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Poultry Processing & Slaughter
on August 10, 2010
GROWER CONTRACTS

GIPSA rule would reset poultry contracts

Attorney says proposed rule is likely to increase litigation, curtail use of tournament-style grower pay and increase processor ownership of poultry farms.

The 2008 Farm Bill charged the USDA Grain Inspection, Packers and Stockyards Administration (GIPSA) with revising regulations dealing with the contractual relationships between livestock and poultry processors and livestock farmers and poultry growers.

GIPSA held three public meetings in October 2008 to gather comments and then held joint competition workshops with the department of justice in Spring 2010. According to Brett Schwemer, Esq., Olsson Frank Weeda Terman Bode Matz P.C., GIPSA used complaints aired at the meetings to justify proposed regulations that go far beyond the direction of the Farm Bill.

Schwemer, who spoke at the National Turkey Federation Leadership Conference, said that the most significant provision of the proposed rule is the elimination of the requirement to demonstrate competitive injury or likelihood of competitive injury to prove violations of sections 202a and b of the Packers and Stockyards Act. In the past, being unable to prove competitive harm meant losing the lawsuit. He said that removing the need to prove competitive harm would lead to more lawsuits brought by growers against processors for differences in price, premiums and other contract terms. Fear of litigation would lead processors to have more standardized contracts with growers and possibly to ownership of growing operations.

Tournament with no losers?   

Many contracts for growing broilers and turkeys in the U.S. utilize a “tournament system” where the live cost per pound of raising birds on a grower’s farm are compared to some sort of rolling average for competing farms over a given time period. How the farm’s costs deviate from the average is used as a factor in calculating the cost per pound the grower receives as payment for raising the flock. In many cases the deviation from average cost becomes a deduction or addition to the base rate of pay. So, if the base pay is $0.05 per pound and the farm’s costs are a half-cent lower that then the average cost, the grower receives $0.055 per pound. The grower receives $0.045 per pound if the farm’s costs are a half-cent per pound higher than the average.

Under GIPSA’s proposed rule, all growers raising the same type and kind of poultry must receive the same base pay; there can be no contract provisions that decrease or reduce grower compensation below base price. According to the rule, growers must be ranked in settlement groups with growers with “like houses,” but what are like house types? This portion of the rule could have sweeping implications for integrators and growers. It is possible that tournament-style contracts would become far less common?

Capital investment requirements   

GIPSA’s proposed rule says that the grower must have discretion to decide against a required capital investment. It says that the processor must notify the grower if it intends to reduce or end operations within 12 months of requiring capital investments. The rule also says that any required capital investment must be accompanied by contract duration of a sufficient period of time for the poultry grower to recoup 80% of the cost of the required investment. Schwemer said that these provisions are ambiguous and subject the processor to more risk.

90 days notice   

A written notice is required 90 days prior to the suspension of delivery of birds to growers under the proposed GISPA rule. GIPSA is required by the Farm Bill to establish a reasonable period of notice, but Schwemer questioned whether 90 days is the right amount of time.

The GIPSA proposed rule goes far beyond mandates of the 2008 Farm Bill, according to Schwemer. “The proposed rule could have significant adverse effects on processors and growers alike,” he said.

Schwemer outlined what he expects to see happen, if the proposed rule is adopted in its present form.

  • More lawsuits brought by poultry growers and livestock farmers who won’t have to prove competitive injury caused by the processor.
  • Fewer premium and value-added contracts and more standardized contracts for poultry and livestock.

Finally, the fear of litigation may lead to more vertical integration and ultimately to more processor owned farms, he said.

Growers and processors are invited to comment on the proposed rule; the comment period ends November 22, 2010. Read the proposed GIPSA rule online: http://archive.gipsa.usda.gov/psp/Farm_bill_rule_outline.pdf.  

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