The Commerce, Science, and Transportation Committee United States Senate
Huron, South Dakota
Chairman Pressler and members of the Committee, I am pleased to appear before you today to discuss the jurisdiction and activities of the Federal Trade Commission with respect to livestock and grain products. The Commission understands that the Committee is examining concerns expressed by ranchers and farmers about the prices they receive for their products. I appreciate the opportunity to appear before the Committee to present the Commission's perspective on these matters.
The Federal Trade Commission is a law enforcement agency whose mission is to prevent unfair methods of competition and unfair or deceptive acts and practices. The FTC is an independent agency with law enforcement powers under the Federal Trade Commission Act, the Clayton Act, and other statutes. Although the Commission does not have authority to enforce the Sherman Act directly, it generally may address conduct that would violate the Sherman Act by invoking Section 5 of the Federal Trade Commission Act.
The Federal Trade Commission and the Department of Justice both have antitrust law enforcement authority with respect to such practices as monopolization, attempts to monopolize, conspiracies in restraint of trade, and mergers and acquisitions. The agencies cooperate closely on matters of antitrust enforcement. Under a long-standing liaison agreement, both agencies agree in advance on which agency will conduct specific investigations, to avoid duplication of effort and undue burden on private parties.
The Commission's law enforcement activities span a broad range of industries and types of conduct. Some have special significance for citizens of South Dakota, such as the Commission's 1988 consent order settling charges that a group of private practice physicians threatened a boycott of a University of South Dakota Medical School residency program. Other Commission actions have a broad impact on all Americans, such as the Commission's recent consumer protection rules aimed at combatting telemarketing fraud.
Let me now turn to the first matter you have raised: livestock prices. This is an area in which the FTC plays only a limited role, because Congress has allocated primary responsibility to other federal agencies. As a result, the Commission's statement on this issue will be brief.
The Commission's jurisdiction over the meat packing industry is limited by statute. Section 5(a)(2) of the Federal Trade Commission Act excludes from its coverage any activities subject to the Packers and Stockyards Act. The Packers and Stockyards Act assigns responsibilities regarding the non-retail segments of the meat industry to the U.S. Department of Agriculture, and assigns responsibilities to the Commission only with respect to the retail segment of the meat industry.
The FTC may exercise jurisdiction over unfair methods of competition in the non-retail segment of this industry only in two circumstances. First, the FTC may investigate or report on the non-retail segment of this industry for USDA if expressly requested to do so by USDA. Second, the FTC may investigate or take action against non-retail violations if (a) the Commission determines that its ability to exercise its enforcement authority regarding the retail meat industry would be impaired if it does not investigate the non- retail segment of the market, and (b) USDA is not already investigating or otherwise proceeding in the matter. The Department of Justice has no comparable limitations on its antitrust authority in the non-retail aspects of the meat industry.
The FTC's authority over the meat industry is not limited in review of mergers under the Clayton Act, but DOJ has taken the lead on livestock issues in recent years. Under the FTC/DOJ liaison agreement, DOJ recently has sought and obtained clearance to investigate a number of mergers in the meat packing industry. When one of the agencies has developed special expertise by investigating or bringing law enforcement actions in a particular industry, the other agency generally defers to that expertise. Accordingly, in matters involving mergers in the livestock and meat packing industry, the FTC has deferred to DOJ's more current expertise.
The FTC has maintained a cooperative working relationship with USDA through a liaison agreement, both to resolve any jurisdictional questions between the two agencies and to stay current with research in agricultural industries. Currently, as participants in an inter-agency working group that also includes the Department of Justice and the Commodity Futures Trading Commission, FTC staff members are assisting the USDA in overseeing the conduct of an economic study funded by USDA on livestock procurement. The study, which was directed by Congress, is to examine competition in the red meat packing industry. Components of the study include analysis of regional cattle procurement markets, the effects of concentration on prices paid for slaughter cattle, price determination in slaughter cattle procurement, the role of captive supplies in beef packing, vertical coordination in hog production, and hog procurement practices. The study is scheduled to be concluded in December 1995.
In sum, because of the FTC's jurisdictional limitations and its liaison arrangements with the Department of Justice and the Department of Agriculture, the concerns that have been expressed about livestock prices, concentration in the meat packing industry, and ownership of feed lots by meat packers are matters that fall within the primary responsibility of DOJ and USDA. The FTC has strong cooperative relationships with both of these agencies, and stands ready to provide all appropriate assistance.
