Pacific Views

Fair Markets For Farm Country: The Competition Title

The typical American wage worker hasn't gotten a raise in somewhere around thirty years:

As Tom Kochan and Beth Shulman note, millions of America’s working families fail to have the necessary means for basic self-sufficiency—and it looks no better for the next generation. In their report, “A New Social Contract: Restoring Dignity and Balance to the Economy,” they write:

In 2000, the average high-school educated workers age 25–29 started out earning about $5,000 less real income and could expect slower growth in earnings than those who entered the labor force in 1970. Workers with some college started about $3,500 behind their 1970 counterparts.

Thing is, the typical American farmer or rancher isn't doing much better. (pdf) As the profits of food processors, meat packers and agribusiness firms have soared, farmers and the rural economies that center around them have been methodically and systematically crushed.

One aspect of this economic vise has been the tendency towards consolidation in the meat packing and food processing industries. They carve out what are often non-overlapping territories and no longer have to compete among themselves as frequently to offer growers a fair price.

"Rural America is becoming the company town," said Christopher Campany, who was the 2002 Farm Bill coordinator for the National Campaign for Sustainable Agriculture.

A set of bills being proposed for inclusion in the 2007 Farm Bill, collectively known as the competition title, could reform the current structure of the market to level the playing field for farmers without asking for additional taxpayer dollars to be diverted for subsidies.

"Chickenization"

The term chickenization is used in agricultural circles to describe the lack of competition among purchasers of farm goods. Among the growers and ranchers who came to Washington D.C. two weeks ago to lobby Congress for competition title reform, it's a dread-inspiring word.

I don't say 'dread' lightly. One former poultry farmer refused to be quoted at all if any information was included in this article that could identify him, the group he was with, the chicken integrator he talked about, or even the region of the country he came from. All out of fear that a relative could lose their chicken growing contract out of retribution.

"Being small farmers with a heavy debt load, most of us are afraid to speak out. ... If we have a complaint, we really have no recourse," said the former poultry farmer, while noting that their contracts include arbitration agreements that prevent them from taking the integrators to court. Of their options, he said, "You either sign [the contract you're offered when they deliver the chicks] or you don't get product. ... If he cuts us off, we're saddled with a debt we can't pay."

Becky Ceartas of the Rural Advancement Foundation International - USA (RAFI) explains the basics of chickenization: "We use poultry as the poster child of what can go wrong with vertical integration and consolidation within the industry," noting that vertical integration means that the company owns the birds and the feed and contracts with the grower to raise them.

"[The growers] don't own those birds unless they die," said John Crabtree of the Center for Rural Affairs.

Ceartas said that in the 1960s, though many poultry companies were already vertically integrated, there were still enough competing companies that a farmer who didn't like the contract they were offered could go elsewhere. During the 1980s, however, industry buyouts began to mean that for the majority of farmers, there were only one or two companies in town that they could contract with. And not having a contract to raise poultry isn't a viable option for most chicken farmers. "Their poultry barns that they've invested hundreds of thousands of dollars into are single use structures ... that can't make a decent return producing anything else."

Scott Marlow of RAFI drew a more detailed picture of what poultry integrators' geographic monopolies mean for contract growers. He said that they end up with "long term debt for short term commitments," taking out 15-20 year loans for the prospect of yearly contracts with what is frequently the only integrator in their area. If the returns on the contracts go down from year to year, the grower doesn't have the option to go elsewhere. The company controls their inputs and what equipment they have to buy, as well as the price of the grown chickens. The single purpose equipment growers are forced to buy has to be upgraded at the will of the integrator, and he illustrated this with a case where a grower was made to buy around $40,000 worth of upgrades, only to have their contract terminated two months later.

Rancher Jerry Petik, the director of the South Dakota Farmers Union, explained that an integrator like Tyson might make an 18-20% return on their investment, while a grower is typically getting only a 1-2% return. He emphasized that growers weren't asking for a handout, more infrastructure or protection from everything, they just want to be able to compete. "We think we could compete with anybody," he said. He added that if someone couldn't operate efficiently, they shouldn't be in business, "... but we are losing people we shouldn't be losing. Sometimes the only thing they did wrong was to not be filthy rich."

Now, other growers are increasingly concerned that chickenization will be coming to their markets, if it isn't already on the way. In the food industry, the most profitable commodity of all is chicken, and other meat packers and processors have been taking notes.

Chickenization on the March

Marlow described the speed with which similar contracts are being adopted in other industries, and peanuts are a prime example. “What took twenty years in poultry took five years in pork, two years in tobacco and one in peanuts.”

