USDA’s proposal would prohibit live poultry dealers from reducing a broiler grower’s base payment as provided in a contract, create a duty of fair comparison for live poultry dealers, require live poultry dealers to create and implement written procedures for operating a fair ranking system for broiler growers in relation to the duty of fair comparison, and require live poultry dealers to disclose information to broiler growers regarding capital investments prompted by the live poultry dealer. The proposed rule expands USDA’s Agricultural Marketing Service (AMS) requirements for live poultry dealers under the PSA and is intended to strengthen requirements relating to unfairness and deception in contracting.1 It focuses specifically on broiler chicken production.
The proposed rule is the third in a series of four rulemakings AMS is pursuing to advance USDA’s agricultural competition agenda. AMS has finalized two other rules in the series—one in December 2023 focused on transparency in poultry grower contracting and another in May 2024 intending to strengthen requirements related to discrimination, retaliation, and deception in livestock and poultry contracting. The fourth rule AMS is working to develop is reported to address the requirement to show injury or likely injury to competition when establishing a violation of Section 202 of the PSA.2
Summary
The new proposed rule follows an advanced notice of proposed rulemaking from 2022 that requested comments on how to address potential unfairness in poultry grower ranking systems.3 AMS indicates in the preamble to the proposed rule that the proposed regulations seek to address commenters’ concerns regarding lack of transparency in ranking system payments, fairness of ranking systems, and capital improvement requirements.
The proposal would add four new sections in 9 CFR 201, subpart N, related to live poultry dealers in the broiler chicken business. The first two sections apply only to live poultry dealers that compensate broiler growers based on a grouping, ranking, or comparison of growers (hereinafter referred to as a “tournament system”), and the third would apply regardless of the compensation model:
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Proposed 9 CFR § 201.106 would prohibit live poultry dealers from reducing broiler growers’ base pay as provided in the contract.
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Proposed 9 CFR § 201.110 would establish a “duty of fair comparison” and certain comparison factors used to determine whether a live poultry dealer has reasonably designed its poultry grower ranking system. The section also sets out the documentation live poultry dealers would need to develop in order to show their poultry grower ranking system is consistent with the duty of fair comparison. These documents would be audited regularly.
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Proposed 9 CFR § 201.112 would require live poultry dealers to disclose certain information to broiler growers when requiring or requesting growers to make capital investments into their operations.
Finally, proposed 9 CFR § 201.290 would introduce a severability clause permitting the remaining sections in Subpart N to remain in effect even if others become unenforceable. We summarize the first three key provisions below.
Proposed § 201.106 Broiler grower compensation design
In the preamble, AMS raises concerns about the fairness and transparency of tournament contracts in relation to possible adjustments that can affect broiler grower compensation, particularly when growers in AMS’s view may have limited ability to control the variability of their payment outcomes.4 This section would prohibit live poultry dealers using a tournament system from reducing a grower’s base pay in the growing arrangement based on the grower’s ranking compared to others in the group. Dealers would only be able to make upward adjustments to grower compensation, e.g., through bonuses.
Proposed § 201.110 Operation of broiler grower ranking systems
In the preamble to the proposed rule, AMS explains its concerns that the contract structure of poultry contracting means live poultry dealers have control over key inputs and production practices leading to potentially unfair outcomes for growers.5 This section would establish a “duty of fair comparison” requiring live poultry dealers to ensure their tournament systems are designed and operated in a manner that provides a fair comparison between growers. The proposal provides the following factors to determine if a tournament system is “reasonably designed or operated” to deliver a fair comparison among growers:
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Whether differences in performance caused by a dealer’s distribution of inputs or assignment of flock production practices cause material differences in performance without appropriate adjustments to grower compensation.
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Time period of dealer’s comparison and use of groupings, rankings, or comparisons to mitigate differences in inputs over that period.
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Extenuating conditions or circumstances outside a dealer’s control that “render comparison impractical or inappropriate.”
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Reasonable efforts by the dealer to resolve grower concerns regarding the tournament system’s design and operation for fair comparison.
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“Any other factor relevant to a fair comparison.”
The proposed rule also provides that if fair comparison is not possible for one or more growers, the live poultry dealer would need to compensate the growers through a “non-comparison method” to be specified in the contract that reasonably compensates the grower for his or her services.
The proposed rule would require live poultry dealers to adopt policies and procedures to meet the duty of fair comparison. These documentation requirements would include establishing processes for the following:
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Selecting and distributing inputs. These processes would seek to ensure dealers fairly distribute inputs that affect grower performance, such as the birds themselves, feed, medication, and other inputs, and control for quality and quantity between growers. Dealers would also be required to state how they adjust compensation based on inputs provided.
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Flock production practices. These processes would need to describe and explain how the dealer conducts dealer-controlled practices that affect grower performance, such as target weights and growing density, and how dealers adjust compensation based on these flock production practices.
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Comparison flexibility. These processes would include descriptions of the dealer’s processes for items such as when growers are removed from a ranking group comparison, when dealers compensate by a non-comparison method, and the suitability for the time period used in a comparison.
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Communication and cooperation. These processes include how a dealer resolves grower concerns with the design of the tournament system with regard to fair comparison and the timeline for resolving these concerns.
The proposed rule provides that the above processes must be independently audited and reviewed every two years, including the preparation of a written report providing the conclusions of the review. Live poultry dealers must maintain records pertaining to this section for 5 years.
Proposed § 201.112 Broiler grower Capital Improvement Disclosure Document
AMS explains in the preamble its concerns that additional capital investments that live poultry dealers may request of broiler growers can be problematic when growers have reduced bargaining power and insufficient information about the expected returns of the investment.6 The proposed rule would require when a live poultry dealer requests a grower to make a capital investment, the dealer provides a “Capital Improvement Disclosure Document” (CIDD) containing the following information, aimed at increasing transparency in these investments and expected outcomes:
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Purpose of the investment and supporting justification
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Related financial incentives and compensation
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Relevant construction schedules, housing specifications, and required/approved manufacturers or vendors
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Analysis of projected returns related to the investment, including assumptions, risks, or uncertainties
The CIDD would need to include a mandatory disclosure statement with language provided in the regulation that informs the grower that USDA has not verified the information contained in the disclosure document and that providing false or misleading information or a material omission may be a violation of law in violation of the Packers and Stockyards Act.7
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AMS estimates the first-year total cost of the rule to industry would be $19.8 million and approximately $4 million for each succeeding year.
The deadline to submit comments on the proposed rule is August 9, 2024. We will continue to monitor developments related to this proposal and other PSA developments. Please contact us if you have any questions about this rule or would like additional information.
Authored by Brian D. Eyink and Connie Potter.
References
1 89 Fed. Reg. 49002 (June 10, 2024). AMS has published a fact sheet and webinar recording with more information on the proposed rule on its website.
2 The White House Office of Management and Budget (OMB) is currently reviewing the proposed rule addressing injury to competition.
USDA has not verified the information contained in this document. If this disclosure by the live poultry dealer contains any false or misleading statement or a material omission, a violation of Federal and/or State law may have occurred. Violations of Federal and State laws may be determined to be unfair, unjustly discriminatory, or deceptive and unlawful under the Packers and Stockyards Act, as amended. You may file a complaint at farmerfairness.gov or call 1-833-DIAL-PSD (1-833-342-5773) if you suspect a violation of the Packers and Stockyards Act or any other Federal law governing fair and competitive marketing, including contract growing, of livestock and poultry. Additional information on rights and responsibilities under the Packers and Stockyards Act may be found at www.ams.usda.gov.
