USDA releases proposed rule on tournament system

On May 26, 2022, the United States Department of Agriculture (USDA) announced a long-anticipated proposed rule on performance-based poultry grower compensation, commonly called the “tournament system.” The proposal would require certain pieces of information be disclosed to poultry growers through the contract process, at flock placement, and at settlement. The proposal focuses heavily on disclosures and attestations. The proposal would also require integrators to implement executive-led auditing and oversight programs and to include attestations as to the accuracy of information provided to growers.

The Biden Administration has long highlighted three planned Packers and Stockyards Act (PSA) rulemakings as cornerstones of the Administration’s efforts to promote competition, reduce consolidation, and fight inflation. The tournament system proposed rule1 is the first of these proposals to be published. In announcing the proposal,USDA characterized its efforts as promoting transparency in tournament system contracts and dealings.

USDA will accept comments on the proposal for 60 days from the date the proposed rule is officially published in the Federal Register. As of the time of writing, the proposal has not been officially published in the Federal Register or listed in prepublication form, and so the exact date comments will be due is not known. This summary is based on an advance copy of the proposal shared with stakeholders by USDA.

Key Elements of Proposed Rule

The proposed rule focuses primarily on requiring certain information be disclosed to growers by live poultry dealers at various stages of the contract relationship, including when contracts are initiated, when capital investments are required, when chicks are placed, and when flocks are caught. In particular, AMS would require contracts include a newly created “Live Poultry Dealer Disclosure Document” (Dealer Disclosure Document) that would include historical payment information to growers, past litigation with growers, information about the minimum number of placements annually and minimum stocking densities, the expected value of contracts, and other mandatory disclosures. The Dealer Disclosure Document would also need to contain certain disclosure statements using phrasing mandated in the regulation. The proposed rule would require live poultry dealers establish an auditing framework to track and maintain the information to be disclosed, overseen by senior company executives. The proposal would also require integrators to provide certain information about flocks at the time of placement and details at settlement about inputs and placement for other growers in the settlement pool.

Notably, the current proposal is very different than previous attempts by USDA in 2010and 20164to regulate poultry contracting, which proposed direct restrictions on contracting (neither of which were finalized). USDA’s Agricultural Marketing Service (AMS) appears to make a decision to focus specifically on disclosures, noting in the preamble its view that “many production contracts do not provide enough information for growers to assess their expected value, and important information relating to live poultry dealer obligations and practices should be better illuminated” and explaining that the “purpose of this proposed rule is to provide growers with this type of relevant information."5

We describe these requirements in detail below and include a sample layout in Appendix 1 of what a Dealer Disclosure Document might look like based on the information and disclosures required in the proposed rule.

Proposed 9 CFR § 201.100, Disclosures and records to be furnished poultry growers and sellers

This provision would revise current § 201.100 by adding items to the list of required disclosures live poultry dealers must make to growers and prospective growers and adding terms that must be specified in growing contracts. It would require live poultry dealers to provide certain documents to current poultry growers in the following situations:

Contract scenario

Documents to be provided by live poultry dealer

When live poultry dealer must provide documents

Renewing, revising, or replacing an existing poultry growing contract or establishing a new contract that does not contemplate modifications to existing housing specifications

  • Copy of the new/renewed/revised/replaced growing contract
  • Dealer Disclosure Document (see below)

*Note: Live poultry dealers (including all parent and subsidiary companies) slaughtering fewer than 2 million live pounds of poultry weekly (104 million pounds annually) are exempt from this requirement.

7 days before signing the contract.

 

Entering a new poultry growing arrangement that will require an original capital investment

  • Copy of the growing contract affiliated with the current housing specifications
  • Dealer Disclosure Document (see below)
  • Letter of intent that can be relied upon to obtain financing and that expresses a preliminary commitment from a live poultry dealer to contract with the grower, including the chief terms of the agreement

Simultaneously with the housing specifications

Offering or imposing modifications to existing housing specifications that could reasonably require the grower or prospective grower to make additional capital investments

  • Copy of the contract affiliated with the modified housing specifications
  • Dealer Disclosure Document (see below)
  • Letter of intent that can be relied upon to obtain financing and that expresses a preliminary commitment from a live poultry dealer to contract with the grower, including the chief terms of the agreement

Simultaneously with the modified housing specifications

 

