Where's the Beef? Inflation at the Grocery Store and Proposed Regulatory Responses

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Although inflation has broadly scattered across the economy, it is the food we buy where inflation's bite is the most obvious.  The Biden Administration has pointed the finger at industry consolidation as the culprit.  It proposes a rewrite of the regulations implementing agricultural antitrust statutes as the remedy.  Industry disagrees that consolidation is to blame and looks warily at the proposed regulations as harbingers of what is to come for antitrust policy more generally.  What is to blame for $18/pound beef, and what if anything can be done to counteract the rapid price increases at the grocery store?  How will businesses respond to the proposed regulatory changes?  Sean Heather of the U.S. Chamber of Commerce; Mark Dopp, Chief Operating Officer and General Counsel of the North American Meat Institute; and Joe Maxwell, president of Farm Action and former Lieutenant Governor of Missouri will discuss the policy and legal options available.  Judge Stephen Alexander Vaden of the U.S. Court of International Trade and former General Counsel of the U.S. Department of Agriculture will moderate the panel.

Featuring:

Mark Dopp, General Counsel, the North American Meat Institute

Sean Heather, U.S. Chamber of Commerce

Joe Maxwell, President, Farm Action 

Moderator: Hon. Stephen Vaden, Judge, U.S. Court of International Trade 

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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

  

Ryan Lacey:  Hello, and welcome to The Federalist Society’s virtual event. This afternoon, March 24, 2022, we discuss “Where’s the Beef? Inflation at the Grocery Store and Proposed Regulatory Responses.” My name is Ryan Lacey, and I am an Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of our experts on today’s call. Today, we are fortunate to have an excellent panel moderated by Judge Stephen Vaden, whom I will introduce briefly. Judge Vaden serves on the United States Court of International Trade, following his confirmation by the United States Senate on November 18, 2020, in his appointment by President Donald J. Trump.

 

Before joining the Court, Judge Vaden served as General Counsel of the United States Department of Agriculture. In private practice, Judge Vaden focused on election law, and he is a proud resident of the great state of Tennessee. After our speakers give their remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen. We’ll handle questions as we move towards the end of today’s program. With that, thank you for being with us today. Judge Vaden, the floor is yours.

 

Hon. Stephen Vaden:  Thank you so much, Ryan, and thank you all for joining us here today. And thanks to The Federalist Society in providing this forum. Inflation has hit highs not seen in the last forty years. Some observers, such as former Clinton administration Treasury Secretary Lawrence Summers, point to traditional explanations, like the rapid expansion of the money supply caused by repeated trillion-dollar COVID-stimulus programs. Other observers, most notably the Biden administration, argue that an important contributor to the current rapid rate of inflation is the increasing concentration of market power in fewer corporate hands in key sectors of the economy. The Biden administration has targeted much of its early ire at the food and agricultural sectors, which, coincidentally, also represent Americans’ most visible gauge of inflation with each trip to the grocery store, particularly with regard to meat prices.

 

That brings us to today’s panel, which will look at who is to blame for rising food prices and whether anti-trust policy has a role to play in taming it, alongside more traditional tools of monetary policy. We have three excellent experts joining us on today’s program, and that’s not only my opinion. That’s the opinion of The Wall Street Journal, which quoted two of them in a front-page article on this topic on Tuesday. So without any further ado, I’m going to introduce each of our panelists right before they speak. Each panelist will speak for about 10-12 minutes. And then, I’ll help them engage in a free exchange of ideas based on the topics that they have chosen to speak on. And then, we’ll open it up to you, the viewer, for questions, and, hopefully, I can go to that Q&A box and pick out some of your questions and have our panelists address them.

 

Our first panelist today is Mr. Joe Maxwell. Mr. Maxwell is co-founder of Farm Action. He focuses his work on a vision of an inclusive US economy that works for all people. He’s held key positions in both political and initiative-petition campaigns. During the last election cycle, Mr. Maxwell assisted presidential, US Senate, and US House of Representative candidates in developing their anti-trust, agriculture, and food policy positions. He holds degrees in Agricultural Economics and Law from the University of Missouri. He has also served as a state legislator in Missouri and was elected as Missouri’s Lieutenant Governor. Mr. Maxwell is also retired from the Army National Guard. He and his brother, Steve, are proud Missouri family farmers. Joe, the floor is yours.

 

Joe Maxwell:  Thank you so much, Judge. I appreciate the opportunity to be here today and want to thank all of those who are joining. As the Judge indicated, I’m the President of Farm Action. We look at the broader impact of market concentration in the food system. We develop policy recommendations to bring about economic vitality in rural America. Today, consumers are experiencing rising inflation at the grocery store.

 

For us at Farm Action, a contributing factor to the spike in inflation is captured in this recent Nasdaq headline, “Who’s Hungry? Food Companies Are Gobbling Up Profits.” Today, I will be addressing the market and pricing power meatpackers have within the protein market. I will be discussing the impact this power has over the farmer, rancher, and the retail grocer, and the consumer. I’ll be discussing the impact retail grocery concentration has on the issue of inflation and price. Economists state market abuses are likely to occur when the market concentration ratio of the top four firms exceeds forty percent. This is when four companies control forty percent of any one market sector, for instance, the beef market, grain processing, beer manufacturing, and so on.

 

Today, the ratios of nearly every agriculture and food sector are far beyond this point of likely abuses. Beef is at 85 percent, pork 67 percent, poultry’s 54 percent, and, if DOJ allows the joint venture between Cargill and Continental to proceed with the purchase of Sanderson Farms, the CR4 for poultry will increase to 60 percent. Acceleration among food and agriculture corporations to grow horizontally—that is to start buying up companies in the same market, beef companies buying out beef companies, etc.—began shortly after the Reagan administration shifted acquisition and merger reviews at DOJ and FTC to a Chicago School of Economics lens of efficiency. And President Reagan also set aside a 1920s court order that had placed market restrictions on the top five meatpackers. Pre-Reagan, the CR4 was around 25 percent.

