. .

-
AMERICAN MEAT INSTITUTE

January 3, 2011

Honorable Darrell Issa

Chairman
House Committee on Oversight and Government Reform
2157 Rayburn House Office Building
Washington, DC 20515-6143

Dear Mr. Chairman:

You recently asked for information about existing and proposed regulations
that have 01' will adversely affect the American Meat Institute's members and the
Illeat industry more broadly. Your request particularly inquired about regulations
with an adverse impact on job growth.

The meat industry is among the most heav:ily regulated industries in the
American economy. Every day federal inspectors are in plants and in that regard,
the industry has adapted to the existing regulatory scheme and produces the safest
meat and poultry supply in the world. Although the regulatory burden in which the
industry currently operates is significant, it pales when measured against the
adverse impact that a proposed rule will have, not only on.the meat and poultry
industry, but also on livestock and poultry producers - the farmers andl'flllChers of
this co·untl'Y.

Specifically, the United States Department of Agriculture's (USDA) Grain

Inspection, Pf.\ckers and Stockyards Administration(GlPSA) hflS proposed a rule,
Implementation of Regulations Reqtdred Under Title Xl of the Food, Conservation
and Energy Act of 2008; Condu.ct il~ Violation of the Act. l Studies show this rule, if
finalized as proposed, could cost the meat and livestock and related industries more
than 100,000 jobs. 2 These several studies, done by affected industries as part of the
rulemaking comment process demonstrating the likely job losses and other adverso
effects, are in stark contrast to the absence of any meaningful economio impact
analysis of the proposed rule done by USDA.3.

175 Fed. Reg. 35338 (June 22, 2010).

2See study summaries by Dunham & Assoc., Informa, and FarmEcon LLC, (Attachment A).
3Indeed, USDA's chief economist had virtually no role in analyzing the impact of the
proposecl rule before its publication.

1150 Connecticut Avenue, NW, 12th Floor, Washington, DC 20036

(202) 587-4200 • fax: (202) 587-4300 • www.meatami.eol1l
 The absence of a sound economic analysis of the rule, calls for which have
come from numerous members of the House and tho Sonato, is just one of the
numerous problems attendant te the proposed rule:' Among the other significant
problem. with the rule is the fact that it goe. well beyond the mandate g"iven to
GIPSA by Congress in the 2008 Farm Bill- a fact pointedly made by numerous
members of the House Committee on Agriculture in both a July 2010 hearing and
through other venues thereaftor.

In addition, the proposed rule ignores and attempts to overturn long·standing

case law interpreting the Packers anel Stockyards Act (PSA) - case law developed
and considered by eight separate federal appellate courts. Indeed, through this rule
GIPSA would change well settled law and lessen the burden of proof that a
plaintiffs lawyer would have to must !Ileet when bringing a PSA a claim."

In short, the proposed rule would reverse more than 30 years of progress and
innovation driven by consumer demand. ThL~ rule, if implemented as written, will
return the meat and poultry industry to what it once was, stifling the ability to
provide consumers what they desire and making the industry less competitive in the
world market. I would be happy to discuss at your convenience with the significant
and adverse impact this proposed rule would have if implemented as written.

~~ Mark D. Dopp
Sr. Vice President &; General Counsel

Enclosures

--------
4 E'or example, 115 mombel's of the House of Representatives sent a letter to Secretary of
AgrieultUl'e Vilsack asking that a comprehensive economic analysis be clone. (Attachment B)
See also other letters from members of the House ancl Senate expressing concerns and
requesting an economic impact analysis. (Attachments C·G).
, In rejecting GIPSA's interpretation of tho PSA only weaks before the rule was proposocl the
Unitecl States Court of Appeals for tho Sixth Circuit saiel: "The ticle has now beeomo a tidal
wave ... all told, seven circuits - the Fourth, It'ifth, Seventh, Iiiighth, Ninth, Tenth and
j

Eleventh Ch'Clli.ts - have now weighed ill on this issue with unanimous results," 'Terrjl I),

1yson Farms 604 F.3,·d 272 6' 1> Cir. (May 10, 2010). (See Attachment I-I). Sea also AMI's
comments (Attaehmen t I).

2
ATTACHMENT A

IFACT SHEET
AMERICAN MEAT INSTITUTE
In June, 20 10. USDA's Grain ,Inspection, Pnckers und
Stockyards Administration (GIPSA) proposed s\veeping
new livestock and poultry marketing rules. Although some
parIs of the rule were mandated by Title XI of the Food,
Conservation and Energy Act of2008 (Fm'm Bill), lllany
more jJl'Ovislons were lldded nnd exceed the Cong.ressional
intent evidenced in the Farm Bill. Unfortunately, in
developing the proposal, GIPSA conducted only n cursory
analysis of the Jl1l1 impnct of the proposed rule on the meat
aIle! poultry sector - an allalysis tlmt allowed GIPSA 10 clrtim
lhat t.he rule's cost would be less than $100 million, which
is the threshold that requires a comprehensive economic
assessment. Sinee the rule wns proposed, three in-depth,
privnte ccollom ic analyses have documented the staggering
COSls - in both jobs and revenue - nssocialccl wHh tlw
pl'Opo5cd nile, Although the studies lise slightly different
1l1odels and arrive at somewhat difl"cl'Cllt finnl costs, they
have aile thing in cOlllmon: ench study projects that the rule's
costs would be well ill excess of$lOO million.
The studies' top linc 'Ilndings al'e summarized below.
John Dunham and Associates
This ecollol1lic illlpacl study eXill11illCS bolh tIle red meat
and poultry sectors and concludes thnt if the new rule is
finalized as proposed,l 04,000 Amcriculls would lose their
jobs following the rille's implcmcnlntion. The proposed rule
also would reduce national GDP by S14 billion, and would
cost a total of $1.36 billioniu lost I'evenues to the fedeml, st{lte
and 10c;:]1 governments.
The study's findings conclude thnt Iivcsl'ock producers
would be especially affected by the implementation ofthis
rule, costing as many flS 21,274 jobs, 11UlBy in rural Amel'ica.
Additionally, consumers would be 'lbreed to pay flbollt 3.33
percenllllore fhr meat and poultry products, meaning thut it
will cost Americans an additionfll $2.7 billion to keep ea.ting
the SHme mnoulll of me~l ihey cLlrrently do.
The sludy was commissioned by tht.~All1el'ical1 Meat
Institute. John Dunham & Associntes is n New York~bnscd
firm that conducts cconmnic ilnpact studies on various
picc,es oflcgislaliotl fhr parties from all sides of the political
spectrum. The study is pl'csenl:cd on an interactive website
that aggn~gatcs eeonomic impact 011 nnlional, state nnd
congressional district levels. The complete slucly call hc found
at: \V\vw.t\'lcatFuelsAmeriC<l.com/GIPSA.
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American Meat Institute
1150 Connecticut Avenue, NW • 12th Floor. Washin(jton, DL 20036
(202) 5B7·4200· fax (202) 587·4300· http://www,MeatAMl.com
What Three Comprehensive
Studies Have Said About the
Cost of Proposed GIPSA Rule
Informa Economics, Inc.
This comprehensive an1'llysis of tile prop()s~d regulation
fllld I1mv it would affect both the meat lind the poultry sectors
. determined th<1t the rule "mule! result injob losses OfmDrl'
thclIl 22,800, with an atUlmd drop in gross dorill..'stic product by
as much us $1.56 billion fllld an <Ullluulloss in tax revenues of
$359 million,
The study found that the rule would result ill "on!.!oing
nnd indirect" t:osts to the livestock and poultry industries"-
- evenhmlly borne by producers and consumers - of more
('hUll $1.64 billion, including a neurly $880 million loss to tile
beef industry, more than $40 I million ill losses for tilt: pork
industry and almost $362 million to the poultry illl.lustry. Tht,
flIlUlysis concludes Ihat, although the fllllllWI rJircct losses lhllll
the proposed rule will be borne by producers - $780 million
1'01' the beefindust'ly. $259 million for the pork industry and
$302 million for the poultry industly --, the "ongoing and
indirect cos1swill eventually be bome by consumers and
producers, not packers."
The study was commissioned by the Natiou<l1 Meat
Association ill coopern.tion with the Nfltional Cat1lcman's
BeefAssociation, the National Pork Producers Council and
the National Turkey Fedemlion. Infol'maEconomics, IllC.
is a world leader in broad-based domestic and international
flgricl'lltural find cOllllllodity/product Illarkt':t research, analysis,
eV!'Iluat'ion find consulting. The comp,lIly was Ihunded ill 1977
and is based in Memphis, Tennessee. To see the stlldy, go to:
hllp:flbi t.lyfnp IwOy
FarmEcon llC
The only study to date thul examines the impact of lhe
propost'd rule solely OIl thc meat chkkcll industry fhund
that the proposed GIPSA rule would cost the broiler chicken
illclustry more than $1 billion ovt:r five ycnrs in reduced
efficiency, higher costs for tecd and hOllsing, llnd increased
administrative expenses. "Higher costs would put upw(lrd
presslire on chi.ckcn prices, and economic theory strongly
suggests thilt consumers would uhim<ltcly b~nr most of these
costs," the Sl"lldy says.
The report nlso notes that "the proposed rule ch(Jllgcs
arc likely to slow the pace ofil1lloYfltion, increase the costs
ofmising live chickens and result in costly litigation." In
addition to economic losses in the U.S., the report also warns
oflost compctitivCllC:SS ahrond. 'The Proposed Rules place
cost burdens ill1d regulnfOly restrictions on U.S. broiler
companies that do nol apply to foreign competitors. To thc
extent that U.S. chicken company competil·iveness in global
markets is reduced, U.S. ehit:kcnllcl exports would likely
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AMI Fact Sheet: What Three Comprehensive Studies Have Said About the Cost of Proposed GIPSA Rule
I!"~~tm "":G ua u ~W1rmr )Mt>~~',m"~'~-.e.~~,:<;;,.;to_'"",,-~;;n:'

decline in a manner similar to the recent decline ill EU chicken

net exporls, Export competil'or COl1l11ries such as Brazil could
renp significant benefits from the Proposed Rules." the study
says.
The study was commissioned by the National Chicken
Coullcil. FarmEcoll LLC is all agricultural and rood industry
consulting firmlocaled near Indianapolis, in Cannellndiunn.
For a copy of the study. click here: hllp://bit.ly/aXqxOt

Concilision: USDA errecl ill cotll'luding lhallhe

economic impacl orlhe proposed rule \vollle! be less than
the $100 million threshold that triggers more comprehensive
economic impact assessments. For this reason, the rule
should be withdrawn and USDA should immcdialely initiate a
comprehensive economic impact study.

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(i) December 201 American Meat In5titut(~
 AMERiCAN MEAT INSTITUTE

The Proposed GIPSA Rule will Cost the United States 104,000 .Tobs
A regulation proposed by the Grain Inspection. Packers and Stockyards Administmtion (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to usc marketing
agreements. Why? The proposed rule incrcases the risk associated with using marketing agreements
because it would change longsl!1I1dingjudiciul precedent and make it easiel' for a disgruntled livestock
supplier to sue and win inu Packers und Stockyards Act lawsuit. In doing so. the proposed rule creates a
disincentive for packers to use such agreements.
Although supporters of the mle claim thc proposal will hclp livestock produccrs', careful look at the a
economics of the proposal shows that it actually will lead to a decline in jobs, wages, economic activity,
and tax revenues in United States. That's why so many organizations representing cattle. pig and poultry
producers, as well as meat and poultry processors, oppose the rule.
The United States companies that produce, process, distribute, and sell meat and poultry products aTe an
integral part of the nation's economy. Manufacturers, retailers, and distributors of meat and poultry
products, provide well-paying jobs in the United States, and pay signitieant amounts in taxes to the State
and Pedeml governments.
Economic Impact of the PI'ollosed GIl'SA Rule in the United States
Direct' Snl>plicl' Induced Total
Jobs (PTE) 30,000 43,443 30,151 104,00
Wacres $764,3 I 8,247 $ 1,4 I5,726.892 $1,172,97 I ,419 $3.353,016,55
Economic Imnaet $3,838,461,850 $6,350,851,492 $3,795,974,168 $13,985,287,51

Federal Taxes State Taxes Total

Business Taxes $790,705,294 $569,758,882 $1,360,464,176
The Meat Industry is an IntegralPlII't of the United States' Eeonomy
.:. Companies in the United States that produce, process, distribute and sell meat and poultry
products would lose as many as 30,000 jobs in the nation. As many as 74,000 jobs in supplier and
ancillary industries will also be lost. These include jobs in companies supplying livestock and
services to manufacturers, distributors and retailers, as well as tllose that depend on sales to
workers in the meat industry .
. •:. In this harsh economic period, every job is important. In fact, in the United States the
unemployment rate has reached 9.2 percent. This means that there are already 14,139,762 people
trying to find jobs in the nation and collecting unemployment benefits.
The Nation Would Suffer from a Decrease in Taxes Paid by the Industry
.:. Not only docs the meat industry create jobs, it also generates sizable tax revenues. In the United
States, the industry and its employees would pay about $1.4 billion less in taxes to the State and
Fcdeml govel'llments, as a result of the proposed GJPSA rule.

Producer jobs include ngl'icullural supplier jobs that arc meat [lnd poultry rehlled.
Dirccljobs !lrc those involved in the pllcldng, wholesaling, nnd retailing ofmcnt products, Supplier jobs include li\'C~;tock lInd
poultry producers, ns well as those working in other compunies Ihat supply goods and services 10 meat packers, whoJcsalcr.~, and
retailers, Tnduced il1lplletS come nbollt when those working in the direet ulld supplier sec(OI'Il spend their income in the regional
economy.
 AMERICAN MEAT INSTITUTE

The Proposed GII'SA Rule Will Cost Livestock Producc."s 21,000 Jobs!
While Making it More Difficnlt for Them to Pmduce Qnality Products
A regulation pl'Oposed by the Omin Inspection, Packers and Stockyards Administration (OIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule incl'eases the risk associated with using marketing agreements
because it would change longstanding judicial precedent and make it easier for a disgruntled livestock
supplier to sue and win in a Packers and Stockyards Act lawsuit. In doing so, the pl'oposed rule creatcs a
disincentive for packers to use such agreements.

1991J"" 1993J." 199$J"" 1991J~n 11199Jnn :l:001J,,,, ZOO"3J"n 2005J"" ~OOlJ;'" 2009Jn"

Marketing Agrecments Help Producel"s Manage Volatile Day to Day Pdce Changcs
.:. Historically, "spot" prices for livestock have been 500 percent morc volatile than market prices for
meat:. As the graph above shows, mcat prices have bcen fairly stable over time, while spot prices
for livestock vary wildly by day or even hour. 2
.:. This volatility not only leads to higher meat costs, but makes livestock productionmorc difficult
bccausc no onc producer, packer, retailcr nor consumer knows what to cxpect Ii'om day to day.
Producers who arc forced to rely on a spot market may be forced to sell inventory when market
prices are low, and will be forced to keep inventory longcr than average in order to ensure a
consistent flow of income.
Higher Consumcr Prices Will Rcduce the Overall Demand for Meat and Mellt Prodncts, Leading to
Reduction of About 21,000 Jobs for the United StMcs Livestock Producers
II

.:. In these tough times with as many as 14,139,762 workers in the United States struggling to find
jobs, removing 21,000 fi'om the nation's economy will only make matters worse. In othcr words,
eVen though the proposed OIPSA rule raiscs prices to consumCI'S, it does nothing to stem the
exodus of producers from the state.

Producer jobs include agricultum) slJpplier jobs that nrc moM and poultry related.
The slEllldon] deviation of monthly g]'(lwth rates of spot livestock prices wns 3 camporee! to 0.6 for I'clllill1'leat prices. There is II
direct relationship between the price of livestock lind the retail price of meat. In fact, over lime the two prices arc almost pl,:)r1~r,:lly
correlated.
Increased Uneertllinty Will Reduce Producers' Ability to Benefit from the Prodnction of Quality
Products
.:. The prices reflected inl11arketing agreements reflect thc innovation, care and work that farmcrs
put into their product. The rule proposed by GIPSA will remove the incentive 1)'0111 fanners and
ranchers to produce high quality livestock.
 AMERICAN MEAT INSTITUTE

USDA's Grnilll'roposed GIPSA Rule will RaiseFood P"ices and Hnrm Consnmcrs in thc United
States .
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstandingjudicial precedent and make it easier for a disgruntled livestock
supplier to sue and win in a Packers and Stockyards Act lawsuit. In doing so, the proposed rule creates a
disincentive for packers to use such agreements.
The Proposed GIPSA Rule Wonld Dismantle Innovative Marketing Tools that Help Producers' and
Processors
.:. Rather than helping struggling consumers during thcse difficult economic times, a new
bureaucratic regulation proposed by GIPSA will lead to higher consumcr prices for meat and meat
products.
•:. The current meat production system relies on mutually agreed upon marketing agreements to help
both fanners and meat packers ensure a steady stream of quality products at a stable price .
•:. By forcing meat packers to purchase livestock on a volatile spot markct, packers will have to
incl'ease their inventory carrying costs ancl will- over time - face higher prices for livcstock.
The l'roposed GIl'SA Rule Will Cost United Stntes Consnmers More Than $2.7 billion per Year

Currently, the people who live in the United The Pro!Josl;!'dRnle will Increase Grocery PUCCi:
(I.ng};(;lkl
States spend about $80.6 billion on meat and
poultry products annually.
If the proposed GIPSA rule is implemented, these MeaL
consumers would. be forced to pay about 3.33%
morc for their meat and poultry products.
This means that the Unitcd States's residents will
have to pay an additional $2.7 billion to keep I Groceries

eating the same amount of mcat thcy currently do.

As a result, they may be forced to make tough I
Ie'I
GIPSACO,I,
choices at the supermarket and elsewhere.
I

The United States's Prodncers Are Harmed by the Proposed GIl'SA Rnle
.:. Rather tban helping the Unitcd States's livestock producers, the proposcd GIPSA rule nctually
harms them. In fact, it is estimatcd that about 21,000 of thc United Statcs' livestock producers
will lose their jobs as a result ofthese bureaucratic rules.
•:. That is why organizations like the National Cattlemen's Beef Association and the National Pork
Producers' Council- groups that represent Iivcstock producers - strongly oppose this government
interferencc in the marketplace.

PI'OdllCCJ'jobs include agricultural supplier jobs thnt nrc meat llnd poultry rclnlcd.
 I
AMERiCAN MEAT INSTITUTE

The Proposed GIPSA Rule Will Have Unintended Consequences Throughout the United States
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely an'ect packel's' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstanding judicial precedent und muke it easier for a disgruntled producer to
sue and win in a Packers and Stockyards Act lawsuit. ]n doing so, the proposed rule creates a disincentive
[or packers to use such agrcements. .
The Proposed Gll'SA Rulc Hurts Consumcrs
• Currently, the people who live in the United States spend aboilt $80.6 billion on meat and poultry
products annually.
• Under the proposed GlPSA l'l1le, these consumers would be forced to pay about 3.33'% - or $2.7
billion - more for the same amount of meat and poultry they currently purchasc.
Producers Will Lose Jobs and Face Volatility on the Spot Market
• Over the last 20 yems, livestock spot prices have been 500 percent more volatile than retail meat
prices. Consumer prices for meat and poultry have bcen fairly stable over time, while livcstock spot
prices vary wildly by day or even hourly. I
• This volatility not only leads to higher produce,' prices, but makes production more difJIcult if
producers are forced to sell livestock wheo market prices are low / 01' have to keep inventory in hopes
of receiving a higher price.
• Conversely, more stable and predictable prices reached in marketing agreements rellect the
innovation, care and wOI'k that producers put into their product. This rule will take those quality
incentives away tl'om producers.
The Meat Industry is an Integrn\ I'art of the United Stntes' Economy
• Companies in the United States that produce, process, distributc and sell meat and poultry products
would lose more than 30,000 jobs ifthc proposcd GIPSA rule were implemented. In addition, almost
74,000 jobs in supplier and ancillmy industries will also be lost. These include jobs in companics
supplying livestock and services to packers, distributors and retailers, as well as those that depend 011
retail meat and poultry sales.
• In this harsh economic period, every job is important. ]n fact, in the United States the unemployment
rate has reached 9.2 percent. This means that there are already 14,139,762 people trying to find jobs in
the country and collecting unemployment benefits. Thc GlPSA rule would add another 104,000
unemployed Americans to the jobless list.
The Economic Benefit of the Indnstry Spreads Thnmghout the Nation
• Not only does the meat industry create good jobs in the United States but the industry olso contributes
to the economy as a whole. The proposed GIPSA l'ule eould cost the nation as much as $14.0 bill ion
in economic activity.
• Producers would be especially a/Tected, losing more than 21',000 jobs under the proposed rule. In
summary, the proposed GIPSA rule raises prices to consumers, it does nothing to stem the exodus o[
producers tl'om rural America; mther it would exacerbate the job losses in rural America.

The slandard deviation of monthly growth rates of spot prices was 3 compared to 0.6 nll" retail prices.
 AMERICAN MEAT INSTITUTE

The Proposed GIPSA Rule Will Cost Livestock Producers 21,000 Jobs l
While Makiug it MOl'e Difficult 1'01' Them to Produce Quality l'rod ucts
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (G1PSA) would,
among other things, adversely affect packers' and their supplicrs' willingness to use marketing
agreements. Why? Thc proposed rule inercases the risk associatcd with using mal'1<eting agrcements
bccause it would change longstanding judicial preeedcnt llndmakc it casicr for a disgruntlcdlivcstoek
supplicr to sue and win in a Packers and Stockyards Act lawsuit. In doing so, thc proposed rulc creates a
disincentive for packers to use such agreements.

'"

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199'1.1." 1,993.IM 19~5J." t~91Jn" lBUD.r." 'ZOlJU.n 2003Jm, 2005.1"" 20BU"" 2009J"n

Marketiug Agreements Help Producers Manage Volatile Day to Day Price Changes
.:. Historically, "spo.t" prices for livestock have been 500 percent more volatile than market prices for
meat. As the graph above shows, meat prices havc becn fairly stable over time, whilc spot prices
for livestock VH1Y wildly by day or even hour. 2
.:. This volatility not only leads to higher meat costs, but makes livestock production more difIieult
bceausc no one producer, paekcr, retailer nor eonsumcr knows what to expect from day to day.
Produecrs who are forced to rely on a spot market may be fore cd to sell inventory when market
priecs are low, and will be fllreed to keep inventory longer than average in order to cnsure a
.eonsistcnt now of income.
Higher Cousumer Prices Will Reduce the Overall Demand for Meat aud Meat Pl'Oduets, Leading to.
a Reduction of About 21,000 ,Tobs 1'01' the United States Livestock Producers
.;. In these tough times with as many as 14,139,762 workers in thc United States struggling to find
jobs,l'emoving 21,000 from the nation's economy will only make matters worse. In other wOl'ds,
even though the proposcd GIPSA rule raises prices to consumers, it docs nothing to stem the
exodus of producers from the state.

Pl'odllcCJ'jobs include agricultural supplier jobs Ih:lt ure meat and poultry related.
The stanciUI'd deviation oflllolllhly growth rUles ofspollivcSlock prices was 3 compared to 0.6 [or retail mcu( prices, There is U
dil'eCII'c1ft~ionship between the price oflivcstock und the retail price ofmcat. ~n fnct, ovcr time the t\\'O prices arc almost pcd'ectly
corrclliled.
Increased Uncertainty Will Rednce Prodncers' Ability to BelICtit from the Prodnetion of Quality
Products
.:. The prices retleeted in marketing agreements reilect the innovation, care and work that farmers
put into their pr0911ct. The rule proposed by GIPSA willrcmove the incentive from fanners and
ranchers to produce high quality livestock.
 Executive Summary
An Estimate of the Economic Impact of GIPSA's Proposed Rules

Informa Economics
Nov 8, 2010

Bnc!,ground:

In September and October 01'2010, Informa Economics conducted an economic impact analysis of the
recently proposed GIPSA rules on behalf of the National Meat Association in cooperation with the
National Cattleman's Beef Association, the National Pork Producers Council and the National Turkcy
Federatioil. The primary objective of the research was to disccrn how industry participants might
respond to the rules if implemented and to estimate the eeonomic impact that would result. The study
utilized an approach that relied on extensive interviews with key personnel in all stages of thc heel~
pork and poultry supply chains. In addition, cost cstimates were solicitcd tl'om many of the mt,ior
companiesopcrating in the packing sector. This information was used to dcvclop an estimate of
industry-wide dircct and indircct costs that might be expected as a result of the rule. Finally, this cost
information was utilized in an input-output model ofthc US economy which enablcd the rescarch team
to project how the rnle might impact employmcnt, GOP and tax revenue nationwide.

li'illdillgs:

Total Economic Impact ofGIPSA's Proposed Rules

Job Losses 23,084
Annual GDP Loss $1.56 billion
Annual Tax Revenue Loss $360 million

With Respect to the Rule Itself:

• Industry participants are nearly unanimous in assessing the rule language as being vague and
poorly-defined.

• Affected companies have no guidance as to how stringently G1PSA will interpret and enforce
the rule. This has created considerable uncertainty and fostered an environment where
participants are predisposed to take extreme measures to minimize their exposure to the risks
associated with the proposed rule.

• The provision that removes the burden fot' litigants to show competitive injury in order to scek
damages is by Hu' the largest area of concern. Informa finds that nearly 75% of the expected
economic damage arising Irolll this proposed rule can be tied directly to this provision.

~I~ informa economics

-
~W 1111 iH~H'\ illfl)rllllI "J.lIIlIJ:ln)
'Vith Respect to Costs and Losses:

• Direct costs associated with rule compliance arc signil1cant but considerably smallCl' than the
indit:ect costs that are expected to materialize, Oil'ect costs encompass spending on pcople and
systems nceded to comply with the rule, Indirect costs refer to losses suffered by the indusll'y
from product quality deteriorution and eft1ciency reduction,

• Dircct one-time costs are projected as follows: Bccf Industry, $39 million, Pork Industry $69
million, Poultry Industry: $28 million,

• Direct annual on 'oin" costs are ro'ected as follows:

----------~
Annual Direct O~Oillg Costs from_G~PSA's Pro osed Rules
Bceflndustry $62 million
Pork Industry $74 million
Poultr Industr $35 million

• Indircct costs arc largcst in the becf sector where packers are likely to significantly reduce the
use of marketing agreements that are currently uscdto supply pl'emium and specialty bcef as
well as permit emcient plant throughput.

• Pork industry indirect costs arisc from the presence of both marketing and production contmcts,
Changes to market agreements are expected to diminish product value and hampel' plant
emciency, Changes to production contracts will foster pl'Oduction efficiency losses,

• Indirect losses in the poultry sector arise I\'om lost efliciency in bird production that is expccted
to result from modification or abandonment of tournament pay systems,

• Annual indirect losses are estimated as follows:

Annual Indirect Losses from GIPSA's Proposed Rules
BeefIndustry $780 million
Pork Industry $259 million
Poultr Indusll' $318 million

• Ongoing and indirect costs will eventually be borne by consumers and producers, not packers,
Our analysis indicates the following percentages of costs borne by producers: Beef Industry,
82%; Pork Industry, 56%, Poultry Industry, 19%,

• The I'ule is expected to have a signiticant impact on livestock auction facilitics and eommission
agents, Wc tind that the rulc may reduce buyer participation at auction barns to the point wherc
150-200 of the smallest barns in rcmote areas may go out of business,

I£I!1isinfol'lIJ3 economics
~~ 1111 M;J~,\ IllrumuI CU,"ptlll)
" 2
With Respect to the US Economy:

• The added costs are ~xpeeted to result in reductions in industry output that will impact not only
the meat and poultry industries themselves, but support industries and entities that rely on
spending by meat and poultry industry employees.

• This research finds the following industry "'eo:::n.:.:t.:.:l'H.:.:c.::;ti.:.:o.:.:n:::s:'---- _

Indnstry Contraction Due to the Pr()~sed Rules
Beef Industry -494,000 head (-0.6%)
Pork Industry -1.25 million head (-1.9%)
Poultl Industry -1.32 billion birds (-0.8%)

• . Our full-economy model suggests that overall annual GDP could fall by as much as $1.56
bi~, with the losses divided among the various industries as follows:

1-::--,::"=-c-_-,L::.o=-:s:.:ct-,V-,a.:.:.}~Ie Resulting From the Proposed Rules ---;:;-7,';7--1

BeefIndustry -$837 million
Pork Industry -$335 million
Poultry Industry -$345 million
Livestock Auction Markets -$45 million

• Total job losses as a result of the rule are expected to total just over 23,000.

• Job losses will be highest in the production sectors tor beef and pork with caltle ranching
expected to lose nearly 2900 jobs while pork production could lose over 1900 jobs.

• Other areas that will be particularly hard hit in terms of employment declines are agricultural
support activities as well as the retail and foodscrvice sectors.

• As a result of thc decline in economic activity, tax revenues are expected to decline by $360
million, with 46% of that reduction occurring at the state and loeallcvel.

With Respect to Timing:

• The outcomes portraycd above will take time to reach their full levels. For example, it may
take 2-3 years before the declining beef quality or poultry production efliciency reach the point
that results in the economic losses described above.

• Industry participants will evcntually nnd ways to adapt to the rules and thus the eeonom;e
impact wiII be lessened at much longer time horizons. However, we expect lingering ceonomic
effects for ten years or more in all three industries.

lIil!i~ infol'mll economics

~flli" \111 AGIl,\ Illf'JnIlIl \'nmJl:IIl~
_ "tr"
3
ATTACHMENT B
 Octllber I. 20 I0

The JJonorable Tom Vilsaek .

Secretary of Agriculture
U,S, Depmtment of Agriculturc
1400 Independence Avcnuc, SW
WHshington, D.C. 20250

Dear Sccretary Vilsaek,

We arc writing tll express our concerns regarding the cconomie unalysis I{lr the
proposed rulc, publishcd in the Fedemillegisfer by the Grain Inspection, Packers and
Stockyards Administration (GJPSA) on June 22, 20 I0, on the mnrkcting 0 I'livestoek and
poultry under the Packers and Stockyards Act.

In the 200S Farm Bill, Congress direetedthc Dcpartment to pl'Otnulgatc a discrete

set of regulations under thc Packers und Stockyards Ael. However, in doing so, GIPSA
also includedlldditional proposed regulations that greatly c:\cceu the mandate of the Farm
Bill. Such a broad rule that cxtends so far beyond Congrcss' dircction in the Farm Bill
and thai would precipitatc major changes in livestock and poultry marketing requires a
vigorous cconomic unalysis, The analysis contained in the proposed rule fails to
demonstrate the need for the rule, Hssess the impact of its implementalion on the
marketplace, or establish how the implcmentation oj' thc rule would address the
demonstrated need,

This proposcd rule is sweeping in its scope and would have ml\ior consequcnccs
in the marketing of livestock lind poultry for producers aod proecssors or all sizes, In
order j()r Congress and the public to evaluatc this rule and its implications wilh rull
transpmcncy, a thorough economic analysis is necessary, Our constitucnts need this
analysis in orcler to participate in the rulemaking process in a mellningful WllY, We me
asking USDA's Of11ce or tile Chief Economist 10 provide such lin analysis, speciiically
addressing the above conecrns,

YOUI' prompt response to this requcst will be apprcciated,

Sincerely,

Frank D, Lucas

Randy Neugebauer
The ][ol1ol'l1ble Tom Vilsack
Secretary or Agriculture
Page 2

'.
Thc Honorablc Tom Vil~ack
or
Sccrctary Agricultmc
Page 3

I,

,,
The Ilollorable Tom Vilsuek
Secretur)' of i\griClllilll'c
Page if

'/
i .,•• cc.c.c:'- c..:,_,__."..,L•
•

/ ."
 The Honorable Tom Vilsnek
Secretary oj' Agriculture
Page 5.
!
\•

I'

II (i . N
/"~;':Q~=::~~_~~\JjL_.~d{u,:.,,.:lt:~
 The lIonorable Tom Vilsaek
Secretary of Agriculture
Page 6
!

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+_1~

(\
, \
'.
The Honorable Tom Vilsnck
Sccrclury of Agriculture
Page 7

-,. ......
ATTACHMENT C
 C!.lf\,IMlnlj~:
PAT HOBERTS
"AN~;I\S Al;f-\ICUI.TUHL

~tatcB ~CI1ntc
W!l lINn SENATE OFFicE BUlI.DIN(,
V\'MilIlNGTON, DC ?0510--1605
:1H2 2:M ,r17.j
'1'..lnitcd HEALTH, EDUCAll{)f\J,
WASHINGTON, DC 20!i10·-160!) l.AROll AND PENSIONS
hltp:ilrobIJrl~.S'JIWW·fJ(JV

July 26, 2010 ETHICS

RULES

The Honorable Gass Sunstein

Administrator
Office of Information and Regulatory Affairs
Eisenhower Executive Office Building
1650 Pennsylvania Ave, NW
Room 262
Washington, DG 2050:,

Dear Mr. Sunstein:

I write in reference to the United States Department of Agriculture, Grain Inspection,

Packers and Stockyards Administration's (GIPSA) proposed rule amending the Packers and
Stockyards Act (PSA) as published in the Federal Register on June 22, 2010. Illave strong
concerns that the Administration's cost-benefit analysis (GBA) of the proposed changes is
inadequate. Given the potential impacts of the proposed rule on livestock and pOUltry
producers, processors and consumers, I believe it is criticai that a robust and comprehensive
GBA is conducted to ensure all affected stakeholders have a firm understanding of the potential
consequences of th'ls regulation on their economic welfare and livelihood.

On June fl, 2009, we met in my office to discuss your nomination to be the Administrator
of the Office of Information and Regulatory Affairs (OIRA). During that meeting you expressed
your support for the federal government to apply sound GBA principles in the regulatory
process. Furthermore, in 2002, you wrote, "At least cost-benefit analysis will help show them
what they are doing." I could not agree more. However, federal agencies must examine the full
range of consequences of proposed regulations for the administration and public to trUly "know
what they are doing."

UnfortLlnately, I fear the Administration neglected to conduct a thorough GSA of GIPSA's

proposed rule. As an example, GIPSA's GBA never references potential costs to consumers.
Based on my initial discussions with constituents, this rule could dramatically reduce consumer
choice and increase costs. Over the past decade, consumer demand combined with innovative
marketing arrangements created specialty protein products like natural, age verified and
branded breed meats and poultry. GIPSA's proposal decreases the likelihood that a packer
would enter into a variety of specializod arrangements over fear of litigation. Without such
arrangements, consumers may find purchasing specialized products more costly or less
convenient.

Additionally, the GBA overlooked the potential for producers who currently receive a
premium for operating efficiently and producing higher quality livestock and poultry to lose
income due to an erosion or elimination of marketing options for their livestock. Under tho
proposed rule, plaintiffs would no longer have to prove competitive injury in order to bring a
successful claim under the PSA. Therefore, packers may very well forego many of the current
alternative marketing arrangements that benefit producers and simplify their procurement
methods in an effort to decrease legal exposure. Ultimately, this reduction of marketing options
could depress the prices received by many of America's most efficient and successful
producers, The Administration's GBA fails to consider this potential outcome and its effects on
producers and their bottom line.
July 26, 2010
Page 2

In 2007, GIPSA's Livestock and Meat Marketing Study showed that over ten years a 25
percent reduction in alternative marketing arrangements would cost feeder cattle producers
$5.1 billion; fed cattle producers $3.9 billion; and $2.5 billion for consumers. If marketing
arrangements were eliminated, the 10-year cumulative losses for producers and consumers
would top $60 billion. Feeder cattle producers would lose $29 billion; fed cattle producers would
lose $21.8 billion; and consumers would lose $13.7 billion. Now is not the time to take money
out of the pockets of both producers and consumers.

As OIRA Administrator, your office is responsible for reviewing federal regulations

before they are made pLlblic and put into practice. Simple cursory analysis in order to validate
an agency's pre-determined policy position is not in the best interest of our country. I urge the
Administration to look deeper into the proposed rule and provide the public with a better
understanding of its potential impact on their daily lives and pocketbooks.

With every best wish,

PRjl
ATTACHMENT D
,JACK KINGSTON CotnmitteG On Appmprintlol\,;
1st District, Goorgia Banlling Member, Agri(;u!tuHI SUlJc;~>rf\l"I[\,"!
()elens(J Subcol'nrrtif'{!'"
WASHINGTON OFFICE
2:1tiH R<JY~url' H()U$(J Office Huiklinq Sl\VANNI\IIOri;(,'('
Watlliington, DG 20515 One Di,l,ji·.'nd c,1useW,1'{. S.1i>' ;'
WlZl 22S-!:18:i 1 ~;;l\';li'II,1:-;, GA J1~()l;
(202! 226·2269 >:AX

Bf{UNSWICK OFFiCE
Hl'."leFiJI Building, Room 304
O::ol1grcss of the 'ltnitcd cStatcfi E,l\X:LEY u~-rlq'
BOS Glollcoster Street
Brunswick, GA 31520
i'lOLJ!JC of RCpI'CBrl1Wrino} I~O Be" _\\1
ih:d,y,. G.'\ r j ~.-; ~
(~17.) 1,05·-9010 i'J 1/; ]u':·!·'("}
fH1212fl(j.···!lf)13 r-AX ;~ll:'! />:;-;··1.1',.: '-I,

August 26, 2010

The Honoruble Tom Vilsack

_n'"!l 2,L' -'.' 1:"
Secretury (:2:W}:l.l7ni:,:q f/',;'"
U.S. Department of Agriculture
14th und Independence Avc, SW
Washington, DC 20250

Dear Mr. Secretary:

I am writing today regarding the cUITent nllemaking by the Grain Inspection, Packers and
Stockyards Administration (GIPSA) dealing with livestock marketing.

We can agree that transparent and efficient markets benefit producers, processors, retailers and
consumers. Make no mistake: there has never been any question thut the Packers and Stockyards
Act should be strictly arid vigorously enforced. However, anyone who witnessed the recent
Livestock, Dairy & Poultry Subcommittee hearing on the Administration's proposed lUle got the
messuge that there are broad, bipartisan concerns that the proposed rule goes far beyond the
scope of the 2008 Farm Bill, lacks a sound economic analysis necessary to judge both the need
,md utility of the proposed rule and may be the result of a flawed rulemalcing process.

Unfortunately, several questions have been raised with this rulemaking that require your
immediate rcsponse. These include what some view as an attempt by the agency to circumvent
the clear intent of Congress in crafting thc rules to implement provisions ofthe 2008 Farm Bill; a
noticeable lack of an economic analysis ofthe costs ofthe proposed regulations; and what
appear's to be a carefully choreographed effort by the agency and others within the USDA to
lobby the Congress, press, industry and the public on the proposed rule.

As you recall, when the Congress debated the 2008 Fann Bill, many livestock marketing issucs
were considered. Among those that Congress consented to ·was a request to the USDA to define
certain telms under the Packers and Stockyards Act and to improve transparency in arbitration of
contract disputes. It is noteworthy that elements in GIPSA's proposed rule represent policies
that were flatly rejected by the Congress during considcration ofthc Farm Bill. This is part of
the reason that the objections raised during the recent hearing of the House Committee on
Agriculture, Subeommittee on Livestock, Dairy, & Poultry were so strong and bipartisan.

While many in the affected industry and Congress have focused on what the proposed mle
includes, also troubling is what it does not include - a sound economic analysis for interested
parties to judge both the need and utility of the proposed rule. In my view, it is unprecedented
for a Fedcral agency to propose such a wide-swceping regulation and not conduct an economic
analysis. I am concerned that despite Congrcss having appropriated $13 million in the current
fiscal ycar for the USDA Office of the Chief Economist, GrPSA has seemingly chosen to ignore
this resomce to analyze this proposal. In light ofthe fact that the Presidcnt has requested
continued funding for the Chief Economist, it is necessary and appropriate for you as Secretary
to see to it that the expertise ofthis office is utilized when an agency under your supervision
attempts to insert the Federal govenunent into the day-to-day workings of our agricultural
markets. As the public comment period has been extended and continued Congressional
oversight is anticipated, I request and expect that a comprehensive analysis of this proposed
regulation by the USDA Chief Economist be submitted in sufficient time for commenters to
incorporate the analysis into their evaluation of the proposed mlc.

Following the hearing held in the House Agrieulture Subeommittee, USDA took the
extraordinary step in the middle of a public comment period to publish an advocacy document
aiming to persuade Members of Congress, the press, thc affected industry and the general public
regarding so-called "Misconceptions and Explanations" about this regulatory proposal. Some
view this as contrary to the spirit and intent of the Administrative Procedure Act. This problem
has likewise been exacerbated by the recent press reports ofindividuals within the USDA
circulating information advocating specific points of view and activities concerning issues
addressed in this regulation from groups with an economic interest in its outcome. Some
'observers have suggested that these incidents raise questions of impropriety within your
department that may involve violations of the Hatch Act. I strongly encourage you to refer this
matter to the Inspector General for an immediate investigation.

I am troubled that while the USDA and the Department of Justice are in the midst of conducting
a series of workshops throughout thc nation to gather information on a range of topics addressed
by this proposal, USDA has chosen to focus its resources on eff01is to promote tlus regulation
rather than carefully consider the consequences, intended and unintended, particularly for those it
purports to protect - producers.

Your attention to this critical matter is appreciated, and I look forward to your response.

Sincerely,
ATTACHMENT E
 ,:,'-! (" :"'1"'''';
'; ~:' ... j '.' It Fr:,'

.,1,> ':;
,',',
Cl-!AHLES [. GnASS~ f'l

.-, ",-'1'"
I'" ':1-:,-;:
September 22, 2010

The Honorable Tom Vilsack

Sccrctnry
U.S. Department of Agriculture
1400 lndepcndenee Ave, SW
Washington, DC 20250

Dear Secretnry Vilsaek,

I write today, on behalf of the Iowa Cattleman's Association, regarding the proposcd rules
published by the Grain Inspection Packers and Stockyards Administration (GII'SA) on June 22,
2010. .

Muny uncertainties surround the proposed rule, which could result in both positive and ncgativc
clTccts on indepcndent producers. I belicve a sound economic -analysis conducted by thc Omee
of the ChiefEcortomist would be approprillte to lI11SWer producers concerns about what aITeet
these rules could havc on thcir operations. This analysis will be benetIcial to both GIPSA and
producers who are reviewing how thesc rules may change their bottom line.

Please consider conducting a comprehcnsive ccollomic stud)' ofthc proposed rule that Can be
reviewed prior to the closing of the commcnt period on November 22, 20 I O.

Thunk you for consideration of this request.

Sincercl)',

~.A!.A'I~ei. F.;,,"1';,,# ",,"<e'.A;1. /CiA:"~"'''i

Charlcs E. Grasslcy
United Stalcs Senator

CEG:arl

','I' ,r;, 11/,'MUd1- el;·( ',r,'i'.

\'<;\:'-)CI: BUDGET n,rrU;NA !ltYi'\[ ':,\1':1
JUU!(;IABY CUN I PUL C;~U,(I'
t\GHiCUCTURr:
ATTACHMENT F
 <EllllgrC!3!.i uf flp~ l1niteD f''''iah'~,
m<l1l11itlutOll, tlill 211:i1:1

October 5, 20 I0

The [lonorable Tom Vii sack

Secretary U.S, Department of Agrienlture
14th and Independence Ave, S. W.
Washington, DC 20250

Dear Mr. Secretary,

We write today regarding the current rule proposed by USDA's Grain Inspection, Packers and
Stockyards Administration (GlPSA) dealing with livestock marketing, We certainly agree that
America's livestock producers need effic.ient, competitive markets to maintain a strong vibrant
industry. We also agree that the Packers and Stockyards Act should be strictly and aggressively
enforced. However, the proposed rule goes well beyond the intentions ol'the :WOS Farm Bill and
this proposed rule lacks a sonnd and thorough economic analysis necessary to determine the
need, logic or functionality if implemented.

It appears the proposcd rule by the agency is a clear attempt to circumvcnt Congress, Upon close
review this proposed rule, it contains many elements and almost exact wording that was
discussed and eliminated by Congress when the Farm Bill was passed in 200S. It is our opinion
that government should not take on the role of manipulating domestic supply, cost or prices. This
proposed rule is a clear invasion of the government into the private marketplace.

It directly connicts with eight difl'ercnt court decisions. It will grossly restrict individual
livestock producers' freedom tOl1larket livestock in buyer and seller agreements that will,
consequently, create a chaotic business environment in which the industry will be forced to
operate. The proposed rule clearly' establishes enormous opportunity for unnecessary frivololls
lawsuits.
The rule offers numerous restrictions on who shall represent buyers aud sellers in livestock
transactions and owm,rship,

Ollce again, we embrace the idea of USDA enforcing Packers and Stockyards Act across all
",'gments of the industry however this proposed rule goes well beyond that. The vagueness in the
proposed rule will lead 10 destruction ofa multitude ol'value-addedmarketing programs, It will
eliulinate the incentives progressive producers pursue in investing and developing eflicicilt high
qunJity protein demanded by consumers. It has the potential ofseltillg the industry back 30 --~O
years, It will destroy jobs and drive our food supply to other countries.
Mr. Secretary, we strongly encourage you to delay implementation of this proposed rule and
conduct a thorough and complete economic analysis. lt is clear that the repercussions of this
proposed rule have not been properly analyzed or thought out and upon doing so we hope you
will reconsider implementation of this rule in its entirety.

Your time and attention in this matter is appreeiated and wc eagerly Await your response.

Sincerely.

1) .
d:)J)~~tJ~~~,,·~·~· .
Bill Nelson
[.:.S. Senate

~b,:j!
Allen Boyd ~
Member of Congress .

Posey
Member of Congress
ATTACHMENT G
 'llnitcd $Stotts ~3cnarc
WASHINGTON, DC 20510

Dcccmbcr 21, 20 I0

Thc Honorablc T0111 Vilsack

Unitcd States Departmcnt of Agriculture
14th and lndcpcndcncc Avc, SW
Washington, DC 20250

Deal' Secretary Vilsack:

Wc write regarding commcnts you recently made on your intcntions to conduct a cost-bcnellt
analysis (C13A) of your proposed I'Ule amending rcgulations ofthc Packcrs and Stockyard Acl. Wc arc
vcry conccrncd about thc inadequacy ofthc Administration's CBA that was a part ofthc proposed rulc,
as it revcaled nothing about the mcthodology or data uscd to arrive at its hasty conclusions.

According to prcss rcports, last week you indicated that "a far more rigorous cost-benefit
analysis will be conductcd" and c0111mitted to having USDA Chief Economist Joseph Glaubcr involvcd
in this process. Wc arc hopeful that USDA is now on the path to conducting a thorough, comprehensivc
CHA, which will providc thc kind ofinfonnation that is nccessary to understand thc potential
consequcnccs of this rule. Howcver, this announccment leads LO scvcralrclcvant qucstions;

• -To what cxtcnt will Dr. Glauber be involved in USDA's CBA? Beeausc oftllc economic
cxpcrtise and analytic ability of thc Office ofthc Chief Economist (aCE), wc urge that the aCE
Icad the chargc in conductiilg a robust tUld complcte CBA ofthc proposcd rule.

• To what extent wiII thc Office of Information and Rcgulatory Affairs at the White House O!1iec
of Managcnlenl and Budget bc involvcd?

a Will the CBA be subject to cxternal pcer review, ensuring objcetivity and that the best
economists have an opportunity to rigorously rcvicw the new CBA?

a What is the scope of the CBA that will be conductcd? Will this analysis account for the potential
elimination ofaltcrnativc marketfng arrangcments (AMAs)'? GlPSA's own mOSlrccent study of
AMAs concluded that rcstrictions on the use of AMAs would have severe ncgative economic
cffects on livestock producers, meat packers, and consumers. It is important that we have a clear
understanding of both the marketing changcs that may occur as a result of this rule, as well as the
J1nancial impacts on produccrs, related busincsses, and consumers.

• Could thc rule actually lcad to decreascd competition and fewer markets for Amcrican pl'Oduccrs
to market their livestock? Wc understand that many COlllmentCl'S on the rule are eOllccl'l1ed that
draconian requiremcnts of the tule, never envisioncd in the 2008 farm bill, wililcad to fewcr
buyers, fewer auction-barns, and lower produccr prices.
 As you know, an economic analysis conducted by Inf'onna Economics Inc. on behalf ofthe
National Cattlcmen's Beef Association, National Meat Association, National Pork Producers Council,
and National Turkcy Fedcration estimatcdthat thc rulc would rcsult in job losses of more than 22,800,
an aImual decrease in gross domestic product o[as much as $1.56 billion, and an ann\lal10ss in tax
revenues of$359 million. Whilc you may not agl'ce with the conclusions in these industry studics, thcsc
analyses should at the very least highlight thc nced for USDA to conduct its own rigorous eGA that
examines both the direct and indirect costs that will potentiully result under this rule.

Given thc significancc of the potcntial impacts of the proposed rule on livestock and poultry
pl"Oduccrs, processors, and consumers, it is essential that we proceed with the best information vve can l
including a thorough and comprehensive eBA conducted by thc OCE, aided by an impartial, cxternal
peer review.

We appreciate your considcration o[ our request and look forward to your timcly rcsponsc.

Very truly yours,

A.
ATTACHMENTH
 AMERICAN MEAT INSTITUTE
I Backgrounder
USDA's Grain Inspection and PJckers unci Stockyl'll'cls
Adminisll'ntion (GIPSA) on June 18 unveHcd n long
aW<liled pl'OpOSecll'llle (the Proposal) Unt would
establish, among oth~r things, criteria regarding undue
01' unreasonable preferences or advanhlges, as mondnted
hy Ih(' Til 1(-' Xl of th-' Food, COl1sE"l'val'ion and Enel'!W Act
of 2008 (Farm BiH). 111e Pl'oposnl/ however, extends well
beyond the Congressional mandate in several important
arens.
Specifically, the Proposal would create distinct
d.isinccnlivcs for packers to continue .many of the
marketing programs that have evolved over the past
-1:::;-20 ye"ars through relationships between livestock
producers and packers. These pcrrtnerships (]re
importnnt because InCC1I' producls today bear brands find
\\'ith brands conH::~ conS\Ul1cr e>qJectalions, Packers enter
into supply relationships with livestock producers to gel-
thy number and types of.~ninlals they neeclto provide
certain products that 81'e consisterlt from purch('lse to
purchase,
An aspect of the Proposal that will have u chilling
effect on the use of thesp marketing agreements is the
view posited by the Gnlil1. Inspection, Packers and
Stockyard's Administration (GIPSA) is the breadth and
vagueness of the proposed regula tory Cl'i,teriCl with
rpspecl h1"what would be "unfair."
For example, proposed seelion 201.210(a)(8) would
prohibit "[A]ny act that GUIses competit:ive injury
01' crcates Ellikc'lilmod of COl11lX"ltitive injury," The
definition of "Likelihood of Competitive rnjury" is iJS
far retlching tiS it Is vClgue, In that regard part of the
definition includes the following:
"wrongfully deprcssins prices fll1ir! fo a prodllcer 01' grower
[;e{(rw n/arket '(mlllc or ill/pairing 11 producer's or grower's
abit it}! to compele 'with other producers or growers oj'
jmllflir~!LJlUJl:fucer's or St'Q1(l(!r'.-: a/Ji1if'.l'JiUEcii11Q.1h.r;:.
J:.Cillilll1flMe CJpededjrfll ecml,Omic vallie/mill a lnlJ{<>/KUmL
itl Ule market elwt/ne! 01' /'/lorkcrplace" •
'111ilt" definition raiscs many questions, including:
• Is (~l]cril1g t.111lf1rlr.:el'ing agreement to one producer and
1101 Q/wUlel' impClirillg Ii producer's 01' grower's ability 1'0
compet{~ wi/It ollter pl'Oduce/'s 0/' growe}':>? Tn other words, if
Parmer A raises pigs ElCCOl'CUi,1g lo certain nnimal welfare
_ _~":7_""""_"''''''''1f'''_'''''""__'''_j"",,,
AmerIcan Meat Institute
1150 C"nneeticut Avenue, NW, 12th Floor· Washington, D.C. 20036
(202) 587-4200· fax (202) 587-4300' http://www.MeatAMl.eom
Competition in the Livestock
and Meat Industry: What the
Courts Have Said
standflrcls thnt your customer pl'efe.l's, while Fanner 13
does not, is it unjust to offer Eln incentive la Farmer A for
m~king the extra efforl and investment?
• Does hal/ins f.1111111'kctiIlS I1Sl'l:CIJ1Cut iPilh Ollt' pn)(fllcer
impair Iht' ability /0 c01llpde ofa df(fereJlI j'lmd/l("l!r who
doesn'l w/Ull SUdl all t1grecmellt? If" packer needs a
stc(ldy supply of cattle "nd Farmer A wants to contrucl
with you so thal he can tlSe his contract as collateral
[01' El bnnk loan while Fmmel' B on principle prefers the
spot markel, is the ngl'ecm,cnt wHh Fanner A by its very
nature impairing ,Farmer B's income?
• W/Ul{- cems/illltes "rellsoJUlllle expected filII economic
vn/ue7" Who decides what that 1'h1'flse meiJns? What is
reasonable? And how is economic value determined'?
How mE' expectations to be determined?
Thc uncel'tElinty created by this standnl'd rmd
definition is heightened by the filet thilt fhe Proposal
would Imvcl' the legal standard necessary for a
d isgruntlecl producer ,to sue sllccessfully if that producer
believed he hfld l?een trcclted unfni.rIy, Specifically,
proposed section 201.3(e) provides that
"A fit/dillS thnt /he drallensed act 0/' pmctice arlvl'I"sely
affects or likely !O/UhNI'!.<cly llj]ect cOlllpeUtiol1 is 1101'
necess{Jry in flll C(lses. I C.londucl: CClll bl.! found to violate
sectioll 202(1l) alldlor f/J) of Ihe Aclwilholll afinding of
11111'111 or likely !If/I'm to compdiNuII,"
Simply phI', this proposed 1'L1'lr~ would make it easter
fOT a trial lawyer to bring n P&S Glse rind \>\tin than 11 nclel'
tocItly'sIegal stnndard, That is so because this pl'OpDsed
rule conflicts directly wi th the judicialpl'ecedcnt
estnblished in 11 decisions from eight differC'.Jlt. appeals
courls in the following CClses, all of which have found
that proving harm or likely harm 1'6 competition is n
necessCllY l~tement to successfully proving a Packers fllld
SI·ockyardsAct violation:
Phi{,;on v. GoldS/lOrn Milling Co. (11h Cirruil)
• W!lre/crv. tJ. Pilgrim's Pride Corp. (5th CircliU)
• Terry 11. Tyson Far/ns, Inc. (61h CireniIJ
• Pile Ij'llrlillg Co. '0. Wilson & Co. 17th Cirenif)
• jad"on v. S,aift Eekridl f81h Cireuil)
• Farrow'lJ. LlJlil"ed Slol'e$ (8rh Cil'c/lil')
• IllP, Inc. v Ciiclwnlll (8th Cirwil)
• De ]OIlg Packing Co. '" U.S. Del'l of Ageic. (91h Cirenil)
,,,_,,.,,,,,,,,,,,,,,."""
......_''"pm.....'''''''''..'~~''''':,;~;,,~:
AMI Fact Sheet: Backgrounder: Competition in the Livestock and. Meat Industry -- What The Courts Have Said
• Bcen i,. OX Illrills/I'ies (1011, Cirelli/)
• London '0, Fieldale Farll1s (11 til Circuit)
• Pickell v. ~lJ50n Fresh Nlef1{-s~ Inc. tlltll Circnif)
In son1e of the~e cases GrrSA Wil5 il party to the case
and in several others GIPSA filed Amicus briefs, In
ever}' easc, hovvevcl', the interprel'ntion of the luw thElt
GIPSA has proposed in the regulation has been soundly
rejected by the courts.
In fact, the two most recent courts to [Iddl'ess spoke
directly to USDA's cuguments and its efforts to seek
different answers from differ~~nt S"0urts ~~ with some
notable admoni !'ions.
"'I7u' GavermU@.1J1i1$.JllllJenl'ed here (l~'i..allficlls 1'(1 conknn
J1mlJJJ,; COWls 11O"e had Ihe PSA wrollg nndJlJiJ1.it
5hmlld be Cnil'Sll11.!2tUO 111J1l(fJJll/air..]2.f..ncliCflUI ulnwflt1
wit-hollr rrgmJi..ill...gllllJJl!.lilimr. ,.. We conclude t/tat an
I1l1fi-colI/pct-ifioe (~ffec/ is necessary for an m:timwble claim
ImrieI' the PSA in li..~1Jt of '/Ie Act's !lisfory ill Congress
and its consisterll- intcrprel,athm in Ille caliri's." lVhceler
v. Pilgrim's Pride Corp. IDw,wl,"r '15,20(9) (Ewphllsis
adried)
"]1w tide Jill:> now lJI'COIl1r! a Udal 'wave ... all told, seven
circllils -Ihe Four/h, Fifth, SevCIllh, EiShJh, Ninth, limlh,
ami Eleventh Circuits -have 1l0W iUdg/ted in on litis issue
wilh 1manhnolfs results." Terry v. Tyson Farms (6th
Circuil-- May:lO, 20M
_"~~",,,,_,,,,,,, __,,,,,,,,,,,_,,,,,,,s"_
..._"'=._...m_"'IWWfI&l_""'' '_ _U'' S_'";j!:'QI_..."I"G...'''"..,_........_''''".....
© July 20'10 American Meat Institute
"l.lltimatellj, "fer/'ll (lwl USDA wOlilrill/we this COIIl'f
de1 1iate frOl~1 the c'ollrse h~lell by till! seven o/her drOll'!:;
tllat fllwc spokel1 rm this issue, thlls creating a cOl~flicl,
Weoilccline:: fo do so.... the rationale employed by 0/11'
sister cirwi/'s is 1Jlcll-rel1sollr!d and groll//lied 011 s(I/ll/d
principles ~rstf1tlllol'.v constrllctioll . .. Wi' then:1ilJ'!' joil/
0
these circuits nnd hold Ihllt in order fa succced 0/111. c!fli111
tinder :;ech'orl :l92(n) nnd (/1) ,., (! plainfurlJlllSf :-:1t0'lf-l (]II
adverse effect 011 cOlllpefiUol1," Jerry l'. 1~/:;OIl Fafllls (6th
Circllil-- N1ny1O, 2m 0) (EHlphasis lIrided)
Given the legal history on this issuE', USDA's
proposals are much like the child who doesn't like the
answel' he gets from Dad and so he asks Ivlol11. vVhell
Mom says no, he goes to Uncle Joe fltld then to Aunt Flo
find finillly, he just ignores the lit,my of no's he's received
and just does it Elnyvvay,
In short, this i1Spcct of the Proposal involves an
cxecutiv(:"' brandl Clgency refusing to abide by the
repented hoJdings of muHiple federal appell<lle courts,
which Is contrary to hov" our system of government is
supposed to work. The practical effed of USDA's refusal
would be to destroy rerationshiops built over decades that
hllye ,improved the quality and variety of meat f1vailable
to consumers. CIPSA needs to heed the COllI't rulings
and listen to the view of the majority of producers, i"lI'ld
the packers, who are is s<l)dng unequivocally: "This m'le
hurts, not helps,1I
_''''"'''K_rl<'''''I'~;v..Jt~,;;::''''l
ll!l'''...
ATTACHMENT I
 MI
AMERICAN MEAT INSTITUTE

November 22,2010

Tess Butler
GIPSA, USDA
1400 Independence Ave., NW
Room 1643-S
Washington, DC 20250·3604

Re: Implementation of Regulations Required Under Title XI of the

Food, Conservation and Energy Act of 2008; Conduct in Violation of
the Act; Proposed Rule; RIN 0580-AB07; 75 Fed. Reg. 35338 (June 22,
2010).

Dear Ms. Butler:

The American Meat Institute (AMI) submits this letter in response to

an invitation for comments in the above-referenced notice of proposed
rulemaking (proposal) published by the Grain Inspection, Packers and
Stockyards Administration (GIPSA or the agency). AMI is the nation's oldest
and largest trade association representing packers and processors of beef,
pork, lamb, veal, turkey, and processed meat products, and AMI member
companies account for more than 95 percent of United States output ofthese
products. Many AMI members procure livestock and poultry on the spot
market and through a variety of marketing agreements and contracts and as
such would be subject to these proposed rules.

Title XI of the Food, Conservation and Energy Act of 2008 (Pub. L. i

110-246) (Farm Bill) directed the Secretary of Agriculture to "promulgate

Regulations with respect to the ... Packers and Stockyards Act, 1921 (7 U.S.C.
181 et seq.) to establish criteria that the Secretary will consider in
determining

(1) whether an undue or unreasonable preference or advantage

. has occurred in violation of such Act;

]150 Connecticut Avenue, 12th Floor, Washington, DC 20036

(202) 587-4200 • fax: (202) 587-4300 • www.meatami.com
 (2) whether a live poultry dealer has provided reasonable notice
to poultry growers of any suspension of the delivery of birds
under a poultry growing arrangement;

(3)when a requirement of additional capital investments over

the life of a poultry growing arrangement or swine production
contract constitutes a violation of such Act; and

(4) if a live poultry dealer or swine contractor has provided a

reasonable period of time for a poultry grower or a swine
production contract grower to remedy a breach of contract that
could lead to termination of the poultry growing arrangement or
swine production contract." Section 11006, Farm Bill.

In addition to exceeding the Farm Bill's mandate, the proposal is

fatally flawed and should be withdrawn for several other reasons.

• The proposed rule conflicts with long-standing judicial

precedent.

• Many provisions would cause severe economic harm to

producers, consumers, packers, and live poultry dealers.

• Many elements of the proposal are unconstitutionally vague and

patently unworkable.

• The proposal would adversely affect the meat and poultry

industry's ability to compete regarding international trade.

• The agency failed to meet the requirements of Executive Order

12866.

For these reasons, articulated in more detail below, AMI urges the
agency to withdraw the proposal, reconsider many of the proposed sections,
and reissue a proposed rule that is consistent with the Farm Bill mandate
and that will not adversely affect livestock and poultry producers and the
meat packing industry.
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

I. MANY PROVISIONS IN THE PROPOSED RULE ARE LEGALLY

INFIRM.

GIPSA, through the proposal, seeks to do what it has failed to do

through the judiciary on multiple occasions and what the Congress has not
authorized the agency to do through legislation. Specially, the proposal
would, in effect, waive a necessary element in a Packers and Stockyards Act
(PSA or the Act) case, i.e., a showing of competitive injury, thereby setting in
motion a cascading effect that will dramatically increase the threat of
litigation brought under the PSA and that ultimately will undermine the
significant progress made by the meat and poultry industry in meeting
consumer demands during the past quarter century. The elements ofthe
proposal that would cause this problem, however, are flawed legally. A more
detailed discussion of the legal infirmities follows.

Proposed Section 201.3(c) Conflicts with the Plain Meaning of the

Act and Numerous Appellate Court Decisions, including Recent
Cases in which the Agency has Participated.

Extensive Case Law before Enactment of the Farm Bill

Conflicts with the Proposed Rule.

The agency asserts in the proposed rule that a plaintiff seeking to

establish a claim under subsections 202(a) or 202(b) of the PSA need not
demonstrate competitive injury or likelihood of competitive injury. This
assertion conflicts with the great weight of judicial authority that has on
numerous occasions examined that very question and thoroughly reviewed
the intent of congress in enacting section 202 of the PSA. In fact, the
agency's position conflicts with decisions of every federal circuit court to
address the issue over the course of decades.

One of the first circuits to address this issue was the Seventh Circuit,
which interpreted subsection 202(a) to require "either [predatory] intent or
adverse competitive effect."l In that seminal decision, Armour & Co. v.

I Armour & Co. v. United States, 402 F.2d 712, 718. See also at 717-718 (discussing Swift &
Co. v. Wallace, 105 F.2d 848 (7 th Cir. 1939); Wilson & Co. v. Benson, 286 F.2d 891 (7th Cir.
1961); and Swift & Co. v. United States, 308 F.2d 849 (7th Cir. 1962»; see also Pacific
Trading Co. v. Wilson & Co., 547 F.2d 367, 369-370 (7th Cir. 1976) (holding that plaintiffs
had failed to state a Section 202(a) claim because "the purpose of [the PSA] is to halt unfair
business practices which adversely affect competition, not shown here").

3
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22,2010

United States, the Seventh Circuit recognized the PSA's "ancestry in

antitrust law."2 The antitrust laws, the court observed, "express a basic
public policy distinguishing between fair and vigorous competition on the one
hand and predatory or controlled competition on the other."3 "The fact that a
given provision [in the PSA] does not expressly specifY the degree of injury or
the type of intent required," the Armour court reasoned, "does not imply that
these basic indicators of the line between free competition and predation are
to be ignored·."4 Thus, the court concluded, "[s]urely words such as 'unfair'
and 'unjustly' in Section 202(a) * ,. * require some examination of [a dealer's].
intent and the likely effects of its acts or practices under scrutiny, even
though [the] test under Section 202(a) * * * [may] be less stringent than
under some ofthe anti-trust laws."5

The Armour court also found that the PSA's legislative history "fully
supports [the] conclusion that Section 202(a) was not directed at [a practice]
unless there was some intent to eliminate competition or unless the effect of
the [practice] might lessen competition."G The court noted that the Senate
Committee Report "makes it clear that this part of the legislation was
promoted primarily by fear of monopoly and predation."? Likewise, the
House Committee Report makes clear that the PSA "was aimed at halting 'a
general course of action for the purpose of destroying competition.' "8

Many circuits have followed Armour's lead. For example, the Eighth
Circuit stated that section 202(a) "authorize[s] the Secretary of Agriculture to
regulate anticompetitive trade practices in the livestock and meat industry"
and that "[a] practice is 'unfair' [under the PSA] if it injures or is likely to
injure competition."9 Likewise, the Ninth Circuit has held that, at the very
least, section 202(a) requires "a reasonable likelihood that * * * the result [of

2 Been v. O.K. Indus., Inc., 495 F.3dI217, 1228 (10th Cir. 2007)
3 Armour, 402 F.2d at 717.
'Id.
5 Id. (Emphasis added).
6 Id. at 720.
7 Id. (citing S. Rep. No. 66-429, at 1, 3) (Emphasis added).
8 Id. (quoting H.R. Rep. No. 66-1297, at 11 (1921)).
• Farrow v. United Sta.tes Dep't of Agric., 760 F.2d 211,214 (8th Cir. 1985) (Emphasis added).
See also IBP Inc. v. Glickman, 187 F.3d 974,977 (8th Cir. 1999) (agreement providing for
right oHirst refusal did not violate Section 202(a) where it did not "potentially suppress or
reduce competition sufficient to be proscribed by the Act"); United States v. Stanko, 491 F.3d
408, 417-418 (8th Cir. 2007) (construing Section 202(a) to require "proof of economic effects
on competition or consumers").

4
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

a practice] will be an undue restraint of competition."10 As the DeJong court

stated, "[w]hile § 202 ofthe [PSA] may have been made broader than
antecedent antitrust legislation in order to achieve its remedial purpose, it
nonetheless incorporates the basic antitrust blueprint of the Sherman Act
and other pre-existing antitrust legislation."l1

Similarly the Fourth Circuit concluded that a plaintiff must prove that
a practice or action at issue "was likely to affect competition adversely in
order to prevail on [a] claim under [Section 202(a) ofthe PSA]."12 And the
Tenth and Eleventh Circuits have followed suit and held that "only those
unfair, discriminatory or deceptive practices adversely affecting competition
are prohibited by the PSA."13 Thus, every circuit that examined this issue
before enactment ofthe Farm Bill- reaching back over the course of decades.
- has held that showing an anticompetitive effect is required to establish a
claim under subsections 202(a) or 202(b) ofthe PSA,14

In the face of this judicial precedent GIPSA attempts to support its

erroneous interpretation ofthe PSA by citing legislative history and
Congressional amendments to the PSA. Specifically, GIPSA claims that
"Congress confirmed the agency's position by amending the P&S Act to
specify specific instances of conduct prohibited as unfair that do not involve
any inherent likelihood of competitive injury."15 The amended sections of the
PSA to which the agency refers for support for its argument, however, are
sections 409 and 410 ofthe Act - not section 202,16 If Congress wished to

10 DeJong Packing Co. v. United States Dep't of Agric., 618 F.2d 1329, 1337 (9th Cir. 1980).
11 Id. at 1335 n.7 (Emphasis added).
12 Goldsboro Milling Co., 1998 WL 709324, at *4. See also Griffin v. Smithfield Foods, Inc.,
183 F. Supp. 2d 824, 827 (E.D. Va. 2002) ("only those unfair, discriminatory or deceptive
practices adversely affecting competition are prohibited by the Act") (quotation omitted);
Philson v. Cold Creek Farms, Inc., 947 F. Supp. 197,201 (E.D.N.C. 1996) (Section 202(a) "is a
general mandate against unfair acts by live poultry dealers which adversely affect
competition").
13 London v. Fiel.dale Farms Corp., 410 F.3d 1295, 1303 (11th Cir. 2005). See Been, 495 F.3d
at 1230 ("a plaintiff who challenges a practice under § 202(a) [must] show that the practice
injures or is likely to injure competition").
14 For like discussions that subsection 202(b) requires the same showing see Adhins v. Cagle
Foods JV, LLC, 411 F.3d 1320, 1321, 1324 & n.6 (11th Cir. 2005); IBP, 187 F.3d at 976·977;
Armour, 402 F.2d at 717.
15 75 Fed. Reg. at 35340.
16 Id. See footnote 23 referencing sections 409 and 410.

5
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

amend section 202, as it has amended sections 409 and 410, it has had ample
opportunity to do so. Congress, however, has declined that option. I?

The agency also asserts that judicial decisions involving sections 307
and 312 support the concept articulated in proposed subsection 201.3(c).
That effort, too, fails because the cases cited are both in circuits that have
examined specifically the question of competitive injury as it pertains to
section 202 of the PSA and both of those circuits have concluded that a
showing of competitive harm is necessary. Specifically, GIPSA cites a 10 th
Circuit case, Capitol Packing Company v. the United States, 350 F.2d 67 (10 th
Cir. 1965), and a 9th Circuit case, Spencer Livestock Comm'n Co. v. USDA,
841 F.2d 1451 (9 th Cir. 1988), which deal with parts ofthe PSA other than
section 202, to support its position. The preamble, however, ignores the fact
that a showing of competitive injury has been found necessary with respect to
section 202 in both circuits.l 8

The agency also argues that the courts should defer to the agency's
interpretation ofthe PSA. Deference, however, is inappropriate in this
instance because, "If the intent of Congress is clear, that is the end of the
matter; for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress."19 Among the several circuits
that have faced the deference argument the Eleventh Circuit's discussion in
rejecting the agency's claim for deference best captures the issue: "Congress
plainly intended to prohibit only those unfair, discriminatory or deceptive
practices adversely affecting competition."20 Thus, "a contrary interpretation
of Section 202(a) deserves no deference."21

17 Section 202 has been amended more than once over the last few decades and Congress has
never amended the statute to indicate that an anticompetitive effect is not required to
establish a PSA claim. See, e.g., Farm Security and Rural Investment Act of 2002, Pub. L.
No. 101-171, 116 Stat. 134, 509·510 (2002); Poultry Producers Financial Protection Act of
1987, Pub. L. No. 100-173, 101 Stat. 917, 917-918 (1987). In the Farm Bill Congress failed to
enact proposed legislation that would have done just that. See Competitive and Fair
Agricultural Markets Act of 2007, S. 622, 110th Cong., at 29 (2007).
18 See London (lOth Cir.) and DeJong (9 th Cir.).
19 Chevron U.S.A., Inc. v. Nat"ral Res. Defense Co"ncil, Inc., 467 U.S. 837, 842-843 (1984).
20 London, 410 F.3d at 1304 (quotation omitted).
21 Id. See also Been, 495 F.3d at 1227 ("we are not persuaded by the USDA's interpretation of
the statute"); Armo"r, 402 F.2d at 722 ("in Section 202(a) Congress gave the Secretary no
mandate to ignore the general outline of long-time antitrust policy by condemning practices
which are neither deceptive nor injurious to competition nor intended to be so by the party
charged").

6
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

Finally, the agency contends that publication ofthe new regulations

constitutes a "material change in circumstances that warrants judicial
reexamination ofthe issue."22 That argument is inapplicable here, where 1)
GIPSAhas participated repeatedly in cascs in which this issue was presented
and in doing so has provided to the courts its interpretation of subsection
202(a) and (b), and 2) has had that interpretation rejected at least four times
in the last five years by every circuit that has examined the issue. 23

Cases Decided since the 2008 Farm Bill also Conflict with the
Proposed Rule.

Wheeler v. Pilgrim's Pride Corp. - December 2009

The discussion above focused on the conflict between the several cases
decided before the 2008 Farm Bill. Since passage of the Farm Bill two more
circuits have examined the issue and the agency's position, as reflected in
subsection 201.3(c), which directly conflicts with the uniform interpretation of
the PSA from the eight (8) different federal appellate courts that have
considered the issue. The preamble discussion and the language in section
201.3(c) simply confirms that agency officials intend to apply the law as they
see fit -- regardless of statutory language, Congressional intent, and existing
judicial precedent.

Judicial rejection of the interpretation advanced by GIPSA in the

preamble and articulated in section 201.3(c) is captured in the recent en bane
decision from the United States Court of Appeals for the Fifth Circuit,
Wheeler v. Pilgrim's Pride Corp., 591 F.3d 355 (5th Cir. 2009) (en bane). The
Wheeler case includes an extensive review and analysis ofthe Act's language,
its legislative history, and the extensive case law history. The opinion begins,
however, with the following observation, which more than suggests that the
necessity of showing competitive injury in a PSA case is a matter of settled
law.

2275 Fed. Reg. at 35341.

23London v. Fieldale Farms Corp., 410 F.3d 1295, 1303 (11th Cir. 2005); Been V. O.K. Indlts.,
Inc., 495 F.3d1217, 1228 (10th Cir. 2007); Wheeler v. Pilgrim's Pride Corp., 591 r.3d 355 (5th
Cir. 2009) (en bane); and Terry V. Tyson Farms, Inc. 604 F3rd 272 (6'h Cir. 2010).

7
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

Once more a federal court is called to say that the purpose of the
Packers and Stockyards Act of 1921 is to protect competition
and, therefore, only those practices that will likely affect
competition adversely violate the Act. That is this holding. 24

The Wheeler court engaged in a thorough analysis ofthe history ofthe

PSA and the extensive case law that preceded Wheeler. In that regard, the
court examined holdings of the Supreme Court, as well as decisions in the 7th ,
8 th , 9 th , 10 th , and 11 th Circuits. 25

Wheeler also examined the legislative history of the Act and concluded
that the history "supports the conclusion that it was designed to combat
restraints on trade, with everyone from the Secretary of Agriculture to
members of Congress testifYing to the need of this statute to promote healthy
competition."2G The Wheeler court also recognized that Congress has
amended the Act several times since its enactment, including the Farm Bill
amendments. 27 The language at issue in Wheeler and in proposed section
201.3(c) however, sections 202 (a) and (b), has remained unchanged from
original enactment even after many courts found that proving competitive
injury necessary. Thus, the Wheeler court concluded, "[I]t is reasonable to
conclude that Congress accepts the meaning of § 192(a) to require an effect on
competition to be actionable because congressional silence in response to
circuit unanimity 'after years of judicial interpretation supports adherence to
the traditional view'."28

The Wheeler court properly rejected the agency's Chevron deference

argument, which GIPSA made through its role as amicus. In fact, contrary to
the agency's position in the proposed rule, Wheeler specifically found that
such deference "is unwarranted where Congress has delegated no authority

24 Wheeler at 357.
25 The Wheeler court also discussed an unpublished opinion ftom the 4th Circuit with a
consistent finding.
26 Wheeler at 36l.
27 Congress amended the PSA to provide for guidelines for poultry and hog production
contracts that allow producers to terminate a contract within three days of execution, as well
as mandating disclosure of required capital investments. The 2008 amendments also
established a judicial forum for dispute resolution and provided producers an option
regarding refusing arbitration clauses in contracts. See 122 Stat 1651, Pub. L. 110-246.
28 Wheeler at 361-362 citing Ge7Lerai Dy7Lamics La7Ld Sys., 17Lc. v. Gli7Le, 540 U.S. 581, 593-94,
124 S. Ct. 1236, 1244-45 (2004).

8
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

to change the meaning the courts have given to the statutory terms, as the
Eleventh and Tenth Circuits have held."29

Finally, in writing for the majority, Judge Reavley wrote: "We conclude
that an anticompetitive effect is necessary for an actionable claim under the
PSA in light ofthe Act's history in Congress and its consistent interpretation
by the other circuits.... Given the clear antitrust context in which the PSA
was passed, the placement of § 192(a) and (b) among other subsections that
clearly require anticompetitive intent or effect, and the nearly ninety years of
circuit precedent, we find too that a failure to include the likelihood of an
anticompetitive effect as a factor actually goes against the meaning of the
statute."30

Terry v. Tyson Farms. Inc. -- May 2010

Subsequent to Wheeler and just six weeks before the proposed rule
published, the most recent interpretation of the PSA, this time from the
United States Court of Appeals for the Sixth Circuit in Terry v. Tyson Farms,
Inc. raised to eight the number of federal appellate courts that have
considered the key issue of whether demonstrating harm or likely harm to
competition is a necessary element of a PSA claim. 3! In Terry the Sixth
Circuit said the following:

The tide has now become a tidal wave, with the recent issuance of the
Fifth Circuit Court of Appeals' en bane decision in Wheeler v. Pilgrim's
Pride Corp., 591 F.3d 355 (5th Cir. 2009) (en bane), in which that court
joined the ranks of all other federal appellate courts that have
addressed this precise issue when it held that "the purpose of the
Packers and Stockyards Act of 1921 is to protect competition and,
therefore, only those practices that will likely affect competition

29 Wheeler at 362.
30 Id.
31 Terry v. Tyson Farms, Inc. 604 F3rd 272 (6 th Cir. 2010). An interesting and telling
indicator of the agency's stubborn refusal to abide by the repeated rulings against the
position articulated in proposed subsection 201.3(c) is the fact that in footnote 31 in the
preamble to the proposed rule GIPSA references the fact that Ten~y was argued in March
2010, leaving the impression that the case had yet to be decided when the proposed rule
published on June 22. The agency does not acknowledge that Terry was decided consistently
with seven other circuits, and in a manner at odds with the agency's interpretation, on May
10 - six weeks before publication of the proposed rule.

9
American Meat Institute Comments
Proposed Rule; RIN 0580-AB07 -
November 22, 2010

adversely violate the Act." Wheeler, 591 F.3d at 357. All told, seven
circuits - the Fourth, Fifth, Seventh, Eighth, Ninth, Tenth, and
Eleventh Gircuits - have now weighed in on this issue, with
unanimous results. See Wheeler, 591 F.3d 355; Been v. O.K. Indus.,
Inc., 495 F.3d 1217, 1230 (10th Gir. 2007); Pickett v. Tyson Fresh
Meats, Inc., 420 F.3d 1272,1280 (11 th Gir. 2005), cert. denied, 547 U.S.
1040 (2006); London v. Fieldale Farms Corp., 410 F.3d 1295, 1303
(11th Gir. 2005), cert. denied, 546 U.S. 1034 (2005); IBP, Inc. v.
Glickman, 187 F.3d 974, 977 (8th Gir. 1999); Philson v. Goldsboro
Milling Co., Nos. 96-2542, 96-2631,164 F.3d 625,1998 WL 709324, at
*4-5 (4th Gir. Oct. 5, 1998) (unpublished table decision); Jackson v.
Swift Eckrich, Inc., 53 F.3d 1452, 1458 (8th Gir. 1995); Farrow v.
United States Dep't of Agric., 760 F.2d 211, 215 (8th Gir. 1985); DeJong
Packing Co. v. United States Dep't of Agric., 618 F.2d 1329, 1336-37
(9th Gir. 1980), cert. denied, 449 U.S. 1061 (1980); and Pac. Trading
Co. v. Wilson & Co., 547 F.2d $67,369-70 (7th Gir. 1976).32

The Terry court also referenced directly the agency's participation in the case
as amicus stating:

In this appeal, Terry, joined by amicus wriae United States

Department of Agriculture ("USDA"), seeks to persuade us to adopt the
decidedly minority view embraced by some district courts and
vigorously articulated by Judge Garza, along with six of his colleagues,
in his dissenting opinion in Wheeler. See Wheeler, 591 F.3d at 371
(Garza, J., dissenting).... Ultimately, Terry and the USDA would have
this court deviate from the course taken by the seven other circuits
that have spoken on this issue, thus creating a conflict. We decline to
do SO.33

The Terry court found that "the rationale employed by our sister
circuits is well-reasoned and grounded on sound principles of statutory
construction. Moreover, under the fundamental principle of stare decisis, we
deem the construction of this nearly 90-year-old statute to be a matter of
settled law. We therefore join these circuits and hold that in order to succeed

32 Terry at 277.
33 Terry at 277-278.

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on a claim under §§ 192(a) and (b) ofthe PSA, a plaintiff must show an
adverse effect on competition."34

The agency's blatant disregard for the holdings in the extensive case
law and its misplaced reliance on report language and dissents in one of
those cases is the defmition of arbitrary and capricious under the
Administrative Procedure Act.

Proposed Section 201.3(c) does not reflect a Longstanding Agency

Interpretation of the Packers and Stockyards Act.

The proposal is far reaching and several of the provisions are legally
suspect. That conclusion is especially true with respect to proposed section
201.3(c), which reads as follows.

(c) Scope of Sections 202(a) and (b) of the Act. The appropriate
application of section 202(a) and (b) of the Act depends on the
nature and circumstances of the challenged conduct. A finding
that the challenged act or practice adversely affects or is likely
to adversely affect competition is not necessary in all cases.
Conduct can be found to violate section 202(a) and/or (b) ofthe
Act without a finding of harm or likely harm to competition.

This proposed subsection conflicts not only with extensive judicial precedent
requiring that private plaintiffs and the agency demonstrate harm or likely
harm to competition to prevail in a PSA case brought under section 202(a) or
(b), but it is at odds with previous agency positions.

In the preamble the agency contends that it has "consistently taken

the position that, in some cases, a violation of section 202(a) or (b) can be
proven without proof of predatory intent, competitive injury, or likelihood of
injury."35 Indeed, the agency goes on to say "[T]he longstanding agency
position that, in some cases, a violation of section 202(a) or (b) can be proven
without proof of likelihood of competitive injury is consistent with the
language and structure of the P&S Act, as well as its legislative history and
purposes."36

34 Terry at 279.
35 75 Fed. Reg. 35338, 35340 (June 22, 2010).
3G Id.

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That assertion is at odds, however, with a 1997 agency report

responding to a petition submitted by the Western Organization of Resource .
Councils (WORC).37 In its response to WORC GIPSA wrote:

In order to prohibit activities of the packers through regulation

or to file a complaint citing a violation of section 202, the
Department must develop evidence that the packers have either
predatory intent or that there is the likelihood that the
complained of activity will result in injury.38

That the reference to injury means injury to competition is confirmed in the

next sentence in which the report states:

Case precedent supports this statement ofthe Secretary's

authority to regulate packer activities. As the ArmoLtr court
states: The clearer the danger of the [likelihood of competitive
injury], as when competitors conspire to eliminate the
uncertainties of price competition, the less important is proof of
[predatory intent]. Conversely, the likelihood of injury arising
from conduct adopted with predatory purpose is so great as to
require little or no showing that such injury has already taken
place. Armottr, 402 F.2d 717.... Therefore, to satisfy the Armour
test, WORC would have to establish a violation of the Act based
on evidence ofthe likelihood ofinjury.39

In addition, the Eleventh Circuit also concluded that the government

had failed to establish that its interpretation was the Department of
Agriculture's (USDA) "consistent view" of section 202(a).40 That the

37 Review of Western Organization of Resource Councils (WORC) Petition for Rulemaking,

Grain Inspection and Packers and Stockyards Administration, Packers and Stockyards
Programs, August 29, 1997 http://archive.gipsa.usda.gov/psp/issueslworc petitionlworclunpg.pdf.
(Allaelnnent A)
38). Id. at 15-16.citing OGC Memorandum to the Chief Economist, June 20,1996, p. 5
(Attachment 2).
so Id. at 16. (Emphasis added).
40 London, 410 F.3d at 1304 n.7. Indeed, in In re IBP, Inc., 57 Agric. Dec. 1353 (1998), the
Judicial Officer held that a right offirst refusal violated Section 202(a) precisely "because it
hard] the effect or potential effect ofreducing competition." 1998 WL 462705, at *34
(emphasis added), rev'd, IBP, 187 F.3d at 977 (holding that right offirst refusal did not
violate Section 202(a) because it did not "potentially suppress or reduce competition
sufficient to be proscribed by the Act") (emphasis added).

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government's interpretation is a mere litigating position also means it is not

entitled to deference. 41

In short, as recently as 1997 the agency understood and accepted the

position that in order to prevail in a PSA case a plaintiff must demonstrate
injury or likelihood of injury to competition, which calls into question the
agency's assertion that the proposed rule reflects a "longstanding" GIPSA
interpretation of the PSA. Why the agency shifted its position to that posited
in the preamble is unknown and not explained by GIPSA.

The Proposed Rule Inappropriately Exceeds the Congressional

Mandate in the Farm Bill.

As stated earlier, the Farm Bill directed the Secretary of Agriculture to

promulgate rules that would establish criteria on several explicit topics.
Specifically, the Secretary was directed to develop criteria for determining:

(1) whether an undue or unreasonable preference or advantage

has occurred in violation of such Act;

(2) whether a live poultry dealer has provided reasonable notice

to poultry growers of any suspension of the delivery of birds
under a poultry growing arrangement;

(3) when a requirement of additional capital investments over

the life of a poultry growing arrangement or swine production
contract constitutes a violation of such Act; and
(4) if a live poultry dealer or swine contractor has provided a
reasonable period of time for a poultry grower or a swine
production contract grower to remedy a breach of contract that
could lead to termination of the poultry growing arrangement or
swine production contract. 42

41 See Bowen v. Georgetown Univ. Hasp., 488 U.S. 204, 213 (1988) ("Deference to what
appears to be nothing more than an agency's convenient litigating position would be entirely
inappropriate."); see also Been, 495 F.3d at 1227 ("USDA's position as stated in its a.micus
brief [is entitled] little to no deference").
42 Section 11006, Farm Bill.

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November 22,2010

In addition, section 11005 ofthe Farm Bill amended the Act with respect to
production contracts, choice of law and venue, and arbitration and for that
reason the proposal includes proposed language concerning arbitration.

In contrast, several other provisions of the proposal were not mandated

nor authorized by the Farm Bill. Indeed, the concepts included in many of
these sections were considered by the House Committee on Agriculture, the
Senate Committee on Agriculture, Nutrition and Forestry, or both, and were
rejected or not included in the Farm Bill. In that regard, the provisions found
in sections 201.3, 201.94, 201.210, 201.212, 201.213, and 201.214 are all
outside the scope of the Farm Bill mandate.

For example, proposed rule's putative abolition ofthe competitive

injury requirement found in section 201.3 was included in a discussion draft
of Chairman Harkin's markup of the Farm Bill, but subsequently deleted
from the bill offered to the Senate Agriculture Committee. Likewise, the
concepts in section 201.210 regarding fairness were included in Chairman
Harkin's mark up ofthe Farm Bill and were removed in conference.
Similarly, the business justifications requirements in section 201.94 were
included in an amendment offered by Senator Tester on the Senate Floor
during the debate and vote on the Senate version of the Farm Bill. That
amendment was defeated.

That these concepts were considered by the Congress in its debate on

the Farm Bill and rejected or not included requires GIPSA to delete them and
implement the Farm Bill as Congress intended. That the agency would
usurp the will of Congress and seek to implement through the regulatory
process that which the elected officials in the Congress have rejected is at
odds with our system of government.

The Proposal Essentially Eliminates Preferences or Advantages that

Possess a Valid Business Justification and have, on Balance, No
Anticompetitive Effect.

Development of the criteria mandated by the Farm Bill concerning

section 202(b) must start with a review ofthe plain language of the statute.
In that regard, section 202(b) ofthe Act provides that

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November 22, 2010

"It shall be unlawful for any packer or swine contractor with

respect to livestock, meats, meat food products, or livestock products in
unmanufactured form, or for any live poultry dealer with respect to
live poultry, Lo: ...

(b) Make or give any undue or unreasonable preference or

advantage to any particular person or locality in any respect, or subject
any particular person or locality to any undue or unreasonable
prejudice or disadvantage in any respect; .... "43

Thus, the plain language ofthe Act contemplates that preferences or

advantages may be afforded to livestock suppliers by a packer or swine
contactor, so long as those preferences or advantages are not "undue" or
"unreasonable." As a practical matter, this conclusion makes perfect sense.
A packer should be able to pay more, for example, for cattle that grade prime
than for cattle that grade select, because meat derived from a prime steer
generally has greater value than the meat from a select steer. By structuring
payment terms to reward attributes that are desired by consumers, e.g.,
organic, grass fed, etc., packers are able to create incentives that benefit
everyone in the supply chain. The proposal, however, is crafted in a manner
such that a packer or swine contractor essentially is precluded from
employing a preference or advantage that yields a social benefit (such as
preferred product characteristics, increased efficiency, lower transaction
costs, etc.).

In developing the proposal, GIPSA was not writing on a blank slate.

Courts have addressed the meaning of this statutory language in case law
that extends over decades. This case law makes clear that a preference is
"undue" or "unreasonable;' when (a) it has no valid business justification and
(b) it has, on balance, an anticompetitive effect.

The following discussion of section 202 (from the Seventh Circuit) is

illustrative.

Surely words such as ... "undue" and "unreasonable" in Section 202(b)

require some examination ofthe seller's intent and the likely effects of
its acts or practices under scrutiny, even though these tests under
Section 202(a) and (b) be less stringent than under some of the

43 7 U.S.C. 192(b), (Emphasis added).

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November 22, 2010

antitrust laws. These adjectival qualifications expressed in the

statutory language enjoin the Department and courts to apply a rule of
reason in determining the lawfulness of a particular practice under
Section 202(a) and (b).44

The Seventh Circuit properly concluded that the packer's intent is one
legitimate factor to consider in determining whether a preference or
advantage is undue or unreasonable. The crucial issue with respect to intent
is whether the packer made use of the preference or advantage in order to
achieve a valid business objective, such as improved quality, greater
efficiency, lower transaction costs, to meet competition, obtain a consistent
supply of livestock for a plant, or the like. The proposal as written, however,
does not contemplate this factor as a part of determining whether a
preference or advantage is "undue" or "unreasonable."

Where there is no valid business justification for a preference, and the

preference has the effect of suppressing competition, it is illegal under section
202. As the Seventh Circuit explained, the "rule of reason" is the appropriate
screen to distinguish those preferences that have an anticompetitive effect.
The "inquiry mandated by the [r]ule of [r]eason is whether the challenged
agreement is one that promotes competition or one that suppresses
competition. "45

The courts have already considered assertions that section 202

requires that all producers be treated the same, regardless of valid business
justifications that might warrant differences. Such assertions have been
emphatically rejected. A leading Eighth Circuit case contairis this discussion:

Thus, their claim, in essence, is that § 202 ofthe PSA, 7 U.S.C. § 192,
statutorily creates an entitlement to obtain the sa'me type of contract
that Swift Eckrich may have offered to other independent growers. We
are convinced that the purpose behind § 202 of the PSA, 7 U.S.C. §
192, was not to so upset the traditional principles of freedom of
contract. The PSA was designed to promote efficiency, not frustrate
it. 4G

'4 Armour & Co. v. United States, 402 F.2d 712717 (7th Cir. 1968) (emphasis added). Although in Armour
the focus was on the packer's behavior as a seller of meat, the same reasoning and standards should apply to
the packer's behavior as a buyer of livestock.
'"National Society of Professional Engineers v. United States, 435 U.S. 679,691 (1978).
46 Jackson v. Swift Eckrich, Inc., 53 F.3d 1452, 1458 (8th Cir. 1995).

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November 22, 2010

Indeed, the United States agreed with such an approach in its amicus
submission in a brief recently filed in Wheeler v. Pilgrim's Pride Corp.
Specifically, the agency stated that"a primary (but not sole) purpose ofthe
PSA was to foster competition and, for that reason, practices that have the
potential to enhance effIciency should not be condemned as 'unfair' under the
PSA without consideration of competitive effects."47

A Rule of Reason Approach also Must Apply to Many Other

Components of the Rule.

A number of elements of the proposal fail to contemplate a rule of

reason approach. For example, section 201.218 involves contract termination
and providing a "reasonable time" to cure a breach of contract. Elements of
that section suggest that in no circumstance can a swine contractor or live
poultry dealer take immediate action to terminate a contract. Although
hopefully the circumstances where immediate termination is necessary do
not frequently arise, the criteria do not recognize that in some cases
immediate action is necessary and warranted.

For example, many contracts include provisions allowing termination

of a contract if the grower is found to have violated applicable animal welfare
laws or if the grower fails to maintain the facilities in a manner such that the
welfare ofthe livestock or birds is at risk. Section 201.218(d) includes as one
of the criteria whether sufficient time has been afforded the grower to rebut
in writing the allegation in the notice that serves as the basis for the
termination and establishes a presumption that 14 days is necessary for the
grower to respond. In the animal welfare circumstance discussed above, a
swine contractor or live poultry grower should not have to wait 14 days to
receive a response before taking action or risk being subject to a possible PSA
violation. Yet, the proposal contemplates just that result - to the detriment
of the livestock or birds in the care ofthe grower and the industry at large. 48
Similarly, other actions by growers may warrant immediate termination. In

47 Wheeler v. Pilgrim's Pride Corp., U.S. Cow't of Appeals for the Fifth Circuit, No. 07-40651,
en Bane Brief for Amicus Curiae the United States, September 8, 2009. .
48 Indeed, public viewing of and reaction to past instances of undercover film footage taken by
animal rights organizations at a very small number of livestock and poultry production
facilities documenting abuses by workers on those farms caused as much damage to the
packers and poultry processors to whom those growers supplied livestock or birds than it did
to the growers themselves.

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November 22, 2010

short, the proposal's 14 day time in subsection 201.218(d) should be

reconsidered.

Similarly, the agency should not establish "absolutes" in the rule

regarding when a capital investment requirement "constitutes a violation" of
the Act. A host of factors, such as technological advances or the development
of generally accepted best practices related to food safety or animal welfare,
are part of the calculus that can dictate the need for additional capital
investment on the part of the grower. Such requirements must be considered
in the context of whether there is a legitimate business justification for the
. investment requirement.

II. THE PROPOSAL WOULD RESULT IN CHANGES TO THE

LIVESTOCK AND MEAT INDUSTRY THAT THE GIPSA RTI
INTERNATIONAL STUDY FOUND HARMFUL TO PRODUCERS AND
CONSUMERS

The RTI International Study Warns of Severe Adverse Effects if

Alternative Marketing Agreements are Reduced or Eliminated.

The 2002 Farm Bill authorized, and in 2003 Congress allocated monies
to GIPSA to conduct a' study regarding the effects of what the agency defined
as "alternative marketing arrangements" (AMAs) on the livestock and meat
industries. RTI International (RTI) conducted the GIPSA Livestock and
Meat Marketing Study (GIPSA study), which was completed in 2007. 49 As
the discussion below demonstrates, based on the GIPSA study's conclusions,
the proposal, iffinalized, would have a very adverse effect on the meat and
livestock industry. Livestock producers and consumers would suffer the
greatest adverse effects, with a lesser but still significant adverse economic
impact on packers and processors.

In its Assessment of the Livestock and Poultry Industries Fiscal

Year 2007 the agency recognized and discussed the GIPSA study and its
results. In that regard, the agency stated that "[T]he study addressed many
questions and concerns that have been raised about changes in the structure

49GIPSA Livestock and Meat Marketing Study, prepared for Grain Inspection, Packers and
Stockyards Administration, prepared by RTI International (January 2007),
http://archive.gipsa.usda.gov/psplissues/livemarketstudy/LMMS Vol I.pdf. (Attachment B)

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November 22, 2010

and business practices in the livestock and meat industries."50 That 2007
Rfport went on to say that the "study found that alternative marketing
arrangements provide net benefits to producers, packers, and consumers, and
that net economic losses would result from restrictions on Lhe use of such
arrangements."51

Significantly, GIPSA stated the following in its 2007 Report.

In particular, the study found that packers and consumers

receive better quality and more consistent product as a result of
alternative arrangements, and producers receive value for better
quality livestock. All parties are better able to set delivery/sale
dates. The arrangements help to stabilize the flow of supply,
and provide cost savings in sellers and buyers interactions to
arrive at a market price (i.e., the price discovery process). In
general, the use of alternative marketing arrangements provides
livestock buyers and sellers with improved risk management
options that lower costs or allow for the creation and capture of
greater value. 52

Certain specifics in the GIPSA study also are worthy of agency

consideration regarding the proposed rule. In that regard, a fundamental
conclusion of the GIPSA study was that "[M]any meat packers and livestock
producers obtain benefits through the use of AMAs, including management of
costs, management of risk (market access and price risk), and assurance of
quality and consistency of quality."53 Moreover, the GIPSA study concluded
that "[I]n aggregate, restrictions on the use of AMAs for sale ofIivestock to
meat packers would have negative economic effects on livestock producers,
meat packers, and consumers."54

50 Assessment of the Livestoel, and Poultry Industries Fiscal Year 2007 Report, United States
Department of Agriculture Grain Inspection, Packers and Stockyards Administration May
2008, p. 28-29. http://archive.gipsa.usda.gov/pubs/07assessment.pdf. (Attachment C)
51 Id. at 29.
52 Id. (Emphasis added).
53 GIPSA study, ES-3.
04 Id. (Emphasis added).

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November 22, 2010

With respect to fed cattle and beef, the study found that "beef
producers and packers interviewed believed that some types of AMAs helped
them manage their operations more efficiently, reduced risk, and improved
beef quality. Feedlots identified cost savings of $1 to $17 per head from
improved capacity utilization, more standardized feeding programs, and
reduced financial commitments required to keep the feedlot at capacity."55
The GIPSA study stated that producers who use AMAs "identified the ability
to buy/sell higher quality cattle, improve supply management, and obtain
better prices as the leading reasons for using AMAs."5G Packers also benefit,
citing their top three reasons for using AMAs as 1) improving week-to-week
supply management, 2) securing higher quality cattle, and 3) allowing for
product branding in retail stores.57

Relevant to the impact ofthe proposed rule is RTI's conclusion about

"hypothetical" reductions in AMAs. Unfortunately, if the proposal as written
is finalized, the troubling reductions identified by RTI will not be
hypothetical - they will be real.

Specifically, RTI found that a reduction in AMAs would have "j!

negative effect on producer and consumer surplus measures. Beef and cattle.
supplies and quality decreased and retail and wholesale beef prices increased
because of reductions in AMAs."58 Specifically, RTI found that the

short-run, long-run, and cumulative present value surplus for

producers and consumers associated with reduced AMA volumes
are all negative. Over 10 years, a hypothetical 25% restriction
in AMA volumes resulted in a decrease in cumulative present
value of surplus of - 2.67% for feeder cattle producers, - 1.35%
for fed cattle producers, - 0.86% for wholesale beef producers
(packers), and - 0.83% for beef consumers. A hypothetical 100%
restriction in AMA volumes resulted in a decrease in cumulative
present value surplus of - 15.96% for feeder cattle producers,-
7.82% for fed cattle producers, - 5.24% for wholesale beef
producers (packers), and - 4.56% for beef consumers. 59

"Id. at ES-3. (Emphasis added.)

56 Id. at ES-4.
67 Id.
58 Id. at ES-8. (Emphasis added)
50 Id at ES at 8-9.

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November 22, 2010

In short, with respect to beef, RTI found that the net effect of
eliminating AMAs would be to reduce prices, quantities, and producer and
consumer surplus in almost all sectors ofthe industry - meaning that
"reducing the use of AMAs would result in economic losses for beef consumers
and the beef industry."GO

RTI drew similar conclusions regarding the adverse impact that

reducing or eliminating the use of AMAs would have with respect to hogs. In
that regard, RTI found that "AMAs are an integral part of hog producers'
selling practices and pork packers' procurement practices"Gl and that a
"higher proportion of AMA use is associated with higher quality pork
products."62

As with cattle and beef, RTI examined hypothetical restrictions

regarding AMA use in the hog and pork industries and "found that hog
producers would lose because of the offsetting effects of hogs diverted from
AMAs to the spot market, consumers would lose as wholesale and retail pork
prices rise, and packers would gain in the short run but neither gain nor lose
in the long run."G3 (Emphasis added.) RTI identified losses to producers and
consumers in every simulation scenario because oflost efficiencies associated
with reducing the proportion of hogs sold through contracts and/or packer
owned channels. RTI concluded that "[I]n all instances, the price spread
between farm and wholesale prices would be expected to increase because of
the net increase in the costs of processing. Moreover, wholesale, and hence
retail, prices would increase, causing pork to become more expensive for
consumers."G4

The Proposal Will Force Packers to Consider Reducing Markedly

Their Use of Marketing Agreements (Alternative Marketing
Arrangements) or Eliminating them Altogether

The RTI conclusions are both relevant and significant because many, if
not all, marketing agreements and forward contracts either may no longer be
used or they may be notably limited in their use if the proposed rule becomes

GO Id. at ES-9.
G1 Id.
G2 Id. at ES-12.
GBld. atES-12-13.
64 Id. at ES-13.

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final as written. The reasons for that conclusion are straightforward and
arise from the disincentives the proposal creates regarding the use of
marketing agreements.

First, the threat ofliability facing packers from lawsuits that are likely
to be brought, either by GIPSA or by private plaintiffs, alleging violations of
the Act is markedly greater if proposed section 201.3(c) becomes final. As
discussed above in Section I, lessening the burden that a potential plaintiff
must meet to prevail in a PSA lawsuit and based on past experience may
. cause many packers to consider abandoning or significantly limiting the
number and types of marketing agreements they utilize simply to limit risk.
Past experience, e.g., Pickett v. Tyson Fresh Meats may cause packers to
consider limiting, if not abandoning wholly, the use of AMAs - however
specious the litigation.

Second, the breadth and ambiguity in the definition of "likelihood of

competitive injury" also makes the use of such instruments much more risky, .
again because of the threat of litigation. That definition reads, in pertinent
part:

It also includes situations in which a packer, swine contractor,

or live poultry dealer wrongfully depresses prices paid to a
producer or grower below market value, or impairs a producer's
or grower's ability to compete with other producers or
grower.s ... 65

This proposed definition is a backhanded attempt to satisfy the

statutory requirement identified by the eight federal circuits regarding
showing competitive injury or a likelihood of competitive injury. Elements of
the definition, however, are so vague and so broad that a packer will not be
able to make an informed decision regarding what must be done to comply.
This uncertainty is particularly applicable regarding the risks of litigation
attendant to using marketing agreements.

For example" under the proposed definition, it would be virtually

impossible for a packer to know whether having marketing agreements with
a particular producer or group of producers will be found to have "impaired"
the ability of a different producer, e.g., a producer who affirmatively chooses

65 75 Fed. Reg. at 35351, proposed 201.2(u) (Emphasis added).

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November 22, 2010

not to use such agreements or who does business with another packer, to
compete against the producers with whom the packer has such agreements. 66
Similarly, a packer may elect to enter into marketing agreements with a
group of producers. At the same time the packer may choose not to enter into
the same agreement with other producers for legitimate business reasons,
e.g., poor herd management skills, history of poor performance, or the packer
simply has met all of its livestock needs. The definition's ambiguity leaves
unclear whether the packer has impaired the ability of the producer with
whom it has no agreement to compete with those producers who have such an
agreement. If by not offering a marketing agreement to a producer the'
packer is deemed to have impaired that producer's ability to compete, that
producer could be in a position to assert he or she has demonstrated a
likelihood of competitive injury and prevail in a PSA because, as the agency
stated in the preamble, "any act that ... is likely to harm competition
necessarily violates the statute."67

Finally, the last clause of the "likelihood of competitive injury"

definition is unacceptably vague. Specifically, the proposed definition would
find a likelihood of competitive injury in a situation in which a packer
impairs "a producer's or grower's ability to receive the reasonable expected
full economic value from a transaction in the market channel or
marketplace." (Emphasis added.) Absent is any explanation in the preamble
of what the agency means by the phrase "reasonable expected full economic
value."68 Against this vague and unintelligible standard, the packer in both
of the fact examples discussed above will be at an unacceptable risk in a
lawsuit. In the first, the producer who sells on the cash market will
assuredly assert that his ability to receive the "reasonable expected full
economic value" was impaired by the packer's use of marketing agreements
with other producers. In the second fact scenario, the producer who was
denied a marketing agreement will contend that his ability to receive the
"reasonable expected full economic value" was impaired because he was
denied such an agreement.

66 This scenario is not hypothetical as the fact pattern of Pickett v. Tyson ]?resh Meats is very
similar.
67 75 Fed. Reg. at 35341. (Emphasis added).

68 Indeed, the preamble merely recites the language in the proposed rule (or does the rule
merely recite the language in the preamble?) in its attempt to explain what "likelihood of
competitive injury" is.

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In any of the circumstances discussed, and many others not discussed

in these comments given time and space constraints, packers will be at risk of
being sued successfully given the vagueness and breadth of the definition.
Given the history of jury awards in earlier cases, packers will be reluctant to
utilize marketing agreements in any meaningful way, to the detriment of
most producers and consumers. Companies may consider reacting as they
did in South Dakota and Missouri several years ago when those states
enacted laws prohibiting any discrimination (including reasonable
discrimination).

III. THE PRACTICAL IMPACT OF MANY PROVISIONS IN THE

PROPOSED RULE WILL ADVERSELY AFFECT THE LIVESTOCK,
MEAT, AND POULTRY SECTORS.

The Definition of "Likelihood of Competitive Injury" is Unworkable

and Unconstitutionally Vague.

Subsection 201.2(u)'s definition of "likelihood of competitive injury" is

so vague that it is unworkable and contrary to law. Specifically, the
definition provides that "likelihood of competitive injury"

includes but is not limited to situations in which a packer, swine

. contractor, or live poultry dealer raises rivals' costs; improperly
forecloses competition in a large share of the market through
exclusive dealing; restrains competition among packers, swine
contractors, or live poultry dealers; or represents a misuse of
market power to distort competition among othe,r packers, swine
contractors, or live poultry dealers. It also includes situations in
which a packer, swine contractor, or live poultry dealer
wrongfully depresses prices paid to a producer or grower below
market value, or impairs a producer's or grower's ability to
compete with other producers or growers or to impair a
producer's or grower's ability to receive 'the reasonable expected
full economic value from a transaction in the market channel or
marketplace. (Emphasis added.)

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November 22, 2010

The proposed definition fails to consider, as required by the various

judicial decisions discussed above, that the required competitive injury is
injury to the competitive process. Such a construction ofthe PSA makes
sense given the' history of the statute. The only concept of injury to
competition existing at the time of the PSA's enactment was the
Sherman/Clayton/FTC Act concept of harm to the competitive process, and
the terms used in the statute have to be understood in that context. The
terms used in section 202 are terms of art that evince Congressional intent
that there must be competitive harm in the antitrust sense before a violation
is found. Therefore, any regulations issued under the authority of section 202
of the 'PSA may be no broader than the underlying statutory mandate. G9

Many of the types of "competitive harm" identified in the proposed

rule's definition of "likelihood of competitive injury" have no economic or legal
content. In that regard, the concept of "raising rivals costs" is really a type of
monopolization or attempted monopolization; but is utterly without definition
in the proposed rule. Unclear from the proposed rule or the preamble is
whether any conduct by a packer that causes the costs of a rival packer to
increase is effectively a form of competitive injury under the proposed rule?
For example, assume Packer A is more efficient than Packer B and therefore
is able (and willing) to pay his livestock suppliers or poultry growers slightly
more for their products than Packer B. If Packer A raises his price to his
suppliers and Packer B must raise his price to match, has Packer A engaged
in conduct that "raises rivals' costs" in an unlawful manner? Interestingly,
such an interpretation would hurt not only the packer, but its livestock
suppliers. The preamble and the proposal, however, provide no guidance,
leaving the affected packer unsure of its regulatory responsibilities.

