Thursday, November 15, 2012

Strategies for reforming poultry contracts

For many years, advocates for farmers have been concerned about production contracts in the poultry, pork, and beef industries.

In the current issue of the Washington Monthly, Lina Khan has a captivating feature article criticizing the Obama Administration for retreating on proposed reforms to contracting rules.  A taste of Khan's theme of deflated hopes:
Big processing companies remain free to treat independent poultry, cattle, and dairy producers largely as they please. “You had farmer after farmer after farmer telling the same story, basically pleading for help, and absolutely nothing has come of it,” said Craig Watts, a poultry farmer from Fairmont, North Carolina, who drove 512 miles to attend the hearing in Alabama. Staples agreed. “We had really thought something might change.”

This issue is complex, however.  Recent years have generally been high-profit years for poultry growers (.pdf) -- a key piece of context that readers of Khan's article might miss.  In particular, for the industrial-scale poultry producers who get contracts with the big processors, both farm income and household income are comparatively good on average.  Certainly, I lose more sleep over poverty among hired farm workers in the poultry sheds than among poultry business owners!

Furthermore, many economists are instinctively reluctant to have government agencies write rules for questions as difficult and complex as poultry production methods and pricing.  Tina Saitone and incoming AAEA President Richard Sexton argue that contracts offer some efficiencies and benefits for consumers and farmers alike.

In my view, not all contracts are bad, but some contracts may be abusive and anti-competitive.

Even if you take the economists' view on this issue, there still is an important role for government reform.  In particular, it is essential for contract terms to be transparent, so that farmers are not trapped into contracts with a single processor because they cannot find out their competitive alternatives.

For this reason, when USDA retreated on its proposed contract reforms, one of the passages I read most closely had to do with the transparency of contracts.  Under pressure from Congress, USDA backed down on a simple and entirely sound proposal to require processors to publish sample contracts.  Buried deep in the Federal Register notice (.pdf) where USDA explained its revisions to the rule, a careful reader may find that the USDA officials themselves seemed to recognize that this would have been a good provision, and they sound disappointed that they had to back down.
Livestock and Poultry Contracts Section 201.213 of the proposed rule required the submission and potential publication of sample contracts. Most supporting comments stated that implementation of this rule would assure fairness and market transparency which would allow farmers and ranchers the opportunity to make informed decisions, it would promote fair competition, and it would allow efficient and evenhanded enforcement of the P&S Act. Some comments expressed concern with the lack of clarity and the ambiguity of this section of the proposed rule.

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