Poultry Grower Payment Systems and Capital Improvement Systems

Federal RegisterJun 10, 2024

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

9 CFR Part 201

[Doc. No. AMS-FTPP-22-0046]

RIN 0581-AE18

Poultry Grower Payment Systems and Capital Improvement Systems

AGENCY:

Agricultural Marketing Service, U.S. Department of Agriculture.

ACTION:

Proposed rule.

SUMMARY:

The U.S. Department of Agriculture's (USDA) Agricultural Marketing Service (AMS or the Agency) is soliciting comments on proposed revisions to its regulations under the Packers and Stockyards Act, 1921 (P&S Act or Act). The proposal would prohibit certain payment practices under poultry grower ranking systems (commonly known as tournaments) in contract poultry production for broiler chickens, require live poultry dealers (LPDs) to adopt policies and procedures for operating a fair ranking system for broiler growers, and require LPDs to provide certain information to broiler growers when the LPD requests or requires the grower to make additional capital investments (ACIs). AMS proposes these changes in response to numerous complaints from growers about the use of tournament systems. AMS intends for the proposed regulations to increase transparency and address deception and unfairness in broiler grower payments, tournament operations, and capital improvement systems.

DATES:

Comments must be received by August 9, 2024. Comments on the information collection aspects of this proposed rule must be received by August 9, 2024.

ADDRESSES:

Comments must be submitted through the Federal e-rulemaking portal at

https://www.regulations.gov

and should reference the document number and the date and page number of this issue of the

Federal Register

. All comments submitted in response to this proposed rule will be included in the record and will be made available to the public. Please be advised that the identity of individuals or entities submitting comments will be made public on the internet at the address provided above. A plain-language summary of this proposed rule is available at

https://www.regulations.gov

in the docket for this rulemaking.

FOR FURTHER INFORMATION CONTACT:

S. Brett Offutt, Chief Legal Officer/Policy Advisor, Packers and Stockyards Division, USDA AMS Fair Trade Practices Program, 1400 Independence Ave. SW, Washington, DC 20250; Phone: (202) 690-4355; or email:

s.brett.offutt@usda.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

II. Industry Background and Need for the Rulemaking

III. Broiler Grower Compensation Design (Proposed § 201.106)

IV. Operation of Broiler Grower Ranking Systems (Proposed § 201.110)

V. Broiler Grower Capital Improvement Disclosure Document (Proposed § 201.112)

VI. Severability (Proposed § 201.290)

VII. Regulatory Notices and Analyses

VIII. Request for Comments

I. Executive Summary

On June 8, 2022, AMS published an advanced notice of proposed rulemaking (ANPR) in the

Federal Register

titled, “Poultry Growing Tournament Systems: Fairness and Related Concerns” (87 FR 34814), to inform policy development and rulemaking under the P&S Act regarding improved fairness in poultry grower ranking systems in contract poultry production.

In the ANPR, AMS solicited comment from the public on how to address potential unfairness arising from the use of poultry grower ranking systems under contracts to grow broiler chickens. As with past opportunities for input, commenters identified a lack of transparency regarding payments under tournament pay systems, fairness in tournament operations, and additional capital improvement requirements as ongoing concerns. These comments and AMS's Packers and Stockyards Division's (PSD) expertise provide the basis for this proposed rulemaking.

The comment period ended September 6, 2022. In response to industry organizations' request for additional time to submit comments, AMS reopened the comment period on September 9, 2022 (87 FR 55319). That comment period closed September 26, 2022.

Section 407(a) of the P&S Act (7 U.S.C. 228(a)) authorizes the Secretary of Agriculture to make rules and regulations as necessary to carry out the provisions of the Act (7 U.S.C. 181

et seq.

). The Secretary has delegated the responsibility for administering the Act to AMS. Under this authority, AMS is issuing this proposed rule to carry out the provisions of section 407 of the Act, as well as sections 202(a) (which prohibits “any unfair, unjustly discriminatory, or deceptive practice or device”), 401 (which requires an LPD to “keep such accounts, records, and memoranda as fully and correctly disclose all transactions involved in his business”), and 410 (which bans the failure to pay “the full amount due [to the] poultry grower on account of such poultry”). The Federal Trade Commission (FTC)'s extensive experience enforcing prohibitions against unfair practices, unfair methods of competition, and deceptive practices arising under the FTC Act has also informed aspects of this proposed rule.

Letter from FTC Chair Lina Khan to AMS, “Poultry Grower Tournament Systems: Fairness and Related Concerns,” Docket No. AMS-FTPP-22-046, at

https://www.regulations.gov/comment/AMS-FTPP-22-0046-0143;

Michael Kades, “Protecting livestock producers and chicken growers,” Washington Center for Equitable Growth (May 2022).

AMS is proposing to amend 9 CFR part 201, subpart N, by adding new § 201.106 regarding LPD responsibilities for the design of broiler grower compensation arrangements; new § 201.110 regarding the fair operation of broiler grower ranking systems; new § 201.112 regarding disclosure requirements for LPDs when requesting additional capital investments from broiler growers; and new § 201.290 regarding severability. In particular, the Agency is proposing to:

• Prohibit LPDs from discounting or reducing a grower's rate of compensation as disclosed in the broiler growing arrangement based on the grower's grouping, ranking, or comparison to others.

• Establish a duty of fair comparison that requires LPDs to design and operate their broiler grower ranking system to provide a fair comparison among growers, with particular attention to certain factors including the distribution of inputs and flock production practices, the time period of the comparison, the conditions and circumstances for the comparison, and the reasonableness of efforts to resolve disputes.

• Require LPDs to establish and maintain written documentation of their processes for the design and operation of a broiler grower ranking system that is consistent with the duty of fair comparison, review their compliance with these processes not less than once every two years, and retain all relevant written records for five years.

• Require LPDs to provide a grower with a Capital Improvement Disclosure Document when an LPD requests that the grower make an additional capital investment.

• Introduce a severability clause that would permit for certain parts of the

regulations to remain in effect even if others are deemed unenforceable.

If the proposed rule is adopted, USDA would enforce the regulations through referral to the Department of Justice (DOJ) for appropriate action or, where failure to pay is implicated, through administrative action. Injured individuals would also have a right to proceed in Federal court. AMS would also conduct compliance reviews of adherence to the proposed regulatory requirements and would investigate suspected violations. Additionally, growers can always file a complaint or tip at

farmerfairness.gov

or by calling 1-833-DIAL-PSD (1-833-342-5773) if they suspect a violation of the Act or any other Federal law or regulation governing fair and competitive marketing, including contract growing, of livestock and poultry.

II. Industry Background and Need for the Rulemaking

A. Overview

The current broiler chicken industry is susceptible to both unfairness and deception. To build or upgrade chicken barns, growers both initially and periodically incur substantial debt in loans that typically last 15 years. To meet those obligations and earn a reasonable return, the grower is then dependent on the LPD that provides the chickens (both the number and frequency), the feed, and other inputs. Grower contracts with the LPD are commonly much shorter than the length of the loans. Growers often have little, if any, ability to negotiate their contracts with LPDs or opportunity to switch to alternative LPDs. LPDs' bargaining and market power, premised on lack of competitive alternative LPDs locally, creates significant risk to growers.

Most large LPDs today include a tournament component as part of the compensation arrangement with growers under contract. If a grower's feed conversion performance is above the average, the grower receives a bonus; if the grower is below average, the LPD reduces the grower's compensation. In theory, the tournament system insulates growers from variation in the cost of feed and other inputs, encourages growers to perform to the best of their ability, and rewards better-performing growers. In practice, however, the tournament system has many problems. For example, if an LPD treats individual growers in a tournament differently (

e.g.,

by providing different quality inputs) the grower's skill would not determine their compensation, which makes for an unfair tournament.

The difference between the length of grower's loan and the length of the grower's contract with an LPD creates another problem. Because LPDs have substantial bargaining power after the initial grower investment, an LPD can require a grower to make ACIs that will increase the grower's debt; if the grower refuses, the LPD can terminate the grower, either actually or constructively (for example, by reducing the number of flocks or chicks delivered). Depending on the facts and circumstances, such actions would be unfair and deceptive practices in violation of section 202(a) of the Act.

B. Industry Background

Until the late 1950s or 1960s, farmers owned their chickens, and the primary value was in the eggs those chickens laid. After a brief period of chicken auctions in the 1950s, farming chicken meat for distribution led to “grower” contract arrangements with feed distributors and later with processors. As these arrangements gained popularity, processors experimented with various compensation methods to capture costs and incentivize grower performance. One commonly used compensation method was a fixed performance standard payment system. Under a fixed performance standard payment system, individual grower performance is compared to a fixed standard of feed cost or efficiency set by the LPD rather than to an average of other growers in a contemporaneous settlement group. Other methods included square footage contracts, which remain common with pullet farmers (

i.e.,

farmers who raise chicks from hatching until they are ready to produce eggs, or about 20-22 weeks). Pullet farmers typically are paid weekly or biweekly based on the square footage of chicken housing, or breeder farmers, who are typically paid a flat rate per dozen eggs.

Since the 1990s, the broiler industry overwhelmingly uses the tournament system, described below in section II.C., to compensate growers.

See,

e.g.,

New Farmer's Guide to the Commercial Broiler Industry: Farm Types & Estimated Business Returns—Alabama Cooperative Extension System (aces.edu).

Today, the broiler chicken industry is highly vertically integrated. That is, a single entity owns or controls nearly all the steps of production and distribution, with the only partial exception being the growout stage. The USDA National Agricultural Statistics Service's (NASS) Census of Agriculture (Agricultural Census) reported that 96.2 percent of broilers were raised and delivered under production contracts between LPDs and independent farmers, or broiler growers.

Under a production contract, the LPD provides the inputs, like chicks, feed, and veterinary treatment services, that the contract broiler grower uses in growing the flock and the LPD maintains ownership of the chickens throughout the production process. The grower provides the poultry growing facility, flock management, labor, and utilities required during flock growout.

At the end of growout, the LPD collects and weighs the mature poultry and pays the broiler grower for their services.

USDA, NASS.

2022 Census of Agriculture: United States Summary and State Data.

Volume1, Part 51. Issued February 2024 p. 51 and p.411.

https://www.nass.usda.gov/Publications/AgCensus/2022/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.

Growout period is defined as the period of time between placement of poultry at a grower's facility and the harvest or delivery of such animals for slaughter, during which the feeding and care of such poultry are under the control of the grower.

To grow broiler chickens on a commercial scale, a grower must make an initial substantial investment in housing. Most farms have multiple houses, and the total investment required can easily exceed $1 million.

The housing, which growers build and equip specifically for the purpose of growing poultry, has an expected life of 20 years or more. The costs of adapting the housing for any other purpose can be prohibitive.

Over time, LPDs have requested or required that growers make ACIs to upgrade housing and equipment for improved efficiency during the contracting relationship. An ACI is defined under 9 CFR 201.2, in relevant part, as an investment or combination of investments of $12,500 or more per structure paid by a poultry grower or swine production contract grower over the life of the poultry growing arrangement or swine production contract beyond the initial investment for facilities used to grow, raise, and care for poultry or swine. Growers generally finance these long-term assets against much shorter-term production contracts, which generally range from between less than a year (or “flock to flock”) to less than five years.

This can

expose growers to financial risk and uncertainty around debt repayment and the recoupment of their investments. Growers thus are dependent on LPDs—who control most aspects of a grower's production—to recoup their substantial initial and subsequent investments.

See, for example, Cunningham and Fairchild (November 2011) Op. Cit.; Simpson, Eugene, Joseph Hess and Paul Brown, Economic Impact of a New Broiler House in Alabama, Alabama A&M & Auburn Universities Extension, March 1, 2019 (estimating a $479,160 construction cost for a 39,600 square foot broiler house).

For a discussion of the difficulty in adapting of broiler grow houses for other purposes,

see

Vukina and Leegomonchai 2006, Op. Cit.

MacDonald, James M. “Financial Risks and Incomes in Contract Broiler Production.” Amber Waves August 4, 2014.

https://www.ers.usda.gov/amber-waves/2014/august/financial-risks-and-incomes-in-contract-broiler-production/

(last accessed 12/13/2023).

For a discussion the difficulty in adapting of broiler grow houses for other purposes see Tom Vukina and Porametr Leegomonchai. “Oligopsony Power, Asset Specificity, and Hold-Up: Evidence from the Broiler Industry.” American Journal of Agricultural Economics 88 (2006).

Currently, many LPDs operate with the benefit of substantial market power in local markets to purchase grower services. Broiler grower operations must be located in close proximity (usually less than 50 miles) to an LPD's feedmills, hatcheries, and processing plants due to the costs of transporting feed to the grower's farm and the costs (including death loss) associated with transporting finished chickens from the grower's farm to the processing plant. This can result in poultry production that is often highly localized and concentrated at a regional level. Most growers have few LPDs in their area with whom they can contract. The table below shows the number of LPDs (referred to as integrators in the table) that broiler growers have in their local areas by percent of total farms (number of growers), total birds produced (number of birds), and total production (pounds of birds produced).

Table 1—LPDs (Integrators) in Broiler Grower's Area

Integrators in grower's area *

Farms

Birds

Production

Can change to

another integrator

Number

Percent of total

Percent of farms

21.7

23.4

24.5

30.2

31.9

31.7

20.4

19.7

16.1

14.9

14.8

7.8

6.7

6.6

No Response

3.8

2.7

Not available.

* MacDonald. (June 2014) Op. Cit. (Percentages were determined from the USDA Agricultural Resource Management Survey (ARMS), 2011. “Respondents were asked the number of LPDs in their area, which was subjectively defined by each grower. They were also asked if they could change to another LPD if they stopped raising broilers for their current LPD.” The 7 percent of those facing a single LPD assert that they could change, presumably through longer distance transportation to an LPD outside the area. Ibid. p. 29 and 30.).

The

data in

the table shows that roughly 22 percent of growers operate in a pure monopsonistic local market, and that 52 percent of broiler growers (farms), accounting for 55 percent of broilers produced and 56 percent of total production, report having only one or two LPDs in their local areas. This limited competition among LPDs accentuates the contract risks to growers. Even where multiple LPDs are present, there can be significant costs to switching, including adjustments for differences in technical specifications that LPDs may require. To switch LPDs, a grower may need to invest in new equipment and learn to apply different operational techniques for different breeds, target weights, and growout cycles. By requiring ACIs specific to that LPD, an LPD may inhibit the ability of growers to switch to a competing LPD due to the costs associated with those differing housing specifications.

MacDonald, James M. 2014. Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, USDA Economic Research Service.

The term “integrator” used in MacDonald (June 2014) refers to a vertically integrated poultry company that contracts with farmers who serve as growers. LPDs referenced elsewhere in this document are also “integrators.”

In another study of broiler concentration, MacDonald and Key (2012) found that the level of market concentration in an area tends to correlate with measurable payment impacts on growers.

