Comments from the Pew Environment Group Urging the Grain Inspection, Packers and Stockyard Administration to Restore Competition and Contract Fairness to Livestock and Poultry Markets

Source Organization: Pew Environment Group


11/22/2010 - Newly proposed rules by the U.S. Department of Agriculture’s Grain Inspection, Packers and Stockyard Administration  are the first steps on a path to restoring a much needed level of fairness to the structure of animal agriculture in the US. These practical rules will open up opportunities for independent farmers to find buyers who will pay a fair price for the animals they choose to raise humanely and under conditions that protect public health and natural resources.

Tess Butler
Grain Inspection, Packers and Stockyards Administration
U.S. Department of Agriculture
1400 Independence Ave, SW
Room 1643-S
Washington, DC 20250-3604

Re: Docket ID GIPSA-2010-PSP-0001-RULEMAKING

Dear Ms. Butler:

Please accept these comments on the proposal noticed in the Federal Register on June 22, 2010 (Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008; Conduct in Violation of the Act; GIPSA-2010-PSP-0001-RULEMAKING). The Pew Environment Group believes that these rules offer a good start on restoring a level of fairness to the structure of animal agriculture in the United States.  We join with a variety of organizations that support the new rules and urge their speedy adoption. 

We are grateful for the opportunity to comment on this proposal, because we believe that the American animal agriculture sector can be sustainable in the long run, if the sector includes a diverse group of farming enterprises that can innovate to deliver quality meat products without imposing harm on the environment, resorting to production methods which are inherently cruel, or creating threats to public health. We believe that such a group can exist only if the U.S. Department of Agriculture (USDA) and the Department of Justice carry out their obligations to provide for a fair and open marketplace.

By specifying certain conditions that represent unfair contract terms or unfair, discriminatory or unlawful practices, (Sec. 201.210, Sec. 201.211, Sec. 201.214, Sec. 201.215, Sec. 201.216, Sec. 201.217) the proposed rules will provide growers and farmers with the capacity to negotiate reasonable contract terms for animal production. At the same time, the new rules will provide integrators, processors and other large purchasers with much-needed clarity about the business practices that clearly violate or have a high probability of being found to violate the Packers and Stockyards Act.  The rules will also allow for fair and expeditious enforcement of the Act, something that has long been lacking.

We support the added clarity that the rules provide and applaud the new level of accountability and transparency.  Record-keeping requirements (Sec. 201.94 (b)) and disclosure of contract terms (Sec. 201.213, Sec. 201.219) and other information (Sec. 201.211) are important improvements that will allow for informed decisions, fair competition and efficient and even-handed enforcement of the Packers and Stockyards Act.  We applaud the Department for crafting practical rules that utilize basic information that contractors already hold.

On this point, we concur with the Department’s suggested approach of making sample contract information broadly available on the USDA website, thus allowing potential growers to evaluate contract terms without infringing on the privacy of other growers. As the Iowa Attorney General has pointed out,(1) access to price and contract information has heretofore been very limited.  That office undertook its own initiative to share Iowa-specific contract information, primarily related to pork production, and the experience in Iowa has demonstrated that contract information made publicly available can be useful to farmers, educators and policymakers and can be shared without harm to the industry.

In addition, the proposed restrictions and disclosure requirements on the purchase of livestock by processers (Sec. 201.212) will prevent corporations from buying and selling livestock through intermediaries in order to depress or inflate prices at particular times. Such price manipulation, which is more likely in today’s highly concentrated agricultural markets, can work to the detriment of producers and as well as consumers and should be restricted, with exceptions made for natural disasters or other emergencies, as the rule provides. We understand that a concern has been raised that the proposed restrictions could adversely affect associations of ranchers who are working together to raise certain high quality or specialty breed cattle. While we believe, as several U.S. Senators do,(2) that the proposed rules would maintain opportunities for marketing premium products, we would support adjustments to the requirements to the extent necessary to allow those enterprises to continue.   We are hopeful that USDA will not withdraw these purchasing provisions entirely, however, since the continued thinning and manipulation of the cash market for beef will likely result in the loss of more independent producers and the further consolidation of the industry.   

Related to this point, we also support the proposal (Sec. 201.211) that contract prices based on number, volume or other condition should be made available to all growers or groups of growers who can meet such contract conditions, either individually or collectively, and that price premiums based on quality or timing may not discriminate against producers who can meet the same standards. We are hopeful that by eliminating these sorts of discriminatory barriers from the marketplace, USDA will allow small and mid-level producers to compete in the marketplace and gain better access to processors and packers.

The Pew Environment Group also applauds the proposed requirements for reasonable notice for suspension of delivery of birds to poultry growers (Sec. 201.215) and for safeguards regarding requirements for capital investments (Sec. 201.216, Sec. 201.217). 

