.1 percent of all agricultural product sales. About three-quarters of them (646) were in the cattle business, selling at least $50,000 worth of cattle and calves in 1997. However, only 21 percent (182) were sellers of at least $50,000 worth of hogs and pigs.

Another 1,636 farms had sales of $500,000 to $1,000,000. Bottom line: When all farms with sales of at least $500,000 are added together, they accounted for only 4.9 percent of all farms, but 55.3 percent of the state's agricultural sales in 1997.

At the other end of the spectrum, 33,249 farms recorded sales of less than $100,000. Although they accounted for 65 percent of all farms, they produced only 10 percent of total sales. Many are part-time or hobby farms.

Left unaccounted for are a group of "middle-size" farms, with sales of $100,000 to $500,000 annually. In 1997, they accounted for 30.5 percent of all farms and 34.8 percent of total output.

Much of the public concern about the structure of agriculture relates to small and middle-size farmers. Those in these groups often are conveniently labeled "family farmers," though some larger farmers would argue with good reason that they are also family farmers.

Regardless of what truly is a family farm, the public is often indifferent­and sometimes shows outright disdain­for operations perceived to be beyond middle-sized. Rural polls generally indicate that citizens prefer smaller and mid-size operations in their midst.

At the same time, production and marketing efficiency are important. Some farms simply are more efficient than others. To the extent consumers­and producers--benefit from efficiency, that should be a factor in the number and size of farm operations, as well.

Among smaller and mid-size farms, some would like to expand their operations but, because of any number of limiting factors, are unable to do so. However, others do not want to grow. In particular, quite a few of those in the small-farm group have no intention of ever making farming a full-time business. They simply enjoy the amenities of rural living.

One issue on which there is widespread agreement relates to the problems of beginning farmers.

Costs of entering agriculture are well known. In 1997, the average value of land and buildings on a Nebraska farm was $567,468. Machinery and equipment added another $84,535. That a parent or someone else is needed to help a young person begin farming is obvious.

In 1997, only 976 farmers in Nebraska were less than 25 years of age. This compares to 1,390 in 1992 and 2,127 in 1987. Those in the 25-to-34 age bracket also fell precipitously, from 10,482 in 1987 to 4,555 in 1997.

Not surprisingly, given the reduced number of younger farmers, the average age of farmers is increasing. In 1997, it stood at 52.5 years, up from 49.4 years in 1987.

The primary concern with the decreased number of young farmers is that the next generation of full-time commercial farmers must come from this group. Rarely would someone 35 years of age or older enter farming with designs on making it a full-time occupation. (Older entering farmers almost always are part-time or hobby farmers.)

Population losses tend to feed on themselves. Fewer people mean fewer businesses, declining school enrollments and church attendance, threatened loss of basic services and higher tax burdens per capita for those who remain. None of this is conducive to encouraging people to move into rural communities.

The Nebraska Legislature is encouraged to take appropriate legislative action in the following areas (listing is in no particular order of priority):

1. Adequacy of Nebraska law, including securities law, for allowing producers to come together to form value-added cooperatives.

2. Adequacy of Nebraska law for retaining some life forms, including germ plasm, in the public domain. In particular, the University of Nebraska's Institute of Agriculture and Natural Resources (IANR) should be positioned as a national leader to enhance life forms of potential benefit to agricultural producers.

3. Adequacy of price reporting and other terms of contracts for crops sold outside traditional cash markets. In particular, should a price reporting provision for crops be implemented similar to that required for livestock? (The model(s) for crops could be two livestock price-reporting laws passed in 1999: LB 835 at the state level and H.R. 1906 at the federal level.)

4. Adequacy of Nebraska law regarding beginning farmers. Stated differently, is everything possible being done to encourage beginning farmers? For example, a report on the potential use of the provisions of the Beginning Farmer Tax Credit Act (LB 630, passed in the 1999 session) is due by January 3, 2000. Further action may be appropriate as a result of that report.

5. Adequacy of funding for educational programming relating to rapidly-changing market channels for agricultural commodities. The task force sees the Institute of Agriculture and Natural Resources as being critically important in this regard.

6. Appropriateness of current legal structures under which agricultural production may occur. In particular, the task force urges the Nebraska Legislature to consider a new legal structure specifically for production agriculture that would allow producers to effect efficiencies, gather capital, and limit liability in order to enhance their opportunities to prosper.