MacDonald and Key reported that grower payments (per pound, controlling for bird size) were lower in markets with fewer dealers. While the study could not identify the causal impact of LPD numbers on payments, the results conform to general economic theory about the impact that reduced competition would have on prices. For example, going from four LPDs to two LPDs lowered grower payments by four percent, and going from four LPDs to one LPD lowered grower payments by eight percent, controlling for compensation rates and features of the grower operation and contract.

James M. MacDonald and Nigel Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey.”

Journal of Agricultural and Applied Economics

44 (November 2012): 477-490.

Table 1 however, also shows that more than 23 percent of broiler growers (farms) have four or more integrators in the grower's area, and more than 71 percent report that they can change integrator (although at what cost is not reflected). Although growers in these areas may have relatively more bargaining power than those in more concentrated markets, they remain at significant bargaining disadvantages relative to integrators and commonly subject to industry-wide practices. The potential for the abuse of market power may vary based on concentration and practices employed by specific LPDs in local markets or nationally.

In this proposed rule, AMS uses the term “inputs” to mean resources supplied by LPDs, such as chicks or feed. There is often variation in the quality of these inputs, which can impact the performance of a grower's flock. If an LPD distributes inputs of substantially different quality to growers within a settlement pool, these inputs contribute to differences in relative grower performance, with the growers receiving the lowest quality inputs receiving lower pay as a result. Several commenters in the 2022 ANPR, for example, noted that the quality of inputs can vary, unfairly shifting risk to the growers.

Likewise, LPDs determine production practices on growers' farms, which also affect growers' pay. In this proposed rule, AMS uses the term “production practices” to refer to features of the on-farm production process that are determined by the LPD, such as density of bird placement (number of chicks delivered or placed with a grower per square foot of broiler housing), age at harvest, and weight at harvest. These practices greatly impact grower compensation. If these factors are not applied evenly across grower participants in tournaments, that unevenness also unfairly skews relative performance measures. If an LPD uses a

settlement pool to compare growers to whom the LPD has assigned substantially different production practices, perhaps, for example, to test the consequences of different feed or veterinary practices, the growers receiving the less advantageous production practices will receive relatively lower pay. These production decisions may result in variation in the amount of feed required per pound of meat that is unrelated to grower effort or acumen. Including both types of growers for comparison in a single settlement pool is analogous to matching wrestlers across different weight classes.

As described above, the organization and structure of broiler production is characterized by a high degree of vertical integration, market power in many regional markets, substantial investment in production capital that is specific to a single LPD, nearly universal use of production contracts, and use of complex grower compensation systems based on relative performance. Asymmetric information, incomplete contracts, and hold-up are also issues of concern in poultry contracting that motivate the specific interventions proposed in this proposed rule.

Information asymmetry in poultry contracting arrangements can contribute to market inefficiencies and unfair and deceptive practices. Asymmetric information occurs when one party to a contract has more critical information than the other party. LPDs have information related to (as well as control over) many areas of strategic decision making that impact growers. For example, LPDs use systems of grower compensation and methods for calculating grower payment designed to limit total grower compensation, while maximizing production efficiency. LPDs also have exclusive information about many factors under their control that influence the performance elements of poultry production and thereby affect grower payments. Even where some of information is disclosed to growers, LPDs continue to have much more information about the quality and distribution of grower inputs, specific production practices the LPD assigns to individual growers, the likely effect on grower performance of different input qualities and production practices, and the manner in which the LPD chooses to compare growers in a ranking system.

In addition, LPDs determine the types of ACIs they request or require of growers, which growers may not anticipate and can place significant drains on available cash and substantially degrade expected investment returns. Neither growers, nor AMS, have ready access to the information that informs these specific requests unless LPDs provide it to them. Information asymmetry can lead to market failure in the broiler production industry because growers must make important production decisions without access to important information. This also facilitates abusive practices where the information would help growers, and AMS, identify and halt those practices sooner.

LPDs exercise discretion in fulfilling the contract terms when operating a tournament by, for example, choosing which growers to be included in a settlement group or whether appropriate comparable growers are available for comparison purposes.

Contracts used in broiler production are also often incomplete. Under the typical poultry production contract, LPDs compensate the grower for raising live poultry from the time of chick delivery through retrieval by the LPD for slaughter. Such a contract may be viewed as complete, with no material gaps, if the contract terms include the substantive legal, practical, and economic promises, obligations, and contingencies needed to operate in a poultry growing arrangement. These terms should be verifiable and legally enforceable. Incomplete contracts arise when terms key to basic functioning of the contract do not meet these conditions and magnify risks with respect to the performance of the other contractual party, leading to other potential inefficiencies. In this instance, incomplete contracts may give LPDs discretionary latitude to deviate from expectations.

LPDs often offer highly complex pay systems in broiler contracts based on the interplay of several separate components, including base pay rate, incentive pay for ACIs or certain production practices, and performance adjustments under the tournament. The complexity of such pay systems makes it difficult for growers to fully understand the potential range of payments they are likely to receive or the ways in which LPD performance or nonperformance may affect that pay, preventing them from properly evaluating the fairness of the contract before signing. For example, several ANPR commenters noted the difficulty growers face without having full understanding of—or confidence in—how inputs are distributed or how the quality may affect performance. Their inability to evaluate how this distribution occurs inhibits their ability to effectively contract and to effectively enforce those contracts to the extent that is possible given the overall power imbalance and concentration in many local markets.

Contracts that require investments in contract-specific assets can give rise to the hold-up problem. The economic concept of a hold-up problem refers to a situation in which one or both parties to a transaction must make investments in such contract specific assets, and the two parties may be unable to cooperate efficiently due to incomplete or asymmetric information and the inability to write, enforce, or commit to contracts. Once a party becomes locked into a transaction as a result of making a transaction-specific investment, they lose bargaining leverage and become vulnerable to exploitation by the other party. This may involve one party to a contract opportunistically deviating from expectations of the other party or failing to live up to previously agreed upon terms. Hold-up occurs in broiler production due to market failures associated with incomplete grower information, contract-specific investments, and market power, as well as insufficient enforcement around aspects necessary to maintain market integrity and prevent market abuses including unfair breaches of contract. Broiler growers lack sufficient information about the nature of inputs they will receive from the LPD over time, the performance of other growers in the tournament pool, and the nature of complex tournament operations under grower contracts.

The production of broilers requires investment in specialized equipment and facilities, which can be specific to the enterprise of broiler production and have little alternative value outside of a contractual relationship with a limited pool of nearby LPDs (or, in some cases, a single LPD).

As a result, the realistic options for growers to reallocate their labor and invested capital are reduced, and growers are committed to growing chickens to pay off the financing of the initial capital investment, plus ACIs. When growers are committed to broiler production to pay off lenders and have few, if any, alternative LPDs with whom they can contract, they are under more pressure to accept less favorable contract terms. LPDs can behave opportunistically by failing to perform under contracts in ways that growers reasonably expect and by requiring ACIs with little or no economic value to the producer. Economic research has shown that hold-up can lead to reduced

compensation when a grower has only one LPD available with which to contract in the local area.

For a discussion of hold-up in the broiler industry, see Vukina and Leegomonchai (2006), Op. Cit.

Ibid.

C. The Tournament System

LPDs typically pay broiler growers for the services they provide using a unique system in which growers' pay is based in part on a comparison of their feed conversion relative to other growers. A 2014 survey found that over 93 percent of these broiler production contracts make use of a relative performance payment system, often called a tournament system.

Under a tournament system, the contract between the broiler grower and the LPD provides for payment to the grower based on a grouping, ranking, or comparison of broiler growers delivering broilers to the same company during a specified period (usually one week). This grouping is informally referred to as a settlement group.

James M. MacDonald, “Technology, Organization, and Financial Performance in U.S. Broiler Production.” U.S. Department of Agriculture Economic Research Service, Economic Information Bulletin No. 126 (June 2014).

Under a typical tournament system, the broiler grower receives a fixed payment per pound of broilers produced, called a base pay rate, plus a calculation adjustment based on how efficiently the grower used the resources provided by the LPD to produce each pound of broilers (informally referred to as a performance adjustment).

LPDs typically calculate the performance adjustment primarily by comparing the feed conversion ratio (

i.e.,

the quantity of feed consumed by the flock divided by the weight of the flock delivered) to the average ratio of all growers in the tournament settlement group. (As a technical matter, grower contracts sometimes use fixed weights expressed in dollar terms for this calculation.) Broiler growers whose costs are less than the average cost for that tournament settlement group receive a bonus above the base pay rate, while those whose costs are above the average incur a discount from the base pay rate. Broiler contracts also typically specify a minimum rate of pay that the grower can receive after all performance discounts have been applied. The broiler grower may receive additional incentives as components of total payment from the LPD to employ particular housing, equipment, management practices, fuel usage, or other contributions the LPD requests. Some of these incentive payments may be based on the delivered weight of each flock and others may be a fixed per flock amount.

There is some inconsistency in the use of payment terms across broiler contracts at different companies or complexes. Most grower contracts define the term base pay rate as it is described in this paragraph. However, some contracts instead use the term base pay when referring to a fixed amount plus the performance adjustment.

In a simplified example of how tournament systems operate, the LPD places flocks with 10 growers under contract to deliver the same-sized broiler chickens to the dealer's processing plant at the end of a specified growout period. Upon harvest, the LPD determines each grower's performance by measuring the quantity of feed and other inputs in the LPD's tournament formula (such as chicks supplied by the LPD or medicines) per pound of broilers produced by the grower. The LPD then compares individual grower ratios against average ratios for all growers in the settlement group and ranks individual growers according to their relative performance within the group of 10 growers. Each grower's pay is determined by adding a bonus to, or subtracting a discount from, the contract's stipulated base pay rate, calculated as the difference between the grower's ratio and the average ratio within the tournament grouping for that specific growout period. This is also known as a performance adjustment. For instance, if the grower's contract stated a base pay rate of $0.0550 per pound, an above-average grower (

i.e.,

a more efficient grower with a lower cost per pound produced) in this hypothetical example could receive $0.0615 after the performance adjustment, while a below-average grower could receive $0.0530.

LPDs benefit from the tournament system in several ways. The tournament system provides LPDs control and certainty over total compensation to the growers as a group. For each tournament, the LPD knows the total compensation that will be paid per pound of broilers produced by the group; that total amount is allocated among the growers through performance adjustments (amounts above, or deductions from, the base pay rate). LPDs also benefit from the tournament system to the extent it may incentivize additional grower effort and expenditure of resources beyond that required for the grower to remain in the LPD's rotation of growers.

The tournament system is intended to, and LPDs in fact purport that it does, reward growers financially for their experience, skill, effort, and investments in up-to-date and efficient housing and equipment.

Additionally, assuming that all growers in a tournament grouping are treated similarly and the variables within the tournament grouping are within the control of the growers, the tournament may insulate growers to some degree against external shocks that affect all growers in the grouping.

Examples of external shocks might include unfavorable weather, the introduction of new genetics, or changes in the LPD feed formulation. This protection can be incomplete, however, because these external shocks—some of which are within the control of the LPD—can adversely affect the overall weight of the broilers in a tournament affected by such shocks, thereby reducing the base weight compensation for all participating growers.

See,

e.g.,

“How the Tournament System Works”, National Chicken Council (informing farmers that: “1 All farmers are provided the same quality of chicks, the same feed, and access to veterinary care. 2 Farmers who invest in more advanced facilities, as well as use the best management practices will likely produce higher quality chickens more efficiently. 3 Farmers receive a base pay (per their contract) and potentially a bonus, based on the health and quantity of the flock (tournament system).”); available at

https://www.chickencheck.in/faq/tournament-system/

(last accessed May 22, 2024).

Knoeber and Thurman show that tournaments shift most of the risks of broiler production from broiler growers to LPDs relative to a fixed payment system. See Knoeber, C.R. and W.N. Thurman. “ `Don't Count Your Chickens . . .': Risk and Risk Shifting in the Broiler Industry,”

American Journal of Agricultural Economics

77 (August 1995) p. 486-496.

The tournament system can operate unfairly and deceptively. Without a guaranteed base pay rate, the complexity of the tournament makes it difficult for growers to clearly understand what the minimum amount is they could actually receive in payment. Base pay can be, but is not commonly, a guaranteed minimum pay.

(This is discussed in greater detail below in section III.A.) Furthermore, if the comparison-compensation factor (

i.e.,

the bonus or deduction) is a large percentage of total compensation, that variance in total grower compensation could turn a reliable business proposition into a high-risk venture without a demonstrable countervailing benefit. Therefore, sufficiently large variance in total grower compensation can, by itself, be deceptive and unfair. Moreover, because many broiler growers operate in regions with just one to two LPDs, the local market dynamics may force

growers to enter into riskier contracts, in particular, contracts that do not guarantee them an adequate minimum base pay rate, flock placements and stocking densities, or length of contract in relation to the loan obligations commonly necessary to engage in broiler growing.

See “A Bird's Eye View of How Chicken Farmers Are Paid”, National Chicken Council (informing farmers that: “All farmers are guaranteed a base pay from the chicken company per their contract.”; “No matter what, farmers get paid.”; and “Bonuses are given to farmers who raise healthy flocks and invest in their farm. This is referred to as the tournament system.”); available at

https://www.chickencheck.in/faq/tournament-system/

(last accessed May 22, 2024).

Compensation based on relative performance when LPDs control the distribution of inputs and assignment of production practices creates the potential for unfairness and deception. Nor are tournament pay systems an effective incentive system when factors outside of the grower's control largely determine performance. Unfortunately, growers have no choice but to rely on the good faith of LPDs for the fair administration of tournaments. They must trust that LPDs will use their extensive information and control to prevent or remedy situations where a particular grower within the tournament receives dissimilar inputs or the assignment of production practices that result in a substantial disadvantage to that grower within the settlement pool. They also must trust that LPDs will not use their control to advantage favored growers or to punish or otherwise impermissibly disadvantage growers.

The tournament system also introduces considerable complexity and uncertainty for growers in the calculation of the compensation for their services and in evaluating the returns on growers' investments, which can sometimes make it more difficult for growers to discover unscrupulous conduct by LPDs, to compare offers from competing LPDs, and to plan and manage their businesses.

D. Need for the Rulemaking

USDA has received concerns about the impact of unfair or non-transparent LPD practices from growers in listening sessions and during comment periods for more than a decade. In 2010, USDA held a series of workshops in conjunction with DOJ to hear from farmers about concentration and trade practice issues in agriculture. Normal, Alabama, hosted one such session with an emphasis on the poultry industry.

Many growers complained that their success or failure depended on factors controlled by LPDs and that LPDs required them to undertake additional capital investments. Further, growers expressed concern about the lack of choice among LPDs in many relevant regional markets, which further enhanced LPD's bargaining position and control over growers.

See Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010, Normal, Alabama.

Grower public comments at the 2010 workshop led USDA to propose rules in 2010 and 2016.

Growers have continued to communicate to USDA specific areas of concern regarding the poultry industry. Since 2021, AMS renewed its efforts to address these concerns through different approaches, one of these being the June 8, 2022, ANPR which informed this proposed rule.

Grain Inspection, Packers and Stockyards Administration (GIPSA), USDA, “Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008; Conduct in Violation of the Act,” 75 FR 35338 (June 22, 2010)

and

“Poultry Grower Ranking Systems,” 81 FR 92723 (Dec. 20, 2016).

In the ANPR, AMS sought comments and information to inform policy development and future rulemaking regarding the use of poultry grower ranking systems. The comment period for the original notice was June 8, 2022, to September 6, 2022. AMS provided additional time for the public to submit comments and extended the comment period to September 26, 2022. AMS received a total 168 comments, 153 during the first comment period and 15 during the second. Organizational commenters included farm bureaus, live poultry dealers, poultry industry trade associations, meat industry trade associations, and other associations or non-profit organization. Commenters expressed both support and concern about the use of tournaments in poultry production.

Many commenters supported the current poultry grower contracting system and opposed rulemaking. Commenters supporting the current poultry grower contracting system stated they believe it is well designed; efficient; and beneficial to growers, dealers, and consumers. Commenters were concerned that changes to or the elimination of the tournament system could have an adverse financial impact on LPDs. Commenters stated that they believe that the current system encourages efficient poultry production by providing greater payments to the most efficient poultry growers. Supporters contended the tournament system has fueled improvements and innovations, incentivized growers to raise birds ethically, and allowed for efficient risk management. They also stated that the Agency has failed to establish credible evidence of the existence of exploitation; that the proposed measures would address exploitation, if it existed; or, that the Agency has the statutory authority to engage in this exercise.

Other commenters opposed the current tournament payment system, stating that tournament systems do not meet their intended purpose and that the payment systems exemplify the manipulative and unjust abuses or practices that the Act was designed to prevent. They cited arbitrary, unjust, or punitive distribution of inputs and production variables, all of which are controlled by integrators; potential manipulation of the group composition for similar purposes; and penalties for even small deviations below average. Some commenters noted that LPDs often supply insufficient information with respect to requested or required upgrades and deceptively induce growers to make costly ACIs. Commenters also asserted that LPDs demand costly upgrades that are arbitrary and apparently untethered to any reasonable assurance of increased compensation. Some asserted that the tournament system operates instead as a cost-shifting mechanism that controls growers like employees while keeping them from collaborating in furtherance of their best interest. Commenters stated that proposed rulemaking would help address bargaining power imbalances for growers, provided proper enforcement. Commenters also requested that AMS establish a guaranteed base payment floor that would ensure the producer does not suffer a loss of income and can earn enough to exceed incurred debts. Trade organizations commented on how input variability affects pay and that LPDs are known to take action to reduce unpredictability in grower outcomes. Monitoring and intervention to remedy unfairness requires an LPD to expend effort and incur cost, and the LPD does not directly benefit from the increased fairness to growers. Therefore, the LPD has an incentive to shirk this responsibility.

Commenters echoed many of the same concerns that were voiced in the 2010 workshops and that animated previous unfinished rulemaking efforts. A survey conducted by the Rural Advanced Foundation International USA (RAFI) in preparation for its comments to the ANPR was particularly striking. The survey covered 105 growers from 17 States, with 90% active growers and 10% retired growers. At the broadest level, 94% of its growers expressed significant dissatisfaction with the design and operation of the tournament system, indicating that, “1. Tournament systems are generally unfair and pit growers against each other (75%). 2. Tournament systems are too often used to retaliate or discriminate against

growers (70%). 3. Tournament systems often negatively impact grower income (68%).”

Surveyed growers reported an astoundingly high percentage of problems, including: flock health problems (92%); suboptimal layer flock (92%); 6-hour feed disruption (90%); suboptimal flock pickup time (88%); 12-hour feed disruption (83%); incorrect feed mix (75%); extended layout times (73%); reduced stocking density (72%); arbitrarily disadvantageous tournament group placement (63%); low revenue generating breed (59%); feed delivery discrepancy (59%); reduced annual flock placement (54%); non-randomized flock gender (40%); retaliation via any of the above (25%); and more.

That comment also included multiple direct quotations from growers describing these types of experiences. The challenges that RAFI's growers report in their comments highlight the range of concerns with current practices in the broiler grower industry that remain unaddressed. “They don't have to cut you off, they can just bleed you dry,” said one grower in the RAFI letter, which encapsulates the challenge with both the arbitrariness and the control inherent in the design and operation of tournaments that benefits LPDs at the expense of growers. Commenters, including RAFI, highlighted expensive additional capital upgrades that unexpectedly burden growers, as well as inhibit the ability to switch integrators. Growers also reported informal “no poach” agreements and conscious parallelism among LPDs. According to the most recent large USDA survey on the topic, growers with the choice of only one integrator are paid six percent less than those with four or more integrators.

Rural Advancement International Foundation—USA, “Letter to S. Brett Offutt, Packers and Stockyards Division, USDA-AMS, Fair Trade Practices Program,” Filed as a comment to “Poultry Grower Tournament Systems: Fairness and Related Concerns,” Sept. 2022, pp. 15-18, available at

https://www.rafiusa.org/blog/comments-on-poultry-tournament-system/; https://www.rafiusa.org/wp-content/uploads/2022/09/RAFI-USA-Comment-on-Poultry-Growing-Tournament-System-Fairness.pdf.

James MacDonald and Nigel Key, Economic Research Services, USDA, “Market Power in Poultry Production Contracting? Evidence from a Farm Survey,”

Journal of Agricultural and Applied Economics,

November 2012, 44(04):477-490, available at

https://www.researchgate.net/publication/305948391_Market_Power_in_Poultry_Production_Contracting_Evidence_from_a_Farm_Survey.

Some of the largest LPDs have begun adopting contracts that ameliorate certain aspects of these persistent complaints. For example, some LPDs offer contracts where the base pay rate is the minimum pay and there are no negative performance adjustments. In response to an enforcement matter, one of the largest LPDs has also already limited the magnitude of comparison-based pay, in part to address related concerns.

This proposed rule takes note of and builds on that progress to align important farmer protections across the industry.

See

United States

Cargill Meat Solutions Corp. et al.

Civil Action No.: 1:22-cv-1821, District of Maryland, Final Judgement entered June 5, 2023.

III. Broiler Grower Compensation Design (Proposed § 201.106)

Current tournament contracts are unfair and deceptive when they mislead growers about expected revenue and the potential range of payment outcomes on a settlement-by-settlement basis—particularly when they are unclear about growers' practical ability to control the range of the payment outcomes. Both the lack of grower control over payment outcomes and the variability of the outcomes can be unfair. The complexity and opacity of current tournament contracts impair growers' ability to compare contract offers between LPDs. This section describes this problem in depth, discusses AMS's proposed regulation, and provides questions for commenters to consider, including around an additional proposal to limit excessive variability in pay.

A. Degradation of Contract Pay Rates in Tournament Payments

As explained in section II, “Industry Background and Need for the Rulemaking,” tournament contracts contain one or more pay rates that LPDs use as a basis to allocate compensation among growers in a flock settlement group. These pay rates are generally expressed in cents per pound. In most tournament contracts, positive relative performance (bonuses) will add to these rates while poor relative performance (discounts) will deduct from these rates, to reflect the grower's performance within a settlement group. Applying these adjustments, whether positive or negative, significantly affects growers' effective rates of compensation and net income.

In a 1999 survey conducted by Schrader and Wilson, 43 percent of growers reported earning income below their expectations.

In response to the ANPR for this proposed rule, some commenters contended that any ranking system is fundamentally unfair if it lacks a firm base pay rate. Some commenters stated that premiums should be determined by objective and transparent criteria, and a few suggested a capped or limited premium such as 25% of base pay or a percentage based on performance. An agricultural advocacy organization further acknowledged that a system in which performance-based incentives include only additive bonuses and not negative discounts could still be effective in fostering competition among growers. Another commenter noted that LPDs entice growers by representing that they can expect to earn the average pay provided to all growers, obscuring the fact that every settlement has winners and losers regardless of an individual grower's absolute performance. The Chair of the FTC, in response to the 2022 ANPR, commented that “poultry companies often function as local monopsonists or oligopsonists with the power to control prices, prescribe contract terms, and retaliate against growers who object to these tactics,” and that disclosure was valuable but insufficient to address the problem. A consumer advocacy group said tournament systems that dock pay based on relative performance can lead to capricious pay differences that do not accurately reflect differences in performance, such as cases where a grower who ranks last in a tournament at 10 percent below the average feed-to-weight conversion receives a 50 percent pay cut. Many of these and other commenters further recommended that AMS should set a price floor for grower pay rates to ensure growers can, among other things, earn reasonable profits and cover costs.

The 1999 survey was conducted by Lee Schrader of Purdue University and John Wilson of Duke University and included responses from over a thousand broiler growers in ten of the largest broiler-growing States (Alabama, Arkansas, Delaware, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Texas, and Virginia). This survey is cited frequently in this document because it included questions meant to assess the impact of broiler company practices on growers in contract poultry production. Although the survey is older, it was conducted by respected academic experts and provides information on the experiences of a broad sample of growers and covers specific questions of concern in this rulemaking. Based on AMS's experience, the survey is still relevant and useful as a reasonable reflection of the views of growers today. Lee Schrader and John Wilson, “Broiler Grower Survey Report,” in Farmers' Legal Action Group, Assessing the Impact of LPD Practices on Contract Poultry Growers, ed. Farmers' Legal Action Group (FLAG Survey) (September 2001).

http://www.flaginc.org/publication/assessing-the-impact-of-LPD-practices-on-contract-poultry-growers/,

last accessed 07/28/2023.

An organization representing LPDs countered that most poultry contracts already have a minimum “base” payment floor that performance-based adjustments to growers' “standard” or “average” pay cannot go below, and that AMS should not regulate this issue.

According to the commenter, if LPDs wanted to avoid passing on costs to consumers, they would be forced to lower their new base pay rate to keep the overall pool of money allocated to grower pay at a similar level, which means they would calculate all performance-based compensation bonuses based on this lower rate rather than on a rate equivalent to the current average pay. This commenter asserted this outcome would lead to an income redistribution from high-performing growers to low-performing growers, encouraging less efficient, and therefore costlier and less profitable, poultry production.

In carefully considering this issue, AMS analyzed a sampling of current contracts from a cross-section of ten LPDs, including at least one contract from each of the top five broiler companies identified in the WATT 2021 rankings

to evaluate their contract terminology and the significance of the gap between “base” and “minimum” pay rates. Seven out of ten, including the top five companies ranked, use the term “base” with reference to a pay rate that the LPD adjusts by tournament ranking. Two use the term “average”, and one uses the term “middle.” The differences between the “base” or “average” rate and the “minimum” rate were as high as 42 percent and as low as 13 percent, with an average of approximately 27 percent with “minimum” pay always lower than “base” pay. This serves as a rough proxy for the range of variation that may exist under different contracts, and thus demonstrates that the stated base pay rate is not representative of actual, ultimate pay to growers. In general, there is no limit (maximum) on bonus payments in most contracts. No contract in our sample used the term “base” to identify the actual minimum payment possible. This analysis also demonstrates that the disparity between “base” and “minimum” rates is often significant.

WATT PoultryUSA Top Companies Survey, 2021;

www.WATTPoultry.com;

accessed 12/13/2023.

After considering public comments and the results of its contract and settlement analyses, AMS has determined that the practice of discounting or reducing contract pay rates creates significant risk of deception or unfairness for growers. This practice conceals the true payment baseline, which makes it difficult for growers to compare broiler production contracts from LPDs competing for their services. This can reduce competition among LPDs for grower services and result in market inefficiencies. It can also inhibit growers' ability to plan and manage their businesses. A grower evaluating the expected value of these contracts can estimate potential earnings by reviewing a contract's stated “base” or “average” pay rates; however, growers are not able to precisely evaluate the “downside risk” (used here to refer to the financial risk associated with performing in the bottom half of the settlement pool). It is very difficult for a grower to estimate how much their pay rate might be discounted (

i.e.,

reduced below the stated base pay rate) based on their relative performance in the settlement pool. This is especially problematic because the design of the tournament system means that roughly half of growers will rank below average. Significant factors that affect tournament rankings—such as settlement groupings, inputs, and flock ages, the timing of collection for delivery, and weights—are outside growers' control.

Moreover, empirical research has shown that franchisees (whose relationships with franchisors in some respects look similar to the relationships growers have with LPDs) are overly optimistic in their expectations of their performance under the franchise agreement. In their review of the empirical literature, Benoliel and Buchan report that “although franchisees are often perceived as sophisticated business people, they systematically suffer from a common psychological bias: over-optimism about the future.”

Benoliel and Buchan's findings are consistent with previously cited comments from grower organizations suggesting that growers underestimate the possibility of below average outcomes, reflecting the same type of optimism bias reported for franchisees.

Benoliel, U. and J. Buchan. “Franchisees' Optimism Bias and the Inefficiency of the FTC Franchise Rule.”

DePaul Business and Commercial Law Journal

2015 13(3): p. 414.

Under section 202 of the P&S Act, the practice of discounting disclosed “base” pay rates in broiler contracts is an unfair and deceptive practice. The use by LPDs of contracts that fail to clearly state an accurate rate of compensation obscures substantial and unavoidable downside risk. Under this system, growers must estimate future earnings using contractually stated “base” pay rates, rates that, by the design of the system, LPDs know will not be realized by roughly half of the settlement group. Additionally, this lack of clarity in contracting terms impedes growers' ability to meaningfully compare competing offers from other LPDs in markets where growers are fortunate enough to have more than one or two LPDs to contract with. AMS's analysis of unfair and deceptive trade practices in poultry contracts is informed by prior P&S Act case law and States' unfair practice laws. Additionally, the FTC's extensive experience enforcing prohibitions against unfair practices and unfair methods of competition arising under the FTC Act has, in part, informed this proposal.

See

e.g.

Michael Kades, “Protecting livestock producers and chicken growers,” Washington Center for Equitable Growth (May 2022), discussing FTC Policy Statement on Unfairness, 1980, available at

https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness

(last accessed Jan. 2024); Federal Trade Commission: Policy Statement on the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, Nov. 2022, available at

https://www.ftc.gov/legal-library/browse/policy-statement-regarding-scope-unfair-methods-competition-under-section-5-federal-trade-commission.

