Implementation of Regulations Required Under Title XI of the Food, Conservation and Energy Act of 2008; Suspension of Delivery of Birds, Additional Capital Investment Criteria, Breach of Contract, and Arbitration, 76874-76890 [2011-31618]

Agencies

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

[Federal Register Volume 76, Number 237 (Friday, December 9, 2011)]
[Rules and Regulations]
[Pages 76874-76890]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31618]


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DEPARTMENT OF AGRICULTURE

Grain Inspection, Packers and Stockyards Administration

9 CFR Part 201

RIN 0580-AB07


Implementation of Regulations Required Under Title XI of the 
Food, Conservation and Energy Act of 2008; Suspension of Delivery of 
Birds, Additional Capital Investment Criteria, Breach of Contract, and 
Arbitration

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

ACTION: Final rule.

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SUMMARY: The U.S. Department of Agriculture (USDA) Grain Inspection, 
Packers and Stockyards Administration (GIPSA) is amending the 
regulations issued under the Packers and Stockyards Act, 1921, as 
amended and supplemented (P&S Act). GIPSA is amending the regulations 
to clarify conditions for industry compliance with the P&S Act pursuant 
to the Food, Conservation, and Energy Act of 2008 (the 2008 Farm Bill). 
In response to comments and other public input received in response to 
the proposed rule published in the Federal Register on June 22, 2010, 
making necessary changes. The provisions finalized with this action 
will clarify conditions for industry compliance with the P&S Act. Other 
provisions listed in the June 22, 2010, proposed rule are not being 
finalized at this time.

DATES: This rule is effective February 7, 2012.

FOR FURTHER INFORMATION CONTACT: 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: The supplemental information of this final 
rule is composed of four sections. Section I provides a background of 
the rulemaking. Section II provides a summary of provisions not being 
finalized by this action. Section III provides a summary of provisions 
being finalized. Section IV provides a summary of the comments received 
on the proposed rule and at the relevant USDA/Department of Justice 
(DOJ) Joint Competition workshops that occurred during the comment 
period and describes how sections of the proposed rule have been 
modified based on these comments. Section V provides the revised impact 
analyses including those required by Executive Orders 12866 and 13563, 
the Regulatory Flexibility Act, and the Paperwork Reduction Act.

I. Background

The P&S Act, As Amended by the 2008 Farm Bill

    The P&S Act was enacted in 1921 ``to comprehensively regulate 
packers, stockyards, marketing agents and dealers.''\1\ The P&S Act 
provides that ``[t]he Secretary may make such rules, regulations, and 
orders as may be necessary to carry out the provisions of this 
chapter.'' \2\ The P&S Act also sets forth procedures for 
administratively adjudicating certain enforcement actions.\3\ Title XI 
of the 2008 Farm Bill requires the Secretary of Agriculture to issue a 
number of regulations under the P&S Act, 1921, as amended. Among these 
instructions, the 2008 Farm Bill directed the Secretary to identify 
criteria to be considered in determining:
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    \1\ Hays Livestock Comm'n Co. v. Maly Livestock Comm'n Co., 498 
F.2d 925, 927 (10th Cir. 1974).
    \2\ Id. section 408.
    \3\ Id. sections 203, 309, 411.
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     Whether an undue or unreasonable preference or advantage 
has occurred in violation of the Act;
     Whether a live poultry dealer has provided reasonable 
notice to poultry growers of any suspension of the delivery of birds 
under a poultry growing arrangement;
     When a requirement of additional capital investments over 
the life of a poultry growing arrangement or swine production contract 
constitutes a violation of the Act;
     If a live poultry dealer or swine contractor has provided 
a reasonable period of time for a poultry grower or a swine production 
contract grower to remedy a breach of contract that could lead to 
termination of the poultry growing arrangement or swine production 
contract; and
     Whether the arbitration process provided in a contract 
provides a meaningful opportunity for the grower or producer to 
participate fully in the arbitration process.
    In addition to developing criteria, the 2008 Farm Bill provided 
that livestock and poultry contracts must specifically disclose the 
right of the contract producer or grower to decline the requirement to 
use arbitration to resolve any controversy that may arise under the 
livestock or poultry contract.
    On June 22, 2010, GIPSA published a Notice of Proposed Rulemaking 
in the Federal Register that proposed language for implementing both 
the Farm Bill provisions described above and a number of discretionary 
provisions, including a ban on packer-to-packer

[[Page 76875]]

livestock sales, a requirement that dealers disclose their contracts, 
and more. Some of these provisions proved to be controversial, and the 
rule attracted more than 61,000 comments from the public (discussed 
below). As a result of information obtained from the public, GIPSA has 
reconsidered each of its proposed provisions. GIPSA has opted not to 
finalize some of those provisions at this time; others are finalized 
with changes. We will discuss in detail which provisions are finalized 
by this action, which are not, and the input we received from the 
public.

II. Summary of Provisions Not Being Finalized

Value-Added Production and Premiums

    The proposed rule included several provisions related to the 
potential use of price premiums and related types of contracts such as 
marketing agreements in a manner that are potential violations of the 
P&S Act. However, comments identified a number of concerns raised by 
the proposed regulations related to price premiums and defining certain 
production arrangements. Specifically, many felt that, taken together, 
the proposed regulations would increase the potential for litigation 
thereby jeopardizing the continued use of these agreements. The rapid 
growth of value-added segments of the livestock industry based on 
alternative marketing agreements (e.g. breed certifications, source 
verification, production method certification) has been beneficial for 
many producers and supported by consumer demand. GIPSA did not intend 
to limit the use of such arrangements and we determined this final rule 
would not include sections relating to price premiums and marketing 
agreements. This includes subsection 201.211(b) of the proposed rule. 
Related definitions in the proposed rule (i.e., ``Forward Contract,'' 
``Marketing Agreement,'' and ``Production Contract,'' proposed in 
sections 201.2(q), (r) and (s)) are also not being finalized at this 
time as the sections with which the definitions were associated are not 
included in this final rule.

