Poultry Grower Payment Systems and Capital Improvement Systems

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:

Final rule.

SUMMARY:

This final rule by the United States Department of Agriculture's (USDA or the Department) Agricultural Marketing Service (AMS or the Agency) amends the Agency's regulations under the Packers and Stockyards Act, 1921 (P&S Act or Act). The Act protects fair trade, financial integrity, and competitive markets for poultry. The final rule prohibits certain payment practices under poultry grower ranking systems (commonly known as tournaments) in contract poultry production for broiler chickens, requires live poultry dealers (LPDs) to adopt policies and procedures for operating a fair ranking system for broiler growers, and requires LPDs to provide certain information to broiler growers when the LPD requests or requires the grower to make additional capital investments. These regulations will increase transparency and address deception and unfairness in broiler grower payments, tournament operations, and capital improvement systems.

DATES:

This rule is effective July 1, 2026.

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. Background

III. Summary of the Proposed Rule and Changes in the Final Rule

IV. Provisions of the Final Rule

V. Comment Analysis

VI. Regulatory Analysis

I. Executive Summary

The current broiler chicken industry is highly susceptible to both unfairness and deception. Within the last 40 years, the poultry industry has become highly integrated, with most LPDs operating as “integrators” who frequently own or control all segments of the production process except growout. The growout stage of the production process consists of growers raising young poultry to harvest size under poultry growing arrangements (contracts). To pay the grower, most LPDs, which will also be referred to as “integrators” throughout this rule, use a relative performance or poultry grower ranking system, commonly known as a tournament. Under the tournament system, poultry growers compete against one another to determine payment for their services. As discussed throughout this rule, growers cannot reasonably avoid certain practices that cause them harm. Additionally, growers lack access to certain information, which inhibits their ability to meaningfully understand, negotiate, and enforce poultry growing contracts with LPDs, including in relation to capital investments that LPDs request.

The Packers and Stockyards Act, 1921, as amended (P&S Act or the Act) (7 U.S.C. 181

et seq.

), authorizes USDA to issue regulations and orders to prohibit unfair and deceptive practices by LPDs.

In a June 8, 2022, advance notice of proposed rulemaking (ANPR), AMS sought comments and information to inform policy development and future rulemaking regarding the use of poultry grower ranking systems (87 FR 34814, June 8, 2022)). Commenters expressed both support and concern about the use of tournaments in poultry production, with the majority expressing support. Other commenters, especially advocacy associations, objected to the current tournament payment system, stating that tournament systems do not fulfill the integrators' claimed purposes and that the tournament payment systems exemplify the manipulative and unjust practices that Congress designed the Act to prevent. These commenters cited integrators' arbitrary, unjust, or punitive distribution of inputs and production variables, potentially punitive manipulation of the group composition, and penalties for small deviations below average performance. Some of these ANPR commenters also stated that the rulemaking could help address bargaining power imbalances for growers by providing proper enforcement, minimum base pay, and other provisions.

Trade organizations commented on the ways input variability affects pay and that LPDs lack incentives to take action to reduce unpredictability in grower inputs and pay outcomes. AMS has observed that monitoring and intervention to remedy unpredictability requires an LPD to expend effort and incur cost, and that the LPD does not directly benefit from the increased fairness to growers. Without an explicit prohibition on unfair variability, LPDs lack compelling incentives to operate their tournament system contracts fairly. Comments in response to the ANPR, other available data and information, and AMS's Packers and Stockyards Division's (PSD) expertise provided the basis for a proposed rulemaking.

On June 10, 2024, AMS published the proposed rule, Poultry Grower Payment Systems and Capital Improvement Systems, in the

Federal Register

(89 FR 49002). In response to the proposed rule, AMS posted 755 comments, some with multiple signatories, over a 60-day comment period. Comments were submitted by a variety of stakeholders, including farmers' coalitions, government entities, advocacy organizations, industry trade organizations, processors, producers, and other individual interested parties. Stakeholders commented on the proposed rule, as well as several specific questions containing alternate proposals. The proposed rule covered, among other things, rate of compensation for growers, transition and implementation costs, the proposed duty of fair comparison, and reasonable recoupment for required additional capital investments. Farmers' coalitions, advocacy associations, government entities, and unaffiliated individual commenters broadly supported the proposed rule, while the regulated trade organizations and LPDs opposed the proposed rule. Live poultry growers both supported and opposed the proposed rule. Many growers who support the rule raised concerns of unfairness within the tournament system, including that pay rates are influenced by factors outside growers' control, that growers are forced to make new capital investments that have poor to nonexistent return while putting growers in more debt, and that growers must compete against fellow growers in an unfair manner. Those growers who opposed the proposed rule felt that the tournament system does a good job of rewarding effort, and that the rule would upset this system by shifting money away from high-performing growers and by reducing overall bird quality. However, several growers that opposed the rule expressed concern that LPDs force growers to make additional capital investments that do not produce an economic return for the grower.

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

carry out the provisions of the Act (7 U.S.C. 181

et seq.

), and the Secretary has delegated the responsibility for administering the Act to AMS.

See

7 CFR 2.22(a)(3)(iii) (delegating authority to administer the Act from the Secretary to the Under Secretary for Marketing and Regulatory Programs); 7 CFR 2.79(a)(17) (in turn, delegating authority to administer the Act from the Under Secretary to the Administrator, Agriculture Marketing Service). Under this authority, AMS issues this rule to carry out the provisions of section 407 of the Act, as well as provisions of sections 202(a) (7 U.S.C. 192(a)) (which prohibits “any unfair, unjustly discriminatory, or deceptive practice or device”), 401 (7 U.S.C. 221) (which requires an LPD to “keep such accounts, records, and memoranda as fully and correctly disclose all transactions involved in his business”), and 410 (7 U.S.C. 228b) (which bans the failure to pay “the full amount due [to the] poultry grower on account of such poultry”).

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

• Prohibiting 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 (§ 201.106(a)).

• Establishing that it is a presumptive violation of the Act when aggregate gross annual payments based upon a grouping, ranking, or comparison of growers exceeds 25 percent of total gross payments to growers in a complex on an annual-calendar year basis (§ 201.106(b)).

• For each of the three calendar years following the publication date of the above-referenced provisions, requiring LPDs to submit certain documentation to the Secretary when any contract modification or renewal subject to the prohibition on discounts results in a decrease in the prior annual-calendar year's complex-wide average gross payment to the grower (§ 201.106(c)).

• Establishing 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 in the methods of comparison, including the distribution of inputs and flock production practices, the time period of the comparison, the conditions and circumstances for the comparison, the reasonableness of efforts to resolve disputes, and how the LPD will compensate growers when the LPD cannot conduct a fair comparison (§ 201.110(a)).

• Requiring 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 and to retain all relevant written records for five years (§ 201.110(b)).

• Requiring LPDs to provide growers with a Capital Improvement Disclosure Document when an LPD requests that a grower make an additional capital investment and requiring that LPDs make reasonable efforts to assist the grower in translating the document, as well as ensure that the grower is aware of their right to request translation assistance (§ 201.112).

• Introducing a severability clause that specifies that it is USDA's intent that the provisions in subpart N remain in effect even if any provision or component of any provision is deemed unenforceable (§ 201.290).

II. Background

A. Vertical Integration and Market Power

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, during which broiler growers raise chicks on their farms to slaughter weight. 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.

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Under a production contract, the LPD provides the grower chicks, feed, and veterinary treatment services, which the grower uses to grow out the flock. 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.

2

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

1

USDA, NASS,

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

volume1, part 51, issued February 2024 pp. 51 and 411.

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

2

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 a substantial initial investment in housing. Over time, LPDs may request or require that growers make additional capital investments to upgrade housing and equipment, which are intended to improve efficiency or respond to customer preferences (

e.g.,

relating to the use of antibiotics or other animal-raising concerns) during the contracting relationship. Growers generally finance these long-term assets against much shorter-term production contracts.

3

This exposes growers to financial risk and uncertainty around debt repayment and the recoupment of their investments. For example, compared to other commodity producers, broiler growers registered among the highest share of farms in extreme financial stress, measured as carrying a term debt coverage ratio less than one and a debt-to-asset ratio greater than 55 percent.

4

Growers are thus dependent on LPDs—who control most aspects of a grower's production—to recoup their substantial initial and continuing investments.

5

Growers also currently receive little to no information about the purpose, process, and outcomes expected around such investments.

3

MacDonald, James M. “Financial Risks and Incomes in Contract Broiler Production.” Amber Waves August 04, 2014.

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

(last accessed 12/13/2023).

4

Nigel Key, Christopher Burns, and Greg Lyons, “Financial Conditions in the U.S. Agricultural Sector: Historical Comparisons,” EIB-211, U.S. Department of Agriculture, Economic Research Service (2019),

https://www.ers.usda.gov/webdocs/publications/95238/eib-211.pdf?v=4876.5

(In 2017, compared to other commodity categories considered, poultry farms showed the greatest share of farms in extreme financial stress—around four times that of larger-scale general livestock and specialty crop, fruit, nut, and vegetable producers and twice that of large-scale grain and oilseed producers. Moreover, the percentage of poultry farmers in extreme financial stress has been increasing since 2006).

5

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, most LPDs operate with the benefit of substantial market power and bargaining power in local markets to purchase grower services. Broiler grower operations must be close (usually less than 50 miles) to an LPD's

feed mills, 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 results in poultry production that is often localized and regionally concentrated. Most growers have few LPDs in their area with whom they can contract. Even where multiple LPDs are present, there can be significant costs associated with switching to a different LPD, 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 programs. Facility-specific investments may inhibit the ability of growers to switch to a competing LPD where different facility specifications are required. Growers have recently complained of at least one LPD penalizing growers that are trying to switch to an LPD's competition. AMS referred the complaint to the Department of Justice for enforcement under the Packers and Stockyards Act. The Department secured a consent decree that stopped the conduct, prohibited its recurrence, and compensated the harmed growers.

6

6

Final Judgment,

United States

v.

Koch Foods, Inc.,

No. 23-cv-15813, Dkt. No. 23 (N.D. III. Feb. 12, 2024). See also, Zimmerman, Sarah, “Department of Justice, “Justice Department Files Lawsuit and Proposed Consent Decree to Prohibit Koch Foods from Imposing Unfair and Anticompetitive Termination Penalties in Contracts with Chicken Growers,”

https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and-proposed-consent-decree-prohibit-koch-foods-imposing.

Owing to the vertical integration in the system, LPDs exercise substantial control over growers' operations through the provision of inputs, control over production practices, their tournament settlement and comparison practices, and their level of performance in relation to communication and dispute resolution. In this rule, AMS uses the term “inputs” to mean resources supplied by LPDs, such as chicks or feed. Inputs often vary among growers, which impacts the growers' flock performance, thereby unfairly skewing relative performance measures. Likewise, LPDs determine production practices on growers' farms, and those production practices affect growers' pay. 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 LPDs fail to apply production practices evenly across grower participants in tournaments, that unevenness also unfairly skews relative performance measures.

Additionally, information asymmetry in poultry contracting arrangements contributes 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. Information asymmetry leads to market failure in the broiler production industry as growers lack the information needed to make informed business decisions, whereas LPDs know what each grower makes. This increases LPDs' to set contractual terms in ways that benefit themselves, while the grower lacks the information needed to effectively negotiate compensation for the provision of growout services or to make a comparison and switch to a competitor that offers more competitive terms. Another feature of this information asymmetry is that while LPDs know the amounts they have fixed for grower compensation, growers do not know this amount, which can span a wide range. Similarly, LPDs know the distribution of inputs as well as which growers may be grouped together for settlement in the complex, while growers cannot easily track that information. Exploiting this information asymmetry, LPDs can adjust down compensation in ways that are difficult for growers to know or competitively discipline the LPD,

e.g.,

by switching out. As highlighted by grower comments and based on AMS's experience in evaluating grower concerns in this area, without an accurate projection of purposes, processes, and outcomes related to capital improvement programs, growers cannot accurately and effectively evaluate their allocation of resources to cover necessary expenses

7

or engage in rational decision-making around whether to pursue (or resist) additional capital investments to improve and protect their own financial interests. Additionally, having widely variable income prevents growers from knowing which elements under their control they can adjust, and how to adjust them, to correspondingly increase compensation. This can cause growers to futilely expend extraneous resources that do not yield proportionate increases in performance and compensation.

8

Information asymmetry also facilitates abusive practices, whereas the provision of information would help growers and AMS identify and halt those practices sooner. Disclosure is not an absolute defense. Acts or practices can be unfair or deceptive and violate section 202(a) of the Act even if they have been disclosed.