In conclusion, deductions from the contractually stated base pay rate create variance in pay that harms growers and their ability to accurately assess the risk they are taking, which is particularly problematic given the risk they bear. Further, these growers cannot reasonably avoid this harm if they wish to become or continue to be growers. Finally, AMS has not found any evidence that poultry tournament systems that include deductions from the base pay rate provide a benefit to growers or competition in the market for grower services that outweighs the harm to growers. Deductions in other livestock contracts commonly reflect performance within the control of the producer. This deceptive poultry discounting practice creates an unfair competitive advantage for LPDs who use it relative to LPDs who do not discount the base pay rate. The widespread adoption of these types of contracts has frustrated fair competition, instead of enhancing it. Such discounting also is a reflection of the market power of the LPDs.

B. Summary of Proposed § 201.106

AMS is proposing to add a new § 201.106 titled, “Broiler grower compensation design.” This proposed provision would prohibit the reduction, or discounting, of any compensation rate under the broiler growing arrangement on account of a comparison to other growers. That is, when a broiler growing arrangement between an LPD and the grower provides for the grower's compensation (which is commonly determined by a weight-based rate), the broiler growing arrangement would

clearly state that rate and not provide for further mechanisms or calculations that would reduce that rate based on the grower's performance relative to other growers. The broiler growing arrangement could provide for the rate to be increased based on the broiler grower's performance relative to others, but in no event could the rate be decreased or discounted by that comparison. As used in this proposed rule, “rate of compensation” refers to any payment amount that the LPD utilizes to compensate the grower under a broiler growing arrangement, which could include “base pay,” “minimum pay,” or any other rate defined in the contract. That rate would have to be prominently and clearly defined as the guaranteed level of pay a grower will receive if they perform to the minimum specifications of the relevant provisions of the contract. To the extent that a broiler growing arrangement had more than one rate of compensation, none of the rates could be reduced or discounted by a comparison. Under existing AMS regulations, a broiler growing arrangement must include all payment terms in the contract (9 CFR 201.100(c)(2).

Prohibiting the discounting or reduction of rates of compensation would provide growers greater clarity regarding the minimum payments they could earn under compensation rates stated in the broiler growing arrangement, thus better enabling them to properly evaluate their base pay rate under the arrangement prior to entering the contract. The proposed rule's prohibition against discounting or reducing the rate of compensation disclosed in the contract would provide growers with an assured minimum payment when they satisfy their responsibilities under the agreement. Increased clarity regarding the rate of compensation may also enable new growers to better determine how they will perform under the tournament system before they undertake costly investments. Experienced growers may benefit as well, especially in advance of any potential capital investments.

This proposed rule would prohibit LPDs from misleading growers with the presentation of a compensation design whereby the grower receives an income lower than expected under a rate of compensation in the broiler growing arrangement. As noted above, minimum pay is a payment term that would be required be disclosed under the terms of broiler growing arrangement. (9 CFR 201.100(c)(2).) This proposed rule would also protect growers against the risk of unavoidable discounts. While a grower may miss out on additional income, the LPD would not be permitted to discount the grower's pay below the expected rate of compensation that was disclosed to the grower and relied upon by the grower when making the decision to participate in the broiler growing arrangement. AMS emphasizes that it may also be a deceptive practice were an LPD to make representations during the contracting process that implied most growers will get bonuses or are otherwise likely to earn more than the minimum where such representations were false, misleading, or contained material omissions or were otherwise not in compliance with other relevant rules and regulations under the Act. (9 CFR 201.102.)

AMS expects that LPDs will still be able to pay a grower to elicit a competitive level of performance using a design that conforms to the requirements of this proposed rule. The LPD could reward performance for feed efficiency relative to the growers in the settlement with a minimum base pay rate per pound and an upward adjustment to the payment formula. A compensation structure without a penalty or reduction from a true guaranteed minimum pay rate, however, may still be unfair and/or deceptive if facts and circumstances demonstrate an unlawful exercise of market power or other legally unjustified means. For example, if the variable income (from the range of bonuses) is large relative to the grower's potential total compensation, the grower may still be unable to reasonably estimate actual payments. The variability of payments alone may create unjustifiable risk for the grower. As a result, the compensation system could still be unfair and/or deceptive. We are seeking comment, as noted below, on the best way to assess such unfairness and/or deception.

Based on AMS experience (including investigations and reviews of contracts), many LPDs already separately identify bonuses to incentivize capital investments as additions to a base pay rate. Under most current LPD grower contracts, growers receive these additions to the base pay rate before the performance adjustment. Under the proposed rule, LPDs would be prohibited from making any adjustments to discount or reduce the rate of compensation disclosed in the contract. LPDs can adhere to this requirement without changing the total expenditure per pound of broilers or performance incentive structure used in most contracts, despite the new base pay rate being the true guaranteed minimum pay rate. Clearly rewarding performance above the base would give growers clarity regarding which elements of their pay are based solely on the weight of the delivered flock and which elements reflect their performance relative to other growers. Virtually all growout contracts currently have a minimum pay, but it is often not clear how that minimum relates to performance pay. As noted earlier, some of the largest LPDs have already adopted contracts at some complexes where the base pay rate is the minimum pay and there are no negative performance adjustments.

AMS emphasizes that the proposed rule would not absolve the LPDs of liability under section 202 of the Act arising in other ways from any particular tournament system or tournament systems overall, including from any rate, distribution, or variability of compensation. Excessive variability in total pay can make it difficult for growers to estimate likely earnings and can unfairly transfer costs or risk from the LPDs to growers. Such a system also means a substantial number of growers may not be able earn a reasonable return. For example, if an LPD set the base pay rate at $0.01, AMS would almost certainly find that this violates section 202. If the base pay rate does not reasonably guarantee that the grower can make loan payments, which are known to the LPD, the compensation system is likely unfair. Likewise, if the base pay rate is suppressed below competitive levels (due to an unlawful exercise of market power or other legally unjustifiable means) and does not provide a reasonable return considering the operating costs and the costs of investments over the long term, the compensation system may still be unfair.

Neither this proposed § 201.106, nor proposed §§ 201.110 or 201.112, purport to alleviate all potential unfair aspects of the tournament system or of the integrated model of broiler production. At this time, AMS proposes enforcement on a case-by-case basis to remedy other particular aspects of tournament system unfairness, including issues arising from excessive variability in payments. For example, the Department of Justice, upon referral by USDA, entered into a settlement with LPDs for P&S Act violations.

That settlement barred processors from discounting base pay rate compensation and capped total relative (comparison-based) compensation at 25 percent of the total of base pay rate plus

performance compensation. AMS believes that this approach alleviates extreme variability as an aspect of existing tournament system unfairness and believes that compensation variability beyond 25 percent is presumptively unfair, whether as a function of the tournament system or as a result of other payment practices utilized by LPDs in the integrated model of broiler production.

See

United States

Cargill Meat Solutions Corp. et al.

Civil Action No.: 1:22-cv-1821, District of Maryland, Final Judgement entered June 5, 2023.

Ibid.

In support of that goal, AMS believes that the clarity and simplicity provided by the proposed rule's prohibition on deductions will assist AMS and growers in identifying the presence of such concerns, and thus will assist AMS in any further review regarding unfairness overall. As noted, we are also seeking comment on whether other options would work more effectively. In particular, AMS asks below (in section III.C.) whether it should be more prescriptive in the proposed rule, including whether it should adopt requirements to document or disclose processes related to the proportion of relative pay to the base pay rate, whether this proportion should be limited in all circumstances, and whether and how to establish a methodology for evaluating unfairness where the minimum base pay rate for growers was not reasonably likely to deliver a fair return. It also seeks feedback on whether these requirements should apply to payment systems that are not a tournament but may be otherwise unfair or deceptive due to asymmetrical power and other dynamics in the integrated model of broiler production. We also seek comment on the economic outcomes from these possibilities, including whether they would change the performance incentive structure, in particular whether it would raise total grower compensation by increasing total expenditure or whether it would adjust performance payments within the existing total expenditure.

Under proposed § 201.106, LPDs may not reduce any rate of compensation under a broiler growing arrangement based upon the grower's grouping, ranking, or comparison to other growers in the grower ranking system. Further, because optimism bias may dilute the effect of disclosure—and because disclosure is not always a sufficient remedy for an unfair act or device—this proposed rule is intended to complement existing regimes aimed at improving transparency and fairness in the poultry industry.

Improved clarity in the presentation of payment systems would enhance the effectiveness of disclosure requirements and is intended to bring to light unfairness in other aspects of payment systems.

See, e.g., generally

9 CFR 201.100, 9 CFR 201.215-218.

AMS expects that LPDs would comply with this proposed rule by desisting from discounting any rate of pay under the broiler growing arrangement and instead utilizing a minimum rate of pay with comparison-based performance bonuses paid in addition to the new minimum base pay rate. AMS is attentive to the risk that LPDs would lower the base pay rate beyond what the grower expects to be the minimum based on the broiler growing arrangement or LPD promises and grower expectations. Those concerns may be particularly acute where the bonus is large relative to the base compensation. AMS is also attentive to concerns that growers may not have entered into their current contracts had a clear base pay rate been disclosed.

Accordingly, AMS also asks questions below regarding whether to establish limitations on the lowering of the base pay rate, such as by establishing a backstop or criteria based on existing obligations under the present contract with the grower; by using a relationship between pay per pound (pool payments) at the complex and the minimum pay; by setting a hard limitation on the proportion of comparison-based pay to total pay (such as 25 percent of the sum of base plus comparison-based performance pay

); or by requiring a base pay rate that makes a reasonable return likely if the grower delivers under the contract. In addition, AMS inquires on the advisability of AMS reviewing contracts for compliance with the transition limitations, as well as for how long those limitations should be in place.

Wayne-Sanderson, DOJ Consent Decree, June 25, 2022, available at

https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and-proposed-consent-decrees-end-long-running-conspiracy.

Enforcement of § 201.106 could occur in several ways. Growers would contact AMS to submit a complaint regarding an alleged violation of § 201.106. AMS would investigate, which could lead to referral to DOJ for appropriate action or, where failure to pay is implicated, USDA enforcement through administrative action.

AMS also would review LPD contracts, along with other required records from the LPD (including with respect to actual payments made), in connection with routine compliance reviews and investigations. Injured individuals would also have a right to proceed directly in Federal court.

Additional information on reporting violations of the P&S Act can be found here:

https://www.ams.usda.gov/services/enforcement/psd/reporting-violations

(last accessed 11/13/2023).

C. Questions

AMS specifically invites comments on various aspects of the proposal as described above. Please fully explain all views and alternative solutions or suggestions, supplying examples and data or other information to support those views where possible. Parties who wish to comment anonymously may do so by entering “N/A” in the fields that would identify the commenter. While comments on any aspect of the proposed rule are welcome, AMS specifically solicits comments on the following:

1. Does proposed § 201.106 effectively and appropriately address concerns that growers have expressed in increasing transparency, understandability, fairness, or certainty as to compensation under a comparison system or otherwise benefit growers in reducing deception and/or unfairness? How might this rulemaking more effectively and appropriately ensure that what growers can reasonably expect regarding their compensation (based on disclosures in the contract or otherwise) matches what growers actually receive? If the proposal will be effective, why? If not effective, in what ways can it better do so?

2. AMS has indicated that if the base pay rate is suppressed below the competitive levels, such as due to the LPD's unlawful exercise of market power or other legally unjustified means, and does not provide a reasonable return considering the operating costs and the costs of investments over the long term, the compensation system may be unfair. Should AMS adopt a rule that more prescriptively requires that the base pay rate must be expected to provide a reasonable opportunity for a grower that delivers under the contract to earn a reasonable return if they comply generally with the specified production practices? If so, please describe the rationale and methodology to be applied (including whether and how it should account for local market power dynamics); and, if not, would another approach be more effective?

3. Is it presumptively unfair for comparison-based compensation to equal or exceed 25 percent of total (base pay rate plus comparison-based) compensation for any grower? If so, is the 25 percent threshold the appropriate portion to presume unfairness, and is it most effective if calculated at the complex level or at the individual grower level?

4. Is case-by-case enforcement on the fairness of the total comparison-based bonus effective? Should AMS include a paragraph (b) to proposed § 201.106 stating that, “Although unfairness will be determined on a case by case basis, the LPD shall be deemed presumptively in violation of this paragraph (b) if: on an annual basis at any complex [for any grower] of the LPD, the amount of Performance Payments exceeds 25% of the sum of Performance Payments and Base Payments, where `Performance Payments' are the compensation paid to broiler grower that is subject to adjustment based upon the relative performance in a grouping, ranking, or other comparison of broiler growers; and `Base Payments' are all compensation that is guaranteed to be paid to broiler growers.”?

5. Please comment on the expected response to the inclusion of the provision described in question 4. In particular, how likely is the provision to be a binding constraint at either the grower or complex level? When the constraint is binding, would LPDs be likely to raise base pay and/or limit performance payments—thus reducing the difference between top and bottom performing growers—without increasing total grower compensation expenditures? Would LPDs also change the types of growers they contract with, for example in terms of size or performance?

6. If AMS were to include the provision described in question 4, would LPDs be likely to provide non-comparison-based incentives (such as per pound or per square foot compensation for housing known to provide efficiencies to the LPD), or deploy other incentives (such as fixed performance bonuses)? Would total grower compensation expenditures by LPDs be expected to increase under these other incentives? How would this vary with or depend upon grower characteristics (

e.g.,

size, individual management ability, or investment) or market conditions?

7. How would the inclusion of the provision described in question 4 affect the relationship between tournament compensation systems and additional capital investments? Would it help to ensure that growers receive adequate compensation for ACIs?

8. What additional requirements would help ensure compliance with this proposed rule such that grower comparison-based unfair and deceptive reductions or discounts to compensation are eliminated, while continuing to permit payment designed to incentivize performance? Please provide as much detail as possible regarding the relationship between payment and performance, any injuries to growers and whether they can be avoided, the effects on other growers and competition, and what data sources AMS should examine to evaluate these concerns more effectively.

9. Should AMS require LPDs to document or disclose the process they use to establish the proportion of total grower pay that is determined by comparing a grower's performance to other growers' performance? Should regulations require documentation of comparisons designed to prevent unfair or unreasonable levels of relative performance-based pay? Should regulations require companies to report how the proportion of comparison-based performance pay to total pay incentivizes effort, grower investment, and other outcomes? If AMS creates these documentation responsibilities, should this be done based on an individual grower or complex-wide basis?

10. What specific burdens might LPDs face in complying with this proposed rule? Would this require LPDs to substantially modify their business model? If so, what specific modifications would be required and why?

11. What risks might growers and/or LPDs face during any transition to the proposed § 201.106? How might AMS mitigate transition risks? How might AMS more fully account for unfairness and deception that may have occurred in the course of contracting for the current broiler growing arrangement? Should AMS establish a backstop for this regulation or set out criteria based on existing obligations under the present contract with the grower (

e.g.,

requiring that the current base pay rate be the new minimum rate, or requiring current payments overall remain comparable), on a relationship between compensation per pound (pool payments) at the complex and the minimum pay, or on the proportion of comparison-based compensation for a grower (such as a limit to 25 percent of total compensation). If so, how long should any transition limitations extend?

