February 25, 2020
On January 13, 2020, the U.S. Department of Agriculture published a long-delayed proposed rule on the undue or unreasonable preference provision, Section 202(b), of the Packers & Stockyards Act of 1921 (P&SA). The P&SA was enacted to combat consolidation and lack of competition in the livestock and poultry industries as meatpackers and processors (also known as integrators) gained more power over the livestock and poultry producers. Attempts to strengthen P&SA, known as the Grain Inspection, Packers and Stockyards Administration (GIPSA) rules, have spanned the last ten years, following the 2008 Farm Bill mandate to publish rules to support the act, but have been largely unsuccessful due to congressional obstruction, stalling by the Administration, and agency inaction.
Despite more than a decade of opportunity to establish meaningful rules to protect farmers from abusive integrator practices, there is significant room for improvement in the proposed rule in order to fulfill the purpose of the P&SA.
The undue or unreasonable preference provision of P&SA is intended to prevent integrators from giving unwarranted advantages or disadvantages to producers who produce the same type and quality of livestock or poultry in the same relative geographic area. In poultry production, integrators require producers to enter a production contract that outlines the terms of how a farmer is paid and how that farmer must raise the poultry produced under the contract. This system is also prominent in hog production. Livestock producers face a different challenge of miniscule markets dominated by a single buyer that can dictate the prices producers receive.
Integrators can use their control to give “undue preference” by offering fairer contract terms, higher prices, and higher quality animals and feed to favored producers, even though they produce the same type and quality of livestock or poultry as others in the same relative geographic area. This control can also be used to unfairly disadvantage producers who fall out of favor with the integrator.
The proposed rule lays out four criteria that the Secretary of Agriculture will use in evaluating a claim of undue or unreasonable preference. A claim will be evaluated to see if the preference or advantage in question cannot be justified:
The first three criteria are vague and fail to address the widespread consolidation in the livestock and poultry industries. There are four major meat processing companies — Tyson, Cargill, JBS, and Smithfield — that account for a majority of the market share in the livestock and poultry industries — 84 percent in beef, 66 percent in pork, and 50 percent in chicken. Integrators use this market dominance to ensure that contract growers accept prices and terms that are most advantageous to the integrator. Because of this control, it is highly unlikely an integrator would need to save costs by dealing with a different producer, seller, or grower. Additionally, the terms and prices offered have little variation between the major companies so the opportunity to meet a competitor’s price or terms is rare.
Even worse, the fourth criterion would enshrine a key component of unfair practices in the livestock and poultry industries. There are multiple business practices that are commonplace in the industry that unfairly advantage or disadvantage producers. The poultry tournament system is a prime example. Despite being promised a base pay, producers are pitted against each other by integrators in a ranking system that awards a premium to certain producers, taken as a deduction from the pay of other producers. The ranks are determined by metrics like the weight gain of the birds, which is directly impacted by the quality of the inputs supplied to producers by the integrator. The integrator exercises control over the entire system, to the disadvantage of some producers and advantage of others. This criterion would enable integrators to justify use of the tournament system and other practices that give undue and unreasonable preference because these practices are customary to the industry. The customary use of a practice does not make it right or reasonable.
The proposed rule omits several key components needed to address undue preference that were included in the 2016 rule and supported by NSAC in previous comments.
“Competitive injury” requirement
A significant omission is the clarification that the P&SA does not require a producer to show harm to the entire industry in order to prove undue or unreasonable preference. Court precedent holds that a producer must prove competitive harm to the entire industry in order to bring a claim for personal harm from anticompetitive practices. The P&SA does not include this requirement anywhere in the act, and both Congress and USDA have made it clear that this “competitive injury” requirement is not founded in law. Not only does the proposed rule fail to clearly establish that this standard is not required, it explicitly states that the rule is not intended “to create criteria that will conflict with case precedent” so case law on competitive harm “is likely to remain unchanged.” Without clear language to the contrary, this illogical requirement will remain unchanged and continue to pose an insurmountable obstacle to producers bringing a claim of undue or unreasonable preference.
Protection based on protected class
In the proposed rule, integrators are not prevented from giving an undue or unreasonable preference based on characteristics like race or national origin. These constitutionally protected classes, and other categories such as political belief or disability, are not protected in the proposed rule, allowing integrators to unduly preference producers with characteristics that the integrator deems more acceptable.
Right to association and communication
The proposed rule does not protect a producer’s right to lawfully join in producer associations or speak to the media or elected officials about their growing contract without suffering retaliation from an integrator. It is common for poultry producers who speak out to receive lower quality inputs, like sick chicks or lower quality feed, which leads to lower quality chickens and reduction in a producer’s pay. This right should be protected in the proposed rule.
Alleged misconduct or unrelated conduct
The proposed rule does not prevent an integrator from giving an undue or unreasonable preference to one producer over a producer that the integrator believes has violated applicable laws or regulations without a reasonable basis for this belief. Without this protection, producers can be targeted by integrators with false or ill-founded claims and unfairly disadvantaged relative to producers who are not targeted.
Similarly, language preventing integrators from giving preferential treatment for an arbitrary reason that is completely unrelated to the growing operation is absent from the proposed rule. It is unfair to allow an integrator to punish or preference a producer for something that is unrelated to the contractual relationship between the integrator and producer.
The proposed rule on “undue preference” misses the opportunity to provide meaningful protections for producers and instead would enshrine unfair conduct by integrators in law. Instead of providing clear criteria to help integrators and producers understand what conduct equals an undue or unreasonable preference, the proposed rule provides potential defenses to protect integrators from a claim of undue or unreasonable preference. NSAC and its members will be submitting detailed comments on the rule. The comment period is 60 days and closes March 13, 2020. Individuals wishing to submit a comment can use the comment template developed by the Rural Advancement Foundation International – USA, which can be found here.
Categories: Competition & Anti-trust, Implementation & Rule-making