7. Appropriateness of Nebraska law relating to inheritance taxes. The task force supports increasing the state and federal exemption on inheritance taxes.

8. Appropriateness of animal waste standards in Nebraska. Standards of other states should be studied to determine if Nebraska's standards leave Nebraska producers at a competitive disadvantage with other states.

9. Need for a Producer Protection Act (patterned after laws that protect consumers) to assure that contracts and other terms of trade have minimum fair standards. Such an act might apply in cases where specialty products are being purchased by one or two buyers or in the case of multi-year contracts.

Actions Recommended to Support the USDA Report on Agricultural Concentration

The majority report of a June, 1996 USDA Advisory Committee on Agricultural Concentration is attached in Appendix B. Recommendations were in four areas:

1. Antitrust and regulatory actions.
2. Market-based disclosure policy.
3. Vertical linkages.
4. Cooperatives and bargaining.

The task force believes the report can be a guideline for the Nebraska Legislature in defining structural problems and in proposing state responses.

Furthermore, the task force notes that the report is three years old and perhaps deserves more attention than it has received thus far.

Recommended Studies on Structural Issues

In addition to the actions listed above, the task force believes formal studies would be fruitful in the following areas and requests federal appropriations to complete these studies in a timely manner:

1. Precise definition and interpretation of the language in Section 202 of the Packers & Stockyards Act is needed. In particular, under what conditions would the Departments of Agriculture and Justice take action under current law? Are there specific thresholds? Should there be specific thresholds? Is packer feeding of livestock prohibited? If not, what action would be necessary to prohibit it? More broadly, should primary responsibility for monitoring Section 202 be moved form USDA to the Department of Justice? Also, what are the limitations (financial, legal, etc.) to the federal government taking action under current law?

2. An analysis of the ramifications of increasing concentration in the seed industry and other life-form businesses should be undertaken. The role of patents and other proprietary protections with respect to increasing concentration should be reviewed. Impacts on producers and consumers of current law should be estimated. Requirements for "bundling" life forms with other agricultural inputs, such as credit, fertilizer and agricultural chemicals, should be a part of the study.

3. A study should commence on January 1, 2001 (with results to be reported by June 30, 2001) regarding the effectiveness of livestock price reporting under HR 1906, which became law in October, 1999.

4. A study should be undertaken to determine the implications on structure of reinstating investment credit on machinery and equipment purchases. (Structural implications could be mixed.)

Additional Recommendations

Actions Recommended to the Institute of Agriculture and Natural Resources, UN-L

1. Establish a "Farmers and Ranchers College" with IANR, which would be dedicated to helping producers make intelligent decisions about their future. This should include utilization of the Internet and any other reasonable means to deliver courses in rural areas. A part of this effort should be to actively assist groups of farmers in forming alliances or co-ops for the purpose of strengthening their negotiating power.

Actions Recommended to the Nebraska Legislature

1. Property taxes on agricultural assets should be reduced. It is imperative to do so to enhance the competitiveness of Nebraska farmers and ranchers with those in other key farm states.

2. Additional resources should be provided for value-added initiatives that would bring additional return to producers. The "Iowa model" deserves special attention to see if it could be adapted (in whole or in part) to Nebraska. It's also recognized that adequate resources for higher education generally and IANR in particular are critically important to efforts to add value to Nebraska agricultural commodities.

3. Carbon sequestration research should be increased. Included in this effort should be adequate funding for carbon mapping of Nebraska. It would be expected that IANR's Conservation and Survey Division would be involved in this effort.

4. All Nebraska counties should be zoned, at least to some minimum level of defined standards. A specific date should be established for meeting these standards.

5. An imaginative new program should be implemented to encourage business development in rural Nebraska.

6. Efforts should be made to strengthen the collective impact of state legislatures on agricultural structure and policy issues. Appropriate linkages perhaps could be developed through such organizations as the National Council of State Legislatures (NCSL) or the Conference of State Governments (CSG).

Actions Recommended to the Executive Branch of State Government.

1. Efforts should be made to strengthen the collective impact of state governors on agricultural structure and policy issues. Appropriate linkages perhaps could be developed through the National, Midwestern or Western Governor's Associations .

2. Efforts should be made to strengthen the collective impact of state agriculture directors, commissioners and secretaries. Appropriate linkages perhaps could be developed through the National or Midwest Associations of State Departments of Agriculture.

