Cargill drops some hog contracts
SPECIAL REPORT Contracts split farmers
BY MATTHEW WALTER ARKANSAS DEMOCRAT-GAZETTE
Agricultural giant Cargill Inc. is phasing out some of its hog-growing agreements with farmers in central and south Arkansas this year, providing a first-hand lesson on the risks of contract farming.
Many of those farmers feel at the mercy of decisions made by corporate farming executives, and they have been left holding mortgages taken out to build hog houses that now sit empty.
Contract farming is the norm in chicken production, and it is growing in hog production. Under the system, independent farmers sign a contract to raise a company's animals.
"If you have only one producer [company] that is writing contracts, then you are much more subject to this kind of [risk]," said Glenn Grimes, professor emeritus in the agricultural economics department at the University of Missouri.
Arkansas legislators have taken notice of those risks, and Gov. Mike Huckabee recently signed legislation ensuring a farmer's right to sue. Many contracts force farmers to use arbitration when disputes arise with the company offering the contract.
But despite the cases where farmers have been left in the lurch, most contract farmers are happier than independent farmers, according to a 2004 study on contract hog production Grimes conducted, along with other professors from Missouri and Iowa State University.
The study found that, on a scale of 1 to 6 of how satisfied farmers were with producing hogs under a contract, the average response was 4.9.
"When you get close to a 5 on a scale of 1 to 6, you have a pretty happy group of campers," Grimes said.
For farmers like Jim and Jacqueline Griffin from Highfill, contract farming makes the whole farm economically viable.
Jim Griffin is the third generation of his family to run a dairy farm on his 333 acres in western Benton County, but he's milked his last cow and switched to chickens.
In 1996, the Griffins both worked off-the-farm jobs to make ends meet.
Jim Griffin worked in the dispatch office at the Siloam Springs Police Department. Jackie Griffin worked at a local hardware store. Then they signed a contract with Cobb-Vantress, a Tyson Foods Inc. subsidiary, to grow pullets, which are young female breeder chickens that produce eggs that are hatched and raised as meat chickens.
They were on a waiting list for a year and a half before Cobb-Vantress offered a contract that allowed them to earn a living off the land again.
"We were excited. We were going to be able to quit our jobs - both of us - and stay home to farm," Jim Griffin said.
With a five-year farming contract in hand, the Griffins secured a $550,000 loan to build their first four chicken houses.
The Griffins said they feel that their relationship with Cobb-Vantress is secure, and they are in the process of getting another loan of $1 million to build four more houses so they can grow more pullets.
FRUSTRATED FARMERS Not all contract farmers have had such a positive experience.
Tim Hayes inherited his 265-acre farm near Appellation from his father, and until 2003 he was able to make a living on it.
Hayes is one of hundreds of Arkansas farmers who are upset with the contract farming system.
"It became: How much money can I make for the company? Not `How much we can make together?'" Hayes said.
He signed his first hog production contract with Wayzata, Minn.-based Cargill Inc. in 1988. At one time he kept about 300 pigs in three houses built to the company's specifications on his land.
To get started, he took out a loan for $167,671 to build the squat, rectangular, wood-and-tin houses similar to the chicken houses found across Northwest Arkansas.
"The first 10 years were great," he said of his association with Cargill.
Then the pork market changed. Hog prices fell, and in 1998, Cargill started changing the way it operates, Hayes said.
Each year since, the Cargill contract offered a bit less and demanded a bit more, he said. While the base pay did increase, other changes mitigated those raises until he was making less every year. For example, in the 2003 contract, base pay increased from $11 a pig to $12.15. But the contract also cut efficiency bonuses and introduced penalties if a farmer's sow mortality rate rose above 10 percent.
Worst of all, Hayes said, it required the farmer to buy semen for breeding and other materials from the company without any guarantee. That significantly increased Hayes' costs, and left him exposed to higher risks.
Hayes and his wife, Christy, teamed up with Steve and Dana Bates, who also raised hogs for Cargill. The two families decided they wouldn't sign the 2003 contract, and they filed a civil suit in U.S. District Court for the District of Columbia.