Contents of the Live Poultry Dealer Disclosure Document

The proposed rule would require the Dealer Disclosure Document consist of a cover page, a series of disclosure information, and a signature page. The proposed rule states that, regardless of any confidentiality provision in the growing contract, a live poultry dealer cannot prevent a grower or prospective grower from discussing the terms of the contract offer or the Dealer Disclosure Document with government agencies, family members, and business associates and advisors. A sample of how the required information might be laid out is provided in Appendix 1. A summary of the required information is below:

  • Cover page
    • Name and contact information of the live poultry dealer
    • Length of the growing contract
    • Minimum number of placements on the poultry grower’s farm annually under the terms of the growing contract. The proposed rule defines “minimum number of placements” as the least number of flocks the live poultry dealer will deliver to the grower annually under the contract.
    • Minimum stocking density for each flock to be placed on the poultry grower’s farm under the terms of the contract. The proposed rule defines “minimum stocking density” as the ratio of the minimum weight of poultry per facility square food that the live poultry dealer intends to harvest from the grower after each growout.
    • Several required disclosure statements that impress upon the grower that (i) the live poultry dealer may have discretion and control over some factors on the grower’s farm, (ii) the live poultry dealer is required to provide the information in the disclosure document to the grower within a specified time period (see above chart), and (iii) the grower has the right to discuss the terms of the contract and the disclosure document with a federal or state agency, financial advisor, and other specified individuals. The document includes a statement that USDA has not verified the information in the disclosure document and any false or misleading statements or material omissions contained therein may be a violation of state or federal law. The proposed rule contains specific wording for these statements, which can be found in the mocked-up Dealer Disclosure Document in Appendix 1.
  • Disclosure pages: the live poultry dealer must disclose certain information about its past dealings with growers, past grower payments, and grow-out inputs:
    • Live poultry dealer’s litigation history for the past 6 years with any grower.
    • Bankruptcy filings of the past 6 years, including for any parent, subsidiary, or related entity.
    • Live poultry dealer’s policy regarding the potential sale of the grower’s facility and whether the growing contract may be assigned to another party, including a successive buyer.
    • Grower income:
      • Tables showing 1) average annual gross payments to poultry growers for the previous calendar year for all complexesowned by the live poultry dealer and 2) average annual gross payments to growers at the local complex for the past five years. The proposed rule provides a step-by-step process for calculating the complex-level values and notes that the tables should be organized by year, housing specification tier, and quintile.
      • If housing specifications for growers under contract with the complex7 are adjusted in a way that may require additional capital investments or if the annual gross payments at the local complex for the past five years do not otherwise reflect anticipated payments for the term of the current contract, the live poultry dealer must also explain why the past five years cannot be used as projections for future payment and provide a table projecting average annual gross payments.
    • Information held by the live poultry dealer related to variable costs a grower at the complex may incur, including production-related costs like utilities, fuel, water, labor, repairs and maintenance, and liability insurance.
    • Contact information for the state university extension service or county farm advisor office that can assist the grower with financial management questions and grower costs for the geographic area.
  • Signature page: The signature page must include the items listed below. The live poultry dealer must retain a copy of the dated, signed page for three years following expiration of the contract and provide a copy to the grower or prospective grower.
    • Required statement specified in the proposed rule stating that the timeline by which the live poultry dealer must deliver the Dealer Disclosure Document and that any false or misleading statement or any material omission may violate federal or state law.
    • Statement from the live poultry dealer executive officer(s) certifying that the dealer has established, maintains, and enforces a governance framework (more information on this below) and based on the officer’s knowledge, the information provided in this document does not contain any untrue statement of a material fact or omit to state a material fact that would render it misleading.8
    • Dated signature of the grower or prospective grower. The live poultry dealer is required to obtain the grower’s signature as evidence of receipt.

Requirement to Establish a Governance Framework

The proposed rule would require live poultry dealers to establish and maintain a “governance framework” that audits the accuracy and completeness of the disclosures required in the Dealer Disclosure Documents and all obligations required under the PSA and its implementing regulations. The framework should include audits, testing, and reviews of representative samples of Dealer Disclosure Documents by the live poultry dealer’s principal executive officer(s).

  1.  
§ 201.214 Transparency in poultry grower ranking pay systems.

The proposed rule would add a new section, § 201.214 that seeks to improve transparency in grower ranking pay systems. This section only applies to live poultry dealers using tournament contracts and requires them to maintain and furnish to growers the following records. The records must be maintained for 5 years.

