# 87 FR 34980: Transparency in Poultry Grower Contracting and Tournaments

> Federal · Regulations · In force

URL: https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2022-11997

## Section

- **Citation:** 87 FR 34980
- **Heading:** Transparency in Poultry Grower Contracting and Tournaments
- **Jurisdiction:** Federal
- **Kind:** Regulations
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** Federal Register / Vol. 87 / 87 FR 34980

## Text

DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 9 CFR Part 201 [Doc. No. AMS-FTPP-21-0044] RIN 0581-AE03 Transparency in Poultry Grower Contracting and Tournaments AGENCY:
Agricultural Marketing Service, USDA.

ACTION:
Proposed rule.

SUMMARY:
The Agricultural Marketing Service is soliciting comments on proposed revisions to the regulations under the Packers and Stockyards Act, 1921. The proposal would revise the list of disclosures and information live poultry dealers must furnish to poultry growers and sellers with whom dealers make poultry growing arrangements. The proposal would establish additional disclosure requirements in connection with the use of poultry grower ranking systems by live poultry dealers to determine settlement payments for poultry growers. The proposals are intended to promote transparency in poultry production contracting and to give poultry growers and prospective poultry growers relevant information with which to make business decisions.

DATES:
Comments must be received by August 8, 2022. Comments on the information collection aspects of this proposed rule must be received by August 8, 2022.

ADDRESSES:
Comments must be submitted through the Federal e-rulemaking portal at https://www.regulations.gov and should reference the document number and the date and page number of this issue of the Federal Register . All comments submitted in response to this proposed rule will be included in the record and will be made available to the public. Please be advised that the identity of individuals or entities submitting comments will be made public on the internet at the address provided above.
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
that the identity of individuals or entities submitting comments will be made public on the internet at the address provided above.
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:
At the beginning of the 20th century, a small number of meat packing companies dominated the industry and engaged in practices that were deemed anticompetitive and harmful to producers. In response, Congress enacted the Packers and Stockyards Act, 1921 (Act), 7 U.S.C. 181 et seq., which seeks to promote fairness, reasonableness, and transparency in the marketplace by prohibiting practices that are contrary to these goals. In the 100 years since the Act went into effect, business practices changed significantly, particularly in the poultry industry, for which provisions were added to the law in 1935.
Within the last 40 years, the poultry industry has become increasingly concentrated, both horizontally and vertically, with the use of the poultry grower ranking or “tournament” pay system increasingly predominant throughout. With vertical integration, live poultry dealers frequently own or control all segments of the production process except growout, where poultry growers raise young poultry to harvest size under poultry growing arrangements (contracts). Under this system, poultry grower investment is substantial and growing, yet they may face a market dominated by only one or two live poultry dealers for which they can grow.
We will explain in this document how poultry growers and prospective poultry growers may find themselves unable to negotiate for (1) access to critical information needed to properly assess farm revenue streams, and (2) information related to the distribution of inputs affecting performance among tournament participants
t dominated by only one or two live poultry dealers for which they can grow.
We will explain in this document how poultry growers and prospective poultry growers may find themselves unable to negotiate for (1) access to critical information needed to properly assess farm revenue streams, and (2) information related to the distribution of inputs affecting performance among tournament participants. The inability to secure this information may expose growers to various risks of deception that could be reduced or eliminated with the provision of the information. Additionally, we will establish that live poultry dealers possess this information and are able to provide it to growers.
Most chicken growers and some turkey growers raise poultry under a growing arrangement commonly known as a tournament system. Under this system, live poultry dealers use a relative performance or grower ranking system for settlement purposes, i.e., to determine grower payment among a group of competing growers. We will explain in this document how poultry growers in tournament systems may find themselves competing for payment without access to information that would allow them to optimize poultry production and payment or manage the risks related thereto.
Over the past several years, the Department of Agriculture (USDA) has received numerous complaints from poultry growers about poultry growing contracting in general and tournament systems particularly. While the complaints cover a range of concerns, a central concern is the gap between expected earnings and the ability to actually achieve those outcomes through reasonable efforts by the grower. Accordingly, AMS is proposing rules that would increase transparency in all poultry growing contracting, including tournament systems, targeted at key inflection points for growers—at the time of contracting and housing upgrades, and at the provision of inputs during tournaments
p between expected earnings and the ability to actually achieve those outcomes through reasonable efforts by the grower. Accordingly, AMS is proposing rules that would increase transparency in all poultry growing contracting, including tournament systems, targeted at key inflection points for growers—at the time of contracting and housing upgrades, and at the provision of inputs during tournaments. In this rulemaking, we are seeking to utilize transparency to secure a more level playing field for growers and enable a marketplace with fairer contracts and the fairer operation of those contracts under the contract production model.
Outline of the Notice of Proposed Rulemaking
I. Background A. Previous Rulemaking B. Relevant Terms and Definitions C. Industry Background 1. Market Structure 2. Poultry Housing Construction and Grower Debt 3. Poultry Grower Compensation 4. Integrator Inputs a. Stocking Density and Flock Placement Frequency b. Breed c. Gender d. Breeder Flock Age e. Breeder Flock Health f. Feed Disruptions g. Medications II. Poultry Growing Arrangements A. Incomplete Contracts B. Market Power and Risks to Growers C. Poultry Grower Earnings and Returns on Equity D. Asymmetrical Information E. Poultry Grower Concerns III. Poultry Grower Payment Systems A. Fixed-Performance Pay Systems B. Tournament Pay Systems IV. Poultry Grower Ranking Systems A. Tournament Settlements B. Tournament Payments as a Measure of Grower Skill, Effort, and Innovation C. Distribution of Inputs Among Tournament Participants D. Input Variability and Grower Payments 1. Stocking Density 2. Breed Ratios 3. Gender Ratios 4. Breeder Flock Age 5. Breeder Flock Health 6. Feed Disruptions 7. Medications E. The Need for Transparency V. Proposed Regulations A. Definitions B. Disclosure C. Contract terms D. Poultry Grower Ranking Systems VI. Regulatory Analyses A. Executive Order 12988—Civil Justice Reform B. Executive Order 13175—Consultation and Coordination With Indian Tribal Governments C. Civil Rights Impact Analysis D
Breeder Flock Age 5. Breeder Flock Health 6. Feed Disruptions 7. Medications E. The Need for Transparency V. Proposed Regulations A. Definitions B. Disclosure C. Contract terms D. Poultry Grower Ranking Systems VI. Regulatory Analyses A. Executive Order 12988—Civil Justice Reform B. Executive Order 13175—Consultation and Coordination With Indian Tribal Governments C. Civil Rights Impact Analysis D. Paperwork Reduction Act E. E-Government Act F. Executive Orders 12866 and 13563 G. Regulatory Impact Analysis H. Regulatory Flexibility Analysis VII. Request for Comments Amendatory Text Appendices I. Background
Among other things, sec. 202(a) of the Act (7 U.S.C. 192) prohibits live poultry dealers, with respect to live poultry, from engaging in or using deceptive practices or devices. Further, sec. 410(a) of the Act (7 U.S.C. 228b-1) requires live poultry dealers obtaining live poultry under a poultry growing arrangement to make full payment for such poultry to the poultry grower from whom the dealer obtains the poultry on a timely basis. Sec. 407(a) of the Act authorizes the Secretary of Agriculture (Secretary) to make rules and regulations as necessary to carry out the provisions of the Act. Such regulations are found, in part, in the Code of Federal Regulations (CFR) at 9 CFR part 201.
This proposed rule builds on existing disclosure concepts under the Packers and Stockyards Act in 7 U.S.C 197(a) through (c) and 9 CFR 201.100. The current disclosure framework has improved transparency in poultry contracting. However, the modern poultry industry now requires larger, and growing, capital investments, and growers need additional information with which to make business decisions. Growers have consistently expressed concerns about the inadequacy of some production contract terms and the discretionary functions exercised by live poultry dealers under those contracts, which they assert have exposed them to deception and other abuses
ry industry now requires larger, and growing, capital investments, and growers need additional information with which to make business decisions. Growers have consistently expressed concerns about the inadequacy of some production contract terms and the discretionary functions exercised by live poultry dealers under those contracts, which they assert have exposed them to deception and other abuses. AMS agrees many production contracts do not provide enough information for growers to assess their expected value, and important information relating to live poultry dealer obligations and practices should be better illuminated. The purpose of this proposed rule is to provide growers with this type of relevant information. This proposal reflects AMS's desire to build on existing Packers and Stockyard Act disclosure concepts to ensure poultry growers have the tools and information they need to be successful in their pursuits.
Disclosure has been a staple 1 of the Act's regulatory scheme and is required under the regulations. Moreover, disclosure for the primary purpose of providing adequate information necessary for parties in asymmetrical business relationships to make informed business decisions and risk assessments has long been the subject of Federal Trade Commission (FTC) regulation under section 5 of the FTC Act, which, like section 202(a) of the Packers and Stockyards Act, addresses deception. For example, the Federal Trade Commission's Franchise Rule requires the franchising industry to provide prospective purchasers of franchises information necessary to weigh the risks and benefits of an investment by providing required disclosures in a uniform format. 2 This proposed rule is designed to similarly provide current and prospective poultry growers with sufficient information prior to entering into an agreement.
1 For example, see current 9 CFR 201.100(a)—Poultry growing arrangement, timing of disclosure.
2 16 CFR part 436; 84 FR 9051 (May 2019)
weigh the risks and benefits of an investment by providing required disclosures in a uniform format. 2 This proposed rule is designed to similarly provide current and prospective poultry growers with sufficient information prior to entering into an agreement.
1 For example, see current 9 CFR 201.100(a)—Poultry growing arrangement, timing of disclosure.
2 16 CFR part 436; 84 FR 9051 (May 2019).
This proposed rule would revise § 201.100 of the regulations by adding certain items to the list of required disclosures a live poultry dealer must make to poultry growers and prospective poultry growers in connection with poultry growing arrangements. The proposal would further require live poultry dealers to specify additional terms in poultry growing contracts. AMS intends these proposed revisions to improve transparency and forestall deception in the use of poultry growing arrangements.
This proposed rule would also add a new § 201.214 to the regulations that would require live poultry dealers to provide certain information to poultry growers in tournament pay systems about integrator-controlled inputs related to the poultry flocks growers receive for growout. The proposed provisions also would add a new level of transparency to grower ranking sheets, ensuring that poultry growers can evaluate the distribution of inputs among all tournament participants and better assess the effect on grower payment. AMS intends the proposed requirements to provide greater transparency and forestall deception in the use of poultry grower ranking systems.
Finally, this proposed rule would make conforming changes to the regulations by adding to the list of definitions in § 201.2 to define terms used in revised § 201.100 and new § 201.214. Specifics of each of these proposals are provided later in this document.
A. Previous Rulemaking
USDA has made previous attempts to address grower concerns arising from the use of poultry growing arrangements and poultry grower ranking systems
make conforming changes to the regulations by adding to the list of definitions in § 201.2 to define terms used in revised § 201.100 and new § 201.214. Specifics of each of these proposals are provided later in this document.
