AMS releases ANPR seeking information for future tournament system rulemakings

The ANPR¹ is not itself a proposed rule, and it does not expressly propose any particular regulations or policies, although the questions and discussion indicate areas of interest to AMS. If AMS were to decide to conduct further rulemaking based on the information gained through the ANPR, the agency would have to follow normal rulemaking procedures.

This ANPR is distinct from the proposed rule on the tournament system first announced two weeks ago.² Under that proposed rule, AMS proposed a series of disclosures that would have to be provided in conjunction with tournament system contracts as well as an executive-led oversight system for those disclosures. That proposed rule is also scheduled to formally publish June 8, with comments due 60 days from the date of publication.

In the ANPR, AMS recounts the history of tournament system rulemaking going back to the 2008 Farm Bill, recent Biden Administration efforts to increase supply chain resiliency and promote local and regional processing, and its efforts to increase transparency for poultry growers. AMS indicates that the goal of the ANPR is to “obtain information on the industry and assess the extent to which unfairness and deception, where it may exist, can be remedied through additional regulation to level the playing field for growers.” AMS indicates that the focus of any future rulemaking would be poultry growing contract terms, “through specific prohibitions, limits, and/or conditionalities” to address “potential unfairness that may arise from the use of the tournament contracts in the poultry sector.”

Although AMS explains nothing concrete is being proposed in the ANPR, the agency identifies a number of potential rulemaking topics under consideration, including:

• Flock placement and density guarantees

• Input quality and consistency across growers

• Payment floors and guaranteed pay

• Settlement group composition

• Ways to further align incentives between integrators and growers

• Matching capital investment requirements with contract or asset life lengths

• Notice and opportunity to cure breach of contract by growers

• Grower cooperative associations

• Information exchange and access for growers

• The role of lenders and insurance

• Allowing growers to opt out of tournament system structures

• Oversight of local agents

The ANPR includes a list of 10 specific, multi-part questions on which it seeks input, which can be found in Appendix 1, below.

Next steps

Please do not hesitate to contact us with any questions regarding this information request.

Authored by Brian D. Eyink.

References

1 AMS Poultry Growing Tournament Systems: Fairness and Related Concerns, Advance Notice of Proposed Rule Making, Fed. Reg. Document No. 2022-11998 (scheduled for pub. June 8, 2022), https://www.federalregister.gov/public-inspection/2022-11998/poultry-growing-tournament-systems-fairness-and-related-concerns.

2 USDA releases proposed rule on tournament system, Hogan Lovells Engage (June 2, 2022), https://www.engage.hoganlovells.com/knowledgeservices/news/usda-releases-proposed-rule-on-tournament-system.

Appendix 1

List of Questions for Comment from AMS, Advanced Notice of Proposed Rulemaking

Poultry Growing Tournament Systems: Fairness and Related Concerns (Doc. No. AMS-FTPP-22-0046)

Pre-Publication Release, June 7, 2022

1. What is the tournament system’s intended purpose and does the system achieve its intended purpose(s)?

   1. If yes, please describe what they are and how specific elements of the system help achieve those purposes.

   2. If not, why not? Moreover, please describe what you believe the intended purpose(s) are.

   3. Additionally, please describe what you believe should be the purpose of a payment and settlement system between integrators and growers?

2. What specific practices under the tournament system are the most problematic, and why?

3. Which practices should be addressed through regulatory or other administrative steps? Are regulatory steps the only path to curbing these practices?

   1. Should certain practices be subject to whole or partial prohibitions, limits, conditionalities? If so, which ones? Why or why not?

   2. Should certain practices be subject to additional disclosures? Why or why not?

   3. Please explain any reasoning for why such specific practices may be unfair, unjustly discriminatory, provide undue preferences or prejudices, are deceptive, or are otherwise unreasonable or anticompetitive under the law. If you are suggesting a particular regulatory standard for any such terms, please define it clearly. If you suggest administrative (non-regulatory) steps, please explain those.

   4. Do any specific practices harm competition among growers, among poultry companies for the services of growers, or among poultry companies in the sale of poultry products?

   5. [No sub-question (e) is listed in the pre-publication version]

6. Do the practices concerned give rise to significant harms that are unavoidable by certain parties or that undermine supply chain resiliency, price discovery, or open, competitive markets?

7. Are there competitive or other benefits or legitimate business justifications that should be taken into consideration with respect to such practices?

4. For the areas of focus listed as (a) through (n) in the introduction above:

   1. Are there minimum regulatory standards that would help address marketplace practices of concern, and if so, what are they? Please discuss both the marketplace concerns and the way that the minimum standards may address those concerns.

