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At long last, the U.S. Department of Agriculture (USDA) has released a proposed rule that would revise regulations that apply to poultry growing contracts and the use of tournament ranking systems in the poultry industry. For decades, RAFI-USA has partnered with contract poultry growers to advocate that USDA take action against the tournament system and other unfair practices that pit contract growers against each other and base their income on factors outside their control.
On its own, USDA’s proposed rule, “Transparency in Poultry Growing Contracts and Tournaments,” does not achieve this goal. However, it would require poultry corporations (integrators) to more transparently and truthfully disclose information that growers need to make informed decisions about their contracts and better advocate for themselves. It could also build a foundation for further rulemaking or enforcement action by USDA or Congress.
It is important to remember that this rule is only the first of three that USDA has promised to issue this year. Alongside the release of this rule, USDA also announced an “Advanced Notice of Proposed Rulemaking” asking for further feedback from growers, advocates, and the public about whether additional industry practices, including the use of tournament ranking systems, should be designated as unfair practices under the Packers and Stockyards Act. In other words, USDA’s first rule on transparency in the poultry industry is only one piece of the overall puzzle and must be evaluated both on its own terms, as well as in relation to other proposed actions that USDA could take to restore fairness within the poultry industry.
What are the main problems that USDA is explicitly addressing with this rule?
It’s helpful to think of USDA’s transparency rule as an argument that identifies specific problems in the poultry industry, relates them to a core problem, and then proposes a specific approach to fixing that core problem. The core problem that USDA identifies and seeks to address with its transparency rule is that of “information asymmetry” between integrators and growers. Basically, “information asymmetry” exists between integrators and growers because integrators have access to much more relevant information than growers do, and instead of sharing that knowledge with their growers, they use it to take advantage of them.
Some examples of information asymmetry that USDA identifies between integrators and growers include:
- Incomplete contracts (i.e., contracts in which one party has “discretionary latitude to deviate from expectations), most prominently those that do not guarantee a minimum number of flocks at a minimum stocking density annually. Without this type of guarantee, growers are unable to reliably estimate the guaranteed minimum cash flow of their contracts, which in turn limits their ability to know for sure that they will be able to keep up with the payments on the loans they must secure to build their poultry farms.
- Income variability inherent to the usage of tournament systems, variable layout times or stocking densities, and variable inputs, which are obscured during grower recruitment with simplified average pay projections. This variability similarly obscures growers’ ability to accurately forecast their cash flow and debt servicing ability.
- Effects of input quality variability — with regards to flock origin, breed, gender ratio, and health, as well as feed quality and disruptions and facility factors — on the relative performance of growers competing in tournament groups.
What is the USDA’s chosen primary tool for addressing these problems?
Based on existing regulatory policy in relation to both the Packers and Stockyards Act as well as the Federal Trade Commission Act, USDA will require new standards of transparent disclosure of information sets where it is deemed that asymmetry currently exists. The rule does so by creating two new mandatory disclosure requirements for poultry companies: one that accompanies new contract establishment or contract renewal and another that accompanies each time inputs or settlement sheets are provided to growers.
New Disclosures Accompanying Contract Establishment or Renewal:
- Require poultry companies to disclose the number of flocks and minimum flock stocking density that they will contractually guarantee annually.
- Require poultry companies to provide a summary of litigation over the previous six years between them and any poultry grower, including the nature of the litigation, its location, the initiating party, a brief description of the controversy, and any resolution.
- Require poultry companies to disclose any “sale of farm” policies.
- Require poultry companies, when finalizing a new contract, to disclose to prospective growers the estimated income range for all relevant housing specifications, broken down by quintiles, of current growers in a prospective grower’s region. Additionally, they will have to disclose average grower revenue in all of the poultry company’s other regions.
- Require poultry companies to disclose a summary of the information they collect on grower variable costs related to poultry production.
