For many years, small and mid-sized farmers have complained of unfair and anti-competitive practices (PDF) by large meatpackers and poultry processors. Farmers have argued in many venues that smaller operators were being squeezed out by discriminatory pricing, the decline of open markets, unfair contract stipulations, collusion among large meat packers to distort prices, and retaliatory actions against individual growers and ranchers.
In raising these concerns, farmers point to the decline of small and mid-scale livestock operations and the loss of over a million cattle and hog operations since 1980. They also note that U.S. meat production is now dominated by a handful of large meat processors: In 2008, just four firms slaughtered 79% of cattle in the U.S., up from a concentration level of 55% in 1986. This “four-firm” concentration level is likewise up for hogs, which jumped from 33% in 1986 to 65% in 2008, and for poultry, with a rise from 34 to 57% over the same period.
As this consolidation in processing has occurred, cash markets for sale of livestock have also declined and more and more livestock is raised, not by independent entrepreneurs competing in an open marketplace, but under contracts controlled by large packers and processors. In 2009, less than 1% of broilers, less than 10% of hogs and less than half of steers and heifers were sold in open cash markets.
Congressional Call for Action
In response to these concerns, the 2008 Farm Bill directed the U.S. Department of Agriculture (USDA) to issue new regulations to restore fairness and level the playing field in livestock and poultry markets. In June 2010, the Grain Inspection, Packers and Stockyards Administration (GIPSA) within USDA proposed new rules (PDF) to meet this mandate and to clarify important terms already in the Packers and Stockyards Act, the 1921 law aimed at assuring open competition in livestock markets (PDF).
USDA provided a 5-month public comment period and received more than 60,000 comments. The Department is completing review of those comments and is in the process of finalizing an economic analysis of the proposal. The proposed rules have drawn strong support from the National Farmers Union and other organizations (PDF) across the country representing small and mid-sized farmers and consumers. The rules have been opposed by the meatpacking and poultry processing industry.
While some members of Congress are pressing USDA to finalize these rules, others have supported riders to appropriations measures that will stop or delay completion of this long-awaited rulemaking.
What the GIPSA Rules Do
The Packers and Stockyards Act of 1921 (PSA) makes it unlawful for packers and meat processors to use “unfair,” “unjustly discriminatory” or “deceptive” practices in livestock markets, but over the years, the ambiguity of those terms has limited the practical effect of the law. The new rules would help to clarify the types of actions that would fall into these categories, and in so doing, would promote open, competitive livestock markets and allow for improved enforcement of the PSA.
Protections for Small Businesses
Because the organization of livestock markets varies by animal type, portions of the rules are specific to certain sectors, such as poultry. Overall, however, the proposal makes it clear that processors and meatpackers, while free to pay premium prices for special grades or quality of meat, may not discriminate against farmers and ranchers without an objective rationale. In other words, they cannot use their market power simply to drive small operators or other competitors out of business or retaliate against an individual who has complained about processor practices.
Smaller farmers will be able to compete with larger operations, because the rules make it clear that if a single producer or a group of producers that can meet the same contract terms as a large producer, including providing a certain volume of livestock, the packer or processor would not be allowed to undercut the prices and contract terms offered to the smaller entities.
Reasonable Enforcement of PSA
The rules also make it clear that USDA, in its efforts to protect farmers and ranchers from unfair or discriminatory practices, need not prove that a particular practice has had the effect of raising prices across the entire market. Many practices, such as not allowing a poultry grower to watch birds being weighed, giving a grower sickly birds or canceling a contract in retaliation for complaints, are, on their face, unfair but would not necessarily alter the price of meat. Some PSA court decisions, however, have reasoned that because USDA regulations have not provided any criteria for determining what is unfair, the proof of harm that must be shown is a detrimental impact to market prices across the board. As USDA has noted, this is an extremely high standard, akin to requiring an individual to prove harm to an entire neighborhood before the police could act to recover his stolen car. The proposed rules attempt to bring clarity to measures of unfairness in livestock markets, thereby allowing PSA to have a practical effect in assuring open markets for producers of all sizes.
In response to concerns that the current system allows for large businesses to coordinate their sales and purchases of livestock with one another in order to depress prices paid to independent ranchers and farmers, the new rules put restrictions on packer-to-packer sales and require more transparency in market transactions and in contract offerings. The rules also compel packers and processors to maintain written records to provide justification for differential pricing offered to livestock producers.
Fairness for Poultry Growers
The proposed GIPSA rules also offer new protections to poultry growers, a business almost exclusively dominated by a form of contracting in which the processor “places” birds in houses owned by growers, dictates the type of housing and equipment to be used, and makes payments based on a grower’s “ranking” compared with other growers. The rule would help growers protect their housing investments by requiring contract terms long enough to recoup at least 80 percent of their investment costs. It keeps integrators from demanding upgrades to facilities that are in good working order—unless the integrator chooses to offer compensation to the grower—and disallows contract demands for new facilities made at the same time an integrator is planning to substantially reduce or even end operations at a processing plant—something that has happened to numerous growers. The draft rule also brings needed reforms to the “tournament” pay system, requiring growers to be ranked only with others using the same type of poultry houses and requiring the same base pay rate for all growers raising the same type and kind of poultry.
Pew Support for the GIPSA Rules
The Pew Environment Group believes that the proposed rules benefit farmers and consumers, allowing the Department of Agriculture to guard against deceptive and fraudulent trade practices in the livestock and poultry markets and allowing small and mid-sized farmers and ranchers to compete fairly. We filed formal comments on rules in November of 2010, and we urge USDA to finalize these long-over protections.