When the new farm bill became effective on June 18, 2008, the USDA charged the Grain Inspection, Packers and Stockyards Administration (GIPSA) with efforts to turn up the heat and ensure that contract producers are protected from unfair, fraudulent or retaliatory practices. The USDA, assigned this authority in the 2008 farm bill as well as an existing authority under the Packers and Stockyards Act (PSA), formally filed the “Proposed Rules for Agriculture Competition” on June 22, 2010. Agriculture Secretary Tom Vilsack says the new rules focus on ensuring competitive fairness for all producers, regardless of size or contract affiliation.

Market fairness concerns surfaced during the writing of the 2008 farm bill and often related to increasing consolidation and vertical integration in the livestock and poultry sectors. Citing shrinking farm numbers, USDA notes there were over 660,000 hog farms in 1980. The count now stands at about 71,000 farms. Furthermore, pork producers received an estimated 50% of retail value for market hogs sold in 1980, which slipped to 29% in 2009, USDA reports. Similar slippage was documented in the cattle and poultry industries.

The USDA proposed rule includes several new provisions, written to provide pork producers and contract growers with the following protections:

  • Provide further definition to practices that are unfair, unjustly discriminatory or deceptive, including outlining actions that are retaliatory in nature, efforts that would limit a producer’s legal rights, or representations that would be fraudulent or misleading. The proposed rule reiterates USDA’s position that a producer need not overcome unnecessary obstacles and have to always prove a harm to competition when they have suffered a violation under the PSA.
  • Define undue or unreasonable preferences or advantages and undue or unreasonable prejudices or disadvantages.
  • Establish new protections for contract growers required to provide expensive capital upgrades ($25,000 or more) to their facilities, including protections to ensure contract growers have the opportunity to recoup 80% of the cost when capital investment is required.
  • Prohibit packers from purchasing, acquiring or receiving livestock from other packers, and communicate prices to competitors.
  • Enable a fair and equitable process for producers who agree to use arbitration to remedy a dispute. Additionally, require bold, clear and conspicuous print in the contract that ensures producers are provided the option to decline the use of arbitration to settle a dispute.
  • Improve market transparency by making sample marketing and production contracts (except for trade secrets or other confidential information) on GIPSA’s Web site (www.gipsa.usda.gov).
  •  Outline protections so that producers and contract growers have a reasonable period of time to remedy a breach of contract before the contract is terminated.
  •  Improve competition in markets by limiting exclusive arrangements between packers and dealers (packer buyers).

A “Gotcha Law?”

Although rules have just been proposed by GIPSA, other provisions of the 2008 farm bill on livestock contracting have been in effect since the bill’s signing. In a brief presentation and an accompanying white paper shared at World Pork Expo in early June (a week before the USDA released the proposed rule), Eldon McAfee, an attorney with Beving, Swanson & Forrest, P.C. in Des Moines, IA, addressed these requirements.

McAfee cautioned pork producers who place hogs with contract growers to follow federal contract requirements or face fines levied by GIPSA. He describes some of the requirements as a “gotcha law,” noting that although the mandatory federal requirements have been in effect for two years and the rules are not yet in place, GIPSA recently began “vigorous enforcement of the law.” GIPSA’s enforcement action caught many by surprise, since rules had not even been proposed.

Another reason producers may have been caught off guard, McAfee notes, is a misguided notion that because the Packers and Stockyards administration is involved, the contracting requirements only apply to market hog contracts with packers. “That is not the case. All producers who have production contracts with contract growers should carefully review those contracts and the law to ensure compliance with the federal contracting requirements,” he says.

Some provisions in the law apply to only production contracts, some apply to both production and marketing contracts, while another provision applies to all livestock contracts.

Also, some of the provisions apply only to contracts entered into, amended or renewed after June 18, 2008. It is important to read each section of the law carefully to fully understand how the law applies. McAfee was hopeful that the “gray areas” of the law, such as the effective date of the requirements for existing contracts, would be clarified in the rules and other information provided by GIPSA when the proposed rules are released. However, after reviewing the proposed rules, McAfee notes that most of the gray areas were not addressed.

Interpreting the PSA Law

As the law stands, McAfee briefly outlines the requirements that apply to swine production contracts:

  • Contract grower’s right to cancel. A swine contract grower has the right to cancel a production contract by mailing a cancellation notice to the contractor no later than three business days after the contract was executed or any cancellation date stated in the contract, whichever is later.“The contract must clearly disclose the right to cancel, the method by which the grower may cancel the contract and the deadline for cancelling the contract,” McAfee notes.

From a practical standpoint, al‑­though not specified in the law, McAfee says it would be best for both parties that the notice be sent by certified mail. The producer’s three-business-day requirement for cancellation (or other specified time lapse in the contact), begins when the producer signs the contract. Also not expressed in the law, the right to cancel could only apply to contracts executed after June 18, 2008. The proposed rules issued on June 22, 2010, do not provide any further clarification on this requirement, he notes.

  • Disclosure of Additional Large Capital Investments. “Federal law states that all swine production contracts must have a disclosure statement on the first page of the contract conspicuously stating that additional, large capital investments may be required of the contract producer. This disclosure statement must have the heading: ‘Additional Capital Investments Disclosure Statement,’” McAfee explains. This requirement applies to all contracts “entered into, amended, altered, modified, renewed, or extended” after June 18, 2008.

From a practical standpoint, McAfee notes that GIPSA initially took the position that the capital investment disclosure had to be in all contracts, whether such investment is required or not. On March 19, 2010, GIPSA indicated alternative, acceptable terminology could be: “No additional large capital investments shall be required during the term of the contract.” The term “large capital investment” was not defined in the law, but in the proposed rule GIPSA is proposing to define it as $25,000 or more, he adds.