69This principle is enshrined in numerous cases but most notably in the Supreme Court's
securities law jurisprudence, which holds that rules promulgated by the Securities and
Exchange Commission may not reach conduct not addressed by the statutory scheme that
purports to authorize the regulations in the first instance. Morrison u. National Australia
Banh, Ltd., 130 S. Ct. 2869, 2881 (2010) (regulation promulgated under a statute "'does not
extend beyond conduct encompassed by [the statute's] prohibition"') (quoting United States u.
O'Hagan, 521 U.S. 642, 651 (1997); Ernst & Ernst v. Hochfelder, 425 U.S. 185,214 (1975)
("scope [of a rnle] cannot exceed the power granted the [agency] by Congress under [the
relevant statute]").

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Proposed RuIe; RIN 0580-AB07
November 22, 2010

Other provisions of the proposed rule certainly trade in antitrust

concepts, throwing around terms such as "market power" and "competition"
. liberally. The agency, however, apparently takes the position that
"competitive injury" is not required to violaLe section 202 of the Act, leaving
vague how such terms will be construed.

Similarly, the provision that would prohibit "wrongfully depress[ing]

prices paid to a producer or grower below market value" is incoherent. Does
the agency mean "predatory buying" ofthe type that was at issue .in
Weyerhaeuser v. Ross-Simmons Hardwood Lumber? In the alternative, does
the agency intend it be a form of monopsony pricing? "Market value" is far
too vague a term to be enforceable because, by definition, the "market value,"
at least with respect to prices, is the price on which a willing buyer and
willing seller agree when neither is compelled to enter the transaction and
both have no information constraints. Moreover, "market value" must surely
encompass more than price terms. Contracts are a bundle of rights and
obligations. All ofthe obligations could be given a monetary value. A poultry
grower who promises to provide a certain number of units to a processor and
to provide services A, B, and C may expect and be entitled to a higher price
than a grower who merely promises to provide a certain number of units to a
processor without services A, B, and C. In other words, to determine "market
value," one must look at a transaction as a whole - in both monetary and
non-monetaryterms -- and classify them accordingly.

From a practical standpoint and given the absence of any standard or

guidance, this "market value" clause will become a de facto "seller's remorse"
provision. This would allow a poultry grower or livestock producer to
challenge a contract or a transaction once he finds out that another grower or
producer got a "better deal," maybe because the favored grower or producer
offered a higher quality product, agreed to provide additional services, or was
simply a shrewder negotiator.

The "receive thereasonable expected full economic value from a

transaction" provision also is unacceptably vague. No packer could possibly
know what the "full economic value from a transaction" is, much less the
"reasonable expected" full economic value. These terms have no economic
meaning. The preamble does not provide any discussion regarding the
phrase because the agency cannot provide a meaningful definition. Unlike a
breach of contract case in which there is a set of objective standards to

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November 22, 2010

measure the validity of the conduct of the two parties, in the proposed
definition the expectancy is itself the measure ofthe "wrongful conduct."
Both parties could adhere strictly to the terms of a contract, but if the dealer
or packer does something that the grower or producer does not like, he may
well be accused of "impair[ing]" the grower or producer's ability "to receive
the reasonable expected full economic value from a transaction."

In short, as written, this proposed rule is a recipe for price controls.

The only way that there can be any coherent application of it as drafted is for
GIPSA, or jury in a civil trial, to get into the business of determining market
prices and "reasonable expected full economic value" from a transaction.
Even then, the proposal provides no way to know how to determine such
values. This section is a price control regime without standards and
Congress has not authorized that and therefore the proposal does not accord
with the Act.

In addition, the proposed rule is unconstitutionally vague. Although

not a criminal statute, the rule raises several due process concerns. Even in
statutes establishing civil legal violations the operative provision must give
those subject to it fair notice of what is prohibited so that they may
reasonably conform their conduct to the legal requirements. This proposed
rule does not come close to meeting that standard. In that regard, the Act
shares some characteristics of a penal statute, most notably the possibility of
imposing enhanced damages on violators.

Supreme Court precedent has controlled the quantum of punitive

damages imposed in civil cases under the due process clause ofthe 14 th
Amendment because the standards for imposing punitive damages are often
vague or malleable and depend upon the values of the jurors. Indeed, unlike
the underlying liability standards in punitive damages cases, the liability
standards in the proposed rule are not readily ascertainable. In fact, the
"standards" in the proposed rule are much worse than the vague punitive
damages standards because they go to liability rather than remedy. For that
reason, the proposal raises significant risks of violating Fifth Amendment
due process requirements. 7o

70 Antitrust theory provides that a competitive injury/consumer welfare standard is required

in antitrust c8Jles to meet constitutional due process requirements. See :t.>rofes8or Bark's
discussion in the Antitrust Paradox. See generally R. Bork, The Antitmst Paradox 73-89
(1978).

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American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

The Requirement to Keep Records Justifying Differential Pricing or

Deviations from Standard Pricing or Contract Terms is Unduly
Onerous and Unconstitutionally Vague.

Subsection 201.94(b) would require a packer, swine contractor, or live

poultry dealer to keep "written records that provide justificationfor
differential pricing or any deviation from standard price or contract terms
offered to poultry growers, swine production contract growers, or livestock
•
producers."71

GIPSA asserts in the preamble that a packer, swine contractor, or live

poultry dealer must keep records that justify differential treatment of poultry
growers, swine production contract growers, or livestock producers. The
agency further asserts that the "justification need not be extensive but should
be enough to identify the benefit-cost basis of any pricing differentials
received or paid, and may include increased or lower trucking costs; market
price for meat; volume; labor, energy, or maintenance costs, etc." In that
regard, GIPSA cites as an example packer participation in a particular
program that yields a premium for the meat as justification for paying a
higher price for cattle. 72 The preamble goes on to state that the packer's
justification data essentially identify "those pecuniary costs and benefits
associated with the treatment that demonstrate its decreased costs or
increased revenues from a standard business practice."73

This proposed requirement ignores the realities of livestock

procurement and is unworkably and unconstitutionally vague. As an initial
matter, the proposed rule grossly underestimates the economic impact of this
detailed cost analysis and recordkeeping burden. This proposed rule will
result in packers spending much more time and incurring significantly more
expenses to calculate in detail and document the necessary justification. This
is especially true when one considers that many ofthe tens ofthousands
transactions that some packers engage in every year talm place "in the field."
For example, if, on the same day, different representatives of a packer buy
cattle from several sellers in the same market region but pay different prices
because some sellers simply are better negotiators than others, what would
the agency expect and deem sufficient in terms of written justification? Or,

71 75 Fed. Reg. at 35351. (Emphasis added).

721d. at 35344.
73 rd. (Emphasis added.)

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November 22, 2010

what if the buyer's assumptions about the will grade are wrong? Given the
provision's reference to "standard price," is the first sale the standard price
and does the proposed rule contemplate all sellers re'ceiving that price on that.
day or at that time? How do other changing elements of the market on a
given day affect the construct of the "standard price?" Similarly, it is unclear
how the proposed provision would function in an auction setting with
different prices paid for different animals that may not be cost or revenue
driven but may be a function of a factor as simple as supply and demand.

Indeed, one of the biggest differences in prices paid is simply supply

and demand, i.e., competition. If a packer needs 1,000 head to cover a day's
kill and only acquires 500 head on its first offer, the packer may have to "pay
up" to get the other 500 head needed. This circumstance results in paying
two producers who may operate next door to each other different prices
within the same hour. The proposed rule as written and as explained in the'
preamble does not consider supply and demand as a justification for different
prices. Ironically, as written, the proposed-rule would favor the use of
marketing agreements generally where, if in writing, the justifications for
premiums paid or discounts assessed are documented, in contrast to the spot
market, the prices for which present have little opportunity for
contemporaneous written justification and may be largely if not solely a
function of supply and demand factors.

GIPSA's preamble statement that it "would consider the particular

circumstances of any pricing disparity in determining whether a violation of
the P&S Act occurred" is insufficient for a packer to be able to make an
informed decision as to what constitutes compliant behavior, including
whether there is a legitimate justification for the disparity. As discussed in
the previous section, the only way that there could be any reasonable
certainty about what this section requires would be for GIPSA to get into the
business of determining market prices and contracts so that the packer can
have some ability to ascertain what "standard price or contract terms" are in
order to comply with the rule.

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American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

The Unfair, Unjustly Discriminatory and Deceptive Practice or

Device Provisions are contrary to the Purposes of the Act and Are
Unworkable and Unconstitutionally Vague,

Many subsections of section 201.210 include elements or provisions

that are so vague that it would be virtually impossible for a packer, swine
contractor or live poultry dealer to behave in a manner ensuring compliance.
Forthe reasons that foHow, section 201.210 should be withdrawn.

It is well settled that laws of a penal nature must be of "sufficient

definiteness that ordinary people can understand what conduct is prohibited
and in a manner that does not encourage arbitrary and discriminatory
enforcement."74 Laws not meeting this standard are unconstitutionally
vague and invalid. 75

Specifically, section 201.210(a)(1) provides that an unfair, unjustly

discriminatory and deceptive practice or device includes, but is not limited to
"[A]n unjustified material breach of a contractual duty, express or implied, or
an action or omission that a reasonable person would consider unscrupulous,
deceitful or in bad faith in connection with any transaction in or contract
involving the production, maintenance, marketing or sale of livestock or
poultry."76

This subsection inappropriately would turn state law contract disputes

into federal cases. The courts have recognized this p,roblem and rejected such
a concept. "Failure to require a competitive impact showing would subject
dealers to liability under the PSA for simple breach of contract or for
justifiably terminating a contract with a grower who has failed to perform as
promised."?? Moreover, the proposed standard, what a "reasonable person"
would consider to be is unworkably vague, and therefore arguably
unconstitutional, making it virtually impossible for a regulated entity to

74 Kolender v. Lawson, 461 U.S. 352, 357 (1983); Village of Hoffman Est. v. Flipside, Hoffman
Estates, Inc., 455 U.S. 489, 498 (1982) (applying standard to law imposing civil penalties).
75 Id.
76 75 Fed. Reg. at 35351. Unclear from the proposed langue and the preamble is whether the

agency envisions the possibility of a "justified material of a contractual duty." (Emphasis

added.)
77 London v. Fieldale Farms Corporation 410 F.3,·d 1295 (11 th Cir. 2005). See also Been v. O.K.
Indus., Inc., 495 F.3d 1217 (10th Cir. 2007) citing London. (Emphasis added). '

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Proposed Rule; RIN 0580-AB07
November 22, 2010

know what behavior, other than treating every producer exactly the same,
would be compliant.

Proposed subsection 201.210(a)(2) would make it an unfair practice for

a packer, swine contractor, or live poultry dealer to take a retaliatory action
or omission "in response to the lawful expression, spoken or written,
association, or action of a poultry grower, livestock producer or swine
production contract grower."78 As with subsection (a) (1) the breadth and
vagueness of this provision makes ensuring compliance virtually impossible,
For example, if a livestock producer or poultry grower makes defamatory
remarks about a packer or live poultry dealer and the packer in turn sues for
defamation, would that lawsuit be deemed to be a'retaliatory action?
Similarly, if a poultry grower frivolously sues a live poultry dealer and the
dealer elects to terminate a contract, would that constitute a retaliatory
action in violation ofthis standard?

Some of the problems associated with proposed subsection 201.210(a)

(5) are, in many respects, similar to those raised by proposed section 201.94,
Beyond that, however, the subsection ignores a fundamental reality of the
livestock industry - many transactions are done on a handshake. Requiring
substantiation of premiums or discounts in such circumstances is at best a
difficult task. More generally, unclear from the proposed rule and nowhere
discussed in the preamble, is whether a premium paid must be at least as
much as (or not greater than) the financial benefit the company gained from
the product or, conversely, that the discount applied is at least much loss as
the company incurred. To engage in such calculations and document that
justification will take far more time by the packer than the agency purports
to have estimated in its Executive Order 12866 analysis, even if it were
possible to make such calculations.

Beyond that, however, such an approach would be virtually impossible

to achieve in the cash market, negotiated bid process. For example, would a
packer have violated the proposed rule in the circumstance in which a buyer
purchases a pen of cattle in the cash market and in doing so pays a premium
for cattle, which later turn out not to be of the quality estimated at the
feedlot? Likewise, ifbuyer discounts a pen of cattle that ultimately turn out
to be better in quality than estimated, has a violation occurred? Also unclear
is whether the packer has to provide revenue or cost justification for

78 Id,

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November 22, 2010

differences in negotiated transactions that occur on or about the same time at

different locations, and potentially with different buyers, that may be due
solely to the dynamics of negotiations.

The proposed rule also likely will provide a disincentive for creativity
and innovative marketing programs. It is not uncommon for a packer and
producer to enter into an agreement with a "let's see how this works"
attitude. Sometimes, however, such arrangements do not work and it may be
impossible, for example, for the packer to be able to revenue justify a
premium paid to a producer in such a circumstance.

Finally, the proposed rule includes a catch-all provision that will

trigger the filing of countless lawsuits and, as demonstrated above, is
founded on a definition that is unconstitutionally vague and unworkable.
Specifically, subsection 201.210 (8) provides that "any act that causes
competitive injury or a likelihood of competitive injury" is an unfair practice.

Certain groups purporting to represent producers have, on several

occasions, alleged that various practices engaged in by packers "distort
competition in the marketplace" or impair the ability of a producer to
compete with other producers. Given that the agency provided no
explanation as to what the clause "distorts competition in the marketplace"
means, it is virtually impossible for regulated entities to know what activity
or behavior is compliant. For example, can a packer be accused of distorting
competition in the market if it chooses to change operations from two shifts to
one or if the packer elects to close a plant or transform the plant from a
slaughter operation to a processing-only facility? Do any ofthese changes, or
others, provide a claim to a private plaintiff who finds it more difficult to
market livestock if the plant no longer slaughters or is limited to one shift?
Has such action by the packer impaired the ability of that producer to
compete with other producers? And how broad and geographically dispersed
a group of producers must be considered? Similarly, has the packer impaired
the ability of a producer to compete if the packer enters into an agreement or
series of agreements with other producers that occupies considerable plant
capacity? The possible scenarios in which the packer could be subject to
litigation based on the breadth and vagueness of the proposed rule are
endless. For the foregoing reasons, section 201.210 should be withdrawn.

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American Meat Instit>lte Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

The Undue or Unreasonable Preferences or Advantages; Undue or

Unreasonable Prejudice or Disadvantages Provisions are
Unworkable and Unconstitutionally Vague.

Section 201.211 provides several, but not all-inclusive, criteria that the
Secretary may consider in "determining if an undue or unreasonable
preference or advantage, or an undue or unreasonable prejudice or
disadvantage, has occurred in violation of the Act." Similar to section
201.210 discussed above, this provision ofthe proposed rule cites several
subjective factors that the agency can consider in determining compliance.
The language, however, is too vague for packers and processors to know how
to operate to accomplish their business objectives while maintaining
compliance with the rules.

Specifically, subsection 201.211(a) refers to whether contract terms

"based on number, volume or other condition, or contracts with price
determined in whole or in part by the volume of livestock sold are made
available to all poultry growers, livestock producers or swine production
contract growers who individually or collectively meet the conditions set by
the contract."79 (Emphasis added.) Unclear from thl'llanguage ofthe
proposed rule or the preamble discussion is how a packer will, or is expected
to, know which growers or producers are capable of meeting the terms and
conditions of a contract. The language in the proposal suggests that a packer
has an affirmative obligation to advise all producers or growers about the
availability of a contract and to accept livestock or poultry from anyone who
purportedly can satisfy the conditions ofthe contract, presumably on first
come, first served basis. That is the equivalent of requiring a consumer to
buy a Chevrolet if the Chevrolet dealer is the first to offer a functioning car.
Moreover, should a consumer be forced to explain why he is willing to pay
more for a Cadillac? If that is the agency's intent, it is an inappropriate
intrusion into the private right of contract. A packer or poultry dealer should
be permitted to contract with whatever growers it wants based on a host of
factors, including among others, past history and performance. If, on the
other hand, the above interpretation is not the agency's intimt, that
interpretation should be made clear and the rule revised to establish clear,
ascertainable, and economically sensible guidelines. In either event, the
proposed rule should be withdrawn.

79 [d. at 35352. (Emphasis added).

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Proposed Rule; RIN 0580·AB07
November 22,2010

Subsection 201.21l(c), with respect to "whether information regarding

acquiring, handling, processing, and quality of livestock is disclosed to all
producers when it is disclosed to one or more producers" is similarly flawed.
Specifically, the proposed rule as written again seems to impose an
affirmative duty on a packer to notify every producer regarding certain
details of a transaction or agreement. The limited preamble discussion states
that the agency would consider whether price differences based on the cost of
acquiring or handling are disclosed "equally" to all producers. Although that
concept is, alone, problematic given the logistical challenges of notifying all
producers, the language in the proposed rule is broader and again raises the
question of whether the rule imposes an affirmative obligation on a packer to
provide such information to all producers or to know how to do so
instantaneously on a real time basis throughout a buying day. If so, absent
posting in a public forum, e.g., on the packer's website, the terms at issue, it
is virtually impossible for a packer to disclose "information regarding
acquiring, handling, processing, and quality of livestock" to all producers.
Indeed, even that vehicle does not satisfy the rule's requirement for
producers without access to the internet. In short, the rule as written
exposes a packer to an enforcement action by the agency or, in the
alternative, a private lawsuit, if a producer can show he or she was not
provided information about "acquiring, handling, processing, and quality of
livestock,". whatever that means.

Finally, subsection 201.21l(b), which includes as a criteria "whether

price premiums based on standards for product quality, time of delivery and
production methods are offered in a manner that d·oes not discriminate
against a producer or group of producers that can meet the same standards"
is problematic for a different reason. In that regard, the proposed rule would
read out of the statute the terms "undue" or "unreasonable."

The PSA allows packers, swine contractors, and live poultry dealers to
give preferences and advantages. It does not allow the giving of undue or
unreasonable preferences or advantages. Likewise, the Act does not allow a
person to be subject to any "undue or unreasonable prejudice or
disadvantage."8o The proposed rule deletes the words undue and
unreasonable from the standard when referencing discrimination and
offering price premiums. In doing so, the proposed rule establishes a

80 7 USC 192(b).

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American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

different, lesser standard provided by the statute and for that reason conflicts
with the Act and should be withdrawn.

The Proposal will Adversely Affect Competition by Requiring

Dealers to Purchase Livestock for a Single Packer.

Proposed section 201.212(a) provides that "dealers who operate as

packer buyers must purchase livestock only for the packer that identifies that
dealer as its packer buyer."81 Related to that limitation, subsection (b) would
preclude a packer from entering into an exclusive arrangement with a dealer
unless the packer has identified that dealer and reported that relationship to
GIPSA on approved forms. These requirements ignore the economics of
livestock acquisition and rather than foster competition will adversely affect
it. Moreover, given the agency's existing authority, the provisions are
unnecessary.

The issue of joint livestock purchasing or shared agents has been a

topic of discussion by GIPSA for a number of years. Indeed, several annual
assessments that GIPSA has published over the years reference this topic.
GIPSA's Assessment of the Cattle and Hog Industries Calendar Year 2000
prepared in June 2001 discussed what GIPSA characterized as shared
agents. Specifically, the report said

It is a common practice for one buyer to represent more than one

packer at an auction sale, especially in sales involving cull
livestock. Auction market owners and livestock sellers have
raised concerns that the use of common buyers, or shared
agents, reduces the number of competing buyers. This practice
has the potential for reducing competition. However, the issue
is complicated by a general lack of buyers at many auctions.
Sharing a buyer may result in packers purchasing livestock at
auctions where the packers otherwise would not be active.
P&SP continues to investigate complaints about shared agents
at livestock markets. 82

8175 Fed. Reg. at 35352.

82Assessment oftite Cattle and Hog Industries Calendar Year 2000, p.30 (Emphasis added)
(Attachment D).

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American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

This discussion, acknowledging the potential risk, highlights the problem

created by the proposed rule. Ten years ago there were not enough buyers at
auctions, and it was not economical for packers to send individual buyers to
every location. Those economic challenges are more acute today, and several
packers have advised AMI unequivocally that this proposed. rule will limit
even further their ability to procure livestock that best suits their purchase
criteria. Contrary to the agency's assertion in the preamble that the proposal
will increase participation in the cow and bull slaughter market, simply put,
ifthe proposed rule becomes final, although the number of people at auctions
may not change much, there likely will be fewer buyers and less competition
at many of those locations.

The above discussion demonstrates that the proposed rule will have .
adverse effects on packers, auctions, and producers. That the proposed rule
is ill-advised is further highlighted by the fact that the agency already has
tools to address the "problem" that the agency asserts it is attempting to
address and GIPSA has acknowledged it possesses those tools.

In its Assessment of the Cattle, Hog, and Poultry Industries Calendar

Year 2004 GIPSA again acknowledged that concerns had been raised about
joint livestock purchasing and even went so far as to say that the activities
identified were "potential violations ofthe P&S Act."83 GIPSA's response
included an assertion that the agency investigates complaints concerning
shared agents, etc., as well as an acknowledgement that whether such
activity violates the Act "depends on the circumstances of each case."84
Significantly, GIPSA cited two existing regulations, sections 201.69 and
201.70, which give the agency the authority to investigate the types of
activities complained about and to take action against a packer, dealer, or
market agency if appropriate. AMI presumes that GIPSA, in fact, has
investigated complaints received and, where appropriate, has taken the
necessary steps to preclude or address anticompetitive behavior or actions.
That GIPSA activity is proof that the proposed rule is unnecessary.

Given the adverse impact shown above and the fact that GIPSA has
the authority to address concerns about collusion.and price manipulation,
proposed subsections 201.212(a)-(b) should be withdrawn.

83 Assessment of the Cattle, Hog, and Poultry Industries Calendar YeaI' 2004, p.16.
(Attacbment E)
84 Id.

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American Meat Institute Comments
Proposed Rule; RIN 0580-AB07
November 22, 2010

The Prohibition on Packer-to-Packer Livestock Sales is a De Facto

Ban on Packer Ownership of Livestock and will Adversely Affect
Consumer, Producers, and Packers

The proposal, if finalized, would impose an indirect ban on packer

ownership of livestock and in doing so will adversely affect producers and
packers. Specifically, subsection 201.212(c) provides that a packer "shall not
purchase, acquire, or receive livestock from another packer or another
packer's affiliated companies, including but not limited to, the other packer's
parent company and wholly owned subsidiaries ofthe packer or its parent
company."S5 In the preamble the agency asserts that this section is necessary
to "limit the ability of packers to manipulate prices."s6 The agency, in
attempting to address a purported issue of concern, i.e. alleged price
manipulation, either fails to appreciate or simply ignores several significant
considerations in proposing this ill-conceived and unnecessary provision.

First, GIPSA has tools available to help ascertain whether any illegal
activity is occurring and if so it has the tools to take action. s7 Significantly,
there is no discussion in the preamble about the fact that every packer-to-
packer sales transaction is required to be reported pursuant to the provisions
of the mandatory price reporting program administered by GIPSA's sister
agency, the Agricultural Marketing Service. This fact alone makes the
reason proffered by GIPSA for the prohibition dubious at best.

The agency's rationale for the rule is even less compelling when one
considers the price monitoring program that GIPSA has in place to address
these issues. In that regard, GIPSA's 2009 Annual Report, published in
March 2010, just three months before the proposed rule was published,
discusses the fed cattle and hog market price monitoring program that
GIPSA has in place. That program, initiated because of concerns about the
cattle market in the wake of the 2003 case of bovine spongiform encephalitis
(ESE) in the United States, "includes a weekly internal reporting regime and
a detailed work plan to conduct in-depth investigations into possible
violations ofthe Act if the initial regulatory reviews of price differences do

85 75 Fed. Reg. at 35352.

8G Id at. 35342.
87 Indeed, the provision can be viewed as, and perhaps it is, a tacit admission that the agency
is incapable of preventing or addressing instances of purported price manipulation.

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American Meat Institute Comments
Proposed RIlle; RIN 0580-AB07
November 22, 2010

not clarify whether they were caused by external market factors."88

According to the report, the

model is run weekly, and any price outlier that is not caused by
certain technical statistical factors triggers a regulatory review
by P&SP. If the regulatory review does not determine that the
price outlier was caused by certain external factors or readily
observable market conditions, then a formal investigation is
initiated to determine the cause ofthe price outlier. The formal
investigation involves deeper examination ofthe price data and
cattle characteristics, and interviews with buyers, sellers, and
other market participants. 89

That GIPSA has in place a program, about which the agency appears
quite proud of its rigor and effectiveness, to monitor pricing in order to
prevent the very threat that this packer-to-packer ban is intended to help
preclude speaks volumes about how unnecessary the proposed rule is. This
conclusion is particularly compelling in light of the fact that, during the time
the monitoring program has been in effect, the agency has not brought any
price manipulation cases, suggesting that the packer-to-packer sales ban is a
solution in search of a problem.

Not only is the packer-to-packer sales ban provision unnecessary, its

impact will be detrimental to packers and producers because of the various
inefficiencies it will introduce into the marketing system and the
displacement oflivestock that will occur. In that regard, there are numerous
examples of transactions that will be prohibited that make the livestock
procurement system efficient. A few examples are presented below.

Example One

The most glaring example of how this proposed provision would

adversely affect a packer was presented during the July 20,2010 hearing
before the House Agriculture Subcommittee on Livestock, Dairy and Poultry.
At that hearing USDA officials were apprised that a packer with a slaughter

882009 Annual Report, Packers & Stockyards Program, United States Department of
Agriculture Grain Inspection, Packers and Stockyards Administration, p. 13.
http://archive.gipsa.usda.gov/pubs/2009_psp_annuaIJeport.pdf (Attachment F)
80 Id.

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facility in Washington State also has feedlots more than 1500 miles away in
Kansas. For obvious logistical and animal welfare reasons it is not practical
to transport the cattle in the Kansas feedlot to Washington for harvest so
those animals typically are sold to one of several packers with plants in
Kansas or Nebraska. 90 Yet, the proposed ban leaves the Washington packer
with two options: ship the cattle across the Rocky Mountains or sell them to
an independent entity who in turn can sell the cattle to the very same
packers who buy the Kansas feedlot cattle.
The first option, as the agency must be aware, is simply not feasible
and could result in unnecessary injuries to livestock. 91 The second option,
which the agency advanced in its ill-considered and misleading
Misconceptions and Explanations document provided the following simplistic,
and economically unrealistic, solution:

EXPLANATION

The proposed rule prohibits only direct sales of livestock

between packers. A packer could sell to individuals, market
agencies, dealers or other buyers. 92

The proffered explanation ignores, or misunderstands, the realities of

the market by suggesting that introducing an independent third party into
the mix does anything other than introduce inefficiencies and costs into the
system. Clearly, the Washington packer with the Kansas cattle will incur
costs that competing feedlot operators not owned by packers will not suffer,
putting the Washington packer at a competitive disadvantage. In the long
run, the Washington packer's incentive will be either to divest the Kansas
feedlot(s) or divest the slaughter establishment.

80 In this circumstance the agency's purported reason for the proposed ban, limiting price
manipulation, is wholly inapplicable given that the Washington state packing plant does not
in any meaningful way compete for the purchase of cattle with the plants that buy the
Kansas feedlot cattle.
81 See Ag Department Proposal Threatens Animal Welfare, Hnfflngton Post, Oct. 20, 2010,
http://www.huffingtonpost.com/temple-grandin/ag-department-proposal-th_b_769717.htm!.
(Attachment G).
92 http://archive.gipsa.usda.gov/psp/rulefacts.pdf. P.3.

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Example Two

The above discussion, although extreme in some respects, is not an

isolated example. For example, an AMI member Company X operates a hog
slaughter facility in California. ThatJacility harvests approximately 1.8
million hogs annually. The majority of these hogs are obtained from a facility
owned or affiliated with another packer. The proposed rule would prohibit
those hogs from being sold to Company X. There are, however, not enough
. non-packer-affiliated hog production facilities near this slaughter facility to
supply sufficient replacement hogs. Moreover, environmental, political, and
capital constraints make it highly unlikely that independent producers would
enter the area to provide a supply of hogs. If the proposed provision goes into
effect that circumstance leaves Company X with the following options.

1. Ship market hogs from the Midwest. The costs and logistics of
transporting such a large number of hogs make this option
. infeasible. As undesirable as it is to ship cattle more than 1500
miles across the Rocky Mountains, it is' even less desirable to
transport hogs a like distance, particularly from an animal welfare
standpoint.

2. Limit the harvest to company-owned hogs only. Because there are

currently an insufficient number of company-owned hogs to fill the
plant, Company X would have two options: the company could
. expand its farm operations to become completely vertically
integrated, which is contrary to the proposed rule's purported intent
to benefit independent producers; or reduce the harvest to company-
owned hogs only at current production levels, supplemented with
any other independently produced hogs. This option, however, is
infeasible because it would result in a harvest reduction such that
the plant would fail to cover costs. In that case, Company X would
be forced to cease harvest operations at that plant, which would
leave independent hog producers who sell to that slaughter facility
with no outlet for their pigs.

Compounding that problem is the fact that more than 900,000 hogs
that previously went to the Company X plant from the other packer owned
hog production facility now have nowhere to go because there are not other
proximate hog slaughter facilities capable of processing that number of hogs.

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In short, the proposed provision will have introduced inefficiencies into the
livestock procurement system to address a perceived problem that the agency
has been monitoring using other resources and about which it has never
brought a case during the several years it has engaged in such monituring.

Example Three

In another circumstance, a group of hog producers are members of a

cooperative packing operation, i.e., Packer A. Packer A can process about
halfthe hogs its cooperative members produce. The other 50 percent ofthe
hogs are sold by the producer members to other packers. Unclear from
201.212(c), which provides that a "packer shall not purchase, acquire, or
receive livestock from another packer or another packer's affiliated
companies, including but not limited to, the other packer's parent company
and wholly owned subsidiaries ofthe packer or its parent company" is the
scope of prohibition with respect to "affiliated companies."93 The qualifying
language "including but not limited to," coupled with absence of any
discussion in the preamble about the scope ofthe prohibition creates
considerable uncertainty regarding its effect on this group of producers.
GIPSA's sister agency, the Agricultural Marketing Service, does not consider
these producers to be packer affiliates.

If other packers are prohibited from purchasing these hogs', the

member producers of Packer A have two choices: (1) reduce their herds to
remain within the capacity of Packer A processing operation; or (2) increase
. Packer A's capacity so it can accommodate all the hogs the members produce.
In any case, the result is complete vertical integration. Conversely, if the
agency concludes that the scope of 201.212(c) does not extend to the producer
owners of Packer A the agency has provided a notable and distinct
competitive advantage to Packer A.. Indeed, the agency has distorted the
market, benefitting one packer at the expense of others,

Ironically, given the uncertainty caused by the broad language of the

ban and the absence of any discussion in the preamble, some of the producer
owners of Packer A who currently do business with other packers are
requesting longer-term contracts in hopes of delaying the effect of the ban on
packer-affiliated sales. Such actions are only band aids on the bleeding that
would be caused by this proposed ban, and in the long' run the ban would

03 75 Fed. Reg. at 35352.

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fundamentally alter the way the member producers do business and force
other packers to find other sources of supply, likely leading at least in part to
further vertical integration among packers.

Example Four

The proposed ban also is problematic for packers that are largely
vertically integrated. For example, one such packer numerous times
throughout the year will sell excess market hogs to another packer. This
excess could be due to a plant breakdown, a legitimate scheduling decision or
any number of other business reasons. Although the provision would allow a
packer to apply for a waiver in the case of a catastrophe, natural disaster, or
other emergency, this exception does not sufficiently recognize the many
legitimate reasons packers buy from one another.

Further, some packers have ongoing procurement agreements and

engage in spot market purchases from other packers. Whether on a current
or prospective basis the proposed rule limits a packer's ability to purchase
market hogs that may satisfY preferred product quality objectives, because
the rule likely would make it more costly for such packers to procure other
market hogs due to having to haul them a further distance to a plant. These
considerations could spur further vertical integration.

In addition, the proposed ban would, in some circumstances, likely

"displace" hogs sold by independent producers. For example, Packer D has a
plant near Guyman, Oklahoma. A different packer, Packer E, with a plant
450 miles away in Nebraska, owns hogs at a facility located close to the
Guyman plant. Absent introducing the economically nonsensical
inefficiencies and costs involving a third party dealer, the proposed ban
would force those hogs to be hauled an incremental 450 miles to Packer E's
plant in Nebraska. These hogs would then "displace" market hogs raised by
producers nearer the Nebraska plant who historically have sold their hogs to
that facility. The newly displaced hogs would then need to be transported
either that same 450 miies to the Guyman plant or elsewhere. The result is
that both operations would not only incur incremental freight costs and
inefficiencies but also have a larger impact on the environment, etc.
Ultimately, the~e costs may be passed on to consumers.

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The proposed ban would also adversely affect vertically integrated

packers in selling cull sows. Today, integrated packers typically cannot
process cull sows because they are markedly different from the market hogs
processed in their planLs. So the integrated packer usually sells cull sows to
other packers who specialize in harvesting hogs of that type and producing
the items they can yield. The proposed ban would end those transactions and
force the integrated packer to sell its cull sows to a third party dealer who in
turn will sell them to the very same cull sow processor the integrated packer
sells to today. Again, the net effect of the proposed ban is to place the
integrated packer at a competitive disadvantage to others who sell cull sows
directly to the cull sow processor and to introduce unnecessary costs and
inefficiencies into the system.

In addition, one the country's largest procurers of cull sows is a

subsidiary business of a packer. In explicably, with evidence of any price
manipulation, the proposed ban would render this business relationship
illegal and force the packer to divest its cull sow buying business.

The agency's purported purpose for the proposed ban on packer-to-

packer sales is to limit opportunity for price manipulation by packers, which
the Act in subsection 202(e) clearly makes illegal. Yet, packer-to-packer sales
oflivestock occur everyday and have for many years. Nonetheless, the
agency has not brought any price manipulation cases involving packer-to-
packer sales utilizing the tools and authority available. To suggest, as the
agency does in the preamble, that this proposed ban is needed to prevent
behavior that is prohibited but which the agency has never found· it necessary
to pursue an enforcement action suggests that a different, yet unstated,
reason to preclude packer ownership of livestock is the true motive behind
the proposal.

The Requirement that each Unique Contract be Submitted to GIPSA

for Posting on the Agency's Website is an Inappropriate Intrusion
into Private Contracts.

Section 201.213 would require packers, swine contractors, and live

poultry dealers to submit GIPSA each "unique type of agreement or
contract."94 This proposed rule is ill-considered for several reasons. First,
publishing contracts could well have the long-term effect of encouraging live

04 [d.

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November 22, 2010

poultry dealers or processors to grow their own birds or packers to raise their
own livestock. Rather than be subject to the intrusions inherent in this rule,
becoming more vertically integrated eliminates the necessity of submitting
the multitude of contracts and agreements that will have to be filed and
updated and limits the ability of private plaintiffs to mine the contracts
posted as a means to file a lawsuit alleging an unfair practice or an undue
preference.

Second, at a minimum the proposal is an unnecessary and

inappropriate intrusion into private transactions that is not contemplated by
the PSA. In that regard, section 223 of the PSA provides for the
establishment of a swine contract library and providing information about
those contracts. It is noteworthy that this library is limited to swine
contracts only. The proposed rule, would in effect, expand the scope of a
contract library into areas and species that Congress has not chosen to
capture. Given that the Congress in 2008 amended the Act in several
respects, it did not direct the agency to broaden the scope ofthe existing
contract library. For the foregoing reasons, this section should be withdrawn.

The Capital Investment Requirements and Prohibitions are Beyond

the Scope of the Act and Will Encourage Greater Vertical
Integration.

Section 201.217 provides that any requirement that a live poultry

grower or swine production contract grower make an initial or additional
capital investment "must be accompanied by a contract duration" to allow the
grower "to recoup 80 percent of the cost of the required capital investment."95
This provision is problematic for several reasons. First, this provision is
tantamount to the agency requiring that packers pay a grower a price that
ensures a certain rate of return_ There is no authority within the Act that
permits the agency, in effect, to take such action and guarantee a return on
investment to a grower. Thus, the proposal fails for lack of statutory
authority.

Second, the proposed rule makes no exception for capital

improvements that are necessary to comply with changes that may be
required by law. For example, an investment required by a statutory or
regulatory change (e.g., gestation crate bans) is less optional than an

95Id. at 35353.

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investment contracted for by a packer in order to improve efficiency, although

both should be considered as lawful. In addition, although the agency
documents released publicly, as well as statements made by USDA officials
refer to this provision as requiring an "opportunity" for the grower to recoup
80 percent of the investment, the word "opportunity" is not found in either
the preamble or, more importantly, the regulatory language. Therefore,
although this provision has been "pitched" by various USDA officials as only
requiring an opportunity to recoup 80 percent, the plain language of the rule
. and the preamble establish a hard requirement of 80 percent.

Finally, this 8Q percent recoupment requirement likely will stifle

innovation in the industry. Risk is a necessary component of innovation.
And that risk must necessarily be shared by both sides - the packer who
seeks to improve quality and the producer who seeks to increase his
efficiencies. If the risk of innovation is disproportionately shifted to one side
of the equation then, given the price equity requirements imposed by the
proposed rules, there is no incentive for the producer to improve and the risk
is too high for the packer to require improvements. At a time in which the
meat industry as a whole faces pressures to address everything from health
and wellness to antibiotic usage to animal welfare, the industry cannot afford
a regulatory requirement that provides a disincentive to innovation.

The Proposed Rule's "Reasonable" Period of Time to Remedy a

Breach of Contract Does Not Consider Circumstances that Warrant
Faster Action.

Section 201.218 of the proposed rule prescribes "reasonable" times to

notify, rebut, and cure a breach of contract. In that regard, the rule, in
essence, would set a minimum of 14 days for a grower to rebut the allegations
included in a notice of breach of contract. The proposed rule fails to provide a
contractor the ability to act quickly in certain circumstances.

For example, neglect or intentional abuse of livestock or birds, or poor

animal husbandry practices by a grower, is a serious issue that a packer,
processor, or contractor should be permitted to address immediately. The
proposed rule, .however, does hot allow the packer, processor, or contractor to
suspend deliveries or terminate the contract, even though the grower's
actions may violate the law and are a clear breach of contract. Indeed, under
the proposal a contractor would be required to continue to do business with

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November 22, 2010

such a grower, thereby creating the possibility that the harm to the animals
or birds could continue, while perpetuating harm to the packer's or
processor's reputation in the marketplace. Immediate termination must be
permitted in such circumstances. Failure to allow the contractor to act could
result in damage to the contractor's assets in those cases where the
contractor owns the livestock or birds ilndcould damage the reputation of the
packer and the reputation ofthe industry as a whole.

Similarly, a packer, processor, or contractor should be able to take

immediate action regarding a grower who acts in a manner that jeopardizes
food safety or the environment. The proposed contract termination rules
emasculate a contractor's ability to act quickly if a grower fails to observe
required drug withdrawal periods or discharges emissions in violation of
environmental regulations. If a grower fails to observe the required drug
withdrawal period, and those animals are harvested, a food safety issue
exists for end consumers that likely will result in a recall of the affected food
products. The grower could be liable under the contracts for damages
sustained by the packer as a result'ofthe recall. The propos~d rules,
however, do not allow a contractor to suspend deliveries or terminate a
contract,' even though the grower's actions would be a clear breach of
contract. Requiring the continuation of deliveries raises the threat of
additional recalls and the possibility of additional monetary claims against
the packer, processor, or contractor and the grower.

IV. THE PROPOSAL WOULD INHIBIT THE U.S. LIVESTOCK AND

MEAT INDUSTRIES' ABILITY TO SERVE INTERNATIONAL
MARKETS, LEADING TO LOSS OF COMPETITIVENESS, EXPORTS,
REVENUE, AND JOBS IN THE UNITED STATES.

In addition to the above-discussed consequences and problems, the

proposed rule would adversely affect international trade in that it would
restrict, and in many cases preclude, U.S. exporters of beef, pork, and poultry
from meeting the demands for high quality products requested by
international customers. Specifically, an erosion of the U.S. position in Asian
and European premium meat markets likely would result frpm the
implementation of this rule.

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Proposed Rule; RIN 0580-AB07
November 22, 2010

u.s. exports of red meats and poultry totaled $11.7 billion in 2009.
Maintaining and increasing export sales is vital to the health and
sustainability of U.s. meat and. poultry industry because U.s. per capita meat
consumption has leveled off in recent years.

As international markets have become more sophisticated,

international customers want to know about livestock origin and the
processing of the meat they are purchasing from the United States.
Knowledgeable foreign customers will pay high premiums to purchase the
highest quality specialty meat produced from grain-fed livestock available
from U.S. livestock producers and packers. These customers are willing to
work with producers and packers, especially on pre-harvest conditions and
post-harvest unique processing techniques, to obtain the type and quality of
beef, pork, and poultry they need in their specialty markets. The very high
premiums paid for this meat cannot be earned in the U.s. domestic market
and represent the additional income needed to keep U.S. ranchers and
processors in business.

The proposed rwe would largely eliminate the marketing agreements

that offer the incentives to develop and maintain these customized meat
production programs including:

• European Union beef business (certified hormone free; 45,000 MT

quota for each ofthe next three years);

• Natural beef business;

• Each packer's "Premium Program" beef;

• Meat from age-verified livestock; and

• Specialized production systems such as "Certified Angus Beef."

Some countries demand meat production programs with strict

parameters, such as requiring no beef tallow and/or no meat and bone meal
in feeds, or imposing specific age restrictions and traceability to the producer.
Specialized diet requirements used with cattle from superior genetic stock
and breeding must also be met.

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Proposed Rule; RIN 0580-AB07
November 22, 2010

Use of unique feeds and customized feed rations drive the quality of
the final meat product and ability ofthe producer and processor to add value
in creating taste and quality characteristics. Livestock operations and
processors must be able to guarantee the quality of the meat produced from
cattle raised under these strict feeding regimes. The significant disincentive
to enter into marketing agreements because ofthe threat oflitigation caused
by the proposed rule's waiver ofthe proving competitive injury and its
definition oflikelihood of competitive injury will inhibit all ofthese programs.

The impact will also be felt in foreign countries that require meat
produced from age verified (AV) cattle. Processors and exporters must be
able to predict the supply of AV cattle destined for specific markets or the
business will be lost. International customers pay a premium to U.S.
producers and packers to meet these requirements and producers benefit
from participating in these specialty programs. The proposed rule would
remove the incentives to enter into these specialty programs and contracts.
The inability to differentiate products, create brands, and market unique end
product characteristics would result in significant l,oss of income and jobs
throughout the livestock and meat processing industry.

Some producers and processors note that high value international

markets are serviced with customized systems blending the highest quality
genetics, feed formulations, intricate concentrated feed management,
livestock hauling and handling. The resulting meat products are created in
such a way, special to each producer and process, to allow promotion and
marketing which cannot be matched by our competitors.

International meat buyers and importers are now requiring

traceability ofthe livestock in purchase contracts and have limited or strict
tolerances for feed additive and veterinary drug residues. Meeting these
specifications becomes nearly impossible without source information. The
proposed rule will virtually ensure that the specifications cannot consistently
be maintained, will erode the quality of U.S. meat products, lower meat
standards for all domestic and foreign consumers, and eliminate the
competitive advantages the U.S. currently benefits from at home and
overseas in producing the best meat in the world.

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In short, ifthe proposed rule is enacted, the U.S. would lose

international markets because competitive suppliers in other countries will
not face similar restrictions or public disclosure of contracts. The inability to
produce and guarantee the meat characteristics in demand overseas would
turn U.S. beef and pork cuts into commodity cuts with lower values and lower
returns to producers and packers throughout the production and marketing
chain. The proposed rule, thought to create economic activity and jobs, would
do just the opposite when considering international meat demand - the
inability of the U.S. to meet overseas specifications will lower demand for
quality livestock, reduce the quality of meat production, eliminate jobs
throughout the industry, and lead to shifts in productfon to U.S. competitors.

V. THE PROPOSED RULE VIOLATES EXECUTIVE ORDER 12866

AND IS NOT SUPPORTED BY THE NECESSARY, COMPREHENSIVE
ECONOMIC IMPACT ANALYSIS.

Executive Order 12866 Requires a More Comprehensive Assessment

than the Cost-Benefit Analysis Conducted as Part of the proposed
Rule

The 2008 Farm Bill directed GIPSA to promulgate regulations to

address five distinct areas related to livestock and poultry marketing:

• the arbitration process,

• criteria that GIPSA would use to determine what constitutes
undue or unreasonable preference,
• notice regarding suspension of the delivery of birds,
• additional capital investment requirements in growing
contracts, and
• the time producers and growers are given to remedy a breach of
confract.

The proposed rule, however, goes far beyond the scope of this mandate,
proposing additional regulations that would, among other things:

• require packers to maintain records justifying differences in

price and contract terms,
• prohibit specific conduct alleged to be unfair without regard to
its competitive effects,

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November 22, 2010

• prohibit packer to packer sales

• prohibit packer buyers-from purchasing livestock for more than
one packer
• require packers to guarantee that producers recoup capital
investment costs and
• require packers to make available to GIPSA copies of contracts
and agreements that they have with producers.

Against this statutory background GIPSA must satisfy the parameters

of Executive Order 12866 (EO) and the Regulatory Flexibility Act. The EO
requires regulatory agencies to conduct an economic impact analysis of any
"significant" rule, with special consideration given to small entities.
Specifically, agencies are required to demonstrate the need for any proposed
significant regulatory action, assess the costs and benefits of that action, and
make those assessments available for public review and comment. Here, the
agency has failed to properly conduct a thorough economic impact analysis as
required. That failure compels the agency to perform that analysis and then'
propos~ a rule consistent with its analysis.

Specifically, the EO provides, in pertinent part, that

Federal agencies should promulgate only such regulations as are

required by law, are necessary to interpret the law, or are made
necessary by compelling public need, such as material failures of
private markets to protect or improve the health and safety of
the public, the environment, or the well-being of the American
people. In deciding whether and how to regulate, agencies
should assess all costs and benefits of available regulatory
alternatives, including the alternative of not regulating. Costs
and benefits shall be understood to include both quantifiable
measures (to the fullest extent that these can be usefully
estimated) and qualitative measures of costs and benefits that
are difficult to quantify, but nevertheless essential to consider .96

DO Executive Order 12866 Section l(a).

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November 22, 2010

As part of a rulemaking agencies are directed to "ensure that the

agencies' regulatory programs are consistent with the philosophy set forth
above, agencies should adhere to the following principles, to the extent
permitted by law and whcre applicable."97 Specifically, each agency is to

identify in writing the specific market failure (such as

. externalities, market power, lack of information) or other
specific problem that it intends to address (including, where
applicable, the failures of public institutions) that warrant new
agency action, as well as assess the significance ofthat problem,
to enable assessment of whether any new regulation is
warranted; ".

identify and assess available alternatives to direct regulation,

including providing economic incentives to encourage the
desired behavior, such as user fees or marketable permits, or
providing information upon which choices can be made by the
public; ...

assess both the costs and the benefits of the intended regulation
and, recognizing that some costs and benefits are difficult to
quantify, propose or adopt a regulation only upon a reasoned
determination that the benefits ofthe intended regulation
justify its costs; .. ,

base its decisions on the best reasonably obtainable scientific,

technical, economic, and other information concerning the need
for, and consequences of, the intended regulation or guidance
document; ...

tailor its regulations and guidance documents to impose the

least burden on society, including individuals, businesses of
differing sizes, and other entities (including small communities
and governmental entities), consistent with obtaining the
regulatory. objectives, taking into account, among other things,
and to the extent practicable, the costs of cumulative
regulations; and

87 Id. at'section l(b).

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draft its regulations and guidance documents to be simple and

easy to understand, with the goal of minimizing the potential for
uncertainty and litigation arising from such um;ertainty.98

The EO also defines a "significant regulatory action" as any

"regulatory action that is likely to result in a regulation that may: (l)[H]ave
an annual effect on the economy of $100 million or more or adversely affect in
a material way the economy, a sector of the economy, productivity,
competition. jobs, the environment, public health or safety, or State, local, or
tribal governments or communities."99

Furthermore, the EO imposes certain additional responsibilities on

agencies regarding rule making. In that regard, the EO provides that

(B) For each matter identified as, or determined by the

Administrator of OIRA to be, a significant regulatory action, the
issuing agency shall provide to OIRA:
(i) The text of the draft regulatory action, together with a
reasonably detailed description of the need for the regulatory
action and an explanation of how the regulatory action will meet
that need; and
(ii) An assessment of the potential costs and benefits of the
regulatory action, including an explanation of the manner in
which the regulatory action is consistent with a statutory
mandate and, to the extent permitted by law, promotes the
President's priorities and avoids undue interference with State,
local, and tribal governments in the exercise of their
governmental functions.
(C) For those matters identified as, or determined by the
Administrator of OIRA to be, a significant regulatory action
within the scope of section 3(f)(l), the agency shall also provide
to OIRA the following additional information developed as part
ofthe agency's decision-making process (unless prohibited by
law);
(i) An assessment, including the underlying analysis, of benefits
anticipated from the regulatory action (such as, but not limited
to, the promotion of the efficient functioning of the economy and

08Id. at section l(b)(l, 3, 6, 7, 11, 12).

" Id. at section 3(f)(1) (Emphasis added).

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private markets, the enhancement of health and safety, the

protection of the natural environment, and the elimination or
reduction of discrimination or bias) together with, to the extent
feasiblo, a quantification of those benefits;
(ii) An assessment, including the underlying analysis, of oosts
anticipated from the regulatory action (suoh as, but not limited
to, the direct oost both to the government in administering the
regulation and to businesses and others.in complying with the
regulation, and any adverse effects on the effioient functioning of
the eoonomy, private markets (including productivity,
employment, and oompetitiveness), health, safety, and the
natural environment), together with, to the extent feasible, a
quantification of those costs; and
(iii) An assessment, including the underlying analysis, of costs
and benefits of potentially effective and reasonably feasible
alternatives to the planned regulation, identified by the agencies
or the public (including improving the current regulation and
reasonably viable nonregulatory actions), and an explanation
why the planned regulatory action is preferable to the identified
potential alternatives. (Emphasis added)lOO

Although GIPSA identified the proposed rule as a "significant

regulatory action," because the agency did not oonduot the assessments
required in EO section 6(a)(3)(C), it did not make them available as required
by subsection (E). Acoordingly, GIPSA either erroneously concluded that the
proposed rule is not a significant regulatory aotion within the scope of section
3(£)(1) or failed to meet its obligations under the EO. Specifioally, it appears
that GIPSA improperly viewed the proposed rule's eoonomic impact as
narrowly as possible in an effort to avoid having to conduct the above-
referenced assessments.

In several parts of the preamble GIPSA discusses the "adjustment

costs" that packers will incur because of changed packer behavior driven by
the proposed rule. Because ofthe lawsuits that were previously filed against
packers regarding their past use of marketing agreements, about which
GIPSA was fully aware, the agency knew or should have known and therefore
should have considered how the proposed changes regarding proving

100 [d. at section 6 (3)(B),(C), and (E).

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November 22, 2010

competitive injury or the likelihood of competitive injury would increase the

risk oflitigation and affect packers' behavior.

In that regard, any reasonable analysis of the industry and the

proposed rule would have led to the conclusion that the "annual effect on the
economy" would exceed $100 million and just as relevant that the proposed
rule would "adversely affect in a material way the economy. a sector of the
economy, productivity, competition. jobS."101 To that end, an analysis done by
John Dunham and Associates examining the impact of the proposed rule and
the fact that it will significantly alter and lessen the use of marketing
agreements by packers yielded a conclusion that implementation ofthe
proposed rule as written will cause the loss of approximately 104,000 jobs
and adversely affect GDP by $14 billion.l 02 In addition, the Dunham analysis
shows that implementation ofthe proposed rule would cause consumers to
pay 3.3% (approximately $2.7 billion) more for meat and poultry than they do
under the current structure. By several measures included in the EO this
analysis requires GIPSA to conduct the more complicated assessments
mandated in section 6(a)(3)(C).l°3

Similarly, another study conducted by Informa also demonstrates that

the economic impact ofthe proposed will easily exceed the $100 million
threshold, which triggers the requirement that GIPSA conduct the more
comprehensive analysis provided in section 3(£)(1).104 Specifically, the
Informa analysis concluded that the proposed rule would cause the loss of
approximately 22,900 jobs, cause a loss of annual GDP of $1.5 billion, and
result in lost annual tax revenues of $389 million. Informa's analysis also
found that the proposed rule would impose one time direct costs on the meat
and poultry sector totaling $136 million, direct annual ongoing costs to the
beef, pork and poultry industries of $169 million, and annual indirect losses
to the beef, pork, and poultry industries in the amount of $1.341 billion. In
addition, Informa estimated that because of the proposed limitation on
buyer/packer representation at auction barns, approximately 150-200 ofthe

101 Id. at section 3(1)(1).

102 The Amel'ican Meat Institute Meat Demand Study; The Impact of Proposed Grain
Inspection, Pachers and Stochyards Administration Proposed Rule; John Dunham and
Associates, Inc.; August 24,2010; see pages 1-2 (Attachment H).
103 Id.

104 An Estimate of the Economic Impact of GIPSA's Proposed Rules; Informa Economics, Inc.
November 8, 2010 (Attachment I).

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November 22,2010

smallest auction barns will go out ofbusiness,lo5 Similarly, a study

commissioned by the National Chicken Council and conducted by FarmEcon
LLC evidenced a cost the chicken industry of more than $1 Billion over the
first five years,l0G

Whether using the Dunham analysis or the Informa study, in either

event, the impact of the proposed far exceeds the $100 million threshold that
triggers a 3(£)(1) assessment. The agency failed to do so and such an
assessment must be done in order for GIPSA, the affected industries, and the
public to understand the significant and adverse impact this proposed rule
would have;

The Proposed Rule does not Comply with Executive Order 12866
with Respect to Numerous Proposed Provisions.

In addition to failing to conduct the necessary assessments, GIPSA

fails to provide information or evidence to substantiate many assertions in
the proposed rule. In that regard, absent from GIPSA's EO analysis is any
documentation or other empirical evidence that supports the vague
generalizations used to justify many of the proposed sections. GIPSA
provides no evidence that the producer complaints cited as justification for
the rule have been verified or documented nor has the agency taken
enforcement actions against a packer based on those assertions.

Similarly, the agency does not provide any data or empirical evidence
that increased contracting or purported market concentration has adversely
affected the industry or the economy, or that packers have used their alleged
"market power" to harm producers, impair property rights of growers or
producers, or injure consumers. Nor does GIPSA provide any evidence to
support its assertions that transparency, competition, and the financial
integrity of the markets have lessened. The agency's failure to provide any
tangible, documented support beyond unsubstantiated claims from a few
disgruntled producers on any of these issues proves that the proposed rule
does not satisfy the EO. A careful review of whether GIPSA met the EO
requirements unquestionably leads to the conclusion that the agency has

Id.
105
Proposed GIPSA Rules Relating to the Chichen Industry: Economic Impact; FarmEcon
JOG
LLC, November 11, 2010 (See Attachment J).

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American Meat Institute Comments
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failed to comply in numerous respects with the EO. A fuller explanation of

specific failures and why the proposed rule should be withdrawn follows.

GIPSA has failed to comply with EO section 6(a)(3)(E). GIPSA

identified the proposed rule as a significant regulatory action and section
6(a)(3)(E) provides that

(E) After the regulatory action has been published in the Federal
Register or otherwise issued to the public, the agency shall:
(i) Make available to the public the information set forth in
subsections (a)(3)(B) and (C);
(ii) Identify for the public, in a complete, clear, and simple
manner, the substantive changes between the draft submitted to
OIRA for review and the action subsequently announced; and
(iii) Identify for the public those changes in the regulatory action
that were made at the suggestion or recommendation of OIRA.
107

The agency, however, has not identified for the public the "substantive
changes between the draft submitted to OIRA for review and the action
subsequently announced" (ii) nor has the agency "identified for the public
those changes in the regulatory action that were made at the suggestion or
recommendation of orRA" (iii).

In addition, the preamble discussion regarding the EO fails to discuss,

or inaccurately identifies, several significant elements of the proposed rule.
Notable is the preamble discussion pertaining to proposed "Terms Defined."
The EO preamble discussion regarding newly defined terms says

Proposed new section 201.2(1) through (t), "Terms Defined,"

would contain definitions for eight terms used in the proposed
regulations. These definitions are of commonly used terms in
industry and enter into the cost analysis through the proposed
regulations. lOS

107 See 75 Fed. Reg. at 35345.

108 Id.

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The proposed rule, however, contains 10 new definitions. Unclear from

the preamble discussion is whether the agency is attempting to sweep under
the rug any required analysis regarding two very significant newly defined
terms, "competitive injury" 201.2(t) and "likelihood of competitive injury"
201.2 (u), or whether GIPSA has simply failed to recognize and consider the
ramifications of these terms - or both. In that regard, the agency's assertion
that the cost-benefit analysis of "commonly used" but newly defined terms
. such as "production contract" (201.2(s» or forward contract (201.2(q» "enters
into the cost analysis through the proposed regulations" is dubious with
respect to an accurate EO analysis.

More importantly, however, unlike terms such as "forward contract"

and "production contract" the terms "competitive injury" and likelihood of
competitive injury" are not commonly used in the industry and, in light ofthe
their importance to the rule and the potential for significant amounts of
litigation involving those terms, the agency's new minting ofthese terms
warranted a thorough cost-benefit analysis of at least those two terms. For
this reason alone the EO requirements have not been met.

The agency's analysis also fails to satisfY other elements ofthe EO

requirements. In that regard, section 1(b)(12) ofthe EO requires an agency
to "draft its regulations and guidance documents to be simple and easy to
understand, with the goal of minimizing the potential for uncertainty and
litigation arising from such unce.rtainty." As discussed below in Section III of
these comments, many aspects ofthe proposed rule are anything but simple
and easy to understand and are an open invitation to litigation.

For example, the newly defined term "likelihood of injury to

competition" includes several elements that almost defY definition.
Specifically, an element oflikelihood of injury to competition is whether
situations that "impair a producer's or grower's ability to receive the
reasonable expected full economic value from a transaction in the market
channel or marketplace."loD The preamble recites almost verbatim the
language in the proposed rule, providing no explanation or discussion
regarding what the phrase "reasonable expected full economic value" means.
This amorphous phrase is the epitome of creating a "potential for uncertainty
and litigation" and thus at odds with the intent and direction of section
1(b)(12) of the EO.

100 Proposed section 20!.2(u), 75 Fed. Reg. at 35351.

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The agency also has not identified a need for some of the proposed
rules. For example, section 201.212(c) wo'uld impost a ban on packer to
packer livestock sales. In the preamble the agency states that the proposed
section is necessary to "address situations where a packer (or group of
packers) is able to manipulate prices paid for livestock, such as where a
packer-to-packer sale signals the price that packers will pay producers or
whether a packer purchases cattle through exclusive arrangements."110
Missing from the discussion, however, is any evidence or supporting
documentation that the behavior the proposed rule seeks to curb has
occurred. Nor does the agency explain in the EO discussion why an absolute
ban is necessary when the agency is currently empowered to take
enforcement action on a'case-by-case basis,111 To take necessary enforcement
actions on an as-needed basis rather than a blanket ban on packer to packer
livestock sales is far more in keeping with EO sections 1(b)(7) and (11) than
. imposing a ban that will disrupt not only the operation of so many packers
but many producers as well. (See discussion in Section III) This is
particularly true considering all packer to packer transactions are currently
reported to USDA through USDA's mandatory price reporting program and
GIPSA has a program that monitors every transaction.l 12

The EO analysis is replete with vague and unsupported generalities

about the benefits that what will accrue from the proposed rule. In that
regard, GIPSA states that

Potential benefits include gains from having market prices for

commodities or grower services more accurately reflect supply-
demand conditions; from making decisions based on more
accurate price signals and from remedying anticompetitive
conduct and minimizing associated dead weight losses and other
inefficiencies." 113

110 75 Fed. Reg. at 35342.

IIIThe agency fails to cite to a single instance where an enforcement action was brought
against a packer because its transactions with other packers allegedly resulted in price
manipulation.
112 2009 Annual Report, Packers & Stockyards Program, United States Department of
Agriculture Grain Inspection, Packers and Stockyards Administration, p. 13.
113 75 Fed. Reg. at 35345. (Emphasis added).

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American Meat Institute Comments
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November 22,2010

Setting aside the fact that GIPSA characterizes the above as "potential"
benefits, nowhere in the discussion and as required by the EO, however, does
GIPSA provide any evidence that: (1) market prices do not currently reflect
supply-demand conditions, (2) decisions are not based on accurate price
signals, or (3) that there is anticompetitive conduct that needs to be
addressed.

Also lacking is any meaningful, accurate evaluation of the costs

attendant to this proposed rule. GIPSA seems to dismiss with a wave of the
hand the costs attendant to proposed sections 201.210 and 201.211, which
would define "unfair practice" and "undue preference" under subsections
202(a) and (b) ofthe Act. For both proposed sections GIPSA simply asserts
that "because these regulations merely clarify existing requirements, any
such cost must be incurred regardless of whether the regulations are issued
and are therefore not costs associated with the regulations themselves."
From an Executive Order 12866 perspective this assertion is flawed for
several reasons. First, the proposed sections do not merely clarify existing
requirements - in some circumstances, e.g., proposed section 201.210(a)(5),
they impose substantive new obligations on packers and other regulated
entities. Ironically, other elements ofthe proposed sections, e.g.,
201.210(a)(8), violate the EO because they are so vague that the only
certainty associated with the rule is the litigation that will ensue.

Second, not only does the agency provide no support for its cost
assertions, but they conflict with the agency admission in the preamble that
the new regulations would "constitute a material change in circumstances" by
removing the requirement to prove competitive injury or likelihood of injury
for violations of sections 202(a) and (b) of the Act.l 14 Because the conduct set
forth in sections 201.210 and 201.211 would now be in violation of the Act
without a showing of competitive harm, proposed sections 201.210 and
201.111 would impose new requirements, with costs associated thereto.l 15

11475 Fed. Reg. at 35341.

liSAlso noteworthy is GIPSA's reliance on the Interim Report"done by RTI. Nowhere does
GIPSA discuss the GIPSA Livestock and Meat Marketing Study done by RTI. See United
States Dept. of Agriculture. Grain Inspection, Packers and Stockyard Administration. GIPSA
Liuestoch and Meat Mar/wting Stttdy. Vol. 1. Research Triangle Park: RTI International,
2007.

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Because the EO analysis conducted by GIPSA fails to meet the criteria

established by Executive Order 12866, the proposed rule should be
withdrawn.

VI. THE PROPOSED RULE FAILS TO SATISFY THE

REQUIREMENTS OF THE DATA QULAITY ACT

The Proposed rule also fails to comply with the restrictions and
guidelines imposed by the Data Quality Act (DQA),11G Pursuant to the DQA
and USDA's Information Quality Guidelines (Guidelines), in addition to the
comments filed herein, AMI submits a request for correction of information
contained in the Notice of Proposed Rulemaking, published in the Federal
Register. The DQA and the Guidelines are intended to ensure the quality of
the information used by GIPSA, including the information's utility,
objectivity and integrity.

Specifically, this request pertains to certain information used in

support of and in partial justification for the proposed rule. In the preamble
the agency refers to public meetings held in October 2008, in Arkansas, Iowa,
and Georgia. These meetings purportedly were used to gather comments,
information, and recommendations from interested parties. In addition to
the meetings, GIPSA contends that it gathered data concerning market
participants. According to GIPSA, the proposed rule is "based on comments,
information, and recommendations received in the previously mentioned
meetings, along with GIPSA's expertise, experience, and interactions in the
livestock and poultry industries."117

GIPSA purports to rely on the information described above, but to the

best of AMI's knowledge, that information has not been made available to the
public nor is it included in the proposed rule. There is no specific information
that would allow AMI or the public to determine whether the drastic changes
in the implementation of the PSA that would occur if the proposal is
implemented are warranted. Until GIPSA can justifY these changes, the
proposed rules is arbitrary, capricious, and not in accordance with law.

11& 44 U.S.C. § 3516.

lJ7 74 Fed. Reg. at 35339.

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American Meat Institute Comments
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November 22, 2010

GIPSA, through the preamble or the record, 'has failed to provide any
evidence to support this sweeping overhaul of the PSA. The federal
government should not, indeed cannot, change a 90-year old statute to suit a
perceived need without support. Thc DQA and the Guidelines were
implemented to prevent just this type of misuse of administrative authority.

Significantly, the information used by GIPSA to justify the proposed

rule violates many of the "Regulatory" or "Influential Regulatory" standards
provided under the Guidelines. For example, the Guidelines require the
agency to use "reasonably reliable data and information," which includes data
from surveys, complied information, and/or expert opinion. In the proposed
rule, however, GIPSA relies on data and information provided at what are, in
effect, "town hall meetings." Information gathered at such meetings can only
be described as inherently unreliable. More'over, utilizing the
aforementioned meetings as well as the general "expertise" of the agency
provides no transparency into any analysis conducted by GIPSA, nor does it
clearly identify sources of uncertainly affecting data quality.

Because this rulemaking is significant pursuant to EO 12866, the

information used to justify the proposed rule is considered influential.
Influential information should, in pertinent part, "(i) use the best science and
supporting studies conducted in accordance with sound and objective
scientific practices, including peer-reviewed science and studies where
available; and use data collected by accepted methods or best available
methods."118 The information gathered meetings and the "general expertise"
ofthe GIPSA simply does not conform to these standards.

Because the agency has failed to comply the DQA and EO 12866, AMI
cannot know or understand GIPSA's justification or rationale for the
proposed rule. More importantly, AMI and its members will be harmed by
the proposed rule, particularly if the rule is promulgated using biased or
faulty information.

118USDA Information Quality Activities, Regulatory Guidelines,

http://www.ocio.usda.gov/qi_guide/regulatory.html

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November 22,2010

* * * * *
For the foregoing reasons, AMI respectfully requests that the proposed
rule be withdrawn and that the agency repropose a rule consistent with
Congressional direction in the Farm Bill and consistent with longstanding
judicial precedent.