Recordkeeping

    Section 201.94(b) of the proposed rule that would have required 
packers, swine contractors and live poultry dealers to retain records 
justifying differential pricing decisions is not included in this final 
rule. As with sections related to price premiums, many comments 
suggested this requirement would contribute to a potential unintended 
consequence of eliminating or reducing the practice of offering price 
premiums.
    While many comments indicated this requirement would have required 
the creation of new records, this was not the intention of the proposed 
rule. While this final rule does not contain the proposed changes 
regarding recordkeeping, this does not change the existing 
recordkeeping requirements. We expect covered entities to continue to 
comply with the existing requirements of 7 U.S.C. 221.

Packer-to-Packer Sales and Relationships With Dealers

    Section 201.212 related to packer-to-packer sales and packer 
relationships with dealers will not be finalized. Although some 
comments supported inclusion of these provisions, many comments raised 
serious concerns about potential adverse effects on the marketplace, 
such as encouraging further vertical integration and reducing the 
number of dealers and other buyers. While this section will not be 
finalized, we expect covered packers and dealers to continue to comply 
with the related portions of the Act (7 U.S.C. 192c-g) and existing 
regulations (9 CFR 201.69-70).

Prohibitions and Requirements Related to Capital Investments

    While section 201.217 of the proposed rule establishing specific 
requirements related to capital investments is not included in this 
final rule, the criteria required by the 2008 Farm Bill are being 
finalized, in modified form. Considering the variation that exists with 
respect to capital investments and payment terms in contracts, we 
believe stating criteria that the Secretary may use to determine 
whether certain terms in arrangements and contracts are in violation of 
the P&S Act is more appropriate. The associated definition of ``Capital 
Investment'' (proposed section 201.2(n)) will also not be included in 
this final rule.

Definition of Competitive Injury and Likelihood of Competitive Injury

    Sections 201.2(t) and (u) of the proposed rule provided definitions 
for ``competitive injury'' and ``likelihood of competitive injury'' in 
an attempt to provide more clarity on the meaning of these terms. These 
definitions are not necessary for the purposes of this final rule and 
therefore are not included.

Applicability of Contracts

    We believe this paragraph is unnecessary considering the sections 
related to price premiums and discounts are not included in the final 
rule. To avoid confusion over whether GIPSA regulations cover 
transactions between non-subject entities, we are deleting this 
paragraph from this final rule.

Scope of Section 202(a) and (b)

    Comments were sharply divided with respect to proposed provision 
201.3(c) with respect to harm to competition. Those supporting the 
proposal pointed out it would provide legal relief for farmers and 
ranchers who suffer because of unfair actions, such as false weighing 
and retaliatory behavior, without having to show competitive harm. 
Opposing comments relied heavily on the fact that several of the United 
States Courts of Appeals have ruled that harm to competition (or the 
likelihood of harm to competition) is a required element of a violation 
of sections 202(a) and (b) \4\ of the P&S Act.
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    \4\ All cases in question have ruled relative to section 202(a), 
while only one case has also referenced 202(b).
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Unfair, Unjustly Discriminatory, and Deceptive Practices or Devices

    Section 201.210 of the proposed rule listed examples of conduct 
GIPSA considers to be unfair, unjustly discriminatory or deceptive 
practices or devices, in violation of section 202(a) of the P&S Act.

Undue or Unreasonable Preference or Advantage

    Section 201.211 established criteria the Secretary may consider in 
determining if conduct would violate section 202(b) of the P&S Act. 
While many commenters provided examples of similarly situated poultry 
growers and livestock producers receiving different treatment, several 
comments asked for additional clarification about the language proposed 
and were concerned about the impacts of the provision on marketing 
arrangements and other beneficial contractual agreements.

Livestock and Poultry Contracts

    Section 201.213 of the proposed rule required the submission and 
potential publication of sample contracts. Most supporting comments 
stated that implementation of this rule would assure fairness and 
market transparency which would allow farmers and ranchers the 
opportunity to make informed decisions, it would promote fair 
competition, and it would allow efficient and evenhanded enforcement of 
the P&S Act. Some comments expressed concern with the lack of clarity 
and the ambiguity of this section of the proposed rule.

[[Page 76876]]

Tournament Systems

    Section 201.214 of the proposed rule required live poultry dealers 
that pay poultry growers on a tournament system to pay all poultry 
growers raising and caring for the same type of poultry the same base 
pay, and that would prohibit paying poultry growers less than the base 
pay amount. The proposed provision also required that poultry growers 
be ranked in settlement groups with other poultry growers that raise 
and care for poultry in the same type of houses. Several comments were 
received indicating that the proposed provision needs to be revised.

III. Summary of Provisions Finalized by This Rule

    The majority of the sections of the proposed rule that were 
required by the 2008 Farm Bill are being finalized with modifications. 
These sections include criteria regarding suspension of the delivery of 
birds (Sec.  201.215 of the proposal), additional capital investment 
(Sec.  201.216 of the proposal), breach of contract (Sec.  201.218 of 
the proposal), and arbitration (Sec.  201.219 of the proposal).

Suspension of the Delivery of Birds

    This section indicates the various criteria the Secretary may 
consider when determining whether a live poultry dealer has provided 
reasonable notice to poultry growers of any suspension of the delivery 
of birds under a poultry growing arrangement. These criteria include, 
but are not limited to, a written notice at least 90 days prior to 
suspension, written notice of the reason for the suspension of 
delivery, the length of the suspension of delivery, and the anticipated 
date the delivery of birds will resume.

Additional Capital Investments

    This section indicates the various criteria the Secretary may 
consider when determining whether a requirement of additional capital 
investments over the life of a poultry growing arrangement or swine 
production contract constitutes a violation of the P&S Act.

Breach of Contract

    This section indicates the various criteria the Secretary may 
consider when determining if a packer, swine contractor, or live 
poultry dealer has provided a reasonable period of time for a poultry/
swine grower to remedy a breach of contract that could lead to 
termination of a production contract. These criteria include, but are 
not limited to, the form and substance of the notice following the 
discovery of a breach of contract.

Arbitration

    This section requires production contracts that require the use of 
arbitration to include language on the signature page that allows the 
producer or grower to decline arbitration. This section also includes 
the criteria the Secretary may consider when determining if the 
arbitration process provided in a contract provides a meaningful 
opportunity for the poultry growers, swine production contract growers, 
or livestock producers to participate fully in the arbitration process. 
To implement this provision, it is necessary to clearly identify the 
applicability of the regulations to live poultry dealers.

