Poultry Contracts; Initiation, Performance, and Termination, 41952-41956 [E7-14924]

Agencies

• DEPARTMENT OF AGRICULTURE
• Grain Inspection, Packers and Stockyards Administration

[Federal Register Volume 72, Number 147 (Wednesday, August 1, 2007)]
[Proposed Rules]
[Pages 41952-41956]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14924]


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DEPARTMENT OF AGRICULTURE

Grain Inspection, Packers and Stockyards Administration

9 CFR Part 201

RIN 0580-AA98


Poultry Contracts; Initiation, Performance, and Termination

AGENCY: Grain Inspection, Packers and Stockyards Administration, USDA.

ACTION: Proposed rule.

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SUMMARY: We are proposing to amend the regulations issued under the 
Packers and Stockyards P&S Act, 1921 (7 U.S.C. 181, et seq.) (P&S Act) 
concerning Records to be Furnished Poultry Growers and Sellers. The 
regulations list the records live poultry dealers (poultry companies) 
must furnish poultry growers, including requirements for the timing and 
contents of poultry growout contracts.
    The proposed amendments would require poultry companies to timely 
deliver a copy of an offered contract to growers; to include 
information about any Performance Improvement Plans (PIPs) in 
contracts; to include provisions for written termination notices in 
contracts; and notwithstanding a confidentiality provision, allow 
growers to discuss the terms of contracts with designated individuals.

DATES: We will consider comments we receive by October 30, 2007.

ADDRESSES: We invite you to submit comments on this proposed rule. You 
may submit comments by any of the following methods:
     E-Mail: Send comments via electronic mail to 
comments.gipsa@usda.gov.
     Mail: Send hardcopy written comments to Tess Butler, 
GIPSA, USDA, 1400 Independence Avenue, SW., Room 1643-S, Washington, DC 
20250-3604.
     Fax: Send comments by facsimile transmission to: (202) 
690-2755.
     Hand Delivery or Courier: Deliver comments to: Tess 
Butler, GIPSA, USDA, 1400 Independence Avenue, SW., Room 1643-S, 
Washington, DC 20250-3604.
     Federal e-Rulemaking Portal: Go to https://
www.regulation.gov. Follow the on-line instruction for submitting 
comments.
    Instructions: All comments should make reference to the date and 
page number of this issue of the Federal Register.
    Background Documents: Regulatory analyses and other documents 
relating to this action will be available for public inspection in Room 
1643-S, 1400 Independence Avenue, SW., Washington, DC 20250-3604 during 
regular business hours.
    Read Comments: All comments will be available for public inspection 
in the above office during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Director, Policy and 
Litigation Division, P&SP, GIPSA, 1400 Independence Ave., SW., 
Washington, DC 20250, (202) 720-7363, s.brett.offutt@usda.gov.

SUPPLEMENTARY INFORMATION:

Background

    As the Grain Inspection, Packers and Stockyards Administration 
(GIPSA), one of our functions is the enforcement of the Packers and 
Stockyards (P&S) Act of 1921. Under authority granted us by the 
Secretary of Agriculture (Secretary), we are authorized (7 U.S.C. 228) 
to make those regulations necessary to carry out the provisions of the 
P&S Act. Section Sec.  201.100 of the regulations (9 CFR 201.100) 
specifies what contract terms must be disclosed to growers by poultry 
companies.
    We believe the failure to disclose certain terms in a poultry 
growing out arrangement (growout contract) constitutes an unfair, 
discriminatory, or deceptive practice in violation of section 202 (7 
U.S.C 192) of the P&S Act.
    Due to the vertical integration and high concentration of the 
poultry industry, growers are often presented contracts on a ``take it 
or leave it'' basis. Growers do not realistically have the option of 
negotiating contract terms with a large poultry company. Growers often 
do not have the option of contracting with another poultry company on 
more favorable terms because there may be no other poultry companies in 
the area. There is considerable information asymmetry as well as an 
imbalance in market power: Growers sometimes do not know the full 
content of their own contract and are constrained by confidentiality 
clauses from discussing the contract with business advisers, while at 
the same time poultry companies have detailed information about the 
market as a whole and about the current terms being offered to other 
growers. Growers often have much of their net worth invested