A. Previous Rulemaking
USDA has made previous attempts to address grower concerns arising from the use of poultry growing arrangements and poultry grower ranking systems. Two such attempts were made by USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA), which previously administered the provisions of the Act. GIPSA issued a proposed rule in 2010 (75 FR 35338; June 22, 2010) that would have, among other things, identified as unfair, unjustly discriminatory, and deceptive specific practices related to poultry contracting. The 2010 proposed rule would have required live poultry dealers—when paying growers under poultry grower ranking systems—to pay growers the same base pay for growing the same type and kind of poultry. The 2010 proposed rule further would have required that tournament system growers be settled in groups with other growers with similar house types. After considering comments on the 2010 proposal, GIPSA elected not to finalize certain provisions related to poultry contracting, so it modified the original proposal and published a second proposed rule in 2016 (81 FR 92723; December 20, 2016). The 2016 proposed rule would have identified criteria that the Secretary could consider when determining whether a live poultry dealer's use of a system for ranking poultry growers for settlement purposes is unfair, unjustly discriminatory, or deceptive or gives an undue or unreasonable preference, advantage, prejudice, or disadvantage
second proposed rule in 2016 (81 FR 92723; December 20, 2016). The 2016 proposed rule would have identified criteria that the Secretary could consider when determining whether a live poultry dealer's use of a system for ranking poultry growers for settlement purposes is unfair, unjustly discriminatory, or deceptive or gives an undue or unreasonable preference, advantage, prejudice, or disadvantage. The proposed amendments would also have clarified that, absent demonstration of a legitimate business justification, failing to use a poultry grower ranking system in a fair manner after applying the identified criteria is unfair, unjustly discriminatory, or deceptive and a violation of the Packers and Stockyards Act, regardless of whether it harms or is likely to harm competition. The original 60-day public comment period for the 2016 proposed rule was extended an additional 30 days, consistent with the memorandum of January 20, 2017, to the heads of executive departments and agencies from the Assistant to the President and Chief of Staff entitled “Regulatory Freeze Pending Review.”
In November 2017, responsibility for GIPSA activities was transferred to AMS, which now administers the Act and regulations, and which has assumed responsibility for this rulemaking. In its review of public comments on the 2016 proposed rule, AMS found that many of
Executive Order 14036—Promoting Competition in the American Economy (86 FR 36987; July 9, 2021) directs the Secretary of Agriculture to address unfair treatment of farmers and improve conditions of competition in their markets by considering rulemaking to address, among other things, certain practices related to poultry grower ranking systems. AMS has considered that direction in undertaking this rulemaking
Order 14036—Promoting Competition in the American Economy (86 FR 36987; July 9, 2021) directs the Secretary of Agriculture to address unfair treatment of farmers and improve conditions of competition in their markets by considering rulemaking to address, among other things, certain practices related to poultry grower ranking systems. AMS has considered that direction in undertaking this rulemaking. While the discussions in this rule focus largely on broiler (chicken) production, the industry concepts presented—and the proposed regulations—are intended to apply to the commercial production of all poultry species where the proposed regulatory requirements are relevant. The bulk of available research and information currently available to AMS specifically addresses broiler production. Nevertheless, AMS believes that body of research and information is relevant to other poultry species, given the absence of material differences in their commercial production.
B. Relevant Terms and Definitions
For this preamble, section 2(a) of the Act (7 U.S.C. 182) provides various useful definitions: A live poultry dealer is any person engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another. A poultry grower is any person engaged in the business of raising and caring for live poultry for slaughter by another, whether the poultry is owned by such a person or by another, but not an employee of the owner of such poultry. A poultry growing arrangement is any growout contract, marketing agreement, or other arrangement under which a poultry grower raises and cares for live poultry for delivery, in accord with another's instructions, for slaughter.
C. Industry Background
In this section, we explain how high levels of vertical integration in U.S. commercial poultry production have influenced the poultry production contracting process and the production contracts themselves
eting agreement, or other arrangement under which a poultry grower raises and cares for live poultry for delivery, in accord with another's instructions, for slaughter.
C. Industry Background
In this section, we explain how high levels of vertical integration in U.S. commercial poultry production have influenced the poultry production contracting process and the production contracts themselves. We also illustrate how the effects of market concentration limit poultry growers' options in relation to dealers with whom they can contract to produce poultry. When they have few or no alternative options, growers lack the bargaining power to negotiate for, among other things, better information symmetry, which gives rise to the risk of deception at a series of points in the relationship. We also describe some of the factors that affect grower payments as they relate to the information imbalances we are proposing to remedy.
1. Market Structure
Some live poultry dealer firms own and manage local “complexes” of integrated operations that include hatcheries, feed mills, transportation systems, and processing facilities, and they contract with individual growers within a local region to raise birds for meat and hatchery eggs. 3 These live poultry dealers that own and manage vertically integrated operations are referred to in the industry as “integrators.” Other industries may follow this model to some extent (for example, some firms manage multiple aspects of hog production), but it is used in almost all broiler chicken production 4 and is fairly common in turkey production.
3 MacDonald, James M. Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, U.S. Department of Agriculture, Economic Research Service, June 2014.
4 In a 2011 survey of 17 sample states, 97% of broiler production was done by contract growers. MacDonald (June 2014) Op. Cit.
Through vertical integration, integrators control the complete supply chain from poultry genetics to slaughter
Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, U.S. Department of Agriculture, Economic Research Service, June 2014.
4 In a 2011 survey of 17 sample states, 97% of broiler production was done by contract growers. MacDonald (June 2014) Op. Cit.
Through vertical integration, integrators control the complete supply chain from poultry genetics to slaughter. Integrators also own most of the inputs and manage the operation of the supply chain. However, integrators outsource the function and major costs of raising the poultry to broiler growers, while controlling much of that process through their production contracts. Through the poultry growing arrangement, broiler growers provide the growout facilities and the equipment, labor, and management associated with those facilities. Broiler growers are responsible for utilities, fuel, maintenance, and repair. The growers' tasks include ensuring the equipment functions properly and the environment inside the house is satisfactory at all times. The grower is responsible for waste removal and disposal of dead birds. These activities are subject to significant direction and control by the integrator or integratory subsidiary. Integrators exert significant power over contract poultry grower operations through individual production contracts, payment systems, and control of certain production variables, such as poultry breeds, breeder stock age, frequency of flock placements, stocking density, length of the growout periods (the number of days birds are housed on the grower's farm), feed quality and delivery, and the type and administration of veterinary medicines.
Market consolidation combined with certain natural factors (such as the fragility of birds limiting their transport), many integrators operate as monopsonists 5 or oligopsonists 6 in their relevant regional market
g density, length of the growout periods (the number of days birds are housed on the grower's farm), feed quality and delivery, and the type and administration of veterinary medicines.
Market consolidation combined with certain natural factors (such as the fragility of birds limiting their transport), many integrators operate as monopsonists 5 or oligopsonists 6 in their relevant regional market. Some research 7 shows a correlation in local markets between the number of available integrators and grower payments, with payments shrinking as the number of integrators decreases. In local markets, the lack of alternative integrators coupled with integrator control and discretion over production contracts leaves growers with little market power to demand reasonable contract transparency. As discussed in the following section, growers' plights are aggravated further by the substantial investment required to enter the poultry business.
5 Merriam-Webster online dictionary: A monopsonist is one who is a single buyer for a product or service of many sellers. https://www.merriam-webster.com/dictionary/monopsonist ; accessed 3/8/2022.
6 Merriam-Webster online dictionary: Oligopsony is a market situation in which each of a few buyers exerts a disproportionate influence on the market. An oligopsonist is a member of an oligopsonistic industry or market. https://www.merriam-webster.com/dictionary/oligopsonist ; accessed 3/8/2022.
7 MacDonald, James M., and Nigel Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey”. Journal of Agricultural and Applied Economics 44 (November 2012): 477-490. See also, MacDonald, James M. Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, U.S. Department of Agriculture, Economic Research Service, (June 2014): 29-30.
2
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7 MacDonald, James M., and Nigel Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey”. Journal of Agricultural and Applied Economics 44 (November 2012): 477-490. See also, MacDonald, James M. Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, U.S. Department of Agriculture, Economic Research Service, (June 2014): 29-30.
2. Poultry Housing Construction and Grower Debt
Poultry growout operations require significant financial investments on the part of poultry growers, who typically provide the facilities (poultry housing and necessary equipment), utilities (electricity, gas, and water), manure management, compliance with environmental regulations, labor, and day-to-day management of the growing poultry. One of the costliest investments
A 2011 study estimated a cost of $924,000 for site preparation, construction, and necessary equipment for four 25,000-square-foot poultry houses (or $231,000 per house) in rural Georgia at that time, independent of the cost for the land. 8 Costs for establishing poultry houses have increased substantially since 2011, due to the advancement of new technologies in poultry housing and the increased cost of materials. AMS estimates current construction costs at $350,000 to $400,000 per poultry house. 9
8 Cunningham, Dan L., and Brian D. Fairchild. “Broiler Production Systems in Georgia Costs and Returns Analysis 2011-2012.” UGA Cooperative Extension Bulletin 1240 (November 2011), University of Georgia Cooperative Extension.
9 See, for example, Cunningham and Fairchild (November 2011) Op. Cit.; Simpson, Eugene, Joseph Hess and Paul Brown, Economic Impact of a New Broiler House in Alabama, Alabama A&M & Auburn Universities Extension, March 1, 2019 (estimating a $479,160 construction cost for a 39,600 square foot broiler house).
Poultry growers can incur considerable debt to make the investments necessary for poultry production. Most new broiler housing is debt-financed. According to MacDonald, U.S
gene, Joseph Hess and Paul Brown, Economic Impact of a New Broiler House in Alabama, Alabama A&M & Auburn Universities Extension, March 1, 2019 (estimating a $479,160 construction cost for a 39,600 square foot broiler house).
Poultry growers can incur considerable debt to make the investments necessary for poultry production. Most new broiler housing is debt-financed. According to MacDonald, U.S. contract poultry growers' total debt amounted to $5.2 billion, or 22 percent of the total value of their assets, in 2011. 10 The research cited here found that debt loads—and exposure to liquidity risks, should flock placements and revenues fall—are closely related to the age of the operation, with newer farmers carrying greater debt relative to the value of farm assets. Farmers with fewer than six years of experience in broiler production carried debt equal to 51 percent of assets, on average, and one quarter of those farmers carried debt equal to at least 77 percent of assets.
10 MacDonald (June 2014) Op. Cit.
The weight of poultry grower debt load can be exacerbated by three additional factors: (1) The length, in terms of time, of a poultry growing arrangement is rarely long enough to cover the grower's debt repayment period, and can be as short as one flock; (2) growers may be encouraged or required by live poultry dealers to invest in facility upgrades, which may lead to additional debt; and (3) poultry housing is a specific-use asset with little salvage or repurpose value. 11 In other words, the grower is unlikely to be able to use or sell the facilities for a different purpose should the poultry growing contract be terminated.
11 Poultry growing facilities are often characterized by certain expensive attributes, such as temperature and other habitat control systems. A fully equipped poultry growing facility repurposed, for example, as a hay barn or other storage is unlikely to generate the revenue necessary to meet a grower's $400,000 mortgage obligation
erent purpose should the poultry growing contract be terminated.
11 Poultry growing facilities are often characterized by certain expensive attributes, such as temperature and other habitat control systems. A fully equipped poultry growing facility repurposed, for example, as a hay barn or other storage is unlikely to generate the revenue necessary to meet a grower's $400,000 mortgage obligation. Nor is repurposing it for an alternative livestock usage, such as hogs or dairy cows, possible, at least without retrofitting that would essentially demolish the growout facility. The grower's return on investment is tied to using the facility as intended.