McAfee also outlines the requirements in the law that apply to both production and marketing contracts: Choice of law and venue. “The legal forum for resolving any dispute between the parties to a swine production or marketing contract must be located in the federal judicial district in which the principal part of the performance of the contract takes place,” McAfee points out. The proposed rules define “principal part of performance” as the raising of and caring for livestock.

The law doesn’t specifically cite June 18, 2008 as the start date for this requirement, so it appears it would apply to contracts entered into before that date, he adds.

From a practical standpoint, he points out that the language of the law does not specifically address the venue question. However, a contract clause that requires lawsuits be filed in a different court than the federal judicial district where the principal part of the performance of the contract takes place would violate the venue section of the law.

Arbitration. “Any livestock or poultry contract that requires any controversy under the contract to be resolved by arbitration must contain a provision allowing the producer, before entering the contract, to decline to be bound by the arbitration provision,” McAfee says. But, although the producer may waive the arbitration provision, he/she may still use arbitration when a dispute arises, if both parties of the contract agree to do so in writing. It is an unlawful practice under the PSA for contractors, packers or dealers to not give producers the right to decline arbitration in a livestock contract.

“The proposed rules establish criteria to determine whether the arbitration process in a contract provides a meaningful opportunity for the producer to participate fully in the arbitration process,” he notes.

In the proposed rules, it appears GIPSA has taken the position that the arbitration requirement does not apply to weaned and feeder pig sales contracts, only to production and marketing contracts, McAfee notes. However, he also notes that at the same time GIPSA is applying this requirement to all livestock, not just swine.

Rules are Contentious

The American Meat Institute (AMI) filed strong concern about the potential impact of the rule changes. “USDA is attempting to turn the clock back on the livestock and meat marketing practices that have made the U.S. meat production system the envy of the world,” AMI Senior Vice President of Regulatory Affairs and General Counsel Mark Dopp says. “Courts have affirmed that our industry is dynamic and competitive and have rejected USDA’s arguments repeatedly. Now, in the face of repeated judicial rejection of their arguments, USDA is engaging in a regulatory end-run and attempting to change the law through administrative fiat. This is not an appropriate role for the Department (of Agriculture) to play, and could potentially cause harm and enormous disruption.”

In an outline of the rule, USDA wrote that a number of U.S. circuit courts of appeals have not given “deference” to USDA’s interpretation of various sections of the Packers and Stockyards Act. USDA asserts that the proposed regulations would constitute “a material change in circumstances that would warrant judicial reexamination of this issue.” AMI feels the outline ignores the fact that USDA has presented these same arguments to several federal appellate courts, and they have been repeatedly rejected, including rulings as recently as December 2009 and again in May 2010.

A statement from the Center for Rural Affairs (CRA), Lyons, NE, notes, “The administrative rule covers a number of reforms to help restore competitive markets and contract fairness to livestock and poultry markets, including establishing a definition for what constitutes an ‘undue or unreasonable preference.’”

The Packers and Stockyards Act specifically prohibits price discrimination by meat packers against smaller-volume, family farm and ranch livestock producers. Specifically, the act makes it unlawful for packers to “make or give any undue or unreasonable preference or advantage to any particular person or locality in any respect, whatsoever.”

“The rule isn’t perfect, but it is the most aggressive, significant livestock market reform to come out of Washington, perhaps since the passage of the Packers and Stockyards Act itself,” says the CRA’s John Crabtree. “This rule will breathe some life, some competition back into our livestock markets. And we’re going to work hard to keep improving it; we’re going to fight tooth-and-nail to ensure that the packers cannot weaken the rule.”

Crabtree says USDA has not effectively enforced the Packers and Stockyards Act for decades. He believes packers routinely pay five, six or even 10 cents per pound — even more in some cases — in purely volume-based premiums to the largest hog producers.

“These sweetheart deals for large-volume producers have become commonplace, but no less a violation of the Act,” Crabtree states. “Six cents per pound may not sound like much of a discount, but for a family farmer with 150 sows in a farrow-to-finish operation, it amounts to receiving $56,000 less, annually, for hogs of the same quality, simply because he markets fewer hogs. In the end, that’s what this rule needs to put an end to; that’s what we set out to accomplish with this rulemaking provision in the farm bill.”

Iowa Senator Charles Grassley pushed to have the issues of competition addressed in the 2008 farm bill, and emphasized that any arbitration provision in a contract should be voluntarily agreed upon by both parties to settle disputes at the time the dispute arises, not when the contract is signed.
“I have fought for several years to allow farmers the opportunity to choose the best form of dispute resolution so they didn’t have to submit to packers. This will help level the playing field for independent producers,” Grassley says.

The National Pork Producers Council (NPPC) says the long-awaited proposed rule may limit pork producers’ options in selling pigs to processors.

“NPPC is carefully reviewing the proposal because we don’t want to see producer marketing options limited by overly broad government regulations that negatively impact pork producers’ bottom line,” says NPPC President Sam Carney, a pork producer from Adair, IA.

Comment Period Open

Secretary of Agriculture Tom Vilsack says, “This proposed rule will help ensure a level playing field for producers by providing additional protections against unfair practices and addressing new market conditions not covered by existing rules. Concern about a lack of fairness and common-sense treatment for livestock and poultry producers has gone unaddressed for far too long.”

The proposed rule was published in the June 22, 2010, Federal Register. GIPSA will consider comments received by Aug. 23, 2010. Comments may be sent via email to: gipsa@usda.gov or sent by mail to Tess Butler, GIPSA, USDA, 1400 Independence Avenue SW, Room 1643-S, Washington, DC 20250-3604. Copies of the proposed rule and additional information can be found at: www.gipsa.usda.gov, by clicking on “Federal Register.”