[[Page 41953]]

in poultry houses, which have limited value for purposes other than 
growing out poultry. Therefore, there is significant potential for 
poultry companies to engage in unfair and deceptive practices. Growers 
may decide they have little choice but to sign contracts in which 
disclosure of terms is incomplete and/or not provided in a timely 
fashion. In some cases, poultry companies are already providing the 
information proposed in this rule in a timely fashion; this rule will 
level the playing field by requiring all companies to adopt these fair 
and transparent practices in dealing with all growers.
    Failure to deliver a written contract in a timely fashion is 
considered by GIPSA to be an unfair and deceptive practice because 
growers do not know what the contract terms will be. This practice 
could also be discriminatory if some growers receive written contracts 
in a timely fashion and others do not. Failure to include notice of 
written termination procedures in the contract and failure to provide 
notice of written termination is unfair, discriminatory and deceptive 
for the same reasons.
    Failure to include information about Performance Improvement Plans 
is similarly potentially unfair and discriminatory if some growers 
receive this information and others do not, and deceptive if growers 
are unaware that such a program exists until they fail to meet a 
minimum performance threshold that was not specified in their contract.
    Prohibiting growers from discussing contract terms with business 
advisers is unfair because growers are not typically attorneys or 
accountants, and it is unfair to deprive growers of professional advice 
before they commit to a contract, particularly when the poultry 
companies had access to such advice in drafting their growout 
contracts.

Current Poultry Contracting Practices and Proposed Changes

    The market for growing out broiler chickens is vertically 
integrated and highly concentrated. USDA GIPSA reported that in 2005, 
the top four broiler slaughters represented 53% of the total market 
share based on volume of production.\1 \A large number (20,000+) of 
poultry growers essentially receive contracts on a ``take it or leave 
it'' basis from a small number of poultry companies. While this 
concentration of poultry companies represents certain economies of 
scale, it also represents a potential for asymmetrical information and 
a lack of transparency that could lead to market inefficiencies.
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    \1\ ``Assessment of the Livestock and Poultry Industries, FY 
2006 Report'' https://archive.gipsa.usda.gov/pubs/06assessment.pdf.
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    The poultry companies accept much of the short term financial risk 
by providing growers with the chicks and feed, and typically pay the 
growers on a per pound basis when the poultry are ready for slaughter. 
Growers take the longer term risk by investing in the poultry houses. 
There is often a tournament or bonus system in which growers for the 
same poultry company compete with each other over a given period of 
time. Growers who consistently perform less well than other growers 
with regard to output (pounds of poultry) produced per unit of input 
(food and chicks) may be placed on a Performance Improvement Plan, may 
have their contract terminated, or may not receive a new contract offer 
or extension to their existing contract.
    The current contracting process may involve verbal agreements that 
are made prior to delivery of a written contract. The process by which 
new growers are recruited can be informal word-of-mouth, although some 
poultry companies solicit new growers via their website. Prospective 
growers must have a line of credit sufficient to finance the 
construction of poultry houses in order to be a successful applicant. 
The poultry company will also typically inspect the property held by a 
prospective grower to verify that the grower has sufficient space and 
suitable soil conditions on which to place the houses, has right of way 
capable of supporting truck traffic, and has means to dispose of dead 
birds and bird waste. The discussion between the poultry company and 
prospective growers to verify these conditions may involve verbal 
commitments, and therefore growers may not understand all their rights 
and obligations. Existing growers may make similar verbal commitments 
for poultry house improvements. Currently, a grower may receive a 
specification for the poultry houses and use that specification to 
obtain a construction loan prior to receiving a written contract. New 
growers typically receive their contracts at about the same time as 
they receive the specifications for the poultry houses, but in some 
cases may not receive their written contracts until after construction 
of the poultry houses has already begun.
    The existing Sec.  201.100 already protects growers by requiring 
that the growout contract include the per unit charges for feed and 
other inputs furnished by each party, the duration of the contract and 
conditions for the termination of that contract, and the factors to be 
used when grouping or ranking poultry growers, among other items. This 
rulemaking proposes amendments to Sec.  201.100 to additionally require 
that:
    (1) The growout contract be delivered to the grower in writing at 
the same time that the grower receives the specifications for the 
poultry houses;
    (2) The growout contract also include the criteria that will be 
used to place the grower on a performance improvement plan;
    (3) A grower shall be notified in writing 30 days before removal of 
the flock that a contract is to be terminated;
    (4) The contract shall include a provision allowing growers to 
terminate a contract by written notice 30 days before removal of a 
flock, and
    (5) Notwithstanding any confidentiality clauses, growers shall be 
permitted to discuss the offered contract with their financial and 
business advisors.
    These new requirements should help both growers and poultry 
companies by providing poultry growers with more information at an 
earlier stage in the contracting process. In many cases, these 
requirements are already being met in existing contracts or are being 
met through verbal agreements; this proposed rule would ``level the 
playing field'' by requiring poultry companies to include these 
provisions in all poultry growout contracts. Growers would have more 
information upon which to make a decision as to whether to accept the 
terms of the contract, and would be able to discuss the terms of the 
contract with business and financial professionals before committing to 
building or upgrading poultry houses. Poultry growers would understand 
the criteria that will be used to place them on a Performance 
Improvement Plan. Poultry companies would benefit from having growers 
who better understand the obligations of their contract. Poultry 
companies would also benefit by having more specific contract language 
to resolve performance issues and contract termination.