 

Four dominate firms only controlled twenty-five percent of the market in beef. By 1990, the CR4 in beef was already at 70 percent. By 2007, it was at 83.5 percent, and today, as I have said, it’s at 85 percent. Because the CR4 in beef has been at this extremely high level of concentration for about 15 years, many have asked, “How can inflation now be blamed on high levels of concentration?” Well, it is because the business structure of the horizontal, dominant firms had not matured through redefining the meat sector as protein, and they had not advanced vertical control of the supply chain through vertical integration. Vertical integration is when a company buys up or controls links within their own supply chain.

 

To the first point, meat companies are protein companies. In the 1990s, there were pretty much beef companies, pork companies, chicken companies, and so on. Today, they’re all protein companies. For instance, JBS is one of the dominant firms in beef, pork, and poultry and has invested in alternative proteins, both plant-based as well as cultivated meat. This move by meatpackers to buy up and dominate substitute goods eliminates the substitution effect within the market. The substitution effect is when prices rise too high on a particular good that a consumer decides, “Well, I’m going to buy a substitute good.”

 

Price of beef goes up under the substitution effect, then the consumer simply buys chicken. But today, the same companies control both sectors and simply raise all prices, leaving the consumer to simply pay the higher price for protein. And we all need protein. It’s not an option not to buy. The second point of market maturity is vertical integration. In the 1980s and 1990s, in the beef and hog market, the dominant firms bought their supply of livestock in mostly an open market through what is often called a cash basis or cash market from independent farmers and ranchers.

 

Today, dominant meatpackers control up to 80 percent of their supply. They either have done this through direct ownership or through forward contracts. Today, cattle producers find themselves in direct competition with the very companies who they depend on to buy their cattle. The ability of the meatpacker to hold up the kill of their own cattle or to push them into the market gives the meatpacker pricing control at the farm gate as well as the ability to create a choke point in the supply chain. That’s giving them a basis for raising the wholesale price the retail grocer is forced to pay and then to pass onto the consumer as a retail price. As these levels of concentration and control over the supply chain have elevated, the understanding and application of basic supply-and-demand modeling fails to explain the market dynamics of concentrated corporate power and pricing power.

 

What we see are dominant firms exerting their power to extract excessive wealth up and down the supply chain, contributing to inflation. A great case study that exemplifies the pricing power of the dominant meatpacking firms is a single occurrence of a supply chain disruption. Let’s look at the 2019 fire at the Tyson beef processing plant in Holcomb, Kansas. On a Friday night, August 9, 2019, a fire shuttered a Tyson beef processing plant that represented about five or six percent of beef processing in the US. On Monday morning, the beef packers were literally screaming, “Fire,” causing retail grocers to make a run on the beef in an attempt to secure the expected Labor Day beef sales. At the same time, beef packers cut the price they were paying cattle producers, using the excuse of lost process.

 

By August 24, the result was a 67 percent spread in what the beef packer paid the cattle producer and how much they charged the retail grocer. To put this in perceptive, this spread reflected a 143 percent increase over the average spread from 20 -- in 2016 to 2018. What is most telling about the market power of the dominant beef packers is that the week following the slaughter of fat cattle -- weeks following the fire, slaughter numbers only dropped by 1,000 head as compared to the week prior to the fire. In the three weeks that followed the fire, the beef industry slaughtered 5,000 more fat cattle than the three weeks prior to the fire, yet they had continued to charge retail grocers the higher wholesale prices, as well as farmers, the lower price for cattle. The reality was the packers had the processing capacity to replace -- or the elasticity in the market to replace the capacity that was lost at Holcomb. Seldom does anyone profit from a fire, but when you have dominant market power, you can do whatever you want. You can make more profits during a supply chain disruption, as evidenced in this case study, than you can when everything else is running smooth.

 

The pandemic has given the dominant firms the excuse to test their pricing power, and as a result, market concentration has contributed to the spike in inflation. In spite of the fact the pandemic -- we absolutely agree that the pandemic has brought about increased costs of goods, supply chain disruptions, labor outages, and market shifts between industrial beef markets and retail markets. However, meatpackers are declaring record quarterly profits in spite of these pandemic impacts. Marfrig, a Brazilian company that owns controlling interests of US National Beef, reported in their first quarter of 2021 earning statement that the industry was experiencing record profits for the first quarter, attributing this record of profitability on factors such as a robust economic-relief package and the fact that the cost of cattle was down 4.8 percent compared to the same period in 2020. While cattle prices had gone up since the first quarter of 2021, the big meatpackers have not slowed their appetite to garner record profits from the market. In their 2021 third quarter earnings statement, JBS South America, Brazilian company, reported its US beef earnings before interest, taxes, depreciation, and amortization had increased 220 percent over the same period the previous year—220 percent increase.

 

JBS closed out 2021 US beef with an increase in cost of goods of 15.1 percent, but their increase in gross profit was 99.7 percent. This is the number that holds the truth about the impact concentration has on inflation. The scenario is playing out at all of the dominant beef protein firms. Here’s a quote. “We delivered double-digit sales and earnings growth during the fourth quarter and full year, and our performance was supported by our diverse portfolio of protein and continued strength in consumer demand for protein,” said Donnie King, President and CEO of Tyson Foods. “We delivered a record performance in our beef segment.” Again, a Nasdaq April 2021 headline sums up the power of concentration in all the US supply -- food supply. “Who’s Hungry? Food Companies are Gobbling Up Profits.”

 

The failure of our US government to rigorously enforce anti-trust laws has ushered in these monopolies. Our government has also advanced the growth of dominant firms, like JBS, Tyson, Cargill, Smithfield, and the others, through favorable trade deals, propping up their sales through direct procurement, allowing foreign imported meat to be labeled, “Product of the U.S.A,” and other agricultural marketing services for the benefit of dominant firms. We strongly support government taking steps to safeguard the marketplace. We support strengthening the Packers and Stockyards Act, ending fraudulent labeling of foreign beef, returning to review of mergers and acquisitions with a lens to impact on competition, not just efficiency. We support DOJ and FTC being able to look back at previous acquisitions and mergers. Let’s determine if the promised efficiencies that was given by those companies in order to merge -- that they had been realized.

 

I want to thank you for this opportunity. To us, this issue of being free from monopoly power is a critical issue of our time. The control of a few corporations have over our country and our economy is a threat to our democracy. We believe history clearly demonstrates that the spark of the Revolution that brought us our independence and our freedoms was an action by the patriots when they threw the monopoly East India and Company’s tea in the water. I thank you very much.