12. To minimize transition risks to growers, should AMS include a requirement that LPDs submit to AMS for review any contracts modified or revised to comply with new § 201.106? Should compensation data be required to be submitted for review? Should AMS review of modified or revised contracts during any transition assess the changes made to ensure LPDs have not reduced total aggregated and individual grower payments in such a way that is inconsistent with payment expectations under the original contracts?

13. Should AMS make the effective date for the provisions of this proposed rule 180 days following publication of the final rule in the

Federal Register

? If you recommend shorter or longer for some or all of the provisions, please explain why.

IV. Operation of Broiler Grower Ranking Systems (Proposed § 201.110)

Under the tournament system, LPDs control the inputs and production practices assigned to growers. Therefore, LPDs unfairly affect grower payments when they compare growers without taking action to manage and mitigate unequal inputs or unfavorable production practices over one or more tournament settlements. This section describes this issue in depth, discusses AMS's proposed regulation, and provides questions for commenters to consider.

A. The Act Prohibits Certain Aspects of Current Tournament Practices

As described above in section II, “Industry Background and Need for the Rulemaking,” LPDs control the inputs and production practices growers use to compete under the tournament system. LPDs generally promise that tournaments provide growers with the same inputs, production practices, and contract-related services.

Yet LPDs do not have sufficient incentive to ensure the design or operation of a fair ranking system for growers. LPDs commonly do not adequately specify in their contracts their obligations regarding the operation of the tournament. LPDs benefit from information asymmetries relative to their growers. LPDs also commonly do not adequately perform under their contracts with growers, failing to meet growers' reasonable expectations relating to contractual performance or behaving in a punitive or inequitable manner to growers.

See,

e.g.,

https://www.chickencheck.in/faq/tournament-system/

(last accessed May 22, 2024).

The harms of an unfair tournament system fall disproportionately on growers. The benefits of increasing fairness in the tournament to the LPD may not justify the costs in providing greater fairness. Many growers and grower representatives responding to the ANPR for this proposed rule expressed concern regarding the extent to which variability in inputs can affect

grower performance and thus pay. Commenters stressed the problematic nature of LPD control over inputs and the resulting potential for poor-quality inputs to affect broiler grower compensation. These commenters said LPDs' discretion over the distribution of inputs and flock production practices gives them control over almost all factors affecting a grower's final performance, such as health, breed, and gender composition of flocks; age of breeder flocks; number of birds placed; amount, quality, and timing of food; medical care provided; and flock pick-up. Although some industry trade associations commented in response to the ANPR that the tournament system worked effectively to manage these risks, other industry commenters noted that without adequate safeguards to manage and mitigate input and production practice differences, the tournament system is coercive, predatory, and deceptive because it denies growers the ability to earn based on their skills, efforts, and investments.

Several of these commenters emphasized that LPDs are unlikely to acknowledge variability in their distribution of these inputs to growers or engage in timely communication and cooperation to address what growers believe is the inappropriate provision of input or production practices. Commenters also asserted that LPDs sometimes intentionally deliver inappropriate inputs and assign inappropriate production practices to growers (

e.g.,

by providing high percentages of sick chicks, delivering feed designed for older birds to new birds, or delaying pickup) to penalize growers or force contract termination. According to commenters, even unintentional input variability can lead to unfair comparisons within a tournament group. These commenters indicated poultry growers who receive lower quality inputs (including inputs inappropriate for the type or age of the bird) are likely to rank lower compared to those who receive better inputs, and consequently, receive lower pay than the rate disclosed in the growing contract. Some commenters asserted that issues with the availability and quality (including appropriateness) of feed are especially common. In response to the ANPR, a North Carolina non-profit organization conducted an anonymous contract grower survey in 2022.

Ninety-six percent of poultry growers surveyed reported a negative impact on their income due to feed disruption, receipt of incorrect feed mixes for a flock's growth stage, or receipt of less feed than stated on their feed load receipt.

Rural Advancement Foundation International-USA, “Comment on AMS-FTPP-22-0046: Poultry Growing Tournament Systems: Fairness and Related Concerns” (received Sept. 26, 2022), available at

https://www.regulations.gov/comment/AMS-FTPP-22-0046-0166.

Studies demonstrate that differences in production practices and inputs, such as stocking density, slaughter weight, bird gender, and breeder flock age, can impact the performance metrics used in determining the performance adjustments in tournament payment systems.

Some breeds, for example, may exhibit faster growth rates, which may result in heavier farm weights and better feed conversion rates than other breeds.

A major genetics company, Cobb-Vantress, reports substantially different feed conversion rates and finishing weights for three of the most commonly used commercial broiler breeds. AMS investigations and analyses have likewise found situations where growers' performance increased with some inputs compared to others and that growers performed better when assigned certain production practices rather than others.

Dozier III, W.A., et al. “Stocking Density Effects on Growth Performance and Processing Yields of Heavy Broilers,”

Poultry Science

84 (2005): 1332- 1338; Puron, Diego et al. “Broiler performance at different stocking densities.”

Journal of Applied Poultry Research

4.1:55-60 (1995). Burke, William and Peter J. Sharp. “Sex Differences in Body Weight of Chicken Embryos.”

Poultry Science

68.6 (1989): 805-810; Beg, Mah, et al.

Effects of Separate Sex Growing on Performance and Metabolic Disorders of Broilers.

Diss. Faculty of Animal Science and Veterinary Medicine, Sher-e-Bangla Agricultural University, Dhaka, Bangladesh, 2016; Wilson, H.R. “Interrelationships of Egg Size, Chick Size, Posthatching Growth and Hatchability.”

World's Poultry Science Journal

47.1 (1991): 5-20; Washburn, K.W., and R.A. Guill. “Relationship of Embryo Weight as a Percent of Egg Weight to Efficiency of Feed Utilization in the Hatched Chick.” Poultry Science 53.2 (1974): 766-769; Weatherup, S.T.C., and W.H. Foster. “A Description of the Curve Relating Egg Weight and Age of Hen.” British Poultry Science 21.6 (1980): 511-519; University of Kentucky/Kentucky Poultry Federation, Poultry Production Manual,

https://afs.ca.uky.edu/poultry/production-manual

(uky.edu), last accessed 08/21/2023.

Cobb500TM Broiler Performance & Nutrition Supplement (2022), Cobb-Vantress; Cobb700TM Broiler Supplement, Cobb-Vantress, 2022; Ross 308/Ross 308FF Broiler Performance Objectives 2019, Aviagen Ross,

http://eu.aviagen.com/tech-center/download/1339/Ross308-308FF-BroilerPO2019-EN.pdf,

accessed March 25, 2022.

See, e.g.,

Dkt. No. 12-0123 (USDA March 8, 2013).

In response to the ANPR, LPDs and trade associations representing them noted the challenges in trying to determine standards to regulate distribution of inputs and production practices among growers. A meat industry trade association indicated that LPDs are known to take action to reduce unpredictability in grower outcomes, such as contracts that evaluate performance over multiple flocks and contract pay adjustments for factors outside growers' control. For example, some LPDs adjust payments for different densities of birds placed or provide credits for excess seven-day death loss. AMS investigations have also found that some LPDs will attempt to ensure that broiler growers do not receive chicks from young laying hens too often because this can negatively affect growers' tournament performance. Some LPDs will communicate and correct ordinary problems on a timely basis, which helps growers avoid unintentionally punitive outcomes than would otherwise be the case. Yet these claimed practices are not universal and depend extensively on the goodwill of the LPD, commonly via the manager of the local complex. This dynamic leaves considerable room for local complexes to make discretionary decisions that may harm growers. While LPDs regularly maintain extensive grower manuals, there is currently no requirement that manuals address the range of situations that can undermine a fair comparison or monitor whether the local complexes comply with that manual in practice.

LPDs would incur the costs associated with ensuring the fair operation of their tournaments, while the benefits of a fairly operated tournament would accrue primarily to broiler growers. However, LPDs' substantial bargaining power, growers' risk, and growers' inability to reasonably avoid the tournament system (or other payment systems that effect similar dynamics arising from unfair distribution of inputs and assignment of production practices) require that LPDs provide a basic level of fairness for growers.

AMS acknowledges that some variability in input quality is unavoidable: not all chicks or inputs controlled by the LPD could ever be identical. Moreover, the ability of an LPD to adapt regarding input decisions and production practices is necessary to respond to external conditions. While these changes can dramatically, and sometimes disastrously, affect overall compensation for growers, these changes may not significantly affect the distribution of the relative performance component of compensation among rival growers. That is, if LPDs provide all growers in a tournament group similar-quality inputs and compare growers using similar flock production practices, or if they take steps to balance these differences over time or otherwise adjust pay to account for the relevant differences, these components under LPD control may not unfairly affect growers. In situations where LPDs rank

growers against growers who have received higher-quality inputs-or who operated under more favorable production practices-without taking effective steps to make appropriate adjustments, the tournament operation itself is unfair because the growers who received lower-quality inputs or less favorable production practices will likely receive lower pay compared to the rest of the tournament group through no fault of their own. The ranking in the tournament will not reflect the grower's actual performance.

Because different inputs and flock production practices affect performance under the tournament, and therefore a component of grower payments, an LPD has committed an unfair and deceptive practice under the Act when it operates a tournament that uses arbitrary or inequitable delivery of inputs and production practices—that is, without establishing systems to manage and mitigate material differences in inputs and production practices among growers in a comparison group. This duty of a fair comparison also arises out of the Act's prohibitions on unjust discrimination, the manipulation of prices, and failure to pay. Violations of the Act include an LPD failing to maintain policies and procedures necessary to document the company's compliance with those fair comparison duties, owing to the Act's recordkeeping authorities (7 U.S.C. 221).

Current tournament practices are persistent and prevalent across the industry, giving rise to industry-wide harm because even small pay differences cause significant harms in the aggregate. As supported by the response to the ANPR, growers have complained to AMS over the years of arbitrary, inequitable, and sometimes punitive delivery of adverse inputs or unfavorable production practices in successive tournaments. Growers cannot avoid the impact of adverse inputs and unfavorable production practices on their performance. For example, LPDs determine the type, quality, and number of chicks delivered to a grower per square foot of housing, handle the delivery of feed, and determine the age at which they collect the chickens.

As discussed in section II, the tournament system can sometimes reduce harm to growers from external shocks (such as adverse weather conditions) and may enhance competition among growers in ways that, at least in theory, can improve grower productivity. Yet arbitrary or inequitable differences in inputs and production practices are not an essential feature of delivering those benefits; in fact, they undermine them. Arbitrary or otherwise inequitable differences run contrary to the theoretical design of the tournament system and the description of the tournament system that the industry itself provides.

In theory, LPDs would provide the optimal mix of inputs to all growers to yield an overall better final product and in turn yield a larger profit. However, differences in inputs will exist, and LPDs want to obtain full value out of all usable inputs—even if those inputs perform differently. LPDs also have limited financial incentive to engage in the effort to evenly distribute inputs and production practices across growers in a settlement pool. Indeed, growers have commonly asserted that the “noisy” grower who complains more to local agents is commonly believed to more readily be tendered “bad” or otherwise inappropriate, untimely, etc., inputs or flock production practices. The question is thus how to manage those differences to ensure a fair comparison between growers. For example, breeders have a lifecycle of 50 weeks. They produce optimal chicks between weeks 20-34, but they also produce chicks that have value outside the optimal window. The LPD has a financial incentive to grow all these chicks to maturity, and therefore will distribute higher- and lower-quality chicks in any one settlement period. Growers who receive a higher proportion of suboptimal chicks are disadvantaged in a relative comparison to growers who received a higher proportion of optimal chicks. The LPD's general incentive is to use all the chicks, regardless of how they are distributed among growers.

Because the tournament system functions to allocate a component of grower pay, LPD practices that impair the fairness of the comparison result in a misallocation of performance compensation, thereby unfairly reducing the compensation that may otherwise be due to some growers in violation of section 410 of the Act. Section 410 requires full payment if LPDs fail to compensate or supplement the compensation of affected growers though alternative means. Further, AMS's analysis of unfair and deceptive trade practices in the operation of these comparisons has been informed by prior P&S Act case law, States' unfair practice laws, as well as the FTC approach to unfair practices and unfair methods of competition.

For this part of the proposed rule, AMS seeks to build on the series of poultry practices regulations that it has adopted over the years, including 9 CFR 201.100 (which requires various settlement and other disclosures), 9 CFR 201.215 through 218 (which provide various protections against unfair and deceptive practices relating to the suspension of delivery of birds, additional capital investments, reasonable time to remedy a breach of contract, and arbitration), and other provisions, as well as enforcement actions in response to grower complaints about the tournament system and its operation. This proposed rule would require that broiler grower ranking systems contain adequate safeguards necessary to ensure that they function fairly and as described to growers in their contracts.

When an LPD describes the tournament system under the broiler growing arrangement as delivering certain outcomes for growers, yet the LPD does not implement sufficient processes to ensure a fair comparison in the tournament system, the LPD is exploiting the asymmetric information gap, as well as the gap in bargaining power and hold up, between the LPD and growers. From the perspective of a reasonable grower, this is misleading and harmful. It also gives rise to harms that growers cannot avoid. Such harm includes the loss of earnings. In some cases, it includes targeted coercion, retribution, or manipulation of prices from the strategic deployment of inappropriate inputs or flock production practices, as well as LPD failure to communicate or address concerns. These unfair and deceptive practices are impermissible under the Act.

In addition, under those circumstances, LPDs compete in a market in which the incentive is to avoid their obligations and at times deploy tournament operational differences to obtain coercive or punitive ends. Pervasive deception in contractual relationships, breach of contract, or the use of coercion or retribution in markets are not beneficial to competition. The grower may not have entered into the contract knowing that the tournament would be deceptively or unfairly manipulated to the grower's disadvantage, and the grower has an expectation that the LPD will make a good faith effort to distribute inputs and production practices evenly. Boilerplate disclosure that seeks to limit an LPD's commitment to good faith implementation of tournament practices does not cure the deception either, because the LPD maintains full control over the inputs and flock production practices, which are at the very heart of the LPD's offer to growers under a contract. Disclosure is not a remedy for unfair practices by LPDs.

