Poultry Grower Ranking Systems, 92723-92740 [2016-30429]
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Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Proposed Rules
(5) Requiring unreasonable additional
capital investments from a poultry
grower or swine production contract
grower after applying the criteria in
§ 201.216;
(6) Failing to provide a reasonable
period of time to remedy a breach of
contract before termination of the
contract after applying the criteria in
§ 201.217;
(7) Failing to provide a meaningful
opportunity to participate fully in the
arbitration process after applying the
criteria in § 201.218;
(8) Failing to ensure accurate scales
and weighing of livestock, livestock
carcasses, live poultry, or feed for the
purposes of purchase, sale, acquisition,
payment, or settlement as required by
the regulations under the Act; or
(9) Failing to ensure the accuracy of
livestock, meat, and poultry electronic
evaluation systems and devices for the
purposes of purchase, sale, acquisition,
payment, or settlement as required by
the regulations under the Act.
(c) Conduct or action that harms
competition. Absent demonstration of a
legitimate business justification, any
conduct or action that harms or is likely
to harm competition is an ‘‘unfair,’’
‘‘unjustly discriminatory,’’ or
‘‘deceptive’’ practice or device and a
violation of section 202(a) of the Act.
■ 3. Section 201.211 is added to read as
follows:
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§ 201.211 Undue or unreasonable
preferences or advantages.
The Secretary will consider the
following criteria when determining
whether a packer, swine contractor, or
live poultry dealer has engaged in
conduct or action that constitutes an
undue or unreasonable preference or
advantage and a violation of section
202(b) of the Act. These criteria include,
but are not limited to:
(a) Whether a packer, swine
contractor, or live poultry dealer treats
one or more livestock producers, swine
production contract growers, or poultry
growers more favorably as compared to
one or more similarly situated livestock
producers, swine production contract
growers, or poultry growers who have
engaged in lawful communication,
association, or assertion of their rights;
(b) Whether a packer, swine
contractor, or live poultry dealer treats
one or more livestock producers, swine
production contract growers, or poultry
growers more favorably as compared to
one or more similarly situated livestock
producers, swine production contract
growers, or poultry growers who the
packer, swine contractor, or live poultry
dealer contends have taken an action or
engaged in conduct that violates any
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applicable law, rule, or regulation
related to the livestock or poultry
operation without a reasonable basis to
determine that the livestock producer,
swine production contract grower, or
poultry grower committed the violation;
(c) Whether a packer, swine
contractor, or live poultry dealer treats
one or more livestock producers, swine
production contract growers, or poultry
growers more favorably as compared to
one or more similarly situated livestock
producers, swine production contract
growers, or poultry growers for an
arbitrary reason unrelated to the
livestock or poultry operation;
(d) Whether a packer, swine
contractor, or live poultry dealer treats
one or more livestock producers, swine
production contract growers, or poultry
growers more favorably as compared to
one or more similarly situated livestock
producers, swine production contract
growers, or poultry growers on the basis
of race, color, national origin, sex,
religion, age, disability, political beliefs,
sexual orientation, or marital or family
status;
(e) Whether the packer, swine
contractor, or live poultry dealer has
demonstrated a legitimate business
justification for conduct or action that
may otherwise constitute an undue or
unreasonable preference or advantage;
and
(f) Whether the conduct or action by
a packer, swine contractor, or live
poultry dealer harms or is likely to harm
competition.
Larry Mitchell,
Administrator, Grain Inspection, Packers and
Stockyards Administration.
[FR Doc. 2016–30430 Filed 12–19–16; 8:45 am]
BILLING CODE 3410–KD–P
DEPARTMENT OF AGRICULTURE
Grain Inspection, Packers and
Stockyards Administration
9 CFR Part 201
RIN 0580–AB26
Poultry Grower Ranking Systems
Grain Inspection, Packers and
Stockyards Administration, USDA.
ACTION: Proposed rule.
AGENCY:
The Department of
Agriculture’s (USDA) Grain Inspection,
Packers and Stockyards Administration
(GIPSA), Packers and Stockyards
Program (P&SP) is proposing to amend
the regulations issued under the Packers
and Stockyards Act, 1921, as amended
and supplemented (P&S Act). The
SUMMARY:
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proposed amendments will identify
criteria that the Secretary may consider
when determining whether a live
poultry dealer’s use of a poultry grower
ranking system for ranking poultry
growers for settlement purposes is
unfair, unjustly discriminatory, or
deceptive or gives an undue or
unreasonable preference, advantage,
prejudice, or disadvantage. The
proposed amendments will also clarify
that absent demonstration of a
legitimate business justification, failing
to use a poultry grower ranking system
in a fair manner after applying the
identified criteria is unfair, unjustly
discriminatory, or deceptive and a
violation of section 202(a) of the P&S
Act regardless of whether it harms or is
likely to harm competition.