Timely Contract Delivery

    In some cases, growers do not currently receive a written copy of 
their contract from live poultry dealers or poultry companies until 
after they have obtained financing for the construction or improvement 
of poultry houses. Lenders that have other contracts on file for a 
particular poultry company may extend financing to a grower based on a 
verbal commitment from the poultry company. In a six-month period 
beginning September 2005, GIPSA received 16 written and/or emailed 
complaints from growers regarding slow

[[Page 41954]]

delivery of written contracts by poultry companies. Growers typically 
invest $200,000 or more for the construction of each poultry house, and 
they often build at least four houses.
    Requiring the poultry companies to provide growers with a written 
copy of their offered contracts on the same date the growers receive 
the specifications for their poultry houses will provide several 
benefits:
     It provides disclosure to growers of their rights and 
responsibilities before they sign a written contract to grow poultry 
for a particular poultry company. This would benefit both parties to 
the contract by ensuring that growers understand what their rights and 
obligations are before signing the contract.
    [cir] It allows growers time to ask questions clarifying their 
responsibilities so they can remain in compliance with the terms of 
their contracts.
    [cir] It benefits the poultry companies by increasing contract 
compliance rates among growers.
     It may make it easier for growers to obtain financing on 
favorable terms if they have a copy of the contract to show financing 
institutions.
    We therefore propose to amend Sec.  201.100 to require poultry 
companies to provide growers with a written copy of the offered 
contract on the same date that the growers receive the specifications 
for their poultry houses.

Right to Discuss Terms of Offer With Business Advisers

    For the past decade, poultry grower stakeholder groups have been 
advocating regulation and/or legislation to limit confidentiality 
clauses in poultry contracts. Earlier this year, over 200 agricultural 
organizations sent a letter to the Senate Committee on Agriculture, 
Forestry and Nutrition, the House Committee on Agriculture, the Senate 
Committee on the Judiciary, and the House Committee on the Judiciary. 
The letter asked, among other things, for fairness standards for 
agricultural contracts that would include a prohibition of 
confidentiality clauses.\2\ The Farm Security and Rural Investment Act 
of 2002 (FSRIA) validated this issue as one needing to be addressed. 
Section 10503 (7 U.S.C. 229b) of FSRIA requires that livestock and 
poultry companies allow producers/growers to discuss the terms of their 
contracts with certain individuals.
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    \2\ https://www.rafiusa.oerg/programs/CONTRACTAG/
NCSA07FarmBillCompetition.pdf.
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    Permitting growers the freedom to discuss terms of their contracts 
with their accountant, lender, or other business advisors would help 
ensure that growers fully and correctly understand their rights and 
responsibilities as growers. This would heighten the degree to which 
growers remain in compliance with their contracts, providing benefits 
to the poultry companies as well. It would benefit poultry company-
grower relationships by promoting communication and thereby decreasing 
misunderstandings and contract non-compliance issues.
    We propose to amend Sec.  201.100 to allow growers, notwithstanding 
a confidentiality clause in a contract, to discuss the terms of their 
contracts with their business advisors.