7

For example, a grower without an accurate projection of future income may forgo making an expenditure that costs less long-term,

e.g.,

making a bundled purchase for two pieces of equipment at a reduced per-unit price. Instead, if they don't know if they can afford a future purchase, they purchase the minimum amount—one piece of equipment at a time at a higher unit price—to sustain operations short-term.

8

Numerous commenters described how they would make all of the upgrades recommended by the LPD technician and inexplicably place last compared to other growers: “Six months of down time spent installing several more thousands of dollars of equipment. We've grown two flocks since then and have failed to make enough money to even pay the bank each time. We've had to take out a loan to even survive our day-to-day life and are behind on all farm bills. We do everything the company tells us, but when we finish in the negative, were given all kinds of reasons for why our birds weren't good enough. When speaking with other farmers and techs from other companies, we're told that our weight and feed conversions are good, but a couple of farms seem to continuously have unexplained successful numbers. Basically, were losing money that goes to pay the ones at the top. On one flock, 12 farms were pitted against each other. Two farms performed at a level so high that isn't believable, and three farms performed below the bottom level we can be paid at. The integrator took the bottom three farms out of the tournament calculation and compared the remaining farms without them. How fair is it that they drop the bottom farms, but not the top ones? This resulted in the farms that were close to average being pushed down and making less money because the average was raised considerably with the highflyers included and the bottom places excluded. The company tells us that this helps us, but it doesn't. We've made the decision to sell because we can't continue to put our children through this”).

LPDs often use incomplete contracts in broiler production. When a contract is incomplete, the LPD interprets material terms in their favor as the grower lacks the ability to require a fairer interpretation. Contracts are incomplete when key terms basic to its functioning are vague or missing. Incomplete contracts magnify risks with respect to the performance of the other contractual party, leading to other potential inefficiencies. For example, broiler production contracts regularly disclaim LPD responsibility for input quality or usability. Nor do they provide enforceable detail around LPD management of tournament operations, including tournament groupings or dispute resolution expectations. Moreover, 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. Preventing LPDs from injuring producers using these contracts is among the purposes of the Act.

9

Contracts 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.

9

See,

e.g.,

Luke Herrine, “Cutthroat Business,” U. of Alabama Legal Studies Research Paper Forthcoming, Aug. 2024, available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4936628;

Michael Kades, “Protecting livestock producers and chicken growers,” Washington Center for Equitable Growth (May 2022); Peter C. Carstensen, “The Packers and Stockyards Act: A History of Failure to Date,” The CPI Antitrust Journal (2) (2010), available at

https://www.competitionpolicyinternational.com/assets/Uploads/CarstensenAPR-2.pdf;

Herbert Hovenkamp, “Does the Packers and Stockyards Act Require Antitrust Harm?” (Philadelphia: Faculty Scholarship at Penn Law, 2011), available at

https://scholarship.law.upenn.edu/faculty_scholarship/1862.

Finally, contracts that require investments in contract-specific assets give rise to the hold-up problem. The economic concept of hold-up 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 by making a transaction-specific investment, they lose bargaining leverage and become vulnerable to exploitation by the other party. Hold-ups occur in broiler production due to market failures associated with incomplete grower information, contract-specific investments, market power, relative capital leverage, as well as insufficient enforcement of law intended to maintain market integrity and prevent market abuses—including unfair breaches of contract. Growers are commonly unable to exercise contract rights to remedy LPD performance failures owing to the risk of hold-up and to the necessity of timely remedies when dealing with living birds. Examples from grower complaints include failure to correct improper or insufficient feed delivery, the delivery of successive inputs that are lower performing, or tournament groupings that are suspect.

B. Tournament Practices

Since the 1990s, the broiler industry overwhelmingly uses the tournament system to compensate growers. As discussed above, 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). AMS will refer to this as a settlement group. Under a typical tournament system, the broiler grower receives a fixed payment per pound of broilers produced, that LPDs often call a “base pay rate,” plus a calculation adjustment that is supposed to be based on how efficiently, compared to other growers, the grower used the resources provided by the LPD to produce each pound of broilers (informally referred to as a performance adjustment).

10

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. Broiler growers whose feed conversion ratio is less than the average ratio 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.

10

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.

LPDs benefit from the tournament system in several ways. The tournament system provides LPDs control and certainty over total grower compensation as a group. For each tournament, the LPD knows and sets the total compensation that will be paid per pound of broilers produced by the group. In other words, the LPD is never concerned about paying an excess bonus for an individual flock because the LPD allocates the pool of payments among growers through performance adjustments for growers relative to the floating average performance (

i.e.,

in today's system, amounts above, or deductions from, the base pay rate). LPDs (and growers, as discussed below) also get the benefit of utilizing a floating average (relative to external shocks, such as weather, as noted below) to incentivize performance. However, the tournament system comes at a cost to growers: that of seeing payment for the services they provide reduced for reasons outside of their control yet within the control of the LPD. This outcome is magnified by the fact that growers cannot easily switch over to a competitor LPD—even if the competitor LPD offers more attractive compensation—due to the high barriers to switching imposed partly by LPDs.

11

11

See,

e.g.,

“Settlement Administrator Angeion Group Announces Proposed Settlement In Broiler Grow-Out Services Class Action,” PR Newswire (2024),

https://www.prnewswire.com/news-releases/settlement-administrator-angeion-group-announces-proposed-settlement-in-broiler-grow-out-services-class-action-302252706.html

(In 2024, some of the largest LPDs agreed to settle grower claims that the LPDs conspired with rivals to suppress pay by agreeing not to hire growers from each other. Multiple commenters also described the difficulty in switching.); United States Department of Justice, United States Department of Agriculture, (May 2010), Public Workshops Exploring Competition in Agriculture,

https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10.

LPDs have long claimed that tournaments systems reward growers financially for their experience, skill, effort, and investments in up-to-date and efficient housing and equipment.

12

The extent to which the tournament actually incentivizes additional grower effort and expenditure of resources, and whether those efforts and expenditures were necessary and fair to growers, depends on a range of factors, including the magnitude of the tournament but, in some circumstances, also the design of the housing specification (

e.g.,

the use of automation and other technology), the type of bird being raised (

e.g.,

some require special efforts), the availability of other payment incentives, and the absence of arbitrary distortions in the allocation of payments, among other factors. In theory, provided that all growers in a tournament grouping were treated materially the same and the variables within the tournament grouping were within the control of the growers, a tournament system could insulate growers to some degree against external shocks that affect all growers in the grouping. This is because, in this scenario, performance is based on an average that floats and adjusts to the particular external circumstances that all growers in the pool experienced during the period.

13

In reality, the

tournament system does not sufficiently protect from external shock. A range of shocks and factors external to the growers—some of which are within the control of the LPD—still adversely affect the overall weight of the broilers in a tournament and thereby reduce the compensation for all participating growers.

12

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).

13

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.

AMS has concluded that several widely adopted aspects of LPDs' operations are unfair, deceptive, or both. First, without a clearly stated base pay rate, LPDs deceive growers regarding their actual minimum pay. The complexity and unpredictability of LPDs' current operation of tournaments makes it difficult for growers to clearly understand before entering into a contract the minimum amount they could actually receive under the contract.

14

For example, base pay can be, but is not commonly, a guaranteed minimum pay.

15

Second, if performance pay—particularly performance pay that is based on comparisons with other growers—is substantial relative to total compensation, the arbitrary lottery-like aspects in a tournament system operation will, in most circumstances, undermine its effectiveness as a compensation scheme because compensation outcomes will not reflect the effort or performance of growers, and is unfair and deceptive. Third, arbitrary or unjustly discriminatory distribution of inputs, production practices, tournament groupings, or communications and dispute resolution—as key aspects of LPD performance under the contract—also can create a system in which compensation does not reflect the effort or performance of growers, deprives growers of the full amount due for their performance, and is unfair. These provisions are meant to be complementary and mutually reinforcing. AMS explains each of these concerns in greater detail below, under section IV., “Provisions of the Final Rule.”

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United States

v.

Cargill Meat Solutions Corp.,

1:22-cv-01821-ELH (D. Md. July 25, 2022) (Wayne-Sanderson), pars. 153-56, available at

https://www.justice.gov/media/1238931/dl?inline;

AMS-FTPP-22-0046-0913 (“As a third-generation contract poultry farmer, this is one of the most unstable times I have witnessed or heard about with the growers in the majority. For many years we have been paid based on the tournament system, and for several years I viewed it to be fair, but no longer. Currently, we as growers compete against each other on a weekly basis to see who has the best cost. The list used to be really tight on what cost of top versus bottom grower, but in our complex alone, that is no longer the case. The top grower is making a healthy check, while those below average are not making enough to cover the cost of production and overhead. It is no longer the ones that put in the effort of hard work that are successful in this business”); Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010, Normal, Alabama. 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/

(In 1999, Lee Schrader of Purdue University and John Wilson of Duke University surveyed 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). Based on AMS' experience, the survey results still provide a relevant reflection of the views of growers today, including companies' representations about compensation to growers).

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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).

As noted above, many broiler growers operate in regions with just one to two LPDs.

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The local competitive conditions result in higher-risk, lower-paying grower contracts that commonly subject the grower to arbitrary and unfair payment; in particular, these contracts do not guarantee growers 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. Because LPDs control the distribution of inputs and assignment of production practices, growers repeatedly tell AMS that they experience unfair and deceptive operation of the contract. The typical tournament contract introduces levels of complexity and uncertainty for growers in the calculation of their compensation and in evaluating growers' return on investments so as to render the payment system unfair and deceptive. Furthermore, under that payment system, growers are commonly unable to discover unscrupulous conduct by LPDs, compare offers from competing LPDs, and plan and manage their businesses effectively. LPDs also say growers will operate “independently”—

i.e.,

their individual effort will produce commensurate higher compensation—though in practice their comparison-based compensation pay is heavily dependent on the LPD's inputs and comparison method, close supervision, responsiveness, and the performance of others in their LPD-determined settlement group.

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

https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6

(Half of respondents with two integrators in their area and over a third of those with three integrators asserted that they could not shift to another integrator).

AMS concludes that the “incentive system” in its current form does not excuse the unfair and deceptive operation of tournament systems because factors outside of the grower's control impact performance. Without adequate regulation under the current system, LPDs fail to provide fair compensation for the grower's effort and deceive the grower regarding tournament operation and pay.

C. Debt and Financial Vulnerabilities

Requests by LPDs for growers to make additional capital investments are a pervasive part of the broiler growing industry such that Congress required that LPDs disclose the possibility of such requests to growers in their contracts (7 U.S.C. 197a(b)). These additional capital investment requests occur against a backdrop of significant financial vulnerability for growers, which implicates issues of potential unfairness and deception. Under this system of capital improvement, the LPD requests—and indeed, in practice, largely requires—growers to invest in housing improvements with little to no information regarding the purposes, processes, outcomes, or likely return to be achieved by the investment. These omissions of material information critical to growers' decision-making is unfair and deceptive. These additional capital investments are highly particularized, which leaves the growers investing in projects and investments that may be used only for growing broilers with a particular LPD. Growers have long complained to AMS that they face a perpetual cycle of debt owing to successive requests by LPDs for additional capital investments, suppressing their returns and leaving them even more vulnerable to the range of abuses outlined above.

Indeed, the Figures below show a declining rate of return on assets and higher debt to asset ratios carried by poultry operations compared to cattle, dairy, and hog operations.

BILLING CODE P

ER16JA25.001

ER16JA25.002

BILLING CODE C

The higher debt to asset ratios carried by poultry operations are driven, in part, by LPD requests for additional capital investments and are also facilitated, partially, by loan guarantees authorized under Federal law. Additionally, the gains from upgrades commonly flow to LPDs, and so growers' higher debt levels are not always supported by efficiency gains that would result from the additional capital investments. Under those circumstances and because of the willingness of lenders to loan due to guarantees, when growers are asked by LPDs to make additional capital investments without critical information about their purposes, processes, or outcomes, they are deprived of key information relating to those decisions. This practice is both deceptive and unfair because it deprives growers of their ability to identify fundamentally coercive or otherwise unfair capital improvement programs at an early enough time to seek AMS enforcement assistance in halting them, if appropriate.

Accordingly, AMS adopts this final rule prohibiting practices that, in AMS's view, violate the Act. The overall tournament system is highly problematic for poultry growers, and it is crucial to implement some guardrails for the industry to prevent unfair and deceptive contracting practices.

III. Summary of the Proposed Rule and Changes in the Final Rule

In the June 2024 proposed rule, AMS proposed amending 9 CFR 201, subpart N, by adding several new provisions: § 201.106 regarding LPD responsibilities for the design of broiler grower compensation arrangements; § 201.110 regarding the fair operation of broiler grower ranking systems; § 201.112 regarding disclosure requirements for LPDs when requesting additional capital investments from broiler growers; and § 201.290 regarding severability.