Sincerely,

~~~,,?------_.._-- -
Mark D. Dopp
Senior Vice President, Regulatory
Affairs and General Counsel

Enclosures

62
ATTACHMENT A
Review of Western Organization of Resource Councils

(WORC) Petition for Rulemaking

Grain Inspection and Packers and Stockyards Administration

Packers and Stockyards Programs

August 29, 1997

 Table of Contents

Executive Summary . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. iii

Background I

The Petition I

The Petitioner 2

Need For The Suggested Rules 2

Request For Comments 2

Summary of Comments 4

Assessment 14
Problem Statement 14
Legal Assessment 14
Economic Evidence Regarding the Proposed Rule 16
Impact of Concentration 17
Impact of Packer Feeding on Prices 20
Forward Contract Impact on Price 20
Use of Formula-Priced Forward Contracts 21
Captive Supply Decisions and Impact on Price 24
Impact of Number of Buyers on Price 25
Conclusion from Economic Studies 25

General Economic Conditions 27

Supply and Demand 27
Reasons Packers and Feedlots Use Captive Supplies 28

Effect On Current Procurement and Pricing Methods 29

Fed Cattle Industry Procurement Methods 29
Spot Market 29
Marketing Agreements 30
Packer Feeding 30
Forward Contracts 30
Fed Cattle Industry Pricing Methods 31
Formula Price and Basis Contracts 31
Formula Priced Cattle 31
Conclusions 31

Attachment I 33

Attachment 2 : 34

ii
 Executive Summary

The Secretaty of Agriculture received a petition for rulemaking submitted by the Western
Organization of Resource Councils (WORC) on October 12, 1996. WORC requested that the
United States Department of Agriculture (USDA) issue rules under the authority of the Packers
and Stockyards Act (the Act) that would: (1) prohibit packers from procuring cattle for slaughter
through the use of a forward contract, unless the contract contains a firm base price that can be
equated to a fixed dollar amount on the day the contract is signed and the fOlward contract is
offered or bid in an open, public manner and (2) prohibit packers from owning and feeding cattle,
unless the cattle are sold for slaughter in an open, public manner.

On January 14, 1997, the WORC petition was published in the Federal Register. USDA
solicited public comments on the petition. In early April 1997, a team from USDA was assembled
to review the WORC petition and assess the comments received. The comment period closed on
April 14, 1997.

There were 1,757 comments received regarding the WORC petition of which 1,651 of the
comments totally supported the petition. There were an additional 13 comments received that
supported only a portion of the WORC petition. Forty-six comments were received that did not
clearly state a position either supporting or opposing the proposed rulemaking. There were 45
comments received that opposed the WORC petition in its entirety and two comments that
opposed a portion of the WORC petition.

There were 1,706 comments received from 40 states and the District of Columbia. One
comment was submitted from Canada and 50 comments could not be identified to a geographic
location. Of the comments received, 80 percent came from four states, Montana (31 percent),
Wyoming (24 percent), South Dakota (17 percent) and North Dakota (8 percent).

Of the total number of comments received, 73 percent were in the format of a "form
letter" supporting WORC's petition. Of the total comments received, 59 percent were form
letters from the following states: Montana (24 percent), Wyoming (22 percent) and South Dakota
(13 percent).

Information provided in the comments was used to categorize each commentor by

occupation/affiliation. There were 511 comments received from persons or firms related to the
raising or feeding of cattle. There were 73 comments received from various associations. Elected
officials submitted 32 comments and agricultural economists submitted four comments. There
were 18 comments received froin other agrieulture,related businesses and 163 comments that
were categorized as other occupations. The balance of the comments did not state an
occupation/affiliation.

iii
 A majority of the comments received suppOiting WORC's petition also had numerous
alternative comments that offered reasons for or solutions to industry problems. The five most
frequently submitted alternative comments were: (1) manipulation of market price, (2) enforce
P&S Act, (3) oppose packer concentration, (4) restore competition and (5) retail beef price does.
not reflect lower cattle prices.

The majority ofthe comments that supported the petition did not provide any economic
data or analysis, but referred to the petition's economic arguments or to an economic study
referenced in the petition. There were 25 comments (mostly opposed) that provided economic
data, analysis, or an assessment.

WORe wants the Grain Inspection, Packers and Stockyards Administration (GIPSA) to
selectively regulate the fed cattle segment of the beef industry to comply with their petition. This
would affect the sellers of fed cattle and their lenders by limiting the ways in which they can
market their product.

The difference between the legal opinion expressed by WORC and that of the Office of the
General Counsel (OGC) regarding the Secretary's authority to issue regulations \lnder the Act is
primarily the level of association required to prove a likelihood of injury or harm. OGC and
GIPSA believe that a causal relationship between the complained of activity and the injury must
be shown in order to regulate the activity. WORC, on the contrary, believes that the Secretary is
authorized to regulate an activity based only upon any degree of association between the
complained of activity and the injury.

The power of the economic, logical, and empirical arguments was the primary basis for
developing our conclusions, rather than the number of comments suppOiting or opposing the
petition. The team finds no compelling evidence to suggest that anything other than basic
economic conditions determined the general price level of the fed cattle market. After weighing
the economic arguments supplied by WORC, commentors (suppoiting and opposing), and other
information assembled by the team, we could not definitively conclude that spot prices were
affected or manipulated by captive supplies. The economic evidence does not indicate the use of
captive supplies is a violation of the Act. Therefore, we conclude that promulgating the rules
suggested by the petition is unwarranted.

iv
 Background

In early 1995, there was a sharp decline in cattle prices. This caused various groups in the
industry, mainly cattle producers, to urge Congress and USDA to take action to improve
conditions. During that same period of time, USDA was conducting a congressionally-mandated
study on concentration in the red meat industry.l The study, released on February 14, 1996,
confirmed the existence of concentration but provided no definitive evidence that it had an
. appreciable effect on cattle prices. Following release of the study, USDA has undertaken several
initiatives in response to the concerns of the industry.

The Advisory Committee on Agricultural Concentration was appointed by the Secretary

to review the study and a number of other issues involving concentration in agriculture. The
Advisory Committee submitted its recommendations and findings on June 6, 1996.' The
recommendations of the majority report included increased monitoring and enforcement of
antitrust and regulatory policy, limiting packer activities regarding price differentiation, improving
collectiori and reporting of market data, and value-based pricing. The Advisory Committee also
submitted three minority reports. The recorrimendations of the minority reports included taking
additional action to address the concerns of producers relating to the effects of concentration on
the cattle industry, increased reporting of export data, and educating producers about the current
market environment.

On July 31, 1996, the Secretary announced the first in a series of actions by USDA to
improve competition in the livestock industry. These actions address two of the major areas of
recommendations made by the Advisory Committee. These first actions, taken to immediately
address the concerns of many livestock producers, included price reporting initiatives that
broadened the coverage of market transactions reported and improved the timeliness and
availability of information on the growing international trade in livestock and meat products.

On June 4, 1997, the Secretary announced new 'actions to address concentration and
promote competition in agriculture. These actions include restructuring GIPSA in response to an
independent review of its enforcement of anticompetitive practices.

The Petition

Independent of USDA's activities, the Secretary received a petition for rulemaking

submitted by WORC on October 12, 1996. WORC requests that USDA issue rules under the

I Concentration in the Red Meat Packing Industry, Packers and Stockyards Programs, Grain

Inspection, Packers and Stockyards Administration, USDA, February 1996.

2 Concentration in Agriculture: A Report o/the USDA Advisory Committee on Agricuitural'

Concentration, Agricultural Marketing Service, USDA, June 1996.

 authority of the Act that: (I) prohibit packers from procuring cattle for slaughter through the use
of a forward contract, unless the contract contains a firm base price that can be equated to a fixed
dollar amount on the day the contract is signed and the forward contract is offered or bid in an
open, public manner and (2) prohibit packers from owning and feeding cattle, unless the cattle are
sold for slaughter in an open, public market.

The Petitioner

WORC is a federation of grassroots organizations located in Colorado, Idaho, Montana,

North Dakota, South Dakota, and Wyoming that was formed in 1979. The various organizations
. are composed of affiliated citizen groups in 42 communities across the region. The 6,000
members of these groups are farmers, ranchers, small business owners, and working people who
seek to protect natural resources, family farms, and rural communities. They include both cattle
ranchers and beef consumers.

Need For The Snggested Rules

WORC has submitted this petition for rulemaking because it believes that packers' direct
ownership and feeding of cattle for slaughter and their procurement of slaughter supplies through
formula or basis-priced forward contracts have decreased prices paid to cattle producers. WORC
also believes that because cattle sold through forml1la or basis-priced forward contracts are not
traded publicly and packer-fed cattle are not sold publicly, these practices unjustly discriminate
against some producers and provide unreasonable preferences to others. According to WORC,
these practices are in violation of Section 202 of the Act and should be restricted through rules.

Request For Comments

On January 14, 1997, the entire petition was published in the Federal Register.' USDA
solicited public comment on the petition and utilized the comments in assessing the need for the
requested rulemaking.

USDA sought public comment on the petition from all segments of the industry
(producers, marketing firms, meat packing firms, etc.), academia and other interested parties,
including small entities that may be affected by implementation of WORC's proposal. Small.
entities were defmed as firms that meet the following standards: (I) beef cattle producers, except
feedlots, with annual receipts of $500,000 or less for beef cattle sales; (2) beef cattle feedlots with
annual receipts of $1.5 million or less for beef cattle sales; and (3) meat packing plants with 500
employees or less.

3 Federal Register, Vol. 62, No.9. Tuesday, January 14, 1997, pp. 1845-59.

2
 USDA requested comments on the petition that would provide the Secretary with
additional information to consider in determining whether or not the rulemaldng requested by
WORe should be undertaken. USDA also requested comments that addressed the following
questions to be used as a framework for comments submitted:

I. What competitive or other economic effects would implementing the rules that WORe
is asking USDA to propose (hereinafter "proposed rules") have on individual businesses
and the cattle and beef industry as a whole?

2. What are.the competitive effects of formula or basis-priced forward contracting and

packer feeding on cattle producers, feedlots, meat packers, meat wholesalers and
retailers, and consumers?

3. What would be the effects of implementing the proposed rules on the structure, conduct,
and competitive performance of the cattle producing, cattle feeding, meat packing,
wholesaling and retailing industries? What would be the effect on the structtire, conduct
and competitive performance of livestock and meat markets? In answering tllese
questions, what do you consider to be the relevant markets and how do you define
them?

4. How do formula or basis-priced forward contracting and packer feeding affect cattle
prices? Do formula or basis-priced forward contracting and packer feeding have
adverse competitive effects or other adverse economic effects? Are there competitive
benefits or other economic benefits associated with use of formula or basis-priced
forward contracting and packer feeding that would not support implementing the
proposed rules?

5. Do the research studies cited by the Petitioner support its position that the formula or
basis-priced forward contracting and packer feeding practices outlined in the petition
. result in competitive harm or otller economic harm to cattle producers and that the
practices harm competition in beef packing? Are there other studies that USDA should
consider?

6. Does sufficient evidence exist to find that the formula or basis-priced forward
contracting and packer feeding practices outlined in the petition violate Section 202
ofthe Packers and Stockyards Act? If so, what is that evidence?

7. Is regulatory action needed?

8. Are the proposed rules too broad or too restrictive?

9. Do the proposed rules adequately address the concerns raised by the Petitioner?

3
 10. Are there alternatives to rulemaking that would address the concerns raised by the
Petitioner?

Summary of Commen ts

GIPSA logged, as received, a total of 1,772 comments. Fifteen of the comments logged,
as received, were inadvertently logged twice and were excluded from the final tally of 1,757
comments. The comment review revealed that 19 individuals submitted two comments each.
Although the comments were not exact duplicates of each other, they were very similar. These
multiple comments were left in the final tally.

Forty-six of the comments received did not clearly state a position either supporting or
opposing the proposed rulemaking (Table 1). These comments were categorized as "no
position." Many of these comments offered alternatives to the proposed rulemaking or stated that
available information on the issues was inadequate or inconclusive to enter a position. One
thousand six-hundred fifty-one (1,651) of the comments supported the proposed rulemaking in its
entirety. Most of these comments expressed deep concern about the decline in prices paid
producers, the level of concentration in the meat packing industry, the dominance of the "big
three packers" and the failure of GIPSA to enforce section 202 of the Act. Thhieen of the
comments voiced support for only parts of the proposed rulemaking. These comments were
categorized as "support portions." Forty-five comments opposed the proposed rulemaking in its
entirety. Most of these comments expressed the view that the proposed rulemaking was based on
incorrect assumptions regarding how prices paid producers are impacted by a packer's direct
ownership and feeding of cattle, a packers use of formula or basis-priced forward contracts, and
concentration in the red meat industry. Many of the comments in opposition also stated that the
proposed rulemaking was intrusive government regulation and would be counter-productive to
innovations in the meat industry. Two of the comments voiced opposition for only palis of the
proposed rulemaking. These comments were categorized as "oppose portions."

4
Table 1
Number of Comments bv State and Position
State Sunnort Petition Support Portions Oopose Petition Oonose Portions No Position Total
MT 530 5 3 1 10 549
WY 414 2 2 5 423
SD 281 2 I 10 294
ND 137 1 4 142
lD 35 1 36
NE 24 I 2 1 28
..
NY 23 23
TX 13 5 4 22
OR 15 I 16
CO 6 8 I 15
KS 10 5 15
CA 10 2 2 14
DC 7 I 5 13
NV 13 13
MO 10 1 11
GA 8 8
OK 6 1 7
WA 6 1 7 .
MI 3 2 I 6
IL 2 3 I 6
AL 5 5
MA 5 5
MN 5 5
]A 4 1 5
WI 4 4
OH 1 2 3
CT 3 3
PA 2 1 3
VT 2 I 3
NC 3 3
TN 2 2
VT 2 2
AR 2 2
FL 1 1 2
IN 1 1 2
KY 2 2
NM 2 2
MD 2 2
VA 1 1
AZ 1 I
MS 1 I
Canada 1 1
Unknown 48 I 1 50
Total 1651 13 45 2 46 1757

5
 Those wanting to comment were asked to provide the Secretary of Agriculture with
additional information for consideration in determining whether or not the rulemaking should be
undertaken. The USDA posed 10 questions as a framework to help commentors address their
responses to the petition. Those submitting comments were also asked to include any data,
analysis, or other empirical evidence that supports their position. Only 25 of the 1,757 comments
submitted included some fonn of data, analysis, or other empirical evidence in SUppOlt of their
position. Instead, most of the comments expressed emotional concerns and anecdotal evidence.

One thousand seven hundred and six comments were submitted from 40 states and the
District of Columbia (Table 2). One comment was submitted fi'om Canada and 50 comments
could not be identified to a geographic location. Eighty percent of the comments received came
from four states; Montana (31 percent), Wyoming (24 percent), South Dakota (17 percent ), and
NOlth Dakota (8 percent). The balance of the comments originated in equal propOltions from the
remaining states. No other state accounted for more than 2 percent of the total number received.

Seventy-three percent of the comments received were in the format of a "form letter"
supporting WORC's position. Fifty-nine percent of the total number of comments received were
."form letters" from Montana (24 percent), Wyoming (22 percent), and South Dakota (13
percent). Attachment I illustrates the locations ofWORC's affiliated associations.

FOlty of the comments received contained multiple signatures totaling 273 signatures.
However, each comment was only counted once in the final tally of comments. These multiple
signature comments were submitted on behalf of individuals, county commissioners, associations,
and various state, county or local depattments of government or elected officials.

Using infonnation provided in the comments, each was categorized by the commentor's
stated occupation or affiliation with a trade, association, or business entity. Table 3 provides a
tabulation showing each commentor's position on the proposed rulemaking categorized by
occupation or affiliation.

6
 Table 2
Number of Comments and Form Letters By State

State Number of Comments Percent of Total Number ofFonn Letters Percent of State's Total
Comments as Farm Letters
MT 549 31.2 421 76.7
WY 423 24.1 389 92.0

SD 294 16.7 220 74.8

ND 142 8.1 95 66.9
ID 36 2.0 17 47.2
NE 28 1.6 20 71.4
NY 23 1.3 20 87.0
TX 22 1.3 9 40.9
OR 16 0.9 II 68,8
CO 15 0.9 1 6.7
KS 15 0.9 1 6.7
CA 14 0.8 5 35,7
DC 13 0.7
NV 13 0.7 12 92.3
MO 11 0.6
GA 8 0.5
OK 7 0.4 3 42.9
WA 7 0.4 1 14.3
IL 6 0.4
MI 6 0,3
AL 5 0,3 5 \'00,0
IA 5 0,3 1 20.0
MA 5 0,3 2 40.0
MN 5 0,3 2 40.0
WI 4 0.2
CT 3 0.2
NC 3 0.2 1 33.3
OR 3 0.2
PA 3 0,2
UT 3 0.2
AR 2 0.1 I 50.0
FL .
2 0.1 I 50.0
IN 2 0.1
ICY 2 0.1 I 50.0
MD 2 0.1 I 50.0
NM 2 0.1 1 50.0
TN 2 0.1
VT 2 0.1
AZ I 0.06
MS I 0.06
VA 1 0.06
Canada I 0.06
Unknown 50 2,8 36 72.0
" Total 1757 100 1277

7
Table 3
Position on Petition By Occupation or Affiliation
Occupation No Support Support Oppose Oppose Total
Position Petition Portions Petition Portions
Agricultural Economist 1 3 4
Association (farm) 7 1 2 10
Association (cattle) 1 1 1 11 14
Association (other) 2 41 2 4 49
Business 18 18
Cow/Calf Producer 4 256 3 I 264

Cattle Feeder 5 59 15 79

Elected Official 2 28 1 1 32

Livestock Producer 166 2 168

Rancher /Farmer 8 49 2 59
.

Other 5 150 1 7 163 .

Unknown 18 876 3 897
Total 46 1651 13 45 2 1757

Seventy-three comments were received from various associations, national, state and
local. The association comments were placed into three categories; "fann associations," "cattle
associations," and "other associations." "Farm associations" and "other associations" clearly
supported the proposed rule making with 81 percent of their comments voicing support. In
contrast, the comments received from "cattle associations" clearly opposed the proposed
rulemaking with 79 percent voicing opposition. Table 4 is a tabulation providing a brief
description of the membership of each national association submitting a comment and the
association's stated position on the proposed rulemaking.

8
Table 4
Association
American Farm Bureau
Federation
American Meat Institute
(AMI)
American Veal Association
Food Marketing Institute
(FMI)
Fal111 Aid
Livestock Marketing
Association (LMA)
National Meat Association
(NMA)
National Association ofState
Departments of Agriculture
National Cattlemen's Beef
Association (NCBA)
National Fanners Union
National Fanners
Organization (NFO)
National Catholic Rural Life
Conference
National Family Fann
Coalition
Rural' Advancement
Foundation Intel11ational.
USA
Women Involved in Fann
Economics (WIFE)
Nationl1l Associations
Membership Position
Fann organization representing 4.7 million member families in Opposes Petition
the U,S. and Puerto Rico.
Represents packers and processors ofbeet~ pork, lamb, veal and Opposes petition
turkey products Hod their suppliers throughout NOith America.
Approximately 1103 members.
Represents over 1,300 U,S. veal growers supplying product to Opposes Petition
meat packers, feed cOl1'ipanies, and animal health companies
1500 members include food retailers, wholesalers and their Opposes Petition
customers in the U,S. [lnd 200 intemational members from 60
countries.
Public organization to raise awareness about the plight of the Supp011s Petition
American family fonn and provide assistance to farm families
Represents livestock mal'keting businesses, including auction Opposes Petition
markets, dealers and livestock commission finns throughout
the U.S. Approximately 1)00 members
Represents interests of meat packers, processors, and Opposes Petition
equipment manufacturers and suppliers who provide services
to the meat industry. Over 600 members throughout U.S.,
Canada, Australia. and Mexico
Represents Commissioners, Secretaries. and Directors of No Stated Position
Agriculture form 50 states and 4 territories.
Represents 40,000 individual members, 46 state cattle Opposes Petition
associations and 27 breed organizations
Represents 300,000 family farmers and ranchers Supports Petition
Represents independent livestock producers nation wide. Opposes prohibitions on
forward contracts
Supports prohibitions on
packer feeding ilnd ownership
Infonnation unavailable Supports Petition
Information unavailable Supports Petition
Organization dedicated to the conservation of agriculture Supports Petition
biodiversity and socially responsible development of
technologies useful to nJral societies.
Organization of Women throughout the U,S. with interests in Supports Petition
all Agl'iculturc commodities.
9
 There were 1,757 comments received regarding the WORC petition, of which 990 letters
had additional or alternative substantive comments. There were other altemative comments such
as ranching is not lucrative and ranchers should be able to make a decent living without working
in town. Although these types of alternative comments may be true, they offer nothing of
substance regarding solutions to industry problems. Of the 990 altemative comments that were
classified as substantive, 297 letters had multiple alternative comments. These alternative
comments ranged from comments stating that manipulation of market prices is the main reason
for low cattle prices to concerns about the affect on producer packing cooperatives to a comment
that the definition of captive supply should be redefined. Tahle 5 lists alternative comments
received that either support WORC's petition totally, support a: portion of the petition, or
commented without taking any position on the WORC petition. Also included is the number of
letters received for each comment and the number of comments that were "form letters."

Table 5
Alternative Comments Number of N nm ber of Form
COmments Letters
Manipulation of market price 495 422

Enforce P&S Act 465 380

Oppose packer concentration 92 41

Restore competition 85 65
Retail beef price does not reflect lower cattle 37 37
prices

The following comments are a sample of other alternative comments received. Some of
these comments were received from more than one commentor:

• More and/or better market price information

• Mandatory market price reporting
• Report fixed price contracts
• Oppose beef imports
• Label imported meats
• Regulate imports
• Imported meat should show country of origin
• Report import prices
• Report captive supply
• Prohibit captive supply

10
• Change definition of captive supply
• Opposes non-competitive' captive supply
• Prohibit packers from controlling captive supply beyond 7 days
• Oppose vertical integration
• Future packer mergers should be prohibited
• Repeal ban on interstate shipment of state-inspected meat
• Prohibit packers from buying feedlot cattle using an average price for all cattle
• Oppose 30 minute window for feedlots to market their show list
• Government should force packers to divest all ownership in livestock
• Stop packer ownership of feedlots and ranches
• Packers should not be allowed to feed their own cattle
• Concerned that beef industry is headed toward vertical integration like the poultry industry
• Totally eliminate all forward contracting
• Disputes the theory that there is an over supply of cattle
• Limit the packers market share to 7 percent
• Limit packers board of trade buying and selling
• Packers should report purchase and delivery dates
• Packers should report fixed contract prices
• Public bidding is the best marketing method
• The P&S Act needs to be amended in order to keep up with today's changes in marketing
• Wants level playing field with poultry
• Reverse decision regarding yogurt as a meat substitute
• Require packers to report prices paid, the number of head purchased, the kind and the
quality of their purchases

• Require packers, processors, wholesalers and distributors to repOlt the types of product
sold, the price and to whom

• Prohibit packers and processors from speculative "short" selling of commodity futures
contracts

• Require packers and processors to divest themselves when production capacity exceeds 20
percent of total production share
• Require USDA to report the retail value of all meat and meat products

II
• Require .country of origin identification for all livestock, meat and meat products
• Require all imported or domestic meat, poultry and seafood products to be subject to the
same inspection, testing, labeling and standards

• . Implementation of a value-based pricing structure for live purchases that reflects potential
premiums received by the packer when the meat is sold

There were 45 comments opposed to the WORC petition of which 28 had alternative
comments. Of the 28 alternative comments, a majodty had multiple alternative comments. None
of the comments received opposing the WORC petition were form letters. Some of the
comments gave reasons why cattle prices are low and offered ways to improve cattle prices in
addition to other statements regarding the industry. Some of these comments were received from
more than one person. The following is a majority of the substantive altel11ative comments:

• Continue to enforce the P&S Act

• Market price reporting should be mandatory
• USDA should do more/better market price repOiting
• Imported meat should be labeled
• Industry must work to make beef a more 60nsistent product and a more competitive
animal protein

• Elimination of captive supply will work to the detriment of the beef industry
• Cattle prices move inverse to the trend in beef production
• Average price selling encourages the surplus production of below average cattle
• It's the consumers who determine the real value of beef
• Per-capita beef consumption has declined 14 percent in the past 10 years
• Quality of beef has deteriorated during the past several decades
• Change definition of captive supply
• Opposes any limitation of any method of marketing fed cattle
• Supports free market system
• Opposes any type of action that alters current trends toward private business alTangements
in the beef industry

• Captive supplies have had a small negative effect on fcd cattle prices
• Develop value-based marketing system
• Checkoff monies should be used more for new product development and product quality
enhancement'
• Value-adding marketing cooperatives should be developed

12
• Better price discovery
• Concerned about the effect the WORC petition would have on small packers
• Captive supply helps packers control costs, run at near capacity and avoids large price
peaks and valleys thus allowing more stable prices

• Large packers pay higher prices for cattle

• Beef is not a consistent product, not convenient to prepare and is high in cholesterol
• More buyers donot necessarily equal higher prices
• The law of supply and demand is working
• Cattle prices have always been cyclical
• Cattle should be sold on a carcass merit basis in order to improve quality
• Implementation of the WORC petition would cause lower cattle prices
• Packer concentration is caused by a combination of declining demand for beef and the
need to increase efficiency
Table 6 shows the number of comments that addressed the ten questions posed by USDA
in the Federal Register. The table also shows the number of comments that provided information
for each question with their.comments.

Table 6
Nurn ber of Comments That Addressed Questions Posed by USDA in the Petition
Question Number Addressed Question Provided Information
I 439
2 361
3 28
4 346 2
5 13 4
6 24 2
7 1692 1

8 47
9 26
10 32 I

13
 Assessment

Problem Statement

In preparing their rulemaking petition, WORC believes that less than competitive prices
are being paid to fed cattle producers because of increased packer concentration and packers' use
of procurement practices commonly referred to as "captive supplies." Concentration (size
distribution of firms) is one of several attributes describing industry structure that influence the
nature of the competitive process. Captive supply is but onc of many industry practices or
attributes (conduct) describing firms' behavior. In WORC's petition, their problem statement (pg.
1846) is H[p]ackers' direct ownership and feeding of cattle for slaughter and their procurement of
slaughter supplies through forward contracts have decreased prices paid to cattle producers ...
[and] unjustly discriminate against some producers and provide unreasonable preferences to
others."

The problem that WORC wishes to address refers to the use of captive supplies, which is
an industry practice or behavior issue, rather than a market structure problem. Coordination
activities, such as captive supply, are utilized to transfer information, specify quality, transfer risk,
and enhance scheduling and timing of production. Furthermore, WORC's proposed regulations
only address coordination activities that are part of the actual operation and conduct of individual
firms. .

WORC's written comment submitted April II, 1997, on behalf of their own petition,
identifies meat packer concentration as the root of the problem. WORC H... contends that the
current methods of using captive supplies to procure cattle for slaughter are the mechanisms by
which the major packers exercise the market power created by the rapid increase in market
concentration."

WORC also"... seeks to reduce the disadvantages of a concentrated market by

instituting rules which will move the market closer to the outcome observed in competitive
markets, without going to the extreme of plant divestiture and losing either the advantages of
reduced processing costs or the risk reduction packers get when they can ensure the supply of
cattle to the plant."

Legal Assessment

The Review Team asked the Office of the General Counsel (OGC) to explain the
difference between the position expressed by WORC and that ofOGC regarding the Secretary's
authority to issue regulations under the Packers and Stockyards Act (the Act). The difference is
primarily that OGC and P&S believe that a causal relationship between the complained of activity
and the injury must be shown in order to regulate the activity. Such a relationship would support
a finding that the complained of activity is likely to result in a haon or injury that the Act was
intended to prevent. WORC, on the contrary, believes that the Secretary is authorized to regulate

14
an activity based only upon a showing of some lesser degree of association between the
complained of activity and the injury.

WORC asserts that the Secretary's rulemaking authority is broad and limited only in that
the activity or practice must in fact violate the Act, citing Swift & Co. V. Wallace, 105 F.2d 848
(7tl> Cir. 1939). OGC agrees with WORC's assertion.

In its petition, WORC cites Armour & Company v. United States, 402 F.2d 712, 717 (7tl>
Cir. 1968) and cases cited therein for the proposition that to find a violation of Section 202(a) and
(b) of the Act, the Secretary need only find either some non-competitive intent or some likelihood
of competitive injury; there is no requirement to find actual injury. 62 Fed.Reg.18S7. WORe
offers its legal opinion that the Secretary has the authority to issue the proposed regulations if the
Secretary concludes that the practice violates the Act, and to establish that it does, the Secretary
need only find either some non-competitive intent or some likelihood of competitive injury; there
is no requirement to find actual injury. OGC agrees with WORC's opinion on this point.

WORC goes further, however, to state that any association between captive supplies and
declines in prices paid to producers is sufficient to support a finding of the reasonable likelihood
of injury:

[I]t is not necessary to show any certain degree or level of

association between the use of captive supplies and declines in
price. To show that there is some adverse impact on producer
prices is all that is necessary to provide sufficient basis for the
proposed rules. WORC Comment, p.11.

If there is a reasonable likelihood that a harm the statute was designed to prevent will
occur, the Secretary can regulate that activity even before any harm results. In the opinion of
WORC, the likelihood of competitive injury would be shown by any degree of association
between captive supplies and decline in prices paid to producers. According to WORC, only a
minimal showing of relationship between the allegedly violative practice and the harm likely to
result therefrom is necessary to supp0l1 l'egulation of that practice by the Secretary.

Practices of packers must violate the Act in order for the Secretary to take enforcement
action to prohibit those practices, and as the Armour court states, evidence of the likelihood. of
injury, or predatory intent must be shown to support a finding that such practices violate the Act.
The level of association' required to prove a likelihood of injury or harm is the critical point of
divergence between the opinions of WORC and OGC. OGC has opined:

In order to prohibit activities of the packers through regulation or

to file a complaint citing a violation of section 202, the Department
must develop evidence that the packers have either predatory intent
or that there is the likelihood that the complained of activity will

15
 result in injury. (OGC Memorandum to the Chief Economist, June
20, 1996, p.5 (Attachment 2)).

Case precedent supports this statement of the Secretary's authority to regulate packer
activities. As the Armour court states:

The clearer the danger of the [likelihood of competitive injury], as

when competitors conspire to eliminate the uncertainties of price
competition, the' less important is proof of [predatory intent].
Conversely, the likelihood of injury arising from conduct adopted
with predatory purpose is so great as to require little or no showing
that such injury has already taken place.

Armour, 402 F.2d 717. WORC has not asserted that the packers have or are conspiring to reduce
prices paid to producers through the use of captive supplies (predatory intent). Therefore, to
satisfY the Armour test, WORC would have to establish a violation of the Act based on evidence
of the likelihood of injury. The likelihood of injury must be more than "the mere specter"
(Central Coast Meats v. USDA, 541 F.2d 1325, 1328, n.2 (9 th Cir. 1976)) that WORC avers is
sufficient. In order to prohibit captive supply, there must be a likelil~ood that the complained of
activity will result in the kind of injury the Act was designed to prevent. Whether or not that
likelihood is present is made under a "reasonable person" standard. If a reasonable person who
reviewed the evidence would find that the Act was likely to be violated if the complained of
activity continued, then the Secretary could prohibit that activity through the regulatory process.

WORC's position that only a minimal showing of injury or the likelihood of injury is
sufficient to authorize rulemaking has not been adopted by the courts. Conversely, the OGC
opinion of the Secretary's legal authority under the Act to promulgate regulations is based on
case precedent, statutory interpretation and analysis of the legislative history of the Act.

Economic Evidence Regarding the Proposed Rule

The vast majority of the comments that support the petition, did not provide any economic
data or analysis, but either referred to the petition's economic arguments or to the san1e economic
studies referenced in the petition. Only 25 comments provided economic data, analysis, or
assessment. Most of these were comments that opposed the petition's rulemaking. This section
presents the economic arguments from the petition, supporting comments (primarily WORC's
comment), opposing comments, and other publicly available economic studies. The discussion
follows the order ofthe principal (and related) economic arguments presented in the section
"Economic Evidence Supporting the Proposed Rule" statting on page 1848 of the petition.

16
Impact of Concentration

Quoting the Center for Rural Affairs' report on livestock competition, the petition states
(p. 1849) "[t]here is a large body of economic research establishing a high positive reiationship
between the level of concentration among sellers and prices buyers must pay. Aboutthree-fourths
of the more than 70 studies undertaken in this field in general conclude that concentration is
related to prices (Weiss 1988). Although this research relates to situations in which the
concentration level is high among sellers (called oligopoly) rather than among buyers (called
oligopsonies), the basic theory is the same on hoth sides of the market. Higher levels of
concentration should result in price levels that favor the more concentrated side of the
market--higher prices for concentrated sellers (oligopolies), lower prices for concentrated buyers
(oligopsonies)."

The studies referenced in the petition used two major approaches to examining industry
competition and concentration, the Structure-Conduct-Performance (SCP) and New Empirical
Industrial Organization (NEro). The Structure-Conduct-Performance (SO') paradigm attempts
to examine the relationships between industry structure (number, size, location, and concentration
of firms) and performance (prices paid/received and profitability). The SCP models test the
hypotheses that industry structure affects performance. Structure-performance correlations were
then indicative of some form of noncompetitive behavior (practice or conduct).

The New Empirical Industrial Organization (NEro) approach attempts to focus more on
the conduct of firms in the industry. This approach starts with an explicit theoretical model of
firm optimization, usually profit maximization. Based on an application restricted to an explicit
theoretical model, empirical results (through statistical inference of price-taking behavior) are
used to assess aspects of market power.

The petition (pp. 1848-49) also quotes Dr. John Helmuth "Economic studies show that
when the four-firm concentration ratio gets over 40% firms stali to have enough market power to
have some control over price. By the time it gets to 80% they have as much power as a monopoly
would have." In response, Professor Clem Ward, Oklahoma State University, (p. 4) writes "[t]he
petition quotes John Helmuth regarding when the four-firm concentration level becomes
problematic. In fact, there is no definitive literature regarding this issue."

Many of the comments supporting the petition (mostly form letters) stated that the big
three packers controlled over 80 percent of the cattle market and were manipulating prices. Also,
many of the comments in suppOli of the WORC petition cite the petition itself as evidence enough
or they cite the same studies reviewed in the petition. A couple of comments cited concentration
studies and statistics for other species and agricultural industries. Albeli Medvitz discusses
concentration in the U.S. Iamb industry by citing a Texas A&M University study and the National
Falmers Union discusses concentration issues in the livestock, grain, and food processing
industries.

17
 Several of the commentors, in particular, the agricultural economists, commented on the
petition's lack of references on the most recent and exhaustive studies on the packing industry.
Clem Ward laments that "the resulting research reports [GIPSA concentration study] have been
virtually ignored by agricultural journalists, industry associations, analysts, and producers."4 He
goes on to say "[m]any contractors involved in the P&SP study have a long history of addressing
concentration; pricing, and related industry issues. Our access to data was better for this study
than any ever before undertaken. In many cases, data came from a broader segment of the
industry, covered a longer time period, and contained information never before available. In
ShOlt, this was the most thorough work done on these issues to date and the results should not be
buried or ignored because some people had preconceived ideas not suppOlted by scientific
research." He concludes (p. 121) "Did this study find negative effects from concentration? No.
Did this study exonerate packers from questions about use and abuse of market power? No."

Professor Wayne Purcell, Virginia Polytechnic Institute and State University, writes (p.
11) "[e]ven more important is the fact that the 1996 round of studies published under the auspices
and via the coordination of the Packers and Stockyards Administration is a result of a massive
effort that far exceeds anything that has been possible prior to that date with regard to researching
these various issues. Because the industry didn't like the results that came out of those studies,
results such as no serious price impact from captive supplies, or no decisive and expected negative
relationship between concentration and prices paid for cattle, the research has been largely
dismissed and ignored."

Clem Ward writes (pp. 3-4) "[s]everal studies cited and discussed were conducted by me,
either alone or in conjunction with others. The petition discusses market shares in national and
local markets, citing some of my work. However, the petition fails to address the question of
relevant markets anywhere and does not draw on the research pertaining to defining relevant
ma~kets in the GIPSA concentration study." He also states (p. 4) "[t]he petition addresses the
relationship between packer concentration and prices paid for livestock. My work, which can
support both sides of this issue, is cited. The research literature is not consistent on this question.
Considerable relevant, recent research is omitted from the discussion. (1850) While citing some
of the work by Azzarn, the petition does not include some of his more recent work. Implications
and inferences from some of my studies and others extend well beyond those that are possible
based on the data used and time period covered. The literature review by Azzam and Anderson in
the GIPSA concentration study is considerably more thorough and correct and I'll defer to it
rather than attempt to indicate the numerous limitations of the review in the petition."

Azzam and Anderson, from their recent exhaustive literature review of packer studies
state (p. 123-24), "[i]n summary, because of interpretational difficulties, stemming largely from

'Ward, Clement E. "Important and Ignored Messages from the Packers and Stockyards Program's
Concentration Research Study," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed.. Wayne Purcell (Research Institute on Livestock Pricing, Depmiment of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, Fcbrumy 1997), p. 110.

18
using ad hoc, reduced-form models, SCP studies of the U.S. meatpacking industry offer no
objective benchmark for judging the reasonableness of their empirical assessments of market
power. Parameters lack clear, fundamental, economic interpretations to which the analyst can
appeal in seeking to validate empirical results. Therefore, the validity of SCP methodology in the
assessment of competition in the U.S. meatpacking industry is questionable.... an overall
conclusion of noncompetitive conduct from 'the empirical results seems unwarranted.... The
same is equally true ofNEIO models. The key parameter estimates, from which market conduct
(in the sense of price-taking behavior) is inferred, are extremely sensitive to the functional forms
of the auxiliary demand and supply curves, and of cost or production functions.'" They conclude
(p. 124) "[t]he retUlTIS from the considerable investment in SCP andNEIO studies may appear
fairly meager; but given measurement and interpretational problems, that is the most one should
expect from such studies. We must, finally, reach the decision that the body of empirical evidence
from both SCP and NEIO studies is not persuasive enough to conclude that the industry is not
competitive."

The most recent and exhaustive review of the relevant economic literature conducted by
Azzam and Anderson confirmed the earlier findings of the 1990 GAO report on beef industry
concentration. The 1990 GAO concluded, "... our review of empirical studies did not lead us to
draw any overall conclusions regarding the impact that market concentration in the beef-packing
industry has on the prices packers paid for steers and heifers in the 1980s. Industly analysts and
experts we spoke with said that recent packer concentration has not lowered steer and heifer
prices in the 1980s. Some industry analysts believe that cattle prices may be higher because the
inq-eased efficiencies that accompanied increased concentration enabled beef packers to pay more
for cattle...'"

Schroeder, et al. based on numerous meat industry studies state, "[t]wo questions that
surfaced recently relative to packer concentration and captive supplies are: (1) whether recent
declines in fed ,cattle prices have been created by packer captive supply? and (2) whether recent
high margins of beef packers are related to captive supply levels? The answer to each is no.,,7

'Azzam, Azzeddine M. and Dale Q. Anderson. Assessing Competition in Meatpocking: Economic

History, Theory, and Evidence. Grain Inspection, Packers and Stockyards Administration, U.S. Department
of Agriculture, GIPSA-RR 96-6, May 1996.

6United States General Accounting Office, BeefIndustry: Packer Market Concentration and Cattle
Prices. QAO/RCED-91-28, December 1990.

7 Schroeder, Ted C., Clement E. Ward, James Mintert, and Derrell S. Peel. "Beeflndustry Price

DiscovelY: A Look Ahead," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed. Wayne Purcell (Research Institute on Livestock Pricing, Department of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, February 1997), p. 63.

19
Impact of Packer Feeding on Prices

The petition (p. 1850) cites the findings of a"... Packers and Stockyards Division study
that examined the price impacts from packer-feeding in the mid-1960s explains how an
oligopsonistic packer that feeds its own cattle can adversely affect prices paid to other producers
for slaughter supplies.'" The petition then concludes that "[t]his study found that packer-fed
cattle caused a significant decline in the local market price when the packer had some
oligopsonistic power."

Clem Ward comments (p. 3) "[t]here is no evidence that packer feeding has increased
significantly in recent years. GIPSA data I believe suggests packer feeding has remained a
relatively small proportion offed cattle marketings over the past decade." He also states (p. 4)
that "[t]he petition bases much of its argument on a single study conducted 35 years ago. It
ignores more recent research from the GIPSA concentration study on captive supply impacts."
The GIPSA study that Clem Ward refers to is the captive supply study that states (p. 81) "[p]rices
for packer-fed cattle were not significantly different than cash market cattle.,,9 The study also
.concludes (p. 82) "[t]he overall short-run impact on fed cattle transaction prices from captive
supply deliveries or inventories based on the this study was small and would be viltually
impossible to observe in raw transaction price series."

Forward Contract Impact on Price

The WORC petition cites two studies that examined forward contracts. The first focussed
on southwest Kansas marketing region during six months in 1990. The second is the GIPSA
concentration studies. WORC states (p. 1850) that these "studies have found that forward
contracting. for fed cattle supplies has a depressing effect on prices."

Clem Ward states (p. 4) "[t]he literature on impacts from forward contracting on balance
suggests decreased prices result as forward contracting increases. However, the magnitude of the
impact varies considerably based on data period and coverage. When the petition cites the more
recent work in the GIPSA study on captive supplies, the much smaller magnitude of negative
impacts found was not reported. Increases in deliveries of cattle from the inventory of forward
contracted cattle were associated with $0.03-$0.05/cwt. (dressed weight basis) lower cash market
fed cattle prices. The petition correctly reports findings from the GIPSA study indicating that
contracting increased when cash prices and cash price variability increased. Rathel' than

8 Aspelin, Arnold and Gerald Engelman, Packer Feeding ofCattle; Its Volume and Significance,
Packers and Stockyards Division, Consumer and Marketing Service, USDA, Marketing Research Report No.
776, Nov. 1966.

9 Ward, Clement E., Ted C. Schroeder, Andrew P. Barkley, and Stephen R. Koontz. Role q(Captive
Supplies in BeefPacking, Grain Inspection, Packers and Stockyards Administration, U.S. Department of
Agriculture, GIPSA-RR 96-3, May 1996.

20
concluding that this behavior by packers 'is likely to have the effect of manipulating prices,' this
finding simply verifies that packers behave rationally in their use of forward contracts."

Wayne Purcell writes that "[t]he findings from these efforts [GIPSA concentration
study]. .. indicated either no statistically significant impact on prices [Purcell's emphasis] paid or
coefficients on measures of captive supplies, while statistically significant because of the large
number of observations, were relatively meaningless in an economic context." [Purcell's
emphasis] (pp. 3-4)

Use of Fonnula-Priced Forward Contracts

Addressing the use of forward contracts and fonnula pricing arrangements, the WORC
petition for rulemaking follows closely the Secretary of Agriculture's Advisory Committee on
Concentration in Agriculture minority report." One of the petition's allegations is price
manipulation. The petition (pg. 1847), quoting from the USDA Advisory Committee minority
report, states "[w]hen the futures market is used to establish a base, the packers are heavy players
on both sides. Their futures market activities, whatever the motivation and whether the packers
are long or short in the market, affect the price they pay for formula cattle and, ultimately, for
negotiated sales." . WORC alleges that packers manipulate futures market prices to lower prices
paid in the cash market.

The Commodity Futures Trading Commission (CFTC) investigated similar allegations that
the largest meat packers manipulated futures market prices during the period April 4 through June
30, 1994. The CFTC issued two separate reports based on their investigation. The first report
was on CFTC's analysis oflarge trader position data that examined end-of-day futures positions
and day-to-day position changes. 11 This repmt concluded (p. 6) "[t]hese overall data do not
support an assertion that beef packers engaged in a pattern of consistent selling of live cattle
futures or that their futures trading was a principle contributor to the fall in cattle prices that
occurred from mid-April to late May." The second report was on CFTC's packers intraday
trading analysis. I' This analysis was conducted to see if packers manipulated futures prices within
a trading day to lower cash prices that same day. The second report concluded that packers did
not engage in manipulative intraday trading activity, stating (p. 5) "[p]acker day trading generally
was not a large portion of their total trading, representing less than II percent of all packer

Concentration in Agriculture: A report ofthe USDA Advisory Committee in Agricultural

. 10

Concentration, Agricultural Marketing Service, USDA, June 1996, pp. 29-36.

II Commodity Futures Trading Commis&ion, Report to Congre&&ional Oversight Committees and

National Cattlemen& As&ociation. Market Surveillance Section, Divi&ion of Economic Analysi&, CFTC,
Wa&hington, DC, June 20, 1994.

12Commodity Futures Trading Commi&&ion, An Analysis ofIntra day Trading ofBeefPackers in

Live Cattle Futures. Market Surveillance Section, Divi&ion of Economic Analy&i&, CFTC, Washington, DC,
September, 1994.

21
trading." The report also stateq (p. 6) "[0 ]ver the period, packers on average were net buyers of
futures on each day of the week. Moreover, total sales on each weekday over the period varied
little..."

WORC also contends in their comment (p. 6) that "[fjorward contracts that are not traded
publicly give preferences to those producers who are offered contracts over those who are not."
In the petition (p. 1851), WORC states that" ... marketing agreements as defined by the report
[GIPSA concentration study] are included in the definition offOlward contract in the proposed
rule..." They also state (p. 2) that "[u]ndue preference or discrimination and the tcndcncy to
manipulate prices are inherent in privately negotiated captive supply agreements, as the case
GIPSA has brought against IBP for its arrangements with selected Kansas feeders has shown."

GIPSA's complaint and subsequent hearing before a USDA Administrative Law Judge
alleges that IBP, inc. has violated sections 202(a) and (b) of the Packers and Stockyards Act by
paying a preferential price for fed cattle to an exclusive group of Kansas feedlots. GIPSA's
complaint did not allege price manipulation as suggested by WORC.

The WORC petition (p. 1851) states "[t]he report states: Small firms use spot markets
almost exclusively, whereas the Big Three packers are more likely to use alternative procurement
methods." WORC continues, "[t]he report clearly demonstrates that the Big Three packing firms
and the largest feedlots account for the vast majority of the formula-priced agreements... This
data suggests that in practice the largest feedlots have preferential access to marketing agreements
-- and therefore to an assured market for their cattle. And that this preferential status does not
only ensure market access in the long term but also provides a price advantage not available to
producers not offered the marketing agreements." WORC also alleges (p. 1847) that smaller
feeders are " ... most easily pressured into exploitative, captive supply contract arrangements."
They also suggest (pp. 1847-48) that because of "severe discounting" and "volatile" market
prices, retained ownership by cow/calfproducers " ... involves an intolerable and l111necessary
degree of price risk."

Clem Ward writes (p. 3), "... I know of no evidence that smaller feeders are 'pressured
into exploitative, captive supply contract arrangements.' In fact, the GIPSA concentration study
verified that most forward contracting and marketing agreement arrangements are between larger
packers and larger feeder, not smaller feeders." Ward continues. " ... there is no evidence of
'severe discounting of feeder prices in response to the volatility ofthe fat cattle market.' There
are clear economic reasons to discount input prices (feeder cattle) where possible in light of
increased volatility, both for outputs (fed cattle) and other inputs (grain). Such volatility gives
rise to contractual relationships that benefit both buyers and sellers. This petition would have.
little effect on retained ownership opportunities.... In fact, reducing the use of forward contracts
might increase price volatility and reduce the attractiveness of retained ownership."

Based on the concentration study that larger packers and feedlots were general users of
forward contracts and marketing agreements, results do not show causation or preferential

22
treatment. Theconcentratioll study analyzed individual transactions data (including prices for
fOlward contracted, marketing agreement, and packer fed cattle) for 43 beef packing plants that
slaughtered at least 75,000 steers and heifers per year. As such, the captive supply use of smaller
packers was not examined. Conclusions about the use of captive supplies cannot be drawn beyond
the scope ofthe concentration study data and the study's results.

Clem Ward writes (p. 4), "[t]he petition draws on findings from the GIPSA concentration
study to incorrectly conclude 'that in practice the largest feedlots have preferential access to
marketing agreements.' ... Higher prices paid by larger packers to larger feeders relate in part to
the increased plant efficiency resulting from having consistently large supplies of cattle available
for slaughter. Throughout the petition, any research related to plant efficiency is omitted. Yet
cost of operation is critical in understanding the competitiveness of rival firms in a margin
business such as meatpacking."

In their comment (p. 6), WORC believes that packers dictate delivery times for formula
priced marketing agreement cattle to manipulate prices, stating "[f]orward contracts that do not
contain firm-base prices establish the incentive for packers to manipulate captive supply inventory
and delivery levels ..." Referring to nlarketing agreements and alliances, Schroeder, et.a!. state
that it is the cattle feeders,not packers, decision when to deliver cattle, writing "[f]requently,
cattle feeders determine the day or week cattle will be delivered, giving them more control over
deliveries and the terminal date than in cash market trades."13

Grande Ranch Company comments that "[t]he vast majority of formula price agreements
in place in the industry today have been proposed by the feeders/producers as ways of generating
premium prices for above average cattle. They are not the idea of the packers... In the
Northwestern corner of the country, while there are smaller packers, one packer (IBP) dominates
the market. The majority of cattle in this area are sold to IBP on a formula based on the weekly
averaged price in areas of the country (such as Kansas) where many packers competitively bid the
fed cattle. By using this formula agreement, feeders get access to a series of premiums and
discounts for quality, but more importantly, they get access to a base established by competitive
bidding."

Kevin Brockhoff of BeefEx (the Beef Exchange electronic market) writes (p. 4) " ...
eliminating basis contracts would be of benefit to the majority of producers who do not
understand basis trading." However, Wayne Purcell (p. 6) writes "... it is velY important for the
producer to be able to determine the time of pricing. A basis contract that ties the final price to
the futures contract and leaves the flexibility of timing of the final price to the producer can be a
very effective forward pricing instrument ..." Based on this, he continues by saying (p. 7) " ... I

"Schroeder, Ted C., Clement E. Ward, James Mintert, and Derrell S. Peel. "BeefIlldustry Price
Discovery: A Look Ahead," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed. Wayne Purcell (Research Institute on Livestock Pricing, Department of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, February 1997), p. 37.

23
 prefer the basis contract to the formula price contract" and (p. 6) " ...would be inclined to want
. to see discontinuance of the formula price contract."

Captive Supply Decisions and Impact on Price

The WORC petition (p. 1851) contends that the GIPSA concentration study"... does
demonstrate that the use of captive supply procurement methods in the cattle industry causes a
decline in the cash-market price for cattle. It shows that packers increase their captive supply
inventories when cash-market prices increase. The report also demonstrates that as packers
increase the deliveries of captive supplies, the cash-market prices decline." However, WORC's
comment (p.IO) even questions causality between captive supplies and prices, stating "... the
negative associations shown for all three captive supply types to spot prices say nothing about
causality..."

Clem Ward states (p. 4) "[t]he petition correctly reports findings from the GIPSA study
indicating that contracting increased when cash prices and cash price variability increased. Rather
than concluding that this behavior by packers' is likely to have the effect of manipulating prices,'
this finding simply verifies that packers behave rationally in their use offorward contracts... In
fact, while many of our findings suggested negative relationships between captive supplies and
cash market prices, the magnitude of those negative effects were small. While statistically
significant, they may not be economically significant."

Wayne Purcell writes that "[t]he findings from these efforts [GIPSA concentration study]
... indicated either no statistically significant impact on prices [Purcell's emphasis] paid or
coefficients on measures of captive supplies, while statistically significant because of the large
number of observations, were relatively meaningless in an economic context." [Purcell's
emphasis] (pp. 3-4) He continues by stating that the GIPSA concentration study"... found that
when captive supply cattle were more readily available at larger percentage levels, the
slaughtering facilities operated more nearly at capacity and with less variation around their
designed capacity level. In turn, the studies showed that when packing plants operated
consistently at and around designed operating levels, higher prices were paid for cattle... It
would appear, then, that one of the possible ramifications of captive supplies is to cut off the price
peaks and fill up the price valleys and make prices paid for cattle more stable over time than they
would be in the absence of that procurement practice. This does not argue, however, that the
mean price paid for cattle is reduced by captive supplies. The research says that captive supplies
are not in any economically significant way related to lower cattle prices, meaning changes in
captive supplies are not an important factor in explaining short-run variations in fed cattle prices."

24
Impact of Number of Buyers on Price

The WORC petition summarizes several studies that examined the number of bidders and
bids on prices. The results from these studies generally SUppOlt the view that more buyers and
bidders increase livestock price.

Wayne Purcell (p. 6) contends that if the petition's regulations are enacted that "... it
would prompt some disinvestment by the current big 3 packers.... [and] that capacity [would]
move into the hands of more disaggregated smaller packer/processors who inevitably are going to
face higher costs of operation. [Because] the economies of size in packing and processing are
clearly very large and very important ... [t]his would probably bring at least some 'window
dressing' competitiveness in the industry because it has the potential to raise the number of bids a
particular producer might garner. The question, then, becomes one of whether or not more bids
from higher cost, smaller operations result in better prices to cattle producers and cattle feeders
than do fewer bids from larger, more cost effective operators."

Alternatively, if the larger packers do not divest from the industry, because of their
economies of size and cost efficiency, smaller higher cost packers may be forced to exit the
industry. This would result in a more concentrated industry and the potential for fewer bidders.
This view is shared by several commentors. Don Anderson ofthe Colorado Cattle Feeders
Association writes, "[r]estricting procurement practices would likely inhibit the ability of small-
and mid-sized packers to compete and could actually contribute to increased packer
concentration." Lynn Cornwell of the Montana Stockgrowers Association believes that the
petition " ... could actually contribute to more packer concentration in that bigger packers could
bid on smaller' 'nitch market' cattle contracted by smaller packers or alliances." Cindy Garretson-
Weibel with the Wyoming Stock Growers Association suggests "[i]mplementation of the rules
asked for by WORC could adversely affect small packers and branded beef promotion efforts,
which would only serve to further increase packer concentration."

Conclusion froni Economic Studies

WORC's petition (p. I 852) argues "[t]he economic studies discussed above provide
substantial evidence supporting findings that the cmrent use of forward contracts [including
marketing agreements] and packer-owned cattle to procme captive slaughter supplies are likely to
have the effect of manipulating prices by depressing those prices paid to cattle producers. These
studies also support a finding that the trading of forward contracts and packer-owned cattle in a
public market designed to encourage more bidders on cattle is likely to improve prices paid to
producers."

Clem Ward's (p. 5) reaction to this section of the petition is that "[t]he first sentence in
this section is simply wrong. Economics research does not 'provide substantial evidence
suppOlting findings that the cmrentuse of forward contracts and packer-owned cattle to procme
captive slaughter supplies are likely to have the effect of manipulating prices by depressing those

25
prices paid to cattle producers.'" Ward also states (p. 2) "... the intent appears to be protection
of a declining segment of the livestock industry, i.e., public markets. Public markets have played
and continue to play an important role in the livestock economy. However, there is no per se
reason to single them out for protectiori and alter the evolution of markets. Direct marketing of
fed cattle has replaced public marketing for sound economic reasons, not because anyone imposed
them onto the marketplace." Wayne Purcell also states (p. 10) [m]uyh of the thrust of the
petitioner's proposed changes is based on the notion that unless prices for cattle are negotiated in
some sort of public arena, we can't possibly have effective price discovery.' This assumption,
assertion, or whatever it may be called, is very wrong. [Purcell's emphasis] ... Just negotating
the price of cattle on a Iiveweight basis in an auction arena, any electronic system, or any other
publicly accessible price arena in no way guarantees effective and efficient price discovery."

Schroeder,et al. conclude "[t]wo questions that surfaced recently relative to packer
concentration and captive supplies are: (1) whether recent declines in fed cattle prices have been
created by packer captive supply? and (2) whether recent high margins of beef packers are related
to captive supply levels? The answer to each is no.,,14 Clem Ward also concludes "Did this study
[GIPSA concentration study] find negative effects from concentration? No. Did this study
exonerate packers from questions about use and abuse of market power? No."I'

Wayne Purcell states (p. 5) "[m]y overall conclusion is that captive supplies that allow
meat packers to schedule flows of cattle into the plants in future weeks or months are not a major
factor in the relatively low cattle prices of recent years." Despite his reservation regarding
formula prices, he goes further, (p. 8) "'Is regulatory action needed?' My response is no." He
also writes, (p. 5) "I think the proposed rules are both too broad and too restrictive. I don't see
the justification for this type of constraint on how the seller and buyer can interact.in the
important fed cattle complex."

The Secretary of Agriculture charged the Advisory Committee on Concentration in

Agriculture (p. iii) to review market concentration in meat packing industry, including the effects
of procurement practices (captive supplies) and concentration on prices for slaughter cattle. 16 The
chairman of the Advisory Committee, Dr. Daniel 1. Padberg, Professor Emeritus of Agricultural

14Schroeder, Ted C., Clement E. Ward, James Mintert, and Derrell S. Peel. "Beeflndustry Price
Discovery: A Look Ahead," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed. Wayne Purcell (Research Institute on Livestock Pricing, Department of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, February 1997), p. 63.

IS Ward, Clement E. "Important and Ignored Messages from the Packers and Stockyards Program's

Concentration Research Study," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed. Wayne Purcell (Research Institute on Livestock Pricing, Department of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, February 1997), p. 121.

Concentration in Agriculture: A report ofthe USDA Advisory Committee in Agricultural

16

Concentration, Agricultural Marketing Service, USDA, June 1996, pp. 29-36.

26
Economics, comments (p. 1) that " ... we considered the evidence available to us, and what we
could produce from hearings..." He continues, "[s]hould our industry have restrictive rules
placed on it? As it turned out, the majority answered, No ..." [Padberg's emphasis]

General Economic Conditions

Historically, the cattle industry has suffered through periods of cyclically low prices.
Industry participants and analysts have often pointed to many general economic factors for
observed price levels. WORC states in their comment (p. 2), "[t]he increases in market
concentration and use of captive supplies are not the only factors affecting prices paid to
producers." They also write in their comment (p. 12), "[a]nalysts who seek to minimize the
impact of captive supplies on prices often do so by showing that normal supply and demand
factors are at work and responsible for changes in prices. It does not follow from this that captive
supplies do not have an effect on prices, unless it is shown that all of the change in prices is
caused by supply and demand forces. Of course, it is perfectly possible for the supply of cattle,
the price of corn, industry concentration and the level of use of captive supply all to effect the
price of fed cattle at one time." However, WORC did not specifically address industry supply and
demand factors in the petition. Also, the petition did not address all of the economic benefits and
reasons feeders and packers use various marketing arrangements. Most of WORC's discussion
focusses on their allegations of economic harm.

General economic conditions of supply and demand factors are impOltant determinants of
price. There are also many benefits for using various marketing arrangements not specifically
addressed. Several comments presented supply and demand analyses and reasons for using
captive supply arrangements. The following sections present arguments on these topics.

Supply and Demand

Several comments stipulate that declining demand for beef is a primary problem for the
industry. Andrew Gottschalk (p. 1) writes "Beef demand peaked during the spring of 1979 and
remains in a continuous downtrend." Gottschalk also states "[t]his primary problem of declining
beef demand is precipitous and ongoing." Wayne Purcell (p. 5) concurs, stating that decreased
beef demand"... is one of the long-tenn structural-type' changes in the industry that has
prompted lower fed cattle prices." Purcell continues by writing (p. 10) ", .. the long-term villain
in the beef business that is responsible for the often desperately low prices in recent years is the
sustained decreases in demand. ,Those decreases have occurred primarily because the product
offering made available to the consumer is outdated, outmoded, and totally lacking in adherence
to modern consumer preferences." Andrew Gottschalk (p. 2) says "[t]here is no disagreement
with the fact that the quality of beef has deterioated during the past several decades." Jerry Bohn
of the Kansas Livestock Association (p. 2) also says " ... declining beef demand and loss of
market share remains the most significant challenge faced by all beef producers." Andrew

27
Gottschalk (p. 1) suggests that "[c]umulatively, each consumer's decision has led to a 14%
decline in per capita consumption of beef during the past ten years (equivalent to losing 36 million
consumers) and a 28% decline since beef production peaked in 1976."

Beefs loss of market share to competing meats has hurt the industry. Tim Hammonds
with the Food Marketing Institute says "[t]he competition to beef is not found within the beef
distribution system. It comes form alternative meat sources -- chickens, turkeys, pork, lamb, fish,
and shellfish." Andrew Gottschalk says (p. 2) "... during the period form 1990 - 1996 combined
meat supplies increased 13.2 billion pounds. Of this increase, beef comprised only 21% (2.8
billion pounds) of the combined 13.2 billion pound production gain. The competing meats,
reflecting consumer [Gottschalk's emphasis] preference, comprised 79% (l0.4 billion pounds) of
the combined increase in beef, pork and poultry production during the 1990 - 1996 period. Thus,
the shrinkage in beefs market share continues." Wayne Purcell states (p. 5) that per-capita beef
consumption "has declined from near 951bs. in 1976 to just above 65 Ibs. in the early 1990s."

On the production (supply) side, Andrew Gottschalk writes (p. 2) "[a]dding confusion to
this issue, cattle inventories declined from 132 million head during 1975 to 103.5 million in 1996,
a 21.6% decline. Ignored by the petitioners is the basic [Gottschalk's emphasis] fact that during
this period, average carcass weights increased from 579 pounds to a peak of 709 pounds in 1994.
This represents a carcass weight gain of 22.4%, which offsets the entire reduction in cattle
inventories. Thus, during the past year, commercial beef production at 25.4 billion pounds nearly
equaled the 'previous peak beef production during 1976 at 25.7 billion pounds. The level of beef
production in 1996 was achieved with a cattle inventory approximately 25 million head (103.5
million vs. 128.0 million head) smaller than in 1976."

Reasons Packers and Feedlots Use Captive Supplies

Several commentors also discussed the reasons for and benefits of captive supply
arrangements in the livestock industry. Buyers and sellers enter into various marketing
arrangements expecting to benefit in some manner. In the cattle industry, Clem Ward states (p. 6)
" ... that many times feeders have approached packers regarding alternative means of marketing
and pricing fed cattle." LaiTY Ragains of the Idaho Cattle Association states that "[c]aptive
supply and various forms of price discovery have been developed over time for inventory and risk
management by both producers and packers."

There are several benefits for cattle feeders and packers to enter into various marketing
arrangements. Schroeder, et al. 17 write, "[p]rimary benefits to cattle feeders may include
improved risk management, access to more financing options, guaranteed buyer for cattle,

11Schroeder, Ted C., Clement E. Ward, James Mintert, and Dendi S. Peel. "Beeflndustry Price
Discovery: A Look Ahead," in Price Discovery in Concentrated Livestock Markets: Issues, Answers,
Future Directions, ed. Wayne Purcell (Research Institute on Livestock Pricing, Department of Agricultural
and Applied Economics, Virginia Tech., Blacksburg, VA, February 1997), p'. 57-58.

28
improved opportunity for carcass quality premiums, and reduced marketing costs. Packers'
primary benefits include securing cattle slaughter needs so they can operate large packing plants
near capacity, having more control over the type and quality of cattle to fill their plants, and
reducing procurement costs." They also suggest "[s]ome captive .supply agreements are also a
step toward value-based marketing of live cattle. Captive supply agreements that contain price
adjustments for varying carcass quality attributes provide cattle feeders increased incentives to
produce cattle possessing desired quality characteristics."

Andrew Gottschalk agrees by writing "[s]o called 'captive supply' cattle circumvent the
latter problem, [average pricing of cattle] as producers are paid for the quality oftheir production
with premiums and discounts paid on carcass merit. Average pricing occurs when feedlots sell a
pen of high quality cattle together with a pen of lower quality cattle at a single price. Andrew
Gottschalk (p. 2) argues that '''[a]verage pricing' only encourages the SUllJlus [Gottschalk's
emphasis] production of below [Gottschalk's emphasis] average product."

Effect On Current Procurement and Pricing Methods

The WORC petition is requesting rules that would restrict or limit the industry's use of
common procurement and pricing methods. The petition would restrict packers from procuring
cattle for slaughter through the use ofa forward contract (including marketing agreements),
unless the contract contains a firm base price that can be equated to a fixed dollar amount on the
day the contract is signed and the forward contract is offered or bid in an open, public manner.
The petition also restricts packers from owning and feeding cattle, unless the cattle are sold for
slaughter in an open, public market.

Fed Cattle Industry Procnrement Methods

Spot Market

Spot market transactions are purchases directly from the feedlot or seller at a fixed price at
the time the transaction is agreed upon. The cattle are usually picked up by the packer within 1 to
7 days. Spot market transactions would not be affected by the proposed rules.

Marketing Agreements

Marketing agreements are normally long-term arrangements between a packer and a

feedlot in which the packer agrees to purchase cattle offered for sale by the feedlot for the period
of the agreement. Cattle procured by marketing agreements are generally priced by using a
formula agreed upon by both the packer and feedlot. Essentially, the WORC petition eliminates
marketing agreements by disallowing formula pricing. This is because, if applied literally to a
marketing agreement contract, the rule requiring a firm base price would require the buyer and

29
seller to agree upon a firm base price at the time the cattle are contracted. This would be
possible, but somewhat impractical and risky given the long-term nature of the agreement.

Feedlots that utilize marketing agreements usually deliver cattle to the packer on a regular
basis. There is almost a continuous flow of cattle going from the feedlot to the packer.
Negotiating price on every delivery would possibly disrupt this flow of c!l;ttle, and defeat at least
one of the reasons for having an agreement, Le., a dependable supply of and/or outlet for cattle.
The marketing agreement not only allows the stream of cattle to keep flowing out of the feedlot
and into the plant but it also offsets the dilemma that the feedlot, and the packer would face in
trying to guess what the market price will be at some future date. Under the proposed WORC
rules, neither the packer nor the feedlot could count on any individual group of cattle entering the
flow, until a price was agreed upon.

Packer Feeding

Packer owned or fed cattle are cattle that a packer owns and is feeding either at a custom
feedlot or at a feedlot owned and controlled by the packer. These are usually cattle that the
packer has procured as feeders and placed on feed. However, they could be cattle that the packer
procured during some stage of their feeding period and is finishing them to a heavier weight and
hopefully to a higher grade. The WORC proposed rules likely would discourage this method of
procurement because it would require packers to offer their own cattle for sale publicly.. This
would cause packers to incur a marketing cost which would add to their overall cost of
procurement.

Forward Contracts

Forward contracts are contracts to purchase cattle, which a packer enters into with a seller
and in which both parties agree that delivery of the cattle will occur at some future date. (Basis
contracts are a form of forward contracting as well as a pricing method) The rules proposed by
the WORC petition would allow only contracts which specified a fixed price or a fixed base price.

Fed Cattle Industry Pricing Methods

Formula Price and Basis Contracts

Basis contracts are so called because they utilize the futures market to establish a base
price from which the contract price is computed. The difference between the futures price and the
contract price is referred to as the basis. Although basis contracts are never written with a firm
base price, they always have a firm "basis" at the time the cattle are contracted. If applied lit~rally
to a basis contract, the rule requiring a firm base price would mean that the price must be tied to
the sale of a futures contract or contracts on the day the cattle are contracted to the packer.
Under the present method, timing of the pricing decision is in the hands of the seller. Typically,

30
the seller has several weeks in which to select the day on which to price the cattle. Sellers always
try to price the cattle on a day which favors themselves. Conversely, the price isn't important to
most packers because they usually hedge these cattle as soon as the seller picks a futures day. If
the cattle are hedged, the price is irrelevant to the packer, because it becomes more or less an
even trade and the only thing relevant is the basis .. The WORC petition requiring a film base price
would effectively eliminate basis contracts.

Formula Priced Cattle

On page 1847 of the petition for rulmaking submitted by WORC it states" 1. Restrictions
on use of fOlward contracts. No packer shall procure cattle for slaughter through the use of a
formula or basis price forward contract." Later on the same page it states that: " packers and
producers could still enter into contracts in which the price is set through a formula ifthere is a
firm base price which can be equated with a specific dollar amount when the contract is entered
into." The WORC proposed rules would eliminate all types offonnula priced transactions
including Carcass Weight, Grade and Yield and so called Grid sales unless they are tied to a finn
base price. It would also eliminate liveweight transactions which are based off market reports.

Conclusions

The vast majority of the comments supported the WORC rulemaking petition to restrict
the use of captive supply arrangements. A large percentage of these comments were form letters
that referred to or endorsed the petition's arguments.

The power of the economic, logical and empirical arguments was the primary basis for
developing our conclusions, rather than the number of comments supporting or opposing the
petition. The team finds no compelling evidence to suggest that anything other than basic
economic conditions determined the general price level of the fed cattle market. After weighing
the economic arguments supplied by WORC, commentors (supporting and opposing), and other
information assembled by the team, we could not definitively conclude that spot prices were
affected or manipulated by captive supplies. Furthennore, the economic evidence does not
indicate the use of captive supplies is a violation of the Act. Also, there was insufficient evidence
to shaw that implementation of the petition would improve or solve WORC's stated problems.
Therefore, we conclude that it is unnecessary and unwarranted to effectively ban the industry's use
of various procurement (marketing agreements, forward contracts, and packer fed) and pricing
(basis price and formula price) methods that the industry relies on to assure packers a reliable
source of cattle, assure feeders an output market, a mechanism to transfer risk, and the
opportunity to reduce transactions costs.

WORC wants OIPSA to selectively regulate the livestock industry by requiring only the
fed cattle segment of the beef industry to comply with their petition. It would be unfair to the
sellers of fed cattle and their lenders to limit the ways in which they can market their product. It

31
should be noted that hog, lamb and special-fed veal producers rely heavily on the use of marketing
agreements and contracts without fixed prices. These producers select the type of contract or
marketing agreement that they feel most comfortable with. Fixed price contracts have always
been an option available to sellers offed cattle, however, sellers might prefer to price their
livestock using an alternative method, i.e. formula or basis pricing. Some sellers are reluctant to
commit to a fixed price for their fed cattle with a delivery date 2 to 4 months in the future without
some mechanism for offsehing that price risk. Livestock producers, including sellers of slaughter
cattle, use marketing agreements and contracts other than fixed price, to market their livestock
because they choose to. The buyer and seller enter into a contract or marketing agreement freely,
both expecting to benefit in some manner.

32
 Attachment 1

Attachment 1 is a set of three maps illustrating the locations and statistics ofWORC's affiliated
associations presented in Tables 1 and 2 in the report. These are available upon request.

33
 Attachment 2

Attachment 2 is not being made available.

34
ATTACHMENT B .
 January 2007

GIPSA Livestock and Meat

Marketing Study

Contract No. 53-32KW-4-028

Volume 1: Executive Summary and Overview

Final Report

Prepared for

Grain Inspection, Packers and Stockyard Administration

U,S, Department of Agriculture
Washington, DC 20250

Prepared by

RTI International
Health, Social, and Economics Research
Research Triangle Park, NC 27709

RTI Project Number 0209230

RTI
INTERNATiONAL
Abstract

Over time, the variety, compiexlty, and use of alternative

marketing arrangements (AMAs) have Increased In the livestock
and meat Industries. Marketing arrangements refer to the
methods by which livestock and meat are transferred through
successive stages of production and marketing. Increased use
of AMAs raises a number of questions about their effects on
economic efficiency and on the distribution of the benefits and
costs of livestock and meat production and consumption
between producers and consumers. This final report focuses on
AMAs used in the beef, pork, and lamb industries from the sale
of live animals to final meat sales to consumers and addresses
the following parts of the Grain Inspection, Packers and
Stockyard Administration (GIPSA) Livestock and Meat
Marketing Study:

• Part C. Determine extent of use, analyze price

differences, and analyze short-run market price effects
of AMAs.
• Part D. Measure and compare costs and benefits
associated with spot marketing arrangements and AMAs.
• Part E. Analyze the implications of AMAs for the livestock
and meat marketing system.
This final report follows the publication of an interim report for
the study that used qualitative sources of Information to
identify and classify AMAs and to describe their terms,
availability, and reasons for use. The portion of the study
contained In this finai report Is based on quantitative analyses
using industry survey data from producers, feeders, packers,
processors, wholesalers, retailers, and food service operators;
transactions data and profit and loss (P&L) statements from
packers and processors; Mandatory Price Reporting (MPR) data;
and a variety of other published data sources.

iii
 The final report contains separate volumes that describe the
data collection methods and results (Volume 2) and the
analysis results for the beef Industry (Volume 3), the pork
industry (Volume 4), the lamb industry (Volume 5), and meat
distribution and sales (Volume 6). Volumes 3 through 6 address
the effects of AMAs on prices, costs, quality, risk, and
consumers and producers, to the extent feaslbie given the
availability of data.

The principal contributors to this study are the following:

RTI International Management, Data Collection, and Analysis

(across all species):

• Mary K. Muth, PhD, Project Manager

• Sheryl C. Cates, Data Collection Manager
• Michaela Coglaltl
• Mansour Fahlml, PhD
• Jeff Franklin
• Shawn Karns
• Katherine Kosa, MS
• Van (Julia) Li, MS
• Yanyan Liu, PhD
• Nadia Paoli, MS
• Richard Squires
• Justin Taylor, MS
Catherine Viator, MS
Fed Cattle and Beef:

• John Del Roccill, PhD, formerly of Econsult, LLC, West

Chester University, and AERC, LLC (Beef Team
Coordinator) (deceased)
• Martin Asher, PhD, Wharton School of the University of
Pennsylvania and AERC, LLC
• Eric Bradlow, PhD, Wharton School ofthe University of
Pennsylvania and AERC, LLC
• Francis Diebold, PhD, Wharton School of the University
of Pennsylvania and AERC, LLC
• Paul Kleindorfer, PhD, INSEAD, Wharton School of the
University of Pennsylvania and AERC, LLC

iv
 • Stephen Koontz, PhD, Colorado State University and
AERC, LLC
• John Lawrence, PhD, Iowa State University and AERC,
LLC
• John Schroeter, PhD, Iowa'State University and AERC,
LLC
Hogs and Pork:

• Tomlslav Vuklna, PhD, North Carolina State University

(Pork Team Coordinator)
• Nicholas Piggott, PhD, North Carolina State University
• Changmock Shin, PhD, North Carolina State University
• Michael Wohlgenant, PhD, North Carolina State
University
• Xlaoyong Zheng, PhD, North Caroiina State University
Lambs and Lamb Meat:

• Gary Brester, PhD, Montana State University (Lamb

Team Coordinator)
• Joseph Atwood, PhD, Montana State University
• John Marsh, PhD, Montana State University
• Kevin McNew, PhD, Cash Grain Bids, Inc,
We would like to thank the anonymous peer reviewers and
GIPSA staff who provided comments on earlier drafts, which
helped us Improve this report. We also thank Melissa Fisch and
Sharon Barrell for editing assistance.

This report and the study on which it is based were compieted

under a contract with GIPSA, U.S. Department of Agricuiture
(USDA). Any opinions, findings, and conciusions or
recommendations expressed in this report are those of the
authors and do not necessariiy refiect the views of GIPSA or '
USDA.

v
 Contents

Section Page

Abstract iii

Executive Summary ES-l

1 Introduction 1-1 .

2 Overview of Parts C, D, and E of the Study 2-1

3 Information Sources Used for Parts C, D, and E of

the Study 3-1

4 Organization of the Report 4-1

5 References 5-1

vii
Executive Summary

As part of the congressionally mandated Livestock and Meat

Marketing Study, this volume of the final. report presents the
results of analyses of the effects of alternative marketing
arrangements (AMAs) In the fed cattle and beef, hog and pork,
and lamb and lamb meat industries. This final report focuses on
determining the extent of use of AMAs,·analyzing price
differences and price effects associated with AMAs, measuring
the costs and benefits associated with using AMAs, and
assessing the broad range of implications of AMAs. The
analyses in this volume were conducted using results of
Industry Interviews, industry survey data, transactions and
profit and loss (P&L) statement data from meat packers,
Mandatory Price Reporting (MPR) data, and data from other
publicly available sources. Analyses are limited to the economic
factors associated with AMA use, and the report does not
analyze policy options or make policy recommendations.

In this report, AMAs refer to all possible alternatives to the cash

or spot market. AMAs inclUde arrangements such as forward
contracts, marketing agreements, procurement or marketing
contracts, production contracts, packer ownership, custom
feeding, and custom slaughter. Cash or spot market
transactions refer to transactions that occur Immediately, or
"on the spot." These include auction barn sales; video or
electronic auction sales; sales through order buyers, dealers,
and brokers; and direct trades.

It is important to note that the data collection period for the

study, October 2002 through March 2005, was an unusual time
for the U.S. meat industry. The beef industry experienced a

ES-l
Volume 1: Executive Summary and Overview

turbulent market because of the discovery of bovine spongiform

encephalopathy (SSE) In North America. The initial SSE case In
Canada in May 2003 stopped imports of live cattle to the United
States. The first U.S. case of SSE in December 2003 blocked
U.S. beef exports until July 2005. Cattle prices set annual
record highs in 2003, 2004, and 2005. Packers experienced
significant losses because of tight cattle supplies and continued
imports of Canadian boxed beef. While hog prices were not at
record highs, hog producer returns, which were negative during
2002 and much of 2003, turned positive from February 2004
through the end of 2006. The higher hog prices in .2004 and
2005 came at a time of record production, while demand for
pork improved. Lamb prices increased sharply-setting record
highs in the first quarter and second quarters of 2005-while
the supply of lambs declined.

ES.l GENERAL STUDY CONCLUSIONS

Within the context of these market conditions, the general
conclusions of the study are as follows:

• Use of AMAs during the October 2002 through March

2005 period, including packer ownership, is estimated at
38% of the fed beef cattle volume, 89% of the finish
hog volume, and 44% of the fed lamb volume sold to
packers.
• Packer-owned livestock accounted for a small
percentage of transactions for beef and lamb (5% or
less), even when the small percentage of partial
ownership arrangements is included, but accounted for a
large percentage of transactions for pork (20% to 30%
depending on assumptions).
• Given the current environment and recent trends, we
expect moderate increases In use of AMAs in the lamb
industry, but little or no Increase In the beef and pork
industries.
Cash market transactions serve an important purpose in
the industry, particularly for small producers and small
packers. In addition, reported cash prices are frequently
used as the base for formula pricing for cash market and
AMA purchases of livestock and meat.
• The use of AMAs is associated with lower cash market
prices, With a much larger effect occurring for finished
hogs than for fed cattle.

ES-2
 Executive Summary

• Many meat packers and livestock producers obtain

benefits through the use of AMAs, Including
management of costs, management of risk (market
access and price risk), and assurance of quality and
consistency of quality.
• In aggregate, restrictions on the use of AMAs for sale of
livestock to meat packers would have negative economic
effects on livestock producers, meat packers, and
consumers.
Primary conclusions for this final report by species are
described below.

ES.2 FED CATTLE AND BEEF INDUSTRIES

The primary conclusions for this final report, as they relate to
the fed cattle and beef Industries (Volume 3), are as foliows:
• The beef producers and packers interviewed
believed that some types of AMAs helped them
manage their operations more efficiently, reduced
risk, and improved beef quality. Feedlots Identified
cost savings of $1 to $17 per head from Improved
capacity utilization, more standardized feeding
programs, and reduced financial commitments required
to keep the feedlot at capacity. Packers Identified cost
savings of $0.40 per head In reduced procurement cost.
Both agreed that if packers could not own cattle, higher
returns would be needed to attract other investors and
that beef quality would suffer In an all-commodity
market place.
• Eighty-five percent of small producers surveyed
used only the cash market when selling to
packers, compared with 24% for large producers,
and pricing methods also differed by size of
operation. Large producers used multiple pricing
methods, including Individually negotiated pricing (74%
of producers), public auction (35%), and formula pricing
(57%). In comparison, small producers used Individually
negotiated pricing (32%), pUblic auction (84%); and
formula pricing (6%). Four times as many large
producers sold cattle on a carcass weight basis with a
grid compared with small producers.
• Ten percent of large beef packers surveyed
reported using only the cash or spot market to
purchase cattle, compared with 78% of small beef
packers. Large packers relied heavily on direct trade
and less on auction barns and dealers or brokers for
their cattle procurement compared with small packers.

ES-3
Volume 1: Executive Summary and Overview

Conversely, small packers used AMAs for approximately

half as much on a percentage basis as large packers.
Both large and small packers used multiple pricing
methods when buying cattle, including Individually
negotiated prices, formula pricing, public auction, and
Internal transfer pricing. While nearly all packers bought
some cattle on a IIveweight basis, 88% of large packers
purchased cattie based on carcass weight with grids,
while almost no small packers used this type of
valuation.
• Neither the producers nor packers surveyed
expected the use of AMAs to change dramatically
in the next 3 years. In addition, they Indicated that
their use of AMAs had not changed significantly from 3
years earlier. Auction markets were the predominate
marketing method across all producers seiling cattle and
calves. Based on the survey results, which tend to
represent smaller packers, 19% of fed cattle are
purchased through auctions. This is a substantially
higher percentage than the estimate based on the
transactions data obtained from larger packers.
• The producers surveyed that used AMAs identified
the ability to buy/sell higher quality cattle,
improve supply management, and obtain better
prices as the leading reasons for using AMAs. In
contrast, the producers surveyed that used only cash
markets Identified independence, flexibility, quick
response to changing market conditions, and ability to
buy at lower prices and sell at higher prices as primary
reasons for using only cash or spot markets.
• The packers surveyed that used AMAs said that
their top three reasons for using AMAs were to
improve week-to-week supply management,
secure higher quality cattle, and allow for product
branding in retail stores. Much like producers,
packers that used oniy cash markets identified
independence, flexibility, qUick response to changing
market conditions, and securing higher quality cattle as
reasons for using only the cash or spot market.
• Transactions data summarized from the 29 largest
beef packing plants during the time period of the
study included more than 58 million cattle and
590,000 transactions and indicated that the cash
or spot market was the predominate purchase
method used. Specific estimates of the percentage of
cattie purchased through each type of marketing
arrangement are as follows:

ES-4

Note: To ensure the
confidentiality of the
companies that
provided data for this
study, the packer
ownership category is
often combined with
other categories in the
summary statistics
presented in this
volume. Results of
analysis for the packer
ownership category are
prOVided In cases for
which the resuits do not • Transactions data indicate that packing plants in
reveal company-specific
confidentlai Information.
• Individually negotiated pricing was the most
Executive Summary
61.7% cash or spot market
28.8% marketing agreements
4.5% forward contracts
5.0% packer owned, other method, or missing
information
Thus, marketing agreements are the primary AMA used.
in the fed cattle and beef Industries, but other types of
AMAs are used extensively by Individual firms for
specific reasons that benefit their operations.
the CornbeltjNortheast used AMAs less frequently
than plants in the High Plains or West regions.
High Plains plants procured 61 % of cattle by direct
trade, 30% through marketing agreements, and a very
small percentage through auctions and forward
contracts. Cornbelt/Northeast plants bought the majority
of their cattle by direct trade, but some were purchased
through auctions and marketing agreements. Plants in
the West bought a lower percentage by direct trade
compared With the other regions and a higher
Percentage througn marketing agreements and auction
barns.
common method used to determine purchase
prices for fed cattle. Specifically, 60% of cattle
purchased by plants In the High Plains used Individually
negotiated pricing, with a similar percentage in the
Cornbelt/Northeast and a substantially lower percentage
In the West. Formula pricing was Lised to purchase 34%
of the cattle in the High Plains, With a higher percentage
in the West and a substantially lower percentage in the
Corn belt/Northeast. The formula was based most often
on either U.S. Department of Agriculture (USDA)-
reported prices or subscription service prices.
Corn belt/Northeast packers purchased the largest
percentage of cattle on a iiveweight basis (47%) in
comparison with the High Plains (40%) and the West
(25%). Packers In the West purchased more than half of
their cattle using carcass weight with grid valuation,
while packers in the High Plains and Cornbelt/Northeast
used this valuation method for 42% and 44% of their
purchases, respectively. The remainder were
predominately purchased on a carcass weight basis
without a grid.
ES-5
Volume 1: Executive Summary and Overview

• Regression analysis of the relationship between all

fed cattle transactions prices and use of marketing
arrangements indicates that, relative to direct
trade transactions, prices for fed cattle sold
through auction barns tended to be somewhat
higher and prices for fed cattle sold through
forward contracts tended to be somewhat lower.
These results are likely due, In part, to the differences in
risk associated with the two methods: auction barn sales
are subject to greater price risk, but forward contracts
ensure market access and a guaranteed price for cattle
producers. However, the results also are Influenced by
the period of the analysis, during which fed cattle prices
were at record highs. The prices for fed cattle sold
through marketing agreements and transferred through
packer ownership were relatively similar to direct trade.
Prices for cattle under packer ownership are Internal
transfer prices that are typically based on external
market prices; thus, Implications of the results for
packer-owned cattle are less clear.
• Regression analysis of the relationship between
cash market (auction barns, dealers and brokers,
and direct trade) transactions prices for fed cattle
and use of marketing arrangements suggests that
if capacity utilization within a plant increases
through the use of AMAs, firms pay slightly less
per pound for cattle purchased in the cash market.
Specifically, a 10 percentage point increase in capacity
utilization through AMAs Is associated with a 0.4 cent
per pound carcass weight decrease In the cash market
price. Furthermore, if more cattle are available through
AMAs within the following 21 days, cash market prices
decrease slightly. Specifically, a 10% reduction In the
volume of cash market transactions, assuming that
volume Is shifted into AMAs, is associated with a 0.11%
decrease In the cash market price.
Beef packer plant-level P&L data showed
significant economies of scale in beef packing, and
costs were decreasing across the entire data range
analyzed. When both are operated close to capacity,
smaller plants ~re at an absolute cost disadvantage
compared with larger plants. When larger plants operate
with smaller volumes, they have higher costs than
smaller plants operating close to capacity and, thus,
have an Incentive to Increase throughput. For all plants,
large and small, average total cost increases sharply as
volumes are reduced. A representative plant operating
at 95% of the maximum observed volume is 6% more

ES-6
 Executive Summary

efficient than a plant operating In the middle of the

observed range of voiumes and is 14% more efficient
than a plant operating at the low end of the observed
range.
• Based on an analysis of P&L statements,
procurement of cattle. through AMAs results in
production cost savings to the plants that use
them. However, the results differ across firms and
plants. Some plants benefited substantially from AMAs
and other plants did not appear to capture any benefits.
The weighted average Industry totai production cost .
savings associated with AMAs was approximately $6.50
per animal. For an Industry With an average loss of
$2.40 per head during the 30-month sample period, this
Is a substantial benefit.
• Marketing agreements are the most widely used
AMAs in the beef industry, and thus restrictions on
the use of marketing agreements would have the
greatest negative effects on costs of production in
the beef packing industry. Forward contracts and
packer-owned cattle were used, but to a much lesser
extent. Therefore, restrictions on the use of packer
ownershlp'and forward contracts for cattle would have
lesser effects on costs of production.
• While the results differ by plant and firm,
simulation analysis indicates that reducing or
eliminating AMAs would result in higher average
total cost (ATe) for slaughtering and processing
beef cattle and, likewise, reduced gross margins
and packer profits. The average Increase to beef
slaughter and processing ATC would be 4.7% With a
hypothetical elimination of AMAs and 0.9% with a
hypothetical 25% reduction Is use of AMAs. Packer
profits are estimated to decrease by 6.0% and 1.5% If
AMAs were reduced by 100% or 25%, respectively.
• Beef quality has a positive effect on beef demand,
the producers and packers interviewed and,
surveyed believe that AMAs are important for beef
quality, and quantitative analyses suggest that
AMAs are often associated with higher quality.
Regression analysis of MPR data found a small but
positive relationship between formula and packer
ownership procurement and USDA Quality Grade and
found no statistical relationship between cash purchases
and USDA Quality Grade. Regression analysis on
transactions data found that marketing agreement cattle
had a higher percentage Choice and Prime carcasses
without Increasing the percentage of Yield Grade 4 and 5

ES-7
Volume 1: Executive Summary and Overview

carcasses and had only modest declines in Yield Grade 1

and 2 carcasses. Other procurement methods had a
greater trade-off between preferred quality grade and
preferred yield grade. Furthermore, marketing
agreement cattle and packer-owned cattle were
associated with relatively higher quality compared with
direct trade cattle, as measured by a composite quality
index, but the small percentage of cattle sold through
auction barns was associated with the highest quality
and the highest variability In quality. The small
percentage of cattle sold through forward contracts was
associated with the lowest quality but also the lowest
variability in quality:
• The producers and packers surveyed that use
AMAs value ~hem as a method of dealing with
production, market access, and price risks. More
specifically, feedlots believed that AMAs allow them to
secure or sell better quality cattle and calves and
Improve operational management, efficiency, and
capacity utilization. Packers Identified AMAs as an
Important eiement of branded products and meeting
consumer d€mand by producing a higher quality, more
consistent product.
• Regression analysis accounting for cattle quality
and sales month found that auction market and
forward contract prices were more volatile than
direct trade, marketing agreement, and packer-
owned cattle prices. Furthermore, the volatility of
prices for direct trade and marketing agreement cattle
were relatively similar. Results were generally consistent
for fed beef cattle and fed dairy cattle.
• Hypothetical reductions in AMAs, as represented
by formula arrangements (marketing agreements
and forward contracts) and packer ownership, are
found to have a negative effect on producer and
consumer surplus measures. Beef and cattle supplies
and quality decreased and retail and wholesale' beef
prices increased because of reductions in AMAs.
However, feeder and fed cattle prices decreased because
. of higher slaughter and processing costs resulting from
the AMA restrictions. The short-run, long-run, and
cumulative present value surplus for producers and
consumers associated with reduced AMA volumes are all
negative. Over 10 years, a hypothetical 25% restriction
in AMA volumes resulted in a decrease in cumulative
present value of surplus of
2,67% for feeder cattle producers,

ES-8
 Executive Summary

1.35% for fed cattle producers,

0.86% for wholesale beef producers (packers), and
0.83% for beef consumers.
A hypothetical 100% restriction in AMA volumes resulted
in a decrease In cumulative present value surplus of

15.96% for feeder cattle producers,

7.82% for fed cattle producers,
5.24% for wholesale beef producers (packers), and
4.56% for beef consumers.
Thus, feeder cattie producers lose more surplus relative
to the other sectors under either scenario. In addition,
the estimated changes would Imply a reduction in the
competitiveness of beef relative to other meats.
• The cost savings and quality improvements
associated with the use of AMAs outweigh the
effect of potential oligopsony market power that
AMAs may provide packers. In the model simulations,
even if the complete elimination of AMAs would
eliminate market power that might currently exist, the
net effect would be reductions in prices, quantities, and
producer and consLimer surplus In almost all sectors of
the industry because of additional processing costs and
. reductions in beef quality. Collectively, this suggests
that reducing the use of AMAs wouid result In economic
losses for beef consumers and the beef industry.

ES.3 HOG AND PORK INDUSTRIES

Primary conclusions for this final report, as they relate to the
hog and pork industries (Volume 4), are as follows:
• AMAs are an integral part of hog producers' selling
practices and pork packers' procurement
practices. There are significant regional differences In
the observed patterns of use of AMAs: a stronger
reiiance on cash/spot markets and marketing contracts
is apparent in the Midwest, and a stronger reliance on
production contracts and packer ownership of hogs Is
apparent In the East. The pattern of future use of AMAs
is not expected to change dramatically; hence, we do
not expect that hog Industry industrialization will
emulate the Industrialization of the poultry sector.
• Based on individual transactions data, there are
substantial differences in daily hog prices paid by
packers on a carcass weight basis. On average, the

ES-9
Volume 1: Executive Summary and Overview

. price dispersion Is about 40% of the average value of

the transaction prices each day. One part of such strong
price dispersion can be explained by factors such as
region, quality, or plant size. However, even after
controlling for these factors, the remaining differences
must be due to organizational issues related to supply
. chain management in the pork processing sector.
• Results indicate that, on average, plants that use a
combination of marketing arrangements pay lower
prices for their hogs relative to plants that use the
cash/spot market only. In addition, comparing the
magnitudes of the portfolio effects to the magnitudes of
the individual marketing arrangement effects shows that
Individual marketing arrangements have minimal
additional impacj: on the average price after accounting
for the portfolio effect. That is, the portfolio system
categorical variables capture aimost the entire effect on
lowering the average price.
• Of particular interest for this study is the effect of
both contract and packer-owned hog supplies on
spot market prices; as anticipated, these effects
are negative and indicate that an increase in either
contract or packer-owned hog sales decreases the
spot price for hogs. Specifically, the estimated
elasticities of industry derived demand indicate
- . a 1% increase in contract hog quantities causes the
spot market price to decrease by 0.88%, and
a 1% Increase in packer-owned hog quantities
causes the spot market price to decrease by 0.28%.
A higher quantity of either contract or packer-owned
hogs availabie for sale iowers the prices of contract or
packer-owned hogs and Induces packers to purchase
more of. the now relatively less expensive hogs and
purchase fewer hogs sold on the spot market.
• Based on tests of market power for the pork
industry, we found a statistically significant
presence of market power in IivEl hog
procurement. However, the results regarding the
significance of AMA use for procurement of live hogs in
explaining the sources of that market power are
inconclusive. Whereas the model based on farm-
wholesale price spread data shows that a higher
proportion of AMA use leads to increased market power,
the model estimated with company-level Individual
transactions data indicates that AMA use may not be a
source of market power in pork packing.

ES-l0
 Executive Summary

• Estimated total and average cost functions

indicate that economies of scale diminish as the
pork packing firm size increases. The estimates
indicate that the scale economies are exhausted well
within the sample output range such that the biggest
plants already exhibit negative returns to scale. That is,
they operate on the upward-sloping portions of their
. average cost curves. The observed patterns of
procurement portfolio choices by packers also Indicate
that certain combinations of marketing arrangements
may reduce costs and/or increase economies of scale. In
particular, relative to using spot market procurements
alone, all other combinations of marketing arrangements
improve the efficient scale of production.
• Based on the observation that packers use
marketing arrangements in clusters (portfolios),
we hypothesized that marketing arrangements
may be complementary to each other in the sense
that implementing one procurement practice may
increase thl'! marginal return of the other practice;
however, the analyses of the complementarity of.
marketing arrangements produced inconclusive
results. Simpler tests based on the
correlation/association approach indicate that marketing
contracts are In fact complementary to production
contracts and/or packer owned arrangements. Also, the
portfolio coefficients In the performance equations based
on either the earnings before insurance and taxes (EBIT)
or the gross margin show that all marketing
arrangement portfolios improve plant performance
relative to simple spot market purchases. However, the
coefficient associated with the portfolio of three
marketing arrangements is smaller than the coefficient
associated with portfolios of two marketing
arrangements, thus vloiatlng the complementarity
requirement. More conclusive formal tests were not
. feasible given data limitations.
• To analyze quality differences in live market hogs
across alternative procurement methods (AMAs),
we tested whether various quality attributes used
by the industry are significantly different across
AMAs and found that different AMAs are
associated with different levels of quality of hogs.
Even though the rankings are not unique, we found that
marketing contracts (especially other purchase
arrangements and other market formula purchases) are
consistently associated with higher quality hogs than
negotiated (spot market) purchases.

ES-ll
Volume 1: Executive Summary and Overview

• An examination of the relationship between the

proportion of AMAs used to procure live hogs and
the quality of resulting pork products indicates
that a higher proportion of AMA use is associated
with higher quality pork products. We measured
pork product quality using Hicks' composite commodity
index and hypothesized that a higher percentage share
of the AMAs (essentially marketing contracts and
packer-owned hogs) should produce higher quality pork
products. The correlation coefficient showed that these
two series are positively correlated, thus confirming our
hypothesis.
• An analysis of risk associated with different
marketing arrangements shows that different
types of marketing arrangements exhibit different
price volatilities as measured by the variance of
prices. Therefore, hog producers selling hogs using
different types of marketing arrangements experience
different levels of risk. From the hog producers' point of
view, the ordering of marketing arrangements in
decreasing order of risk is as follows: (1) spot/cash
market sales; (2) marketing contracts in which the
pricing formula Is based on spot market prices; (3)
marketing arrangements in which the pricing formula Is
based on some futures or options price; (4) other
purchase arrangements containing ledgers, windows,
and other pricing mechanisms, which may serve as a
cushion against price volatility; and (5) production
contracts.
• In analyzing the importance of hog producers' risk
aversion for contract choice, we found that hog
producers who use production contracts are more
risk averse than producers who use
cash/marketing arrangements. The difference in risk
exposure between contract producers and Independent
farmers Is substantial because production contracts
eliminate all but 6% of total income volatility. Therefore,
the utility losses associated with forcing producers to
market their hogs through channels different from their
risk-averslon-preferred marketing arrangement choice
are substantial.
• In analyzing the economic effects of hypothetical
restrictions on the use of AMAs in the hog and
pork industries, we found that hog producers
would lose because of the offsetting effects of
hogs diverted from AMAs to the spot market,
consumers would lose as wholesale and retail pork
prices rise, and packers would gain in the short

ES-12
 Executive Summary

run but neither gain nor lose in the long run. The
results applied to three different simulations: (1) 25% .
reduction In both contract- and packer-owned hogs, (2)
increase the spot/cash market share to 25%, and (3)
complete ban of packer-owned hogs. The reason that
producers and consumers lose In all three simulation
scenarios Is because of efficiency losses from reducing
the proportion of hogs sold through contracts and/or
packer owned channels. Although a reduction in AMAs
leads to an Improvement for hog producers through a
reduction In the degree of market power, the loss in cost
efficiencies offsets the gains from reduced market
power. In all instances, the price spread between farm
and wholesale prices would be expected to Increase
because of the net increase In the costs of processing.
Moreover, wholesale, and hence retail, prices would
increase, causing pork to become more expensive for
consumers.

ES.4 LAMBS AND LAMB MEAT INDUSTRIES

Primary conclusions for this final report, as they relate to the
lamb and lamb meat Industries (Volume 5), are as follows:
•. Lamb packers procure fed lambs primarily through
formula pricing arrangements and auctions.
According to MPRdata, lamb packers procure 42.2% of
fed lambs through formula pricing arrangements and
39.4% through auctions. Negotiated sales account for
12.0% of fed lamb procurement, and packer ownership
represents4.9%. Contracted procurement represents
only 0.8% of lamb procurement, while imports represent
only 0.7%. These data are similar to those obtained
from the lamb packer survey.
• The means and standard deviations of fed lamb
prices from MPR data for formula pricing and cash
arrangements were similar during the sample
period. The price series were highly correlated with an
estimated correlation coefficient of 0.970. A reduced-
form model of the difference between normalized
formula pricing and cash fed lamb prices Indicated that
lamb inventories, lamb carcass price risk, and
seasonality were the primary determinants of variations
·in the difference.
• Changes in procurement methods for lamb would
impose costs on the lamb marketing system by
reducing efficiencies, but may also provide some
benefits by altering potential market power
effects. If formula pricing procurement is restricted,

ES-13
Volume 1: Executive Summary and Overview

lamb acquisition costs would rise. However, some of this

Increase In costs may be offset by a reduction in
. potential oilgopsony power. Ultimately, a combination of
these effects yields net changes in lamb prices,
quantities, and producer surplus.
• Given that lamb markets are relatively thin, the
primary effect of MPR may have beento reduce
price risk rather than to influence price levels. The
implementation of MPR in 2001 Increased slaughter
lamb price by only 0.129%.
• AMAs were found to have statistically significant
although economically small effects on lamb
prices. A 10% Increase In formula pricing lamb
procurement would Increase the slaughter lamb price by
an estimated 2.54%; this effect is likely due to risk
reductions. A 10% increase in cash lamb procurement
Increases slaughter prices by an estimated 2.68%. A
10% increase in packer ownership reduces slaughter
lamb prices by an estimated 0.23%.
• Increases in formula pricing and cash procurement
methods reduce lamb procurement costs, while
increases in packer ownership increase
procurement costs. The effects of formula pricing and
cash procurement methods on procurement costs for
. Iambs were similar and not statistically different from
one another.
• Technological change has likely increased lamb
quality over time. However, there does not appear to
be any statistically significant difference in the quality of
lambs procured through formula pricing and cash
procurement methods.
• Price risk shifting from lamb producers to lamb
packers and breakers has not occurred as a result
of AMAs. No statistical difference was found between
the variances of prices for each type of AMA.
• Restrictions on the use of AMAs cause almost
every sector in the lamb industry to lose producer
surplus, even if potential market power (if it
exists) is reduced or eliminated. Reductions in the
use of AMAs have both positive and negative effects on
the lamb industry. Reductions In potential market power
(a positive effect) do not offset the increases in
processing costs and reductions in lamb quality
(negative effects) .
• Restrictions on the use of AMAs would likely
reduce the competitiveness of the lamb industry.

ES-14
 Executive Summary

Although lamb is not a strong substitute for beef and

pork, restrictions on the use of AMAs wouid place It at a
competitive disadvantage to these other meats. More
importantly, however, it appears that imported lamb is a
strong substitute for domestic lamb. Hence, the loss of
competitiveness in response to restrictions on the use of
AMAs Is much more pronounced with respect to lamb
imports.
• AMAs may have mUltiple effects on accessing the
lamb market. Ease of entry may be affected by the
availability of AMAs, because financing of production
operations often depends on the assurance of market
access and price risk management. However, for small
producers, it may be more difficult to secure AMAs
because It is more costly for packers to negotiate with
many small producers relative to fewer large producers.
Hence, if AMAs reduce the viability of public auctions,
. small producers may find that their market access is
limited.
• Restrictions on the use of AMAs may increase
concentration of various segments of the lamb
industry, but the effect of increased concentration
on market power is unknown. There are no clear
effects of the changes in the use of AMAs on
concentration in the lamb industry. Concentration In the
lamb packing industry has remained relatively flat, even
though the use of AMAs has increased. However,
Increased use of AMAs may reduce the viability of
auctions and could lead to increased concentration in the
lamb feeding sector. In addition, If restrictions on AMAs
reduce the competitiveness of domestic lamb meat
relative to lamb imports, then concentration in the lamb
packing and processing industry Is likely to increase in
response to declining domestic demand.

ES.5 MEAT DISTRIBUTION AND SALES

Primary conclusions for this final report, as they relate to meat
processing, distribution, and sales (Volume 6), are as follows:

• Transactions data on meat processor purchases

indicate a much larger use of AMAs than do the
survey data. Based on transactions data, only 21% of
beef and pork products were purchased on the spot
market. Internal transfers were a large factor for pork
but were virtually nonexistent for beef. Forward
contracts were 28% of beef purchases, but less than 1%
of pork purchases. The type of purchase method used is
either not Important to meat processors or they did not

ES-.15
Volume 1: Executive Summary and Overview

understand the meaning of the categories, because 39%

of beef and 32% of pork purchase methods were listed
as "other or missing."
• Approximately 99% of pork and 55% of beef
product pounds that were priced using formula
pricing used a USDA-reported price as the base.
The other base used for purchased beef was a
subscription service. Although nearly ali pork pricing
formulas are based on USDA-reported prices, It Is worth
noting that wholesale pork, while reported by USDA, Is
not covered under Mandatory Price Reporting (MPR).
• Meat processors play an important distribution
role in the meat value chain by purchasing large
lots from a few sources and selling small lots to
many firms. Transaction purchase data Inciuded 53,831
records from 32 firms, averaging 22,800 pounds per
transaction. Sales transactions from 11 firms included
848,295 records, averaging 771 pounds per transaction,
, and these were all case ready or RTE. A high percentage
of these transactions ,did not identify the sales method,
Indicating that processors either did not understand the
meaning of the categories that were listed or do not
track this information.
• When examining data specific to the beef industry,
aggregate cattle purchase and beef sales
transactions data suggest no relationship between
cattle purchase methods and branded beef sales,
although this relationship may be important to
individual firms. Plants that sold 0% to 20% of their
beef as branded product purchased approximately the
same percentage of their cattie on the spot market as
did plants that sold 21% to 40% of their beef as
branded product. Although the differences were smali,
the 21 % to 40% plants used more forward contracts
and less packer ownership than did the 0% to 20%
plants. Shares of marketing agreement cattle were
nearly identical across the two groups. In addition, 60%
of the meat purchased on the spot market by processors
was branded product compared with none through
marketing agreements and internal transfers'.
• Although potentially important to some beef
industry firms, aggregate transaction data suggest
that downstream marketing arrangements have no
relationship to cattle purchase methods. Beef plants
were divided into two groups based on beef sales
methods-O% to 50% and 51% to 100% cash or spot
market beef sales. Transactions from both groups
indicated that they each bought 60% of their cattie

ES-16
 Executive Summary

through the spot market and 40% using AMAs. The 0%

to 50% cash sales group used more marketing
agreements, and the 51 % to 100% cash sales group
had more packer-owned cattle.
• Aggregate transactions data for the beef industry
suggest some relationship between meat buyer
type and cattle purchase methods. Packers that sold
more beef to meat processors bought fewer cattle on
the spot market but about the same number of cattle
through AMAs (with the difference resulting from a
larger percentage of other purchases or missing
Information). Packers that sold a larger amount of beef
to retailers and food service operators bought a larger
percentage of their cattie on the spot market and a
slightly lower percentage of cattle through AMAs.
• The porl< industry is more vertically integrated
than is the beef industry. Pork packers produce a
higher percentage of the animals that they slaughter
than do beef packers, and pork processors acquire much
more of their product through internal transfer than do
beef processors.
• Meat processor buyers mix and match purchase
and pricing methods. Formula pricing was used as the
pricing method for spot market, forward contracts, and
marketing agreements. Likewise, individually negotiated
prices were more common in forward contracts than in
spot markets.

ES.6 LIMITATIONS OF THE ANALYSES

Decisions regarding methodologies, assumptions, and data
sources used for the study had to be made in a short period of
time. The analyses presented in this final report are based on
the best available data, using methodologies developed to
address the study requirements under the time constraints of
the study. Some analyses were limited because of availability
and quality of the transactions and P&L statement data.
However, secondary data were used, as available, to
supplement primary data in order to conduct the analyses.

ES-17
 j
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 1 Introduction

Over time, the variety, complexity, and use of AMAs have

AM As Include all Increased in the livestock and meat industries. Marketing
possible alternatives to arrangements refer to the methods by which livestock and
use of cash or spot meat are transferred through successive stages of production
markets for conducting
and marketing. A marketing arrangement also designates a
transactions.
method by which prices are determined for each individual
transaction. The increased use of AMAs raises a number of
questions about their effects on economic efficiency and on the
distribution of the benefits and costs of livestock and meat
production and consumption between producers and
consumers .

. USDA's GIPSA is charged with facilitating the marketing of

livestock, meat, and other agricultural products. This agency
also promotes fair and competitive trading practices for the
overail benefit of consumers and American agriculture. In
fulfilling its mission, GIPSA evaluates, among other things, the
implications of the evolving landscape of AMAs and pricing
methods.

In 2003, Congress allocated funds to GIPSA to conduct a broad

In 2003, Congress
study of the effects of AM As on the livestock and meat
ollocatedfunds to GIPSA
to conduct a broad study industries. GIPSA developed the specific scope and objectives
ofthe effects ofAMAs on of the study, and foliowing a competitive bidding process, RTI
the livestock and meat was awarded a contract to conduct the Livestock and Meat
industries. Marketing Study.

The questions posed by the Livestock and Meat Marketing

Study included the following: What types of marketing
arrangements are used? What is the extent of their use? Why
do firms enter into the various arrangements? What are the

1-1
Volume 1: Executive Summary and Overview

terms and characteristics of these arrangements? What are the

effects and implications of the arrangements on participants
ahd on the livestock and meat marketing system?

, The study examined the fOllowing species and meat types:

• fed cattle and beef,

• hogs and pork, and
• Iambs and lamb meat.
The .study comprised five main parts:

• Part A. Identify and classify types of spot marketing

arrangements and AMAs.
• Part B. Describe terms, availability, and reasons for use
of spot marketing arrangements and AMAs.
• Part C. Determine extent of use, analyze price
differences, and anaiyze short-run market price effects
of AMAs.
• Part D. Measure and compare costs and benefits
associated with spot marketing arrangements and AMAs,
• Part E. Analyze the Implications of AMAs for the livestock
and meat marketing system.
An interim report released in August 2005 addressed Parts A
The interim report and B of the study (Muth et al., 2005). The report described
released in August 2005 marketing arrangements used In the livestock and meat
addressed Parts A and B Industries and defined key terminology.' Results presented in
of the study. This final
the interim report were preliminary because they were based
report focuses on Parts
C, D, and E. on assessments of the livestock and meat industries using
published data, review of the relevant literature, and industry
Interviews.

Concurrent with conducting Parts A and B of the study, the

study team developed and pretested Information collection
plans for obtaining transactions data and P&L statements from
packers, processors, and downstream market participants, In
addition, the study team developed and pretested a set of 10
Industry survey questionnaires to obtain additional information
beyond what could be obtained in transactions data and P&L
statements. We received approval for both information
collection requests from the Office of Management and Budget
(OM B) in October 2005.

, Terms used In the study are included in the glossary,

1-2
 Section 1 - Introduction

This final report describes the results of quantitative analyses

addressing Parts C, D, and E of the study, using data from the
industry surveys across all stages of livestock and meat
production, transactions data and P&L statements from packers
and processors, production contract settlement data from
packers, and a variety of pUblicly available data. According to
the Performance Work Statement (PWS) In the contract with
GIPSA, the results of these analyses will provide Information to

• livestock producers to help them make more informed

production and marketing decisions,
• the general public to help them understand the roles and
reasons for using these arrangements,
• GIPSA for its role In enforcing the Packers, and
Stockyards Act, and
• USDA and Congress to help them determine whether
polley changes affecting livestock marketing methods
that were originally considered during the development
of the 2002 Farm Bill are warranted.
The study is national in scope, but It considered regional
The Livestock and Meat differences among marketing arrangements, if applicabie, and
Marketing Study was International dimensions related to marketing arrangements, If
limited to economic significant. All stages of production and marketing were
factors associated with addressed, including farm level, slaughtering, processing,
spot marketing
wholesaling and distribution, retailing, food service, and export.
arrangements and AlvlAs
The Livestock and Meat Marketing Study was limited to
and did not analyze
economic factors associated with spot marketing arrangements
policy options or make
policy recommendations. and AMAs and did not analyze policy options or make polley
recommendations.

1-3
 Overview of

2 Parts C, 0, and E
of·the Study

Parts C, D, and E include complementary analyses of the

effects of AMAs In each Industry. The aims of Part C were to
Throughout the report, determine the extent to which various types of spot marketing
Industry participants are arrangements and AMAs are used, to analyze price differences
grouped Into the
among the marketing arrangements, and to analyze the effects
following categories:
• livestock producers of alternative arrangements on short-run spot market prices as
and feeders follows:
• meat packers and
• Determine the volume of livestock and meat transferred
processors (or
breakers) through the various types of spot and alternative
arrangements by type, size, and location of market
• wholesalers and participants.
distributors
exporters • Report al(erage price levels and differences in prices by
type, size, and location of market participants.
food service or
restaurant • Determine price differences associated with the various
establishments types of spot marketing arrangements and AMAs,
retail establishments adjusting for quality differences, lot size, and other
relevant factors that may affect prices, and determine
how price differences vary with market conditions.
• Determine If packers' use of alternative procurement
and pricing arrangements for fed cattle, slaughter hogs,
and lambs is causally related to spot market prices for
these animals in the short run and determine the nature
of the relationship.

The aims of Part D were to measure and compare possible

costs and benefits associated with the various types of spot
marketing arrangements and AMAs as follows:

2-1
Volume 1: Executive Summary and Overview

• Determine cost and efficiency differences and measure

size and other economies and diseconomies associated
with the use of AMAs.
• Determine the extent to which any differences in animal
and meat quality are associated with differences In spot
marketing arrangements and AMAs.' .
• Determine if the various types of marketing
arrangements shift risks among market participants or
alter risk levels. 3
The alms of Part E were to analyze the impiicatlons of AMAs for
the livestock and meat marketing system, using the models
developed In Parts C and D, as follows:

• Assess system-wide economic implications of restrictions

on AMAs used by packers to purchase livestock.
• Assess the relative overaii strength of positive and
negative economic incentives for increased or decreased
use of the various types of marketing arrangements.
• Examine the impiications of expected changes in the use
of various marketing arrangements over time.

, As noted in the PWS, quality measures might Include meat grades,

tenderness, taste, nutritional characteri!?tics, consistency, and
conformity to specifications.
3 As noted in the PWS, risk might reiate to price, quality, loss of
product, ioss of supplier, loss of buyer, reduced credit rating, or
iess reliable trading partners.

2-2
 Information
Sources Used for

3 Parts C, 0, and E
of the Study

. The analyses conducted for the final report build on information

obtained for and summarized In the interim report. The interim
report was based on Information from the empirical agricultural
economics and management literature, information from the
development and pretesting of the data collection Instruments
for the transactions data collection and the industry surveys,
available contract forms for beef cattle and hogs, discussions
with trade associations, and discussions with industry
participants.

The analyses presented in this final report use the following

types of data:

• purchase and sales transactions data from meat packers

and processors
• P&L statements from meat packersand processors
• production contract settiement data from hog packers
• industry survey responses from livestock producers,
meat packers, meat processors, meat wholesalers, meat
exporters, grocery retailers, and food service operations
• a broad range of publicly available data, Including MPR
data

3-1
 Organization of
4 the Report

This final study report provides information and quantitative

results for Parts C, D, and E of the Livestock and Meat
Marketing Study. The volumes of the final report are as follows:

• Volume 2: Data Collection Methods and Results

• Volume 3: Fed Cattle and Beef Industries
• Volume 4: Hog and Pork Industries
• Volume 5: Lamb and Lamb Meat Industries
Volume 6: Meat Distribution and Sales
• Appendix A: Glossary
The results from Volume 2 are Incorporated Into all volumes, in
the relevant sections. Volumes 3 through 5 have a similar
structure, which follows the requirements of the study, as
specified in the PWS. Volume 6 has a different structure to
Inciude additional analyses beyond the species-specific analyses
Included In the previous volumes.

4-1
5 References

Muth, M.K., G. Brester, J. Del Rocclll, S. Koontz, B. Martin, N.

Piggott, J. Taylor, T. Vukina, and M. Wohlgenant. July
2005. spot and Alternative Marketing Arrangements in
the Livestock and Meat Industries: Interim Report.
Prepared for the U.S. Department of Agriculture, Grain
Inspection, Packers and Stockyards Administration.

5-1
ATTACHMENT C
 Assessment of the Livestock and Poultry Industries
Fiscal Year 2007 Report

United States Department of Agriculture

Grain Inspection, Packers and Stockyards Administration

May 2008
Structural Chauge aud Iucreased Coordiuation in Meat Packing

Concerns about increases in concentration and related changes in industry structure, and
the perception that these changes are inherently anticompetitive continue to be expressed
as criticisms of economic efficiency within the livestock and meat industry. Although
concentration has stabilized somewhat in recent years in some segments of the livestock
and meat industry, continued mergers and acquisitions, plant closings, and plans of leading
firms to build new plants all suggesl concentration and structural change will continue to
be a source of concern. With increasing concentration (share of total market or production
at a given stage), there has also been an increase in consolidation of control by individual
firms. Consolidation refers to changes that often reduce the number of firms but also
increase individual firms' coordination and control of activities across stages ofthe
production and marketing system. Increased cross-stage coordination and control are often
associated with use of production contracts, marketing contracts and ownership of
production operations at another stage in the production and marketing system.

GIPSA Actions
GIPSA has administrative authority in the livestock sector under the P&S Act and acts-
to enforce the Act and enhance competitive markets. GIPSA does not have authority to
review or to prevent mergers and acquisitions, but often cooperates with and lends its
industry expertise to DO] in its review of mergers in the livestock, meatpacking, and
poultry industries.

Changes in industry structure, such as concentration levels and vertical integration, tend
to alter the focus GIPSA has on particular firms and behavior. These industry-wide
changes reflect the dynamics of competition, and hence are not prohibited by the P&S Act.
It is important to note that many of the changes in coordination associated with industry
consolidation may also provide for improved economic performance of the industry, that
is, lower processing costs and consumer prices. Also, structural change can lead to
downstream market alliances to facilitate penetration of retail markets with branded
products to increase consumer choices. Merger and acquisition activity in recent years has
increased the market shares offirms with management expertise in supply channel
management across channels, including value-added processing and branded product
retailing. The capability to increase branded retail products depends on high levels of
input supply management to achieve uniform and high levels of packing plant utilization,
and production of carcasses that can be processed into uniform retail products.

In fiscal year 2003, GIPSA received $4.5 million in appropriations for a broad study of
marketing practices in the entire livestock and red meat industries from farmers to retailers,
food service firms, and exporters. The study addressed many questions and concerns that
have been raised about changes in the structure and business practices in the livestock and
meat industries. RTI, International Inc. delivered a final report in the late fall of 2006, and
GIPSA publicly released the report in February 2007 after briefing Congress on the results

28
ofthe study. 16 The study provided a quantitative analysis of prices and of costs-benefits of
alternative marketing alTangements, and it assessed the implications of potential future
changes in the use of various types of marketing arrangements, including packyr feeding.

The study found that alternative marketing arrangements provide net benefits to
producers, packers, and consumers, and that net economic losses would result from
restrictions on the use of such arrangements.

In particular, the study found that packers and consumers receive better quality and
more consistent product as a result of alternative arrangements, and producers receive
value for better quality livestock. All parties are better able to set delivery/sale dates. The
arrangements help to stabilize the flow of supply, and provide cost savings in sellers and
buyers interactions to arrive at a market price (i.e., the price discovery process). In
general, the use of alternative marketing arrangements provides livestock buyers and
sellers with improved risk management options that lower costs or allow for the creation
and capture of greater value.

Currently, GIPSA inspects the procurement records of the five largest fed cattle packers
to verify firm reporting accuracy for cattle procured under alternative marketing
agreements, including cattle procured through packer ownership, forward contracts, market
agreements, and the spot market. In 2008, GIPSA will expand its inspection of
procurement practices to include the five largest hog packers. GIPSA's review assists in
correctly categorizing the cattle procured under contract into one of the committed
procurement methods, or alternatively into a non-committed method. The review also
contributes to available information on the trends and methods by which the packers
procure cattle.

Adequacy of Bonds for Regulated Entities

The P&S Act provides that the Secretary may require packers, market agencies, and
livestock dealers to have reasonable bonds (7 USC§204). The regulations issued under the
P&S Act prescribe bond requirements and bonding formulas for market agencies either
buying or selling on commission or acting as clearing agencies; for livestock dealers; and
for packers purchasing over $500,000 of livestock annually. These entities must maintain
a bond or bond equivalent to protect unpaid livestock sellers. The bonding formulas, last
modified in 1983, rarely provide full coverage to livestock sellers when a bonded entity
experiences financial difficulty. Between fiscal years 2002 and 2007, sellers who were not
paid as a result of financial failures by market agencies selling on commission recovered
between 35 and 78 percent of their total claim amounts each year. During the same period,
the recovery rate ranged between 5 and 21 percent for livestock sellers owed by dealers
that failed financially. Members of the livestock industry and Congress have expressed

16 Copies of the report CDn be obtained at:

http://www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lmp&topic=il'-mms.

29
ATTACHMENT D
 Assessment of the Cattle and Hog
Industries
Calendar Year 2000

United States Department of Agriculture

Grain Inspection, Packers and Stockyards Administration
Issued June 2001
On many occasions, the public has expressed its belief that USDA may restrict
meatpackers' behavior, without specific evidence of competitive harm. P&SP must
prove any allegation of a prohibited anti-competitive practice in a litigated case by
proving through a preponderance of the evidence that some measurable harm has
occurred or is likely to occur. Most issues regarding competition and potentially anti-
competitive practices are complex and interrelated. They often do not yield to easy
answers. Extensive data collection and sophisticated economic analyses are required to
fully understand the reasons for and implications of the practices.

Packers Acting in Concert to Restrict Competition-Members of the industry,

especially producers, express concems about possible concerted action by meatpackers.
In some cases, concerns are expressed about wide-ranging impacts cutting across broad
industry segments, such as allegations of packer behavior leading to low hog prices
during December 1998-January 1999. In other cases, concerns address specifiC
circumstances involving narrow industJy segments, such as why few packers bid on cattle
at a particular feedlot. These concerns do not necessarily suggest firms are engaging in
unlawful practices and instead may be attributable to normal supply and demand forces,
competitive bidding processes, or personal relationships that have developed over time
between packers and livestock sellers. The P&S Act prohibits unlawful conspiracies,
combinations, or agreements that result.in certain anti-competitive activity. 96 Past
analyses by P&SP of packers' livestock procurement patterns have not revealed such
activity among packers.

Short Trading Window-A specific practice that raises concerns is the allegation that
there is a short window during which trading of fed cattle occurs. Some cattle producers
and market observers contend that vittually all spot-market cattle transactions occur
during a relatively short period each week, often described as a 15- or 3D-minute window.
During its 1996 Texas Panhandle Fed Cattle investigation, P&SP found that the highest
volumes of cattle were purchased on Wednesdays, but spot-market transactions occurred
on every business day of the week. As discussed previously, the bidding process for fed
cattle normally begins early on Monday momings when packer buyers visit feedlots to
view cattle for sale. The price discovery process continues during the week as buyers and
sellers presumably assess market conditions, followed by rapid consummation of many
transactions once market participants believe the market price has been discovered.

Shared Agents-It is a common practice for one buyer to represent more than one packer
at an auction sale, especially in sales involving culllivestoG1c Auction market owners
and livestock sellers have raised concerns that the use of common buyers, or shared
agents, reduces the number of competing buyers. This practice has the potential for
reducing competition. However, the issue is complicated by a general lack of buyers at
many auctions. Sharing a buyer may result in packers· purchasing livestock at auctions
where the packers otherwise would not be active. P&SP continues to investigate
complaints about shared agents at livestock markets .

. % 7 V.S.c. 192

30
ATTACHMENT E
United States
Department of
Agriculture Assessment of the
Grain Inspection,
Packers and
Stockyards
Cattle, Hog, and Poultry
Administration

fi.!iJ:-i"~'f'~
Industries
(~I
\c".• .. "
,!~~~';.':",~
;
2004 Report
the livestock sellers under each of the purchase types and confirm the correct amount was paid. In the
replication process, investigators verifY the data used as variables in the formulas are accurately transferred
into the formulas, and that computations are handled properly. The investigators also confirm that the
factors used to determine the final payment amounts are clearly disclosed on the sellers' settlements and
that any adjustments are explained in an appropriate manner.

Joint Livestock Pnrchasing

P&SP is aware of several situations in which two packers have used the same agent to procure livestock of
similar type and quality, packers have bought liveslock of similar type and quality for each other, and
dealers and order buyers have orders from multiple packers for similar type and qnality of livestock. These
are potential violations of the P&S Act.

GIPSA Response: P&SP investigates all complaints about the use of shared agents, packers buying
livestock for each other, and dealers or order buyers having orders from multiple packers for the same type
and quality of livestock. Whether the P&S Act is violated depends on the circumstances of each case.
Regulation §20 1.69 prohibits packers, dealers, and market agencies from furnishing information to
competitor buyers for certain purposes. Regulation §201.70 requires every packer and dealer to conduct his
or her buyer operations in competition with and independently from other packers and dealers similarly
engaged.

Livestock, Meat, and Ponltry Evalnation Devices and/or Systems

In the livestock and meatpacking industries, packers and producers are expanding beyond USDA grading to
determine the value and appropriate prices to pay for livestock purchased on a carcass merit basis. The
industries are developing sophisticated electronic evaluation devices and/or systems to measure live or
carcass merit charactedstics on which payment is based. Before 2003, there was no accredited (by the
government or any other organization) procedure to evaluate the accuracy of electronic devices and/or
systems used to evaluate beef or pork carcasses.

In the pork industry, packers pay most producers based on the lean percent of their hogs, estimated by
formulas using measurements taken by electronic carcass evaluation devices. Many forms of evaluation
devices and/or systems and in-house graders have taken the place of USDA graders. Due to the lack of
performance standards for evaluation devices and/or systems, producers receive information from packers
that is not comparable when marketing to multiple packers that use different evaluation devices for lean
measurement.

In the beef industry, at least SO percent of market ready slaughter cattle are sold on a value-based marketing
grid, meaning that premiums and discounts are paid for carcass ath'ibutes that affect the total value of the
products derived from that carcass. In contrast to tl,e pork industry, these evaluations are based on visual
appraisals from USDA graders alone or in combination with information garnered from the evaluation
devices and/or systems.

USDA's Agdcultural Marketing Service (AMS) is involved in developing standards for approval of
evaluation devices. In 2003, for example, AMS developed a standard for approval of a vision-based system
for-evaluating the size of a beef ribeye, one of the most important factors in determining the estimated yield
of boneless beef product. These standards establish the level of accuracy that systems must meet in order
to be certified by USDA.

16
ATTACHMENT F
2009 Annual Report
Packers & Stockyards Program
United States Department of Agriculture
Grain Inspection, Packers and Stockyards Administration

Table of Contents

2009 Report Highlights I

Executive Summary ii
Overview of the Packers and Stockyards Program 4
Packers and Stockyards Program's Unit Level Activities 10
Packers and Stockyards Program Management 24
Assessment of the Industries 40
Report Provenance 72

MISSION:

"To protect fair trade practices, financial integrity, and

competitive markets for livestock, meat, and poultry."

March 2010
 Packers and Stockyards Program Annual Report I 2009
."-•. ~._--_.,,-~_._-".,. __ ._----~--_...•~,,--_ .._._-,,.. _-.-.-._---_.__.....~._ ..._-_._.__.._._.•._._.._!_.,,-_.,...--,,-

P&SP conducts many activities that monitor changes in industry

behavior in order to understand the nature of and reasons for
changes, and to anticipate potential competitive issues that may
result from those changes.

Details of specific, ongoing individual monitoring efforts are

described in the next three sections:

Fed Cattle and Hog Market Price Monitoring

P&SP undertook a price monitoring initiative in response to

market issues that evolved from the announcement of the first case
of bovine spongiform encephalitis (BSE) in the United States on
December 23, 2003. A national task force comprised ofP&SP
economists modified an econometric model in use since the mid-
1990s that detected price differences in regional fed cattle markets.
The statistical model relied on publicly reported price data to
assess regional price differences. If a statistically significant price
difference was detected, P&SP initiated a regulatory review work
plan to determine whether those price differences were caused by
an undue or unreasonable preference or disadvantage in violation
of section 202 (b) of the Act or by uncontrollable external factors,
such as weather or other external macroeconomic conditions. The
statistical model is similar to the model used by the Federal Trade
Commission in 2008 to monitor retail gasoline prices.

The current fed cattle market price program was first implemented
in 2004, but has since evolved into an enhanced program that
includes a weekly internal reporting regime and a detailed work
plan to conduct in-depth investigations into possible violations of
the Act if the initial regulatory reviews of price differences do not
clarify whether they were caused by external market factors. The
model and the historical database upon which the monitoring
program is based have also been enhanced through further
economic and statistical research activity conducted by P&SP
economists.

The model is run weekly, and any price outlier that is not caused
by certain technical statistical factors triggers a regulatory review
by P&SP. If the regulatory review does not determine that the price
outlier was caused by certain external factors or readily observable
market conditions, then a formal investigation is initiated to
determine the cause of the price outlier. The formal investigation
involves deeper examination of the price data and cattle
characteristics, and interviews with buyers, sellers, and other
market participants.

Page 113
 The fed cattle price monitoring program initiated 25 regulatory
activities in 2009, and of these, 3 indicated cause for investigation
(Table 4).

Table 4. Regulatory Activities ond Investigations Resnlting From Weekly

Statistical Monitoring of Fed CaUle Marl,ets
Regulatory Investigations
Fiscal Year Activities Initiated Initiated
2006 25 6
2007 13 o
2008 19 4
2009 25 3

Of the three investigations initiated in 2009 with a request for data

from the Agricultural Marketing Service (AMS), all three are
ongoing with field interviews being conducted. Although no
competition violations have been identified, P&SP continues to
actively monitor market prices on a weekly basis and initiate
.timely regulatory reviews and investigations, if necessary, of
observed market price anomalies.

Effective September 9, 2009, a statistical model similar to the fed-

cattle model was implemented for daily monitoring of hog market·
prices for the three AMS barrow and gilt price reporting areas.
These AMS market areas include Iowa-Minnesota, the eastern
Cornbelt, and the modified western Cornbelt. The AMS repOlting
market area is the western Cornbelt region, which includes Iowa
and Minnesota. To ensure non-overlapping markets, P&SP
modified the territory to remove the Iowa and Minnesota hog
transactions and prices from this region. Live and carcass prices
are monitored, except in the modified western Cornbelt market,
which only reports carcass prices. The model repOlted no daily
price outliers for these five market prices from September 9, 2008,
through September 30, 2009. Whether P&SP is monitoring fed-
cattle or hog prices, when the statisti.cal model reports an outlier,
an economist from either the Midwestern or Western regional
office reviews the suspect price and makes a recommendation
report, which is reviewed by an economist in each regional office,
the originating Business Practice Unit's supervisor, and an
economist in headquarters. Based on the report and reviewer
comments, the supervisor either closes the review or opens an
investigation and requests firm-level data from AMS.

Committed Procurement Review and Audit

Page I 14
 1 2009
•.._-....
·
_,~---_ .. ~-------,,-~-~.-_ ... _._--~_.~._._-_.-~----~.~_._." .. _._ __._-_
Packers and Stockyards Program Annual Report 1
.. .. .. ~.~ .. __._- --._._ .. ••.•.....
" ,-.

P&SP monitors the use of "committed procurement" arrangements,

which commit cattle and hogs to a packer more than 14 days prior
to delivery. Each year, P&SP economists obtain fed-cattle and hog
procurement data for the previous calendar year from the five
largest beef packers and four largest hog packers. If the packers
change their procurement arrangements with suppliers from
previous years, P&SP also collects any new or modified written
marketing agreements or contracts: P&SP economists review the
contracts and, if necessary, discuss them with the packers to
determine how the terms of the agreements relate to committed
procurement categories of interest. Economists then classify,
review, and tabulate the individual transactions data, and calculate
the reliance of the top packers on committed procurementmethods.
Finally, P&SP economists reconcile the calculations based on the
detailed transaction data on committed procurement as reported by
the packers in their Packer Annual Reports.

If there are significant differences between the transaction data and

the Packer Annual Report submissions on committed procurement,
the economists contact the packers to identify the cause of the
discrepancy. If necessary, P&SP meets with the packers in person
to discuss the packers' procurement methods and explain how they
should be reported on the Packer Annual Report. These meetings
foster a mutual understanding of the reporting of requirements for
committed procurement and more reliable reporting and
calculation of the packers' reliance on committed procurement
methods.

Relying on written contracts and other information collected

during the committed procurement reviews, P&SP agents analyze
the various procurement and pricing methods used by hog and fed-
cattle packers. Agents obtain and review all available contracts and
agreements to determine if there have been any competition
violations of the Act. The contracts are also used in procurement
reviews of the packers to help detennine if proper payment
practices are being followed.

fn 2009, P&SP conducted regulatory reviews ofthe procurement

practices of the four largest hog packers. The reviews included
analyses of contractual arrangements that packers had with pork
producers, and price relationships among various procurement
arrangements. P&SP also assessed whether the procurement
methods reported to the Agency in the packers yearly reports
accurately reflect packer procurement transactions, and whether
packers made pricing decisions based on the size of the producer.

Page 115
 P&SP's review revealed hog prices differed based on pricing and
procurement methods and seller sizes. For example, hogs
purchased on the negotiated market, hogs priced on a live-weight
basis, and hogs sold by smaller sellers tended to receive lower
prices. Purchases from smaller sellers were primarily on the
negotiated market, with most ofthese hogs priced on a live-weight
basis, while purchases from larger sellers were primarily through
marketing agreements using carcass-merit pricing. Hogs procured
in the negotiated live markct tcnded to be priced higher compared
to hogs of equivalent quality procured using the carcass-merit
negotiated market, based on a 75-percent yield. P&SP will be
pursuing investigations in 2010 to determine if these differences
constitute price discrimination in violation of the P&S Act.

The hogs procured in the reviews were mostly purchased on ~

formula basis using both written and verbal arrangements. P&SP
regulatory reviews revealed that hogs procured through verbal
agreements but reported to AMS on a formula basis were being
reported to P&SP as spot market transactions because the
agreements were made within 14 days before slaughter.

Poultry Contract Compliance Review Process

In 2009 P&SP added a formal poultry contract compliance review
as a component of P&SPs performance measure (see Performance
and Efficiency Measurement section below). Contract reviews in
addition to the reviews conducted based on a random sample may
be initiated based on industry intelligence or complaints.
A documented, automated process has been implemented for
P&SP agents to follow in conducting such reviews. In general, the
agent will collect relevant background information on the firm that
is under review prior to conducting a site visit. Once on-site, the
agent will conduct an interview and obtain copies of the grower
contract being used at the plant location and 3 months of weekly
ranking sheets for the contract. These documents are reviewed for
consistency and adherence to P&S Act regulations. One week of
payment data from the settlement sheet is selected as a random
sample for a detailed review for accuracy and completeness. The
results are compared to the firm's ranking sheets, settlement
sheets, and payments to the growers to ensure consistency with the
contract. If discrepancies are found, an investigation is opened. If
the firm's practices are determined to be free of violation, the agent
provides an exit interview indicating this to the finn's·
management.

Page 116
ATTACHMENT G
t]~I-IE I-I-UFF INGrfC)]\J 1)()S'T~
BREAKI1\G 1\EWS A~'D OPI~!O~

lluffPost Social News

,~,
~) 11l:;/1j

Temple Grandin, Ph.D

Professor of animal science at Colorado State University, subject of the HBO film, Temple
Grandin
Posted: October 20, 2010 12:00 PM

Ag Department Proposal Threatens Aninlul

Welfare
It seems that some people can't see how a regulation that looks good on paper will have bad
consequences. That is what is happening at the U.S. Department of Agriculture (USDA) with a
new proposal that would have major animal welfare consequences if it's finalized. I always
worry about rules that come out of Washington because the bureaucrats who write them often
have no practical experience in the real world and that sure comes through in this latest missive.

Congress told USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) to
write some rules about what constitutes an "undue preference" in livestock marketing and
procurement. GIPSA is the agency the monitors the marketing of livestock and poultry to ensure
that things are done properly and that markets are competitive. But the USDA has gone way
beyond what Congress told the department to do. As proposed, the depmiment wants to prohibit
meat packers from purchasing, acquiring or receiving swine or cattle from another packer or
packer-affiliated company.

That means that an integrated beef-processing cOlnpany that owns feedlots or production
facilities would, for example, be required to ship cattle to either its own plant or sell the livestock
to an independent dealer, perhaps hundreds of miles away, rather than selling the cattle 01' pigs to
another company's packing plant very close to the ranch or farm.

Adding shipping time is stressful to livestock and stands to increase injury and potential death
losses, particularly among pigs because they are more subject to transport stress. Companies that
don't want to ship the livestock the additional distance would be forced to sell their livestock to
independent dealers, who serve as middle-men, to facilitate transactions. This also would present
unnecessary animal welfare risks, because the dealers likely would not have the animal handling
programs and standards in place that have become the standards among production and
processing facilities. .
I'm also worried that the proposed rule would complicate and compromise the effectiveness of
many established animal welfare-certification programs by requiring another level of paperwork
and recordkeeping to track the additional transactions and premiums paid to producers for higher
quality or niche raised animals.

Niche producers are some of the great success stories in livestock agriculture. Companies with
products that bear labels like Celtified Humane, American Humane Certified, Celtified Angus
Beef, Whole Foods or Niman Ranch have made commitments to the principles behind these
labels. These companies need established relationships with fanners and ranchers they can trust
to raise livestock in a way that is consistent with their brands and their humane labels. But the
ilew proposal would make it easier for fanners and ranchers to sue meat companies that pay
premiums to farmers who offer a higher quality animal that was raised in a certain way.

In my view, a farmer with a progressive, humane veal production system deserves ahigher price
than one offering sick, weak calves -- and no justification should be necessary. Some other
examples would be grass-fed beef, certified cattle vaccination programs and specific housing
requirements for animals. Producers raising animals to fit specifications shoulp get more money
for their animals. .

As a scientist who has dedicated her life to improving livestock welfare, I am extremely alarmed
that the department ultimately responsible for enforcing the Humane Slaughter Act apparently
has paid so little attention to the animal welfare implications of this proposal.

I urge Agriculture Secretary Vilsack to reconsider this rule in order to maintain good animal
welfare and to foster development of important niche markets that create many marketing
opportunities for producers. This will help animal welfare, rural development and family farms.
ATTACHMENT H
 )OHHOU~{Hfi.H
.',t,S.SO(,:I;1.1 r. s

.The American Meat Institute

Meat Dem>lnd Stndy

The lmpllet of Proposed

Gl'ain Inspection, Packers and Stockyards Administration
Proposed Rnle

Methodology and Documentation

Prepared for

MI
AMERICAN MEAT INSTITUTE

!ISO Connecticut Avenue, NW 12th Floor

Washington, DC 20036

13y

John Dunham and Associates, Inc.

32 Court Street, Mezzanine
Brooklyn, New York 11215

August 24, 2010

 GIPSA lVIodellVlethodology "nd Results

Summary Results:

A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA)
would, among other things, adversely affect packers' and their suppliers' willingness to use
marketing agreements. The proposed rule increases the risk associated with using marketing
agreements because it would change long standing judicial precedent and make it easier for a
disgruntled supplier to sue and win in a Packers and Stockyards Act lawsuit. In doing so, the
proposed rule creates a disincentive for packers to use such agreements.

These limitations in particular will introduce inefficiencies into the existing livestock marketing
system, and reduce selling options for livestock producers, while at the same time increasing
price, quality and supply variability for packers. Taken together, these inefficiencies will raise
retail meat prices for consumers, leading to lower meat sales, less jobs for packers, retailers and
most importantly producers. Another result will be seen in lost tax revenues throughout the
country.

In 2009, the American Meat Institute commissioned an.analysis ofthe combined impact of the
meat processing, poultry processing, hide and skin production and offal production industries
(hereafter meat and poultry products). The industry was defined to include not only the
production of meat and poultry based products, but meat distribution and retailing. Based on that
analysis, the industry contributed about $832 billion in total to the US economy in 2009, or just
under 5.9 percent of GDP.! All told, about 6.19 million people depended on the industry for
their livelihoods, with an estimated 1.3 million of those being livestock producers.

In addition, to providing jobs, wages and economic opportunity, the meat industry was shown to
be an important contributor to the public finances of the community. In the case of the meat and
poultry products industry, this contribution comes in two forms. First, the traditional direct taxes
paid by the firms and their employees provide over $81.224 billion in revenues to the federal,
state and local governments. In addition, the consumption of meat and poultry generates $2.4
billion in state sales taxes? .

Table I: Economic Impact of the Meat and Poultry Products Industry (2009)

($ In Billions) Direct> Supplier' Induced'

Output .
$ 228.590 $ 377.734 $ 226.080
Jobs 1,816,940 2,581,580 1,794,110
Wages .
$ 45.522 $ 84.319 $ 69.851
Taxes $ 81.214

Dosed on GDP of$14.1 trillion. See: Gross Domestic Product: US Department of Commerce, Bureau of Economic
Analysis. Available at: http://w\\'\v,oea.gov/l1!ttiol1111/. Economic sectors based on IMPLAN sectors.
Significant local sales taxes are also generated; however, as there are over 50,000 different faxing jurisdictions these
are extremely difficult to calculate.
Direct jobs arc those involved in the packing, wholesaling, and retailing of meat and poultry products. Supplier jobs
include liveslock and poultry producers, as well as those working in other companies that supply goods find 5ervices to
meat packers, wholesalers, and retailers. Induced impacts come about when those working in the direct and 5upplier
sectors spend their income in the regional economy. .

GIPSA Methodology
John Dunham and Associlltes, 201 0
Table I on the prior page presents a summary of the total economic impact of the industry in the
United States.

Were the proposed GIPSA rules to take effect, there would be significant disruptions in the
manner in which livestock are supplied to the nation's meat processors. Rather than being able
to count on a stable supply of animals, packers will for the most part be subject to an extremely
variable "cash" or "spot" market (or a similarly variable futures market) to purchase their
livestock. The resultant inefficiencies (as well as the slightly higher prices found on spot
markets) will lead to an increase of about 3.33 percent in the retail price of meat at a national
level. In the case of most consumer goods consumer demand is impacted by priccs.
Inefficiencies brought on by the proposed rule will therefore be translated into lower demand. In
this case it is estimated that overall consumer demand for meat will fall by 1.68 percent. 4

As meat sales fall, so too will jobs in the meat industry. Not only will there be fewer
opportunities for packers, wholesalers and retailers, but producers and other suppliers will also
see a reduction in demand and economic opportunities. All told, it is estimated that about
104,000 people would lose their jobs following the implementation of this rule. This would
reduce national GDP by $14.0 billion, and would cost a total of $1.36 billion in lost revenues to
the Federal, state and local governments.

Table 2 below presents a summary of how the impact of the Proposed GIPSA rule will impact
the.meat production industry, and Appendix Table I shows the employment impact by state,
Appendix Table 2 5 shows industry figures by state, and Appendix Table 3 shows the consumer
impact by state.

Tnllle 2: Economic Cost oftbe .Proposed GIPSA Hules

Direct Supplier Induced Total

Jobs (FTE) 30,518 43,443 30,151 104,112
Wages $764,318,247 $1,415,726,892 $1,172,971,419 $3,353,016,558
Economic Impact $3,838,461,850 $6,350,851,492 $3,795,974,168 $13,985,287,510

Metbodology

Three separate models were constructed in order to develop the estimates presented in the
Executive Summary above. First, the Meat and Poultry Industry Economic Impact Model
(Model) for the United States (2009) was developed by John Dunham and Associates based on
data provided by Dun and Bradstreet (D & B), the US Department of Agriculture and various
state agriculture departments. The analysis utilizes the Minnesota IMPLAN Group Model in

This implies a price elasticity of demand of about -0.44, meaning that for a 10 percent increase in the price of meat,
demand will fall by about 4.4 percent. This decrease in demand could be due to either smaller sales volumes, or a
substitution of lower cost products (like chicken) for higher cost products like lamb. Demand elasticity data are from
the US Department of Agriculture, see: You, Z., lE. Epperson, and c.L. Huang, A Composite System Demand Analysis
for Fresh Fruit and Vegetables in the United States, Journal of Food Distribution Research, (October 1996): 11 ~22
Most recent data available for number of livestock on farms and number of operations with livestock and broiler
chickens obtained from: National Agricultural Statistics Service, United States Department of Agriculture. Cash
receipts from farm marketings obtained from Meat and Poultry Facts 2009, Sterling Marketing, Inc., 2009. Labor
expenses for livestock workers is the sum of both hired and contract labor expenses in livestock obtained from Unitecl
States Department of Labor, The National Agricultural Workers Survey, Census of Agriculture, (2002).

GIPSA Methodology
John Dunham and Associates, 20 10
2
order to quantify the economic impact of the meat and poultry products industry on the economy
of the United States. The model adopts an accounting framework through which the relationships
between different inputs and outputs across industries and sectors are computed. This model can
show the impact of a given economic decision - such as a factory opening or operating a sports
facility - on a pre-defined, geographic region. It is based on the national income accounts
generated by the US Department of Commerce, Bureau of Economic Analysis (BEA). 6

Producer employment is based on a census offederal and state inspected facilities as of 2009.
The Federal government and 27 states inspect meat processors and slaughterhouses.? Data were
gathered from the Federal and state agriculture departments, entered into a databasc and
physically located in a geographic analysis system. All told, there were almost 8,500 plants
identified (although there were some duplicates). These data provided the number of plants and
the physical location; however, none of the government entities had employment data available.
In order to estimate employment, data were gathered from D & B for companies that reported a
primary SIC of 20 I I (establishments primarily engaged in the slaughtering of cattle, hogs, sheep,
lambs, and calves for meat to be sold or to be used on the same premises in canning, cooking,
curing, freezing, and in making sausage, lard, and other products; SIC 2015 (establishments
primarily engaged in slaughtering, dressing, packing, freezing, and canning poultry, rabbits, and
other small game, or in manufacturing products from such meats, for their own account or on a
contract basis for the trade. This industry also includes the drying, freezing, and breaking of
eggs; and SIC 2013 (establishments primarily engaged in manufacturing sausages, cured meats,
smoked meats, canned meats, frozen meats and other prepared meats and meat specialties, from
purchased carcasses and other materials. Products include bologna, bacon, corned beef,
frankfurters (except poultry), luncheon meat, sandwich spreads, stew, pastrami, and hams
(except poultry). Prepared meat plants operated by packinghouses as separate establishments are
also included in this industry. These data were matched to the inspected location data where
possible by company name, phone number, and physical location. For those establishments
where a match could not be found econometric techniques were used to estimate an employee
count. All told, the number of estimated employees was within 99 percent of estimates from the
actual employment levels as found in the IMPLAN tables. 8

Jobs were then assigned to meat or poultry processing and slaughtering based either on
allocations provided by the departments of agriculture or based on the national percentage of
jobs in each industry.9 .

For hides, skins and offal producers, employment at specific locations reported to D & B by the
companies as of April 2009 for a number of industries including some companies with a primary
SIC code of 2833 - establishments primarily engaged in manufacturing bulk organic and
inorganic medicinal chemicals and their derivatives, as well as some companies with the primary

The IMI'LAN model is based on D series ofoational input-output accounts known as RIMS II. These data are
developed and maintained by the U,S. Department of Commerce, Bureau of Economic Analysis as n policy and
economic decision analysis tool.
These states are: Alabama, Arizona, Delaware; Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Minnesota,
Missouri, Mississippi, Montana, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas,
Utah, Virginia, Vermont, West Virginia, Wisconsin, and Wyoming. Source:, FSIS Review afState Meat and Poultry
Inspection Programs, United States Department of Agriculture, March 2010.
IMPLAN employment levels are based on county employment data as reported by the US Department of Labor,
Bureau of Labor Statistics.
Based on the input output accounts of the United States as compiled by IMPLAN.

GIPSA Methodology
John Dunham and Associates, 2010
3
SIC 5159 this industry's products are animal hair, bristles, feathers, furs and hides, broom corn,
raw cotton, hops, unprocessed or shelled-only nuts, tobacco leaf, raw silk, and bovine semen. 10
Data are as of April 2009.

Wholesale employment consists of the number ofjobs by facility as reported to D & B by

companies with a primary SIC code of5147. This industry consists of wholesale distributors of
fresh, cured, and processed (but not canned or frozen) meats and lard. Data are as of April 2009.

Data on the retail sectors are all based on data from D & B as of April 2009. Data on total
employment by zip code was obtained from D & B's Zapdata system for cstablishments with the
following primary SIC codes: .

o 5411 Grocery Stores

o 5812 Eating Places
o 5813 Drinking Places
o 5421 Meat and Fish Markets
o 5431 Fruit and Vegetable Markets
o 5441 Candy, Nut, and Confectionery Stores
o 5451 Dairy Products Stores
o 5461 Retail Bakeries
o 5499 Miscellaneous Food Stores

Employment figures were then multiplied by the percentage of sales of meat in each store type as
. 11
calculated by the US Department of Commerce Bureau of the Census. The resulting figure was
then adjusted to remove seafood sales from the calculation. The resulting figures were then
allocated to states and congressional districts based on the percentage of total establishments in
each zip code falling within the particular boundary.

Once the initial direct employment figures have been established, they are entered into a model
linked to the IMPLAN database. The IMPLAN data are used to generate estimates of direct
wages and output in each of the three sectors: production, wholesaling and retailing. IMPLAN
was originally developed by the US Forest Service, the Federal Emergency Management Agency
and the Bureau of Land Management. It was converted to a user-friendly model by the
Minnesota IMPLAN Group in 1993. The IMPLAN data and model closely follow the
conventions used in the ."Input-Output Study of the US Economy," which was developed by the
BEA.

The Economic Impact Analysis provides a base level of employment, jobs and taxes in the
industry (See Table I above). These data were then linked to a meat demand model for each
state in the country. This demand model is based on a series of demand functions created for
each of the 50 states and the District of Columbia, and examines not only in-state demand for
meat products, but cross-state sales that can occur due to differential meat prices in each of the
states. In other words, the model estimates in-state demand of own-state taxed sales of meat,
exports to and imports from other states. The model can be "shocked" with different price

10
Not in both cases only compsnies engaged in manufacturing Rnd selling animal products were included in these data.
II
See: Table 2.4.5U. Personal Consumption Expenditures by Type a/Product, US Department of Commerce, Bureau of
Economic Analysis, Revised October 31, 2008.

GlPSA Methodology
John Dunham find Associntes, 2010
4
changes (in this case a National price change) and the resulting adjustments to demand are
calculated.

The general methodology is an estimation of current demand equation linked to a non-linear

programming model of the import and export patterns. Initial demand is assumed to be equal to
current retail sales in each state as based on the Economic Impact Model of the Meat Industry
(2009). Each state's current demand is obtained in dollars, and linked directly to the cross-
border methodology. Since the Impact Model includes all types of meat, poultry, and offal the
total demand can be assumed to apprOltimate the weighted-average demand of all of these
products across the state.

Obtaining a weighted average price is more complicated since comprehensive (series level) data
are only available for livestock. Since the model being developed depends more on the
percentage change in price, average retail prices are calculated based on livestock prices per
hundredweight obtained from the US Department of Agriculture. 12 After converting the chicken
price to the same units as the other data was presented in, these raw livestock prices are then
multiplied by a processing margin which reflects the value added by the packer who converts
livestock into cuts of meat. 13 The resulting prices were weighed to reflect actual consumption
patterns calculated from the average household expenditure on the four meats in the Consumer
Expenditure Survey.14 This gives a weighted producer price for meat. This was then adjusted
by applying transportation, wholesale and retail margins from the US Depmtment of Commerce,
Bureau of Economic Analysis. ls . . .

The calculation outlined above provides a national average price for meat products, but the
model is based on differential prices on a state by state basis. In order to calculate this, the
national price is multiplied by an index of the relative cost of groceries in each state obtained
from the Missouri Economic Research and Information Center. 16 The resultant product provides
an average price for each state.

The price and volume data are entered into the demand model.

Linear Programming Model

A non-linear programming model is used to determine consumption and trade patterns based on
the current values developed above and any subsequent price shocks. The model contains a
series of matrices that are multiplied together to produce a trade flow matrix. The first matrix is
a distance matrix that contains adjusted centroid distances among all 50 states and the District of

12
United States Department of Agriculture, National Agricultural Statistics Service, Quickstats 1.0. 2010. Data are
monthly prices on the following products: Pork"" Sows prices per 100 lbs., Chicken = Broilers, price per lb., Lamb =
Lamb, prices per 100 Ibs., Beef= Cattle 500+lbs, prices per 100 lbs. See
www.nass.usda.gov/Dnta and Statistics/Quick Slats I.O/index.asp
IJ
Processing mmgins are obtained from IMPLAN and reflect the value added by meat and poultry processors. The
margins [lye weighted with the poultry margin accounting for 24 percent of the total.
14
Bureau of Labor Statistics. Consumer Expenditure Survey. 2008, Table 4500: Selected Age ofRefel'ence Person:
Average Annual Expenditures and Characteristics, All Consumer Units http://www.bls.gov/cex/
l5
Stewart, Ricky et. a1., U.S. Benchmark Input-Output Accounts, 2002, US Department of Commerce, Bureau of
Economic Analysis. October 2007.
16
Missouri Economic Research and Information Center, Cost ofLiving Index, 2010 Ql. Grocery Sub-Index, See:
www.missourieconomy.org/inclicators/cost_ofJiving/index.stm

GIPSA Methodology
John Dunham (Illd Associates, 2010
S
Columbia. I? These are adjusted by a population density function that stretches the actual
distance in the high traffic east coast states, and reduces them between western states. IS The
next matrix contains population data - given price differentials and distances between states, the
volume of trade is adjusted by the number of people living in a state. 19 The fourth matrix
contains the price differentials between each state pair, and the last matrix is a calculated matrix
containing expected consumption and trade patterns. The import (or export) values in this matrix
are calculated according to the formula:

Import(ij) = Price(ij)*Pop(i)* 11(1+EXP(-U*Distance(ij»

where i denotes the importing state and j is the exporting state. Price(ij) is the price differential,
Pop(i) is the population of the importing state, and distance ij is the distance between the pair.
The term u is the parameter to be estimated for the distance function in the shape of a sigmoid.

The value of u is determined based on a minimization function that sets the model parameter to
the point where the total trade curve is tangent to a 45 degree line. Below this point, trade
between states is surprised, while above it trade explodes exponentially. An in-state elasticity of
-.44 is used to calculate lost demand outside of the interstate modeling structure?O

The demand model is then shocked with a price change which reflects the impact of the key
provisions of the proposed GIPSA rule - the shift from the current system of livestock supply
based on a combination of spot market purchases, futures contracts and marketing agreements to
one dominated by spot prices.

The estimated cost was developed by comparing the spot price index (developed above) to the
behavior of the Producer Price Index for meat over the same period. This comparison showed
that producer prices had risen much more slowly than our measure of spot meat prices.

With current meat prices set as a baseline, two scenarios for the future evolution of the retail
price of meat were developed. The first was based on the assumption that the weighted average
price of meat would rise in line with the historic trend growth rate in producer prices, while the
other assumes that retail prices will track the historical trend in spot prices. This provides an
estimate ofthe possible increase in meat prices from.a switching supply sources from the
contract market to the spot market. The simulation was conducted over a period of 43 months,
which is the length of the meat price "cycle" observed in the data.

The result of this analysis is that the proposed GIPSA rule will increase meat prices by 3.33
percent, which would lead to a national decrease in sales of I .68 percent or about 1.35 billion
dollars.

The change in sales is linked back to the Industry Economic Impact Model, which is adjusted to
reflect the lower sales volume. The resulting change in employment, output, wages, and taxes
are reported in Table 2 and in Appendix Table I.

11
State~to-state centroid distance data were o,btained from Caliper Corp

'"
19
US Department of Commerce, Bureau of the Census, Data for 2007
US Department of Commerce, Bureau orthe Census, Datu for 2009.
20
You, Z., J,E, Epperson, and C.L. Huang, A Composite System Demand Analysis for Fresh Fruit and Vegetables in the
United Stales, Journal of Food Distribution Research, (October 1996):ll 22
w

G1PSA Methodology
John Dunham and Associates, 20 I0
6
 Appendix I: Employment Impact of Proposed GIPSA Rule by State

Initial Direct Direct Jobs "Initial Producer Producer Jobs InitllllSuppller Supplier Jobs Initial Induced Induced Jobs InltinlTotll1 Total Jobs
Slate Jo", LQ,f Jo", Lost Jo", LQ,t Jo", Lost Jo", LQ,f
Alabama 33,127 567 72,815 1,223 102,029 1,746 39,078 669 174,234 2,981
Alaska 2,610 44 64 I 790 13 1,2~3 2J 4,653 78
MwM 23,717 396 2,026 34 10,674 178 14,674 245 49,064 820
Arkansas 44,506 751 88,417 1,485 147,023 2,480 78,606 1,326 270,136 4,557
Califbmia 187,877 3,142 57,811 971 166,221 2,780 169,220 2,830 523,318 8,752
Colorado 27,94,8 467 10,094 170 27,177 454 23,281 389 78,405 1,311
COflnecticllt 15,105 252 1,967 33 6,723 112 9,060 151 30,888 516
Delaware 10,946 183 1,762 .30 8,712 146 7,825 131 27,483 461
District OfColumbia 4,289 72 742 12 530 9 5,561 93
Florida 90,875 1,518 10,659 179 47,428 792 64,659 1,080 202,962 3,391
Georgia 72,041 1,206 83,388 1,401 152,751 2,557 87,231 1,460 312,023 5,224
Hawaii 7,268 126 1,275 2J 3,907 68 4,533 79 15,708 272
Idaho 7,430 130 3,748 63 8,704 152 5,759 101 21,892 383
Illinois 82,550 1,390 31,587 531 105,560 1,778 103,102 1,736 291,211 4,904
Indiana 41,775 699 21,145 355 51,794 866 38,895 651 132,464 2,216
Iowa 45,098 756 45,034 756 105,514 1,768 70,596 1,183 221,208 3,707
Kansas 19,242 333 11,270 189 29,594 512 21,616 374 70,452 1,219
KentLlcky 27,679 463 37,938 637 58,578 980 28,052 469 114,309 1,912
Louisiana 25,305 423 9,681 163 23,182 38' 19,481 326 67,968 1,136
M~ine 7,493 125 1,886 32 4,639
Maryland 27,892 466
592
6,052 102 17,655 "
295
4,987
19,229
83
321
17,119
64,776
28'
1,083
M~ssacl1llsetts 35,444 1,570 26 14,743 24"6 23,283 389 73,470 1,228
Mk:higan 51,661 864 24,488 411 47,374 792 36,585 612 135,620 2,267
Mimcsola 39,645 664 29,206 491 69,818 1,169 52,621 881 162,084 2,713
Mississippi 22,567 390 35,782 601 56,795 980 27,642 477 107,004 [,847
Missouri 43,364 731 70,791 1,189 121,874 2,055 63,476 1,070 228,714 3,856
Montana 6,976 117 6,747 113 12,430 20B 6,435 lOB 25,841 432
Nebmska 21,146 3>4 13,747 231 45,944 770 33,459 561 100,549 1,685
Nevada 156 107 2 74
New Hampshire
9,338
7,066 118 163 3
2,551
1,932 "
32
4,408
3,634 61
16,298
12,633
272
211
New Jersey 43,427 726 8,155 137 29,731 497 32,590 "5 105,747 [,768
New Mexico 8,800 147 2,010 34 5,784 97 5,705 95 20,288 339
New York 89,008 1,488 25,662 431 62,050 1,037 62,565 1,046 213,623 3,571
NorthCaroJina 56,422 944 19,037 320 57,241 9" 48,391 810 162,055 2,711
North Dakota 5,503 n 4,233 71 7,961 133 3,788 63 17,253 289
Ollio
Oklahoma
74;872
23,953
1,253
412
52,092
45,341 '"
762
98,059
70,896
1,640
1,218
66,308
33,629
1,109
578
239,238
128,477
4,002
2,208
Oregon 19,260 322 8,505 143 19,426 325 15,945 267 54,631 913
Pellnsylvania 75,915 1,270 61,864 [,039 121,907 2,039 87,184 1,459 285,007 4,768
R1nde Island 5,398 90 69 I 1,447 24 2,816 47 9,660 161
South Carolina 28,283 473 16,826 283 33,381 558 22,068 369 83,733 1,401
South Dakota 6,228 107 3,816 64 9,021 155 6,689 115 21,938 377
Tellnessee 32,804 57' 28,199 474 45,672 799 27,211 476 105,687 1,848
T",,,, 143,483 2,401 161,111 2,706 294,155 4,922 160,806 2,691 598,444 10,OJ3
Ulllh 13,857 235 10,586 178 21,728 368 13,910 236 49,495 '38
Vermont 4,061 68 7,643 I2B 10,l17 169 3,594 60 17,772 297
Virginia 54,099 920 55,768 937 97,010 1,649 49,483 841 200,592 3,4 [0
WaslJilgton 34,916 "4 18,980 319 40,492 677 28,968 "4 104,376 1,746
WestVirginitl 8,162 140 13,943 234 17,739 304 4,196 72 30,097 515
Wisconsin 43,651 731 40,525 681 83,086 1,391 53,956 903 180,692 3,025
Wyoming 1,006 17
Ullited States
2,861
1,816,942 "
30,518 1,266,592 21,274
.
1,823
2,581,583
30
43,443
1,102
1,794,114
18
30,15l
5,785
6,192,639
97
104,1 [2

GJPSA Methodology
John Dunham and Associates, 2010
7
 ,,0
s~
""
§.~

li
,.~
Stale
Cattle lind Calv,,",
011 Farms
Sheep Rnd Lambs
~F_ Ho,"s on Farms
Nlllllberof
OpentiowWilb
Beef Cattle
Numbernf
Ope~tio)ns with
Sheep and L:u:nbs
Numberaf
Opcralillns with
HO"
Numberof

Broiler OIickcns
Cath Receipts from
Open.tions with Fann Markefin~ 0
Cattle and Calves
Cash. Reecipts from Cash Receipts from
Farm Marketinp 0
Sheep and Lambs
F","" M,:u'keting! 0

,,Ho"
Hired and Contrnct
Labor Expenses for
Livestoek Workers

,,•
• ,
,,,
,~
A..Iabama 1,260,000 NtA 140,000 22,000 750 2,263 3:>1,749 34,079 $" 188,604,3%
..lJaska 14,000 NtA 1,400 100
~ 40 22 1.Sn · 306 16,917,550
~. Arizona 1,020,000 150,000 167,000 5,300 5.000 380 lOl
,,
637,016

,
6.102 $
· , 43,057 $ 172,442,542

"~
." """""
California
Colorado
1.810,000
5,250,000
2,600,000
NfA
660,000
410,000
200.000
100,000
710,000
25,000
11,800
11,600
·
4.100
1.600
1,100
1,400
1,200
2,408 $"
374
291
494,614
\,82.2,&56
3,058.,056 ,$
30.717
113,923
$
$"
95,075
33,.217
175,882
$"
$
S
216_622,937
1,460,5~8,9S8
380,831,867

" ,
ConnecticUl 52,000 NtA 2,900 NtA NtA NJA $ 8,168 $ · $ 305 $" 23,293,784
a Delaware 21.000 NtA 7,500 250 80 778 7,465 $ $ 3,115 $" 30,688,279
.
District Of Columbia NtA NfA NfA NtA NtA NtA
,, NtA
, NtA NtA NtA

,,
Florida 1,700,000 'NfA 20.000 16,700 · 1,900 376 405',124 · $ 3,116 $" 390,538,014
Georgia l,llO,OOO NtA 195,000 17,700 · 1.100 2,l70 291,990 $ 62,244 $" 227,974,523
Hawaii 150,000 NtA 13,000 850 · 230
,,
59 $ 24,305 $ · 3,359 $ 38,&SS,094

,,, ~g
Idaho 2,110,000 210.000 36.000 7,400 1,200 660 233 1;1&3,446 $ 19.439 $ 9,5&6 $ 325.073,124
IIl!ilois 1,.200,000 58,000 4.250,000 14.800 1,900 2,900 370 581,ffi2 2,634 $" 971,218 $ 212,651,285
Indiana 860,000 50,000 3,6IJ0,000 1:2,700 2,000 3,400 '94 , 251,482 2,010 $ 923,843 $ 258,916,776

'" ,,
Iowa 3,950.000 200,000 19,000,000 21,000 3,500 8.300 $ 2,881,656 30,266 $ 4,758,635 $" 535,064,019
"""~
Kentucl:y
6,300.000
2,300,000
80,000
40,000
l,8IO,OOO
350,000
,"000
38".000
,,00
1,400
1,500
