December 15, 2016 Blog
Mike Weaver, President of Contract Poultry Growers Association of the Virginias
By Hannah Packman, NFU Communications Coordinator
Of all the metaphorical cogs and gears in the American food supply chain, farmers and ranchers arguably make the most significant contribution, yet they receive only a small portion of the American food dollar. Indeed, more than 80% of national food expenditures go to processors, distributors, retailers, and advertisers, leaving only 17.4% for farmers and ranchers.
Although most farmers have concerns about this economic trend, contract poultry growers are at a particular disadvantage. The poultry industry is highly vertically integrated, meaning that companies like Perdue and Tyson, known as integrators, provide chicks, feed, medication, processing, and marketing to poultry growers, also known as contractors. Growers are responsible for supplying the land, housing, equipment, utilities, labor, and other associated production costs required to bring the chicks to market weight. Integrators then pay growers a set amount for each pound of live bird produced.
Some argue that vertical integration benefits both integrator and grower. For integrators, it allows for the efficiency of economies of scale, making the production of each bird less expensive. Similarly, growers gain access to both specialized services like marketing and processing, as well as protection from market fluctuations, having passed the economic risk to the integrator.
Despite the potential advantages, this system allows integrators to take advantage of growers. Integrators promise generous profits to coax growers into contracts. The reality, however, is far more grim. Growers face hundreds of thousands to millions of dollars in upfront costs to install housing and plumbing, in addition to yearly maintenance and labor costs. Moreover, the return on investment is paltry; on average, integrators pay growers about 5 cents per pound of chicken, and about 6 cents per pound of turkey, according to Mike Weaver, the President of the Contract Poultry Growers Association of the Virginias. These rates have stayed constant for the past twenty years or so, even as the retail prices for turkey and chicken have increased. As such, net revenue for these facilities ranges between $6,000 and $10,000 annually, hardly enough to sustain a household.
Unfortunately, the economic hardship endured by contract poultry growers has often been overlooked, largely due to a lack of transparency. Every month, the USDA National Agricultural Statistics Survey (NASS) reports the average prices farmers received for most agricultural products. However, these numbers do not take the contract system into account. Rather than report the price per pound of live weight allocated to growers by integrators, Weaver says, the USDA reports the price per pound of carcass weight received by integrators. Consequently, the reported numbers are misleading. As an example, NASS reported that growers received 88 cents per pound of turkey in September. In truth, when converting live weight to carcass weight, growers received only about 8 cents per pound, or 5% of the retail value. Integrators, on the other hand, claim more than 50% of the retail value, even though they generally only spend two days managing the birds – one when they hatch and one when they are processed – whereas farmers spend several weeks to several months with the birds, depending on species.
Because the economics of the American poultry industry have been intentionally rendered opaque, most consumers are unaware of the challenges poultry growers encounter. To address these issues, the USDA yesterday announced a set of protections for poultry growers and livestock producers, called the Farmer Fair Practices Rules (FFPR), formerly known as the GIPSA Rules. If adopted, these rules will address some of the fraudulent and anti-competitive practices that are all too common in the highly concentrated livestock and poultry sectors. FFPR contains three rules – two proposed rules, which are open for public comment, and one interim final rule, which will go into effect 60 days after publication. The latter, a “competitive injury” provision, deals with the unreasonable burden that for growers to be able to sue for abusive practices, they must prove that harm was done to the entire industry rather than harm to themselves. This commonsense rule will eliminate that burden so that farmers who have been wronged can sue for harm only to themselves, rather than the entire industry.
NFU is happy to see these rules published, and encourages the public to review, understand, and offer feedback on the Federal Register. Contract producers have been waiting too long for these protections. Only through greater transparency and competition will growers be afforded fair pay and their due share of the retail food dollar.