Actions Recommended to the Nebraska Legislature and Governor

1. Protect irrigation interests in Nebraska that may be affected by multi-state agreements.

2. Change the title, nature and role of the Rural Development Commission to make it more effective and responsive. It should become the "Rural Economic Development Advisory Board," reporting to the Director of the Department of Economic Development and the Governor, with ties to IANR and the Department of Agriculture for area of value-added products. Members should serve at the pleasure of the governor.

Actions Recommended to the Federal Government

1. Increase promotion efforts to expand foreign sales of agricultural products. Access to foreign markets is critical to the future sustainability of Nebraska agriculture. We recommend that steps be taken to level the playing field in international trade.

2. Study how biotechnology, particularly the ownership of desired life forms by private companies, may relate to the control of food supplies.

3. Review how intellectual property rights (and associated technology fees) may affect U.S. producers differently than foreign producers.

4. Study the impact of regulations, such as the Endangered Species Act and the Food Quality Protection Act, on production agriculture.

5. The federal government should acknowledge and protect the private property rights of individuals.

6. The $1,000 threshold for defining a farm should be raised.

2. Azzam, Azzeddine, "Measuring market power and cost-efficiency effects of industrial concentration." Journal of Industrial Economics XXXXV (1997) 377-386.

3. Azzam, Azzeddine and Dale Anderson, "Assessing competition in meatpacking: economic history, theory and evidence" USDA Packers and Stockyards Programs, GIPSA-RR 96-6 (1996).

4. "Concentration in the Red Meat Packing Industry" (Executive Summary), USDA Packers and Stockyards Programs, GIPSA, February, 1996.

5. Shepherd, William G., The Economics of Industrial Organization (fourth edition), 1997. Prentice-Hall, Inc., pp 1-32.

6. USDA Advisory Committee on Agricultural Concentration, June 1996.

1. Sen. Roger Wehrbein, Plattsmouth (Chair); state senator, farmer.
2. John Klosterman, David City (Vice Chair); farmer, cattleman.
3. Bart Beattie, Sumner; diversified farmer.
4. Fred Bruning, Bruning; farmer, banker, agribusiness.
5. Cheryl Burkhart-Kriesel, Gurley; seed producer, educator.
6. Homer Buell, Rose; rancher.
7. Merlyn Carlson, Lincoln; Director, NE. Dept. of Agriculture, rancher.
8. Sen. M.L. (Cap) Dierks, Ewing; rancher, veterinarian, state senator.
9. Roy Frederick, Lincoln; agricultural economist, UN-L.
10. Faith Parde, Sterling; farmer, county commissioner.
11. Milton Rogers, Chappell; wheat producer.
12. Rod Schroeder, Aurora; cooperative general manager.
13. Gary Todd, Union; farmer, cattleman.
14. Max Waldo, DeWitt; swine seed stock producer; farmer.
15. Al Wenstrand, Lincoln; Director, NE. Dept of Economic Development.

Objectives & Guiding Principles

A number of objectives or guiding principles should undergird the recommendations made with respect to livestock and poultry sectors. Specifically, recommendations should:

• Promote competition;
• Achieve as close as is possible equal market information for buyers and sellers;
• Assure that markets exist for all comparable products under comparable terms.

The committee was also mindful to avoid recommendations that proscribe market behavior in ways which could ultimately stunt opportunities for growth within the industry. Recommendations should improve the functioning of market, and not in the words of many committee members, "tear down industry." In this regard, the committee endeavored to:

• Focus recommendations in those areas of long-term significance and those areas of most immediate need to producers;
• Recognize the distinctions and major differences among livestock and poultry sectors, and refrain from blanket recommendations for one species that could have serious, unintended consequences if applied to the entire meat industry;
• Take care not to overreact to the normal functioning of the cattle cycle already entering the adjustment phase, leading to lower supplies and higher prices; and
• Refrain from making recommendations that would slow or prevent the industry's need to adapt to a changing marketplace.

The committee is also aware that, in making recommendations to improve markets for producers, effects on consumers must be considered. Some of the recommendations may, in fact, show short-term price increases to consumers, since in a current battle to achieve market power, firms may be willing to cut prices and sacrifice short-term profits for market share. Recommendations that thwart the use or dilute the value of this strategy could lead to higher prices in the short run. However, maintaining competitiveness will pay long-term dividends to consumers by assuring a safe and reliable food supply, without monopoly premiums that are ultimately paid by consumers.