AMS proposed adding § 201.106, titled “Broiler Grower Compensation Design,” to prohibit the reduction, or discounting, of any compensation rate under the broiler growing arrangement based on a grower's performance relative to other growers. The proposed provision would have required broiler grower arrangements to clearly state the grower's rate of compensation and not reduce that rate based on the grower's performance relative to other growers. The arrangement could provide for the rate of compensation to be increased based on that comparison.

AMS proposed adding § 201.110, titled “Operation of Broiler Grower Ranking Systems,” to prevent unfair and deceptive practices in LPDs' operation of ranking systems for broiler growers. Proposed paragraph (a)(1) would have required LPDs to design and operate their poultry grower ranking system to provide a fair comparison among growers, and under proposed paragraph (a)(2), the Secretary would evaluate specific factors to determine if the poultry grower ranking system is reasonably designed to deliver a fair comparison among growers. Proposed § 201.110(a)(3) also included a requirement that, when LPDs could not conduct a fair comparison, they must compensate growers through a non-comparison method. Proposed paragraph (b)(1) would have required documentation regarding the processes (policies and procedures) the LPDs must establish and maintain for the design and operation of poultry grower ranking systems for broiler growers that is consistent with the duty of fair comparison. Under proposed paragraph (b)(2), LPDs would have been required to review their compliance with these processes, and under proposed paragraph (b)(3) they would have been required to retain all written records relevant to their compliance for no less than 5 years from the date of record creation.

AMS proposed adding § 201.112, titled “Broiler Grower Capital Improvement Disclosure Document,” detailing in proposed paragraph (a) that an LPD would be required to provide the grower with a Capital Improvement Disclosure Document (Disclosure Document) upon requesting that the grower make an additional capital investment. Paragraph (b) of the proposed regulation described the disclosures that the LPD would be required to include in the Disclosure Document. These disclosures included a justification of the request, financial incentives for the grower, specifications for construction, and a thorough analysis of the grower's projected returns.

Lastly, AMS proposed adding § 201.290, titled “Severability,” to ensure that if any provision of subpart N or component of any provision is declared invalid, or if the applicability of any of these provisions to any person or circumstances is held invalid, the validity of the remainder of this subpart or the applicability thereof to other persons or circumstances shall not be affected. Such a provision is typical in AMS regulations that cover several different topics and was proposed here as a matter of housekeeping.

Upon consideration of public comments on the proposed rule, AMS has modified the proposed provisions as follows:

• Revised proposed § 201.106 by designating the proposed text as paragraph (a) and adding the paragraph heading “Rate transparency.”

• Added a new § 201.106(b), “Excessive variability,” that establishes a presumptive violation of the Act when aggregate gross annual payments based upon a grouping, ranking, or comparison of growers exceeds 25 percent of total gross payments to growers in a complex on an annual-calendar year basis.

• Added a new § 201.106(c), “Transition,” that requires that LPDs, for each of the three calendar years commencing with and including the rule's effective date, submit to AMS a copy of the prior and modified contract and any LPD Disclosure Document prepared under § 201.102 for any modified or renewed contracts under specified conditions.

• Simplified proposed § 201.110(b)(1)(i) and (ii) (concerning LPDs' processes for determining inputs and production practices) by removing the subparagraphs that itemized each component of the required processes.

• Simplified proposed § 201.110(b)(1)(iii) (concerning LPDs' processes for grower comparison flexibility) by removing subparagraphs (A) through (C) and placing those requirements into three simple paragraphs: (b)(1)(iii), “League composition;” (b)(1)(iv), “Evaluation period;” and (b)(1)(v), “Non-comparison.” Accordingly, AMS also redesignated proposed § 201.110(b)(1)(iv), “Communication and cooperation,” as paragraph (b)(1)(vi).

• Removed proposed § 201.110(b)(2), “Compliance review” and redesignated proposed § 201.110(b)(3), “Record retention,” as paragraph (b)(2).

• Revised proposed § 201.112(a) and (b) to include the paragraph headings “Disclosure requirement” and “Disclosure contents,” respectively.

• Revised proposed § 201.112(b)(1) through (3) to remove the term “relevant” as a technical change, along with conforming grammatical edits.

• Revised proposed § 201.112(b)(5) to clarify that, in addition to disclosing any required or approved manufacturers or vendors, the Capital Improvement Disclosure Document must disclose all financial benefits, if any, that the LPD or other affiliated persons receives from the use of the required or approved manufacturer or vendor.

• Revised proposed § 201.112(b)(6) as a technical stylistic change.

• Added a new § 201.112(c) to require the LPDs to make reasonable efforts to ensure that growers are aware of their right to request translation assistance and to assist the grower in translating the Capital Improvement Disclosure Document.

Section IV. below explains in detail AMS's reasons for making these changes.

IV. Provisions of the Final Rule

Throughout this final rule, AMS's analysis of unfair and deceptive trade practices in poultry contracts is informed by prior P&S Act case law, States' unfair and deceptive practice laws, and, in particular, the Federal Trade Commission (FTC)'s encapsulation of principles governing unfairness, unfair methods of competition, and deception.

17

AMS looks to the FTC's policy statements owing to the FTC's extensive experience enforcing prohibitions against unfair practices, unfair methods of competition, and deception arising under the FTC Act, which are similar to provisions prohibiting unfair and deceptive practices under section 202(a) of the P&S Act. Like section 202(a) of the Act, section 5 of the Federal Trade Commission (FTC) Act also prohibits unfair and deceptive practices and unfair methods of competition. In 1980, 1983, and 2022, the FTC adopted the aforementioned policy statements summarizing its longstanding approaches to these matters under its cases. While recognizing that the P&S Act is broader than the FTC Act, AMS references these policy statements because they offer useful guidance owing to the similarity of the statutory provisions and case law histories.

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In addition, AMS recognizes the benefits to the practical application of this final rule by grounding it on the well-understood principles of unfairness, unfair methods of competition, and deception as identified in the FTC policy statements. It is for these reasons that the FTC Act has, in part, informed this final rule.

17

Federal Trade Commission, Policy Statement on Unfairness, 1980,

https://www.ftc.gov/legal-library/browse/

ftc-policy-statement-unfairness (last accessed Oct. 2024); Federal Trade Commission, Policy Statement on Deception, 1983 available at

https://www.ftc.gov/system/files/documents/public_statements/410531/831014deceptionstmt.pdf

(last accessed Oct. 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

(last accessed Oct. 2024).

Spencer Livestock Comm'n Co. v.

USDA,

841 F.2d 1451, 1455 (9th Cir. 1988);

Armour & Co.

v.

United States,

402 F.2d 712 (7th Cir. 1968) (“Section 202(a) should be read liberally enough to take care of the types of anti-competitive practices properly deemed `unfair' by the Federal Trade Commission (15 U.S.C. 45) and also to reach any of the special mischiefs and injuries inherent in livestock and poultry traffic”).

18

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

A. Broiler Grower Compensation Design (§  201.106)

AMS is finalizing new § 201.106, “Broiler grower compensation design,” with two notable changes from the proposed rule. In the final rule, AMS is retaining § 201.106 as proposed and designating it as paragraph (a), “Rate transparency.” AMS is adding paragraph (b), “Excessive variability,” and paragraph (c), “Transition.” Paragraph (b) adds a presumption against excessive variability in performance compensation to growers competing in a tournament. Paragraph (c) provides for grower protections during the transition from the existing payment systems to systems compliant with this final rule. Each paragraph will be discussed further below.

Most large LPDs today include a tournament component as part of their grower compensation arrangements. Under this type of arrangement, if a grower's feed conversion ratio (

i.e.,

the quantity of feed consumed by the flock divided by the weight of the flock delivered) is above the average of other growers in the tournament, the grower receives a bonus; if the grower is below average, the LPD reduces the grower's compensation. Under the tournament system, the contract between the grower and LPD provides for payment to the grower based on a grouping, ranking, or comparison of growers delivering broilers to the same company during a specified period. These pay rates are generally expressed in cents per pound. Applying these adjustments, whether positive or negative, significantly affects growers' effective rates of compensation and net income.

In its current form, the tournament system operates unfairly and deceptively. Without clearly stated base rates of compensation, the complexity of the tournament makes it difficult for growers to clearly understand the minimum amount they could be paid. Moreover, compensation based on relative performance when LPDs control the operation of the tournament (such as the distribution of inputs and assignment of production practices) creates the potential for growers' performance to be determined by factors outside their control, thereby making the tournament system an ineffective incentive system that is arbitrary and unfair to growers. The tournament system also introduces considerable complexity and uncertainty for growers in calculating their anticipated total compensation and evaluating the potential return on their investments. 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 is no longer a legitimate business but simply shifts economic risk from processors onto poultry growers without a demonstrable countervailing benefit. Without additional guardrails, the current tournament system creates significant risk of deception or unfairness for growers under the Act.

AMS has not found any evidence that poultry tournament systems that include deductions from the base pay rate or excessive variability in grower compensation 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 attributes of the animal itself, which is owned by the producer. Here, the producer provides a service with no ownership interest in or role in the selection of the animal. These deceptive and unfair payment practices create an unfair competitive advantage for LPDs at the expense of growers. Therefore, the widespread adoption of these types of contracts has frustrated fair competition, instead of enhancing it. Such discounting and pay variability also reflect the market power and bargaining power of the LPD in dictating contract terms.

Section 201.106 will provide growers with greater clarity and protection regarding the minimum payments they can expect under broiler growing arrangements. This rule prohibits a range of unlawful behavior by establishing a threshold presumption against excessive pay variability, establishing a transition period to preserve existing pay, and making minimum pay clear for growers. This rule will better enable growers to compare contract terms, evaluate revenue generation, and assess the value of additional capital investments.

i. Section 201.106(a)—Rate Transparency

AMS is finalizing new § 201.106(a), which prohibits the reduction of any rate of compensation under the broiler growing arrangement on account of the grower's grouping, ranking, or comparison to other growers. This provision is identical to that which was proposed, except that the provision is

now designated paragraph (a), with the paragraph heading “Rate transparency.” Under this provision, the broiler growing arrangement must clearly state the compensation rate. The arrangement may not provide for mechanisms or calculations that would reduce the compensation rate based on the grower's performance relative to other growers, but it can provide for the rate to be increased based on the grower's performance relative to others. The broiler growing arrangement could provide for the compensation 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.

“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 the grower performs 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)).

Under section 202 of the P&S Act, AMS concludes that the practice of discounting disclosed “base” pay rates in broiler contracts is an unfair and deceptive practice. This practice forces growers to estimate potential earnings using contractually stated “base” pay rates that, under the tournament system, only half of the settlement group can achieve. This unfair and deceptive practice obscures the value of the contract, thereby frustrating comparisons with competing LPD contracts in markets where growers are fortunate enough to have more than one or two LPDs to contract with.

AMS expects that, under this regulation, LPDs will still be able to elicit a competitive level of performance using a broiler compensation design that conforms to the requirements of this final 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. Depending upon the facts and circumstances, mere compliance with this regulation does not absolve an LPD of its other legal obligations. A compensation structure without a penalty or reduction from a true guaranteed minimum pay rate may still—if the facts demonstrate it—result in other violations of the Act.

ii. Section 201.106(b)—Excessive Variability

In the final rule, AMS is adding new paragraph (b), “Excessive variability,” which establishes a presumption that an LPD has violated section 202 of the Act when aggregate gross annual payments based upon a grouping, ranking, or comparison of growers exceed 25 percent of total gross payments to growers in a complex on an annual-calendar year basis. AMS is adopting this approach because excessive variance in total grower compensation arising from comparison-based compensation would, generally, create excessive variability that is deceptive because growers cannot reasonably assess the risk they are undertaking or forecast, predict, or budget their business operations. Further, excessive pay variance makes compensation dependent on arbitrary criteria, random factors, or other criteria that the grower cannot control or affect. When the comparison performance pay too substantially affects compensation, it is unfair.

When growers perform reasonably under the terms of the production agreement, excessive variability in performance pay arises at least in part due to LPD-controlled factors or unavoidable inherent natural variability. These factors are outside of the grower's control and cannot be completely offset by grower effort or skill. LPDs design ranking systems to allocate grower payments based upon grower effort and skill. When factors other than grower effort and skill are comingled with the metrics used to allocate pay, the practice is ripe for potential abuse and unfairness because excessive variability in performance payments unfairly reduces compensation to growers. This unfairness to growers is particularly pronounced owing to high indebtedness among growers, which leaves them more financially vulnerable to harms from excessive income variability that does not reasonably reflect their own efforts.