Grain and Wheat Issues
The Committee has also asked the Commission to address concerns that the level of grain prices is generally low in comparison to consumer prices for processed foods, such as ready-to-eat cereals. The Commission understands that this issue has been of interest to this Committee and its Chairman for some time. In April of this year, in connection with a congressional request for an investigation of possible collusive behavior by leading firms in the ready-to-eat cereal industry to raise prices, the Committee asked that any investigation include an inquiry into the gap between grain prices and cereal prices.
A conspiracy among cereal manufacturers to fix prices would be actionable as a criminal violation of Section 1 of the Sherman Act. Earlier this year, the Department of Justice considered allegations of possible anticompetitive conduct by cereal manufacturers, and concluded that no criminal investigation of pricing practices in the ready-to-eat cereal industry was warranted. DOJ referred the matter to the FTC to consider whether any inquiry into possible non-criminal anticompetitive conduct was warranted. If evidence of such conduct exists, then action by the Commission might be appropriate.
Although I cannot comment here on the existence or substance of any non- public investigation, the Commission would be concerned about anticompetitive conduct involving agricultural commodities. The Commission has challenged a number of mergers to preserve competition in the supply of important intermediate products in food production and processing. These included actions to remedy allegedly anticompetitive mergers involving bulk bakery wheat flour, soy protein, and dry corn milling facilities used for basic ingredients of breakfast cereal and beer. The Commission's 1989 enforcement action in Elders Grain, which involved processed corn used in cereal manufacture, was aimed at preserving competition in cereal processing markets. In that case, the Commission obtained rescission of an anticompetitive acquisition of one of the very few firms in the national dry corn milling market.
Excessive concentration at such an intermediate processing level may lead to the exercise of monopoly power in the sale of a critical ingredient to downstream markets, and it may create or enhance monopsony power -- market power in buying upstream ingredients or inputs -- that could adversely affect producers and consumers. Although antitrust cases based on concerns about the exercise of market power by buyers rather than sellers are relatively rare, there are Commission actions in this area. Although the Commission has not brought any cases to date involving the application of monopsony theories in food markets, we would carefully examine information indicating that this type of anticompetitive conduct is occurring. Of course, the Commission can only challenge conduct that violates one of the laws that it enforces. Absent unlawful anticompetitive conduct, the Commission cannot address the prices at which goods are bought and sold. Accordingly, evidence of an antitrust violation would be required to support an enforcement action.
The Commission has also taken a number of antitrust enforcement actions in recent years under the FTC Act and the Clayton Act to preserve the benefits of competition at the processing, wholesale, and retail levels of food markets. These actions were aimed at preventing or eliminating unlawful restraints on competition resulting from anticompetitive mergers or acquisitions, from collusion, and from other anticompetitive behavior.
The Commission's antitrust initiatives involving food products also include enforcement actions aimed at preserving competition across the range of take-home grocery items sold in retail food markets, to prevent anticompetitive price increases for groceries. The Commission has issued some orders in the past year requiring divestitures of competing supermarkets involved in horizontal acquisitions to remedy alleged violations of Section 7 of the Clayton Act, 15 U.S.C. 18, and Section 5 of the FTC Act, 15 U.S.C. 45, and to ensure competitive retail grocery markets in St. Louis, New Orleans, Manhattan, and several communities in Pennsylvania. Since 1988, the Commission has also required supermarket divestitures to prevent consumer injury from anticompetitive mergers in California, Texas, New Mexico, New York, and Vermont.
Other FTC cases in recent years have challenged alleged anticompetitive acquisitions or anticompetitive agreements in the manufacture and distribution of important consumer products sold to supermarkets and other retail outlets.
The Commission has also taken enforcement action to prevent anticompetitive price increases for baby formula. In 1992, the Commission accepted settlements with two of the three leading producers of infant formula, Mead Johnson & Company and American Home Products, and issued a complaint against a third, Abbott Laboratories. These actions were undertaken to prevent anticompetitive conduct in two separate areas. First, the Commission sought to ensure that a taxpayer-funded program would not face anticompetitive activities that could increase prices to consumers for infant formula. The 1992 settlements required the firms to provide restitution valued at $25 million to the U.S. Department of Agriculture, which administers the program. Second, to resolve separate charges relating to the broader market for infant formula, Mead Johnson and Abbott were required to cease anddesist from agreeing not to compete by means of restrictions on mass media advertisements.
The Commission is dedicated to vigorous enforcement of the antitrust laws, and appreciates the Committee's interest in its antitrust activities. I would be pleased to answer any questions you may have.