New Rules Project - Family Farm Rules Bulletin

ABOUT THIS BULLETIN

This issue of the Family Farm Rules Bulletin examines policies that address the growing use and abuse of contracts in animal agriculture. The use of production and marketing contracts has increased the bargaining power of processors at the expense of independent farmers. The trend towards contracting is quickly spreading from poultry to hogs and cattle, and new rules are under development to protect growers.

For a description of the New Rules Project, contacts and links to the text of the bills mentioned below, visit the New Rules website: http://www.newrules.org/ Past issues of this bulletin can be found at: http://www.newrules.org/misc/bulletins.htm We encourage submissions of relevant news.

BACKGROUND

Production contracts:
Today virtually all US chicken is grown by farmers under production contracts. In this system, an "integrator" (e.g. Tyson, Perdue, etc.) typically supplies farmers with the basic inputs--chicks, feed, medication and other supplies. Integrators maintain ownership of the chickens. The farmer provides land, labor, buildings, and care until the chickens reach processing size. They are typically paid according to a formula that establishes a base price and bonus payments for higher quality birds.

Once under production contracts, processors benefit from extraordinary bargaining power, and are able to offer "take it or leave it" contracts to farmers. As a result, many contracts contain obscure language, payment plans, and confidentiality provisions that make it difficult to negotiate a fair deal. Once farmers agree to a contract, there are no provisions barring early cancellation, which may leave farmers with huge loans on production equipment (e.g. chicken houses) and no market. No laws prevent processors from retaliating against farmers who attempt to collectively organize. And when wastes from poultry houses spill into the environment, it is farmers- not processors- who remain liable, even though it is processors who own the poultry under production contracts.

Marketing contracts:
Marketing contracts are agreements between a contractor and grower that establishes a price in advance of the product being delivered. Under this arrangement, farmers retain ownership and control over the production process. Unlike the chicken industry, the pork and cattle industry still maintain a large core of independent producers. Increasingly, however, the use of marketing contracts in the industry is changing the terms of trade in favor of processors. Today, only four processors control over 80% of the market in cattle. At the same time, packers have increased the amount of cattle and hogs they either own themselves or control through marketing contracts. These captive supplies' that processors control represent around 40% of the US cattle market, and 60% of the pork market. In some individual states, the figure is over 90%. Captive supplies essentially shrink the open market for livestock, making it more easily manipulated by processors. When market prices are high, the packers use their captive supplies, which undercuts market demand and forces down the prices paid to cattle producers. When the price for cattle falls, the packers start buying cattle on the open market again at the artificially reduced price. The remaining independent farmers are left to sell on an increasingly small and depressed open market, or having to enter into contracts. Analyzing this dynamic, the Western Organization of Resource Councils' (WORC) economists found that for each percent of captive supply, prices decreased by eight cents per hundred weight (about $40/steer).

NEW RULES

Production contracts:
Nationally, several bills to protect contract farmers have stalled - the Poultry Farm Protection Act of 1999 (H.R. 2829) and the Family Farm Cooperative Marketing Amendments Act of 1999 (H.R. 2830). In the absence of federal legislation on the issue, states have developed rules of their own- though many of the laws needed to protect contract growers are not yet enacted.

On the state level, Minnesota took an early lead to protect contract growers, setting guidelines on contract cancellation, requiring a mediation clause in contracts between growers and processors, and assigning parent company responsibility for contracts of subsidiaries. There is still a dearth of legislation and case law in this area, however, and new legislation is still focused on the basics: contract readability and a 3 day right to review (MN), banning confidentiality on production contracts (IA), and contract liens (guarantees) to give producers the first priority to be paid if a processor goes bankrupt (IA).

The Iowa Attorney General's office recently wove this patchwork of legislation into a complete package of rules, and released a model contract law- the "Producer Protection Act"- designed for introduction in state legislatures. The Act was developed by a coalition of 16 state AG offices to protect contract growers and producers. It contains six major components: Section 4: requires contracts to be in plain language and clearly disclose risks.

