Deputy Assistant Attorney General
Committee on Commerce, Science, and Transportation
United States Senate
June 11, 1996
Mr. Chairman and Members of the Committee:
I am pleased to be here this morning to discuss the role of the federal antitrust laws and the Justice Department's Antitrust Division with respect to the meat industry. Raising livestock and processing meat are important to the American economy and to the American family diet. We are very much aware of the concerns expressed by livestock producers and others that the livestock procurement and meat packing markets may not be functioning as they should. And we take those concerns very seriously.
As many have noted, concentration in the meat packing industry has increased significantly over the last 15 years, particularly in the steer-heifer sector. Because of the increased potential for antitrust problems in a concentrated market, and because of the concerns expressed, we have been monitoring this industry on an ongoing basis for a number of years. And we now have a special monitoring group of attorneys and economists designated to spearhead this task.
Recent Department Activities
In recent years, the Antitrust Division has conducted several antitrust investigations in the meat packing industry. Although confidentiality requirements under the antitrust laws limit my ability to discuss in detail the Division's investigative activities or the rationales for our determinations in specific cases, I want to mention a few that are already public knowledge. In the early 1990's, we conducted an investigation into complaints about possible anticompetitive collusion by packers and breakers (wholesalers) causing low slaughter prices in the lamb industry. We ultimately decided there was not sufficient evidence to prosecute. Our investigation indicated that the drop in lamb slaughter prices during that period was consistent with normal fluctuations in supply and demand, a determination that seems to have been substantiated by the recovery in lamb slaughter price levels more recently.
We have also conducted investigations in the merger area. In 1993 and 1994, we received reports that Cargill's large meat-packing subsidiary Excel might be interested in acquiring Beef America, a significant Nebraska-based beef packer. We opened an investigation, and Excel never put forth a public proposal. This past fall and winter, we investigated the acquisition by Smithfield, a major pork packing firm centered in the Southeast, of John Morrell, a smaller but still significant pork packer centered in the Midwest. This year, we investigated IBP's acquisition of Calhoun. As one part of the IBP-Calhoun investigation, deposed the Chairman and CEO of IBP, and the vice president of IBP's cow division -- that is, we questioned them under oath. I can mention those depositions because IBP has made them a matter of public record.
We have an investigation open now relating to merger reporting issues, which I am not at liberty to discuss in more detail at this time.
In addition to numerous meetings and interviews held in connection with these and other investigations, Antitrust Division officials have participated in a number of what I would call "outreach" meetings during the last two years, here in Washington and around the country, with concerned livestock producers and other people in various segments of the industry. For example, in June of 1994, a Division attorney spoke at the annual meeting of the National Cattleman's Association in Omaha. In October of that year, a Division attorney spoke at the Center for Rural Affairs conference in Kansas City, and in Rapid City at a "livestock summit" put on by the Western Organization of Resource Councils. In May of 1995, Assistant Attorney General Anne Bingaman herself traveled to Omaha to speak with cattle producers and packers. In late August and early September, I and other Division officials traveled to Huron, South Dakota for a congressional field hearing and a meeting with cattle producers. In February of this year, a Division attorney spoke at the National Meat Association's convention in San Francisco. In March, we had three outreach meetings with groups in Washington, and another barely a month ago. And last Thursday and Friday, I was in Missoula, Montana, speaking with the Montana Stockgrowers Association. We have had other meetings, and many telephone conversations, that I am not at liberty to describe specifically.
The Antitrust Division takes very seriously its responsibility to protect the marketplace -- including the livestock marketplace -- against anticompetitive conduct and mergers that substantially lessen competition. Of course, simply because cattle slaughter prices drop -- even to a record low -- does not necessarily mean that there is an antitrust violation behind it. But if we do uncover conduct in violation of the antitrust laws, we will take prompt and appropriate enforcement action to remedy it.