Grower debt problems are exacerbated by the limited number of live poultry dealers in most localities and by dealer-specific requirements that inhibit grower movement between dealers. For example, a grower who currently produces smaller birds for one live poultry dealer may desire to move to a different dealer that wants larger birds. The grower could be required to upgrade their poultry growing facility to include more cooling capacity in order to accommodate larger birds. However, such upgrades may not be economically feasible for the grower, so the grower stays with the current live poultry dealer.
3. Poultry Grower Compensation
Poultry growers are compensated on the growout of individual flocks. Most growers are paid on the basis of the weight of the finished poultry, adjusted by a feed conversion factor. Live poultry dealers calculate feed conversion by dividing the total pounds of poultry feed used during growout by the total pounds of finished poultry at the end of growout. The feed conversion factor is expressed as a ratio of pounds of feed to pounds of finished poultry. For example, a feed conversion ratio of 1.93 means an average of 1.93 pounds of poultry feed were needed to produce each pound of finished poultry. The live poultry dealer uses the feed conversion factor to measure poultry grower efficiency
the total pounds of finished poultry at the end of growout. The feed conversion factor is expressed as a ratio of pounds of feed to pounds of finished poultry. For example, a feed conversion ratio of 1.93 means an average of 1.93 pounds of poultry feed were needed to produce each pound of finished poultry. The live poultry dealer uses the feed conversion factor to measure poultry grower efficiency. Specific poultry growing arrangements may provide for a variety of nuanced cost and payment formulas, and may include supplemental fuel and square footage bonus payments. However, the greatest portion of grower compensation is determined according to the following simplified equation:
Farm Weight (in pounds) × Feed Conversion (in dollars) = Grower Pay Under a typical scenario, birds are caught at the end of the growout period, loaded onto trucks, and delivered to the processing facility, where they are weighed. The sum of all weights of all loads originating from a grower's farm is the “farm weight.” “Feed conversion,” as described above, is determined by formula and converted to a monetary value.
Alternatively, growers may receive partial or full compensation based on their growing facility square footage. For instance, some growers may receive square footage supplements as incentives to offset new costs for housing. Or in rare cases, compensation is based strictly on facility square footage. In either of these situations, square footage compensation is based on the size of the poultry growing facility, regardless of the number or weight of birds produced.
Growers seeking to maximize farm returns would naturally prefer to keep their facilities in a near-constant state of production, receiving as many individual flock placements as possible over a relevant time period, with minimal idle or lay-out time between flocks. 12 If they are paid on a farm-weight basis, growers seeking to maximize individual flock returns will naturally strive to maximize farm weight
seeking to maximize farm returns would naturally prefer to keep their facilities in a near-constant state of production, receiving as many individual flock placements as possible over a relevant time period, with minimal idle or lay-out time between flocks. 12 If they are paid on a farm-weight basis, growers seeking to maximize individual flock returns will naturally strive to maximize farm weight.
12 Growers views and practices may vary with respect to their preferred times between flocks for the purposes of appropriate maintenance and sanitation activities.
4. Integrator Inputs
Two important factors affecting poultry grower compensation are the timing and quality of certain inputs controlled by the live poultry dealer. In this section we describe those inputs and explain how their timing and variation can impact farm weight and feed conversion, and thus grower payments.
a. Stocking Density and Flock Placement Frequency
Often expressed as a ratio of birds per square foot, or pounds (target weight of poultry at harvest) per square foot, stocking density reflects the number of birds placed on a farm. The target weight informs a range of stocking densities that may result in optimal bird performance. Integrators set both stocking density and target weight.
For example, one approach 13 recommends the following range of stocking densities:
13 National Chicken Council. National Chicken Council Animal Welfare Guidelines and Audit Checklist For Broilers, pp. 11-12, (September 2020). https://www.nationalchickencouncil.org/wp-content/uploads/2021/02/NCC-Animal-Welfare-Guidelines_Broilers_Sept2020.pdf ; accessed 1/3/2022.
Other approaches include those set forth by the Better Chicken Commitment, which will set a https://betterchickencommitment.com/policy/ (last accessed March 2022).
Maximum bird weight range Maximum stocking density Below 4.5 lbs. liveweight 6.5 pounds per sq. ft 4.5 to 5.5 lbs. liveweight 7.5 pounds per sq. ft. 5.6 to 7.5 lbs. liveweight 8.5 pounds per sq. ft. More than 7.5 lbs
essed 1/3/2022.
Other approaches include those set forth by the Better Chicken Commitment, which will set a https://betterchickencommitment.com/policy/ (last accessed March 2022).
Maximum bird weight range Maximum stocking density Below 4.5 lbs. liveweight 6.5 pounds per sq. ft 4.5 to 5.5 lbs. liveweight 7.5 pounds per sq. ft. 5.6 to 7.5 lbs. liveweight 8.5 pounds per sq. ft. More than 7.5 lbs. liveweight 9.0 pounds per sq. ft. Stocking density has critical implications for poultry growers because—up to a certain point—farm weight can increase as the number of birds per facility square foot increases. Because stocking densities can impact payments based on farm weights, growers desire the maximum stocking density that does not result in performance impairments. 14 Integrators dictate the stocking density of each placement, and generally prefer maximum stocking densities to maximize production volume. Of course, complex-level supply factors may affect integrator decision making, and integrators may not place as many birds with growers as growers could accommodate and would like for maximum growout efficiency. Consumer, environmental, and animal welfare factors may also affect stocking density decisions by integrators. However, being able to anticipate the minimum size of flocks that will be placed for growout on their farms each year allows growers to make appropriate farm management and financial decisions. This is challenging because many poultry growing arrangements do not specify the minimum stocking density of flocks that will be placed with the grower.
14 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).
Obviously, maximum efficiency is also achieved when a grower's facility is in production for as many days as possible during the year
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).
Obviously, maximum efficiency is also achieved when a grower's facility is in production for as many days as possible during the year. Depending on the term of the poultry growing arrangement between the live poultry dealer and the poultry grower, the dealer may schedule the placement of one or more flocks at the grower's facility over the course of a year, with gaps (lay-out or idle time) for necessary cleanup and maintenance between placements. Being able to anticipate the number of flocks that will be placed for growout on their farms each year allows growers to make appropriate farm management and financial decisions. However, many poultry growing arrangements do not specify the number of flocks per year that will be placed with the grower.
b. Breed
Modern chicken breeds are the result years of evolution by means of natural selection, to which artificial selection for commercial objectives has been applied. At the highest level, the pure-breeding lines are owned and controlled by the breeding companies. These lines are subjected to full scale selection programs; it is from these lines that all of a company's broiler products have descended. 15 The great-grandparent stocks, which are produced from the pure-bred lines, are subjected to mass selection for selected traits. Specific grandparent lines are cross bred to produce the parent stock, which are then distributed to breeder growers. The final step of the intensive artificial selection is the crossbreeding of these hybrids (parent stock) to give rise to the production broilers, which are raised for slaughter by contract growers.
15 Muir, W.M. and SE Aggrey. Poultry Genetics, Breeding, and BioTechnology (2003)
Specific grandparent lines are cross bred to produce the parent stock, which are then distributed to breeder growers. The final step of the intensive artificial selection is the crossbreeding of these hybrids (parent stock) to give rise to the production broilers, which are raised for slaughter by contract growers.
15 Muir, W.M. and SE Aggrey. Poultry Genetics, Breeding, and BioTechnology (2003).
Growth rate has consistently been the prime selection trait since the 1950s, with more recent emphasis placed on the yield and other attributes of breast meat, limiting mortality, and feed use efficiency. 16 17 Much progress has been made in artificial selection technologies in order to increase growth rate and feed use efficiency. In the production of broilers, different breeds may be used within each target weight category. Breeds with higher and faster growth rates may result in heavier farm weights, with the inverse also being true.
16 Muir and Aggrey (2003) Op. Cit.
17 Laughlin, Ken, “The Evolution of Genetics, Breeding, and Production. Temperton Fellowship Report 15 (2007).
To illustrate, the following comparison uses information from the breed performance and nutrition guides published by the companies themselves. 18
18 See: Cobb500 TM Broiler Performance & Nutrition Supplement (2022), Cobb-Vantress; Cobb700 TM Broiler Supplement, Cobb-Vantress, 2022; Ross 308/Ross 308FF Broiler Performance Objectives 2019, Aviagen Ross, http://eu.aviagen.com/tech-center/download/1339/Ross308-308FF-BroilerPO2019-EN.pdf, accessed March 25, 2022.
Breed Cobb 500 Cobb 700 Ross 308/308FF 42nd Day: Weight: 7.23 6.28 6.914 Cumulative Feed Conversion Rate: 1.555 1.597 1.596 56th Day: Weight: 10.23 9.07 10.115 Cumulative Feed Conversion Rate: 1.842 1.849 1.914 c. Gender
The gender of poultry placed on a grower's farm facility may impact the flock's growth rate and final farm weight, and thus grower payment. Differences between the growth rates of male and female broilers have been reported by many researchers
6.914 Cumulative Feed Conversion Rate: 1.555 1.597 1.596 56th Day: Weight: 10.23 9.07 10.115 Cumulative Feed Conversion Rate: 1.842 1.849 1.914 c. Gender
The gender of poultry placed on a grower's farm facility may impact the flock's growth rate and final farm weight, and thus grower payment. Differences between the growth rates of male and female broilers have been reported by many researchers. Under similar management conditions, males grow faster and achieve marketable weight earlier than females. According to Burke and Sharp, 19 the mean body weight of a male embryo was significantly greater than that of a female at 11, 13, and 18 days of incubation. Male broilers have been reported to grow faster and heavier than females under various rearing conditions. Growth rate reflects metabolic activity, which is strongly influenced by sex, age, nutritional status, and homogeneity. It also has been reported that male chickens showed better performance than females in terms of more weight gain. 20 The majority of integrators use “straight-run” birds to supply farms. Straight-run
19 Burke, William and Peter J. Sharp. “Sex Differences in Body Weight of Chicken Embryos.” Poultry Science 68.6 (1989): 805-810.
20 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.
d. Breeder Flock Age
Breeder facilities are populated with select poultry breeds whose purpose is to produce eggs and ultimately chicks that will go into broiler production. The age of breeder flocks may also influence the size and quality of eggs and chicks, bird mortality, and feed conversion, and ultimately the weight of poultry at harvest and thus grower payments. Older hens lay larger eggs that hatch into larger chicks, 21 22 23 and egg weight and hatching weight of chicks are correlated with market age weight
timately chicks that will go into broiler production. The age of breeder flocks may also influence the size and quality of eggs and chicks, bird mortality, and feed conversion, and ultimately the weight of poultry at harvest and thus grower payments. Older hens lay larger eggs that hatch into larger chicks, 21 22 23 and egg weight and hatching weight of chicks are correlated with market age weight. 24 25 Small chicks from young hens have higher mortality after placement and reach market weight at a later age, thus theoretically requiring more time in growout and more feed to achieve market weight.
21 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.
22 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.
23 Wilson, H.R. “Interrelationships of Egg Size, Chick Size, Posthatching Growth and Hatchability.” World's Poultry Science Journal 47.1 (1991): 5-20.
24 Goodwin, K. “Effect of Hatching Egg Size and Chick Size Upon Subsequent Growth Rate in Chickens.” Poultry Science 40 (1961): 1408-1409.
