Pew calls out the growing chorus against meat packer's and NCBA's call for rollback of GIPSA regulations
Administration (GIPSA) Rule
Jun 21, 2011
Reforming Industrial Animal Agriculture
Contact: Daniel Klotz, 202.887.8855
cafo-chickens-400-lwThe Packers and Stockyards Act of 1921 was passed after a sustained effort by farmers, ranchers, and press advocates during the early part of the 20th century, due to their concerns that the economic power of the meat packing companies was unfair to producers (farmers and ranchers) thus hurting the economic health of rural areas. The act, still in place today, seeks to foster fair competition in livestock and poultry production for the benefit of consumers and producers. It further seeks to provide payment protection and guards against deceptive or fraudulent practices by the industry. The Grain Inspection Packers and Stockyard Administration (GIPSA) was established to administer and enforce the Packers and Stockyards Act and is responsible for reviewing, monitoring, and investigating livestock and poultry markets.
From the passage of the Packers and Stockyard Act in 1921 until debate on the 2002 omnibus farm bill, no significant action had been taken by GIPSA even though evidence indicated that the consolidation, vertical integration, and economic concentration in the livestock and poultry industry increased. In fact, over the last two decades, the majority of the market has come under the control of big firms who dominate the meat industry.
An economic analysis, referred to as the four firm concentration ratio, which measures the four largest firms’ share of the market is used as an indicator of concentration in the livestock and poultry industries. According to a Congressional Research Service Report from March of 2011, “from 1986 to 2008, the four-firm share of slaughter increased from 55% to 79% for cattle, 33% to 65% for hogs, and 34% to 57% for poultry.”1
This change in the market has limited competition. There are fewer companies to buy animals from farmers and ranchers (producers or growers). Contracting practices have compounded the problem. The big firms/meat packing companies work to lock in producers through contracts to guarantee a steady flow of animals for slaughter. The alternative for growers is the cash market, which operates on a bidding system with companies competing to buy animals, but this system is all but disappearing.
In the late 1990s, groups supporting farmers and ranchers began supporting a legislative remedy to perceived anticompetitive behavior by the largest meat companies. They sought changes in the 2002 Farm Bill, but most of those were defeated. During debate on the 2008 farm bill, supporters of increased oversight of the meat production and processing industry again advocated for a competition title. They were again unsuccessful, but the bill did include a provision directing GIPSA to issue regulations clarifying what constitutes a violation of the Packers and Stockyards Act – which led to the issuance of the currently proposed rule.
The proposed rule, Grain Inspection Stockyard and Packers Administration (GIPSA) rule 2010-PSP-0001, was issued on June 22, 2010, to fulfill the Congressional mandate to issue regulations on the violations of the Packers and Stockyards Act.
The Proposed GIPSA Rule
The 2008 farm bill directed the Secretary of Agriculture to develop a rule that would address four primary issues and developing criteria to determine:
1. if producers were treated with undue or unreasonable preference advance,
2. if poultry producers receive enough advance notice from poultry dealers before suspending delivery of bird,
3. if additional capital investments at times required of poultry or swine contract producers by the companies were a violation of the Packers and Stockyards Act, and
4. if poultry growers and swine producers are given enough time to remedy a breach of contract before a contract is terminated by the company.2
In announcing the proposed rule, a statement from the United States Department of Agriculture (USDA) outlined its goal “to level the playing field between packers, live poultry dealers, and swine contractors, and the nation’s poultry growers and livestock producers.”3 The rule covered four primary areas: undue or unreasonable preference, arbitration, competitive injury, and unfair practices.
Competitive injury is defined in the rule as any action that distorts competition in the marketplace. Specifically, those actions could be undue or unreasonable preferences, unfair, discriminatory, and deceptive practices, or the restriction of commerce or creation of a monopoly. Conduct by packers, contractors, and poultry dealers that depresses prices to producers or prevents them from competing with other producers would be considered competitive injury. That broad definition could call into question the widespread use of production contracts in the poultry industry. Importantly, the rule also says that the conduct itself could be a violation the act without a finding of harm to competition.
