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Statement of State Attorneys General on "Producer Protection Act"

September 13, 2000

We, the Attorneys General of the States of Iowa, North Dakota, Colorado, Indiana, Kentucky, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, Oklahoma, Vermont, West Virginia, Wisconsin and Wyoming join together to address a serious issue facing our states and the nation - concentration in agriculture.

In recent years, we have become particularly concerned about the rapid trend towards consolidation in agriculture at both horizontal and vertical levels. Through mergers, acquisitions, alliances, and other arrangements, fewer and fewer firms control the production, processing, preparation, and retailing of agricultural commodities and food. We worry that this conglomeration of economic power may lead to anticompetitive practices and adversely affect the prices paid to farmers for commodities and the prices paid by consumers for food.

State Attorneys General play a significant role in fostering full and free competition in the United States economy through the enforcement of federal and state antitrust laws. We pledge to continue our past practice of working together and with the United States Department of Justice and the Federal Trade Commission to vigorously enforce these laws as they apply to agriculture.

However, it is clear that enforcement of antitrust laws, as interpreted by the courts, may not be enough to promote effective competition in agriculture. The antitrust laws do not provide us with the tools to deal with an important cause of concentration in agriculture - contracting. The use of production contracts and marketing contracts by firms with ever growing market shares has dramatically increased vertical integration in American agriculture. Dr. Neil Harl of Iowa State University has called this the "rising tide in contract agriculture."

We acknowledge that there are important reasons why contractors (most often processors) and farmers utilize, and can benefit from, contracts. Indeed, some argue that contracting may greatly increase economic efficiency in agriculture. However, we also believe that contracting poses serious risks for producers and, ultimately, for consumers. This is particularly true in some agricultural sectors where producers are, as Dr. Harl puts it, "contracting with near monopolists." Our offices have received numerous complaints and allegations of abuse in agricultural contracting. We have also reviewed the history of contracting, especially in the poultry industry. In general, we see several risks arising from contracting, including the following:

First, there is greater and greater disparity between processors and farmers with respect to market information and bargaining power. Large companies often offer contracts to producers on a "take it or leave it" basis. The contractual risks to producers are buried in pages of legalese and producers are stuck with unfair contract terms. The poultry industry, which has been vertically integrated for decades through the extensive use of contracts, is replete with allegations of unfair treatment of producers.

Second, contracting can result in the unfair shifting of economic risks to farmers. This is common in production contracts that require producers to make substantial capital investments. For example, in the poultry industry, some producers are contractually required to make long term capital investments in buildings and equipment, but are only offered a contract that covers one flock of birds.

Finally, a serious consequence of the widespread use of contracts, which often contain strict confidentiality provisions, may be the demise of market transparency traditionally achieved in agriculture through auctions, terminals, and futures trading. Most agricultural contracting is conducted in virtual secrecy and this severely limits the ability of farmers to compare contracts and negotiate the best, or even a fair, deal.

We believe that states have an opportunity and, indeed, a responsibility to consider reasonable oversight of agricultural contracting that will lessen these risks and promote meaningful competition in agriculture. Several states have such oversight in place and several others have considered similar legislation. We have studied the problem and analyzed various legal and public policy solutions. We have concluded that an effective approach at this time would be the development of model state legislation which provides needed protections for farmers, but is not overly burdensome for processors. The product is model state legislation entitled the "Producer Protection Act."

The attached section-by-section explanation describes the legislation in detail. In brief, the Act has several noteworthy provisions: It requires contracts to be written in plain language and contain disclosures of material risks. It provides contract producers with a three-day right to review production contracts. It prohibits the inclusion of confidentiality provisions in contracts. It provides producers with a first priority lien for payments due under a production contract. It makes it harder for processors to terminate production contracts capriciously or as a form of retribution if farmers have already made sizable capital investments pursuant to requirements in the contracts. It makes it an unfair practice for processors to retaliate or discriminate against producers who exercise certain rights (such as the right of producers to join producer organizations).

A couple of caveats: First, although we as a group endorse the purpose and general components of the legislation, we may not agree on all of the specific provisions of the Act. Second, we do not presume that state legislatures will enact the Act as written - each state will obviously need to make independent legislative decisions. Nevertheless, we see a real benefit for states to enact similar laws and we see this model statute as an important starting point.

In conclusion, we urge state legislators and others to seriously consider this Act. We believe that enactment of this sort of legislation will help preserve competition in agriculture for the benefit of farmers and consumers.

THOMAS J. MILLER
Attorney General
State of Iowa

HEIDI HEITKAMP
Attorney General
State of North Dakota

KEN SALAZAR
Attorney General
State of Colorado

KAREN FREEMAN-WILSON
Attorney General
State of Indiana

ALBERT B. CHANDLER, III
Attorney General
State of Kentucky

MIKE HATCH
Attorney General
State of Minnesota

MIKE MOORE
Attorney General
State of Mississippi

JEREMIAH W. (JAY) NIXON
Attorney General
State of Missouri

JOSEPH P. MAZUREK
Attorney General
State of Montana

DON STENBERG
Attorney General
State of Nebraska

FRANKIE SUE DEL PAPA
Attorney General
State of Nevada

W.A. DREW EDMONDSON
Attorney General
State of Oklahoma

WILLIAM H. SORRELL
Attorney General
State of Vermont

DARRELL V. MC GRAW, JR.
Attorney General
State of West Virginia

JAMES E. DOYLE
Attorney General
State of Wisconsin

GAY WOODHOUSE
Attorney General
State of Wyoming