 

Hon. Stephen Vaden:  Thank you, Mr. Maxwell. That sets the table quite well for our next guest, who will have a slightly different perspective on what’s going on in the market. Allow me to introduce Mr. Mark Dopp. Mr. Dopp is the Chief Operating Officer and General Counsel for the North American Meat Institute. He previously served as its Senior Vice President of Regulatory Affairs. In his role, Mr. Dopp oversees policy development and represents industry views on significant regulatory, scientific, legislative, and communications matters.

 

Before joining NAMI, Mr. Dopp worked at Hogan & Hartson, now known as Hogan Lovells, where he was active in areas of food and agriculture law on behalf of many clients, including domestic and foreign corporations. I particularly love the fact that Mr. Dopp began his career at my old pond, the United States Department of Agriculture’s Office of General Counsel. Mr. Dopp received his Bachelor of Science in Agriculture degree—Agricultural Economics, to be specific—from the University of Wisconsin and his Master of Science from Michigan State University, also in Agricultural Economics. His law degree is from the University of Missouri. So, Mr. Dopp, the floor is yours.

 

Mark Dopp:  Thank you, Judge Vaden. Good afternoon, everybody. It’s a pleasure to be here; appreciate the opportunity. As the Judge mentioned, I’m the Chief Operating Officer for the North American Meat Institute. For those of you who don’t know much about the Meat Institute, it is the national trade association representing meat and poultry processors, primarily meat processors, in the United States and in North and -- throughout North America, frankly. Our members are the largest of the large—the Tysons, the Smithfields, the JBSs—to the smallest of the small. I think our smallest company -- member company is a small jerky manufacturer in Oregon, who, I think, has about five or six employees. So we run the spectrum in terms of size and who we represent.

 

I’m going to ask Ryan to help me out with the slides here. I’ve got a few slides that accompany my remarks. Trust me. If I tried to do this myself, it would not go well. So, Ryan, if we could move to the second slide. I’m going to touch base on -- the topic today is Inflation and Beef.

 

And I’ve listened with some interest in what Joe Maxwell had to say. There are a couple things that he said with which I agree, and there are several things, of course, that I probably don’t agree. So let’s talk about -- let’s look at it this way. I’m going to talk about what didn’t cause inflation, what causes -- what we will point to as causing inflation, and then a couple of the regulatory or legislative proposals that are out there that we think would be adverse to the meat/poultry sector and, frankly, the entire supply -- the beef supply chain. So let’s talk first about what did not cause inflation—what is not the cause of inflation beef prices. It’s not consolidation, and we don’t believe it’s concentration.

 

With all due respect to Mr. Maxwell’s remarks, this first chart shows -- it’s going back to 1994, so that’s the past 25 to 30 years. The four-firm concentration ratio for beef—for feed cattle in particular—has toggled between 80 to 85 percent. And, candidly, I was part of that. I worked on a couple of the mergers back in the late ‘80s where -- Agribots, Swift Independent, etc. Those of you who are in the audience who may remember or know Jim Reel (sp). I worked for Mr. Reel back in those days on these deals, and I can tell you that it was a challenging, terrifying but one of the most rewarding experiences of my life. So, Mr. Reel, if you’re listening, thank you. But let’s look at this.

 

Like I said, the four-firm concentration ratio hasn’t changed in any meaningful way since at least 1994 and probably before that. Yeah, but look at what the beef prices have done and what CPI shows with respect to inflation. It’s remained relatively constant as well. It toggles a little bit up and down, but you can’t really make any -- you can’t draw any conclusion or make the assertion that concentration is any way linked to the cost of -- to the recent rise in the price of beef. Second, I’d like to point out -- you hear on Capitol Hill and the administration talking about consolidation in the beef industry. That’s simply not true.

 

There hasn’t been a meaningful merger since about 1991, and, in fact, the last time a merger was proposed between two of the big four—between JBS, when JBS attempted to buy National back in 2008—the Justice Department stepped in and blocked that merger. So to -- somehow, to contend that justice is not active in this area, I don’t think is accurate. Let me point -- Ryan, would you go to the next slide, please? I think this slide tells us a great deal. Much has been made about how the four-firm concentration ratio has been problematic for the producer sector, but if you look at this -- and I apologize. It’s a little bit busy.

 

And by the way, this is not our data. This is either USDA data, or the margin data is from a very reputable economic firm called, Sterling Marketing—John Nalivka, in particular. If you look at this, you’ll see that this represents, in my view, what we typically talk about when I’m talking about the cow cycle. There are years when the packers make money. There are years when the producers make money. The red lines here are when the cow-calf producers are -- when their margins are profitable and then when they’re positive.

 

And you can look and see. Obviously, back in 2013, ’14, ’15, the cow-calf producers were doing exceptionally well, and the packers were getting behind. In fact, in some respects, it was the feedlots who were doing less well. So this idea that somehow, someway, the producer being -- the producers are being downtrodden based on the four-firm concentration ratio is not borne out by the data. And, Ryan, if you’d go to the next slide, I’d appreciate it. I thought it was interesting Judge Vaden mentioned Larry Summers.

 

I don’t expect you to read all of these quotes. I just pulled a handful from the last several months. It’s interesting that the spectrum, if you will, the range of individuals or entities who are commenting and disagreeing with the Biden administration and those on Capitol Hill, who are -- who continue to assert that concentration is the reason for inflation, they range from Larry Summers to The Wall Street Journal to The Washington Post to the National Review. You can’t find a more diverse -- and this is just a handful of the quotes that we have pulled over the past three or four months. Next slide, please, Ryan, if you would.

 

So what has caused wholesale beef -- and what has caused prices to raise for consumers? I think it’s -- the answer’s pretty simple. I think it’s basic supply and demand coupled with a huge dose of COVID with a sprinkling of politics. There are those who favor -- those who are favoring this government interventions point conveniently to the fact that the price that cow producers have received has gone down since 2014/2015, but, if you go back -- if you remember the slide before, 2014 -- no, go back one, please, Ryan -- 2014/2015 are when the cow-calf producers were making record profits. That also coincides with when the beef or the cattle supply was at its lowest levels since 1952 in the Truman administration. In the five or six years since then, the herd has grown from 88 million head to about 94 million head.