We will consider comments we
receive by February 21, 2017.
DATES:
We invite you to submit
comments on this proposed rule. You
may submit comments by any of the
following methods:
• Mail: M. Irene Omade, GIPSA,
USDA, 1400 Independence Avenue
SW., Room 2542A–S, Washington, DC
20250–3613.
• Hand Delivery or Courier: M. Irene
Omade, GIPSA, USDA, 1400
Independence Avenue SW., Room
2542A–S, Washington, DC 20250–3613.
• Internet: https://
www.regulations.gov. Follow the on-line
instructions for submitting comments.
Instructions: All comments should
make reference to the date and page
number of this issue of the Federal
Register. Regulatory analyses and other
documents relating to this rulemaking
will be available for public inspection in
Room 2542A–S, 1400 Independence
Avenue SW., Washington, DC 20250–
3613 during regular business hours. All
comments received will be included in
the public docket without change,
including any personal information
provided. All comments will be
available for public inspection in the
above office during regular business
hours (7 CFR 1.27(b)). Please call the
Management and Budget Services staff
of GIPSA at (202) 720–8479 to arrange
a public inspection of comments or
other documents related to this
rulemaking.
ADDRESSES:
S.
Brett Offutt, Director, Litigation and
Economic Analysis Division, P&SP,
GIPSA, 1400 Independence Ave. SW.,
Washington, DC 20250–3601, (202) 720–
7051, s.brett.offutt@usda.gov.
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
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Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Proposed Rules
Background on Prior Rulemaking
GIPSA previously published a notice
of proposed rulemaking on June 22,
2010, which included requirements
regarding a live poultry dealer’s use of
a poultry grower ranking system when
determining payment for grower
services. That proposed rule would have
required live poultry dealers paying
growers on a tournament system to pay
growers raising the same type and kind
of poultry the same base pay and further
required that growers be settled in
groups with other growers with like
house types. Upon review of public
comments received both in writing and
through public meetings held during the
comment period in 2010, we have
elected not to publish this rule as a final
rule, but rather have modified proposed
§ 201.214 and are publishing it as a
proposed rule and requesting further
public comment.
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Background on Current Rulemaking
The P&S Act (7 U.S.C. 181 et seq.) sets
forth broad prohibitions on the conduct
of entities operating subject to its
jurisdiction. For example, section 202(a)
of the P&S Act prohibits packers, swine
contractors, and live poultry dealers
from engaging in any unfair, unjustly
discriminatory, or deceptive practices. 7
U.S.C. 192(a). Section 202(b) of the P&S
Act prohibits packers, swine
contractors, and live poultry dealers
from making or giving any undue or
unreasonable preference or advantage to
any particular person, or subjecting any
particular person to any undue or
unreasonable prejudice or disadvantage.
7 U.S.C. 192(b). These broad provisions,
which have not previously been
interpreted in regulations, make
enforcement difficult and create
uncertainty among industry participants
regarding compliance.
GIPSA is proposing these regulations
to clarify when certain conduct in the
poultry industry related to poultry
grower ranking systems violates sections
202(a) or 202(b) of the P&S Act. A
poultry grower ranking system,
sometimes called a ‘‘tournament,’’ is the
process used by live poultry dealers to
determine final payment to poultry
growers upon settlement of each flock.
Under a poultry grower ranking system,
growers whose flocks are slaughtered
during the same settlement week are
paid according to a structure that
compares growers’ feed efficiency and
live weight of the grown birds delivered
to the plant. Growers with better
performance according to a live poultry
dealer’s standards are ranked higher
than growers with lower performance
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and, therefore, receive more
compensation.
Poultry grower ranking systems are
widely used by live poultry dealers
operating as vertically integrated
companies. The vertically integrated
company is responsible for every step of
the poultry production process except
the raising and caring of the live birds
meant for slaughter. Independent
farmers, acting as contractors and
referred to as ‘‘poultry growers,’’
perform this function. The vertically
integrated live poultry dealer provides
the chicks,1 feed, and medication to
poultry growers who house and feed the
birds under a contract. The poultry
grower grows the birds to market size
(preferred weight for slaughter) and
then, after slaughter, receives a
settlement check for that flock. The
payment received depends on how
efficiently the poultry grower converted
feed to meat as compared to the other
poultry growers in the settlement group.
