December 15, 2016
USDA has taken the historic step of issuing three rules that will begin to bring some fairness and order to the poultry and livestock industries, with a particular focus on farmers growing under contracts with the big meat and poultry processing corporations. These three rules, when finalized, will prevent unfair and anti-competitive practices by meat processors, protect farmers from retaliation for working with other farmers to promote their interests, and bring some order the “tournament” system that is so harmful to rural American farmers.
A diverse set of organizations – including the National Sustainable Agriculture Coalition (NSAC), American Farm Bureau Federation, National Farmers Union, Campaign for Contract Agriculture Reform, and U.S. Cattlemen’s Association, among others – spoke out in support of the rules following USDA’s announcement. Read NSAC’s press release here.
USDA issued one interim final rule and two proposed rules. The interim final rule confirms what previous Administrations have held and what the underlying law plainly says, that the Packers and Stockyards Act does not require a showing of competitive injury. The idea that farmers and ranchers should have to prove injury to the whole sector in order to show they have been the victims of a fraudulent or deceptive business practice by a multinational corporation is nonsensical.
This rule, which upholds the original intent of the law, will become final in 60 days.
The other two rules issued today are proposed rules. Both of these rules will be subject to a 60-day public comment period that begins immediately after they are published in the Federal Register, which will likely happen soon.
The first of these proposed rules addresses some of the abusive practices in the payment system commonly used by poultry companies to pay contract growers, called a “ranking” or tournament system. Although contract farmers receive a minimum base pay, most of their income is reliant on the this ranking system, which increases or decreases that base depending on factors outside the farmer’s control. The tournament system purports to be a fair competition, but in reality is far from it. This system pits farmers against their fellow farmers, and, because the processing companies control most of the factors that determine if a farmer is successful or not, is often used to play favorites and punish growers who speak out.
The new proposed rule will address some of the most egregious aspects of the tournament system by identifying and stopping discriminatory practices like retaliating against growers by intentionally giving them lower quality feed or chicks.
The second proposed rule addresses undue preference and unfair practices of certain livestock and poultry dealers. This rule defines criteria for what amounts to undue preference for one producer over another such as when a company treats similarly situated farmers differently without a reasonable business justification. However, unlike the original proposed rule, which USDA initially issued in 2010, companies will not have to provide written justification for their decisions, significantly reducing their financial and legal burden.
This rule also addresses the criteria used to determine if an unfair practice has taken place. It clarifies what actions against a poultry or livestock farmer would be considered unfair, unjust, discriminatory, or deceptive. Of course, livestock and poultry companies will retain the right to provide a reasonable business justification for their actions in the case that a complaint is brought against them.
Below we provide a very preliminary assessment of the rules, with additional analysis to come in future weeks.
Interim Final Rule Affirms Packers and Stockyards Act (PSA) Interpretation
The interim final rule confirms that a violation of the PSA (unfair practice or undue preference) does not require a finding that the action or device adversely affects competition or has the likelihood to adversely affect competition. Sections 202(a) and 202(b) of the PSA say nothing about a requirement for showing a harm to competition and this interim final rule reiterates the position of USDA that this is the case.
Some federal courts have read into the law a requirement to show a harm or likelihood of harm to competition for the entire industry, but this is an impossible standard for a farmer to meet. Corporate meat companies have used this perverse interpretation to avoid responsibility for damages caused to contract farmers, but where the farmer could not prove harm to the entire sector.
Without this rule, the situation is akin to, should an arsonist burn down your house, having to prove that it harmed the value of all the houses in your city in order to be able to prove you were harmed personally.
What are an Unfair Practice and Undue Preference?
One of the two proposed rules sent to the Federal Register provides more clarity about the provisions within the PSA that address unfair practices and undue preferences.
Section 202 of the PSA makes it illegal for livestock and poultry integrators to enter into conduct that is an unfair, unjustly discriminatory, or deceptive. The proposed rule further clarifies this provision by defining “per se” violations of section 202, and by providing examples of the actions and conduct that could be a violation without a business justification.
These clarifications are important to help producers and contractors and dealers know how to avoid a violation of the PSA since these terms unfair, unjustly discriminatory, or deceptive have never been defined.
Section 202 of the PSA also makes it illegal to provide undue or unreasonable preference or advantage, which has in the past been determined on a case-by-case basis. This proposed rule identifies several criteria for determining whether the undue or unreasonable preference or advantage provision of the PSA has been violated. However, the list is not exhaustive.
A packer or integrator may be in violation of Section 202 if they treat one or more contract farmers more favorably than others for any of the following reasons:
In any case, a company would have the opportunity to prove a legitimate business justification for any action.
This list is paired down from the original 2010 proposed rule. The new proposed rule eliminates the criteria related to price premiums and disclosing information. This is an attempt to satisfy packers who had expressed concern about the impact of the rules on alternative marketing arrangements. In the rule, USDA explicitly states that the rule is not intended to impact these arrangements.
Helping Farmers Stuck in the Tournament System
This rules seeks to clarify how section 202(a) and (b) apply to the poultry grower ranking system or tournament system for calculating farmer pay.
The tournament system is the most prevalent payment system in the contract poultry industry. Under this system farmers receive a base payment and either have money added or taken away based on their efficiency as compared with other farmers who received chicks on the same day. The problems stem from the fact that farmers do not control the two biggest factors – quality of the feed and chicks – that determine whether they perform above or below the baseline. The companies frequently manipulate these two variables to punish outspoken growers or growers that refuse to make expensive upgrades.
In this proposed rule, USDA pulled back significantly from the 2010 version, which prohibited some conduct and prescribed others. This rule only provides a non-exhaustive list of criteria to determine whether a poultry integrator is using a tournament system “in an unfair, unjustly discriminatory, or deceptive manner, or in a way that gives an undue or unreasonable preference or advantage to any poultry grower or subjects any poultry grower to an undue or unreasonable prejudice or disadvantage.”
These criteria are:
This rule would essentially prohibit a poultry integrator from using a tournament system to target a specific producer to receive inferior chicks or feed. Contrary to some recent statements, it would not get rid of the tournament system. Moreover, integrators would have the opportunity to demonstrate a legitimate business justification for any action.
Minimal Costs to the Industry
USDA calculated the 10-year cost of all three rules to be $144 million, which is significantly less than the industry estimates of the cost of the 2010 version of these rules. USDA clearly took the comments on the 2010 rule seriously and targeted these rules to reduce the burden on the industry.
Unfortunately, USDA did not complete a similar analysis to assess the economic benefits of the rules to farmers.
At the end of the day, the total cost of these rules is minimal for these multinational companies. Tyson Foods alone, one of the largest integrators and dealers, had sales of $41 billion for the 12 months ending October 3, 2015, so any increased costs as a result of this rule is quite reasonable to create the fairer playing field for farmers and contract producers across rural America promised by the Packers and Stockyards Act.