What the Antitrust Laws Prohibit
Let me be a little more specific about what our role is and the kind of conduct that is prohibited under the antitrust laws. We are a law enforcement agency, and our particular mission is to enforce the antitrust laws -- most prominently, the Sherman and Clayton Acts. That is a very important mission, but it is also a very focused one. We do not have wide-ranging regulatory authority to take action to address any concern we choose. What we do have is full authority to investigate potential antitrust violations, and to take law enforcement action when we find them.
When the Antitrust Division brings an enforcement action, a court makes the ultimate decision as to whether the antitrust laws are being violated in the particular instance. The court's decision depends on the particular facts in evidence. Therefore, we bring an enforcement action in court only when we are in the possession of factual evidence that gives us good reason to believe that the antitrust laws have been violated.
I think that by describing some of the principal types of antitrust violations, I can give you a reasonably clear picture of the kinds of factual evidence we look for, in this or any other industry, to support enforcement action.
The first type of antitrust violation I will describe is collusion, which means that firms that are holding themselves out to the public as competing against each other instead agree with each other to unreasonably restrain competition among themselves. These kinds of agreements are serious violations of section 1 of the Sherman Act, because they willfully subvert the normal operation of free markets, and can result in serious harm to consumers, suppliers, and the economy. They virtually always result directly in inflated prices to consumers and denial of choices in the marketplace; indeed, that is their purpose. The most common of these agreements are agreements to fix prices, agreements to allocate markets, and agreements to boycott particular customers, suppliers, or competitors.
Let me explain each of these a bit more fully. First, price fixing. Price fixing includes not only agreeing on the specific price, but also agreeing to increase or depress price levels, or agreeing to follow a formula that has the intended effect of raising or depressing prices or price levels. Allocation of markets includes not only agreeing to divide up geographic areas to avoid competition, but also agreeing to divide up customers or suppliers within an area, or agreeing to divide up a sequence of bids. Group boycotts include any agreement among competitors that they will deal with their customers or their suppliers only on particular terms. All of these activities are flatly illegal, and all U.S. businesses and individuals must refrain from engaging in them. If we find evidence in any industry, including the livestock industry, that leads us to believe these laws have been violated, we will prosecute.
It is important to remember that with any of these forms of collusion, proving a case requires evidence of an agreement among the allegedly colluding parties. It is not enough to show merely that two meat packers bid a similar price, or that some packers go to some auction barns and other packers go to other barns. What would concern us is if there are additional facts, such as patterns of bids over time, or patterns of attendance at various auction barns, that don't make sense as part of normal competitive behavior. Needless to say, if we ever heard about two or more packers discussing with each other what price they intend to bid, or which auction barns they intend to buy from, we would definitely be concerned and find cause to investigate.
2. Monopolization or Attempt to Monopolize
A second type of antitrust violation, less common than collusion but also a serious willful subversion of the free marketplace, is monopolization or attempt to monopolize, which violates section 2 of the Sherman Act. This would occur if one firm -- a meat packer, for example -- attempted to drive other packers out of business by interfering with their ability to engage in the business, such as by refusing to buy from producers who sell to the other packers, refusing to ship with transportation companies who ship for the other packers, or refusing to sell to distributors or retailers who handle the products of the other packers. Under section 2, it is not necessary to prove an agreement. One firm can illegally monopolize by itself.
But section 2 monopolization cannot be proved just by showing that a firm has engaged in the restrictive conduct. The law also requires proof that the firm has a monopoly -- and that means an extremely high market share all to itself -- and that it engaged in the restrictive conduct in order to acquire or maintain the monopoly. Or, in the case of attempted monopolization, it must be proved that the firm stands a "dangerous probability" of obtaining a monopoly as a result of the restrictive conduct. And to prove "dangerous probability," the courts generally require, for starters, that the firm involved in the restrictive conduct already have a quite large market share. And even a large market share might not be enough, if other facts indicate that the restrictive conduct is unlikely to succeed in creating a monopoly.
Just as important, section 2 monopolization cannot be proved just by showing that the market is highly concentrated. It is legal under our antitrust laws for a firm to have a monopoly, as long as the firm has not acquired the monopoly or maintained it through the kind of restrictive conduct I described a minute ago. So both things -- very high market share, plus restrictive conduct -- must be proved. One or the other by itself is not enough.