GIPSA has received complaints from
poultry growers alleging unfair
treatment in poultry grower ranking
systems. Many of the underlying factors
in these complaints were shared with
GIPSA in the comments to the 2010
proposed rule. The 2010 proposed rule
(§ 201.214) would have required live
poultry dealers paying growers on a
tournament system to pay growers
raising the same type and kind of
poultry the same base pay and further
required that growers be settled in
groups with other growers with like
house types. Comments in favor of the
proposed rule most often cited the
imbalance in power and control
between the poultry companies and the
growers. Most common among the
reasons for supporting the proposed rule
was the control the poultry company
has over inputs. Growers have no
control over numerous inputs that
ultimately determine pay. In particular,
the poultry companies control the
following inputs and production
variables: Chick health, number of
chicks placed, feed quality,
medications, growout time, breed and
type of bird, weighing of the birds, and
weighing of the feed. Commenters
complained that the poultry grower
ranking system is a poor indicator of the
grower’s abilities and performance in
growing chickens. One commenter
pointed out that bird age can vary as
much as 9 days in a group. Due to the
relatively short growing period for
1 Poultry grower ranking systems are used
extensively in broiler production. The ranking
systems are also used in turkey production.
References in this document to chicks, chickens, or
broilers are also relevant to the use of grower
ranking systems in turkey production.
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poultry, there can be significant
differences in bird size, and as a result,
grower pay, in birds just a few days
apart in age. Comments also expressed
concern that company employees who
are also poultry growers get preferential
treatment and may get better birds or get
to keep flocks longer.
Comments opposed to the proposed
rule overwhelmingly cited the loss of
the incentive for growers to perform. For
example, commenters complained that
‘‘there will be no incentive available for
above-average growers,’’ ‘‘the pay
system rewards the ones who strive to
do best,’’ it ‘‘will take money from the
most progressive growers,’’ and ‘‘is
grossly unfair to the most productive
and successful growers, only benefits
the least productive and least
successful.’’ Those opposed to the
proposed rule commented that everyone
should not be paid the same, that
competition is good for the industry,
and that those that spend money and
expend effort should be rewarded. Some
commenters stated there will not be
enough like houses to group together for
ranking purposes.
A few commenters offered
recommendations. Specifically, they
suggested ‘‘same type and kind’’ of
poultry should be defined as same
breed, age range, sex, and target weight.
Also, they suggested that the base pay
rate should reflect grower’s cost of
production plus a reasonable rate of
return. Other commenters suggested that
GIPSA should clarify that incentive pay
would still be allowed under the
proposed rule. In GIPSA’s experience
reviewing live poultry dealer records,
some poultry companies use the base
pay as the minimum pay rate, so
implementing the provision regarding
base pay would not be difficult. Several
comments said that ‘‘like house type’’
was poorly defined. Depending on the
interpretation, there could be many
different categories of like house types
in which case, there could be very few
growers in a given settlement group.
Commenters critical of the poultry
grower ranking system focused on the
live poultry dealer’s control over the
inputs. Inputs and other factors
influencing performance and pay are
not equal among growers. Commenters
noted that variations in chicks, feed,
and medications have a significant
influence on the poultry grower’s
performance, but the grower has no
control or influence over the quality of
those inputs. As an example, one
comment stated that male chickens have
higher average weight gain than female
chickens. Therefore, if one grower gets
a higher percentage of male chickens
than other growers, that grower could
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Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Proposed Rules
have an advantage in the ranking system
over growers who receive all or a higher
percentage of female chickens. The
breed of the poultry is also a factor.
Growers who receive a breed that does
not perform as well, due to the
characteristics of that breed, are
disadvantaged compared to growers
who receive a better-performing breed.
Another factor noted by commenters
was the age of the breeder flock and that
chicks from breeder hens that are very
young or very old are known to be
inferior to chicks from hens that are of
prime egg-laying age. Commenters
stated that poultry growers who get all
or a higher percentage of chicks from
very old or very young breeder hens are
at a disadvantage compared to growers
who receive chicks from hens in the
prime weeks of laying good eggs. Citing
these examples, commenters pointed
out the ways live poultry dealers could
give preferential treatment to some
growers by delivering superior chicks to
their farms.
