NSAC's Blog

Undo the Packers and Stockyards “Undue Preference” Final Rule

February 17, 2021

USDA Photo by Lance Cheung.

In the waning days of the Trump Administration, the U.S. Department of Agriculture (USDA) published a final rule on the undue or unreasonable preference provision, Section 202(b), of the Packers & Stockyards Act of 1921 (P&SA). Unfortunately, the rule fails to protect livestock and poultry farmers from the abusive and exploitative practices that have become customary in the meat industry. Though NSAC submitted recommendations to USDA to strengthen the rule, these changes were not incorporated. This means that integrators will continue to circumvent the purpose of P&SA while our farmers and ranchers continue to cede their ability to compete in the marketplace.

“Undue Preference” Background

The P&SA was passed just under a century ago to combat anticompetitive practices in the livestock and poultry industries as corporate meatpackers and processors (also known as integrators) consolidated and amassed substantial power over producers. Attempts to strengthen P&SA have spanned the last decade, prompted by a 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.   

The undue or unreasonable preference provision of P&SA is intended to prevent corporate integrators from giving unwarranted advantages or disadvantages to growers who produce the same type and quality of livestock or poultry in the same relative geographic area. In a food system where just four corporations have concentrated their market share to control 73 percent of beef processing, 67 percent of pork processing, and 54 percent of chicken processing, these integrators possess outsized leverage to set favorable terms of a contract with small poultry and hog producers, or set the price that beef producers receive in consolidated markets. Fair negotiation is simply not a realistic option for small growers under these conditions. 

The Secretary of Agriculture is given the authority under P&SA to determine when an integrator may be abusing their relative power by exhibiting positive or negative “undue or unreasonable preference” toward any producer (e.g. giving certain growers favorable or unfavorable contract terms or prices without reasonable or due cause). In the 2008 Farm Bill, members of Congress charged USDA to make this process less subjective by creating criteria that the Secretary may consider when determining if a preference is undue or unreasonable. 

This is not the first time we have been here, or at least near this point. The Farmer Fair Practices Rules proposed in the waning days of the Obama Administration included an interim final rule on this undue preference provision. NSAC applauded the rules as historic for their clear intent to bring fairness and order to the poultry and livestock industries by providing clear criteria to help integrators and producers understand what conduct amounts to an undue or unreasonable preference. These rules would have instituted fair footing for farmers growing under contract with big meat and poultry processing corporations.

The Trump Administration, however, promptly delayed and then withdrew these rules as one of its first official acts. NSAC raised the alarm when the administration issued a revised interim final rule on the undue preference provision. Instead of protecting small poultry and livestock ranchers, it offered defenses to protect corporate integrators from a farmer’s claim of undue or unreasonable preference. Unfortunately, the new final rule upholds this damaging paradigm. 

Final Rule Overview

The final rule lays out four criteria that the Secretary of Agriculture will use to evaluate a claim of undue or unreasonable preference or advantage to any individual. According to these criteria, an integrator’s preference or advantage for one grower over another can be justified:

  1. On the basis of a cost savings related to dealing with different producers, sellers, or growers;
  2. On the basis of meeting a competitor’s prices;
  3. On the basis of meeting other terms offered by a competitor; and
  4. As a reasonable business decision. 

These criteria create a blanket defense for corporate integrators in the poultry, hog, and beef markets at the expense of small-scale or contracted producers. If treating one or more contract growers more favorably than others can be justified according to one of these criteria, and is not found to violate any other, an integrator’s practices will be vindicated. 

These criteria directly contrast the Farmer Fair Practice Rules, which listed explicit instances where an integrator may be in violation of Section 202(b). Those criteria would have enabled the Secretary of Agriculture to determine “whether an undue or unreasonable preference or advantage has occurred in violation [of P&SA],” a direct interpretation of language in the 2008 Farm Bill. This final rule, meanwhile, turns that statute on its head; it establishes criteria to determine what actions are “justified,” or allowed, instead of what preferences or advantages violate P&SA.

The list of criteria is not exhaustive. USDA may consider “additional criteria” when investigating a violation of this section of the P&SA. The inclusion of this clause is a tool that has potential to be misused as a blanket justification for any exercise of preference by an integrator that is not protected under the criteria above – which are already exceptionally broad and subject to interpretation, as we remark below. 

USDA Ignored NSAC Recommendations 

NSAC made a number of recommendations to strengthen the rule and create real protections for farmers in our comment to USDA’s Agricultural Marketing Service (AMS), which has had jurisdiction over P&SA enforcement since 2017. Just part of one of our recommendations was ultimately adopted by AMS. You can read their responses to comments and justification for their actions here.

Integrators should be required to maintain written records to prove preference on the basis of the first three criteria.

NSAC recommended that integrators maintain written records to prove why any exercise of preference may have been necessary (i.e. on the basis of cost savings, etc.). This would institute some degree of accountability and transparency to the rule’s implementation, which may otherwise amount to the word of the multinational corporate integrator versus the word of a farmer. AMS responded by saying they “expect” integrators to keep these kinds of records – which fails to implement any accountability mechanism. 

Cost savings based solely on volume should be prohibited to avoid discriminating against smaller livestock or poultry growers.