IV. Comments and Responses

    The proposed rule published on June 22, 2010, (75 FR 35338) 
provided a 60-day comment period to end on August 23, 2010. In response 
to requests for an extension of time to file comments, on July 28, 
2010, GIPSA extended the comment period to end on November 22, 2010 (75 
FR 44163). GIPSA considered all comments postmarked or electronically 
submitted by November 22, 2010. Over 61,000 comments were received. The 
following discussion addresses written comments as well as comments 
received at two public meetings, on June 25, 2010, and August 27, 2010, 
that were conducted jointly by USDA and DOJ. Because two of these 
``Workshops on Competition in Agriculture'' were held during the 
comment period for the proposed rule, the Secretary announced that any 
comments made in those forums would be considered comments on the rule. 
Only a portion of the sections of the proposed rule are being finalized 
at this time. The majority of the sections of the proposed rule that 
were required by the 2008 Farm Bill are being finalized with 
modifications. These sections include criteria regarding suspension of 
the delivery of birds (Sec.  201.215 of the proposal), additional 
capital investment (Sec.  201.216 of the proposal), breach of contract 
(Sec.  201.218 of the proposal), and arbitration (Sec.  201.219 of the 
proposal).

Definition--Principal Part of Performance

    Summary of Comments: GIPSA received a few comments on this term 
suggesting some clarification be added. For example, commenters 
suggested that ``principal part of performance'' should be redefined to 
say ``the forum for contentious proceedings (i.e., arbitration or 
litigation) cannot be other than where the majority of the poultry or 
livestock are located.'' An additional suggestion stated that this 
definition should be revised to specifically apply to swine marketing 
agreements, swine producers, and packers. Commenters recommended the 
definition be divided into sections by contract type and species.
    Agency Response: This term references the services provided under 
livestock and poultry contracts and are used in conjunction with the 
location where those services are rendered. These services involve the 
raising and caring for livestock or poultry and would be provided in 
the location where the livestock or poultry is located. Any 
``contentious proceedings,'' however, concern the quantity or quality 
of the services provided by the poultry grower or livestock producer 
and not the location of the livestock or poultry. We determined no 
changes to the definition were needed to address the location related 
comments. Given the diverse and dynamic nature of the livestock 
industry, we are not limiting the definition to swine marketing 
agreements, swine producers, and packers, as suggested by the 
commenter.

Definition--Additional Capital Investment

    Summary of Comments: Many comments suggested the definition for 
``additional capital investment'' should specify how additional capital 
investment would be calculated. Some comments also suggested the 
threshold was set too low if applied to the total operation. Comments 
stated that if ``combined'' is meant to be a cumulative figure over 
years, then that should be explained. In addition, they stated the word 
``combined'' should be redefined to specify ``additional capital 
investment means $25,000 or more * * * beyond the initial investment * 
* *''. Another comment suggested ``additional capital investment'' 
should provide for a percentage of the initial capital investment such 
as 10%, instead of a set amount of $25,000.
    Agency Response: With respect to the comments requesting more 
clarity, we have reduced the dollar amount from $25,000 to $12,500 and 
added the phrase ``per structure.'' These changes were included to make 
the definition more applicable across a range of sizes of operations 
since those investments could vary depending on the number of houses a 
poultry or swine production contract grower operates. Specifically, we 
reduced the dollar amount so it would be more in relation to additional 
investments on a per structure basis. We have also modified the 
definition to clarify that the dollar amount relates to the total 
aggregate investment ``over the

[[Page 76877]]

life of the poultry growing arrangements or the swine production 
contracts.'' With respect to the comment on defining additional capital 
investment as a percentage of the initial investment, we did not adopt 
this suggestion. We believe the dollar amount of the additional capital 
investment should stand alone and not be tied to the amount of the 
initial capital investment.

Definition--Suspension of Delivery of Birds

    Summary of Comments: We received only a few comments on this 
definition. They presented some disagreement with the idea that a flock 
should be delivered before the next payment date. The comments 
expressed the belief that this was not practical, citing an example 
where a flock was picked up on a Thursday and under the terms of the 
contract, payment was due the next Thursday. In this example the 
commenter argued it would be highly unusual for the next flock to be 
delivered before that following Thursday and suggested some dealers 
might have to lengthen the payment period for the current flock.
    Agency Response: Because the definition bases the payment date on 
section 410 of the P&S Act, which specifies a payment due date under 
poultry growing arrangements as the fifteenth day after the week in 
which the poultry was slaughtered, the example described by the 
commenter would not have required a notice of suspension of bird 
delivery under this rule. We made no changes to this definition based 
on the comments received.

Applicability to Live Poultry Dealers

    Summary of Comments: Almost all of the comments related to the 
proposal to extend the regulations to all stages of a live poultry 
dealer's production, including the hatcheries, were favorable. They 
felt that pullet and breeder growers needed the same protections as 
those growing broiler chickens. Opponents said the USDA had no legal 
authority to subject eggs to the P&S Act. Other comments also indicated 
the term ``laying hen'' was not typically used in the broiler or turkey 
industry and the term ``pullets'' usually referred to birds that would 
become broiler breeders.
    Agency Response: Commenters are correct that the P&S Act provides 
USDA no authority over eggs. It is for this reason we specifically 
excluded hens that only produce table eggs from this provision. The 
proposal does not include table eggs but rather those poultry classes 
involved in producing birds for slaughter. In response to comments on 
pullets, we are clarifying the exclusion by using the phrase 
``excluding egg-type pullets, hens that only produce table eggs, and 
breeder flocks for the egg industry.''

Effective Dates

    Summary of Comments: In a comment to the rulemaking proposal one 
party noted the ``Effective Dates'' was ``very curiously drafted'' as 
it would leave open a comparison between a spot market transaction 
after the effective date of the final regulations with a sale 
transaction based upon a pre-effective date marketing agreement. That 
commenter also asked whether a packer must ``justify'' a price 
differential in such a case.
    Agency Response: The final regulations will require no such 
justification. A spot market transaction negotiated today will be 
inherently different in form and substance from a marketing agreement 
transaction consummated today based on terms negotiated when the market 
agreement was signed and made effective. This will be true with or 
without this rulemaking. The effective dates listed in this final rule 
would not necessitate documentation for price differences between spot 
market- and marketing agreement-based transactions. We made no changes 
to the wording of this paragraph.