 

It’s simple supply and demand, and then COVID hit. So if you look at this chart with retail versus wholesale beef prices, I can tell you as somebody who was working for the meat industry back in the spring of 2020—that May, June, July window, that three to four, five-month window—I’d been practicing law now for 38 years, and those were probably the darkest days and most difficult days of that 38-year career. Plants were being idled. People were getting sick. Unfortunately, some of them were dying. Plants were running at 40 to 50 percent of their capacity.

 

We’re talking about beef, but in the -- the hog sector was equally affected. You probably saw where hogs were being euthanized. And it’s about one thing. It’s about -- you can have physical plant capacity. You can have a facility that’s handle -- that can handle 3,000 to 4,000 head per day, but if you don’t have the people to man that operation, that’s what we really talked -- that’s what we’re talking about when we talk about operational capacity. It can be the biggest plant on the planet, but there’s got to be people there to be able to work it, and that’s what happened.

 

That’s what you see with this significant spike in terms of wholesale versus retail prices in 2020. And as the industry worked through the backlog, over time, you see where things settled out. And these other spikes are commensurate with some of the other variant spikes that we see with respect to Delta, etc., over time.

 

If you can go to the next slide, please, Ryan. Thank you. This is a chart that talks about -- it shows the price that are being -- the cash price of fed cattle because, again, we’re talking about beef here.

 

Again, record-high prices in 2014 when the herd size was at its smallest. It filters down over time as the herd size begins to grow. I think it’s interesting that -- I read an article just the other day, I think, in fact, two days ago -- Cassie Fish who was a market analysts -- cash cattle prices, right now, are toggling between $138, $140, 100 weight. A year ago, they were $109. And again, the four-firm concentration ratio has not changed whatsoever.

 

But supply is only part of the equation. Demand is something that we need to consider as well. Every economist who has looked at this issue will tell you that demand for beef, demand for meat, through COVID, through the pandemic has been at record-high levels. And that’s both domestically and with respect to exports. And there’s a reason why demand was high. The government pumps significant amounts of money into people’s pockets.

 

They couldn’t travel. They couldn’t go on vacation. They couldn’t buy cars. So they started to spend money on things like more expensive cuts of meat. From January through October of 2021, there was an additional 3.729 trillion dollars in government-relief payments paid to the population. That’s 3.8 trillion more than was paid from January through October 2020.

 

And the economic aid and job recovery added an additional 14.3 trillion dollars in personal income in January to October 2021 over that found in January to October 2020. That extra money is what fueled the personal demand, and a lot of people start spending more money on meat products because they can’t travel, etc. If you could get me the next slide, please, Ryan. I’d like to point to this as well because you’ve heard Secretary Vilsack talk about this. You’ve had -- you’ve heard people up on Capitol Hill talk about this. President Biden has made this -- has commented on this on more than one occasion.

 

Everybody talks about how the value of the -- the producer value of the dollar spent -- the consumer dollar spent for meat products, in particular, has gone down. That’s true. But if you look at this chart, which shows the share of the retail beef dollar that the producer receives versus the share of the retail beef dollar that the packer receives, historically, the packers have received a considerable -- considerably less, potentially smaller number than the producers received. Admittedly, in January of 2020 -- and when you talk about the spring when we had the COVID -- the beginning of the COVID pandemic spike, no doubt that there was a -- that that was inverted. But historically, that’s been the case. And we see that that can -- now that things are getting back to whatever constitutes normal, that that continues. We’re back to what more historically expected and seen, and I expect that to continue as well.

 

And you may ask, “Well, where’s the money going?” Well, the short answer, in my view, is it’s going to -- if you think about it, go back to 20, 30, 40 years ago. You didn’t walk into a grocery store and see ready-to-eat meals. You didn’t walk into a Whole Foods and see -- you could walk in and get a whole chicken. You didn’t have prepared meals. You didn’t -- all of that, the value is being added elsewhere, probably in the retail chain, largely, is my best guess. We don’t have that data here, but I believe that to be the case.

 

So this is -- what I’m getting at is I think that the rationale or the -- the reasons why we’ve seen what we’ve seen are readily explained by market supply-and-demand forces. In fact, if you ask Professor Tonsor, Professor Koontz or any other well-established agricultural economist, they are likely to -- they are going to agree with you. We had this -- we’ve had these issues analyzed. Now, all of this has brought a lot of tension to the industry, and there have been calls for -- I think Joe mentioned -- made a passing reference to the Packers and Stockyards Act. Senator Grassley and Senator Fischer have had a couple bills introduced, and they’re still working on a third. Let me just address those two issues, and then I’ll stop talking and let Sean take over. With respect to the Packers and Stockyards Act, it has nothing to do with inflation, as far as I’m concerned, because the origins of that rule-making exercise began in 2010.

 

So while this inflation issue is being used as an excuse to justify those regulations, they’re really unrelated. And I want to point out one thing about those issues. I’ve been working on this for a dozen years now. The linchpin to this whole issue when it comes to P&S is the issue of USDA wishes to repeal, for lack of a better term, the standard that’s applicable in a Packers and Stockyards Act case. Eight federal appellate courts have looked the issue and decided that a plaintiff must demonstrate injury or likelihood of injury to competition to prevail in a P&S case. Eight. Every circuit court from the Fourth through the Eleventh has looked at this issue and come to that conclusion, the most recent case being Terry v. Tyson in 2010.

 

Notwithstanding that, USDA continues to want to make -- to change the standard, thinking they can do it by rulemaking. I’m here to tell you right now that, if that happens, it’s bad -- it’s both bad law, and it’s bad policy because what will happen is the alternative marketing arrangements—what Joe would call captive supply, but I prefer the term alternative marketing arrangements because I think it’s more accurate—the alternative marketing arrangements, which were the brain child of producers who came to the packers and said, “If I come to you with a product or an animal that has -- with certain characteristics or traits, will you pay me more?” That is -- that has led to, as Joe pointed out, a reduction in the cash and the number of sales in the cash market. But it’s been to the benefit of the producers, consumers, and packers. And the RTI study from 2007 proves that. If the standard has changed to something other than having to prove injury to competition, the packers will reduce to -- they will go from 15 AMAs to 1 or 2 or 3, and that will be detrimental, not just for the packers, but also to the producers and consumers.