In light of these considerations, the committee recognizes that many of the recommendations are likely to bring increased costs, and that timing may need to be a consideration in their implementation. Despite these cost and time considerations, the committee feels that the benefits of improved market performance justify their adoption and implementation.

The committee is very concerned about the distrust between segments in the cattle industry. The recommendations offered below should help in this regard by promoting efficient price discovery, thereby helping to restore confidence in the market. With specific regard to adequate and accurate reporting of market information, the committee believes that efficient and fair marketing information can be obtained without causing undue burdens on reporting parties. Situations with many sellers and few buyers my require greater availability of information than would otherwise normally be forthcoming, and such information availability helps to ensure competitive markets. Fewer buyers would be unable to exert undue leverage if market information were widely available to more dispersed sellers.

However, notwithstanding recommendations that are more market based in their approach to improve market performance and confidence, existing antitrust and regulatory tools should not be abandoned. The committee believes these tools can and should be effectively used to prevent or stop anticompetitive behavior of firms. With these objectives and considerations in mind, the committee makes its recommendations in four areas: a) antitrust and regulation; b) a new disclosure policy; c) vertical linkages; and d) cooperative/producer bargaining. Recommendations may overlap across these broad areas. This simply reflects the overlapping nature of many of the issues related to concentration in the marketplace.

A. Antitrust & Regulatory Actions

We have considered a number of actions within the framework of our legal structure and tradition of antitrust policy including the special provisions of the P&SA. The following are recommendations of the committee dealing with antitrust and regulatory actions:

Increased monitoring and enforcement of antitrust and regulatory policy
A.1. Antitrust enforcement of current regulations under the P&SA should be stepped up. Any new mergers and consolidations that have the potential to reduce competition should be quickly challenged by the U.S. Departments of Justice and Agriculture. If any consolidations or strategic alliances are challenged, the contracting parties should be required to show that existing laws are not being violated, and the further concentration will enhance and not diminish competitiveness within the livestock industry.

A.2. The committee supports the position expressed often during the public testimony to "just enforce the laws." The P&SA provides authority to deal with unfair trade practices, under Section 202, which states that, "it shall be unlawful for any packer with respect to livestock, meats, meat food products, or livestock products in unmanufactured form, or for any live poultry dealer with respect to live poultry to: make or give any undue or unreasonable preference or advantage to any particular person or locality in any respect whatsoever, or subject any particular person or locality to any undue or unreasonable prejudice or disadvantage if any respect whatsoever." It should be enforced to the letter of the law.

A.3. Congress should appropriate sufficient resources to USDA to allow aggressive pursuit of violations of the act and address problems in their incipiency.

A.4. As to enforcing the laws as they now exist, the Secretary should immediately undertake a review of current enforcement practices and publicly report the results of that review. This would help restore the confidence of producers that their interests are important and protected adequately.

A.5. USDA should expand the private right of action to parties believing themselves to be damaged by violations of the Packers & Stockyards Act and its regulations. While a certain right exists, to make the law fully effective, especially at a time of shrinking federal resources, a right to attorneys' fees should be provided.

A.6. GIPSA should investigate lamb supply contracts for their impact on markets and market access for their impacts on markets and market access for participants without a supply contract.

A.7. USDA should ask the Antitrust Division of the U.S. Department of Justice for a report (confidential) about their findings to date on the question of packer concentration, including the lamb investigation of the 1990s. If their disclosure reveals the need for investigation, it should be done.

A.8. Congress should amend the P&SA to provide the Secretary with the same administrative and enforcement authority in all poultry products as in red meat, including all growers who raise and care for live poultry for another entity.

Limiting packer activities A.9. Price differentiation should only be permitted with respect to differences in quality, verifiable differences in procurement costs (including differences in cost due to quantity), and time of delivery.

B. Market-Based Disclosure Policy

As we have stated above, the committee endorses the message widely repeated in public testimony to "just enforce the law." Over and over, the committee heard from individuals who compared conditions of the early 1920s that gave rise to the Packer Consent Decree and the Packers and Stockyards Act, with market conditions today, with no comparable antitrust action being taken.

Of course, we realize, as do these individuals, that the marketplace of the 1990s is not the marketplace that prevailed in the 1920s. Structure, technology, and the marketing system are vastly different: markets are global in scope, and marketing strategies are increasingly complex. Government resources are limited, and certainly not expanding. In today's environment, antitrust actions have become much more complex and burdensome. Antitrust violations are more difficult to identify, or in some cases, to define. Massive amounts of records mut be collected in the pursuit of an antitrust case, partly because it is not clear what information is needed. Firms are better able and more willing to mount a strong defense.