“The first key point to understand about the peanut market is that almost all of the purchases of peanut from farmers are now done through private contracts between the companies and the farmer rather than through public markets," said Marlow. "There is no Chicago Board of Trade market for peanuts, so a farmer can’t check anywhere to find if he is getting a fair price or not. In tobacco, as well, almost all of the public tobacco markets are gone. Where there were once hundreds of auction barns for tobacco in North Carolina, now there are fewer than ten. And farmers are not allowed to talk with anyone except their lawyers and family members about their contracts, so there is no way to know what the going price or conditions are.”

In peanuts, Marlow pointed to a new twist on contracts, the options contract. “Like most commodities, the current peanut program provides marketing loans, which allow the farmer to take out a short term loan with the crop as collateral and then buy back those peanuts when they want to sell them. But while the farmer keeps the loan, the peanuts must be held in a government warehouse, and the loan must be paid back as soon as the farmer loses 'beneficial interest.'"

Marlow said, "Under an options contract, the company pays the farmer not for the peanuts, but for the option take back the peanuts from under the loan. So a contract with the company for $450 per ton is actually a $55 payment from the company plus the $395 loan price that the farmer receives from the government."

"But where this really gets interesting is that the government does not own peanut storage, but leases it from the companies that are writing the contracts. A little-known provision in the 2002 Farm Bill ruled that options contracts do not mean that the farmer has lost beneficial interest, and the loan can be maintained. Once the farmer signs a contract, the company can require that the farmer put those peanuts into their storage where they maintain control of them, but the government pays storage and handling fees right until the peanuts are processed. Instead of having to buy the peanuts at harvest, this allows the companies to control the peanuts for far less money, and then make money on the storage and handling, and the taxpayer picks up the tab," said Marlow.

Marlow said that all of these issues were about the same basic thing; whether of not there is an open market where farmers can negotiate a fair contract and prevent companies from having market manipulating power. “If a contract is freely negotiated between two parties, it’s a great thing.” he said.

Hit To The Pocketbook

The packers and processors have argued that they're taking advantage of economies of scale, bringing greater efficiency to the markets. Michael Stumo of the Organization for Competitive Markets, says that if that were true, consumers should be seeing prices go down. Yet prices have gone up for consumers while the farm prices paid for commodities have stayed flat. Essentially, retail prices are no longer tied to input prices, which is exactly what happens when monopolies use their control to charge all the market will bear, while at the same time that they're paying producers barely enough to keep their heads above water.

"We get those cheapness benefits of economies of scale at a much, much smaller level. ... After you've wrung those economies of scale out of the system and you continue getting bigger, the purpose is gaining market share and market power, the ability to push price around in ways that the supply and demand wouldn't determine the price to be. That's how you get monopoly profits," Stumo said.

Stumo said the impact at the grocery store was that "consumers are paying more for the perishable food products than they should be. Perishables are things that go bad, that are not in cans. ... Those food items are increasing every year in price at a rate exceeding the consumer price index, at a rate exceeding the general food inflation, and so consumers are paying more because of the market power of the large retailers. Yet farmers do not get more. So the retailers pay the same for the incoming product, but they charge a lot more for it. ... We think everybody should make money when they're participating in the food system, but the farmers should too and the retailers' profits should not exceed a rate of reasonable return."

Stumo illustrated his point by bringing up the farm price of milk in New England in 1981, which was $1.17 per gallon. In 2006, the farm price was $1.14 per gallon. Yet cattle feed costs have recently doubled, fuel costs have increased, and even healthcare has increased in cost. All of these costs, the farmer has to cover while getting less for their milk than they were more than 25 years ago. At the same time, the price to the New England consumer of a gallon of milk is over $4 today, whereas in 1981, it was close to $2 a gallon.

Though Stumo said that New England dairy farmers had become more efficient in the intervening years, in 2006, the average 100 cow dairy farm in New England received about $40,000 less income than the previous year and had between $40,000 to $50,000 more in expenses. "Given that they try to make about $40,000 a year, they had an $80,000 or so shift to a pretty significant loss as compared to 2005, in rough numbers," he said.

Additional profits are being made, but they aren't going to the farmer. Where farmers increase their efficiency, that savings isn't being passed to the consumer. That's what happens in a monopoly market. (pdf)

Four Steps to Competition Reform

Crabtree explained both the structure of the industry and the ways in which the competition title legislation would correct it. He said that there were four main areas of reform addressed either by legislation that Sen. Tom Harkin (D-IA), chair of the Senate Agriculture Committee, wanted included in the Farm Bill as far back as 2001, though some of it has been proposed as standalone legislation being prepared for release by individual Senators.