25 Morris, R.H., D.F. Hessels, and R.J. Bishop. “The Relationship Between Hatching Egg Weight and Subsequent Performance of Broiler Chickens.” British Poultry Science 9.4 (1968): 305-315.
USDA research 26 indicates breeder facility flocks are typically populated and depopulated on an all-in and all-out basis. That is, the majority of birds in each breeder flock are all the same age. Each breeder flock is entirely depopulated (slaughtered) when it reaches a certain age where egg and progeny quality diminish.
26 Video-conference interview with Joseph L. Purswell, Ph.D., PE, Agricultural Engineer, Dr. Katie Elliot, Hatchery Research Scientist, Dr. Klint McCafferty, Nutrition Research Scientist, Agricultural Research Service, U.S. Department of Agriculture (Sept. 2, 2021)
age. Each breeder flock is entirely depopulated (slaughtered) when it reaches a certain age where egg and progeny quality diminish.
26 Video-conference interview with Joseph L. Purswell, Ph.D., PE, Agricultural Engineer, Dr. Katie Elliot, Hatchery Research Scientist, Dr. Klint McCafferty, Nutrition Research Scientist, Agricultural Research Service, U.S. Department of Agriculture (Sept. 2, 2021).
Composed of a high female-to-male ratio, a typical broiler breeder flock's productive life cycle ranges from 21 weeks to 65 weeks. Studies suggest that broiler offspring from hens between 35 and 51 weeks of age perform best at different periods during growout. 27 However, research results concerning feed efficiency and weights of broilers at market age have been mixed. Feed efficiency has been shown to be positively, 28 negatively, 29 or not 30 correlated to weight of broilers at market age. Even with the benefit of static growth rates, poultry grown from smaller chicks are unlikely to match the weight of poultry grown from chicks of more mature breeder flocks in identical time frames.
27 Peebles, E. David, et al. “Effects of Breeder Age and Dietary Fat on Subsequent Broiler Performance. 1. Growth, Mortality, and Feed Conversion.” Poultry Science 78.4 (1999): 505-511.
AMS notes additionally that research in this and related areas has limitations. It is older and results are mixed. AMS is concerned that publically available research has stagnated, despite the introduction of new breed strains in the intervening years. Because integrators now own the genetics companies, AMS has additional concerns that research has, in effect, been privatized, creating informational asymmeteries. Based on regulatory experience and on public comments, growers believe these factors affect performance, highlight its value to growers from disclosure.
28 O'Neill, J.B. “Relationship of Chick Size to Egg Size and its Effect Upon Growth and Mortality.” Poultry Science 29 (1950): 774.
29 Wyatt, C.L., W.D. Weaver Jr, and W.L. Beane
in effect, been privatized, creating informational asymmeteries. Based on regulatory experience and on public comments, growers believe these factors affect performance, highlight its value to growers from disclosure.
28 O'Neill, J.B. “Relationship of Chick Size to Egg Size and its Effect Upon Growth and Mortality.” Poultry Science 29 (1950): 774.
29 Wyatt, C.L., W.D. Weaver Jr, and W.L. Beane. “Influence of Egg Size, Eggshell Quality, and Posthatch Holding Time on Broiler Performance.” Poultry Science 64.11 (1985): 2049-2055.
30 Guill, R.A., and K.W. Washburn. “Genetic Changes in Efficiency of Feed Utilization of Chicks Maintaining Body Weight Constant.” Poultry Science 53.3 (1974): 1146-1154.
e. Breeder Flock Health
Various diseases 31 and conditions can adversely affect egg production and quality either directly, by affecting the reproductive system, or indirectly, by affecting the overall health of the bird. According to Spackman, 32 many of the diseases originating in breeder flocks can result in suboptimal offspring performance.
31 Examples include: Bacterial (pullorum and gallinarum), Mycoplasma, and Avian encephalomyelitis (AE).
32 Wells, R.G., and C.G. Belyawin. “Egg quality-current problems and recent advances.” Poultry science symposium series. No. 636.513 W4. 1987. (citing Spackman, D. “The Effects of Disease on Egg Quality.”
The progeny flocks from impaired breeder flocks may be associated with higher mortality, higher morbidity, and decreased growth rates, resulting in decreased farm weight or lower feed conversion, which impact grower payment. Disease outbreaks can generally be traced to an individual breeder farm, but growers have no control or knowledge regarding the source of young poultry placed at their facilities for growout.
f. Feed Disruptions
Poultry diets are formulated by integrators to optimize bird weight. Integrators are responsible for ensuring feed is consistently delivered to growout facilities
mpact grower payment. Disease outbreaks can generally be traced to an individual breeder farm, but growers have no control or knowledge regarding the source of young poultry placed at their facilities for growout.
f. Feed Disruptions
Poultry diets are formulated by integrators to optimize bird weight. Integrators are responsible for ensuring feed is consistently delivered to growout facilities. However, feed disruptions—where poultry go without feed for a certain length of time—may occur for any number of reasons, such as feed mill power outages, ingredient supply shortages, or transportation problems, and they may result in suboptimal poultry weight gain. A study by Dozier and others 33 indicated that broiler body weights decreased when feed was removed. Depending upon the timing and duration of a feed outage, a broiler may be able to recoup any weight loss. Regardless of their cause, feed disruptions have the potential to affect bird weights, result in less farm weight, and affect grower payments.
33 Dozier III, W.A., et al. “Effects of Early Skip-A-Day Feed Removal on Broiler Live Performance and Carcass Yield.” Journal of Applied Poultry Research 11.3 (2002): 297-303.
g. Medications
A live poultry dealer may find it necessary to supply one or more flocks with veterinary medicines or supplements during flock growout. Such treatments may be necessary to mitigate disease within a single poultry house or an entire flock, or to boost the performance of suboptimal progeny from impaired breeder flocks, as described above. These treatments may affect the flock's growth rate or mortality and, therefore, grower payments.
II. Poultry Growing Arrangements
In this section, we explain the operation of poultry growing arrangements in general, as well as some of the risks growers face in connection with those arrangements. We also summarize comments we've received from growers expressing their concerns about contracting with live poultry dealers to produce poultry.
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e or mortality and, therefore, grower payments.
II. Poultry Growing Arrangements
In this section, we explain the operation of poultry growing arrangements in general, as well as some of the risks growers face in connection with those arrangements. We also summarize comments we've received from growers expressing their concerns about contracting with live poultry dealers to produce poultry.
A. Incomplete Contracts
As explained earlier in this document, a poultry growing arrangement or production contract reflects the arrangement between a live poultry dealer and a poultry grower, under which the grower is compensated for raising live poultry for delivery to the dealer for slaughter. Such a contract may be viewed as complete if the terms include the substantive legal, practical, and economic promises, obligations, and contingencies needed to operate in a poultry growing arrangement. Additionally, those terms should be verifiable by a third-party and legally enforceable. Incomplete contracts may arise when practically important terms do not meet those conditions. Incomplete contracts may magnify risks with respect to the performance of the contractual counterparty and lead to other potential inefficiencies. 34 In particular, at least one party may have 35 For example, poultry production contracts often do not guarantee the number of flocks a grower will receive, even under long-term contracts, although this is a critical datapoint for understanding the value of the contract to the grower. 36 The following sections will highlight areas and terms where AMS believes typical poultry growing arrangements are deficient or incomplete from an economic or operational standpoint, inhibiting growers' ability to properly assess the expected value of the contract.
34 Wu, S. 2014. “Adapting Contract Theory to Fit Contract Farming”. American Journal of Agricultural Economics, Volume 96, Issue 5 (October 2014): 1241-1256.
35 Steven Y
areas and terms where AMS believes typical poultry growing arrangements are deficient or incomplete from an economic or operational standpoint, inhibiting growers' ability to properly assess the expected value of the contract.
34 Wu, S. 2014. “Adapting Contract Theory to Fit Contract Farming”. American Journal of Agricultural Economics, Volume 96, Issue 5 (October 2014): 1241-1256.
35 Steven Y. Wu and James MacDonald, “Economics of Agricultural Contract Grower Protection Legislation,” Choices, Third Quarter, 2015, pp 1-6.
36 MacDonald (June 2014) Op. Cit.
B. Market Power and Risks to Growers
Live poultry dealers often operate as monopsonists 37 or oligopsonists 38 in a local market. According to MacDonald and Key, 39 about one quarter of contract growers reported that there was just one live poultry dealer in their area; another quarter reported two; another quarter reported three; and the rest reported four or more. Owing to their greater negotiating power than that of the poultry growers with whom they contract, live poultry dealers set the terms of the contracts. Consequently, most poultry growers have little or no influence over the frequency of individual flock placements they receive over any particular time period. A growout period is based on the target weight of finished poultry, as determined by the live poultry dealer. The amount of time between flocks is also decided by the dealer.
37 Merriam-Webster online dictionary: A monopsonist is one who is a single buyer for a product or service of many sellers. https://www.merriam-webster.com/dictionary/monopsonist ; accessed 3/8/2022.
38 Merriam-Webster online dictionary: Oligopsony is a market situation in which each of a few buyers exerts a disproportionate influence on the market. An oligopsonist is a member of an oligopsonistic industry or market. https://www.merriam-webster.com/dictionary/oligopsonist ; accessed 3/8/2022.
39 MacDonald, James M., and Nigel Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey”
er online dictionary: Oligopsony is a market situation in which each of a few buyers exerts a disproportionate influence on the market. An oligopsonist is a member of an oligopsonistic industry or market. https://www.merriam-webster.com/dictionary/oligopsonist ; accessed 3/8/2022.
39 MacDonald, James M., and Nigel Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey”. Journal of Agricultural and Applied Economics 44 (November 2012): 477-490. See also, MacDonald, James M. Technology, Organization, and Financial Performance in U.S. Broiler Production, EIB-126, U.S. Department of Agriculture, Economic Research Service, (June 2014): 29-30.
Grower payments are also influenced by live poultry dealer market power. In the study cited above, grower payments (per pound, controlling for bird size) were lower in markets with fewer dealers: going from four integrators to one lowered grower payments by eight percent (8%). This imbalance of negotiating power also exposes poultry growers to other risks.
For example, the considerable expense associated with building, maintaining, and upgrading poultry growing facilities places growers at financial risk if they are unable to realistically predict future income under a poultry growing arrangement and meet their financial obligations. Growers typically make investments in long-term assets—poultry houses that can last 20 years or more, and they typically take on long-term liabilities, in the form of 15-year mortgages, to finance those assets. However, live poultry dealers write production contracts for substantially shorter terms, with contract durations ranging from a few weeks (the time needed to raise one flock) to five years. Substantial disparities exist between the periods of time covered by the contracts and the mortgages on poultry housing, creating uncertainty around whether growers will be able to repay their debt and recoup their investments, and introducing “hold-up” risk problems
or substantially shorter terms, with contract durations ranging from a few weeks (the time needed to raise one flock) to five years. Substantial disparities exist between the periods of time covered by the contracts and the mortgages on poultry housing, creating uncertainty around whether growers will be able to repay their debt and recoup their investments, and introducing “hold-up” risk problems.