19

That pay variability also frustrates growers' ability to accurately assess, or reasonably control, their rates of compensation and the overall financial risk they undertake under a broiler growing arrangement, which is particularly problematic given the risk they bear. The injury is not offset by attendant benefits, since the practice tends toward distorting the market's true pay amount and reducing growers' ability to accurately assess, or reasonably control, their finances and make informed business decisions.

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In contrast to contributions by the grower, LPDs contribute much more significantly to overall performance by furnishing the inputs,

e.g.,

genetics, feed, nutrition, sex of chicks, and close supervision of the grower's managing production.

Though § 201.106(a) addresses the problem of reductions to rates of compensation that arise owing to groupings, rankings, or comparisons of growers, it does not alleviate all potentially unfair aspects of the tournament system or of the integrated model of broiler production. The proposed rule indicated that AMS intended to engage in case-by-case enforcement to remedy other aspects of tournament system unfairness, including issues arising from excessive variability in payments. In addition to a prohibition on discounting rates of compensation, the proposed rule particularly highlighted the potential importance of a 25 percent presumption on total compensation based on a grouping, ranking, or a comparison (the tournament) to total of base pay rate plus performance compensation. As AMS indicated in the proposed rule, this approach could alleviate extreme variability as an aspect of existing tournament system unfairness.

In the proposed rule, AMS included questions containing additional proposals. One such proposal solicited comment on whether it is presumptively unfair for comparison-based compensation to equal or exceed 25 percent of total (base pay rate plus comparison-based) compensation for any grower and asked a range of questions around the appropriateness of the specific threshold, how to calculate it, and how it would affect the industry.

20

These questions included highlighting the role of the 25 percent presumption as a potentially binding constraint, and how LPDs might respond to the prohibition introduced in § 201.106(a) by modifying the compensation structures in grower contracts. AMS's questions indicated that it could raise base pay and/or limit performance payments—thus reducing the difference between top and bottom performing growers—without increasing total grower compensation expenditures. It also left open the possibility that LPDs could potentially adjust their compensation structures in other ways, such as by providing non-comparison-based incentives to growers they might seek to reward (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).

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89 FR 49002, 49011-49012 (June 10, 2024).

In response to the proposed rule, growers and advocate commenters overwhelmingly supported the need for additional limitations on excessive variability in payment arising from rates of compensation, with a particularly strong endorsement of the 25 percent limitation on performance. Commenters underscored the importance of this limitation for some of the reasons that AMS indicated in the proposed rule: that it is necessary to protect growers from unfair reductions in payments.

To incentivize grower effort, LPDs allocate grower pay using relative performance metrics; however, grower effort alone is an insufficient determinant of grower performance. Growers' performance depends on many factors, some of which are under the control of growers while others are not. Some known factors, including a grower's skill and effort, are within a grower's control. Other factors are outside a grower's control, such as feed quality, chick quality, and the skill or other efforts of other growers in the comparison group. Even if all these known factors are accounted for, there is still some unavoidable inherent natural variation in performance that would explain growers' performance volatility, flock to flock, even if all the known factors remain constant. The nature of this variability creates harm to growers in reduced performance payments.

The use of flock performance metrics, specifically feed conversion, as a proxy to grower effort is imperfect. Feed conversion itself is affected by variables beyond grower effort. AMS is not aware of existing technological innovations that could serve to better isolate grower effort, which is exclusively under grower control. That is not to say flock performance metrics serve no purpose in assessment of grower effort and allocation of grower payments. AMS's experience in analyzing performance payments suggest that ranking systems can be a useful and reasonably equitable mechanism for pay allocation with proper regulation and in proper magnitude. Within a reasonably contained range—

i.e.,

presumptively 25 percent of total compensation—the tournament may offer a reasonable benefit to growers by enabling LPDs to efficiently measure grower performance and guard against natural forms of variability that would arise were compensation fixed rather than floating (

i.e.,

the comparison-based average of growers). Yet at too high a level, the potential harms of comparison-based compensation (performance pay dominating grower pay allocation without rewarding commensurate differences in effort) outweigh the potential benefits. That is unfair under section 202(a) of the Act because compensation under the tournament becomes correlated to input distribution (and other circumstances under the control of the LPD, such as flock production practices or responsiveness to complaints), which is commonly arbitrary—or, in some cases when not arbitrary, can be punitive. Some growers who comply with the contract and are unfairly penalized for factors beyond their control suffer unavoidable harm; they are denied the full amount due for their growout services. While growers can benefit from participation in the tournament, excessive pay variability can cancel out those benefits as they are outweighed by the harms.

Based on previous analysis of grower compensation data for a small sample of broiler complexes, AMS is not aware of any complex with performance payments that are as much as 26 percent of total payments. Additionally, in

United States

v.

Cargill Meat Solutions Corp.,

commonly referred to as “Wayne-Sanderson,” the final judgment also contains a 25 percent limitation on performance payments.

21

The Wayne-Sanderson settlement is significant because it was agreed to by one of the largest market participants and has not caused any demonstrable harm to the company or to the market, nor is there any evidence that it disincentivized grower effort or lowered performance. While Wayne-Sanderson had agreed to a 25 percent limitation on performance payments, this final rule establishes that performance payments above 25 percent are

presumed

to be unfair. This is because performance pay variability causes injury to growers when the magnitude of performance pay is so excessive. That is, the performance pay significantly affects whether the grower is successful, yet the amount depends on unavoidable variance and does not reflect grower performance. In those circumstances, compensation no longer correlates to factors within grower control, such as their effort and expertise. This deprives growers of the value, both real and expected, of their services. The vast majority of commenters who addressed the topic of comparison-based compensation endorsed the idea of 25 percent as an appropriate level for a presumption of this type.

21

United States

v.

Cargill Meat Solutions Corp.,

1:22-cv-01821-ELH (D. Md. July 25, 2022).

We note that this presumption will provide guardrails in helping LPDs set and maintain performance pay standards that achieve appropriate goals, such as rewarding effort and skill against a floating average that adjusts for common circumstances, like weather, without unduly denying growers the expected value of their growout services. This clarity will guide LPDs that need to modify existing contracts to comply with this final rule, such as with § 201.106(a). For example, absent the existence of § 201.106(b), LPDs could comply with § 201.106(a) by decreasing base pay and excessively increasing the proportion of pay that is dependent on performance compensation. Such contract modifications would supercharge pay variance in the tournament while penalizing growers under the guise of complying with reforms designed to improve transparency and fairness. The presumption under § 201.106(b) helps ensure continuity in compensation at an aggregate level because it guards against excessive variability of performance pay relative to total pay. To stay within the presumptive boundary set by § 201.106(b), an LPD must set a reasonable compensation rate for any new base payment under the contract. AMS underscores that nothing in the rule prevents LPDs from providing other forms of incentive compensation to growers for reasons other than relative performance, such as payments for improved facilities or utility subsidies. Overall, the 25 percent presumption against excessive variability is useful to provide clarity and consistency around when AMS may seek to investigate for case-by-case compliance and enhances the fairness and transparency of compensation rates in broiler growing arrangements. As such, it reflects a logical outgrowth of the proposed rule.

Separately, AMS notes that it also expects to examine for excessive variability other forms of performance payments that are based on how efficiently a grower uses inputs supplied by the LPD: such payments could emerge as a method for evading this provision's purpose. Examples of such performance payment systems include what are commonly called fixed metric performance payments, which predate the current tournament, whereby growers' performance payments are tied to their individual achievement of certain fixed metrics around efficient use of inputs. AMS expects to examine these types of performance systems for excessive variability for similar risks of unfairness, including because the LPD provides the inputs and production

practices and in those circumstances would be setting the fixed metrics.

In review of the presumption, AMS will consider other complex-specific incentives as requested by the LPD that would otherwise not be appropriate to consider as part of the rates that make up base payment. For example, energy incentives may be considered differently because they vary significantly based on geographic location, and so would result in somewhat different application of the provision for growers at different complexes. Where a relatively high degree of variability in performance pay exists, even within the 25 percent, due in part to energy incentive payments, AMS may examine whether the tournament is unfair.

To rebut the presumption of unfairness triggered when comparison compensation payments exceed 25 percent of total compensation, the LPD may affirmatively demonstrate (i) that a given tournament's compensation system allows all growers to be economically successful without the need to receive any payments based upon a grouping, ranking, or comparison of growers that exceed the amount covered by the presumption; (ii) that payments to all growers that exceed the amount covered by the presumption are sufficient to reflect the increased risk of variability to all growers under that system; and (iii) that the system is not otherwise unfair or deceptive. The Agency would examine any rebuttal on a case-by-case basis to comport with the purposes of the presumption to prevent LPDs from engaging in unfair or deceptive practices or devices that harm poultry growers.

AMS adopted this provision after considering the case-by-case presumption set forth in the proposed rule and public comments that urged AMS to instead establish a greater limitation on excessive variability of payments arising from performance, especially comparison-based, compensation. Public comment regarding this provision, and AMS's response to those comments, are discussed in greater detail below in section V., “Comment Analysis.”

iii. Section 201.106(c)—Transition

In the final rule, AMS is also adding new § 201.106(c), which requires that, for any contract modification or renewal subject to § 201.106(a) that results in a grower receiving less than the prior year's complex-wide average gross payment, the LPD must submit a copy of the prior contract and the modified contract, as well as any LPD Disclosure Document prepared under § 201.102 with respect to the prior and the modified contract, to the Secretary.

AMS will monitor contracts to identify signs of the unfair exercise of LPD bargaining power during this transition period. These could include, for example, a predatory method of competition whereby an LPD seeks to lower pay across the entire complex or discriminatory or retaliatory conduct that seeks to lower the pay of some subset of growers. Unfair conduct by the LPD could potentially arise where the LPD seeks to undermine contractually agreed-upon earnings from the previous contract irrespective of the tournament. One way for AMS to identify such conduct could be through LPD Disclosure Documents (currently required under existing 9 CFR 201.102), which would be required if LPDs modify or replace contracts in seeking compliance with this rule. The record-keeping and reporting requirements in this final rule will further help identify any potential illicit exertions of market power by allowing AMS to closely scrutinize contract modifications that jeopardize grower welfare during the transition period.

In keeping with the requirements in § 201.102(d)(2), AMS expects LPDs to explain why the annual gross payment averages for the previous five years may not provide an accurate representation of projected future payments. AMS also expects a distinct explanation of how any changes the LPD is proposing under the new contract are necessary to comply each part of final § 201.106. That is, changes made to comply with § 201.106(a) and (b) should be explained. AMS strongly encourages LPDs to explain changes needed to comply with § 201.106(b) first, and then apply a conversion scale from whatever updated approach is adopted to comply with § 201.106(a).

AMS will evaluate the reported contract modifications and associated documentation to assess grower welfare, given that growers will be particularly susceptible to economic hold-up concerns. In particular, AMS will consider the following variables: (1) the number of flock placements annually; (2) the stocking density; and (3) the distributional range of payments. If, upon consideration of these variables, AMS identifies contract modifications that negatively impact grower welfare or that include supply reductions from the complex, the Agency will closely scrutinize the modifications, including rates, for fairness and reasonableness.

It is crucial that growers are meaningfully informed about the terms of the grower arrangements and the expected compensation for their services so that they can make financially sound decisions and identify potential economic hold-up. The reporting requirements will only be in effect for three years including and from the effective date of this rule.

During the three-year transition period, LPDs must evaluate average grower compensation at the complex level for each of the three calendar years commencing with and including the rule's effective date to determine if they need to submit their contract to AMS for review. The rule requires LPDs to use the average grower compensation across the complex, because this analysis shows if an LPD has cut grower compensation overall. The rule uses averages because performance-based compensation is unpredictable on a grower-by-grower basis and because using total grower compensation at the complex would be overinclusive. For example, grower turnover might skew an analysis based on total grower compensation. This makes the § 201.106(c) method of evaluation comparable to how unfair levels of performance-based compensation are defined under § 201.106(b).

AMS chose a transition period of three years for several reasons. First, it is nearly impossible to evaluate the changes to grower pay made to contracts within 180 days or even a single year with any level of confidence. Many contracts are three, five, or ten years in length, so it may take up to a year of payments to even begin evaluating the financial effect of changes. Reviewing payments within a 180-day period may not indicate what growers would earn in a year and would be limited in scope and value; any conclusions based on that limited review would be speculative, and violations of the Act cannot be based on speculation. After a full year of operation following contract modification, the realization of grower performance outcomes and practical application of the compensation structure are known and translated into actual grower payments. This will facilitate AMS's analysis of the actual distribution of grower payments and overall level of compensation that resulted from the new compensation structure and allow for a more fulsome evaluation of fairness concerns. It also allows AMS to consider the market environment as context for LPD actions.