All of these factors mean that antitrust enforcement operates in a far more challenging environment than in the past. It is not that the standards of unacceptable market behavior have been relaxed; but building the case for unacceptable behavior has become more difficult.

Moreover, the complexity of initiating and successfully bringing an antitrust investigation to closure creates perceptions of the Government as a micro-manager of firms, and contributes to a hostile business-government relationship. In today's global market, no country can afford a climate of distrust and hostility when successful global competition often depends on productive, industrial partnerships between government and business.

We conclude that antitrust policy would be more positively and effectively enforced if anticompetitive practices and behavior were more transparent and visible. Scarce resources and opportunities for productive government-business relationships would not be wasted in investigations that eventually wither for lack of evidence­or worse, because they were unjustifiable in origin. Thus, we propose a more innovative approach to addressing concentration­a market-based disclosure policy.

Carefully implemented, a disclosure policy offers several opportunities to address concentration issues in positive ways. First, a disclosure policy can provide a basis for harmonious and productive interactions between the food industry and farmers, as well as consumers. By itself, this would significantly reduce the distrust, anxiety, and hostility present between many segments of the market. Second, a disclosure policy is more consistent with other, current policy initiatives to facilitate efficient marketing and be results-oriented. Finally, and importantly, disclosure makes the unfair use of market power against farmers more visible, easier to observe, and therefore, more effectively and quickly corrected.

A Disclosure Policy Precedent in the Food Industry: Nutrition Labeling

We recall a recent policy shift to disclosure that dramatically affected the food industry and its relationship with consumers. That was the shift from an early 1900s policy of food "standards of identity" to the present policy implemented by nutrition labeling. Standards of identity were useful to protect product integrity and, in doing so, safeguard the public interest against unscrupulous processors who might be motivated to reduce the amounts of the more expensive agreements.

In recent decades, the combination of food science technology and changing consumer demands for a host of food attributes have brought the introduction of thousands of new product formulations. Changing concepts of nutrition increased demands for less sugar and fat; changing lifestyles have increased demands for convenience, shelf-life, and variety. It is simply not possible to draft and maintain a dynamic, useful (up to date) set of standards of identity to safeguard product integrity.

Rather than waste scarce resources trying to keep up with the fast-based food industry by writing more and more "recipes" that become outdated no sooner than they are written, a new policy protects the public interest in food integrity much more effectively. Today, nutrition labeling helps ensure the integrity of food products in an open setting that promotes more harmony in the marketplace.

Nutrition labeling is based on a policy of disclosure. Quite simply, firms are required to disclose the nutrition of their products in a standard and comparable format. The public interest in the nutrition content of food products is left to market forces of competition and the firms' desire to be responsive to consumers' needs and wants. With open disclosure, any product (and firm) that is insensitive to the needs of consumers is very likely to draw criticism, certainly attention, for the press or consumer advocates. Public criticism and the potential loss of public confidence or support for a product (thus, market share) help to maintain integrity in this public interest area.

Guidelines for Implementing a Disclosure Policy

Specific recommendations related to the types of information that we believe would enhance market performance are offered in the following pages. Before listing those specific recommendations, however, we suggest some guiding concepts that would be useful in crafting a successful disclosure policy.

Mutual trust in terms of trade ­ A successful disclosure policy can improve the functioning of the food system and provide a basis for mutual trust and cooperation. In this arrangement, there is little place for secrecy concerning terms of trade between concentrated parts of the food industry and farm producers or consumers. We are aware that defining some terms of trade involves complexities and sensitivities to products and product quality.

We do not presume to settle all of these issues here, nor do we presume that our specific recommendations are all-inclusive. It will take time for the new policy to emerge, be developed and tested, and find support. The significant expertise within the Department can work out the complex definitions involved, as well as optimal procedures for collection and dissemination of information.

When terms of trade are complex, new descriptions of terms of trade may be required­a quality identification system for beef, a weighted average retail meat price or salient components of a poultry production contract. These concepts will evolve with experience.

Information reporting & access­Information on prices and terms of trade is critical to both buyer and seller for efficient functioning of market systems. Disclosure of price and terms of trade by both buyer and seller for market and contract transactions would provide information that both parties could use to evaluate the competitiveness of proposed transactions. Line of business reporting by packers and feedlots if another area where disclosure would significantly reduce distrust and improve market confidence.