1,500 '"
909
,
6,239,195
574,319 ,,
$ 5,"155 $"
2,206 $"
,,
421,076
83,315
$
$
405,670,295
428.3&4,286
0-
,t
,, ,,,
Louisi:ma 890.000 NtA 10,000 12,400 no 410 191,011 · 1,109 .$ 78,780,813
N
"faine
Maryland
89,000
185,000
N/A
24,000
4,900
30,000
NtA
2,500
NtA
800
NtA

'"
Zl4
783
,
13.330
70,1l8 1,121 ,, 782
7,400
$"
S
56,612,963
127,954,769
~
MasslIlhusetls 43,000 NJA 11,000 NJA NtA NtA II< 8,123
, 1.250 $ 43,581.660 S
,, 0-

-
Michigan 1,070,000 73,000 L080,000 7,800 1.,300 2,700 1,088 S 384.943 4,274 $ 250,885 $ 314,809,874
t::
Minnesota
Mississippi
2,400,000
960,000 NJA
140,000 7,200,000
365.000
14,400
16.000
2,500
·
4,400
680
1,195
1.478
,
1,095,348
150,134
$
, 16,489 $
· , 2,046,905
73.904
$
$
509,844,505
166.032,288
en
JI,'lissouri 4,250,000 83,000 3,100,000 52.000 2,.200 3,000 37' L216,820 S 5,142
,
$ 876,503 $" 331,148,418 .:i
Montana
Nebraska.
2,600,000
6,350,000
255.000
71.000
175,000
3.100;000
11,100
18,300
1,500
1,300
<90 150 $
321 , ],003,050
,,
$" 17533 41,2-M $: 193,653,163 '"Ij

m, "'"or
2.200 7,058,679 10,144 $: 128,702 $ 439,243,951
Ne,-ada
New Hampshire
450,000
39,000 NtA
67,000 2,900
2,4<10 NJA
1,300
NtA
250
NtA
90 31 $
I'" ,
185,168
5,349 ,, · ,,,
3,642 $"
339 $"
54,870.135
11.256,.282
New Jersey
New Mexico
38.000
1,.540,000
N/A
120,000
8,000
1,500
030
8.200 2,900
"0
400
158 $
SO ,, 5,187
999,419 , ·
4,923
940
235
$:
$"
45,936,591
24S,8G2,114
cr
'<
New York
North Carolina
1380,000
1150,000
62,000
28,000
77,000
9,600,000
6,800
15,000
1,800
1,300
1",,0
2,800
636
1,879 $"
144,664
197,650 ,,
$ 2,983
'" ,
$ 9,462
2,170,1106
.$
$'
489,314,831
269,133.546
t:/J
g
,,
North Dilkota 1,760,000 88,000 155,000 9,700 68O 35O 126 $ 705.')03 6.289 $ 39,217 $ 51,859.972
Ohio !.2lI0,OOO 130.000 2,010,000 17.400 3,"100 3,700 1,027 $ 356,646 11,204 $ 434,662 $ 277.877.090 "
Oklahoma
Oregon
5,"100,000
1,240,000
80,000
220,000
2,290,000
11,000
47,000
12,900
1,900
,,00 2,700
1,300 ". ,
857 $" 2,436,638
517,238 , 3,078 $:
12,686 $:
558,580
5,433 ,,
$ 351,648,948
218,690,289
Pennsylvania
Rhodelsland
1.590,000
5,000 NtA
100,000 1)40,000
1,700 NtA
12,300
NtA
3,800
NJA
3,600
,
1,499 $
18
493,621
787
S
,, 5,795 $"
· ,, 182,141
287
, S
370,350,536
2,306,407
South Ccrolina
Soulb DaJ.:ol:l
380.000
3,700,000
NtA
305,000
225.000
1,190,000
8,200
13,1100 1,700
810
960 ,
512 $
141
126.404
1,699,376 $
·
26,898 $"
48,789
393,124 $'
15,608,492
113,315,315

,,, , ,
Tennessee 1,980,000 34,000 1115,000 42,000 1,300 J,500 959 $" 534,092 $ 1,709 $ 39,S411 $ 135.948,428
T~ 13,600,000 870,000 760,000 132,000 8,700 4,500 1,872 S 6,895,625 28,711 130,691 1,135,916,7Il

,,,
no,coo
UIM 810.000 29<1,000 5.600 1.600 "0 106 $ 301.491

,
17:6IJ0 $: 167,601
, $ 161,101,432

'"' ,
Vermont 270,000 NtA 3_000 NIA NtA NtA 149 51,667 $ 49.341,3111

,,,
Virginia 1,470,000 365,000 2)00
Washington 1,080,000
15,000
53,000 23,000
22,000
10,100 2.400
1)00
1,500 '"
467
395,946
605,380
4.884
2,117
$

,
$
61,S-H
5,562 $
222,792,659
370,253,311
Wes; Virginia 415.000 33,000 5,000 10,700 1,300 1,000 334 $' 113,545 3,911 370 ,
, 38,014,218

,,
Wisconsi,''l 3350.000 85.000 360,000 14,800 2.800 3,.200 1,123 $ 820.222 5,344 $" 112,800 731.854,891
Wyoming
United St~tes
1,350,000
94,521,000
420,000
5,747,000
87.000
64,887,000
4,800
765,350
900
83,130 '"
75,450
49
32,668
598,510
48,189,201 ,
$ 32,497 $
442,680 $
6l,l!0
16,077,3112
$
$
65,083,966
13,126,124,368
 Appendix 3: Consumer Impact

June 2010
Initial Cost to Extrn Cost to Unemployment
State Consumers Consumers Population Rate
AJabama $ 1,063,128,531 $ 35,451,537 4,625,354 10.3%
Alaska $ 159,023,195 $ 5,302,855 681,235 8.5%
Ariwna $ 1,517,499,784 $ 50,603,194 6,343,952 9,1%
Arkansas $ 571,823,738 $ 19,068,278 2,830,047 7.5%
Califurnia $ 10,243,026,798 $ 341,568,336 36,418,499 12.3%
Colorado $ 1,499,173,681 $ 49,992,084 4,844,568 7.8%
Comlecticut $ 1,007,267,073 $ 33,588,757 3,493,006 8.5%
Delaware $ 267,084,029 $ 8,906,298 861,804 8.7%
District OfCo[umbia $ 311,401,726 $ 10,384,135 588,373 9.8%
Florida $ 5,318,925,509 $ 177,367,156 18,182,321 11.2%
qeorgia $ 2,581,594,989 $ 86,086,966 9,509,254 9.8%
Hawail $ 438,194,217 $ 14,612,211 1,280,273 6.3%
Idaho $ 355,701,330 $ 11,861,368 1,493,713 9.1%
Illinois $ 3,188,242,705 $ 106,316,500 12,829,014 10.8%
Indiana $ 1,749,365,766 $ 58,335,096 6,335,595 9.8%
Iowa $ 836,557,507 $ 27,896,203 2,984,391 7.0%
Kansas $ 716,576,489 $ 23,895,265 2,778,599 6.3%
Kentucky $ 1,122,823,464 $ 37,442,150 4,234,999 10.2%
Louisiana $ 1,211,161,304 $ 40,387,901 4,342,582 6.2%
Maine $ 410,171,746 $ 13,677,762 1,315,069 8.4%
Maryland $ 1,651,100,796 $ 55,058,311 5,618,250 6,9%
Massachusetts $ 2,095,152,880 $ 69,865,861 6,469,770 9.1%
Michigan $ 2,494,120,388 $ 83,170,001 10,045,697 13.7%
Minnesota $ 1,452,057,460 $ 48,420,927 5,181,962 7.0%
Mississippi $ 549,807,296 $ 18,334,108 2,918,790 10.7%
Missollfi $ 1,533,092,396 $ 51,123,152 5,874,327 8.8%
Montana $ 250,115,000 $ 8,340,441 956,496 7.1%
Nebraska $ 453,175,406. $ 15,111,780 1,770,896 4.9%
Nevada $ 664,524,869 $ 22,159,529 2,546,235 14.0%
New Hampshire $. 410,396,216 $ 13,685,247 1,312,298 6.3%
New Jersey $ 2,306,997,071 $ 76,930,107 8,658,668 9.6%
New Mexico $ 474,142,579 $ 15,810,960 1,962,226 8.1%
New York $ 4,900,358,404 $ 163,409,439 19,428,881 8.2%
North Carolina $ 2,377,611,117 $ 79,284,833 9,036,449 10.0%
North Dakota $ 183,099,750 $ 6,105,722 638,613 3.8%
Ohio $ 3,007,365,877 $ 100,284,904 11,473,983 10.7%
Oklahoma $ 767,254,969 $ 25,585,211 3,606,200 6.3%
Oregon $ 1,027,468,304 $ 34,262,396 3,735,524 10.8%
PemlSylvania $ 3,214,952,465 $ 107,207,175 12,418,756 8.7%
Rhode Island $ 297,710,751 $ 9,927,590 1,054,306 l2.4%
South Carolina $ 1,246,657,008 $ 41,571,556 4,403,175 10.4%
South Dakota $ 204,555,589 $ 6,821,198 795,757 4.5%
Tennessee $ 1,664,973,812 $ 55,520,926 6,144,104 10.3%
Texas $ 6,150,934,430 $ 205,111,680 23,845,989 8.1%
Utah $ 578,534,596 $ 19,292,061 2,663,500 7.0%
Vermont $ 163,908,852 $ 5,465,774 620,738 6.7%
Virginia $ 2,087,442,507 $ 69,608,747 .7,698,738 6.7%
Washington $ 1,867,221,664 $ 62,265,169 6,453,083 8.7%
West Virginia $ 372,733,524 $ 12,429,331 1,810,358 8.9%
Wisconsin $ 1,387,397,621 $ 46,264,752 5,598,453 8.2%
Wyoming $ 149,982,821 $ 5,001,391 522,833 7.2%
United States $ 80,553,590,000 $ 2,686,174,335 301,237,703 9.5%

GlPSA Methodology
Jolm Dunham and Associntes, 2010
9
 Appendix 4: Questions and Answers About the Study

1. What is defined as "meat" in the study?

Meat as defined in the study is a combination (weighted average) of all edible meats
including beef, pork, lamb, poultry and offal.

2. What jobs are included as "direct" and what are included as "supplier" and
"producer?"

This is a model of the meat processing industry, so direct jobs include people working in
meat packing, processing, meat wholesaling and meat retailing. Suppliers to the
processing industry include livestock producers (farmers and ranchers) as well as finns
that provide equipment, utilities, transportation, packing supplies, business services, etc.
to the processors, wholesalers and retailers. A "producer" as defined in this study is a
livestock producer - a farmer or a rancher.

3. What does "induced" economic impact mean?

Induced economic impacts are those effects that are due to the re-spending of income by
people working as direct employees of the meat processing industry or by those working
for supplier firms. This would include their spending on things like housing, utilities,
entertainment, cars, etc. It is what is commonly called the "multiplier effect."

·4. The impact in some states seems counter-intuitive. For example, how can
Connecticut, a small agricultural state, lose more producer jobs than say, Wyoming,
which is typically considered a "big" agricultural state?

Production jobs do not necessarily correlate with livestock production. In this case
producer jobs are those jobs directly involved in the farming of meat animals. These
could be owner-operators of farms or hired laborers. Jobs are counted in full-time-
equivalent units so someone working halftime on a ranch for example would be counted
as half a job. In Wyoming where animals are produced on an open range, the amount of
labor per dollar of output is very low, while in New England, where animals are generally
produced on smaller farms, it will take more people (or units of labor) to produce the
same output.

5. When looking at job losses and economic impact by state, what are the key variables
that come into play that affect that bottom line?

There are a number of factors, but the most impoltant are 1) the mix of industries in a
state. For example, if a meat processor uses particular machines that are only produced in
Ohio, then there would be a large impact in Ohio relative to the amount of meat actually
produced there; 2) the mix of land, labor and capital availability in a state. (States with a
lot of land and few people will have higher output per employee of livestock
production.); and 3) the relative price levels in a given state. Higher cost states may
generate more economic output without necessarily generating more "goods."

GIPSA Methodology
John Dunham and Associates, 20lq
10
6. Does this model account for all aspects of the proposed GIPSA rule? If not, why?

No, the model only acconnts for the effects that the proposed GIPSA rule will have on
the input price of livestock into meat processing companies and how that translates into
higher consumer prices. If the rule changes the way in which companies do business - if
it changes the amount of capital that they need to hold, the mechanization of processes, or
the mix of animal types that they use - those effects are not included since the model is
based on the current production system and technologies. It cannot control for these
changes.

7. Is the price elasticity of demand for meat a figure that is widely nsed in these kinds
. of models?

Yes, the price elasticity is used to help determine how consumers will react to higher
meat prices. Our elasticity estimate is roughly -0.44375 suggesting that a 10 percent
increase in the retail price of meat will reduce demand by 4.44 percent.

8. How will the proposed GIPSA rule affect different types of meat consumers'
pnrchase?

If the proposed rule increases prices to the extent that we believe, then consumers will
react by purchasing less meat. They could react by purchasing either a smaller volume of
meat, or by changing the mix of products that they buy - substituting cheaper poultry for
more expensive lamb for example. The model looks at meat as if it is a single product so
it can't determine these substitution effects.

9. How can you predict the impact ou consumers and their response?

We know what when prices rise in a production system where there is competition the
increased costs will be passed on to the consumer. We also know that for what
economists call "nom1al goods," higher prices lead to reduced demand. Because meat is a
normal good, any increased costs from the proposed rule will lead to reduced demand.
This model only examines the costs associated with the way in which processors must
purchase meat from producers - particularly a reduction in the use of marketing
agreements. This will add significantly to the cost of the livestock purchased by the
processors - a cost that will be passed on and lead to roughly a two percent decline in
meat sales.

10. How can we be sure these numbers are accurate?

No economic analysis comes with a guarantee of a future impact, and all models are
based on assumptions and estimates. However, this analysis was built on widely accepted
principles of economic modeling and in consultation with industry experts. All of the
assumptions have been made available and are documented. If they are generally correct,
then the results will be generally correct.

GIPSA Methodology
John Dunham und Associfltes, 2010
11
 .All
AMERICAN MEAT INSTITUTE

The Proposed CIPSA Rule Will Have Unintended Consequences Throughout the Uuited States
A reguiation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstanding judicial precedent and make it easier for a disgruntled producer to
sue and win in a Packers and Stockyards Act lawsuit. In doing so, the proposed rule creates a disincentive
for packers to use such agreements.
The Proposed CIPSA Rule Hurts Consumers
• Currently, the people who live in the United States spend about $80.6 billion on meat and poultry
products annually.
• Under the proposed GIPSA rule, these consumers would be forced to pay about 3.33% - or $2.7
billion - more for the same amount of meat and poultry they currently purchase.
Producers Will Lose Jobs aud Face Volatility on the Spot Market
• Over the last 20 years, livestock spot prices have been SOO percent more volatile than retail meat
prices. Consumer prices for meat and poultry have been fairly stable over time, while livestock spot
prices vary wildly by day or even hourly. I
• This volatility not only leads to higher producer prices, but makes production more difficult if
producers are forced to sell livestock when market prices are low / or have to keep inventory in hopes
of receiving a higher price.
• Conversely, more stable and predictable prices reached in marketing agreements reflect the
innovation, care and work that producers put into their product. This rule will take those quality
incentives away from producers.
The Meat Industry is an Integral Part of the United States' Economy
• Companies in the United States that produce, process, distribute and sell meat and poultry products
would lose more than 30,000 jobs if the proposed GIPSA rule were implemented. In addition, almost
74,000 jobs in supplier and ancillary industries will also be lost. These include jobs in companies
supplying livestock and.services to packers, distributors and retailers, as well as those that depend on
retail meat and poultry sales.
• In this harsh economic period, every job is important. In fact, in the United States the unemployment
rate has reached 9.2 percent. This means that there are already 14,139,762 people trying to find jobs in
the country and collecting unemployment benefits. The GIPSA rule would add another 104,000
unemployed Americans to the jobless list.
The Economic Benefit of the Industry Spreads Throughout the Nation
• Not only does the meat industry create good jobs in the United States but the industry also contributes
to the economy as a whole. The proposed GIPSA rule could cost the nation as much as $14.0 billion
in economic activity.
• Producers would be especially affected, losing more than 21,000 jobs under the proposed rule. In
summary, the proposed GIPSA rule raises prices to consumers, it does nothing to stem the exodus of
producers from rural America; rather it would exacerbate the job losses in rural America.

The.standard Jeviation of monthly growth rates of spot prices was 3 compared to 0.6 for retail prices.
 AMERICAN MEAT INSTITUTE

The Proposed GIPSA Rule Will Cost Livestock Producers 21,000 Jobs!
While Makiug it More Difficult for Them to Produce Quality Products
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstanding judicial precedent and make it easier for a disgruntled livestock
supplier to sue and win in a Padcers and Stockyards Act lawsuit. In doing so, the proposed rule creates a
disincentive for packers to use such agreements.

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Sourc"., Oap.rlma"l or Labo, and Daparlmonl of Agrioullura

Marketing Agreemeuts Help Producers Mauage Volatile Day to Day Price Changes
.:. Historically, "spot" prices for livestock have been 500 pereent more volatile than market prices for
meat. As the graph above shows, meat prices have been fairly stable over time, while spot prices
for livestock vary wildly by day or even hour. 2
.:. This volatility not only leads to higher meat costs, but makes livestock production more difficult
because no one producer, packer, retailer. nor consumer knows what to expect from day to day.
Producers who are forced to rely on a spot market may be forced to sell inventory when market
prices are low, and will be forced to keep inventory longer than average in order to ensure a
consistent flow of income.
Higher Consumer Prices Will Reduce the Overall Demand for Meat and Meat Products, Leading to
a Reduction of About 21,000 Jobs for the United States Livestock Producers
.:. In these tough times with as many as 14,139,762 workers in the United States struggling to find
jobs, removing 21,000 from the nation's economy will only make matters worse. In otherwords~
even though the proposed GIPSA rule raises prices to consumers, it does nothing to stem the
exodus of producers from the state.

Producer jobs include agricultural supplier jobs that are meat find poultry related.
The stundard deviation of monthly growth rates of spot livestock prices Was 3 compared to'0,6 for retail meat prices. There is a
direct relationship between the price of livestock and the retail price ofrneat. In fact, over time the two prices are almost perfectly
correlated.
Increased Uncertainty Will Reduce- Producers' Ability to Benefit from the Production of Quality
Products
.:. The prices reflected in marketing agreements reflect the innovation, care and work that farmers
put into their product The rule proposed by GIPSA will remove the incentive from farmers and
ranchers to produce high quality livestock.
 Atl
.AMERICAN MEAT INSTITUTE

USDA's Grain Proposed GIPSA Rule will Raise Food Prices and Harm Consumers in the United
States
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstanding judicial precedent and make it easier for a disgruntled livestock
supplier to sue and win in a Packers and Stockyards Act lawsuit. In doing so, the proposed rule creates a
disincentive for packers to use such agreements.
The Proposed GIPSA Rule Would Dismantle Innovative Marketing Tools that Help Prodncers l and
Processors
.:. Rather than helping struggling consumers during these difficult economic times, a new
bureaucratic regulation proposed by GIPSA will lead to higher consumer prices for meat and meat
products.
•:. .The current meat production system relies on mutually agreed upon marketing agreements to help
both farmers and meat packers ensure a steady stream of quality products at a stable price.
•:. By forcing meat packers to purchase livestock on a volatile spot market, packers will have to
increase their inventory carrying costs and will- over time - face higher prices for livestock.
The Proposed GIPSA Rule Will Cost United States Consumers More Than $2.7 billion per Year
..._...._.-_..._-
~-----~-~-"----->.".,._---"-,.,..~_

CUl'1'ently, the people who live in the United [ The Proposed Rll]e will Incre<l:::e Ch\xery Pri,ef:
States spend about $80;6 billion on meat and jl n. ogf;(i1Je"1
poultry products annually.
If the proposed GIPSA rule is implemented, these
consumers would be forced to pay about 3.33%
I Meal

more for their meat and poultry products.

This means that the United States's residents will other
have to pay an additional $2.7 billion to keep GrocerjC'~

eating the same amount of meat they currently do.

As a result, they may be forced to make tough
choices at the supermarket and elsewhere. ,I
,t ".~", "",,">""'""""""

The United States's Producers Are Harmed by the Proposed GIPSA Rule
.:. Rather than helping the United States's livestock producers, the proposed GIPSA rule actually
harms them. In fact, it is estimated that about 21,000 of the United States' livestock producers
will lose their jobs as a result of these bureaucratic rules .
•:. That is why organizations like the National Cattlemen's Beef Association and the National Pork
Producers' Council- groups that represent livestock producers - strongly oppose this government
interference in the marketplace.

Producer jobs include agricultural supplier jobs that arc meat and poultry related.
 AMERICAN MEAT INSTITUTE

The Proposed GIPSARule will Cost the United States 104,000 Jobs
A regulation proposed by the Grain Inspection, Packers and Stockyards Administration (GIPSA) would,
among other things, adversely affect packers' and their suppliers' willingness to use marketing
agreements. Why? The proposed rule increases the risk associated with using marketing agreements
because it would change longstanding judicial precedent and make it easier for a disgruntled livestock
supplier to sue and win in a Packers and Stockyards Act lawsuit. tn doing so, the proposed rule creates a
disincentive for packers to use such agreements.
Although supporters of the rule claim the proposal will help livestock producers I, a careful look at the
economics ofthe proposal shows that it actually will lead to a decline in jobs, wages, economic activity,
and tax revenues in United States. That's why so many organizations representing cattle, pig and poultry
producers, 'as well as meat and poultry processors, oppose the rule.
The United States companies that produce, process, distribute, and sell meat and poultry products are an
integral part of the nation's economy. Manufacturers, retailers, and distributors of meat and poultry
products, provide well-paying jobs in the United States, and pay significant amounts in taxes to the State
and Federal gove1'11ments.
Economic Impact of the Proposed GIPSA Rnle in the United States
Direct2 Supplier Induced Total
Jobs (FTE) 30,000 43,443 30,151 104,000
Wages $764,318,247 $1,415,726,892 $1,172 971,419 $3,353,016,558
Economic Impact $3,838,461,850 $6,350,851,492 $3,795,974,168 $13,985,287,510

Federal Taxes State Taxes I Total I

I Business Taxes $790,705,294 $569,758,8821 $1,360,464,1761
The Meat Indnstry is an Integral Part of the United States' Economy
.:. Companies in the United States that produce, process, distribute arid sell meat and poultry
preducts would lose as many as 30,000 jobs in the nation. As many as 74,000 jobs in supplier and
ancillary industries will also be lost. These include jobs in companies supplying livestock and
services to manufacturers, distributors and retailers, as well as those that depend on sales to
workers in the meat industry.
•:. In this harsh economic period, every job is important. In fact, in the United States the
unemployment rate has reached 9.2 percent. This means that there are already 14,139,762 people
trying to find jobs in the nation and collecting unemployment benefits.
The Nation Would Suffer from a Decrease in Taxes Paid by the Industry
.:. Not only does the meat industry crcate jobs, it also generates sizable tax revenues. In the United
States, the industry and its employees would pay about $1.4 billion less in taxes to the State and
Federal governments, as a result of the proposed GIPSA rule.

Producer jobs include agricultural supplier jobs that are meat and poultry related.
Direct jobs [Ice those involved in the packing, wholesaling, and retailing of meat products. Supplier jobs include livestock Hnd .
poultry producers, as well as those working in other companies that supply goods and services to meat packers, wholesalers, and
retailers. Induced impacts come about when those working in the direchmd supplier sectors spend their income in the regional
economy.
ATTACHMENT I
 Executive Summary
An Estimate of the Economic Impact of GIPSA's Proposed Rules

Informa Economics
Nov 8,2010

Background:

In September and October of 201 0, Informa Economics conducted an economic impact analysis of the
recently proposed GIPSA rules on behalf of the National Meat Association in cooperation with the
National Cattleman's Beef Association, the National Pork Producers Council and the National Turkey
Federation. The primary objective of the research was to discern how industry participants might
respond to the rules if implemented and to estimate the economic impact that would result. The study
. utilized an approach that relied on extensive interviews with key personnel in all stages of the beef,
pork and poultry supply chains. In addition, cost estimates were solicited from many of the major
companies operating in the packing sector. This information was used to develop an estimate of
industry-wide direct and indirect costs that might be expected as a result of the rule. Finally, this cost
information was utilized in an input-output model ofthe US economy which enabled the research team
to project how the rule might impact employment, GDP and tax revenue nationwide.

Findings:

Total Economic Impact of GIPSA's Proposed Rules

Job Losses 22,800
Annual GDP Loss $1.5 billion
Annual Tax Revenue Loss $359 million

With Respect to the Rule Itself:

• Industry participants are nearly unanimous in assessing the rule language as being vague and
poorly-defined.

• Affected companies have no guidance as to how stringently GIPSA will interpret and enforce
the rule. This has created considerable uncertainty and fostered an environment where
participants are predisposed to take extreme measures to minimize their exposure to the risks
associated with the proposed rule.

• The provision that removes the burden for litigants to show competitive injury in order to seek
damages is by far the largest area of concern. Informa finds that nearly 75% of the expected
economic damage arising from this proposed rule can be tied directly to this provision.

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With Respect to Costs and Losses:

• Direct costs associated with rule compliance are significant but considerably smaller than the
indirect costs that are expected to materialize. Direct costs encompass spending on people and
systems needed to comply with the rule. Indirect costs refer to losses suffered by the industry
from product quality deterioration and efficiency reduction.

• Direct one-time costs are projected as follows: Beef Industry, $39 million, Pork Industry $69
million, Poultry Industry: $28 million.

• Direct annual ongoing costs are proiected as follows:

Direct Annual Ongoin~ Costs from GIPSA's Proposed Rules
BeefIndustry $62 million
Pork Industry $74 million
Poultry Industry $33 million

• Indirect costs are largest in the beef sector where packers are likely to significantly reduce the
use of marketing agreements that are currently used to supply premium and specialty beef as
well as permit efficient plant throughput.

• Pork industiy indirect costs arise from the presence of both marketing and production contracts.
Changes to market agreements are expected to diminish product value and hamper plant
efficiency. Changes to production contracts will foster production efficiency losses.

• Indirect losses in the poultry sector arise from lost efficiency in bird production that is expected
to result from modification or abandonment oftournament pay systems.

• Annual indirect losses are estimated as follows:

Annual Indirect Losses from GIPSA's Proposed Rules
BeefIndustry $780 million
Pork Industry $259 million
Poultry Industry $302 million

• Ongoing and indirect costs will eventually be borne by consumers and producers, not packers.
Our analysis indicates the following percentages of costs borne by producers: Beef Industry,
82%; Pork Industry, 56%, Poultry Industry, 19%.

• The rule is expected to have a significant impact on livestock auction facilities and commission
agents. We find that the rule may reduce buyer participation at auction barns to the point where
150-200 of the smallest barns in remote areas may go out of business.

ltZ!1~informa economics
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2
With Respect to the US Economy:

• The added costs are expected to result in reductions in industry output that will impact not only
the meat and poultry industries themselves, but support industries and entities that rely on
spending by meat and poultry industry employees.

• This research finds the following industry contractions:

Industry Contraction Due to the Proposed Rules
Beeflndustry -494,000 head (-0.6%)
Pork Industry -1.25 million head (-1.9%)
Poultry Industry -55.2 million birds (-0.6%)

• Our full-economy model suggests that overall annual GDP could fall by as much as $1.56
billion, with the losses divided among the various industries as follows:
Lost Value Resulting From the Proposed Rules
BeefIndustry -$837 million
Pork Industry -$335 million
Poultry Industry -$34 I million
Livestock Auction Markets -$45 million

• Total job losses as a result of the rule are expected to total just over 22,800.

• Job losses will be highest in the production sectors for beef and pork with cattle ranching
expected to lose nearly 2900 jobs while pork production could lose over 1900 jobs.

• Other areas that will be particularly hard hit in terms of employment declines are agricultural
support activities as well as the retail and foodservice sectors.

• As a result of the decline in economic activity, tax revenues are expected to decline by $359
million, with 46% of that reduction occurring at the state and local level.

With Respect to Timing:

• The outcomes portrayed above will take time to reach their full levels. For example, it may
take 2-3 years before the declining beef quality or poultry production efficiency reach the point
that results in the economic losses described above.

• Industry participants will eventually find ways to adapt to the rules and thus the economic
impact will be lessened at much longer time horizons. However, we expect lingering economic
effects for ten years or more in all three industries.

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3
CHANUh Ut' FLAN~: ~A~~ I:<orm tor Vee. ') Urab & Uo Fage I: ot 4

Heather Schoch

From: Shafran, Ann [ashafran@courtesyassoc.com]

Sent: Monday, November 15, 2010 9:26 AM
To: Heather Schoch
Cc: Greenbaum, Lindsey
Subject: RE: CHANGE OF PLANS: SASS Form for Dec. 9 Grab & Go

Ladies,
Our 8th board room is reserved from 11am -1pm.

The address is 2025 M Street NW, Suite 800 (8 th floor), Washington, DC 20036

Is there anything else I can do?

Ann

AIm Shafran
202-367-2485

This message was received from outside of the company.

Privileged or confidential information may be contained in this message. If you are not the
addressee indicat~d in this message (or responsible for delivery of the message to such
person), you may not read it, copy it or deliver or forward it to anyone. If this message has

been received in error, you should destroy this message and notify us immediately.

From: Heather Schoch [mailto:HSchoch@meatamLcom]

Sent: Monday, November 15, 2010 8:40 AM
To: Shafran, Ann
Cc: Greenbaum, Lindsey
SUbject: RE: CHANGE OF PLANS: SASS Form for Dec. 9 Grab & Go

At least 20ppl either conference or hollow-square setup... Thanks!

From: 'Shafran, Ann [mailto:ashafran@courtesyassoc.com]

Sent: Friday, November 12, 2010 S:31 PM
To: Heather Schoch
Cc: Greenbaum, Lindsey
Subject: RE: CHANGE OF PLANS: SASS Form for Dec. 9 Grab & Go

Let me check and get back to you next week. How many people?

Ann Shafran
202-367-2485

11116/2010
CHANUJ::\ UI:' PLAN;): ;)A;);) ):<Offfi lor uec. 'J uraD (J[, IJO rage L. or"

This message was received from outside of the company.

Privileged or confidential information may be contained in this message. If you are not the
addressee indicated in this message (or responsible for delivery of the message to such
person)( you may not read it, copy it or deliver or forward it to anyone. If this message has

been received in error, you should destroy this message and notify us immediately,

From: Heather Schoch [mailto:HSchoch@meataml.com]

Sent: Friday, November 12, 2010 9:46 AM
To: Shafran, Ann
Cc: Greenbaum, Lindsey
Subject: FW: CHANGE OF PLANS: SASS Form for Dec. 9 Grab & Go

Hi Ann,.

See below, We're looking for a home for a Grab and Go meeting scheduled for December 9 th over the lunch
hour. Any chance Courtesy could host this? I remember Dot mentioned that the conference rooms were
undergoing renovations.,. ,is all of that finished now? Let me know when you have a chance!

Thanks,
Heather

From: Greco, Shannon N. [mailto:ShGreco@FDIC.gov]

Sent: Friday, November 12, 2010 9:38 AM
To: Heather Schoch; dot.hewitl@onpeak.com
Cc: Jason Watkins; Shonzia Thompson; Rebecca Miller
Subject: CHANGE OF PLANS: SASS Form for Dec. 9 Grab & Go

Good Morning Ladies,

We've had a slight change in plans to our repertoire for the December 9 educational session. It was supposed to be a
webinar that higWighted MACE but instead we are going in another direction and decided to make this a supplier
focused Grab & Go Session. I need your help rmding a location to hold this G&G, which we'd like to have from l2pm
- Ipm on December 9.

Please find attached the completed SASS form for this event. Time is of the essence, so anything you can put together
would be great. I can also send an email out to the Board to see if anyone is interested in hosting it (since I plan to see
if any of our suppliers want to be a "speaker" at the event), Do you want me to do that or do you want to handle it
from here?

If you have any questions, please let me know.

Sorry for the last minuteness of this request!!!

Thanks,

«SASS Form - December 9 G&G,doc»

11116/2010
CHANGE OF PLANS: SASS Form tor Dec. 9 Grab & Go Page 3 of 4

Shannon Greco

Conference Planning Manager

ARAMARK@ FDIC

L. William Seidman Center

3501 Fairfax Drive

Arlington, VA 22226

Ph: 703-562-2747

F: 703-812-7464

Work Cell: 571-436-5485

This message was received from outside of the company.

Privileged or confidential information may be contained in this message. If you are not the
addressee indicated in this message (or responsible for delivery of the message to such
person), you may not read it, copy it or deliver or forward it to anyone. If this message has

been received in error r you should destroy this message and notify us immediately.

From: Greco, Shannon N.

Sent: Tuesday, September 21, 2010 11:54 AM
To: hschoch@meatami.com; 'dot.hewitt@onpeak.com'
Cc: Jason Watkins; Shonzia Thompson; 'Rebecca Miller'
Subject: SASS Forms for Future Grab & Gos - PD Committee

Good Afternoon Ladies,

Please find attached completed SASS forms for our March & May Grab and Go sessions. I was told that SASS will be
handling site selection for the Grab and Go's moving forward.

These are just 1 hour complimentary sessions that we hold around lunch time. We prefer an intimate space that can
hold up to 20 people (like a Large Boardroom or smaller function space). We prefer a 12pm - Ipm tirneframe but can
be a little flexible so long as it sticks to lunchtime (1130am - 12:30pm; 12:30prn - 1:30pm okay). These venues do not
have to be hotels so you can expand your facility search if necessary.

11116/2010
LtiAl~lJb Vi' t'LA1~::i: ::iA::i::i i'orm ror vee. ':J lJraD a lJO t'age 'I 01 'I

In the past, I know you said that Coco Sala was interested in hosting one of these. I know Katie Rais with the
American Hotel & Lodging Association expressed interest when I sent out an email to Leadership about a venue for
the July G&G. These might be good starting points?

Anyways, let us know if you are able to locate venues/facilities for these programs.

Thanks!

Shannon

« File: SASS Form - March G&G.doc» «File: SASS Form -

May G&G.doc »
Shannon Greco

Conference Planning Manager

ARAMARK @ FDIC

L. William Seidman Center

3501 Fairfax Drive

Arlington, VA 22226

Ph: 703-562-2747

F: 703-812-7464

Work Cell: 571-436-5485

Privileged or confidential' information may be contained in this message. If you are not the
addressee indicated in this message (or responsible for delivery of the message to such
person) I you may not read it, copy it or deliver or forward it to anyone. If this message has

been received in" error, you should destroy this message and notify us immediately.

Privileged or confidential information may be contained in this message. If you are not the
addressee indicated in this message (or responsible for delivery of the message to such
person), you may not read it, copy it or deliver or forward it to anyone. If this message has

been received in error, you should destroy this message and notify us immediately.

11/16/2010
 An Estimate of the Economic
Impact of GIPSA's
Proposed Rules

Prepared for

National Meat Association

Prepared by

Informa Economics, Inc.

775 Ridge Lake Blvd
Memphis, TN 38120

~i~ informa economics

...." LlllAGRAlnfllrmlll'Olllplill)'

www.informaecon.com

© by Informa Economics, Inc.

 Table of Contents

I. Study Background and Objectives I

2. Project Methodology 3
2.1. Industry Interviews 4
2.2. Industry Cost Survey 4
2.3. Desk Research 5
204. Macroeconomic Modeling 6
3. Important Elements of the Proposed Rule ~ ; 6
3.1. Justification of Differential Pricing 7
3.2. Prohibition of Livestock Transactions Between Packers 7
3.3. Limits on Livestock Dealers and Packer Buyers 8
3A. Restrictions on Poultry Tournament Systems 9
3.5. Changes to Poultry and Hog Contracts II
3.6. Abolishment of the Need tei Prove Competitive Injury 14
4. How Rule Elements Will Affect Industries 15
4.1. Cattle & Beef : 16
4.2. Hogs & Pork 19
4.3. Broilers & Turkeys 21
404. Retail and Food Service Sectors : 22
5. Direct Costs 24
5.1. Cattle and BeeL 25
5.2. Hogs and Pork ,.26
5.3. Poultry 28
504. One-Time Direct Costs 29
5.5. On-Going Direct Costs 30
6. Indirect Costs 30
6.1. Cattle and Beef 30
6.1.1. Branded Beef Programs 31
6.2. Hogs and Pork 35
6.3. Poultry 36
604. Supply Chain Efficiency Costs 43
6.5. QualitylDemand Revenue Impacts 44
6.6. Livestock Auction Markets : 45
7. Total Industry Cost Estimates 49
7.1. Cattle and BeeL 49
7.2. Hogs and Pork ; 51
7.3. Poultry 52
704. Aggregate MeatIPoultry Industry Costs 53
8. Macro Economic Impacts 54
8.1. Market Analysis 54
8.1.1 Adding Costs to the Economic System 54
8.1.2 Modeling Quality Decline 57
8.1.3 Modeling Efficiency Losses : 58
8.104 Total Losses 58 .

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

8.2. Input-Output Analysis : 59

8.3. Economy-Wide Impact, Beef.. 61
8.4. Economy-Wide Impact, Pork 62
8.5. Economy-Wide Impact, Poultry 63
8.6. Economy-Wide Impact, Livestock Auction Markets 64
8.7. Economy-Wide Impact, Total 65
8.8. Tax Revenue Impact 66
9. Timing of the Economic Impact 66
10. Summary 69

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

List of Tables

Table I. Specific Direct Cost Categories ; 25

Table 2. Meat Industry One Time Direct Costs 29
Table 3. Meat Industry Ongoing Direct Costs 30
Table 4. Meat Industry Efficiency Impact 44
Table 5. Meat Industry QualitylDemand Impacts 45
Table 6. Size Distribution of US Livestock Auction Market Agencies and Firms Selling
On Commission (Primarily Stockyards) ~ 48
Table 7. Beef Industry Supply Chain Cost 51
Table 8. Pork Industry Supply Chain Cost 52
Table 9. Poultry Industry Supply Chain Cost.. 53
Table 10. Aggregate Economic Impacts Across All Species 53
Table I I. Supply and Demand Elasticities 57
Table 12. Industry Output Effects Estimated for the Direct Ongoing, Quality Decline and
Efficiency Losses as a Result of the Proposed Rule 58
Table 13. Relative Cost Burden Between Consumers and Producers 59
Table 14. Estimated Economy-Wide Effects Associated with Declining Output in the
Beef Supply Chain 61
Table 15. Top Ten Sectors for Job Losses Originating from the Beef Supply Chain 62
Table 16. Estimated Economy-Wide Effects Associated with Declining Output in the
Pork Supply Chain 62
Table 17. Top Ten Sectors for Job Losses Originating from the Pork Supply Chain 63
Table 18. Estimated Economy-Wide Effects Associated with Declining Output in the
Poultry Supply Chain ~ 63.
Table 19. Top Ten Sectors for Job Losses Originating from the Poultry Supply Chain. 64
Table 20. Estimated Economy-Wide Effects Associated with Effects on the Livestock
Marketing Sector. 65
Table 21. Estimated Total Economy-Wide Effects Associated with the Proposed Rule. 65
Table 22. Change in State and Local Tax Revenue by Source (Million $) 66
Table 23. Change in Federal Tax Revenue By Source (Million $) 66

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

List of Figures
Figure I: Proposed GIPSA Rule, Areas ofImpact 15
Figure 2: Proposed Rule Impact Diagram, Beef.. 17
Figure 3: Proposed Rule Impact Diagram, Pork.. 20
Figure 4: Proposed Rule Impact Diagram, Poultry 21
Figure 5: Premium on Branded Boxed Beef Sales 33
Figure 6: Annual Premium on Branded Boxed Beef Sales 34
Figure 7: Broiler Feed Conversion Estimates: 2000 vs. 2010 39
Figure 8: Average Broiler Market Weight.. 40
Figure 9: Average Broiler Market Age : 41
Figure 10: Average Broiler Daily Weight Gain 42
Figure II. Retail and Farm Level Supply and Demand 55
Figure 12. Effect of Adding Costs at the Processor LeveL 56
Figure 13. Estimated Economic Impact Over Time, Beef.. 68
Figure 14. Estimated Economic Impact Over Time, Pork 68
Figure 15. Estimated Economic Impact Over Time, Poultry , 69

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

1. Study Background and Objectives

In the 2008 Farm Bill, language was included that called for USDA's
Grain Inspection, Packers and Stockyards Administration (GIPSA) to
develop new regulations dealing with several sections of the Packers and
Stockyards Act of 1921 (PSA). The requests made by Congress relevant to
GIPSA regulations were identified in Sections 11005 and 11006 of the
2008 Farm Bill. In Section 11005, the legislation addresses the need to
make amendments to Sections 208, 209 and 210 of the PSA focusing on
poultry and swine production contracts. That language lays out specific
requirements regarding the right of growers to cancel contracts, disclosure
about capital investment requirements, arbitration issues, etc.

Section 11 006 of the Farm Bill talks specifically about writing new
GIPSA regulations with respect to:

(1) Whether an undue or unreasonable preference or advantage has

occurred in violation ofsuch Act;

. (2) Whether a live poultry dealer has provided reasonable notice to

poultry growers of any suspension of the delivery of birds under a poultry
growing arrangement;

(3) When a requirement ofadditional capital investments over the life ofa
poultry growing arrangement or swine production contract constitutes a
violation ofsuch Act; and

(4) If a live poultry dealer or swine contractor has provided a reasonable

period of time for a poultry grower or a swine production contract grower
to remedy a breach of contract that could lead to termination of the
poultry growing arrangement or swine production contract.

. GIPSA has responded with a set of proposed rules as required by Congress

and our research effort is directed at estimating the economic impact of the
proposed rules. The rules (collectively referred to as the "GIPSA rule")
are cUlTently open for public comment arid may be amended before they

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

are implemented. I This work is based on our interpretation of the rules as

they are currently written.

It seems that in writing their regulations, USDA/GIPSA focused heavily

on number (I ), above. Numbers (2), (3) and (4) are quite specific in their
focus on poultry and swine contracts, and these are addressed by the
proposed regulations (as in USDA sections 201.215, 201.216 and 201.217
of USDA's proposed regulations). Of course, one could argue that USDA
goes way too far even on these issues. (For example, nothing in the Farm
Bill section above mentions anything about pouitry tournament contracts)
Most of the remainder of GIPSA's proposed regulatory language,
including banning packer-to-packer sales, disclosure of contract terms,
applying base pricing standards to all producers, requiring justifications
for differential pricing, seem to be derived from the requirement number
(I), above. That provision requires GIPSA to write regulations with
respect to determining whether an undue or unreasonable preference or
advantage has occurred in violation of the PSA.

It is readily apparent that the intent of Congress was fot the regulations not
to go beyond some relatively specific poultry and swine contract issues.

With this as a background, a heated debate is now taking place within the
livestock and poultry industry regarding the implications and economic
impacts of these proposed regulations should they be implemented as
written. Informa Economics, Inc. has been retained by stakeholders in the .
industry to conduct an economic analysis of the proposed rule and this
report contains Informa's findings in this regard.

Specific tasks included in this analysis are as follows:

(1) Conduct an information discovery on how industry participants would react

to (or be forced to change business practices) due to implementation of the
proposed rules. This involves information collection from the various
segments of the major meat protein supply chains (packers, processors,
producers/growers, livestock dealers, market agencies, retailers, food
service providers and consumers) that would be affected by the rules.

I The Federal Register posting of the proposed rules can be found at

http://archive.gipsa.usda.gov/rulemakingifrIOI06-22-1 0.pdf

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

(2) Provide an interpretation of how industry business responses would likely

manifest in aggregate for beef, pork and poulh'y in complying with the
rules.

(3) Estimate the financial impact on producers and consumers in each supply
chain (beef, pork and poulh'Y) as a result of the industry changes that are
likely to occur if the rules are implemented.

(4) Assess the expected macroeconomic impact of the rules on jobs, GDP,
taxes, industry size and meat/poultry industry growth.

As one might expect, the task at hand is extremely complex in nature as

each industry stakeholder and particularly the packing sector can be
impacted by one or more of the proposed rules and each entity could be
affected differently than others in the· same segment of the supply chain.
Since several of the proposed rules are rather vague in terms of what
changes will actually be required of industry participants and how the
regulations might actually be implemented, quantification of the ultimate
effects becomes somewhat open-ended and hazardous. In some cases, the
vagueness of the rule and the lack of any similar precedent forced Informa
to utilize the knowledge and expertise of the study team to make "best
estimates" of the economic impacts.

2. Project Methodology
In order to meet the objectives of the study outlined above, it was
determined that an all-inclusive supply chain evaluation would need to be
conducted for each of the major meat protein categories; beef, pork, and
poultry. Section 4 contains a set of schematics that provide focal points
for each supply chain as it relates to the elements of the proposed rules put
forward by GIPSA. In some cases, the functional or operational impact of
a particular rule will be restricted to one segment of the supply chain; in
other cases it may impact several segments of the chain or the entire chain.
We have attempted to be as specific as possible in identifying how the
various rules will create the need for "new" or "altered" business practices
and, on a best efforts basis, have estimated the costs associated with these
changes at various transactional points in the respective supply chains.

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

2.1. Industry Interviews

Gaining first-hand input from industry stakeholders was considered to be
essential for identifying and measuring the financial and business impacts
from the proposed GIPSA rules. Consequently, numerous telephone and
personal interviews were conducted with stakeholders at all levels of each
supply chain. Attempts were made to get specific input and data from
companies and individuals representing all segments of each ofthe supply
chains as well as from different sized operations.

A list of contacts was provided to Informa representing entities tl1at had

agreed 'in advance to participate. We supplemented that interview list willi
additional firms in order to get a broad cross section of primary input. In
excess of 40 interviews were conducted by both telephone and in-person
and ilie issues and concerns raised during these interviews were taken into
consideration when developing the analytic approach for estimating the
impacts and costs of ilie proposed rules. The information and business
intelligence gathered through the interview process was extensive and
essential to the results presented in this report. However, it is important to
recognize that it was impossible to structure the interview process in a way
that provided a pure random sample and thus the information gleaned
from the surveys should not be used to make statistical inferences about
industry populations in a strict sense.

2.2. Industry Cost Survey

The proposed rules developed by GIPSA are extremely complex and
consequently, identifying all of ilie business process changes or new
business activities that would be required to comply witl1 the rules was
difficult. Part of that difficulty is that many of the requirements related to
the rule do not have a "clear business precedence" so often companies
were uncertain as to how they were going to deal with changes and the
costs of those changes had limited basis for comparison.

Informa dissected the various elements of ilie proposed rules and

organized these elements into categories. A cost matrix survey was
developed and sent to several companies operating in ilie slaughter
segment of each supply chain. The rules are directed at these companies
and iliey will experience the most significant changes in business practices

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Economic Impact of GIPSA's Proposed Rules Nov. a, 2010

and hence incur the bulk of the costs originating from this change.
Follow-up discussions were held with many of these companies regarding
the cost estimates they provided for the study. All industry participants
were guaranteed that their cost estimates would be kept in strict
confidence and only reported in aggregate if required in the study.

Informa industry experts were also challenged to provide estimates of the

cost of implementing and complying with the various elements of the rule
and these professional opinions were synthesized with those provided by
industry participants. A consensus cost range for each of the various
element categories was transformed into a cost-per-unit of production for
each supply chain and then aggregated into an industry-wide cost. These
per unit costs then became essential input into subsequent analysis such as
the effolt to quantify the rule's effect on industry size, economic activity,
job creation/loss etc.

2.3. Desk Research

Informa conducted a rather thorough literature search seeking other
sources of industry data that might provide analytical guidance to the
needed estimation process. It quickly became apparent that little effort has
been extended to fully documenting costs within each of the supply
chains. One can certainly expect that companies themselves have a
relatively good feel for how costs break down in their own operations but
this data tends to be proprietary and consequently, little is available in the
public sector.

Informa does have experience in evaluating supply chain costs illld

conducted a major economic evaluation of the supply chain cost impacts
related to the introduction of Mandatory Country of Origin Labeling
(MCOOL). The industry cost estimates developed by Infonna (formerly
Sparks Companies, Inc.) were highly referenced by the USDA when
formalizing and implementing rules related to MCOOL. Informa business
and economic professionals that conducted that work are the same
consultants conducting this economic impact study. They possess a high
degree of knowledge and experience in the organization and structure of
each of the supply chains. Several have many years of experience
. working with companies in each vertical and, as a result of this high
intensity engagement with each supply chain, they possess the internal

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

knowledge and a "business feel" that is useful in validating the cost

estimates provided by companies for this project.

2.4. Macroeconomic Modeling

The final step taken in this study entails using the cost and economic loss
estimates derived in the previous steps into a market-level supply demand
model in order to estimate the lost production that will occur in each'
supply chain. This information then becomes input into a large scale
input-output model of the US economy. This model allows us to make
projections as to the effect of the rule on macroeconomic variables such as
gross domestic product (GDP), employment and tax revenue.

In this report, Informa will focus on the results of this complex analysis
process and strive to present it in a way that can be easily understood and
that increases the readability of the document.

3. Important Elements of the Proposed Rule

The proposed rule changes described above will require multiple changes
to how US beef, pork and poultry industry stakeholders conduct their
business activities. Some of the potential changes in business activities
could actually lead to changes in a company's asset structure as well as a
broader change in industry structure. An example of such changes would
be the need for a business to divest of certain assets or possibly initiate
changes within the business that would lead to more vertical integration.

A forensic review of the proposed rules was conducted and an attempt was
made to identify all of the provisions that have economic significance and
would require business process and supply chain alterations in order for
supply chain participants to adhere to the rules as proposed. Informa finds
the rules as written to be very open-ended and vague and thus a high
degree of uncertainty exists at this point as to intent and interpretation
from an implementation and enforcement perspective. Nonetheless, the
study team identified the following broad areas described by the rule as
those which have economic significance. Brief descriptions of each rule
element are given below, but the reader is directed to GIPSA's document
announcing the rule for the official interpretation.!

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010.

3.1. Justification of Differential Pricing

An important element of the proposed rules is a requirement for
documentation to justify differential pricing. This would put increasingly
more scrutiny on packer purchases of cattle and hogs in an attempt to
ensure that the prices they are paying for those animals are reasonable and
fair. As it stands right now, packers are able to use considerable discretion
in paying premiums for livestock that meet certain quality thresholds or
discounts for animals that are of a poorer quality. Requiring
documentation to justify those price differentials would place a significant
cost burden on packers as they would be forced to invest in technology to
adequately and accurately maintain written and/or electronic records. 2 A
packer who chooses to absorb those costs may find themselves in an
uncompetitive situation in the market and they will at least be forced to
pass on those additional record-keeping costs to consumers and producers.
Some packers may avoid these costs by simply paying one standard price
for all animals, regardless of quality. Without the premiums associated
with higher-quality cattle or hogs, livestock producers will likely put less
effort into raising a higher-quality animal. The result of this would be
poorer quality beef and pork products, which would translate into reduced
consumer choice.

Packers expressed concerns about the interpretation of this proVISIOn.

While the quality-related differentials may be relatively straightforward,
packers worry about differing prices paid simply because the market has
"moved". For example, a packer may pay more for animals in the
afternoon than in the morning simply because he wasn't getting enough
animals at the lower price to fill his kill schedule. It is unclear whether or
not the packer might be subject to a violation of the Act in such a case.
Documenting this type of market differential will be much more onerous
for packers than the documenting quality-related differentials.

3.2. Prohibition of Livestock Transactions Between

Packers
The proposed rules include a stipulation that "packers shall not purchase,
acquire, or receive livestock from another packer or another packer's
affiliated companies." This is critical because this is a common practice

2 The risk also exists that G1PSA may not deem the packer's justification to be adequate, thus leaving the
packer at risk for a violation of the Act.

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Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

among beef and pork packers and would significantly change the nature of
business transactions in the livestock industry. Take, for example, a pork
packer who also owns and manages a live production unit as well. Right
now, in situations where that packer-producer is caught running with an
excess of hogs in the supply chain compared to their processing capacity,
they can sell those hogs directly to another packer at the prevailing market
price. With the proposed rule, that kind of transaction would not be
allowed and would be forced through a third party or independent
livestock dealer. Given that an independent dealer is not going to take on
that role without being properly compensated, there will be a transactional
.cost associated with getting those hogs from the initial packer to their final
destination. The increase in costs will eventually be accounted for by
higher pork prices at a cost to the consumer and lower live animal prices
paid to producers. Similar situations can be found in the cattle and beef
industry but are practically non-existent in the poultry industry because of
the heavy influence of vertical integration.

Of special interest is the situation where producers may also be the owners
of packing plants. There are several examples of this in both the beef and
pork supply chains. For example, producers that own shares in US
Premium Beef, which itself owns a large proportion of National Beef
Packing, might be considered packers. Many of these producer/owners
sell large volumes of cattle to other packers because those cattle do not
meet the specifications that US Premium Beef requires. If those producers
can no longer transact with other packers directly, a middleman would
need to be inserted into the transaction. This would almost certainly lower
the price that the producer receives.

3.3. Limits on Livestock Dealers and Packer Buyers

Limits are placed on livestock dealers and packer buyers by the proposed
rule. It states that dealers who operate as packer buyers must purchase
livestock only for the packer that identifies that dealer as its packer buyer.
Also, a packer may not enter into an exclusive arrangement with a dealer
except those dealers the packer has identified as its packer buyers and
reported to the Secretary of Agriculture on approved forms. It is common
at many auctions, particularly at smaller ones, to find packer buyers
bidding on cattle for multiple packers. This rule's intent appears to target
the buying side of the market and encourage more bidders for those

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Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

animals, possibly increasing the likelihood that sellers are receiving a "fair
market price". However, if packer buyers were forced to purchase
livestock for only one packer, it could be prohibitively expensive for
packers to send individual buyers to every auction market. Over time,
some business would dry up at the smaller markets because there would
actually be fewer buyers
, attending those auctions. Livestock producers
would then be forced to send their cattle to larger auction markets that are
farther away. The increased transportation costs would be borne by the
producer, thus lowering the effective price they receive for their cattle.

3.4. Restrictions on Poultry Tournament Systems

One of the key ways that live poultry dealers have been able to promote
innovation and investment from contract growers is through the use of the
so-called tournament system, a method of measuring growers'
performance relative to each. other based on metrics such as feed
conversion efficiency and livability that is commonly used throughout the
industry. Compensation to growers begins with what is called a "base
pay" which is a set price paid by the live poultry dealer. This is spelled
out in a grower's production contract, and payment is usually made on a
per live pound basis for the totalliveweight amount that is harvested from
the grower's farm. All of the growers who have birds harvested during the
settlement period, which is typically one week, are scored against each
other and are paid according to how well they performed against each
other based on the aforementioned performance metrics. Premiums to the
base pay are often given to growers with better-performing flocks in a
settlement period while a grower may be docked for substandard
performance. Premiums are also paid to some growers who have invested
in new buildings or have made upgrades to existing facilities, regardless of
how they perform relative to their peers during a settlement period. What
this often means is that growers who continue using older houses and
equipment are consistently compensated at a lower rate than their peers
because they are not able to take advantage of specific premiums being
paid for updated technology and because their birds often score lower than
the growers with newer buildings and equipment that they are scored
against as part of thc tournament system.

Differing levels of compensation among growers during a settlement

period has led to accusations of unfairness or unjust practices on the part

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

of integrators, or live poultry dealers. This issue 'was raised during

interviews \Yith several broiler growers who are currently on a production
contract. A few different remedies have been offered to combat these
alleged discrepanciesand are included as part of the proposed rule. The
first is a stipulation that all growers raising the same type and kind of
poultry must receive the same base pay and that live poultry dealers are
not allowed to offer a growing arrangement that contains provisions that
reduce compensation below the base pay amount. The next is that live
poultry dealers must rank growers in settlement groups with other growers
with similar or "like" houses.

Informa's interviews with live poultry dealers revealed an incredible

amount of concern about these stipulations, especially the first one that if
discounts to the base pay were no longer allowed, it would have the effect .
of lowering the base pay for everyone and severely restrict their ability to
give premiums to new growers or innovative ones to help them as they
make significant capital investments in newer equipment and technology.
Without those additional incentives, investment in new buildings and
equipment would slow down considerably, which would slow down the
rate of gain in feed conversion efficiency and livability the industry has
enjoyed over the past few decades. The requirement for live poultry
dealers to rank growers only in settlement groups with similar-type houses
could also prove to be an onerous and costly endeavor. While all poultry
houses are similar to one degree or another in that they provide shelter and
climate control mechanisms as well as feed and water delivery systems,
the age, size, and effectiveness of the buildings and equipment being used
can vary greatly. The sturdy nature of poultry barns means that some are
stilf in use 25 years or more after they are built. Differences in size can be
stark between older and newer poultry houses. Older broiler houses, for
example, may have been built at a length of 400 feet while newer ones are
often built at a length of 600 feet. Even after accounting for size, the
proposed rules seem to indicate that another step of grouping houses
according to technology is necessary (i.e, climate control and feed/water
delivery systems). Grouping growers in a settlement period based, on like
houses would be very difficult, and developing a system to do so would be
very costly compared to the current system of grouping everyone together.
The most extensive interpretation of the proposed rules could potentially
break up a settlement group of 15 or 20 growers into 6 or 7 groups with no
more than 2 or 3 growers apiece.

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Discussions with live poultry dealers and contract growers revealed some
interesting thoughts about the proposed changes to the poultry tournament
system. Growers want a level playing field but do seem to be cognizant of
the fact that integrators need to have a tool to encollrage investment in
newer buildings and technology to promote efficiency. Integrators are
very concerned about this aspect of the proposed rules as it could mean a
complete overhaul in the way they administer the tournament system,
which would come at a significant cost both in up-front changes to how
they restructure the system around growers with like houses and in lost
efficiency over the long-term.

3.5. Changes to Poultry and Hog Contracts

Beyond what might necessitate a tota,l restructuring of the way poultry
tournament systems are administered, the proposed rule addresses other
issues of fairness between live poultry dealers, swine contractors and
contract growers. Much of this was initially included in the 2008 Farm
BiIl, and Infonna was given the impression during the interview process
that many of the poultry integrators (GIPSA uses the less common term,
"live poultry dealers") had already taken steps to accommodate these
requirements. Some of these same requirements will apply in the pork
industry, where entities designated as swine contractors enter into
production agreements with swine growers in much the same fashion as
poultry integrators contract with poultly growers.

While the estimated costs associated with restructuring poultry contracts

to comply with these proposed rules is dwarfed by potential costs
associated with loss of efficiency if onerous restrictions are placed on how
poultry toumament systems can be administered, they are still significant
and would be another added cost passed on to consumers over time.

One of the proposed rules requires that live poultry dealers provide
adequate notice to a grower about an impending suspension of delivery of
birds, which has become commonly known as the "90-day rule." Some
contract growers have indicated that, in the past, there have been problems
with live poultry dealers terminating the delivery of birds without
warning, leaving growers in a financial bind after extending considerable
effort to prepare for a new flock of birds and counting on that new flock

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Economic Impact of GIPSA's Proposed Rules Nov.S, 2010

for the next round of income. Advance warning in the form of a 90-day
notice that birds would not be delivered to their farm would allow growers
time to try and respond by making other accommodations. In interviews
with poultry companies, .they maintain that these are very isolated
occurrences and necessary decisions when some growers have failed to
adequately prepare their facilities for a new flock of birds. The proposed
rule does indude language that gives integrators the discretion to suspend
bird delivery during an "emergency," but some expressed concern that
their judgment may ultimately be considered unfair.

Another grower concern that was expressed in the comment period 111
putting together the 2008 Farm Bill and was reiterated in interviews was
that live poultry dealers have used coercion and threats of retaliation as
methods of requiring additional capital investment on the part of growers
to invest in or upgrade to newer facilities and equipment. These
investments can occasionally be in the hundreds of thousands and
sometimes millions of dollars. Furthermore, live poultry dealers have
been accused of terminating contracts with growers soon after they have
made these expensive investments, leaving them with much of the cost of
that additional investment without a source of revenue, possibly leading to
bankruptcy on the grower's part. Integrators deny that they have used any
coercive tactics to encourage additional investment and insist that they
have a vested interest in maintaining a long relationship with a grower
who is willing to make those investments. Informa is not in a position to
examine the accuracy of the claims from either side. One element of the
proposed rule would make it ·more difficult for live poultry dealers to
require additional capital investment so long as a grower's facilities are in
"good working order" and if upgrades are necessary, live poultry dealers
must be willing to extend a contract long enough for the grower to recoup
at least 80% of their investment. It is Informa's perception that live
poultry dealers are not strongly opposed to the rule on the surface, but
recognize that if it is applied in its strictest sensc it could severely limit
new investment in facilities and technology. It might also make
integrators financially liable for growers who make those investments but
fail to back it up with the necessary labor and management skills to raise
quality birds, thus reducing efficiency by adding potentially significant
costs to the supply chain.

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Similar to the last item is a provision in the proposed GIPSA rule to make
sure a reasonable time period has been afforded growers to remedy a
breach of contract that might lead to contract termination. This is the
foundation behind the "90-day" and "80%" l'1.lles, and its intent is to
address the reasoning behind why a contract may be terminated and ensure
that a grower has been given a reasonable opportunity at compliance. The
live poultry dealers that were interviewed indicated that they either already
had in place or are currently developing and building what are commonly
known as poultry improvement plans, which are simply methods of
getting underperforming growers up to speed by having service
technicians spend extra time and attention on these farms for several
months or up to a year or more before making a decision to terminate the
contract. A strict interpretation of the l'1.l1~ could possibly make live
poultry dealers stick with underperforming growers for longer periods of
time to avoid being accused of terminating a contract in an unreasonably
short time period. Sticking with these growers would lower the overall
efficiency and result in higher costs across the poultry industry.

Similar to poultry, swine contractors will also need to make a number of

contract changes. These will parallel those described above for poultry,
with the exception of the 90-day rule. Swine production contracts are not
as prevalent as poultry contracts, but are still an important tool used in the
supply chain. Interviewees had similar concerns abOlit additional costs of
compliance with the rule and indicated that production efficiencies could
suffer due to the provisions that restrict the contractor's ability to require
facility and equipment upgrades.

Some swine contracts have risk-sharing components that allow for ledger
accounts where producers can essentially receive a loan from packers
when the market price is below a reference or breakeven price and this
loan gets paid back when prices are above the reference price. Producers
place a high value on this contract feature. Some producers indicated that
their business would not have survived the recent two-year stretch of
negative margins without this type of contract. Packers benefit from this
type of contract as well because it keeps valued producers operating at a
less variable rate, thus limiting throughput risks. It is doubtful that
packers could afford to finance these contracts for all of the hogs that they
process. If they decide thaI offering such contracts to some, but not all

© by Informa Economics, Inc. 13

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

producers puts them at risk for a violation of the Act as a result of the
proposed rules, then these contracts may disappear.

3.6. Abolishment of the Need to Prove Competitive

Injury
Perhaps the most contentious provision of the proposed rule is one that
would no longer require producers who bring complaints under the
Packers and Stockyards Act to show that the actions of the accused packer
caused competitive injury. In many past legal proceedings damages have
not been allowed because the plaintiffs have been unable to demonstrate
that the actions of the defendant caused harm to competition in the market,
With these rules, GIPSA is proclaiming that that condition is no longer
necessary to find damages under the Act.

This provision was far and above the one that respondents claimed would
cause the most harm. Nearly all interviewees from the packer community
referenced the $1.2 billion verdict that was rendered by an Alabama jury
against Tyson Foods in 2004 in a case that alleged a violation of the Act,3
The judgment was later vacated largely because the element of
competitive injury did not exist. Needless to say, this past experience has
led packer/processors to fear legal action brought by producers. It was
clear that many thought their company's overarching concern would b.e to
limit legal liability first ahead of all other company concerns.

Figure 1 below provides a visual representation of how the many rule

elements. will impact various business functions such as production
contracts, cash transactions/trades, marketing agreements/contracts and
packer-owned livestock. The segment of the supply chain that receives
most of the focus is the livestock/poultry processing plant as most of the
rules are directed toward issues related to the sale of live animals to
slaughter/processing facilities.

3 http://caselaw.findlaw.com/us-llth-circuit/1492709.html

© by (nforma Economics, Inc. 14

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Figure 1: Proposed GIPSA Rule, Areas oflmpact

Production Tournament
Contract / Compensation

Arbltratlont-----+ / Time to remedy contract breaches

Packer-Owned
Suspension of
delivery of birds
• I Unfairness Livestock
Contract presentation

Undue
preferences
Capital
I Ban on packer~to-packertrade

investments
Processing Plant

Cash
Trades
Unfairness
"'-..

\
Undue preferences
Unfairness
----
Contract presentation
/
./~
Arbitration

Undue
preferences

Marketing
Contract

4. How Rule Elements Will Affect Industries

Not all of the elements that create a market or economic impact will occur
in each supply chain. Many of the elements of the rules specifically
requested in the 2008 Farm Bill will impact the poultry (chicken and
turkey) sectors directly; some will have an impact on the hog sector and
most will have no impact on the cattle and beef sector. Similarly, the rules
that contain high levels of regulative authority related to livestock market
transactions including a ban on packer·to·packer trade and restrictions on
use of livestock buyers will impact the cattle and hog sectors in a major
way but will have limited impact on the poultry industry. The rule dealing
with market "fairness", undue market "preference" and market
"discrimination" will impact all meat protein sectors as it exposes
businesses in these supply chains to potential litigation issues. A
discussion follows of some of the key business practices and supply chain
processes that will require change based on a literal interpretation of the
proposed rules.

© by Informa Economics, Inc. 15

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

It is useful to recognize that in the poultry supply chain, it is only

production contracts that will be affected. There is no cash market, no
packer-to-packer issues and no livestock dealer issues. In the pork supply
chain, both production and marketing contracts exist and will be affected
and the packer-to-packer and cash market issues will apply. In the beef
vertical, production contracts are not a factor but all of the remaining areas
will be affected: cash trades, packer-to-packer, livestock dealers,
marketing contracts.

4.1. Cattle & Beef

Figure 2 provides a view of the cattle and beef supply chain and focuses
on those segments of the chain that will be directly affected by various
elements of the proposed rules. Since the proposed rules are directed at
business transactions between the sellers of cattle and cattle
slaughter/processing operations, the supply chain economic impact will
have its primary origins in the center of the supply vertical. Cattle sold by
cattle feeding entities (large and small) will be directly affected as will
other entities that assemble cattle for sale to packers such as dealers and
auction sale operations. Packers that have direct or partial ownership of
feedlot and/or backgrounding operations will be affected by the proposed
rule that restricts packer-to-packer sales of live cattle as in many instances
such cattle. are not sold strictly within the packer's own veltically
integrated system.

Given the broad nature of the proposed regulations, there will be supply
chain impacts (both costs and sales prices) that affect stakeholders in the
industry right from the cow calf/ranching sector all the way through the
supply chain to consumers. In Figure 2 below, we attempt to reflect where
these effects will occur and the nature of the business impact. In the end,
implementation of the 1'Uies will add cost to the US beef supply chain as
well as reduce incentives for industry participants to enhance quality and
value added offerings. The methods by which businesses react to
regulatory requirements will ultimately determine the magnitude of supply
chain value loss that will occur.

Much of the direct impact of the rules as they relate to the beef supply
chain will fall on the feedlot and the steer and heifer slaughter sector with
likely pushback toward the cow-calf producer. Individual producers and

© by Informa Economics, Inc. 16

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

other entities selling cull cows and bulls to cow/bull slaughter operations
will be directly affected by the proposed rules as well. New costs are
anticipated as a result of the regulations that address market transactions
between buyers and sellers of cull animals.

Figure 2: Proposed Rule Impact Diagram, Beef

Litigation &
Lack of Buyers AssoGlated Costs
At Smaller Auctions
,,
,/
," ."
" Fewer Marketing
Reduced Consumer
Fewer , Added Choice & Consumer
Premiums ,,, ,/
,
,/
,
/ Grids
, Costs Demand
T
~ " , : Reduction of :
CU!JAn/l1~ " " Fewer Premium: Quality:
~ ~ " ,/ Programs': : : :
/' ,.,,/ / Efficiency \, \\ j ~ i i~;-
Packer ,/ ,,' ,/ Is~ue6 \, '\... Retailer -'----i-,---+ ::0
~,/ ~:~'i
Buyer
Restriction i + '-: 1
Fed Cattle • I,'Pac·., 'I \: : 'u"

Unfairness
I Arb:tratiOn i~ .' ~Foodservic • .....:..l_-+,·W
Contract I _,R;',
Undue Presentation ,S':i
Ban on Packer-
Preference Packer Trade

Added Cost & Reduced Incentive to Produce Beef

In addition to the direct economic impacts on supply chain participants

.involved in the buying and selling of cattle for slaughter, changes in the
rules will also have an indirect effect. on supply chain participants who
operate on both sides of the packer interface in the beef vertical. Of major
interest and concern is whether implementation of the rules, as proposed,
would seriously impact current cattle marketing agreements and other
formalized quality-based programs that are built upon enhanced live
animal and animal production specifications that provide premiums back
to the producer. This study attempts to identify and quantify, where
possible, both direct and indirect cost and revenue impacts related to the
proposed I'Ules.

© by Informa Economics, Inc. 17

Economic Impact of GIPSA's Proposed Rules Nov.S,2010

'The cattle and beef supply chain holds the most potential to be affected by
the proposed rules as it is much more complex than either the pork or
poultry supply chains. There are many breeds and cross breeds of cattle
that results in a .broad range of animal quality. Genetic variability, which
can result in a wide variety of carcass attributes, has given rise to multiple
breed-oriented programs. Further, many quality-oriented specification
programs have evolved .as supply chain participants attempted to
differentiate beef products to meet a broad range of consumer tastes and
preferences (differentiated demand).

In addition to quality differentiation in live animal and beef products, the

beef supply chain has multiple transaction points with many animals that
progress through the supply chain being bought and sold three or four
times before the animals are slaughtered. Differentiated consumer beef
demands result in a broad range of price premiums (and in some cases,
discounts) relative to a benchmark cattle price. This mix of pricing
differentials seems to be one of the targets of some components of the
proposed rules. There is a notion that not all cattle being transacted
receive "fair" market value and portions of the proposed niles are focused
at regulating what "fair" means and that in itself creates huge issues for
the industry to deal with.

The beef industry is also relatively concentrated as very significant

economies of scale have driven the industry toward a structure that is
dominated by a few large firms. The top four cattle slaughter operations
in the US account for roughly 80% of the annual steer and heifer kill.
There are other slaughter operations (mostly single plant firms) that
compete in this segment of the beef supply chain and yet another group of
operations that specialize mostly in the slaughter of cull animals (cows
and bulls). Proposed restrictions on packer-to-packer cattle sales will be
particularly onerous on several of the industry's slaughter operations.

The US cattle and beef industry has a modest degree of vertical integration
with some slaughter operations also whole or part owners of cattle feeding
operations. For those firms that are involved at multiple levels of the beef
supply chain, the new rules would prohibit them from selling their feedlot
cattle to slaughter operations other than their own. In order to avoid
violating the rule, additional transportation costs might need to be incurred
or there could be added costs for selling these cattle to a third party who

© by Informa Economics, Inc. 18

Economic Impact of GIPSA's Proposed Rules Nov.8,2010

would then sell the animals to a slaughter operation. Companies that are
integl:ated between the feedlot segment and the slaughter segment of the
industry may find business reasons to become even more integrated or
alternatively, to divest of assets in one of the business segments.

The schematic of the cattle and beef supply chain (Figure 2) and the
schematic of the proposed l'11le elements (Figure 1) provide the broad basis
from which Informa developed economic impact measures. The
complexity of the rules and how they would impact the cattle and beef
industry resulted in segmenting the economic analysis into multiple
components. It was determined that there would be a host of one-time
costs associated with putting in place processes and measuring
mechanisms to deal with some aspects of the rule. There would also be
on-going costs associated with these business process changes.

4.2. Hogs & Pork

Figure 3 provides a very simplified schematic of the US hog and pork

supply chain. The pork supply chain is much simpler than the one for
beef, but it is much more concentrated and integrated. This creates the
potential for enhanced regulatory impacts should the proposed rule
changes be implemented. This is particularly the case as it relates to
issues of competition, fairness and litigation issues.

As with the beef supply chain, the pork supply chain will be affected
primarily at the interface of financial transactions between producers and
slaughter operations. Certain features of the proposed rules will also
impact producer-to-producer business aJTangements as some independent
hog feeding operations do have contractual relationships with growers
even though they do not have direct financial linkages to a slaughter
facility. Regulations relating to contracting activities and arbitration will
have impacts on these business relationships that fall outside of packer
transactions.

Vertically integrated hog systems will be impacted less than will

independent hog production systems. The contracting of hog production
whether by integrators or independents will be affected by those rules that
relate to market fairness as well as arbitration. Market hog transactions as

© by Informa Economics, Inc. 19

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

well as the sale of cull sows and boars will be affected by the ban on
packer-to-packer trade. Such a ban will require reorganizing businesses to
either utilize all internally produced market hogs within the vertical
system or, if this is not possible or feasible, sell such animals to
independent third party entities. Such a requirement will add costs and
inefficiencies to the flow of hogs to market. For cull animals, integrators
will he banned from selling these culls (or market hog outliers) to other
packers so, in essence, the rules will infuse another cost; another margin
and added inefficiencies into that portion of the hog trade that involves
sales of animals between slaughter entities not owned by the same firm.

Figure 3: Proposed Rule Impact Diagram, Pork

Need for
Intermediary Reduced Consumer
Dealer litigation & Added Choice & Consumer
I Associated Costs Efficiency Costs Demand
: I I lssue~ ,, Reduction of
Quality,
f f i Fewer Grids \
Fewer PremIum
Programs
::
::
,,
: t: " Fewer Contracts '- i t

.\ ~
t
I
Ga.;!1 SOws'
"
" •
l(
,:. i, ~ Retailer

M~w~et HO;~; )I."" IJ~~'~~~·ri t: ,,

, f

. . 1 ,,,
,,
I /
Unfairness
! \
Contract
Ban on Packer-
Packer Trade
,
,,,
Presentation •
Undue Foodservice -----+
Preference Arbitration

. Added Cost & Reduced Incentive to Produce Pork

Due to the geographical dispersion of the US hog production sector and a

rather complicated network of vertically integrated operations and
small/medium/large independent hog production facilities, there will be
industry organization challenges should the proposed rules be
implemented as written. Packers do sell hogs to other packers but there
are generally strong economic and geographical reasons why such trade
takes place. Many integrated operations have contractual relationships

© by Informa Economics, Inc. 20

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

with sow slaughter operations to handle the disassembly of their cull sows,
All of these business transactions will need to change and such change
will lead to higher direct industry costs, lost efficiencies-and in all
likelihood-reduced revenue opportunities for the seller ofthe sows,

4.3. Broilers & Turkeys

Figure 4 provides a very simplified schematic of the poultry supply chain
and it is representative of both the broiler and turkey industries, In most
cases, both the broiler and turkey industries are totally integrated with the
poultry producer being a contract grower of birds for the integrated
processing firm, Contractual arrangements between the grower and
slaughter/processing operation dictate the flow of birds through the supply
chain with the grower providing certain physical assets (housing and
equipment) and labor/management while. the integrator provides the
chicks, feed, animal health and other production services, The grower is
provided payment from the integrator with performance premiums being
paid for exceeding peer-measured performance measures.

Figure 4: Proposed Rule Impact Diagram, Poultry

litigation & Fewer Types of Contracts Added

Associated Costs ,, Costs
,
Productivity
Issues
" ,
:
:
:
:
Efficiency
~U~
i c....;
.
: : . i /Retailer ---+
t ~9"
: : ~ .N
.
f'2~=1D~_-=----=-_~t~-~.~_:-_++~~c~'''tIU
~~ . $ ..
!'!I:
\ .E
FoodsaNice -+ :R
·S

\ \
Tournament Capital Remedy Suspension of
Compensation, Investment Contract Bird Delivery
Breaches
Arbitration
Contract
Undue
Presentation
Preference

Added Cost & Productivity/Efficiency Issues = Slower Growth

© by Informa Economics, Inc. 21

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Many of the specific requests from Congress for additional rules as noted
in the 2008 Farm Bill were specific to issues in the poultry industry.
. Clarification of existing rules and definitions were requested by Congress
and several of the rules proposed by GIPSA specifically deal with these
Congressional requests.

Most of the rules that are applicable to the poultry industry deal with
elements of the contracting process and they seemed to be written with the
intent of providing more flexibility for the grower in his dealings with the
integrator.
Implementation of contract-oriented rule changes in the poultry industry
may occur with limited cost to the contracting parties although they will
lengthen out the time element for making contract changes associated with
poor performance on the part of the grower. It is our impression that both
broiler and turkey contractors desire to have mutually beneficial
contractual relationships with their growers as both parties stand to gain if
all parties are performing at the highest level of efficiency and
productivity..

4.4. Retail and Food Service Sectors

At this point in time food retailers and food service operators appear to be
largely unaware of the proposed rules and the possible ramifications for
their operations. The rules have received very little if any coverage in the
retail trade press and to date has been seen as an issue between packers
and producers only.

This is unfortunate in that the rules could have a significant effect on retail
and food service if either premium programs are reduced or if they are
maintained but at significantly higher cost due to supply chain
inefficiencies.

As of July 14,2010, the Agriculture Marketing Service of USDA listed 65

Celtified Beef Programs but these do not include many producer, packer
and retailer brands that are not registered with USDA. The 2010 National
Meat Case Studl indicated that 51 % of beef packages in retail cases

4 http://www.beefretail.org/CMDocs/BeetRelaillresearch/201ONationalMeatCaseStudy.pdf

© by Informa Economics, Inc. 22

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

were branded items and it is now estimated that 40% of beef retail sales
are accounted for by premium branded programs.

Freshlook data 5 indicates 2009 annual retail beef sales dollars of $15.9
billion and ~nnual beef sales in tonnage of almost 4.5 billion lbs. At 40%
of sales the retail branded beef would account for 1.9 billion lbs as of
2009.

These branded programs at retail and food service have added incremental
sales as the wholesale premiums are more than passed through to the
consuming public and margins at retail have· increased due to these
premium prices as a significant number of US consumers show a
willingness to pay a premium price for high quality meat products that
deliver a' great eating experience.

The 40% of beef sold in retail food stores is branded either under a
. premium brand such as Celtified Angus Beef, a packer brand such as
Cargill's Sterling Silver or a house or retail brand such as Publix Premium
Certified Beef.' These branded programs are dependent on the
packer/suppliers ability to acquire enough cattle of the specified grade and
quality to satisfy the retail demand for the product.

Should the rules reduce the number of cattle available Ihat meet the
required specifications some retailers may lose Iheir branded program and
therefore lose their competitive differentiation in the marketplace. Any
reduction in qualifying cattle can be expected to increase the cost of the
product, an added cost many retailers may be unable to pass through to the
consumer due to the competitive nature of tlle retail marketplace. Either a
reduction in program availability or increased product costs due to limited
supplies of quality cattle or higher prices due to· supply chain
inefficiencies will have a negative effect on retail sales and on retail profit
margins.

The same situation exists in food service where an increasing number of

operators have moved to celtified/branded programs and market those
programs on their menus and in their advertising as a point of
differentiation and a sales and margin enhancement strategy. In addition,

5 Sourced from FreshLook Data, http://www.freshlookmarketing.com/

© by Informa Economics, Inc. 23

Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

it is the food service sector that is the current primary user of Prime,
natural, grass fed, hormone free and other premium programs being
demanded by and introduced to certain consumer groups. The recession of
2008-2009 has already had a devastating effect on white table food service
operators and these sales, often dependent on prime and branded
programs, are just beginning to recover from losses the past two years.

Pork and poultry are likely less subject to direct impacts of the rules at
retail and food service in that typical supermarket and food service
product needs have historically been more consistent and standardized
than for beef. However the growing interest in natural and/or organic
programs; hOlwone free, free range, and increasing state regulations
concerning animal welfare are also creating carcass premiums that are
inconsistent in definition, standard or state to state requirement. Until
these standards and definitions are applied universally there is great risk
that under the proposed rules these programs could be eliminated or
watered down in an effort to avoid potential legal liability resulting in
similar outcomes to those of beef but on a somewhat smaller scale.

The largest impact of the rules on the retail/food service chicken and pork
categories is the potential negative sales and profit impacts of increased
product costs due to increased inefficiencies in the various supply chains.
As. sales fall so these companies will experience declining labor
requirements, reduced equipment efficiency, smaller sales pel' square foot,
less fixed cost coverage and ultimately profits decline.

The retailers most at risk to the unintended consequences of the proposed

rules are those retailers who have invested the most time, effort and
money into providing their customers with high quality meat at
competitive prices and are therefore the leading food companies in terms
of sales, profitability and customer satisfaction. Those operators that have
done the least to provide quality food at fair prices will see much less
impact than the industry leaders.

5. Direct Costs
Costs imposed by the proposed GlPSA rules were divided into two
categories: direct costs and indirect costs. Direct costs are those that will
require an outlay on the part of a company in its effort to comply with the

© by Informa Economics, Inc. 24

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

rules. An example would be new computer software or the hiring of

additional staff. Indirect costs refer to those costs that will impact the
industry in a broad way and are more likely to develop over time than at
the rule's inception. Examples would include costs associated with losses
in efficiency and declining product quality. Direct costs are further
divided into two sub-categories: one-time and ongoing. This section
provides a brief description of the direct costs considered.

Table 1. Specific Direct Cost Categories

Beef Pork Poultry
1 Cost Areas Associated with Differential Pricing
• Infonuation systems for tracking
• Contract review for compliance '"
oJ .
.j

• Re-writing and Renegotiating contracts

• Documentation of quality differentials
• Documentation of market differentials
."'
.
'"
2 Cost Areas Associated with Submitting Sample Contracts to GIPSA
• Collecting Contracts
• Obliterating identifying infonnation '"'" .,""
• Transmission ofsatllvle contracts
'" ""
3.eost Areas Associated with Limits on Livestocl{ Dealers
• Retaining dealers to work exclusively with the campau
• Additional intcmallabor

4 Cost Areas Associated with Packer-to-Packel' Transactions

- Route transactions through broker a" other third party .
- Additional transportation ...'"
- Asset divestiture costs

5" Cost Areas Associated with Changes to Tournament Systems

-Restructuring Groups for like houses only
-Rewriting contracts to eliminate discounts
.
-Compiling and disseminating statistical infonnation to all growers '"
'"
6 Cost Areas Associated with Changes to l>oultry & Hog Contracts
-Research related to the 80% reCOUD rule
-Lost chicks due to complying with 90-day rule
J ..
-Additional transportation costs associated with 90-day nJ1e
-Labor involved in providing written explanations and remedies
-Re-writing contracts to allow al"bitration opt-out
J
., ."'
7 Cost Areas Associated with Increased Litigation Potential
- Additional legal staff
- Court costs, filing fees, research mId investigation
- Kcstructurmg to limIt legal exposure
.
5.1. Cattle and Beef
Table I above provides a listing of the specific business activities that
were identified by the study team based on the team's knowledge of the
cattle and beef supply chain as well as from input gathered from extensive

© by Informa Economics, Inc. 25

Economic Impact o(GIPSA's Proposed Rules Nov. 8,2010

interviews with supply chain participants. The objective of preparing such

a list was to provide a structure around which cost estimates would be
made measuring one-time supply chain costs as well as cost estimates that
would be ongoing. Industry stakeholders were asked to provide specific
input relative to these busiriess process changes and, while it was not
possible to get data from all firms operating at the primary slaughter level
of the beef supply chain, sufficient primary data was collected to provide a
consensus estimate of the costs companies would incur to position
themselves for complying with the proposed mles. The beef supply chain
will incur all of the direct costs except those that relate to changes in the
tournament system and those that relate to changes in poultry and hog
contracts.

Asset divestitures may be the best option for some packers in response to
provisions of the mle and a category was included to capture those costs.
A feedyard owned by a packer but located far away from the packer's
, processing facility might need to be sold should the packer-to-packer sale
ban be implemented.

5.2. Hogs and Pork

Not unlike the cattle and beef industry, the hog and pork industry is going
to be impacted by the various elements of the proposed GIPSA mles in a
multitude of ways. Businesses will need to constmct or upgrade
infOlwation systems that will allow them to track individual market
transactions. That might require installing new computer systems with
software that will provide an automated way of documenting th~ payment
of market price differentials. With the requirement to justify the payment
of price differentials (premiums and/or discounts), comes the need to track
these transactions and then harmonize those with quality and performance
differentials in order to document that the prices paid are legitimate and
consistent with the incremental value of the hog. It is easy to see that just
putting in place the tracking mechanisms for justifying differential pricing
will be a timely and costly activity.

Table I categorizes the major cost areas that will need to be addr~ssed by
the pork supply chain to comply with the proposed rules. The areas are
identical to those listed for the cattle and beef sector, with the addition of
costs associated with contract changes. The integrated nature of a portion

© by Informa Economics, Inc. 26

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

of the hog and pork sector suggests that not all market hogs will be
impacted by some of the process requirements and in those cases,
adjustments were made to the cost estimates to reflect these structural
issues.

There are six major business components or functions that will require
business process changes by the hog and pork sector. . In addition to
setting up processes for dealing with the differential pricing issue, efforts
will be required to conform with the new requirement to provide sample
production and marketing contracts to GIPSA. There may also be a need
to review and/or re-negotiating cun'ent contracts that spell out in very
specific terms the pricing elements of these contracts. Since many packers
utilize packer buyers or dealers to procure some percentage of their
ongoing slaughter requirements, costs will be incurred to rearrange this
business activity. New personnel and new business arrangements may be
required and failure to actually operate as effectively may result in
increased costs associated with reduced slaughter plant efficiencies.

Hog slaughter operations will be affected by the ban on packer-to-packer

transactions as presently some hog production operations owned in 1111
integrated production system sell some or all of their production to other
packers. This is nonnally due to geographic location of the hog
production unit relative to location of the integrator's slaughter facilities.
To minimize transportation costs and optimize overall revenues, these
hogs are sold io the "competition". We believe GIPSA's concern is that
packer-to-packer sales provide packers the opportunity to influence prices
and/or have better price intelligence than others in the market. With
mandatory price reporting on live hog sales, it is unlikely that such an
advantage actually exists.

The packer-to-packer restrictions will also have a major impact on the

merchandising and pricing of cull animals (sows .and boars). Those
involved in slaughter of these cull animals typically procure their sows in
a variety of ways and have established. procurement systems that allow for
optimization of the value of these residual animals. Many integrated hog
production systems sell their sows directly to sow slaughter operations or
through a company-owned marketing firm. Such activity would be
restricted and, while other business structures would surely evolve, costs
associated with the cull segment of the industry would be increased.

© by Informa Economics, Inc. 27

Economic Impact of GIPSA's Proposed Rules· Nov. 8, 2010

Several companies demonstrated financial losses that they will endure if

they must divest of subsidiary marketing groups that efficiently manage
the accumulation and sale of cull animals and market hogs typically
defined as outliers.

Many of the contract requirements imposed on poultry integrators will

also apply to hog contractors. These entities operate in a manner similar
to poultry integrators, offering production contracts to swine growers and
then marketing those hogs to packers. In some cases, the contractors are
packers. Costs associated with the 80% rule, providing written
explanations and allowing arbitration opt-out are all applicable here.

The elements of the proposed rule that deal with competition and the
added threat of litigation are high on the list of potential disruptive and
costly factors associated with the proposed rules. Those in the business
recognize that they might be subjected to litigation whether or not there is
due cause and this threat may very well cause companies to change
dramaticallythe way they are conducting business.

Finally, we included a category for the cost of asset divestitures if it is

obvious route that a company would need to take upon rule
implementation. For example, a pork packer may own a hog production
facility in a particular geographic region but no processing plant.
Historically that packer has sold the production from the facility to other
area packers. With the packer-to-packer ban that could no longer occur
and given that transport to the packer's own facilities is infeasible, the
packer might determine that divesture of the production asset is the best
course of action.

5.3. Poultry
Direct costs in the poultry area differ somewhat from those identified for
beef and pork: Infonna created three groups of cost categories that
roughly correspond to the major areas of the rule that will affect poultry.
The first cost area relates to those costs that companies will incur as a
result of making changes to the tournament system. This includes things
such as restructuring groups and providing statistical information to all
growers. Changes in the· pay system, such as having to eliminate
discounts from the pay scheme, are included in this category.

© by Informa Economics, Inc. 28

Economic Impact of GIPSA's I'roposed Rules Nov. 8, 2010

Costs associated with contract changes are also grouped together. Survey
respondents indicated that they will incur costs as a result of complying
with the rule requiring producers have a reasonable opportunity to recoup
at least 80% of their investment in growing facilities. Nearly all existing
grower contracts would need to be rewritten and those costs are also
included in this category..

The final category of direct costs is the costs which companies will incur
as a result of the increased legal activity. In some cases staff attorneys
will need to be added and in others more out-sourced legal costs will be
incurred. Any costs associated with divestiture of assets in order to
comply with the rule were included in this category. Table 2 provides a
listing of the direct cost areas for poultry.

5.4. One-Time Direct Costs

The analysis conducted by Informa utilized input from industry
stakeholders as well as internally generated cost estimates with consensus
forecasts being developed. One-time direct costs as shown in Table 2
ranged from an estimated $26 million for the poultry. sector to an
estimated $69 million for the pork industry. The primary factor raising
one-time costs for the pork industry relative to the other two species was
costs associated with likely asset divestitures. The per-head one-time
costs for the pork industry are about half those of cattle but the larger
annual hog slaughter volume does raise the overall industry direct costs.
For the poultry industry, one time direct costs are estimated at $26 million
with much of this related to litigation related preparations.

Table 2. Meat Industry One Time Direct Costs

Supply Chain Million $
Beef $38.7
Pork $68.7
Poultry $26.0

Total $133.3

© by Informa Economics, Inc. 29

Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

5.5. On~Going Direct Costs

Table 3 provides estimates by species and in total for ongoing direct costs.
These are costs that the industry will be burdened with year after year as
business practices change to allow for compliance with the proposed rules.
As can be seen, the ongoing direct costs are larger than the one time direct
costs for each of the species and in aggregate, roll up to a total meat sector
economic impact of $168.7 million on an annualized basis.

Table 3. Meat Industry Ougoing Direct Costs

Supply Chain Million $
Beef $61.5
Pork $73.8
Poultry $33.4

Total $168.7

6. Indirect Costs
6.1. Cattle and Beef
Importantly, the proposed rules could have a major impact on the
multitude of branded beef programs as well as other beef merchandising
programs with quality differentials. Industry participants made it
abundantly clear that to limit legal liability, companies in the packing
sector would strongly consider reducing the number and types of AMAs
that they are involved with. This in turn, would make it more difficult to
reward producers for raising cattle that meet the specifications of branded
and specialty beef programs. The US cattle and beef industry has spent
the past 20 years improving the quality of the beef being brought to
market and much of this improvement has been the result of proprietary
business programs and supply chain alliances which have allowed added
value from the programs to be shared by those creating that value. This
typically involves premiums for the cow calf producer, the backgrounder,
the feedlot as well as the slaughter operation. At the extreme, many of
these programs might be threatened as the potential for litigation because
of "fairness" or "preferential treatment" is elevated due to certain elements
of the proposed rules that deal with competition.

© by Informa Economics, Inc. 30

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

All.of the packer respondents indicated that the number of AMAs offered
to producers would decline dramatically with implementation of the
proposed rule. Also, potential premiums would be adjusted, likely
downward, as the elements of marketing agreements would shift toward
"the lowest common denominator" in 6rder to avoid accusations of
unfaimess and to avoid the possibility of litigation. This would reduce the
incentive for producers to go to the extra effort,. management and costs of
producing higher quality animals. Ultimately, this would jeopardize
several of the branded meat programs that have been developed over the
years to increase meat quality and improve consumer demand, particularly
for beef and pork. But these higher quality animals do not disappear right
away. In the short run, packers will "cream the coolers", doing more
sorting of carcasses to meet the needs for the various branded programs.
Over time, the lack of incentive to produce the higher quality animals will
lead to more commodity-style beef and pork being produced, with overall
average quality declining. Packers will assess the various branded meat
programs to identify those providing them with the best return. To keep
from diluting or losing those selected programs, they would tend to feed
more of their own animals (increase packer ownership of livestock) to fit
the branded program specifications.

6.1.1. Branded Beef Programs

Evidence from the interviews and surveys suggested that branded and
specialty beef programs could be endangered if beef packers reduce the
number and complexity of AMAs. Therefore, the study team evaluated
the branded beef market to more accurately quantify the potential indirect
costs that loss ofthese programs would imply.

In the 2008 Livestock Mandatory Reporting Final Rule, USDA defines

"branded" beef as follows:

"The term 'branded' means· boxed beef cuts produced and marketed under
a corporate trademark (for example, products that are marketed on their
quality, yield, or breed characteristics), or boxed beef cuts produced and
marketed under one of USDA's Meat Grading and Certification Branch,
Certified Beef programs.,,6

6 Federal Register /Vol. 73, No. 96/ Friday, May 16,2008 /Rules and Regulations, page 28635

© by Informa Economics, Inc. 31

Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

As of July 14, 2010, the Agricultural Marketing Service of USDA listed

65 Certified Beef Programs. But this is not a complete list of the branded
beef programs existing in the US. There are several producer brands,
packer brands and retail brands that are not registered with USDA. Schulz
et at commented on a review of retail data from Freshlook that indicated
there are more than 100 beef brands in US retail markets 7. Plus, the
branded product reported by USDA under livestock mandatory reporting
is a subset of the total branded beef products sold in the US, being limited
to negotiated sales for delivery within 0-21 days and product grading
upper two-thirds of the Choice grade. At least 35 of the 65 listed branded
beef programs allow beef from cattle grading Select or lower. Still, the
data provides the opportunity for a partial analysis of the value of branded
beef programs.

The weekly National Comprehensive Boxed Beef Cutout (LM_XB463)

provides cutout values for the various categories of boxed beef. The
difference between branded boxed beef and non~branded beef! is shown
below:

Since the start of mandatory livestock reporting in 2002, the premium at

which branded beef has sold over non-branded beef (on a carcass cutout
basis) has ranged from $3/cwt to nearly $25/cwt (Figure 5). On a per head
basis, the calculated premium has varied from $24 per head to $190 per
head. Over the data series, the premium has averaged just over $72 per
head.

Using average steer and heifer carcass weights, the average annual
premium on boxed beef sales reported by USDA over non-branded beef is
shown in Figure 6. With the weakening economy of the past couple of
years, the premiums on higher quality beef sales have been narrowing.
This is not only the case for branded beef, but also for the premium of
Prime grade beef over Choice grade beef. Further, the spread between
Choice and Select grades of beef, along with the spread between Choice

7Schulz, L.L., Schroeder, T,C. and White, K., "Value of Beef Steak Branding: Hedonic Analysis of Retail
ScanneI'Data", Agl'icultul'Ul & Applied Economics Association 2010 AAEA, CAES & WAEA Joint
Annual Meeting, July 25-27, 2010.
http://ageconsearch.umn. edu/bitstream/61596/2/AAEA%20Selected%20Paper%20 I0823 %20 07-15-
2010 .pdf

8 Includes sales ofPl'ime, Choice, Select and ungraded boxed beef

© by (nforma Economics, Inc.. 32

Economic Impact of GIPSA's Proposed Rules Nov. 8,·2010

grade and ungraded beef, have narroweq somewhat since 2007. Still,
consumers have shown willingness to pay significant premiums on
branded beef products. A 2007 study by Cattle-fax estimates the added
value of premium brands at an average of $500 million per year. 9

Figure 5: Premium on Branded Boxed Beef Sales

(Branded Cutout minus Unbranded Product)

$30,00 r-----~---------------------_

$25.00 t--------...------------------------I

$20.00 t------F.fI---------f_,_-------------1

~ $15.00 t-----f\c-+-+--+<----_,.-;H-t-_o_------------i

Souro ...: USDA, National Comprehensive Bo:la<J Beef Culout tluough Oct. 22, 2010

The figures reported by USDA are based on packer sales into the
wholesale beef market. For producers involved in supplying cattle to
packers for branded beef programs, a portion of the premiUlns achieved by
the packers will be passed back to the producer. The amount will vary by
program and by the quality attributes required by the programs. .BEEF
magazine recently published a listing of 33 producer alliances. lO Where
available, descriptions of desired characteristics, production practices,
premium amounts and number of cattle involved in the programs were
provided. In· many cases, the· average premium paid was described as
variable by packer and grid being used. Where dollar amounts were
reported, they varied considerably, with many running in a range from $14 .
per head to $90 per head. One of the largest programs for which some
details are available was for U.S. Premium Beef, LLC. The number of

9Value of Quality Analysis, Cattle-Fax Resea,eh, July 2007.

http://www.cabpartners.eom/news/research/eattle-fax valueofguality,pdf

10 2010 Alliance YeHow Pages http://beefmagazine.com/20 10AllianeeTable.pdf

© by Informa Economics, Inc. 33

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

cattle in the alliance for 2009 was reported at 735,000 head with an
average premium of $31.85 pel' head. The number of cattle involved in
the various alliances amounted to more than 4 million head, not including
those programs where the numbers were not available or considered
confidential. The feedlots involved in these various alliances are not the
only ones eligible for premiums. There are at least 10 programs that
provide post-harvest premiums back to cow-calf operators.

Figll1'e 6: Annual Premium 011 Branded Boxed Beef Sales

(Branded Value minus Unbranded Product)

$120.00

$110.00

$100.00

$90.00

$80.00

$70.00

"~ $60.00

$50.00

$40.00

$30.00

$20.00

$10.00

$0.00
2002 2003 2004 2006 2006 2007 2008 2009 YTD2010
Source: USDA, Nal10nal Comprehensive Boxed Beef Cutout through Oct. 22, 2010

Some of the largest premiums listed in the 2010 Alliance Yellow Pages
involved the production of "natural" cattle, where the premiums could run
from $75 per head to $130 or more per head. Creekstone Farms was
offering premiums of $35 per head for source and age verified cattle,
$125/hd for natural cattle, and $135/hd for non-hormone treated cattle. As
is the case with the Certified Beef Programs listed with USDA-AMS, the
2010 Alliance Yellow Pages is not an exhaustive list of producer alliance
programs in the US beef industry.

The 2010 National Meat Case Study!l indicated that the percentage of
packages in retail stores carrying a brand had increased for beef from 31 %

II http://www.beefretail.org/CMDocs/BeefRetail/research/201 ONationalMeatCaseStudy.pdf

© by Informa Economics, Inc. 34

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

in 2007 to 51 % in 2010. Store branding of ground beef rose to 37% in

2010, compared to 21 % in the 2007 survey. There is also a considerable
amount of branded beef soId through foodservice distributors, All of the
major packers have branded beef programs, along with several of the mid-
sized and smaller firms. While the proportion of fed beef sold as branded
beef varies by company, Informa estimates that at least one-thiri:! of the
beef from steer and heifer slaughter is sold under a branded beef program.
The value added from the various branded beef programs, including
organic beef and natural beef, is estimated at approximately $750 million
per year.

To reiterate, this is only a partial analysis of the value of branded beef

programs to the US cattle industry. The available data does not cover all
of the programs, producers and animals that are involved in producer
alliances and branded beef programs. The premiums that are attained by
cattle producers can be substantial. If packers reduce their reliance on
AMA's, this could reduce the number of branded programs. and/or the size
of premiums paid by packers, resulting in a significant revenue reduction
for producers as a whole. For the millions of cattle sold through these
programs and the numerous producers who are working on improving the
quality of their animals to better fit these programs and maximize their
premiums, the losses in revenue would be several tens of dollars per
animal and amount to several hundreds of millions of dollars in lost
revenue to the industry.

6.2. Hogs and Pork

Optimal use of slaughter facilities is considered to be a major issue for
slaughter operations in the hog/pork sector. In many interviews, industry
stakeholders stressed the importance of getting first shift slaughter
operations off to a seamless shut and with the daily volume that many top
level hog slaughter operations have, efficiency of throughput is critical for
keeping costs down.

Threats to the optimal utilization of hog slaughter and processing

operations was a key concern of many of ·the industry stskeholders
interviewed during the course of this study. Slaughter/processing finns
were asked to provide their estimates of the impact of the proposed rules
on their company's operational efficiency. These estimates covered a

© by Informa Economics, Inc. 35

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

rather broad range on a per head basis. In the end, a consensus forecasts
was developed reflecting input from the impacted companies as well as
business intelligence from the study team. It was determined that a 3%
negative impact on operational efficiency would be a conservative
estimate of the economic impact relative to efficient operations of most
plants.

A roll up of costs associated with efficiency loss was estimated somewhat

in excess of $175 million.

While potential revenue loss in the pork sector due to quality issues will
be substantially less than in the beef industry, it is still a major factor for
the pork industry. There are many programs within the hog/pork sector
where marketing agreements are in place and which pay differential prices
for meeting certain quality specifications. Several slaughter/processing
operations indicated that they may be required to scale back on premium
based programs due to the added costs of documenting these and the
uncertainties of the legal exposure that continuing these programs creates.
Organic and natural programs operate under a higher cost structure than
do other commercially based production systems and cost justification for
such entities producing this product is possible but will occur with some
added cost to the processor.

An estimate was made of the value creation resulting from various quality
requirements and associated premiums and, like beef, the potential lost
revenue for such programs was set at the half way mark between zero and
the highest calculated cost. For the hog industry, this cost was estimated
to be $82 million.

6.3. POUltry
Examining the potential cost impacts of the proposed rule on the US
ponltry industry requires a critical understanding of key components that
have driven growth and efficiency over time. For this study, only
potential costs to the broiler industry were examined in detail, but the
turkey industry will face similar issues. Based on market-ready volume,
broiler production is nearly seven times that of turkey production in the
US. Since the proposed rule targets many aspects of the contractual
relationship between integrators and growers, the economic impact on the

© by Informa Economics, Inc. 36

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

broiler industry will be considerably larger relative to the turkey industry

because of differentiations in both the size and structure of each.

The broiler industry has grown at a phenomenal rate over the past three
decades. Total annualliveweight production increased from slightly more
than 15.5 billion pounds in 1980 to more than 47.6 billion poimds in 2009,
representing an average annual growth rate of approximately 2.5%.
Increasing vertical integration has extended decision-making within the
industry across more elements of the supply chain, thereby helping drive
down costs and improve product consistency and quality. Integrators have
been able to accomplish this by embracing technological advances in both
raising live birds and processing them after slaughter. While integrators
. have direct control over adopting technology at the processing level, their
influence on adopting technology at the live production stage is mitigated
by the fact that those are almost always grower-owned facilities and not
under direct control of the integrator. Consequently, for there to be
improvement in the live production process, integrators mlist provide
incentives for contract growers to make the necessary upgrades to their
facilities or enter into contractual relationships with new growers to build
new facilities that are up to current standards. These improvements
generally include, but are not limited to, larger and sturdier houses that
take advantage of scale efficiencies' and newer climate control
technologies to protect birds from extreme temperatures as well as better
delivery systems for both feed and water.

Elements of the proposed rule - such as changes to how integrators are

able to use a tournament system to score growers' performance and
increased scrutiny of new and existing poultry contracts - are very likely
to alter the integrator-grower relationship in such a way that slows down
the adoption of new technologies that drive efficiency gains and lower
costs in the industry. In interviews with integrators throughout the broiler
industry, tllere was a universal sentiment that, as it reads, the proposed
rule would significantly increase the threat of litigation. Monetary
incentives that are currently used to encourage innovation and investment
on the grower's part to adopt new technology would be used with much
more caution to try and avoid accusatiolls of unfair or unjust payment
practices. This would diminish integrators' ability to promote and
encourage the purchase of newer houses or more efficient technology and
would leave more of that decision-making to the discretion of contract

© by Informa Economics, Inc. 37

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

growers. Given the massive capital investment this often requires and the
possibility of integrators being less willing to pay a premium to innovative
growers for fear of litigation, investment in new buildings and upgrades
for existing ones is expected to slow down considerably.

To understand exactly how this slowdown in investment in new buildings

and upgrades for existing ones would impact efficiency, it's important to
understand key efficiency metrics in the broiler industry and how they
have evolved over time. One such metric is the average mortality rate for
broilers. Estimates from the National Chicken Council suggest that the
rate was relatively constant at around 5.0% from 1980 through. 2000;
however, estimates over the past decade have fallen to. as low 4.0% in
some years but have averaged closer to 4.5%. Continuing investment in
newer buildings and technology should aid livability, but quantifying the
impact of a slowdown in investment on mortality rates with or without the
proposed rule would be highly speculative because of the erratic nature of
recent estimates making it difficult to project a trend under either scenario.

A much better metric to focus on is feed conversion, which is the amount

of feed required to produce one pound of weight gain for a broiler.
According to estimates from the National Chicken Council, the average
feed conversion ratio has declined from 2.05 in 1980 to an estimate of
1.92 in 2010. There is more to the story, however, as the average market
weight for a broiler in 1980 was 3.95 pounds but has increased to an
estimated 5.66 pounds this year. The reason this matters is that as a
broiler gets heavier it becomes less efficient at converting feed into weight
gain, masking an even greater trend towards efficiency than is implied by
the 0.13 difference between 1980 and 2010.

Figure 7 below illustrates this by examining feed conversion estimates

across a wider range of rnarket weights and how it has changed over the
past 10 years. The chart shows a definitive shift to an improving rate of
feed conversion, which is directly attributable to ongoing investment in
new buildings and equipment and upgrades to existing facilities. The
average market weight for a broiler is no longer 5.00 pounds as it was in
2000, but this illustrates what the average feed conversion would be if that
were still the case. Based on Informa estimates, broilers raised to exactly
5.00 pounds in 2010 would have, an average feed conversion of
approximately 1.80 pounds which compares to an average 1.92 feed

© by Informa Economics, Inc. 38

Economic Impact of GIPSA's Proposed Rules Nov.S,2010

conversion for broilers weighing 5.66 pounds, the projected average

market weight this year. This approach more accurately highlights
improving trends in feed efficiency than simply looking at the difference
in average feed conversions between two time periods.

Figure 7: Broiler Feed Conversion Estimates: 2000 vs. 20ur

.5 2.30 - , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
(!)'" 2.20 ----------------------------- ------------------------,"
:c.~ 2.10 - 1.95 f.e. @ 5.00 Ibs.
3: 2.00
'0
." 1.90
"g 1.80
D.
1.92 f.e. @ 5.66 Ibs.
~ 1.70

j ~::~
'0III 1.40 -+- 2000 --0-2010 [:::::::::::::::::::::
."
§ 1.30 -
o
D. 1.20 +---,----c--,..--.---,-----,--,---.---,------,----I

3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00
Average Market Weight
Source: National Chicken Council and In!onna Economics estimates

The above exercise is important to consider because average broiler

market weights are expected to continue trending higher over the next few
years, and that is a necessary consideration when taking into account any
change in average feed conversion with or without the proposed rule.
Figure 8 below illustrates historical estimates for broiler liveweights
supplied by USDA and includes 1nforma's baseline projections out to
2017. The outlook is contained to a 7-year period as this is the estimated
length of time that efficiency would be impacted by the proposed rule
before the necessary adjustments could be made to return the industry to
its previous trajectory. As the graph shows, average broiler market
weights have been increasing at an accelerated pace over the past few
years but that is about to slow down with the current feed cost shock that
is hitting the market. Broiler weights should move decidedly higher
between now and 2017 but not improve at nearly the same rate as the past
30 years because of lingering strength in feed input costs. The average
broiler market is expected to increase from an average of 5.66 pounds in

© by Informa Economics, Inc. 39

Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

2010 to 5.81 pounds in 2017. The trend for broiler market weights over
the next seven years is assumed to be the same with or without all of the
elements of ihe proposed GIPSA rule. There will be a greater demand for
broiler meat in the market, and the projected increase in market weights
over the next few years will help supply that demand, even if it comes at a
greater cost to integrators and is eventually passed on to consumers.

Figure 8: Average Broiler Market Weight

6,00 ~--------------------~--~

5.75
5.50
5.26
VI
'C
c
5.00
" 4.76
~

4.50 .
4.26
4.00 J. -,,,,",,, - - - - - - - - - - - - ... - - - - - - - - - - - - - - - - - - - - - - - - - - . - - - - - - - - - - - - - - - .. - - -

3.76 -1---~~~~~~~~~~~~~~~r-r--.--'r-r~r-r~~~r-r--.---l
1980 1983 1986 1989 1992 1996 1998 2001 2004 2007 2010 2013 2016
Source: USDA and Informa Economics baseline projections

Against a backdrop of increasing broiler market weights in line with

Informa's baseline projections, reasonable estimates of average feed
conversion can be made over the next SeVe!1 years without the proposed
rule. Average feed conversion in the broiler industry is expected to hold at
1.92 in 2011 but decline to 1.90 in 2012 and hold there through 2015.
Informa estimates that the average feed conversion in the industry will
decline to 1.88 for 2016 and 2017. If the proposed rule goes into effect
next year, it will likely have a very small initial impact on feed conversion
as existing industry infrastructure should be able to at least hold onto
previous gains in efficiency. The slowdown in investment should catch up
with the industry by 2012, however, and feed conversion rates should
average between 0.02 and 0.03 points higher over the next few years
compared to the current trajectory without the proposed rule. We believe
the gap should narrow a bit by 2017 as the industry adjusts and finds new
ways of promoting innovation and raising efficiency standards over time.

© by Informa Economics, Inc. 40

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

The lag in feed conversion efficiency would be most apparent in that it

would extend the average time it takes a broiler to reach its market weight.
There might not be a discernable impact next year, but by 2012 and
continuing through 2017, the expected feed efficiency loss would translate
into one extra day, on average, for broilers to reach their target market
weight. Figure 9 below illustrates the expected trends for both scenarios
with and without the proposed GIPSA rule in place.

Figure 9: Average Broiler Market Age

540----------------------------,

53
_________________________ r-----------~.
52
__ Without Proposed GIPSA Rule
51 ~ With Proposed GIPSA Rule
-Trend
;;-"' 50
°49 .®+~. - - - -- _.- -- -- - - -_.- - ---- -- ._-- - - _.. - - - - - -- - _.- -- - - - --

48 -
47
46
45 +'-,-..-r-.-",.-,.,-,--,-,-..-r-,-"-,-;--,-,,-,-,,-,-,,,--,-,-.-r-.-,.-,-i
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Source: National Chicken Council and Informa Economics estimates

Extending the length of time a broiler is on feed by one day may seem
small, but that marginal decline in efficiency can be very expensive for an
industry when looked at in aggregate. Estimating the impact on the
average age that broilers reach their market weight and keeping in mind
the baseline projections for average market weights in Figure 8, it is now
possible to isolate a very important metric to measure efficiency in broiler
production and that is to examine the average daily weight gain. This is
the primary tool used to estimate potential costs to the broiler industry
under the proposed rule.
Figure 10 (below) illustrates vividly the historical trend and forecast under
alternate scenarios with and without the proposed rule. Up to this point,
the trend has been rather consistent with very little deviation. Average

© by Informa Economics, Inc. 41

Economic Impact of GIPSA's Proposed Rules Nov.8,2010

daily weight gain for broilers increased from less than 0.080 pounds in the
early 1980s to more than 0.1 00 pounds by the late 1990s, This year it is
expected to top 0.120 pounds for the first time. Without the proposed rule,
the average daily weight gain for broilers is expected to average nearly
0.123 pounds between 2011 and 2017. The average is projected at slightly
less than 0.121 pounds with the rule in place. Overall this translates into a
loss of efficiency of nearly 1.6%.

Figure 10: Average Broiler Daily Weight Gain

0.13 - , - - - - - - - - - - - - - - - - - - - - - - - - - ,

0.12 ---- --- ------- -- ------ ------------ ---_.------- -- -~-~~I

0.11
..."'c 0.10
::l
0
ll.
~Without Proposed GIPSARule
0.09
-z:r- With Proposed GIPSA Rule
0.08 -Trend

0,07 -h-,-.,--r,--"..,-"",.,,,-,-..,.,.-,-,,-.--,.,-..,-,-,,-,-,-,.-,-,-,,-.--rl
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Source: National Chicken Council and Informa Economics estimates

The final step is to translate what an expected 1.6% loss of efficiency

under the proposed GIPSA rule would mean from a dollar standpoint per
year and over the 7-year time period that is being examined. Some
assumptions about production and costs have to be made to accurately
estimate the total. This first involves total broiler liveweight production,
which is expected to approach 48,8 billion pounds in 2010. The total is
expected to increase to slightly more than 50.0 billion pounds next year
and grow to more than 53.8 billion pounds in 2017. Average annual
production is estimated at nearly 51.7 billion pounds for the next seven
years. With an efficiency loss of nearly 1.6% under the proposed GIPSA
rule, that translates into an added cost of producing a little more tllan 800
million pounds of broiler meat per year.

© by Informa Economics, Inc. 42

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Ten years ago, broiler production costs per live pound generally averaged
around $0.25, but recent increases in corn and meal prices have pushed
that average to nearly $0.40 at times, and expectations are that higher feed
costs are here to stay for the foreseeable future. Being generous and
assuming an annual average live production cost of $0.35 per pound, that
would translate into an average total cost to the US broiler industry of
nearly $285 million dollars per year from 2011 to 2017. For the entire 7-
year period, that comes to an aggregate cost of nearly $2 billion. When
the cost impact on turkey production is taken into consideration, the
proposed rules would translate into a cost of more than $300 million pel'
year for the US poultry industry and an aggregate total of more than $2.1
billion over a 7-year period. This takes into account what Informa
believes to be the most likely scenario with the proposed rules. Under a
best-case scenario, an efficiency loss of slightly more than 0.5% is
expected, which would translate into an annual cost of more than $100
million per year to the US poultry industry and an aggregate cost of more
than $700 million. Considering a worst-case scenario, an efficiency loss
of more than 2.8% is estimated, which would translate into an average
annual cost of more than $540 million to the US poultry industry.

In aggregate, the costs to the poultry industry are estimated to be about

$362 million. Thesecosts are less than the expected economic impact on
either the pork 01' beef industries.

6.4. Supply Chain Efficiency Costs

Based on the discussion provided earlier in this document, there would
appear to be a large potential cost across the three major meat protein
velticals related to loss of supply chain efficiencies. These costs are
estimated to roll up to give a total efficiency-related impact of $880.9
million as shown in Table 4 below.

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Table 4. MeatIndustry Efficiency Impact

Supply Chain Million $
Beef $401.9
Pork $176.7
Poultry $302.2

Total $880.9

6.5. QualitylDemand Revenue Impacts

One of the primary concerns raised by industry stakeholders during the
active debate on the costs and merits of the proposed GIPSA rules was the
impact such rules would have on the broad array of livestock alternative
marketing agreements CAMAs) and other quality-oriented programs that
provide product differentiation in the marketplace. Informa analyzed the
potential economic impact that changes or loss of these programs might
have on the meat sector and the aggregate results are presented in Table 5.
These impacts do not attempt to quantify the number of AMA' s that might
be altered or lost; they merely reflect an estimate of the economic impact
that could occur depending upon how the rules were implemented and
enforced and how supply chain participants might respond to the added
burdens of cost justification and the threat of litigation regarding the
premium price structures that exist to validate these programs.

The largest economic impact will occur in the beef industry as the beef
supply chain has spent many years and significant investment dollars
developing a broad range of quality-driven programs that differentiate
beef products and which have highly differentiated pricing incentives and
supply chain participant rewards. The pork.industry also has worked hard
to create value differentiation in many programs whether it be for Natural
pork, Paylean free. porle or for products differentiated for the export
market.

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Economic Impact of GIPSA's Proposed Rules Nov.8,2010

Table 5. Meat Industry QualitylDemaud Impacts .

Supply Chain Million $

Beef $377.7
. Pork $82.2
Poull1y $0.0

Total $459.9

The study team was unable to identify an analytic process to reflect

potential quality/demand impacts on the poultry industry related to the
proposed new GIPSA rules. This does not suggest that some won't exist
but the integrated nature and highly standardized production process for
the poultry sector suggests that such impacts would be relatively sinal!.

6.6. Livestock Auction Markets

Several interviewees suggested that the provision banning order buyers
from working for more than one packer could have a significant impact on
livestock auction barns throughout the country. Informa found this to· be a
valid concern and followed up by interviewing auction owners. It is well
known that most barns auction a wide variety of animal types and anyone
individual packer is often only interested in purchasing a small subset of
the animals that might be offered on any given day. Forther, sales
volumes at smaller, geographically isolated barns can be low which also
reduces the number of animals in a daily sale that might be of interest to a
particular packer. Thus a system has developed where order buyers
contract with several packers to procure animals and then visit a barn on
sale day to purchase animals according to ·each packer's needs and
specifications.

GIPSA's proposed rule prohibits order buyers from purchasing livestock

on behalf of more than one packer. It is immediately obvious that packer
costs of animal procurement through livestock auction barns would be
increased considerably if they were no longer able to "share" in the cost of
putting a buyer in the smal1er barns. Packer representatives were
questioned about this during the interview process and were nearly
unanimous in their conclusion that the increase in cost due to having a
buyer work exclusively for them would be prohibitive and that they would
very likely reduce the number of order buyers that they ntilize. It then

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follows that those remaining order buyers would focus on the high volume
sales in attempt to minimize the packer's per unit cost of procuring
animals in this fashion.

Informa judges this argument to be economically sound and believes that

it would likely play out in the following fashion. If the rule were to be
implemented as written, smaller auction barns in difficult to reach places
would see an immediate decline in the number of buyers attending sales
while larger, more centrally located sales would see less of an impact.
Over time, prices at the smaller volume locations would decline due to the
lack of competition as a result of having fewer buyers present. Eventually,
.livestock producers in remote locations would become discouraged by the
lower prices and seek to transact their livestock at the larger barns where
better buyer attendance results in higher prices. To the extent that the
higher prices in large barns could offset the increased transportation cost
that would be incurred to get them there, the producers would abandon
their local sale bam and move animals to a bigger central barn. This sets
off a death spiral as now smaller numbers will be available for sale each
week and that will cause fewer buyers to incur the expense of attending.
Eventually, the smaller sale barns will close their doors.

There is another angle on the proposed rule that could impact livestock
auction barns. Some respondents felt like the provision that requires
packers to document all price differentials combined with the potential for
litigation posed by eliminating the need to prove competitive injury would
cause buyers to move away from purchasing animals on a live basis.
Packers see risk in purchasing animals live because judging the economic
value of animals before they are dressed is an inexact science. They fear
that paying less for one animal relative to another simply because the
buyer "thought" the economic value would be less could expose them to a
legal claim should the animal in question actually grade better than
expected once it was in carcass form. Packers. have, in other
circumstances, moved away. from live purchasing when the risk of
misjudging an important economic characteristic is too great. An example
is carcass pricing that is practiced in northern cattle feeding areas where
muddy feedyard conditions can make it difficult to accurately estimate
carcass yield. In fact, it would be rational to argue that on average we
should expect packers to pay more for the same animal in carcass form
than live simply because he faces less uncertainty in the carcass

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transaction. Now, with the proposed rule packers have a new (and
potentially very large) risk added to the live procurement process. It
makes sense that would drive them in the direction of dressed pricing.

Movement to dressed pricing would imply that animals bypass the

livestock auction segment of the marketing channel and move directly to
the packer from the producer. Auction owners confirmed this as a feared
unintended consequence of the proposed rule. This risk would likely
affect all livestock auction barns regardless of size.

Both of these potential consequences (the movement away from live

pricing and the death spiral at smaller barns) will have a negative impact
on the livestock auction barn segment of the economy. We think that the
economic impact will be far larger in small communities than in larger
ones. In many smaller rural communities, the local sale barn is a hub of
economic and social activity. Loss of this asset could be devastating for
some small towns.

In an attempt to quantify the economic impact that the proposed rule could
have on the livestock auction sector, Informa used data that is routinely
collected by GIPSA in conjunction with its oversight responsibilities in
this area. All livestock markets are required by law to post a bond with
GIPSA and the agency makes this data available to the public. As of
August 2010, GIPSA held bond for 1237 livestock market agencies in the
United States. Very little public data on the value added by these
institutions exists, but we can infer economic size from the amount of
bond that GIPSA requires of each entity. Table 6 below provides a view
on the size distribution of livestock auctions stratified according to their
bond.

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Table 6. Size Distribution of US Livestock Auction Marl,et Agencies and Firms

Selling On Commission (Primarily Stockyards).
Bond Size Number Total Bond Estimated Volume (hd)
Greater Than $500,000 3 $2,327,650 735,893
$400-$500,000 3 $1,360,000 429,968
$300-$400.000 12 $4,137,500 1,308,082
$200-$300,000 40 $9,672,500 3,057,987
$100-$200,000 297 $36,920,510 11 ,672,517
$50-$100,000 627 $44,768,794 14,153,773
$20-$50,000 125 $3,738,000 1,181,779
less than $20,000 130 $1,455,000 460,002

Totals: 1237 $104,379,954 33,000,000

Additional costs will arise ftom two distinct causes: (I) demise of smaller
barns due to the "one packer per buyer" provision and (2) reduction in the
number of animals transacted live due to the increased litigation threat. .
We believe the second of these causes to be dominant and consider 'the
potential costs as follows.

Informa conservatively estimates that as many as 25% of beef cull animals

that are currently transacted through stockyards could end up bypassing
that segment due to a switch by some packers to grade and yield pricing.
Nearly all of this would originate from tile cull cow sector. Assuming that
the average value added by a livestock auction barn is $15/head 12 and
given that we estimate that 5 million head 13 moved through such barns in
2009, a conservative estimate of the value lost as packers increase grade
and yield pricing in response to the rule is $18.8 million. The removal of
that much value from the system along with the problems related to (I)
would almost assuredly put many smaller livestock auction barns out of
business. Information obtained in the interview process suggested that
many smaller barns are heavily dependent upon cull cow sales and the loss
of a quarter of that business could put the barn in financial jeopardy. We
believe that up to 15% of existing facilities could succumb in such a
scenario and this would imply that between 150 and 200 of the smallest
livestock auction markets might cease to exist. Should this occur, all of
the remaining animals that are normally traded through the closed
facilities would have to travel greater distances to reach a larger sale
location.

12 Typical commission posted in the stockyards and filed with G1PSA

13 Out of 6 million commercial cows slaughtered in 2009

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

In 2009, 33 million animals were transacted through commission markets

or commission firms in the US I4 • The largest proportion.ofthese animals
are bovine, cull cows and feeder cattle. A modest number of hogs and
horses would be in that mix. Often the same animal may pass through the
system more than once. Assuming that 1.25 million cull cows will no
longer be marketed within the system (25% of 5 million), that would leave
31.75 million head still marketed in the post-rule sector. If a quarter of
those animals had to travel an additional 50 miles due to consolidation of
the industry brought about by (1) and (2) above, and assuming an all-in
cost of $10 animal per trip 15, this would amount to an additional $79.4
million in costs that would be borne by producers.

As a result, Informa estimates the overall direct cost to the livestock

auction sector and producers due to the new requirements of proposed rule
to be $85.8 million. These are only the direct costs. There would be a
heavy economic burden in the small rural communities where shuttered
facilities are located as business moved from smaller barns to larger ones.
Economic activity would increase around the larger facilities and decline
around the smaller ones. The sector would become more consolidated.

7. Total Industry Cost Estimates

7.1. Cattl.e and Beef
In previous sections of this report, information was provided that
identified the methodology employed in pulling together estimates of the
direct and indirect costs associated with the proposed rules. This section
provides the results of the analysis and, as can be seen, there will be a
rather significant potential cost burden placed on the cattle and beef
supply chain. For purposes of simplicity in presenting the results, supply
chain costs have been aggregated into four primary categories. There will
be costs incurred by the beef supply chain that are of a one-time nature
and basically reflect actual cost outlays. These one-time costs for the beef
industry were aggregated up from a rather large matrix of individual costs

14Annual Report, Packers and Stockyards Program, GIPSA, USDA, March 2010, p.63.
15 Gadberry, Shane and Troxel, Tom, '~Cow-CalfEnterprise Budget", University of Arkansss Cooperative
Extension Service, MP413-PD-IO-IORV, page 10.

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Economic Impact of GIPSA~s Proposed Rules Nov. 8, 2010

elements based on primary data submissions provided by commercial

supply chain palticipants and supplemented by knowledge and experience
based estimates provided by business consultants at Informa.

A similar process was used to develop a consensus estimate and roll-up of

qngoing direct costs. These costs reflect estimates developed for sustained
business adjustments that would be required to comply with the proposed
rules as currently written. While the one time direct costs were estimated
at nearly $39 million, the ongoing direct costs were estimated to total just
over $61 million.

In addition to direct beef industry costs, two other major areas of

economic impacts were identified and estimated. The US beef packing
sector is a complex and highly differentiated business with optimal
efficiency in the slaughter/processing sector very dependent upon the
entire live animal procurement, slaughter/processing and beef product
merchandising process. Disruptions in this process whether due to the
wrong type of cattle arriving at the plant; too few cattle to operate at a
high level of capacity or the wrong quality of product to meet various
merchandising programs will all have a negative impact on operational
efficiencies. This can be a major cost to the industry; estimated in this
study to total nearly $402 million.
In addition to efficiency losses, the beef industry has spent the past 20
years developing a broad range of quality based programs; some breed
specific and some branded in nature while others reflect specific product
attributes that qualify the product as organic or natural. Most of these
value enhanced programs center around marketing agreements that specify
how the animals are going to be produced and in most cases, priced.
Virtually all of these programs have imbedded in the requirements a
higher cost structure and this necessitates higher prices to be paid for the
animals. The premiums that are paid cover the added costs and provide an
additional margin incentive to the cattle producer to assure that supplies
continue to be produced.

An effort was made to calculate the value that various beef production and
marketing programs have generated for the industry and a description of
this evaluation is provided in Section 6.1. An aggregate mcasure of the
value enhancement to the US beef industry was made and this totaled an
estimated $755 million. While the adjustment to marketing agreements

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that will occur is very unceltain given the vague wording of the proposed
rules, it is most certainly to be less than the maximum value-added
estimate and just as certain to be greater than zero. In our judgment, the
midpoint of these two extremes seems like a good choice to represent the
losses in revenue from declining product quality. Thus, our estimate of
the quality impact (lost revenue opportunity) in the beef sector is $378
million.

For the cattle and beef supply chain, these four cost components roll up to
a total industry cost of roughly $880 million. In addition to this cost, there
will be costs at the sales barn/auction market level of the supply chain and
possibly company-specific costs related to asset divestitures, business
reorganizations and possibly acquisitions. It was noted in several industry
interviews that, should the rules as written be implemented, there may be a
strong incentive for further vertical integration as a counter measure to the
increased exposure that the rules are certain to create from a litigation
perspective
Table 7. BeefIndustl'y Supply Chain Cost

Million $
One Time Direct Costs $38.7
Ongoing Direct Costs $61.5
Cost Increase Due to Efficiency Loss $401.9
Revenue Lost Due to Quality/Demand Impact $377.7
Total Supply Chain Loss $879.9

7.2. Hogs and Pork

For the hog and pork sector, the same analytic framework was used
whereby one-time and ongoing direct costs were estimated as were costs
associated with efficiency losses and revenue loss associated with quality
programs. The process changes leading to direct cost impacts (both one-
time and ongoing) were very similar to those for the cattle and beef sector
with costs totaling nearly $70 million for one-time costs and just above
$70 million for ongoing costs.

For the hog and pork supply chain in aggregate, the potential costs
associated with implementation of the proposed rules summed to $401
million. This is much lower than the estimated cost for the beef industry

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but still a significant cost burden for the US industry to bear. The supply
chain lacks sufficient margin for such an economic cost to be absorbed so
ultimately, such costs will need to be borne by the consumer through
higher prices; the producer through lower prices or more likely, a
combination of both. Costs of this magnitude ultimately will lead to a
downsizing of the production base and, given the enhanced threat for
expanded litigation, there would be incentives for industry vertically
integrate beyond current levels.
Table 8. Pork Industry Supply Chain Cost

Million $
One Time Direct Costs $68.7
Ongoing Direct Costs $73.8
Cost Increase Due to Efficiency Loss $176.7
Revenue Lost Due to QualitylDemand Impact $82.2
Total Supply Chain Loss $401.4

7.3. Poultry
The poultry industry is highly integrated with only limited transactional
activity at the live bird/slaughter level interface. Consequently, the
industry has operated for many years on contractual relationships between
integrated processors and contractual growers. Over time, the industry has
built contracting relationships that provide incentives to growers that meet
or exceed certain productivity and efficiency standards and these systems
are not always looked upon favorably by some growers.

Informa believes the proposed rules will change some of the details in
contractual arrangements between growers and processors but overall the
industry will continue to operate much as it does today. Complying with
the proposed rules will not come without some cost and the analysis
conducted suggests those costs will roll up to industry aggregates as
shown in Table 9.

Since both the chicken and turkey industries are already organized such
that contracts drive the production, marketing and pricing of live birds,
many of the proposed changes for this industry deal with specific elements
of these contracts. It was estimated that changes required in this regard
would result in one-time direct costs of $26 million and ongoing costs of

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$33.4 million. While these are costs that reflect relatively small
incremental costs on a per bird or per pound of production basis, they
nevertheless add new costs to both the chicken and turkey supply chains
and cannot be simply ignored. Much of the ongoing direct costs and to a
lesser extent, one-time direct costs relate to likely costs of establishing
contingency funds to deal with a higher incidence of litigation. This fear
of "open ended" litigation was raised time and again by industry
stakeholders interviewed during the course of this investigation.

As can be seen in Table 9, the analysis conducted by Informa and

presented in Section 6.4 estimates a large ($300 million +) cost associated
with efficiency losses which are expected should the proposed rules be
implemented.
Table 9. Poultry Iudustry Supply Chain Cost
. Million $
One Time Direct Costs $26.0
Ongoing Direct Costs $33.4
Cost Increase Due to Efficiency Loss $302.2
Revenue Lost Due to Quality/Demand Impact $0.0-
Total Supply Chain Loss $361.6

7.4. Aggregate Meat/Poultry Industry Costs

Pulling all of the cost and revenue components together, the aggregate
impact of the proposed GIPSA rule for the US meat and poultry industry
is estimated to be $1.64 billion. This reflects a significant burden for this
sector of the US economy and the impacts do not stop here. In the
following section an analysis of the macroeconomic consequences from
such an economic impact are provided.

Table 10. Aggregate Economic Impacts Across All Species

Source Million $
One Time Direct Costs $133.3
Ongoing Direct Costs $168.7
Cost Increase Due to Efficiency Loss $880.9
Revenue Lost Due to Quality/Demand Impact $459.9

Total Supply Chain Loss $1,642.8

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8. Macro Economic Impacts

8.1. Market Analysis

The next step in the analysis was to take the cost estimates developed in
the previous section and use those to gauge the impact of the rule to the
broader US economy. The primary tool used for this purpose is an input-
output model based on data for the entire US economy. In preparation for
that step however, the cost and revenue loss information had to be
translated into a change in industry output which is the primary
information that drives input-output analysis. The next sections describe
how that transformation was made.

8.1.1 Adding Costs to the Economic System

Most of the effects of the proposed rule involve added costs bome by the
industry. Here we develop a simple model of how added costs affect
industry output. It is important to recognize that for supply chain
palticipants such as packers, who are primarily margin players, added
costs will not, in the long run, remain at the packer level. Instead, what
occurs is that the spread between farm and retail prices increases to reflect
the new costs that have been added to the system.

Figure 11 illustrates this concept using lineal' supply and demand curves.
In this figure, we show both retail and farm level supply and demand. In
this market, quantity QI is produced and there is a spread between the
retail price (prl) and the farm price (Pfl)' Often economists will refer to
this spi'ead as the marketing margin becausc it encompasses all of the costs
that are required to take a raw material from the farm to the retail level
whcre it is purchased and consumed. When new costs are injected into the
system, the rctail supply curve and the farm level demand curve both shift
back to the left, leaving a new equilibrium farm level price, Pf2, and a new
retail price, Pr2. The spread between the retail and farm price increases to
accommodate the new cost (see Figurc 12).

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Figure 11. Retail aud Farm Level Supply and Demand

Retail Supply

Price
Farm Supply

Retail Demand

Quantity
Thus, the long-run result of an increase in costs is that some of the
increase is borne by producers in the form of a lower farm price arid some
is bome by consumers in form of a higher price at retail. Quantity in the
market declines (illustrated as the movement from Ql to Q2 in Figure 12)
and the spread between retail and farm prices widens. How much of the
cost increase is borne by producers and how much is borne by consumers
depends upon the slopes of the supply and demand curves. If the demand
curve is "steeper" than the supply curve, more of the increase will move to
the consumer. If the supply curve is steeper, then more of the cost will be
borne by the producer. In this simple model of the market using linear
supply and demand curves it is easy to show that the percentage of the cost
increase borne by the consumer is:

fJs-fJ d

where Ed is the elasticity of demand and Es is the elasticity of supply.

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Economic Impact of GIPSA's Proposed Rules Nov. 8, 20:(0

Figure 12. Effect of Adding Costs at the Processor Level.

Retail Supply

Price
FarmSupply

Retail Demand

arm Demand

Quantity·

Informa used this basic framework to determine how the quantity of

output would change given the cost increases that were calculated in the
previous sections. Obviously, estimates of the elasticity of supply and
demand were required for this exercise. These were based on past
research by other authors with some professional judgment used where
good external estimates could not be located. Table 11 below gives the
elasticities used in this study. Linear supply and demand curves were
assumed and the parameters of these were determined using 2010 prices
and quantities in the three markets with the broiler market used to
represent all poultry. Elasticities are dependent upon the tirrie-horizon
considered, particularly supply elasticities. Since the cost estimates and
later impact analysis was done on an annual basis, the elasticities were
selected with a one-year horizon in mind.

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Table 11. Supply and Demand Elasticities

Beef Pork Poultry
Supply Elasticity .993 16 .520 11 .850 IS
19
Demand Elasticity _.951 _,993 19 _.644 20

Once this basic model framework was established. it was used in

conjunction with the cost estimates developed earlier to calculate the
decline in industry output that would occur in each of the three markets as
a result of injecting higher costs into the system, Only the direct ongoing
costs are considered because it is those costs that we can be sure that
packers will eventually pass on to consumers and producers, It is possible
that packers might absorb some or all of the one-time costs, and so that
portion of costs is not included in this portion of the analysis,

8.1.2 Modeling Quality Decline

Not all of the damage expected to come from the rule originates from cost
increases. In the case of beef and pork, we believe that substantial harm
will come to the industry as the availability of high quality and specialty
product declines when packers limit the use of alternative marketing .
agreements out of fear of litigation. We model this effect as a downward
shift in the demand curve, which reflects the reality that, as the average
product quality declines, consumers can only be induced to keep their
consumption intact by lower prices,

Given the loss in value due to quality decline calculated in previous

sections and assuming a linear demand function with a demand elasticity
as given in Table II, it is a simple matter to calculate the reduction in
output that arises from the assumed decline in product value,

16 Tvedt, D, et al. Elasticities in World Meat Markets. Agricultural Economics Research Report Series No
55, Kentucky Ag Experiment Station, (November, 1991).
11 Meyer, et al. FAPRI US Sector Elasticities, Volume II Livestock, Poultry and Dairy. Technical Report
92-TR 26, (October 1992),
18 Infonna estimate
19 Chen, K. Z, 1998, The Symmetric Problem in the Linear Almost Ideal Demand System, Economics
Letters 59: 309-315,
20 Huang, K. S" and B, Lin, Estimation ofFood Demand and N;,trient Elasticitiesfrom Household Survey
Data. Food and Rural Econoinic Division) Economic Research Service, US Department of Agriculture.
Technical Bulletin, Number 1887 (August 2000),

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Economic Impact of GIPSA's Proposed. Rules Nov. 8, 2010

8.1.3 Modeling Efficiency Losses

For all three species, we expect that there will be efficiency losses as a
result of the proposed rule. In beef and pork these losses steIn from less
predictable throughput in plants as a result of fewer animals procured
under marketing agreements. In poultry, the efficiency losses come from
a reduction in feed efficiency that results from decreased incentives to
growers to improve once the tournament system changes called for by the
rule become reality. In both cases, efficiency losses are'modeled as an
increase in costs to the packer/integrator. Thus, the methodology
described above for modeling cost increases is also used for modeling the
degree to which industry output will decline once the rule is in place.•

8.1.4 Total Losses

The final step in preparing for the input-output analysis is to aggregate the
change in the value of industry output from all three sources: direct
ongoing cost increases, quality decline and efficiency losses. This total,
expressed as a wholesale dollar value of lost output is then used as the
starting point for the input-output analysis. Table 12 provides the
estimated industry output results of all three consequences of the rule.

Table 12. Industry Output Effects Estimated for the Direct Ongoing,
Quality Decline and Efficiency Losses as a Result of the Proposed
Rule
Change in Change in
Wholesale Value of Industry Animal
Lost Industry Production Numbers
Production (million $) (million Ibs) (thousands)
Beef $591 -379 -494
Pork $246 -256 -1,253
Chicken $236 -313 -55,219
Turkey $14 -19 -658

Given the assumed supply and demand elasticities, it is also possible to

segregate the damages between producers and consumers. The direct
ongoing and efficiency costs will be split between the producer and
consumer while losses due to quality degradation will not impact the
consumer financially and will all be borne by the producer. In the case of

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beef and pork the producer segment is very clear. In the case of poultry,
the integrators themselves are the producers and thus it makes it more
likely that nearly all of the cost increases will be pushed up to the
consumer.. The estimates of consumer/producer burden are presented in
Table 13.

Table 13. Relative Cost Burden Between Consumers and Producers

----- Costs Borne By -----
Consumers Producers Percent that Falls
(million $) (million $) on Producers
Beef $106 $485 82.0%
Pork $108 $138 56.2%
Chicken $190 $45 19.3%
Turkey $12 $3 19.3%

Totals: $416 $672

8.2. Input-Output Analysis

The final task in the economic analysis was to determine how the
reduction in output value in each of the respective industries would impact
the overall US economy. For this we turned to an input-output model of
the US economy. Input-output models are a more restrictive form of
computable general equilibrium models. They represent the economy as a
series of interrelations between sectors of the economy and final demands
which include export markets and government. Household demand is
endogenous to the system. Historical data is used to construct these
interrelationships and each sector is characterized by a production function
that uses other sector's outputas its input.

For this study, lnforma made use of software and data provided by the
Minnesota IMPLAN Group which was optimized for input-output analysis
where the United States was treated as the region of interest. . Since
GIPSA's proposed rule is directed at the packing sector, and most of the
costs associated with the mle will initially fall on that sector, that is where
the modeling effort began. A set of activities were selected that are
believed to adequately represent the production functions of the bcef, pork
and poultry processing sector. For this effort, chicken and turkey were

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combined to create a general pou ltry category in the same way that the
two industries were combined for the cost analysis.

When applied to a particular sector, the input-output modeling process

will account for three different effects. First, the direct effect represents
the impact that the reduction in output will have on the target industry-in
this case the processing sector. The model will also render an estimate of
the decline in output that will result in all of the industries that supply the
target industry. We refer to this 'as the supplier effect. Finally, the model
provides an estimate of the induced effect which describes how reduced
spending from those working in the target sector will reverberate through
the economy and affect other industries. Thus for every industry we were
able to segregate the direct, supplier and induced effects. Since the model
is linear, these can be summed to arrive at the total reduction in output that
arises from a changein the target industry's output.

In addition to the output changes, the input-output model can provide an

estimate of the change in employment and the change in value added for
each affected sector. Employment is expressed as the number of full-time,
12-month jobs while the value added component is expressed in dollars.
One further piece of information provided by the model is an estimate of
the change in tax revenues that will result from the change in economic
activity. This is a rough estimate since the model doesn't estimate taxes in
many of the local tax jurisdictions but rather uses an average approachto
estimate the nationwide effect. Still, it provides an indication of the
magnitude of tax revenues that will be foregone as output in each of the
three industries declines.

In addition to modeling the effects on the processing sectors and all of the
suppliers to those sectors, Informa also modeled the effects that could be
expected further down the supply chain. In particular, all three proteins
have a significant presence in both the retail grocery and food service
sectors and the reduction in beef, pork and poultry output will have a
negative effect on those segments of the supply chain. In this manner, we
get a much better picture of the total impact to the overall economy than if
these sectors were not included in the analysis. Finally, results are
presented by specie, with the turkey and chicken grouped together, and are
then summed to arrive at the total industry impact of the proposed GIPSA
rule across the entire US economy.

© by Informa Economics, Inc. 60

 Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

8.3. Economy-Wide Impact, Beef

We expect the beef supply chain to be the one most affected by the
proposed GIPSA rule. The driving reason behind this stems largely from
the expected decline in quality and thus beef demand that is expected to
result from a reduction in the utilization of AMA's by industry
participants. The· other costs of the rule are significant, but they are
dwarfed by the impact that arises from declining average product quality.
By comparison, the poultry industry is not expected to experience a o

significant quality problem as a result of the rule. This disadvantages beef

relative to poultry in the long-run battle for market share with consumers.

Table 14. Estimated Economy-Wide Effects Associated with Declining Output in the Beef
Supply Chain.
Direct Supply Chain Induced Total
Employment (# ofjobs) -3,710 -4,486 -3,892 -12,088
GDP (mil $) -188 -325 -323 -837
Output from Affected Industries (mil $) -598 -817 -608 -2,022

The results from the input-output analysis are presented in Table 14. We
find that the impact of the proposed GIPSA rule on the beef sector has the
. potential to result in the loss of just over 12,000 jobs and reduce GDP by
$837 million dollars. It is important to recognize that while the job loss is
not an every year occurrence; the lost contribution to the national GDP
does repeat each year. We note that the biggest loss in terms of jobs and
GDP comes from the supply chain, i.e., the industries that supply the beef
industry. The largest of these related industries is cattle ranching and
farming. Table 15 proVides the top ten sectors with respect to job losses
related to the problems created in the beef supply chain by the proposed
rule.

© by Informa Economics, Inc. 61

 Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Table 15. Top Ten Sectors for Job Losses Originating from the Beef Snpply Chain.
Sector Job Loss
Cattle ranching and farming -2,889
Animal (except poultry) slaughtering, rendering, and processing -508
Rea! estate establishments -498
Wholesale trade businesses A 70
Food services and drinking places -466
Retail Stores - Food and beverage -462
Support activities for agriculture and forestry -456
Transport by truck -340
Animal production, except cattle and poultry and eggs -317
All other crop farming -295

8.4. Economy-Wide Impact, Pork

The pork sector will also see dramatic effects originating from adoption of
the rule. Losses in this sector are not as large as for beef, primarily
because the impact on product quality is not expected to be as large. Still,
the industry will suffer some quality decline as packers find it more
difficult to supply specialty products such as organic arid natural pork in
an environment that includes far fewer marketing agreements. The pork
industry will take its biggest hit from reduced efficiency, primarily in the
form of inefficiencies in plant utilization that will result from less .
predictable supplies in a reduced AMA environment. Direct ongoing
costs will also playa role.

Our analysis suggests that the potential for 5400 job losses will result from
imposing the conditions of the proposed rule on the pork industry. GOP
contribution is expected to decline by $335 million. Table 16 gives the
change in jobs, GOP and output that are expected to arise from the pork
sector.

Table 16. Estimated Economy-Wide Effects Associated with Declining Ontput in the Pork
Supply Chaiu.
Direct Supply Chain Induced Total
Employment (# ofjobs) -2,507 -1,451 -1,472 -5,430
GOP (mil $) -108 -104 -122 -335
Output from Affected Industries (mil $) -238 -256 -230 -724

© by Informa Economics, Inc. 62

 Economic Impact of GIPSA's Proposed Rules Nov.S, 2010

As with the beef sector, the biggest decline in jobs will come from the
production sector as nearly 2000 jobs are projected to be shed in the
production sector alone. By comparison, the slaughter and processing
sector is expected to lose only 236 jobs. Table 17 provides the top ten
sectors for job loss originating from the pork supply chain..

Table 17. Top Ten Sectors for Job Losses Originating from the Pork Supply Chain.
Sector Job Loss
Animal production, except cattle and poultry and eggs -1,928
Animal (except poultry) slaughtering, rendering, and processing -236
Retail Stores - Food and beverage -232
Cattle ranching and farming -193
Food services and drinking places -177
Wholesale trade businesses -176
Real estate establishments -161
Support activities for agriculture and forestry -150
Transport by truck -130
Employment services -83

8.5. Economy-Wide Impact, Poultry

Overall economic damage was the smallest in the poultry area. Our
assumption that the proposed rule would not impact the quality or demand
for poultry products is largely responsible for this outcome. The largest
impact comes from the efficiency decline that is expected to result from
the tighter regulations placed on the tournament system. Ongoing direct
costs are significant in the poultry area and those, combined with the
efficiency loss point to an output decline in this sector that is projected to
cost the economy at total of 4500 jobs and $341 million dollars in GDP.
Table 18 provides the input-output results as they relate to the poultry
sector.

Table 18. Estimated Economy-Wide Effects Associated with Declining Output in the
Poultry Supply Chain.
Direct Supply Chain Induced Total
Employment (# ofjobs) -2,032 -1,338 -1,143 -4,513
GDP (mil $) -133 -113 -95 -341
Output from Affected Industries (mil $) -280 -235 -178 -692

© by Informa Economics, Inc. 63

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

An interesting outcome from the poultry model identifies oilseed farming

to be the sector at risk to lose the most jobs due to the cost increases in this
sector. Poultry farms are big consumers of soybean meal which likely
plays a role in this result and the lack of a specific production sector (the
processors are the producers) helped to produce a job loss distribution in
this sector that differs from what was noted in the pork and beef results.
This does not mean a direct loss of soybean farmers per se, but rather just
a loss of jobs in that sector. There are many people employed as farm
hands, etc. whose jobs would be at risk if demand for soybean meal were
to decline because of shrinking animal production. Agricultural support
activities rank much higher in the poultry industry's list of sectors losing
jobs.

Table 19. Top Ten Sectors for Job Losses Originating from the Ponltry
Snpply Chain.

Sector Job Loss

Oilseed limning -1,634
Support activities fur agriculture and forestry -430
Real estate establishments -247
Retail Stores - Food and beverage -222
Poultry processing -213
Food services and drinking places -123
Wholesale trade businesses -102
Grain limning -57
Monetary authorities and depository credit intennediation activities -56
Employment services -53

8.6. Economy-Wide Impact, Livestock Auction

Markets
In Section 6.6 we described the economic risks that would confront the
livestock marketing sector if the proposed rule was implemented. We
found that it was likely that increasing numbers of cull animals would
bypass livestock auction markets and be sold directly to packers on a
grade and yield basis. The total direct costs to the economy system in
terms of both lost value added and increased transportation costs borne by
producers was found to be $85.8 million dollars.

© by Informa Economics, Inc. 64

 Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

The IMPLAN software does not contain a sector specific to livestock

auction markets so the cattle ranching production sector was used as a
proxy. This is particularly applicable since much of the added cost
involves a new transportation cost burden that falls on producers, many of
which will be in the cow-calf sector of the beef supply chain. Table 20
provides the results of the model constructed to represent the losses that
might be expected from the changes in the livestock auction market
. industry.

Table 20. Estimated Economy-Wide Effects Associated with Effects 011 the Livestock
Marketing Sector.
Direct Supply Chain Induced Total
Employment (# ofjobs) -307 -350 -157 -813
GOP (mil $) -7 -25 -13 -45
Output fi'om Affucted Industries (mil $) -40 -64 -24 -128

8.7. Economy-Wide Impact, Total

Finally, we bring together all of the aforementioned economic impacts in
order to gauge the overall impact that the rule is expected to have on the
US economy. Table 21 provides these totals. We find the overall loss in
GOP resulting from this rule to be $1.56 billion and the total number of
jobs lost to approach 23,000. Output from all of the affected industries is
expected to decline by $3 .58biIlion, including those in ancillary supply
chains that are not part of the targeted industries and those that suffer an
. induced effect due to reduced spending by participants in the meat and
poultry sectors. Clearly, this proposed rule has the potential to cause
significant economic loss to the nation.

Table 21. Estimated Total Economy-Wide Effects Associated with the Proposed Rule.
Direct Supply Chain Induced Total
Employment (# ofjobs) -8,555 -7,624 -6,664 -22,843
GOP (mil $) -436 -568 -553 -1,557
Oulput from Affucted Industries (mil $) -1,155 -1,371 -1,041 -3,567

© by Informa Economics, Inc. 65

Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

8.8. Tax Revenue Impact

The IO software that was used for this study contains the capability to
estimate the changes in tax revenues that will result from the output
changes described above. These are only rough estimates as the software
uses average tax relationships in the past to project future revenues.
Obviously, there is n~ guarantee that future tax rates will resemble those
of the past. Still, we think it is informative to present these estimates as an
indicator of how much tax revenue could decline as a result of the
proposed rule. Table 22 presents the annual change jn tax revenue to state
and local governments while Table 23 gives the annual change for the
federal govemment.

Table 22. Change in State and Local Tax Revenne by Source (Million $).
Taxes on Taxes on
Indirect Taxes Paid By Taxes Paid By
Employee Proprietor Total:
Business Taxes Households Corporations
Compensation Income
-$1.90 $0.00 -$119.91 -$22.97 -$21.37 -$166.14

Table 23. Change in Federal Tax Revenne By Sonrce (Million $).

Taxes on Taxes on
Indirect Taxes Paid By Taxes Paid By
Employee Proprietor Total:
Business Taxes Households Corporations
Compensation Income
-$75.46 -$8.07 -$16.78 -$63.50 -$29.28 -$193.10

9. Timing of the Economic Impact

Many of the economic results discussed above will take time to
materialize. Perhaps the only economic impact that can be expected to
occur shortly after rule implementation are· those cost expenditures
associated with the direct one-time costs (discussed in Section 5). The
other, more significant impacts such as declining efficiency and quality
degradation can be expected to happen more slowly and may not reach the
full potential described here until three or four years post implementation.

© by Informa Economics, Inc. 66

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

The 10 models used in Section 8 are designed to measure an annual

change.2 I Therefore to be consistent, all of our cost estimates in Sections
5 through 7 were made on an annual basis. However, these estimates were
made with the idea that the full effect of the rule was being felt. We have
little empirical evidence to suggest how the economic impacts will evolve
over time. Subjectively, our professional experience and information
gleaned from the industry interviews will allow us to provide a subjective
assessment of how these effects may play out over time.

In the graphs that follow, one for each supply chain, we show our opinion
of the relative impact in each year following implementation of the rule.
The following convention is used. We rate each year from 0 to I with I
representing full impact and zero representing no impact. Fractions in
between can be interpreted as pattial impacts. The full impact years are
expected to correspond to the numbers presented in Section 8, while in
other years the economy will feel less of an impact.

It is important to recognize that eventually companies will find ways to

adapt to the provisions of the rules and thus in more distant years the
economic impact of the rules will be lessened. There may always be some
residual ongoing costs that remain and some of the quality and efficiency
effects may have a very long tail, but it is safe to assume that the overall
impact a decade from now will not be as great as it is in the first few years.

21Projected GDP and output declines are on a per year basis. Employment loss does not re-occul' each
year, but rather the jobs that were lost early years remain lost in later years.

© by Informa Economics, Inc. 67

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

Figure 13. Estimated Economic Impact Over Time, Beef

1,-------

o
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Figure 14. Estimated Economic Impact Over Time, Pork

1 ,----------h

o
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

© by Informa Economics, Inc. 68

Economic Impact of GIPSA's Proposed Rules Nov.8,2010

Figure 15. Estimated Economic Impact Over Time, Ponltry

1,------

o
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year7 Year 8 Year 9 Year 10

10. Summary
This study was commissioned because GIPSA has proposed a rule to implement
directives in the 2008 Farm Bill without conducting a careful and credible cost
. analysis. With this work, we begin to fill that gap and provide the industry and
ind ication of the costs that are likely to arise if the rule were to be implemented as
written. The rule as it currently stands strikes us as very vague and ill-defined.
This has created considerable uncertainty among industry players as to what to
expect once the rule is implemented.

Our process began with in-depth interviews of industry participants in all

segments of the beef, pork and poultry supply chains. Through these interviews
we were able to gain an understanding of how companies were planning to
respond to the rule and collect their thoughts on the potential costs they would
incur in their response. To help quantify the cost aspect, surveys were sent
directly to companies involved in each supply chain asking them to provide cost
estimates on a long list of potential actions that might be required to deal with the
rule. These included everything from costs associated with additional computer
systems and the personnel to support them to projected costs associated with
defending their firms from increased litigation as a result of the rule. These
survey results were combined with professional expertise at Informa to arrive at a

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Economic Impact of GIPSA's Proposed Rules Nov. 8,2010

reasonable cost estimate for several broad categories of costs. This process also
involved having the Infonna study team prepare estimates of financial losses that
could be expected from reduced efficiency and declining demand that was
expected to arise as a consequence of the rule.

These cost and revenue loss estimates were aggregated to an industry-wide basis
and worked through a simple supply-demand framework to arrive at an estimate
of the change in output that was expected for each supply chain. lnforma found
. that the rule is likely to reduce animal numbers in the beef sector by 494,000 head
and in the pork sector by 1.25 million head. For broilers the expected decline was
55.2 million birds and for turkeys the rule was expected to reduce output by an
amount equivalent to 659,000 birds.

Once an estimate of the change in output was in hand, the analysis progressed to
the final stage which was designed to provide an estimate of the· impact on the US
economy from these changes in the meat and poultry sectors of the economy. An
input-output model was used for this purpose. Results of this stage of the study
indicated that the rule as written is expected to reduce GDP by just over $1.5
billion and cost the US economy nearly 23,000 jobs. This work indicates that all
three industries will suffer significant economic damage should the proposed rules
be implemented. The fact that the estimated economic loss to beef and pork
exceeded that of poultry highlights the potential magnitude of the unintended
consequences.

Through this analysis, the Informa team came to believe that this rule could also
have a substantial impact on livestock auction markets throughout the country.
The rule will prohibit order buyers from purchasing cattle for more than one
packer and we believe that this will cause a decline in buyers at smaller sale bams
that likely set off a "death spiral" that will ultimately lead to many small rural
auction barns ceasing business operations thus forcing ranchers in remote rural
areas to ship animals further for sale at larger barns. We estimate that as many as
200 of the nations smallest sale barns could be at risk of disappearing. The
demise of these barns and the consolidation of the sector is expected to result in a
loss of over 800 jobs and a $45 million dollar loss in valu.e added by this sector.

Finally, we do not expect all of the impacts described by this study to occur
immediately. They will take time to evolve. In particular, the decline in beef and
pork quality and the subsequent damage to consumer demand will take time to
materialize and time for the full impact to be felt. For beef and pork the full

© by Informa Economics, Inc. 70

Economic Impact of GIPSA's Proposed Rules Nov. 8, 2010

impact might not be felt until three or four years after the rule is implemented.
Efficiency losses in poultry would likely happen sooner, but would still be
delayed somewhat from the rule's implementation date. The economic damage
resulting from the rule would likely stretch for many years into the future.

It is worth noting in closing that during the course ofthis study, it became clear to
us that the provision in the rule that relieves plaintiffs from the burden of proving
competitive injury is by far the most damaging. Simply removing that one
provision could reduce the economic damage expected from the rule by nearly
75%. All of the expected efficiency losses and demand decline that forms the
basis for the largest portion of the costs are tied back directly to the
packer/processors' fear of increased litigation and an increased likelihood that a
very large financial judgment will be rendered against them. That is the factor
that will drive the packers to sharply reduce their use of AMAs, which in turn
creates large costs in terms of efficiency and product quality.

© by Informa Economics, Inc. 71

ATTACHMENT J
Disclosures: Th.is study was prepared for the
National Chicken council. FarmEcon LLC was
compensated for the preparation of th is study.
 Proposed GIPSA Rules: Economic Impact

Introduction
The United States Department of Agriculture (USDA), Grain Inspection, Packers and Stockyards
Administration (GIPSA), has proposed regulations that would affect chicken company contracts
with independent chicken growers. These proposals wouid significantly expand both the scope
of GIPSA oversight of grower contracts, and the legal definition of "unfair practices". The
purpose of this study is to examine the likely economic impact of the GIPSA proposals on
chicken companies, their independent contract growers, and consumers.

GIPSA's Proposed RUles would alter long-standing contractual and business relationships
between chicken companies and independent growers. The changes that are proposed are, in
part, designed to broaden the scope of GIPSA authority, reduce the latitude to pay growers
based on their performance, limit the ability of chicken companies to seek grower investments,
and set new requirements for cessation or reduction of delivery of birds to growers. The most
likely economic effects would be a reduction of performance-based competition among
growers, a reduced rate of capital investment, a reduced rate of efficiency gains, higher chicken
prices, and reduced chicken exports.

The GIPSA proposal has been put forward without meaningful evidence of harm done by
current or historic practices. To the contrary, the current organization of the chicken industry
has resulted in efficiency advances that benefit contract growers, chicken companies, and
consumers. GIPSA also failed to present empirical evidence that the proposed rules would
result in improved economic performance of the chicken industry. Indeed, based upon an
analysis of the proposed rules and application of basic economic theory, it is likely that the
proposed rules would increase production costs by reducing incentives for efficient chicken
production, adversely affecting competition, chicken companies, efficient and effective chicken
growers, and consumers.

GIPSA has aiso proposed new rules that specifically relate to pork and beef production, pricing
and marketing practices. This study does not address those proposals. The proposals affecting
chicken companies could also affect other types of poultry production. However, only the
potential economic effects of the proposed rules on the chicken industry were considered in
preparing this study.

Summary ofthe Proposed Rules

For purposes of this study, GiPSA's proposed rules that would likely affect chicken industry
economics materially will be grouped into six broad categories.

1. Suspension of Bird Delivery: A 90day written notice for suspension' of delivery of birds
to growers would be required. In addition, written reason for the suspension of
delivery, the length of the suspension of delivery, and the date the delivery of birds will
resume would be required.

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 Proposed GIPSA Rules: Economic Impact \

2. Required Records: Several proposed changes are related to records that chicken
companies would be required to maintain and make available to growers and/or GIPSA:
These include:

a. A specific statistical basis for determining grower pay for each flock raised;

b. Justification for differentials in grower pricing and payment;

c. Provision to GIPSA of a copy of each unique contract to growers, and;

d. Furnishing growers with written documentation of expected costs and returns

for many company-sought capital improvements to grower facilities.

3. Limits on Base Pay and Tournament Compensation: These proposed changes are
designed to regulate compensation of growers by establishing:

a. A uniform grower base pay rate based on type and kind of poultry; and

b. Pay-for-performance sub-groups based on grower housing type.

4. Capital Improvements: The proposals are designed to affect the terms under which a
chicken company may seek capital improvements to be made by growers to their
facilities. The Proposed Rules would require:

a. Contracts of sufficient length for a grower to recover 80% of the cost of the
improvement;

b. Capital improvements made as a result of poultry company coercion be deemed

an unfair practice;

c. The age and upgrade history of a grower's facilities could be the basis for a
finding of an unfair practice for capital improvements;

d. Growers be able to "reasonably expect" the recovery of the cost of capital

improvements sought by poultry companies;

e. A prohibitio·n on reduced placements or termination of a grower for refusing a

capital improvement if the grower's facility is in "good working order"; and

f. A prohibition on poultry companies reducing or ending processing at a facility

within 12 months of a bargained for capital improvement for any of the growers
supplying that facility. Emergency relief from this rule would require GIPSA
approval.

5. Expanded Enforcement Authority: GIPSA's proposals would significantly expand GIPSA's

enforcement authority to include:

a. A broad definition of breach of contract;

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FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

b. A broad definition of retaliatory action or omission,

c. A broad definition of fraudulent representation, by practice or omission, that

would, or could, create competitive injury, or a "likelihood of competitive
injury"; and

d. Expanded authority eliminating the test of competitive injury that applied to the
Packers and Stockyards Act. Specifically, the Proposed Rules state "Conduct can
be found to violate section 202(a) and/or (b) of the Act without a finding of harm
or likely harm to competition."

6. Effective Date: The Proposed Ruies would apply to any poultry growing arrangement or
contract entered into, amended, altered, modified, renewed or extended after the
effective date of the final ruie.Thus, flock-to-flock and expiring contracts would likely be
immediately affected by the Proposed Rules. Longer term contracts may pose significant
issues for implementation of the Proposed Rules as currently written.

Background - Chicken Industry EconomicPerformance

Market Performance: The U.S. chicken industry has an exemplary record of technologicai and
management advances that have translated into lower real costs, lower real chicken prices, and
increased chicken production and exports. As a direct result of innovation, since 1960 chicken
has come from a distant #3 ranking in the U.S. meat Industry to become the premier leader in
both meat consumption and exports. To a great extent the growth of the industry can be
attributed to its vertically integrated, effectively structured, production system. That system
has enabled the chicken industry to compete aggressively with producers of beef and pork.

U.S. Consumption of Chicken, Beef and Pork, 1960-2009

35

ON~IDoooN~wroON~IDrooN~moooN~woon
mwwww~~~~~oooooooooommmmmoooooo
mmmmmmmmmmmmmmmmmmmmooooo~
~~~~~~~~~~~~~~~~~~~~NNNNNO
N
··-Beef Consumption "'''''Pork Consumption -<-Chicken Consumption
Source: USDA/FAS. PS&D database found at .b..ll.t2.1/www.fas.L1sda.gov/psdonllnlllpsdQuery.asillL. Accessed 11-2-2010.

