Background for USDA/DOJ hearing
From the Campaign for Contract Reform. Send in your own comment to the USDA and Justice Department.
The United States Department of Agriculture and the Deparment of Justice are holding joint hearings on competition and concentration in agriculture. The hearing on issues in the poultry industry is May 21, 2010.
The poultry sector is a broken, anti-competitive market. Poultry companies have total control over all levels of production. Contract poultry farmers are forced to sign one-sided, abusive contracts to use their own farms to grow out the poultry company’s chicks in sole-purpose chicken houses built at the growers own expenses, under procedures completely dictated by the poultry company. Because of the consolidation in the poultry industry, and the threat of retaliation, poultry farmers cannot negotiate the terms of the contracts, which are presented to farmers on a take-it-or-leave it basis. Growers have few, if any, alternative options.
In recognition of this imbalance in market power, Congress long ago gave USDA and the Department of Justice (DOJ) the authority to prohibit unfair and deceptive contracting practices by poultry companies, and to take action against companies that use such practices. The Packers and Stockyards Act is the main law that creates that authority. But this law has not been adequately enforced, nor have the unfair poultry practices been adequately specified.
Here’s what USDA and the Department of Justice should do now:
- Take aggressive action to enforce the law against unfair and deceptive trade practices by poultry companies. This requires the USDA and the DOJ to work together to enforce the law, which splits the authority between the two federal agencies. This workshop is a good first step toward effective cooperation by the two agencies.
- Prohibit poultry companies from requiring growers to install expensive upgrades in their poultry houses at their own expense. Growers are often put in a position where they have to pay for the expensive company-mandated upgrades to their chicken houses or lose their contract altogether and face bankruptcy. These upgrades can cost growers as much as $100,000 per chicken house. A typical grower has four chicken houses. This practice is similar to extortion and should be considered an unfair practice.
- Acknowledge that the current system of payment for poultry growers is itself unfair and deceptive, and prohibit its use. The payment used by most poultry companies is a vague and murky system that gives companies free rein to manipulate growers’ payment based on factors completely out of growers’ control. If the companies supply growers with bad chicks or bad feed, the payment system is rigged to make the growers to pay for the companies’ errors, even though the growers’ managerial decisions have no influence over these factors. This system is unique to poultry and does not exist anywhere else in our economy. It only exists because of the extreme market power enjoyed by poultry companies, the lack of negotiating power by the growers, and the growers’ valid fear of retaliation if they do speak out against the abusive contract terms.
- Investigate how anti-competitive practices and concentration in the poultry sector have resulted in cuts in payment to poultry growers over the past fifteen years. Because of the extreme market power of poultry companies, and the lack of competition between companies at the local and regional level, the pay growers receive has been stagnant, or even declined in real terms, in recent years. Alabama Farm Business Analysis Association records show that between 1995-2009 growers had a negative net return in 10 of the 15 years.
Here’s what Congress should do now:
- Amend the Packers and Stockyards Act to give USDA full enforcement authority over unfair and deceptive practices in the poultry sector, instead of continuing the awkward split in authority between USDA and the U.S. Department of Justice. This change would parallel the authority that USDA already has over unfair practices in the beef and hog sectors. Poultry companies have opposed this common sense reform because they don’t want effective enforcement of the law by USDA.
- Prohibit poultry companies from canceling growers’ contracts without adequate cause, unless they reimburse growers for the investments they made to service the contract. Most growers make investments in excess of $1 million for poultry houses and equipment dictated by the company as a prerequisite for the contract. Yet despite these large investment requirements, growers are given no contract security at all. When companies go out of business, or decide to shift operations elsewhere, growers’ contracts are cancelled. The company has no financial investment in those farms or poultry houses. Based on the company decisions, the growers are left to shoulder the entire weight of these stranded investments, often leading to bankruptcy.
Our ultimate goal is the following:
A fair and competitive market where poultry companies and grower associations negotiate the terms of the contract growing arrangement from a position of similar power, to the mutual benefit of both growers and companies.
Page Updated 12.3.09