Hold-up is the risk growers face at the time of contract renewal when live poultry dealers make contract renewal dependent on further grower investments not disclosed at the time of the original agreements. 40 This is of particular concern in production contracts because the capital requirements related to growing poultry are significant and highly specialized (that is, they have little value outside of growing poultry). As a result, growers entering the market are tied to growing poultry to pay off the financing of the capital investment. Growers have reported that they must accept unfavorable contract terms because they are tied to production to pay off lenders and they have few, if any, alternative dealers with whom they can contract. Long term, this behavior may result in underinvestment in broiler production. The hold-up problem is a manifestation of both market power and incomplete information.
40 Vukina, Tom, and Porametr Leegomonchai. “Oligopsony Power, Asset Specificity, and Hold-Up: Evidence from the Broiler Industry.” American Journal of Agricultural Economics 88 (2006).
C. Poultry Grower Earnings and Returns on Equity
Poultry growing is an intensive capital investment endeavor where returns can be unstable and fail to meet reasonable grower expectations. Grower capital investment is substantial, and contract payments received by U.S. poultry growers vary widely. Lack of transparency in returns to grower investment can create underinvestment and overinvestment problems
try Grower Earnings and Returns on Equity
Poultry growing is an intensive capital investment endeavor where returns can be unstable and fail to meet reasonable grower expectations. Grower capital investment is substantial, and contract payments received by U.S. poultry growers vary widely. Lack of transparency in returns to grower investment can create underinvestment and overinvestment problems. In 2011 data drawn from a nationally representative sample of growers, the mean payment received by contract growers was 5.77 cents per pound of farm weight. However, 10 percent of growers earned at least 7.02 cents per pound, while 10 percent earned less than 4.32 cents per pound. 41 The sample data ranged across all growers and all contract types, but research has also shown that payments can range widely within specific contract types and within individual grower pools, creating revenue uncertainty for growers. 42
41 MacDonald (June 2014) Op. Cit.
42 Knoeber, Charles R. and Walter N. Thurman. “Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production.” Journal of Labor Economics 12 (April 1994). Levy, Armando and Tomislav Vukina. “The League Composition Effect in Tournaments with Heterogeneous Players: An Empirical Analysis of Broiler Contracts.” Journal of Labor Economics 22 (2004).
Perhaps even more concerning than the range of grower contract payments are the low returns on equity for poultry operations. According to USDA's Economic Research Service (ERS), 43 a special survey conducted in 2011 showed average returns on equity were negative for operations with one to two poultry houses, and increased with the size of the operation to a maximum of 2.7 percent among operations with six or more houses. These figures were well below rates of return on equity reported for manufacturing, mining, and trade corporations in the Quarterly Financial Reports of the U.S. Census Bureau for the same period. They were also below average rates of return on equity for large and midsize U.S. farms
and increased with the size of the operation to a maximum of 2.7 percent among operations with six or more houses. These figures were well below rates of return on equity reported for manufacturing, mining, and trade corporations in the Quarterly Financial Reports of the U.S. Census Bureau for the same period. They were also below average rates of return on equity for large and midsize U.S. farms.
43 MacDonald (June 2014) Op. Cit., pp. 38-40. Data from the Agricultural Resource Management Survey—Version 4, Financial and Crop Production Practices, 2011, and U.S. Census Bureau, 2011 Quarterly Financial Report (QFR): Manufacturing, Mining, Trade, and Selected Service Industries. https://www2.census.gov/econ/qfr/pubs/qfr11q4.pdf; accessed 1/19/2022.
Growers must be able to evaluate their return on equity—a measure of a business's profitability relative to the equity invested in it—to remain solvent. However, many factors, including monopsonistic and oligopsonistic market structures, incomplete contracts, uncertainty about the required level of skill and involvement, and asymmetrical information, make calculation of return on equity difficult for growers. The structure of the contracts themselves results in such a wide range of potential grower financial outcomes that it is difficult for growers to make reliable profitability
D. Asymmetrical Information
As explained earlier, one symptom of incomplete contracts is asymmetrical information. This occurs when one party to a contract has more and/or better critical information than the other party. For example, because live poultry dealers determine grower pay, they have access to records of the payments made to each grower, and have information regarding the complete range of payments across growers with birds delivered for processing in each week. The individual grower—both existing and prospective—however, lacks the same ready access to this information
l information than the other party. For example, because live poultry dealers determine grower pay, they have access to records of the payments made to each grower, and have information regarding the complete range of payments across growers with birds delivered for processing in each week. The individual grower—both existing and prospective—however, lacks the same ready access to this information. Additionally, dealers have information related to (and also control) strategic decision making that may include placement frequency, stocking densities, and input quality and distribution—factors that influence the weight and performance elements that comprise individual flock payments and influence grower payments in the long term. It is unlikely that poultry growers are privy to information about the range of grower payments or dealers' strategic decision making. As a result, they lack key information needed to make informed decisions with respect to the range of financial risks they face.
Prospective growers can draw upon information provided by poultry specialists in state cooperative extension services and by lenders, but those sources do not have live poultry dealers' internal data on the full range of payments or their frequencies and, as a result, typically base financial modeling and advice on average levels of payments received by growers, not on the full range of payments. 44 Existing growers know what they have been paid, and may elicit further information from other growers, but likewise lack complete integrator information on the range of grower payments, making it difficult for them to accurately project future earnings based on the past experience of similarly situated growers and, as such, to gauge their ability to meet financial obligations.
44 See, for example, Doye, Damona Grace, et al. “Broiler Production: Considerations for Potential Growers” Oklahoma Cooperative Extension Service, (March 2017); Rhodes, Jennifer and Jonathan Moye
ayments, making it difficult for them to accurately project future earnings based on the past experience of similarly situated growers and, as such, to gauge their ability to meet financial obligations.
44 See, for example, Doye, Damona Grace, et al. “Broiler Production: Considerations for Potential Growers” Oklahoma Cooperative Extension Service, (March 2017); Rhodes, Jennifer and Jonathan Moye. “Broiler Production Management for Potential and Existing Growers”, University of Maryland Extension, (October 2017); and Cunningham, Dan L., and Brian D. Fairchild. “Broiler Production Systems in Georgia, Costs and Returns Analysis 2011-2012.” University of Georgia Cooperative Extension (June 2011).
Some live poultry dealers provide pro forma income estimates to prospective growers and lenders. Grower advocate groups have complained these estimates are generally based on simple “average pay” projections, which are insufficient given fluctuations in grower payments, particularly under the tournament system. 45 AMS has observed these projections lack standardization making it difficult for growers to compare estimates among multiple dealers. Additionally, the assumptions underlying the projections such as number of placements, stocking densities, target weight are subject to dealer discretion and in many cases the estimates themselves are expressly disclaimed in the production agreement.
45 “A Poultry Grower's Guide to FSA Loans,” Rural Advancement Foundation International, July 2017, available at https://www.rafiusa.org/blog/a-poultry-growers-guide-to-fsa-loans/.
These risks are particularly acute when growers must make key investment decisions for their operation, such as whether or not to enter the poultry business and whether or not take on or invest in new or expanded facilities, all of which can be expected to involve incurring debt
Foundation International, July 2017, available at https://www.rafiusa.org/blog/a-poultry-growers-guide-to-fsa-loans/.
These risks are particularly acute when growers must make key investment decisions for their operation, such as whether or not to enter the poultry business and whether or not take on or invest in new or expanded facilities, all of which can be expected to involve incurring debt. AMS believes that the provision of the information in this rule will reduce the risks of these information asymmetries and enable growers to improve their decision-making and risk-management.
USDA's Farm Services Agency (FSA), which manages a loan guarantee program, has also recognized repayment reliability concerns related to informational asymmetries and their effect on poultry grower payments and total revenues.
In order to reduce FSA's exposure under the loan guarantee program, the FSA Handbook requires the following of poultry production contracts in order to assess their “dependability.” 46 Contracts must:
46 USDA Farm Service Agency, Guaranteed Loan Making and Servicing 2-FLP (Revision 1) pp. 8-86 (October 2008). https://www.fsa.usda.gov/internet/FSA_File/2-flp.pdf ; accessed 1/3/2022.
• be for a minimum period of 3 years • provide for termination based on objective “for cause” criteria only • require that the grower be notified of specific reasons for cancellation • provide assurance of the grower's opportunity to generate enough income to ensure repayment of the loan by incorporating requirements such as a minimum number of flocks per year, minimum number of bird placements per year, or similar quantifiable requirements. Enhanced and more reliable transparency in the poultry production contracting process is likely to assist FSA's in effectuating the mandates under the loan guarantee program as set forth in its handbook.
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ome to ensure repayment of the loan by incorporating requirements such as a minimum number of flocks per year, minimum number of bird placements per year, or similar quantifiable requirements. Enhanced and more reliable transparency in the poultry production contracting process is likely to assist FSA's in effectuating the mandates under the loan guarantee program as set forth in its handbook.
E. Poultry Grower Concerns
In 2010, USDA held a series of workshops in conjunction with the Department of Justice to hear from producers about concentration and trade practice issues in Agriculture. Normal, Alabama, hosted one such session with an emphasis on the poultry industry. Globally, growers complained that their success or failure is dependent on factors controlled by their integrators. Further, growers are troubled by the lack of choice among integrators in many regional relevant markets, which further enhances the bargaining position of integrators. 47 Grower public comments at the workshop were consistent with numerous comments submitted to USDA on the 2010 and 2016 GIPSA rules and identified specific areas of concern in the poultry industry.
47 See Domina, David A. and Robert Taylor. “The Debilitating Effects of Concentration Markets Affecting Agriculture,” Drake Journal of Agricultural Law 15 (May 2010): 61-108. See also Leonard, Christopher, The Meat Racket (2014).
Growers expressed concerns about contract dependency, uncertainty of pay, and informational asymmetries related to farm revenues and debt. Poultry growers have indicated they lack control over and even information about certain crucial production factors controlled by live poultry dealers, such as the anticipated frequency and density of flock placements and bird target weight under poultry growing arrangements, factors that heavily influence grower payments on an individual flock basis and over the long term
farm revenues and debt. Poultry growers have indicated they lack control over and even information about certain crucial production factors controlled by live poultry dealers, such as the anticipated frequency and density of flock placements and bird target weight under poultry growing arrangements, factors that heavily influence grower payments on an individual flock basis and over the long term. 48
48 Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010; Normal, Alabama.
Growers cited the level of control and discretion reserved to integrators under their contracts, remarking how discretionary decisions related to flock placements, housing specifications, tournament grouping, 49 and other production factors can significantly affect grower revenue and profitably. Many growers were worried that contract terms did not cover the time required to repay the debt on their farms, noting that additional capital investments, such as those necessitated 50 Concerns have also been raised regarding the use of deficient and unreliable “pro forma” financial estimates during the contracting process.
49 The effect of tournament groupings, or league composition, is an area requiring additional exploration and research. It is not directly addressed in this proposal.
50 Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010; Normal, Alabama.
Finally, poultry growers have complained to USDA about being prohibited by dealers from asserting their rights under the current regulations to discuss poultry growing contracts with government representatives, family members, lenders, and other business associates. Some growers allege they have been threatened or retaliated against for asserting those rights
kshop May 21, 2010; Normal, Alabama.
Finally, poultry growers have complained to USDA about being prohibited by dealers from asserting their rights under the current regulations to discuss poultry growing contracts with government representatives, family members, lenders, and other business associates. Some growers allege they have been threatened or retaliated against for asserting those rights.