In addition to bringing action against anticompetitive collusion and monopolization, we also investigate mergers and acquisitions. A merger or acquisition that would substantially lessen competition in a particular product market and geographic market would violate section 7 of the Clayton Act.
The Clayton Act legal standard for evaluating mergers is different from the Sherman Act standards for collusion and monopolization, and for an important reason. The Sherman Act requires proof of anticompetitive conduct -- as it should, because Sherman Act violations can subject violators to stiff criminal fines and jail sentences. In contrast, under Clayton Act merger review, the principal focus is not on the conduct of the merging parties, but on whether the merger would change the market structure to such a degree that competition would be substantially lessened. And the remedy for a merger that violates the Clayton Act is typically to sue to stop the merger, or to insist that it be modified to remove the cause for antitrust concern.
The Division analyzes mergers pursuant to Horizontal Merger Guidelines developed jointly by the Department of Justice and the Federal Trade Commission. The analysis is aimed at determining whether the merger is likely to create or enhance market power, or to facilitate the exercise of market power, in any relevant market. Market power is the ability of a firm or group of firms to raise the price they charge to customers -- or to lower the price they pay to suppliers, such as livestock producers -- a small but significant amount without being defeated by counteractive competitive responses by other competing firms.
The starting point in evaluating any merger is determining the scope of the product markets and geographic markets that would be affected by it. The scope of a market is largely defined by the smallest geographic area or product area in which a hypothetical firm, assuming it faced no competition in that area, could make a small but significant change in price stick. Usually, we are looking at that firm as a seller, and determining the smallest area within which the firm's customers would be unable to thwart the firm's inflated pricing by going outside that area for their buying needs. But we can also look at the firm as a buyer, and determine the smallest area in which sellers to the firm would be unable to thwart the firm's depressed prices by selling to others outside that area.
So in investigating a meat packing merger for possible creation of undue buying power, we in effect draw a circle around the area we are investigating; then we see how small we can shrink that circle and still have a group of livestock producers who as a practical matter have to sell to someone located within that circle.
A judgment as to the dimensions of this area can sometimes be reached by examining recent buying and selling patterns in the marketplace -- in the case of meat packing, how wide a range the meat packers travel to acquire livestock. But the judgment can also depend on a variety of other, more subtle factors, because the ultimate question is not how far they have traveled in the past, but how far they could or would travel in response to anticompetitive price changes.
Past analyses of mergers in the meat packing industry suggest that steer/heifer and cow/bull are usually distinct product markets for antitrust purposes, for example. This is because the kind of livestock used in each of these two markets is not considered readily suitable for use in the other. Past analyses have also shown that geographic markets may not be isolated local markets, and may in some circumstances be multi-state.
There is no automatic threshold of market concentration that will always result in a determination that a merger would violate section 7 of the Clayton Act. Other factors also play an important role in analyzing the impact of the merger -- such as other structural features of the market that make anticompetitive effects more likely or less likely; evidence of prior anticompetitive conduct, to the extent it could indicate an anticompetitive bent among the firms in question; and the possibility or difficulty of entry into the marketplace by new competitors, which could neutralize any anticompetitive potential. We would also consider the impact of any demonstrable efficiency gains that would result in benefits to consumers.
But market concentration is the first thing we look at, because in highly concentrated markets not only are price fixing and other collusion easier to coordinate; there is also a dampening effect on competitive rivalry, even in the absence of collusion, because it is easier to monitor what your rivals are doing and to anticipate what they will do next. And there is no doubt that the meat packing industry is far more concentrated than it was 10 or 15 years ago -- particularly the steer & heifer sector. We will be scrutinizing mergers among meat packers closely to determine whether they violate the Clayton Act.
