Given the inevitable press of time, we would appreciate having your re sponse as soon as possible, and are most grateful for your continued

U.S. House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: This is in response to your letter of April 27, 1977, in which you addressed to me three questions as a followup to my March 29, 1977 testimony before the Subcommittee. I have relied on the assistance of Bureau of Competition staff in preparing the following answers to your questions. 1. What studies has the Federal Trade Commission prepared, or is it in the process of preparing, concerning the Webb-Pomerene Act, and its effect on competition? Please outline the methodology study, if possible, and the issues the study will address.

There are no present plans for a study of the Act and its effect on competition, as such. The last comprehensive analysis and report by the Federal Trade Commission concerning the administration of the Webb-Pomerene Act was the Economic Report on Webb-Pomerene Associations: A 50-year Review (June 1967). In addition to the statutory annual report of organizational information re quired to be filed by each association, in most recent years we have collected certain additional information by questionnaire. This information is helpful in monitoring the performance of registered associations, but it has not been used for economic evaluation. At Commission direction, we are planning to improve the reporting procedure and questionnaire in order to obtain information of a more meaningful nature and in a more usable format. When this revised survey form has been approved by GAO under the Federal Reports Act, it will be issued with an Order Requiring Filing of Special Report under Section 6(b) of the Federal Trade Commission Act.

2. Please elaborate on your statement that marketing orders provide an antitrust exemption for agricultural cooperatives and exacerbate the problems associated with the cooperative antitrust exemption.

Marketing orders permit sellers of agricultural products, many of whom are cooperatives, to gather together in industry committees and, in effect, fix prices. While decisions of such industry committees are, legally, "recommendations" to the Secretary of Agriculture, 40 years of experience with marketing orders shows that the Secretary rarely refuses to implement a decision of an industry committee. Marketing orders thus sanction the existence of agricultural cartels, the purpose of which is to raise prices. Were it not for the marketing orders, this collusion between independent sellers would be prohibited by the antitrust laws. Large dominant cooperatives may play a significant role in both the adoption and continuation of price enhancing marketing orders. The 1975 FTC Staff Report on Agricultural Cooperatives commented that dominant cooperatives and marketing orders seemed to exist side by side in many industries. The Report noted:

"... while there are few examples of restrictive marketing orders where no cooperative has a large market share, there are few examples of leading coopera tives which have not sought marketing orders, most of which impose significant restrictions." (p. 170)

The Report also commented that “a political connection of causation between a marketing order and a cooperative's large market share... seems probable in some instances":

"A marketing order is put into effect only upon the vote of producers and handlers. A cooperative can cast a bloc vote for all its members. Therefore a dominant cooperative can have a strong influence on the terms of the order. A restriction which leads to enhanced prices will of course benefit nonmembers [of the cooperative] but it will benefit members as well. It may even be that producers choose to band together in a cooperative in order to vote in a marketing order." (p. 172)

The Marketing Order Program thus allows agricultural cooperatives to act in concert with other industry members to increase prices without fear of antitrust prosecution.

3. What exemptions does the Bureau of Competition propose be re-examined, eliminated or modified?

In my March 29, 1977 testimony before the Subcommittee, I placed major emphasis on two areas of Bureau of Competition concern, the exemptions and immunities applicable to the insurance industry and to the agricultural industry. Regarding the McCarran-Ferguson exemption for insurance, we do not now have a specific recommendation for modification or change. But, our experience has illustrated that whatever legitimate protective purpose Congress intended in enacting this exemption, the sweep of the law has been widely expanded by subsequent judicial construction and permissive state regulation. This latitude in application flows, in part, from the broad language employed in the statute itself. Because of the discrepancy that is historically evolved between the legislative purpose and the practical effect of the law, we feel a full congressional re-examination of McCarran-Ferguson is justified. In such hearings, the insurance industry should bear the burden of justifying the current broad exemptions it enjoys. The outcome of such a review process would be, we predict, a specific legislative fencing in of the industry, or at least some segments thereof, to the benefit of the ultimate consumer. Should the Subcommittee decide to explore the McCarran-Ferguson area, the Bureau of Competition would be pleased to work with the Subcommittee and its staff in narrowing the focus of inquiry into specific problem areas.

