U.S. integrated poultry companies may soon be required to disclose far more information to contract growers than ever before in a regulatory effort to boost grower knowledge and leveraging power.
Transparency
In June 2022, the U.S. Department of Agriculture’s (USDA) Agricultural Marketing Service (AMS) published a proposed rule on transparency in poultry grower contracting and tournaments in the Federal Register.
The proposed changes would require integrators to disclose certain information to growers before entering new contracts, renewing existing contracts or requiring growers to make additional capital investments. It would also require integrators to disclose additional information at the placement and settlement of each flock.
The proposed rule argues that the current tournament system used by most growers creates a situation rife for potential abuse by keeping growers in the dark about numerous financial and breeding factors. Supplied with new information, growers would be better informed when considering a new investment, have a better sense of what other farmers are earning and be less vulnerable to potential deceptive practices.
Disclosure requirements
According to a legal analysis of the proposed rule published in May 2022 by international law firm Hogan Lovells, specifically, it would require poultry contracts to include a new “Live Poultry Dealer Disclosure Document.” This document would include historical grower payment information, information about past litigation with growers, information about the minimum number of placements annually and minimum stocking densities, the expected value of contracts and other mandatory disclosures.
Moreover, at placements of flocks it would require disclosure of the stocking density, the names and ratios of breeds of the poultry delivered and ratio of males to females delivered. At the settlement of flocks, integrators would need to supply a similar document with information about the individual grower’s position compared with other growers in its grouping during a certain period.
That settlement document would also need to provide the following information about every grower’s flock in the comparative grouping: the stocking density of the placement, the names and ratios of breeds of the poultry delivered, the ratio of males to females delivered, the breeder facility supplying the birds, the breeder flock age and the number of feed disruptions exceeding 12 hours.
Motivations
Andy Green, senior advisor for fair and competitive markets at the USDA, said the goal of the measure is to increase transparency in the growing contract and the contracting process. The rule would provide insights into how much the grower will earn, how many flocks will be placed, flock stocking density and other key business areas like the sale of farm policy.
The motivation behind the regulation, he said, was to end potentially deceptive practices in the industry.
“When you don’t have the information you need to make good contracting decisions, or you don’t have the information regarding what the actual inputs are, you are very much vulnerable,” Green said.
Brian Eyink, a partner at Hogan Lovells US LLP’s Washington office, said the USDA’s proposal indicates there are “information asymmetries” in the poultry growing market. By taking this action, the information gap would be closed and growers could better predict their income under a contract.
He was skeptical of this rationale. Especially given poultry farmers’ typical earnings compared with the average American household.
“Many of the disclosures have little if anything to do with grower pay, especially in the aggregate over the life of a contract,” Eyink said. “The proposal would require a costly auditing and oversight framework that’s entirely unnecessary for USDA’s stated goals.”
New costs
Newly merged Wayne-Sanderson Farms is already carrying out the terms of the proposal. CEO Clint Rivers said the new company agreed to follow the new disclosure rules as part of the complex $84.8 million settlement involving the USDA and the U.S. Department of Justice.
In the past, Rivers said his contracts always set a base, or average, pay. If a grower performed below average, base pay declined. If the grower performed above average, base pay increased.
Going forward, the base pay in the contract will be the minimum pay and it cannot be decreased based on lower-than-average flock performance. However, better-than-average growers will still receive an incentive based on performance.
For new farmers, Rivers said Wayne-Sanderson will continue to offer 15-year contracts.
As for the new transparency proposal, Wayne-Sanderson will be required to follow it – whether or not it become law for the rest of the industry – as part of the settlement. Rivers said the disclosures require significant administrative work to produce all the required information. This effort adds costs and time to the process.
Rivers said he believes the new information isn’t very beneficial for the grower.
“That will depend on the grower and how much he pays attention to it,” Rivers said. “There's so much information there that I don't know if they'll really pay attention to it or not.”
In sum, the settlement’s conditions create added costs and added compliance aggravations, but Rivers does not expect the changes will affect the profitability of the company.
Industry impacts
According to the proposal, the AMS expects the impacts on the industry to be “immeasurably small.”
The proposal’s financial impact analysis estimated the total fiscal impact on the chicken industry to be about $4.9 million. A small improvement in efficiency from “improved allocation of capital and labor resources” would outweigh the cost of the proposed rule, it said.
Green, who helped author the proposal, said he believes it would only create a modest cost for growers to share information they already have with growers.
Eyink said the proposal would require integrators to “develop data tracking systems, hire accountants and lawyers to oversee those systems, update contracts and track with great precision a whole lot of information that not everyone currently tracks.”
The National Chicken Council (NCC), a lobbying group in Washington, filed official commentary in August 2022 urging AMS to withdraw the proposal. In those comments it said the proposed rule would bring a “devastating” financial impact on the chicken industry by raising costs and administrative burdens. These actions could lead to higher food prices for consumers.
“The proposal would undermine the efficiency and global competitiveness of the U.S. broiler industry by imposing needless costs and rigid mandates with no quantifiable benefit but with clear negative impacts,” the comments said.
Force of law
Green said the public comment period for the proposed final rule closed on August 23, 2022. After the comment period, the agency considers the input, drafts a new, final rule and sends it to the U.S. Office of Management and Budget for review.
After review, it becomes final with the force of law. This process, Green said, takes three to nine months and there is a compliance period once the rule is finalized.
Eyink said the USDA is prioritizing this rule and it “has support from the top.” It’s not clear how long it would take for the proposal to go from its current status to the standard practice.
Looking ahead
In its commentary to the USDA, the NCC asked the agency to assess a true cost of the proposed rule, limit the scope of disclosure, omit the proposed governance framework and certification, eliminate the required disclosure of forward-looking projections and to eliminate the requirement for minimum annual placements and minimum stocking densities to be included in contracts.
Eyink said this proposed rule is a source of worry for the poultry industry. He said this is only one of three different proposed rules concerning the Packers and Stockyards Act, which is used to regulate the chicken industry, under development and “only the USDA knows what those proposals are going to say.”
Green and Eyink said the USDA is issuing an advanced notice of proposed rulemaking seeking public input on proposals related to grower pay.
“With all these moving pieces, the lack of information on the USDA’s big-picture plan and this administration’s rhetoric on economic issues, I think companies are justified in being concerned about what the future holds,” Eyink said.
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