Other comments focused on the
quantity and quality of feed. One
poultry grower commented about the
effect on rankings when the live poultry
dealer assumes that the grower receives
more feed than the live poultry dealer
actually delivered. The grower
explained that a 200 pound underdelivery of feed in a system where
production costs are averaged to tenthousandths of a cent, would affect the
rankings and cause the grower to be
paid less than other growers in the
settlement group. Another grower
commented that he had received a
delivery of bad feed that made the
chickens sick. Although the live poultry
dealer replaced the bad or spoiled feed,
the damage had been done and the
grower’s flock ranked at the bottom of
the poultry grower ranking for that
settlement group. These commenters
were expressing their frustration with
the poultry grower ranking system that
relied on inputs over which they had no
control.
Recognizing that not all inputs are the
same, in proposed new § 201.214,
GIPSA is not proposing that all poultry
growers receive the same quality inputs,
or that growers only be ranked in
settlement groups where all growers
receive the same quality inputs. In each
settlement group, it is very likely that
the live poultry dealer will place chicks
on some farms that are inferior to other
chicks simply due to the variation in the
birds. Likewise, feed quality or the
delivery quantity may vary.
Unlike the proposed rule published in
2010 regarding poultry grower ranking
systems, this proposed rule would not
prohibit or prescribe certain conduct,
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nor would it prescribe specific payment
to be made to growers. Instead, after
consideration of the comments received,
we are proposing a rule that encourages
better sharing of information with
growers and fairness in areas under a
live poultry dealer’s control. Proposed
new § 201.214 sets forth criteria that the
Secretary may consider to determine
whether live poultry dealers have used
the poultry grower ranking system in a
manner that violates sections 202(a) or
(b) of the P&S Act.
Proposed new § 201.214, ‘‘Poultry
Grower Ranking Systems’’ would
establish a non-exhaustive list of criteria
the Secretary may consider when
determining whether a live poultry
dealer has violated the P&S Act with
respect to the use of a poultry grower
ranking system. Under proposed
§ 201.214(a), the Secretary may consider
whether the grower is provided enough
information to make informed decisions
regarding the grower’s poultry
production operation. Such information
would include the anticipated number
of flocks per year and the average gross
income from each flock. Because most
growers borrow substantial sums of
money to build and upgrade houses to
meet the live poultry dealer’s
specifications, a grower would want a
contract of sufficient length and with
sufficient poultry production to repay
the loan. For that reason, it is important
for the poultry grower to know the
anticipated average gross income from
each flock in order to plan accordingly
for future earnings and investments.
Live poultry dealers should disclose
information necessary to enable the
grower to make informed decisions.
Under proposed § 201.214(b), the
Secretary may consider whether a live
poultry dealer supplies inputs (e.g.,
birds, feed, and medication) of
comparable quality and quantity to all
poultry growers in the ranking group.
When considering the inputs provided
by the live poultry dealer to the poultry
grower and the growout specifications
established for the poultry grower,
GIPSA does not require uniformity, but
rather fairness among the growers in a
settlement group. Growers are not paid
based solely on their individual
performance, but as compared to other
growers in a settlement group. When a
grower received inputs of either
superior or inferior quality as compared
to the inputs provided to other growers,
that grower may be at either an
advantage or disadvantage when flocks
are settled depending on the quality of
the inputs received. Under proposed
§ 201.214(b), the Secretary may also
consider whether there is a pattern of
supplying inferior inputs (e.g., birds,
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feed, and medication) to one or more
poultry growers in the ranking group.
With regards to supplying inferior birds,
as discussed above, lower quality chicks
may result from very young or very old
breeder hens, from a poultry breed that
does not perform as well as other breeds
in the growout, or for other reasons. If
a poultry grower consistently receives
lower quality or inferior chicks, the
grower will experience higher mortality
rates and lower efficiency. The grower
will rank lower in the settlement group
and receive less compensation as
compared to the other growers in the
settlement group. Similarly, if a poultry
grower receives lower quality feed, or if
the grower receives less feed than the
quantity used to calculate payment, the
grower’s performance will suffer as
compared to other growers in the
settlement group. Also, if a grower’s
flock needs medication, but the live
poultry dealer fails to provide the
medication, or if one flock is placed on
a different treatment schedule, the flock
performance may suffer as compared to
other flocks in the settlement group.
Under proposed § 201.214(c), the
Secretary may consider additional
company-controlled factors that could
affect a grower’s performance in a
settlement group.