The closest FTC staff scrutiny of antitrust exemptions and immunities has been in the agricultural field. Specifically, in the course of reviewing the CapperVolstead Act, the staff noted that by joining agricultural cooperatives, large agribusiness corporations may reduce competition in the sale of agricultural commodities. Such large corporations, if they may be characterized as “producers" of agricultural commodities, may then escape antitrust liability for the reduction in competition resulting from their cooperative membership.

With regard to the Agricultural Marketing Agreement Act of 1937, the Commission has stated its belief that this scheme of regulation should be subjected to careful scrutiny. Apparently, marketing order regulation has proceeded since enactment of the federal legislation in the Depression era without any definitive determination of all of the ramifications of such programs. Even if marketing orders were appropriate responses to the acute distress of Depression-era agriculture, economic conditions may have changed sufficiently in the intervening 40 years to make a reevaluation of the programs both necessary and appropriate. The Commission's views on both Capper-Volstead and the Agriculture Marketing Agreement Act are incorporated in a December 31, 1975 letter to the President of the Senate by then-FTC Chairman Lewis A. Engman. A copy of that

letter is attached.

The Commission has also recommended modifications in the Packers and Stockyards Act, removing limitations on the jurisdiction of the Federal Trade Commission, and we have additionally sought clarification of the Commission's jurisdiction over non-profit organizations. H.R. 3816, which originally contained provisions making these changes, has now advanced to the Rules Committee without these important modifications in law.

Sincerely yours,

Attachment.

Hon. NELSON A. ROCKFELLER,

OWEN M. JOHNSON, Jr., Director, Bureau of Competition.

President of the Senate, U.S. Senate, Washington, D.C.

DECEMBER 31, 1975.

DEAR MR. PRESIDENT: The staff of the Federal Trade Commission recently examined the present status of agricultural cooperatives under the antitrust laws and federal marketing order regulation of agricultural commodities as part of the Commission's ongoing review of the state of competition at the various levels of the food industries. The results of the study are summarized in a staff report, entitled "A Report on Agricultural Cooperatives," a copy of which is enclosed. Briefly, the staff report reviews the intended scope and present state of the limited agricultural cooperative antitrust exemption contained in the CapperVolstead Act and Section 6 of the Clayton Act, provides a general overview of the economic impact of agricultural cooperatives, and examines the operation

of federal programs designed to regulate the marketing of fruits, vegetables, nuts, and milk, which have been established pursuant to the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 601 et seq.

After consideration of the conclusions and recommendations of the staff, the Commission has determined that Congress may wish to re-examine the impact of the Agricultural Marketing Agreement Act of 1937, and one aspect of the Canper-Volstead Act.

First, with regard to the Agricultural Marketing Agreement Act of 1937, the Commission believes that in a time of rising food prices, this regulatory scheme should be subjected to careful scrutiny. Federal marketing orders control or manipulate the marketing of comodities which had a 1973 farm value of approximately $6.9 billion. Marketing orders control the rate of flow of produce to market, set minimum prices for milk, divert produce from fresh markets, and entail many other features designed to increase and stabilize raw agricultural commodity prices by substituting producer and handler collaboration for the competitive process. Therefore, to insure the best possible public policy formulation concerning the continued utility of marketing orders, the Commission believes that it is appropriate at this time to determine (a) the direct costs of marketing orders to consumers; (b) the total economic and social benefit of marketing orders to producers and the distribution of these benefits by income class; (c) the expense of accomplishing the same results through alternative programs; and (d) the indirect costs of marketing orders, such as possible encouragement of anticompetitive industry structures and practices.

To date the staff of the Commission has not identified any definitive study quantifying the total economic costs and benefits of marketing order regula. tion, although, as the staff report indicates, there is reason to believe that marketing orders distort free markets, increase prices, and increase price stability for some agricultural products. Apparently marketing order regulation has proceeded since enactment of the federal legislation in 1937 without any definitive determination of all of the ramifications of such programs. Even if marketing orders were appropriate responses to the acute distress of Depression-era agriculture, economic conditions may have changed sufficiently in the intervening 40 years to make a re-evaluation of the programs both necessary and appropriate. For instance, today more agricultural producers are aggregated into cooperatives and present agricultural technology, marketing skills, and market conditions may obviate the need for marketing constraints through marketing orders.