The proposed rule provides eight examples of unfair practices. They are:
1. actions that a reasonable person would consider unscrupulous or deceitful;
2. retaliatory actions, such as coercion or intimidation, in response to a lawful action by a producer or grower;
3. refusal to provide statistical data used to determine contract payments;
4. actions to limit producers’ or growers’ legal rights;
5. paying premiums or discounts without documenting a reason;
6. terminating a production contract based only on allegations of misconduct by a producer or grower;
7. practices that are fraudulent or likely to mislead a producer or grower; and
8. broadly, any act that causes or creates a likelihood of competitive injury.”4
Under present practices, companies providing live broiler chickens to growers can cancel contracts with little, or no notice and can demand the that the grower make expensive improvements in their production facilities that may take years to pay for with no guarantee from the company that the producer will continue as one of their contract growers. Both of those activities would be changed by the rule. Producers would be given a minimum of 90 days notice upon the cancellation of a contract and would be given the discretion on making the physical improvements requested by the company. A required physical improvement in order to continue receiving contracts could be considered a violation of the Packers and Stockyards Act under the new rule. Producers would be given the reasons for a breach of contract in writing, identifying the breach, when it occurred, and how it might be remedied with the producer given sufficient opportunity to fix the breach.
Undue or unreasonable preference occurs when companies treat producers differently, including disparities in payment, for producing similar poultry or livestock. The rule includes regulations for differential pricing, recordkeeping, and packer-dealer relationships. The Secretary of Agriculture would use three criteria to determine undue preference or differential treatment, including: 1. contract terms have to be available to any producer or grower who can meet the terms of the contract; 2. premiums for product standards must be offered to a producer or group of producers who can meet the standards; and 3. information about handling, processing, and the quality of livestock must be available to all producers if made available to one.5
A good example of an unreasonable preference is the tournament system used in poultry contracting. The tournament system is a ranking system to determine what a poultry company will pay their contract producers. At the end of the 47 day growing period, a producer’s flock is ranked against a group of producer’s to determine the value of the flock of the individual producer. Depending on the growth of the chickens, a deduction or bonus may be paid on the base contract pay for each grower.
The tournament system is widely viewed as a means of price control and manipulation by companies since the company provides the producer with the birds (usually a genetically narrow breed), the feed, the timetable for growth, feed additives, and mandates the structure of the production facilities, including feeding and watering systems. Therefore, any difference in weight, if the mandates from the company were followed, would be minor and subjective. The new rule would require using a tournament or ranking system among producers with similar growing facilities.
Pew Environment Group Comments
The Pew Environment Group (PEG) supports the efforts of the USDA to enforce the anti-trust provisions of the Packers and Stockyards Act and to foster a more equitable relationship between producers and the meat companies through clear contract guidelines, more transparency in the contract relationship, as well as clearly defining abuses. Importantly, the proposed rule states that a violation of the rule would occur if there is economic harm to an individual as opposed to the standard of the action causing harm to competition.
In formal comments filed November 22, 2010, PEG stated support for many parts of the proposed rule. PEG stated the proposed rule provides producers the capacity to negotiate reasonable contract terms with companies, disclosure of those terms. USDA placing sample contract information on its website would allow producers to assess contract language without infringing on other producers.
PEG supported banning the tournament system used by some poultry companies stating that “contract prices be based on number, volume, or other condition should be made available to all growers, or groups of growers, who can meet contract conditions, and that price premiums based on quality or timing may not discriminate against producers who can meet those same standards.”6 However, if the tournament system is to be retained, PEG stated that all major factors in flock management should be considered, including housing, source of the chickens, and the feed used.
The proposals for companies to give producers 90 days notice when halting deliveries of new flocks, as well as longer contract time to recoup more of their investment were also highlighted in the PEG comments. The GIPSA rule proposes a contract length that would allow a producer to recoup up to 80% of their investment. PEG, while acknowledging this provision is a step in the right direction, stated that contracts should be structured so producers could recoup 100% of their investments as well as a profit.
In addition, PEG recommended that USDA add contract provisions that shift the entire responsibility of disposing of poultry litter, dead birds, and other wastes solely to producers to the list of unfair practices. Currently, companies do not share the legal or financial liability of disposing of litter and other waste, even though they may mandate practices that make disposing of the waste more difficult, such as adding arsenic as an antimicrobial feed additive.
1 USDA's Proposed Rule on Livestock and Poultry Marketing Practices, Congressional Research Service, Joel L. Greene, March 8, 2011, p. 3
2 Ibid., p. 7
3 Grain Inspection, Packers and Stockyards Administration, Farm Bill Regulation—Proposed Rule Outline, p. 1, http://archive.gipsa.usda.gov/psp/Farm_bill_rule_outline.pdf
4 USDA's Proposed Rule on Livestock and Poultry Marketing Practices, Congressional Research Service, Joel L. Greene, March 8, 2011, p. 9
5 Ibid, p. 10
6 Pew Environment Group letter to Grain Inspection, Packers and Stockyards Administration, November 10, 2010, http://www.pewenvironment.org/news-room/other-resources/comments-from-the-pew-environment-group-urging-the-grain-inspection-packers-and-stockyard-administration-to-restore-competition-and-contract-fairness-to-livestock-and-poultry-markets-8589942527