As explained in section II.A., AMS believes that poultry growing arrangements are often incomplete contracts that may be deceptive when omissions or inadequate descriptions of key terms mislead, camouflage, conceal, or otherwise inhibit growers' ability to assess the financial feasibility and expected value of investment. For example, for a grower to estimate future revenues, it is necessary for the grower to know how many flocks the dealer will place with the grower over a given time period. When contract terms do not establish the number of flocks a grower will receive during that time period, the grower could be misled or deceived into believing he will receive an optimistically high number of placements, which might increase the grower's willingness to contract with the dealer. This risk is particularly acute if the financial statements or estimates provided to the grower paint only the most optimistic picture possible regarding the returns that may be possible under complex and opaque payment arrangements, such as the commonly used tournament ranking system, rather than the range of realistically expected outcomes. If poultry contracts contain more material terms relating to revenue over the life of the agreement, we believe the potential for deception is reduced significantly.
AMS considers this imbalance of information, or “asymmetrical information,” as described in the previous section, an important consideration for this rulemaking. We recognize that neither dealers nor growers can predict market conditions far into the future
ain more material terms relating to revenue over the life of the agreement, we believe the potential for deception is reduced significantly.
AMS considers this imbalance of information, or “asymmetrical information,” as described in the previous section, an important consideration for this rulemaking. We recognize that neither dealers nor growers can predict market conditions far into the future. Yet given the substantial investment from the grower, together with the greater ability for dealers to monitor market trends, adjust contracting, and otherwise hedge risks, we believe these upfront and ongoing information asymmetries could be effectively mitigated through the disclosure regime that will be outlined later in this rule.
AMS believes that by providing critical information that addresses the risks that growers face, the rule would encourage greater certainty and confidence among growers, encourage investment, and enhance the overall competitive market for grower services. As for growers' ability to assert their rights without fear of retaliation, we note that the current regulations, at 9 CFR 201.100(b), already require live poultry dealers to allow poultry growers to discuss the terms of their contracts with government agencies, family members, and business associates and advisors, regardless of confidentiality provisions in the contracts. However, it may be appropriate to shed more light on those rights. AMS believes the proposed transparency enhancements would further aid growers in identifying illicit conduct of this type.
III. Poultry Grower Pay Systems
As discussed in section I.C.3.—Poultry Grower Compensation, the majority of poultry growers are paid on an individual flock basis, where the calculation for grower payments can be expressed as: Farm Weight (in pounds) × Feed Conversion (in dollars) = Grower Pay
posed transparency enhancements would further aid growers in identifying illicit conduct of this type.
III. Poultry Grower Pay Systems
As discussed in section I.C.3.—Poultry Grower Compensation, the majority of poultry growers are paid on an individual flock basis, where the calculation for grower payments can be expressed as: Farm Weight (in pounds) × Feed Conversion (in dollars) = Grower Pay. Farm weight is a nearly universal measure among all poultry grower pay systems; however, the metrics and formulas for determining feed conversion vary among pay systems and between integrators.
Poultry grower pay systems can be categorized as either ranking or non-ranking. The most common non-ranking pay system is called “fixed-performance.” Pay systems that rank growers are called “poultry grower ranking systems” or “tournaments.” In this section we focus on the characteristics of—and challenges associated with—tournament pay systems, but we begin with a brief description of fixed-performance pay systems for comparison.
A. Fixed-Performance Pay Systems
Under fixed-performance production contracts, growers are paid a base rate for each animal or for the farm weight delivered to the processor. These contracts generally adjust payments based on fixed performance standards. For example, farmers with lower animal mortality or higher conversion of feed to live weight might receive higher pay. These are called fixed performance contracts because although compensation may fluctuate, the performance elements are tied to fixed standards. 51 In contrast, under grower ranking pay systems, performance elements are relative standards tied to the performance of other growers.
51 Tsoulouhas, Theofanis, and Tomislav Vukina. “Regulating Broiler Contracts: Tournaments Versus Fixed Performance Standards.” American Journal of Agricultural Economics 83 (2001).
B. Tournament Pay Systems
The majority of growers producing poultry under production contracts are paid under a poultry grower ranking or “tournament” pay system
standards tied to the performance of other growers.
51 Tsoulouhas, Theofanis, and Tomislav Vukina. “Regulating Broiler Contracts: Tournaments Versus Fixed Performance Standards.” American Journal of Agricultural Economics 83 (2001).
B. Tournament Pay Systems
The majority of growers producing poultry under production contracts are paid under a poultry grower ranking or “tournament” pay system. 52 Under poultry grower ranking systems, the contract between the live poultry dealer and the poultry grower provides for payment to the grower based on a grouping, ranking, or comparison of poultry growers delivering poultry to the dealer during a specified period. In a simplified example, the live poultry dealer places flocks with ten growers under contract to deliver the same size of finished poultry to the dealer's processing plant at the end of a specified growout period. Upon harvest, each grower's performance ( e.g., farm weight and feed conversion) is determined. The dealer then compares individual grower results against average results for all growers in the group, and ranks individual growers according to their relative performance within the group of ten growers. Grower base pay rate is adjusted by the grower's deviation from average within the tournament grouping for that specific growout period. For example, a contract-based pay rate of $.06 per pound might be adjusted to $.0725 for an above average grower, while a below average grower may be paid $.048.
52 MacDonald (June 2014) Op. Cit. See footnote 20 on page 27 citing ARMS data from 2011 that reported 97% of broilers are grown under contract, with 93% of contracts tied to relative performance.
Payments under tournament contracts still vary with flock mortality and feed conversion, but in tournament contracts, the performance elements are not fixed targets
w average grower may be paid $.048.
52 MacDonald (June 2014) Op. Cit. See footnote 20 on page 27 citing ARMS data from 2011 that reported 97% of broilers are grown under contract, with 93% of contracts tied to relative performance.
Payments under tournament contracts still vary with flock mortality and feed conversion, but in tournament contracts, the performance elements are not fixed targets. The performance elements are compared to average performance results from a tournament group, which is group of growers delivering poultry to the plant during the same time period (usually within a week). Growers who exceed the group's average performance get higher payment, while growers who
IV. Poultry Grower Ranking Systems
A. Tournament Settlements
9 CFR 201.100(d) and 9 CFR 201.100(f) are important parts of the existing tournament payment disclosure regime under the Packers and Stockyards Act. This proposal builds on the existing disclosure concepts by incorporating new transparency into the distribution of inputs, which is an area of particular concern to growers.
Currently, 9 CFR 201.100(d) requires all live poultry dealers to prepare and furnish a settlement sheet to a poultry grower at the time of settlement. Under that regulation, the settlement sheet must contain all information necessary to compute the grower's payment, including, if applicable, the number of birds marketed, the total weight and average weight of the birds, and the payment per pound. Further, § 201.100(f) requires live poultry dealers who pay growers under a tournament system to furnish growers with a grouping or ranking sheet at the time of settlement that shows the grower's precise position in the grouping or ranking sheet for that period. Currently, the grouping or ranking sheet need not disclose names of other growers, nor the housing specifications for each tournament participant, but must show the actual figures used to compute each grower's position within the ranking for that period
h a grouping or ranking sheet at the time of settlement that shows the grower's precise position in the grouping or ranking sheet for that period. Currently, the grouping or ranking sheet need not disclose names of other growers, nor the housing specifications for each tournament participant, but must show the actual figures used to compute each grower's position within the ranking for that period. Neither section currently requires the live poultry dealer to provide information about the distribution or nature of integrator inputs among settlement participants.
The tournament ranking sheet required under § 201.100(f) provides growers with numeric data comparing their performance and the performance of other growers in the tournament. While the numeric data describes the relationship between grower performance, as assessed by the integrator, and settlement payments, its value is limited without information about the distribution of integrator inputs among tournament participants. Poultry grower commenters on the 2010 and 2016 GIPSA rules stated that without knowing how inputs they receive compare to inputs provided to other growers within their tournaments, growers cannot determine whether differences in pay are due strictly to grower skill or to other factors beyond their control.
B. Tournament Payments as a Measure of Grower Skill, Effort, and Innovation
In comments submitted to USDA on the 2010 and 2016 GIPSA rules, live poultry dealers suggested that tournament systems benefit poultry growers by offering financial incentives and rewards to growers who invest time and effort into their poultry growing operations. They asserted that the competition inherent in tournaments fosters grower innovation and increased efficiency, and rewards those growers who are the most efficient and provide the best services. They also stated that tournament pay systems reward above-average growers that are willing to take risks or improve their production systems
ho invest time and effort into their poultry growing operations. They asserted that the competition inherent in tournaments fosters grower innovation and increased efficiency, and rewards those growers who are the most efficient and provide the best services. They also stated that tournament pay systems reward above-average growers that are willing to take risks or improve their production systems. One poultry processing company stated that contract broiler growers are paid for their services based on a formula that rewards efficiency, ingenuity, and good animal welfare and animal husbandry practices.
Comments from some poultry growers and others associated with the industry concurred with those of processors, indicating that the opportunity to earn higher compensation for superior performance under tournament systems motivates above-average growers to work hard, invest in their facilities, and utilize innovative technology.
At the same time, other growers dispute this. Indeed, growers often comment on wide swings in grower rankings from flock to flock, where the same individual grower ranks high in one tournament and much lower in another. One available analysis confirms significant volatility in grower rankings from flock to flock, 53 This suggests that while grower experience and skills can lend to consistently successful individual flock performance, a grower's relative success in tournaments might be attributed to other factors.
53 Taylor, C. Robert, and David A. Domina, “Restoring Economic Health to Contract Poultry Production.” Report prepared for the Joint U.S. Department of Justice and USDA/GIPSA Public Workshop on Competition Issues in the Poultry Industry (May 2010).
Input variability is commonly cited by grower commenters as a key explanation for ranking volatility. We discuss the distribution of inputs and the effects of input variability on tournament rankings and grower payments in the following sections.
C
” Report prepared for the Joint U.S. Department of Justice and USDA/GIPSA Public Workshop on Competition Issues in the Poultry Industry (May 2010).
Input variability is commonly cited by grower commenters as a key explanation for ranking volatility. We discuss the distribution of inputs and the effects of input variability on tournament rankings and grower payments in the following sections.
C. Distribution of Inputs Among Tournament Participants
Grower experience and skill, the technical specifications and relative sophistication of the housing, and other factors, such as the makeup of tournament groupings or inconsistent grower effort, may all affect performance. In this section, we explain how integrator decisions about inputs provided to tournament growers can also impact growers' relative performance.
Under the tournament system, dealers control the source of inputs and the distribution of those inputs to growers. In section I.C.4.—Live Poultry Dealer Inputs—AMS has provided evidence that the range of inputs is nonhomogeneous. The range of inputs is selected to satisfy customer or product requirements, as well as efficiency in the slaughter process, presumably at the lowest costs. Input distribution has not been studied extensively, and little information is available in the public domain. In response to prior USDA rulemaking efforts, dealers have denied or downplayed the significance of input variability and its effect on bird performance. The existence of non-homogeneity and the persistence of grower complaints raise questions about dealer input allocation practices and the extent to which tournament parity and cost efficiency are balanced, or whether other factors may also be at play.
For example, if a complex has three breeder farms with different aged flocks, it may be costly or even impracticable for integrators to evenly distribute chicks from the three breeder flocks in identical ratios to all settlement participants
dealer input allocation practices and the extent to which tournament parity and cost efficiency are balanced, or whether other factors may also be at play.