New Disclosures Accompanying Provision of Inputs or Settlement Sheets:
- Require poultry companies to disclose information about the origin, breed, gender ratio, and health of flocks placed with growers within 24 hours of delivery.
- Require poultry companies to provide settlement sheets to each grower with anonymized information about the origin, breed, gender ratio, and health of both their own flocks as well as those provided to every other grower in their tournament group. Additionally, they will be required to disclose facility specifications and any feed discrepancies for each grower in the tournament group.
- Require poultry companies to disclose how their tournament system formulas account for input quality variability and feed discrepancies.
Additionally, to ensure the reliability of these disclosures, USDA will require poultry company CEOs to sign agreements that mandate the implementation of internal controls frameworks necessary to provide accurate disclosures and compliance with USDA audits of disclosed data.
What are the problems that USDA acknowledges but is not substantively addressing with this rule?
It is important to understand that USDA’s proposed rule mandates new disclosure requirements but critically does not prohibit specific industry practices or contractual terms. For example:
- Poultry companies may still offer contracts that do not guarantee annual flock placements or stocking densities sufficient for grower debt servicing or profitability. Indeed, poultry companies may still choose to offer contracts that do not guarantee any flock placements at all, and they are not required to offer contracts that extend for the entire term of the loans taken out by growers.
- While poultry companies will be required to disclose input quality variables and feed discrepancies within tournament groups and how their ranking formula accounts for those variables, they are not required to create new tournament formulas that actually account for variable inputs.
- Tournament group composition effects (wherein a grower can produce identical outcomes on two flocks, but receive different revenue based on which other growers they must compete with in each tournament group) are not addressed or accounted for in the currently proposed rule.
More broadly, USDA acknowledges in its rule’s narrative that poultry companies often operate as regional monopsonists or oligopsonists and as such have disproportionate power to set prices, dictate contract terms, and suppress resistance to their operating practices. USDA specifically acknowledges “hold-up risk” — “the risk growers face at the time of contract renewal when live poultry dealers make contract renewal dependent on further grower investments or other unfavorable contract terms not disclosed at the time of the original agreements” — that growers are often compelled to accept because they lack alternative integrators with which to contract. However, nothing in the existing rule proposal addresses these concerns.
What are the possible positive effects of USDA’s transparency rule for contract growers?
Rather than taking direct action to end the unfair dynamics inherent to the poultry tournament system, USDA’s transparency rule is an incremental improvement — but an improvement nonetheless. Here are some specific ways that this rule could have positive effects:
- By requiring poultry growing contracts to clearly disclose minimum annual flock placement and density guarantees, as well as real income variability and cost estimates, growers may be better positioned to evaluate whether entering into a poultry growing contract is the right decision for them, and lenders may be able to better evaluate whether poultry growing contracts with poor guarantees are a wise lending investment. If fewer growers and lenders are willing to enter into contracts with poor guarantees, integrators may be pressured to improve the guarantees they include in contracts.
- By requiring integrators to disclose input quality, feed discrepancy, and facility specification information for each grower in a tournament group to each tournament participant, growers should be able to better assess whether they are experiencing retaliation or consistently being disadvantaged by the quality of the inputs they are being provided. If growers keep these records over time, they may have stronger bodies of evidence to provide to regulators should they believe they are experiencing discrimination or retaliation.
What improvements could be suggested, either as modifications to the proposed rule or as additional rules?
As previously mentioned, USDA’s transparency rule is only the first of three that it plans to release this year. Later this year, it is anticipated that USDA will issue a second rule related to Packers and Stockyards Act enforcement that would establish an updated list of specifically prohibited unfair practices or undue preferences across all livestock sectors. In the meantime, USDA is asking for additional feedback on which practices within the poultry industry need further attention, saying:
AMS recognizes that measures beyond disclosure and transparency may be necessary to address those practices, given the economic power imbalances and competition concerns that exist in today’s markets. We also believe that the market may benefit from greater certainty around which specific practices relating to tournaments would be considered unfair, unjustly discriminatory, or otherwise unreasonable under the Packers and Stockyards Act.
