March 16, 2010
On Thursday, March 11, USDA announced that Farm Service Agency (FSA) farm loan policies already in place for contract poultry production will be extended to contract pork operations as well.
The aim of the guidance is to try to put an end to the practice of FSA financing new hog or poultry operations in cases where the integrators who own the animals have terminated or declined to renew contracts with current producers and instead look for new operators as a cost cutting measure.
Those new operators have then been eligible for FSA farm ownership and operating loans, providing taxpayer support for the shady business practice of leaving an existing producer with a pile of debt and no animals while seeking out new replacement operators. These bait and switch moves often put contract farmers out of business, stimulate oversupply and lower prices farmers receive, or both. If the original operators had FSA loans on their expensive animal-raising facilities, the shift also puts the taxpayer at risk of losses on the original loan.
The guidance includes new stipulations that, if government loans are sought, production contracts must be for a minimum period of three years, termination of contracts must be based on “for cause” criteria only, contracts must require that producers be given specific reasons for any contract cancellation, and contract provisions must be present to give FSA assurances that the producer will be able to generate income with which to cash flow and repay the loan.
The poultry guidance, issued last spring, can be found here. The new pork guidance is not yet online, though we are told by FSA it will be very similar to the poultry guidance.
In addition to the new guidance, USDA also announced that FSA soon will be issuing an Advanced Notice of Rulemaking seeking public comment on the prevalence of these types of abusive contracting situations and the best way for USDA to address loan making to contract operations in the long term.
The USDA release also noted that its Grain Inspection, Packers and Stockyards Administration will continue to investigate allegations from producers of contract abuse under its Packers and Stockyards Act authority to prohibit unfair, deceptive and discriminatory practices.
Categories: Competition & Anti-trust
It is about time our government stopped catering to destructive business practices. Unfortunately from an economic stand point this might just be what the packers want. If supplies of poultry financing dries up and that dries up supplies, the rub is that prices of poultry will tend to go up and packers will be the beneficiaries. The government must pick and choose between the companies doing the destructive practices and those who are not. The industry is already concentrated so much that the short term beneficiaries will inevitably be the packers who are abusing their market power.
It is real hard to oust those who have the money to buy you off if you are a politician. Their success is largely a factor of their campaign contributions, not how well they act as a legislator, barring some kind of sex scandal.
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