LPDs' existing recordkeeping regarding the design and ongoing

operation of their tournaments is insufficient for AMS to monitor the ongoing transactions between LPDs and growers as it relates to allocation of payment for grower services. LPDs do not currently maintain clearly written processes describing how and when the LPD distributes inputs and deploys flock production practices, makes adjustments to comparisons or deploys non-comparison compensation methods, and responds to complaints. Existing LPD records have tended to lack sufficient documentation that would allow for systematic examination of the reasoning for changes in the inputs, flock production practices, or communication practices assigned to particular growers, either as designed or during operation of the tournament. Therefore, even when LPDs provide the details of those input or flock production practices to AMS investigators, the insufficiency of the documentation impedes AMS's ability to reconstruct an LPD's reasoning for its decisions. LPD communications and complaint monitoring documentation has also been lacking. Further, AMS has encountered challenges within LPD organizations regarding corporate management's ability to record and monitor practices occurring at local complexes. AMS's enforcement of the Act is hampered when corporate management lacks documented processes and records to explain why coercive and retributive practices appear to have been deployed at local complexes despite corporate management's assurance that coercion and retribution are not a factor in the assignment of inputs and flock production practices; enforcement is also hampered when LPD corporate management lacks documented processes and records to explain an LPD's purported failure to address complaints.

B. Summary of Proposed § 201.110

AMS is proposing to add a new § 201.110, “Operation of broiler grower ranking systems,” to regulate LPDs' operation of ranking systems (

i.e.,

tournaments) for broiler growers. Paragraph (a) establishes an LPD duty of fair comparison in tournaments. This duty of fair comparison would require LPDs to structure their tournament system in a manner that will provide a fair comparison among growers. AMS acknowledges that there may be instances in which a fair comparison is not possible. AMS recognizes unforeseen differences in inputs or other circumstances occasionally prevent fair comparison in a tournament. In those instances, an LPD must compensate growers through a non-comparison method specified in the contract that reflects a reasonable compensation to the grower for its services.

Thus, under § 201.110(a) the Secretary would evaluate specific factors to determine if a poultry grower ranking system (

i.e.,

tournament) is reasonably designed to deliver a fair comparison among growers. Paragraph (a)(1) would require that LPDs providing compensation to broiler growers based upon a grouping, ranking, or comparison of growers delivering poultry design and operate their poultry grower ranking system in a manner that would provide a fair comparison among growers. Paragraph (a)(2) would establish the factors the Secretary will consider in determining whether an LPD reasonably designed its poultry grower ranking system to deliver a fair comparison among growers or whether the LPD must utilize a non-comparison compensation method. Paragraph (a)(3) would require that when an LPD uses a poultry grower ranking system and cannot conduct a fair comparison for one or more growers, the LPD must compensate those growers through a non-comparison method specified in the contract that reflects reasonable compensation to the grower for its services. The non-comparison method is intended to fairly compensate the grower and therefore, absent special circumstances where a rationale and an agreement to do otherwise are reasonable and appropriate (and documented as such), would need to be equal to or more than what the comparison-based compensation rate would have delivered. The provisions of paragraph (a) are described in more detail below.

Paragraph (b) would establish documentation requirements regarding the processes (policies and procedures) the LPD maintains for the design and operation of poultry grower ranking systems for broiler growers. AMS is proposing this provision to ensure that the LPD would maintain a full and complete record of every aspect of the tournament system structure. This recordkeeping system would provide AMS with the information needed to determine whether the tournament is, in fact, following principles of fairness laid out in proposed paragraph (a). Paragraph (b)(1) would require that LPDs establish and maintain written documentation of their processes for the design and operation of a poultry grower ranking system that is consistent with the duty of fair comparison; paragraph (b)(1) also delineates the items the written documentation must include. Paragraph (b)(2) would require that LPDs review their compliance with those processes not less than once every two years and delineates the requirements of that review. Paragraph (b)(3) would require that LPDs retain all written records relevant to their compliance with paragraph (b) for no less than five years from the date of record creation. These provisions, their anticipated effect, and compliance requirements are discussed in more detail below.

Section 201.110(a)(1) would require LPDs to design and operate their poultry grower ranking system to provide a fair comparison among growers. The proposed rule would focus on how LPDs address inputs and flock production practices, as well as flexibility and communications practices controlled by the LPD that impact grower payment. LPDs have a multitude of means to maintain fair comparisons, including correcting inputs or production practices inappropriately delivered, extending the time period over which the comparison is made, adjusting payment for certain inputs or production practice differences, removing growers from tournaments where a fair comparison is not possible, etc. LPDs are in violation of the Act when they do not design and deploy, based on the particular circumstances of their businesses, those tools to deliver a fair comparison.

Section 201.110(a)(2) describes the factors that AMS would consider when determining whether an LPD reasonably designed or operated its poultry grower ranking system to deliver a fair comparison among growers or whether the LPD must utilize a non-comparison compensation method. The factors are listed in subparagraphs (i) through (vi).

Paragraphs (a)(2)(i) and (ii) address whether an LPD's distribution of inputs and assignment of flock production practices would cause material differences in performance that growers cannot avoid, and whether the LPD will make appropriate adjustments to compensation. Fair comparison of growers requires that growers do not receive a distribution of inputs or assignment of production practices that cause material differences in performance from other growers to whom they are being compared and are caused by factors outside of a grower's control. Material differences in performance are differences that meaningfully (from the perspective of the grower) impact grower payments.

To comply with these requirements, LPDs would need to identify inputs and flock production practices under their control that impact grower payment.

LPDs would also be required to improve systems to monitor and, as appropriate, adjust the allocation of inputs and flock production practices to reduce the unequal distribution among growers settled together. LPDs would be required to adjust grower pay to compensate growers if a fair comparison is impractical due to unavoidable inequitable allocations. For example, the LPD may determine that a grower payment adjustment, such as a five-flock average, may be appropriate when the LPD provided chicks that are later discovered to be diseased, and no fair comparison is possible. Such a grower payment adjustment would need to employ a non-comparison method specified in the contract that reflects reasonable compensation to the grower for its services. Ensuring that the payment adjustments agreed to are fair will be part of regular AMS poultry compliance reviews.

Paragraph (a)(2)(iii) would address whether the designated time period used in the LPD's comparison is appropriate, including whether the LPD uses one or more groupings, rankings, or comparisons of growers to mitigate the effects of any differences in inputs over the designated time period. Fair comparison of growers does not necessarily require that LPDs provide all growers precisely equal inputs and identical production practices for each flock. This proposed rule would permit LPDs to minimize production inefficiencies that would arise from a literal equality standard while avoiding an unfair comparison of grower performance by ensuring that LPDs compare growers fairly over a flexible but reasonable period of time. AMS considers a period of one year or less to be a reasonable timeframe across which to compare growers' performance because it provides sufficient time to limit variation from one event while ensuring that LPDs treat growers fairly over a reasonable timeline. The one-year period coincides with commonly used five-flock averages and with one-year comparisons used in some live poultry growing arrangements.

Paragraph (a)(2)(iv) would address whether conditions and circumstances outside the control of the LPD render comparison impractical or inappropriate. A settlement group may have differences among LPD-provided inputs, LPD-assigned production practices, or other factors beyond the control of LPDs and growers that render a reliable comparison impossible. The Secretary will consider the facts and circumstances applicable to each case. One example might be the previously described situation where an LPD unknowingly delivered chicks to a grower that are later discovered to be diseased so that no fair comparison is possible. Pursuant to paragraph (a)(3) of this section, under these circumstances the LPD is required to compensate growers using an alternative to the tournament system through a non-comparison method specified in the contract. One approach is to pay the grower for pounds delivered at a rate that is the sum of the grower's base pay rate and the average per pound performance compensation rate for the tournament from which the grower was excluded, or for the last several tournaments in which the grower participated. An average of the grower's own per-pound total compensation rate over the previous 12 months—commonly, a 5-flock average, variable depending on the size of the birds—might be a useful non-comparison alternative if the prior tournaments were not also affected by unfair conditions and circumstances that would reduce their utility as reference points. AMS may review documentation maintained by the LPD to ensure that such conditions and circumstances were not present.

Paragraph (a)(2)(v) would address whether an LPD has made reasonable efforts to resolve concerns in a timely manner that a grower may raise regarding the LPD's exercise of discretion over the implementation of its fair comparison processes. In determining compliance with this requirement, through audit or in response to a complaint, AMS would consider whether an LPD has demonstrated responsiveness and commitment to resolving legitimate concerns in an appropriate manner that would avoid potential secondary harm to the grower. “Reasonable efforts” and “timely” resolution of a grower's concerns will depend on the facts and circumstances of each case, with particular attention placed on whether the situation adversely impacts the fairness of the comparison(s) for the grower. For example, if a grower raises immediate and urgent concerns about feed quality, such as the delivery of feed meant for older chicks than the grower has, the LPD's resolution of this concern should be as immediate as possible to limit any additional undue damage to the grower's flock due to lack of adequate nutrition. If a grower raises concerns about feed persistently being delivered late or in an insufficient quantity, the Agency would examine the LPD's “reasonable efforts” taken to adjust the method of delivery. Additionally, an LPD would be prohibited from retaliating against a grower in any manner for raising concerns as to whether a fair comparison method was used.

Lastly, paragraph (a)(2)(vi) would state that the Secretary would consider any other factor relevant to a fair comparison. This provision would give AMS the authority to address any other facts or circumstances that adversely affected the fairness of the design or operation of the poultry grower ranking system. AMS would determine compliance with this requirement by examining the facts and circumstances, and in particular, whether the LPD took specific actions to undermine the comparison process. For example, were the LPD to intentionally group together certain growers for a comparison as a means of manipulating or adversely affecting their comparison-based outcomes, this prong would enable AMS to consider those facts and circumstances.

AMS underscores that it would, when determining whether an LPD has designed and operated their broiler grower ranking system to provide a fair comparison among growers, consider the fair comparison factors set forth in § 201.110(a)(2) against the backdrop of the magnitude and design of the relative performance pay. Where relative performance compensation forms a very small portion of grower compensation net of long-term debt and other fixed costs, AMS would expect that differences in inputs and flock production practices would cause fewer material differences in pay. AMS would expect this to operate on a sliding scale. AMS would also consider the design of the formula to determine its impact on the magnitude or distribution of compensation, if any.

In some situations, differences among LPD-provided inputs, LPD-assigned flock production practices, or factors beyond the control of both LPDs and growers can make a reliable comparison impossible. In such cases, the proposed rule under § 201.110(a)(3) would require that an LPD must fairly compensate growers through a non-comparison method. The non-comparison method must be specified in the contract and would have to reflect a reasonable effort to fairly compensate the grower. For example, if an LPD is unable to pick up a flock in a timely manner because of processing disruptions (as occurred during the COVID-19 pandemic), the LPD may remove the grower from the settlement rather than compare that grower's flock performance against growers delivering flocks of a significantly different age. In such cases, the LPD must compensate the grower

using a reasonable non-comparison alternative. Multiple approaches could be considered reasonable depending on the particular circumstances. For example, AMS is aware that LPDs often pay the grower an amount equal to the average rate they received over their previous five flocks.

Compliance with § 201.110(a) would require that LPDs establish a standard for fairness in the operation of tournament compensation systems. The proposed regulation creates a framework for holding an LPD to account under the Act for using an unfair comparison between growers because of the LPD's unequal distribution of inputs and assignment of flock production practices. The proposed rule would require LPDs to assess input allocations and flock production practices to meet the standard of fairness delineated in § 201.110(a)(2). LPDs could meet the standard through a range of approaches deployed over time, allowing the LPD to take into account the natural variability in living systems while protecting growers from substantial injuries they cannot avoid owing to the distribution of those inputs. For example, typically, flocks are settled with chickens ready for slaughter in a particular week. Sometimes, if there are not enough similar birds (

e.g.,

similar weight) ready in one week, LPDs may use all birds slaughtered over two or three weeks. Alternatively, some contracts settle a grower's last five flocks (approximately one year) against all other growers' last five flocks to help choose a comparable settlement pool. AMS considers a period of up to one year to be reasonable because that provides sufficient time to limit variation from one event, while assuring that LPDs treat growers fairly over a reasonable timeline. Relying on the documentation of written processes set out in proposed § 201.110(b), AMS would evaluate compliance based on the extent to which the LPD carefully evaluated the factors and took reasonable measures to protect growers from substantial injuries that they could not avoid.

Inputs like breed of chick, feed, and medication can vary independently of production practices like density, target weight and slaughter age, and vice versa. The proposed rule would provide LPDs flexibility in managing these elements within the framework of their duty to provide a fair comparison, as documented by the written processes required under proposed § 201.110(b). Based on their evaluation of these elements as set forth in their written processes, LPDs would use allocation and grouping strategies that promote a fair comparison among tournament participants, provide remedial action to offset unavoidable circumstances in which fair comparison is not possible, and resolve grower concerns. With respect to both the distribution of inputs and the assignment of flock production practices, an LPD's duty is to design and operate a tournament to enable a fair comparison between growers. While AMS acknowledges the possibility of variability in inputs and production practices, the LPD should not design and operate their contract with the grower in manner that would impose on the grower injuries that the grower cannot reasonably avoid which the LPD could reasonably prevent.

Section 201.110(b) would set forth documentation requirements regarding LPDs' duty to ensure the fair design and operation of broiler grower ranking systems. Under section 401 of the Act, AMS is authorized to prescribe “the manner and form in which such accounts, records, and memoranda shall be kept” whenever the Secretary finds that the records of an LPD do not fully and correctly disclose the LPD's business transactions (7 U.S.C. 221). Paragraph (b)(1) would require that LPDs establish and maintain written documentation of their processes for the design and operation of a poultry grower ranking system that is consistent with the duty of fair comparison. This proposed rule would require documentation to include written processes, informally called policies and procedures, regarding the process for (i) inputs under LPD control, (ii) flock production practices under LPD control, (iii) comparison flexibility, and (iv) communication and cooperation with growers. The written processes would provide a general description of the items that the proposed rule requires be set forth, yet must contain sufficient detail to provide a reasonable user of the processes—such as the local manager that directs the operation of a tournament at a complex—with an understanding of the processes, including any policies that the LPD adopts governing the relevant parts of its operation and any discretion it or its agents may exercise under those policies, as well as the procedures it or its agents may deploy.

Under paragraph (b)(1)(i), LPDs would be required to create written processes for selecting and distributing inputs to growers, including how and when the LPD delivers inputs, how and when the LPD manages similarities and differences of quality and quantity in the delivery of inputs, how and when the LPD identifies differences in inputs and the potential effects of those differences on grower performance, how and when the LPD adjusts the inputs the grower receives, and any steps the LPD takes to adjust compensation calculations based on inputs growers receive. LPDs unfairly harm growers when they distribute inputs in a manner that disadvantages a grower relative to other growers in a tournament. Growers cannot control inputs such as quality of chicks or high- or low-quality feed, yet receipt of low-quality inputs has an unfair impact on their performance in a tournament. LPD processes would require ongoing accounting and monitoring of inputs supplied to each producer using objective measures of quality that are generally accepted in the industry. Processes developed by LPDs would be required to address key areas of concern, including management of chicks that differ in quality and performance and variation in quality or quantity of feed or medication provided to growers, as well as conscious selection and delivery of inputs to specific growers for specific purpose to facilitate fair comparisons. To the extent possible, LPDs should include policies and procedures for balancing disparity of inputs either within a single flock or over multiple flocks as appropriate and feasible.