Suspension of Delivery of Birds

    Summary of Comments: GIPSA received several comments in favor of 
this provision. The comments generally said that growers were 
struggling financially because there was too much time between flocks 
and too few flocks. One comment stated that growers need 90 days to 
make financial arrangements to mitigate the effects of a reduction in 
cash flow caused by a suspension of deliveries. This time could be used 
to adjust loan payments with banks or to arrange to grow poultry for 
another poultry company. In addition, many growers agreed this would 
cause a reduction in the use of extended layouts as a form of 
retaliation, usually with no notice, for arbitrary reasons or to force 
upgrades.
    There were a few opposing comments from live poultry dealers, 
stating that forcing them to work with a terminated grower for 90 days 
would put their birds at risk. They argued that suspended growers have 
no incentive to do a good job with their last flock and may even 
abandon their operation putting the birds at risk. Also, growers who 
are suspended because of poor flock management would put the birds at 
risk and cause the live poultry dealer to receive inferior product. An 
additional concern was for the safety of the live poultry dealer's 
employees from physical threats following the suspension of deliveries.
    Other comments opposed the rule saying it did not give live poultry 
dealers the flexibility they needed to adjust to market conditions. For 
example, live poultry dealers may need to suspend the delivery of birds 
when the demand for product suddenly falls. There are times when a 
business forecaster cannot know 90 days ahead of time that the company 
will need to curtail production. Certain grower-specific reasons would 
make it practically impossible to give 90 days' suspension notice, they 
said.
    One comment suggested the exact date of re-delivery following 
suspension may be impossible to determine. They said GIPSA should 
change the requirements for suspension of delivery notices to say the 
notices did not have to state the date deliveries would resume.
    A commenter suggested bankruptcy be added to the list of emergency 
situations for which live poultry dealers might see a waiver of the 
notice requirement in subsection (c) of the proposed rule.
    Agency Response: While those in general support of and in 
opposition to this provision spoke of bird delivery suspensions in the 
same context as grower contract terminations, this section applies only 
to extended layouts and not to terminations. Growers receiving a 
written suspension of delivery notice would still have a growing 
arrangement with the live poultry dealer and would expect to receive 
additional flocks. Additionally, this section is a list of criteria the 
Secretary may consider in determining whether reasonable notice of 
suspension of birds has been given; not a list of prohibitions.
    With respect to concerns that providing a notice of suspension 
while the grower was in the midst of raising a flock would risk grower 
neglect or nonperformance, we feel poultry growing arrangements 
generally have other terms related to animal welfare or neglect that 
could be exercised to address this concern. Therefore, we decided not 
to adjust the section based on this comment. Similarly, threats against 
live poultry dealer employees can be addressed through other contract 
terms or reporting such actions to local law enforcement.
    Some commenters suggested live poultry dealers could not plan 90 
days in advance because of changes in the market. Considering the fact 
live poultry

[[Page 76878]]

dealers coordinate the production process from the hatchery to 
slaughter, we believe planning is generally possible under the 90-day 
timeframe. Within this timeframe, live poultry dealers would usually 
know with some certainty what their production needs were for the 
current flock under production. A 90-day notice period would obligate a 
live poultry dealer to place at most one additional flock after the 
current flock. Finally, the rule provides a criterion to consider in 
determining whether a live poultry dealer's ability to provide notice 
has been impacted by a variety of unforeseen emergency situations.
    While we agree the exact date that flock deliveries will resume may 
not be known, this final rule only establishes some criteria to be 
considered, and does not impose a specific requirement. Additionally, 
the rule discusses the ``anticipated date,'' which implies some level 
of uncertainty and adjustment if conditions change. We generally feel 
providing an idea about the length of the suspension is an important 
part of these criteria and included this in this final rule. With 
respect to bankruptcies as emergencies, there have been bankruptcies of 
live poultry dealers in recent years and we agree these events do 
create emergency situations. We included bankruptcy among the list of 
unforeseen emergency situations that the Secretary may consider when 
determining whether or not reasonable notice has been given for 
suspension of delivery of birds.
    We made additional minor and non-substantive changes to the wording 
and ordering of some words within paragraphs in this section for 
clarity.