Additionally, this new rule may necessitate adjustments to the compensation structures used in grower contracts, and it will take time for growers to become used to the new regulation. AMS needs to look at how the overall market is adjusting to this new reality and prevent evasion during

that adjustment period. For example, an LPD may make a series of small contract changes, which would require AMS to review the overall market adjustments, not just the initial changes. Failure to capture the full implications of the transition period would put growers at risk from LPD market power and bargaining imbalances between LPDs and growers.

AMS underscores that this is a monitoring and reporting requirement, owing to the ongoing risk to growers that the contracts could be modified and re-modified during this transition period. This contract review will help the Agency decide whether to conduct more specific oversight and enforcement while the new regulatory regime is implemented.

Three years is the period of financial information that banks request from borrowers, such as growers, and so it provides a reasonable period for AMS to engage in these market-monitoring activities. After three years, AMS agents will continue to monitor contracts and ensure they are following the requirements of this final rule, but LPDs will not need to submit contract modifications.

In the proposed rule, we asked for public comment on this issue, and received overall support for a provision to protect growers that rely on existing contracts from holdups and potential market abuse. Specifically, we asked the following question: “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?”

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The comments received in response to this specific question were mixed in their support and are addressed below in sections V.A.iv. and v.

Because the Secretary will subject the updated contracts to close scrutiny for unfairness, the Secretary would seek access to the dealer's business records. During any investigation, AMS may examine any changes to average annual gross payment per pound for growers in the complex and any changes to average payment per square foot increased. Each investigation will consider the individual facts and circumstances of each situation, as these considerations are important in examining whether growers were held at least no worse off during the contract modification process. Although the final rule is designed to benefit growers and reduce unfair and deceptive practices, growers face a significant risk of unfair practices owing to the risk of hold-up when they may be required to change their contracts so that LPDs comply with this rule. Based on AMS's experience implementing rules, LPDs may seek during any compliance and implementation period to extract changes to the contract unrelated to the regulatory requirements of this rule. The purpose of providing contracts to AMS is to identify unfair practices or otherwise unlawful reductions to payment that are favorable to LPDs and harmful to growers.

B. Operation of Broiler Grower Ranking Systems (§  201.110)

AMS is finalizing new § 201.110, “Operation of broiler grower ranking systems,” which regulates how LPDs operate ranking systems (

i.e.,

tournaments) for contract broiler growers, establishing a duty of fair comparison when calculating comparison-based compensation among a group of poultry growers in a settlement group. This section contains factors for the Secretary to consider when evaluating whether LPDs have abided by the duty of fair comparison requirement. When LPDs are unable to make a fair comparison for one or more growers, they are required to use a non-comparison compensation method as specified in the contract. LPDs are required to document how they design and operate their poultry grower ranking systems in a manner that is consistent with the duty of fair comparison. The documentation must show that LPDs take measures to mitigate the impact of inequitable distribution of inputs and flock production practices on grower performance and, hence, comparison-based compensation.

The purpose of the rule is to ensure that comparison-based compensation reflects grower effort, not factors that injure the grower, such as feed or chick quality or timing of feed delivery that are outside of grower control but within the control of LPDs. The problem this rule seeks to address is how LPDs manage variation in quality or timing of inputs, flock production practices, and how LPDs handle growers' concerns (

i.e.,

groupings, responsiveness to problems). AMS certainly believes that rewarding grower effort is fair, but unfair and deceptive comparison systems are not.

For example, breeding hens 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 thus will distribute a mix of higher and lower quality chicks in any one settlement period to its growers. Those growers receiving a higher proportion of suboptimal chicks are disadvantaged in a relative comparison to growers who received a higher proportion of optimal chicks.

In theory, LPDs would provide uniformly high-quality inputs (such as chicks and feed) and appropriate production practices (such as flock density) to all growers to ensure maximum efficiency, product quality, and profit. LPDs would also ensure tournament groupings are reasonably random or otherwise not biased and would also reasonably control for problems that growers faced (such as accidental delivery of the wrong feed). However, inputs are natural systems and, therefore, variation in input quality necessarily exists. This variation in input quality affects performance. Moreover, human error can be present in vertically integrated systems as well, for example, the accidental delivery of feed designed for older birds. LPDs want to obtain the full value from all usable inputs and are not inclined to dispose of lower quality chicks or feed to ensure growers only get the highest quality inputs. Thus, LPDs routinely distribute lower quality, lesser performing inputs to their contract growers, even though growers who receive those inputs will likely receive lower compensation than their peer growers in the same tournament that receive higher quality, higher performing inputs. Within a given poultry complex (group of growers serving a single processing plant), a significant share of each grower's compensation is determined by their rank in tournaments between growers at the complex, even though a proportion of performance variation across growers is attributable to variation in inputs, including feed and chick quality, timing of feed delivery and flock pick-ups.

LPDs purport that this system works to promote fair competition in the market for grower services. From an LPD's perspective, as outlined in several public comments, a grower receiving poorly performing inputs and a low rank in one tournament is how the system works; over the long term, according to the commenter, the grower will likely receive better-performing inputs that help to balance out one tournament's losses. LPDs also stated in their public comments that they have no incentive to furnish a grower with poorly performing inputs and/or otherwise mistreat growers.

In practice, LPDs assertions do not bear out. LPDs have limited financial incentive to expend extra efforts to evenly distribute optimal inputs and production practices across growers in a

poultry settlement pool or even to some extent to promptly address problems. LPDs have not provided supporting evidence that long-term provision of inputs balance out uniformly. Even if over the long-term the variability, on average, balances out, there will be growers who do not benefit from the balancing or for whom the balancing comes too late to address the harms caused by variability. LPDs' assurances of long-term balancing out do not provide comfort to the grower facing decreasing ability to pay for immediate operating expenses—and who does not have the extra cash to buffer one tournament's losses. Furthermore, under the current compensation system, LPDs have little motivation to limit performance variability, exercise appropriate care in input distribution, or generally create reasonable uniformity regarding other aspects of tournament operations.

As growers and grower advocacy organizations have asserted, LPDs often provide the “noisy” grower (who exercises their dissatisfaction or seeks redress for bad treatment) “bad” or otherwise inappropriate or untimely inputs or flock production practices, or even organize them into comparison groupings designed to adversely affect their performance. This can even occur for those seeking timely assistance or correction for supposedly inadvertent mistakes (

e.g.,

feed delivered to new chicks that is designed for older birds, and hence is not edible by the younger birds). Growers have consistently reported over the years that LPDs commonly exercise punitive control over inputs, production practices, tournament groupings, and the availability of assistance for ordinary problems. These circumstances suggest an environment characterized by unavoidable unfairness and oppressive methods that adversely affect growers' and even LPDs' ability to compete on the merits. Growers who receive bad treatment cannot competitively discipline an LPD by negotiating better terms or choosing a different LPD. They must accede to continued poor treatment by the LPD.

LPDs' practice of basing grower compensation on factors beyond growers' control distorts the competitive market for grower services. LPDs possess power—whether regionally, within the contract relationship with growers who depend on that relationship to pay down debt, and/or through information asymmetry (

i.e.,

through knowing detailed information about inputs and growers' finances while growers know relatively little). This power allows them to reduce growers' compensation to unfair levels they know growers can barely bear; in turn, growers' reduced financial stability further reduces their countervailing power. Another feature of this practice is that LPDs are not actually allocating more funds to better compensate higher-performing growers: they fix overall compensation to their growers from tournament to tournament and deduct pay from those who performed below the average to reward those who performed above average. In so doing, they prevent growers from actually earning compensation commensurate to services—a circumstance that numerous commenters described experiencing but possessed little recourse to counterbalance,

i.e.,

“Take it or leave it.” This practice further erodes the competitive conditions in the market for grower services. Numerous commenters discussed how just a few below-average rankings caused them to not be able to afford operational expenses and perform worse and worse; and/or exit. By basing compensation on factors outside of actual grower services, LPDs also distort the actual price signal for grower services. And, by fixing overall compensation and deducting from the bottom to reward the top, they prevent honest competitors that actually allocate more funds for better-performing growers. Altogether, AMS believes these are unfair and deceptive practices under the Act.

LPDs harm growers when they compare growers where inputs, production practices, tournament groupings, and assistance are not equitably distributed. Grower pay becomes undeservedly low and fosters unlawful variability in both performance and compensation that have no relationship to the grower's work, initiative, or skill. Growers have no control over how inputs, production practices, tournament groupings and assistance are allocated, owing to the vertically integrated model of broiler chicken production. Unfair comparisons do not benefit growers or competition, and indeed frustrate the LPDs' claimed purpose of the tournament structure. The tournament is a form of performance payment that is intended to incentivize grower deployment of effort, skill, and investment to foster more efficient use of the inputs provided by the LPD. Purportedly, tournaments capture actual differences in grower performance during a given period, while adjusting for overall conditions affecting performance, such as adverse weather conditions, that affect all growers in the complex. The rule sets out reasonable alternatives to these harms that do not undermine the benefits to growers from the vertically integrated production system or from using comparisons to establish flexible baselines for evaluating grower performance, within its appropriate limits.

AMS notes that growers get paid by the pound and start with a static number of chickens. Thus, they have contractually inherent incentives to grow their chickens to the target weight and to minimize the death loss of chickens, even in the absence of a performance payment. Yet AMS also acknowledges that ensuring growers' use of the minimum amount of inputs, such as feed, to achieve maximum growout is also an important part of the overall mix of cost efficiencies. AMS agrees, to the extent that the pool of growers in a tournament is sufficiently random and that the necessary conditions for equitable comparison are met, a tournament may spur growers to operate more efficiently as they seek higher comparison-based compensation, while reasonably guarding against commonly shared external conditions. Yet as discussed in the proposed rule and reflected in comments from grower groups and others, those conditions are often not met. Nor, indeed, are arbitrary or inequitable differences in inputs and production practices inherently essential features required to deliver the benefits of the poultry industry's vertically integrated production and comparison-based performance compensation system. In fact, arbitrary or inequitable practices undermine these benefits, producing instead arbitrary or otherwise inequitable grower pay differences that run contrary to the industry's avowed purpose of the tournament system.

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22

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).

Because the tournament system determines a component of grower pay, LPD practices that impair a fair comparison of grower performance cause a misallocation of performance compensation, thereby unfairly reducing the compensation that may otherwise be due to some growers. Studies

23

have shown 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. 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 production factors under LPD control are unlikely to unfairly affect growers.

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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.

However, when LPDs rank growers who received lower quality (

i.e.,

lesser performing) inputs or less favorable flock production practices against growers who received higher quality (

i.e.,

higher performing) inputs or more favorable flock production practices the former group will likely receive lower pay than the latter group due to factors beyond their control. The ranking in the tournament will not reflect the grower's actual performance; it will reflect the inputs and flock distribution practices the grower received and the grower's performance relative to that of other growers. This is an unfair practice unless the LPD took effective steps to make appropriate adjustments to the compensation structure for this settlement group to reasonably neutralize the impact of the inequitable distribution of inputs and flock production practices within the ranking group. The problem this section of the rule addresses is how tournaments can be designed to effectively counteract the impact of inequitable tournament practices and lead to a fair comparison in poultry ranking systems.

Some LPDs have taken steps to design their compensation systems to appropriately account for the maldistribution of inputs and production practices within a poultry ranking group. In response to the Advance Notice of Proposed Rulemaking that preceded the proposed rule for this final rule, LPDs and their trade associations described different steps LPDs have taken to correct for the inequitable distribution of inputs and production practices among growers and resulting comparisons. A meat industry trade organization indicated that LPDs are known to reduce unpredictability in grower outcomes by having contracts that evaluate performance over multiple flocks and adjust pay 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.

Complementing these examples, 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. This helps growers avoid unintentionally punitive outcomes than would otherwise be the case. Yet, while LPDs assert that quality communication and fair operation are universal, AMS has found through interviews and comment review that LPD behavior currently depends extensively on the goodwill of the LPD, commonly via the manager of the local complex, and LPDs are not uniformly consistent in addressing issues that lead to unfair outcomes. Some local complexes make discretionary decisions that harm growers.

For instance, while LPDs regularly maintain extensive grower manuals, LPDs are not obligated to have their manuals address the range of situations that undermine a fair comparison or monitor whether the local complexes comply with that manual in practice. Growers need a poultry ranking system that meets a reasonably reliable standard. For there to be fair payments under sections 202(a) and 410 of the Act, LPDs must properly adjust their comparison-based compensation systems used in poultry grower ranking systems. Rules, like this final rule, must reasonably neutralize the impact of inequitable distribution of inputs and flock distribution practices on poultry grower compensation.