Such open disclosure would make markets more transparent (e.g., all parties could "see" the prices being paid for various attributes). Reporting by both parties would also provide a mechanism for checking accuracy and reduce the incentives to not report accurately.

Key concerns are the right to privacy, the importance of unique information as a source of competitive advantage, and the negative impact that open disclosure might have on innovation and creativity. Problems of privacy might be resolved with increasingly more sophisticated electronic data retrieval and manipulation systems.

In this area of information access, one of the most efficient ways to accomplish transaction transparency is through the implementation of an electronic marketing system. Before this can be done, however, the operating system of the electronic market must be designed and accepted by government and industry. This is not something that can be done quickly, but it is the understanding of this committee that this direction is a superior choice for the long run.

With these guidelines and objectives in mind, the committee makes recommendations for disclosure in the following areas:

Improvements in collecting & reporting
B.1. As part of a new reporting process, contract or formula pricing premiums and discounts, based on carcass merit, should be captured and reported. To the degree that contracting improves plant utilization efficiency, and to the degree that contracting allows improved carcass merit to be captured, premiums will tend to be paid over the cash market. The resulting average prices currently reported will, therefore, understate the actual value of livestock slaughtered in any given week.

The addition of quality factors to the price reports, as suggested in this recommendation, will correct this deficiency. This addition will also result in improving the transmission of quality incentives back from the retail level, creating new producer incentives for improved breeding and management programs.

B.2. Research the reasons for and sources of economic difference in the value of market hogs­size of load, volume of annual business, timing of deliver, arranged time of delivery, plant operation economies, leanness, genetic line, etc. USDA should play a role in explaining the magnitude and sources of differences that exist. Engineering cost studies of packing plants or other research could add to the public's knowledge about differences in end-use value which arise from non-physical characteristics, such as delivery timing or supplier dependability.

B.3. Require timely, accurate price reporting for all packer livestock transactions. Reporting must include accurate, verifiable data on all captive supply. Responsibility should be equal upon both parties to the transaction; and penalties should be imposed for late, inaccurate, or misleading information.

B.4. Specifically, the committee recommends the following packer reporting: numbers of cattle purchased in the cash market on a daily basis; all captive supplies committed for delivery at the start of each week; numbers of forward contracted cattle in all out-months; Canadian or Mexican cattle committed for delivery at the start of each week; numbers and prices of cattle slaughtered on a daily basis; and exports in a weekly basis. For lambs, packer reporting of captive supplies for delivery is recommended at the start of each month.

B.5. For hogs, research and report on a quarterly or greater frequency, the proportion of farm-packer sales which are formula-priced by State or region. Such research would provide valuable information about the impact of formula pricing on the price discovery process. As the industry evolves, formulas may begin to be based on downstream markets, thereby making accurate, timely data on wholesale and retail price levels more critical to the farm pricing decision. To this end, USDA support for and involvement in cooperative industry; efforts to improve product price reporting systems on the wholesale, sub-wholesale, and retail sectors will be vital.

Value-based pricing
B.6. Producers need help in comparing price bids among packers. A computerized decision tool which compares base prices and pricing grids would be of great benefit to producers. In addition, such a tool would allow producers to take advantage of geographic price differences that may occur and thereby reduce the effects of regional market power that exist or may develop.

B.7. The committee strongly encourages the Secretary to assist the beef industry in the development of a negotiated "grid" pricing structure, with the base price and spreads determined by competitive bidding between buying interests no more than 7 days prior to shipment. AMS Market news should report a value matrix for cattle on a weekly basis.

A similar price reporting mechanism, the "Lean Value Direct Hog Trade," is currently available for three regions to the pork industry. Indications are that these regionally reported value matrices have been well accepted by packers and producers as the primary mechanism for price/value discovery in the pork industry, and they may be resulting in a competitive advantage for the pork industry relative to beef.

B.8. Expand the producer price reporting pilot project for market hogs in Missouri to include other States and/or regions to represent a broader participant base. A producer price reporting system may be feasible with modern communication systems. Work with the industry to establish a standard leanness measurement as the industry's benchmark­such as the Fat-Free Lean Index. Explore ways to make differentiated prices more available nationwide and understandable to producers.

