RAFI Explains Two New USDA Packers and Stockyards Act Rules

This article is from RAFI’s website and shared with permission.

Written by: Melanie Canales and Aaron Johnson

For decades, RAFI has partnered with contract poultry growers to advocate that USDA utilize its authority under the Packers and Stockyards Act to take action against manipulative poultry tournament systems and other unfair practices that pit contract growers against each other and base their income on factors outside their control. RAFI has also long argued that USDA should clarify that the growers are not required to prove industry-wide ham to competition when making an unfairness complaint under the Packers and Stockyards Act. Over the past month, USDA has issued two new proposed rules that, at long last, take direct action to address these concerns.

The first of USDA’s recently proposed rules, the Poultry Grower Payment Systems and Capital Improvement Systems rule (or “tournament rule” below), will reform poultry contracts and tournament systems, ensuring that growers always receive a consistent base price for the flocks they raise and that any bonuses they receive are fairly calculated. The rule will also require any requests for additional capital investments by poultry corporations or “integrators” to growers be accompanied by a “Capital Improvement Disclosure Document” that will help growers determine if they can reasonably expect to recoup any capital investments they are encouraged or required to make on their farms. USDA’s second proposed rule, the Fair and Competitive Livestock and Poultry Markets rule (or “unfair practices rule” below), seeks to reestablish the Packers and Stockyards Act’s protections against unfairness for all livestock and poultry producers in the face of a series of incorrect federal court rulings that have held that producers that bring a complaint under the Packers and Stockyards Act must prove that the unfairness they are experiencing represents an industry-wide harm to competition.

Below, we answer some of your questions about the implications and background of USDA’s two proposed rules.

Follow this link to complete our Contract Grower Feedback Survey.

RAFI will be compiling a comment to USDA that incorporates grower feedback to advocate for increased transparency and fairness protections in the poultry industry. If you are a current or former contract poultry grower, you have invaluable insights into how these rules may or may not benefit contract poultry growers. In the survey linked above and below, we hope to gather some specific feedback from you, which we will present anonymously in a comment to the USDA to inform revisions they may make to their rule before it is finalized.

A NOTE ON PRIVACY:

We know that active contract growers who speak up about industry practices often face retaliation from their integrators. For this reason, we have designed this form to allow for fully anonymous submissions, if that is your preference, to protect you from any adverse consequences of telling your story.

Follow this link to complete our Contract Grower Feedback Survey.

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Photo: U.S. Department of Agriculture, CC BY 2.0

What issues does the unfairness rule address?

It is currently very difficult for farmers to successfully bring suits against meat corporations for violating the Packers and Stockyards Act because a number of federal court judges have incorrectly required farmers to prove that the company’s actions harmed competition within their entire industry. Since individual farmers’ production only represents a tiny fraction of their overall industry, it is very easy for large corporations to allege that their extractive practices against any given farmer that sues them are not hurting overall competition.

The USDA must clarify that the Packers and Stockyards Act does not require individual farmers or the USDA to demonstrate a likelihood of competitive injury to the sector as a whole when alleging a violation of the Act. Instead, farmers and USDA should only be required to prove harm to individual farmers under the Act.

How will USDA’s unfairness rule work, and who will it benefit?

USDA’s Fair and Competitive Livestock and Poultry Markets rule creates a detailed framework for determining whether a practice is unfair under the Packers and Stockyards Act. This rule applies to all livestock and poultry producers covered by the Act. Critically, in addition to defining unfair practices concerning markets, the rule also defines unfair practices for market participants. In doing so, the rule clarifies how cases may be brought under the Packers and Stockyards Act on behalf of individual growers experiencing unfair practices without the need to prove market-wide harm. Under the proposed rule, a practice may be deemed to be unfair to a particular producer by considering the following factors about the injury caused by the unfair practice:

How the practice restricts a producer’s decision-making or participation within livestock and poultry markets, or denies a producer the full value of their products.
The magnitude of the injury caused by the unfair practice, whether significant harm to one producer or minor harm to many producers.
The extent to which the producer(s) would have to take unreasonable steps to avoid injury.

The rule also establishes a framework for evaluating unfair practices that harm market-wide competition.

What issues does the tournament rule address?