Performance Improvement Plans

    All parties to a contract have a right to know all terms and 
conditions they will be subject to when signing the contract. In some 
cases, poultry growers are unaware that they are subject to being 
placed on a Performance Improvement Plan (PIP) if they do not meet 
minimum performance criteria. A grower may not be aware of the PIP 
program until the company sends the grower written or verbal 
instruction explaining the need to improve performance. In other cases, 
poultry growers were aware that their poultry company has a PIP 
program, but were unaware what the minimum performance level is until 
they fail to meet that level. The minimum performance level often 
represents an average performance over several growout cycles, which 
can be difficult to understand if the criteria are not explained in 
written detail. GIPSA has received complaints from growers that several 
large poultry companies have provided information on PIPs as additional 
riders (contract amendments) well after the initial contract was 
signed, or provided the information only after the grower had failed to 
meet criteria not previously documented. Not all poultry companies have 
PIPs, and of those that do, some but not all already provide 
information on their PIPs in their contracts. A review of the reference 
library of poultry contracts maintained by the Packers and Stockyards 
Program Eastern Regional Office found that roughly a quarter of the 
broiler contracts did have a PIP or ``probation'' clause. We propose to 
level the playing field by requiring the disclosure in the written 
contract of PIP terms by the poultry companies that have them.
    If a poultry company has a PIP, growers need to know what 
performance criteria determine if they will be placed on a PIP. Growers 
need to know what, if any, additional support they can expect from 
their poultry company while on a PIP. Finally, growers need to know how 
they can regain their good standing classification and avoid having 
their contract terminated.
    We propose to amend Sec.  201.100 to add a requirement that those 
poultry companies with a PIP include information in their contracts 
concerning what triggers placement on the PIP and how growers may earn 
their way back to good standing.

Written Termination Notification

    Existing contracts generally require that growers or the poultry 
company provide written notice of termination to the other party. 
Existing notice requirements vary from one contract to the next but 
typically require that notice of termination be provided anywhere from 
3 to 30 days prior to the pick-up or delivery of the final flock. 
Poultry companies, however, are not consistently abiding by the 
termination requirements of their contracts. In one case, we found that 
only 10 percent of growers for one company received written termination 
notices when the company chose to terminate many contracts in a single 
region. This occurred despite the fact that the contracts stated that 
growers were to receive written termination notices. Written contract 
termination has been an issue for several years. The USDA National 
Commission on Small Farms recommended in 1998 that, ``The Secretary 
should consider Federal production contract legislation to address 
issues such as contract termination, duration, and re-negotiation.'' \ 
3\ Without written termination notices documenting the date and reason 
for termination, it is difficult for GIPSA to investigate complaints 
alleging unfair or discriminatory termination.
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    \3\ ``A time to Act: A Report of the USDA National Commission on 
Samll Farms'', 1998, Miscellaneous Publication 1545 (MP-1545), page 
6 https://www.csrees.usda.gov/nea/ag_systems/pdfs/time_to_act_
1998.pdf
_____________________________________-

 Currently, Section Sec.  201.100(a)(1) states that contract 
contents must clearly specify, ``The duration of the contract and the 
conditions for the termination of the contract by each of the 
parties.'' (9 CFR 201.100(a)(1)) The regulation does not currently 
specify the means by which the notice is to be conveyed nor what 
additional guidance should be provided to the grower.

[[Page 41955]]

    We propose to amend Sec.  201.100 to require that poultry companies 
notify growers in writing of the termination of contracts at least 30 
days in advance of flock removal. We would require the notices to state 
when the termination is effective and what appeal rights, if any, the 
grower may have. The proposed amendment would require that contracts 
include a provision that either side may terminate the contract by 
providing written notification and 30 days advance notice.

Options Considered

    We considered different alternatives to each of the proposed 
regulatory changes. These alternatives included issuing policy guidance 
to GIPSA employees, providing public notice that failure to provide 
growers with additional contract information was an unfair practice in 
violation of section 202 of the P&S Act, or recommending that growers 
seek redress of grievances through civil court action or arbitration. 
We did not believe that any of these alternatives would meet the needs 
of poultry growers. Therefore, we determined that Sec.  201.100 needs 
revision as proposed.

Effects on Regulated Entities

    If we implement these regulatory changes, some poultry companies 
may have to deliver their contracts to growers earlier than in the 
past. This would be the case only if the poultry company has 
historically delivered a written copy of its contracts to growers after 
delivering the house specifications.
    These regulatory changes may require some revisions of contracts to 
include additional required information. Poultry companies, however, 
add or change contract terms in the normal course of business. There 
should therefore be little additional cost to the companies.
    Information on PIPs would only result in changes to contracts if a 
poultry company already had a PIP. The additional contract wording 
should require little additional cost to the companies. Companies that 
do not already use PIPs but add PIPs later will need to revise 
contracts to reflect the PIP terms.
    As noted above, most contracts already require that one party 
notify the other of a contract's termination. The regulatory change 
proposed here would make it a requirement that termination notices 
issued by either party be in writing, and require that poultry 
companies provide relevant termination information.