Proposed § 201.214(d) provides that
the Secretary may consider whether the
live poultry dealer has demonstrated a
legitimate business justification for
conduct that may otherwise be unfair,
unjustly discriminatory, or deceptive, or
that gives an undue or unreasonable
preference or advantage to any poultry
grower or subjects any poultry grower to
an undue or unreasonable prejudice or
disadvantage. A legitimate business
justification for certain conduct may be
sufficient to find that the conduct does
not violate the P&S Act. We request
comment on the types of conduct that
might be considered for a legitimate
business justification, in order to give
further context to this provision in the
final rule.
Concurrent with the publication of
this proposed rule, GIPSA is also
proposing another rule in this issue of
the Federal Register that, among other
things, would clarify the conduct or
action by packers, swine contractors, or
live poultry dealers that GIPSA
considers unfair, unjustly
discriminatory, or deceptive and a
violation of section 202(a) of the P&S
Act. Specifically, this proposed rule
includes § 201.210, ‘‘Unfair, unjustly
discriminatory, or deceptive practices or
devices by packers, swine contractors,
or live poultry dealers,’’ which includes
in paragraph (b) a non-exhaustive list of
conduct or action that, absent
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demonstration of a legitimate business
justification, GIPSA believes is unfair,
unjustly discriminatory, or deceptive
and a violation of section 202(a) of the
P&S Act, regardless of whether the
conduct harms or is likely to harm
competition. Currently, proposed
§ 201.210(b) contains nine examples. In
this rule, GIPSA is proposing to add to
proposed § 201.210(b) a tenth example,
§ 201.210(b)(10) GIPSA also considers a
live poultry dealer’s failure to use a
poultry grower ranking system in a fair
manner after applying the criteria in
§ 201.214 to be an unfair, unjustly
discriminatory, or deceptive practice or
device and a violation of section 202(a)
of the P&S Act regardless of whether it
harms or is likely to harm competition.
IV. Required Impact Analyses
Executive Order 12866 and Regulatory
Flexibility Act
This rulemaking 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. As a required
part of the regulatory process, GIPSA
prepared an economic analysis of
proposed § 201.214. The first section of
the analysis is an introduction and
discussion of the prevalence of
contracting in the poultry industry as
well as a discussion of potential market
failures. Next, GIPSA discusses three
regulatory alternatives it considered and
presents a summary cost-benefit
analysis of each alternative. GIPSA then
discusses the impact on small
businesses.
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Introduction
GIPSA issued a proposed rule on June
22, 2010, which included § 201.214.
GIPSA has revised the 2010 version of
§ 201.214 and is now proposing a new
§ 201.214. The rule GIPSA proposed on
June 22, 2010, included several
requirements regarding live poultry
dealers’ use of tournament systems.
That section of the proposed rule would
have required live poultry dealers
paying growers on a tournament system
to pay growers raising the same type
and kind of poultry the same base
compensation and further required that
growers be settled in groups with other
growers with like house types. The rule
also prohibited live poultry dealers from
offering poultry growing arrangements
containing provisions that decrease or
reduce grower compensation below the
base compensation amount.
Upon review of public comments
received both in writing and through
public meetings held during the
comment period in 2010, GIPSA elected
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not to publish this rule as a final rule
and has removed the requirements and
prohibitions in the rule proposed on
June 22, 2010.
GIPSA has re-written § 201.214 and is
proposing this regulation to establish
criteria the Secretary may consider in
determining whether a live poultry
dealer has used a poultry grower
ranking system to compensate poultry
growers in an unfair, unjustly
discriminatory, or deceptive manner, or
in a way that gives an undue or
unreasonable preference or advantage to
any poultry grower or subjects any
poultry grower to an undue or
unreasonable prejudice or
disadvantage.2 Coupled with § 201.3(a),
which is being published as an interim
final rule concurrently in this edition of
the Federal Register and proposed
§ 201.210(b)(10), which is discussed
below, the criteria clarify whether a live
poultry dealer’s use of a poultry grower
ranking system violates sections 202(a)
and/or 202(b) of the P&S Act.