B.9. GIPSA should continue its long-standing work of monitoring the accuracy of carcass measurement equipment and devices.

B.10. USDA should develop a standardized list of premium or discount categories for carcass merit purchasing, and an additional list of premium or discount categories based on market arrangements (e.g., forward contracts, marketing agreements). These premium and discount categories may be used at the option of the packer as an aid in market communication. In addition, consideration should be given to reporting ranges as well as averages for each appropriate premium-discount category for livestock. This would improve the quality of market information now available.

B.11. We strongly support GIPSA's work with packers to review carcass merit pricing systems and changes to systems before their implementation, to assure fairness. Because some mistrust still exists between packers and producers about in-plant, packer-operated carcass measurements and items such as trim losses, the feasibility of third-party oversight of post-slaughter carcass evaluation should be reviewed.

B.12. The committee recommends that the volume of boxed beef price reporting be increased beyond the current 36 percent of total steer and heifer boxed beef reported by the AMS Market News Service in 1995. It should include reporting of forward sales beyond the 10-day delivery period already reported, branded products, sales delivered as price basis to a futures contract, sales of less than carlot volume, and formulated sales. In addition to the currently reported Choice/Select price differential there should be a report of a price differential for USDA Price and upper two-thirds of USDA Choice.

B.13. USDA should encourage the development of a close-trimmed boxed beef futures contract as an additional means of price discovery for the livestock industry.

Firm data & trade statistics
B.14. Line-of-business profits should be reported for both packers and feed yards.

B.15. Import and export data for meat and meat products, including both price and volume information, should be made more timely and more accurate. Imports on feeder and fed cattle entering the United States should be reported, and information should be compiled and published regarding all exports of beef, veal, pork, lamb, chicken, turkey, and products thereof. The information should be reported within one week after the end of the week during which exports occurred.

Reports should include tonnage that is chilled, frozen, and the aggregate total tonnage exported. Reports should include tonnages of: a) carcasses and of each primal cut, reported by USDA grade where applicable; b) variety meats and processed meats exported; and c) exports to each destination (country) for variety meats, processed meats, and boxed primals, by USDA quality grade when applicable.

B.16. Develop better retail price reporting in order to more accurately reflect the farm-to-retail price spread.

C. Vertical Linkages

The trend to more negotiated vertical linkages in the food chain and the significant benefits in terms of cost reductions, quality improvements, and food safety of those linkages are real. But equitable sharing of the risks and rewards in vertical chains can be a serious problem­exploitation can occur.

C.1. One way to reduce this potential for exploitation is to make sure that all parties are well informed of their risks and rewards. The public role could be one of providing assistance to those negotiating a contract or other form of alliance to understand completely the financial and other consequences of the agreement.

C.2. Another approach would be to set up rules to "level the playing field" in negotiation of these linkages. These rules might identify, for example, what would be deemed "a priori" to be exploitative or inappropriate behavior (not unlike anti-redlining rules in lending or rules concerning sexual or racial discrimination in hiring) and the consequences thereof. Rules similar to those used in some States such as Minnesota, which indicate the penalties if a contract is breached without cause, might be implemented.

C.3. A related alternative could be mandatory sharing of information on costs, margins, and other relevant data between the contract or alliance partners, not unlike what is often shared in "due diligence" analysis in the cases of merger and acquisition activity. A key concern with this regulatory approach is that it has the potential to be a large bureaucratic morass and/or so burdensome that it discourages linkages and alliances that would otherwise have significant economic benefits.

C.4. Within the boundaries of making contracts more transparent, standardizing the terminology used within contracts has significant merit. This would place both the contractor and contractee on even ground in terms of knowing what is being agreed to. Standardized terminology also helps define legal rights and gives the court system a uniform code from which to work.

C.5. With respect to social costs that arise as a consequence of integration­including costs associated with environmental, safety, and health considerations, the committee recommends implementation of consistent and effective rules for animal feedlots which address traditional water and air pollution problems along with odor. If technology is available to prevent significant negative environmental effects, it should be used. However, flexibility should be given to producers to achieve mandated environmental quality results through means of the producers' devising.

C.6. Since contracting in its various forms is now an integral and permanent feature of the meat procurement system, USDA should initiate an effort to explain to producers the terms of these arrangements, along with the potential advantages for both packers and producers. USDA should also provide some guidance as to how producers should make their decisions concerning whether or not to participate. This would remove much of the emotion now connected with these decisions, enabling producers to make more rational, informed decisions.

