LITTLE ROCK — Tommy Choate of El Dorado said he didn’t know a thing about the Grain Inspection, Packers and Stockyards Administration when he borrowed more than $1 million to get into poultry farming in 2005.
Back then, the small-business man said he didn’t know much about poultry contracts, either. But, if the bank felt comfortable with a contract that only ran flock to flock, or about two months, then so did Choate.
Choate, 54, is now in the first phase of foreclosure on his farm two years after his poultry buyer, Pilgrim’s Pride Corp., shuttered a processing plant in El Dorado that took Choate’s birds.
Proposed rules issued last year by the Grain Inspection, Packers and Stockyards Administration seek to minimize the risk of financial ruin some growers face. The administration, an agency of the U.S. Department of Agriculture, enforces rules governing contracting and the buying and selling of livestock and poultry.
The capital-investment section of the rules would help the administration decide whether a poultry company violated the Packers and Stockyards Act when asking for company-required capital investments.
The act is designed to prevent “unfair, unjustly discriminatory or deceptive practice or devices” by entities such as live-poultry dealers in the poultry industry. It defines several unlawful practices in broad language.
Poultry-farmer advocates say requirements such as contracts long enough to recoup 80 percent of their required capital investment are needed to protect growers from abuse.
A separate but related proposal includes giving a poultry farmer the ability to refuse making additional capital investments over the course of a contract. The government defines capital investment as a cost greater than $25,000.
Representatives for the poultry industry say the proposed capital investment section will hurt innovation and violates a “freedom of contract” concept.
The Grain Inspection, Packers and Stockyards Administration has not issued final rules and is revising its proposals in the wake of a public comment period that ended in November.
“Following a detailed analysis of more than 60,000 comments of the proposed rule, we are completing a more rigorous cost-benefit analysis that shows how producers would be impacted,” a USDA spokesman said in an e-mailed statement Monday. “We continue working on the rule, however, and it would be premature to speculate on the outcome or potential opportunities for further public comment.”
Integrators such as Tyson Foods Inc. of Springdale and Pilgrim’s Pride of Greeley, Colo. — the nation’s top chicken producers — control the entire process of turning a chicken into a ready-to-eat or readyto-cook product. Integrators supply the drugs, delivery and pickup of birds and the quality and quantity of feed.
In addition, the companies decide the need for poultryhouse upgrades, which are contractually legal.
The length of time covered in a poultry contract varies among the estimated 42 poultry companies processing chickens in the United States.
Contracts can be as short as flock to flock or as long as 15 years, said William Roenigk, a spokesman for the National Chicken Council of Washington, D.C., the commercial poultry industry’s trade group.
The council said that according to its 2010 poultry company-survey of 12,213 contracts, 28 percent of contracts were longer than six years. That fact was included in a 45-page public-comment submission to the Grain Inspection, Packers and Stockyards Administration.
But the industry is moving away from flock-to-flock contracts even though there are growers who have been with the same company for 40 years on a flock-to-flock contract, Roenigk said.
Lenders such as the USDA require a three-year minimum contract, and a longer contract is becoming more common among private lenders, too, because of the significant restructuring that’s taken place in the industry, said Roenigk.
The country’s estimated 20,000 poultry growers scattered across a crescent of Southern states now borrow between $180,000 and $270,000 to build a new chicken house.
It is unclear how frequently poultry-house upgrades are requested and what the average cost of those upgrades is.
Examples of upgrades include tunnel ventilation systems and automated watering and feeding systems. So-called tunnel houses are equipped with ventilation systems using banks of fans and cool water to help improve flock health and productivity in hot weather, industry representatives say.
The capital-investment proposals “will promote the use of outdated technology and stifle innovation,” resulting in the “marked decrease in the quality of growing facilities over time,” the National Chicken Council wrote in its public-comment submission.
And industry representatives say the ability to contract freely also is in jeopardy, in part because of the proposal to make upgrades a voluntary choice.
“Portions of the proposed rule would interfere with the parties’ ‘freedom of contract’ rights, something that Congress, the courts and even GIPSA has in the past clearly declared is not the intent or purpose of the Packers and Stockyards Act,” Vince Chadick, a Fayetteville lawyer who is familiar with the Grain Inspection, Packers and Stockyards Administration proposals and has represented the industry in cases, wrote in a recent email.
Not all growers agree with the proposals.
Dwain Asbill, 44, raises chickens for Tyson Foods and said in a telephone interview that he opposes the proposed rules for reasons other than the capital-investment criteria.
Asbill operates eight houses in eastern Oklahoma, a 40-minute drive from downtown Springdale.
The construction of two 54-by-500-foot chicken houses was completed last year — a decision that allowed the former poultry-house inspector to become a full-time farmer.
“We had some extra land,” he said, explaining his 2010 decision that had him borrowing about $500,000.
The houses are fully automated, and Asbill’s paycheck includes additional money to help him afford the upgrades.
Most businesses will pay growers building newer, modern houses a premium, or a bonus, for a set amount of time or throughout the life of the mortgage, said Roenigk of the National Chicken Council.
And while Asbill said he’s unsure of how long the contract on his new investment runs, he’s not worried about a piece of paper.
“As long as you’re doing your job,” he said, “the contract is pointless.”
Farmer advocates say growers need contract security as a help in situations where processing plants are shuttered or a company wants the latest equipment or a grower speaks out against a company, Becky Ceartas, a spokesman for the Rural Advancement Foundation International-USA, a Pittsboro, N.C.-based advocacy group, said in a recent telephone interview.
Ceartas couldn’t provide an estimate of how many farmers have their contracts cut off because of reasons other than fault of the farmer, but she cited an example of a failed business deal this summer that stranded about 200 North Carolina growers.
Omtron Inc. in February bought poultry-processing and hatchery facilities formerly operated by Townsends of Georgetown, Del. The Ukrainian buyer said in July that the facilities in Siler City and Mocksville, N.C., would be closed this month.
Roenigk said that while some businesses have the resources to pay off growers’ mortgages in situations where a poultry plant closes, others do not.
The poultry industry since 2008 has struggled to achieve profitability, in part because of rising corn prices, which affect feed costs.
Corn rose from about $2.05 a bushel in June 2001 to a record $6.39 a bushel on May 9, 2008. The average national price of a bushel of corn for the 2010-11 crop year ended Aug. 31 was $5.20, compared with $3.55 per bushel in the 2009-10 crop year, USDA data show.
The Rural Advancement Foundation International and the Farmers Legal Action Group of St. Paul, Minn., caution growers in a pamphlet titled “Questions to Ask Before Signing a Poultry Contract” to make their investment decisions carefully, since “nothing you can do with the barn besides raising birds for a major poultry company can generate the cash needed to support your debt payments.”
Poultry contract farmers will have more protection against an arbitrary contract termination with the regulation, said Ceartas.
Choate, the poultry farm investor from El Dorado, said he liked the capital-investment proposal.
It could give “the grower, and their lender, just a little bit more stability,” he said.
After losing his poultry contract with Pilgrim’s Pride, the grower, along with at least 120 others, banded together to find another buyer, but instead filed suit against the company.
At the end of September, a federal magistrate judge awarded Choate $397,750 as part of a $25.8 million decision.
Business, Pages 71 on 10/23/2011