Under paragraph (b)(1)(ii), LPDs would be required to create written processes for production of live poultry, including how and when the LPD assigns density at delivery; how and when the LPD manages pickup of birds with respect to slaughter weight and bird age, including documenting any variation by pounds and number of growout days; how and when the LPD adjusts how a grower is compared to other growers with different assigned flock production practices or otherwise adjusts the flock production practices the grower receives; any steps the LPD takes to adjust compensation calculations based on the flock production practices the grower receives; and how and when the LPD minimizes, adjusts, or otherwise accounts for differences in production practices. LPDs can unfairly manipulate grower payments when they compare growers within a single tournament settlement group for which LPDs have required different types of production practices. Under the proposed rule, LPDs must develop policies and procedures that describe the processes for ongoing accounting and monitoring of LPD-determined flock production practices allocated to each producer. The LPD's processes must provide a consistent approach to minimize differences in production practice assignments and describe methods to

compensate growers for differences that result in harms, for example, if differences do not equitably balance out over time as set forth in the LPD's written processes.

Under paragraph (b)(1)(iii), LPDs would be required to create written processes for the LPD's grower comparison flexibility methods. If an LPD evaluates growers over one or more groupings or rankings (rather than within each grouping or ranking), these policies and procedures would need to describe how the LPD sets a reasonable time period over which the LPD fulfills its duty of fair comparison. Additionally, if the LPD might remove a grower from a ranking group, the LPD would be required to describe the circumstances under which the LPD would remove a grower and how the LPD would compensate the grower to satisfy the non-comparison compensation method required under proposed § 201.110(a)(3). For example, LPDs may not have enough comparable growers with which to make a reliable comparison in the current grouping and may use growers settling in previous periods to make a reliable comparison. Likewise, a specific grower may have received undesirable inputs or production practices that materially impacted the grower's performance, necessitating removal of the grower from the grouping and compensation under a non-comparison compensation method. Lastly, if the LPD groups growers based on criteria other than in the manner grouped in previous settlements, the LPD would need to set out written processes for how and when that is to be done. Settlement groupings, also called league composition, are most commonly based on their chronological availability for slaughter within the complex but could be by housing type or on other ways. Generally, the settlement is determined by flock placement timing, which commonly varies based on chronological needs by the LPD and grower. For example, one or the other may need additional layout time between flocks for cleaning, maintenance, vacation, or other similar reasons. This proposed rule would not seek to disturb that ordinary decision-making but would rather serve to identify practices or circumstances that would diverge from those ordinary reasons. While there are legitimate reasons to deviate from a strict chronological availability-based grouping, this provision is principally meant to ensure that LPDs do not inappropriately use comparison flexibility to interfere with fair comparison by intentionally grouping specific growers together to lower their pay, or to otherwise manipulate pay to deliberately benefit certain growers over others.

Under paragraph (b)(1)(iv), LPDs would be required to create written processes for how the LPD will resolve a grower's concerns with the LPD's exercise of discretion over the implementation of the policies required by this section, including the timeliness of the resolution. A tournament system cannot be fair if it fails to permit growers to contest negligent or malicious actions taken by the LPD that may impact grower performance without fear of retribution. The proposed rule would provide flexibility on how LPDs can satisfy this requirement. A range of procedures are available, such as timely communication with complex management, communication with LPD headquarters, and grower councils, wherein disputes are resolved with input from other growers. The implementation of processes to manage and resolve grower disputes can serve to alert LPDs to potential unfairness in their comparison of growers and enable them to resolve issues in a timely manner.

Section 201.110(b)(2) would require LPDs to review their compliance with the processes set forth in paragraph (b)(1) not less than once every two years. Under this requirement, (i) the reviewer must be independent of the management chain of a particular complex and qualified to conduct the review; (ii) the review must include examination of compliance practices of the complex management, production supervision, and all agents that have discretion in contract implementation, including an analysis of how often growers must be paid outside of the tournament system in order to meet the duty of fair comparison and whether the payments given were in fact greater than or equal to what the growers would otherwise have received; and (iii) the LPD must prepare a written report with the conclusions of the review, which must be based on work papers of the review and other documentation relevant to the review.

Under this proposed rule, LPDs would have a duty to monitor compliance with the processes established under paragraph (b)(1). LPDs would be required to formalize tournament operation standards and assemble either internal or external teams of reviewers to perform compliance reviews. An LPD's failure to run a tournament that provides a fair comparison between growers may result from decisions made at the complex level rather than at corporate headquarters. The requirement for periodic compliance reviews will ensure regular supervision of local complex employees' adherence to the LPD's processes. AMS anticipates that complex management will adopt practices to comply with LPD standards with respect to tournament operation. A qualified reviewer would be a person familiar with broiler growout operations who has experience analyzing the management, operations, settlement procedures, and documentation commonly used by poultry complexes of the scale and complexity being reviewed and who is familiar with and able to apply relevant principles of internal accounting controls or a comparable internal control methodology appropriate to the industry. Under this proposal, AMS would require that LPDs create a written report providing the conclusions of the compliance review to aid AMS in enforcing the requirements of this section. Section 201.110(b)(2)'s requirement that LPDs establish documented, ongoing review of compliance processes would contribute to the operation of fair tournaments by preventing harms such as LPD manipulation of prices or delivery of subpar inputs and assignment of undesirable production practices by local complex managers.

Section 201.110(b)(3) would require LPDs to retain all written records relevant to their compliance with paragraph (b) for no less than five years from the date of record creation. Relevant records would include, for example, copies of existing processes (policies and procedures); written documentation of LPD processes used within the last five years, including documentation of inputs and flock production practices provided to growers; compliance review reports covering the last five years; board minutes discussing compliance with this section for five years from the date of the board meeting; current and expired grower contracts for five years for the date of last effectiveness of the contract; disclosures provided to growers for five years from the date of the disclosure is provided to the grower; information on payments to growers or other forms of adjustment made to ensure a fair tournament, etc. Under this proposal, AMS would require that LPDs retain these records for five years to enable the Agency to monitor the evolution of compliance practices over time in this area and to ensure that records are available for what may be complex evidentiary cases. As noted

earlier in this section, section 401 of the P&S Act authorizes AMS to prescribe the manner and form in which LPDs keep business records. This recordkeeping requirement would enhance LPD management's ability to establish and monitor compliance, as well as AMS's ability to supervise and enforce the proposed rule.

Compliance with proposed § 201.110(b) would require LPDs to document processes for the design and operation of broiler grower ranking systems that are consistent with the duty of fair comparison. These policies and procedures are necessary to document compliance precisely because the options for delivering a fair comparison are so diverse. Policies and procedures developed pursuant to the proposed rule should describe the LPD's framework for assigning inputs and LPD-determined flock production practices, comparing grower performance, and resolving growers' concerns regarding the LPDs' implementation of its policies and procedures. Recordkeeping should enable periodic review by the LPD to examine and report on the LPD's compliance with its established written processes and, as such, with its compliance with the duty of fair comparison.

Enforcement of § 201.110 could occur in several ways. Growers could contact AMS-PSD to submit a complaint regarding an alleged violation of § 201.110. PSD would then investigate, which could lead to referral to DOJ for appropriate action or, where failure to pay is implicated, to USDA enforcement through administrative action.

AMS would also review LPD contracts, along with other required records from the LPD, in connection with routine compliance reviews and investigations to ensure LPD compliance. Injured individuals would also have a right to proceed directly in Federal court.

Additional information on reporting violations of the P&S Act can be found here:

https://www.ams.usda.gov/services/enforcement/psd/reporting-violations

(last accessed 11/13/2023).

C. Questions

1. Does proposed § 201.110 effectively and appropriately benefit growers in reducing unfairness and deception? If so, why? If not, in what ways can it better do so?

2. Are the duty of fair comparison and the factors for evaluating whether the LPD reasonably designed its ranking system to deliver fair comparison appropriately designed? If not, how should they be changed?

3. Are the policies and procedures and the compliance review requirement effective and appropriate tools for documenting and enhancing compliance with the fair comparison duty? Why or why not? If not, what additional tools are needed? Is additional documentation on the inputs provided, timing of input delivery, and requirements for growing methods needed? Why or why not?

4. What means exist for LPDs, growers, and AMS to evaluate performance differences stemming from inputs and production practices? To the extent that information asymmetries continue to exist, please offer any views or suggestions on ways to address them.

5. How should the non-comparison methods of compensation be set to ensure that growers are fairly compensated outside of the tournament system, if needed? Should the proposed rule permit other non-comparison methods of compensation that are not specified in the broiler grower contract to be used as long as they are mutually agreed upon by both parties (

i.e.,

both the affected grower and the LPD)?

6. Should AMS be more specific regarding what constitutes “reasonable efforts” made by the LPD to resolve disputes, and if so, for which circumstances and how?

7. What specific burdens might LPDs face in complying with this proposed rule? Would this require LPDs to substantially modify their business model? What specific modifications would be required and why?

8. Is this proposal's standard for determining if a difference in inputs was material to grower performance—

i.e.,

whether it meaningfully impacts pay from the perspective of the grower—appropriately designed? Should the Agency set a threshold for change in pay (

e.g.,

a percentage) that is always material? If so, what threshold?

9. Are there simpler means to achieve the ends proposed in § 201.110? For example, would a limitation on the proportion of comparison-based compensation to total compensation—like comparison-based compensation limited to 10 percent of total compensation—be sufficient to provide flexibility to LPDs and protect growers from variability in inputs and flock production practices?

10. Should AMS's final rule expressly clarify that a pattern or practice (including, but not limited to, intentional, arbitrary, or punitive distribution) of unequal, dissimilar, or inappropriate inputs or flock production practices would be an unfair practice under the Act under any payment system that relies upon grower performance relative to inputs or production practices provided by the LPD (such as feed efficiency) irrespective of whether the payment system was a tournament? In particular:

a. Please explain why or why not or suggest alternative approaches to address particular concerns with non-tournament pay systems that rely on grower performance.

b. Would some or all of the criteria with respect to the duty and the requirement for written processes set forth in § 201.110 be useful to address concerns with these non-tournament performance pay systems? If so, please explain under what circumstances and how.

c. Are there specific circumstances where AMS should articulate additional protection for growers against punitive actions by LPDs through the differential provision of inputs or other processes?

11. Should AMS make the effective date for the provisions of this proposed rule 180 days following publication of the final rule in the

Federal Register

? If you recommend shorter or longer for some or all of the provisions, please explain why.

V. Broiler Grower Capital Improvement Disclosure Document (Proposed § 201.112)

LPDs often request or require that growers make costly additional capital investments. These ACIs may benefit LPDs by enabling them to profit from growers' investment in more efficient technology or by otherwise enabling LPDs to meet changing consumer demand for different products (for example, because growers have invested in producing antibiotic-free chickens). ACIs may also benefit growers by enabling them to earn more in some cases.

At the same time, ACIs can be problematic. The LPD requesting an ACI may be exploiting its bargaining leverage and forcing the grower to bear unreasonable risk. The terms of the ACI may also be complicated or difficult to evaluate. Because of the tournament system, the grower's benefits may dissipate over time as other growers

adopt similar ACIs. In such cases, the grower may face increased debt with only a small increase in revenue. Growers, however, are often not in a financial position to avoid making an ACI. Generally, growers have already incurred debt to enter into a broiler growing arrangement. They need to repay their existing broiler-production related debts. If their LPD threatens them with termination or reduced compensation, growers may have no choice but to make the investment. Further, growers have limited options to switch to alternative LPDs, and the cost of switching LPDs can be high. Undertaking an ACI increases growers' debt, which can further increase growers' dependence on their relationship with their LPD. These problems were identified in a USDA rule published in 2011 (which added § 201.216 governing USDA's evaluation of unfairness in ACIs (76 FR 76874; December 9, 2011)) and were among the concerns raised by growers in the ANPR for this proposed rule.

Even when a grower has sufficient bargaining leverage, the LPD may not provide sufficient information for the grower to assess the risk and reward of undertaking the ACI. Many growers undertake ACIs without the opportunity to fully understand the ACI's purpose, design, risks, and impacts on their financial well-being. Information asymmetry impairs growers' ability to negotiate, effectively exercise independent decision-making to reject an ACI, and, more broadly, manage their farming operation. When information asymmetries prevent growers from evaluating whether they are able to recoup their investment or whether they can engage in other farming practices that could achieve the goals of the ACI, growers cannot effectively protect their financial interests or freely exercise decision-making with respect to their farming operation. Growers and AMS may also be unable to identify circumstances where LPDs are seeking to compete through ACI practices that shift or hide costs to growers, which subverts the competitive process.

AMS has identified as deceptive those LPD contracting practices that fail to disclose key information about ACIs. AMS emphasizes that disclosure under proposed § 201.112 is not, and is not intended to be, a remedy to unfairness in and of itself; rather, disclosure provides AMS and growers with information necessary to enforce their rights under existing § 201.216, and the P&S Act more broadly, when terms are unfair.

This section describes the problem in depth and further discusses AMS's proposed regulation to require disclosures to facilitate AMS's and growers' ability to better identify and enforce growers' rights against unfair ACIs under the existing ACI criteria in § 201.216. Lastly, this section provides questions for commenters to consider regarding the proposed regulation, including whether additional substantive limits on additional capital investments are needed in addition to the proposed disclosure.

A. Problems Related to ACIs in Broiler Contracts

ACIs in poultry growing facilities can improve growout productivity, satisfy customer demands related to broiler production (

e.g.,

animal welfare), qualify an operation for USDA's Process Verified Program,

and help growers conform to other product or process attributes demanded by LPDs. ACI programs, however, impose costs and risks borne largely, and often solely, by growers. Due to asset specificity and hold-up problems (discussed in section II, “Industry Background and Need for the Rulemaking”) many growers are uncomfortable taking on additional financial risk—especially absent appropriate compensation—but for all practical purposes are compelled to when LPDs unilaterally impose ACI costs and risks.

See https://www.ams.usda.gov/services/auditing/process-verified-programs.

These costs and risks are particularly problematic when growers lack relevant information about the purpose, risks, and returns of the ACI. As a result, growers may be unable to protect themselves against insufficient compensation or other unfair practices including by, for example, attempting to switch LPDs. The ability to make such a switch is extremely limited because of LPD-specific housing specifications. Even when the ACI is presented as voluntary, it can be as coercive as a mandatory ACI if the grower cannot evaluate risks and rewards or if the grower has few or no options to switch to an alternative LPD. Indeed, the LPD often has substantial bargaining power: switching may be difficult or costly, alternative LPDs may not need additional growers, differing requirements may increase the cost of switching, and preexisting debt that has not been fully recouped (owing to mismatches between the duration of growers' contracts and the duration of their borrowing terms) can aggravate costs and risks to growers. Given these challenges, growers are commonly unable to negotiate with LPDs over ACIs or decline to make a particular investment and thus limit their risk.