This recommendation would have placed additional guardrails on the first criterion, which allows corporate integrators to justify their preference for one grower over another on the basis of cost savings. It is often more cost effective for a meatpacking or poultry company to do business in bulk with the largest contracted growers, rather than smaller operations, due to reduced costs otherwise incurred in transportation, supervision, and inspections per operation. NSAC made recommendations to give small farmers fair footing when pitted against the largest producers, and it is extremely disappointing that USDA rebuffed these suggestions to instead pave the way for packers to legally discriminate against small farms.

Protection of ‘reasonable business decisions customary in the industry’ should be eliminated in its entirety. 

The fourth criterion in the final rule modifies the interim final rule to an extent, which would have upheld a preference or advantage deemed a “reasonable business decision that would be customary in the industry.” AMS noted that most comments to the rule called for the removal of this “customary in the industry” language, given the unlawful and discriminatory practices which have become commonplace in the industry.

USDA may continue to uphold a preference deemed a “reasonable business decision” – still inherently subjective and unclear, which highlights the need to eliminate the entire criterion as NSAC recommended. AMS defended the choice by arguing “reasonableness is an objective measure with timeless application,” which, if true, would directly contradict the need to define an “unreasonable” preference or advantage (the task at hand). Regardless of intent, we hope that USDA holds integrators accountable under this new standard, and consider not only short-term but long-term impacts of what may be considered “reasonable” with climate, workers, and industry sustainability in mind.

Clearly state that there is no requirement to prove “competitive injury.”

The P&SA does not require a livestock or poultry grower to prove “competitive injury” when bringing a claim of undue or unreasonable preference, or provide evidence that the act harms competition in the industry overall. That said, a number of courts have misinterpreted the statute and issued rulings that uphold this elevated burden of proof. NSAC recommended that USDA issue a clarification that growers need to only prove that their own operation was harmed by an undue or unreasonable preference in accordance with the P&SA. 

AMS cited the inclusion of a similar provision in the Farmer Fair Practice Rules as the explicit reason for the rules’ revocation; their position was that it is not “appropriate,” for rulemaking to interpret the intent of statute, and defers to court precedence – which has not been consistent – to settle the matter. The decision to not clarify the intent of Congress and avoid the “competitive injury” issue altogether is a weak response by USDA and renders this rule ineffective. It only succeeds in placing another insurmountable obstacle before growers to bring a claim of undue or unreasonable preference. 

Provide protections based on protected class and based on the right to association and communication.

NSAC recommended provisions to protect growers on the basis of protected class (e.g. race, sex, religious affiliation, etc.) and their right to associate, as included in the Farmer Fair Practice Rules. The clear record of discrimination against growers of color and retaliation against farmers and ranchers who speak out – even to their member of Congress – about unfair practices in the livestock and poultry industries makes these recommendations necessary. AMS refused to add these basic protections to the final rule, claiming that they are already protected by existing federal statute. Existing laws have not prevented these practices in the industry, however, and AMS’ failure to reinforce these basic protections for all growers will perpetuate discrimination and retaliation in ways that have unfortunately become customary in the industry. 

You can read NSAC’s full comment here

What Now?

USDA refused to adopt NSAC’s recommendations to the final rule, which would have afforded accountability to, and explicit protection for, farmers in an otherwise arcane, subjective process. Instead of outlining clear practices that would be considered violations of Section 202(b), the agency chose to pacify the interests of corporate integrators, effectively side-stepping the intent of Congress. What now? 

  1. Undo the undue preference rule. This rule, which has now gone into effect, will further erode the ability of small, contracted growers to compete in the industry and perpetuate the consolidation of livestock operations. NSAC calls on Secretary of Agriculture Tom Vilsack, renominated to retake his role atop USDA, to roll back or issue revisions to this rule so that it more closely follows the 2016 Farmer Fair Practice Rules.
  2. Reissue a competitive injury rule. Among the most pressing obstacles to P&SA enforcement is the manufactured requirement in a growing number of court circuits for farmers to prove that an integrator’s actions threaten competition across the entire industry – rather than demonstrate harm against their individual operation. This does not reflect the intent of Congress and is an unrealistic burden of proof for a small farmer. NSAC calls on the Secretary to reissue the competitive injury rule included in the Farmers Fair Practice rules, or otherwise clarify that there is no requirement to prove competitive injury under P&SA.
  3. Think bigger. Predatory and anticompetitive practices have become common in the meat and poultry industries. While the recommendations above address the most egregious obstacles for small farmers and may be accomplished with relative speed, foundations must be laid for an industry that is more resilient, equitable, and sustainable in the long-term. To read more about the bigger picture, read NSAC’s ongoing competition and antitrust blog series.

NSAC will continue to fight for policies and regulations that establish fair footing for small livestock producers and restores competition in that marketplace. We look forward to working with our members, allies, and champions in Congress and the new administration to make this possible.

Categories: Competition & Anti-trust, Implementation & Rule-making, Sustainable Livestock

One response to “Undo the Packers and Stockyards “Undue Preference” Final Rule”

  1. Reid Phifer says:

    Until the hold of the meat industry is broken regarding control of politicians there is no hope for fairness in the food production arena. Hopefully Vilsack will bring about change where money and benefits are being funneled to politicians through big meat lobbing efforts. This change must take place before fairness can ever become a part of the production equation.