Additional Capital Investments Criteria

    Summary of Comments: The comments on this section were mixed 
between support for the criteria and opposition. Supporters generally 
felt capital investment burdens were almost exclusively borne by the 
producers and growers and at the same time, they had little choice 
about whether or not to make the investments. These commenters felt the 
criteria provided a framework for establishing a more equitable 
balance. Comments opposed to this section generally expressed concern 
the criteria could result in not being able to terminate long-term 
contracts with poor producers or growers. Some comments also indicated 
the need to differentiate between capital investments that are required 
to repair or maintain a facility, which should be considered as capital 
investments, and those that are an upgrade or to implement new 
technology.
    GIPSA also received some comments on specific criteria within the 
section. The first criterion involved consideration of whether growers 
had discretion in deciding against making capital investments. Comments 
in support of this provision believed it would provide growers and 
producers the ability to negotiate reasonable contract terms for animal 
production including the ability not to be forced to upgrade or change 
equipment without having input. Supportive comments also claimed this 
was necessary because upgrades were usually required by the companies 
although the grower or producer is the one who paid for them. Comments 
opposed to this criterion argued it would hinder growers or producers 
from making necessary improvements such as insurance requirements or 
mandatory capital investments. Comments also noted typical production 
contracts include insurance requirements and require insurance be used 
to reconstruct and repair facilities in the event of a fire or tornado 
or other natural damage. Under the proposal, these standard provisions 
may be unfair practices because the grower or producer cannot elect to 
keep the insurance proceeds.
    Comments related to the paragraph on retaliation or coercion were 
only supportive. The comments said this rule was necessary to protect 
growers and producers from forced upgrades, retaliation or fear of 
losing their production contracts or poultry growing arrangements. 
Several commenters stated they had been or knew growers or producers 
who were being threatened with reduced placements, pay reductions, or 
contract revocation if they did not make upgrades. There were a few 
comments related to the criteria about capital investments required 
within 12 months of a planned significant reduction or end of 
operations that stated the proposed rule confused swine contractors 
with packers. Many comments from producers and growers supported this 
section because they made expensive upgrades only to see a decrease in 
the size of placements or to see the processing facility shut down. One 
grower stated he was required to retrofit his houses to grow bigger 
birds. The live poultry dealer declared bankruptcy a short time later 
and the grower did not get chickens for several months.
    Two comments questioned the need for a waiver for natural 
disasters. They said such events should not give packers, swine 
contractors or live poultry dealers opportunity to require upgrades 
that go beyond necessary repairs. The comments also questioned why the 
waiver would only apply to live poultry dealers.
    A comment in support of the criteria related to whether some 
growers or producers are required to make capital investments that 
other similarly situated growers or producers do not have to make 
claimed a particular firm required some growers to make more new 
capital investments to their facilities than was required of others. A 
few comments were against this criteria stating the phrase ``similarly 
situated'' was not defined. Another comment said that to require all 
poultry growers or swine production contract growers to make the same 
additional capital investment is not always possible. There will be 
circumstances that support requiring additional capital investments of 
only some growers or producers but not all, even if the growers or 
producers are otherwise similarly situated.
    We received numerous comments in support of the criteria related to 
the age of prior upgrades or capital investments and whether recent 
upgrades had been completed. Comments from growers and producers 
expressed concern with having to make frequent upgrades, receiving no 
additional compensation for upgrades, and being given no choice about 
making the upgrades or not. Some expressed the belief that the criteria 
would discourage packers, swine contractors and live poultry dealers 
from demanding often unnecessary upgrades which tended to keep poultry 
growers and livestock producers in debt. One comment recounted being 
required to make changes to their poultry houses only a short time 
after the houses had been built according to company specifications. 
Two comments argued the provision was unintelligible and it provided no 
standards for determining whether additional capital investments 
constituted an unfair practice.
    Almost every comment received concerning the criteria related to 
whether a grower or producer can be expected to recoup a required 
capital investment was favorable. Comments by growers and producers 
argued that any added compensation or enhanced efficiencies that might 
result from additional capital investments did not cover the cost of 
the investments. One comment stated that the wording regarding 
recouping the investment was vague and would invite litigation. Another 
comment said this criterion should be deleted because it was redundant 
or in conflict with a paragraph in the proposed Capital Investment 
Prohibitions (proposed section 201.217).
    We received a small number of comments on the criterion which would

[[Page 76879]]

have the Secretary examine the amount of time a grower was given to 
make a required capital investment. All of the comments supported this 
criterion. Those commenting said that when the same capital investment 
was required of all growers, resources and equipment would be in short 
supply and expensive due to the increased demand. Growers therefore 
need a reasonable amount of time to make the required capital 
investment.
    Agency Response: With regard to comments that the criteria could 
eliminate the ability to terminate poor growers or producers, we note 
that the section consists of criteria and not specific requirements. 
Additionally, other terms within poultry growing arrangements and swine 
production contracts provide for ways to terminate based on non-
performance and provide incentives to improve performance. We decided 
to include this section in this final rule with some modifications.
    Some commenters suggest that the criterion addressing the provision 
of discretion to growers or producers would prevent any requirement for 
additional capital investments or even contract terms that require 
insurance proceeds to be used to rebuild. We believe these comments 
ignore the fact that this section provides criteria and not 
prohibitions. In the 2008 Farm Bill, Congress directed the Secretary to 
establish criteria and not specific prohibitions. This criterion is 
only a factor the Secretary may consider to evaluate whether a firm's 
investment requirement practices violate the P&S Act. With regard to 
comments that capital investments should not include maintenance and 
repair costs, we note that this distinction was made as part of the 
definition of ``additional capital investment.''
    With respect to the comments regarding a waiver due to natural 
disasters, we replaced the waiver provision with criterion and 
thereafter merged it with the criterion related to significantly 
reducing or ending operations. This will allow the Secretary to take 
into account whether a packer, swine contractor or live poultry dealer 
proffered justification, such as a catastrophic or natural disaster, or 
other emergency, when a poultry grower or swine production contract 
grower was required to make additional capital investments over the 
life of the production contracts or growing arrangements. We also added 
bankruptcy as a possible justification to be considered. A related 
comment questioned why a waiver would only apply to live poultry 
dealers. In the modified section, these justifications would not be 
limited to live poultry dealers.
    With respect to the comment on the meaning of the phrase 
``similarly situated,'' we believe the meaning is plain and does not 
require a definition within regulation. In determining whether two or 
more growers are ``similarly situated,'' the Secretary will consider 
whether poultry raised is of the same type, facilities are similar, and 
if the houses are in the same geographic area, among other factors.
    With respect to comments on the criterion related to the age of and 
whether recent upgrades had been made, which felt the criteria was too 
vague to identify what practices were prohibited, we disagree. Since 
the criteria only provide factors that the Secretary may consider, 
these are not meant to be bright-line prohibitions. The Secretary will 
determine on a case-by-case basis whether the facts related to any 
applicable criterion are a violation of the P&S Act. The only change 
made to the wording of this criterion as a result of comments was to 
include the phrase ``the number of'' before the phrase ``recent 
upgrades or capital investments.''
    With respect to the comment suggesting that criterion related to 
recouping a capital investment was redundant with part of the proposed 
section 201.217, we note section 201.217 was not included in this final 
rule. Therefore this criterion was not removed. In addition to the 
above modifications to proposed paragraphs in this section, this final 
rule includes an additional criterion as a new paragraph (h) on whether 
required equipment changes were for previously approved and functioning 
equipment. This criterion is based on section 201.217(c) of the 
proposed rule that we felt was better included in this section as a 
criterion. The proposed paragraph required packers, swine contractors 
and live poultry dealers to provide adequate compensation incentives to 
poultry growers and swine production contract growers when requiring 
equipment changes on previously approved equipment, provided that 
equipment was in good working order.
    Several comments on proposed section 201.217(c) said that GIPSA 
failed to define what constituted ``adequate compensation incentives'' 
and ``good working order.'' The comments said that this would cause 
disputes between the parties to poultry growing arrangements and 
livestock production contracts. It was also argued that the paragraph 
would preclude even necessary upgrades if a company could not afford to 
provide funding. Some said that discouraging technological advances 
would put the United States at a comparative disadvantage with other 
competing countries by decreasing efficiency and providing 
disincentives for innovation, including those that could improve food 
safety. Although there were many comments received in favor of this 
paragraph, many of them requested GIPSA define adequate compensation as 
the full cost of the upgrade at the time the upgrade was required.
    Regarding the discussion of adequate compensation incentives, we 
feel this would place too large a financial burden on packers, swine 
contractors and live poultry dealers. By moving this paragraph from 
Sec.  201.217 to Sec.  201.216, we changed this provision from a 
requirement to that of a criterion the Secretary would consider to 
determine whether, in a particular instance, requiring a grower to make 
additional capital investments is a violation of the P&S Act. Based on 
the comments received, we feel this is the appropriate function for 
this provision. With regard to the capital investment criteria (Sec.  
201.216 in the proposed rule), we feel using these criteria to 
determine whether certain arrangements are a violation of the P&S Act 
is more appropriate given the variation that exists with respect to 
capital investments and payment terms in contracts.
    We made non-substantive wording changes to the introductory 
paragraph for this section to emphasize there were several criteria 
listed.