The suit alleges that Cargill deceived Hayes into believing that, as long as he managed his farm well, he would be able to work with the company for 25 to 30 years.
It states that Cargill offered the terms as "our way or the highway," meaning there was no mutual agreement on the terms, and that the arbitration clause infringes on the farmer's right to use the court system.
"It puts a lot of stress on it. They are out here telling you if you don't produce more pigs, we're going to shut you down. Well, that's my living," Steve Bates said.
Cargill Pork spokesman Mark Klein declined to comment on the case, since the lawsuit is pending.
Hayes' hog houses sit empty now, and they can't be used for much other than raising pigs, he said.
Next to the houses lies a bigger headache. Hayes dug two pools to collect hog litter and runoff from the houses, which he can't leave there forever. Bids to clean and fill the pools exceed $35,000, he said. LOSS OF CONTRACTS Other hog farmers in Arkansas and across the country are losing their contracts even now.
In April 2004, Cargill sent a letter to hog growers outlining its plan to begin phasing out its sow operations in North Carolina and Illinois to stay competitive.
The letter stated the company was in the process of reducing the geographic circles in which it keeps hogs to cut transportation costs. Farms less than 100 to 120 road miles from its target areas in California, Mo., London, Ark., northeast Missouri and Ottumwa, Iowa, will have an advantage.
The letter also said that, within two years, the company will offer only short-term contracts of less than a year to farms with fewer than 80 farrowing crates. Within four years, farmers with fewer than 200 crates would only get short-term deals.
A farrowing crate is a rectangular stall in which sows give birth.
Short-term contracts expose the farmer to even more risk, since it only guarantees income for a period of months.
In January, several Arkansas farmers received a second letter notifying them that Cargill would not renew their contracts, which were up for renewal in 30 days.
The Arkansas Democrat-Gazette obtained the letters from a farmer who wished to remain anonymous out of fear of retaliation from the company.
Klein, the Cargill Pork spokesman, confirmed that the company sent the letters. He noted that the first letter was sent out 11 months before the letter notifying the farmers that their contracts would not be renewed.
"Regarding North Carolina and Illinois (sows): We gave advanced notice to those producers and helped them find other long-term agreements," Klein wrote in an e- mail. "North Carolina simply was too far from the Midwest, where our processing plants are."
Cargill is a privately owned company, so it does not have to disclose as much information about its operations as publicly traded companies like Tyson Foods, which have to comply with Securities and Exchange Commission regulations.
But Cargill is no less influential. It employs 105,000 people in 59 countries and is the largest privately held company in the United States in terms of revenue.
In 2003, it took in $62.9 billion, according to Forbes magazine.
Klein said Cargill has no plans to pull out of Arkansas. The state remains the hub of Cargill's live production operations, and it recently renewed 50 contracts here.
LITIGATION CHECKS In 2001, Oklahoma Attorney General Drew Edmondson wrote an opinion that said contract farmers are essentially employees of the companies for which they grow livestock and poultry.
While individual contracts may vary, when an integrated livestock or poultry company "directs in detail" the way that farmers raise the animals, the contract farmer becomes an employee, Edmondson wrote.
Oklahoma Rep. Kenneth Corn had requested the opinion.
It hasn't been tested in the courts, but it could have serious implications about the nature of the relationship between agriculture companies and contract farmers, said H.L. Goodwin, professor of agricultural economics at the University of Arkansas at Fayetteville.
"If they are in fact employees, does that mean that a producer that owns his own production capital can't make decisions about how he produces? Does it mean that he can't file bankruptcy under agricultural bankruptcy provisions? Does it mean that they get employee benefits? Does it mean that their operation would be taxed as part of the corporation?" he said.
Arbitration clauses have also come under scrutiny.
In February 2004, the state Supreme Court ruled 4-3 that arbitration clauses in hog-growing contracts with Tyson, the biggest chicken and beef producer, and the second-biggest pork producer, were invalid.
The court ruled that because there was not a mutual obligation to use arbitration, Tyson could not force contract farmers to use the often-expensive process instead of litigation.