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 Proposed GIPSA Rules: Economic Impact

Over the last 20 years chicken export volume has grown rapidly to about equal the combined
totai of beef and pork exports. Chicken export growth is a direct result of vertical integration,
innovation, improved genetics, and investments that have made the u.s. chicken industry a
premier competitor on the global market.

u.S. Exports of Chicken, Beef and Pork, 1960-2009

g~~ffiffi~~~~~2~~~~g~~~~g~~~~g
mrnmmrnrnrnrnrnmrnrnmmmmrnrnmmooooo~
~~~~~~~~~~~~~~~~~~~~NNNNNO
N
-<-Beef Exports --Pork Exports -'-Chicken Exports

Source: USDA/FAS. PS&D database found at http://www.fas.usda.gov/psdonline/psciQuery.aspx. Accessed 11-2-2010

Chicken Price Trends: Since 1990, retail chicken prices have declined about 10 percentage
points against both beef and pork (chart, next page). The decline in relative price was a
significant factor behind the increased volume of U.S. chicken consumption relative to beef and
pork. The fact that prices have declined relative to beef and pork is a direct function of a faster
rate of cost-reducing innovation in chicken production. Innovation in chicken production has
also driven increased rates of innovation in beef and pork, and helped lower their costs and
prices as well. This result is exactly what economic theory would suggest in a well-functioning,
highly competitive, marketplace.

Retail chicken prices, in 1982-84 constant dollars, declined from about $1.20 per pound in 1980
to only about $0.80 in 2010. The only way real prices can decline to this extent Is the adoption
of cost reducing, innovative, technology in a highly competitive market where cost reductions
are passed along as lower consumer prices.

The chart on the next page showing constant dollar retail chicken prices demonstrates that the
primary beneficiary of increased chicken industry efficiency has been the u.S. consumer. Real
retail chicken prices have declined by 33% in the last 30 years, while chicken company
profitability has not changed significantly. In other words, the cost-saving technology and
investments that chicken companies have deployed since 1980 have been competitively
transferred to consumers via lower real retail prices. Again, this result is consistent with
economic theory. In competitive markets, as costs decline the benefit is passed along to
consumers in the form of lower real prices and expanded output.

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FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

USDA/ERS Monthly Reta,il Chicken Prices Relative to Beef and Pork

90%

~~~ ~t==J~~~~~~'iiii"'~k,;;;;""""~h.,..,.;lJ
t",.·V'!··
60% I~,· I-'-f 1.(.1<."

50%
40%
30%
20% =
Chicken/Beef Ratio -O.OD00064+Monlh +0.7017
R2= 0.1397
10%
0%

Source: Retail meat data found at http://www.ers.usda.gov/Data/meatprlcespreads/. Accessed 9~29-2010,

Retail Constant Dollar (Real) Chicken Prices

Real Price = -o,000035*Monlh + 2.2033

R'= 0.8101
..-¥"

I --Real Chicken Price -Trendline I

Sources: Chicken, beef and pork prices found at http://www.ers,usda,gov/Data/meatpricespreads/. Consumer Price Index, base
years 1982~1984, found at http://data.bls.gov/cgi-bln/dsrv. Accessed 9-29-2010.

Value of Innovation: One way to approximate the actual savings of chicken sector value chain
innovation is to calculate the actual retail value of chicken production (average retail price
times volume produced) versus retail vaiue calculated as if average retaii prices had increased
with inflation, The gap between the two total retail values is what would have happened if
innovation had not lowered increases in costs and prices to below the rate of general inflation,
versus what actually happened with innovation-driven prices, Both volume and price effects are
captured,

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 Proposed GIPSA Rules: Economic Impact

Had retail chicken prices since 1980 increased with general infiation, the actual value of
production would have increased much faster than was the case with lower actual prices that
capture the value of cost-reducing innovation. The value gap is shown in the chart below.

The total 1980 to August, 2010 value gap between inflation-corrected 1980 and actual retail
prices is $1.21 trillion. In other words, since 1980, chicken consumers have saved over $1
trillion from the lower retail prices made possible by investments in cost reducing technology.

Not all of those savings were due to investments made by chicken companies. Investments in
crop production, feed processing and optimization, grower housing, genetics, processing
equipment, distribution, and many other areas involved in chicken production all contributed to
the decline in costs and prices relative to overall consumer price inflation. Improved efficiency
of live chicken production has been one key driver in these overall cost savings.

Estimated Monthly Retail Value of U.S. Chicken Production

1980 inflation-Corrected Retail value versus Actual Retaii Value

$18.0
I L'_o_,._'"'_,_.,_,v_.I_u•...:(_'9_80_I_nf_'a_lIo_'-_oo_,,_.o_t'_d'-p''o" O...:h...:'Ok...:'_',--Pro_du_ot_ion...:l_of...:I...:','7...:"...:III,-oo ,,"",,
$16.0 .1----- ------.-. --- ..--------- -----. ----------
!g $14,0 1___r::~o- :~- : ~-~e-af-a~- :,~::~-,~e-=,2s-,1a--:I~:::~~-i;-df:-;~-m'-_.---.--._-- __.----. ----.---·-·---·.,.I,l·.~.l'('\;1".1
II actual chicken production. },-, ¥
~
$12.0 I-
~
~ $10.0
.<: f
§ $8.0
::;;
~- $6.0
in $4.0
'"
$2.0

-Current DollarRetall Value -RelailValue, Inflated 1980 Price

Sources: Retail chicken prices found at hUp://www.ers.usda.gov!Dat<l/meatpricespreads!.Chicken production found at

http://www.nass.usda.gov/QulckStats/Create Federal All.jsp. Consumer Price Index found at http://data.bls.gov/cgi-bin/qsrv.
Accessed 9 29-2010.
M

Contract Grower Compensation: Contract growers have also benefited from improvements in
chicken production efficiency. Actual records of inflation-adjusted average chicken company
payments to growers, per square foot of their housing, show an increase since 1990 (table, next
page), Those increased payments reflect, in part, returns on the investments made by growers
that have increased the efficiency and value of their operations. Increased payments also

6
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

reflect freely negotiated chicken company current dollar pay rate increases to offset increasing
grower costs for construction, maintenance, and operation of their chicken growing facilities.

Contract Chicken Grower Pay: u.s. Industry Average, 1990 through Projected 2010
(Average Grawer Payment Inflation-Adjusted by Implicit GDP Price Deflator, 2005 Bose Year)

1990 5.65 25'550 $1,444 4.8% 33.12 $1.87

1991 5.50 27,171 $1,494 3.5% 33.44 $1.84
1992 5.41 28,998 $1,569 5.0% 33.77 $1.83
1993 5.39 30,474 $1,644 4.8% 34.09 $1.84
1994 5.30 32,766 $1,735 5.6% 34.77 $1.84
1995 5.30 34,353 $1,820 4.9% 34.93 $1.85
1996 5.18 36,035 $1,865 2.5% 34.75 $1.80
1997 5.27 37,207 $1,963 5.2% 34.87 $1.84
1998 5.30 38,055 $2,016 2.7% 35.26 $1.87
1999 5.39 40,444 $2,181 8.2% 36.09 $1.95
2000 5;39 41,294 $2,227 2.1% 36.23 $1.95
2001 5.37 42,336 $2,274 2.1% 36.03 $1.94
2002 5.22 43,715 $i,283 0.4% 34.64 $1.81
2003 5.21 44,318 $2,308 1.1% 37.22 $1.94
2004 5.21 45,667 $2,378 3.1% 38.56 $2.01
2005 5.24 47,579 $2,493 4.8% 39.15 $2.05
2006 5.22 48,333 $2,523 1.2% 38.97 $2.03
2007 5.11 49,090 $2,508 -0.6% 38.56 $1.97
2008 5.19 49,781 $2,585 3.1% 38.84 $2.02
2009 5.13 47,613 $2,441 -5.6% 38.19 $1.96
2010p _ 5.25 49, 594 $2,606 6.8% 38.51 $2.02
1f&11:1isa "e .vi!!'..., ,"n% ' :~~Q15...'BJl:lT:f~~lff~:'{l¥}1!§l
Sources: AVerage grower payment and pounds/sq. foot: Agrl Stats, 10/30/2010, Average grower payment Is computed as total grower
payments made by chicken companies to, oron the behalf of, growers, divided by total live pounds produced.
Live chicken production from \..lSDA/NASS, found at htto:l!www,nass,usda,gov{QulckStats[,accessed 11/9/2010.
1990-1992 and 2010 pounds/sq. foot estimated based on 1993-2009 trend.
2010p based on Jan-Jun Agrl Stats average payment rate, and USDA's 10/2010 chicken production forecast found at
hUp :Uusd a. rna nnII b. corne II.e dutu sda t curre nttw asdetwa sde-l0-08- 2010. odf, ac cessed 10/18/2010
Implicit GDP Price Deflator from Bureau of Economic Analysis found at http://www.bea.gov!natlonal/nlpawebLlndex.asQ,
accessed 11/4/2010

Although inflation-adjusted average pay rate per pound has declined slightly since 1990,
inflation-adjusted payments per square foot of grower housing increased by an estimated 8.1%.
Improved chicken performance, made possible largely by chicken company genetics
investments, more than offset a decline in the infiation-adjusted pay rate per pound. Average
daily gains for broilers increased from 0.091 pounds per day to 0.120 pounds per day, a 32%
increase. As a result of improved bird performance the annualized average pounds marketed'
per square foot of a grower's house has increased slightly more than 16%.

7
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

Since it accounts for the grower investment in housing space, pay rate per square foot is a
better indicator of average grower return on housing than payment per pound.

Increased inflation-adjusted grower payments are what would be expected from a competitive
market. Chicken companies, faced with increasing demand and production requirements, have
increased average current dollar payment rates to offset increasing costs, and to encourage
growers to expand and improve their facilities. Without the participation of their contract
growers and improved chicken performance, chicken companies wouid not have been able to
. meet increasing demand, while simultaneously reducing real costs and retail prices.

Chicken companies and growers have shared the benefits of improved performance. To
stimulate the necessary grower production and investment to meet increasing demand, chicken
companies have not had to increase their current dollar average payment rate per pound as
much as would have been needed without these performance gains. At the same time, due in
large part to performance improvements made possible by chicken company investments in
genetics, growers have received higher inflation-adjusted payments per square foot of their
housing.

Economic Growth and Employment: Expansion of the u.s. chicken sector has enabled chicken
companies to contribute to overall U.s. economic and job growth. Direct employment effects
have been seen in the chicken companies themselves, and among their contract growers. The
industry currently directly employs about 360,000 people in its U.s. operations. In addition,
about 20,000 contract growers produce the live birds to supply chicken company processing
plants.

Indirect job and economic benefits from chicken company growth have occurred in food
retailing, grain/soybean/feed ingredient production, export services, foodservice providers,
equipment suppliers, packaging suppliers, transportation, animal health suppliers, and many
other sectors.

Since 1960, chicken has been the fastest growing sector in both U.S. and global animal protein
production. That growth is largely accounted for by an efficient and effective business model
that has innovated, reduced costs, increased product quality, and dramatically increased
product offerings.

Imposition of regulations that would reduce the industry's ability to innovate and increase
efficiency would damage not only the chicken industry, but the entire U.S. economy.
Consumers wouid pay higher prices, potential job creation would be lost, and export
competitiveness would be at risk.

8
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

GIPSA Proposed Rules - Estimates of Economic Impact

The GIPSA Proposed Rules would impose significant added costs on chicken companies. It is
likely that the Proposed Rules would, in their individual parts and entirety, have a substantial
adverse impact on costs and risks of raising live chickens under contract arrangements with
independent growers, to the detriment of the entire chicken industry and consumers.

Potential costs can be broken out into the following categories (Proposed Rules sections that
are related to the effect). These categories are illustrative, and not intended to be exhaustive.

1. Reduced Rate of Efficiency Improvements: Directly and indirectly, the Proposed Rules
are very likely to have a negative effect on the level of future productivity gains, and
could cause costs to increase above what they otherwise couid have been in the
absence of the Proposed Rules. To the extent that costs are higher than they would
have been in the absence of the Proposed Rules, economic theory tells us that retail
chicken prices will also likely be higher. (201.215, Suspension of Delivery; 201.94,
Required Records on Pricing Differentials and Contract Terms; 201.216, Capital
Investment Requirements; 201.217, Capital Investment Requirements; 201.214,
Tournament Compensation Requirements; 201.3, Expansion Of Authority)

2. Increased Administrative Overhead: The Proposed Rules would require significant

additions to documentation for contract terms, grower payment rates, and f)egotiated
capital improvements made to grower facilities. Tournament compensation systems
would require additional documentation and increased overhead from segregation by
housing type. Termination of a grower that fails to perform under a contract would
entail additional documentation. All unique contracts would have to be submitted to
GIPSA, with confidential information identified. All of these new requirements would
add costs to chicken company overhead. (201.94, Required Records on Pricing
Differentials and Contract Terms; 201.210, Records Related to Contract Payments;
201.213, Contracts to be Submitted to GIPSA; 201.216, Capital Investment
Requirements; 201.214, Tournament Compensation Requirements)

3. Increased Cost of Litigation: The Proposed Rules contain numerous requirements and
terms that are vague, poorly defined, or defined differently from long standing practice.
The lack of clear definition of requirements and terms invites litigation. Even if litigation
does not occur, uncertainty about the scope and meaning of the Proposed Ruies create
disincentives for investment or the introduction of innovative contractual
arrangements. In addition, the Proposed Rules would extend USDA's enforcement
authority well beyond its historical reach defined in numerous court decisions. The
Proposed Rules would impose a set of requirements that may be impossible for chicken
companies to meet without breaking and re-drafting existing long term grower
contracts, inviting further litigation. The Proposed Rules contain rules and prohibitions
in areas of activity that have never been regulated in any other sector of agriculture.
Added litigation imposes an unknown, and unpredictable, added cost burden to the

9
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

industry. More significantly, the risk of litigation is a disincentive for investment and
innovation in the production of live chickens by contract growers. (All sections of the
Proposed Rules are included in this cost category.)

1. Reduced Rate of Efficiency Improvements

Several historical productivity and efficiency trends in live chicken production are shown in the
tables on the next page. Improvements in feed conversion, average daily gain, live production
per square foot of grower house and mortality are major driving forces behind growth in
chicken production, and lower real costs and prices for chicken products. Productivity gains
have come primarily from improvements in genetics, feeds, and grower housing.

Feed Conversion (Feed to Meat Gain): Feed accounts for most of the cost of raising live
chickens. Chicken companies have made significant investments in genetics and feed
formuiations in order to increase the efficiency of feed conversion and chicken production.
Feed conversion is highly correlated with other performance measures. As a result, compared
to 1925, in 2010 the amount of feed required to produce a pound of live chicken is less than
half, daily gain has increased by more than 5 times, and mortality dropped from 18% to 4%.

U.S. Live Chicken Performance, 1925 to Present

1925 112 2.5 ------------_._------_._._-_._

0,0223 4,7 ...._--_._-----
18
1935 98
-~,
2,86 0,0292 4.4
-----,-,---,-----------------,------- 14
1940 85 2,89 0_,03_40 4 ,!?. _
1945
---=~----=
1950
84
70
3,03
3,08
0.0361
0.0440
---::::-----'-------------------------------
----------------,-,-
4
3
10
8
---
1955 70 .3,()7 , 0"043_~ ' L_, ,__"_,__ ,__,L__,,, _
1960 63 3,35 --_._-_._----_._-_
0.0532 2.5
... _-_ ..•..•----"._---------------_._.6
1965 63 3.48 0.0552 -----------------,---2.4 6
1970 56 3.62 0,0646 2,25 5
----------
1975 56 3,76 0,0671 2.1
-_._._--_._-_._._-_._._-----_. 5
1980 53 3,93 0,0742
--------------_._"-~-----_._'~-_._----_._.,---------_
2.05 S .. -
1985 49 4,19 0,08SS 2 ~ _
1990 48 ' 4,37 0,0910 __ __ _
--_.2 . ._... .. _._.•5_--,._.
1995 47 4,67 0,0994 .. _---"._---_ 1.9S S •..... __._'"
...-._.. _------_
._--------------_._-----------"----~_

2000
---- 47
2010_' ,__ ,4z.....~,
5.03
s~
0.1070
---------.
0.1198
.
1:9~
__
1.9S S
--------
, 4:.._, 1
'Estimated, May 17, 2010, Source: National Chicken Council and Agri Stats

Chicken companies supply chicks and feeds to contract growers. Chicken companies are able to
take advantage of economies of scale, and reduce costs of feed production, chick production,
and genetics research. Independent growers could not duplicate chicken company cost

10
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

economies or genetics research programs. Chicken companies also offer a stable market for
their growers' chickens, and assume all risks of feed cost variation. In recent years that risk has
been substantial.

Contract growers suppiy labor, housing, feeders, water, and the utilities to operate their
chicken growing houses. This partnership has resulted in lower costs and increased efficiency
for the entire industry.

To realize the potential efficiency of genetics and feeds supplied by the chicken companies,
housing and related equipment used to raise live chickens must be regularly improved.
However, chicken companies generaliy contract with growers who own the housing and
equipment in it. Thus, chicken companies do not directly determine the quality of facilities or
equipment that they depend on to efficiently convert feed into chicken meat, and optimize
investments in improved genetics.

To encourage growers to improve their facilities, most chicken companies have put incentives
in their contract compensation plans that reward improved feed conversion. In many cases,
improving feed conversion has required capital investment in grower housing. In some cases,
chicken companies have bargained for improvements in housing as a term in their contracts
with independent growers. Growers have also benefited from improved feed conversion, With
improved conversion comes higher daily gain. Improved gains increase the pounds per year
that a grower can raise in a house, increasing the grower's gross income potential. Since 1990
the average pounds raised per square foot of grower house space has increased by about 16%.

20 Years of Chicken Company Live Bird Efficiency Improvements

48 4,37 0,0910 - - -2.00 33.1 .. _...

- - - - - _...._-----, ~,_.
S'
47 S,63 0,1198 1.92
---------------_ 38.S .... 4:
_,._---_._._~

48 4,37 0.0910 2.00

Sources; Agrl 5tat5, and Nee. 1990 and 2010 live pounds produced per square foot estimated by Farm.Econ based on 1993-2009 trend.

As chickens gain weight the efficiency of feed conversion declines. Actual gains in feed
conversion have thus been significantly masked by the trend in increasing average market
weights, As shown in the table above, at the 1990 average market weight of 4.37 pounds, the
2010 feed conversion standard is about 1.8 pounds of feed per pound of live gain, lower than

11
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

the actual averag~ of 1.92 at an average 5.63 pounds of market weight. Over time, feed
conversion has improved significantly across the entire spectrum of chicken market weights.
Competition among chicken companies has translated these gains into consumer benefits of
lower inflation-corrected chicken prices, and increased chicken production.

Summary: Since 1990, and corrected for constant market weights, the improvements in both
gain rates and improved feed conversion have been significant. Compared to 1990, raising a
4.37 pound live bird now takes 12 (32%) fewer days. Feed conversion has declined from 2.0:1 to
1.8:1 (-10%; lower is better) for a 4.37 pound market weight chicken. Mortality losses also
declined by 20%, and average daily gains increased by 32%. Live pounds produced per square
foot of grower house increased by about 16%; These increases in efficiency benefited contract
growers (increased gross income per pound and per square foot, and more live pounds
produced), chicken companies (lower costs and increased sales volume), and consuiners (lower
inflation-adjusted prices and more chicken consumption).

Gain from Feed Conversion Improvement: Feed consumption per bird is calculated as feed
conversion times live weight. In 1990 it took 8.74 pounds of feed to produce a 4.37 pound
chicken. In 2010 it would take only 7.87 pounds of feed to produce that same live weight
chicken, 10% iess. The difference of 0.87 (10%) fewer pounds of feed has a current cost of
about 10 cents per 4:37 pound bird (at a feed cost of$225/ton), or 2.3 cents per pound of live
chicken.

Had the improvements in feed efficiency in the table on the prior page not occurred, the
current conversion rate would be about 10% higher than the actual 2010 of 1.92, or about 2.11
at 5.63 pounds live weight. At 2010 feed costs of about $2:25 per ton, improved feed conversion
since 1990 will save $1.1 billion in 2010 feed expense. This cost reduction is a direct result of
chicken company innovation and investment. Savings of this magnitude would not have been
possible without ongoing improvements in contract grower-owned facilities. The primary
beneficiaries of lower costs have been chicken consumers who have enjoyed lower inflation-
corrected prices and expanded chicken production. However, chicken growers have also
benefited from increased production per square foot of their houses.

At 2010 feed cost per ton, every 0.01 improvement in feed conversion is worth about $56
million in lower feed costs (table, below). Every loss of 1 point of feed conversion would
increase feed costs by that same $56 million

Value of 1 Point of Feed Conversion at 2010 Production and Costs

Total Liveweight Production Billion Pounds 49.6 49.6 o

Feed Conversion Pounds 1.92 1.93 0.01
Total Feed Used Million Tons 47.616 47.864 0.248
Feed Cost Million Dollars $10,714 $10,769 $56

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FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

Average Daily Gain and Pounds Raised per Square Foot of Grower House: The 32% increase in
average daily gain since 1990 has also been important to lowering chicken production costs.
Increasing gain rates by 32% has helped increase the average productivity of housing by about
16% since 1990. Housing investments in ventilation, temperature control, feeders, water
distribution and lighting were important contributors to the increase in pounds produced per
square foot of grower house. Since growers are typically compensated based on pounds
produced, the increase in daily gain has translated directly to improved inflation-corrected
grower pay, and improved gross return on house investment.

Put another way, absent the improvement in average daily gain, the 2010 chicken production
level would require 16% more housing than is actually the case. For both the grower and the
chicken company, the increase in average daiiy gain has meant that housing is more productive,
enabiing more pounds of chicken to be raised per year, per square foot. Significant investment
in building added square footage of houses has been avoided. Both investment costs and the
operating costs required for additional housing have also been avoided.

2010 Vs. 1990: Housing Cost Savings For a 16% Increase in Pounds Produced per Square Foot
Based on recent building and operating costs for modern, tunnel ventilotion housing

199oActual.... . . 25,5;\9,690 ._. 33.12 771,428

2010 Proje~e~_ 49,593,661 38.51 1,?!!2,81~
201Q.at 1990 Pounds/Sq. Foot 49,593,661 33.12 1,497,393
DiffererlceJ.~,OOOSquare Feet Required for 2010 prod~;:~------:-- 209;581-
Total Co~t Savings at Estimated $1.79/Sq. Foot ($Million) __ ~ ~37~
Investment Avoided at Estimated $10.10/Sq. Foot ($Million) .. §2,1J.2.
Source: Based on UniversIty of Maryland data found at http://mdchick.umd.edu/Broiler%20BudgeLcfnJ., Accessed 9/30/2010

A 2009 University of Maryland study (found at http://mdchick.umd.edu/Broiler%20Budget.cfm,

accessed 9/30/2010) estimates that a modern, tunnel ventilation, broiler house costs $10.10
per square foot to build and equip. At 1990 house productivity rates, it would take about an
extra 210 million square feet of housing to produce the 2010 chicken supply. At current costs,
adding those additional square feet would increase the investment cost for chicken housing
needed in 2010 by over $2.1 billion.

In addition, total fixed and variable costs for that extra housing are also avoided. The University
of Maryland study estimated $1. 79 per square foot for such costs. The estimated 2010 cost
reduction for not requiring the additionai square footage is about $375 million.

Mortality: The 20% reduction in mortality since 1990 also has an economic value. The reduction
in mortality implies that 2010 chicken marketing will require about 86 million fewer birds
placed in. houses. Assuming that each bird has an average cost at time of death of about $1, the
2010 cost reduction is about $86 million.

13
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

Total Cost and Investment Reduction from 1990-2010 Live Chicken Productivity Gains: The
total annual reduction in 2010 live chicken production costs versus 1990 is about $1.57 billion
per year, or about 3.1 cents per liveweight pound. In addition, the need for grower investment
of about $2.1 billion (based on 2009 construction costs) in an additional 209.6 miliion square
feet of chicken housing was avoided.

Potential Impact of Specific Sections of the GIPSA Proposed Rules: Several areas of the
Proposed Rules could adversely affect future chicken performance trends, and cause costs to be
higher than would be the case under current practices. These are:

201.215: Suspension of delivery. The Proposed Rules could make it more difficult to suspend or
reduce delivery of birds to growers. In many instances suspensions and reductions promote the
interests of both the grower and the chicken company. Hot summer weather, for example, may
increase death loss and cause lower performance if birds are placed at normai density. Adverse
business developments, such as the 2008-2009 recession, may indicate that placements for a
company be reduced or suspended in order to better balance supply with expected demand. If
the Proposed Rules force chicken companies to temporarily produce in excess of demand, the
market value of chicken products could be reduced below cost. Producing chicken at a loss is
not in the best interest of chicken companies, or contract growers.

201.94: Required records on pricing differentials and contract terms. The Proposed Rule could
cause companies to change payment rates, contract terms and reduce incentive payments, all
in order to avoid increased admin'istrative costs and litigation risks. To the extent that current
payment rate and contract terms promote increased growers efficiency, those gains could be
impinged.

201.216 And 201.217: Capital investments criteria. The Proposed Ruies would add to the cost of
capital improvements, and the risk of litigation by either growers or GIPSA. Companies would
be required to maintain additional records on all capital improvements that are negotiated or
requested by chicken companies. Chicken companies would also likely feel compelled by
litigation risks to maintain additional records on suggested improvements. This section of the
Proposed Rules would likely reduce investments by growers to upgrade their facilities.
Restrictions and additional recordkeeping requirements add to the costs of improvements, and
litigation risks increase if investments do not meet chicken company expectations made known
to growers. In addition, restrictions on reducing bird deliveries contained in this section could
endanger the welfare of birds, cause increased death loss, adversely affect grower payments to
the best performing growers, and increase costs of production.

In summary, adding to costs and compiexity of improvements would likely discourage the '.
technical progress that led to the innovation, efficiencies, and cost savings shown above.

201.214: Tournament systems. Parts (a) and (b) of this proposed rule could significantly reduce
incentives for chicken growers to invest in their facilities. Part (a) could cause substantial
changes in payment rate schedules that could alter incentives and cause loss of goodwill
between chicken companies and their growers. Part (b) could also mean that growers with less-

14
FarmEcon LLC, November 21.2010
 Proposed GIPSA Rules: Economic Impact

efficient housing would not have to compete with more modern, efficient, facilities. The
incentives for grower improvements could therefore be significantly reduced.

The Proposed Rules would distort market-based prices and terms contained in chicken
company contracts with growers. The proposed rules could distort economic signals for both
growers and chicken companies. The result would likely be reduced rates of efficiency
improvements and innovation that benefit the entire chicken industry and consumers.

201.94: Required records on pricing differentials and contract terms: The added cost burdens
imposed by the Proposed Rules could cause chicken companies to make sub-optimal decisions
on grower payments in order to avoid administrative costs and risks of having documented
differentials litigated. That is, chicken companies may elect to reduce grower payment
differentials in order to avoid administrative costs and potential litigation. To the extent that
these differentials reflect true underlying costs and efficiencies, distortions caused by the
Proposed Rules could cause payment rates that deviatefrom underlying costs of production.
The most effective producers could be under-compensated, and the least effective could
receive compensation in excess of the true market value of their services.

201.214: Tournament compensation requirements: : The equal base pay requirements of this
section would create incentives for chicken companies to change the definition of "Base Pay"
from current use, often "expected pay for average performance", to a minimum pay rate of the
lowest performing grower. Under the PR all growers would likely see lower base payments. All
growers would receive either the base pay, or base pay plus a premium.

Current payment scales have been established over many decades of negotiation between
growers and chicken companies. Imposing regulatory rigidity and forcing the re-writing of base
pay and performance payment scales could be difficult, and entail substantial investment in
time and resources. Long standing relationships between growers and chicken companies could
also be damaged.

Growers across a chicken company's trade area may also face cost differentials for utilities,
construction, land and other inputs. In the current environment, base pay is often adjusted to
reflect these local cost differentials. The equal base pay requirement could cause growers with
relatively high costs to be at a competitive disadvantage to growers in lower cost areas unless
chicken companies document differentials and incorporate them into contracts.

Taken together, sections 201.94 and 201.214 could require detailed examination,
documentation, and re-drafting, of all 20,000 current grower contracts. The costs for these
changes is expected to be substantial, and would likely result in litigation by those who feel that
they have been damaged by changes in contract terms.

Potential Cost Impact: FarmEcon projects that reduced incentives for investment in grower
housing, potential distortions caused by changes in tournament incentive systems, and
increased risk of litigation could cause performance gains to slow, but not stop. Chicken
companies will likely continue to improve genetics and feeds, but housing investment and

15
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

grower management needed to optimize chicken performance improvement potential will

suffer. Based on historic trends the following effects of the Proposed Rules are used to estimate
the cost of lost performance:

1. For the first five years of Proposed Rules' enforcement, feed conversion gains at
forecast (increasing) market chicken Iiveweights are projected to slow from 1 point
(0.01) per year under current conditions to 0.2 points (0.002) under the Proposed Rules.

2. The trend increase in pounds produced per square foot of grower housing could
decrease from 0.32 pounds per year to 0.16 pounds per year, for the first five years of
enforcement.

3. Mortality could increase by 0.08% per year over the long term trend for the first five
years of enforcement.

Impact on Feed Costs: The Proposed Rules' potentiai effect on live production feed costs, at
$200/ton cost of feed, is shown in the table below. In the 5th year additional feed costs would
be $223 million. The total feed cost impact over the first 5 years of enforcement is estimated to
be $644 million.

Estimated Impact on Feed Conversion and Feed Expense

r.. 20~.:!:- __ ~J700JOOOJOOO 5.69 4~ESl3,ooo/aoo__ 1.910 1".:9:,.-18 -'0"'.0"'0.8 47,27",S,3",6""5--.:4",7,,,,47,,,3,p7 __....$200 _i:l9!~3c40~!
UOU__ ~874.000,OOO .S. 7S.__ 51,025,SOO,000 1.900 1,916 0,016 48,474,225 48,882,429 $200 $81,640,8001
-'-"'-~-~~-----'-"------'-I

i~~_9,051,480,000 S.81 52,S89,098,800 1.890 1,914 0,024 49,696,698 50,327,768 . $200 . $126,213,8371
! 2014 9,2.32,509,600 5.87 54,194,831,352 1.880 1,912 0,032 50,943,141 5i,810,259 --$20()_::.J.1?E23~;4{;()J
! 2015 9,417,159,792 5.93 55,843,757,567 1.870 1,910 0,040 52,213.913 53",§0,788 _ _$3.~_.. $223,325,03°)
b:lJtal 5 Year Cost --"'="---====-=:':' . ._. .__S.~2~.?_~~:
PR;: proposed Rules; Fe =Feed Conversion

Impact on Cost of Housing: Projected lower pounds produced per square foot of grower
housing caused by the Proposed Rules would increase the housing area required. Based on the
University of Maryland's study's estimated costs, fixed and variable housing costs would
increase by about $51 million per year in the 5th year of enforcement. In addition, about $289
million in added grower capital investment would be required over the 5 years. All annual
recurring costs for that investment are included in the estimated additional fixed and variable
costs.

Impact on Mortality Costs: The estimated 0.08% per year increase in mortality due to the
Proposed Ruies would increase live production bird mortality cost by about $38 million in the
5th year of Proposed Rules enforcement. The estimated cost for increased mortality over 5
years is about $110 million.

16
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

Estimated Impact on Housing Requirements, Expense and Grower Investment

:j
'3
oj

I,JJiit]
2011 49,503 38.8 38.7 1,275 1,'328140 5.33 $$1~9·.4s31 -.----1.$ss}s-.".7793-..j
2012 51,026 39.2 38.8 1,303 _:=7::---__
1 ---:5:::.5::=2 7.':""" _
f---'2"'0"'13'-_ _-='S2:~,S;.:8"_9_---c?39:::.S'-._--:3=9.~0-____:1":,3'?32::-----:1':,3:c:49--- 5.71 $29.64 _ $57171'
2014 S4,19S 39.8_~~_ 1,361 1,384 S.92 $40.23 $59.75
__ 201S SS,844 40.1 39.3 1,392 1,420 6.12 $S1.18 $61.83
Total Added Cost and Grower Housing Investment .~~~~~~~~~~2~8=.~S=_9:--_-_-_~-_--"7'$1::49-'-9_9 ~~88.80
·PR = Proposed Rules

Estimated Impact on Mortality and Costs

2011 8,700,000,000 4.00% 4.08% 6,960,000 $6,960,000 J'

2012 8,874,000,000 3.900/<.,..' 4.06% !_4'_19._8,_40_0_.2!.~,_19_8,402.,
_.2Q!-L_~,051,480,000 3.80% __4.04~__ 21, 723,~52,_.J?.1J23,55_?
29,544,031 $29,544,031 I

~
2014 9,232,50.9,600 3.70% 4.02%'
-3~1:?_,. ~~!2>.1_~~,
__ 792'--:::'3.'-'-60"'0/<"'-, 4. 00% _~_~_'_3~~_68,63~-=-_$~7_,6~.~,_li_3-_9=1
T-"_1O"0 Y_ea_r~-,,_st___ _ 110,094,6~?._.J.!.:i:g'_Q93.c622
PR =Proposed Rules

Total Bird Performance and Mortality Cost Impact: In the first 5 years of the Proposed Rules'
enforcement, reduced bird performance and increased mortality are estimated to increase live
chicken production costs by $904 million.

Impact on Ownership of Housing: Due to capital investment costs, and the past performance of
capable independent growers, chicken companies have been reiuctant to own or lease live
production assets. However, the Proposed Rules do not apply to fully integrated, company-
owned or leased, live production facilities. Chicken companies, at some point, may find that
owning, or ieasing, their live production assets will more effective than contract production.

The extent of any conversion to company-owned facilities would depend on chicken company
experience in the first few years of implementation of the Proposed Rules. Companies may
choose to operate under the Proposed Rules, and still attempt to remain competitive. However,
benchmarking and performance monitoring systems used by chicken companies would reveal
any competitive disadvantage of operating under the currently Proposed Rules.

If companies determine that compliance with the Proposed Rules would cause a cost
disadvantage, it is likely that some contract live production would move to company-owned or
leased housing. For the most part, company housing would likely be larger, and more efficient,

17
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

than contract houses replaced. To the extent that this conversion takes place, any impact of
fully integrated housing investment would likely fallon smaller, lower productivity growers who
depend on contracting for a secure and predictable income source.

If only 10% of 2015 production were to be moved from contract growers to company-owned
faciiities it would require about 3,700 modern chicken houses and about $1.3 billion of invested
capital. Most of the housing would likely be new construction to replace grower's older
facilities, but some could also be purchased or leased from contract growers. Ongoing live
production costs, and risks of litigation, wouid likely be somewhat reduced by the investment.

2. Increased Administrative Costs

Under the Proposed Rules there are significant additions to the records that chicken companies
would be required to generate and retain. Several specific sections of the Proposed Rules would
likely increase administrative costs. The analysis below focuses on only the most significant of
the potential costs.

201.94 (b): Records justifying pricing differentials: Chicken companies would be required to
document, in writing, the business case for any differentials in payment rates or contract terms
for their contract growers.

Administrative Cost Burden: Without detailed knowledge of all current chicken company
records systems it is difficult to estimate the additional administrative costs. However, to the
extent that chicken companies would choose to not pay growers based on the true value of
their services, this requirement would likely impose a lost performance cost burden far in
excess of any administrative burden.

201.210 (a) (3): Unfair, unjustly discriminatory and deceptive practices or devices: Chicken
companies would be required to offer each grower, upon request, detailed statistical
information documenting the calculation of payment rates for each delivery of birds. Though
not entirely clear, required information would apparently include, but not be limited to, feed
conversion, feed analysis and history of the breeder flock supplying the contractor.

Administrative Cost Burden: Most companies already offer detailed settlement statements,
including feed conversion, which would come close to meeting most of the requirements for
grower payments. However, feed analysis and breeder records are not generally included in the
data available to growers. Assuming these items are required, the costs would be substantial.

Currently, chicken companies do not routinely assay feed loads delivered to growers. FarmEcon
estimates that including a very basic feed assay for each load of feed delivered to a grower
would cost about $10 per sampled load for an assay, and $2 for administrative expenses (table,
next page). The average load of feed delivered to a grower is estimated to be a full truck, 24
tons. In some cases growers may receive partial truck loads, but 24 tons is the maximum
allowed load normally delivered. The calculation in the table is for the minimum number of
feed loads required for the estimated chicken production, and for a basic assay only. Partial
feed ioads, or a more extensive assay requirement, would significantly increase costs.

18
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

Cost of Compliance with Proposed Rules Requirement for Delivery of Feed Analysis Data

1..~'

2011 47,473,377 24 1,978,057 $10 $2 $21,2~_~,§~]

2012 48,882,429 24 2,036,768 $10 $2 $22,404,447:
__201}_ 50,327,-?68 ~ 24-==::~ i096~90 -:-$-io~~::::::j_~=-::=:-$~~~~~~~jj
2014 51,810,259 ._~ 2,158,761 $10 .2~. __. 2~~J4§,~§~i
2015 53,330,788 24 2,222,116 $10 $2 $24,443,2781
Total 5 Year Cost . .__._._._. ~==__=::::=Ii:~5"~~iii?]
PR = Proposed Rules

Breeder history is available in many companies' records. Including those records in grower
settlements would add a cost burden for revising the payment system to include that
information. The administrative cost is not known, but would not be expected to be material.
However, breeders typically produce chicks in a 40 life week cycle: Growers receiving chicks at
the beginning of a cycle would have little or no history. Growers receiving chicks at later points
in the cycle would have more history. The difference in records is unavoidable, and could lead
to increased risk of litigation between growers and chicken companies. The Proposed Rules also
do not define the exact details of the breeder or feed records to be made available, also
possibly leading to litigation.

201.213 (a through e): Livestock and poultry contracts: Chicken companies would be required
to submit to GIPSA a copy of every unique contract, with business-sensitive ianguage indicated.

Administrative Cost Burden: The administrative costs of submitting contracts to GIPSA is not
expected to be material to chicken companies, but publicly disclosing individual contract terms
and formats could adversely affect competition.

201.214 (a) (b): Tournament systems: Chicken companies operating tournament pay incentive
. programs would be required to pay all growers the same base pay, and group. growers by
housing type. Administrative costs for re-drafting contracts and running several tournament
sub-systems could be incurred ..

Administrative Cost Burden: All contracts could need to be eventually re-drafted to

accommodate Proposed Rules-specific arbitration language. However, the Proposed Rules
would impose additional requirements that imply changing base pay. Incentive payment
programs are also likely to be revised.

Companies could add specific guaranteed premiums to base pay for prior contractual
agreements, especially for capital improvements and cost differentials. In fact, such
documented premiums to base pay are likely required under the Propo~ed Rules.

Companies may also choose to make extensive changes in their incentive payments programs
so as to avoid over-payment for below-average grower performance. Companies will likely

19
FannEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

decide to guarantee less of the grower payment as base pay, arid make more subject to
performance incentives.

An estimate of the cost of amending all contracts is on page 21.

201.216 (e through h) And 201.217 (a): Capital investments criteria: For any negotiated capital
investment a chicken company would be required to maintain complex records to show the
business case for the investment; and that the grower can be expected to recover at least 80%
of the investment cost. Such a business case entails many factors, some of which are subject to
variation beyond the control of both the chicken company and the contract grower.

Administrative Cost Burden: Most companies already present growers with estimates of
expected costs and returns for both negotiated and suggested improvements. However,
maintaining detailed records,including a business case and tracking actual results, for each
capital improvement for each grower could entail a significant administrative cost burden.