 

And then, lastly, I’m going to turn my attention briefly to the bills that Senators Grassley and Fischer and others are promoting. Essentially, what those bills would do -- and they were posed, by the way, by National Cattlemen’s Beef Association, the Farm Bureau Federation, but they still have life, surprisingly. That bill, in some way, shape, or form, would mandate some x percentage -- the original bill had 50 percent. The second bill has a percentage to be established by the Secretary of Agriculture. It would require packers to purchase, on the cash market, a specified percentage as set by the Secretary of Agriculture. This, too, is a terrible idea. This is the kind of government intervention in the market that should not be tolerated, and it, too, will be to the detriment, not only to the packers, but more to producers and consumers, because every time -- if I am a packer and I’m required to buy 40 percent of my cattle on the cash market, and I’m currently buying 20, that means I have to tell some producer who wants to use an AMA that I cannot, and he won’t -- he or she will not have access to it.

 

So these ideas that are being floated as a solution under the auspicious of inflation, like I said, they’re bad law, and they’re bad policy. I might add, I haven’t had a chance to read it -- and I’ll sum up with this. I haven’t had a chance to read it, but I’ve just skimmed real quickly through the recently published—I think it was a couple of days ago—SEC proposal on -- it has to do with climate, etc. That, too, could have a similar impact because you start thinking about the kind of information that has to be provided. A packer might decide that they’re going to become more vertically integrated because they either can’t get the information, or they just don’t want to have to bother. So with that, Judge Vaden, I will end my remarks and turn it over to you and Sean.

 

Hon. Stephen Vaden:  All right. Well, thank you very much for that comprehensive presentation, Mr. Dopp. And I just like to remind our viewers, if you have a question, please enter it into the Q&A box because when Mr. Heather, our next speaker, concludes his remarks in about 10 minutes, then we’re going to turn to some discussion, and I hope to get to some of your questions. Our last speaker on today’s panel is Sean Heather. Sean is Senior Vice President for International Regulatory Affairs and Anti-Trust at the U.S. Chamber of Commerce. He leads the Chamber’s Center for Global Regulatory Cooperation, which seeks to align trade, regulatory, and competition policy in support of open and competitive markets.

 

He also oversees the organization’s anti-trust policy on behalf of the Chamber members. He’s held a variety of positions during his long tenure at the Chamber. He has served in the Congressional and Public Affairs division and was the head of the Chamber’s regional office in Chicago. Before joining the Chamber, Mr. Heather worked for the Illinois Comptroller and with several political campaigns across that state. He holds both an undergraduate degree and an MBA from the University of Illinois. And Mr. Heather is going to talk about the larger anti-trust issues that are emphasized by this debate, which has so far focused just on agricultural issues. Mr. Heather, the floor is yours.

 

Sean Heather:  Thank you, Judge. It’s good to be with you, Mark, and Joe, and appreciate The Federalist Society’s invitation. I’m dialing in today from The Greenbrier in West Virginia, hence the beautiful drapes behind me. Anybody who’s been here knows the floral prints are rampant across the property. Yes, I am not an expert in the ag field, specifically, but do spend a lot of time these days on this debate about concentration and whether concentration is harmful to the market. And in my brief remarks here, before we open it up to a more conversation-like approach between the three of us but also with all of you online, I want to quickly make three points.

 

One, I want to talk about the myth that is concentration. Two, I want to talk about the distinction between the role of anti-trust and regulation, something that I think is often lost in today’s debate. And then, finally, I want to talk about, to a degree to which we want to move down a more regulatory path, some of the dangers associated with that. So when I say that there’s a myth around concentration—I think it’s been set up well between the two first speakers—that there is a debate that is often being put forward by the Biden administration, not just for the ag sector but for a number of sectors. Last summer, the president issued an executive order on competition. That executive order essentially claims that the entire US economy is overconcentrated, that we have a monopoly problem in America, that every sector is suffering from excessive concentration.

 

And that executive order has a variety of things that asks lots of different regulatory agencies to look into and do, but what it’s based on is this idea, again, that we are excessively concentrated. Well, when you actually look at the data, that is not true. The US economy today is no more concentrated than it was in 2002. If you look at the US Census -- Economic Census data that the Department of Commerce collects—there’s an economic census in this country every five years—it shows that, actually, concentration rates across the US economy have been falling since 2007. That was a peak point for us. So you cannot say that the US economy is more concentrated today than it was in the past.

 

Another great data point when you look at industry after industry, concentration is not persistent. In other words, those -- industries that are the most concentrated, since 2002, have actually been losing their concentration on a whole, while those industries that are least concentrated have actually been gaining concentration. So you see, over time, concentration levels moving and shifting and shaping. Finally, I think the most important aspect of the data -- it shows that, actually, where there is concentration in the market, that you cannot directly link that to what happens from a competition standpoint. In other words, concentration levels do not mean more or less competition. And this is a well-known fact for any anti-trust economist.

 

Anti-trust economists don’t worry about industry concentration. They will tell you, you could have an industry that only has two players, and it can be highly competitive. Or you can have an industry that has eight players and be highly competitive. They look at what is happening with market competition, not industry concentration. And so, this debate, in some ways, is very artificial as to what the CR4 numbers are. And that’s why, for real anti-trust economists, they look at a thing called, “HHI,” and it’s a different metric, which does a better job of trying to measure whether or not concentration potentially is harmful.

 

But even under an HHI metric, you don’t have a necessary ability to draw a straight line between whether or not you have market power, and that market power is also translating to harm in the market. So some of this debate that we’ve heard today and some of the numbers the Chamber’s put out in a recent study we had commissioned by NERA, which is a leading economic firm, all looks at the CR4 data. And what that shows, again, is that the US’s economy is no more concentrated today than it was in 2002, and concentration levels are following 2007. But it doesn’t necessarily understand the myth that industry concentration is not market concentration. So let’s talk about market concentration and the role of anti-trust. As I said, the other point I wanted to make was anti-trust and regulation are not the same thing.