Because different inputs and flock production practices affect performance under the tournament, LPD decisions are an outsized component of grower payments. When an LPD operates a tournament that uses arbitrary or inequitable delivery of inputs and production practices without establishing systems to mitigate material differences in inputs and production practices among growers in a comparison group or otherwise reasonably neutralize comparison impacts, the LPD has committed an unfair and deceptive practice under the Act. Such a practice is unfair because it uses criteria outside the growers' control to evaluate their performance. It is deceptive because it purports to evaluate growers on their effort when in fact it does not, often leading to payment rates that are wildly fluctuating and unpredictable. The duty of fair comparison established in this rule also arises out of the Act's prohibitions on unfair practices, unjust discrimination, the manipulation of prices, and failure to pay. Comparison-based compensation systems can be used to proactively cause harm to one or more growers by placing them in grower settlement groups that are inappropriate based on distribution of inputs or flock production practices. LPDs likewise can use league composition (

i.e.,

the formation of settlement groups) to manipulate prices downward for a given grower or group of growers. Finally, such practices can lead to a failure to pay for services provided. 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).

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

i.e.,

tournaments) for broiler growers. Paragraph (a) establishes an LPD duty of fair comparison in tournaments. This duty of fair comparison requires LPDs to structure their tournament system to provide a fair comparison among growers. AMS acknowledges that sometimes a fair comparison is not possible due to unforeseen differences in inputs or other circumstances, in which case 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. Paragraph (b) establishes basic documentation that LPDs must maintain regarding how they design and operate their poultry grower ranking systems for broiler growers.

i. Section 201.110(a)—Fair Comparison

Paragraph (a)(1) requires LPDs that use comparison-based compensation systems for their poultry growers to design and operate their poultry grower

ranking system (

i.e.,

comparison-based compensations system) in a way that provides a fair comparison among growers. This final rule uses in various places the definition of “poultry grower ranking system”—commonly called the tournament contract—already set forth in PSD regulations at § 201.2.

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Recognizing that LPDs have long claimed that tournament contracts are designed to promote efficiency, not frustrate it, AMS has written this rule to affirm the duty to fairly compare growers. Specifically, this rule requires LPDs to advance a fair comparison among growers in a poultry ranking group based on grower effort and skill. Measuring performance based on input quality—which is outside of the grower's control—is unfair and deceptive. LPDs have a multitude of means to maintain fair comparisons. This includes correcting for: input quality variations, inappropriate feed type delivery, gaps in feed delivery, variation in production practices such as flock density, pick-up time or pick-up weight across the comparison group. LPDs can manage fair comparisons through extending the period over which the comparisons are made, adjusting payment for certain inputs or production practice differences, or removing growers from tournaments where a fair comparison is not possible. LPDs can ensure league composition (ranking groups) are reasonably random and robust enough to establish a fair comparison baseline. LPDs can also establish processes for responding to complaints in a timely manner or making appropriate adjustments to comparisons. But LPDs violate the Act when they do not design and operate their comparison poultry compensation system in a manner that delivers a fair comparison among growers within any given ranking group.

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Poultry grower ranking system

means a system where the contract between the live poultry dealer and the poultry grower provides for payment to the poultry grower based upon a grouping, ranking, or comparison of poultry growers delivering poultry during a specified period.

Paragraph (a)(2) of § 201.110 establishes the factors the Secretary will consider in 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. This provision establishes a violation for either the LPD's failure to design or failure to operate a poultry grower ranking system to deliver a fair comparison among growers. In the first instance, AMS could bring an enforcement action for an LPD's failure to design the ranking system in a manner that would deliver a fair comparison; such an action would be based upon the processes set forth in the documentation required under paragraph (b) of this section. In the second instance, AMS could bring an enforcement action based upon an LPD's failure to operate the ranking system in a manner consistent with the duty of fair comparison. Such a failure could be because the LPD was not following the documented processes or because in practice the documented processes do not deliver a fair comparison. The factors listed in § 201.110 (a)(2)(i) through (vi) are designed to establish what constitutes reasonable delivery of a fair comparison. That is, the Secretary will examine these factors when determining whether the LPD has reasonably designed or operated their ranking system. Reasonableness should be viewed as an objective test that accounts for growers' contract expectations, basic considerations of equity, and the LPD's ability and willingness to prevent harms to growers resulting from factors outside growers' control. However, it should also provide some flexibility to LPDs to achieve distinct goals provided they are well-designed, justified, and not otherwise unfair or deceptive.

Paragraphs (a)(2)(i) and (ii) of § 201.110 address whether an LPD's distribution of inputs and assignment of flock production practices caused material differences in performance that growers cannot avoid, and whether the LPD made 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 must identify inputs and flock production practices under their control that impact grower payment and ensure that these factors do not meaningfully impact grower payments. LPDs also must improve their monitoring of how inputs and flock production practices are allocated across growers, and, as appropriate, adjust such allocations to reduce the unequal distribution among growers within a settlement group or across a given time period. An LPD could still provide certain growers with different inputs, for example because an LPD believed certain growers were better at raising particular types or quality of birds (

e.g.,

chicks from older hens), provided it adjusted compensation if material differences in performance affected the comparison. The LPD would also be free to use a non-comparison method for those growers.

LPDs must adjust how grower pay is calculated if a fair comparison is impractical due to unavoidable inequitable allocations. For example, the LPD may determine that a five-flock average may be appropriate for determining a grower's pay when the LPD provided chicks for that grower are later discovered to be diseased, and no fair comparison is reasonably possible, practical, or appropriate for that grower within the tournament for that flock. Any adjustment to how grower compensation is determined must use a non-comparison method specified in the contract that reflects reasonable compensation to the grower for its services. The contract should set forth the preferred approach(es) of the parties. Ensuring that agreed-to payment adjustments are fair will be part of regular AMS poultry compliance reviews. An average of the last five settlements by the grower is considered a non-comparison method for the purpose of the tournament settlement that the grower is being excluded from, even though the average is affected by the previous comparisons (unless unusual facts and circumstances call into question the fairness of such an approach).

Section 201.110(a)(2)(iii) addresses whether the designated time period used in an 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 require that LPDs provide all growers precisely equal inputs and identical production practices for each flock. This rule permits LPDs to minimize production inefficiencies that would arise from a standard requiring strict equality in inputs, while avoiding an unfair comparison of grower performance. If the LPDs compare growers fairly over reasonable period of time, randomly selecting inputs is one way, in most cases, to minimize the effect of the flock-to-flock variance in inputs. Companies may use non-random distribution, including temporarily correct for what would otherwise be an inequitable distribution of inputs under an otherwise random system, provided they ensure comparisons are fair.

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) of § 201.110 addresses whether conditions and circumstances outside the control of the LPD render comparison impractical or inappropriate. A settlement group may have differences in 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.

Section 201.110(a)(2)(v) addresses whether an LPD has made reasonable efforts to resolve in a timely manner grower concerns regarding the LPD's exercise of discretion over the implementation of its fair comparison processes. In determining compliance with this requirement, through compliance reviews or in response to a complaint, AMS will consider whether an LPD has demonstrated enough responsiveness and commitment to resolving legitimate concerns to avoid potential secondary harm to the grower. What constitutes “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 and how 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 should have in place processes to—and in fact, actually—resolve this concern as soon as possible to minimize any additional undue damage to the grower's flock due to lack of proper nutrition. If a grower raises concerns about feed persistently being delivered late or in an insufficient quantity, the Agency will examine the LPD's “reasonable efforts” taken to adjust the delivery method. Additionally, an LPD is prohibited from retaliating against a grower in any manner for raising concerns as to whether a fair comparison method was used.

Lastly, § 201.110(a)(2)(vi) states that the Secretary shall consider any other factor relevant to a fair comparison among broiler growers in a poultry ranking system. This provision gives 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 will determine compliance by examining the facts and circumstances, and in particular, whether the LPD took specific actions to undermine the comparison process. For example, this prong allows AMS to consider whether an LPD's intentional grouping of certain growers in a poultry ranking group to manipulate or adversely affect comparison-based outcomes constitutes a violation of the Act.

When determining whether an LPD has designed and operated its broiler grower ranking system to provide a fair comparison among growers, AMS will consider the fair comparison factors set forth in § 201.110(a)(2) against how and to what degree comparison factors account for total grower compensation. When relative grower performance pay accounts for a very small portion of grower compensation, AMS expects differences in inputs and flock production practices to cause fewer material differences in pay. AMS expects this dynamic to operate on a sliding scale; the smaller the role of comparison pay in total grower compensation, the smaller the effect of variations in inputs and flock production practices on total compensation. AMS will 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 make a reliable comparison impossible, impractical, or inappropriate for one or more growers. In such cases, § 201.110(a)(3) requires that an LPD must fairly compensate growers through a non-comparison method specified in the contract that reflects reasonable compensation to the grower or growers for their services. 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 circumstances, and LPD costs are an appropriate consideration as part of those particular facts and circumstances. AMS is aware that LPDs often pay the grower an amount equal to the average rate they received over their previous five flocks. The non-comparison method is intended to fairly compensate the grower. Therefore, absent special circumstances where a rationale and an agreement to do otherwise are reasonable and appropriate (and documented as such), the non-comparison compensation method needs to equal or exceed the pay that the comparison-based compensation rate would have delivered. AMS will rely on the documentation of written processes set out in § 201.110(b), as well as the facts and circumstances of specific occurrences, to evaluate compliance.

ii. Section 201.110(b)—Documentation

Paragraph (b) of § 201.110 details the documentation an LPD must establish and maintain of its processes for the design and operation of its poultry grower ranking system for broiler growers that is consistent with the duty of fair comparison. This paragraph has changed considerably from the proposed rule to provide greater flexibility in meeting the terms of this regulation. AMS also revised paragraph (b) in response to commenters' concerns that the specific documentation requirements laid out in the proposed rule were very similar to documentation requirements delineated in existing regulations at § 201.102(b) and that burdening LPD service technicians with increased paperwork would take away from their core responsibilities of attending to the production needs of growers.

In the final rule, § 201.110(b) sets 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) requires 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 rule requires documentation to include

written processes, referred to as policies and procedures, regarding the process for (i) inputs under LPD control, (ii) flock production practices (iii) league composition, (iv) the evaluation period, (v) non-comparison factors, and (vi) LPD communication and cooperation with growers. These processes must provide a general description of the items that the rule requires to be included, with sufficient detail to provide a typical user of the documentation—such as a local poultry complex manager that directs the operation of the complex's tournament—with an understanding of how duty of fair comparison is to be operationalized within this complex's poultry grower ranking systems.

To simplify the documentation requirements and minimize paperwork burdens for poultry complex service technicians, AMS revised paragraph § 201.110(b)(1)(i), “Inputs under live poultry dealer control,” from what was proposed by removing subparagraphs (b)(1)(i)(A) through (E), which delineated detailed requirements pertaining to identification, management, and adjustment of differences in input distribution to growers, and how LPDs adjust compensation calculations based on the inputs a grower receives. In the final rule, paragraph (b)(1)(i) contains no subparagraphs and simply requires that the LPD's written processes include how and when the LPD assigns, adjusts, or otherwise accounts for similarities and differences of quality and quantity in the delivery of inputs to growers. The removal of subparagraphs (A) through (E) simplifies the requirement by including one all-encompassing requirement that LPDs must explain how they assign, adjust or otherwise account for similarities and differences of quality and quantity in the delivery of inputs to growers. Revised paragraph (b)(1)(i) clearly requires that LPDs address all the ways that variation in inputs can impact a poultry growing ranking system, while giving LPDs flexibility in how to mitigate the impact of uneven distribution of LPD-provided inputs on fair comparison in the tournament and, hence, comparison-based grower pay. In sum, AMS determined that the deleted subparagraphs were not needed to establish that LPDs must explain in their written documentation how they account for the possible distortions and resulting inequities that can manifest in poultry grower ranking systems when they fail to properly account for variations in inputs.