Reasonable Period of Time To Remedy a Breach of Contract

    Summary of Comments: The 2008 Farm Bill required the Secretary to 
establish criteria the Secretary would use to determine if a reasonable 
period of time has been afforded to remedy a breach of contract that 
could lead to termination of a growing relationship. The majority of 
the comments supported the proposed section and felt that the list of 
criteria was reasonable. Several parties commented that the regulation 
did not allow processors to immediately terminate a growing agreement 
if the grower failed to comply with the processor's internal food 
safety or animal welfare requirements. Processors could be at risk for 
product liability suits, recalls, adverse press and damage to 
reputations if required to allow a grower to operate following a breach 
involving food safety or animal welfare standards.
    We received many comments on the paragraph related to providing 
reasonable time to rebut an allegation

[[Page 76880]]

that there was a breach of contract. Many of the comments argued 
against allowing growers time to provide rebuttals to significant 
breaches. Typical examples of significant breaches included those 
affecting animal welfare, abuse or food safety. Several comments said 
describing a sufficient amount of time for rebuttal as being 
``generally 14 days'' was too vague and should be eliminated or 
explained further.
    There were a few comments that stated certain paragraphs were vague 
or unclear and that the section should be rewritten so it would be more 
precise and less confusing.
    Agency Response: With regard to the comments on animal welfare and 
food safety, we agree with the concerns raised by these comments. As a 
result, we added a sentence to the introductory paragraph which allows 
the terms of a livestock contract or poultry growing arrangement to 
control the actions of a packer, swine contractor or live poultry 
dealer when food safety or welfare of animals is at stake.
    With respect to the commenter that felt the term ``generally 14 
days'' in proposed section 201.218(d) needed revision, we agree and 
changed the wording to ``adequate time'' for rebuttal from the date of 
the breach notice. Since this section is criteria and not specific 
requirements, setting an exact time also did not seem appropriate.
    With respect to the general comments regarding the need for better 
clarity and suggested revisions to make the paragraphs more precise, we 
agree. We made a number of changes to wording within criteria to make 
their meaning more clear. Additionally, several criteria either seemed 
redundant (e.g. the criterion related to arbitration) or duplicative of 
other criteria (e.g. criteria regarding notice within 90 days of 
breach) were not included in this final rule.

Arbitration

    Summary of Comments: Almost all the comments on this section were 
supportive. Comments from growers and producers felt this was an 
important provision to protect their rights. Two comments expressed 
concern that live poultry dealers may terminate their relationship with 
growers that opted-out of arbitration when the live poultry dealers 
need to decrease production. Several comments expressed general 
opposition to the entire section and that anyone who did not like the 
arbitration terms in a contract should simply not enter into the 
contract instead of having a right to opt-out. One commenter identified 
the criterion related to whether arbitration procedures comply with the 
terms of the Federal Arbitration Act as an unnecessary addition to the 
rule. There were several comments on the provision that said failure to 
sign either the arbitration acceptance or declination statement voided 
the contract. Comments from two parties recommended that in the 
alternative, the rule should state failure to sign one of the elections 
meant the grower was opting-out of arbitration without voiding the 
contract. One other party suggested that if neither election is made 
the required arbitration clause portion of the contract was void.
    Agency Response: With regard to comments concerning growers or 
producers being subject to retaliation for exercising their right to 
opt-out, we agree with this concern. We also point out that terminating 
relationships with growers because they exercised their right to opt-
out of required arbitration under Sec.  201.219 would be an unlawful 
practice. With regard to general comments against the right to opt-out 
of arbitration, we point out this provision was included in the 2008 
Farm Bill. This provision implements section 210 of the P&S Act added 
by the 2008 Farm Bill. We have not included the criterion related to 
the Federal Arbitration Act in this final rule. We have concluded that 
if terms in a contract violate the Federal Arbitration Act, the 
remedies provided under that statute are better suited to address the 
issue than the P&S Act. With regard to the comments on failure to 
select the option to decline or to be bound by the arbitration terms, 
we tended to agree with the comments that voiding the entire contract 
was not necessary. We have modified the provision to say a failure to 
sign either of the ``Right to Decline Arbitration'' statements will be 
treated as if the contract producer or grower declined to accept the 
required arbitration clause in the contract.
    While the comments generally did not focus on the specific 
arbitration criteria, we made a few changes to improve clarity. For 
example, one criterion said GIPSA would examine the extent to which 
impartial and unbiased neutrals would be used as arbitrators in 
deciding if contract producers and growers were allowed to participate 
fully in the arbitration process. In practice it is often the case that 
each party to the dispute names a non-neutral arbitrator to serve on an 
arbitration panel to hear and decide the dispute. Often, use of non-
neutral arbitrators is necessary so that the arbitrators are qualified 
and have appropriate foundational knowledge of the industry to 
understand the facts of the case so a proper ruling can be made. The 
naming of a non-neutral arbitrator by a party to the arbitration 
process does not necessarily restrict a contract producer or grower 
from participating fully in the process. For these reasons, we removed 
this criterion. As another example, we combined the provision about the 
cost of arbitration with that of whether there are reasonable time 
limits in the arbitration process.