   2. Are any of the areas more, or less, amenable to transparency-oriented solutions, such as disclosures? Please explain why or why not.

   3. For these areas, please share any views regarding the scope and applicability, or inapplicability, of relevant USDA authorities, in particular (but not necessarily exclusively) the Packers and Stockyards Act.

   4. Are there any other Federal or state authorities that may be relevant to USDA’s analysis of these issues?

5. Please comment on the specific conditional approaches to the tournament system listed as (i) through (iv) in the introduction above.

   1. Which aspects of the tournament system are unfair as to warrant the possible conditions set forth? Do the conditional approaches appropriately address those concerns? Why or why not.

   2. What are the strengths and limitations, and costs and benefits, for each approach?

   3. Are there any competition implications to their adoption?

   4. Are there any other risks that should be considered with respect to the approaches?

   5. With particular respect to the cooperative negotiation option:

      1. Are there additional steps that USDA could take under the laws governing cooperatives that could facilitate the formation of cooperatives for those engaged in providing growout services?

      2. Alternatively, to what extent can poultry grower organizations adequately rely on the Capper-Volstead Act (in particular it’s exemption from the antitrust statutes) to accomplish goals such as cooperating to negotiate or arbitrate for better terms and conditions of contracts? If not, why not?

   6. For all of these conditions, please share any views regarding the scope and applicability, or limits and inapplicability, of relevant USDA authorities, in particular the Packers and Stockyards Act, and whether any other Federal or state authorities are also relevant.

6. With respect to the following areas, to what extent can the tournament system pay mechanisms be modified to achieve the following goals, while still retaining performance-based incentives? If so, how?

   1. Can they be modified to avoid degradation of base pay rates?

   2. Can they be modified to reduce variability or unpredictability in outcomes (at least over any short-term horizon)?

   3. Can they be modified to better reflect factors that are largely within own the control of growers?

   4. Can they be modified so that an integrator cannot terminate without cause, and if so, under what conditions would performance in the tournament be a basis for terminating a contract?

   5. Are there other targeted ways in which they should modified?

   6. If not, what alternatives may exist to it, and what risks might arise from such alternatives? What are the economic implications, including relating to competition, that may arise from the alternatives and any transition to them?

   7. For these questions, please share any views regarding the scope and applicability, or inapplicability, of relevant USDA authorities, in particular (but not necessarily exclusively) the Packers and Stockyards Act, and whether any other Federal or state authorities are also relevant.

7. We further seek comments on the following additional related matters:

   1. Should capital investment provisions (9 CFR 201.216) be revised to address compensation requirements when integrators require upgrades beyond the original housing specification?

   2. Are there minimum standards or protections needed to prevent interference with the rights of growers to sell their farms? If so, what should they be?

   3. Are protections needed against premature contract cancellation without reasonable cause, and if so, how should they be designed?

   4. Should the remedy for breach of contract rules (9 CFR 201.217) be revised to provide for a specific time period that constitutes a reasonable period to remedy a breach of contract that could lead to termination (and if so, how long)?

   5. Should provisions relating to the suspension of the delivery of birds (9 CFR 201.215) be revised to protect against arbitrary suspensions of flocks, and if so, how?

   6. For these questions, please share any views regarding the scope and applicability, or inapplicability, of relevant USDA authorities, in particular (but not necessarily exclusively) the Packers and Stockyards Act, and whether any other Federal or state authorities are also relevant.

8. What role can reforms of lending and loan guarantee systems play to ensure better alignment between borrowers and lenders? Consider the following questions and please explain what authorities USDA or other relevant agencies might deploy, if any.

   1. Should borrower income be evaluated by lending institutions for justification of loan cash-flow only based on the minimum or lowest quartile of returns, or based on median returns, or in some other way?

   2. Should limitations or additional transparency cover the relationship between lenders and integrators? Are steering payments, prepayment penalties, or other finders’ fees of concern?

   3. Should standards and oversight be improved for ensuring that credit is fair and nondiscriminatory? If so, how?

   4. How might relevant agencies better monitor the lending marketplace, including through data collection, reporting, and supervision?

9. We also invite input on how to improve data collection and research generally.

   1. What data and information should be collected to assist with analyzing the concerns highlighted above?

   2. How can that information be more effectively collected?

   3. In what ways can AMS or USDA’s research agencies make that information more available to growers, academics, smaller market participants, and other relevant parties?

   4. Please discuss concerns or risks with respect to confidentiality or collusion that should be considered as well.

   5. How might USDA support additional academic research with respect to poultry market practices and competition?

10. Are there other approaches or proposals pertaining to regulation of the tournament system that USDA should consider?