Assuming a well-designed ACI that results in improved efficiency, failing to implement an ACI when other growers do will likely result in inherently weaker performance under the tournament. An LPD may offer an incentive payment (commonly added to base pay rates) to a grower to make a desired ACI, but growers have limited, if any, ability to negotiate those incentive payments. LPDs continually benefit from ACIs to the extent they improve production efficiency for growers or enable growers to match consumer preferences by switching to specific production processes, such as limited antibiotic usage. But any relative performance advantage gained by early adopters of an ACI will fade as other growers make the investment and gain the same productivity advantages. The incentive payments thus may not sufficiently compensate for the additional risk and cost of the debt or enable growers to fully share in the cost-savings or improvements to the product.

Further, when LPDs do not provide important information about the nature of the ACI growers cannot determine the extent to which incentive payments could be expected to compensate them for the costs of these investments. Nor can they evaluate the risks relating to the structure of those incentives—including whether the opportunity for recoupment is undermined by other growers adopting the same technology.

Without sufficient, simple, and clear disclosures, growers cannot assess the benefits or risks of making the investment. Growers cannot determine whether a program presented as voluntary is, for all practical purposes, mandatory. AMS notes that LPDs may not retaliate against a grower's refusal to engage in ACI programs—for example by the intentional delivery of subpar or inappropriate inputs or production practices—under the P&S Act.

Past grower concerns and comments in response to the ANPR add further context from both sides of this issue. The 1999 FLAG survey found that 33 percent of broiler growers believed that making improvements to housing as recommended by their LPD did not make them better off financially. As the cost of poultry growing infrastructure has increased over the past two decades, the financial risk of ACIs appears to be increasing. Multiple ANPR commenters indicated that contracts are not long enough to ensure return on costly infrastructure investments. One State farm bureau, for example, commented that upgrades of equipment and housing typically benefit the LPD at the cost of

the grower. Another State farm bureau commented that LPDs should provide documentation citing relevant research to justify mandatory modification of buildings and equipment and that LPDs should offer contracts for a sufficient length of time to recoup the cost of poultry growers' investment. Grower advocate organizations stated that some LPDs require poultry growers to make unnecessary upgrades and further urged AMS to consider the practice of demanding large capital investments without commensurate assurance of income from those capital investments to be an unfair and deceptive practice.

Organizations representing LPDs countered that existing protections and regulations sufficiently address this issue. A commenter on the ANPR cited the list of criteria in 9 CFR 201.216, “Additional capital investments criteria,” that the Agency may use in considering whether capital investment requirements violate the Act. This commenter also underscored the prevalence of existing industry practices that address this issue, such as the practice of LPDs offering compensation through contract amendments to growers when they make equipment changes during the term of that contract. The commenter also stated that existing causes of action for breach of contract protect growers in cases where an LPD refuses to honor a signed contract by cancelling or modifying it.

The Agency agrees with the commenter's perspective that the existing regulation in § 201.216 may allow the Agency to partially mitigate the effects of these problems. The regulation sets forth criteria for whether ACIs would be an unfair practice or other violation of the Act. These criteria include whether the grower can decide against the ACIs; whether the ACIs were a result of coercion, retaliation, or threats by the LPD; and whether the ACIs can result in reasonable recoupment, or adequate compensation for the ACIs, among other non-exhaustive criteria. However, AMS has found that the presence of the criteria alone is insufficient to effectively address problems stemming from ACIs. AMS and growers lack the data necessary to analyze whether an ACI violates the criteria. Moreover, once an investment is made and a grower incurs debt, it can be nearly impossible to unwind. Technical specifications can make switching costly (where even possible), and alternative uses at similar compensation rates are nearly nonexistent.

A key component of the criteria, expectation of recoupment (§ 201.216(f)), is impossible to assess in the absence of reliable and accurate projections of revenue and earnings and is best evidenced by data possessed by the LPD who is asking the grower to make the ACI. Insufficient information about ACIs also, for example, impacts the criteria seeking to preserve the grower's discretion to decide against an ACI (§ 201.216(a)), in that a grower is unable to effectively analyze the extent to which without the ACI they would still be able to compete against other growers. AMS has encountered these issues in investigations regarding ACI programs.

As the practice of LPDs requiring or seeking ACIs in tournament system growing arrangements has become standard practice, Congress enacted section 208 of the Act to inform unsuspecting growers that such potential investments may be required.

The need for such a disclosure emphasizes the prevalence of the practice and its perceived unavoidability owing to growers' lack of reasonable alternatives and the pervasiveness of ACIs across the industry. A grower may not have meaningful opportunity to choose whether to make an ACI if a grower only has one or two LPDs to choose between, faces obstacles switching LPDs, is denied the key information needed to understand the risks and returns of the ACI, and/or fears retaliation from an LPD if it refuses an ACI.

Section 208 requires all poultry production contracts to include a “required disclosure” that “additional large capital investments may be required of the poultry grower or swine production contract grower during the term of the poultry growing arrangement or swine production contract.” 7 U.S.C. 197a(b)(1).

In carefully considering this issue, AMS is concerned that some growers are unable to negotiate or refuse contracts to prevent the imposition of ACIs and that the imposition of some particular ACIs are unfair under a § 201.216 analysis. When LPDs can impose ACIs on unfair terms, they expose growers to financial risk that growers cannot mitigate during the contracting process. While the statutory ACI disclosure tells growers there is a potential risk of ACIs, the majority of contracts contain no information relating to when ACIs may be required, nor the costs of any such ACI, nor what, if any, limits there are on an LPD's ability to unilaterally impose ACIs that do not materially improve production efficiency or meet consumer demands.

AMS is also concerned that if growers are precluded from negotiating on ACIs, they also lack the ability to demand increased transparency related to ACI programs. Transparency will not cure unfairness, but it may help growers and AMS assess the risks and benefits of an ACI. For example, growers have asserted that some ACIs have been experimental in nature, which may implicate unfairness concerns in § 201.216. Compliance with these disclosures would also create the records necessary to analyze the § 201.216 criteria.

To better enable AMS and growers to protect against unfairness and deception, LPDs must disclose and record more information regarding the ACIs they request from broiler growers. The disclosures must occur before growers take on the financial burden and risks of the ACI. The provision of such information is not, in and of itself, the cure for unfairness, but rather a key tool for AMS and growers to halt abusive practices by arming them with the ability to identify those challenges sooner.

Growers bear all, or nearly all, of the costs and risks of ACIs. LPDs do not own the production capital and therefore do not share in these risks, although they frequently dictate grower investments. The system of ownership of poultry production capital provides no direct incentive for LPDs to carefully consider the extent to which the ACI will improve individual grower production efficiency, whether the ACI will result in financial benefit to growers, and whether the cost of the ACI is proportionate to any such benefits. Even when LPDs share in some of the costs by providing ACI incentive payments, the payments may not cover all the costs or risks that the grower bears. These are problems this proposed rule alone cannot and does not purport to solve; however, the disclosure required in this proposed rule will provide data points for analysis under § 201.216 that have been lacking based on AMS's experience.

When considering new investment, growers seek to maximize net productivity benefits subject to cost. However, when LPDs do not bear investment cost, they have incentives only to maximize their benefits and encourage growers to over-invest in poultry-specific production capital to the point of negative returns for the grower. LPDs' use of incentive payments to compensate growers for ACIs can help to align investment incentives. For these arrangements to work properly, however, growers must clearly understand the parameters of the investment and its future revenue potential to evaluate potentially unfair ACIs under § 201.216.

LPDs possess material information that is critical for growers and for the recordkeeping of ACI transactions.

When LPDs withhold important information about ACI programs, they prevent growers from making fully informed decisions, understanding the extent of over-investment, and assessing the fairness of the transaction. LPDs can exploit this information asymmetry to impede growers' ability to evaluate contracts and manage farms effectively; in more competitive markets, LPDs can impede growers' ability to compare contracts among LPDs, bargain efficiently with competing LPDs, and enforce their rights under the Act. This type of deceptive conduct results in misallocation of grower resources, enhanced LPD bargaining power, exacerbation of hold-up problems, significant financial risk to growers, and reduced competition among LPDs for grower services. An increase in grower investment also leads to increased grower dependency on LPDs to generate returns on that investment through poultry contracting. Additionally, in some cases the presence of few or no other poultry contracting options in a grower region further focuses dependence on a single LPD. The misalignment of incentives coupled with growers' inability to bargain creates deceptive and unfair conditions. These practices may amount to unfair and deceptive trade practices under an analysis informed by Packers and Stockyards Act case law and States' unfair practice laws, as well as the FTC approach to unfair practices and unfair methods of competition.

Clear disclosure of ACI parameters will enhance growers' ability to enforce their rights relating to unfair practices under § 201.216 (such as recoupment and discretion to refuse to make an ACI), as well as other provisions of the P&S Act and regulations. Disclosure alone is not a remedy for an ACI that is unfair if, for example, an LPD with the advantage of hold-up power (

e.g.,

there are no alternative LPDs for growers to contract with) requires an ACI that is likely to have unreasonably low or negative financial returns for growers who in good faith have invested in a long-term relationship with that LPD. Nevertheless, the disclosures required by proposed § 201.112 will create a record that will facilitate the Agency's ability to enforce the Act under § 201.216.

In section V.C. below, AMS asks commenters questions regarding proposed § 201.112 to determine whether the proposed disclosure requirement will help growers effectuate their rights under § 201.216. In that section, we are also seeking comment on whether to strengthen the substantive protections for reasonable capital investments and adopt a requirement preventing an LPD from mandating an ACI unless the cost of the required ACI can reasonably be expected to be recouped by the grower or another similar requirement to ensure that ACIs are reasonable for growers.

B. Summary of Proposed § 201.112

AMS is proposing to add new § 201.112, “Broiler grower Capital Improvement Disclosure Document,” which would require that LPDs use a Capital Improvement Disclosure Document (Disclosure Document). Paragraph (a) of the new section states that when an LPD requests that a grower make an ACI, the LPD must provide the grower with a Disclosure Document. Paragraph (b) describes the disclosures that the LPD would be required to include in the Disclosure Document. These disclosures include the purpose of the ACI and a summary of relevant research or other supporting material that the LPD has relied upon in justifying the ACI (paragraph (b)(1)). LPDs must also disclose all relevant financial incentives and compensation for the grower associated with the ACI (paragraph (b)(2)), along with all relevant construction schedules related to the request for the ACI (paragraph (b)(3). LPDs must also identify the housing specifications associated with the ACI (paragraph (b)(4)) and any required or approved manufacturers or vendors (paragraph (b)(5)). The proposed rule would also require LPDs to provide an analysis—including any assumptions, risks, or uncertainties—of projected returns the grower can expect related to the ACI sufficient to allow the grower to make their own projections (paragraph (b)(6)). Lastly, the proposed rule (in paragraph (b)(7)) would require LPDs to provide a specific statement in the Disclosure Document. The statement indicates that USDA has not verified the information contained in the Disclosure Document and that if the Disclosure Document contains any false or misleading statement or a material omission, a violation of Federal and/or State law may have occurred which may de determined to be unlawful under the P&S Act. The statement also includes contact information for use in filing a complaint with PSD and a web address to find additional information on rights and responsibilities under the Act. The specific provisions of the proposed rule are discussed in more detail below.

Proposed § 201.112(a) would require that LPDs assemble a Disclosure Document and provide the document to growers before requesting an ACI. This disclosure provision would require LPDs to make explicit representations about the nature of required ACIs. Growers would review the disclosure information provided by LPDs when making the further investment decisions contemplated by the ACI. This disclosure would not cure any unfairness in the ACI itself, but the requirement would alleviate some asymmetric information problems and better enable growers and agencies to identify problematic practices relating to ACIs including to assess and apply the criteria in § 201.216.

Information provided in the Disclosure Document would then help growers protect themselves at an earlier stage—before the investment—from unfair practices, by enabling them to report to AMS potentially unfair ACI practices or bring their own action. Improved documentation will also enable AMS to take earlier and more effective action against problematic ACI practices, owing to past insufficiency in obtaining a timely and clear understanding of the full range of costs, risks, and/or benefits relating to the ACI. Transparency will also enable some growers, where sufficient choice exists, to make better additional investment decisions. The Disclosure Document would be required to clearly state the intended and expected outcome of LPD ACI requirements. As such, LPDs would demonstrate the extent and likelihood that growers would benefit from or be put at risk by the ACI.

The requirement to provide the disclosure would be triggered when the LPD requests the grower make an ACI. At a minimum, this would occur when the LPD provides any new or modified housing specifications to the grower. AMS has chosen to utilize this timing as the trigger because capital investments generally take months, not days, to plan, finance, and operationalize, affording the grower sufficient time during the steps that advance that process forward (such as engaging in planning and borrowing) to be able to act on the information provided in the Disclosure Document, including contacting AMS to report concerns. Accordingly, providing the grower with the Disclosure Document no later than when the LPD provides any new or modified housing specifications to the grower, will provide the grower with ample opportunity and flexibility for review to effectuate their rights. Additionally, an LPD may not restrict growers from sharing the Disclosure Documents with legal counsel, accountants, family, business associates, and financial advisors or lenders.

Proposed § 201.112(b) lists the items the Disclosure Document is required to disclose. These disclosures must be

prominently presented in a clear, concise, and understandable manner. Paragraph (b)(1) would require that the Disclosure Document provide the purpose of the ACI for both the LPD and the grower and a summary of any relevant research or other supporting material linking the specific infrastructure modification/housing specification with that purpose. Growers, and AMS, face significant obstacles in assessing the potential costs, benefits, and risks relating to any ACI, and therefore are hamstrung in their ability to take action against problematic ACI practices. LPDs almost always have superior information regarding the outcomes of and risks around the contemplated ACI. LPDs commonly research and design ACIs and usually have a plan or intended outcomes with respect to their request for the adoption of an ACI. Growers have limited to no access to that information, yet they are asked to expend hundreds of thousands or even millions of dollars to implement ACIs.

As part of any assessment of risks or benefits relating to an ACI, growers need to understand the intended purpose of the ACI and have access to any relevant research or other supporting material regarding that ACI. Over the years and in response to the ANPR, growers have raised concerns that ACIs are often experimental, that it is difficult to determine whether ACIs are necessary, and whether ACIs would be profitable. Providing the information proposed in this paragraph would assist growers, and in turn AMS, in evaluating whether a requested or required ACI raises those concerns or other potentially unfair practices. An ACI for which the LPD does not clearly provide this information is more likely to be deceptive because growers are unable to evaluate the real purposes and material risks relating to the ACI. For example, without disclosures indicating that an ACI was designed to improve growout productivity, growers would be unable to evaluate the real implication of the structures and the incentives offered. Similarly, without disclosures indicating that an ACI was desig

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