Regulatory Impact Analysis

    Summary of Comments: Thirty-seven comments were received on GIPSA's 
compliance with the analytical requirements of Executive Order 12866. 
Many of the comments favoring the proposed changes pointed to what they 
viewed as the deleterious effects of increased concentration on 
competition. For example, a number of commenters referred to declining 
farm prices and the declining farm share of the retail value of meat 
and poultry as indications that increased concentration had adversely 
affected producers. However, few comments provided numerical estimates 
of the economic benefits of the proposal.
    Three comments, consisting of over 1,000 pages, expressed concern 
that the economic impacts of the proposed rule would be economically 
significant and submitted evidence that the proposed provisions might 
have costs of more than $1 billion per year. Comments also suggested 
the rule would hurt innovation and food safety and increase costs and 
prices to consumers. Commenters noted that for the cattle and hog 
industries adjustment costs would be related to the shifting away from 
the use of marketing arrangement forms of procurement and contracts in 
favor of the spot market and for poultry would entail overall losses of 
production efficiency in the conversion of factor inputs to product 
output. In the study prepared for the National Meat Association by 
Informa Economics, 75 percent of the economic costs associated with the 
proposed rule were associated with, in their view, relieving plaintiffs 
from the burden of proving competitive injury.\5\
---------------------------------------------------------------------------

    \5\ Informa Economics, Inc. ``An Estimate of the Economic Impact 
of GIPSA's Proposed Rules,'' prepared for the National Meat 
submitted as Appendix C to the National Cattlemen's Beef Association 
and Appendix D of the National Pork Producers Council comment 
submissions (henceforth referred to as the Informa Study).
---------------------------------------------------------------------------

    The Informa study estimated the aggregate impact of the June 22, 
2010, proposed GIPSA rule for the U.S. meat and poultry industry at 
$1.64 billion (Table 1). The Informa study further estimated the value 
of lost production based on their estimated on-going and adjustment 
costs. The value of lost production totaled almost $1.1 billion or

[[Page 76881]]

about 66 percent of the total estimated costs. The estimates differ 
because the total on-going and adjustment costs represent the cost to 
each industry before markets adjust to the changes in output. The value 
of lost industry production represents the cost to each industry after 
markets adjust to changes in output.

                            Table 1--Informa Study--Adjustment Cost and Industry Output Effects, June 22, 2010 Proposed Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Million $
                                                         --------------------------------------------------------------------------------      Lost
                                                                                                               Total                       production as
                         Sector                            Total Informa    Efficiency      Quality and   efficiency and   Value of lost   a  percentage
                                                               costs           costs       demand costs     quality and      industry        of total
                                                                                                           demand costs     production     Informa costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beef....................................................           879.8           401.9           377.7           779.6             591              67
Pork....................................................           401.4           176.7            82.2           258.9             246              61
Poultry.................................................           361.6           302.2             0.0           302.2             236              65
Turkey..................................................              na              na              na              na              14              na
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................         1,642.8           880.8           459.9         1,340.7           1,087              66
--------------------------------------------------------------------------------------------------------------------------------------------------------
na = not applicable.

    Agency Response: This final rule contains several significant 
changes based on the comments received during the comment period for 
the June 22, 2010 proposed rule. Many of the proposed provisions 
identified by commenters and in the Informa analysis as having the 
largest effect in the market are not included in this final rule.
    We have considered all the analyses and information provided in 
comments as we completed the analysis for this final rule, but in some 
cases it was of limited use and refinement of estimates was difficult. 
For example, though the Informa study provided some insight into 
understanding the costs and benefits associated with many of the major 
proposed rule changes, it also has limitations. As detailed in the 
Informa study, ``* * * it is important to recognize that it was 
impossible to structure the interview process in a way that provided a 
pure random sample and thus the information gleaned from the surveys 
should not be used to make statistical inferences about industry 
populations in a strict sense.'' \6\
---------------------------------------------------------------------------

    \6\ Informa Economics, Inc. ``An Estimate of the Economic Impact 
of GIPSA's Proposed Rules,'' p. 4.
---------------------------------------------------------------------------

    It is also not clear whether those responding to the Informa survey 
based their input on the estimated cost associated with the proposed 
rule or a ``worst case'' scenario. As discussed by Gresenz et al., 
without a history of claims on which to base a prediction, it is 
difficult to accurately estimate the potential threat.\7\ Gresenz et 
al. further notes that individuals are likely to over-estimate the 
likelihood that plaintiffs will win cases and decision makers may over-
react to the small possibility of having to pay large penalties. To the 
extent this tendency to over-react to the small possibility of having 
to pay large penalties is reflected in the Informa study estimates, the 
Informa study costs over-estimate the costs associated with the 
proposed rule. Similarly, the estimates of the economic costs provided 
by Elam \[3]\ are potentially an over-estimate of the true costs 
because of the significant changes to the proposed rule.
---------------------------------------------------------------------------

    \7\ Gresenz, Carole Roan, Deborah H. Hensler, David M. Studdard, 
Bonnie Dombey-Moore, and Nicholas M. Pace (1998). ``A Flood of 
Litigation? Predicting the Consequences of Changing Legal Remedies 
Available to ERISA Beneficiaries.'' RAND Issue Paper, IP-198.
    \[3]\ Elam, Dr, Thomas E. ``Proposed GIPSA Rules Relating to the 
Chicken Industry: Economic Impact.'' FarmEcon LLC (November 16, 
2010).
---------------------------------------------------------------------------

V. Executive Orders 12866, 13563 and Other Analyses

    Executive Orders 13563 and 12866 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. 
This final rule has been determined to be significant for the purposes 
of Executive Order 12866 and, therefore, has been reviewed by the 
Office of Management and Budget.