The case stemmed from a class-action suit filed by about 100 Arkansas hog farmers who wanted the right to sue. In 2002, Tyson decided to phase out contracts with 132 hog farmers in Arkansas and eastern Oklahoma in response to losses in its pork division.
Tyson's poultry contracts don't contain arbitration clauses, but its hog contracts did.
The Arkansas bill ensuring a farmer's right to sue was sponsored by state Rep. Scott Sullivan, D-De Queen, one of the Tyson hog farmers in the class-action suit.
Sullivan raised hogs on his farm from 1989 to 2002, when Tyson pulled the plug. Unlike other growers, he was able to find a contract with another pork producer, so he's still in business.
"All my bill really does is just clarify that after a dispute arises between a contractor and an integrator, that if both parties agree, the claim could be heard by arbitration, but if one party objects, that it will be heard in court," he said.
Arbitration can cost up to $16,000, while a court case costs just a few hundred dollars to file.
The Arkansas Poultry Federation, which represents poultry companies and was originally against Sullivan's bill, has said trials are more expensive in the long run.
Morril Harriman, the federation's vice president, knows of similar laws that have already passed in Georgia, Kansas, Illinois and Iowa, and he said other states are considering the issue, he said.
AN EFFICIENT MODEL While farmers who have lost their contracts are obviously upset, the system works for many, said Goodwin, with the University of Arkansas.
"With respect to how contested it is. A lot of that depends on who you're talking with," he said.
The system typically rewards farmers who are good managers, he said.
Most companies use the "tournament system," which groups contract farmers together into geographic areas, Goodwin said. Farmers within that area compete to have the lowest costs.
Within the pool, farmers are ranked from having the highest to lowest costs. There are different formulas, but the company usually figures out the average production costs among that pool.
Based on that figure, farmers who go over the average cost are penalized, and farmers who come in under the average are rewarded.
"I think it's the most efficient production system there is. In the tournament system, better managers get better pay. Better managers produce birds for lower cost, which is in the interest of the integrators," Goodwin said
SPECIAL REPORT Contracts split farmers
BY MATTHEW WALTER ARKANSAS DEMOCRAT-GAZETTE
Agricultural giant Cargill Inc. is phasing out some of its hog-growing agreements with farmers in central and south Arkansas this year, providing a first-hand lesson on the risks of contract farming.
Many of those farmers feel at the mercy of decisions made by corporate farming executives, and they have been left holding mortgages taken out to build hog houses that now sit empty.
Contract farming is the norm in chicken production, and it is growing in hog production. Under the system, independent farmers sign a contract to raise a company's animals.
"If you have only one producer [company] that is writing contracts, then you are much more subject to this kind of [risk]," said Glenn Grimes, professor emeritus in the agricultural economics department at the University of Missouri.
Arkansas legislators have taken notice of those risks, and Gov. Mike Huckabee recently signed legislation ensuring a farmer's right to sue. Many contracts force farmers to use arbitration when disputes arise with the company offering the contract.
But despite the cases where farmers have been left in the lurch, most contract farmers are happier than independent farmers, according to a 2004 study on contract hog production Grimes conducted, along with other professors from Missouri and Iowa State University.
The study found that, on a scale of 1 to 6 of how satisfied farmers were with producing hogs under a contract, the average response was 4.9.
"When you get close to a 5 on a scale of 1 to 6, you have a pretty happy group of campers," Grimes said.
For farmers like Jim and Jacqueline Griffin from Highfill, contract farming makes the whole farm economically viable.
Jim Griffin is the third generation of his family to run a dairy farm on his 333 acres in western Benton County, but he's milked his last cow and switched to chickens.
In 1996, the Griffins both worked off-the-farm jobs to make ends meet.
Jim Griffin worked in the dispatch office at the Siloam Springs Police Department. Jackie Griffin worked at a local hardware store. Then they signed a contract with Cobb-Vantress, a Tyson Foods Inc. subsidiary, to grow pullets, which are young female breeder chickens that produce eggs that are hatched and raised as meat chickens.