 

Anti-trust is the premise that the markets will self-regulate, that supply and demand will force the markets to an equilibrium that will maximize welfare for the consumer. And that is the idea that we, as a country, have decided to build our economy, not having a lot of government intervention, to allow the free market to operate. Well, when the free market stops operating, the role of anti-trust is to restore market forces, so anti-trust is a very narrow tool. And what we see today is everybody wants to say that the problems that they see in the market are an anti-trust problem. See, the beauty of the anti-trust laws are very simple. One is they’re a law general application. So every industry, essentially, save for a few instances where Congress has created an exemption in statute, are subject to anti-trust scrutiny.

 

The second basic principle of anti-trust is you have to demonstrate harm to the competitive process, which means harm to the consumer. It’s not what happens to the other producers that you’re competing with. It’s not what happens to the people who are supplying you your product. It’s not happening -- what happened downstream in the supply chain. It’s how does the actions of the business that is being brought before a judge in an anti-trust case can demonstrate that the harm is actually harm to the consumer. The third and final principle of antitrust, which is, at its core, is that all actions in the market may create some harm to some consumer, so we’re not looking to prohibit all harm.

 

We’re looking to use what they call the rule of reason to establish whether or not that harm is outweighed by pro-competitive benefits. So all of the debates we’ve heard here today about what’s happening in the market can be evaluated under the existing anti-trust laws. Anyone can bring forward a claim because of the law of general application that is anti-trust and state that there is harm in the market. They’re just going to be asked to show two things—one, that harm is harming the consumer, and two, they’re going to have to demonstrate that that harm is greater than any pro-competitive outcome as a result of that conduct. That’s what anti-trust law is. Much of what we hear today and the debate we’ve just listened between Joe and Mark and much of what we hear on the debate on Capitol Hill, whether it be this industry or other industries, is people would like the market to do something else, and they often will project political or priorities that we might have as a society that we want out of the market.

 

And when we do that, we don’t look to anti-trust to resolve that. So we have now people saying, “Well, we should be looking at mergers and acquisitions as to whether or not there’s job loss.” Or we have people who are suggesting that there are other kinds of factors that we should be thinking about, not just what’s in the interest of the consumer. And so, when you start to do that, you’re no longer talking about anti-trust. You’re really talking about the role of regulation. And throughout our history, we have often put regulations in place for certain industries in order to achieve certain outcomes in the market.

 

And as a democracy, the Congress is free to make decisions and trade-offs and say, “We’re not going to just leave it to the market to allocate resources. We’re not just going to leave it to the market to decide something. We’re actually going to step in and direct market outcomes, and we’re going to do that through regulation.” So a lot of the debate that we’re concerned with at the Chamber is that not every different solution someone has out there to a problem that they think they’ve identified is one that is for anti-trust to decide. It really should be one of a conversation as to whether we want regulation in that space. My last and final point, and then look forward to opening up the conversation is, be careful what we ask for.

 

Recently, I was having a conversation with an office on the Hill—Senate staff—and we were not talking about the agriculture industry. They were talking, though, about concentration. And the example that they gave me was that there is excessive concentration in the casket industry. And I think it was something like, “There’s only two casket companies in the United States that have about 80 percent of the market, and that’s a problem, Sean. You know that, don’t you?” And I said, “Actually, I don’t know that.” I said, “A, today, there’s a lot of people who get cremated who don’t need caskets. Perhaps the reason that there’s concentration is that we just don’t need as many casket manufacturers today.”

 

I said, “Perhaps, we’re not living in the 1800s, where you needed a pine box manufacturer in every town in America, and so, it makes sense to have fewer pine box manufacturers.” And then, I finally said, “Well, do tell me, dear Senate staffer, how many casket manufacturers would you, as the Government, like to have in this great country of ours?” And at that point, the Senate staffer stopped for a moment and reflected and said, “You got a point.” So I’ll end with that, going back to where we started, which is there’s a huge debate today as to whether we are more concentrated, and that that concentration somehow is harmful. And the answers, I think, are very clear. One, the economy today is no more concentrated than it was in 2002.

 

It’s also very clear, when you talk about industry concentration, you’re not really talking about the state-of-market competition. And market competition is well safeguarded by today’s anti-trust laws, which work well when they are applied using that law of general principle, using that rule of reason analysis, and evaluating whether harm is being done to the consumer. The debate we’re having today is whether we want to have more regulation, whether it be in this sector or in other sectors, which begins to move us away from an anti-trust test into one in which we, as a democratic group of citizens, asks our Congress to empower our regulators to put more conditions on the marketplace than otherwise anti-trust would allow to happen naturally. So with that, let me stop, and let’s open it up for a conversation, Judge.

 

Hon. Stephen Vaden:  Thank you, Sean. You took us from the slaughterhouse to the casket, so I think we’ve gone full circle, [inaudible 44:45] as things go. Well, we’ve already got some questioners who have put their questions in. And I’m going to try to mix those in with two questions that came to my mind as our three speakers were talking. Mr. Maxwell, my first question is for you. And that is, there seems to be a debate between you and Mr. Dopp about what the appropriate metric we need to look at is—whether the metric that’s driving the market is there are too few meat-packing companies, buying up cattle, poultry on a large basis so that farmers have few options to sell.

 

And then, on the other side, Mr. Dopp suggests that, no, the metric we need to look at is how many cattle are out there, and the chart that he put up seemed to suggest that, roughly speaking, the price for protein, as he put it, tended to follow the supply of how many animals were available for that particular type of protein, in his example, beef. How do you, Mr. Maxwell, respond to Mr. Dopp’s suggestion that what we really need to look at is not how many packing plants there are but, rather, how many cattle there are?

 

Joe Maxwell:  Well, I really lean more towards Sean’s analysis. I don’t think it’s the exact number. I think for us and the economists we work with, the CR4 or the HHI—we can talk about HHI—I don’t see a huge distinction between the two, Sean, but perhaps that’s for another day. But the thing that matters is, is the CR4’s an indicator that there is likelihood of abuse, but then, it’s how it plays out in the market. You can have two -- you can have competition and just two companies, as Sean said. But the question is, are those companies responding within the market so that the market does work?

