A proposal by the U.S. Department of Agriculture to rewrite rules governing livestock production contracts has produced a divided response from farm groups and requests that implementation be delayed until they can study it more thoroughly.
The Food, Conservation and Energy Act of 2008 – the Farm Bill – directed the Secretary of Agriculture to promulgate new regulations with respect to the 89-year-old Packers and Stockyards Act. The rules would define an undue or unreasonable preference or advantage as prohibited by the Act, as well as what constitutes reasonable notice of suspension of delivery to a poultry grower, when it’s illegal to require capital investments of a swine or poultry grower, and how much time should be allowed for a swine or poultry grower to correct a condition that could lead to contract termination.
In announcing the proposed rules, Agriculture Secretary Tom Vilsack said they would help ensure a level playing field by providing additional protections against unfair practices and addressing new market conditions not covered by existing rules. Some of them address issues that have been resolved in the courts in the processor’s favor; for instance, a requirement that companies who use a “tournament” compensation system have to offer the same base price to all comparable growers would, said Grain Inspection, Packers and Stockyards Administrator Dudley Butler, “rank apples against apples and oranges against oranges.” In addition, the proposal states that a producer does not have to prove a contractor’s action injures competition to file a lawsuit; it gives a producer the right to recoup up to 80 percent of a capital improvement required by a processor; it blocks packers from selling livestock to each other or sharing order buyers; it ensures producers that choose to take a dispute to arbitration undergo a fair and equitable process; and it requires companies to give poultry growers 90 days termination notice.
The ranchers group R-CALF USA thoroughly embraced the rollout, calling it “a bold and absolutely essential step in ridding the U.S. cattle market of anticompetitive practices,” and saying it would reverse adverse court rulings that had relegated the Packers and Stockyards Act “a toothless tiger.” On the other hand, the National Cattlemen’s Beef Association said it had “serious concerns with any efforts to increase government intrusion in the marketplace” and claimed studies show the current rules have kept the cattle market free from antitrust activities, collusion and price fixing. The American Meat Institute accused USDA of “engaging in a regulatory end-run”; NCBA, AMI and the National Pork Producers Council all requested a 120-day extension of the comment period beyond the initial cut off date of Aug. 23, 2010.
R-CALF and other groups objected to that, saying in a letter to Butler it “would unduly delay implementation of the specific reforms mandated by Congress,” and called on GIPSA to expedite implementation of the rules “so that we can begin the process of returning to independent livestock and poultry producers a properly functioning, competitive marketplace.
The American Farm Bureau Federation came down in favor of the proposed rule, president Bob Stallman saying in a statement, “For too long, producers have had to bear the financial hardship of being at the whim of production contractors, resulting in inequality in production practices, increasing losses and decreasing profitability. The GIPSA proposed rule would level the playing field.”
However, Travis Justice, senior economist for the Arkansas Farm Bureau, has his concerns, and he supports the call for an extended comment period. “On the surface, some of these provisions are pretty straightforward,” Justice told Ozarks Farm & Neighbor. “Others, I think we need some more time to flesh out some of the ramifications.”
In particular, Justice singled out provisions for making public the provisions of private contract arrangements. “Is this helping or hurting the price discovery process?” he asked. Justice said the consolidation of the packing industry was driven by economics and the need to become more efficient. “If we’re attempting to reduce the role of the packers in the pricing process, we could do that by rule, but have we helped the producer’s bottom line in the process?” he said.
One example of that, according to Justice, is the proposed base price requirement. Under a tournament system, “half the people benefit and the other half may not like it,” he said; if a floor price is established and only premiums are allowed, “you’re going to lower the base price for everybody… It may be perceived as a fairer system, but will it be a more profitable system?”
Similarly, he said if integrators are obligated for 80 percent of the capital improvement investments of growers, they will build that additional expense into the system, further impacting returns to producers. And the provisions restricting packer sales and procurement sources and eliminating volume-based preferences, he said, “run the risk of interfering with some of the current marketing agreements that are in place. There’s a lot to be considered in this proposal; there’s some risk there. We may be protecting producers from predatory practices by dealers, buyers and packers, but are we in the process protecting or harming the price discovery system?”