For example, if a complex has three breeder farms with different aged flocks, it may be costly or even impracticable for integrators to evenly distribute chicks from the three breeder flocks in identical ratios to all settlement participants. Similar cost considerations might play a role in distribution where breed and sex variation are present. In another example, supply considerations may play a role in stocking density differences among settlement participants. As a result, growers settled together could be allocated flocks with some level of variance in attributes. None of those input variances would be materially affected by incentives for uniformity of product or processing plant efficiency; they would be premised cost efficiencies.
D. Input Variability and Grower Payment
Tournament payments are based on relative measurements, including poultry mortality, morbidity, feed use efficiency, and growth rate, among tournament participants. As discussed earlier, the attributes of various integrator-controlled inputs can affect those measurements. Therefore,
1. Stocking Density: Variability in stocking densities among poultry growers in settlement pools are likely to result in farm weight and feed conversion disparities among settlement participants. If one or more growers in a tournament receive flocks with fewer birds than what would be optimal, and those flocks do not achieve optimal feed conversion efficiency, those growers may not rank as high as their tournament competitors who receive flocks of optimal stocking density. 54 Thus, the input variability has the potential to affect tournament grower payments.
54 Stocking density is a function of the desired weight of uniformly sized birds at harvest. A placement with a specified number of smaller birds would have the same density as a placement with the same number of larger birds
high as their tournament competitors who receive flocks of optimal stocking density. 54 Thus, the input variability has the potential to affect tournament grower payments.
54 Stocking density is a function of the desired weight of uniformly sized birds at harvest. A placement with a specified number of smaller birds would have the same density as a placement with the same number of larger birds. Smaller birds would just take somewhat longer to get there.
2. Breed Ratios: As described in section I.C.4.b., different poultry breeds convert feed to weight gain with varying efficiency. Thus, differences between the breeds or ratios of breeds of poultry flocks placed with individual growers within a tournament group may ultimately affect each grower's relative performance and tournament ranking. Depending on the specific breeds involved, USDA has connected variances in the distribution of poultry breeds or breed ratios with farm weight disparities, 55 affecting grower pay.
55 Tyson Farms, Inc. 71 Agric. Dec. 1065, 1160 (U.S.D.A. 2012).
3. Gender ratios: As explained in section I.C.4.c., The majority of integrators use straight-run (not sorted by gender) flocks to supply farms. AMS would not view the placement of randomized straight-run flocks as an input variability if all tournament growers received randomized straight-run flocks, since the ratio of males to females in each flock would be randomized and not dictated by the integrator. However, integrators placing sexed flocks, or integrators supplementing straight-run flocks with sexed flocks, may create input variability in the distribution of birds that could result in farm weight and feed conversion disparities.
4. Breeder Flock Age: As discussed in section I.C.4.d., the age of breeder flocks is correlated with egg and chick size, mortality, and eventual weight gain
rator. However, integrators placing sexed flocks, or integrators supplementing straight-run flocks with sexed flocks, may create input variability in the distribution of birds that could result in farm weight and feed conversion disparities.
4. Breeder Flock Age: As discussed in section I.C.4.d., the age of breeder flocks is correlated with egg and chick size, mortality, and eventual weight gain. Variability between the ages of breeder flocks producing the young poultry placed with different growers in a tournament may result in farm weight and feed conversion disparities at the end of growout, which may impact the rankings and payments to individual growers in that tournament.
5. Breeder Flock Health: Placing birds from breeder flocks of varying health with tournament participants may affect each flock's performance and thus each grower's ranking and pay. Other factors, such as variations between facility sanitation practices and performance may exist among breeder facilities within the same complex, and may impact progeny growout performance, creating an input variability when poultry sourced from multiple breeder farms are settled together.
6. Feed Disruptions: As described in section I.C.4.f., bird growth may be affected by feed disruptions (where poultry go without feed for a certain length of time), possibly resulting in less farm weight, which affects grower tournament rankings and payments. Feed disruptions for any cause, if they do not affect all growers equally, may constitute an input disparity that can affect grower ranking and pay.
7. Medications: The integrator may find it necessary to supply one or more flocks with veterinary medicines or supplements during flock growout. Such treatments, when provided on a flock-by-flock basis, may impact relative flock performance and grower pay
isruptions for any cause, if they do not affect all growers equally, may constitute an input disparity that can affect grower ranking and pay.
7. Medications: The integrator may find it necessary to supply one or more flocks with veterinary medicines or supplements during flock growout. Such treatments, when provided on a flock-by-flock basis, may impact relative flock performance and grower pay.
As described in the previous section, an integrator's input allocation decisions are impacted by cost efficiencies that may be inconsistent with individual growers' interests, including risk management and earnings maximization. But variability in integrator-provided inputs among settlement participants can ultimately influence settlement rankings and payments. Thus, tournament participants prefer some level of parity in input distributions, or at least mitigation of any disparities, in order to evaluate whether grower compensation is related to grower management and skill or correlated with “favorable” inputs.
E. The Need for Transparency
Input variability among settlement participants have long been a point of contention between growers and integrators because growers are not involved in input distribution decisions, and any balancing between cost efficiency and parity is not transparent. With respect to this input variability, growers have repeatedly complained in public forums and to USDA of retaliation, discrimination, and other disputes arising in connection with distributions of inputs, including in ways that result in significant economic harm to growers. 56
56 See, e.g., Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010, Normal, Alabama; Leonard, Christopher, The Meat Racket (2014).
AMS has not identified research regarding whether variability in inputs between tournament growers affects grower outcomes
harm to growers. 56
56 See, e.g., Transcript, United States Department of Justice, United States Department of Agriculture, Public Workshops Exploring Competition in Agriculture: Poultry Workshop May 21, 2010, Normal, Alabama; Leonard, Christopher, The Meat Racket (2014).
AMS has not identified research regarding whether variability in inputs between tournament growers affects grower outcomes. However, some existing research establishes the effects of certain inputs on poultry growth and feed conversion.
We believe growers' assertions regarding the connection have merit. AMS is aware that integrators collect input information for private use, 57 although we do not know whether it includes information about how inputs are distributed among individual growers. Nevertheless, growers complain that this information, which could be useful to them in flock management, is not generally provided to them.
57 For example, integrators may contract with Agristats, a chicken, turkey, commercial egg, and swine industry research company, to collect input information and compare such information against similar organizations in the industry. Agri Stats, Inc. Partnership and Services, https://www.agristats.com/partnership.
At the 2010 Normal, Alabama, workshop referenced earlier, contract poultry growers further raised significant concerns regarding the design and operation of tournament systems. Commenters asserted that the high degree of integrators' control over the inputs, the reliance that growers have on the inputs for outcomes under the system, and the opacity of the tournament calculations fostered a range of risks, including risks relating to deception. These include the inability to verify the accuracy of payments, the inability to measure and manage risks, and the ways in which tournament systems can mask or facilitate hard-to-detect forms of discrimination or retaliation for disputes arising under the poultry growing arrangement
em, and the opacity of the tournament calculations fostered a range of risks, including risks relating to deception. These include the inability to verify the accuracy of payments, the inability to measure and manage risks, and the ways in which tournament systems can mask or facilitate hard-to-detect forms of discrimination or retaliation for disputes arising under the poultry growing arrangement.
These concerns reflect similar issues of market power and information asymmetry discussed earlier. Where integrators have made business decisions to procure and distribute inputs in a manner that most suits their cost structure and business strategies, poultry growers have limited- or no ability to negotiate, including for information that would enable them to avoid, mitigate, or manage the risks arising from the integrator's decisions. Growers may or may not be able to discern from a visual inspection of the flocks certain important information,
Their lack of information at the time of placement about the specific inputs delivered to growers exposes them to the performance risks described in section IV.D. associated with the variability of those inputs. Those performance risks may manifest in in tournament ranking. Similarly, the absence of input distribution information at the time of settlement undermines growers' ability to manage their operations to address those performance risks. In both cases, growers are disadvantaged in their performance by a lack of information outside of their control. Conversely, the ability of growers to monitor and measure input differences is especially important for mitigating risks relating to the accuracy of payments and the ways in which tournament systems may mask or facilitate hard-to-detect forms of discrimination or retaliation for disputes
n both cases, growers are disadvantaged in their performance by a lack of information outside of their control. Conversely, the ability of growers to monitor and measure input differences is especially important for mitigating risks relating to the accuracy of payments and the ways in which tournament systems may mask or facilitate hard-to-detect forms of discrimination or retaliation for disputes. 58
58 One example of deception risk is the alleged practice of dealers offering more lucrative contracts to attract new growers but then reducing the pay once the grower is secured and in debt, (Taylor and Domina 2010; Vukina and Leegomonchai 2006). See also Vukina, T. 2001. Vertical integration and contracting in the US poultry industry. Journal of Food Distribution Research 81: 61-74.
AMS believes that tournament growers need information about input distribution—particularly at the stage where the input is provided—when they could apply, to the extent possible, their experience and skills to the adjustment of flock management as necessary in response. For example, a grower is informed he has received a salmonella infected broiler flock, which will present with loose, runny stools that can cause floors to cake quickly, leading to burnt paws and increased coccidiosis. A grower aware of the condition can manage the flock through use of migration fences early in flock and with increased ventilation to remove excess ammonia and to help dry floors. These management adjustments may be departures from normal growout procedure, but could lower mortality, decrease condemnations, and result in higher farm weights and feed efficiency. Thus, improved outcomes would benefit growers and integrators alike.
Further, growers seek transparency regarding flock input distribution among tournament participants so they can individually assess the relationships between input variability, grower management and skills, and tournament payments
ld lower mortality, decrease condemnations, and result in higher farm weights and feed efficiency. Thus, improved outcomes would benefit growers and integrators alike.
Further, growers seek transparency regarding flock input distribution among tournament participants so they can individually assess the relationships between input variability, grower management and skills, and tournament payments. Such information is also particularly important, when shown together with housing specifications, for growers to assess the relative value and necessity of making additional capital investments. Put another way, failure to make this information available to growers puts them at risk of making very expensive investments with very little insight into their value and risks involved.
For both at placement and settlement disclosures, growers have expressed a mistrust of live poultry dealers when information about flock placements is not transparent. Improving transparency is intended to reduce concerns relating to input distribution and may help establish a higher degree of trust in the integrity of the marketplace.
Finally, relative ranking systems (tournament) premised on grower skill, effort, and innovation should measure and compensate based upon those merits. Pay systems highly correlated with individual input variability may be inconsistent with the merit premise and demonstrate misrepresentations and deception in the operation of tournament pay systems.
V. Proposed Regulations
AMS proposes to address concerns related to market power imbalance and asymmetrical information in poultry grower contracting by revising the regulations at 9 CFR part 201 that effectuate the Packers and Stockyards Act. AMS intends the proposals to better balance the quantity, quality, and type of critical information poultry growers, prospective poultry growers, and live poultry dealers have as they enter into and operate under poultry growing arrangements
lance and asymmetrical information in poultry grower contracting by revising the regulations at 9 CFR part 201 that effectuate the Packers and Stockyards Act. AMS intends the proposals to better balance the quantity, quality, and type of critical information poultry growers, prospective poultry growers, and live poultry dealers have as they enter into and operate under poultry growing arrangements. AMS expects that these proposed rules would improve transparency and reduce the risk of deception in the contracting process. This section provides detailed descriptions and explanations for the proposals.