Under paragraph (b)(1)(i), LPDs are required to create a written process for how and when the LPD assigns, adjusts, or otherwise accounts for similarities and differences of quality and quantity in the delivery of inputs to growers. This provision requires LPDs to have a defined process governing how they will ensure the duty of fair comparison is met. Such a process needs to explain how the LPD will operate its poultry complex and its related poultry grower ranking system, so growers have fair opportunity to compete on a level playing field in individual flock settlements or in a comparison settlement that stretches beyond individual flocks, where the impact of variation in quality, quantity, or timing of inputs may be significantly reduced or eliminated. LPDs unfairly harm growers when they distribute inputs in a manner that disadvantages a grower relative to other growers in said tournament(s) and base their compensation accordingly. Growers cannot control the nature of the inputs they receive from their LPD, whether that be quality of chicks or feed, appropriateness of feed delivered for stage of growth, gaps in feed delivery, or delivery of veterinary services. Receipt of low-quality, insufficient, or inappropriate inputs can unfairly impact growers' performance in tournaments if the LPD does not have appropriate processes in place for mitigating such variation in input delivery. LPD processes required under paragraph (b)(1)(i) must include ongoing accounting and monitoring of inputs supplied to each producer using objective measures of quality and performance that are generally accepted in the industry. Such monitoring and accounting should aim for as minimal variation as possible in input delivery quality or quantity across the members of one or more grower poultry ranking groups, and appropriate mechanisms for detecting and correcting for input variations in a timely manner. Such processes should address key areas of concern, including allocation of chicks that differ in quality and performance, variation in quality or quantity of feed, or variation in medication across grower groupings. LPDs may include policies and procedures for balancing disparity of inputs either within a single flock or over multiple flocks as appropriate and feasible.

In the final rule, AMS also simplified § 201.110(b)(1)(ii), “Flock production practices,” from that which was proposed. AMS removed subparagraphs (b)(1)(ii)(A) through (E), which described, in detail, the processes LPDs must include in the design and operation of their poultry grower ranking systems pertaining to assignment of flock density at delivery, timing of pick-up, adjustment of comparison based on different assignment flock production practices, and adjustment of compensation calculations based on the grower's receipt of specific flock production practices. In the final rule, paragraph (b)(1)(ii) contains no subparagraphs and simply requires that written processes include how and when the LPD assigns, adjusts, or otherwise accounts for differences in production practices. The removal of subparagraphs (A) through (E) simplifies the requirement by including one all-encompassing requirement that LPDs must explain how they assign, adjust, or otherwise account for similarities and differences regarding assignment of flock production practices. Revised paragraph (b)(1)(ii) clearly requires that LPD address the ways that variation in flock production practices assigned to growers can impact a poultry growing ranking system, while providing flexibility on the appropriate processes LPDs can establish to mitigate the negative impact LPD-assigned production practices can have on fair comparison in the tournament(s) and, therefore, comparison-based grower pay. In sum, AMS determined that the deleted subparagraphs were not needed to establish that LPDs must explain how they account for the possible distortions and resulting inequities that can manifest in poultry grower ranking systems when LPDs fail to account for variations in flock production practices.

Under paragraph (b)(1)(ii), LPDs must maintain written documentation of its processes for how and when the LPD assigns, adjusts, or otherwise accounts for differences in production practices across growers in a poultry ranking system. Similar to paragraph (b)(1)(i), such processes should include ongoing monitoring of how flock production practices are allocated across different growers in one or more poultry grower ranking systems, and mechanisms for adjusting for disparities in flock production allocations in a reasonable time frame such that additional harm does not result. Such processes governing flock production processes should cover 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; 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 suboptimal allocation of flock production practices to growers; 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 even within a single tournament settlement group within which the LPD has assigned different types of production practices to growers in the group. Under this 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.

In the final rule, AMS also simplified paragraph (b)(1)(iii) of § 201.110 from what was proposed. In the final rule, AMS removed subparagraphs (A) through (C) from paragraph (b)(1)(iii) and instead separated out the requirements into three distinct paragraphs: (b)(1)(iii), “League composition;” (b)(1)(iv), “Evaluation period;” and (b)(1)(v), “Non-comparison.”

Under the final rule, paragraph (b)(1)(iii), “League composition,” requires LPDs to create written processes governing league composition, which is how LPDs assign groups of growers to settlement groups. AMS revised this paragraph for simplicity and readability. Formerly, the provision was contained in paragraph (b)(1)(iii)(C), reading, “If the live poultry dealer groups growers for settlement in any manner other than the one used in recent settlements, how the dealer determines such groupings.” Settlement groupings, also called league composition, are most commonly based on their chronological availability for slaughter within the complex but could also be based on housing type or other commonalities across a group of growers. Generally, the settlement grouping is determined by flock placement timing, which commonly varies based on the timing needs of the growers. For example, growers may need additional time between flocks for cleaning, maintenance, vacation, or other similar reasons.

Paragraph (b)(1)(iii) of this rule serves to identify practices or circumstances that diverge from these ordinary reasons for determining settlement groupings. While legitimate reasons exist for deviating from a strict chronological availability-based grouping, this provision is principally meant to ensure that LPDs do not use league composition to interfere with fair comparison by intentionally grouping specific growers together to lower the pay of one or more members of the settlement group, or to otherwise manipulate pay to deliberately benefit certain growers over others.

Under § 201.110(b)(1)(iv) of the final rule, “Evaluation period,” the LPD is required to maintain written documentation of how it establishes a reasonable time period over which the LPD evaluates the duty of fair comparison. This provision was proposed with slightly different phrasing as paragraph (b)(1)(iii)(A). This provision requires the LPD to describe its process for how it determines the number of settlement groupings over which grower comparisons will be made. The duty of fair comparison requires that LPDs design and operate their poultry growing ranking systems to provide a fair comparison among growers. This means that the comparison must genuinely reflect effort by the growers, not variability in inputs or flock production practices, which are outside of the growers' control and thus not criteria that form the basis of a fair comparison. It may be that over the course of a year variations in inputs or flock production practices will cancel each other out. The evaluation period must account for the length of its growers' contracts and the reasonable expectation of renewal. If the duty of fair comparison requires five flocks, then the contracts need to span at least five flocks, or if they do not, there must be a very high likelihood that the contract will be renewed such that the growers will receive the five flocks and thus be subject to a fair comparison that evens out fluctuations in input quality or quantity or flock production practices.

In the final rule, § 201.110(b)(1)(v), “Non-comparison,” requires that an LPD's written processes explain when the LPD might remove a grower from a ranking group, and how the LPD will compensate growers removed from a ranking group to satisfy the non-comparison compensation method required under § 201.110(a)(3). This provision was proposed as paragraph (b)(1)(iii)(B) in similar language. There are myriad reasons why an LPD may decide to remove a grower from a ranking group. 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 an assignment of production practices that materially impacted the grower's performance, necessitating the removal of the grower from the grouping and compensation under a non-comparison compensation method. Under this provision, the LPD is required to explain how and when the LPD removes a grower from a ranking group because the grower received unfavorable inputs or production practices and how it will fairly compensate such growers through a non-comparison compensation method.

In the final rule, § 201.110(b)(1)(vi), “Communication and cooperation,” is very similar to the provision as proposed, with the only notable change being the paragraph designation: in the proposed rule, the paragraph was designated paragraph (b)(1)(iv); in the final rule, the paragraph is designated paragraph (b)(1)(vi). This paragraph requires LPDs 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, without fear of retribution, negligent or malicious actions taken by the LPD that may impact grower performance. The rule provides 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.

In the final rule, AMS removed proposed § 201.110(b)(2), “Compliance review.” In the proposed rule, this paragraph delineated detailed compliance review procedures for the processes set out in paragraph (b)(1) of this section. AMS removed this requirement in response to comments that such self-audits are a somewhat burdensome requirement for LPDs that can be eliminated with minimal effect on effective compliance. Rather than requiring self-audits, AMS will review the policies and procedures required under § 201.110(b)(1) through its ongoing compliance review process. This will ensure regular review of LPDs' compliance with the provisions of this

regulation with minimal additional recordkeeping burden on LPDs.

In the final rule, § 201.110(b)(2), “Record retention,” mirrors that which was proposed, with the only notable change being the paragraph designation: in the proposed rule, the paragraph was designated paragraph (b)(3); in the final rule, the paragraph is designated paragraph (b)(2). This paragraph requires 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. These records should be made available to AMS upon request. Relevant records 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; written documentation of league composition; written documentation of grower complaints and their resolution; 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 the regulation, LPDs must 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 will enhance LPD management's ability to establish and monitor compliance, as well as AMS's ability to supervise and enforce the rule.

iii. Compliance and Enforcement

Compliance with § 201.110(b) requires LPDs to retain records that document the LPD's design and operation of broiler grower ranking systems in a manner that is 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 this 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 can occur in several ways. Growers can 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.

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AMS will 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 also have a right to proceed directly in Federal court.

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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. Broiler Grower Capital Improvement Disclosure Document (§ 201.112)

AMS is finalizing new § 201.112, “Broiler grower Capital Improvement Disclosure Document,” which requires that LPDs provide growers with a Capital Improvement Disclosure Document (Disclosure Document). Paragraph (a) requires that when an LPD requests that a grower make an additional capital investment, the LPD must provide the grower with a Disclosure Document. Paragraph (b) describes the required disclosures in the Disclosure Document. AMS made slight modifications to provisions of paragraph (b), which will be described below. AMS also modified proposed § 201.112 in response to public comment by adding a new paragraph (c), which requires the LPD to assist with translating the Disclosure Document.

The inclusion of § 201.112 is necessary because LPDs often request or require that growers make costly additional capital investments, which may benefit LPDs and growers in some ways, but may also be problematic and unfair. The LPD requesting an additional capital investment may be deploying bargaining leverage and forcing the grower to bear unreasonable risk, and the purposes, processes, and outcomes of the additional capital investment may be opaque, complicated, or otherwise difficult to evaluate. Additional capital investments can also further serve to lock in growers to specific LPDs, making it harder to switch. Growers, however, are often not in a position to choose not to make an additional capital investment. Many growers come under significant pressure from LPDs to make a requested additional capital investment. Even when a grower has sufficient bargaining leverage to negotiate the terms of compensation, the LPD may not provide sufficient information for the grower to assess the full risk and reward of undertaking the additional capital investment. Indeed, based on AMS's knowledge of industry disclosure practices and decades of hearing complaints from growers, growers today often undertake additional capital investments for the LPD without the opportunity to fully understand the additional capital investment's purpose, design, risks, and impacts on their financial well-being; or, are pressured in some way to make those investments.

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Information asymmetry impairs growers' ability to negotiate, effectively exercise independent decision-making to reject an additional capital investment, and, more broadly, manage their farming operation upon choosing

to make the additional capital investment. 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 additional capital investment, 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 additional capital investment practices that shift or hide costs to growers, which subverts the competitive process.

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

https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6

(In a 2011 survey of contract growers, sixty percent of growers making any capital expenditures reported that the LPD required those expenditures). AMS-FTPP-22-0046-0799 (“Poultry companies require capital improvements that do not improve my bottom line. I must pay for the capital improvements, which may not be a capital improvement that will benefit my operation. It will not benefit the quality of the bird. The benefit is not clearly proven or explained, just I am required to make the improvement or get paid less or dropped as a grower.”); AMS-FTPP-22-0046-0737 (“For years, I've been forced to upgrade my farms facilities at my own expense just to maintain contracts. These costly and often unnecessary upgrades, dictated by companies like [name redacted], have left me in debt and struggling to cover basic expenses. The financial burden is unsustainable and has made it incredibly challenging to keep my farm afloat”); AMS-FTPP-22-0046-0176 (“For way too long these poultry integrators have been let off the hook for bullying, forcing their contract growers into making large investments in upgrades that will never see a payback beyond the initial investment to build the infrastructure to keep their growers under their total control and blaming growers for everything that goes wrong . . .”). United States Department of Justice, United States Department of Agriculture, (May 2010), Public Workshops Exploring Competition in Agriculture,

https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10

(“It's typical for growers to be asked to do expensive upgrades on their poultry houses before this first loan of this building has been paid off. I know because I was one of those growers. The threats put before you, the communication, the threat is put before you, if you do not do this, they're not going to bring you any more chickens to grow”).

AMS has identified as deceptive those LPD contracting practices that fail to disclose key information about additional capital investments. Growers make critical investment decisions in reliance on the information required by this rule, most of which is not currently provided by LPDs. AMS emphasizes that disclosure under new § 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, “Additional capital investments criteria,” and the P&S Act more broadly, when terms are unfair. Without sufficient, simple, and clear disclosures, growers cannot assess the benefits or risks of making the investment. Indeed, given the role of performance pay in determining total grower compensation under the tournament, some voluntary additional capital investments may seem mandatory if growers want to maintain existing revenue levels, even if growers don't fully understand the purposes and expected outcomes of the requested additional capital investment. Furthermore, growers experience considerable pressure to accept LPDs' additional capital investment requests given LPDs' market power, or substantial bargaining power, and growers' relatively weak market position, including commonly a lack of meaningful choice among LPDs. A majority of broiler growers cannot change LPDs if their current relationship sours.