201.3 (d) And 201.214 (a): Implementation Administrative Costs: As written, the Proposed
Rules would also iikely be difficult and expensive to implement. Existing contracts would
apparently not come under the Proposed Rules untii they are entered into, amended, altered,
modified, renewed or extended. The provisions of the Proposed Rules are thus potentially tied
to the various lengths of approximately 20,000 individual grower contracts.

To the extent that there are existing long term, multi-year, grower contracts tt-le effect of the
Proposed Rules would be potentially to spread out over a multi-year time horizon. For a
considerable period of time chicken companies could have some growers that are covered by
the Proposed Rules, and others that would operate under current rules.

For live production, some companies could need to operate their production programs as if
they were two separate entities. One entity would operate under existing rules, the other
under the Proposed Rules. As contracts meet the criteria for inclusion under the Proposed
Rules, growers would move from the entity operating under current rules to one using the new
rules. In the meantime, the chicken company would need to duplicate its live production
contract compensation administrative systems and costs.

Growers and companies could mutually agree to ame·nd long term contracts, and comply with
the Proposed Rules, but there is no guarantee that thiswould be the case.

A September 2010 National Chicken Council survey showed a wide range fOr length of grower
contracts. Some existing contracts extend as far as 20 years, and almost 60% are longer than
flock-to-flock. It is assumed that flock-to-flock contracts are construed to be "extended" when
the next flock is delivered, and the Proposed Rules would become effective at that time.

Section 201.214 of the Proposed Rules poses a particularly difficult and significant set of
implementation issues for chicken companies with diverse or multi_year contract lengths. This
section of the Proposed Rules dealing with tournament incentive programs states:

20
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

"If a live poultry dealer is paying growers on a tournament system, all growers raising the same
type and kind of poultry must receive the same base pay. No live poultry dealer shall offer a
poultry growing arrangement containing provisions that decrease or reduce grower
compensation below the base pay amount."

Lengths of Grower Contracts, September, 2010

(20 Companies, >70% of u.s.
Production, 12,213 Contracts)

6·10 Year.
22%

3-5 Years
25%

~ess Than One Year

1%

Soun:;e: National Chicken Council Survey, September, 2010

This Proposed Rule related to base pay clearly states that all growers raising the same typeand
kind of poultry will receive the same base pay. Elsewhere in the Proposed Rules, existing
contracts with different pay rates are allowed to remain in effect until they are amended,
altered, modified, renewed or extended. A chicken company attempting to implement the rule
is faced with a contradiction. The company must either be in violation of the Proposed Rules, or
. amend existing long term contracts to bring them into compliance.

Assuming that contracts longer than flock-to-flock must be amended prior to expiration to be in
compliance, there are approximately 11,800 contracts (59% of 20,000 total contracts) affected.
Each long term contract will require negotiation with a grower, and re-drafting to include
grower-specific language pertaining to past negotiated payment differentials, and the new
housing type segregation requirement. It is estimated that amending each contract will require
1 hour of attorney time at $250 and 2 hours of administrative time at $25 per hour, for a total
cost of $300 per contract. The one-time cost is estimated to be $3,540,000.

In addition, approximately 8,000 flock-to-flock contracts would also need to be immediately re-
drafted at an estimated administrative cost of $300 each, for a total cost of $2,400,000. The
total cost of re-writing all 20,000 grower contracts is estimated to be about $6,000,000. To the

21
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

extent that affected growers, or GIPSA, might perceive that amended contracts would not be as
favorabie as existing contracts, there is further increased risk of litigation and costs.

3. Increased Litigation Costs

Substantially increased litigation costs would likely be incurred by chicken companies as a result
of the Proposed Rules. Those costs would come from a combination of proposed expansion of
regulatory authority, ambiguous language and contradictory requirements. The cost of
potential litigation is unknown, but likely to be material.

These specific sections of the Proposed Rules could materially increase litigation costs:

201.219: Arbitration rights, .costs and limits. The proposed arbitration requirements would
discourage the use of arbitration and substitute litigation for conflict resolution. Companies
have frequently experienced higher costs for litigation than arbitration. In addition, only
contract disputes could be arbitrated under the Proposed Rules. Disputes frequently involve
both contract and non-contract issues. Even if arbitration was offered and accepted, litigation
for non-contract issues would be necessary. The cost of potential litigation is unknown, but
likely to be material.

201.94: Records justifying pricing differentials. The proposed requirement invites litigation for
the purpose of examination of detailed chicken company records on contract payment terms,
costs and payment rates. The cost of potential litigation is unknown, but likely to be material.

201.214: Tournament systems. The Proposed Rules would require significant adjustments in
existing contract base pay, incentive pay, and tournament groupings. Growers who feel that
they have been harmed by contract revisions are likely to seek remedy through the courts and
through GIPSA. The cost of potential litigation is unknown, but likely to be material.

201.216 And 201.217: Capital investments criteria. Growers who see capital investment results
that do not meet documented expectations are likely to litigate. The cost of potential litigation
is unknown, but likely to be material.

201.3 Applicability of regulations. This section seeks to significantly enlarge the scope of GIPSA
enforcement authority. It can be expected that this section of the Proposed Rules would
engender substantial litigation. The costs of litigation are expected to be material.

Vague language: The Proposed Rules incorporate vaguely defined new requirements using
imprecise ianguage that invites litigation to determine the limits of meaning of the Proposed
Rules in the context of the chicken company/contract grower relationship. Terms that are not
well-defined include, but are not limited to (Relevant Sectian):

• 201.20: "reasonable person": What is the definition and limit of reasonable? Because of
changing context, determinations made by GIPSA or lay juries could effectively decide
business questions on the basis of rough-cut judgments as to what is considered fair and

22
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

equitable. Those decisions could vary by time and place, and thus faii to establish a
meaningful standard.

• 201.94: "written records": What are the standards for details of these records? How
extensive do they need to be?

• 201.214: "base pay": This term is redefined by the Proposed Rules from current
common usage. The most common current definition is a pay rate based on average
grower performance. Actual pay rates for individual growers may vary, and be above or
below the current definition of base pay. The Proposed Rules redefine "base pay" as a
minimum pay rate that all growers must be paid, regardless of performance. This
redefinition is likely to result in litigation from disgruntled growers who might see their
contract base pay reduced to accommodate the Proposed Ru les.

• 201.214: "like house types": There is no current industry-wide standard definition for
the term "house type". The lack of a standard invites litigation to determine the limits of
the meaning ofthe Proposed Rule.

• 201.216: "similarly situated": What is the limit on permissible differences that are in
excess of "similar?" The lack of a standard invites litigation to determine the limits of
the meaning of the Proposed Rules.

• 201.216: "reasonably be expected": Determination of "reasonably" will vary from time

to time, and will depend on numerous, changing, assumptions. What are the limits of
"reasonably?"

• 201.217: "reasonable time period" Determination of "reasonable time" will vary from
time to time. What are the limits of "reasonable time?"

• 201.217: "adequate compensation incentives": What is the definition of adequate? Is it

80%,90%,95%, or 110% of expected costs?

• 201.217: "good working order" What are the limits of "good working order?" For
example, if 90% of a house's design ventilation is being achieved, is that "good working
order", or is it 85%, 95%, or 100%, or some other percentage?

• 201.218: "include, but are not limited to": What other criteria can be used to determine
compliance? The Proposed Rules in several places do not clearly state the limits of the
proposed regulations, inviting litigation to enlarge the scope of regulatory authority. The
Proposed Rules invite GIPSA to enforce compliance based on criteria that are not
written into the Proposed Rules.

• 201.219: "reasonable discovery": Determination of "reasonable discovery" may vary

from time to time and case to case. What are the limits of "reasonable discovery" with
respect to company records?

23
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

Cost Burden: If adopted in their current form the Proposed Rules would expose chicken
. companies and growers to large, unknown, and unknowable, risks of increased litigation costs.
The business environment under the Proposed Ruies would be one of greatly increased risk and
uncertainty that discourages investment and innovation.

The Proposed Rules could also encourage chicken companies to escape GIPSA regulation
altogether by investing in company-owned or leased growing facilities. The Proposed Rules may
increase the incentives for chicken companies to make investments solely to escape the risks
and cost burdens ofthe rules. Such decisions, driven by regulation·s, are not likely to be
economically efficient to the extent that they are driven by other than market forces. Decisions
to move to full vertical integration with company-owned or leased facilities are also likely to do
significant harm to the very growers that the proposal is intended to protect.

Total Cost Burden:

Identified Cost Burden: The total identified Proposed Rules cost burden is shown in the table
and pie chart below. The identified cost burden increases over time, reaching about $337
million in 2015. The total identified cost over the first S years is about $1.03 billion. Costs would
likely continue to increase beyond the 5 year horizon of this study.

Identified Total 5 Year Cost Increases Associated With the GIPSA Proposed Rules

24
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

Identified Cost Increases Associated With the GIPSA Proposed Rules

OJ

2011 $39,602,4g0 $9,533,249 $6,960,000 $21,758,631 _. $6,000,000 }8~_854,~'~~j

_ 2013-__ $81,640,800 $19,409,608 $14,198,400 $22,4o4,447_. JJ37,65~,.~??1
2013 $126,213,837 $2~,637,641 $21, 723,552 $23,066,893 ~ .~_$2'!.02~41c934J
..2013. $173,423,460 __ $40,226,127_._g~,544,031 $23, 746,369 .....i.261;,93~,987i
2015_._ $223,375,039_ $51,184!~_$37,§68,639 __ J.~,443,27!!._ .._·_._._._.__ ~~6,6.?},og~i
.Total. $644,255,528 $149,990,686 $110,094,622 $115,419,618 .J.(;'.!Jl!.Q,_O'0QJ.l:,Q~5.'.7~0,~~.3J

Unidentified Cost Burden: There are significant additional costs that are also likely to be
imposed by the Proposed Rules. These costs either cannot be estimated at this time, or are
beyond the scope of the comments.

Litigation costs: In addition to the identified costs above, the Proposed Rules would also impose
substantial, but unknown, risks of increased litigation and attendant legal costs. The extent and
cost of increased litigation is impossible to identify with any degree of certainty, but would very
likely be material to the financial health of the entire industry. Higher litigation costs alone
could have a negative effect on growers, chicken companies, USDA and consumers. Indirectly,
the increased threat of litigation will have a chilling effect on innovation and investment. To the
extent that the Proposed Rules slow innovation and investment, the entire chicken industry,
including its growers, would suffer, and consumers will experience higher prices.

Reduced Competition in Related Product Markets: The Proposed Rules are likely to reduce
competitive forces both among chicken companies and within the entire meat and poultry
production system. Increased costs and reduced rates of chicken production innovation could
lower the incentives that an efficient and price competitive chicken industry create for beef and
pork producers. The result could be higher costs, and higher retail prices, of competing meats.

Reduced Competitiveness in Export Markets: To the extent that the Proposed Rules would
unilaterally apply to only U.S. chicken producers, they would likely result in reduced global
competitiveness, and long term loss of export market volume and value, and increased
pressures for U.S. chicken imports. Export losses and/or import increases would reduce
demand for, and production of, U.S. chicken. Lower exports and/or higher imports would
damage the U.S. trade position and result In job losses in chicken production and allied
industries. Included in those job losses would be fewer chicken growers. Brazil, our major
chicken export competitor, would likely become the only major economic beneficiary of the
Proposed Ru les.

Evidence of the potential size of trade damage done by unilateral regulatory action can be seen
in the historical record of the EU chicken market (chart, next page). EU chicken net exports had
been increasing the late 1990s. Following the EU's 1999 unilateral abolition of sub-therapeutic
antibiotics used in chicken production, EU chicken production costs increased. Higher EU costs

25
FarmEcon LLC, November 21,2010
 Proposed GIPSA Rules: Economic Impact

led to a significant loss of trade competitiveness. That, in turn, contributed to a sharp 1.1 to 1.3
billion pound decline in annual EU chicken net exports (graph, next page). In 2007 the EU
actually imported more chicken than it exported. U.S. chicken exports increased by about 2
billion pounds per year after 1999, partly as a result of the EU's lost competitive advantage.

At 2009 average U.S. prices, lost net export volume experienced by the EU in 2009 versus 1998
would cost the U.S. chicken industry about $495 million in lost export value. The price used for
this calculation was based on the 2009 U.S. average leg quarter price. Leg quarters are the
dominant form of U.S. chicken meat exports.

A major loss of export volume would lower income for U.S. chicken producers, contract chicken
growers, and all other economic entities that benefit from U.S. chicken exports. Jobs would also
be lost. About 9,000 chicken industry jobs, and 500 contract growers, would be no longer
needed as a result of an export volume loss similar to the one seen in the EU.

EU Net Chicken Exports (Exports-Imports)

1600 . ! - - - - - - - - - - - - - - - - - - - - - - - - - ,
,

1400 1"··_··-'·--7°;~'-·
1200 1/_.__.- .__
'1"'" c.__ .. _

-g 1000 Ii- .. -,....._"..._-

~. 800 -t ,------.-------,. --- ---~--- --- ---.-------.--.--.'.....-..

~ ~

,:: I---'~'\; : --
600

o T·-·~r-·--,--,--·_,·· --------------------r---- - ~vL-

-200 . 1997 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: USDA!FAS, PS&D Database, Found at http://www.fas.usda.gov/psdonline/psdOuery.aspx, Accessed 10/29/2010

Summary: Unidentified cost burdens are likely to add significantly to the overall cost of the
Proposed Rules. Higher costs could lead to higher consumer prices, loss of competitive
advantage, and a substantial loss of U.S. chicken exports. Associated with these increased costs
and lower exports, there likely would be a loss of jobs in the chicken industry, its supplier
companies, and among its contract growers.

Summary and Conclusions

Without proof of economic harm, GIPSA has proposed a set of rules that basic economic
analysis strongly suggests could result in significant increases in chicken production costs. In
addition, GIPSA is proposing to significantly increase its enforcement powers beyond the "proof

26
FarmEcon LLC, November 21, 2010
 Proposed GIPSA Rules: Economic Impact

of competitive harm" limits that courts have applied to actions brought under the Packers and
Stockyards Act.

The proposed rule changes are likely to slow the pace of innovation, increase the costs of
raising live chickens, and result in costly litigation. Identifiable cost increases for lost
performance, increased bird mortality, and feed assays total an estimated $337 million in the
5th year of Proposed Rules enforcement. Total identifiable cost increases over the first 5 years
-of enforcement total almost $1.03 billion. Higher costs would put upward pressures on chicken
prices, and economic theory strongly suggests that consumers would uliimately bear most of
those costs.

Additional, but unknown, costs could arise from increased litigation and difficulties in phasing in
the new rules on a contract-by-contract basis. These added, but unknown, expenses would be
forecast to be materiai to the industry, and ultimately consumers.

_To the extent that the rate of introduction of cost reducing chicken production innovatio n
would be slowed by the Proposed Ruies, competitive pressures on other meat producers would
aiso be reduced. Costs of producing competing meat couid also be increased, harming those
industries, consumers, and the U.S. trade balance.

The Proposed Rules place cost burdens and regulatory restrictions on U.s. broiler companies
that do not apply to foreign competitors. To the extent that U.S. chicken company
competitiveness in global markets is reduced, U.S. chicken net exports would likely decline in a
manner similar to the recent decline in EU chicken net exports. Export competitor countries
such as Brazil could reap significant benefits from the Proposed Rules.

-GIPSA has not identified any economic benefit gains, or cost reductions, that would arise from
the Proposed Rules and justify changes in current grower contract arrangements. Neither has
GIPSA identified any significant abuse of market power nor proof of harm that would justify
increasing the reach of its regulatory authority beyond the damage to competition that courts
have repeatedly, and consistently, ruled apply to the Packers and Stockyards Act.

27
FarmEcon LLC, November 21, 2010
_ _ AMERICAN FARM BUREAU FEDERATION" ph. 202.406.3600
f. 202.406.3606
. . . .a 600 MflrylllndAve. SW I Sullo 1000W I Waahinolon. DC 20024
www.fb.org

JanuaIy 10, 2011

The Honorable Darrell Issa

Chainnan
House Committee on Oversight
and Government Reform
2157 Raybum House Office Building
Washington, DC 20515

Dear Mr. Chaimlan:

Thank you for your letter requesting the assistance of the American Farm Bureau Federation
(AFBF) in "identifying existing and proposed regulations that have negatively impacted job
growth" in the agricultural sector. Your letter also solicited our suggestions for "reforming
identified regulations and the ru1emaIcing process." We are pleased to respond to your request.

Unfortunately, the list of recent Federal regulatory actions that have had or may have a negative
economic impact on the agriculture sector is long. The attached chart outlines some of the more
important regulatory actions that have recently occurred or are in the process of being
implemented. Where appropriate, we have identified specific remedies to the rule in question or
more general reform of the ru1ema1dng process that might help prevent a recurrence of abuse in
the process.

The attached chart is not exhaustive. We have done our best to identify these immediate
issues but also wish to draw your attention to additional policy matters that merit the
committee's attention. I will elaborate on these in a supplemental submission to the committee
but I would like to draw your attention here to several matters that we believe also have
significant economic implications, as well as due process concerns of the regulated community.

1. Use ofsettlement agreements. In a number of instances, EPA has utilized unilateral

settlement agreements with environmental organizations to achieve policy ends outside
the normal APA process. This is a serious matter that deserves the committee's scrutiny
and we would urge that you share your findings with the House COlmnittee on the
Judiciary, which has jurisdiction over the Administrative Procedures Act.

2. Non-disclosure ofdisbursement ofpublic funds. The United States government pays

millions of dollars aI1TIually in court costs and attorney fees to environmental activists
and others who file actions against the United States. This money is paid from a
Judgment Fund, and in some cases is paid ii'om agency budgets. Entities do not have to
 win their cases in order to be awarded fees and costs. In many cases, agencies settle with
these groups and pay their costs. Until 1995, the Administrative Conference of the
United States filed reports on some of these expenditures, and the Department of Justice
filed repOlts on money paid fTom the judgment fund. In 1995, the ACUS was
deactivated, and reporting requirements by DOJ were repealed as part of a paperwork
reduction effort. These funds are now paid to groups that sue the government, and there
is no accountability for these taxpayer funds being spent. ACUS was reauthorized in
2010 and public disc10sme of these disbursed sums should be made.

3. Use ofcomputer modeling. Use of computer models received much attention in the
context of the global wamling/c1imate change debate and the committee should look into
the use of computer models in its review. Two recent instances of concern are the
computer model used by EPA in its Chesapeake Bay TMDL and EPA's announced
intention to give particular weight to modeling scenarios in determining NAAQS
compliance even when actual data may conflict.

4. Data Quality Act. The committee may wish to evaluate whether the Data Quality could
be strengthened by amending the law to provide for judicial review of such
detenninations.

We strongly SUppOlt yom committee's effort to exercise its oversight authority in this area, and
we would encomage you as well to share your findings with the relevant committees of
jurisdiction so that they may evaluate possible changes to the underlying statutes when
appropriate. We will be pleased to work with you as the committee proceeds with its inquiry. If
you have any questions about this subject, please contact Paul ScWegei at (202) 406-3687.

Sincerely,

Bob Stallman
President

Cc: The Honorable Elijah Cummings

Agency: EPA
Issne: Re-consideration of Atrazine
Status: EPA will have further hearings in the spring of20ll
Discussion: In 2009, in response to requests from environmental activists, EPA re-opened the re-examination of
Atrazine's use as an agricultural herbicide, even though the chemical went through the normal re-
registration process in 2006 and is not due for reconsideration until 2013. Atrazine is widely used in
agriculture and is particularly important in the planting and harvest of corn and sorghum. The chemical
has been the subject of numerous scientific studies (some estimates place the number at over 6,000).
EPA's decision to re-open the registration of Atrazine is virtually unprecedented and has caused great
anxiety among farmers who depend.on this crop protection tool. Were Atrazine removed from the
market, its removal could seriously erode farmers' profitability. (Notably, this chemical is particularly
important in no-till agriculture, which has gained increasing acceptance over the last few decades and
has been cited by some as an important means of keeping carbon stored in the soil.)

Agency: EPA
Issue: Clean Water Act Permits for Normal Pesticide Use
Status: EPA is planning to promulgate a new permit program by April 9, 2011
Discussion: In 2009, a three-judge panel from the 6th Circuit Court handed down an unprecedented ruling. Ignoring
nearly four decades of law, the court invalidated an EPA rule and declared that when a farmer uses a
pesticide - even in complete accordance with Federal requirements under the Federal Insecticide,
Fungicide and Rodenticide Act (FIFRA) - that use may constitute a "discharge" under the Clean Water
Act; the pesticide's use, therefore, according to the Court, requires a national pollutant discharge
elimination system (NPDES) permit under Federal law - even though that use. is currently regulated
under FIFRA and FIFRA label instructions incorporate fmdings related to water quality impacts. The
Secretary of Agriculture asked the Administrator of EPA to appeal this ruling and to defend its own rule
but the agency failed to defend its own regulation. Instead, the agency is proposing a permit system that
will be put in place by April 9,2011 - a system that, by one estimate, would require 5.6 million
application of pesticides by 365,000 applicators to have permits. Moreover, the agency in its original
proposal opened the door to requiring NPDES permits for virtually any application of a FIFRA
registered chemical- even when the application is.done strictly in accordance with the FIFRA label.
The economic impact of this policy change could be enormous. It will not only raise the costs of
farming; it will potentially subject farmers and ranchers to lawsuits from environmental organizations
who have philosophical objections to any pesticides.
 Recommendation: Adopt legislation to clarifY that application ofFIFRA-registered pesticides do not require an NPDES
pennit when applied in confonnance with the FIFRA label. (Bipartisan legislation was introduced in the
I I I th Congress to remedy this issue.)

Agencies: EPA and the Anny Corps of Engineers (COE)

Issue: Regulatory treatment of prior converted croplands (PCC)
Status: Ongoing
. Discussion: In 1993, the Clinton Administration issued a regulation to clarifY the regulatory treatment of prior
converted croplands. (NOTE: Prior converted croplands are wetlands that were drained before 1985 and
that no longer exhibit the characteristics of wetlands. Such PCC are not treated as wetlands under Sec.
404 of the Clean Water Act unless they are abandoned for a period of 5 years.) The Clinton
Administration stated that PCC were no longer to be considered "waters of the US" regardless of how
the land was used. EPA and the COE have been trying to "recapture" such PCC by ignoring the
regulation and promulgating guidance that claims that when there is a "change in use," the PCC comes
into regulation under the Clean Water Act. COE just lost a court decision on this matter, and the court
explicitly rejected the agencies' contention.
Recommendation: If EPA intends to change the regulatory treatment of prior converted croplands, it should be required to
follow the appropriate procedures in the Administrative Procedures Act and not use guidance to
undennine a policy that is nearly two decades old.

Agency: EPA
Issue: Interpretation of Court decisions and enforcement of Clean Water Act for concentrated animal feeding
operations (CAFOs) PAUL, YOU MAY WANT TO EXPLAIN IN LAY TERMS WHAT A CAFO IS,
SUCH AS A TYPICAL DAIRY, HOG, OR POULTRY OPERATION OF AVERAGE SIZE
Status: Pending
Discussion: Several years ago, the 2 nd Circuit Court invalidated an EPA rule in which the agency contended that all
CAFOs propose to discharge pollutants and therefore had a "duty to apply" for an NPDES pennit
whether or not the CAFO actually discharged. The court clearly stated that Congress had given EPA
only authority over actual discharges and the agency had no authority to compel entities to apply for a
pennit ifthey did not discharge or intend to discharge. EPA, however, has been working on regulations
that may come out in 20 II and that are expected to require small- and medium-sized CAFOs to obtain
 NPDES permits, as well as mandating use of more aggressive nutrient management plans. The rule is
rumored to include a presumption that all CAFOs discharge - a policy determination that is clearly at
odds with the ruling in the 2 nd Circuit. Other ways in which the agency is seeking to increase regulation
over CAFOs and increase costs to farmers and consumers are:
J;> Under a secret settlement agreement reached with environmental activists in current litigation over
the 2008 CAFO rule, EPA will soon propose to collect information about farms and post that
information on the internet.
J;> EPA entered into another settlement agreement to requirement permits for dust and feathers blown
out of poultry house ventilation fans.
J;> EPA is proposing regulations to limit the use of manure nutrients and limit a farmer's ability to
sell manure nutrients to crop farmers.

Agency: EPA
Issue: Guidance undermining two Supreme Court decisions (SWANCC and Rapanos) and usurping
congressional language on the legislative term "navigable waters"
Status: A lengthy EPA guidance document is reportedly now under review at the Office of Management and
Budget (OMB)
Discussion: In two important decisions, (SWANCC in 200 1 and Rapanos in 2007) the US Supreme Court declared
that there are limits to Federal jurisdiction under the Clean Water Act, citing Congress's use of the term
'navigable' to limit Federal authority. With the failure of legislation to delete that term in the 111 th
Congress, EPA is now reportedly developing guidance that will undermine the Court's decisions and
assert sweeping Federal jurisdiction over intrastate waters in ways never intended by Congress.
Expanding federal control over intrastate waters will substantially interfere with the ability of individual
landowners to use their private property and will significantly impair job creation from private and
public investments in development and infrastructure projects including housing, schools, hospitals,
roads, highways, agriculture and energy projects. Should such guidance reflect the policy direction of
failed legislation, it could well empower EPA to assert Clean Water Act jurisdiction over even dry land.

Agency: EPA
Issue: Regulation of non-point sources of pollution
Status: Ongoing
Discussion: Under the Clean Water Act, states have primary authority to regulate non-point source pollution
(Section 319 ofthe law). EPA, however, is encroaching upon state prerogatives and is engaged in a
 vigorous regulatory campaign to insert itself into non-point source pollution regulation. Specifically:

}- The agency is trying to narrow the agricultural stormwater exemption - an exemption explicitly
written into the law by Congress. In the Chesapeake Bay, EPA is seeking to do away with the
exemption entirely.
}- EPA has entered into a settlement agreement with environmental activists to adopt unrealistic and
unattainable numeric nutrient criteria.
}- EPA is advocating new total maximum daily load (TMDL) limits that would effectively limit
CAFOs from expanding their operations.
}- EPA is proposing to strengthen the water quality standards program. Key among EPA's proposals
are measures to tighten rules over point and nonpoint sources and give environmental advocates
greater access to challenge livestock operations and land use activities of farmers and ranchers.

Agency: US Department of Labor

Issue: Regulations for the temporary and season agricultural (H-2A) program
Status: Final rule promulgated in 20 IO. Due to effective date, many H-2A employers will feel first impact when
entering into contracts in 20 II.
Discussion: 8 U.S.C. I 101(a)(15)(H)(ii)(a) authorizes a foreign guest worker program under which agricultural
employers may, after meeting certain conditions, hire foreign workers for temporary or seasonal work.
Revised regulations for this program, known commonly as the H-2A program, were promulgated in
December, 2008; those reforms were eventually revoked and replaced by regulations promulgated by the
Department of Labor in 20 I o. The 2008 regulations revised the wage methodology and streamlined the
program; the 20 I 0 revisions reverted to the previous wage structure but at the same time instituted new
reforms that will make the program more costly and less attractive for farmers and ranchers. Although
there are many problems with the new regulations, three items in particular are worth noting:

I. Mandatory wage rate: An employer utilizing the H-2A program must pay his workers the highest of
(a) the state minimum wage; (b) the federal minimum wage; (c) the prevailing wage; or (d) the
adverse effect wage rate (AEWR). In nearly all cases, this is the AEWR. The 2008 regulation
modified the formula by which the AEWR was determined, bringing it much closer to the actual
wages paid in the agricultural labor market. The 20 I 0 [mal rule restored the earlier formula, which is
not based on actual wages but is a formula based on a state-wide average of wages paid in differing
 jobs within agriculture. The practical effect of this change was to drastically increase labor costs for
employers who use the H-2A program and, consequently, to discourage employers from using the
program.
2. Worker eligibility: One of the significant reforms of the 2008 rule was a requirement that state
workforce agencies (SWAs), which receive Federal funds, be required to verify the work eligibility
of individuals whom they refer to H-2A employers. Prior to that reform, SWAs would routinely
refer prospective employees to H-2A employers not knowing whether the individuals themselves
were eligible to work in the United States. Farmers complained that government agencies
themselves were effectively compelling them to consider for employment individuals for whose
eligibility the government itself could not attest. The '08 regulation remedied this ridiculous
situation by simply requiring SWAs to verify work eligibility. The' 10 regulation repealed this
common sense reform, thus restoring a situation which had the effect of requiring farmers to consider
for hire workers not eligible to work in the U.S. The following explanatory note is taken from
DOL's own website (full cite is at http://www.forehmlaborcert.doleta.gov/faqsanswers.cfm#h2a:

May I continue to rely on the SWA to verify the employment eligibility ofthe applicants it
refers to my job opportunity?

Under the Immigration and Nationality Act (INA), the employer is responsible for verifying the
employment eligibility ofall ofits hires. Department ofHomeland Security (DHS) regulations do
not require State agenCies to verify the employment eligibility ofjob applicants they refer to
employers but do permit employers to rely on employment verification voluntarily performed by a
State employment agency under certain limited circumstances. Under the 2008 Final Rule the
Department required the SWAs to perform 1-9 verification on all applicants being referred to job
openings for which H-2A workers were sought. Under the 2010 Final Rule, the SWAs will no
longer be required to conduct 1-9 employment eligibility verification ofjob applicants referred to
job opportunities for which H-2A workers are sought. Employers should carefully examine the
requirements under the INA and the DHS regulations to ascertain their obligations and ensure
compliance with respect to employment eligibility verification.

3. 50% rule: A longstanding regulatory requirement under the H-2A program has been that farmers are
required to recruit and hire eligible and qualified US workers before they receive certification
(approval) to bring in foreign workers under H-2A visas. Customarily, a farmer would file an
 application specifYing the number of workers he or she needs for the work in question. The US DOL
will ultimately reject or approve the application and certifY for a certain number of H-2A workers.
Through 50% of the contract period, a farmer is obliged to interview and hire eligible, qualified
individuals (including those referred by an SWA) up to the number of workers certified on his H-2A
application. For example, if a farmer were certified for 100 workers over a 6-month period, he
would be required to interview and/or hirel 00 workers during the first 3 months. For years, DOL
had interpreted this rule to mean that once a farmer had interviewed or hired referrals up to the
number certified on his H-2A application, the farmer had met his legal obligation. Under the 2010
Final Rule, DOL drastically changed this requirement.! (See the explanatory statements below taken
from DOL's website at http://www.foreignlaborcert.doleta.gov/faqsanswers.cfrn#h2ajoboffers15.).
DOL now requires that a farmer during the first half of the contract period hire any and all eligible
US workers as long as at least one H-2A worker is employed. In real terms, this means that as long
as a farmer has one H-2A employee, he must hire an unlimited number of US workers regardless of
the amount ofH-2A workers actually certified by DOL. This interpretation is wholly unworkable.
From a practical perspective, it is frequently the case that US referrals either will not show up at the
time and date required or, if they do, they will often not return or quit employment after a short
period. A farmer will thus always keep some H-2A employees on the job because he cannot afford
to lose his crop and he knows that referrals from SWAs are, in most instances, highly unlikely to
result in a reliable supply of workers. The practical effect of DOL's new interpretation has been to
raise costs and uncertainties for farmers who want to use the H-2A program. From a public policy
standpoint (coupled with the changes mentioned in # 1 and #2 above), the effect has been to
discourage the use of legal employees under the H-2A program and to make it easier for workers
with fraudulent documents to gain employment in the U.S.

Am I required to hire every U.S. worker who applies, or is referred to me by the SWA, during
the first 50 percent of the contract period?

For as long as an H-2A worker is employed in a certifiedposition during the first 50 percent of
the contract period, the employer mustprovide employment to any able, willing, qualified and
available Us. worker who appiies to the employer until 50 percent ofthe period ofthe work
contract has elapsed, regardless ofthe number ofH-2A workers covered by the employer's

I It should be noted that the 50% rule, like nearly all the regulations governing the H-2A program, is wholly a regulatory creation. There is no language in the

statute mandating such a requirement.

certification. The start ofthe work contract timeline is calculatedfrom the first date ofneed
stated on the Applicationfor Temporary Employment Certification under which the foreign
worker who is in the job was hired.

An employer may continue to employ its H-2A workers under the work contract so long as it
complies with all requirements ofthe H-2A program with respect to the H-2A workers and
workers in corresponding employment. The employer may also choose to displace its H-2A
workers with the newly hired Us. workers so long as it pays for the H-2A workers' return
transportation and subsistence in accordance with 20 CFR 655. 122(h)(2). In the event the
employer decides to displace its H-2A employees as a result ofhiring Us. workers, the employer
is not liable for the payment ofthe three1"ourths guarantee to the displaced H-2A workers.
October 1,2010

What are my options if the newly hired U.S. workers under the 50 percent rule become
unavailable after I have displaced some or all ofmy H-2A workers?

If all ofthe H-2A workers have been displaced, and some or all ofthe Us. workers hired as a
result ofthe 50 percent rule become unavailable, i.e., abandon the position or are terminatedfor
cause, during the first 50 percent ofthe work contractperiod, the employer is under no
obligation, but may continue, to hire any able, willing, qualified and available us. workers.
However, so long as the employer continues to employ at least one H-2A worker in a certified
position during the first 50 percent ofthe contract period, the employer must continue to hire any
able, willing, qualified and available Us. worker who applies to the employer until 50 percent of
the period ofthe work contract has elapsed, regardless ofthe number of us. workers hired
under the 50 percent rule who become unavailable.

If some or all ofthe newly hired US. workers become unavailable after the first 50 percent ofthe
work contract period, the employer may, but is not obligated to, hire additional able, willing,
qualified and available US. workers and/or engage in additional recruitment of us. workers.

Note: An employer whose Applicationfor Temporary Employment Certification is approvedfor

 the full number ofworkers requested may not apply to the National Processing Center for a
redetermination ofits need based on the unavailability of us. workers. Pursuant to the
Department's regulations at 20 CFR 655.166, this option is only available to employers whose
certifications were initially denied or whose applications were partially certified.
Octobffl" 1, 2010

Agency: EPA
Issue: Lowering the national ambient air quality standards (NAAQS) for coarse particulate matter (PM lO)
Status: The agency is expected to.recommend tighter standards in the near future
Discussion: EPA is in the process of reviewing the NAAQS for PMlO. Coarse particulate matter is much more
prevalent in rural areas due to unpaved roads, working farm fields and blowing winds. With very little
evidence of adverse health impacts from PMlO (and virtually no evidence from rural areas), EPA is
proceeding to revise its standards. While EPA has said that it is justified in retaining the current
standard, all indications are that it will reduce the current allowable levels ofPMlO by half. Such a
change will not have much impact in urban areas, but will cause significant economic concerns in rural
areas that are already having difficulty in meeting the current standard. Reducing the standard will cause
many rural areas to go into non-attainment, and bring more restrictions and controls on production. The
effect will be to raise costs and reduce profitability for agriculture.

Agencies: EPA and US Fish & Wildlife Service

Issue: Over-regulation and duplication of efforts under Section 7 of the Endangered Species Act
Status: Ongoing
Discussion: Section 7 of the ESA requires federal agencies to consult with either Fish & Wildlife Service or National
Marine Fisheries Service ("Services") regarding actions that could affect listed species. The Federal
Insecticide Fungicide and Rodenticide Act (FIFRA) provides a procedure for EPA to register crop
protection products, taking into account that product's effect on wildlife, including listed species. Any
crop protection registration has considered impacts of the registered product on wildlife. Because ofthis
procedure, EPA has traditionally not consulted with the Services on registrations. Recent lawsuits have
established a requirement for EPA to consult with the Services on crop protection registrations, even
though EPA has already performed analyses of impacts on listed species during the registration process,
thus creating a duplicative process. Crop protection use is often enjoined or restricted until consultations
are complete. To make matters worse, the analyses done by EPA to assess impacts on listed species are
 different from the analyses done by the Services to assess impacts on listed species. The processes
employed by the agencies are not only duplicative, but they do not agree on the methodology to be used
to perform the same analyses. Losers in this inter-agency dispute are farmers and ranchers who are
restricted in the use of crop protection materials until section 7 consultation is completed.
Recommendation: Legislation should be adopted to resolve this conflict and to eliminate the duplication of costly and time-
consuming reviews of impacts of pesticides on species listed under the ESA.

Agency: EPA
Issue: Regulation of greenhouse gases (GHGs)
Status: EPA regulatory authority commenced on January 2, 2011
Discussion: EPA began regulating greenhouse gas emissions at stationary sources (including farms and ranches) on
January 2, 2011. The Clean Air Act requires that any such sources that emit, or have the potential to
emit, 100 or 250 tons of GHGs per year obtain both Title V operating permits and preconstruction
permits before building or renovating any structures. (EPA, under its "tailoring" rule, has claimed it has
the authority to phase in these limits, starting at levels as high as 100,000 tpy - a level a thousand times
above that explicitly set by Congress in the law. EPA's claim of such authority is being challenged in
court.) EPA estimates that when fully implemented, there will be over 37,000 farms and ranches subject
to Title V operating permits alone, at an average cost of over $23,200 per permit. In addition, EPA has
stated that methane emissions from livestock are not classified as fugitive emissions, and thus would be
required to obtain such permits. If so, this would affect over 90 percent of the livestock production in the
United States.
Recommendation: Congress should act to halt EPA's regulatory over-reach.

Agency: EPA
Issue: Regulation of ammonia emissions
Status: A proposed rule is expected in July, 20 II
Discussion: In the course of revising national ambient air quality standards for sulfur dioxide (Sox) and nitrogen
oxides (NOx), EPA is also seeking to regulate ammonia emissions. Livestock emit ammonia and would
thus be regulated under these standards. The Clean Air Act only regulates emissions of "regulated
pollutants," which does not include ammonia. EPA is seeking to use a controversial and unproven
method for the NOx and Sox standards that would incorporate the regulation of "reduced nitrogen,"
which includes ammonia. The methodology has not been endorsed by the EPA Clean Air Scientific
Advisory Committee which is reviewing these standards.
Agency: EPA
Issue: Spill Prevention, Control and Countermeasures (SPCC) rule
Status: Final regulation issued 20 I0
Discussion: In 2009, EPA finalized regulations that will require any farm with above-ground oil storage capacity of
greater than 1,320 gallons to have secondary containment measures in place; for farms with more than
10,000 gallons of such capacity, such plans must be certified by a professional engineer. This regulation
is over thirty years old and was originally intended for the petroleum industry, although EPA contends
that agriculture has never been exempt. There is no identifiable history of spills from agricultural tanks,
and the agriculture community has repeatedly urged EPA not to extend this regulation to farms and
ranches or, in the alternative, to do so in a way that minimizes burdensome costs (e.g., for farms with
storage capacity of20,000 gallons or more) and to provide a lengthy phase-in period (e.g., 4-5 years) to
educate producers about their responsibilities. Those requests have not been granted and farms are now
faced with spending literally thousands of dollars to undertake spill containment measures that will result
in little to any environmental benefit.

Agency: EPA
Issue: EPA settled a lawsuit with environmental groups to establish a regional Total Maximum Daily Load
(TMDL) for the Chesapeake Bay. The administrator of the EPA is on record indicating her desire to use
the Bay TMDL as a model for the entire nation.
Status: Ongoing
Discussion: The CWA requires that states identify impaired waters and establish Total Maximum Daily Loads
(TMDLs). EPA must approve or disapprove all such TMDLs and, in the event of disapproval, directly
establishes TMDLs. EPA appears to be exceeding its congressional mandate and authority in the law by
pushing states to implement TMDLs as if they are effective caps on economic activity. Congress vested
TMDL implementation with the states in order to balance the attainment of environmental goals with
other important economic and social considerations. The Chesapeake Bay TMDL is unprecedented and
contains far reaching consequences for the entire U.S. EPA's approach effectively ignores limits
Congress prescribed in the CWA and will have the effect of erecting barriers to economic growth, as
well as affecting a secure food supply. The implications are so far reaching that the regulations may well
allow EPA to dictate virtually all economic activity including the ability to build roads, homes and grow
food.
 American
I "" Forest & Paper
ID) "Association

January 10, 2011

Office of the President

The Honorable Darrell Issa, Chairman

Committee on Oversight and Government Reform
U.S. House of Representatives
Washington, DC 20515-6143

Dear Chairman Issa,

The American Forest & Paper Association (AF&PA) appreciates the opportunity to comment
on federal regulations that impact the forest products industry in ways that inhibit economic
growth and jobs.

As you are aware, AF&PA is the national trade association of the forest products industry,
representing pulp, paper, packaging and wood products manufacturers, and forest
landowners. The industry is among the top 10 manufacturing sector employers in 48 states.
The forest products industry is also a leader in sustainability and a foundation for green
jobs. Our industry employs about 900,000 workers in family-wage jobs, leads the way on
recycling and renewable energy, and sustainably uses renewable resources.

Unfortunately, these important contributions are challenged by a wave of regulatory

proposals that cumulatively could cause crippling economic impacts just when our industry
and the national economy are struggling to recover from the recession.

We look forward to working with the Committee, the Administration, and other stakeholders
to address the regulatory challenges in ways that encourage a sustainable future for the
forest products industry and the nation.

Responding to your request for assistance, AF&PA has identified a number of federal
regulations that could negatively affect economic recovery and jobs in our industry and
others.

CLEAN AIR ACT REGULATIONS

EPA is working on more than twenty air rules that could collectively impose $17 billion in
new capital expenditures on the forest products industry alone. The most significant rules
on EPA's 2011 workplan are:

• Boiler MACT: EPA is in the process of setting emission limits for several hazardous
air pollutants (HAPs) from industrial boilers under a court ordered deadline. EPA is
also setting HAP limits for solid waste incinerators and boilers at smaller sites. The
June, 2010 proposed rules would impose over $6 billion in capital costs on the forest
1111 Nineteenth Street, NW, Suite 800 • Washington, DC 20036 • 202463-2"100 Fax: 202463-2785 • www.afandpa.org
America's Forest & Paper People@ -Improving Tomorrow's Environment Today@

1
 products industry and over $20 billion on a wide array of manufacturers. Those costs
put tens of thousands of jobs at risk due to mill closures. EPA could use its legal
discretion under the Clean Air Act to craft a final rule that significantly reduces costs
by targeting emission reductions that produce real benefits.

• Cluster MACT Reopening: EPA finalized Maximum Achievable Control Technology

(MACT) rules for paper mills in 1998 and 2001 but has been petitioned by
environmental groups (ENGOs) to make them more stringent. The Clean Air Act
created MACT as a one-time program, and EPA has met its obligation for paper
mills. If EPA were to re-open the pulp and paper MACT as suggested by ENGOs it
could cost over $4 billion in new capital as more equipment must put on controls.
NOTE: Other sector MACT rules could be re-opened in 2011 that raise similar policy
issues.

• Pulp and Paper Residual Risk Standards: Eight years after a Maximum Achievable
Control Technology (MACT) rule for the pulp and paper industry is promulgated,
EPA must decide whether the health risks that remain ("residual risks") from
hazardous air pollutants (HAPs) are significant enough to warrant further regulation.
EPA is under a court ordered schedule to propose its residual risk determination for
pulp and paper mills by June 15, 2011. Based on precedents in recent proposals,
we are concerned that EPA will set unwarranted, stringent limits for several HAPs
from various process equipment at pulp and paper mills. EPA should find further
regulation is unnecessary since the remaining risks are very small. NOTE: EPA will
be proposing or finalizing several other residual risk rules in 2011 for other industry
sectors that raise similar concerns.

• PM NAAQS: In the fall of 2011 , the five year review cycle for the fine particulates
National Air Ambient Quality Standards (NAAQS) comes due and if tightened could
impose significant new costs for particulate matter (PM), nitrogen oxides (NOx), and
sulfur dioxide (S02)' Once EPA issues a new PM fine standard, states will identify
non-attainment areas and then develop implementation plans to reduce emissions of
PM, NOx and S02. Costs to the forest products industry alone could approach $5
billion in new capital expenditures. The current standard is already very stringent.
Further tightening of an already stringent standard is unwarranted given the scientific
uncertainty.

• Ozone NAAQS: EPA is considering significantly tightening the already tougher 2008
ozone standard two years ahead of schedule. Once EPA issues a new ozone
standard, states will identify non-attainment areas and then develop implementation
plans to reduce emissions of nitrogen oxides (NOx) and volatile organic compounds
(VOCs) - the precursors to ozone. Cost to the forest products industry could
approach $3 billion in new capital expenditures and lead to additional national rules
that control cross-boundary transport of air emissions (so called "Transport Rule II").
According to an APIINAM study, the costs could approach $1 trillion over 10 years to
meet a 60 ppb ozone standard.

1111 Nineteenth Street, NW, Suite 800 • Washington, DC 20036 • 202463·2700 Fax: 202 463·2785 • www.afandpa.org
America's Forest & Paper People@ . Improving Tomorrow's Environment Today@

2
GREENHOUSE GASES

• EPA Greenhouse Gas (GHG) Regulation Under the Clean Air Act: Effective
January 2, 2011, EPA's regulation of GHGs from stationary sources under the
Prevention of Significant Deterioration (PSD) and Title V programs breaks with long
standing precedent for biomass carbon neutrality and treats the combustion of
biomass identicaliy to the combustion of fossil fuels. EPA chose to treat biogenic
emissions the same as emissions from fossil fuei in the Tailoring Rule. Two-thirds of
the energy needs of forest products mills are met through wood biomass residuals.
Counter to Administration objectives, EPA's treatment of biogenic emissions ignores
the renewability of the resource and stymies investmenfin renewable energy.

• EPA Greenhouse Gas Mandatory Reporting Rule: Facilities must report their 2010
GHG emissions beginning April 1, 2011. Unlike other regulations, EPA has not
allowed facilities to propose aiternative methods for calculating emissions or allowed
de minimis emissions levels under which reporting is unnecessary. This inflexibility
makes the rule more expensive to implement than is necessary. EPA has aiso
proposed to make public individual company inputs to GHG emissions calculations
which are traditionally considered confidential business information.

WATER

• Florida Nutrient Standards: Despite the fact that the State of Florida was making
significant progress establishing its own nutrient standards, EPA recently
promulgated extremely stringent numeric nutrient criteria for nutrients (nitrogen and
phosphorous) for certain Florida waters based on a methodology that is not
scientifically defensible. EPA has indicated it views the Florida rule as national
precedent. Stakeholders have estimat.ed compliance with the rule will cost billions of
dollars and will require expenditures for cleaning up waters that are not impaired.

• Analytical Method for Polychlorinated Biphenyls (PCBs). Polychlorinated biphenyls

(PCBs) are a "legacy" pollutant; production of which was banned by Congress and
EPA decades ago. However, PCBs in extremely low levels are ubiquitous in the
environment. EPA has proposed an analytical test method that purports to measure
in the very low range of parts per quadrillion, which is below the national EPA
standard. Once the method is final and dischargers must use it for compliance,
many dischargers will find PCBs in their effluents at levels found in the environment.
This will ultimately lead to permit limits with which compliance will be either
impossible to achieve, or unreasonably expensive.

• Chesapeake Bay Total Maximum Daily Load iTMDl). At the end of 2010, EPA
issued the final TMDL for the Chesapeake Bay. A TMDL is a calculation of the
maximum amount of a pollutant that a water body can assimilate and still maintain
water quality standards. As part of the TMDL process, EPA usurps the states'
traditional role of TMDL implementation by threatening heavy-handed measures if
certain clean up milestones are not met, such as "backstop" actions that would
require forest products facilities to meet water discharge levels for certain pollutants
that are beyond the limits of existing technology and therefore likely unachievable.
1111 Nineteenth Street, NW. Suite 800' Washington, DC 20036' 202463-2700 Fax: 202463-2785' www.afandpa.org
America's Foresl & Paper People@ -Improving Tomorrow's Environment Today@

3
WASTE

• Coal Combustion Residuals. EPA has proposed to regulate coal combustion

residuals from the electric utility industry as either hazardous or non-hazardous solid
waste. Although the forest products industry would be exempt under the current
proposal, states have indicated they would not differentiate between utility and non-
utility residuals. EPA could regulate these materials under the non-hazardous waste
provisions and modify the proposal to make those requirements consistent with the
degree of harm posed by such residuals. Further, strict regulation under the
hazardous waste regulations is not necessary to address the risks posed by coal
combustion residuals. The forest products industry, and other industries, will pay
increased electricity costs passed on by utilities, if EPA chooses the hazardous
waste option.

WORKPLACE HEALTH & SAFETY

• Combustible Dust. OSHA issued an advance notice of proposed rulemaking on

combustible dust in October, 2009. Complying with the new rule could potentially
cost the forest products industry and numerous other industries many millions of
dollars in capital expenditures and higher operating costs without materially
improving worker safety. To be most cost-effective, AF&PA believes that
combustible dust regulations should primarily rely on performance-based
approaches rather than proscriptive standards and that engineering controls should
only be required for new facilities or if major renovations are made to eXisting
facilities.

• Noise Enforcement. OSHA issued a notice on October 19, 2010, indicating that it
plans to change its official interpretation of workplace noise exposure standards.
Until now, OSHA allowed the use of "personal protective equipmenf' such as ear
plugs and ear muffs as the first means of reducing workplace noise exposure to
acceptable levels. Now, the Agency is reinterpreting an existing rule to say that
companies will need to use administrative changes and engineering controls as a
first line of defense. According to the notice, these changes must be adopted
regardless of the costs unless an employer can prove that making such changes will
"put them out of business" or severely threaten the com'pany's "viability." AF&PA
believes that OSHA's new enforcement policy disregards costs and is at odds with
the common-sense hearing protection approaches that have been used successfully
for decades.

FIBER SUPPLY

• Endangered Species Act: The Fish & Wildlife Service (FWS) is placing overly
burdensome requirements upon potential habitat for listed species. For instance; the
Spotted Owl recovery plan is restricting activity on lands that may be suitable habitat
for the Spotted Owl, irrespective of whether the Owl is present in that region. The
new Draft Plan rejects the current strategy which is based on the assessment that
the owl can be recovered by establishing a network of Late Successional Reserves
(LSR's) on federal lands. No supporting scientific analysis was given, and the FWS
1111 Nineteenth Streel, NW, Suite 800 • Washington, DC 20036 • 202463-2700 Fax: 202463-2785 • www.afandpa.org
America's Forest & Paper People@ -Improving Tomorrow's Environment Today@

4
 is calling for the protection of all owl sites and all high quality spotted owl habitat on
all lands regardless of ownership. This Draft Plan has the potential to shutter mills
and destroy jobs as fiber supply from both federal and private lands is constrained.

• NEPA CEs: Management of Forest SerVice lands where there aren't significant
environmental impacts could be achieved in a more cost effective and timely manner
if Categorical Exclusions (CEs) permissible under the National Environmental Policy
Act (NEPA) were used for forest health maintenance projects such as beetle kill and
wildfire prevention. Increasing the use of CEs would allow the Forest Service to
offer additional timber without an increase in appropriated dollars, thereby helping
assure an adequate supply of fiber for our mills.

In most cases identified above, significant capital investment will be required for equipment
needed to meet the regulation that would otherwise go to growth in manufacturing capacity
and the attendant production of jobs. The suite of potential clean air regulations alone could
prevent any new expansion or upgrade of existing forest products industry facilities in the
U.S.

Again, thank you for the chance to provide input on regulations impacting the U.S. forest
products industry. We are happy to provide additional information to you and your staff and
look forward to working with the Committee.

Sincerely,

Donna Harman
President & Chief Executive Officer

Cc: The Honorable Elijah Cummings, Ranking Member

1111 Nineteenth Street, NW, Suite 800 • Washington, DC 20036 • 202 463··2700 Fax: 202463-2785 • www.afandpa.org
America's Forest & Paper People@ -Improving Tomorrow's EnvironmelJl Today@

5
Adh American Gas Association DAVID N. PARKER
President and CEO

December 29, 20 I0

Chairman-Elect Dan'ell E. Issa

Committee on Oversight and Government Reform
2157 Rayburn House Office Building
Washiugton, DC 20515-6143

Dear Chairman-Elect Issa:

The American Gas Association (AGA) appreciates your concem about the impact of existing and
proposed regulations on the economy and jobs. You have raised serious questions about the volume and
impacts of recent regulatory activity, In response to yom' request, however, we would like to work with
our members in the New Year to evaluate whether there are regulations that have negatively impacted job
growth at natural gas distribution utilities. We have generally found that the Environmental Protection
Agency (EPA) and other agencies have been willing to work with us to resolve the largely teclmical
problems we have identificd so that the rules achieve public policy goals without imposing unnecessary
burdens on our members,

AGA supports sensible, cost-effective regulations that promote health, safety and environmental
protection in a manner that also fosters economic growth and prosperity. We believe this can be
accomplished when an agency reaches out to stakeholders early in the process to learn about the affected
industry and how a regulatory program that is workable and effective might be designed. That is
probably the most important suggestion we can ma!{e to improve the regulatory process, Congress can
help in this regard by allowing EPA and other agencies sufficient time to develop rules with less haste and
more time for obtainihg input from experts in the rrffected industry before the agency drafts a proposed
rule.

For example, Congress gave EPA just nine months to draft the mandatory greenhouse gas reporting rules.
.Given the hasty process, it is not sm:jJlising that there were several unintended problems in the reporting
rules for natm'al gas utilities that could have imposed tremendous costs on home and business customers,
without any real environmental benefit. To their credit, EPA responded to our comments and revised thc
mle. EPA is similarly working to resolve unintended problems in the recent "Subpart W" greenhouse gas
reporting rule for the natrn-al gas industry. Given that this rule becomes effective in 2011, EPA and the
industry must work out these issues "on the fly" through interpretive Q&A guidance, technical
corrections and further rules changes - at the same time that the industry must set up programs to comply
with the rule in 2011.

We look forward to working with you and your staff in the 1121h Congress to flUther this discussion.

Sincerely, \

~C:AVtJt~1<Vl/
David N, Parker

Cc: Chairman Edolphus Towns

400 North Capitol St., NW, WaShington, DC 20001 • Teiophone 202-824-7111, Fax 202-824-7092 • Web Site http://www.aga.org
a
1140 Connecticut Avenue, NW
American Suite 705
Washington, DC 20036
Iron and Steel Ptlone 202.452.7146
Institute Fax 202.463.6573
E-mail tgibson@steel.org

www.steel,org

Thomas J. Gibson
President and Chief Executive Officer

January 10,2011

The Honorable Darrell Issa, Chairman

House Committee on Oversight and Government Reform
2157 Raybum House Office Building
Washington, DC 20515

Dear Chairman Issa:

On behalf of the American Iron and Steel Institute (AISI), I am pleased to respond to
your inquiry regarding existing and proposed regulations that negatively impact the
economy and jobs. AISI is the trade association representing U.S. and North American
steelmaking companies. We are comprised of 24 member companies, including
integrated and electric arc furnace steelmakers, and 140 associate and affiliate members
who are suppliers to or customers of the steel industry. AISI's member companies
represent approximately 80 percent of both U.S. and North American steel capacity.

Steel and other manufacturing industries are the backbone of our economy. A strong
manufacturing sector creates significant benefits for society, including good-paying jobs,
investment in research and development, critical materials for our national defense, and
high-value exports. Both the Enviromnental Protection Agency (EPA) and the
Occupational Health and Safety Administration (OSHA) have in place, and have
proposed, multiple new regulations that will create competitive disadvantages to U.S.
industry and endanger manufacturing jobs. AISI appreciates this opportunity to comment
on some of the most problematic regulations to the steel industry.

AlSI has long identified environmental stewardship and commitment to sustainability as

pmt of our industry's strategic plan and our vision for the future. As a result of tins
commitment, we are aggressively seeking ways to reduce oUr environmental footprint
even while producing the advanced and highly recyclable steel that our economy
demands. The industry has reduced its energy intensity by 30% since 1990, while
reducing its greenhouse gas (GHG) emissions by 35% over the same time period. In fact,
the American steel sector is recognized as having the steepest decline of total air
emissions muong nine manufacturing sectors studied in EPA's 2008 Sector Performance
Report.

Over the past two years, the EPA has undertaken an extensive regulatory agenda,
proposing a substantial number of new regulatory initiatives in a number of program

Representing steel producers

in Canada, Mexico and the United States
 The Honorable Darrell Issa
January 10, 2011
Page 2

areas, including air, water, toxic chemicals, and solid waste. AISI cUlTently interacts with
the EPA on more than 40 environmental rules that may have significant impacts on steel
manufacturers. Many of these new regulations will create pemutting obstacles for
investment in new and renovated facilities and impose significant additional costs on
domestic steel producers as well as other energy intensive industries. Even though the
steel industry has a history of demonstrated leadership in meeting and exceeding
environmental requirements, the simultaneous development of multiple new
environmental regulatory proposals across several progranl areas at the federal and state
levels have the potential to limit continued industry advancement, while endangering
critical manufacturing jobs. Below are some of the more significant regulatory issues
that threaten the restoration or preservation of manufacturing jobs.

Greenhouse Gas Regulations

EPA is moving forward this month with economically-damaging actions to regulate GHG
en'lissions from most steel producing facilities. EPA's regulation of GHG emissions
under the Clean Air Act will be very costly to the domestic steel industry, prevent it from
maldng new investments that would allow the industry to grow and add jobs, and
underinine efforts at promoting economic recovery. The unprecedented speed of EPA's
effOlis to regulate GHGs under the Clean Air Act t1ueatens nationwide permitting
gridlock and serious economic disruption exactly when our economy is struggling to
regain its balance. Regulating GHG emissions under the Clean Air Act will create
disincentives to invest, potential for new project construction delay, and increased
litigation risk.

Climate change is a global problem that can only be addressed effectively on a global
basis. EPA's proposal to regulate GHGs from stationary sources under the Clean Air Act
will not address the global dimension of tlle climate change issue, but will place
significant new burdens on steel manufacturers in the United States. This will
unilaterally raise operating costs, which will place our American steel manufactmers at a
competitive disadvantage, while allowing overseas competitors to continue to increase
their emissions. The result would be limited environmental gain, but significant
economic challenges, including further elimination of valuable American manufactming
. jobs, especially for energy-intensive trade-sensitive industries.

In December, EPA released two documents intended to guide state regulators and
industry in the implementation and compliance with these regulations: the Prevention of
Significant Deterioration (PSD) and Title V Permitting Guidance for GreenllOuse Gases
(Guidance Document) and Available and Emerging Technologies for Reducing
GreenllOuse Gas Emissions fi'om the Iron and Steel Industry (Teclmical Document).
Both of these docwnents have only heightened industry's concems willi the regulations.

These EPA documents did not reflect the true status of existing and emerging
technologies for the industry. In particular, due to dramatic reductions in energy usage in
recent years, iron and steel plants have lin'lited opportunities for incremental energy
The Honorable Darrell Issa
January 10,2011
Page 3

efficiency improvements until new breakthrough technologies are developed. The

Technical Document states that the iron and steel industly can further reduce energy use
by 27% for integrated mills and 53% for electric arc furnaces plants. These estimates are
extremely unrealistic. This is primarily because several of the technologies identified in
the Technical Document have already been adopted by the industry. For example, many
integrated facilities already control coal moisture, utilize pulverized coal injection, and
have improved blast furnace control systems. Similarly, many electric arc furnaces
commonly employ foamy slag practices, oxy-fuel burners, insulation of furnaces, and
walking bcam furnaccs. Thus most of the projected gains in efficiency have already been
achieved by the steel industty. Also, as a general matter, most steel companies, whether
integrated or electric arc furnace-based, employ sophisticated preventive maintenance
programs and energy monitoring and management systems.

EPA's efforts to broaden PSD permitting to include GHGs and refocus Best Available
Control Technology (BACT) standards on energy efficiency present not only significant
challenges (as noted above), but also an opporhmity. Through this process, EPA has the
opporhmity to address some of those challenges by streamlining the PSD permitting and
BACT process. Given the agency's acknowledged interest in advancing energy
efficiency projects, it should seize this opportunity to shape not only the BACT process
itself, but also the PSD threshold applicability determination process to avoid ensnaring
energy efficiency projects that have demonstrated environmental benefits.

Boiler MACT Proposed Rules

EPA's set of proposed rules for industrial boiler Maximum Achievable Control
Technology (Boiler MACT) would not only have an adverse impact on the domestic steel
industty, but would create unintended environmental harm. These EPA proposed lUles
are for emissions standards for: (I) area source industt'ial, commercial and institutional
boilers (Area Source Boiler Rule); (2) mqior source industrial, commercial, and
institutional boilers (Major Source Boiler Rille) and; (3) commercial and industrial solid
waste incineration units (CISWI Rule).

Currently, iron and steel manufacturers use byproduct gases from coke ovens and blast
fumaces to fuel plant boilers that produce steam, electricity, and other thermal energy.
Utilization of the process gases as a fuel allows the recovery of energy otherwise wasted,
and offsets consumption of fossil fuels, in particular natural gas. This entire practice
increases the overall energy efficiency of steel production facilities, reduces GHG,
criteria and hazro'dous air pollutant emissions, and is a vital tool for promoting our
nation's energy independence and global competitiveness,

UnfOliunately, the benefits of steel industry process gas recovery would be lost as a result
of tile manner in which EPA's proposed Boiler MACT rules would treat byproduct gases
at steel plants. If steel industry boilers are subject to the proposed "Gas 2" standards, the
industry will be incentivized to flare off the process gases to meet environmental and
safety requirements and use more natural gas to lUn the boilers that are needed. EPA
The Honorable DalTell Issa
January 10, 2011
Page 4

estimates that it will cost companies $600 million to place controls on the approximately
75 coke oven gas fired boilers that would be subject to the proposed rules. In the
altemative, companies could flare the coke gas and use natural gas as a substitute which
would cost $300 million. Flar'ing process gases and using more natural gas will result in
increased steel industry GHG and hazardous air pollutant emissions, as well as more
energy consumption. These undesirable energy and environrtlental results lUn counter to
the desired effect of the Boiler MACT proposed rules. AISI presented this issue to EPA
and provided some workable alternatives, and we are awaiting EPA's response.

It should be noted that, in response to comments and concems raised by both industry and
Members of Congress, EPA recently requested an extension of the cOUit-ordered deadline
for implementing these new Boiler MACT lUles - from Januar'y 16, 2011 to April 13,
2012 - in order to allow the agency to reconsider the proposed rules in light of the
comments received. AISI, along with other industIy associations, has filed a response
with the court in SUppOit of EPA's request for delay in the deadline. We agree with EPA
that the substantial additional time is necessary to adequately review the thousands of
substantive comments that have been filed on the proposed lUles and to revise the
proposals accordingly. The deadline extension will provide EPA sufficient time to
conclude the process with rational and defensible lUles.

National Ambient Air Quality Standards (NAAQS)

The Clean Air Act requires EPA to set and periodically review NAAQS for six especially
widespread pollutants, including ozone and sulfur oxides. The EPA is in various stages
of reviewing all six standards, which impacts the ability of manufacturers to plan futme
operations and investments. In issuing a new sulfur dioxide standard, EPA outlined a
new approach for designating nonattainment areas tlmt will rely on modeling, which is a
significant shift in policy and is inconsistent with the Clean Air Act. The sulfur dioxide
standard is now being challenged by industry and several states in federal court and is
subject to petitions to stay and reconsider the standard. With respect to the ozone
standard, EPA is slated to issue a final standard in 2011. The Manufacturers Alliance
recently released a study showing that setting a new 8-hour ozone ambient air standard at
tlle bottom of the range proposed by EPA (60 ppb) would cost over $1 trillion per year
between 2020 and 2030 and decrease the GDP by more than 5% and lead to 7.3 million
job losses by 2020: .

Economic impact due to the NAAQS for sulfur dioxide and nitI'ogen dioxide and related
EPA implementation and modeling guidance will be significant. The flawed modeling
tools and guidance policy will lead to more portions of the country being designated
"unclassifiable" or "nonattaiJ1111ent." In l1lauy cases air permits for new constIuction or
facility modernization projects will be stalled or projects cancelled because of these
modeling tools and guidance policy, ultimately limiting economic growth and job
creation. The modeling tool is not suited to simulate atmospheric chemical reactions, nor
is it capable of accurate prediction of I-hour concentrations. In Sunl, the tools simply are
The Honorable DalTell Issa
January 10, 2011
Page 5

not capable of doing the job accurately and will be a significant impedllnent to economic
revival.

We believe EPA should not require states to make their sulfur dioxide §107(d)
designations using emission modeling. EPA should also delay implementation of the
NAAQS for sulfur dioxide and nitrogen dioxide until accurate modeling tools are
developed. Other NAAQS standards should not be promulgated until there is adequate
public discourse, and until scientifically valid modeling tools for each pollutant are
detennined to be accmate for the new short tenn standard and implementation guidance
developed.

. Water Issue Regulations

AISI tracks numerous water quality rules that are in various stages of development
including an impending EPA proposal to regulate cooling water intake structures for the
purpose of protecting aquatic life. The rule, previously promulgated but remanded by
federal court order, would have required companies to make significant investments to
redesign or replace existing intalce structures. AISI is working with a multi-industry
group to interact with EPA to provide infonnation that hopefully will lead to a more
reasonable rule based on application of site-specific best professional judgment as
opposed to stringent unifonn standards.

OSHA

AISI re~ognizes that it is a policy priority of the federal government to ensure safety and
health at industrial workplaces, a critical goal shared by the steel industry. AISI members
place the highest priority on occupational health and safety (OHS) matters because it is
imperative that their valnable workers remain safe and healthy. They have made
tsubstantial efforts to decrease the number and frequency of workplace incidents and
continue to work through AISI to share infonnation and best practices to meet their
shared goal of improving occnpational safety and health.

The Department of Labor and OSHA leadership have proposed a multifaceted regulatOlY
agenda that· includes several items of interest to the domestic steel industry. Our
experience has demonstrated that cooperative effOits among company management,
employees, and government can help maximize safety and health. However, regulations
that are not promUlgated with real transparency and stakeholder involvement or are not
based on thorongh cost-benefit analysis may misdirect priorities and create unnecessary
costs for employers that prevent optimum workplace safety and health benefits from
being realized. Furthennore, OSHA's increased enforcement measures can be
counterproductive to achieving optimal benefits. Regulations should be directed to those
hazards that address shared health and safety goals of the industry, employees, and
OSHA, and not create unnecessary costs that prevent these benefits from being realized.
The Honorable Darrell Issa
JanuaJy 10, 2011
Page 6

Noise Policy Reinterpretation

OSHA has proposed to change its enforcement policy on noise limitations to require use
of feasible engineering controls before pelliitting use of personal protective equipment.
The proposed chaJIge would require every steel facility to install economically "feasible"
engineering and administrative controls to reduce employee noise exposure before
relying on hearing protectors, a reversal of decades of agency precedent and policy.
OSHA is defining "feasible" as "capable of being done without threatening the viability
of the company." Under the proposed OSHA rule, the employer would cany the burden
of proof to demonstrate the economic infeasibility of controls. This is a shift in the
burden of proof from previous OSHA regulations adopted pursuant to Section 6(a) of the
Occupational Safety aJId Health Act of 1970. For capital intensive companies aJId
industries that need capital for modernization to remain globally competitive and that are
under continuous pressure to increase productivity, forcing the retrofit of engineering
controls aJIdlor decreasing productivity by requiring the use of additional person-hours
through administrative controls, may threaten our global competitiveness.

Recording Musculoskeletal Disorders (MSDs)

OSHA has proposed a rule requiring employers to record musculoskeletal disorder

(MSD) injuries separately from other injuries and illnesses on their OSHA 300 fOlliS.
The steel industry, as well as others in the business community, is concerned that OSHA
may use the MSD data to issue general duty clause violations in the absence of a national.
ergonomics staJIdard. Using this data to initiate a new mlemaking for an ergonomics
standaJ'd that is substaJItially siInilar to the original would contravene the Congress'
invalidation of the original ergonomics staJIdard purSUaJIt to the Congressional Review
Act.

Combustible Dust

OSHA continues to hold stakeholder meetings in advance of proposing regulations on

workplace combustible dust management. Because of the nature of some steelmaking
processes, these regulations have the potential to disrupt existing operations aJId force
AISI members to adopt costly and unnecessaJY engineering controls. As such, we have
proposed to OSHA that it limit the scope of its anticipated combustible dust rule to
materials that are likely to explode when ignited and to consider the cost and economic
feasibility of relocating existing dust collection equipment outside building structures.
Doing so will result in an OSHA proposal that appropriately addresses substaJ1ces of
concern without creating a misrouted aJId costly regulatory burden on the steel industry.

Injury and Illness Prevention Program

OSHA has proposed requiring that every employer adopt a uniform federal injury aJId
illness prevention program (I2P2) to "reduce injuries aJld illnesses. However, the agency
has also suggested that adoption of the 12P2 will allow it to support alleged violations for
The Honorable Danell Issa
Janmuy 10, 2011
Page?

conditions that are cunently not subject to any specific OSHA standard or rule. Based on
current injmy and illness data, there is no evidence that state plans with such a rule have
actually improved their injmy and illness rates compared to states that have not adopted
such a rule. AlSI members have had effective injury illness programs for decades and are
concemed that a uniform federal standard would adversely affect existing programs.
They are also concemed that OSHA will use the 12P2 rule to "double dip" when
proposing citations and fines for hazards both covered and not covered by a specific
OSHA standard.

Permissible Exposure Limit (PEL) Update Process

OSHA has invited the public to submit candidate chemicals for consideration in
expedited PEL update process. It also announced that its standards and guidance staff are
considering various approaches to such an update. AISI asked OSHA to hold open
tripartite meetings to develop such a process in the agency's initial stakeholder meeting.
But, to date, the agency has published only a listing of chemicals but not the
organizations or individuals who made the specific recommendations. Updating PELs
will affect every steel manufacturer as well as most of the manufacturing sector. As
OSHA moves forward, the PEL update is clearly a process that must be transparent and
involve the major affected stakeholders, viz., employers, employees and the govenunent.

On-Site Consultation Program

OSHA has published a notice of proposed rulemaking for the agency's on-site
consultation program that will give the agency greater flexibility to inspect worksites
undergoing an on-site consultation visit or participating in the Safety and Health
Achievement Recognition Program (SHARP). OSHA also seeks to initiate an
enforcement inspection at a worksite when allegations of potential workplace hazards or
violations are received from a state or local govenunent, the media, and "other" somces.
Cmrent policy pennits OSHA to terminate on-site consultation visits and to inspect
SHARP sites only when an imminent danger exists, a fatality or catastrophe occms, or
pmsuant to a worker complaint. OSHA is also proposing to shorten the initial exemption
from programmed inspections for employers in the SHARP to one year from two years.
TIlis proposal is of concern to the steel industry, as it may discourage employers from
participating in tins successful program and, therefore, have a negative effect on
workplace safety.

* * *
Thank you again for soliciting the domestic steel industry's input on the critical issue of
how regulations may impact the economy and jobs. As detailed above, there are a
number of regulations from both EPA and OSHA that, if not implemented conectly and
appropriately, could limit the steel industry's global competitiveness, investrnent, and job
growth in coming years.
The Honorable Darrell Issa
January 10,2011
Page 8

AISI believes that the Congress should conduct a comprehensive oversight program of
environmental and occupational health and safety regulatory development activities and
initiatives. In particular, such a program should examine the impact of EPA and OSHA
regulatory agenda on jobs and industrial competitiveness. Included in such an effort
should be greater emphasis on cost/benefit analysis of proposed regulations at the EPA
and OSHA, as well as greater transparency and industry access to the regulatory
development process at the agencies.

.AISI looks forward to working with you and the House Committee on Oversight and
Government Reform on these and other issues in the 112'h Congress.

Sincerely,

~~ JJJrw,..
Thomas J. Gibson
American Land Title Association

Our concerns surround Dodd-Frank implementation, especially regulations under RESPA; FTC's
regulation of the "Red Flags" rule; and the 1099 reporting requirement under the healthcare law.

Continuing Uncertaintv Surrounding Dodd-Frank Implementation

The Dodd-Frank Act was signed into law on July 21, 2010, as P.L. 111-203. Despite being over 2,000
pages estimates are that over three-fourths of the provisions of the Act need some regulatory action
before they can be implemented. The uncertainty created by these over 200 rulemakings make it difficult
to effectively operate in the current market place.

Other organizations can discuss the impact rulemakings related to the Truth in Lending Act and other
mortgage provisions has on the mortgage origination process, our comments focus on effect the Act's
provisions related to the Real Estate Settlement and Procedures Act. This Acts provisions call into three
categories (1) the Act's combined mortgage disclosure requirements, (2) the shifting of RESPA regulation
over to the Consumer Financial Protection Bureau (CFPB) and (3) the Act's new penalty provisions
related to RESPA.

You may be aware that on November 17, 2008, the United States Department of Housing and Urban
Development (HUD) published its "Rule To Simplify and ImProve the Process of Obtaining Mortgages and
Reduce Consumer Settlement Costs" (the "RESPA Rule") 1 • This rule presented sWeeping changes and
new concepts to RESPA compliance and caused implementation concerns for all areas of the real estate
financing and settlement process. Over the course of 2009 HUD staff made great efforts to address the
myriad of concerns presented by stakeholders. The result was that many "workarounds" by lenders and
other settlement service providers were necessary to fill the void left by the rule. Unfortunately, such
actions resulted in a lack of consistency among processes and compliance. While HUD recognized the
need for clarification, regulatory guidance has not been forthcoming. Currently, the industry has just
begun to get comfortable with the requirements of the new RESPA rule.

Throughout 2009 and 2010, HUD and ALTA spent a significant amounts of time and resources to educate
and clarify the provisions of the RESPA Rule for industry stakeholders and our members.

Despite all these efforts and costs, the Act included section 1302(f) requiring the CFBP requiring new
"rules and model disclosures that combine the disclosures required under the Truth in Lending Act and
sections 4 and 5 of the Real Estate Settlement Procedures Act of 1974, into a single, integrated
disclosure for mortgage loan transactions." Thus the Act requires a new RESPA regulation only one year
after the current regulations when into effect.

While the combination of these forms into a single simplified disclosure may be a worthy endeavor, we
are concerned that the frequent changes to regulation will caused serious unintended consequences for
consumers and the industry. These frequent changes can have a serious impact on a consumers
understanding of one of the more complicated financial transactions in their lives. Further, our members
spent significant amounts of time and money in training, education and technological implementation of
the RESPA Rule. Upon implementation of a new combined form, virtually all of that time and money will
be rendered worthless. Care should be taken to minimize the frequency of such changes such that a
certain amount of familiarity with the process can be achieved.

The Act also shifts regulation for RESPA and other consumer financial laws to the new CFPB. While
housing regulation of these laws under a single roof may have some positive benefits, early indications
are that there is little transition of personnel from HUD to the CFPB. This loss of institutional memory and
practice could create gaps in RESPA regulation and implementation.
Section 1055 outlines new reliefs and penalties available to courts and the CFPB for a violation of a
consumer financial law, including RESPA. These penalties include steep fines and drastic reliefs such as
rescission or reformation of contracts. Despite promulgating these serious penalties, the Act fails to offer
guidance on when these penalties are appropriate. The potential for a disproportionate penalty for a
RESPA violation could drastically alter the mortgage and housing markets. If a minute RESPA violation
couid lead to a rescission of the entire transaction then real estate transactions couid be delayed costing
consumers significant monies.

Insufficient Guidance on the Federal Trade Commission's Red Flags Rule

In November 2007, the FTC proposed its "Red Flags. Rule," requiring that certain entities deveiop and
implement written identity theft prevention and detection programs to protect consumers from identity
theft. The Red Flags Rule requires "creditors" and "financial institutions" with covered accounts to
implement programs to identify, detect, and respond to the warning signs, or "red flags," that could
indicate identity theft. The Red Flags Rule did not specifically state whether escrow accounts maintained
by title agents to facilitate settlement were subject to the Red Flags requirements.

Despite delaying the enforcement of this rule until January 1, 2011 the FTC has remained intentionally
vague and has refused to give specific guidance about what business are covered and what programs
are sufficient to meet the burdens of this rule. Although there are no criminal penalties for failing to
comply with the Red Flags Rule, financial institutions or creditors that violate the Rule may be subject to
civil monetary penalties of up to $3,500 per violation. Further, because identity theft threats change,
programs must describe how they will update it t6 consider new risks and trends.

The result is the FTC has produced a complicated regulation that requires industry to implement costly
and ever changing compliance practices.

Overly Burdensome 1099 Requirements

Section 9006 of the Patient Protection and Affordable Care Act requires that all businesses file a 1099
form with the Internal Revenue Service for each vendor for whom they pay $600 or more per year. This
overly burdensome and unnecessary provision will be particularly onerous on the local small business
that make up the land title industry. These business owners will need to institute new record-keeping
methods related to payments to vendors and hire extra lawyers and accountants to comply with the
. requirement, inhibiting their ability to increase hiring when the economy improves.

Winslow Sargeant, Chief Counsei for Advocacy U.S. Small Business Administration highlight the burdens
this requirement places on small businesses during his testimony before the U.S. Senate Committee on
Small Business and Entrepreneurship. Sargeant stated the, "The information reported on a Form 1099,
such as the Tax Identification Number (TIN) of a vendor, is different from the information usually
maintained and tracked by businesses. As a result, all-new internal controls will need to be implemented
to determine if the expanded Form 1099 requirement is triggered and this information will need to be
saved. Most small businesses do not have specific personnel available to create and manage such a
system, and the costs of compliance will be daunting." He concluded that by urging Congress to repeal
this onerous obligation. We echo these concerns.
 API input on proposed BOEMRE guidance document

API is pleased to provide the following comments to BOEMRE leadership in an effort to help develop a guidance
document that will provide as much clarity as possible. across all of the outstanding issues related to offshore
operations and permitting. One overarching issue that continues to puzzle the industry is one not included in
the list of items to be addressed. The question concerns the decision making process within BOEMRE. Industry
continues to struggle with inconsistent guidance from various BOEMRE offices and personnel, and that begs the
question as to what level of BOEMRE approval is required (e.g. Regional or Headquarters) for various plans and
permits. Any clarity that can be provided on this issue would be appreciated.

BOEMRE provided the following list of items that will be addressed in the guidance document. API comments
are provided below each item:

• Interim Safety Rule

The comment period for the interim final rule remains open until December 13, 2010. We are still reviewing
the rule and preparing comments for submittal as part of the administrative comment period process.

Changes to API RP language

However, we wish to highlight a particular area of concern presented by the Interim Safety Rule,
namely, the impact and unintended consequences of changing the substantive meaning of the API
Recommended Practices ("RP's) incorporated by reference by converting all of the "should's" to
"must's." Making this change will serve to create contradictions and eliminate options effective for
addressing diverse situations. There are unintended consequences associated with changing the
meaning of the RPs from "should" recommendations to "must dos".

Clarification is needed on what is actually intended and what will be required. Operators need to be
able to use engineering judgment to suitably and safely address particular circumstances presented by a
certain proposed activity. Changing the actual substantive meaning ofthe RP's by a sweeping
conversion of all of the "should's" to "must's" without due consideration and evaluation and regardless
of circumstances presented is not prudent and poses a significant problem.

Wa ivers/Departures
What is the BOEMRE's position on waivers? Will the BOEMRE grant waivers for situations where full
compliance with the new requirements would create a less safe situation? Also, when considering the
discussion above on changing language in RPs, the number of departure requests is potentially huge,
and the BOEMRE should prepare for the impact on resources that the likely requests for authorized
departures will impose on its ability to review and process permit applications.

Training
Please provide any guidance on additional expectations (above the current requirements) in the area
of well control training.

• NTL-lO Compliance - corporate compliance statements and subsea containment

In general, we feel that the requirements found in this NTL, to demonstrate access to subsea containment
resources and to provide a statement of compliance covering a broad breadth of regulations, constitute
substantive new requirements which should be subject to the established rulemaking process. Specific
areas where we request additional clarity are as follows:
 Compliance Statement
It is problematic to require a statement of compliance with a rule-the Interim Safety Rule-that is still
subject to a comment period. Please provide guidance on how companies should respond to a request
for compliance to a rule that has not been finalized?

Response Requirements
The NTL states that the "BOEMRE will be evaluating whether each operator has submitted adequate
information demonstrating that it has access to and can deploy containment resources that would be
adequate to promptly respond to a blowout or other loss of well control," but it does not identify what
"adequate" is.
o Will the BOEMRE clarify the standards by which an acceptable oil spill response plan will be
judged?
o What are the required operational and Source Control Team personnel required to comply
with regarding the NTL?

Near Term Capabilities

o Can operators take into account their total response capability which includes both subsea
containment and surface cleanup capabilities?
o. How will BOEM treat subsea containment equipment that may need to be disconnected during
storms?
o Please confirm that subsea containment can be covered by OSRP as long as WCD is lower than
OSRPrate.

Continued Compliance
One concern that we have is that operators not only must comply with current regulations, but may also
need to be in compliance with as yet unknown regulatory changes. NTL No. 2010-NlO requires that a
statement of compliance be submitted with each application for a well permit (APD).
o What must an operator certify with respect to subsea containment compliance?
o Will an operator be required to be in compliance with a change made to a regulation or an
NTL released after approval of the APD?
o Will an operator be required to be in compliance with a change made to a regulation or an
NTL released after spud of the well?
o Clarification on when compliance statements are required - submitted with initial APDs and
APMs rather than each permit revision, modification or deviation to permit made as needed
during ongoing operations.

• Inspections
APD approvai
Although inspections are not legally required prior to APD approvals being granted, as confirmed by
recent legal challenge (see ENSCO vs. Salazar), in fact, approvals are being delayed due to inspections
being mandated. We can understand and respect the desire to conduct inspections, but when due to
weather or other concerns the inspections are delayed, this should not impact the approval process.
One approach to address this concern would be to institute a nominal time period during which any
inspections would need to occur. Please provide any additional ideas on ways to make this process
more efficient.
 BOP testing
While we have no issue with the requirement that BOEMRE personnel witness BOP inspection and
testing, potential delays are a concern given the costs associated with deepwater operations.
o Will companies be required to hold up drilling operations to allow BOEMRE personnel to
witness BOP inspections and other work?
o How does the BOEMRE suggest operators minimize the amount of time associated with
waiting on BOEMRE personnel to arrive at the rig? For example, if an operator can guarantee
that the BOP will be available for inspection on a certain date; will the BOEMRE guarantee
that inspection personnel will be available on that date?

Inspections during ongoing operations

o How will inspectors carry out inspections of ongoing drilling and completion operations
without distracting from safe operations?

• NTL-06 and WCD Calculations

Worst Case Discharge
Industry needs clarity on a "consistent" methodology to calculate the WCD. Currently the BOEMRE's
guidance on worst case discharge calculation is prescriptive and resource intensive to both calculate
(operator) and review (BOEMRE). One company reports that the effort associated with the calculation
and documentation of the worst case discharge (WCD) for BOEMRE review has averaged 170 man hours
per document as compared to the average burden hours per respondent of 15 hours identified in NTL
No. 201O-N06.

Alternative calculation methods

We believe the approach can be simplified while maintaining the intent of NTL No. 2010-N06. A number
of alternative methods have been proposed including a tiered approach and a standard methodology
presented by the Society of Petroleum Engineers (SPE):
o Is the BOEMRE open to considering alternate methodologies, and if so, how can Industry
submit suggestions for consideration?
o Please provide any guidance on why a tiered approach is or is not acceptable.
o Please answer whether or not the SPE guidance is the "approved" methodology by BOEMRE?
If it is not, what methodology should be utilized?
o Please provide guidance on what method BOEMRE is using to determine WCD.

We request greater transparency in the BOEMRE's process, data inputs and output values associated
with the calculation of WCD rates. If the goal is to assure that a reasonable WCD rate is estimated for
each well to be drilled in the GoM, we do not understand the BOEMRE's reluctance to share their
methodology, inputs and results with operators.

Process improvements
Operators appear to have to call Plan Administrators in the BOEMRE to determine if an NTL No. 2010-
N06 document has or. has not been approved instead of receiving a notice per 30 CFR 250.233. Could
the BOEMRE confirm how it is informing operators of the status of their WCD calculations?

Sidetracks and other low-risk activities

Due to the low risk nature of the activities, BOEMRE exempted side-tracks, well abandonments, well
completions, weli work-overs, relief wells, and injector wells from the enhanced requirements of NTL
 No. 2010-N06 in both the shelf and deepwater. Our understanding ofthe BOEMRE's rationale was that
these excluded well and drilling operations targeting known reservoirs, which have already been
penetrated and evaluated, and thus are considered low risk. Hence, NTL No. 2010-N06 requirements
were not to be triggered. Also, guidance provided in the. NTL No.2010-N06 FAQs expressly excluded
activities for which BOEM approved an APD prior to June 18, 2010. Is it BOEMREs intent to exclude low
risk operotions in/from existing well bores, ond furthermore not retrooctively require NTL-06
complionce for such operotions in permits opproved before June 18, 2010?

• Oil Spill Response Plans

Requirements for Approvals
o Is the OSRP opprovol review incorporoting 011 available tools, technologies, and practices
addressing intervention and recovery, Including, but not limited to, cap and collect, cap and
contain, mechanical recovery, burning, dispersants (including subsea), and surveillance?
o What does the BOEMRE view as the primary issues preventing approval ofOSRPs submitted to
date?
o Will operators be allowed to continue to operate if they have submitted a new OSRP, but have
not received BOEMRE approval of the Plan?
o Is there the potential for credit against the WCD for natural weathering, natural dispersion,
subsea dispersant application, surface dispersant application, and in-situ burn capacity?

Response Capability Requirements

o What is considered initial response (within 2 hours) and what is the basis far this requirement?
o Please clarify the response capacity and timing requirements for surface oil spill response
equipment?
o If 400% response capacity in 60 hours will not be required; what forms the basis of the
requirement, the level of resources needed, and the performance expectations? Industry
would like a description of the science, technology, and thought process used by BOEMRE to
determine these requirements.
o Please confirm that OSRP will cover NTL-l0 subsea containment requirement for each permit
assuming WCD is lower than OSRP rate.

Subsea Dispersant use.

o Please confirm the acceptability of subsea dispersant use to minimize oil at shoreline.

Expectations for nighttime surveillance

o Is approval required? What are the equipment requirements? Is any consideration given to
limitations to working at night?

• Revisions to Exploration Plans/DOeDs and Environmental Assessments

The permitting process remains a very confusing, time consuming experience and we have had trouble
getting clarity on what is required and when we can expect a response from the BOEM RE to our various
submissions.
o Industry needs clarity as to the current BOEMRE process for reviewing these Plans, and the
impact of the outstanding Oil Spill Response Plans submitted to BOEMRE by industry but still
pending approval due to the containment and response issues discussed previously..
o In addition, industry needs clarity on the Information required for BOEMRE to complete their
Environmental Assessments associated with deepwater Exploration Plans and Development
 Plans. This should include clarification on the additional information that is being requested
by BOEMRE which is in conflict with the requirements af NTL 2008·G04.
o What are the primary issues that are preventing the approval of deepwater EPs and APDs?
o How long it should it take to receive a response from the BOEMRE after an Operator has
submitted an EP or APD?
o How is the Environmental Assessment (EA) process being conducted pending resolution of
lawsuits filed by environmental organizations? What is the BOEMRE's assessment of the time
it will take to reach a resolution?
o Do wells which had approved EPs and/or APDs prior to the Deepwater Moratorium require
EAs? When will EAs be conducted and how will Operators.know when their EA has been
scheduled? How long should it take to complete the EA? Can an EP and/or APD be approved
pending the EA?
o Currently, the BOEMRE allows an operator to move a well location by up to 500 ft which
allows an operator to avoid chemosynthetic communities and other seafloor obstructions. Are
there changes to when the BOEMRE will require an operator to submit a modified EP or APD?
If there are changes, will there be a comment process to allow operators to provide their
concerns?
o Are there any options for phasing DOCD revisions to allow operators to re-submit and BOEM
to evaluate without shutting down existing operations plans
o Are sidetrack wells which have been previously assessed for, or categorically excluded, from
NEPA compliance being reassessed?

• Additional Items
o Could the BOEMRE provide additional information concerning new rules and regulations which are
currently being considered or contemplated as well as an estimate as to when they may be
released?
o With regard to the final rule on Safety and Environmental Management Systems, can BOEMRE
supply clarification on requirements for demonstrating contractor compliance?
American Petroleum Institute Response

Regulatorv Impacts Request

Climate

On January 2,2011, the EPA began regulating greenhouse gas emissions from stationary sources under
Title I of the Clean Air Act. EPA's stationary source regulation risks significant adverse impacts on
investment, expansion and job creation in today's fragile economy, raises significant legal concerns, and
places a tremendous regulatory burden on state resources. In order to comply, businesses would need
to obtain permits and take measures which are as yet undefined before moving forward with
construction and modification. Additionally, many states are facing extreme financial strain even
without the added permitting requirements of EPA's regulations.

EPA is also planning to reguiate greenhouse gases in a number of other ways. In 2011, EPA is planning
to propose New Source Performance Standards (NSPS) for refineries. NSPS for expioration and
production operations are currently undergoing a review, with proposal scheduled for January, 2011,
and mayor may not contain requirements to reduced greenhouse gas emissions.

Revenue Transparency
Section lS04 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies
registered with the Securities and Exchange Commission (SEC) to report, on an annual basis, payments
made to a foreign government or the Fe,deral Government relating to the commercial development of
oil, natural gas and minerals.

API supports transparency. However, the current structure of Section 1504 undermines the
internationally accepted transparency effort of EITI, places U.S.-listed companies at a competitive
disadvantage, and jeopardizes U.S. jobs supporting international oil and gas projects. Section 1504 also
raises conflict of laws concerns, and could increase security risks for U.S. citizens working abroad for
reporting companies.

Cooling Water
EPA is expected to issue regulations for cooling water intake structures at existing electric power plants
and manufacturing facilities, including refineries and exploration and production operations, including
platforms. Potential retrofit costs could be significant, and could affect energy supply and reliability.

We also are concerned with the EPA's reconsideration of the National Ambient Air Quality Standard
(NAAQS) for ground level ozone. As you know, the Clean Air Act requires that EPA conduct a detailed
review of each NAAQS every five years. This review, with extensive process, public input and comment,
was last completed for the ozone standard in March 2008. EPA strengthened its existing 0.084 ppm
standard to a much more stringent 0.075 ppm, declared that level adequately protective of human,
health and environment, and commenced preparation for the next five year review. Despite being
midway through the ongoing five year NAAQS review process, in January 2010, with no new
information, EPA proposed lowering the 2008 standard to within the range of 0.060-0.070 ppm. At any
point in EPA's proposed range, the number of "non-attainment areas" will dramatically increase
nationwide. For local communities, a non-attainment designation can mean a loss of industry and
economic development; plant closures; loss of federal highway and transit funding; and increased fuel
and energy costs. EPA estimates that the cost of the proposed new standard could add as much as $90
billion per year to the already high operating costs of manufacturers, agriculture, and other sectors.
Changing the 2008 standard outside of the normal 5-year review process is unfair and unwise to
businesses and consumers.

DRAFT Regulatory Impacts on the Oil and Natural Gas Industry

• Offshore

a) The oil and natural gas industry continues to seek clarification and certainty regarding proposed
regulations and Notice To Lessee (NTL) requirements established by BOEMRE following the Gulf of
Mexico oil spill. The attached document outlines concerns which remain as a result of the current
BOEMRE regulatory environment.

b) A National Ocean Policy currently under development within the Administration could seriously
impact the energy sector by excluding or restricting operations through implementation of regulatory
proposals such as coastal and marine spatial planning (CMSP), an ocean zoning tool based on the notion
of an inherent conflict and incompatibility among ocean uses. This policy adds a redundant layer of
bureaucracy, creates confusion and unnecessary conflict with existing statutes, and could delay or
restrict oil and gas exploration and development, potentially significantly reducing job-related capital
expenditures and decreasing our domestic energy supply.

• Onshore

a) The dominant issue that affects operators on public lands in the Intermountain West is the series
of efforts under this Administration to close off or to scale bacl< oil and gas leasing. In other words, the
impacts on development of publicly owned domestic energy resources on public lands start with
administrative decisions not to mal<e them available.

b) The next most significant issue concerns the NEPA process. The length of time that is increasingly
required for NEPA reviews at all levels, and the steady efforts to restrict use of less restrictive reviews
for oil and gas projects add cost and delay to energy projects, and serve to de-incentivize exploration on
public lands and/or in the West. "Energy Leasing Reform" changes that BLM introduced through an
instructional memorandum in May, while not yet fully implemented (this is expected second quarter,
2011) are expected to add delay and complexity to the BLM decision processes by which BLM-managed
acreage is made available for lease. The restriction on use of categorical exclusions is likely to add costs
and review periods for many exploration projects that would hitherto have been approved by
categorical exclusion.
c) Emerging potential of use of climate change arguments to limit acreage offered for lease. This
issue has yet to take the shape of specific regulations, but the action by the Council on Environmental
Quality to affirm inclusion of climate change analysis in the NEPA process points the way toward this
possibility.

d) Use of the Endangered Species Act to restrict public lands acreage available for lease or to restrict
oil and natural gas operations on those leases. For example, the listing earlier this year of the Greater
sage-grouse as "warranted, but precluded" for protection under the Endangered Species Act, because of
the large overlap between the sage grouse range and BLM-administered public lands with natural gas
potential east of the Great Basin. There remain strong industry concerns that the case has not been
made that sage-grouse populations are in the state of peril that one would expect for a species given the
"warranted, but precluded" treatment (for example, the species may· still be legally hunted in all but one
of the states). This is due to concerns that the principal method relied upon to assess sage-grouse
populations has methodological fiaws. The core issue here is the reliability and objectivity of the science
that is offered to support ESA decisions in generai (and in the case of the sage grouse in particular), as
well as the balance (or its lack) in the consideration of risk factors that m~y influence sage-grouse
populations.

• Upstream Environmental--Exploration and Production Waste

On September 8, NRDC filed a "Petition for Rulemaking" with EPA, challenging the assumptions in EPA's
1988 Regulatory Determination, which concluded that regulating produced wastes from exploration and
production operations was not necessary or appropriate. In its recent petition, NRDC requests that EPA
reconsider and regulate E&Pwastes under Subtitle C of RCRA. Under the 1980 Bentsen Amendment to
RCRA, EPA was prohibited from regulating wastes from exploration and production operations until it
completed a report to Congress on the status of the wastes' current management and the risk they
presented. Then, if EPA were to determine that regulation was appropriate, any such regulation would
be required to be approved by Congress before it could become effective.

API is developing a response letter (in coordination with other oil and gas trades) to send to EPA, which
should be available by the end of February 2011. API is also undertaking some economic modeling to
get a better understanding of the cost impacts of such a regulatory approach in today's dollars. It is
possible that much ofthat work will be concluded by late January.

• Pipeline

The Department of State is currently reviewing the Draft Environmental Impact Statement for the
Keystone XL Pipeline that will carry Canadian crude from Alberta to the Gulf Coast of the U.S. Approval
of the statement is prelude to DoS's approval of a Presidential Border Crossing Permit for the pipeline.
If not approved, the u.s. will not realize the roughly $20 billion dollars of economic stimulus from the
project, including more than 15,000 high-wage manufacturing and construction jobs in 2011-2012.

• Oil Sands
US Energy Independence and Security Act (EISA) §526 limits domestic refiners processing of Canadian oil
sands by prohibiting the federal government from purchasing fuels derived from unconventional
petroleum sources if it has a GHG Iifecycle emission greater than emissions from the fuel from the
conventional source. It decreases US refiners' competitive position in the global marketplace and
regulations posing constraints on oil sands processing in the US limits the potential creation of 342,000
new jobs in the US between 2011 and 2015.

• E15 Waiver

. In October 2010, EPA approved a Clean Air Act waiver allowing use of ethanol blends of up to 15% in
2007 and newer light duty cars and trucks. EPA is considering extending the waiver to 2001 and newer
light duty vehicles. Significant state and federal regulatory hurdles remain before the E-15 can be
introduced in the marketplace. API is concerned that the EPA approval was premature.
The EPA approval was based on limited testing where only catalyst durability was considered. EPA did
not take into account the broader, still ongoing vehicle and engine testing performed by the
government-industry collaborative Coordinating Research Council on a wide range of vehicle attributes,
including the durability of engines, fuel systems, and emission control systems, including On-Board
Diagnostics. Any issues with these vehicle systems are a great concern to our customers. In addition to
the liability costs for vehicle and equipment repairs, negative consumer experiences with ethanol
blended fuels may threaten the success of the Renewable Fuels Standard program.

• Remove redundant air emissions systems at retail gasoline stations

Current regulations require retail gasoline stations and vehicles to capture the same fumes generated
when a car is refueled with gasoline. In the early 1990's Congress required stations to install their
system (called Stage II vapor recovery) because it was faster to implement and would reduce the
amount offumes that were generated when the vehicle was filled up. The technology successfully met
this goal. At the same time, Congress also mandated that the vehicles install vapor recovery systems
that would reduce these same fumes (called Onboard Refueling Vapor Recovery or ORVR). Because it is
more difficult to upgrade the vehicle design, Congress allowed the auto manufacturers to implement
their requirements using a phased-in approach.

Congress recognized that at some point in the future a majority of vehicles would have the ORVR system
and thus they gave the EPA the authority to remove the requirements for the gas station system. The
EPA has not taken this approach at this time and thus the gas station owner must continue to install new
and maintain existing systems that could easily be shutdown in lieu of the much more efficient system
that is already installed in the majority of vehicles. The EPA should remove this redundant requirement
from the gas station. This action would provide direct savings to the retail station owner by avoiding the
costs associated with both of these activities.
 Associated Builder.
and Contractors. Inc.

January 7, 2011

The Honorable Darrell Issa

Chairman
Committee on Oversight and Government Reform
u.s. House of Representatives
2157 Rayburn House Office Building
Washington, DC 20515-6143

Dear Chairman Issa:

On behalf of Associated Builders and Contractors (ABC), a national association with 75

chapters representing 23,000 merit shop construction and construction-related firms with 2
million employees, I appreciate the opportunity to respond to your letter, dated December 8,
2010. ABC is pleased to provide you with information regarding existing and proposed
regulations--as well as sub-regulatOlY actions--that have or will have negative impacts on job
growth in the construction indus1:J.y. In addition, this letter offers suggestions on reformingthe
federal mlemaking process.

I. Federal Regulations and the Impact on Job Growth

ABC members are responsible for building our country's communitiesand infrastmcture, includipg
schools, power plants and office buildings. Accordingly, they demand the highest level of quality
work from themselves and from their subcontractors. Our members understand the value of
standards and regulations when they are based on solid evidence and sound science, with
appropriate consideration paid to implementation costs and input from the regulated community.

Unfortunately, some of the regulations for our indus1:J.y impose heavy costs with no clear, or very
limited benefit. In many cases, these regulations are based on conjecture and speculation, lacking a
foundation in sound scientific analysis. In a few egregious cases, these regulations even circumvent
will of Congress and conllict with underlying statutory requirements. Regulations ofthis kind
impose tmnecessary and unjustified costs, which, in turn, hinder economic recovery and job growth.

For the construction indus1:J.y, the negative impact of excessive federal rulemaldngs exacerbates an
already dire situation. Overregulation translates into higher costs, which must be passed on to the
consumer in order for firms to remain viable. Higher consumer costs lead to fewer projects, which
ultimately impact whether a firm is able to hire additional workers or must make tmwanted layoffs.

ABC members and construction workers cannot afford this burden right now. ABC's Construction
Backlog Indicator (CEl) reported in November that "construction contract activity declined 3.3

4250 North Fairfax Drive, 9th Floor· Arlington, VA 22203 • 703.812.2000 • www.abc.org
percent in September to 6.7 months after faIling more than 5 percent in Augnst to 6.9 months,'" At
the same time, the construction tmemployment rate began to rise again this fall, approaching an
abysmal 21 percent in December?

To promote economic growth, we must fi'ee industry from those regulations that create
UlUlecessary and costly bureaucratic layers and institute reforms that will help avert future
missteps in the regnlatory process. Per your request, please find below an outline of ABC's most
pressing concerns in this area.

Government-Mandated Project Labor Agreements

ABC has serious concems regm'ding Executive Order (EO) 13502, signed by President Obama in
February 2009, mld the subsequent Federal Acquisition Regnlatory (FAR) Council rulemaldng
implementing it. The EO and rulemaldng su'Ongly encourage federal agencies to require project
labor agreements (PLAs) on federal construction projects exceeding $25 million?

Typically, a PLA is a contract awarded only to contractors and subcontractors that agree to
recognize unions as the representatives of their employees on that job; use the union hiring hall
to obtain workers; obtain apprentices exclusively through union apprenticeship programs;
pay fringe benefits into Ullion-managed benefit and pension programs; and obey unions'
restrictive and inefficient work rules, job classifications and arbitration procedures.

PLAs are anti-competitive, and serve as a barrier to job growth for more than 85 percent of the
construction workforce-the percentage that has decided not to join a labor union.4 Furthermore,
several studies have found that PLAs increase the cost of construction by as much as 18 percent. 5

ABC applauds your December 13 letter, signed by House Oversight and Government Reform
Committee Republicans and additional House Republicans, to the General Services Administration
(GSA) regarding the agency's recent policy change to favor the use ofPLAs in the bidding process
for federal construction projects exceeding $25 million:

Wage Rates under the Davis-Bacon Act

The Davis-Bacon Act is a Depression-era wage subsidy law responsible for mandating so-called
"prevailing" wage rates on federal construction projects. Unfortunately, the methodology used by
the U.S. Department ofLabor's (DOL) Wage and Hour Division (WHD) to determine these wage
rates is Ullscientific, relying on VOlUlltary wage surveys instead of statistical samples. As a result,

1 ABC's Cons/ruction Backlog Indicator (CBI) is a forward-looking economic indicator that measures the amount of
construction work under contract to be completed in the future. For more information, see http;//www.abc.org/cbi.
2 Construction Sector at a Glance: Employment, Unemployment, Layoffs, and Openings, Hires, and Separations,
Bureau of Labor Statistics, December 2010. See http://www.bls.gov/iag/tgs/iag23.htm.
3 Federal Acquisition Regulation: FAR Case 2009-005, Use ofProject Labor Agreements for Federal Construction
Projects, Federal Acquisition Regulatory Council, April 13, 2010. See http://edockel.access.gpo.gov/2010/2010-
SJlS.htm.
4 Union Members Summary, Bureau of Labor Statistics, January 22, 2010. See
http://www.bls.gov/news.releasc/union2.nrO.htm.
5 For lll~re information, see http://www.abc.org/plastudies.

2
Davis-Bacon wage rates are not reflective of actual local wages, and are often inflated. 6 The
problems associated with Davis-Bacon wage calculations have been well documented by the
Government Accountability Office (GAO) and DOL's own Office oflnspeetor General (OIG).7
Studies have shown that the flawed wage methodology mld other problems with Davis-Bacon Cffil
raise the cost of public construction by 22 percent8

Using inflated Davis-Bacon wage rates makes it ahnost impossible for smaller businesses to absorb
costs, ffild can result in some small businesses closing their doors.9 Furthermore, as previously
mentioned, the construction indusliy will be at ffil even greater disadvffiltage due to the traditionally
low net margins on which its fIrms operate. lO ABC has recommended that DOL follow the fIndings
of the 2004 OIG study mld explore using alternative data to deternlining wage rates, including data
collected by the Bureau of Labor Statistics (BLS).

Lack of Transparency under the Davis-Bacon Act

Under Davis-Bacon, the job duties that apply to a particular job classifIcation are determined
by local practice. For example, a carpenter may hffilg sheet rock in one area, whereas that work
may only be performed by sheet rock hangers in ffilother jurisdiction. Where DOL determines
that the prevailing wage rate for a classifIcation is based on a union collective bargaining
agreement, the job duties for that classifIcation will also most likely be governed by the
union's work rules in that agreement. Generally, union work rules require that only a certain
job classifIcation perform certain work. For example, the work rules may require that only ffil

6 The impact of inflated Davis-Bacon wage rates and related red tape can be significant when applied to new
programs, including the U.S. Department of Energy's (DOE) Weatherization Assistance Program. The program
received $5 billion under the American Recovery and Reinves~ment Act (ARRA), and was intended to help low-
income families with energy efficient upgrades to their homes. Unfortunately, DOE and GAO reported that far
fewer homes would be weatherized in 2010 than anticipated, due to the high costs associated with the mandated use
of Davis-Bacon Act prevailing wages that came attached to the funds. See DOE's Progress in implementing the
Department ofEnergy's Weatherization Assistance Program Under the American Recovery and Reinvestment Act,
February 2010, at hltp://ww.ig.energy.gov/docllments/OAS-RA-IO-04.pdt: See also, GAO's Recovery Act: Views
Vary on Impacts ofDavis-Bacon Act Prevailing Wage Provision, February 2010, at
httl'://www.gao.gov/new.items/d10421.pdf. GAO is also in the process of conducting a study on Davis-Bacon as it
applies to all federal construction work.
7 U.S. Department of Labor, Office of the Inspector General, Concerns Persist with the Integrity ofDavis-Bacon
Prevailing Wage Determinations, Audit Report No. 04-04-003-04-420, 2004, at
htIP://Www.oig.dol.gov/pllblic/reports/oa/2004/04-04-003-04-420,pdf. To find cvidence of the flaws in Davis-
Bacon prevailing wage calculation methodology, one need look no further than the dispropor~ionate amount of
jurisdictions across the country in which DOLhas found a union wage rate to prevail. Given that unions make up
only 15 percent of the workforce nationally, it would suggest there should only be a small fraction ofjurisdictions in
which union rates prevail.
8 The Beacon Hill Institute at Suffolk University, The Federal Davis-Bacon Act: The Prevailing Mismeasure of
Wages, Febrllary 2008, at http://www .beaconhi! J.org/bh istlldies/prevwage08/davisbnconprevwage080207 final.pd f.
9 DOL proposed to rescind the current methodology for establishing wage rates for H-2B temporary nonimmigrant
workers and replace it with a system emphasizing Davis-Bacon Act wage determinations. The new system,
published in the Federal Register on October 5, 2010, is estimated to raise H-2B hourly wages in the construction
industry by a minimum of $1 0.65 per hour, per program participant. See, Wage Methodology for the Temporary
Non-agricultural Employment H-2B Program, at http://edocket.access.gpo.gov/201O/2010-25142.htm.
[0 Construction firms often operate on extremely low net margins. According to the 2009 Construction Industry

Annual Financial Survey, published by the Construction Financial Management Association (CFMA), an average
construction firm's operating margin was only 3.4 percent, with many firms operating at even lower margins.

3
electrician is permitted to install almm systems, even though such work is performed by
technicians in other jurisdictions.

While each DOL wage determination lists several different classifications of workers (painters,
carpenters, laborers, etc.), limited information is available on the actual job duties or union
work rules that apply to the classifications. Although the published wage determinations may
identify the relevant local union for each of the listed job classifications, where the rate is
based on the union's collective bargaining agreement, DOL does not provide detailed
information as to whether there are any work rule restrictions attached to those wage rates and,
if so, what those restrictions are. DOL's failure to provide such information makes it difficult
to determine the appropriate wage rate for many constmction related jobS. 11 ABC has
repeatedly requested that DOL provide information about job duties that correspond to each
wage rate.

"High Road" Government Contracting Policy

According to the White House Middle Class Task Force's February 26,2010, annual report, the
Obmna administration is crafting a contracting policy referred to as "High Road," which is believed
to be designed to require government procurement officers to determine whether a contractor's
record is deemed "satisfactory" in a number oflabor relations categories, using criteria subjectively
determined by the Obmna administration. Such a policy could needlessly cut competition, increase
costs, stifle job creation, and delay the delivery of goods and services to the gover11l1lentand the
general public. The administration has not set a date for the final version ofthe proposal to be
released; it is possible that the policy could be issued as an executive order in the coming year.