A. Definitions
Section 201.2—Terms defined—of 9 CFR part 201 provides definitions for terms used in the regulations. AMS proposes to revise § 201.2 by removing the paragraph designations within the section, reorganizing the definitions alphabetically, and adding definitions for new terms used in the proposed rule. Proposed additions to the list of terms defined in § 201.2 are described as conforming changes in connection with the proposed regulatory changes described below.
Additionally, to ensure a common understanding of the use and meaning of certain terms already used in the regulations and in the proposed regulatory revisions, AMS proposes to incorporate into § 201.2 the statutory definitions for those terms. Specifically, the term poultry grower means any person engaged in the business of raising and caring for live poultry for slaughter by another, whether the poultry is owned by such person or by another, but not an employee of the owner of such poultry. The term live poultry dealer means any person engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another, if poultry is obtained by such person in commerce, or if poultry obtained by such person is sold or shipped in commerce, or if poultry products from poultry obtained by such person are sold or shipped in commerce
rson engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another, if poultry is obtained by such person in commerce, or if poultry obtained by such person is sold or shipped in commerce, or if poultry products from poultry obtained by such person are sold or shipped in commerce. The term commerce means commerce between any State, Territory, or possession, or the District of Columbia, and any place outside thereof; or between points within the same State, Territory, or possession, or the District of Columbia, but through any place outside thereof; or within any Territory or possession, or the District of Columbia. Finally, the term poultry growing arrangement means any growout contract, marketing agreement, or other arrangement under which a poultry grower raises and cares for live poultry for delivery, in accord with another's instructions, for slaughter.
AMS invites comments on proposed additions to the list of definitions, including those described later in this section. Please explain fully all views and suggestions, supplying examples and data or other information to support your views where possible.
B. Disclosure
To address concerns identified in the section on Poultry Growing Arrangements earlier in this document, including industry concerns related to dealer transparency in poultry growing arrangements, AMS proposes to amend § 201.100—Records to be furnished poultry growers and sellers. Currently, 9 CFR 201.100 describes the documents that live poultry dealers must provide to poultry growers within certain timeframes. Paragraph (a) of § 201.100 requires a dealer to provide the grower with a true written copy of the offered poultry growing arrangement on the date the dealer provides poultry housing specifications to the grower
0—Records to be furnished poultry growers and sellers. Currently, 9 CFR 201.100 describes the documents that live poultry dealers must provide to poultry growers within certain timeframes. Paragraph (a) of § 201.100 requires a dealer to provide the grower with a true written copy of the offered poultry growing arrangement on the date the dealer provides poultry housing specifications to the grower. Paragraph (b) requires live poultry dealers to allow growers to discuss the terms of poultry growing arrangement offers with a Federal or State agency, the growers' legal and financial advisors and lenders, other growers for the same dealer, and
Specifically, AMS proposes to amend § 201.100 by revising paragraph (a); redesignating paragraphs (b) through (h) as paragraphs (h) through (n), respectively; moving current paragraph (f) to a new regulatory section that addresses poultry grower ranking systems specifically; adding new paragraphs (b) through (g); and revising redesignated paragraph (i).
Proposed revisions to § 201.100(a) would modify the heading to read “Disclosures and records to be furnished poultry growers and sellers” and would require the dealer to provide the prospective or current poultry grower with the Live Poultry Dealer Disclosure Document (the Disclosure Document), as described in proposed new paragraph (b) of the section, in addition to the true written copy of the poultry growing arrangement, under three different scenarios. A proposed conforming change to § 201.2 would define the term prospective poultry grower to mean a person or entity with whom the live poultry dealer is considering entering into a poultry growing arrangement. AMS would add this definition to distinguish between a current or existing poultry grower who has previously entered into a poultry growing arrangement with the dealer and a grower who has not signed a contract. The proposed requirements for live poultry dealers are somewhat different depending on the status of growers with whom they are working
idering entering into a poultry growing arrangement. AMS would add this definition to distinguish between a current or existing poultry grower who has previously entered into a poultry growing arrangement with the dealer and a grower who has not signed a contract. The proposed requirements for live poultry dealers are somewhat different depending on the status of growers with whom they are working.
Under the first scenario, provided in proposed new § 201.100(a)(1), a dealer seeking to renew, revise, or replace an existing poultry growing arrangement (or newly establish a poultry growing arrangement) that does not contemplate modifications to existing housing specifications would be required to provide both the poultry growing arrangement and the Disclosure Document at least seven days before the dealer executes the poultry growing arrangement. This proposal is intended to give growers adequate time to consider all the information provided and consult with others as needed before committing to the new, revised, or replacement poultry growing arrangement. Because this scenario involves growers already familiar with their dealers, and because in this scenario the contract renewal does not involve additional capital investment, we believe seven days would provide time for adequate review. AMS proposes to exempt certain small businesses from this requirement, as described in the discussion about proposed new § 201.100(e)below.
AMS proposes a conforming change to § 201.2 to add a definition for housing specifications to mean a description of—or document relating to—a list of equipment, products, systems, and other technical poultry housing components required by a live poultry dealer for the production of live poultry. Live poultry dealers commonly develop multiple housing specifications. Accordingly, by defining this term, AMS does not intend to limit live poultry dealers to a single housing specification
ons to mean a description of—or document relating to—a list of equipment, products, systems, and other technical poultry housing components required by a live poultry dealer for the production of live poultry. Live poultry dealers commonly develop multiple housing specifications. Accordingly, by defining this term, AMS does not intend to limit live poultry dealers to a single housing specification. Another proposed definition would define Live Poultry Dealer Disclosure Document to mean the complete set of disclosures and statements that the live poultry dealer must provide to current or prospective poultry growers.
Under a second scenario, as described in proposed new § 201.100(a)(2), a dealer seeking to enter into a poultry growing arrangement that would require the grower to make an original capital investment to comply with the dealer's housing specifications would be required to provide the grower with a true written copy of the poultry growing arrangement, the housing specifications, the Disclosure Document, and a letter of intent simultaneously. Because the Disclosure Document and letter of intent would be required to accompany the housing specifications, growers would have more information with which to assess economic and financial considerations prior to obtaining financing for the original capital investment. This proposal is intended to give the grower and their lender adequate time to consider all the information provided and consult with others as needed, and to provide assurance with which to move forward with the necessary financing. A letter of intent would signal to the prospective poultry grower and their prospective lender that the dealer's contract offer is earnest and that the preliminary terms of the agreement should be assessed to determine practical and financial feasibility
all the information provided and consult with others as needed, and to provide assurance with which to move forward with the necessary financing. A letter of intent would signal to the prospective poultry grower and their prospective lender that the dealer's contract offer is earnest and that the preliminary terms of the agreement should be assessed to determine practical and financial feasibility. Further, having the letter of intent would allow the poultry grower to discuss proposed or required upgrades to existing housing specifications with lenders and other advisors while considering whether to make those modifications and financial investments. Growers, working with their lenders, can establish an appropriate period to review and assess the disclosure document and letter of intent prior to undertaking the investment.
A proposed conforming change to § 201.2 would add a definition for letter of intent to mean a document that expresses a preliminary commitment from a live poultry dealer to engage in a business relationship with a prospective poultry grower and that includes the chief terms of the agreement.
Another proposed revision to § 201.2 would add a definition for original capital investment to mean the initial investment for facilities used to grow, raise, and care for poultry or swine. The proposed definition for original capital investment uses similar language as the existing definition for additional capital investment, and is intended to help differentiate between situations where a new or prospective grower would be required to make an initial capital investment for poultry housing in order to become a poultry grower and where a current grower has already made a capital investment related to poultry housing requirements
vestment uses similar language as the existing definition for additional capital investment, and is intended to help differentiate between situations where a new or prospective grower would be required to make an initial capital investment for poultry housing in order to become a poultry grower and where a current grower has already made a capital investment related to poultry housing requirements.
Finally, under the third scenario, as described in proposed new § 201.100(a)(3), a live poultry dealer seeking to offer or impose modifications to existing housing specifications that Additional capital investment, as it pertains to poultry production, is defined in the current regulations at § 201.2(n) as a combined amount of $12,500 or more per structure paid by a poultry grower over the life of the poultry growing arrangement beyond the initial investment for facilities used to grow, raise, and care for poultry. The term includes the total cost of upgrades to the structure, upgrades of equipment located in and around each structure, and goods and professional services that are directly attributable to the additional capital investment. The term does not include costs of maintenance or repair.
The requirement in current § 201.100(a) to provide true written copies of the poultry growing arrangement, whether to establish a new arrangement or to renew, revise, or replace an existing arrangement, helps improve transparency in the new or ongoing relationship between the live poultry dealer and the prospective or current poultry grower, which mitigates the information asymmetries and other deception-related concerns discussed above. AMS would retain that requirement under the proposed rule. AMS believes providing written documents helps ensure that both parties have the opportunity to read and understand all the terms of the poultry growing arrangement
between the live poultry dealer and the prospective or current poultry grower, which mitigates the information asymmetries and other deception-related concerns discussed above. AMS would retain that requirement under the proposed rule. AMS believes providing written documents helps ensure that both parties have the opportunity to read and understand all the terms of the poultry growing arrangement. Further, the requirement in current § 201.100(a) to provide a copy of the poultry growing arrangement at the same time housing specifications are disclosed ensures transparency about the dealer's expectations regarding the grower's responsibility under the arrangement. Under the proposed revisions to § 201.100(a), and in the three scenarios described above, the required documents and the timelines for providing them are determined according to whether new or revised housing specifications are involved.
In each of the three scenarios presented above, the live poultry dealer must provide the grower with the Disclosure Document. The Disclosure is a set of documents prepared by the live poultry dealer. AMS believes providing the Disclosure Document to growers along with the true written copy of the poultry growing arrangement, housing specifications, and letter of intent, where applicable, would help mitigate the asymmetric information problem described earlier in this document by giving growers more information with which to assess poultry growing arrangements and efficiently allocate resources.
The contents and format of the Disclosure Document cover pages would be provided in proposed new § 201.100(b)—Prominent disclosures. Proposed § 201.100(b) would specify the elements to be included with the cover pages of the Disclosure Document, including basic information about the live poultry dealer, key points in the poultry growing arrangement, and precise language for certain notices the dealer must make to the grower
the Disclosure Document cover pages would be provided in proposed new § 201.100(b)—Prominent disclosures. Proposed § 201.100(b) would specify the elements to be included with the cover pages of the Disclosure Document, including basic information about the live poultry dealer, key points in the poultry growing arrangement, and precise language for certain notices the dealer must make to the grower. In conjunction with the requirement to include specific language in the Disclosure Document, AMS is requesting Office of Management and Budget (OMB) approval of a new information collection, as described more fully in the Paperwork Reduction Act section of this proposed rule. AMS is proposing to provide a downloadable and printable electronic form containing the required language described in proposed § 201.100(b). The proposed form is for the use of live poultry dealers and is intended to reduce the burden of creating such a form and simplify compliance with the requirement to make certain notifications to poultry growers.
Proposed new § 201.100(b)(1) would require the Disclosure Document cover page to include the title “LIVE POULTRY DEALER DISCLOSURE DOCUMENT” in capital letters and bold type. Proposed § 201.100(b)(2) would require the live poultry dealer to list their name, type of business organization, principal business address, telephone number, email address, and if applicable, primary internet website address. Proposed § 201.100(b)(3) would require the dealer to specify the l

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/FR_PRORULE_2022-11997. Check the current official text before relying on it. Not legal advice.