They were on a waiting list for a year and a half before Cobb-Vantress offered a contract that allowed them to earn a living off the land again.
"We were excited. We were going to be able to quit our jobs - both of us - and stay home to farm," Jim Griffin said.
With a five-year farming contract in hand, the Griffins secured a $550,000 loan to build their first four chicken houses.
The Griffins said they feel that their relationship with Cobb-Vantress is secure, and they are in the process of getting another loan of $1 million to build four more houses so they can grow more pullets.
FRUSTRATED FARMERS Not all contract farmers have had such a positive experience.
Tim Hayes inherited his 265-acre farm near Appellation from his father, and until 2003 he was able to make a living on it.
Hayes is one of hundreds of Arkansas farmers who are upset with the contract farming system.
"It became: How much money can I make for the company? Not `How much we can make together?'" Hayes said.
He signed his first hog production contract with Wayzata, Minn.-based Cargill Inc. in 1988. At one time he kept about 300 pigs in three houses built to the company's specifications on his land.
To get started, he took out a loan for $167,671 to build the squat, rectangular, wood-and-tin houses similar to the chicken houses found across Northwest Arkansas.
"The first 10 years were great," he said of his association with Cargill.
Then the pork market changed. Hog prices fell, and in 1998, Cargill started changing the way it operates, Hayes said.
Each year since, the Cargill contract offered a bit less and demanded a bit more, he said. While the base pay did increase, other changes mitigated those raises until he was making less every year. For example, in the 2003 contract, base pay increased from $11 a pig to $12.15. But the contract also cut efficiency bonuses and introduced penalties if a farmer's sow mortality rate rose above 10 percent.
Worst of all, Hayes said, it required the farmer to buy semen for breeding and other materials from the company without any guarantee. That significantly increased Hayes' costs, and left him exposed to higher risks.
Hayes and his wife, Christy, teamed up with Steve and Dana Bates, who also raised hogs for Cargill. The two families decided they wouldn't sign the 2003 contract, and they filed a civil suit in U.S. District Court for the District of Columbia.
The suit alleges that Cargill deceived Hayes into believing that, as long as he managed his farm well, he would be able to work with the company for 25 to 30 years.
It states that Cargill offered the terms as "our way or the highway," meaning there was no mutual agreement on the terms, and that the arbitration clause infringes on the farmer's right to use the court system.
"It puts a lot of stress on it. They are out here telling you if you don't produce more pigs, we're going to shut you down. Well, that's my living," Steve Bates said.
Cargill Pork spokesman Mark Klein declined to comment on the case, since the lawsuit is pending.
Hayes' hog houses sit empty now, and they can't be used for much other than raising pigs, he said.
Next to the houses lies a bigger headache. Hayes dug two pools to collect hog litter and runoff from the houses, which he can't leave there forever. Bids to clean and fill the pools exceed $35,000, he said. LOSS OF CONTRACTS Other hog farmers in Arkansas and across the country are losing their contracts even now.
In April 2004, Cargill sent a letter to hog growers outlining its plan to begin phasing out its sow operations in North Carolina and Illinois to stay competitive.
The letter stated the company was in the process of reducing the geographic circles in which it keeps hogs to cut transportation costs. Farms less than 100 to 120 road miles from its target areas in California, Mo., London, Ark., northeast Missouri and Ottumwa, Iowa, will have an advantage.
The letter also said that, within two years, the company will offer only short-term contracts of less than a year to farms with fewer than 80 farrowing crates. Within four years, farmers with fewer than 200 crates would only get short-term deals.
A farrowing crate is a rectangular stall in which sows give birth.
Short-term contracts expose the farmer to even more risk, since it only guarantees income for a period of months.
In January, several Arkansas farmers received a second letter notifying them that Cargill would not renew their contracts, which were up for renewal in 30 days.
The Arkansas Democrat-Gazette obtained the letters from a farmer who wished to remain anonymous out of fear of retaliation from the company.
Klein, the Cargill Pork spokesman, confirmed that the company sent the letters. He noted that the first letter was sent out 11 months before the letter notifying the farmers that their contracts would not be renewed.