Like other commenters, we have heard from some growers and former growers of instances in which growers have had financial difficulties resulting from delays or stoppages of bird deliveries or felt that they were being unfairly pressed to make capital investments in unnecessary housing improvements.  In several instances, the perception was that these actions were a matter of retaliation against a grower who was critical of its integrator. While we cannot speak to whether such cases are common, we understand that such allegations have been made over many years and in several geographic areas, and we believe that the rules that USDA is proposing would help to curtail any such unfair and abusive practices.(3) In a truly competitive market, an aggrieved grower might be able to address these problems simply by contracting with another company, but given the concentration level of the poultry industry, this choice is simply not available to most growers, and fairness requires USDA to intervene.

We believe that the duration requirements for contracts requiring initial or additional capital investments will offer much-needed help to growers who otherwise may become saddled with unmanageable debt.  However, we would also ask the Department to consider increasing the level of investment recovery that is called for.  The proposal requires contract duration to be long enough for the grower to recoup 80% of their capital investment costs, but many prudent investors would only take on additional debt if they knew they could recoup their full investment along with a reasonable margin of return. 

The proposed rules also set out criteria for judging whether or not a reasonable period of time to remedy any breach of contract that might lead to contract termination has been provided (Sec. 201.218). We would note that this requirement and the requirements for written notice of a breach and opportunities for rebuttal are not unlike the process requirements established under environmental laws.  We believe that the procedures outlined protect both the growers and the integrators who may have valid complaints about an individual grower.

We also suggest two areas in which the rules should be strengthened. 

First and most importantly, we urge USDA to clarify that contracts that purport to shift the entire liability for management of manure, litter, dead animals and other wastes to the grower will be deemed unfair practices. We believe that such contract terms are not only onerous and unfair to growers but also in conflict with federal law.

Under the Clean Water Act, there is a broad prohibition against discharge of pollutants from unpermitted point sources, and concentrated animal feeding operations (CAFOs) are specifically defined as point sources.  While compliance with the terms of a permit may shield a permit holder, who may be an owner or an operator, from citizen suits or other enforcement action, an unpermitted discharge is clearly unlawful, and in our view, the duty to prevent such discharges is a shared responsibility of the contractor and the grower or livestock producer. 

This view of Clean Water Act responsibility was recently upheld by a District Court decision in Maryland.  In Assateague Coastkeeper v. Allen and Kristin Hudson Farms, Inc., the court ruled that a Clean Water Act citizen suit against a corporation contracting with a poultry grower can proceed.  Perdue had argued for dismissal of the suit under the grounds that it could not be held liable solely as an integrator, but the court noted that the Clean Water Act “imposes liability both on the party who actually performed the work and on the party with responsibility for or control over performance of the work.”(4) [Emphasis added.] In this instance and in the case of many production contracts, the company owns the animals themselves and provides feed and medications as well as other supplies.  The company also determines the timing of the delivery of the animals and dictates critical aspects of the growing operation such as the type of buildings, equipment, and other facilities. 

As USDA recognizes, many contracts specify the type of livestock housing and ventilation to be used by a grower, the date of animal delivery and length of grow-out period, as well as diet and care regimes. These parameters under the direct control of the contractor can affect volume, moisture content, nutrient ratios and trace elements of manure, all of which become important to proper management and protection of local water sources. In addition, as corporations concentrate their growing operations within limited geographic areas, those areas, in many instances, have experienced difficulties with the associated volume of manure.  In some areas, manure must be moved out of a region, and transportation costs for an individual grower may be significant. Given such contract terms and business practices, the Pew Environment Group believes that in many cases the primary responsibility for manure management would rightfully fall, not to the grower, but to the contractor who dictates and enforces these terms.

For example, a grower contract may require that organic arsenic compounds be included in the feed of broiler chickens, reportedly to improve weight gain and prevent infections.  Much of this arsenic would be excreted by the birds and remain in the poultry litter, thereby affecting how such litter could be responsibly managed.  The presence of arsenic residues in the manure—which can be converted to the more toxic inorganic form of arsenic—might lead to restrictions on field application of poultry litter in order to protect local drinking water supplies, decrease the marketability of pelletized litter intended for use as a garden fertilizer, or present problems of air pollution control on facilities that burn litter for energy.(5) A grower who was subject to such restrictions on the use of such litter would have to bear the expense of shipping the litter out of the area or otherwise dealing with the arsenic content, but would be unable, by terms of the contract, to remove arsenic from the feed. 