Division of Responsibility Between DOJ and FTC
I should mention that the Antitrust Division shares antitrust enforcement responsibility with the Federal Trade Commission, with a few exceptions. One exception is that the FTC does not have criminal enforcement authority, so matters that involve potential criminal violations of the Sherman Act would be handled by us. Another exception is that, by tradition, the FTC handles enforcement of the Robinson-Patman Antidiscrimination Act.
In the areas where the Antitrust Division and the FTC do share enforcement responsibility, we are careful not to duplicate each other's investigative efforts, so as not to waste scarce enforcement resources or unduly burden private entities. We have developed a formal liaison process to determine cooperatively which agency will investigate a particular matter. If one agency has greater current expertise in a particular industrial sector, usually as a result of previous investigations, that agency will generally handle new matters in that sector. Pursuant to this arrangement, it has worked out that the Antitrust Division has handled investigations in the cattle, hog, and lamb sectors, while the FTC has handled investigations in the poultry sector and in meat retailing.
Coordination with GIPSA
The Antitrust Division also maintains close contact with the USDA's Grain, Inspection, Packers and Stockyards Administration (GIPSA). GIPSA does not have authority to enforce the Sherman and Clayton Acts, although it does have authority to consider competition concerns as part of its authority under the Packers and Stockyards Act; that authority, by the way, extends beyond conduct that violates the antitrust laws. And if GIPSA uncovers conduct that it believes may violate the antitrust laws, it has authority to refer the matter to us for investigation and enforcement.
We and GIPSA share information with each other on a regular basis. For example, we received useful market information from GIPSA during our investigation into the lamb industry a few years ago, and during our investigation into the recent mergers. And we have consulted with GIPSA in connection with its investigation of federal cattle procurement practices, and helped advise GIPSA in shaping and overseeing the recent economic studies on market concentration in the red meat-packing industry. We were also in contact with the USDA Advisory Committee on Agricultural Concentration, which was formed to comment and follow up on those studies.
USDA Advisory Committee Report
The Advisory Committee released its report last Thursday. The report confirms the widespread and heartfelt concern among livestock producers and feedlots over the way the market currently functions. The report's central recommendation is to improve the balance of access, as between producers, feedlots, and packers, to market information on which to base their decisions.
Among the advisory committee's other recommendations is that the antitrust and fair trade laws should be vigorously enforced -- including the Packers and Stockyards Act, and the merger laws as they relate both to packer mergers and railroad mergers.
Although all members of the advisory committee signed on to the report, several members also submitted their own minority views. One minority report, submitted jointly by several members, supports the majority report's principal recommendations but goes further in its recommendations regarding vertical integration and formula pricing.
We have obviously not had much time to digest the new report. We also recognize that most of its recommendations extend beyond the realm of antitrust. But the report is going to be of great interest to us, and we will be reviewing it closely and discussing it with the Department of Agriculture in the coming weeks.
We certainly agree with the advisory committee that the antitrust laws should be vigorously enforced. We are going to continue doing just that.
We also agree that railroad mergers should be carefully reviewed for their possible effects on competition. The Department of Justice does not make the final decision on whether to challenge a railroad merger, however. That decision falls to the new Surface Transportation Board created by Congress last year; before that, the decision fell to the now-defunct Interstate Commerce Commission.
We do have authority to submit our views to the Board. Last week we filed a brief before the Board urging that it not approve the merger between the Union Pacific and Southern Pacific Railroads, on the basis that it would substantially reduce competition in hundreds of markets across the country.
As I hope my brief description has made clear, the antitrust laws prohibit the same kinds of conduct in the livestock and meatpacking industries as they do in other industries. We in the Antitrust Division are committed to vigorous antitrust enforcement of the law in all sectors of our economy, and this sector is no exception.
Each time we speak on this subject, we tell everyone that if they have any information that they think is relevant to our enforcement activities, we want to hear about it. As a law enforcement agency, we can treat conversations with us in confidence. If someone brings us facts that suggest the antitrust laws have been violated, we will investigate, and if a violation is found, we will prosecute. In the meantime, we will continue monitoring this industry closely.
Thank you. I would be happy to answer any questions.