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GIPSA Contract Fairness Rule Finalized

December 8, 2011

USDA’s Grain Inspection, Packers & Stockyards Administration has issued a rule, to be published on December 9,  that finalizes some provisions of the GIPSA rule proposed in June 2010.  The provisions are intended to increase protections for farmers who produce poultry and hogs on contract.  The four major areas covered in the final rule include:

  • Measures to ensure that a poultry grower has received adequate notice that a poultry processor plans to suspend delivery of birds;
  • Criteria for determining whether a requirement of additional capital investment over the life of a poultry or hog production contract growing arrangement or swine production constitutes a violation of the Packers and Stockyards Act;
  • Requirement that a packer, swine contractor, or live poultry dealer has provided a reasonable period of time for a grower to remedy a breach of contract that could lead to termination of a production contract; and
  • Arbitration provisions in production contracts that allow a producer or grower to decline arbitration and that detail criteria for USDA to use in determining if an arbitration process provides a meaningful opportunity for participation in the arbitration by a grower or producer.

On the positive side, the arbitration provision of the final rule is an improvement over the proposed rule.  Farmers who do not choose whether to be bound by an arbitration clause in a production contract are deemed by the rule to have declined to be bound by arbitration.

But the final rule also weakens important provisions of the proposed rule.  The proposed rule provided that a processor that requires a farmer to make initial and additional capital investments must also provide a reasonable opportunity for the farmer to recoup the investment over the life of the production contract.  The final rule limits the recoupment requirement to additional capital investments required after a production contract is entered into and omits the recoupment requirement for the initial capital investment.

The final rule also weakens a requirement that packers and processors provide poultry and livestock contract farmers with notice and a reasonable opportunity to remedy an alleged breach of a production contract.   The final rule includes a new broad exemption from the requirements if the packer or processor contends that food safety or animal welfare was concerned in the breach.  There are no safeguards or procedures in the final rule to ensure that packers and processors document these contentions.

The protections provided in this limited GIPSA final rule, which took more than one and one-half year to issue, are an important but very modest first step to ensuring farmers and ranchers a fair shake in dealing with meatpackers and poultry processors.  In 2010, USDA and the Department of Justice heard from farmers and ranchers across the U.S. about the failures of these agencies to enforce the law and improve regulations to actively and effectively address their concerns.

Since that time, the Obama Administration has dragged its feet on issuing final rules.  In November, the Administration announced that it was completely dropping, rather than refining, several provisions from  the GIPSA proposed rule that would provide fair markets for livestock farmers and ranchers, including a ban on packer-to-packer sales and the use of a single buyer at livestock auctions, as well as requirements for packers to retain records about the basis for pricing.

USDA also announced it was still considering and, therefore, delaying finalization of other measures in the proposed regulations including long-awaited elaboration on what constitutes illegal undue price preferences and the pivotal clarification that farmers and ranchers need not prove injury to competition in markets for their products but rather only need show that they had been injured by a deceptive or unfair practice.  These core sections of the rule would have to be revised and issued as new proposed rules, starting the long rulemaking process all over again.

This Administration announcement was followed closely by Congressional approval of a rider to the FY2012 Agricultural Appropriations measure that bars USDA from implementing in FY2012 any rules that would:

  • eliminate the activist court-fashioned requirement that farmers and ranchers prove an injury to market competition from unfair or deceptive practices used against them as individuals by packers and processors;
  • give definitions to unfair, unjustly discriminatory and deceptive practices or abuses;
  • give definition to the prohibition on undue or unreasonable preferences;
  • require packers and processors to make available sample production contracts;
  • limit or modify the existing “tournament system” for that processors use to determine payments for poultry growers; and
  • prohibit the implementation of any of the GIPSA proposed rules if the annual cost to the economy of such rules exceeds $100,000,000, while potential benefits will not be considered.

USDA was allowed to publish any rule not exceeding $100,000,000 in costs to the economy if the rule were published by December 9, 2011.  USDA did meet that deadline for the poultry and hog contract final rule.

Categories: Competition & Anti-trust

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