Over the coming months, RAFI-USA will have more to say about further action that USDA could take in with future Packers and Stockyards Act rules. In the meantime, there are a number of ways that its first rule on poultry industry transparency could be further strengthened:
- Within contract disclosures, integrators should be required to clearly disclose the maximum percentage of variance, both positive or negative, from the contract’s base pay rate that is possible within their tournament system formula. This would provide growers with increased transparency concerning the true price floor of a proposed contract.
- Within contract disclosures, integrators should be required to prominently disclose the contract’s minimum estimated annual cash flow based on the number and density of the flocks guaranteed annually, the minimum possible pay rate (based on their tournament formula’s variance percentage as discussed above), and estimated grower costs. This would provide a more transparent picture to growers and lenders concerning the minimum guaranteed cash flow of a proposed contract.
- Within contract disclosures, integrators should have to disclose all of the potential input variables that they control, how they have affected the tournament performance of their current growers, and whether their formula equalizes for input quality variability and if so, how.
- Within flock delivery disclosures, integrators should disclose a breed identifier and a breeder flock identifier in addition to a breeder farm identifier. Integrators should be required to disclose these identifiers for each grower in any grower’s tournament group on settlement sheets. Integrators should then be required to provide a convenient method for growers to access or request historical data profiles outlining best management practices and tournament system performance (disaggregated by impactful variables like breeder flock age, flock pickup date, etc.) of all chicks from any breed, breeder facility, or breeder flock identifier.
- Within settlement sheet disclosures, integrators should have to disclose the flock age at pickup as an impactful variable, and whether they account for that in the tournament formula.
- Integrators should be required to maintain an appeals process for growers to report feed quality or delivery issues, input quality issues, or other grievances and should be required to disclose any appeals and a summary of their resolution on settlement sheets. This would further strengthen the value of these disclosures as an official record of the treatment of growers by their integrator.
- Any integrator that retaliates in any way against a grower who installs a feed scale on their farm to verify the accuracy of feed deliveries would be in violation of the Packers and Stockyards Act.
Finally, we hope that the finalized rule will include more details concerning how USDA’s proposed governance frameworks, anti-fraud protections, and executive review and certification requirements will be implemented and enforced.
How can active or former contract growers make their voices heard on these issues?
Great question! RAFI-USA will be providing a number of opportunities for active and former contract poultry growers to make their voices heard in this process. RAFI-USA will be preparing detailed comments for submission to USDA, both about how to improve the rule they have released, as well as to advocate for additional rule provisions that would further protect against unfair practices in the poultry industry. Additionally, we will be advocating to elected representatives and policymakers to strengthen and finalize these rules over the coming year. Throughout this process, we will partner with folks on the ground who are directly affected by poultry industry practices and policies implemented by the USDA and Congress.
If you are a current or former contract poultry grower, you have invaluable insights into how this rule may or may not benefit contract poultry growers, and we want to hear your feedback! We know that active contract growers who speak up about industry practices often face retaliation from their integrators. For this reason, we have designed an online survey form that is fully anonymous for active contract poultry growers to protect you from any negative consequences of telling your story. If you are an active contract poultry grower, this form will not ask for any identifying information about you, and all stories that you provide will be fully anonymized in our comments to USDA. To complete the survey, click the link below:
Additionally, if you believe you have observed a violation of the Packers and Stockyards Act or other federal antitrust laws in the livestock or poultry industries, you can file a report for review by the USDA Packers and Stockyards Division and the Department of Justice at farmerfairness.gov. These reports allow federal investigators to pursue action against illegal and unfair practices in the industry and are also giving the USDA important context into current experiences of growers on the ground. To learn all about this process, you can read our explainer on the topic: USDA’s Farmer Fairness Portal: An FAQ.
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