Interim Final § 201.3(a) states that
certain conduct or action can be found
to violate sections 202(a) and/or 202(b)
of the P&S Act without a finding of
harm or likely harm to competition in
all cases. Proposed § 201.210(b)(10)
would add to proposed § 201.210(b),
which is published as part of a separate
proposed rule in this edition of the
Federal Register, another example of
conduct or action by a live poultry
dealer that absent demonstration of a
legitimate business justification, GIPSA
considers an unfair, unjustly
discriminatory, or deceptive practice or
device and a violation of section 202(a)
of the P&S Act regardless of whether the
conduct or action harms or is likely to
harm competition. Specifically,
proposed § 201.210(b)(10) would clarify
that absent demonstration of a
legitimate business justification, GIPSA
considers the failure to use a poultry
grower ranking system in a fair manner
after applying the criteria in proposed
§ 201.214 to be an unfair, unjustly
discriminatory, or deceptive practice or
device and a violation of section 202(a)
of the P&S Act regardless of whether it
harms or is likely to harm competition.
Since § 201.210(b)(10) relies on the
criteria in § 201.214, the estimated costs
and benefits of § 201.210(b)(10) are
included in the estimated costs and
benefits of § 201.214.
The criteria in proposed § 201.214
would include whether a live poultry
dealer has provided sufficient
information to enable a poultry grower
to make informed business decisions.
2 A tournament system is a type of poultry grower
ranking system.
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The criteria would also address whether
the inputs, including birds, feed, and
medication, provided by live poultry
dealers to poultry growers are of
consistent quality and quantity. The
criteria would recognize the nonuniformity of inputs provided by live
poultry dealers to growers and
discourage the live poultry dealer from
consistently providing superior or
inferior inputs to growers in a manner
that consistently affects grower
compensation. The criteria also would
consider whether live poultry dealers
have provided poultry growers with
dissimilar production variables such as
the density at which the live poultry
dealer places birds, target bird sizes, and
age of birds at slaughter that affects the
performance and grower ranking.
Finally, the criteria would consider
whether a live poultry dealer has
demonstrated a legitimate business
justification for conduct that may
otherwise be unfair, unjustly
discriminatory, or deceptive or gives an
undue or unreasonable preference or
advantage to any poultry grower or
subjects any poultry grower to an undue
or unreasonable prejudice or
disadvantage.
Prevalence of Poultry Contracts and
Poultry Grower Ranking Systems
The production of poultry is highly
vertically integrated with live poultry
dealers owning or controlling most
segments of the value chain. Live
poultry dealers typically own the
breeding stock, the hatcheries, the
feedmills, the live birds, and they own
and operate the slaughter operations.
Live poultry dealers typically contract
out the growing operations for their live
birds to independent poultry growers.
Live poultry dealers who own or control
most segments of the value chain and
contract out the growing operations of
live birds are commonly referred to as
integrators.3
Broilers are almost exclusively grown
under production contracts. In 2012,
96.4% of broilers were grown under
contract, while 68.5% of turkeys were
grown under production contracts.
Under a production contract, the live
poultry dealer provides the poultry
grower with many inputs including the
live chicks, feed, and medications. The
poultry grower in turn provides the
housing, labor, water, electricity, fuel,
3 For the purposes of this Regulatory Impact
Analysis, the terms live poultry dealer and
integrator are used interchangeably. P&SP has
jurisdiction over live poultry dealers, most of which
are also integrators. The only time the Regulatory
Impact Analysis will refer to integrators is when
another author uses the term integrator as in Table
2.
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and provides for waste removal. At the
end of the grow-out period, the live
poultry dealer typically picks up the
birds for slaughter. The payment to the
poultry grower for the growing services
is often determined by a poultry grower
ranking system outlined in the
production contract.
Under a typical poultry grower
ranking system, all growers who grew
birds that were shipped to the same
plant in the same week are grouped
together for payment purposes. Their
cost per pound of live weight is
averaged using standard costs for chicks
and feed. Live poultry dealers then rank
the growers based on cost. Live poultry
dealers typically reward growers with
lower costs by providing higher
compensation for their growing services.
Live poultry dealers typically provide
92727
less compensation to growers with
higher costs.
Contracting is an important and
prevalent feature in the production of
poultry. The following table shows the
share of poultry, by type, produced
under contract over the years that the
Census of Agriculture has published
data on commodities raised and
delivered under production contracts.
TABLE 1—PERCENTAGE OF POULTRY RAISED AND DELIVERED UNDER PRODUCTION CONTRACTS 4
Poultry
2002
Broilers (%) ..................................................................................................................................
Turkeys (%) .................................................................................................................................