Item, the first: The packer ban would prohibit meat packers from owning livestock for a period of longer than 7-14 days before slaughter. Because production contracts now allow packers to control animals all their lives, they can use monopoly power to push the market. Crabtree said that they do this by slaughtering their own animals when prices are higher and only buying on the market when prices go lower. The law as proposed would allow companies a full year to divest themselves of their livestock.

This piece of the competition title is especially bipartisan. Harkin is united in the proposal with Iowa's Republican Senator, Chuck Grassley, who introduced it for 2007. Back in 2001, Sen. Paul Wellstone (D-MN) introduced a similar ban on packer ownership, only to see it fail with the rest of the competition title legislation proposed that year.

Item, the second: Captive supply reform would require contracts to specify a base price for animals. Currently, many supply contracts oblige growers to deliver their animals to the meat packer, while obliging the packer only to pay them by a formula.

Crabtree said that if, for example, a packer agreed to a contract that paid $0.50 over the going price per head when it was at $50 per head, the grower signing that contract is thinking about whether $50.50 per head would cover their costs and make some money. If, on the date they've been obliged to deliver the animals, the going rate is $46 per head, they end up having to take $46.50 whether it covers their costs or not.

Another thing captive supply reform would do is require contracts to be offered publicly. At present, a grower can't know what going rate has been offered to other producers, and therefore can't know if the price they're offered is fair. Crabtree said that often, a meat packing plant will offer premium purchasing contracts to large growing operations to ensure that the plant has enough input to run for the day. After they've secured a majority of their operating needs, they start contacting smaller growers, often offering them dirt cheap rates for their animals.

Captive supply reform would require contracts to set a minimum and public price, to ensure that growers get their production costs covered and can make a living.

Item, the third: The fair contracts provision would prohibit certain widespread industry contracting provisions that have kept farmers silent and out of the courts for years.

The most outrageous contract provisions on the list are the industry privacy clauses. Growers aren't allowed to show their contracts to a lawyer, their banker, a financial advisor, or in some cases, even their spouse. This portion of the competition title would forbid such extremely disadvantageous secrecy.

Next would be a three-day cooling off period to allow growers to back out of a deal. At present, they're offered same-day deals that they have to accept right then, often at the same time they're to accept delivery of young livestock.

The last is a right that most of us take for granted outside our cell phone contracts: the right to take our grievances to court. Just as with your cell phone contract, contracts in vertically integrated livestock industries require growers to agree to binding arbitration for any complaints they may have. As Crabtree said, this puts the companies, who have the resources and opportunity to get to know all the tricks of the private arbitration circuit, at a huge advantage. "It's basically a way of barring the door to the courthouse," he said.

Item, the fourth: Creation of an office of special counsel at the Dept. of Agriculture (USDA) that would be charged with enforcing the competition title rules and other industry violations within the USDA's sphere of influence. Crabtree said that even violations of current laws often get shuffled between the USDA, the Dept. of Justice and the Federal Trade Commission, without anyone being responsible for seeing that action gets taken. He said that it wouldn't be a consolidation of authority, but that the office would act as a liaison between the offices and departments with oversight responsibility to see that investigations were completed.

Crabtree said that an audit requested by Iowa's Senators, Harkin and Grassley, of the performance of the Packers & Stockyards Administration at the USDA found that out of around 1800 investigations they claimed to have carried out between 2002 and 2005, 1739 cases included no documentation indicating that there had been any action taken. There were cases where a single phone call made to the department and noted in the records had been reported as an investigation, he said.

Someone needs to be charged with making sure that real investigations are carried out and that the laws passed by Congress to govern the agricultural industry are enforced. Right now, that job doesn't exist.

Competing Interests

Crabtree emphasized that he didn't believe there was anything inherently wrong with packers, just that they didn't make good farmers or ranchers. He said it isn't their job to care about land stewardship or passing a farm along to the next generation. Their job, he said, was to pack meat and make a profit selling it.

The results of packers making decisions farmers and ranchers should be making, Crabtree said, are environmental catastrophes common to industrialized farming, such as confined animal feeding operations, or CAFOs. "Farmers didn't decide to build CAFO's, packers did," he said. The packers drove and sought industrial concentration in farming, he said, so they could control their expenses and benefit their bottom lines at the expense of farmers, water quality and consumers. Even if the farmers have gone along, he said that most of them didn't have a lot of choice. "There's a real, tangible amount of social justice in these issues," he said.