Executive Order 12866 and Regulatory Flexibility Act

    The Office of Management and Budget (OMB) has designated this rule 
as not significant for the purposes of Executive Order 12866.
    We have determined that this proposed rule will not have a 
significant economic impact on a substantial number of small entities 
as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). 
The proposed rule will affect poultry companies (live poultry dealers) 
in contractual relationships with poultry growers. Most such entities 
are poultry slaughterers and processors of poultry with more than 500 
employees and do not meet the definition for small entities in the 
Small Business Act (13 CFR 121.201). To the extent the proposed rule 
does affect small entities, it will not impose substantial new expenses 
or changes to routine operations on them. The proposed amendments will 
require changes to the content and timely delivery of contracts. It 
will require only minor contract modifications in most cases and thus 
should not impose substantial new expenses for poultry companies or 
growers, whether small entities or not.
    In accordance with 5 U.S.C. 605 of the Regulatory Flexibility Act, 
because this rule, if promulgated, will not have a significant economic 
impact on a substantial number of small entities, we are not providing 
an initial regulatory flexibility analysis.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. These actions are not intended to have 
retroactive effect. This rule will not pre-eempt state or local laws, 
regulations, or policies, unless they present an irreconcilable 
conflict with this rule. There are no administrative procedures that 
must be exhausted prior to any judicial challenge to the provisions of 
this rule.

Paperwork Reduction Act

    This proposed rule does not contain new or amended information 
collection requirements subject to the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501 et seq.). It does not involve collection of new or 
additional information by the federal government.

Government Paperwork Elimination Act Compliance

    We are committed to compliance with the Government Paperwork 
Elimination Act, which requires Government agencies provide the public 
with the option of submitting information or transacting business 
electronically to the maximum extent possible.

List of Subjects in 9 CFR Part 201

    Contracts, Poultry and poultry products, Trade practices.
    For the reasons set forth in the preamble, we propose to amend 9 
CFR part 201 to read as follows:

PART 201--REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT

    1. The authority citation for Part 201 is revised to read as 
follows:

    Authority: 7 U.S.C. 192, 204, 222, and 228; 7 CFR 2.22 and 2.81.
    2. Amend Sec.  201.100 to redesignate paragraphs (a), (b), (c), 
(d), and (e) as (c), (d), (e), (f) and (g); add new paragraphs (a)(, 
(b), (c)(3) and (h); and revise the introductory text of paragraph (c) 
to read as follows:


Sec.  201.100  Records to be furnished poultry growers and sellers.

    (a) Poultry growing arrangement; timing of disclosure. As a live 
poultry dealer who offers a contract to a poultry grower, you must 
provide the poultry grower with a true written copy of the offered 
contract on the date you provide the poultry grower with poultry house 
specifications.
    (b) Right to discuss the terms of poultry growing arrangement or 
contract offer. As a live poultry dealer, notwithstanding any 
confidentiality provision, you must allow poultry growers to discuss 
the terms of a poultry growout contract offer or poultry growing 
arrangement offer with:
    (1) A Federal or State agency;
    (2) The grower's financial advisor or lender;
    (3) The grower's legal advisor;
    (4) An accounting services representative hired by the grower; or
    (5) A member of the grower's immediate family or a business 
associate.
* * * * *
    (c) Contracts; contents. Each live poultry dealer who enters into a 
growout contract with a poultry grower shall furnish the grower a true 
written copy of the contract, which shall clearly specify:
* * * * *
    (3) Any performance improvement plan guidelines, including:
    (i) The factors considered when placing a poultry grower on a 
performance improvement plan;
    (ii) The guidance and support provided to a poultry grower while on 
a performance improvement plan; and
    (iii) The factors considered to determine if and when a poultry 
grower

[[Page 41956]]

is removed from the performance improvement plan and placed back in 
good standing, or when the contract will be terminated.
* * * * *
    (h) Written termination notice; furnishing, contents. As a live 
poultry dealer, when you terminate a poultry growing contract, you must 
provide the poultry grower with a written termination notice [pen and 
paper] at least thirty (30) days prior to the removal of a flock. Your 
poultry contracts must also provide poultry growers with the 
opportunity to terminate their poultry growing arrangement in writing 
at least thirty (30) days prior to the removal of a flock. Written 
notice regarding termination shall contain the following:
    (1) The reason(s) for termination;
    (2) In the case of termination, when the termination is effective; 
and
    (3) Appeal rights, if any, the poultry grower may have with you.

Pat Donohue-Galvin,
Acting Administrator, Grain Inspection, Packers and Stockyards 
Administration.
 [FR Doc. E7-14924 Filed 7-31-07; 8:45 am]
BILLING CODE 3410-KD-P