Section 5: provides contractors with a 3 day right to review of production contracts. Section 6: prohibits confidentiality clauses in contracts. Section 7: provides producers with a first priority lien for payments due under a contract in case the contractor company goes out of business. Section 8: protects producers from having contracts terminated early or as a form of retribution. Section 9: makes it unfair for processors to retaliate or discriminate against producers who exercise rights, including the joining of producer associations. Note: some of these sections apply to all contract growers, regardless of contract type. The full text and an explanation of this legislation can be found on the New Rules website at: http://www.newrules.org/agri/ppa.html

Also under development are state laws that assign environmental liability to integrators for the wastes of poultry grown under contract. Several laws in Iowa were proposed (HF 2245, SB 2182 and SF 2198, SF 2387) to make integrators liable for violations committed by contract producers, but the bills failed this summer. Kentucky's Division of Water recently finalized regulations on concentrated animal feedlot operations (CAFOs) which include integrator liability. The KY law is the first of its kind in the country. Under the regulations, integrators must apply for a state permit even if they own animals kept by a farmer under contract. If the permit is violated, it is the integrators who are liable for consequences. The regulations were to go into effect August 24, 2000, but last June the Farm Bureau and other groups challenged the rule in court by arguing that it was pre-empted by another Kentucky law that precludes the state from passing legislation stricter than federal standards. They were granted a temporary restraining order specifically on the integrator liability provision.

Also on the books is legislation that imposes liability on parent companies for unfair contracts or unpaid debts of processors. Bills on parent company liability have failed in Iowa and South Dakota, but Minnesota has had a provision since 1990. More information on liability issues related to contract agriculture can be found at: http://www.newrules.org/agri/liability.html

Marketing contracts:
On the state level, some of the legislation pertaining to production contracts also applies to marketing contracts. In Iowa, several failed bills specifically targeted marketing contracts between packers and livestock sellers. In 1999 a bill (Iowa H.B. 174) would have prohibited packers from holding livestock marketing contracts if they are found liable in a breach of contract. Another proposed law (IA H.S.B. 72) would have prohibited confidentiality in marketing contracts.

On both the state and federal level, efforts to combat the anti-competitive pressures of captive supplies have focused on mandatory price reporting and market transparency. State price reporting legislation spurred the passage of the federal Livestock Mandatory Reporting Act of 1999, which requires the USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) to gather and post contract details from packers. GIPSA has recently released proposed rules under the law for review. In addition, the USDA is at last holding hearings on captive supplies, examining a rule proposed by the Western Organization of Resource Counsels (WORC; http://www.worc.org/) in 1996. The rule would prohibit packers from owning and feeding cattle, unless the cattle are sold for slaughter in an open, public market. The rule would also prohibit packers from procuring cattle for slaughter through the use of a forward contract, unless the contract is offered or bid in an open, public manner. As of this writing, the USDA had not made a final decision on the proposed WORC rules.

For more information see the New Rules Project website: http://www.newrules.org/

Past articles related to agriculture include:

"Seeding Power: The Other Problem with GM crops" : No one knows what effect genetically modified foods will have on the environment or on humans, but one thing is certain: the benefits of using GM seed will accrue mainly to a handful of corporations. (Summer 2000)
"Footloose and Label-Free": Labeling laws allow vendors to sell apples without telling consumers whether they're from Washington or Australia. Congress is looking at several bills that would require country-of-origin labeling. (Winter 2000)
"Hogging the Market": Giant industrial hog producers have practically wiped out the family-owned hog farm, poisoning the land and weakening rural economies in the process. Dramatic shifts in agricultural policies are needed to rescue the independent farmer. (Fall 1999)
"Got (Local) Milk?": New England has worked to save their local dairy farms with a regional pricing structure called a dairy compact. (Fall 1999)
"A Case of the Good Stuff": Small wineries have cleared themselves a space on the shelf, making them an unusual case in this era of consolidation. Now their alternative methods of distribution are threatened. (Fall 1999)
"States Take the Bull by the Horns": Family farmers cheer as plains states pass legislation intended to break up concentration in the meat packing industry. (Summer 1999)

The Family Farm Rules Bulletin

Family Farm Rules Bulletin October 2000

BACKGROUND

NEW RULES