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Analysis: USDA and DOJ Take on Deceptive Poultry Contracts

Last week was a big week for contract poultry farmers. The U.S. Department of Agriculture (USDA) and the Department of Justice (DOJ) took several actions to target deceptive and predatory poultry-growing contracts. USDA finalized a rule that will require chicken companies to disclose more information about pay variation between farmers, and the DOJ sued the fifth-largest poultry company for forcing chicken growers to pay massive fees to work with another company.

These actions deliver on USDA and DOJ’s promise to work together to level the playing field for farmers. However, farmer advocates and even USDA officials acknowledge there’s a lot more work to be done.

“The finalization of this first Packers and Stockyards Act rule is a major and even historic achievement … if correctly enforced, we think this rule will provide contract poultry growers with badly needed transparency,” said Aaron Johnson, senior program manager of RAFI’s Challenging Corporate Power program, in a statement. “At the same time, it is critical that USDA not take its foot off the gas, as additional badly needed reforms — that have been called for by ranchers and growers for decades — remain to be proposed. USDA must finish what it has started.”

Over 99% of U.S. chickens are purchased through forward contracts between chicken processors and growers, in which growers get paid a fee for successfully raising processor-owned birds in barns built to the processors’ specifications, using feed provided by the processor. Even though chicken companies control these critical factors, some growers get paid twice as much per pound of chicken based on an opaque ranking or “tournament” system.

For decades, growers have complained that this system makes or breaks their businesses based on factors beyond their control. Growers allege that processors can dramatically cut their pay by delivering sick birds or fewer birds, withholding feed, or arbitrarily demanding costly upgrades. Since half of chicken farmers only have one or two processors to choose from, growers cannot easily find a new contract if they’re getting a raw deal.

Koch Foods, the fifth-largest chicken processor, made this dynamic even worse by charging farmers a fee to leave for a rival processor. An investigation by the USDA and DOJ found that Koch required contract growers to pay anywhere from half to a full year’s worth of take-home earnings, or more, to terminate their contract. Such steep fees look like de facto noncompete clauses, which the Federal Trade Commission recently proposed banning for employees. Poultry growers are technically independent contractors, though some growers allege that they don’t have enough real independence to qualify as such.

Last week, the Justice Department sued Koch Foods for illegally restricting competition for growers and offering unfair contracts under the Sherman Act and the Packers and Stockyards Act, respectively. In a proposed consent decree, the DOJ would require Koch to remove this penalty from all its current and future contracts and reimburse growers for any termination penalties paid, plus any related legal fees.

This action is one of the first tangible results of the DOJ and USDA’s partnership to enforce the Packers and Stockyards Act (PSA). USDA first identified and referred Koch’s legal violation to the DOJ. Last year, the agencies also worked together to charge Sanderson Farms and Wayne Farms for offering deceptive payment terms that could dock chicken growers’ pay below an apparent base.

USDA extended some aspects of this settlement to other chicken companies last week by finalizing a rule that would mandate more transparency and disclosures in chicken-growing contracts. Companies will need to disclose the full range of probable incomes that farmers could receive, broken down by quintile. This way, farmers will see what the bottom 20% of farmers in their area make compared to the top 20%.

Chicken companies will also need to share the minimum number of flocks and the minimum number of chickens per flock that farmers will receive annually, which is essential for farmers to estimate how much income they could make each year. They will also have to disclose their grower turnover rates, to better reveal farmers’ risk of getting dropped or not getting a new contract.

To expose unequal treatment, companies will also need to give growers anonymized information about the quality of feed and chicks provided to the other growers that they’re ranked against for tournament payment, plus the number of late feed deliveries each grower experienced. Companies will also need to show how their tournament formulas account for inevitable variability in input quality.

Companies will also have to disclose their policies around farm sales. Some contracts require farmers to get company approval before selling their farms or transferring production contracts to prospective farm buyers.

Any chicken companies that require farmers to make capital investments or slaughter more than two million birds weekly will have to comply with this new rule starting in February next year. Chicken companies will also need to renew these disclosures any time they require farmers to make a costly upgrade, so farmers can assess whether or not their investment will pay off before taking out more debt.

However, aside from mandating that processors commit to delivering a minimum number of birds each growing cycle, this rule doesn’t put limits on the ways chicken companies can pay processors nor the unfair terms they can include. It merely requires that they make them clearer. “This rule simply shows farmers the terms of their exploitation,” said Angela Huffman, president of Farm Action, in a statement.

Critics have urged the USDA to do more to ban unfair payment terms outright and lower barriers to PSA enforcement. For instance, farmers could struggle to bring claims under any new PSA rules if the USDA does not issue a rule establishing that farmers do not need to prove harm to industry-wide competition for all PSA violations.

In the press, USDA officials have acknowledged that there’s more to do. The agency expects to finish three to four more Packers and Stockyards rulemakings, but the clock is ticking on President Biden’s current term in office.

In addition to this rule, USDA announced three more efforts to level the competitive playing field for farmers.

First, USDA established that its procurement policies will align with its latest proposals. The agency clarified that it will only buy meats born, raised, and processed in the U.S., in line with new voluntary labeling requirements that the agency proposed in March. As it stands, meat companies can use a “Product of U.S.A.” label so long as meat passes through a USDA facility.

Second, USDA followed up on letters to major seed companies, warning that they must comply with labeling requirements under the Federal Seed Act. Seed companies sell the same seed varieties under several different brand names, and the Federal Seed Act requires that companies disclose that seed variety at the point of sale. USDA’s report on competition in seeds found that companies often mislead farmers or obscure the specific variety. USDA sent a similar notice to seed companies in March. 

Finally, USDA will establish a new Chief Competition Officer within the Agricultural Marketing Service. During the Trump administration, USDA dissolved the independent Grain Inspection, Packers, and Stockyards Administration that enforced the PSA and rolled its duties into the Agricultural Marketing Service. Several farmers’ organizations worried that this move would undermine the office’s authority and create a conflict of interest by putting meatpacking oversight in the same department that works with meatpackers to promote products and manage checkoff programs.

Secretary Vilsack has made clear that this administration will not put PSA enforcement back in an independent USDA agency, but placing the new Chief Competition Officer position in the AMS Administrator’s office could give the Packers and Stockyards division more authority.

Claire Kelloway is a senior reporter and researcher with the Open Markets Institute, a nonprofit organization that uses research and journalism to confront the dangers of monopolization in agriculture, technology, pharmaceuticals, and other industries.. She is the primary writer for Food & Power, which provides original reporting and resources on monopoly power and economic concentration in the food system.

The post Analysis: USDA and DOJ Take on Deceptive Poultry Contracts appeared first on The Daily Yonder.

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