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

AMS notes that the existing regulation in § 201.216 is intended to allow the Agency to partially mitigate additional capital investment problems for growers. The existing regulation sets forth criteria for whether additional capital investments would be an unfair practice or other violation of the Act, including whether the grower can decide against the additional capital investments; whether the additional capital investments were a result of coercion, retaliation, or threats by the LPD; and whether the additional capital investments can result in reasonable recoupment, or adequate compensation for the additional capital investments, among other non-exhaustive criteria. However, AMS has found that the presence of the criteria alone is insufficient to effectively address problems stemming from additional capital investments. For example, insufficient information about additional capital investments impacts the criteria at § 201.216(a) that seek to preserve the grower's discretion to decline an additional capital investment. Lacking sufficient information about additional capital investments, a grower cannot effectively assess whether they would still be able to compete against other growers without the additional capital investment.

The Act requires production contracts to disclose the possibility of additional capital investment (7 U.S.C. 197a(b)). However, the majority of contracts contain no information relating to when or how additional capital investments may be required, nor the costs or risks of any such additional capital investment, nor what, if any, limits there are on an LPD's ability to unilaterally impose additional capital investments that do not materially improve production efficiency or meet consumer demands. To better enable growers and AMS to guard against unfairness and to prevent deception, LPDs must disclose more information regarding the purposes, processes, and outcomes of additional capital investments they request from broiler growers. The disclosures must occur before growers take on the financial burden and risks of the additional capital investment. 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. The disclosures required in § 201.112 accomplish these goals. Furthermore, the act of disclosing information does not, in and of itself, render the action lawful. Even if disclosed, certain actions may be unfair or deceptive practices under the P&S Act. Disclosure alone does not mitigate the legal or ethical ramifications of such practices.

The Agency has an existing regulation, 9 CFR 201.216, which sets forth a non-exclusive list of criteria the Secretary may consider in determining if a required additional capital investment violates the Act. In future cases, the § 201.112 disclosures on additional capital investments will improve the Secretary's analysis of § 201.216. Whether the Secretary considers recoupment of the additional capital investment to be reasonable includes consideration of the projected returns under § 201.112(b)(6), the contract terms, and the return to an average grower operating under the LPD's contract. AMS underscores the importance of length of the contract to secure a full opportunity for recoupment. AMS recognizes that growers in many instances cannot avoid the LPD's unfair exercise of market power or bargaining leverage, and that the LPD failing to sufficiently and fairly compensate growers for an additional capital investment is not a cognizable benefit to growers or to competition.

i. Section 201.112(a)—Disclosure Requirement

In the final rule, paragraph (a) of § 201.112 requires that when an LPD requests that a broiler grower make an additional capital investment, the LPD must provide the broiler grower with a Disclosure Document that contains the information required by paragraph (b) of this section. AMS slightly modified this provision from the proposed rule by adding the paragraph heading, “Disclosure requirement.” Information provided in the Disclosure Document will help growers protect themselves at an earlier stage—before the investment—from unfair practices, by enabling them to report to AMS potentially unfair additional capital investment practices or bring their own action. Improved documentation will also enable AMS to take earlier and more effective action against problematic additional capital investment practices. Transparency will also enable some growers, where sufficient choice exists, to make better additional investment decisions. Importantly, clear disclosure of additional capital investment 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 additional capital investment), as well as other provisions of the P&S Act and regulations. Disclosure alone is

not a remedy for an additional capital investment that is unfair, but the disclosures required by new § 201.112 will create a record that will facilitate the Agency's ability to enforce the Act under existing § 201.216.

This requirement applies prospectively to requests for additional capital investments. However, if the LPD has previously provided any disclosure to the grower that was incomplete or inaccurate, the company should consider revising it and providing an updated copy to the grower to minimize the risks of having engaged in a violation of deceptive practices.

ii. Section 201.112(b)—Disclosure Contents

Section 201.112(b) lists the items the Disclosure Document is required to disclose. AMS slightly modified this provision from the proposed rule by adding the paragraph heading, “Disclosure contents.” The required disclosures must be prominently presented in a clear, concise, and understandable manner. Paragraph (b)(1) requires that the Disclosure Document provide the purpose of the additional capital investment for both the LPD and the grower and a summary of all research and other supporting material that the LPD has relied upon in justifying the additional capital investment. LPDs almost always have superior information regarding the outcomes of and risks around the contemplated additional capital investment. LPDs commonly research and design additional capital investments and usually have a plan or intended outcomes with respect to their request for the adoption of an additional capital investment. Growers have limited to no access to that information, yet they are often asked to expend hundreds of thousands or even millions of dollars to implement additional capital investments. As part of any assessment of risks or benefits relating to an additional capital investment, growers must be provided the information necessary to understand the intended purpose of the additional capital investment and have access to any research or other supporting material regarding that additional capital investment. For example, growers may make different decisions about their approach to additional capital investment depending on whether it is intended to be performance-enhancing (

e.g.,

tunnel ventilation), whether it is intended to enable a change in the product offered (

e.g.,

a switch to “No Antibiotics Ever”), or whether it changes the nature of the controls and risks (

e.g.,

automation and monitoring). Omissions of this information prevent growers from making an informed business decision, negotiating effectively for adequate compensation, or determining if and how the original bargain for exchange has been modified or altered. Thus, an LPD's failure to adequately disclose this information is deceptive and harmful to growers because that failure imposes undue financial risk and increases the likelihood of a poor financial outcome on the investment.

Paragraph (b)(2) of § 201.112 requires LPDs to provide clear additional capital investment financial incentives and schedules to growers. Under paragraph (b)(2), LPDs are required to disclose to the grower all financial incentives and compensation associated with the additional capital investment. The Disclosure Document shall clearly delineate how long such financial incentives or changes in grower compensation will last and the degree to which benefits accruing to growers making such investments are contingent on how widely they are adopted by other growers. Compensation and financial incentives are broad terms and may include changes to grower base pay or performance pay, payments specifically linked to adoption of the particular technology resulting from the additional capital investment, and any other changes to the economics of the grower's relationship with the poultry company associated with making the additional capital investment or its implementation once made. Clearly disclosing financial incentives will assist the grower in assessing the relative risks of non-recoupment, as the reliability of those incentives may vary based on the duration of the contract and whether other growers are likely to incorporate the additional capital investment technology in a way that would make recoupment through performance pay less reliable.

Paragraph (b)(3) of § 201.112 requires that LPDs disclose all construction schedules related to the request for the additional capital investment. Clearly disclosing expected grower construction schedules and other repayment schedules also will assist the grower in assessing incentives and risks relating to borrowing, construction, and payment timing. This disclosure will position growers to better analyze the business risk in undertaking an additional capital investment, including the operational risks relating to implementing the additional capital investment and risks of LPD strict enforcement of these implementation requirements. For example, comments (discussed in further detail below in section V., “Comment Analysis”) noted concerns about LPDs not being sufficiently lenient regarding construction schedules. By enabling growers to clearly understand each component of the additional capital investment requested by the LPD, the required disclosures will address key information asymmetries that exist between the LPD and the grower with respect to LPD's purposes, bases, and expectations for an additional capital investment. Growers will be better positioned to evaluate the true costs and risks from the additional capital investment, as well as the operational implications for their farming enterprise.

As proposed, paragraphs (b)(1) through (3) of § 201.112 included language requiring that LPDs describe within their Disclosure Document: (1) “any relevant” research or other supporting material that the LPD has relied upon in justifying the additional capital investment; (2) “all relevant” financial incentives and compensation for the grower associated with the additional capital investment; and (3) “all relevant” construction schedules related to the request for additional capital investment. After consideration and review of public comments, it became clear that the term “relevant” as proposed was ambiguous and confusing. Commenters expressed uncertainty regarding how to determine compliance with these requirements. Some stakeholders believed that the term “relevant” created an ambiguous requirement that could result in the inclusion of unnecessary documents that may not in fact be “relevant” to satisfy the required disclosures. AMS finds these comments persuasive and, thus, AMS has struck the term “relevant” from paragraphs (b)(1) through (3) of § 201.112. After the change, paragraphs (b)(1) through (3) require LPDs to submit: (1) all research and other supporting material that the LPD has relied upon in justifying the additional capital investment; (2) all financial incentives and compensation for the grower associated with the additional capital investment; and (3) all construction schedules related to the request for additional capital investment. The removal of the word “relevant” will ease the burden on LPDs by removing ambiguity regarding which disclosures are required to be included in the Disclosure Document. This technical change does not increase the burden of the disclosure requirement; it merely removes ambiguous phrasing while retaining the same disclosure requirement proposed in the proposed

rule. This change will prevent inconstancies in LPDs' interpretation of what disclosures are required by paragraphs (b)(1) through (3).

In the final rule, § 201.112(b)(4) requires that LPDs disclose their expectations regarding housing specifications associated with the additional capital investment. LPD housing specifications are critical components to any additional capital investment. The provision of these basic details regarding the additional capital investment will enable a grower to understand the workings, process, and design characteristics of the requested additional capital investment. They thus would enable a grower to identify business risks associated with undertaking the additional capital investment, as well as any unfair or otherwise impermissible additional capital investment practices prohibited under § 201.216. This provision remains unchanged from the proposed rule.

In the final rule, AMS revised § 201.112(b)(5). As proposed, paragraph (b)(5) required that LPDs disclose any required or approved manufacturers or vendors. In the proposed rule, AMS solicited comment on whether paragraph (b)(5) should also require the disclosure of any material financial benefits that the LPD, or any officer, director, employee or family member of any such person, receives from the use of the required or approved vendor.

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Commenters indicated that LPDs should not be allowed to require growers to use certain equipment or vendors, especially when those LPDs hold any amount of financial interest in those equipment companies or specifically required vendors. Therefore, in the final rule AMS expanded paragraph (b)(5) to require disclosure not only of required or approved manufacturers or vendors, but also all financial benefits that the LPD or any officer, director, decision-making employee, or close family member thereof receives from the use of the required or approved manufacturer or vendor.

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89 FR 49002, 49025 (June 10, 2024).

In the additional capital investment Disclosure Document, the LPD must disclose any required or approved manufacturers or vendors, and any financial benefits that the LPD or its officers (such as CEO, President, Secretary, etc.), members of its board of directors, decision-making employees, or close family members of any such person, will receive from using such a manufacturer or vendor. Decision-making employees refers to those employees who are involved with the decision-making for the additional capital investment and its implementation. A close family member covers an immediate or other family member where a reasonable person would question the impartiality of the business judgment of the decision-maker. This component of the Disclosure Document applies to possible conflicts of interest that may influence specifications for required or approved manufacturers or vendors.

The additional language is similar to an existing disclosure requirement under the Federal Trade Commission's Franchise Rule, but requires disclosure of benefits from more individuals.

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AMS found this addition persuasive because it is designed to promote a similar purpose by protecting the more financially vulnerable party—who is making a significant investment—from incurring debt or otherwise expending scare resources, not solely to achieve the investment's purpose, but rather as a reflection of the presence of a conflict of interest on the part of the less financially vulnerable party (the LPD).

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16 CFR 436.5(h)(6).

Section 201.112(b)(6) requires that LPDs provide a financial analysis of projected returns the grower can expect related to the additional capital investment, including any assumptions, risks, or uncertainties, sufficient to allow the grower to make their own projections. The language of the final rule is slightly simplified from that proposed to remove the hyphenated text and incorporate that same language closer to the end of the sentence. This technical change improves the readability of the provision without changing its meaning as proposed. This provision is designed to enable the grower to evaluate the reliability of the financial returns that the grower could receive over the duration of the contract. Such information would include, where relevant, assumptions regarding the expected likelihood of whether other growers will adopt the additional capital investment and the impacts on the reliability of returns in relation to the incentives. Financial analysis of projected returns is critical to enabling growers to understand the opportunities, and hence the risks, they may be taking on. For example, revenue projections should include assumptions that can be relied upon by growers in relation to annual flock placements, stocking density, and the expected distribution of performance pay. Omission of this information is central to the inability for growers to effectively identify whether they can adequately recoup the additional capital investment or whether the additional capital investment is otherwise unfair.

Disclosure under § 201.112 is more detailed than LPD disclosure under the existing regulation in § 201.102(d)(2). The existing disclosures provide guidance to the grower with respect to the relative risks associated with contracting with the LPD to prevent deception before it harms the producer. The disclosures required in this final rule focus on ensuring that growers are aware of known or reasonably expected sources of returns, risks, and costs (including costs such as labor, operating, maintenance, and other costs associated with a request for an additional capital investment). Thus, § 201.102(d)(2)(i) and (ii)

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is a focused revenue disclosure, and references situations where contracts are modified due to additional capital investment or otherwise and requires a projection from LPDs when contract modifications dilute the value of the 5-year revenue tables required in § 201.102(d)(1). If § 201.112 is applicable to the LPD and incorporates what is otherwise requ

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