"Regarding North Carolina and Illinois (sows): We gave advanced notice to those producers and helped them find other long-term agreements," Klein wrote in an e- mail. "North Carolina simply was too far from the Midwest, where our processing plants are."
Cargill is a privately owned company, so it does not have to disclose as much information about its operations as publicly traded companies like Tyson Foods, which have to comply with Securities and Exchange Commission regulations.
But Cargill is no less influential. It employs 105,000 people in 59 countries and is the largest privately held company in the United States in terms of revenue.
In 2003, it took in $62.9 billion, according to Forbes magazine.
Klein said Cargill has no plans to pull out of Arkansas. The state remains the hub of Cargill's live production operations, and it recently renewed 50 contracts here.
LITIGATION CHECKS In 2001, Oklahoma Attorney General Drew Edmondson wrote an opinion that said contract farmers are essentially employees of the companies for which they grow livestock and poultry.
While individual contracts may vary, when an integrated livestock or poultry company "directs in detail" the way that farmers raise the animals, the contract farmer becomes an employee, Edmondson wrote.
Oklahoma Rep. Kenneth Corn had requested the opinion.
It hasn't been tested in the courts, but it could have serious implications about the nature of the relationship between agriculture companies and contract farmers, said H.L. Goodwin, professor of agricultural economics at the University of Arkansas at Fayetteville.
"If they are in fact employees, does that mean that a producer that owns his own production capital can't make decisions about how he produces? Does it mean that he can't file bankruptcy under agricultural bankruptcy provisions? Does it mean that they get employee benefits? Does it mean that their operation would be taxed as part of the corporation?" he said.
Arbitration clauses have also come under scrutiny.
In February 2004, the state Supreme Court ruled 4-3 that arbitration clauses in hog-growing contracts with Tyson, the biggest chicken and beef producer, and the second-biggest pork producer, were invalid.
The court ruled that because there was not a mutual obligation to use arbitration, Tyson could not force contract farmers to use the often-expensive process instead of litigation.
The case stemmed from a class-action suit filed by about 100 Arkansas hog farmers who wanted the right to sue. In 2002, Tyson decided to phase out contracts with 132 hog farmers in Arkansas and eastern Oklahoma in response to losses in its pork division.
Tyson's poultry contracts don't contain arbitration clauses, but its hog contracts did.
The Arkansas bill ensuring a farmer's right to sue was sponsored by state Rep. Scott Sullivan, D-De Queen, one of the Tyson hog farmers in the class-action suit.
Sullivan raised hogs on his farm from 1989 to 2002, when Tyson pulled the plug. Unlike other growers, he was able to find a contract with another pork producer, so he's still in business.
"All my bill really does is just clarify that after a dispute arises between a contractor and an integrator, that if both parties agree, the claim could be heard by arbitration, but if one party objects, that it will be heard in court," he said.
Arbitration can cost up to $16,000, while a court case costs just a few hundred dollars to file.
The Arkansas Poultry Federation, which represents poultry companies and was originally against Sullivan's bill, has said trials are more expensive in the long run.
Morril Harriman, the federation's vice president, knows of similar laws that have already passed in Georgia, Kansas, Illinois and Iowa, and he said other states are considering the issue, he said.
AN EFFICIENT MODEL While farmers who have lost their contracts are obviously upset, the system works for many, said Goodwin, with the University of Arkansas.
"With respect to how contested it is. A lot of that depends on who you're talking with," he said.
The system typically rewards farmers who are good managers, he said.
Most companies use the "tournament system," which groups contract farmers together into geographic areas, Goodwin said. Farmers within that area compete to have the lowest costs.
Within the pool, farmers are ranked from having the highest to lowest costs. There are different formulas, but the company usually figures out the average production costs among that pool.
Based on that figure, farmers who go over the average cost are penalized, and farmers who come in under the average are rewarded.
"I think it's the most efficient production system there is. In the tournament system, better managers get better pay. Better managers produce birds for lower cost, which is in the interest of the integrators," Goodwin said