Likewise, a grower located in one of the many areas of the country with levels of soil nutrients exceeding agronomic needs might reasonably need to comply with special restrictions on land application of manure.(6) In 2003, USDA reported that “feeding operations in 2 to 5 percent of U.S. counties produce more manure nutrients than can be absorbed by all of those counties’ cropland and pasture.”(7)  Included in those areas are counties in the Chesapeake Bay region and elsewhere where contract agriculture is common and the pressure to lessen agricultural runoff mounting. A swine or poultry grower in such a county might consider feed management options, including phytase,(8)  as a means of manipulating nutrient content of the manure.  Again, however, the grower’s interest in making a feed adjustment might conflict with the prescriptions of his contract, and a cost-effective means of complying with new requirements might be ruled out by a contractor who has attempted to transfer the liability for manure management to the grower.

Other actions of the contractor may also impact a grower’s ability to manage manure properly.  For example, the flock delivery date set by a contractor has a direct bearing on the timing of house clean-outs, which in turn affects manure application practices and the need for proper storage in order to avoid manure application on frozen ground or at other times when excessive runoff is most likely. Housing requirements, likewise, may affect the nature or volume of manure, with certain housing types associated with scraping out manure and others requiring manure to be handled as a liquid or slurry.(9) Again, such contract terms illustrate why contractors must be held accountable for the management of manure and other waste.

The second improvement to the regulations that we would recommend involves the use of the tournament system for poultry growers.

We believe that the June proposal (Sec. 201.214) offers an incremental improvement to functioning of the tournament system, the unique and we believe unfair method of payment used by poultry integrators.  Particularly important is the proposal to ban contract provisions that “decrease or reduce grower compensation below the base pay amount.” Without the proposed limitations, the term “base pay” is fundamentally deceptive, offering a prospective grower only a rough notion of the basis from which a higher or lower pay may be derived. 

We understand that some commenters have argued that this prohibition would diminish the incentive for growers to excel in their management, but we vigorously disagree with that conclusion.  If contractors were obligated to use flat per week or per flock base payments to growers, then some of their concerns with the proposal might have merit, but there is no requirement to return to such methods of payment.  We would point out, as others have, that many contract growers have major, long-term financial obligations associated with financing of poultry houses required under these contracts.(10)   These facilities are suited for a single-use: growing out large numbers of birds.  They cannot be readily retrofitted to any other use.  Growers, then, generally have not only an incentive but a financial imperative to do the best they can in raising each flock of poultry.(11) 

The National Chicken Council has responded to USDA’s proposal by telling growers that future contracts will either have to (1) pay all growers at the same average rate, eliminating any premiums for above-average performers or (2) lower the base pay rate to accommodate room for premium payments to some growers.(12) This threat simply illustrates the overwhelming power that the poultry contracting system has given to a small number of corporations and the constraints imposed on growers who generally rely on doing business with a single contractor. In suggesting that contracts will be altered in this way if a real “base pay” is required, the Council underscores the fact that the tournament system, as it is implemented today, simply assures that the contractor itself does not pay premiums out of its own profit margin.  Rather, the tournament system assures that growers who place below average pay the premiums for those at the top of the ranking.

On this topic as well, growers have voiced concerns about being unable to control or even understand the settlement groupings they are placed in, with some growers suggesting that they may be disadvantaged within a grouping by receipt of unhealthy chicks compared to others or by short or otherwise inferior feed and other supplies.  In our view, USDA’s proposal addresses these possible inequities only peripherally by requiring settlement groupings to include growers with like house types. 

While we see little reason for not simply banning the use of the tournament system and allowing growers to be paid on a per pound basis, we would urge USDA to consider further controls if it is retained.  We believe that settlement groups must consider not only housing types, but all the major inputs involved in flock management, including the source of the chicks and the feed as well as the personnel used for directing the growers’ activities.

In closing, we note that a number of opponents of the proposed rule have raised the specter of an avalanche of frivolous or baseless lawsuits based on what they see as vague provisions outlining those practices that would be deemed unfair or unreasonable.  To the contrary, we would suggest that the proposed rule provides a reasonable and clearer interpretation of the broad terms found in the Packers and Stockyards Act. 

Overall, we believe that the proposed rules will help to restore competition and balance to the animal agriculture market, hopefully opening up opportunities for independent farmers to find buyers who will pay a fair price for the animals they choose to raise humanely and under conditions that protect public health and natural resources.  

We urge GIPSA, whose stated mission is “to promote fair and competitive trading practices for the overall benefit of consumers and American agriculture,” to finalize these rules as soon as possible. 

Respectfully,

Karen Steuer
Director, Government Relations
Pew Environment Group

1 Comments of the Iowa Attorney General’s Office. USDOJ/USDA Concentration in Agriculture Forum, Ft. Collins, Colorado. September 27, 2010 Document ID GIPSA-2010-PSP-0001-RULEMAKING-3018, http://www.justice.gov/atr/public/workshops/ag2010/016/AGW-15687.pdf.