 

And what we would suggest, they aren’t responding in the market and where it -- to where it works, that the supply and demand that Mark would indicate is really almost irrelevant. It does not take in, as I said in my comment, an understanding of the impact of the pricing power or the vertical integration power, this control of the supply chain power that these companies have, and how they then can exhibit that power in a negative way upon both the consumer and upon the producer.

 

Hon. Stephen Vaden:  Thank you. Mr. Dopp, I have a question for you. You mentioned a proposal currently floating on Capitol Hill that would require your clients, the meatpacking companies, to buy a minimum amount of the cattle that they need to create the beef that we eat on the open market. Frequently, we think of transparency as a good thing. For example, when we purchase stocks, we have the Dow Jones and the Nasdaq to look at to determine whether we’re getting a good deal for each share of stock that we’re purchasing. Currently, most meatpackers buy the vast majority of the animals that they slaughter as a result of private contracts between them and their farmer suppliers that are not publicly available and, therefore, lessens the amount of information that’s out there about what a fair price might be. Could you explain to us, from your perceptive, why you think in this case that, arguably, a bill designed to create greater transparency in terms of the cattle market would be bad for the consumer and not have a positive effect on prices?

 

Mark Dopp:  Yeah, for a couple reasons. One -- so, we’re talking about two different things a little bit. One, you’ve got -- I’ll just call it the Grassley-Fisher concept, whatever that percentage is. Right? You are taking away choice -- or that would be the Congress deciding to take away choice, not only the choice of the packer but the choice of the producer. Remember, the AMAs originated -- they were the brainchild of cattle producers, particularly, who said, “If I deliver to packer X or if I come to packer X and say, ‘I will deliver you an animal that has certain characteristics or traits, be that organic, be that never ever with respect to antibiotics, be it no hormones, whatever the case may be --’” there are a multitude of programs out there that have producers and packers working together to deliver a product that the consumer demands.

 

Those agreements—again, what I call AMAs—have flourished. They’ve grown. That’s why we have transactions taking place, evolving those AMAs today than we did 20 years ago. It’s sort of flipped, right? Twenty/thirty years ago, those didn’t exist, and now they occupy probably seventy-five to eighty percent of the transactions that are out there.

 

But the point is those are agreements between two parties that have come to terms and said, “I will deliver you a steer with this characteristic so that you, in turn, packer, can sell it -- can kill it, process it, and sell it to Walmart or Whole Foods, whomever, to deliver a product the consumer wants.” And that has benefited the producers, the packers, and consumers. And I mentioned the RTI study earlier that’s the definitive work when it comes to AMAs. RTI said that everybody benefits by the use of AMAs. The RTI study said, “If you reduce the use of AMAs,” which the Grassley bill would do because now I have to buy more cattle on the open market, “by, say, 25 percent, there’s a net welfare loss to all three of the sectors.”

 

If you reduce it by 50 percent, that net welfare loss to all three of the sectors falls even -- is even greater. So it’s taking away choice. And then, you were also, I think, alluding to the bill -- not the -- I shouldn't say the bill -- the provision in the recent appropriations law about the cattle contract library, if I was following your question. There’s a swine contract library and has been used for years, or that it’s been there for use, I should say. It hasn’t really been used all that much, as best I can tell from talking to packers and producers. The concept is we should have a similar library for the cattle industry.

 

That may or may not be a good thing. But here’s what I know. All of the complaints about the lack of transparency in the cattle market, if all the people up on Capitol Hill who complain about lack of transparency and price discovery, etc., etc. -- they passed a bill -- they passed a provision that directs the Secretary of Agriculture to create the cattle library but allows the Secretary to bypass the notice-and-comment rulemaking process. So in other words, if the Secretary of Agriculture wants to do so, he can create a cattle contract library in a black box with no input from the packers.

 

And one of the things that people need to remember when it comes to livestock mandatory reporting—which I helped write in 1999, in a limited fashion—the only people, the only entities who have an obligation to do anything when it comes LMR and on this cattle contract library are the packers. We’re the only ones who bear the burden of reporting—and we report everything—but everybody seems to think it’s okay if we have that. If it sounds like I’m complaining a little bit, it’s because I am. This shouldn’t be done in the dark, I guess, is my point. If they talk about transparency, then let’s have it be transparent all throughout the program.

 

Hon. Stephen Vaden:  All right. Well, we got some great questions that have popped in, and I want to get to a couple of them. We had some careful listeners throughout the past 50 or so minutes, so I’m going to combine two of the questions because they talk about this interaction and some policy proposals and their legality that Mr. Dopp and Mr. Maxwell have been discussing. So anyone can answer this question. I’m going to throw it out there, but two of our questioners want to know -- we’ve talked a little bit about this Grassley bill, which would mandate that a certain percentage of cattle be purchased on the open market. We’ve also talked about the proposed change to the Packers and Stockyards regulation, which would change the focus of that from harm to the market to harm to an individual farmer.

 

And you, Mr. Dopp, mentioned that eight circuit courts of appeals have held, “That’s a no-go.” Our two questioners want to know, if Congress passes that bill that mandates your members purchase a certain of their cattle on the open market, and if the United States Department of Agriculture tries once again to change the definition of what’s harm under the Packers and Stockyards Act, how legally vulnerable would those two decisions be to a court challenge?

 

Joe Maxwell:  I’d like to just say one thing. I don’t know about the data that Mark mentioned, but since AMAs and those programs came in, I’ll say they’re not to the benefit of the producer. We have lost -- and during that time period, we’ve gone from 300,000 plus hog farmers to 66,000. We’ve lost a half of million cattle. Now, that’s what it is on the ground. The changes that Sean talked about on definition of anti-trust, we would agree.

 

We want a definition of antitrust, but we want it pre-Reagan. We want to go back to a definition of anti-trust that is competition. That would be the cases, Judge. That’s what we would ask Congress to do, to go pre-Reagan, to look at competition as the definition of anti-trust as it was since the early 1900s up until Reagan. And that is the way we believe we can restore the system of justice within our economic model. And we believe that could easily stand the test of time.