The Commission's staff estimates that a definitive evaluation of federal mar keting order programs taken as a whole will be a difficult and expensive undertaking. The extent of regulation varies among orders and each product subject to regulation may be unique. Because some industries have been regulated for years, estimating market conditions and prices without orders may be dif ficult. Although the Commission's staff is presently engaged in a limited analysis of the effects of marketing order regulation involving one industry, the Commission does not now have the necessary funds or expertise to conduct a complete and definitive evaluation of all marketing order programs. The Commis sion therefore suggests that the Congress may wish to commit specific resources to conduct a study to evaluate the economic and social impact of marketing or ders under the Agricultural Marketing Agreement Act of 1937.

Second, in the course of reviewing the Capper-Volstead Act, the staff noted that by joining agricultural cooperatives, large agribusiness corporations may reduce competition in the sale of agricultural commodities. The report indicates (at pages 32-83), that such large corporations, if they may be characterized as "producers" of agricultural commodities, may then escape antitrust liability for the reduction in competition resulting from their cooperative membership. A recent antitrust decision, United States v. National Broiler Marketing Asociation, 1975-2 CCH Trade Cases § 60,509 (N.D. Ga. 1975), illustrates at least one situation in which agribusiness concerns apparently have eliminated at least some price competition in the broiler industry through cooperative membership.

The Capper-Volstead Act was designed to enable the small farms to achieve. through cooperatives, some of the same advantages available to businessmen using the corporate form of business organization. The staff believes that a study of the legislation and legislative history indicates that the Act was not designed to allow large agribusiness concerns, which already have the resources, expertise, and other advantages conferred by the corporate form of organization,

to restrict competition by selling with others through a cooperative. Therefore, the Commission suggests that Congress may wish to examine the general issue of the presence of large corporations on the membership roles of agricultural cooperatives.

By direction of the Commission.

Enclosure.

Re Antitrust exemptions and immunities..
Hon. PETER W. RODINO, Jr.,

LEWIS A. ENGMAN, Chairman.

FEDERAL TRADE COMMISSION,
Washington, D.C., June 2, 1977.

Chairman, Committee on the Judiciary, U.S. House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: This is in response to your letter of April 27, 1977, in which you addressed to me three questions as a followup to my March 29, 1977 testimony before the Subcommittee. I have relied on the assistance of Bureau of Competition staff in preparing the following answers to your questions.

1. What studies has the Federal Trade Commission prepared, or is it in the process of preparing, concerning the Webb-Pomerene Act, and its effect on competition? Please outline the methodology of the study, if possible, and the issues the study will address.

There are no present plans for a thorough study of the Act and its effect on competition, as such. The last comprehensive analysis and report by the Federal Trade Commission concerning the administration of the Webb-Pomerene Act was the Economic Report on Webb-Pomerene Associations: A 50-year Review (June 1967).

In addition to the statutory annual report of organizational information required to be filed by each association on January 1, 1977, in most recent years we have collected certain additional information by questionnaire. This information is helpful in monitoring the performance of registered associations, but it has not been used for economic evaluation. At Commission direction, we are planning to improve the reporting procedure and questionnaire in order to obtain information of a more meaningful nature and in a more usable format. When the survey form has been approved by GAO under the Federal Reports Act, it will be issued with an Order Requiring Filing of Special Report under Section 6(b) of the Federal Trade Commission Act.

2. Please elaborate on your statement that marketing orders provide an antitrust exemption for agricultural cooperatives and exacerbate the problems associated with the cooperative antitrust exemption.