One of those social justice questions comes in the form of labor conditions for process workers in U.S. meat packing plants. Indeed, the meat packing industry has the distinction of being the first U.S. industry to be targeted by a Human Rights Watch report as violating both human and labor rights.

Bob Gronski, of the National Catholic Rural Life Conference, elaborated. "I think if you go back a generation or two in these facilities, they might have been union workers, so they would have a union wage. A fairly good wage. But over time, the unions have been busted, particularly in the meat packing area," he said. If they can't find workers in the local community, he said that they may look for illegal immigrants who will work for very low wages. "The other part of the problem is that inside these places, it's quite chilly, it's very wet, there's a lot of blood and guts around, the situation is very unpleasant. There's hardly any breaks, once the line starts for processing it just keeps moving. You're dealing with sharp knives and people are hurting themselves, but they've got to stay on line, they've got to keep it moving," he said.

"The wages are very poor, the working conditions are very poor, and the stories are horrendous," said Gronski. He indicated that he thought one of the reasons things were so bad is that consumers don't know what goes on in the factories where their meat is processed.

Petik also pointed out that it was important to address the needs of the people who worked in the packing plants. The rancher was familiar with packer labor practices and said that farmers and plant workers depended on each other. "Agriculture never got anywhere until unions came in. When people started making a living wage, they were able to pay a little more for food, ... buy better quality food," he said.

The market as it exists today serves the packers' interests almost exclusively. There are few mechanisms in place to hold them accountable to either the farmers, their employees, those who have to deal with the environmental consequences of their business practices, or the consumers who buy the finished product.

Low Cost Rural Development

A great many rural development proposals have been either discussed or implemented over the years: rural broadband, farm subsidies, conservation reimbursement, educational supports, changes in tax laws, disaster relief, etc. Some of them have a lot of potential to improve rural life in substantial ways, or may have done so already, but what they share in common is that they all cost a lot. While the return on investment may well be worth it, what the farmers who traveled to the Capitol last week asked of their legislators was a set of reforms to their industry that will only cost taxpayers the salary overhead for a new legal office at the USDA.

You've never heard such a cheap proposal for uplifting the economy in farm country. Or, as Marlow said, "You give farmers a fair price for their product and you will get rural development."

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You can make a difference this week by letting members of the Senate Agriculture Committee know that, on behalf of the people who grow your food, you'd support their signing on to Senator Harkin's competition title legislation. While any Senator can support another's bill, getting the members of the Agriculture Committee to agree to sign it makes it more likely that it will be included in the 2007 Farm Bill instead of having to be introduced as standalone legislation, which has much less chance of passing without the full support of the committee charged with overseeing agricultural policy.

So if you live in one of the following states, please contact your Senator on Monday and express your support for the competition title. Support fair contracts, banning packer ownership of livestock, captive supply reform and the creation of an office of special counsel at the USDA. The support for the competition title is bipartisan, but so is the opposition. Please don't hesitate to call your Senator regardless of party, their stance might surprise you. Also, your chicken farmer would really appreciate it.

Senate Agriculture Committee

Arkansas - Blanche Lincoln (D)
Colorado - Ken Salazar (D)
Georgia - Saxby Chambliss (R)
Idaho - Mike Crapo (R)
Indiana - Richard Lugar (R)
Iowa - Chuck Grassley (R)
Iowa - Tom Harkin (D - Chair)
Kentucky - Mitch McConnell (R - Ranking)
Michigan - Debbie Stabenow (D)
Minnesota - Norm Coleman (R)
Minnesota - Amy Klobuchar (D)
Mississippi - Thad Cachran (R)
Montana - Max Baucus (D)
Nebraska - Ben Nelson (D)
North Dakota - Kent Conrad (D)
Ohio - Sherrod Brown (D)
Pennsylvania - Bob Casey (D)
South Carolina - Lindsey Graham (R)
South Dakota - John Thune (R)
Vermont - Patrick Leahy (D)

Call the United States Capitol switchboard at (202) 224-3121, ask for your Senator, and you'll be transferred directly to their office.

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Natasha is currently an intern with the Michael Fields Agricultural Institute, an organization dedicated to outreach and education in sustainable agriculture and food systems issues. The opinions expressed in this post are her own and are not representations on behalf of MFAI. For regular legislative alerts about food sustainability issues, sign up with the National Campaign for Sustainable Agriculture.

Posted by natasha at March 25, 2007 06:21 AM | Agriculture | Technorati links |