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Benefits of Contracting in Agricultural
Production and the Poultry Industry
Agricultural production contracts
have many benefits. They help farmers
and livestock producers manage price
and production risks, elicit the
production of products with specific
quality attributes by tying prices to
those attributes, and facilitate the
smooth flow of commodities to
processing plants encouraging more
efficient use of farm and processing
capacities. Agricultural production
contracts can also lead to improvements
in efficiency throughout the supply
chain for products by providing farmers
with incentives to deliver products
consumers desire and produce products
in ways that reduce processing costs
and, ultimately, retail prices. Poultry
production contracts are a specific type
of agricultural production contract that
are widely used due to the benefits of
growing poultry under production
contract arrangements.
There are benefits to both live poultry
dealers and poultry growers from
entering into agricultural production
contracts, referred to as contract poultry
growing arrangements 5 in the poultry
industry. Contract poultry growing
arrangements allow for a sharing of risk
between the live poultry dealer and the
poultry grower. Contract poultry
growing arrangements have provided
poultry growers with predictable
income and access to financing to invest
in more efficient types of houses. More
efficient housing may lead to higher
compensation under poultry grower
ranking systems. Contract poultry
growing arrangements have benefited
live poultry dealers by shifting the
capital expenses of growing poultry to
the poultry growers.
The pervasive use of contract poultry
growing arrangements has benefited the
poultry industry and consumers by
increasing the rate of adoption of new
technology, increasing feed conversion,
and increasing the ability of the
industry to respond to changes in
consumer demand.6 The prevalence of
contract poultry growing arrangements
in the poultry industry is evidence of
the benefits to growers, live poultry
dealers, and consumers.
4 Agricultural Census, 2007 and 2012. https://
www.agcensus.usda.gov/Publications/2012/Full_
Report/Volume_1,_Chapter_1_US/ and https://
www.agcensus.usda.gov/Publications/2007/Full_
Report/Volume_1,_Chapter_1_US/.
5 Under section 2(a)(9) of the P&S Act, a ‘‘poultry
growing arrangement’’ is defined as ‘‘any growout
contract, marketing agreement, or other
arrangement under which a poultry grower raises
and cares for live poultry for delivery, in accord
with another’s instructions, for slaughter.’’
6 Vukina, Tomislav, ‘‘Vertical Integration and
Contracting in the U.S. Poultry Sector,’’ Journal of
Food Distribution Research, July 2001.
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Structural Issues in the Poultry Industry
As the above discussion highlights,
there are important benefits associated
with the use of agriculture contracts in
the poultry industry. However, if there
are large disparities in the bargaining
power among contracting parties
resulting from size differences between
contracting parties or the use of market
power by one of the contracting parties,
the contracts may have detrimental
effects on one of the contracting parties
and may result in inefficiencies in the
marketplace.
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For example, a contract that ties a
grower to a single purchaser of a
specialized commodity, even if the
contract provides for fair compensation
to the grower, still leaves the grower
subject to default risks should the
contractor fail. Another example is a
contract that covers a shorter term than
the life of the capital (a poultry house,
for example). The grower may face the
hold-up risk that the contractor (live
poultry dealer) may require additional
capital investments or may impose
lower returns at the time of contract
renewal. Hold-up risk is a potential
market failure and is discussed in detail
in the next section. These risks may be
heightened when there are no
alternative buyers for the grower to
switch to, or when the capital
investment is specific to the original
buyer.7 Some growers make substantial
long-term capital investments as part of
poultry production contracts, including
land, poultry houses, and equipment.
Those investments may tie the grower to
a single integrator. Costs associated with
default risks and hold-up risks are
important to many growers in the
industry. The table below shows the
number of integrators that broiler
growers have in their local areas by
percent of total farms and by total
production.
7 See Vukina and Leegomonchai, Oligopsony
Power, Asset Specificity, and Hold-Up: Evidence
From The Broiler Industry, American Journal of
Agricultural Economics, 88(3): 589–605 (August
2006).
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TABLE 4—INTEGRATOR CHOICE FOR BROILER GROWERS 8
Integrators in grower’s area 9
Farms
Birds
Number
Percent of total
1 .......................................................................................................................
2 .......................................................................................................................
3 .......................................................................................................................
4 .......................................................................................................................
>4 .....................................................................................................................
No Response ...................................................................................................
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The data in the table show that 52
percent of broiler growers, accounting
for 56 percent of total production, report
having only one or two integrators in
their local areas. This limited integrator
choice may accentuate the contract
risks. A 2006 survey indicated that
growers facing a single integrator
received 7 to 8 percent less
compensation, on average, than farmers
located in areas with 4 or more
integrators.10 If live poultry dealers
already possess some market power to
force down prices for poultry growing
services, some contracts can extend that
power by raising the costs of entry for
new competitors, or allowing for price
discrimination.11
Many poultry processing markets face
barriers to entry, including: (1)
Economies of scale; (2) high assetspecific capital costs with few
alternative uses of the capital; (3) brand
loyalty of consumers, customer loyalty
to the incumbent processors, and high
customer switching costs; and (4)
governmental food safety, bio-hazard,
and environmental regulations.