Marketing orders permit sellers of agricultural products, many of whom are Cooperatives, to gather together in industry committees and, in effect, fix prices. While decisions of such industry committees are, legally, "recommendations" to the Secretary of Agriculture, 40 years of experience with marketing orders shows that the Secretary rarely refuses to implement a decision of an industry committee. Marketing orders thus sanction the existence of agricultural cartels, the purpose of which is to raise prices. Were it not for the marketing orders, this collusion between independent sellers would be prohibited by the antitrust laws.

Large dominant cooperatives may play a significant role in both the adoption and continuation of price enhancing marketing orders. The 1975 FTC Staff Report on Agricultural Cooperatives commented that dominant cooperatives and marketing orders seemed to exist side by side in many industries. The Report noted:

while there are few examples of restrictive marketing orders where no Cooperative has a large market share, there are few examples of leading cooperatives which have not sought marketing orders, most of which impose significant restrictions." (p. 170)

The Report also commented that "a political connection of causation between a marketing order and a cooperative's large market share . . . seems probable in some instances":

"A marketing order is put into effect only upon the vote of producers and handlers. A cooperative can cast a bloc vote for all its members. Therefore a dominant cooperative can have a strong influence on the terms of the order. A restriction which leads to enhanced prices will of course benefit nonmembers [of the coperative] but it will benefit members as well. It may even be that producers choose to band together in a cooperative in order to vote in a marketing order." (p. 172)

The Marketing Order Program thus allows agricultural cooperatives to act in concert with other industry members to increase prices without fear of antitrust prosecution.

3. What exemptions does the Bureau of Competition propose be re-examined, eliminated or modified?

In my March 29, 1977 testimony before the Subcommittee, I placed major emphasis on two areas of Bureau of Competition concern, the exemptions and immunities applicable to the insurance industry and to the agricultural industry. Regarding the McCarran-Ferguson exemption for insurance, we do not now have a specific recommendation for modification or change. But, our experience has illustrated that whatever legitimate protective purpose Congress intended in enacting this exemption, the sweep of the law has been widely expanded by subsequent judicial construction and permissive state regulation. This latitude in application flows, in part, from the broad language employed in the statute itself. Because of the discrepancy that has historically evolved between the legislative purpose and the practical effect of the law, we feel a full congressional re-examination of McCarran-Ferguson is justified. In such hearings, the insurance industry should bear the burden of justifying the current broad exemptions it enjoys. The outcome of such a review process would be, we predict, a specific legislative fencing in of the industry, or at least some segments thereof, to the benefit of the ultimate consumer. Should the Subcommittee decide to explore the McCarran-Ferguson area, the Bureau of Competition would be pleased to work with the Subcommittee and its staff in narrowing the focus of inquiry into specific problem areas.

The closest FTC staff scrutiny of antitrust exemptions and immunities has been in the agricultural field. Specifically, in the course of reviewing the CapperVolstead Act, the staff noted that by joining agricultural cooperatives, large agribusiness corporations may reduce competition in the sale of agricultural commodities. Such large corporations, if they may be characterized as "producers" of agricultural commodities, may then escape antitrust liability for the reduction in competition resulting from their cooperative membership.

With regard to the Agricultural Marketing Agreement Act of 1937, the Commission has stated its belief that this scheme of regulation should be subjected to careful scrutiny. Apparently, marketing order regulation has proceeded since enactment of the federal legislation in the Depression era without any definitive determination of all of the ramifications of such programs. Even if marketing orders were appropriate responses to the acute distress of Depression-era agriculture, economic conditions may have changed sufficiently in the intervening 40 years to make a re-evaluation of the programs both necessary and appropriate. The Commission's views on both Capper-Volstead and the Agriculture Marketing Agreement Act are incorporated in a December 31, 1975 letter to the President of the Senate by then-FTC Chairman Lewis A. Engman. A copy of that letter is attached.

The Commission has also recommended modifications in the Packers and Stockyards Act, removing limitations on the jurisdiction of the Federal Trade Commission, and we have additionally sought clarification of the Commission's jurisdiction over non-profit organizations. H.R. 3816, which originally contained provisions making these changes, has now advanced to the Rules Committee without these important modifications in law.

Sincerely yours,

OWEN M. JOHNSON, Jr., Director, Bureau of Competition.