C.7. A rapidly growing percentage of livestock (hogs, beef cattle, and lambs) are sold to packers under marketing arrangements or contracts. Producers need to know what they must do to be part of future marketing arrangements. Specific contract terms are proprietary business information, but public knowledge of what is required to qualify for a contract will make for more competition for those contracts and, thus, make for an efficient market in future years. USDA should research and publicize what is required to get a contract. Public outreach by USDA on this issue would alleviate many fears of preferential treatment.

A supplier who can offer a steady supply of large numbers of uniform, high-quality hogs, for example, can command premium prices from packers. Independent producers can join cooperatives or networks to realize these gains and increase their competitiveness. Maintenance of the legal rights of producers to act through cooperatives and networks is vital. Specifically, packers should not be allowed to discriminate against producers organized to market animals.

D. Cooperatives & Bargaining

Historically, agricultural cooperatives have been organized whenever producers believed they could gain advantages in the marketplace by joining together instead of buying or selling individually. There are many good reasons to support cooperatives. Cooperatives can provide beef, pork, and poultry producers with several very important benefits:

• competitive prices
• market access
• access to higher margin markets, including exports and value-added products
• risk-sharing marketing agreements
• a well-established and recognized brand name
• participation in the risks and profits beyond the production segment.

Unlike other types of business organizations, cooperatives are owned and controlled by their producer-members. The difference forces cooperatives to uniquely focus on the needs of producers. Cooperatives can effectively address many of the objections and concerns that producers have about the marketplace.

Fostering cooperative/collaborative behavior among producers, as well as between producers and those further along the food chain, has the potential to generate more value to be shared­it is not necessarily a zero-sum game where one party can only gain if another party loses. There is less benefit in this collaborative approach in the commodity businesses and more benefit in differentiated product businesses. With the evolution of agriculture from a commodity to a differentiated product business, the payoff of cooperation/collaboration increases. But, if producers are not proactive, that payoff will be captured by others in the chain.

D.1. Enabling producers to bargain with first handlers and processors as a group and without fear of recrimination is a minimal public policy position. The rights of producers to organized under the Capper-Volstead Act must be preserved. The processor or integrator should retain the right to deal individually with the grower whose performance does not meet the standards of his or her contract.

D.2. USDA has long promoted effective instruments of producer bargaining in many formats, especially marketing orders. We believe some instrument for the redress of producer grievances will eventually be required in large, integrated production and marketing systems like those in poultry and emerging in hogs.

D.3. Congress should amend the Agricultural Fair Practices Act of 1967 to require handlers to engage in good-faith negotiation with producer cooperatives and networks, and to purchase product from these entities without discrimination. As in the first recommendation, processors of integrators should retain the right to deal individually with the grower whose performance does not meet the standards of his or her contract.

D.6. Current laws should be reviewed to assure that there are sufficient safeguards to protect the rights of contract grower associates to bargain with processors to set the terms and conditions of production contracts.

E. Other Areas

The committee considered and makes the following additional recommendations concerning other issues related to its charge:

Meat inspection
E.1. Urge USDA to take aggressive action in a timely manner to end the inequities in meat inspection. With regard to Federal and State inspections, the committee recommends that appropriate steps be taken to promote the ability of State-inspected packing plants that meet federal standards of inspection to compete by selling meat in interstate commerce. Provided, however, that such steps do not undermine the integrity of the U.S. position regarding acceptable inspection standards and safeguards for imported meat.

Trade Policy
E.2. Speed up efforts by USDA and the U.S. Trade Representative to vigorously pursue and eliminate the EU ban on U.S. hormone-treated beef.

Research
E.3. Urge USDA to immediately begin research for new technology to categorize beef by tenderness and implement instrument grading to measure other quality indicators.

E.4. Facilitate field testing and adoption of newly developed technologies like the tenderness-based classification system developed by Koohmaraie, et al., at the U.S. Beef Research Center, Clay Center, Nebraska.

USDA Programs
E.5. The former Farmers Home Administration, now part of the Farm Service Agency (FSA), and the lending arm of the Farm Credit Administration, including the Bank for Cooperatives, should focus their lending resources upon family-sized operations. If operating loan requests can be justified based upon continuation of existing operation scale, expansion should not be imposed as a condition for the extension of credit. USDA should be especially sensitive that resources appropriated under its authority not be used to subsidize large-scale operations.