Numerous regulatory and statutOly protections already ensme that responsible contractors deliver to
the federal government the best possible product at the best possible price. In addition, the federal
government has a well-established process to prequalify contractors and screen out bad .companies.

Regulations and Policies under "Plan, Prevent, Protect" and "We Can Help" Programs
DOL has launched several rulemakings and policy initiatives being carried out under DOL's "Plan,
Prevent, Protect" and "We Can Help" cmnpaigns. Both progrmns are components ofthe Obarna
administration's goal of increased federal control ofthe private workplace.

• Injury and lllncss Prevention Program: Referred to as "I2P2" by the Occupational

Safety and Health Administration (OSHA), this "pre-rule" stage rulemaking will require all
employers, regardless of size, to "find and fix" wmkplace hazards. Aside from the obvious
impact such a requirement could have on small businesses, all employers could find
themselves in a never-ending compliance loop as a result of OSHA's rille. Furthermore, if
filll compliance can never truly be attained, the costs associated with compliance become
even greater. OSHA has not announced a projected publication date for this proposal;
however, the agency has indicated publicly that I2P2 is its highest regulatory priority.

• "Right to Know" under the Fair Labor Standards Act: WHD plans to require that
employers provide workers with information about their employment status, including

11 DOL has refused to publish a memorandum, drafted by the previous administration, in which this issue was raised
(see attached memorandum).

4
 exactly how their pay is calculated. In addition, the proposal will likely require that workers
classified as independent conhactors must receive a "classification analysis" from their
respective employer. DOL's fall 2010 regulatory agenda indicates that this proposal will be
published in April 2011. 12

Such records will smely be discoverable during private litigation, which causes a great deal
of concern for our members. WHD's proposal comes after several non-regulatory policies
implemented by WHD over the past year that emphasize litigation over traditional statutory
enforcement, including "Bridge to Justice," an agency-sponsored attorney referral program
intended to help facilitate lawsuits involving the Fair Labor Standards Act (FLSA) and the
Family and Medical Leave Act (FMLA). Interestingly, no such referral program or support
infrastructure exists within DOL for small businesses targeted with frivolous claims
involving statutes over which DOL has authority, despite the fact that often, such cases are
found to be without merit. 13

Rules Governing "Persuader" Activity

DOL's Office of Labor Management Standards (OLMS) has been worlcing on multiple proposals to
redefrne what constitutes "persuader" activity under Section 203(c) of the Labor-Management
Reporting and Disclosure Act (LMRDA). According to DOL's fall 2010 regulatory agenda, both
rulemalcings will be proposed this surnrner. t4

ABC and others believe that DOL's proposal will have a significant impact on an employer's rights
before and during union organizing campaigns. Much like the provisions of the Employee Free
Choice Act (H.R. 1409 and S.560, 111 u, Congress. Also lmown as "card check"), the proposal seeks
to neutralize employers' voices in their own workplaces dming organizing campaigns. These
upcoming mlemakings discourage (or prevent entirely) spealcing to employees about unions dming
organizing campaigns, and rnalce it eXh'emely difficult for those same employees to obtain a balanced
perspective on the advantages and disadvantages of the union in question-or unionization
generally-prior to casling their votes.

Tax Regulations
Under the nation's current tax system, 1'lltes are too high and laws are too complex, thus inhibiting
the growth of small businesses. ABC supports minimizing the tax bmden on American cilizens-
and the construclion industry in particular - to help increase the rate of capital formation, economic
growth and job crealion.

• New Form 1099 Requirements: A provision contained in the Palient Protection and
Affordable Care Act (PPACA) will significantly increase the amount ofpaperwork
businesses will have to file with the Internal Revenue Service (IRS). The IRS is expected to

12 2010 Unified Regulatory Agenda, Office ofInformation and Regulatory Affairs, Deeember 2010. See
http://www.rcginfo.gov/publie/do/eAgendaViewRule?pu bld~20 I0 I O&RIN~ 123 5-AA04.
13 The Equ~l.EmploY1TIent Opportunity Commission's (EEOC) Enforcement and Litigation Statistics provides an
illustrative example of the ratio of frivolous claims versus those with merit. See
http://www,eeoc.gov/eeoc/statistics/enforccment/litigation.cfm.
14 Fall 2010 Unified Regulatory Agenda, Office oflnformation and Regulatory Affairs, December 2010. See
htlp://www.reginfo.govbmblic/do/eAgendaViewRllle?pllb Id~20 101 O&RlN~ 1245-AA03; and
hlu>://www.reginfo.gov{pllblie/do/eAgendnViewRule?pllbld-20 IOJ 0&RIN-1245-AA05.

5
 release a final rille implementing these provisions in 2012, at which time businesses will
have to file a FOim 1099 for all vendors to which they pay more than $600 annually for both
. 15
goo d s and services.

An ABC member and vice-president of a family-owned small business has indicated that
the expanded Form 1099 reporting requirements may force him to hire an additional full-
time employee to work in his company's accounting department, which already employs
two full-time employees. Because the ABC member works with 1,200 vendors, of which
only four or five presently issue a Fonn 1099, the accOlmting deparlmentwill be requiTed to
spend countless hours on the increased paperwork filing.

Two yeaTS ago, the same ABC member employed 136 employees; however due to tlle
current construction market, he was forced to layoff employees, reducing his staff to 66.
Instead of investing in equipment or hiring employees to actually perform in the field, he
may be faced with a huge overhead expense ofhiTing a full-time employee to solely work
on this new bmdensome mandate. Ultinmtely, the overhead expense resulting from this
new paperwork requirement will have a m'amatic effect on the ABC member's bottom line
and how he conducts business.

• Three Percent Withholding: Section 511 of the Tax Increase Prevention and Reconciliation
Act of 2005 (TIPRA) requires that three percent of payments for goods and services made by
federal, state and local governments and theiT agencies be withheld from government
contractors and is scheduled to go into effect January 2012.

The withholding proposed rule (originally issued December 5, 2008, and not yet
finalizedl~ is especially onerous for the construction industry because construction
contractors typically average a profit margin of 2.2 percent. In addition to withholding 3
percent, construction contractors face retainage between five percent and 10 percent,
putting the contractor at an eight percent to 13 percent cash deficit.

Not only will Section 511 deplete a contractor's profit, but it also will reduce sorely needed
operating capital. Eventually, contractors will be forced to raise theiT proposal price to
account for tllis new financing burden, and the taxpayers' cost of construction will increase.
Or worse, slllall businesses will be driven out of the government contracting market.

Lack of Supportiug Data for Rulemaking; Procedurally Deficient Policymaldng

The Ob= administration has moved forward with several regulatory and non-regulatory policies
without sufficient data to demonstrate theiT benefit mld snpport their need. In addition, some quasi-
regillatory policies are being implemented outside the formal rulemaldng process in an effort to
circU1llvent existing checks and balances within the federal regulatory framework.

• Proposal to Redefme "Feasibility" in Noise Exposure Standard: Last fall, OSHA

mmounced a proposal to change the defmition of "feasible" under its General Industry and

IS IRS Notice 2010-51, IRS Internal Revenue Bulletin, July 1,2010. See
httr://www .irs.gov/pub/irs-drop/n-lO-51.pdf.
16 74 Fed. Reg. at 74082.

6
 Construction Occupational Noise Exposure standards to mean "capable ofbeing done.,,17
As proposed, OSHA would be able to cite a company for relying on personal protective
equipment (e.g., ear plugs) to protect employees rather than implementing administrative or
engineering controls for noise hazards unless the company is able to demonstrate that
implementing such controls would put it out of business or threaten its viability.

OSHA has been unable to explain publicly why it feels such a costly proposal is necessary.
Furthermore, OSHA has classified this proposal as a "non-regulatory" interpretation,
allowing the agency to circumvent crucial aspects ofthe formal regulatory process.IS
Stalceholders were not given advance notice ofthe proposal in the spring 2010 regulatory
agenda, and it 'does not require fonnal notice-and-comment or economic analysis.. Public
comments on the proposal are due March 21,2011.

• Musculoskeletal Disorder Recordkeeping: OSHA also plans to require that employers

report "musculoskeletal disorders" (MSDs) in a separate colmnn from other types of
workplace injuries and illnesses on OSHA's Form 300 log books. 19 On the surface, this
appears to be a minor clerical revision; however, upon closer inspection, the proposal
wrongly groups together a variety of disorders and symptoms that are not necessarily
related (even the scientific commmlity has been mabie to settle on a reliable definition or
cause of most MSDs). The addition of such a difficult-to-define, catch-all category will
result in the collection of erroneous data that in tum could justifY burdensome workplace
controls for injuries and ilmesses that may not even be caused by the work environment.

In addition, the time and cost estimates associated with OSHA's proposal have been grossly
mderestimated in an attempt to bypass requirem~nts of tlle federal regulatory process that
would have brought increased scrutiny and much-needed economic analyses. The Office of
Information and Regulatory Affairs (OIRA) is currently reviewing the proposal before i1s
Februaty 2010 publication,z° In July 2010, ABC shared its concerns directly with OSHA
and OIRA officials.'

• Environmental Rules Targeting the Construction Industry: In addition to the U.S.

Environmental Protection Agency's (EPA) attempts to regulate stormwater runoff from
construction sites (which was mentioned in your December 8 letter to ABC), the agency is
also attempting 1:0 inlpose additional rules governing lead exposure in tlle repair and
renovation of commercial buildings. As with the stormwater mlemakings, we are
concerned that EPA plans to move forward with regulatOly action without the requisite data
needed to justify such action, and to ensure that any potential rulemalcing is not burdensome
on impacted industries.

1775 Fed. Reg. at 64216.

18It appears OSHA has determined that its noise proposal is not a formal flI1emaking, and therefore the agency
believes it does not fall under the authority of the Administrative Procedure Act (APA); the Regulatory Flexibility
and Small Business Regulntory Enforcement Fairness Acts (RFA and SBREFA, respectively); or the Unfunded
Mandates Reform Act (UMRA).
J9 75 Fed. Reg. at 4728.
202010 Unified Regulatory Agenda, Office of Infolmation and Regulatory Affairs, December 201 O. See
httl'://www.rcginfo.gov/public/do/eAgendaViewRule?pu bld~20 I 01O&RIN=1218-AC45.

7
 On May 6, EPA issued an "advance" notice ofproposed mlemaking (ANPRM) annolIDcing
its long-tenn plans to a~ply lead-safe work practices to renovations in public and
conmlercial buildings? Ifthe agency does proceed with a mlemaldng, EPA plans to issue
a proposal by December 2011, and have it finalized by July 2013, with implementation to
begin on or before July 2014.

In July 2010, a broad coalition of commercial construction and real estate interests
responded to EPA, stressing that the agency consider its limited statutory scope and
authority imder the Toxic Substances Control Act (TSCA), and complete a congressionally-
mandated study ofrenovation, repair and painting activities in commercial and public
buildings, before proceeding with a rulemaldng. EPA was also urged to take into account a
variety of factors in any lead rulemaking, including varying exposure patterns in different
types of buildings, the limited use of lead paint since 1978, and potential impact on other
national priorities (such as energy efficiency and job creation). Despite industry's concerns,
EPA appears to be willing to move forward in the rulemaldng process without the TSCA-
mandated data.

Lack of Statutory Authority and Congressional Mandate

The Obarna administration has signaled that it will not hesitate to issue administrative alternatives to
controversial legislation through the federal regulatory process. Two areas ofparticular concern
listed below.

• Greenhouse Gas Regulations: EPA regulations to curb greenhouse gas emissions stand to
be higWy detrinlental to job growth in the construction industry. Although Congress has
not taken action on clin1ate change legislation, EPA nevertheless moved forward in 20 I0,
pushing costly and burdensome regulations on business owners. Collectively, these
regulations will increase energy and material prices for the constlUction industry, impeding
economic recovery and job creation.

• NLRB Rulemaldngs' and Decisions: In recent days, the National Labor Relations Board
(NLRB), now staffed with a pro-labor majority, has started to issue formal regulatory
proposals--an unusual move for an agency that has historically acted largely as an appellate
judicial body. It is relevant to subject matter of this letter as 111e Board's proposed rules
could potentially have a negative impact on job growth in the construction industry.

On December 22, the NLRB issued regulatory proposal to require employers to post a
noticc in their workplaces dealing with the National Labor Relations Act (NLRA). In the
words of dissenting Board Member Brian Hayes, the proposal "lacks the statutory au1hority
to promulgate or enforce.'''2 In addition to its current proposal, the Board is believed to be
considering other regulatory action, including shortened time for representation elections,
allowing employees to vote electronically (possibly from a remote location), and enabling
union organizers (or employees who support a union) to use company email for organizing
purposes without regard to discrimination rules.

21 75 Fed. Reg. at 24848.

22 75 Fed. Reg. at 80415.

8
 Having failed to enact EFCA last Congress, the Obama administration and its allies appear
poised to push onto the workforce card check and other job-killing policies through NLRB
enforcement and adjudication.

Combined, these items represent ml effort to use the federal regulatory process (in lieu of
Congressional mandate) to achieve partisan policy ainls that ABC believes will be
detrimental to the success of our members' businesses.

II. Reforming the Federal Rulemaldng Process

Wi111 available work dwindling, and unemployment rising once again, 111e construction industry
cannot create jobs when ml ever-growing body ofuilllecessary regulations impose excessive and, at
tinles, crippling costs. Federalmlemakings often carry substantial financial and non-monetary
compliance costs 11mt impede businesses' ability to compete. 1bis is especially true for small
businesses. Research from a 2010 U.S. Small Business Administration's (SBA) Office of Advocacy
stndy revealed that small businesses are disproportionately affected by federal regulations.23 The
stndy found that, on average, small businesses face a cost of $10,585 per employee mmually to
comply with federal regulations. Adding large and mid-size businesses to the equation still totals
4
$8,000 per employee, per year.2

ABC strongly supports comprehensive regulatory reform, including across-the-board

requirements for agencies (including so-called "independent" agencies) to evaluate the risks,
weigh the costs, and assess the benefits of regulations. New mlemakings should contain
reasonable sunset clauses, and existing regulations should also be reviewed periodically to
ensure that they are necessmy, current, and cost-effective. Furthermore, federal agencies must
be held accountable for full compliance with existing rulemaking statntes and requirements
when promulgating regulations.

REINS Act
th
In the 1Ii Congress, ABC supported the Regulations from 111e Executive In Need of Scrutiny
(REINS) Act (H.R. 3765), which you cosponsored. The REINS Act requires Congress to pass a
joint resolution of approval before any new major rule (defined as having an impact of $100 million
or more) takes effect. ABC believes 11mt H.R. 3765 would have brought greater transparency and
accountability to the federal rulemalcing process.

As the Obama administration continues to promulgate complex, cos11y and bmdensome regulations,
the REINS Act would ensure that Congress is held accowltable for the impact that finalized rules
have on the business community and the American people. ABC looks forward to the bill's
u
reintroduction in the 112 , Congress, and urges you and the members of your committee to support
!he bill at that time.

Other Reforms
In addition to the REINS Act, other potential solutions for dealing with rcgulatory burden have
emerged recently. For example, in December, Sen. Mark Warner (D-Va) wrote in the Washington

23 Nicole V. Crain and W. Mark Crain, The Impact ofRegulatory Costs on Small Firms, Small Business
Administration Office of Advocacy, September 2010.
24 [d.

9
Post that relief from excessive regulatory burdens is the key to job growth and economic
recovery?5 Sen. Warner's suggestion to create a regulatory "pay as you go" system-requiring
federal agencies to eliminate older regulations in order to introduce new ones--would be a positive
and favorable step. ABC looks forward to seeing this and other regulatory reform solutions
introduced in the llZtl. Congress.

####

Thank you for your consideration, and for the opportunity to comment on these important matters.
Ifyou or your staffhave questions, or require any additional information, please do not hesitate to
contact me.

Sincerely,

~
Sean Thurman
Senior Manager, Regulatory Affairs.
Associated Builders and Contractors

25 Sen. Mark Warner, Red Tape Relieffor a Sluggish Recavery, Washington Post, December 13,2010.

10
 Employment Standards Administration
Wage and 1·lour Division
Washington, D.C. 20210

January 16,2009

ALL AGENCY MEMORANDUM NO. 205

TO: ALL GOVERNMENT CONTRACTING AGENCIES OF THE

FEDERAL GOVERNMENT AND THE DISTRICT OF COLUMBIA

FROM: ALEXANDERJ. PAS,SANTINO/) ()

ACTING ADMINISTRATOR
} n n
lJX.Q...[ L-(1 V~
J_
SUBJECT: JOB DUTIES OF EMPLOYEE CLASSIFICATIONS IN DAVIS-
BACON WAGE DETERMINATIONS

This Memorandum provides guidance intended to clarify requirements regarding

prevailing area job duties for employee classifications referenced in wage determinations .
issued under the Davis-Bacon Act (DBA). Generally, experienced government
contractors are aware of the need to ascertain locally prevailing practices, and do so as a
matter of course, before submitting bids and commencing work on Davis-Bacon covered
contracts. However, the Department believes that many contractors, employees, and
contracting agencies may not be fully aware of the proper assignment ofjob duties to
classifications oflaborers and mechanics listed in wage determinations. The guidance
contained in this Memorandtun is intended to assist to all interested parties in
asceltaining their specific obligations under the Act, ensuring that employees are properly
classified and paid the full prevailing wage rates to which they are entitled.

The Davis-Bacon and Related Acts, and the implementing regulations at 29

C.F.R. Parts 1,5 and 7, require tlIat the advertised specifications for covered construction
contracts contain a provision stating the minimum wages to be paid the various
classificati·oris of mechanics or labor:::rs to be employed under the contract. For
reference, attached is a list of all codes used in wage detenninations along with an
explanation of the codes. The Department of Labor's wage detenninations are typically
based on surveys of the wages paid on construction projects on different types of
construction in a given geographical area, and the determinations are updated
periodically. The wage data infonnation is voluntarily submitted by contractors, trade
associations, tmions, state agencies, and other knowledgeablepalties. For eacli
classification of laborer or mechanic, the Administrator's wage determinations set fOith
the prevailing wage and fringe benefits found prevailing, based upon the wage surveys.
Each published wage detennination lists many different classifications of workers and,
where lmown, any prevailing area work practices. For example, a wage determination
may state that a painter may perfonn all painting as well as drywall finishing work and
taping at the same wage rate, and anotller wage determination may have separate rates for
spraying versus brush painting, drywall finishing and taping. The published wage
 2

determinations, however, often do not identify all of the job duties performed by each of
the classifications listed.

On occasion, the data submitted in a survey does not contain sufIicient

infoU11ation to issue rates for a particular craft that will be needed in the perfoll11ance of
the contract. Because of this, DBA provisions contain a conformance procedure for the
purpose of establishing a wage and benefit rate for missing job classifications.
Contractors are responsible for detelmining the appropriate crafts necessary to perform
the contract work. If a classification considered necessary for performance of the work is
missing from the wage determination applicable to the contract, the contractor must
initiate a request for approval of a proposed wage and benefit rate. See Title 29 C.P.R.
Part 5, Section 5.5(a)(l)(ii) and FAR 22.406-3.

An area practice issue arises when there are two or 1110re classifications listed on
the wage determination that may perform the same work. Under the Davis-Bacon Act
the scope of work covered by a classification must be decided in accordance with the
actual prevailing area practice upon which the prevailing wage rate is based. For
example, where the wage rates published in a wage detemlination reflect collectively
bargained wage rates that have been found to constitute the prevailing wages for a .
particular classification in the locality, the proper assignment of work duties for that
classification must be determined by the area practice of the ptUiies to the collective
bm'gaining agreement. This long-stmlding principle was clem'ly stated by the Wage
. Appeals Board in the case of Fry Brothers Corp., WAB Case No. 76-6 (June 14, 1977).
Conversely, when the wage rates published in a wage detenllination are non-union, i.e, ml
average of wages paid, then the applicable m'ea practice is based on the practice of non-
union contractors in the geographical area. This determination of area practice applies
where the actual prevailing wage rate is based on union wage scales, where non-Imion
rates are found to be prevailing, or where there is a mixture of the two for different
classifications in the sanle locality. For information on how the Department conducts
area practice surveys to deteImine what wages m'e prevailing, including explanations for
both how limited surveys and full surveys are conducted, see the Field Operations
Handbook, section 15fOS, at http://www.dol.gov/esa/whd/FOH/FOH ChIS.pdf.
Additional information regarding area practice can be found in the Area Practice
subsection of the DBA/DBRA Compliance Principles section of the Depmiment's
Prevailing Wage Resource Boole, which cml be found at:
http://www.wdoi.gov/docsIWRB2002.pdf.

Contractors have a duty t~ make reasonable inq)liry, such as to contracting

agencies soliciting bids for constlUction projects covered by Davis-Bacon requirements,
or the Department itself, conceming prevailing classification practices that will apply to
upcoming projects. Unfortlmately, employers may be unaware of their obligation to
inquire as to any applicable practices in the application ofDavis-Bacon wage
determinations; some employers may also be unaware of where to inquire to request
clarification conceming unpublished prevailing classification practices. This lack of
awareness may lead to misclassifications by employers acting in good faith. The
Depm'unent or contracting agencies may have to spend resources investigating and/or
 3

litigating such misclassifications, when employees would be properly classified in the

first place ifthere were greater advance notice of these requirements.

In recent years, the Department has taken steps to include in each published wage
determination information on prevailing area work practices and/or coded references
denoting those unions whose wage rates have been found prevailing for particular job
classifications in an area (or that the prevailing wage is non-1.illion). The Department will
continue to include specific locally prevailing area practice findings where possible on its
wage detelminations. The published wage determinations have not, however, explained
the purpose of the coded references, i.e., that the job duties of the classification for which
the particular union is referenced may be set forth in the colleCtive bargaining agreement
, with union contractors or available from the parties to the collective bargaining
agreement. In an effort to provide more explicit guidance, the Depatiment plans to cross-
reference this Memorandum in each wage determination for more detailed guidance on
the prevailing area practices work assignment issue as well as the codes and meaning of
the codes on wage determinations (see attached).

In addition, although area practice is determined by looking at the work actually

perfonned, where a union rate prevails for a particular classification, it may be helpful to
view the underlying collective bargaining agreement. Some may have been submitted as
part of the wage survey process, others can be found at
www.dol.gov/esa/rcgs/compliance/obns/cba/im!.ex.htm. Contractors are reminded,
however, that the statements contained in collective bargaining agreements are !10t
dispositive, and that the determination of area practice is based on the actual pelfol111atlce
of work. In situations where a contractor or govermnent agency or other stakeholder is
confused or unaware of specific prevailing work classification rules or disputes them, the
appropriate federal contracting agency labor advisors listed on the Wage Determinations
On-Line (WDOL) website at http://www.wdoi.gov/ala.asJ)x may be contacted for
assistatlce. In addition, Wage and Hour Division staff are available to respond to
inquiries. See http://www.clol.gov/esll/whd/whdkeyp.htrn. The Department also has a
fonnal process for adjudicating a dispute regarding what local practices actually prevail.
See 29 C.F.R. 5.13

There may be occasions when work assignment practices at'e not stated in
published documents, such as collective bargaining agreements (e.g., side letters,
jurisdictional memoranda, or other written documents). This is true regardless of whether
the prevailing rates are union, non-union, or mixed union! non-union. In such instances,
the affected parties and stal(eholders, including labor unions, trade associations, or
contractors, should provide the Department with information regarding such work
assignment practices in written form. See 29 C.P.R. 1.3. The Department believes the
ongoing improvement of Davis-Bacon wage determinations, along with this
Memorandum, will improve compliance and prevent potential wasted reSOlU'ces and
unfairness to employers, employees, and contracting agencies who may otherwise have to
perform post-contract award investigations or hearings to determine'proper classification
of workers based on prevailing at'ea practice. .
 4

The additional transparency contemplated in this MemorandlLTll may take time for
the Department to fully implement. With this more explicit guidance~ however~ the
Department expects government contracting agencies that administer Davis-Bacon and
Related Act contracts and contractors subject to Davis-Bacon labor standards will
imniediately be better aware oftheir responsibilities for complying with applicable
prevailing area practices on cOfu'iruction projects covered by the Davis-Bacon and
Related Acts. Employees, too, will be better informed ofthe determination of
appropriate classifications and wage rates for the work that they are perfonning.

Attachment
 5

Davis-Bacon Classification Identifiers

(Union and Non-Union)

The body of each wage determination lists the classifications and wage rates that
have been found prevailing for the cited type(s) of construction in the area covered
by the wage determination: The classifications are listed in alphabetical order of
"identifiers" that indicate whether particular rates are union or non-union rates.

Many wage determinations contain only non-union wage rates, some contain only
union-negotiated wage rates, and others contain both union and non-union wage
rates that have been found prevailing in the area for the type of construction covered
by the wage determination.

J]nion Identifiers

o An identifier beghming with characters other than SU denotes that the union
classification(s) and wage rate(s) have been found prevailing. The first four
letters indicate the inte1'l1ational union for the local union that negotiated the
wage rates listed under that identifier (see listing below). The four-digit number
that follows indicates the local union number.

Example:

-----------------------------------------------------------
PLUM0198-005 07/01/2007
ST. JAMES PARISH (Northwestern Portion) :
Rates Fringes
PI,UMBER (excluding pipe
laying) $ 21.64 6.88
----------------------------------~-------------------
-----

The identifier is PLUM0198-00S 07/01/2007. PLUM = Plumbers; 0198 =

the local union number (district councilmunber where applicable); and 005
= inte111al number used in processing the wage detennination. The date
following these characters is the effective date of the most current
negotiated rate.

o Special identifiers are necessary for two trades because the same local union
number(s) is accompanied by different wage rates in different states.
Bricklayers local union numbers are not unique nationwide, but are unique
within each State. Similarly, Sprinkler Fitters Local Union No. 699 has
negotiated different wage rates in each State within its territorial jurisdiction.
Therefore, the identifiers for the Bricklayers tUlions are in the format "BR +
state abbreviation," (referenced below as BRXX), and the identifier "SF + state
abbreviation" is used for Sprinkler Fitter Local No. 669's rates.
 6

o It is common for many local unions to negotiate wage rates for more than one
classification. Where this is done, all the classifications for which that union's
wage rates are determined to be prevailing will appear under the identifier for
that union.

Example:

The same union may negotiate wage and fi'inge benefits for painters
and glaziers. In such a case, the wage rate for the glazier, as well as
that for the painter will be found wlder an identifier beghming with
"PAIN"(if both the union rates were found prevailing for both glaziers
an painters). Similarly, users may need to look under an identifier
beginning with "CARP" to find not only rates for carpenters, but also
those for millwrights, piledrivermen and (marine) divers.

Union Identifier Code Abbreviations

Following are the identifier codes used to reference the various craft unions.
Examples of classifications for which their local unions commonly negotiate wage
and fringe benefit rates are shown in parentheses.

ASBE =Intemational Association of Heat and Frost Insulators and Asbestos

. Workers

BOIL = International Brotherhood of Boiler Mal(ers, Iron Shipbuilders,

Blacksmiths, Forgers and Helpers

BRXX = International Union of Bricklayers, and Allied Craftsmen

(bricklayers, cement masons, stone masons, tile, marble and
terrazzo workers)

CARP = United Brotherhood of Carpenters and Joiners of America

(carpenters, millwrights, piledrivermen, soft floor layers, divers)

ELEC =Intemational Brotherhood of Electrical Workers

(e1ecllicians, cOillillUnication systems installers, and other low
voltage
specialty workers)

ELEV =Intemational Union of Elevator Constmotors

ENGI= International Union of Operating Engineers

(operators of various types of power equipment)

IRON = International Association of Bridge, Stmctmal and Ornamental

Iron Workers

LABO = Laborers' International Unioll of North America

 PAIN = International Brotherhood of Painters and Allied Trades
(painters, drywall fInishers, glaziers, soft floor layers).

PLAS = Operative Plasterers' and Cement l\tfasons' Intemationall~ssociation

ofthe United States and Canada
(cement masons, plasterers)

PLUM = United Association ofJoumeym.en and Apprentices of the

Plumbing and Pipe Fitting Industry of the United States and
Canada
(plumbers, pipefItters, steamfitters, spriJlkler .fItters)

ROOF = . United Union ofRoofers, Waterproofers and Allied Workers

SHEE =Sheet Ivfetal Workers International Association

TEAM = International Brotherhood ofTeamsters

Non-Union Identifiers

Classification(s) for which the union rate(s) were not determined to be

prevailing are listed under an "SU" identifier. SU means the rates listed u..nder
that identifier were derived from §!!fVey data by computing average rat.es and
are not union rates. (The data reported for such a classification and used in
computing the prevailing rate may include both union and non-union data. Note
that various classifications, for wltjch llQn-Ufilon rates have been determined to
be prevailing, may be listed in alphabetical order under this identifier.
Hn J. Ar\DL,.\ND. I'r~sitl(m\
KRISTINE 1.. YOUNG, SpniorViCl~ Presid('nl
JOSEPH/ r. JAIWOE, Vita Presitlt'nl
NOR.\\AN I. \Nt\LTON, Trt',lsmN
AGe of America
TH~ ASSOCIATED Gf:N[R,\L CONTRACTORS OF AMEI~ICA
$TEPIIEN E. !i1\NlJlIDUt Chief [xC'culiw Offkl'r Quality People. Quality rrojecls.
DAVID It LlIKFNS, Chid Opcr.lling omn~r

December 30,2010

The Honorable Darrell Issa

U.S. House of Representatives
2347 Raybum House Office Building
Washington, DC 20510

Dear Congressman Issa:

Thank you for your letter of December 10'\ and thank you for taking on this important inquiry.

The construction industry has suffered job loss at a far greater rate than other industries in
America. The unemployment rate in construction remains above 18% (double the economy-
wide rate). As such, we are very sensitive to rules, regulations and enforcement efforts by federal
agencies that seem impractical, imprudent or impossible to comply with.

With that said, we did a quick survey of our members and our own internal experts, and have
assembled the attached list of proposals from agencies that seem to meet the criteria you laid out
in your letter. The proposals are written in a way that will likely "negatively impact both the
economy and jobs."

The list attached to this letter is not an exhaustive list. It is, instead, a quick overview of issues
we have been following or agencies we have been working with to help the agency to better
understand the construction industry. In some cases, both our advice and expertise were welcome
additions to the discussions. In other cases, ongoing efforts to share Imowledge between the
regulated community and regulators has been stifled by a significant anti-business sentiment that
seems pervasive in some agencies.

Thank you again for talcing on this important inquiry. This is not an exhaustive list of issues, but
is our first, quick overview of agencies' actions which we have concerns about. We look
forward to working with you to flesh out any additional information that your conunittee may
need during your investigative process, including information gathering, witnesses for hearings
and background information on regulatory initiatives that impact the industry.

Sincerely,

Stephen E. Sandherr
CEO

Enclosures

2300 Wilson Boulevard, Suite 400 • Al'1inglon, VA 22201·330B

Phone: (703) .148·3118' Fox: (703) 540·3119 • www.ogc.org
U.S. ENVIRONMENTAL PROTECTION AGENCY
Effluent Limits for Construction Runoff-
EPA has finalized fIrst-time effluent limitations
guidelines for the "construction and development
industry." The so-called C&D ELG imposes
natiomvide monitoring requirements and
enforceable numeric limits on the amount of
sediment that can run off any construction site
.that disturbs 10 or more acres of land at anyone
time. It also specifies the exact types of erosion
and sediment controls that contractors must use,
at a bare minimum, to control stonnwater runoff
on all construction sites that disturb one or more
acres afland. The rule took effect in February
2010 and phases in over four years. The new
ELG requirements will be incorporated into
federal and state National Pollutant Discharges
Elimination System (NPDES) stonnwater
construction pennits upon their next reissuance.
In August 2010, EPA filed an unopposed motion
in a case before the Seventh Circuit, requesting
that the court vacate the numeric turbidity limit,
remand that part of the ELG rule to EPA, and
hold the lawsuit in abeyance until February 15,
2012, to give EPA time to reevaluate the rule's
numeric limit. The court granted EPA's request
to remand the rule and to hold the suit in
abeyance, but refused to vacate the numeric
limit. In November 2010, EPA published a
direct fmal rule to formally stay the numeric limit
and associated monitoring requirements for
turbidity in the ELG rule because of an error in
the way the Agency calculated the limit. EPA
plans to propose in December 2010 a '"correction
rule" for public comment that would revise the
current numeric limit of280 nephelometric
turbidity units (NTUs), and then take final action
on a revised limit by May 30, 2011.
Post-Construction Stormwater Requirements
- EPA has announced that it 'Will propose and
take final action by Nov. 2012 on a fust~time
national rule that would restrict stormwater
discharges from newly developed and
EPA issued a numeric standard that is excessively
costly, difficult to implement, and based on
numerous factual errors. In it<; current form"the
C&D ELG will apply to all land disturbing
activities, including construction ofhighways,
streets, bridges, turmels, pipelines, transmission
lines and residentiaL commercial, and industrial
structures. The C&D ELG "Will also impact the
construction activities conducted by state and
local governments, as well as how they administer
and enforce their existing erosion control &
stonnwater management programs.
EPA admits (as stated in the rule's technical
supporting documents) that the estimated costs of
compliance (about $953 million per year) are
more than twice the estimated benefits. What is
more, SBA estimates that EPA's fmal rule "Will
cost businesses, including small businesses, in
excess of$9.7 billion per year. Closure of 10 to
20 percent ofthe industry has been considered
acceptable in past ELG rulemakings.
EPA also has not demonstrated that any particular
<<teclmology" will universally ensure compliance
across the country. (EPA set the limit using data
from advanced treatment systems rather than
passive treatment systems, the technology chosen
for the final ELG.) In the likely event that many
construction site operators "Will be forced to rely
on expensive and labor-intensiv~ Advanced
Treatment Systems CATS) as the only viable
control technique, the actual cost of compliance at
many construction sites will far exceed EPA's
estimates and likely put many companies out of
business.
Such new federal requirements will increase the
cost of construction and present liability issues
concerning the contractor's legal/contractual
obligations to the site and the owner after the
contractor leaves the site.
'()'diffC'alfO*~2ii~!fe);Rui~i7'~I(tf~t~;t[0.01~~~,_~~_;~u~a~:tW-titliliKt.o$'ttt-~;,q;~
~Rlilem'aking Process ~ regulation
isarbttrary andcapriciol1s,-an
obuseofdiscretionJo[ otherWise
noUn accordance with the law...
A turbidity-based action level approach would be a The public did not have an
better option for the reasons below. Under an action opportunity to comment on either
level approach, a facility that exceeds a benchmark the data or the methodology used to
(action) level must re~evaluate and document the derive EPA's numeric turbidity
effectiveness of its best management practices to standard for construction site,
minimize discharges. which likely contributed to the
A One-Size-Fits-All Numeric Limit Is Not Suitable series of technical errors. The
to Construction. Numeric limits are not appropriate C&D ELG must use better
for construction because wet weather events are scientific data ELGs are being
highly variable, and sampling techniques do not developed despite the fact that
accurately measure pollutant levels associated with there is no scientific data
stormwater discharges from construction sites. The supporting the regulation. EPA also
high degree of variability in site parameters, regional lacks the site-specific data and
and site specific rainfall, and erosion and sediment analyses typically associated with
control effectiveness make specification of st2ndard promulgating past ELGs.
stOITIlwater monitoring requirements impracticable on
a national regulation.
A C&D ELG Must Be Adjustable to Site
Conditions. Construction sites are temporary in
duration, every changing, and already regulated to
prevent discharges of sediment and other pollutants
into U:S. waters. A final ELG rule must be
sufficiently flexible to allow for proper BMP
selection and the use of innovative teclmologies on
construction sites.
Contractors Could Be Fined Despite Following
EPA Regulations. The ELG could subject a
contractor to fmes and other government action even
though the required BMPs have been fully
implemented. The inability to accurately collect and
measure stOITIlwater samples makes it impractical to
use strict numeric limits for compliance purposes.
Storm Water Management Regulations Must Be
Administered at StateJLocaI Levels, and Be Based
on Best Management Practices. State and local
authorities should retain the ability to tailor
stOITIlwater requirements to state/local conditions,
rather than be bound by a rigid and inflexible federal
standard,
EPA must not include design or performance Congress set as a condition
standards to control stormwater discharges from precedent to any new designation
developed sites as part of the current NPDES and subsequent regulatory program
Construction General Permit program. General that EPA conduct a study pursuant
contractors are not responsible for designing, to Section 402(p)(5) and submit it
I ••• ~~~~e"'PlaYeir~;'l!!.iJ';1'.QPOS~d;~"';'fssu"<a~ ;YNega@';'TTiipacf7tO;i\iel€,iji1'mctioi\'lrilIu~ ~i\t,~;~~~~~!~!\1-"i\irifieafiOn~o{ili"'1tirle~' ':;:;('2;ft5~ £,~~\~~~~~~:~~~:;~~~;:~.J
redeveloped sites. EPA plans to propose a
regulation to strengthen the national stormwater
permit program, including, at a minimum, new
design or performance standards to control
stormwater discharges from developed sites
under the authority of section 402(P) ofthe Clean
Water Act
Chesapeake Bay Watershed Clean-up Plan
The Clean Water Act requires TMDLs (i.e.,
clean-up plans) for all waterbodies that do not
meet their water quality standards (i.e., impaired
vvatenvays). The Bay and its tributaries were
placed on the impaired waters list in 1988 for
mtrogen, phosphorus, and sediment. A lawsuit is
now forcing the prompt development and
implementation of a Bay-wide TMDL. The Bay
TMDL (draft released in 20 I 0) also is a key part
ofthe strategy developed by federal agencies to
meet the President's 2009 Chesapeake Bay
Executive Order (EO 13508). The TMDL
requires states to develop watershed
implementation plans (WIPs) to reduce
pollutants from nonpoint (e.g., a.:,oricultural
runoff) and point sources (e.g., construction site
runoff). EPA also is considering adding
Chesapeake Bay-specific provisions to the
national J~ost-construction stormwater rule
Once fIilal, the Bay TMDL will.contain binding
water quality standards that must be incorporated
into all National Pollutant Discharge Elimination
System (NPDES) permits -t:hat authorize
discharges to the Bay watershed (e.g.,
construction general [storrnwater] permits).
Construction contractors who discharge
storrnwater to the Bay will be required to meet the
TMDL limits in their permits. Because EPA has
identified development and developed land
(including stonnwater runoff from construction
sites) as a contributor to the poor water quality of
the Chesapeake Bay, the Bay TMDL will likely
impact new construction in the Bay area in the
future. To this end, the draft state WIPs all
reference erosion and sedimentation controls and
some states may include groVlth restrictions, low
impact development strategies, strict effluent
limits, and post-construction stormwater controls.
Post-construction controls could include retrofits
fmancing, operating, or maintaining post-construction
stormwater controls.
Moreover, EPA should preserve the role that states
ahd localities have traditionally played. States and
local authorities should lead the regulation ofland and
water use,- not the federal government. Existing
regulatorv programs adequatelY control post-
construction discharges. Project owners/developers
already must consider long-term stonnwater
management in the planning and design phase of a
project, provide incentives (or mandates) for low
impact development, require long-term monitoring
and maintenance for stoIDlwater facilities, and
otherwise address post-construction stormwater
management. In addition. EPA regulations currently
direct the municipalities to address post-construction
stormwater runoff, and many local governments are
adding new requirements - or have had post-
construction stoIDl\V3ter requirements on the books
for years. . for any regulatory program by EPA
State and local authorities are in a better position to
identifY the best practices and techniques to control
any erosion or sedimentation that might result from
storm vvater runoff from the developed sites within
their borders.
Industry maintains that both the data and the
modeling program used by EPA to develop the Bay
TMDL are flawed. EPA should re-evaluate the
loadings in the draft TMDL and address any concerns
with the underlying model before finalizing the clean-
up plan for the Bay watershed. Alleged flaws in the
data and modeling are contributing to concerns that
EPA is setting too aggressive timelines and pollution
loadings.
isarbit[ary ~nd capricious-an
abuse ofdiscretipn, or'Otherwise
riot inaccotdance with the law...
to Congress before proceeding with
a specific process for such new
regulations set forth in Section
402(P)(6). EPA has not complied
with its Congressional mandates
here and cannot justify regulating
developed land without first
meeting the conditions precedent
set forth by Congress. Until EPA
has fulfilled these statutory
requirements, EPA has no basis for
pursuing the rulemaking.
But even if EPA complies with
Congressional mandates and
conducts a study. the fact remains
that developed land, generally, does
not meet the definition of point
source discharge to vvaters ofthe
U.S. and it has not been designated
through the process set forth by
Congress.
The Bay draft TMDL is 2000+
pages and encompasses several
sub-TMDLs for various tributaries.
EPA has been criticized that the
Agency did not provide enough
time for the public to comment,
especially considering that many
small businesses, fanus, and home-
O'Wllers would be impacted by the
TMD1.
'i-'
currently in the works (see above). Other states
with water quality concerns will look to the
Chesapeake Bay TMDL as a guide or model for
developing their own discharge pollution limits.
Oil Spill Prevention, Control and
Countermeasure (SPCC) Plans - The spec
amendments finalized by EPA at the end of2008
took effect in early 2010. Many of these
amendments (and other reforms finalized by EPA
back in 2006) ",.rill ease the compliance burden on
construction companies covered by the federal
oil spill control regulations, but there are still
major inefficiencies inherent to the program.
EPA has set a November 10, 2011, comptiance
deadline for regulated construction sites to
prepare and implement SPCC Plans that meet all
ofthe current requirements.
Nitrogen Dioxide (N02) National Ambient Air
Qnality Standards (NAAQS) - EPA Jan. 22
finalized tighter air quality standards for N02
gas. The revision marks the first time EPA has
updated the NAAQS for N02 in nearly four
deq.ldes. The final rule. intrOduces a new one-
hour maximum standard for N02 at 100 parts per
of stormwater controls for existing development,
performance standards, tracking and reporting.
States may heighten their inspection and
enforcement activities. Implementation of the
plans will be expensive and Some states are
entertaining stormwater fees and pollution trading
schemes to pay for the TMDL.
Construction workers use oil in their operations
(and in their equipment) and, as a result, they are
directly impacted by the SPCC plan requirements
contained in the Oil Pollution Prevention
regulatioIL
Many construction sites fall within the SPCC
thresholds, but do so on a temporary basis that in
no way fits within EPA's general perception of a
"regulated facility." Unlike a fixed or permanent
oil storage site (where the cost to develop and
implement an SPCC plan may be distributed over
many years), a construction contractor must
prepare multiple SPCC plans as jobsites are
modified., projects completed, and new projects
started. Unlike fixed sites, this requires creating
and modifYing SPCC plans throughout the year.
In addition, some contractors may even need to
prepare multiple SPCC plans for the same
construction "project." ,This situation occurs when
a contractor temporarily uses off-site locations
(either adjacent to the project or some distance
away) to perform function that are integral to the
larger construction project and both the off~site
l.ocations and the construction project site meet the
1,320 gallon threshold.
The more stringent N02 requirements will be
Ullllecessarily costly and burdensome on states
and the regulated community. Currently there are
no areas in the United States that are designated as
nonattainment of the N02 NAAQS. With the
tighter N02 NAAQS now on the books, however,
some areas will be classified as non~artainment
~, -- is arbftraryandcaprlcious.,arl
abuse o/discretion, or otherwise
not in accordance with the law...
EPA should amend the SPCC rules to exempt all It appears that EPA did not
construction sites in full compliance with a National recognize the temporary nature of
Pollutant Discharge Elimination System (NPDES) construction when it determined the
construction storm water' permit. The NPDES storm economic impact ofthe SPCC
water permit program regulates construction sites one program on small construction
acre or greater, mandating that they implement and businesses.
develop a stormwater pollution prevention plan
(SWPPP) that includes an oil spill prevention
component. EPA's SPCC protections are mirrored
almost entirely by EPA's storm water permit
requirements, at least with regard to their application
to the construction industry. EPA should allow
SWPPPs to satisfY existing oil spill plan
requirements. It is UlUlecessary and an added cost and
paperwork burden to require two separate plans for
construction sites with simple and small oil storage.
In addition, EPA should exempt asphalt cement (AC)
from the defmition of «oil." An exemption would be.
based on the characteristics of AC and the
documented low risk of a spill reaching navigable
waters. In the event of a spill or leak, AC quickly
hardens at outside air temperatures and would not
flow beyond the immediate vicinity ofthe tank or
holding silo. A simultaneous rain event would only
accelerate the solidification process. The potential for
a fire to influence the viscosity of AC is virtually
impossible. In the unlikely event that an asphalt spill
would reach nearby v.rater, it would not create a sheen.
There is no threat of AC contaminating ground water.
Moreover, recent National Response Center (NRC)
data demonstrate a negligible risk: of an asphalt spill
eVer reaching U.s. waters.
EPA should remove the monitoring component from EPA should let existing air
its N02 NAAQS proposal and wait until the new air emission/fuel regulations and
standard is implemented before proposing a voluntary programs work before
SUbsequent rule for monitoring requirements. EPA tightening NAAQS rules,
should also consider a pilot study to determine how especially considering the continual
roadway monitoring ofN02 would function in the phase-in ofnew federal engine
real world before imposing this costly new system. standards and the recent switch-
.1:~j,~t~mi>laiea"~~~~~yg{~~~~~ff~t\,,,wegafui'e1Iiii~p'act>io,'tb,~CQn'lhicli<ii11g,a:i\.~~~t1~j~v~~i~<j,'t!J\iI,odrflcaiimlS'f6%iii'jRufe''''"'i'\f;'i~~;ifl!!~~r~::~i~~~;~l~:::<"'
, .-
billion (Ppb). The agency is also retaining the
existing annual standard of 53 ppb. Significantly~
EPA also chose to set new, firsHime
requirements calling on states to monitor and
measure N02 levels near major roads. Cities
with at least 500,000 residents must have
monitors near roadv.rays, and larger cities and
areas .....nth major roads \¥ill have additional
monitors. Cities with at least 1 million residents
will continue with communityv.ride monitoring.
All new N02 monitors must begin operating no
later tMn January 1,2013.
Ozone National Ambient Air Quality
Standards (NAAQS) - On December 8, EPA
announced that it will postpone until July 2011
the issuance of new NAAQS for ground-level
ozone. The revised standards were initially
expected by August 31, 2010, and subsequently
postponed until the end of December, before this
most recent delay. According to EPA,
Administrator Jackson \ViII use this extra time to
"ask the Clean Air Scientific Advisory
Committee (CASAC) for further interpretation of
the epidemiological and clinical studies they used
to make their recommendation." The original
recommendation 'was to lower the current
standard from .075 parts per million to
somewhere bet......-een .060 to~ .070 parts per
million.
Greenhouse Gas Emission Permitting for
Buildings and Facilities - In 2010, 'EPA
fmalized a rule to tailor how certain provisions in
the Clean Air Act's (CAA) Prevention of
Significant Deterioration (PSD) and Title V
pennitting programs apply to stationary sources
that emit greenhouse gas emissions. In the so-
States with non-attainment areas will be required
to develop "c1ean~up" plans (State Implementation
Plans or SIPs) that identifY and implement
specific. air pollution control measures to reduce
ambient N02 concentrations to attain and
maintain the revised N02 NAA.QS, most likely by
requiring air pollution controls on sources that
emit oxides of nitrogen (NUx). According to
EPA, two of the top three categories of sources of
NOx emissions are on~road and non~road mobile
SOurces. See also related discussion on revisions
to the ozone NAAQS below.
The lowest standard would hugely increase the
number of counties which would have air quality
that violates the standard. 'When an area is
designated as a "nonwattainmenf' (NA) area under
the Clean Air Act, serious repercussions result
immediately. These come in the fonn of increased
costs to industry and businesses, permitting delays
and restrictions on expansion, thereby forcing
companies to either impose higher prices on their
customers or relocate out of the nonattainment
area For construction, equipment owners may
face restrictions on the use/and or operation of
their off-road diesels, as well as possible federal
sanctions such as emissions caps limiting
economic development and the loss of federal
highway transportation dollars, which can be
imposed in a state that fails to develop a suitable
State Implementation Plan (SIP).
Nonattainment designations under the Clean Air
Act may lead to construction bans in geographic
areas so designated by EPA. which would have a
negative effect on employment, gross domestic
product, manufacturing shipments, the completion
of critical infrastructure projects, and the delivery
of important public services.
The pennitting agencies that administer the PSD
and Title V programs will likely become
overwhehned by the vast number of newlyR
required. Ibis very concern led EPA to adopt the
tailoring role for the Prevention of Significant
Deterioration (new construction and major
uplITade p_errnits) and the Title V (operating
. ,,-
EPA should not tighten the 2008 ozone NAAQS at a
time when implementation of the current standard is
still underway and because ofkey uncertainties in the
underlying science. The existing standard meets the
legal requirement of being "'requisite to protect the
public health," and should not be revised.
The CAA is not the appropriate tool to address the
nature of greenhouse gas emissions. What is more,
now that EPA has moved forward with its mobile
source GRG rules [i.e., first-ever harmonized GHG
and fuel economy standards for light-duty vehicles for
model years 2012 through 2016 and a proposal to
apply similar standards to heavy-duty trucks], the
. is"arbitr"aryandcapriciOus.an
abuse:ofdis~retion, or~therwise
noUn accordance withthe law...
over to exclusively ultra-low-sulfur
diesel fuel.
EPA admits that it does not have
any new scientific studies to
support another revision to the
ozone standard at this time; rather,
the Agency is effectively
attempting to second guess its
previous 2008 decision. In the
absence of innovative scientific
evidence, no particular numeric
change to the current standard is
justified at this time. Any change
in an ambient concentration set by
a NAAQS standard must be
""requisite"to protect human health
or welfare, based on a review of
updated scientific infonnation.
In addition., Congress should
amend the Clean Air Act to state
that the EPA Administrator should
consider costs when setting
NAAQS. This would allow
the EPA to consider economic tools
such as benefit-cost analysis, cost-
effectiveness analysis, and risk-
analysis in setting NAAQS.
Legislation and programs
specifically tailored to address the
unique aspects of greenhouse gases
would be more effective at
reducing those emissions with
potentially less harm on the
economy, making that a more
 ,Rule- .' ' , ' ":,:, -
caned "tailoring rule," EPA set higher thresholds
and longer phase-in periods before these
pennitting programs will apply to large and
medium OHO sources. However, increasingly
more facilities will be regulated in the coming
years. EPA has not ruled out the possibility that
even the smallest GHG emitters will eventually
be covered by the PSD and Title V programs
I permits in the coming years.
In the coming years, businesses will be reporting
their GHG emissions, as per the Mandatory
Reporting of Greenhouse Gas Emissions Rule
(fmalized in 2009).
Black Carbon or "Soot" - There is growing
interest in regulating black carbon emissions.
from many sources. Black carbon is a short-
lived greenhouse gas and very localized.
Lead Renovation, Repair and Painting
(LRRP) Program - EPA is actively reviewing
the lead paint laws that are already on the books
for residential renovation and remodeling work
and recently issued an advance notice of
proposed rulemaking to gather information on
whether and how to apply those requirements to
. ,- ........•........ ;".--,_. ··.._,·~.'";'. ~·:""'i":N~"e',"'v"
permits) programs for stationary sources.
Without the tailoring rule to modify the thresholds
the number of affected facilities would be in the
millions. EPA estimates there would be an
increase of 140-fold for PSD permits from 280
permits issued each year to approximately 41;000
yearly. More than 6 million newly-regulated
facilities would have to obtain Title V pennits and
the nearly 15,000 existing permits would require
revisions.
New building construction and major renovations
would literally come to a halt as pennitting delays
add years to project approvals. The tailoring rule
alleviated the initial concern by raising the
thresholds, but that flx is only temporary. More
and more facilities will be required to obtain
AOC members ovm and/or operate facilities that
could exceed the reporting thresholds (e.g., office
buildings, large stationary equipment, and
materials processing plants) and are dependent on
other potentially regulated facility ovmers for new
work and for materials. As such, the reporting
rule, and any future control requirements, could
directly affect AGC members' daily operations,
their ability to secure future construction work,
and the costs of materials, equipment, and fuel
used in their construction projects.
The construction industry would be most
impacted by regulation of black carbon emissions
from equipment. Based on actions already taken
against equipment, contractors could expect
retrofit mandates, idling and use restrictions, bid
preferences towards newer equipment, etc.
Conunercial office buildings are re-painted and
"renovated" on a continuous basis as part of on-
going maintenance. Given that regulations are
triggered in "target housing" if 6 square feet of
painted surfaces are disturbed - simply taking
residential rules and applying them to commercial
buildings will mean a never-ending cycle of lead
.... ·····.·.·········..<::--,:Rl1Iema'~ng,Pro_c:ess~reBulat/On
is:arhitrqry,an9 cap.riciousi : an
I abuse:of~iscr~tion,orot~erw(se
not-in accordancewith.thelaw...
Agency is obligated to address GHG emission under suitable route for future controls
other sections ofthe CAA-including pennitting 1han the CAA.
programs for commercial buildings and other
stationary sources that emit GHGs.
COIle,OTessional action is needed to stop EPA from
using the Clean Air Act to regulate GRO emissions
altogether and to come up with any needed alternative
legislation. Congress could choose to allow EJ? A to
move forward on mobile source emissions only.
On Dec 20, EPA proposed to delay reporting These reporting requirements were
requirements until it can resolve <Obusiness sensitivity" intended to inform decision-making
issues. Monitoring and measurement activities on GHO policy; however, the
requirements are to remain. So it will be several years agency fmalized key regulatory
before EPA receives the data that is to infonn its action on GRG emissions before
rulemaking on greenhouse gas emissions. receiving or reviewing the first
reports. EPA provided only 60
days for comment and then
fmalized the rule providing very
little time for these facilities to
learn how monitor emissions and
purchase necessary equipment to
start monitoring emissions in 2010.
EPA fast-tracked the rule in order
for the first reports to be submitted
in 2011 {for 2010 emissions).
No new rule is needed. Black carbon reductions are NlA
addressed through existing regulations that clean
particulate matter from air emissions.
In order to regulate RRP activities in commercial and The Toxic Substances Control Act
public buildings, EPA would need to show that such (TICA), 15 U.S.c. § 2682(c)-(d),
activities create a lead-based paint hazard. EPA must requires EPA to first study lead
conduct a study oflead paint hazards in commercial hazards in commercial buildings
buildings before it can issue regulations on that that arise from renovation and
subject. The agency has no alternative to avoid doing remodeling activities before it
the study, and it cannot simplx. take a study from the develops pertinent regulations.
 ~t)~fgopose(Jl1oi'lssue(J!lC~ %c1%gatrve;Effip~f~~iJJi€(}nmuCtio)t,~il:~~ ~~~~N~ei*~\Nfji(JjficaiioiiSlt!i;'(h~leo/";?O;1';1 ~~t{i~~~:,~~:::f~~;:~~~::,1
public and commercial building renovation and
remodeling. This action comes in response to a
legal settlement agreement that the Agency made
with several environmental and public health
advocacy groups.
For exterior renovations of public and
commercial buildings, EPA must issue a
proposed role requiring lead-safe work practices
by December 15,2011, and must take fmal
action by July 15, 2013. For interior renovations,
the EPA must consult with the EPA Scientific
Advisory Board (SAB) by September 30, 2011,
regarding a methodology for evaluating the risk
posed by renovations in public and commercial
bUildings. IfEPA concludes that interior
renovation activities do create lead-based paint
hazards, then EPA must issue a proposed rule
applying specified work practices to such
activities within 18 months after receiving the
SAB report and must take [mal action 18 months
thereafter.
Lead "Dust Wipe" Testing- EPA on Aug. 6
issued a rulemaking proposal that would require
contractors to perform "dust-wipe testing" afteT
most construction activities covered by EPA's
Lead RRP rule to show that lead levels comply
Vvith EPA's standards. Remodelers would be
required to send testing labs samples from
surfaces both in the work area and immediately
outside it or hire a certified testing specialist to
examine the work area. Regulated contractors
would also need to provide the results of the
testing to the owners and occupants ofthe
building. For some ofthese renovations, the
proposal would require that lead dust levels after
the renovationbe below the regulatory dust-lead
hazard standards.
Fly~Ash & Other Coal Combustion Residuals
- EPA is considering two regulatory options to
control the disposal of coal combustion residuals
(CCRe) from electric utilities: (I) Regulate
paint testing, contractor certification, worker
training" and comprehensive management
practices - all increasing the cost of construction.
What is more, in the residential context, it is
widely recognized that there are simply not
enough certified contractors to perform
remodeling activities that satisfy EPA's rules.
That problem will be magnified exponentially for
commercial buildings. In addition, expanded
LRRP rules could likely impose regulatory costs
·that are so high they would nullify any financial
incentives offered for energy efficiency projects,
and thereby discourage building upgrades
designed to lower power consumption, reduce
greenhouse gas emissions, and create green jobs.
This proposal would add significant liability to
construction finns by making the remodeler
responsible for lead exposure issues existing in
regulated facilities before any work is performed,
as well as outside the area in which the renovation
work has taken place. Moreover, as the LRRP rule
expands to public and commercial buildings (see
above), so would the dust-wipe testing
requirements. In addition, the costs associated
with the lead dust wipe testing and clearance
testing requirements would be significant.
The language in the proposed rule (the re-
characterization mechanism) and listing the waste
as hazardous (subtitle C option) will create a
stigma that ,could result in curtailing one ofthe
residential context and use that as the basis to regulate
renovation and remodeling in offices, stores, hotels,
industrial sites and other commercial buildings where
children largely are not present on a continuous basis.
Visual inspection along with post-construction
cleanup have been extremely effective and should
continue as the standard of practice in the industry.
The cost of the proposed amendments outweigh the
minimal benefits of the new requirements, particularly
in light ofEPA's conclusions regarding the
effectiveness ofthe existing cleaning verification
requirements.
EPA should make a nonhazardous waste designation
for CCRs. thereby ensuring the continued beneficial
use of those materials. Industry will not 'WaIlt to use
these materials ifthey are determined hazardous, even
isarbitraryandcC1:pricious.an
abuse,ofdiscretion..or :otherwise
notinaccordance withthe law...
EPA has never studied lead hazards
in commercial space. Its staff and
'advisors from its Scientific
Advisory Board freely
acknowledge there is a lack of
information on the existence of,
and any causal impacts from, lead-
based paint hazards caused by
remodeling activities in
commercial buildings. Congress
should compel EPA to complete
the commercial buildings study
first before it issues pertinent
regulations. Moreover, Congress
should ensure that such a study is
completed and released before the
agency promulgates a proposed set
of regulations in the Federal
Register, anticipated by December
2011.
EPA has statutory authority only to
suggest guidelines for the conduct
ofLRRP activities, not to impose
work practice standards. EPA has
not established that all RRP
activities being regulated create
lead·based paint hazards and EPA
has not conducted a "study of
certification" nor has the Agency
convened a Small Business
Advocacy Review Panel. The
proposed amendments are
inconsistent with the enabling
statute (the Toxic Substances
Control Act) because they would
eliminate the distinction between
abatement and renovation and that
EPA has acted in an "arbitrary and
capricious" manner because it has
failed to consider cost and liability
factors in this rulemaki
After reviewing the proposed rule,
there are still too many unknowns
about the future of beneficial use.
The oroposed rule could be
 "1$s)i~;:;regai'iVe;rmpiicFtil!th~i€;on'iiiiil!tioiY'bia\iS(iY:~ ~~;'!~;,i~~~~c~d;~aificailiJiJS.'io;:t.li!)Riile"')';',1·;Yi?""\"Needed.iS'todifiCiiti<m'";t~jtli.';i~t:
,".' ,': .•. '. . ~ . '.. '
disposal ofthese residuals as hazardous waste
under subtitle C of the Resource Conservation
and Recovery Act (RCRA), or (2) Regulate t1ie
disposal of these residuals as non-hazardous
under subtitle D ofRCRA.
EPA maintains that it intends to safeguard certain
beneficial uses of CCRs. However, language in
the proposed rule advocating subtitle C re-
characterization upon demolition, or at the end of
the recycled material's useful life, ·effectively
eliminates the beneficial use protection.
Termination oflndnstry Partnerships. In
early 2009, EPA terminated a long~standing
voluntary program-the EPA Sector Strategies
Partnership. For several years, AGC served as
the construction industry's representative in this
program. Together AGC and EPA sought to find
workable solutions to long-standing industry-
related environmental challenges, to ease
regulatory burdens that impair environmental
results, to increase the implementation of
environmental management systems by
contractors and to measure progress.
.. : . . . . . . , " .,' ",~"/""<w'--,·""< ,:auIemakingP,rocess~'regulatioti',:s
is arbitrary qnd.capricio,~s.an
abuse ofdifcretion or otherwise
noUn accordancewiththelaw...
most widely and successfnlly recycled products if EPA adopts a "temporary" non-hazardous status for considered an Advanced Notice of
and negatively impact natural resources, landfills when they are being used on a construction site. In Proposed Rulemaking where EPA
and EPA's policy goal of encouraging recycling fact, industries that beneficially use these materials identifies several options and
on a large commercial scale. need the confidence moving forward that these solicits information from the
The construction industry has used CCRs, materials are not hazardous waste and 'Will not later public. In addition, the proposed
primarily fly ash, for approximately sixty years in become hazardous waste simply because the material rule opened the door to many
the construction of roads and highways: Portland reaches the end of its useful life (e.g., the demolition questions regarding beneficial use
cement concrete, soil and road base stabilization, and disposal of concrete or wallboard that of these industrial materials. AGC
flowable fills, grouts, structural fill and asphalt incorporated fly ash). requested additional opportunities
filler. Wet bottom ash and flue gas desulfurization to offer comment once EPA has
(FGD) wastes also are commouly used in highway provided a clear proposed
construction as base material, flowable fill, regulatory option and information
embankment fill, and soil and road base on how it would impact the
stabilization. beneficial use of CCRs.
In the building construction market, fly ash and
other CCRs are diverted into floorings, landscape
features, insulation, drywall/wall board., mortars
and grouts, masonry blocks and building exteriors.
Coal combustion residuals also are used as base,
backfill, foundations and structural fill materials
in building construction.
The termination of t1iis voluntary program, the N/A N/A
denouncing of construction in the EPA's water
action plan. and the agency's new budget that
focuses on enforcement and the administrative
support ofnew roles - all demonstrate that this
administration is not interested in educating the
regulated community or working with industry to
improve environmental performance.
 Government Withholding Relief Coalition
Repeal Section 511 of Tax Reconciliation Act (P.L. 109.222)

Summary of Section 511:

It mandates that federal, state, and local govemments withhold 3 percent f1'Om payments for goods
and sel"Vices.
• Requires a "tax" withholdings at a rate of 3% on all government payments for products and
services made by the federal govemment, state governments, and local governments with
expenditures of $1 00 million or more
• Impacts payments under government contracts as well as Medicare payments, Farm
payments, and grants to for-profit companies (i.e. Invoice for $100, government only pays
$97)
• The 3% withheld is allocated toward the company or individual's tax liability
• Applies to all payments starting in 2012 (change made from 2011 to 2012 in P. L. 111-5, the
EconolIllc Stimllius bill)
• Imposes significant administrative costs and information reporting requirements on
govemments and companies
• Three primary areas for additional costs: 1) financing costs due to the decreases in cash flow,
2) annual recurring costs for additional employees, and 3) capital investments to modify
financia'! systems
• Estimated to "increase" revenue by $7 billion from 2011 to 2015, but "raises" $6 billion of
that amount in 2011 solely due to accelerated tax receipts and not an actual revenue increase
from improved tax compliance
• Generates only $215 million in 2012 and increases slightly in each of the next three years
thereafter. DoD estimated costs to be $17 Billion over the first 5 years for DoD alone.

. Genesis:
110is far-readoing new requirement was inserted as a last-minute revenue raiser into the Tax
fut'onciliation Act of2005 that was signed by the President in May 2006. While supporters argue that
imposing withholdings on payments made by Federal, State and local governments will improve
taxpayer compliance and reduce the tax gap, this is a withholding on all payments with no
relationship to a company's tax liability and doesn't take into account the true ramifications of the
requirement.

Ramifications:
There will be a large number of hatmful consequences if the provision is not tepealed. The
p1'Ovision hutts honest taxpaying businesses while it attempts to find tax delinquents by essentially
forcing companies to p1'Ovide the federal government with an interest-free loan. The
3% withholding significantly affects companies' cash flows. This new requirement is based on
revenues from government payments with no relationship to a compaloies' taxable income.
Companies will lose vital funds needed to operate day-to-day activities and will be forced to pass
along the added costs to customers or finance the additional amount.

In addition, the costs to Federal, State; and local governments to administer the progtam will be
substanti.~l at;d the process complicated to implement. The Congressional Budget Office reported
that the withholding provision is an unfunded mandate on state and local governments because it
exceeds the allowable $50 million annual threshold.

Legislative Change Needed:

Congress should repeal Section 511 ofP.L. 109-222 as soon possible.

www.WithholdingRelief.com
US Occupational Safety and Health Administration

Injury and Illness Prevention The proposed rule would require employers to Remove the requirement for the
Program - OSHA is developing a establish and frequently update programs to development of company safety
rule requiring employers to address safety and health hazards that may programs that address hazards that
implement an Injury and Illness not be currently regulated. are not federally regulated. OSHA
Prevention Program. The Agency should instead proVide simple
currently has voluntary Safety and gUidelines to the small employer
Health Program Management community to develop and
GUidelines, published in 1989 implement an effective safety and
health program that focus on the
regulated hazards that are significant
threats in the workDlace.
Occupational Exposure to The proposed rule recommends permissible Provide realistic/achievable PEL's
Crystalline Silica - OSHA exposure limits (PEL) of SO~g/m3 or 25~g/m3 based on real testing in the industry
announced in the Agency's fall 2010 which may be impossibie to comply with in the
regulatory agenda to pursue a new construction industry.
comprehensive standard for
crystalline silica to require exposure
monitoring, medical surveillance,
and worker trainina in 2011.
Cooperative Agreements - OSHA The proposed rule would eiiminate the This rule will discourage the use of
proposes to revise its regulations for separation of OSHA's consultation program OSHA inspectors for preventative
the federally funded On-site and enforcement subjecting small employers safety audits and will reduce
Consultation Program to: a)define to enforcement activity while participating in cooperation between OSHA and the
sites which would receive the consultation program, SHARP, or Pre- regulated industry. It should never
inspections regardless of Safety and SHARP status. be promulgated.
Health Achievement Recognition
Program (SHARP) exemption status;
b) allow Compliance Safety and
Health Officers to proceed with
enforcement visits resulting from
referrals at sites undergoing
Consultation visits and at sites that
have been awarded SHARP status;
and c) limit the deletion period from
OSHA's programmed inspection
schedule for those employers
participating in the SHARP program.
SHARP is a recognition program that
OSHA administers to proVide
incentives and SUDDort for small
US Occupational Safety and Health Administration
employers to develop! implement,
and continuously Improve effective
safety and hea~h programs at their
jobsltes.
Musculoskeletal Disorders
CMSD) Column - OSHA is
proposing to change its Recording
and Reporting Occupationai
Injuries and Illnesses regulation.
OSHA has reconsidered the need for
a 300 Log column for WMSD, and
for defining "musculoskeletal
disorders" for checkinq the column.
Building Inspectors
Partnership- Secretary of Labor
Hilda L. Solis sent letters to the
mayors of selected cities proposing
that OSHA work with and train local
building inspectors on hazards
associated with the four leading
causes of death at ccnstruction
sites. Under this program, building
inspectors would notify OSHA when
they observe unsafe work
conditions. OSHA would then send a
federal agency compliance officer to
that jobsite for an enforcement
insDection.
Backing Operations - OSHA is
proposing to promulgate a ruie
regulating backing operations
involvinD construction eouiDment.
Interpretatipn of Feasibility:
Noise standards ~ OSHA proposes
to interpret the term feasible in
these provisions as haVing the
meaning of "capable of being done,"
or "achievable." Feasibility
encomoasses both economic and
This rule requires business owners to fill in This added paperwork burden does
additional speculative medical information on not support a standard that has been
OSHA log for injuries for which there is no issued, it should never be
applicable standard. Requires those promuigated.
maintaining the OSHA 300 log to make
medical assessments/diagnosis beyond their
capabilities. Would also require additional
medical costs to accurately assess/diagnose
reported conditions to achieve compliance.
This policy prOVides building inspectors the This policy should never be
authority to act as an extension of OSHA implemented
enforcement that lacks the specific knowledge
and expertise to properly assess construction
hazards. The training of the building
inspectors as stated in the letters would be
merely a 1 V2 hour course which is inadequate
to properly educate the building inspectors in
the proper Identification of the hazards
mentioned in the letter. This policy also has
the potential for piacing additional strain on
relationships between building inspectors and
contractors.
Would require the use of engineering controls Consult with construction industry
(cameras, radarl sonar/ etc.) to minimize or experts to explore alternatives (best
eliminate the number of struck-by incidents on practices, awareness materials, etc.)
construction sites. to the proDosa!.
Requires employers to implement costly OSHA should maintain current This should be considered a
engineering and/or administrative controls that enforcement policy significant rulemaking instead of
may prove ineffective. It also imposes liability interpretive rulemaking.
for a diagnosed hearing injury on a'current
employer without determining that injury was
sustained during time of employment with
current emDlover or even if the iniurv is work
US Occupational Safety and Health Administration

technological considerations! but this related.

proposal addresses only economic
feasibility OSHA proposes to
consider administrative or
engineering controls economicaliy
feasible if they wili not threaten the
employer's ability to remain in
business or if the threat to viability
results from the empioyer's having
failed to keep up with indusby
safety and health standards. OSHA
further intends to change its
enforcement policy to authorize the
issuance of citations requiring the
use of administrative or engineering
controls when these controls are
feasible in accordance with their
interoretation.
Administrative Policy Change to This poiicy changes how penalties are OSHA should maintain the current
Penalty Structure - OSHA has calculated. It will resuit in more resources penalty structure.
implemented several changes to its dedicated to vacating citations and penalties,
administrative penalty calculation increasing iitigation by employers possibly
system. Administrative penalty creating a backlog of OSHA cases very similar
adjustments have been made to to that currently being experienced by the
several factors which impact the Mine Safety and Health Administration
final penalty issued to employers. (MSHA). However, the current administration
The most significant changes are 1) beiieves that higher penalties will have an
the time frame for considering an adequate deterrent effect.
employer's history of violations wili
expand from three years to five 2)
the time period for considering the
classification of repeated violations
will be increased from three to fIVe
years; and 3) the 10% reduction for
employers with a strategic
partnership agreement will be
eliminated.
US Occupational Safety and Health Administration
Advisory Committee for
Construction Safety and Health
(ACCSHl - The ACCSH is a
continuing advisory body established
by statute that provides advice and
assistance in construction standards
and policy matters to the Assistant·
Secretary.
ACCSH is tasked with advising the Assistant
Secretary of Labor for OSHA in the formulation
of construction safety and health standards
and reiated policy under the Construction
Safety Act (CSA) and OSH Act.
Under the new administration, the
committee's role/authortty appears to
have diminished considerably in
advising the agency on construction
safety and health issues. Frequently,
rulemakings and/or policy changes
have been initiated or implemented
without consulting with the safety
and health experts that make up the
committee. We believe that for the
agency to be successful in their
effOrts, industry must be involved.
OFFICE OF MANAGEMENT AND BUDGET (OMB)
se'il~iir""'Sr"'Negativ1icllmp~~~~:~~~g1fffh1tcii~'iFr'i>:Z!:;t~':,#j~e'ltid"M:o.~cai:i~t~'#,
"High Road" Contracting Refonn. The
backbone of this initiative would be a
revival of Clinton Administration
"Blacklisting" Rules overturned by
Congress in 2001.
Project Labor Agreements
• Wauld create unreasonable pre-
qualification screening that would force
perfectly responsible contractors to
adopt social policy goals of the
administration ot be pushed out of the
Federal market.
• The premise and broad assumptions of
the coucept of this poteutialrulernaking
could not be further from the truth with
respect to the federal construction
market.
• AGC has long opposed efforts to paint
all contractors with a broad brush as
suspect, and we have proactively
supported procurement reform to
improve delivery of federal construction
services.
• Encourages Federal agencies to force
open shop contractors to enter into
agreement with unions.
• This rulemaking has already caused
great upheaval in the Federal market,
created an environment that is
encouraging bid protests, strained
relationships between Federal ovmers
and the contracting community, placed
Federal agency career procurement
personnel imder an inordinate amount of
political pressure to meet the
Administration's expectations to award
morePLAs.
• These many factors combined has
created the Dotential to push many
I Never get promulgated.
I Repeal Final Rule issued April 13, 2010.
ae<L;JModlffcafion§'t'O;:tJi~;\:,
'":lile~~king Process - ..
regulationis arbitrary and:
capricious; 'an abuse of
discretiQn, or~th'erwise not in
accordance with the)aw...
• It is expected that the
President would implemeut
this potential rulemaking
by Executive Order. The
FAR Councils would be
ordered to implement the
presumed govenunent-
wide regulations. The
public should have a fair
chance to review such a
massive sweeping change
to the Federal procurement
process.
• Reform of the federal
procurement process
should recognize
construction'sUIrique
melding of industry sectors
while ensuring the
government is using the
most cost~effective method
of Drocurement.
• President Obama forced
this issue by Executive
Order in February 2009.
Con,equeutly, this
rulemaking has already
caused great discord
amongst the Federal
construction agencies. No
one agency s implementing
the rule the same way as
the other. Some agencies,
such as GSA, have gone so
far as to give a price
preference for bids
accompanied by a PLA.
We believe this is a