Since its implementation, the tournament system has led to wild variability and unfairness in broiler grower compensation. When growers enter contracts with integrators, they often do so under the impression that the stated base price would be just that, the floor of what they can expect to earn. The picture integrators paint of the tournament system persuades broiler growers to enter contracts under deceptive terms. Still, the reality of the tournament system penalizes growers based on their tournament rank that is determined mainly by integrator-controlled inputs rather than any factors under their control. In truth, the tournament system leaves growers vulnerable to compensation that fluctuates well below the base price established by their contracts. Additionally, the tournament system can be a convenient avenue for integrator retaliation against growers deemed problematic, as integrators can funnel bad inputs to those growers and slowly drive them into financial ruin.

In addition to addressing the central concern of the tournament system for growers, the tournament rule also introduces new transparency disclosure requirements for integrators when they request or require additional capital investments (ACIs) from their growers. Currently, integrators can request additional capital investments with little to no transparency about their reasoning or the likelihood that they can expect a return on that investment. Broiler growers who question these requests are often given the ultimatum of making the investment or losing their contracts. When integrators have already created a monopsony environment that drastically limits a broiler grower’s option to switch integrators, this ultimatum leaves broiler growers to either blindly make the additional capital investments or lose the only contract available to them with such a highly specialized operation.

The tournament rule will reform grower payment systems and capital improvement requirements by:

Requiring poultry contracts to contain a fixed base price that cannot be reduced by any performance incentive or grower ranking system.
Imposing a “Duty of Fair Comparison” upon poultry integrators to ensure that any bonus systems that compare growers based on flock performance do so fairly and account for variable input quality.
Integrators that request or require growers to undertake additional capital investments on their farms must transparently disclose how they think the grower will be able to recoup their investment.

How will the tournament rule impact poultry contract base prices?

USDA’s tournament rule will require all broiler contracts to contain a firm base price that functions as a true minimum price and cannot be reduced by any penalty assessed in a tournament formula. USDA argues that contracts that fail to clearly state a true base price obscure substantial and unavoidable downside risks in a contract, inhibiting a grower’s ability to plan and manage their business or evaluate the financial risk associated with finding themselves in the bottom half of the tournament pool. In this section, the USDA outlines expectations for broiler grower compensation as well as enforcement measures on administrative and judicial levels:

Integrators may not reduce any compensation rate under a broiler growing arrangement based on the grower’s grouping, ranking, or comparison to other growers in the ranking system.
AMS enforcement includes investigating complaints of alleged violations and referring to the DOJ for appropriate action where failure to pay is implicated.
USDA enforcement may also occur through administrative actions allowing AMS to review integrator contracts, records, and payments during routine compliance reviews and investigations.
Growers can contact AMS to submit a complaint of an alleged violation, and growers with grievances can also proceed directly to federal court.

USDA’s approach is similar to the consent decree implemented by the Department of Justice on Cargill-owned Wayne-Sanderson Farms several years ago. The USDA has requested commentary on capping comparison-based bonuses at 25% of total pay. This bonus-capping proposal intends to mitigate the unpredictability of bonuses and optimism bias that makes it difficult for growers to assess their financial expectations for each tournament accurately.

What will it mean for integrators to have a “Duty of Fair Comparison,” and how will USDA enforce this?

Bonus systems for growers will still be allowed under USDA’s tournament rule, but with the added scrutiny that integrators must comply with a “duty of fair comparison” when implementing any bonus system that calculates bonuses based on comparing growers’ flock performance to each other. USDA insists that it is impossible for integrators to provide equal inputs to all growers and also acknowledges that integrators must distribute the vast majority of their inputs to their growers to avoid waste and inefficiency. USDA’s duty of fair comparison will not require integrators to provide precisely equal inputs and production practices, but it will require them to modify their comparison formulas to account for differences in input quality and standardize methods for awarding bonuses outside of a comparison formula when fair comparison is not possible. Holding integrators responsible for upholding a duty of fair comparison will create more transparency and will make it much more difficult for integrators to use the tournament system to discriminate against or retaliate against growers. In this section, the tournament rule:

Establishes factors that determine whether an integrator reasonably designed its poultry grower ranking system to deliver fair comparison.
Requires integrators to establish and maintain written policies for designing and operating a poultry grower ranking system consistent with the duty of fair comparison.
Requires integrators to adjust compensation to a non-comparison method when circumstances outside of grower control (such as inputs or growing practices) make fair comparison impossible.
Requires integrators to identify inputs and production practices under their control that impact grower compensation, establish monitoring systems to reduce unequal distribution of inputs and flock production practices among growers settled together, and revise their comparison formulas to compensate for remaining differences.
Requires integrators to develop transparent policies for settling disputes between growers and their integrator.
Written documentation on compliance, compensation, and conflict resolution developed by integrators is subject to review by an independent party not less than once every two years.

By requiring integrators to develop, document, and implement policies that allow for flexibility in comparisons, fair compensation for growers when inputs and production practices are not standard across a tournament, and requiring non-comparison forms of bonus calculation when fair comparison isn’t possible, this proposed rule balances a relationship that has historically benefited the integrator at the massive expense of growers.

How will greater transparency regarding additional capital improvements benefit growers?

Many growers are compelled by their integrators to make additional capital investments (ACIs) without the opportunity to fully understand the ACI’s purpose, design, risks, and impacts on their financial well-being. This lack of information impairs growers’ ability to negotiate, effectively exercise independent decision-making to reject an ACI, and, more broadly, manage their farming operation. When integrators withhold this information, they prevent growers from evaluating whether they can recoup their investment or engage in other farming practices that could achieve the goals of the ACI. By requiring the disclosures outlined in this proposed rule, AMS and growers will be more able to identify circumstances in which integrators attempt to shift or hide costs to growers through ACI practices. Clear disclosures will empower growers to enforce their rights of reasonable recoupment or refusal to make an ACI, which already exists under the Packers and Stockyards Act (§201.216). With these proposed disclosures, AMS will be much better positioned to perform investigations, streamlining enforcement of the existing requirement that there must be a reasonable expectation of recoupment when ACIs are requested or required.

By creating standards by which integrators can request capital investments, this rule seeks to empower broiler growers to make more informed decisions about their own operations. When requesting or requiring ACIs, integrators will be required to provide growers a Capital Improvement Disclosure Document (Disclosure Document) that must:

Include the purpose of the additional capital investment (ACI) and a summary of relevant research or other supporting material that the integrator has used to justify the ACI.
Disclose all relevant financial incentives and compensation for the grower associated with the ACI.
Outline all relevant construction schedules related to the request.
Identify housing specifications associated with the ACI and any required or approved manufacturers or vendors.
Provide an analysis of projected returns a grower can expect from the ACI, including any assumptions, risks, or uncertainties.

Additionally, integrators will be required to include a statement in each Disclosure Document indicating that the USDA has not verified the enclosed information and that if the document contains any false or misleading statements or material omissions, it is a violation of federal or state law under the Packers and Stockyards Act. They must also include contact information for filing a complaint to the Packers and Stockyards Department.

Wait, what is the tournament system again?

The tournament system is a manipulative scheme designed by poultry processing corporations to stabilize and control their own production expenses — in the form of prices paid to farmers — while transferring as much of the financial risk involved with growing chickens as possible onto growers they contract with. Contract poultry growers do not own the chickens they raise or control what feed or medicine is provided to their flock — these are all provided by the integrator. Contract poultry growers are tasked with achieving the most efficient possible growth of their flocks for the least amount of feed — which is expressed, in performance terms, in their statistical feed conversion efficiency. It is vital at this point to note that the final weight and feed conversion efficiency of a broiler flock depends mainly on the initial health and gender of the chicks, the quality and reliable availability of their feed, and the timing of flock pick-up — all factors that are controlled by the integrator, not the contract grower.

When these growers’ flocks of fully grown chickens are picked up by their integrator for processing, the corporation does a detailed analysis of the feed conversion performance of each grower in that week’s “tournament group.” It then averages these statistics, docks the pay of the growers whose flocks were found to be below average, and transfers that money to growers of above-average flocks as bonuses. In essence, the effect of this system is to stabilize and externalize the costs of the integrator while accomplishing an extractive transfer of bonuses to some growers by penalizing others — all within a system that is heavily influenced by integrator-controlled inputs and actions.