2 Submission from 21 United States Senators to the proposed rule: Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008: Conduct in Violation of the Act. Docket ID: GIPSA-2010-PSP-0001-RULEMAKING, http://www.regulations.gov/search/Regs/home.html#documentDetail?R=0900006480b41ef1.

3  See, for example, Sammy Fretwell, “U.S.: Poultry contracts place growers’ lives on dotted line,” Inter Press Service, (May 13, 1997); Christopher Sullivan, “Chicken farmers wage war against giant processors,” Record-Journal, (November 25, 1990); Monte Mitchell, “A Rough Game: Poultry companies’ contract system is keeping poultry farmers on a very tight leash,” Winston-Salem Journal, ( June 21, 2004); Scott Hamilton, testimony before the Committee on Agriculture, Nutrition, and Forestry, United States Senate,  April 18, 2007,  http://agriculture.senate.gov/Hearings/hearings.cfm?hearingid=2699&witnessId=6328.

4 Assateague Coastkeeper v. Allen and Kristin Hudson Farm, No. 1:10-cv-00487-WMN (D. Md. July 20, 2010),  http://www.assateaguecoastkeeper.org/images/2010_03_01_ACT_v_Hudson_Complaint_Signed.pdf.

5 See, for example, R.L. Wershaw et al., “Roxarsone in natural water systems,” in Proceedings of Effects of Confined Animal Feeding Operations (CAFOs) on Hydrologic Resources and the Environment (Fort Collins, Colorado, U.S. Geological Survey, Water Resources, National Research Program, August 30-September 1, 1999); D.W. Rutherford et al., “Environmental fate of roxarsone in poultry litter,” Environmental Science and Technology, 15, 37, 1515-1520 (April 15, 2003); B.L. Brown, et al., “Controls on roxarsone transport in agricultural watersheds,” Applied Geochemistry, Vol 20, Issue 1, 123-133 (January 2005);K.E. Nachman, et al., “Arsenic: A Roadblock to Potential Animal Waste Solutions, Environmental Health Perspectives, 113: 1123-24 (May 12, 2005); Bette Hileman, “Arsenic in Chicken Production: A common feed additive adds arsenic to human food and endangers water supplies,” Chemical and Engineering News, (April 9,2007).

6 Noel Gollehon et al., Confined Animal Production and Manure Nutrients, Agriculture Information Bulletin (Resource Economics Division, Economic Research Service, USDA, June 2001), http://www.ers.usda.gov/publications/aib771/aib771.pdf.

7 Marc Ribaudo et al., Manure Management for Water Quality: Costs to Animal Feeding Operations of Applying Manure Nutrients to Land, Agricultural Economic Report (Washington, DC: USDA, Economic Research Service, June 2003), http://www.ers.usda.gov/publications/aer824/aer824.pdf.

8 See, for example, “Managing Manure: New Clean Water Act Regulations Create Imperative for Livestock Producers,” http://www.ers.usda.gov/AmberWaves/Feb03/Features/ManagingManure.htm; “Chickens dieting to help Delaware's waterways,” Manure Manager, undated , http://www.manuremanager.com/content/view/1361/; L.F. Hatten, III, D.R. Ingram, and S.T. Pittman, “Effect of Phytase on Production Parameters and Nutrient Availability in Broilers and Laying Hens: A Review,” Journal of Applied Poultry Research, 10 (2001): 274-278. 

9 US EPA Office of Research & Development, Risk Assessment Evaluation for Concentrated Animal Feeding Operations (Cincinnati, Ohio: US EPA, Office of R&D, National Risk Management Research Laboratory, May 2004), http://www.epa.gov/nrmrl/pubs/600r04042/600r04042.pdf.

10 For example, see information on capital costs in James M. MacDonald, The Economic Organization
of U.S. Broiler Production, Economic Information Bulletin (USDA Economic Research Service, June 2008), http://www.ers.usda.gov/publications/eib38/eib38.pdf. See C. Robert Taylor and David A. Domina, Restoring Economic Health to Contract Poultry Production (Lincoln, Nebraksa: Organization for Competitive Markets, May 13, 2010), http://www.competitivemarkets.com/images/stories/dominareportversion2.pdf for additional information on costs and problems with poultry contracts.

11 See, for example, discussion in Tomislav Vukina, “Vertical Integration and Contracting in the U.S. Poultry Sector,” Journal of Food Distribution Research 32, no. 2 (July 2001), http://ageconsearch.umn.edu/bitstream/27819/1/32020029.pdf.

12 National Chicken Council, “Information for Growers on the GIPSA Proposed Rules,”  undated, http://www.agri-pulse.com/uploaded/Info_for_Growers.pdf.

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