Buy American - Recovery Act
:ffi'C'irtlon:st:to~tJieri~{,
ulemaking::Proc~s':: """~,
regulation is arbitrary and
cClpricious, an abuse' of
dis€retio#; orotherwise notin .
accordanc~,with,the laW, ..
contractors out of the Federal market. violation of the
Competition in Contracting
Act (CrCA) and deserves
review.
• Congress should also
investigate the possible
reach the "White House may
have extended to the
Federal agencies with
respect to ensuring specific
construction projects have
PLA mandates.
• ARRA Rules for Buy American is I Repeal Final Rule Issued August 30, 20 I0 We are concerned that this
distinct in that it establishes a new provision is working its way
definition of "American-made", and into other construction-related
applies the requirement to sectors of the legislation, creating new
construction market that have never had regulatory burdens.
to comply with either of the previous
requirements before.
• There have always been concerns that
other countries would retaliate against
violations afU.S. trade obligations and
that foreign countenneasures could
result in net job losses. Additional U.S.
steel production fostered by the Buy
American provisions could translate into
a gain in the steel industry of around
1,000 jobs. However, ifjust a small
proportion of US exports purchased by
public entities abroad was at risk of or
outright retaliatory measures, the job
loss entailed could total at least 6,500
American lobs.
COUNCIL ON ENVIRONMENTAL QUALITY (CEQ)
Contemplated, Recently Propo~ed or
Issued Rule
Updated Principles and Guidelines
(P&G) for Water and Land Related
Resources Implementation Studies
Negative Impact to the Construction
Industry
Would substantially revise how the large
range of modern water projects-locks and
dams, levees, navigation channels, ecosystem
restoration, flood risk management,
watershed protection, water supply projects -
are designed, and constructed. Many of these
needed infrastructure projects may never be
built if these regulations are promulgated.
Needed Modifications to the Rule
• CEQ draft should be scrapped and process
restored with U.S. Anny Corps of
Engineers (USACE), as directed by
Congress.
• A recent peer review undertaken but the
National Academy of Sciences found the
CEQ proposed revisions lack clarity,
consistency and focus, adding that the draft
P&G is filled with ambiguity and is in dire
need of substantial revision and
clarification.
Needed Modifications to the
Rulemaking Process -
regulation is arbitrary and
capricious, an abuse of
discretion, or otherwise not in
accordance with the law...
• The P&G revision was
ordered to be undertaken
by USACE at the direct
order by the Congress
when it enacted the Water
Resources Development
Act (WRDA) of200?
• Section 2031 of the Act
directed the Secretary of
the Anny (Civil Works) to
revise the P&G adopted by
the U.S. Water Resources
Council in March 1983.
• In 2009, CEQ - in direct
violation of the will of the
Congress -- took control of
the P&G revision and
expanded the scope to
make the P&G revisions
apply to all Federal
agencies.
 January 18, 2010 eaM!
~~~_ Mmmfnclm'lng Technology
OverlOO Years (!fBuildinJ; Glol){/l PmdUCfivif)'
The Honorable DaITell Issa
The United States House of Representatives
CHAIRMAN: 2347 Raybum House Office Building
Daniel D. Janka
President Washington, DC 20515
MAG Industrial Automallon Syslems
AmertC!ls Group

1st VICE CHAIRMAN:

Eugene R. Haffely, Jr.
Dear Mr. Chairman:
Chief OperalJng OmClJr
Assembly B, Tesl Worldwide, 1m:.

2nd VICE CHAIRMAN & I am writing on behalf of AMT - The Association Technology in reply to your letter
TREASURER:
Timothy B. Dln!ng dated December 10,2010. I appreciate the opportunity to comment on the impact of
Presldenl8, C.EO.
Greenerd Press 8, Machine Company, Inc. over burdensome regulations on U.S. manufacturers, particularly our smaller
SECRETARY:
KlmW, Beck
companies. Excessive regulations hinder job growth and innovation - key drivers of a
President 8, C.ED.
Automatic Feed Co. prosperous economy. Reining in regulatory costs along with bringing down the
DIRECTORS: stmctural costs that put U.S. companies at a competitive disadvantage is a guiding
Chsrles N. Clark, Sr.
DMslon President principle of AMT's Manufacturing Mandate, a copy of which I am pleased to include
DukEine Corp. -I.A.S. Dlvlsbn

Krestlne Corbin
with this letter.
Chairman, President 8, C.E.D.
Sierra Mllct1lnery, Inc.

R. Siophon Flynn AMT represents U.S.-based manufacturing technology companies. Our members
President
Optical Gaging Producls, Inc. provide the tools that enable production of all manufactured goods. Iu their workplaces
MIchael Powell and in their products, safety and efficiency are critical elements of the manufacturing
President '
Master WorkHoldlng"Inc. process. AMT members value the role our government plays in providing standards for
Carl Reed
President 11 C.E.D.
each. Unfortunately, in many cases, regulations are excessive, confusing and so costly
Abbott Workholdlng ProdLICls that R&D and business development suffer as a result, hindering job growth and stifling
Richard A. Shore, Sr.
President innovation.
AulomalJon 11 Modular Components, Inc.

Sleven R. Stokey
ExeculJve Vice Pl1l8ldent This is particularly true with regulations originating from the Envirorunental Protection
Allied Machine 8, Engineering Corp.
Agency (EPA) and the Occupational Safety and Health Administration (OSHA), where
EX-OFFICIO:
Ronald F. Schlldgo it is obvious that regulators know little' or nothing about manufacturing. Our companies
President
Eitel Presses, Inc. are not consulted for input, and the result is a convoluted set of regulations that malce
Doug Currie
President 8, C.ED.
compliance increasingly difficult and costly. Iu some cases, industry has more input on
Erie Press Syslems European Union regulations than on the EPA's. Segments of the manufacturing
STAFF:
technology industry must now even deal with the Food and Dmg Administration (FDA)
Douglas K. Woods
President which drew the responsibility for regulating lasers. Today, every laser machine has to
Poter R, Eolman
VICll President-Exhlbilions 8,
be registered with the FDA. Talk about bakers regulating the trains - this is the actual
Communications application of that old joke!
Patrick W. McGIbbon
Vice President-Strategic Infomlation
B, Researoh
Linda G. Montfort
The overwhelming majority of AMT members are small businesses and the regulatory
Vice President-Finance
8, Human Resources burden is worst for them. According to a recent study by the Small Business
Christine T. Rasul
Vice Presldent-Meellngs
Administration's Office of Advocacy, small manufacturers bear a disproportionate
8, Conferences
share of the high cost of government regulations. Yet, these companies are looked to as
Jeffery H, Traver
VIce President-Business the innovators. They are the businesses that will discover safer, cleaner ways to make
Development
Paul R. Wamdorf things.
Vice President-Technology

The govemment must take a more focused and deliberate approach in determining how
best to implement and distribute the regulatory burden so that manufacturers,
particularly small ones, are not competitively disadvantaged. Regulatory reform should
be one part of a comprehensive national strategy to help revitalize and

7901 WESTPARK DRIVE, McLEAN, VIRGINIA 22102-4205 PI-IONE708-BD8-2900 FAX 708·893-1151

E-MAIL AMT@AM'l'onlinq om' www.IMTSNE·l.om
The Honorable Darrell Issa
January 18, 2010
Page Two

strengthen our manufacturing sector - a strategy focused on driving innovation and increasing
competitiveness. AMT has been working to advance the principals of our Manufacturing Mandate
.as the place to begin.

AMT's Manufacturing Mandate C!1llS for a coordinated federal manufacturing policy that: I)
incentivizes innovation and R&D in new products and manufacturing technologies; 2) assures the
availability of capital; 3) increases global competitiveness; 4) minimizes stlUctural cost burdens,
including costly regulatory compliance; 5) enhances collaboration between government, industry,
and academia; and 6) builds a better educated and trained "smart force."

The Mandate advocates tluee major policy objectives to achieve these six goals:

I. Reduce uncertainty and foster innovation - The slow recovery is fueling continued uneasiness
over the future. A persistent fear that govermnent will raise taxes and add to the regulatOlY burden
of small manufacturers stifles investment. Retroactive and short-term extensions of incentives help
in the velY short-ternl, but not when developing a business plan even five years out. There is also a
skilled worker shortage of critical proportion in our industry, at a time when so many Americans are
unemployed. Congress and the Administration must come together to address these issues and tum
the focus on restoring confidence and encouraging innovation.

2. Enhance coordination and cooperation among agencies/departments - The Manufacturing

Mandate supports a consistent, cohesive approach to managing the government's pro-manufacturing
initiatives. Duplicate effOlis, complicated bureaucracies, and unclear directives waste valuable
federal dollars. The Mandate recOimnends establishing a central manufacturing policy structure
within the Executive Branch to develop policy, focus research, and coordinate implementation of
the manufactming mandate strategies.

3. Utilize the existing infrastructure - In this time of strained budgets and high deficits, we must
leverage the resources already in place to help accomplish our goals. Existing manufacturing
technology communities of ManufactuTing Extension Partnerships (MEPs)/economic development
centers, manufacturing companies, and academic institutions are excellent places to stali., schools
and businesses working more closely together can maximize the effectiveness of MEPs,
public/private R&D, federal and state technology funding and other g~JVernnlent programs and
services. Manufacturing teclmology cOimnunities - located across the country - are where
innovation and job creation are most likely to occur.

The I 12th Congress has the responsibility of ensming that a competitive manufacturing sector is at
the top of our national agenda. Efforts to root out impediments to our success, such as this one by
the Oversight and Government Reform Committee, are necessary. I hope we can count on your
support for all of the principles outlined in this Manufacturing Mandate. My staff and I welcome the
opportunity to meet with you and/or your staff for a discussion of what Congress can do to move
manufacturing to the top of om national agenda.

tt;tard;'!J J6
~~
Enclosme
 BCFC
19@
Business Coalition
fol' Fail' Competition
www,goveminentcoillpetition,ol'g

January 12, 2010

The Honorable Darrell Issa, Chairman

Committee on Oversight & Govemment RefOlm
U.S. House of Repres'entatives
Washington, DC 20515

Dear Mr. Chairman:

The Business Coalition for Fair Competition (BCFC) is a national coalition of businesses, associations, taxpayer
organizations and think tan1es that are committed to reducing all forms ofunfair government created, sponsored
and provided competition with the private sector. BCFC believes the free enterprise system is the most
productive and efficient provider of goods and services and st.rongly supports the Federal government utilizing
the private sector for commercially available products and services to the maximum extent possible.

In response to your inquiry of the business community in identifying job killing regulations to roll back, BCFC
urges your oversight and investigation into unfair government competition with the private sector.

Specifically, we offer two regulations for your review and oversight:

1) The March 4, 2009 Obama Administration memo on "Government Contracting" (FR Doc. E9-4938);
and
2) OMB Circular A-76 (USC 48 CFR 7,3),

History

As far back as 1932, a Special Committee of the House of Representatives expressed concern over the extent to
which the government engaged in activities which might be more appropriately performed by the private sector.
The first and second Hoover Commissions expressed similar concern in the 1940's and recommended
legislation to prohibit government duplication of private enterprise. However, there was no fOlmal policy until
1955, when the I-louse passed and the Senate Committee reported legislation to require the Executive Branch to
increase its reliance on the private sector. Final action was dropped only upon assurance from the Executive
Branch that it would implement the policy administratively. Bureau of the Budget Bulletin 55-4 ,., was issued in
1955 prohibiting agencies from carrying on any commercial activities which could be provided by the private
sector, Exceptions were permitted only when it could be clearly demonstrated in specific cases that the use of
the private sector would not be in the public interest. On January 15, 1955, the policy directive issued by
President Eisenhower stated: "the Federal Government will not start or calTY on any commercial activity to
provide a service or product for its own use if such product or service can be procured from private enterprise
through ordinary business channels", President Eisenhower's policy has remained on the books for 50 years and
endorsed by Republican and Democratic Administrations, in Office of Management Budget Circular A-76, until
it was removed by President George W. Bush in 2003.

Each time Congress has authorized a White House Conference on Small Business (1980, 1986, and 1995) - a

1856 Old Reston Avenue, Suite 205

Reston, Virginia 20190
P (703) 787-6665; F (703) 787-7550
 Page 2

convention of small business men and women who adopt a platfonn of issues for action by Congress and the
executive Branch - unfair government competition with and duplication of the private sector has been a top
concern.

In 1980, the first White House Conference on Small Business made unfair competition one of its highest-ranked
issues. It said, "The Federal Govemment shall be required by statute to contract out to small business those supplies
and services that the private sector can provide. The government should not compete with the private sector by
accomplishing these effOlts with its own or non-profit personnel and facilities."

In 1986, the second White House Conference made this one of its top three issues. It said, "Govemment at all levels
has failed to protect small business from damaging levels of unfair competition. At the federal, state and local
levels, therefore, laws, regulations and policies should ... prohibit direct, government created competition in which
govemment organizations perform commercial services ... New laws at all levels, particularly at the federal level,
should require strict goven1l11ent reliance on the private sector for perfonnance of commercial-type functions.
When cost comparisons are necessary to accomplish conversion to private sector perfonnance, laws must include
provision for fair and equal cost comparisons. Funds controlled by a government entity must not be used to
establish or conduct a commercial activity on U.S. property."

And the 1995 White House Conference again made this a priority issue when its plank read, "Congress should
enact legislation that would prohibit government agencies and tax exempt and anti-trust exempt organizations from
engaging in commercial activities in direct competition with small businesses." That was among the top 15 vote
getters at the 1995 Conference and was number one among all the procurement-related issues in the final balloting.

However, the unfair government-sponsored competition issue has not been a top priority for Congress, or the
White House (under either party), for several years.

Not since the President Reagan created a Commission on Privatization has there been a focus on reducing the
size of government and transferring to the private sector those Federal activities that are commercially available.
The Report of the President's Commission on Privatization, "Privatization: Toward More Effective
Governnlent, April 1988, laid a strong foundation, but since it was issued at the end of Reagan's second tenn,
little action was taken. The Small Business Administration's Office of Advocacy conducted a series of hearings
and issued a report, "Government Competition: A Threat to Small Business", (March 1980), and "Unfair
Competition by Nonprofit Organizations With Small Business: An Issue for the 1980s" (June, 1984). It offered
testimony, when requested by the House and Senate Small Business COl1ul1ittees, in 1988 and 1996 and
conducted some research on non-profit competition in 1999.

In 1998, Congress enacted the Federal Activities Inventory Refonn (FAIR) Act, Public Law 105-270. First
implemented by President Clinton, agencies identified were required to conduct an annual inventory of
activities that are "commercial" in nature - perfonn a Yellow Pages Test. The first inventory found more than
850,000 Federal employee positions are commercial, out of a total Federal workforce (not including Postal
Service or unifonned military personnel) of 1.8 million. Some 40 percent of the Federal workforce is in
commercial activities operated by a Federal executive agency which provides a product or service that could be
obtained from a commercial source; including such activities as mapping, computer progrannning, landscaping,
photography, construction, laundry services, printing, auto repair and engineering. These are activities
perfonned by Federal employees in Federal government agencies that duplicate and compete with the private
sector, including small business, found in the Yellow Pages on Main Street, USA.

In his first telTIl, President George W. Bush made a good 'start with his "competitive sourcing" initiative. This
activity, a key part of the President's Management Agenda, required Federal agencies to subject commercial
activities of the government to market-based competition. Competitive sourcing required agencies to compete
 Page 3

these functions against the private sector, with the provider offering the best value to the taxpayer - regardless
of whether that provider is the government employees or a private film - getting to do the work. Since the
government's in-house incwnbent had to modemize and economize in order to beat the private sector, the
taxpayer wins regardless of whether the work stayed in-house or got contracted.

Competitive sourcing should have been an an-ow in the private sector's quiver - not the entire arsenal. Even the
modest Bush program has been thwarted by Congress, with restrictions on the FAIR Act and A-76
competitions. The Obama Administration is moving in the wrong direction - it is "in-sourcing" work from
private enterprise to govermnent employee performance.

How Does the Government Compete or Facilitate Unfair Competition? The following is a summary of just
a few of the ways in which the Federal Gove:tmnent creates or supports unfair govelmnent-sponsored
competition with the private sector.

Government Competition/Utilization of the Private Sector - More than 850,000 Federal employees are engaged
in occupations that are commercial in nature. According to Dr. Ron Utt of The Heritage Foundation, Director of
President Reagan's Office of Privatization, if market-based competition were applied to all 850,000 positions,
some $27 billion could be saved annually for five years.

Non-Profit Competition - Nonprofit organizations unfairly compete with private, for-profit businesses by
engaging in commercial activities, but not paying taxes. TIns also denies the government revenue. Then-Senate
Finance Chainnan Grassley and House Ways and Means Chairman Thomas both investigated abuses by non-
profit and tax exempt organizations ill the 109,h Congress, but there was no legislative remedy. From YMCA's
. competing with private health clubs to credit unions competing with banks to rural electric and telephone
cooperatives competing with investor-owned utilities, as well as nonprofit health and life insurance companies,
provided special tax status under sec. 501(c) of the Intemal Revenue Code, unfairly compete with the private
sector. Their special "exempt" treatment is clearly intended for "governmental" activities, rather than
commercial. A report by the tax-writing Committee on Ways and Means of the U.S. House of Representatives
noted:

"The exemption from taxation of money or property devoted to charitable and other purposes is based
upon the theory that govermnent is compensated for the loss of revenue by its relief from financial
burden which would otherwise have to be met by appropriations from public funds and by the benefits
resulting from promotion of the general welfare." (Unfair Competition: The Profits of Nonprofits, James T.
Bennett, Thomas H. DiLorenzo, Hamilton Press, 1989, p. 26)

Policies that prevent nonprofit organizations from engaging in unfair competition (via the tax code) with the
private sector should be inlplemented.

Prison Industries - Federal Prison Industries unfairly compete with the private sector. Provisions in Defense
Authorizations bills and Appropriations bills have curbed FPI's mandatory source status. Comprehensive
reform passed the House in the 108 tl1 Congress (a vote of 350 to 65, November 2003, H.R. 1829, and a bill was
reported by the Senate Governmental Affairs Committee, S. 346). In the 109,h Congress, the bills are H.R. 2965
and S.749; the House bill passed 362-57 on September 14, 2006). Federal and State prison industries are also
opening the commercial market for inmate services. Enactment of FPI refonn legislation, create a level
competitive playing field, eliminate unfair prison industry advantages, and a prohibit prison industry
participation in the commercial market should be a priority.

Universities - Schools of higher education are increasingly venturing away from their core lnissions of teaching
and conducting basic research. Financial pressures, ran~ing from reduced government funding to pressures to
 Page 4

limit tuition increases have led university presidents to transfOlm academicians into entrepreneurs. Universities
are generating revenues from commercial activities to supplement their budgets. Universities enjoy significant
advantages over for-profit companies. They are eligible for billions of dollars in grants from Federal and State
governments. They often have the ability to secure non-competitive, sole source contracts with government
agencies. They pay no taxes. Their overhead - buildings, electricity, even equipment, is already paid for and is
provided for "free". Their student labor force is either unpaid or compensated at well below prevailing market
wages. They calTY no professional liability insurance, do not have to pay unemployment compensation and in
many cases are exempt from social security contributions. When universities enter into contracts to pelform
services, they usually insist on "best effort" clauses, which absolve them of ever completely finishing a project.
They are also recipients of millions of dollars in free or discounted hardware and software, donated from vendor
finns so that students will learn on their systems, be proficient in their use upon graduation and instill a
consumer loyalty that will translate into sales once these students move up in the ranks of their private sector
employers. The advantages universities bring to the market malce it virtually impossible for private firms to
compete. Policies that restrict universities to their education and research missions and prevent unfair
competition with the private sector should be enacted.

Bailouts & Government Corporations - The American voter has become angered at the conduct of governrnent-
sponsored enterprises and corporations, as well as a variety of bailouts of the private sector. The view that
America is a nation based on free market principles is becoming blulTed. Whether it is bailouts of the auto
industry, insurance companies and banks, or government-run corporations such a Fannie Mae, Freddie Mac, the
Corporation for Public Broadcasting, or the Postal Service, to government takeover of student loans and health
care, the American people see billions of dollars in losses that make the debt and deficit worse and
unsustainable.

Insourcing
On March 4, 2009, the Obama Administration issued a memo on "Government Contracting" (FR Doc. E9-
4938), which began the current "insourcing" policy - the conversion of work cUITently perfonned by private
sector contractor finns to perfonnance by Federal govermnent employees. The memo stated:

"Government outsourcing for services also raises special concerns. For decades, the Federal
Government has relied on the private sector for necessary commercial services used by the
Govemment, such as transportation, food, and maintenance. Office of Management and Budget
Circular A-76, first issued in 1966, was based on the reasonable premise that while. inherently
governmental activities should be perfonned by Govemment employees, taxpayers may receive more
value for their dollars if non-inherently governmental activities that can be provided commercially are
subject to the forces of competition. However, the line between inherently govemmental activities that
should not be outsOlirced and commercial activities that may be subject to private sector competition
has been blUITed and inadequately defined. As a result, contractors may be performing inherently
govemmental functions. Agencies and departments must operate under clear mles prescribing when
outsourcing is and is not appropriate.... Finally, the Federal Government must ensure that those
functions that are inherently govermnental in nature are performed by executive agencies and are not
outsourced.... I further direct the Director of OMB, in collaboration with the aforementioned officials
and .councils, and with input from the public, to develop and issue by September 30, 2009,
Govemment-wide guidance to: ... (4) clarify when govermnental outsourcing for services is and is not
appropriate, consistent with section 321 of Public Law 110-417 (31 U.S.C. 501 note)."

In June 2010, Senator Robeli Menendez (D-NJ) was asked about the effect insourcing had on small and
minority owned business. He said insourcing was "counter-intuitive to the President's goal of creating
opportunities in the federal contracting system for diversity." Sen. Menendez concluded, "We already have a·
much more limited universe than we should, and if [insourcing] is being pursued, then it is only going to erode
 PageS

what exists, so it doesn't make a lot of sense." ("Procurement pinata out of hispanic reach" Hispanic Link News
Service, June 21,2010.)

In August 2010, Defense Secretary Robert Gates said, "We weren't seeing the savings we had hoped from
insourcing." ("lnsourcing failed, DOD's Gates says. Now what?" Federai Computer Week, August 10,2010.)

According to inventories compiled under the Federal Activities Inventory Refonn (FAIR) Act, beginning under
the Clinton Administration in 1999, there are stillmore than 850,000 Federal employees engaged in activities
which are commercial in nature. Subjecting these positions to established public-private comparisons can save
more than $27 billion annually over the next 5 years. We are concemed that in-sourcing is occurring without
such public-private comparisons or cost analysis. In fact, a recent Air Force insourcing effort was reversed
when a court challenge was filed noting that no standards for cost analysis were utilized.

This shift to government perfonnance of commercial activities not only hinders the private sector, including
small and minority owned business, but places additional costs on taxpayers during a lengthened period of a
steep decline in the nation's economy, a staggering national debt, and a high national rate of unemployment. The
government intrusion and competition in the private market that insourcing brings is having a detrimental effect
on capital investment and job creation. The insourcing agenda not .only impacts private firms, including small
and minority owned finns which have lost jobs or have jobs threatened by the insourcing of Federal contracts,
but the policy also increases private sector unemployment and shrinks state and local tax revenues.

Conclusion

We suggest your committee work to reverse these trends, advocate an immediate moratorium on insourcing,
develop a clear and objective metric for justifying and determining cost-effectiveness of government
performance of commercial activities to protect the interest of taxpayers, eliminate bailouts and government
perfornlance of activities best left to the private sector, and end direct and indirect government subsidies that
impede the ability of a competitive private market to flourish, create jobs, and contribute to society and the
quality oflive for all Americans.

Finally, your committee should roll back these job killing regulatory policies (FR Doc. E9-4938 and USC 48
CFR 73), and help return to the Federal policy, beginning in 1955, that recognizes that real economic growth
and job creation is in the private sector, and emphasizes that government should not compete with its citizens,
but should rely on the private sector to the maximmn extent possible.

Sincerely,

~~M:e~
John M. Palatiello, President
Business Coalition for Fair Competition (BCFC)
 Business
Roundtable"
1717 Rhode Island Avenue, NW Telephone 202.872.1260
Suite BOO Facsimile 202.466.3509
Washington, DC 20036 Website businessroulldtable.org

January 7, 2011

The Honorable Darrell E. Issa

Chairman, Committee on Oversight and Government Reform
United States House of Representatives
2157 Rayburn House Office Building
Washington, DC 20515
Ivan G. Seidenberg
Varizon Communications
Chairman
Dear Mr. Chairman:
I<enneth I. Chenault
American Express Company
Vice Chairman Thank you for your letter requesting Business Roundtable's views on existing
and proposed regulations that negatively impact the economy and the
Edward B, Rust, Jr.
State Farm Insurance maintenance and creation of jobs. We very much appreciate the opportunity
Companies
Vice Chairman to prOVide input on your Committee's important work in this area.

Larry D. Burton
Executive Director Business Roundtable long has been concerned about the costs and burdens
imposed by the significant growth in government regulations. Regulatory
Joharina r. Schneider
Executive Director burdens facing U.S. business are rapidly accelerating as a consequence of
External Relations
legislation passed over the previous two years that must now be
implemented and by decisions made by regulatory agencies to aggressively
expand-their regulatory reach. This regulatory tsunami, occurring hastily and
at a time when the U.S. economy is struggling to emerge from a deep
recession, is hindering investment and job creation. As Ivan Seidenberg,
Chairman of Business Roundtable, noted in a June 21, 2010 letter to then
OMB Director Orszag, "[v]irtually every new regulation has an impact on
recovery, competitiveness and job creation. Often that impact is negative.
On an individual basis, most businesses can cope with each new regulation.
But the collective impact on the economy is enormous, and often harmful."
http://busi nessroundtable.org/u ploa ds/h ea ri ngs-
letters/downloads/20100621 Letter to OMB Director Orszag from BRT and
BC with Attachments.pdf

Regulations are like hidden taxes. They impose costs that are not readily
apparent but are real. Just as the public must pay for government spending
programs through higher taxes, they must also pay a high price for
regulations - as customers, employees and stockholders. The soaring costs
of regulation stifle productivity, wages and economic growth. Regulations
also undermine jobs and international competitiveness. Poorly designed and
implemented regulations impose costs much greater than their benefits and
dampen economic activity.
January 7, 2011
Page 2

In 1994, Business Roundtable issued Toward Smarter Regulation, which identified growing,
poorly designed regulations in the environmental, health and safety areas as significant cost
factors to business and our economy and proposed a framework for smarter, more effective
regulation. The observations and recommendations contained in this document are just as
relevant today as they were in 1994. In particular, Business Roundtable noted that regulations
frequently are not well-coordinated among agencies and that the overall cumulative impact of
regulations on our economy is not considered or well-understood. Sadly, little progress seems
to have been made in the intervening years to establish a more sensible regulatory regime. I
am enclosing a copy of this report for your review.

While burdensome regulations affect many areas of our economy, Business Roundtable
members have identified three major areas of greatest concern: environmental regulation,
financial reform, and health care and retirement benefits. In these areas, the potential
regulatory costs and the sheer number of regulations with which business must comply pose
significant challenges. Issues with specific current or proposed regulations within these broad
categories are listed in the enclosed attachment with a brief description of our concerns. In
some cases, particularly with respect to financial reform, proposed regulations have not yet
been issued.

We would be happy to discuss any of these issues in further detail with you or your staff or
provide you with additional information.

Thank you again for giving us the opportunity to share our views and for your personal interest
in identifying regulations that reduce jobs and economic growth while generating little or no
benefits.

Sincerely,

Larry D. Burton

Attachments (2)

c: The Honorable Elijah Cummings, Ranking Minority Member

The Honorable Edolphus Towns
B~ Business
Roundtable"
Business Roundtable Policy Positions on
Existing and Proposed Regulations

Environmental Regulations

The Environmental Protection Agency has unveiled an aggressive Clean Air Act and Clean Water
Act regulatory agenda that, cumulatively, threatens a significant number of electric power
plants and industrial boilers. Most of these regulations are scheduled to be finalized over the
next two years.

NESHAPS for Utility Boilers: Section 112 of the Clean Air Act (CAA) requires EPA to establish
National Emissions Standards for Hazardous Air Pollutants (NESHAPS) for major (and area)
sources of hazardous air pollutants (HAPS) that are subject to regulation. Pursuant to a
consent decree approved by the u.s. District Court for the District of Columbia, EPA is
required to issue a proposed rule for the regulation of HAPS emissions from coal and oil-
fired utility boilers by March 16, 2011 and to finalize the rule by November 16, 2011. It is
anticipated that any final rule will require the installation of costly new control equipment
at virtually every existing coal-fired utility boiler. In addition, it is not clear if technology is
available to meet the anticipated standards if EPA does not use its authority to sub-
categorize or tailor its regulations depending on coal types. Regardless of the final form of
the rule, it is anticipated that significant coal generating capacity will be at risk for closure as
a consequence of the rule.

NESHAPS for Industrial, Commercial and Institutional Boilers: In two separate rule making
proceedings, EPA proposed rules in April 2010 that would reduce HAAPS emissions from
existing and new industrial, commercial and institutional boilers and process heaters located
at major sources and reduce HAPS emissions from existing and new industrial, commercial
and institutional boilers located at area sources. On December 7,2010, EPA petitioned the
federal court for an extension of the deadline for issuance of a final rule to April 13, 2012.
EPA argued that it needed additional time to review over 4800 public comments filed in the
rulemaking proceedings. In addition, EPA indicated that the final rules would reflect material
changes from the proposed rules. According to an EPA Fact Sheet on the NOPR for major
sources, there are approximately 13,555 boiler and process heaters at major sources in the
u.S. The Fact Sheet estimates that the total national capital cost for a final major source rule
would be approximately $9.5 billion in 2012, and the total national annual cost would be
$2.9 billion in 2013. EPA aiso estimated that for area sources, there are approximately
183,000 boilers at 92,000 facilities. Most of these area sources are owned and operated by
small entities. EPA estimates that the total national capital cost for a final area source rule
would be approximately $2.s billion, and the total national annuai cost would be $1.0 billion.
 Given the number of industrial sources affected and the potential severity of the final rule,
this proposed regulation could be extremely costly and disruptive. Moreover, a number of
older facilities could be expected to close given the magnitude of the capital and annual
operating costs anticipated. Permitting the number of upgrades that will be required under
these regulations will present a significant challenge.

Regulation of Greenhouse Gas Emissions Under the Clean Air Act: The EPA has finalized
regulations under the Ciean Air Act requiring major sources of greenhouse gas (GHG)
emissions to be subject to the prevention of s'ignificant deterioration (PSD) and permit
programs of the Clean Air Act. On December 23'd, 2010, EPA also indicated that it intended
to promulgate New Source Performance Standard (NSPS) regulations for major sources. In
general, the PSD program requires sources to apply the best available control technology
(BACT) to limit emissions of air pollutants, determined on a case-by-case basis, and the
NSPS program establishes a "floor" on what this technology can be. At this time, there is no
readily available commercial technology to limit GHG emissions. On November 10, 2010,
EPA issued BACT guidance for the states to implement. In general, this guidance calls for a
reliance on efficiency measures, rather than fuel sWitching or entirely new, unproven
technology to control GHG emissions. EPA has made it clear, however, that through
subsequent rulemakings, the universe of affected facilities is likely to expand, thus
subjecting more and more facilities to new case-by-case regulatory reviews. EPA is being
challenged in court on every significant decision involving this program.

The Clean Air Act was not designed and is ill-suited to regulate a ubiquitous pollutant like
C02. C02 emissions do not pose a local or even national problem; whatever impact there
may be is global. EPA's current regulations require potentially lengthy BACT case-by-case
reviews for new facilities or major modifications ofexisting facilities, thus further delaying
investment in new manufacturing plants. In addition, EPA has made it clear that its current
regulations are just the first step in what will be a series of further rulemakings potentially
expanding the scope, severity and cost of the program.

Cooling Water Intake Structures: The withdrawal of cooling water from rivers, lakes or oceans
by electric power plants or manufacturing facilities may result in adverse environmental
impacts on aquatic life. These impacts may be greater at facilities with open-loop, or once-
through, cooling water systems, which withdraw water from a source, use it to cool and
then discharge it back into the source. Other facilities use closed-loop cooling water
systems, In which cooling water is itself cooled, e.g., in cooling towers, and then recycled for
further cooling purposes. Approximately 43% of electric power plants in the U.S. with
cooling water systems use an open-loop system. On December 3,2010, the District Court
for the Southern District of New York approved a settlement agreement which requires EPA
to issue a Notice of Proposed Rulemaking under the Clean Water Act for existing facilities by
March 14,2011. It also requires EPA to issue final rules by July 27, 2012. If final rules in the
rulemaking proceeding require electric power plants and manufacturing facilities with open-
loop, or once-through, cooling systems to install closed-loop cooling systems, then the
potential retrofit costs could be substantial. The massive cost of retrofits could cause the

Page 2
 premature retirement of power plants. The North American Electric Reliability Corporation
recently estimated that the costs of rules could cause 32,500-36,000 MW of capacity to be
vulnerable to retirement if EPA requires the conversion of open-loop cooling water systems
to closed-loop systems. The premature retirement of that capacity would have implications
for the reliability of the electric power grid. Finally, some power plants may simply not have
the space required for the installation of cooling towers and other associated equipment.

Revised National Ambient Air Quality Standard for Ozone: Under section 109 of the Clean Air
Act, EPA is required to issue national ambient air quality standards (NAAQS) for six air
pollutants: ozone, particulate matter, NOX, CO, sulfur dioxide and lead. EPA is required to
issue both primary and secondary standards. Primary standards are requisite to protect the
public health with an adequate margin of safety. Secondary standards are requisite to
protect the public welfare from any known or anticipated adverse effects of the pollutants.
On March 27, 2008, EPA, under the Bush Administration, finalized primary and secondary
NAAQS for ozone. EPA established a new primary NAAQS for ozone of 0.075 parts-per-
million (ppm) using an eight-hour dialing averaging time. This standard was at variance with
the recommendations of the Clean Air Act Advisory Committee for a standard of 0.060-0.070
ppm. These NAAQs were appealed to the U.S. Court of Appeals for the D.C. Circuit. When
the Obama Administration assumed office, EPA requested that the D.C. Circuit hold the
appeal in abeyance with EPA officials appointed by the Obama Administration reviewed the
2008 standards. In September 2009, EPA Advised the D.C. Circuit that it would reconsider
the 2008 NAAQS for ozone and would propose revised standards. On January 6, 2010, EPA
proposed to revise the NAAQS for ground-level ozone to the level initially proposed by the
Advisory Board. In November, 2010, EPA advised the D.C. Circuit that it would issue a final
rule by December 31,2010. On December 8,2010, EPA requested a continued abeyance
from the D.C. Circuit, indicating that it intends to issue a final rule by July 29,2011.
Compliance with the proposed NMQS for ozone, if finalized, is expected to pose
considerable challenges. According to EPA, 253 of the 675 counties in the U.S. with ozone
monitoring equipment have not yet achieved compliance with the NMQS for ozone issued
in 1997. One half of the counties will be nonattainment areas under the standard of 0.075
ppm issued In 2008 and over 80% of the counties could be in nonattainment under the
standard of 0.060 proposed iast January. Nonattainment status requires reasonable further
progress toward meeting the standards, which makes permitting new sources of ozone
pollution virtually impossible unless offsets or other reductions are found and the lowest
achievable emissions rate for a proposed facility is achieved.

Financial Regulatory Reform

There are a number of provisions stemming from the' Dodd/Frank Financial Regulatory Reform
legislation that are unnecessary, do not constitute "reform" in any recognizable sense, and are
burdensome and costly. Below are examples of regulations stemming from the Dodd/Frank
legislation that have negative consequence to the economy and jobs.

Page 3
Proxy Access: The SEC has created a new federal right to proxy access. This undermines'
decades of state law, precedent and organic evolution of corporate law. The rules will
result in short term focus by boards of directors, turn director elections into political
contests, and could have serious consequences for economic growth and job creation. The
BRT and the Chamber of Commerce have sued the SEC to vacate the rules and the issue is
pending in the courts.

CEO Pay Ratio Disclosure: Section 9S3(b) of Dodd/Frank requires disclosure of the ratio of CEO
compensation to the median of the compensation of all the company's employees. The
statute sets forth a very specific calculation and, as such, it is a very difficult and expensive
undertaking. It could potentially cause companies to take actions that result in less
employment, such as outsourcing, to produce better ratios. Less specificity in the
calculation is necessary.

Disclosure of Conflict Minerals: Section 1S02 relating to conflict minerals will require any
company that uses one of a nu'mber of commonly used minerals in the production of not
only its products, but also potentially those it has contracted to manufacture, to conduct an
inquiry to determine if the minerals came from the Congo, and if it cannot determine that
they did not, to engage in a costly due diligence procedure, including an audit.

'Reporting of Payments: Section 1S04 requires resource extraction issuers to report payments
to foreign governments, including taxes, royalties, fees and other material benefits. Such
information will be competitively sensitive in many cases and its public disclosure may
violate the laws offoreign countries.

Neither Section 1S02 or 1S04, as well Section 1S03 relating to disclosure of mine safety
violations to the SEC, have anything to do with the protection of investors. They are costly
requirements that have been attached to the federal securities laws to address unrelated
concerns. The SEC has no expertise to regulate in this area.

Other corporate governance provisions: Other sections of Dodd-Frank relating to executive

compensation, including the advisory vote on compensation (Section 9S1) and mandatory
stringent c1awbacks (Section 9S4), will interfere with tne ability of boards of directors to
hire, retain and motivate the most 'qualified senior management teams to produce growth
and jobs.

Whistleblower bounty: Pursuant to Section 922, the SEC has proposed rules which provide a
substantial financial bounty to company employees who go directly to the SEC and report
violations of the securities laws, These rules would circumvent and render ineffective
company whistleblower and compliance programs and deprive companies of the ability to
promptly address improper activities by their employees.

Derivatives Regulation: It is critical that end users of derivatives -- companies that employ
derivatives to manage risk, not create it through speculative trading -- should have a c1ea(

Page 4
 exemption from margin, capital, and clearing requirements imposed by the Dodd-Frank Act.
We urge the Committee to focus on the dozens of regulations that have been or will be
proposed to implement the Act's derivatives title (Title VII), which will unnecessarily burden
end-user companies. There are a number of regulations, including proposals imposing
margin, capital, and clearing requirements and defining the terms "major swap participant"
and "swap dealer", which could cause end-user companies to be subject to bank-like
derivatives regulation, when increased transparency combined with regulation of true swap
dealers would address any systemic risks caused by derivatives use.

When considering the need for and effects of derivatives regulation on end-users, it is
important to bear in mind the following:

• End-users account for approximately 10% of derivatives use and largely do not
invest in derivatives to speculate for profit.

• A BRT study shows that a 3% margin requirement could result in the loss of
100,000 jobs and tie up an average of $269 million per year per company. These
results are conservative as they reflect only the imposition of an "initial" margin
requirement, though "variation" margin charges could be much higher, tying up
more capital and costing more jobs.

Health Care and Retirement Benefits

The following are key regulatory issues that have been raised by Business Roundtable member
companies in the area of health and retirement benefits.

ERISA Preemption: It is critically important that ERISA preemption be preserved in health care
reform regulations under the Patient Protection and Affordable Care Act (PPACA). One of
the key features of ERISA is the ability of an employer to design a plan to fit the
profile/needs of its workforce. The imposition of employer mandates inhibits an employer's
ability to do this and will likely result in cost increases for large, self-funded plans without
commensurate benefits to employees.

"Grandfathering": These rules from the PPACA were too cumbersome and didn't allow plans
to comply with "the early requirements over a period of time."

"Cadillac Plan" Tax: This new tax in the PPACA will divert resources away from investment in
new technology, processes and jobs, and will significantly raise costs, harming global
competitiveness. As a result of efforts to avoid the tax, one of the revenue sources that
supports health reform will be significantly reduced.

Page 5
Health IT: The CMS Notice of Proposed Rulemaking (NPRM) and the Interim Final Rule (IFR)
are creating uncertainty and confusion, jeopardizing the goal of the rapid adoption of
electronic health records. Without policy changes, innovation will be marginalized and job
creation threatened.

RDS: Due to the elimination of the tax-free aspect of Retiree Drug Subsidy (RDS) in the PPACA,
employers may be more likely to drop retirees into the open market, where costs to the
Federal government (i.e., under Part D of Medicare), could exceed those to the Federal
government under RDS.

Limited Plans: PPACA provides the Secretary transitional authority to allow benefit limits up
until 2014. We support the "rnini-med waiver authority" to allow employers to continue to
offer limited benefit plans - to current categories of employees - until 2014 to ensure
continued affordable coverage of part-time, seasonal, temporary and full-time employees in
a waiting period; and vital services such as maternity coverage - a benefit that is generally
not available in the individual market. We believe this waiver authority should be extended
beyond 2014.

Medical Loss Ratio (MLR) Requirements: Careful consideration shouid be given to these
requirements. They may:
• Increase premiums,
• Reduce competition in the marketplace, and
• Narrow provider choice for consumers.

Premium Increase Reporting: Anew federal rate review regime would:

• Threaten carrier solvency leaving consumers and providers with unpaid claims,
• Decrease competition,
• Decrease choice of providers, and
• Add unnecessary administrative burden.

Administration and Reporting:

• The Health Care Reform bill includes a provision that requires more companies to file
1099 tax forms; the cost to modify systems to collect the data and send the additional
1099s will be significant.

• The short amount of time in which plans are required to comply with new ICDlO and
5010 coding requirements irnposes an incredible administrative burden that will
increase administrative costs significantly.

Retirement Policy Regulations:

• Proposed PBGC regulations under ERISA section 4062{e} would hinder normal business
transactions in ways that are not supported by the language or intent of the statute.
The rules were intended to apply only when an employer ceases operations at a facility,

Page 6
 but the proposed regulations would apply in many cases where no operations were shut
down and would expose plan sponsors to potential liability that is disproportionate to
the size of a transaction. By placing a significant toll charge on customary and
economic business transactions, employers will be limited in their flexibility to redirect
capital and efforts into job formation.

• Regulations governing cash balance and other hybrid pension plans, including
interpretations of market rate of return standards and conversion requirements, are
requiring unnecessary expenditures by employers and are disrupting pension benefit
plans, adding costs and diverting resources from job creation.

• Ongoing regulatory projects with respect to pension plan funding should seek to
minimize year-to-year volatility and maximize the employer's ability to predict costs.
Without appropriate smoothing of asset values and interest rate swings, volatile funding
requirements will intensify the cyclical nature of the U.s. economy -- forcing employers
to make larger contributions when the economy is at its weakest. This, in turn, would
deepen recessions and slow job growth. In contrast, more predictable, steady funding
rules provide employers with the certainty they need to hire new' employees and to
make capital investments.

Page 7
o The Business Roundtable

Toward Smarter
Regulation.

1994
Toward Smarter Regulation
Table of Contents

Executive Summary . .. i

1. Introduction. ...1

11. Twelve Tenets of Rational Regulation . . . . .. .. . . . . . . . . . .. 6

1. Risk-Based Priorities and Public Education 6
2. Risk Assessment and Risk Management. . . 12
3. Sound Science. . . 14
4. Benefit-Cost Analysis. . . . ..... ...... . 17
5. Market Incentives and Performance Standards. .. . 21
6. Productivity, Wages, and Economic Growth. . . . . . . 24
7, Coordination Among and Within Agencies 26
8. Openness........................ . 28
9. Periodic Review. .............. .............. 29
10. Federalism... .. .. . .... . 31
II. Paperwork Burdens.. .. .. . .. 34
12. Regulatory Budget. . . ... ........... . 37
III. Conclusion . . 40
Endnotes . . .. 43
Selected References . 46
Summary of Recommendations . .51
Executive Summary

America is experiencing a dramatic increase in government regula-

tion, wIth the most significant growth in the environmental, health,
and safety areas. While the goals of many of these regulations may
be laudable, there Is a growing realization that we are wasting
resources: Legislatures and agencies simply are not allocating limited
resources in a cost-effective manner. We could achieve as good or
better protection of human health and the environment at far less
cost by regulating smarter.
Regulations are like "hidden taxes" that impose costs that are not
readily apparent, yet are enormous. Just as the public must pay for
government spending programs through higher taxes. they must
also pay a high price for regulations - as customers, employees, and
stockholders. The soaring costs of regulation stifle productivity,
wages, and economic growth. Regulations also undermine jobs and
international competitiveness. The increasing strain on our nation's
resources brings into sharp focus the challenge for the '90s and
beyond: The nation must not only reduce regulation, but when we
choose to regulate. we must regulate smarter.
Regulators cannot regulate smarter unless their leaders allow it and
demand it. Strong leadership must change the current incentives that
drive agencies to create new regulations with little restraint, but offer
virtually no reward for reforming or eliminating existing regulations
or obviating the need for new ones.
Business is not alone in calling for regulatory reform; taxpayers,
state and local governments, academics, members of Congress, the
President and the Vice President have all expressed concern about
the rising tide of regulations. To provide a framework for smarter
regulation, The Business Roundtable recommends that federal, state,
and local governments implement the following twelve tenets of
rational regulation:
1. Risk-Based Priorities and Public Education: To provide
more cost-effective protection to human health and the envi-
ronment, regulatory priorities should be based upon realistic
considerations of risk. Agencies must educate the public
about the level of risks proposed for regulation compared to
risks familiar to the public, as well as the cost of reducing
that risk. The government should estimate the relative risks posed
by different substances. products, or activities and decide whether, and
how, to regulate based on those rIsks. Resources should be committed
where the greatest risks can be reduced at the least cost. The govern-
ment shouid ensure that the public understands the magnitude of each
risk compared to more familiar risks, as weli as the costs of reducing
that risk.
2. Risk Assessment and Risk Management: Risk assessment
methodologies should be continuously improved, and agencies
should establish a clear distinction between assessing risks
and deciding how to manage them. The scientific process of risk
assessment should be made as objective as possible, and uniform
standards should be applied. Any necessary policy or scientific judg-
ments should be disclosed. Cost-effective approaches to managing
risks should be promoted.
3. Sound Science: Agency decision making should be
grounded on the most advanced scientific knowledge
currently available. New regulations should be based on the most
advanced and credible scientific knowledge, and existing regulations
and methods should be regularly updated to incorporate scientific
advances. In making decisions and setting priorities based on risk,
agencies should use" best estimates," not worst-case estimates of risk.
4. Benefit-Cost Analysis: Benefit-cost analysis should be
utilized by agencies when developing regulations, with
preference given the least costly regulatory alternative that
accomplishes program objectives. First, agencies should use
benefit-cost analysis to determine whether or not a proposal should
be considered for adoption. Second, agencies should use cost-
effectiveness analysis to select the regulatory option that achieves
regulatory objectives in the least costly way.
5. Market Incentives and Performance Standards: Market-
oriented solutions and performance standards should be
favored over command-and-control regulation. Market-based
regulatory approaches reproduce the efficiency of a free market by
internalizing the cost of a regulated activity or substance. They allow
regulated parties to meet or exceed regulatory goals in the least
costly way. Moreover, market incentives and performance standards
adapt to changed circumstances more quickly than government
command-and-control regulation.

ii
6. Productivity, Wages, and Economic Growth: Methodologies
should be implemented and continuously improved to assess
the impact of major regulations on productivity, wages, and
economic growth, as well as the adverse impact on jobs and
international competitiveness in industries that bear the
burden of regulation. For our economy to grow, regulatory and
economic goals must become complementary, not conflicting.
Government must be more sensitive to the impact of regulation on
wages, prices, jobs, and international competitiveness.
7. Coordination Among and Within Agencies: Coordination
of regulatory activities among and within agencies should
be improved to eliminate inconsistencies, duplication, and
unnecessary regulatory burdens. To address problems within
the jurisdiction of multiple agencies, a strong interagency committee
should engage in strategic planning and develop a coordinated
response before regulations are proposed. Each agency should also
coordinate its programs that address different aspects of the same
problem.
8. Openness: The entire regulatory process, including
centralized Executive review and management of agency rule-
making, should be open to public scrutiny, to promote the
quality, integrity, and responsiveness of agency decisions.
Secrecy should be removed from the regulatory development and
review process. More rules should be developed through regulatory
negotiation, which involves open negotiations between regulators
and interested parties.
9. Periodic Review: Programs and regulations should be
periodically reviewed for purposes of determining whether
they should be reformed, discontinued, or consolidated.
Periodic review allows for government-wide priority setting through
reforming or eliminating regulations, updating scientific methodolo-
gies, reorganizing an agency, or reallocating responsibility among
agencies. Where appropriate, legislatures can ensure a stricter review
process by setting firm deadlines by which they will be compelled
to evaluate and vote for continuation of a program, or the program
will terminate.

iii
10. Federalism: Regulatory authority should be more rationally
allocated among the federal, state, and local governments,
and federal regulatory 'programs should avoid unfunded
mandates. Many activities and substances are controlled by a mix
of federal and state regulation. Modern commerciai realities demand
a more cost-effective balance of federal and state regulation. The fed-
eral government is primarily responsible for achieving this balance
and should carefully consider whether to preempt and regulate a field
or leave the field to the states. The federal government should also
refrain from directing state and local governments to administer or
comply with federal programs without providing the necessary funds.
11. Paperwork Burdens: Paperwork burdens caused by regula-
tory programs should be expressly assessed and substantially
reduced. The massive paperwork burdens imposed on business, the
public, and governments themselves must be reduced. The Paperwork
Reduction Act and OIRA's paperwork control responsibilities should
be strengthened. Moreover, administrative process costs - the inflexi-
bility, unresponsiveness, and delay that characterize many reguiatory
programs - should be examined and reduced.
12. Regulatory BUdget: A framework should be developed
to account for expenditures required by regulations' and to
promote greater fiscal restraint on regulatory programs. There
is a pressing need for government to be more sensitive to the cumula-
tive costs of regulations. Under a regulatory budget, agencies would
have a powerful incentive to regulate in a more cost-effective manner;
each agency could be limited in the amount of regulatory costs
imposed on the economy each year.
* * *
A unique opportunity for meaningful regulatory reform presents
itself. There is a growing consensus not only on the need for regulato- '
ry reform, but also on how to achieve it: Government must assess the
seriousness of risks proposed for regulation, compare risks to be regu-
lated to risks familiar to the public, disclose the costs of regulation,
regulate only if the benefits outweigh the costs, and select the most
cost-effective, market-driven method possible. This is smarter regula-
tion. And smarter regulation is better regulation, for consumers, gov-
ernments, and business alike. President Clinton's Executive Order on
Regulatory Planning and Review espouses many of these principles
for improving both regulations and the regulatory process itself.

Iv
However, the White House, Congress, agencies, and the states must all
commit themselves to smarter regulation. The Business Roundtable
recommends that governments at all levels implement these twelve
tenets. Our nation cannot afford to ignore the challenge to regulate
smarter.

v
1. Introduction

Since the 1970s, our nation has implemented far-reaching regulatory

programs to protect human health and the environment. Congress
created new agencies - such as the Environmental Protection
Agency, the Occupational Safety and Health Administration, and the
Consumer Product Safety Commission - with broad responsibilities
to reduce risks to public health, safety, and the environment. Older
agencies, such as the Food and Drug Administration, have been given
expanded regulatory authority. Sweeping legislative mandates have
directed agencies to reduce risk to the environment, health, and
safety, almost without compromise.
Some government intervention in the economy may be necessary to
achieve desirable goals such as a cleaner environment, safer working
conditions, and safer products. In many instances, specific regulations
have been well-conceived and reasonably implemented. These efforts
have produced substantial benefits for the country and its people.
And yet, even with the best of intentions, government simply is
not allocating limited resources in a cost-effective manner. Despite
a dramatic increase in environmental, health, and safety regulation,
experience has taught us that often our regulatory efforts have been
more costly and less effective than they could have been. Moreover,
the enormous costs of federal and state regulations exert a heavy drag
on the economy. They depress wages, stifle productivity and economic
growth, drive up prices, and impede innovation. They also burden fed-
eral, state, and local governments. In our increasingly global economy,
excessive regulation seriously undermines the competitiveness of US.
businesses. Ultimately, the American public suffers.
The costs of regulation are undeniably high, and the costs of many
regulations plainly outweigh their beneflts. The annual cost of federal
regulation was conservatively estimated at $581 billion for 1993; it is
projected to rise to $662 billion by the year 2000.' Almost 75% ofthat
cost increase is expected from additional environmental, health, and
safety regulation.' According to EPA projections, by the year 2000
the United States will spend $160 billion annually on pollution control
alone - almost 90 percent more than was spent in 1987.' Although
economic regulation in areas such as transportation and energy has
declined, cost reductions from earlier reforms have been dwarfed by
new regulation in the environmental, health, and safety areas.'
Beyond the problems caused by the rising costs of government
regulation, the regulatory process itself has become unduly rigid,
unresponsive, and inconsistent. These problems have sparked
Increasing concern about the rationality of the regulatory process
and a growing determination to do something about It.
The Need For Priorities and Reform
Consumers, business, and governments all have a stake In regulatory
reform. Federal, state, and local governments, like business, are
part of the regulated community. The enormous liability of federal
facilities and municipalities for Superfund cleanups is but one growing
regulatory crisis faced by governments at all levels. To absorb the
costs of regulation, businesses may be forced to raise prices, reduce
production, eliminate jobs, cut research and development, or even
go out of business entirely. Likewise, federal, state, and local govern-
ments may raise taxes or reduce services; some local governments
may even face the prospect of bankruptcy.
Although the direct costs of regulation typically are Imposed on
businesses and governments, they ultimately are passed on to the
American consumer through higher prices, diminished wages, reduced
quality or availability of products and services, as well as through
increased taxes. Per household, these costs total about $5,900
per year:
These soaring costs of government regulation come at a challenging
time. The national debt now exceeds $4 trillion - $16,600 for every
man, woman, and child in America.' This expanding deficit makes it
painfully obvious that our resources are limited. Many government
priorities - Including crime prevention, education, and defense - must
compete for these limited resources. Any increase in regulation
must be weighed against other legitimate priorities, as well as against
its adverse impact on wages, productivity, and economic growth.
Too many regulations and regulatory programs have suffered from
inadequate analysis and discipline. Both the Legislative and Executive
Branches must share responsibility - first, to address this problem,
and second, to cure it. The Business Roundtable believes that existing
and proposed reguiatory programs should ensure that:
• Stated goals are in fact attainable.
• Each program or regulation is worth the added cost to the nation
(In increased prices and lower wages and productivity, for example).

2
• Each regulation is the most efficient means to achieve its obj ective
and minimizes adverse economic impacts.
Toward "Smarter" Regulation
The reguiatory process must be reformed. Governmental resources
at all levels must be allocated more rationally. And business must
devote its resources to becoming more innovative and productive. The
question is not only how the nation can reduce regulation, but also
how we can regulate smarter. This question is crucial in both good and
bad economic times.
The concept of smarter regulation is not novel. The increasing
regulatory burden has led to a growing demand for reform across a
spectrum of American society - from leaders of all business sizes,
academics, public interest groups, government officials, and the gen-
eral public. This demand has already sparked some important steps
toward reform; indeed, Vice President Gore's recent National
Performance Review report expressed alarm at the cost of regulation
and concluded;
We must clear the thicket of regulation by undertaking a thorough
revIew of the regulations already in place and redesigning reg,
ulatory processes to end the proliferation of unnecessary and
unproductive rules.'
To this end, President Clinton signed Executive Order 12866 on
Regulatory Planning and Review on September 30, 1993. This Order
carries forward the concern of the last three Administrations by
calling for a vigorous regulatory planning and review process and
embracing many principles that would improve both the regulatory
process and regulations themselves.
However, the hard work necessary to "reinvent" regulation still
lies ahead. To further this worthy goal, The Business Roundtable
recommends that governments at all levels implement the following
twelve tenets of rational regulation;
I. Risk-Based Priorities and Public Education: To provide more
cost-effective protection to human health and the environment,
regulatory priorities should be based upon realistic considerations
of risk. Agencies must educate the public about the ievel of risks
proposed for regulation compared to risks familiar to the public,
as well as the cost of reducing that risk.

3
2, Risk Assessment and Risk Management: Risk assessment
methodologies should be continuously improved, and agencies
should establish a clear distinction between assessing risks and
deciding how to manage them.
3, Sound Science: Agency decision making should be grounded on
the most advanced scientific knowledge currently available,
4, Benefit-Cost Analysis: Benefit-cost analysis should be utilized
by agencies when developing regulations, with preference given
the least costly regulatory alternative that accomplishes program
objectives,
5, Market Incentives and Performance Standards: Market-oriented
solutions and performance standards should be favored over
command-and-control regulation, They allow regulated parties
to meet or exceed regulatory goals in the least costly way,
6, Productivity, Wages, and Economic Growth: Methodologies should
be implemented and continuously improved to assess the impact of
major regulations on wages, productivity, and economic growth, as
well as the adverse impact onjobs and international competitive-
ness in industries that bear the burden of regulation,
7, Coordination Among and Within Agencies: Coordination of regu-
latory activities among and within agencies should be improved to
eliminate inconsistencies, duplication, and unnecessary regulatory
burdens,
8, Openness: The entire regulatory process, including centralized
Executive review and management of agency rulemaking, should
be open to public scrutiny to promote the quality, integrity, and
responsiveness of agency decisions,
g, Periodic Review: Programs and regulations should be periodically
reviewed for purposes of determining whether they should be
reformed, discontinued, or consolidated,
10, Federalism: Regulatory authority should be more rationally
allocated among the federal, state, and local governments, and
federal regulatory programs should avoid unfunded mandates,
II, Paperwork Burdens: Paperwork burdens caused by regulatory
programs should be expressly assessed and substantially reduced,

4
12. Regulatory Budget: A framework should be developed to account
for expenditures required by regulations and to promote greater
fiscal restraint on regulatory programs.
Each of these tenets is explored in greater detail below.

5
II. Twelve Tenets ofRational
Regulation
1. Risk-Based Priorities and Public Education: To provide
more cost-effective protection to human health and the envi.
ronment, regulatory priorities should be based upon realistic
considerations of risk. Agencies must educate the public
about the level of risks proposed for regulation compared to
risks familiar to the public, as well as the cost of reducing
that risk. The escalating costs of regulation and limited resources
available make it imperative to establish priorities in environmental,
health, and safety regulation, Despite the vast and expanding invest-
ment iri programs to protect public health and the environment, there
is a growing realization that we are not spending our money in the
most cost-effective manner to achieve the greatest possible advances,
All too often, regulatory priorities are based on misguided public
perceptions of risk instead of valid scientific knowledge and reasoned
analysis. Accordingly, there is a pressing need to establish a risk-
based approach to environmental, health, and safety regulation and
to provide the public with better information for evaluating and
comparing risks that are candidates for regulation, The goal is not
to put economic values before human values, but to achieve effective
risk reduction at a lower cost.
Risk-Based Priorities
The problem of protecting human health and the environment may
best be defined as the management of risk. The failure to manage risk
effectively and to establish priorities rationally translates ultimately
into a failure to protect heaith, safety, and the environment. Through
the use of comparative risk assessment, the government can estimate
the relative levels of risk posed by different substances, products, and
activities and can establish priorities In determining whether, and
how, to regulate. The government, with public input, should use com-
parative risk assessment to compare the magnitude of various risks
and set priorities where we can achieve greater protection of human
health, safety and the environment in the most cost-effective manner.
• The Environmental Protection Agency has recognized the urgent
need for a risk-based regulatory approach employing comparative
risk assessment. In its landmark report, RedUcing Risk, EPA
warned: "There are heavy costs Involved If society fails to set
environmental priorities based on risk. If finite resources are
expended on lower-priority problems at the expense of hlgher-

6
 priority risks, then society wili face neediessly high risks. If the
priorities are established based on the greatest opportunities
to reduce risk, totai risk wili be reduced in a more efficient way,
iessening threats to both public heaith aI)d iocai and globai
ecosystems.""
Unfortunately, public fears and political expediency - not scientific
analysis - often dictate the priorities set by legislatures and agencies.
As a result, government risk-reduction efforts have been unplanned,
uncoordinated, and inconsistent. Many risk-reduction programs simply
have not been effective:
• Some very costly programs and regulations do not address the
more serious risks.
~ Congress originally estimated that the Superfund program
would cost $5 biliion when it was enacted in i980. Independent
estimates now project the program wili cost between $106
and $302 biliion for Superfund and between $372 and $744
billion for related remedial programs" (in total, up to 25% of
the national debt). Notwithstanding these enormous costs, a
group of EPA professionals have ranked risks associated with
hazardous waste sites well below other probiems receiving far
less resources. 19
• Regulations based on uncertain or unsound scientific information
are not revised when more reliable data is produced.
~ In January 1991, EPA's Office of Drinking Water eliminated
the primary standard for silver because it determined that
there were no adverse human health effects of silver in drink-
ing water; yet the Office of Solid Waste continues to maintain
silver on RCRA's toxicity characteristic list, even though the
RCRA silver standard was based on the obsolete drinking
water standard. lI
• Some regulatory actions actually increase risk.
~ Early in the 1980s, government scientists argued that asbestos
exposure could cause thousands of deaths. Congress responded
by passing a sweeping law that led cities and states to spend
between $15 and $20 billion to remove asbestos from public
buildings. But three years ago, EPA officials acknowledged
after further research that ripping out the asbestos had
been an expensive mistake; it raised the exposure of the
public because asbestos fibers had become airborne during

7
 removal.!2 It also delayed the opening of many schools and
other buildings.
Executive Order 12866 (Sec. 1(b)(4)) states:
In setting regulatory priorities, each agency shall consider, to the
extent reasonable, the degree and nature of the risks posed by
various substances or activities within its jurisdiction.
The White House, the Office of Information and Regulatory Affairs,
Congress, each agency, and the states should vigorously promote this
policy. The Executive Branch should develop a current inventory of
known risks, rank them, and periodically update the inventory every
two to four years in light of new information. It should seek extensive
public involvement in the process. EPA started towards this goal by
creating and implementing two seminal reports, Unfinished Business
and Reducing Risks. These reports were prepared by environmental
experts who assessed, compared, and ranked the various environmen-
tal risks regulated by EPA
• Unfinished Business (1987) found that EPA and Congress in most
instances had directed resources to problems based on misguided
public fears, instead of objective scientific evidence.
• Reducing Risks (1990), produced by an independent committee
of the Science Advisory Board, revised the risk rankings set forth
in Unfinished Business and encouraged EPA to base its programs
on the severity of risks and the availability of cost-effective
options that would reduce the risks and not violate the Agency's
statutory mandates.
The other health and safety agencies - including FDA, OSHA, USDA,
and CPSC - would benefit from similar projects. Agencies should
address highest priority risks first, rank new risks as they are
identified in the future, andToutinely communicate this information
to the public. A coordinating group should be used to facilitate com-
munication and long-term planning among agency leaders: Executive
Order 12866 (Sec. 4(d)) provides such a mechanism by establishing
the Regulatory Working Group.
Many other efforts could further the establishment of risk-based
priorities. For example, President Clinton might issue guidance to
agencies to require the use of risk analysis as a tool for making pollu-
tion prevention decisions. This would complement the President's

8
recent Executive Order 12856, which was designed to make poilution
prevention centrai to government operation and procurement.
Moreover, a task force composed of scientific experts from the envi-
ronmentai, health, and safety agencies should create a government-
wide manual on the regulation of risk. The manual would provide
guidance to regulators on how to manage risks.
In the end, the responsibility lies with Congress and state legislatures
to promote a risk-based approach to environmental, health, and safety
regulation. The most effective legislation for controlling risk will
promote risk assessment while providing the agencies with sufficient.
flexibility to incorporate state-of-the-art scientific knowledge. In
the short term, Congress and state legislatures should require the
risk-reduction agencies, such as EPA, to conduct comparative risk
assessments to set priorities. An Office of Risk Analysis should be
created in EPA and other agencies that need increased expertise in
analyzing and ranking risks. As statutes are reauthorized, reformed,
and created, Congress and state legislatures should require - not
inhibit - the consideration of risk, costs, and benefits In designing
regulatory policy. Legislatures should set clear goals for regulatory
programs, and these goals should be understandable to the regulated
community and the public.
Public Education: Improved Risk Communication
Risk communication Is critical to establishing risk-based priorities
that are acceptable to the public. The government must educate
the public about the level of risks proposed for regulation compared
with familiar risks, as weil as the costs of regulating them. Agencies
often fail to regulate in a cost-effective manner because priorities are
based on misguided public fears. Ail too commonly, agencies fall to
inform the public adequately about risks proposed for regulation or
misinform the public by making biased or exaggerated risk estimates.
This distorts the public's perception of risk, which in turn influences
the legislature's agenda and leads to irrational and costly regulatory
mandates.
Government has the responsibility to accurately inform the public
about the level uf risks and to minimize distortion and exaggeration
of risks. Risk communication is an Interactive process in which
government, the public, business, media, and the environmental and
scientific communities exchange information and opinions about risk

9
and related concerns. In the past, risk communication has been viewed
as a one-way channel from experts to the public, but risk communica-
tion should be a two-way street. Effective risk communication should
satisfy the public that they are informed about the relevant issues
within the limits of available knowledge. It should also generate
information on which decision makers base their choices. This frame-
work for effective risk communication should extend to all levels
ofthe regulatory process.
To ailow public involvement in the important decisions about whether,
and how, to regulate various risks, government must educate the
public about the risks to be regulated - in terms nonexperts can
understand. This can be achieved through the process of risk compari-
son. Risks proposed for regulation that are unfamiliar to the .publlc
should be compared to familiar risks to convey the magnitude of the
risk Involved.
Risk comparison is critical to permitting the public to engage in the
regulatory decision-making process. Moreover, risk comparison tech-
niques are improving. One technique, risk ladders, improves the
validity of risk comparisons by providing a range of probabilities for
a single class of risk. Risk comparisons are most useful when they
involve risks that occur in the same decision context, exhibit similar
risk-perception attributes (such as whether they are voluntary or
involuntary), and have similar outcomes. Multiple comparisons often
will be more helpful than single comparisons. While the nature of
different risks often varies in some respects, there should not be
inflexible rules for comparing risks. The goal of risk comparison should
be to enable the public to make informed choices about the risks they
incur and the costs of reducing those risks. Government should inform
the public about the relative magnitude of regulated risks, as weil
as those proposed for regulation, compared to risks commonly encoun-
tered and understood by the public. The government must also
disclose to the public the potential cost of regulating those risks.
Environmental, health, and safety agencies should develop public
risk communication programs. As part of their risk communication
programs, agencies should summarize relevant qualitative and
quantitative information on the nature of each risk, the nature of the
benefits that might be achieved if the risk were reduced, the available
alternatives, and uncertainty about risks, costs, and benefits. Agency

10
risk messages should include an estimate of the magnitude of the risk
as well as a characterization of the current or potential efforts to
reduce it. This Includes the cost and adverse consequences of regulat-
ing the risk, who must pay the cost, the effectiveness of various
regulatory options, and whether regulation of the risk creates addi-
tional risks of its own, Agencies should use risk communication to
educate the public so they can be involved in formulating policies
and establishing priorities - not to generate support for predeter-
mined conclusions,
Effective risk communication also requires that when agencies
assess the size of risks and decide how to manage those risks, decision
making should be open to the public, To improve the quality of risk
communication with the publIc, agencies should: distingUish policy
or judgmental considerations from scientific considerations when esti-
mating the size of risks and deciding how to manage them; instead
of using single-value or worst-case risk estimates, identify a range
of credible risk estimates and their corresponding probabilities of
occurrence; and disclose and explain any uncertainties in data or
scientific knowledge, The important value judgments that must be
made in deciding how to manage risks should be disclosed,
Risk communication should be based on a written record that is
available to the public: A record facilitates understanding and
improvement of the agency's decision, It also prevents surprise when
information on a particular risk is disseminated and enhances the
consistency and accuracy of that information,
Comparative risk assessment and risk communication provide the
means for implementing a more effective and efficient approach
to environmental, health, and safety regulation, Comparative risk
assessment allows agencies to estimate the size of various risks so
that rational priorities can be establIshed and risk can be reduced in
the most cost-effective manner, Risk communication enables the
public to understand the magnitude of a risk proposed for regulation
compared to familiar risks, as well as the costs of redUcing that risk.
If elected officials and regulators fail to implement this risk-based
paradigm, we will lose the opportunity to better protect human health
and the environment at less cost and to increase public confidence in
the regulatory process itself.

ii
2. Risk Assessment and Risk Management: Risk assessment
methodologies should be continuously improved, and agencies
should establish a clear distinction between assessing risks
and deciding how to manage them. Recent scientific and technical
advances have made it possible to improve the core of the regulatory
process, risk assessment and risk management.
Risk assessment is the lechnical process for estimating the level of risk
posed by a product or process - that is, the probability that a given
harm will occur. Risk assessment, as applied to a substance, proceeds
in four major steps: (1) hazard identification, determining what kinds
of adverse health effects a substance, product, or activity can cause;
(2) dose-response assessment, predicting the degree of adverse effects
at a given exposure level; (3) exposure assessment, estimating the
. amount of exposure; and (4) risk characterization, combining the fore-
going into a numerical range of predicted deaths or injuries."
Once risk assessment estimates the risk, risk management - the
policy-oriented or political determination of what to do about the risk
- should be employed. Unfortunately, agencies often merge the pri-
marily scientific process of risk assessment with the primarily political
process of risk management. This undermines both the validity and
quality of agency decision making.
Separate .Risk Assessment and Risk Management
Risk assessment and risk management should be separated as much
as possible - both by agencies when conducting risk analyses and by
legislatures when designing statutes.
The risk assessment should constitute an agency's best effort to
employ the most advanced scientific and technical methods to predict
accurately the size of the risk. Because risk assessments often require
assumptions to fiIlinformation gaps, however, the intrusion of subjec-
tivity into science cannot be totaIly eliminated. This subj ectivity
has two components: scientific (or professional) judgment and policy
judgment. Nevertheless, most intrusions of scientific and policy judg-
ments can be identified, and these value judgments made in the risk
assessment process shouid be clearly and fuIly disclosed to the public."
Once the agency makes the most accurate and obj ective estimate
of the relevant risks in the risk assessment process, it can then make
an open decision on how best to address that risk in the risk manage-
ment phase.

12
Improve Risk Assessment and Risk Management
Methodologies
A number of steps can be taken to improve the risk assessment and
risk management processes. First, risk assessment methodologies
and gUidelines should be reviewed and updated to reflect the state
of the art. 'In the short-term, agencies should review their risk assess-
ment guidelines and methodologies and make improvements where
appropriate.
• The Clean Air Act Amendments of 1990 created a Risk
Assessment and Management Commission and directed the
National Academy of Sciences to prepare a report on EPA's
risk assessment methodology. This helped motivate EPA to
reconsider and update its risk assessment guidelines.
The White House and Congress should strengthen the expertise
of the Office of Science and Technology Policy in risk analysis. OSTP
could be assigned the responsibility to develop detailed guidance for
agencies on how best to use science in the evolving risk assessment
process and to develop government-wide risk assessment guidelines.
Uniform risk assessment guidelines could also be developed by an
interagency committee or by experts outside of government. Those
guidelines would:
• bolster the credibility of agency risk assessments;
• prevent duplication and foster joint risk assessment efforts among
agencies regulating the same substance;
• define the types of data and interpretations relevant to agency
testing procedures and help the regulated community to under~
stand agency decisions; and
• promote uniform risk assessment procedures among the states.
Greater efforts are also needed to develop a more complete and
current database of relevant scientific data to be used in the risk
assessment process. The lack of scientific data and the uncertainty
about various risks significantly hinder measuring and comparing
risks accurately. The growing volume and reliability of scientific data,
however, have greatly improved the risk assessment field. The data
decrease the need to rely on inference and informed judgments to
bridge gaps in scientific knowledge.
The government should establish a mechanism that would allow new

13
scientific information to be easlly and qUickiy incorporated into the
risk assessment process. This mechanism should allow for information
to be provided by the agencies, academia, business, and the general
public. Agencies also should establish procedures to reevaluate risk
assessments and risk management decisions in light of scientific
advances.
In addition to improving risk assessment methodologies, agencies
should favor cost-effective approaches in the risk management phase
as a matter of policy. Once the risk assessment process identifies the
level of risk posed by a substance, product or process, policymakers
should consider the full range of options for reducing or eliminating
the risk. The principie for choosing among options should be reducing
risk in the most cost-effective manner. Regulatory options should be
analyzed in light of the full spectrum of costs and benefits (including
risks of alternatives and the economic consequences of the regulation).
Risk assessment and risk management are promising tools for helping
regulators achieve the ultimate goal of our environmentai, health, and
safety programs - greater reduction of risk to health and the ecology
with our limited resources.
3. Sound Science: Agency decision making should be grounded
on the most advanced scientific knowledge currently available.
The difficulty of allocating limited resources for maximizing risk
reduction is compounded by the common fallure of agencies to base
their analyses on the most advanced scientific principles. Without
sound science, risks cannot be accurately assessed and effectively
compared.
Science and technology are constantly evolving and improving; often
they outpace the life cycle of regulations. Indeed, some regulations
may become obsolete before they are adopted. This makes it all the
more imperative that agencies use the most advanced and precise
scientific methods to calculate risk estimates that form the basis
for agency decisions. Moreover, agencies should regularly update
their regulations and programs to incorporate advances in scientific
knowledge.
To establish priorities and make regulatory decisions, agencies often
must compare the size of various risks by using risk assessments.
Unfortunately, agencies often lack complete data, leading to scientific

14
uncertainty. To compensate for scientific uncertainty, agencies must
rely on default assumptions, which are sometimes codified in inference
gUideiines. To increase the reliability and credibility of their risk
assessments, agencies should strive to structure their default assump-
tions and inference guideiines so that they will accurately reflect real
risks. In characterizing risks, agencies should consider the probability
that estimated risk values approximate the true size of the risks.
When faced with gaps in scientific data, agencies all too often have
used a series of worst-case default assumptions and upper-bound
probability estimates throughout the risk assessment process. The
cumulative effect of these highly conservative assumptions may be
to produce greatly exaggerated estimates of risk.
Agencies often base their decision on single-point estimates of risk,
which assign a single value for a risk estimate. Typically, agencies
incorporate policy judgments into single-point risk estimates by
basing them upon highly conservative or worst-case estimates. Single-
point estimates, however, do not reveal the degree to which risk
estimates are both uncertain and highly conservative. Unrealistic risk
estimates, however, undermine the credibility of agencies' scientific
methods, can cause undue public alarm, prevent cost-effective regu-
lations, and limit the public's ability to understand and respond to
regulatory decisions.
Common agency practices contribute to biased risk estimates:
• Agencies often use highly conservative or worst-case assumptions
for exposure estimates when more accurate data are available."
~ OSHA bases occupational cancer risks on the assumption that
a hypothetical worker is exposed at the permissible exposure
limit 8 hours per day, 5 days per week, and 50 weeks a year,
for 45 years. IG
~ EPA sometimes assumes that an individual is exposed to emis-
sions at a distance of 200 meters from the factory, 24 hours a
day, every day, for 70 years. 17
• Regulators often assume that there is a linear relation between
the dose of a substance and its response or effect when there is no
scientific rationale for the 'assumption. 18
• Researchers sometimes base their research on reactions of animals
that are most sensitive to the substance under review, instead of

15
 using animals that would best replicate a human reaction to the
substance.'"
When regulators lack Information for a value or parameter needed
for a risk estimate, they should use uncertainty analysis techniques.
Uncertainty analysis techniques identify a range of possible values
and their probability of occurrence. To promote public accountability,
agencies shouid expiain assumptions, inferences, and value judgments
made in the risk assessment and characterize their impact on the
estimated value of the risk.
Although risk assessments should provide a range of risk values to
indicate data limitations and scientific uncertainty, the "best estimate"
of risk - the most credible estimate possible from available scientific
information - should be provided for policymakers and the general
public in the risk management phase.
The use of sound science Is only one tool for improving regulation, and
it does not relieve political leaders and regulators of the responsibility
for making the inevitably difficult decisions required. But it will help
prevent misallocating vast resources to reduce inconsequential risks,
will promote open decision making, and will increase public confidence
in the regulatory process. Ultimately, the public will benefit.
Executive Order 12866 (Sec. I (b)(7)) emphasizes the importance
of sound science:
Each agency shall base its decisions on the best reasonably obtain-
able scientific, technical, economic, and other information concern-
ing the need for, and consequences of, the intended regulation.
The White House should work with agencies to promote this goal
and should hold them accountable for adhering to it throughout the
regulatory review process, and state agencies shouid apply this same
principle.
Moreover, agency scientific and technical expertise can be improved
at the federal and state level. As EPA has proved, agencies can effec-
tively use outside experts to analyze internal scientific capabilities
and to recommend structural improvements. Federal agencies such
as OSHA and state environmental agencies should emulate EPA and
FDA and create scientific advisory panels to participate actively their
strategic planning and internal reform processes.

16
Science should be institutionally represented in agency decisions
that depend on scientific evidence. Scientists can validate analytical
methods and procedures, even If the ultimate regulatory decision will
be based partially on science and partially on policy. Periodic outside
review procedures bolster the scientific credibility of agency decision
making.
Emphasis un the scientific soundness of the regulatory process will
make that process more credible and transparent. It should reduce
the tension among the White House,' Congress, the agencies, and the
states and should Increase public confidence in reguiatory polley.
4. Benefit-Cost Analysis: Benefit-cost analysis should be
utilized by agencies when developing regulations, with
preference given the least costly regulatory alternative that
accomplishes program objectives. Every regulatory program
consumes financial resources - of the government that Is regulating,
of the regulated community that must comply with the regulations,
and, ultimately, of the consumers of the product or activity that is reg-.
ulated. Since resources are limited, the government should maximize
the benefits and minimize the costs of regulation, so that resources
are not squandered. To further this goal, agencies should make better
use of benefit-cost analysis, in which the benefits are weighed against
.the costs of a regulatory proposal before decisions are made and regu-
lations are implemented.
Benefit-cost analysis generally proceeds in the following four steps:
(1) identifying relevant impacts, (2) calculating monetary values for
impacts, (3) discounting for time and risk, and (4) choosing among poli-
cies. First, all relevant Impacts of a proposed action must be identified
and ciassified as either costs or benefits. Second, Impacts must be
valued. When there is no organized market to value an impact, innova-
tive techniques are required. Third, values should be discounted for
time and risk. Costs and benefits accruing in different time periods
should be discounted to their present values. When costs and benefits
involve uncertainties, analysts should attempt to assign probabilities
to various contingencies so that expected net benefits can be calculat-
ed. Finally, when efficiency is the primary goal, the combination of
policies that maximizes net benefits should be preferred.
Even when values other than efficiency are important, or major
impacts cannot readily be estimated in monetary terms, benefit-cost

17
analysis is still useful since its first step - identifying and categorizing
impacts as benefits or costs - can provide a starting point for better
decision making.
In the first instance. federal and state agencies should use benefit-cost
analysis to decide whether or not a proposal should be a candidate
for adoption - whether its benefits exceed its costs. Second, agencies
should use cost-effectiveness analysis to select the regulatory option
that achIeves regulatory objectives in the least costly way. This
analysis should be applied both to substantive regulations and to the
administrative process established to implement them, including
procedures for issuing permits and reviewing compliance. Benefit-cost
analysis should be promoted by the Legislative and Executive
Branches at the federal and state levels.
The White House and governors can and should playa central role in
promoting the use of sophisticated benefit-cost analysis. Without tight
constraints imposed by centralized Executive revIew under a benefit-
cost standard, each agency has an incentive to pursue whatever goal
has been set for it by the legislature without regard for other, equally
Important programs outside of its jurisdIctIon. This leads to inconsis-
tent, duplicative, and burdensome regulatory requirements, as well
as the misallocation of government resources.
To counter thIs tendency, the White House, through OIRA, as well
as governors, can emphasize the importance of benefit-cost analysIs
and encourage all agencies to set priorities based upon thIs analysIs.
The potential gains to be realized by strong centralized revIew of
proposed regulations under a benefit-cost standard, coupled with joint
planning by an Interagency group, are clear: better policy coordina-
tIon: enhanced political accountability: and, ultImately, more balanced
regulatory decisions.
Executive Order 12866 (Sec. 1(b)(6) , (5)) directs agencies to use
benefit-cost and cost-effectiveness analysis:
Each agency shall assess both the costs and the benefits of the
intended regulation and, recognizing that some costs and ,benefits
are dIfficult to quantify, propose or adopt a regulation only upon a
reasoned determination that the benefits of the intended regula-
tion justify its costs.
* * *

18
 When an agency determines that a regulation is the best availabie
method of achieving the regulatory objective, it shall design its
regulations in the most cost-effective manner to achieve the regu-
latory objective.
Agencies thus are required to conduct a full benefit-cost analysis of
significant regulatory actions as part of the decision-making process.
Sec. 6(a)(3)(C). The White House and governors should hold agencies
accountable for vigorously implementing this basic principle.
Federal and state agencies themselves should p'romote Improved
benefit-cost analysis by developing and using standardized gUidelines
for analyZing the costs and benefits of their regulations. Agencies that
already have such guidelines - such as EPA - should periodically
review and improve their gUidelines in cooperation with other agen-
cies and with the White House or the governor.
Further, when agencies estimate costs, they should attempt to
estimate the full costs of regulations, not just compliance costs.
Regulators should carefully consider the potential impact of each
regulatory option. Agencies also should consider as a cost the poten-
tial benefits foregone by regulation of an activity or substance. If
some costs and benefits are nonquantifiable, they should at least be
identified:
• Various regulatory options can have different impacts on behavior;
behavior induced by some options can actually increase risk.
~ The National Highway Traffic Safety Administration was
confronted with data suggesting that a refusal to relax its fuel
efficiency standards for automobiles could increase fatalities
from auto accidents. All other things being equal, a large
car is safer than a smaller car. However, NHTSA failed to
consider whether its "corporate average fuel economy" stan-
dards, which promoted smaller cars, could increase automobile
fatalities. Accordingly, the D.C. Circuit remanded a CAFE
ruiemaking decision to NHTSA for further consideration of
the potential safety costs of its fuel-efficiency regulations."
• Regulatory costs include foregone benefits.
~ If a pesticide is banl\ed, food may cost more because less could
be produced."
Finally, Congress and state legislatures should promote, not inhibit,
benefit-cost analysis. In many instances, agencies are constrained by

19
restrictive legislative requirements or oversight.
• The Clean Air Act prohibits EPA from considering costs of any
kind, much less using benefit-cost analysis, in setting air quality
criteria. 22
• The Supreme Court has interpreted the Occupational Safety and
Health Act to prohibit OSHA from basing certain regulations on a
formal benefit-cost test."
Accordingly, there is a pressing need for fundamental legislative
reform to incorporate benefit-cost principles in statutes. Congress and
state legislatures should design legislation to avoid an "at-any-cost"
approach to achieving regulatory goals.
• Since EPA, OSHA, and CPSC were established in the early 1970s,
many of the larger, more obvious risks have been reduced. As
agencies continue to try to reduce smaller, more intractable risks,
the cost and complexity of regulations are sharply rising."
• Sometimes programs have standards so stringent that they
impose unreasonably high costs without achieving significant
additional safety benefits.
~ In environmental cleanups, for example, it can be extremely
expensive to achieve cleanup levels beyond a certain point.
At one Superfund site that was mostly cleaned up, an added
$,9.3 million was spent to meet the program's stringent cleanup
standards. The benefits were miniscule: the extra expenditure
theoretically meant that the children could safely eat dirt for
245 days per year instead of 70 days annually. But there were
no children in the area because it was a swamp. And children
were not likely to be there in the future because future devel-
opment was improbable. Finally, half the volatile organic chem-
icals probably would have evaporated by the year 2000."
Congress and state legislatures should encourage agencies to balance
costs and benefits when designing regulatory programs. Otherwise,
federal and state agency efforts to improve regulation may be frus-
trated by inflexible legislative mandates.
• The Toxic Substances Control Act is a well-designed risk-reduc-
tion law based on sound benefit-cost principles. Section 6 of TSCA
authorizes EPA to impose a range of controls on a chemical
substance or mixture if it poses an "unreasonable risk of inj my

20
 to health or the envIronment." In applying the concept of "unrea-
sonable rIsk,' EPA must balance the health or environmental rIsk
of a chemical against the economIc or social dIsadvantages of
eliminating or restrictIng the availability of the chemical.
Estimating benefits and costs can be difficult, especially in areas
where many benefits are by theIr nature difficult to quantify. None-
theless, because limited resources necessitate difficult trade-offs,
agencies must make best estimates for benefits and costs - stating
clearly and publicly the bases for those estimates - and regulate
only where the benefits justify the costs. Once a regulatory goal Is
established, agencies should select the least costly optIon for meeting
that goal.
5. Market Incentives and Performance Standards: Market·
oriented solutions and performance standards should be
favored over command·and·control regulation. When properly
calibrated and used, market-based approaches and performance
standards cost less and accomplish more 'than government commands
and controls. The past three AdmInIstratIons have advocated that
regulators use market mechanIsms as much as feasIble. Most recently,
Executive Order 12866 (Sec. 1(b)(3) , (8)) states:
Each agency shall Identify and assess available alternatives to
regulatIon, including provIdIng economic IncentIves to encourage
the desIred behavior, such as user fees or marketable permits,
or providing InformatIon upon whIch choIces may be made by
the public.
* * *
Each agency shall Identify and assess alternative forms of
regulatIon and shall, to the extent feasIble, specify performance
objectives, rather than specifying the behavIor or manner of
compliance that regulated entItles must adopt.
Market Incentives
Market-based regulatory schemes attempt to reproduce tl1e efficiency
of a free market by internaliZing the costs of the regulated activIty or
substance, such as pollutIon, Into prIvate production or investment
decisions. Market Incentives allow regulated parties to achieve compli-
ance in the least costly way, reward innovators who meet or exceed
regulatory goals, and adapt to changed cIrcumstances more quIckly
than government commands and controls.

21
Typically, reguiations apply to a wide variety of activities and firms.
Because compliance costs can differ dramatically among activities
and firms, uniform standards often impose widely varying incremental
costs for achieving a specific benefit. Economic incentives minimize
regulatory costs; they allow firms unable to achieve compliance
efficiently to buy permits or allowances from low-compliance-cost
firms, whlle encouraging firms that can meet regulatory goals to do
so most efficiently. In short, market incentives divert fewer public
and private resources and reduce adverse economic consequences
to obtain the same - or greater - benefits.
• The acid rain trading allowance program for sulfur dioxide emis-
sions exempllfies the market-incentive approach to regulation.
This program provides substantially reduced regulatory costs by
providing an economic incentive for least-cost emissions sources
to reduce their emissions first. The Clean Air Act Amendments
of 1990 set a limit on yearly sulfur dioxide emissions that power
plants must meet by the year 2010 (with lesser caps at intermedi-
ate deadlines). EPA will allocate aimual allowances for emissions
sources to meet their individual emissions limits, which are based
on reducing their historical average emissions. The allowances can
be banked for future use or sold to other emission sources that
have higher compliance costs. EPA has estimated that the program
could reduce compliance costs by nearly $1 billion per year -
about one-fourth of the total cost of achieving its goal without
emissions trading. 2G
Economic incentives also induce innovators not only to develop less
costly means of meeting a regulatory standard, but also to find ways
to exceed the minimum standard and to reap rewards for doing so
through cost savings or revenues from credits sold to firms who do not
meet the minimum requirements. In contrast, command-and-control
regulations provide no incentive for regulated parties to exceed
a regulatory goal;" they may actually punish firms that do so.
Finally, market incentives are flexible; they allow firms to adapt
as their relative compliance costs change over time. Command-and-
control regulations usually cannot adapt to changed circumstances
without the burdensome costs and delays of new regulatory action.
Accordingly, market incentive approaches should be favored over
command-and-control regulation.

22
 Performance Standards
To set a regulatory standard, agencies can choose between basing the
standard on design or performance, Design standards specify how a
product should be built, what technology should be used, or preclsely
how to reach a regulatory goal. Performance standards, on the other
hand, establish the ultimate regulatory goaL They free regulated
parties to achieve that goal in the best way they can find, Performance
standards generally are superior to design standards: They allow
the regulated community to meet or exceed the regulatory goal in
the most cost-effective manner,
Design standards may be more attractive to the government because
they sometimes are easier and cheaper for agencies to enforce than
. performance standards, For example, inspectors can verify compliance
simply by determining whether a manufacturer is using mandated
equipment. But typically, the "savings" from imposing design stan-
dards are illusory, Any administrative savings usually are far out-
weighed by the large costs imposed on the regulated community
by design standards, These costs are passed on to the public through
higher prices and diminished wages, productivity, and economic
growth,

Design standards freeze technology and impede innovation that can

produce better results at less cost, An innovative firm that invents
a more cost-effective way to meet or exceed a regulatory goal must
overcome the heavy burden of changing the agency's standard
before it can implement its better method, Accordingly, performance
standards should be used when performance can be measured or rea-
sonably estimated, It simply makes no sense to impose the enormous
costs and inefficiencies associated with design standards to reduce
enforcement costs by a relatively small margin,
In contrast to design standards, performance standards promote
innovation to increase safety and reduce costs, Because agencies must
consider the comparative performance of different machines or prod-
ucts to write the regulatory standard in the first place, it can be as
easy for the agency to base its standard on performance goals, such
as fewer injuries or cleaner air,
In some instances, "performance" and "design" standards tend to
converge, A standard should not be characterized as a performance
standard if there is only one feasible way to meet it; such a standard

23
is a design standard. Although agencies sometimes transpose perfor-
mance and design standards, there is a fundamental tension between
allowIng innovation to improve safety and reduce costs and setting
a rigid, easily identifiable standard merely to make the agency's
enforcement job easier,
• Under the Resource Conservation and Recovery Act, firms
must treat hazardous wastes under" best available technology"
standards. Instead of setting a clear standard based on health and
environmental risks, the BAT standard changes with each advance
in waste treatment. This design standard imposes enormous
costs without regard to the actual threat to human health or the
environment. 28

In light of the vital importance of encouraging continual improve-

ments in safety at less cost, performance standards should be
preferred over design standards.
Both statutes and regulations should favor market mechanisms
and performance standards over commands and controls. Instead of
trying to mandate what technologies business should use or how to
meet a standard, legislatures and agencies should set standards and
then allow the market to develop the most efficient ways to attain
them. Mandating ends, not means, usually offers the most effective
form of regulation.
6. Productivity, Wages, and Economic Growth: Methodologies
should be implemented and continuously improved to assess
the impact of major regulations on productivity, wages, and
economic growth, as wen as the adverse impact on jobs and
international competitiveness in industries that bear the
burden of regUlation. American businesses of all types, large and
small, face increasing competition from foreign competitors in a global
economy. Today's global competition is heightened by significant
world-wide industrial overcapacity - a factor many believe will be the
defining characteristic for the 1990s.
• In key industries - steel. coal, chemicals, textiles, pulp and paper~
automobiles, shipbuilding, aircraft, computers, home appliances,
and defense - global overcapacity is resulting in a major
restructuring.
• Those firms that cannot compete on price and quality will be

24
 driven out of business, which means that jobs wlll be lost, wages
weakened, and tax bases eroded.
• Efficiency and productivity wlll determine who are the winners
and losers; government policies can either advance or retard these
objectives.
In response to these economic pressures, successful American corpo-
rations are significantly altering the way they conduct their business
to become leaner, more flexible, and faster. In this new economic
world, the slow-moving, pyramidal corporate structure of the past
is facing extinction.
For our economy to grow, regulatory and economic goals must become
complementary, not conflicting. Government must make greater
efforts to promote productivity, economic growth, and innovation
within the regulatory framework and must become more sensitive
to the impact of regulation on wages, prices, jobs, and international
competitiveness.
Executive Order 12866 (Sec. 6(a)(3)(C)(ii)) requires that benefit-cost
analyses of significant regulatory actions include an assessment of
their impact on employment, competitiveness, and productivity. The
nation would benefit from greater consideration of the industry-wide
. and economy-wide impacts of regulation.
• A 1993 report by the National Commission for Employment Policy
recommended the development of economic models to assess the
effects of regulations on jobs and wages."
• In Section 811 of the Clean Air Act Amendments of 1990,
Congress directed the President to report on the economic impact
of air pollution controls on the international competitiveness of
US. manufacturers. The American Automobile Manufacturers
Association has compiled a report documenting that their competi-
tors operating in countries with more flexible and less prescriptive
rules enjoy a significant cost/production advantage over US,
automobile manufacturers that face onerous requirements on
their manufacturing facilities. The new permit rules under Title V
of the Clean Air Act can unnecessarily restrict production and
operational flexibility without commensurate environmental
benefit; this flexibility is critical to the ability of us. manufactur-
ers to respond to dynamic market conditions and international
competitive pressures. 3O

25
• A study recently conducted for the us. Census Bureau found a
strong correlation between regulation and reduced productivity.
The study found that significantly regulated plants have substan-
tially lower productivity and slower productivity growth rates
than less regulated plants. The magnitude of the impacts were
found to be larger than expected: A $1 increase in pollution abate-
ment costs reduced productivity by about $3 - $4. 31
More information is becoming available on the negative effects of
regulation on wages, productivity, and economic growth, as well as
the differential economic impact on jobs and international competitive-
ness in many industries. Because these issues are vitally important
to the American peopie, they should be directly considered when
legislatures and agencies make regulatory decisions. The Legislative
and Executive Branches at the federal and state levels should pro-
mote the use and improvement of state-of-the-art analytical tools to
assess the economic impacts of regulations.
7. Coordination Among and Within Agencies: Coordination
of regulatory activities among and within agencies should
be improved to eliminate inconsistencies, duplication, and
unnecessary regulatory burdens. Regulatory agencies have a
variety of mandates that overlap - among agencies, including federal
and state agencies, and even between different programs of a single
agency. Consequently, there is a need for greater coordination of regu-
latory activities among and within agencies.
Interagency Coordination
To reduce duplication and inconsistency, a strong coordinating
committee is needed to identify and address interagency problems.
Executive Order 12866 (Sec. 4(d)) provides for the establishment of
an interagency committee - the Regulatory Working Group - that
can perform this function at the federal level.
Through the Regulatory Working Group or a similar interagency
committee, agencies should engage in strategic planning to address
problems before regulations are proposed. Where significant environ-
mental, health, or safety problems demand action from multiple
agencies, the interagency committee should coordinate common risk-
reduction approaches for the agencies involved. The committee should
rank the relative risks posed by particular problems in an effort to
maximize risk-reduction in a cost-effective way. The relative risk

26
ranklngs could be updated periodically. An interagency committee
could aiso promote the exchange of information among agencies and
make each agency more sensitive to existing regulations from other
agencies. The committee also could identify common research needs
and allocate responsibility for fulfilling those needs among agencies.
Finally, to address overlap and inconsistency originating in statutory
requirements, the interagency committee could develop a forward·
looking, comprehensive legislative program.
The strategic pianning process should be open, incorporating views
from the general public, inciuding business, academia, and public
interest groups. This strategic pianning process could be used to
educate Congress and invoive the public in the decision making.
Agencies could exchange information, data, and feedback, which
would facilitate improvements in regulations and iaws. These tenets
of rational regulation should guide this process.
Intraagency Coordination
In addition to interagency coordination, there is a need for greater
coordination of programs within each agency as well. Individual
program offices within an agency often are assigned responsibility
for impiementing a specific law or part of a iaw. This narrow approach,
and the growing compiexity of statutes and regulations, has fragment·
ed many programs, even within the same agency. Different programs
often attempt to control different aspects of the same probiem.
Without coordination of programs, inconsistencies, unproductive
duplication, and outright conflicts may result.
• EPA's Office of Solid Waste and Emergency Response at one time
designated trace ievels of carbon tetrachioride and chloroform
found in chiorofluorocarbons as hazardous waste, thus discourag·
ing refrigerator recyciers by threatening them with Superfund
liability. Meanwhile, EPA's Office of Air and Radiation was urging
that refrigerators be recycied to preserve the ozone layer. At the
same time, the FDA allowed CFCs to be used in asthma inhaiers."
Agency efforts to coordinate regulatory programs should focus on
reducing rlsks in the most cost·effective way. When properly designed
and implemented, regulatory programs that address multiple environ·
mental media, such as air, water, and land, have great potential to
reduce both risk and costs. Unfortunately, the emphasis on highly
prescriptive media·specific regulation in current environmental laws

27
often creates obstacles to cost-effective regulation.
• An ambitious joint pollution prevention study recently conducted
by EPA and Amoco Corporation illustrates the cost of inflexible,
media-specific regulation. The study found that if Amoco's
Yorktown, Virginia refinery had been free to pursue a flexible,
performance-oriented approach to pollution prevention, 90% of
the emissions reductions required under applicable regulations
could have been achieved for 20-25% of the cost of meeting the
specific regulatory requirements. In particular, if a performance-
oriented approach to emissions reduction had been followed,
reieases at the refinery could have been reduced at an average
cost of $510 per ton, as opposed to the $2,400 per ton average cost
of achieving reductions under EPA's prescriptive command and
control regulations."
The Executive Branch has the responsibility to ensure that its
programs are coordinated and consistent.. Fulfilling that responsibility
should become a higher priority.
8. Openness: The entire regulatory process, inclUding central·
ized Executive review and management of agency. rulemaking,
should be open to public scrutiny to promote the quality,
integrity, and responsiveness of agency decisions. Openness
is indispensable to the entire regulatory process, including regulatory
planning and development, as well as centralized Executive review
of agency rulemaking. Openness brings obvious benefits:
• The input of an informed public and the regulated community
improves the quality of agency decisions.
• Openness will help ensure that the values and concerns of the
public are addressed by regulators.
• A better informed public will have greater confidence in the
regulatory process and the validity of decision making.
• With a better understanding of the regulatory requirements,
the regulated community can more faithfully comply with them.
• Fewer legal challenges to final regulations are likely to ensue.
Removing Secrecy
The regulatory process should be open to maximum public involve-
ment at the earliest stages. Executive Order 12866 (Sec. 6(b) (4))
recognizes the need for openness. This policy should be nurtured and

28
expanded. For example, OIRA should disclose written communications
from those outside of the government before a rule is published. The
White House should also require agencies to publish their Regulatory
Plans when they are submitted to OIRA for review. Regulatory analy-
sis documents that detail the costs and benefits of regulations also
should be avaIlable to Congress and the public, even If they include
information or considerations that the agency may not actually use
to create a rule. More generally, the public should have access to the
identities and positions of participants in the regulatory process.
Regulatory Negotiation
Agencies also could make better use of negotiated rulemaking, or
"reg neg." To draft a rule, an agency can bring together represen-
tatives of interested parties for face-to-face negotiations, with the goal
of achieving consensus on the proposed language. The primary goal
of "reg neg" is to produce better rules, but it also avoids protracted
litigation and reduces enforcement costs.
President Clinton recognized the benefits of regulatory negotiation
in a Directive that accompanied Executive Order 12866. The Directive
requires each agency to identify at least one rulemaking to be devel-
oped through negotiated rulemaking. 31 Although not always feasible,
agencies should consider using "reg neg" more often, on a wider basis,
and earlier in the regulatory planning process. Typically, the short-
term costs of regulatory negotiation are fully justified by its many
benefits.
In sum, openness can improve the quality and integrity of agency
decisions and increase public confidence in the regulatory process.
9. Periodic Review: Programs and regulations should be
periodically reviewed for purposes of determining whether
they should be reformed, discontinued, or consolidated.
As circumstances and technology change, regulations can become
outmoded, duplicative, or unnecessary. As an indispensable part of
good regulatory management, Congress, the White I-louse, agencies,
and states should periodically review existing regulatory programs
to determine whether they should be reformed, discontinued, or
consolidated.
Legislatures ordinarily operate under the assumption that programs
should continue unless there is an overwhelming reason to curtail

29
them. By conducting periodic review, legislatures can ensure that
government resources are allocated to best address the needs of the
public. Periodic review should allow for government-wide coordination
and priority setting through reforming or eliminating regulations,
updating scientific methodologies, reorganizing an agency, or reallo-
cating responsibility among agencies.
In appropriale instances, Congress and states legislatures can ensure
a stricter review process by incorporating sunset provisions in regu-
latory programs. Sunset is a powerful tool for managing the prolifera-
tion of government programs: Within s,et deadlines, the legislature is
compelled to evaluate and vote for the continuation of a program, or
it will terminate. This forces a review of priorities. Programs that are
not rational or justifiable - perhaps because they have simply outlived
their usefulness - can more readily be eliminated or incorporated into
other programs. Routine periodic review of duplicative or overlapping
programs provides an opportunity for Congress to consolidate them,
even if it decides the programs should be continued. If similar pro-
grams are reviewed at the same time, Congress can more readily
compare their effectiveness and streamline and rationalize them.
Regulatory programs would also benefit from periodic review by the
Executive Branch. Executive Order 12866 (Sec. 5(a)) requires each
federal agency to develop a program for periodically reviewing its
existing significant regulations to determine whether they should be
modified or eliminated to make the agency's regulatory program
more effective, less burdensome, and more consistent with the
President's priorities and principles set forth in the Executive Order.
However, the White House does not now have in place a formal
process for timely oversight and execution ofthese important
reviews; it should develop and implement such a process without
delay. The President also should issue a Directive, like the Negotiated
Rulemaking Directive, to require each' agency to identify and review
at least three significant regulations.
Finally, agencies - individually or through an interagency coordinating
group - should themselves initiate periodic review oftheir programs
to eliminate outdated, duplicative, and irrational regulations. Where
legislative authority is required to terminate or modify unproductive,
outdated programs, the Executive Branch should aggressively pursue
legislative action.

30
10. Federalism: Regulatory authority should be more rationally
allocated among the federal, state, and local governments,
and federal regulatory programs should avoid unfunded
mandates. The expansion of government regulation has raised
concerns about the rational allocation of regulatory authority and
costs among federal, state, and local governments.
Allocation of Regulatory Authority
The growth of government regulation in recent decades has taken
place at both the federal and state levels. In some cases, such as
pollution control and waste disposal, new and expanded federal
programs have supplanted state and local regulatIon. In other cases,
states have added new and costly regulations of their own - both
in areas that were traditionally matters of state policy (such as
automobile insurance) and in areas that were traditionally matters
of national policy (product labeling). The growth of state regulation
has been encouraged by Supreme Court decisions that take a more
lenient approach toward state policies affecting and burdening
interstate commerce.
The mix of centralized national regulation in some areas and an array
of state regulations in other areas has not always been a good one
for American consumers and businesses. The traditional virtues
of federalism - decentralization and responsiveness to varying local
circumstances - remain important today. At the same time, however,
markets, production technology, and business organization have
become increasingly national and international in scope. State regula".
tion that made sense at a time of primarily local markets can produce
highly costly and wasteful conflicts and duplication where national
businesses are affected. This is often the case today. For businesses
whose products are sold nationwide and abroad, inconsistent and
duplicative state regulation increases prices and chills productivity,
wages, economic growth, and innovation.
Modern commercial realities demand a more cost-effective balance
of federal and state regulation; achieving this balance is primarily the
responsibility of the federal government. In general, three factors
should be considered in determining whether the federal government
should preempt and regulate a field itself or leave the field to the
states:
• Is the problem primarily a national one, with little variation in the

31
 nature of the problem among states and regions?
• Will state regulation lead to needless duplication of effort, costly
conflicts among differing state rules applicable to national markets
and national business firms, or opportunities for individual states
to pursue iocal policies at the expense of citizens of other states?
• Does the policy in question present important controversies and
uncertainties, so that state policy experimentation may produce
new information to resolve the uncertainties?
These guidelines will not resolve every controversy over regulatory
jurisdiction, but they do suggest several areas where large improve-
ments could be made. For example, to the extent that regulation
of the labeling of foods, beverages, and other products that are dis-
tributed nationally is appropriate, these regulations should be national
rather than local: The costs of differing labels in different states is
very large, while the benefits are small or nonexistent.
On the other hand, many pollution problems are primarily iocal or
vary in severity from locality to locality: federal regulation to address
these problems may still be justified (where a single item of commerce
is involved, such as automobiles, or where necessary to overcome
"NIMBY" - Not In My Backyard - problems), but should be resorted
to with care. Transportation regulation presents states with numerous
opportunities for imposing price and service controls that are paid for
by citizens of other states, and the trend toward greater preemption
in this area is appropriate and should be continued.
When Congress appropriately determines to preempt state regu-
lation, it should not adopt a one-way approach that preempts only
weaker, but permits more stringent, state regulation. This approach
loses the benefits of preemption without gaining offsetting benefits
from state. experimentation.
Unfunded Mandates
The federal government also regulates state and local governments
directly in the course of administering federal expenditures and
federal programs. As the federal budget deficit has soared, Congress
has increasingly used unfunded mandates. Unfunded mandates
require state and local governments to administer or comply with
federal programs, but do not include funding forthe costs of admin-
istration or compliance. These unfunded mandates burden state and
local governments in the same way that regulations burden business.

32
Unfunded mandates force state and local governments to raise taxes,
cut services, or potentially to face bankruptcy. Likewise. regulations
require businesses to raise prices. eliminate jobs or product lines. cut
research and development, or even go out of busIness entirely.
Congress has Imposed numerous obligations on the states to fund
programs designed to achieve federal objectives. While this pattern
has been familiar for some time, it has becume even more significant
in the 1990s. Unfunded programs do not appear in the federal budget
deficit, yet they impose very real costs at the state and local levels.
These programs threaten to overwhelm state and local governments
who fear that raising taxes for businesses and consumers will stifle
economic growth and jobs and hence erode the tax base.
• The City of Columbus, Ohio has had to comply with 67 new
environmental mandates since 1988. Columbus is expected to
spend $1.3 billion to $1.6 billion on environmental compliance from
1991 to 2001. In 1991, the average Columbus household paid $160
for environmental protection; by 2001 this cost is projected to rise
to $856 per household, or more than the per-household cost of fire
or police protection."
The federal government should not burden state and local govern-
ments with unfunded mandates, especially where the benefits of a
program do not fully accrue at the state or local level. Clearly, duplica-
tive and Inconsistent regulatIon must be prevented. Nonetheless,
programs should be sufficiently flexible to facilitate innovation at the
state and local level. In some instances, the federal government could
define a program's objective (comparable to performance standards),
but allow state and local governments to achieve those outcomes
by the means they think best. When practical, agency leaders should
grant waivers to allow state and local governments to experiment
with innovative programs that may more efficiently achieve regula-
tory goals.
Executive Order 12866 (Sec. I (b)(9)) recognizes the need to reduce
unfunded mandates and to provide greater flexibility to state, local,
and tribal governments:
Whenever feasible, agencies shall seek views of appropriate State,
local, and tribal officials before imposing regulatory requirements
that might significantly or uniquely affect those governmental

33
 interests. Each agency shall assess the effects of federal regula-
tions on State. local, and tribal governments, including specifically
the availability of resources to carry out those mandates, and seek
to minimize those burdens that uniquely affect such governmental
entities, consistent with achieving regulatory objectives. In addi-
tion, as appropriate, agencies shall seek to harmonize Federal
regulatory actions with related State, local, and tribal regulatory
and other governmental functions.
This policy is supplemented by Executive Order 12875, which calls for
reducing unfunded mandates; increasing waivers from federal require-
ments for state, local, and tribal governments; streamlining the
process for applying for waivers; and providing greater consultation
with those governments on federal matters that uniquely affect their
interests. These concepts should be vigorously implemented and
should be applied to regulated businesses as well.
11. Paperwork Burdens: Paperwork burdens caused by regula-
tory programs should be expressly assessed and substantially
reduced. In our vast regulatory system, paperwork burdens impose
huge costs. Federal paperwork burdens alone have been conservative-
ly estimated to consume over 6.4 billion person-hours per year in the
private sector - at a cost of at least $128 billion - merely to collect,
report, and maintain information.'" This does not include the massive
person-hours federal employees spend on processing and evaluating
the information.'" Furthermore, paperwork burdens are a symptom
of unreasonable administrative process requirements - complex,
bureaucratic, and adversarial procedures for obtaining permits,
reviewing compliance, and the like. These administrative processes
impose massive and unnecessary costs by causing delay, frustrating
innovation, and impeding process and facility changes that u.s.
business must make to meet world competition.
Congress recognized the need to reduce the paperwork burden by
passing the Paperwork Reduction Act of 1980, but this statute has
not been effectively implemented.
• The Paperwork Reduction Act of 1980 was designed to minimize
the federal paperwork burden for individuals, small businesses,
state and local governments, and other persons; to minimize the
cost of information collection to the federal government; and to
maximize the usefulness of the information to the federal govern-

34
 ment. The Act established OIRA and delegated it responsibility
for coordinating government information policies, including
reviewing and controlling agency collections of information.
Despite the many benefits promised by the 19S0 Act, It requires much
stronger implementation, and further Initiatives to reduce paperwork
are imperative. Stringent goals for reduclng paperwork requirements
are needed at all levels of government. The anliclpated paperwork
requirements of future legislation should be thoroughly assessed prior
to enactment, and these assessments should be disclosed to the publlc.
Alternative information technologies that can reduce the paperwork
burden should be adopted.
The Administration should strengthen OIRA's paperwork control
responsibilities. Moreover, the Administration and Congress shouid
strengthen and amend the Paperwork Reduction Act. Sound legisla-
tive proposals include a government-wide goal of at least a 5% annual
reduction in paperwork. In the absence of a legislative mandate, the
Executive Branch should nonetheless commit itseif to this goal and
shouid annually report its progress in achieving it.
The new legislation should aiso address the problem of "third party"
disclosures of information. The Paperwork Reduction Act was
intended to limit the ability of federal agencies to impose paperwork
requirements on the public. However, in Dole v. United Steelworkers
ofAmerica, the Supreme Court heid that the protections of the Act
do not apply where an agency requires that information be provided.
to a third party (and not the government).'8 An agency can circumvent
OIRA's paperwork review simpiy by not requiring that the informa-
tion be submitted to the federal government. In that event, OIRA
cannot review the agency's information requirement and has no
authority to stop it. To remedy this problem, Congress should legisla-
tively overrule Dole when it amends the Paperwork Reduction Act.
Excessive paperwork burdens often are caused by unreasonable
administrative process requirements. These administrative process
costs - the inflexibility, unresponsiveness, and delay that characterize
many regulatory programs - are an increasing threat to the competi-
tiveness of U.S. businesses in global markets.
Many major EPA programs, for example, are based on a multi-
layered administrative process for permitting, compliance review, and

35
 the like. Facilities otherwise ready, willing, and able to comply with
the environmental controls can be rendered noncompetitive by the
rigidity and delay of the administrative process. Many of the indus-
tries that hold the greatest promise for jobs and economic growth In
the nation's manufacturing sector must be abie to respond quickly to
technological change at a pace dictated by international competition,
not the regulatory process. Among these vital Industries are electron-
Ics, advanced materials, aerospace, custom and speclalty chemicals,
pharmaceuticals, and automobile manufacturing. In these highiy com-
petitive industries, time is preclous. They cannot wait for regulatory
processes that take years when their products go through entire life
cycles in less time. Despite the massive costs imposed by these com-
plex administrative processes, the agencies do not have procedures for
considering the costs and benefits of these administrative processes
themselves or their potential for being streamlined.
.Congress and the agencies should continually examine administrative
processes. They should look beyond the direct costs of regulatory
controls and take into account the Incremental costs and benefits of
. each layer in the administrative process.
More generally, the adversarial, legalistic nature of the regulatory
system must be reassessed. All too often, conflict - not consensus and
compromise - characterizes declsion making, enforcement, and the
relationship among government, business, interest groups, and the
public. And Increasingly, legislatures and agencles are criminalizing
regulatory violations that traditionally were addressed by clvil and
administrative remedies. In the environmental area, for example,
errors in reporting, sampling, record keeping, aild the like now are
potentially subject to criminal sanctions. At the same time, the grow-
ing complexity of environmental regulation increases the likelihood
that these errors will occur.
The antagonistic nature of the American regulatory system imposes
enormous and unnecessary tosts; these include exacerbating litigation
and other transaction costs, prolonging delay, and chl1ling Innovation.
These costs, like paperwork and administrative process costs, ulti-
mately are borne by customers, employees and stockholders of the
regulated community.
The government should strive to achieve absolute paperwork reduc-
tions, streamline administrative processes, and reduce the adversarial

36
nature of our regulatory system. Only where their benefits clearly
exceed their costs should mandatory paperwork or complex and
adversarial administrative process requirements be imposed.
12. Regulatory Budget: A framework should be developed
to account for expenditures required by regulations and to
promote greater fiscal restraint on regulatory programs.
The costs of regulation affect us all. They are, in effect, "hidden
taxes." American workers see their tax burden on their Form 1040
and state tax reporting forms, but they are told nothing about their
regulatory burden. To compound the problem, the decisions to create
and impose regulations, especially at the agency level, are remote
from public view. Although the public may see that increased govern-
ment spending wl1l require that they or their children eventually pay
the price in higher taxes. they plainly do not realize that collectively
they also must pay for regulations - as customers, employees. and
stockholders.
Regulatory programs create an illusion that business absorbs their
costs. In contrast to taxing and spending programs, regulatory
programs impose co'sts that do not appear in government budget
figures, and therefore seem "free." In the end, however, the public
pays the price just the same - through higher prices, fewer products,
and diminished wages. productivity, and economic growth.
Despite the enormous cumulative burden of regulations, there is no
process for setting priorities and forcing trade-offs among different
programs Qr goals. Government spending programs face some disci-
pline through the budgetary process because current spending limits
create an incentive to establish rational priorities and to spend money
in a more cost-effective way. However, there is no formal budgeting
process for the statutory and regulatory programs that direct non-
federal resources to achieve public purposes. Regulations are created
as their need is perceived, without budgetary constraints or forced
trade-offs with other important regulations. Government must become
more sensitive to the cumulative costs of regulations.
An accounting system for regulatory costs could measure the cumula-
tive effect of regulations and promote a more efficient reguiatory
system. Under a regulatory budget, agencies would have a powerful
incentive to regulate in a more cost-effective manner; each agency
could be limited in the amount of regulatory costs imposed on the

37
economy each year. If the budget limit had been reached, an agency
wishing to add a new regulation would be required to repeal or modify
an existing regulation to offset the cost increase from the new regula-
tion. If the agency were unable to offset the cost of the new regulation
from other regulations for which it is responsible, the government
would have to produce an offsetting reduction from another agency.
In light of the similarities between fiscal and reguiatory expenditures,
the fiscal budgetary process has been proposed as a model for a simi-
lar budgetary process to discipline regulatory expenditures. There
have been bipartisan efforts in the Executive Branch and Congress
to develop an accounting framework to monitor expenditures directly
reqUired by regulation. This work should be encouraged.
The goal of regulatory accounting is worthwhile. Nonetheless, it
should be recognized that measuring the private expenditures
required by federal regulation raises its own set of problems. The
reguiated community should not be unduly burdened with extensive
and costly record-keeping requirements to validate'projected budget
estimates. It is also difficult to distinguish expenditures due to regu-
lation from those that would have occurred regardless of reguiation.
And speciai challenges arise in estimating the indirect costs of regu-
lation, including lost opportunities for consumers to purchase goods
due to higher prices, less desirable products, or complete bans of
products or substances. Regulatory accounting must consider these
indirect costs, but they can only be estimated with complicated
statistical models. Moreover, combining estimates of indirect costs
with direct cost estimates could be difficult. Yet, because bans primar-
ily cause indirect costs, measuring only direct costs could encourage
agencies to institute bans rather than regulatory controls.
These challenges make regulatory accounting more complex than
fiscal accounting, but there are good reasons to persevere in the
development of a regulatory budget:
• Aithough regulatory budgets wouid require forecasts of private
spending on regulations, the forecasts need not be exact to
constrain spending (like spending forecasts for fiscal budgets).
• The measurement problem concerning the proper baseline
for direct regulatory costs diminishes if an incremental budget
approach is used.
• The potential for agencies to use bans to avoid regulatory budget

38
 constraints is outweighed by their tendency to impose costs on the
public absent a regulatory budget; rules for estimating indIrect
costs can be developed."
While a regulatory budget has not yet been perfected, it holds
promise for measuring and disciplining the cumulative burden of regu-
lations and allocating resources more effectively. The starting point
for a regulatory budget b Lu develop an accounting system that would
use information available from both the fiscal budgetary process and
the information-collection budget established by the Paperwork
Reduction Act. The important work to develop a regulatory budget
should continue.

39
III Conclusion

Government regulation can and must be improved. Although some

regulations have been beneficial. there is great need - and much room
- for a smarter, more cost-effective approach to reguiation"To ask how
much regulation w~ should have or how we should best regulate in
specific situations is not to put dollars before people. To the contrary:
It is to make dollars work more effectively for people.
Regulations exact a heavy toll on wages, productivity, economic
growth, prices, and innovation. They burden federal, state, and local
governments. We do not see the factories never built, the products
never made, the services never provided, or the entrepreneurial ideas
drowned in the sea of regulatory process. But, in the end, all of these
costs of regulation are borne by the public - as employees, consumers.
stockholders, and taxpayers.
Regulatory reform must be a national priority. Because our nation has
limited resources and many competing expectations. the soaring costs
of regulation make it imperative to reform regulation and to reduce its
burdens on the economy. There is growing consensus not only on the
need for regulatory reform, but also on how to achieve it: Government
must assess the seriousness of risks proposed for regulation. compare
these risks to risks familiar to the public, disclose the costs of regula-
tion, regulate only if the benefits outweigh the costs. and select the
most cost-effective. market-driven method possible. This is smarter
regulation. And smarter regulation is better regulation, for con- .
sumers, governments, and businesses alike.
The White I-louse, Congress, agencies, and the states must all commit
themselves to smarter regulation. The Business Roundtable recom-
mends that governments at all levels vigorously implement these
twelve tenets of rational regulation. Many promising ideas have
been proposed to "reinvent" regulations and the regulatory system;
President Clinton's Executive Order on Regulatory Planning and
Review takes an important first step. However, the hard work neces-
sary to achieve meaningful reform remains to be done.
It will take strong leadership to reform the culture of regulation that
permeates government at all levels. Government leaders must remove
incentives for regulators to impose burdensome new regulations and
red tape, and reward innovators who reform or eliminate irrational
regulations or who obviate the need for new ones. Government
employees, like private-sector employees, must put the "customer"

40
first and be more accountable for achIeving results, not for developing
or following Byzantine rules.
If we fail to regulate smarter, and if we fail to change the culture of
reguiation, then the American public - not just governments and
businesses - will suffer. Regulating smarter is a challenge our nation
cannot afford to ignore.

41
42
Endnotes

I. Thomas D. Hopkins, "Costs of Regulation: Filling the Gaps"

(Rep. Prepared for Reg. Info. Service Center) Table I (Aug. 1992)
(estimates in 1991 dollars).
2. See Thomas D. Hopkins, "Costs of Regulation: Filling the Gaps"
(Rep. Prepared for Reg. Info. Service Center) Table I (Aug. 1992).
3. Environmentai Protection Agency, Environmental Investments:
The Cost ofa Clean Environment (Nov. 1990); General Accounting
Office, Environmental Protection: Meeting Public Expectations
With Limited Resources 9 (June 1991).
4. Thomas D. Hopkins, "Cost of Federal Regulation" 4, reprinted in
Reg. Pol'y in Canada and the United States (Rochester Inst.
Tech. 1992).
5. Thomas D. Hopkins, "Costs of Regulations: Filling the Gaps"
(Rep. Prepared for Reg. Info. Service Center) Table 2 (Aug. 1992)
(estimate for 1993, in 1991 dollars).
6. National Performance Review, Creating a Government that Works
Better and Costs Less I (Sept. 7, 1993).
7. National Performance Review, Creating a Government that Works
Better and Costs Less 32 (Sept. 7,1993).
8. Environmental Protection Agency, Reducing Risk: Setting
Priorities and Strategies for Environmental Protection 2
(Sept. 1990).
9. Milton Russell, et. al. Waste Management Research and
Education Institute, Hazardous Waste Remediation: The Task
Ahead 16 (0. Tenn. Dec. 1991).
10. Environmental Protection Agency, Unfinished Business:
A Comparative Assessment ofEnvironmental Problems 73-74
(Feb. 1987).
11. Compare 56 Fed. Reg. 3526, 3573 (Jan. 30, 1991) with 40 e.ER.
§ 261.24, Table I (1992).

12. Keith Schneider, "New Views Call Environmental Polley

Misguided," N.Y. Times, Mar. 21, 1993, at 30.
13. National Research Council, Risk Assessment in the Federal
Government: Managing the Process 18-20 (1983).

43
14, National Research Council, Risk Assessment in the Federal
Government: Managing the Process 48-49 (1983),
15, See Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation 46-47 (1993),
16, Richard B, Belzer, "The Peril and Promise of Risk Assessment,"
14(4) Regulation 40, 45 (Fall 1991),
17, John D, Graham, "Improving Chemical Risk Assessment," 14(4)
Regulation 14,16-17 (Fall 1991),
18, See Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation 44-46 (1993),
19, See Bruce N. Ames, et, al. "Ranking Possible Carcinogenic
Hazards," 236 Science 271, 273, Table I (Apr. 7, 1987):
Joel Brinkley, "Animal Tests as Risk Clues: The Best Data May
Fall Short," N,Y, Times, Mar, 23, 1993, at AI.
20, Competitive Enterprise Institute v. NHTSA, 956 F,2d 321
(D,C. Cir, 1992),

21. See Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation 47-48 (1993),
22, Clean Air Act §§ 108 (a)(2) , 109, as amended, 42 US,C, §§ 7408(a)(2),
7409(1983): seeNRDC v. EPA, 902 F,2d 962, 973 (D,C, Cir, 1990)
(§ 109 does not allow EPA to consider the costs of unemployment
in promulating National Ambient Air Quality Standards),
23, Occupational Safety and Health Act § 6(b)(5), 29 US,c. § 655(b)(5)
(1985): see American TexlileMfrs, Inst. v, Donovan, 452 US, 490,
510-513 (1981),
24, See Carnegie Commission on Sclence, Technology, and Govern-
ment, Risk and the Environment: Improving Regulatory Decision
Making 15-16 (June 1993): Louis S, Richman, "Bringing Reason to
Regulation," Fortune, Oct, 19, 1992, at 94,
25, Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation 11-12 (1993),
26, Office of Management and Budget, Regulatory Program ofthe
United States Government 15 (Apr, I, 1992 - Mar, 31,1993),

44
27. Office of Management and Budget, Regulatory Program ofthe
United States Government 11-15 (Apr. 1, 1992 - Mar. 31, 1993).
28. James C. Miller, II! and Phillip Mink, "The Ink of the Octopus,"
Policy Review 4 (Summer 1992).
29. National Commission for Empioyment Policy, Measuring
Employment Effects in the Regulatory Process:
Recommendations and Background Study (Jan. 1993).
30. American Automobile Manufacturers Association, "The Effect of
Air Pollution Control Laws on the International Competitiveness
of US. Automobile Manufacturers" (Jan. 5, 1993).
31. Wayne B. Gray and Ronald J. Shadbegian, "Environmentai
Regulation and Manufacturing Productivity at the Plant Level,"
CES 93-6 (Center Econ. Stud., Mar. 1993).
32. Richard B. Belzer, "The Peril and Promise of Risk Assessment,"
14(4) Reguiation 40,48 (Fall 1991).
33. H. Klee, Jr. and M. Podar, "Amoco - US. EPA Pollution
Prevention Project, Yorktown, Virginia: Project Summary" v
(Rev. May 1992); David Stamps, "Making a Case for Facility-Wide
Compliance," Envtl. Info. Dig. 6-9 (Oct. 1992).
34. Presidential Memorandum, "Negotiated Ruiemaking," 58 Fed.
Reg. 52,391 (Oct. 7, 1993).
35. Environmental Law Review Committee, Environmental
Legislation: The Increasing Cost ofRegulatory Compliance to the
City of Columbus (Rep. to Mayor and City Council of Columbus)
(May 13,1991).
36. Thomas D. Hopkins, "Costs of Regulation: Filling the Gaps"
(Rep. Prepared for Reg. Info. Service Center) 29 (Aug. 1992);
Thomas D. Hopkins, "The Costs of Federal Regulation," 2 J. Reg.
and Soc. Costs 5, 21-23 (March 1992).
37. Office of Management Budget, Information Resources
Management Plan of the Federal Government I!-3 (Nov. 1992).
38. Dole v. United Steelworkers ofAmerica, 494 US. 26 (1990).
39. Office of Management and Budget, Regulatory Program ofthe
United States Government 6 (Apr. 1, 1991 - Mar. 31, 1992).

45
Selected References

Introduction
• National Perlormance Review, Creating a Government That
Works Better and Costs Less (Sept. 7, 1993).
• Environmental Protection Agency, Environmental Investments:
The Cost ofa Clean Environment (Nov. 1990).
• General Accounting Office, Environmental Protection:.Meeting
Public Expectations with Limited Resources (June 1991).
• The Business Roundtable, Cost of Government Regulation Study
(Mar. 1979).
• Thomas D. Hopkins, "Costs of Regulation: Filiing the Gaps"
(Rep. Prepared for Reg. Info. Service Center) Table I (Aug. 1992).
• W. Kip Viscusi, "Pricing Environmental Risk," Policy Study
No. 112 (Center for the Study of Am. Bus. June 1992).
• W. Kip Viscusi, Fatal Tradeoffs (1992).
• Dale Jorgensen and Peter J. Wiicoxen, "Environmental
Regulation and us. Economic Growth," 21 RAND J. Econ. 314
(Summer 1990).
• Dale Jorgensen and Peter J. Wilcoxen, "The Economic Impact
of the Clean Air Act Amendments of 1990," 14 Energy J. 159
(Jan. 1993).
• Clyde Wayne Crews, Jr" "Ten Thousand Commandments:
Regulatory Trends 1981-92 and The Prospects for Reform," 2 J.
Reg. and Soc. Costs 105 (Mar. 1993).
1. Risk-Based Priorities and Public Education:
• Environmental Protection Agency, Reducing Risk: Setting
Priorities and Strategies for Environmental Protection
(Sept. 1990).
• Environmental Protection Agency, Unfinished Business: A
Comparative Assessment ofEnvironmental Problems (Feb. 1987).
• General Accounting Office, Environmental Protection Issues
(Dec. 1992).
• General Accounting Office, Environmental Protecti6n: Meeting
Public Expectations With Limited Resources (June 1991).
• Office of Management and Budget, Regulatory Program ofthe
United States Government (Apr. 1, 1991 - Mar. 31,1992).
• National Performance Review, Improving Regulatory Systems
(Sept. 1993).
• W. Kip Viscusi, "Pricing Environmental Risks," Policy Study
No. 112 (Center for the Study of Am. Bus. June 1992).

46
• Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation (1993).
• Carnegie Commission on Science, Technology, and Government,
Risk and the Environment: Improving Regulatory Decision
Making (June 1993).
• National Research Council, Improving Risk Communication.
(1989).
• Readings in Risk (Theodore S. Glickman, Michael Gough eds.,
1993).
• Keith Sc)meider, "New Views Call Environmental Policy
Misguided," N.Y. Times, Mar. 21, 1993, at I.
2. Risk Assessment and Risk Management:
• National Research Council, Risk Assessment in the Federal
Government: Managing the Process (1983).
• Office of Management and Budget, Regulatory Program of the
United States Government 13-26 (Apr. I, 1990 - Mar. 31,1991).
• Carnegie Commission on Science, Technology, and Government,
Risk and the Environment: Improving Regulatory Decision
Making (June 1993).
3. Sound Science:
• National Performance Review, Improving Regulatory Systems
(Sept. 1993).
• Office of Management and Budget, Regulatory Program ofthe
United States Government 13-26 (Apr. I, 1990 - Mar. 31, 1991).
• Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation (1993).
• National Research Council, Issues in Risk Assessment (1993).
• Carnegie Commission on Science, Technology, and Government,
Risk and the Environment: Improving Regulatory Decision
Making (June 1993).
• Harnessing Science for Environmental Regulation (John D.
Graham ed., 1991).
• Joel Brinkley, "Animal Tests as Risk Clues: The Best Data May
Fall Short," N.Y. Times, Mar. 23, 1993, at AI.
4. Benefit-Cost Analysis:
• Office of Management and Budget, Regulatory Program of the
United States Government 8-13 (Apr. I, 1991 - Mar. 31, 1992).
• Office of Management and Budget, Regulatory Program ofthe

47
 United States Government 33-37 (Apr, I, 1990 - Mar, 31, 1991),
• Office of Management and Budget, Regulatory Program ofthe
United States Government 35-41 (Apr, I, 1988 - Mar, 31, 1989),
• National Research Council, Valuing Health Risks, Costs, and
Benefits for Environmental Decision Making (1990) ,
• W. Kip Viscusi, "Pricing Environmental Risks," Policy Study
No, 112 (Center for the Study of Am, Bus, june 1992),
• W. Kip Viscusi, Fatal Tradeoffs (1992),
• David L. Weimer and Aldan R Vining, Policy Analysis:
Concepts and Practice (1989),
5. Market Incentives and Performance Standards: ,
• Office of Management and Budget, Regulatory Program ofthe
United States Government 10-28 (Apr, I, 1992 - Mar, 31, 1993),
• Budget Baselines, Historical Data, and Alternatives for the
Future 114 (U.S, Govt, Printing Off. jan, 1993),
• National Performance Review, Improving Regulatory Systems
(Sept, 1993),
• Stephen Breyer, Regulation and Its Reform (1982),
6. Productivity, Wages, and Economic Growth:
• National Commission for Employment Policy, Measuring
Employment Effects in the Regulatory Process:
Recommendations and Background Study (Jan, 1993), .
• Dale W, jorgenson and Peter j, Wilcoxen, "Environmental
Regulation and u.s, Economic Growth," 21 RAND j, Econ, 314
(Summer 1990),
• Michael Hazilla and Raymond j, Kopp, "Social Cost of
Environmental Quality Regulations: A General Equilibrium
Analysis," 98 j, PoL Econ, 853 (1990),
• Anthony j, Barbera and Virginia D, McConnell, "The Impact of
Environmental Regulations on Industrial Productivity: Direct and
Indirect Effects," 18(1) j, EnvtL Econ, & Mgmt, 50 (Jan, 1990),
• Robert W. Hahn and john A Hird, "The Costs and Benefits of
Regulation: Review and Synthesis," 8 Yale j, Reg, 233
(Winter 1991),
7. Coordination Among and Within Agencies:
• Environmental Protection Agency, RedUcing Risk: Setting
Priorities and Strategies for Environmental Protection
(Sept, 1990),

48
• National Performance Review, Improving Regulatory Systems
(Sept. 1993).
• Carnegie Commission on Science, Technology, and Government,
Risk and the Environment: Improving Regulatory Decision
Maldng (June 1993).
• Stephen Breyer, Breaking the Vicious Circle: Toward Effective
Risk Regulation (1993).

8. Openness:
• National Performance Review, Improving Regulatory Systems
(Sept. 1993).
• Presidential Memorandum, "NegotIated Rulemaking," 58 Fed.
Reg. 52,391 (Oct. 7, 1993).
• Administrative Conference of the United States, Negotiated
Rulemaking Sourcebook (David M. Pritzker, Deborah S. Dalton
eds., Jan. 1990).
9. Periodic Review:
• National Performance Review, Improving Regulatory Systems
(Sept. 1993).
• Carnegie Commission on Science, Technology, and Government,
Risk and the Environment: Improving Regulatory Decision
Making (June 1993).
• Reforming Regulation (Timothy B. Clark, et al. eds., 1980).
• The Business Roundtable, Cost of Government Regulation Study
(Mar. 1979).
10. Federalism:
• Executive Order 12875, 58 Fed.Reg. 58,093 (Oct. 28,1993).
• Environmental Law Review Committee, Environmental
Legislation: The Increasing Cost ofRegulatory Compliance to the
City of Columbus (Rep. to Mayor and City Council of Columbus)
(May 13, 1991).
• Municipality of Anchorage, Paying For Federal Environmental
Mandates: A Looming Crisis For Cities and Counties
(Sept. 1992).
• Alice M. Rivlin, Reviving the American Dream (1992).
• David Osborne and Ted Gaebler, Reinventing Government (1992).
11. Paperwork Burdens:
• Office of Management Budget, Information Resources

49
 Management Plan of the Federal Government II-3 (Nov, 1992),
• Thomas D, Hopkins, "Costs of Reguiation: Fiiling the Gaps"
(Rep, Prepared for Reg, Info, Service Center) (Aug, 1992),

12. Regulatory Budget:

• Office of Management and Budget, Regulatory Program ofthe .
United States Government 3-7 (Apr,!, 1991 - Mar, 31, 1992),
• Reforming Regulation (Timothy B. Clark, et aJ. eds" 1980),
• Robert E, Litan and Wiiliam D, Nordhaus, Reforming Federal
Regulation (1983),
• Christopher C. DeMuth, "The Reguiatory Budget," Regulation,
Mar./Apr, 1980, at 29,
• The Business Roundtable, Cost of Government Regulation Study
(Mar, 1979),

50
Summary ofRecommendations
1. Risk·Based Priorities and Public Education:

Risk·Based Priorities
• The government should use comparative risk assessment to
compare the magnitude of various risks and set priorities for
achieving greater protection of human health, safety and the
environment in the most cost-effective manner.
• Using comparative risk assessment, the Executive Branch should
develop a current inventory of known risks, rank them. and peri-
odically update the inventory every two to four years in light of
new information.
• Federal and state health and safety agencies should utilize experts
to assess, compare. and rank the risks regulated by each agency.
• An interagency coordinating group should be used to facilitate
communication and long-term planning among agency leaders.
• The President should issue guidance to encourage the use of risk
analysis as a tool for making pollution prevention decisions.
• In the short term, Congress and state legislatures should require
the risk-reduction agencies, such as EPA, to conduct comparative
risk assessments to set priorities.
• In the long term, as environmental, health, and safety statutes are
reauthorized, reformed, and created. Congress and state legisla-
tures should require - not inhibit - the consideration of risk, costs,
and benefits in designing regulatory policy.
• Legislation for controlling risk should promote risk assessment
while provIding agencies with sufficient fleXibility to incorporate
state-of-the-art scientific knowledge.
.• An Office of Risk Analysis should be created in EPA and other
agencies that need increased expertise in analyzing and ranking
risks.
• A task force composed of scientific experts from the environmen-
tal, health, and safety agencies should create a government-wide
manual on the regulation of risks. The manual would instruct
regulators on how to manage risks.
• Legislatures should set clear goals for regulatory programs, and
these goals should be understandable to the regulated community
and the public.

Public Education: Improved Risk Communication

• Agencies should improve the risk communication process, which

51
 includes educating the public on the nature of risks potentially
subject to regulation; the costs and benefits of regulation; available
alternatives; and uncertainty about risks, benefits, and costs.
o The government should educate the public about the level of risks
proposed for regulation; risks unfamiliar to the public should be
compared to familiar risks.
o Environmental, health, and safety agencies should create public
risk communication programs to inform and respond to the public
.on relevant risks and the costs of managing those risks.
o Risk communication should be based on a written record that is
available to the public.
2. Risk Assessment and Risk Management:
o The risk assessment and risk management phases of the regu-
latory process should be separated as much as possible - both by
agencies in conducting risk analyses and by legislatures in design-
ing statutes.
o Risk assessment methodologies and guidelines should be
improved; they should be routinely reviewed and updated to
reflect the state of the art.
o Professional and policy judgments made in the risk assessment
process should be identified and disclosed to the public.
o The White House should issue an Executive Order on risk
assessment and risk management policy.
o Congress and the White House should strengthen the expertise
of the Office of Science and Technology Policy in risk analysis.
o Uniform risk assessment guidelines for the agencies should be
developed by OSTP, an interagency committee, or by experts
outside of government.
o Agencies should review their risk assessment guidelines and
methodologies and make improvements where appropriate.
o A more complete and current government database of relevant
scientific data should be developed for use in the risk assessment
process.
o The government should establish a mechanism that would allow
new scientific information to be easily and qUickly incorporated
into the risk assessment process.
o Procedures should be established to reevaluate risk assessments
and risk management decisions in light of scientific advances.
o Agencies should favor cost-effective regulatory options in the risk
management phase.

52
3. Sound Science:
• Agencies should use the most' advanced and precise scientific
methods when making decisions.
• Agencies should regularly update their regulations and programs
to incorporate advances in scientific knowledge.
• Agencies that depend on scientific information and judgments but
lack scientific advisory boards, such as OSHA, should emulate EPA
and FDA and create scientific advisory boards to participate
actively in their decision making.
• Periodic outside review procedures should be used to bolster the
scientific credibility of agency decision making.
• To increase the reliability and credibility of their risk assessments,
agencies should strive to make their default assumptions and
inference gUidelines accurately reflect real risks.
• When regulators lack information for a value or parameter needed
for a risk estimate, they should use uncertainty analysis tech-
niques to identify a range of possible values and their probability
of occurrence.
• To promote public accountability, agencies should explain
assumptions, inferences, and value judgments made in each risk
assessment and should characterize their impact on the estimated
value of the risk.
• Although risk assessments should provide a range of risk values
to indicate data limitations and scientific uncertainty, the "best
estimate" of risk should be provided for polieymakers and the
general public in the risk management phase.
4. Benefit-Cost Analysis:
• Federal and state agencies should use benefit-cost analysis to
decide whether or not to adopt a regulation and should regulate
only where the benefits justify the costs.
• Once a regulatory goal is established, agencies should use cost-
effectiveness analysis to select the least costly option for meeting
that goal.
• Congress and state legislatures should incorporate benefit-cost
principles in statutes and avoid an "at-any-cost" approach to
achieving regulatory goals.
• The White House and governors should hold agencies accountable
for conducting a full benefit-cost analysis of significant regulatory
actions.

53
• Agencies should apply benefit-cost and cost-effectiveness analysis
not only to substantive regulations, but also to administrative
process, including procedures for issuing permits and reviewing
compliance.
• Agencies themselves should develop and use standardized guide-
lines for analyzing the costs and benefits of their regulations.
• Agencies that already have benefit-cost guidelines, such as EPA,
should periodically review and improve their guidelines in cooper-
ation with other agencies and the White House or the governor.
• When agencies estimate costs, they should attempt to estimate
the full costs of regulations, not just compliance costs.
• Agencies also should consider the potential benefits of the activity
or substance to be regulated.
• If some costs or benefits are nonquantifiable, they should at least
be identified by the regulator.
5. Market Incentives and Performance Standards:
• Both statutes and regulations should favor market mechanisms
over command-and-control regulation.
• Performance standards should be favored over design standards
in federal and state regulations.
6. Productivity, Wages, and Economic Growth:
• Agencies should directly consider the impact of regulatory options
on productivity, wages, economic growth, innovation, jobs, and the
international competitiveness of American businesses,
• The Legislative and the Executive Branches at the federal and
state levels should promote the improvement of state-of-the-art
analytical tools to assess the industry-wide and economy-wide
impact of regulations.
7. Coordination Among and Within Agencies:
• To address problems concerning multiple agencies, a strong
interagency committee should engage in strategic planning and
develop a coordinated response before regulations are proposed,
• Each agency should coordinate individual programs that address
different aspect of the same problem.
• Cross-cutting, cost-effective regulatory approaches, such as
multi-media environmental regulations, should be favored over
piecemeal approaches.

54
8. Openness:

Removing Secrecy
• The regulatory process should be open to maximum public
involvement at all stages.
• OIRA shouid disclose written communications from those outside
of government before a rule is published.
• The White House should require agencies to publish thcir
Regulatory Plans when they are submitted to OIRA for review.
• Regulatory analysis documents that detail the costs and benefits
of regulations should be available to Congress and the public, even
if they include information or considerations that the agency may
not actually use to create a rule.
• The public should have access to the identities and positions of
participants in the regulatory process.
Regulatory Negotiation
• Agencies should make better use of negotiated rulemaking.
9. Periodic Review:
• Programs and regulations should be periodically reviewed for
purposes of determining whether they should be reformed,
discontinued, or consolidated.
• The President should issue a Directive requiring each agency to
identify and review at least three significant regulations.
• The White House should establish a formal process for reviewing
existing regulations and programs.
• Legislatures should incorporate sunset provisions into regulatory
programs to ensure a stricter review process, compelled by termi-
nation of the program absent a vote for continuation.
10. Federalism:
• When creating regulatory programs in a field implicating both
federal and state interests, Congress should carefully consider
whether to preempt and regulate the field itself or leave it
to the states; the goal should be to achieve a more cost-effective
balance of state and federal regulation.
• The federal government should refrain from burdening state and
local governments with unfunded mandates - programs without
funding - especially where the benefits do not accrue at the state
or local level.
• When practical, agencies should grant waivers to allow state and

55
 local governments to experiment with innovative programs that
may more efficientiy achieve regulatory goals.
11. Paperwork Burdens:
o Paperwork burdens imposed by all regulatory programs should
be assessed and reduced.
o Administrative process costs - the inflexibllity, unresponsiveness,
and delay that characterize many regulatory programs - should
be assessed and reduced.
o The adversarial, legalistIc nature of the regulatory process should
be reduced where possible.
o The Paperwork Reduction Act should be strengthened; clear
and stringent goals for reducing paperwork burdens should be
established by Congress and the WhIte House.
o When it amends the Paperwork Reduction Act, Congress should
legislatively overrule Dole v. United Steelworkers ofAmerica to
address the problem of "third party" disclosures of information.
o The anticipated paperwork requirements of future legislation
should be thoroughly assessed prior to enactment, and these
assessments should be disclosed to the public.
o Alternative information technologies should be employed to
reduce the paperwork burden.
12. Regulatory Budget:
o A framework should be developed to account for expenditures
reqUired by regulations and to promote greater fiscal restraint
on regulatory programs.
o Congress should impose a cap on the costs imposed on the econ-
omy by regulations each year. If the regulatory budget limit Is
reached, the government should be reqUired to repeal or modify
existing regulations to offset the cost increase from any new
regulation.

56
The Business Roundtable

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