Information about the grower’s placement

The following information regarding the grower’s placement must be furnished to the grower within 24 hours of flock delivery to the grower’s facility:

  1. Stocking density of the placement (expressed as number of poultry per square foot);
  2. Names and ratios of breeds of the poultry delivered;
  3. Ratio of males to females delivered (if the live poultry dealer has determined the sex of the birds);
  4. Breeder facility identifier;
  5. Breeder flock age;
  6. Information about any known health impairments of the breeder flock or the poultry delivered; and
  7. Adjustments that the live poultry dealer may make to the calculation of the grower’s pay based on the above factors.

Information about distribution of live poultry dealer inputs to the grouping or ranking

At the time of settlement, the live poultry dealer must also provide the grower with a copy of a grouping, ranking, or comparison sheet showing the grower’s position in the grouping for that period. Note that the sheet must include the housing specification and actual figures that the grouping or ranking is based on for every grower, but it need not include the names of the other growers. The sheet must also disclose information about live poultry dealer-controlled inputs for every grower in the grouping, including the following:

  1. Stocking density of the placement (expressed as number of poultry per square foot);
  2. Names and ratios of breeds of the poultry delivered;
  3. Ratio of males to females delivered (if the live poultry dealer has determined the sex of the birds);
  4. Breeder facility identifier;
  5. Breeder flock age; and
  6. Number of feed disruptions each grower endured during the growout period where the grower had no feed for 12 hours or more.

AMS’s Rationale and Cost Analysis

AMS frames its proposed rule as addressing a perceived information asymmetry in poultry grower contracting. AMS explains in the preamble to the proposed rule that it hopes the proposed requirements benefit industry by providing more information in contract negotiations to lower grower uncertainty over revenue and profit estimates and improving growers’ ability to make business decisions like whether to make additional capital investments. AMS also hopes the transparency on placements and settlements could reduce grower concerns regarding live poultry dealer distribution of inputs and address concerns about deception and fraud.

AMS’s cost analysis estimates the combined costs to live poultry dealers for compliance with the reporting and recordkeeping requirements in proposed §§ 201.100 and 201.214 and related benefits to growers are as follows. The figures reflect significantly higher costs in the first year to set up recordkeeping and data collection, with lower costs in consecutive years once those systems are in place.

 

Cost to Live Poultry Dealers

Cost to Growers9

Industry Total Cost

Individual Grower Benefits

First-Year

$2,436,964

$2,448,284

$4,885,248

$3,158,000

Ten-Year Total

$9,039,442

$11,452,718

$20,492,160

$31,580,000

Next steps

Comments on the proposed rule will be due 60 days after it has been published in the Federal Register. AMS invites comments in particular on lists of questions specific to the Dealer Disclosure Document and proposed § 201.214, including the timing of furnishing the required documents, the burden of collecting the information, and other anticipated challenges from industry.

We will continue to monitor the development of this and related proposals. Please do not hesitate to contact us with any questions.

Appendix 1

Click here for a sample layout of what a Dealer Disclosure Document might look like based on the information and disclosures required in the proposed rule.

 

 

Authored by Brian D. Eyink and Connie Potter.

References
1  USDA AMS Proposed Rule, Transparency in Poultry Grower Contracting and Tournaments, pre-release copy issued May 26, 2022, not yet published in the Federal Register (hereinafter AMS Proposed Rule).
2 USDA Agricultural Marketing Service, Press Release, USDA Targets Transparency and Competition in Suite of Actions to Promote Fair and Competitive Markets for Livestock and Poultry (May 26, 2022)
3 Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008; Conduct in Violation of the Act, 75 Fed. Reg. 35338 (June 22, 2010).
4 Unfair Practices and Undue Preferences in Violation of the Packers and Stockyards Act, 81 Fed. Reg. 92703 (Dec. 20, 2016).
5  AMS Proposed Rule at 5.
6  The proposed rule defines “complex” as a group of local facilities under common management of a dealer and notes that the term may include (but is not limited to) hatcheries, feed mills, slaughtering facilities, and/or processing facilities.
7 The proposed rule specifically references “poultry growers under contract with the complex,” rather than with the live poultry dealer. 
8 The proposed rule does not designate a location for this statement.  It could appear anywhere in the document.
9 These figures contemplate the cost of growers to review the disclosed information provided by the dealers and acknowledge receipt where relevant.

 

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