Need for Regulation

    As discussed previously, Title XI of the 2008 Farm Bill requires 
the Secretary of Agriculture to issue a number of regulations under the 
P&S Act, 1921, as amended. Among these instructions, the 2008 Farm Bill 
directed the Secretary to identify criteria to be considered in 
determining:
     Whether an undue or unreasonable preference or advantage 
has occurred in violation of the Act;
     Whether a live poultry dealer has provided reasonable 
notice to poultry growers of any suspension of the delivery of birds 
under a poultry growing arrangement;
     When a requirement of additional capital investments over 
the life of a poultry growing arrangement or swine production contract 
constitutes a violation of the Act;
     If a live poultry dealer or swine contractor has provided 
a reasonable period of time for a poultry grower or a swine production 
contract grower to remedy a breach of contract that could lead to 
termination of the poultry growing arrangement or swine production 
contract; and
     Whether the arbitration process provided in a contract 
provides a meaningful opportunity for the grower or producer to 
participate fully in the arbitration process.
    In addition to developing criteria, the 2008 Farm Bill provided 
that livestock and poultry contracts must specifically disclose the 
right of the contract producer or grower to decline the requirement to 
use arbitration to resolve any controversy that may arise under the 
livestock or poultry contract.
    This rulemaking is necessary to fulfill statutory requirements.

The Use of Contracts in the Pork and Poultry Industry

    Formal contractual arrangements cover a considerable share of U.S. 
poultry and livestock production. Contracting can minimize transaction 
costs, induce firms to make optimal investments in relationship 
specific asset and create production efficiency gains. Agricultural 
contracts can also lead to improvements in efficiency throughout the 
supply chain for

[[Page 76882]]

products by providing farmers with incentives to deliver products 
consumers want and produce products in ways that reduce processing 
costs and, ultimately, retail prices.\8\
---------------------------------------------------------------------------

    \8\ A comprehensive study of the benefits and costs associated 
with contract marketing was conducted by RTI International (RTI). 
The study did not examine poultry production. See RTI International. 
2007. GIPSA Livestock and Meat Marketing Study. Prepared for Grain 
Inspection, Packers and Stockyard Administration. U.S. Department of 
Agriculture. Contract No. 53-32KW-4-028.

                                           Table 2--Share of Commodity Production Under Contract, by Commodity
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Share of production under contract (percent)
                           Commodity                           -----------------------------------------------------------------------------------------
                                                                     1991-93           1996-97           2001-02            2005              2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cattle........................................................                na              17.2              21.0              17.6              29.4
Hogs..........................................................                na              34.2              62.5              76.2              68.1
Poultry and eggs..............................................              88.7              83.8              92.3              94.2              89.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
na = Data not available for commodity detail.
Source: USDA, Economic Resource Service using data from USDA's Agricultural Resource Management Survey, 1996-2008 (all versions); and USDA's Farm Costs
  and Returns Survey, 1991-93.

    In general, contracts are used more widely in pork and poultry 
production compared to cattle production. For example, in 2008 
contracts covered 29 percent of cattle production. In comparison, 
contracts covered about 90 percent of poultry production and about 68 
percent of hog production. While both hog and poultry operations use 
contracts extensively, there are important distinctions between the two 
industries. As discussed by MacDonald and Korb \9\ (2011), hog contract 
enterprises are usually part of larger, diversified farming businesses, 
with the hog segment providing a relatively small share of the farm 
income. The farmers typically have a range of alternative outlets for 
contract hog production, and farm diversification provides a range of 
alternative uses for their own time. Farm households that engage in 
contract hog production have relatively high incomes compared with 
other households--both farm and nonfarm.
---------------------------------------------------------------------------

    \9\ MacDonald, James M. and Penni Korb, USDA Economic Research 
Service. ``Agricultural Contracting Update: Contracts in 2008.'' 
Info. Bulletin No. 72, Feb. 2011.
---------------------------------------------------------------------------

    In contrast, contract broiler enterprises are likely to be part of 
smaller and less diversified farm businesses, and many broiler 
operations have only a single live poultry dealer in their area. As a 
result, their farm businesses are much more dependent on contract 
production, and their income from contract production is much more 
dependent on a single live poultry dealer. Operators of broiler farms 
have lower household incomes, on average, than operators of hog farms, 
and they depend far more on off-farm employment and income.
    GIPSA maintains data on cattle, hogs, and sheep (collectively 
referred to as `livestock') slaughterers and live poultry dealers from 
the annual reports these firms file with GIPSA. Currently, there are 
140 live poultry dealers (all but 16 are also poultry slaughterers and 
would be considered poultry integrators) that would be subject to the 
final rule. The Census of Agriculture (Census) indicates there are 727 
swine contractors. An important factor in determining the economic 
effect of the regulations is the number of contracts held by a firm. 
Poultry/swine growers enter into a contract with one live poultry 
dealer/swine contractor, whereas a live poultry dealer/swine contractor 
may have a number of contracts with many growers. GIPSA records for 
2007 indicated there were 20,637 poultry growing arrangements 
(contracts) of which 13,216, or 64 percent, were held by the largest 6 
live poultry dealers, and 95 percent (19,605) were held by the largest 
21 live poultry dealers. By comparison, there were 8,995 contract swine 
producers. Although there is a significant amount of concentration in 
the poultry and livestock industries (Table 3), the literature has 
typically not shown that buyers are able to exercise significant 
amounts of market power against sellers nationally. As shown in Table 
3, the concentration of the four largest hog slaughterers rose from 34 
percent in 1980 to a high of 64 percent in 2003 and has remained 
relatively stable since then.

             Table 3--Four-Firm Concentration in Selected Livestock and Poultry Slaughter, 1980-2009
----------------------------------------------------------------------------------------------------------------
                                                       Percent of slaughter from four largest firms
                                         -----------------------------------------------------------------------
                  Year                       Steers and
                                               heifers            Hogs            Broilers           Turkeys
----------------------------------------------------------------------------------------------------------------
1980....................................                36                34  ................  ................
1995....................................                81                46  ................  ................
2000....................................                81                56  ................  ................
20