 

If the Congress acts, it is constitutional. It’s been tested pre-Reagan, and that would be our approach. Also, USDA has never changed their position on not requiring a need -- not requiring a harm of competition as a standard for taking a case forward under Packers and Stockyards Act. It was only the courts. There are four courts as Sean -- or as Mark mentioned -- that have definitely decided that it requires -- Packers and Stockyards Act requires a showing of harm to competition. Four courts followed those four courts, and it still has not made its way to the Supreme Court. We would love to take this case to the Supreme Court.

 

Mark Dopp:  Well, let me add -- Judge Vaden, I’ll try to answer your question, but let me respond real quickly to Joe. I mean, the most recent decision, Terry v. Tyson -- my favorite quote of almost all the cases out there is, “The tide has become a tidal wave,” and then the Court goes on to list all eight -- all seven courts that preceded it. So I guess I’ll respectfully disagree. I think you can say with some degree of certainty that eight appellate courts. But, Judge Vaden, to your question, do I think something that -- do I think a law, if enacted by the Congress, that required my members to buy 40 percent of their cattle -- of their fed -- and this is -- that’s the other thing. This is fed cattle only.

 

I mean, they’re very targeted here. So I think that a law that would be -- that would require my major pack -- and by the way, they’re also saying, “If you have one plant, you’re excluded.” So multiplant companies in the fed cattle market have to buy 40 percent or more on any given day. I’m not a constitutional scholar. There are much smarter people than I, either on this panel or probably in the audience, but I have serious doubts as to whether that would survive constitutional challenge. It just -- I hate to sound a little bit tone deaf, but I used to say, “They don’t even do that in Russia anymore.”

 

And maybe that’s not quite -- this may not be quite the right format or climate to say that, but this just seems like something that doesn’t work. And then, with respect to the Packers and Stockyards Act, I think in either case -- well, and if you changed the harm to competition standard -- if USDA tries to do that – I mean, Joe was worried about vertical integration? If I counsel to a packer and I am looking at this, and you strike the harm-to-competition standard as it has existed, making me -- putting me at risk anytime I treat anybody any differently, I’m going to have one or two contracts. And the other thing I’m going to think about doing is I’m going to become more vertically integrated because if I have control of the production, I don’t have to worry about an unhappy camper down the road or an unhappy producer, rather, complaining -- saying that his neighbor down the road got a better deal than he did. If I control the supply, I don’t have that problem. So I think people who are pushing for that need to think long and hard about -- Sean said it best, “What are the unintended consequences of some of the policies and proposals that are being pushed out there?”

 

Hon. Stephen Vaden:  And it would seem, Mr. Dopp, that, at least in those circuits that have held as a matter of statutory construction, that harm to the market is required, that a regulation can’t overcome what the statute is found by a court to require, at least in those circuits.

 

Mark Dopp:  Yeah. And just for the record, the issue of changing that standard has been considered by the Congress in the past. It was considered by the Senate Ag Committee in 2008 as part of the 2008 Farm Bill and rejected. So I’m pretty comfortable saying that I believe that that’s the standard that will be upheld.

 

Hon. Stephen Vaden:  Well, let me see if I can get one last question in before we have to turn it back to Ryan. One of our questioners—we have a very broad audience today—references that there has been some settlement activity, both criminal and civil when it comes to price-fixing allegations, I think they’re referring to, in the poultry industry. There had been at least one criminal plea. There’ve been a number of indictments, and there’s been some settlements. Understanding, of course, that everyone’s innocent until proven guilty in a court of law, what are we to make of these indictments and other activity in the poultry sector alleging price-fixing when we’re thinking about the protein market and the food market as a whole and the fairness of the prices we pay there?

 

Mark Dopp:  Well, I will answer that very briefly. One, we don’t represent the chicken industry, so I’m a little reluctant to dive into what’s going on. The only criminal case I’m aware of involves a handful of executives in the chicken business, so I’ll just let that go at that. In terms of the settlement and all -- and the civil cases that are out there, yes, there are cases—chicken, turkey, pork, and beef. And everybody on this call who’s an attorney knows full well that settling the case doesn’t mean that you did anything wrong but sometimes -- and most of the time, it is simply a business decision.

 

I can tell you as somebody who’s spent almost two million dollars challenging Proposition 12 recently in California, the numbers add up pretty quickly. And I can only -- I can’t even begin to imagine the costs that the companies that we’re talking about here are incurring when you’re talking about discovery, depositions, document production, everything attended to that. It doesn’t surprise me that business decisions are made, that, yes, we’ll settle for this amount of money. Frankly, it’s probably a wise business decision.

 

Joe Maxwell:  We think that --

 

Hon. Stephen Vaden:  Mr. Dopp, just -- I want to quickly ask about Proposition 12. There’s still a cert petition pending on that issue before the Supreme Court that they have not --

 

Mark Dopp:  Yes.

 

Hon. Stephen Vaden:  -- decided, even though it’s gone to multiple conferences. Correct?

 

Mark Dopp:  Correct.

 

Hon. Stephen Vaden:  All right, Mr. Maxwell, your thoughts.

 

[Crosstalk]     

 

Joe Maxwell:  We absolutely agree. We absolutely agree with Mark that the settlements in those cases, especially as it relates to pork, beef, and chicken, are business decisions. We believe that the cases are settling -- JBS’ last beef case settled for 52.4 million dollars. That was a quarter they made 7 billion. We see that these -- it is a cost to doing business. You can go out and collude in the market. You can inflate the prices. You can take the money out of the consumers’ pocket. You can screw the farmer over, and all it’s going to cost you is 52.4 million dollars. It’s a business decision in America, and it’s just part of the way they do business.

 

Hon. Stephen Vaden:  All right. Well, I’m glad we were able to have some discussion at the end. Thank you to all of our listeners this afternoon. I think we have thrown out the issues, and it’s for them to decide who got the best of it. Ryan, I’m turning it over back to you.

 

Ryan Lacey:  Thank you so much, Judge Vaden. On behalf of The Federalist Society, I want to thank our experts for the benefit of their valuable time and expertise today. And I want to thank our audience for joining and participating. We welcome further feedback by email at [email protected] As always, keep an eye on our website and your emails for announcements about upcoming webinars. Thank you for joining us today. We are adjoined.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.