Consistent with these barriers, there has
been limited new entry.
However, an area where entry has
been successful is in developing and
niche markets, such as organic meat and
free-range chicken. Developing and
8 MacDonald, James M. Technology,
Organization, and Financial Performance in U.S.
Broiler Production. USDA, Economic Research
Service, June 2014.
9 Percentages were determined from the USDA
Agricultural Resource Management Survey (ARMS),
2011. ‘‘Respondents were asked the number of
integrators in their area. They were also asked if
they could change to another integrator if they
stopped raising broilers for their current integrator.’’
Ibid. p. 30.
10 MacDonald, J. and N. Key. ‘‘Market Power in
Poultry Production Contracting? Evidence from a
Farm Survey.’’ Journal of Agricultural and Applied
Economics. 44(4) (November 2012): 477–490.
11 See, for example, Williamson, Oliver E.
Markets and Hierarchies: Analysis and Antitrust
Implications, New York: The Free Press (1975);
Edlin, Aaron S. & Stefan Reichelstein (1996)
‘‘Holdups, Standard Breach Remedies, and Optimal
Investment,’’ The American Economic Review
86(3): 478–501 (June 1996).
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Production
21.7
30.2
20.4
16.1
7.8
3.8
23.4
31.9
20.4
14.9
6.7
2.7
niche markets have a relatively small
consumer market that is willing to pay
higher prices, which supports smaller
plant sizes. Niche processors are
generally small, however, and do not
offer opportunities to many producers
or growers.
Economies of scale have resulted in
large processing plants in the poultry
processing industry. Barriers to entry
limit the expansion of choice for poultry
growers who have only one or two
integrators in their local areas with no
potential entrants on the horizon. The
limited expansion of choice of
processors by poultry growers may limit
contract choices and the bargaining
power of growers in negotiating
contracts.
One indication of potential market
power is industry concentration.12 The
following table shows the level of
concentration in the poultry
slaughtering industry for 2007–2015.
TABLE 5—FOUR-FIRM CONCENTRATION
IN POULTRY SLAUGHTER 13
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
Broilers
(%)
..........
..........
..........
..........
..........
..........
..........
..........
..........
Turkeys
(%)
57
57
53
51
52
51
54
51
51
52
51
58
56
55
53
53
58
57
The table above shows the
concentration of the four largest broiler
and turkey processors has remained
relatively steady at between 50 and 60
percent.
The data in Table 5 are estimates of
national concentration and the size
12 For additional discussion see MacDonald, J.M.
2016 ‘‘Concentration, contracting, and competition
policy in U.S. agribusiness,’’ Competition Law
Review, No. 1–2016: 3–8.
13 These data were compiled from Packers and
Stockyards industry annual reports, a proprietary
data source.
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Can change
to another
integrator
Percent of
farms
24.5
31.7
19.7
14.8
6.6
2.7
7
52
62
71
77
Na
differences discussed below are also at
the national level, but the economic
markets for poultry may be regional or
local, and concentration in regional or
local areas may be higher than national
measures.14 The data presented earlier
in Table 4 highlight this issue by
showing the limited ability a poultry
grower has to switch to a different
integrator. As a result, national
concentration may not demonstrate
accurately the options poultry growers
in a particular region actually face.
Another factor GIPSA considered in
proposing § 201.214 is the contrast in
size and scale between poultry growers
and the live poultry dealers they supply.
The disparity in size between large
oligopsonistic buyers and atomistic
sellers may lead to market power. The
National Chicken Council states that in
2016, approximately 35 companies were
involved in the business of raising,
processing, and marketing chicken on a
vertically integrated basis, while about
25,000 family farmers had production
contracts with those companies.15 That
comes to about 714 family-growers per
company. Collectively, the familygrowers produced about 95 percent of
the nearly 9 billion broilers produced in
the United States in 2015. The other 5
percent were grown on company-owned
farms. That means the average familygrower produced about 342,000 broilers.
As Table 5 shows, the four largest
poultry companies in the United States
accounted for 51 percent of the broilers
processed. That means the average
volume processed by the four largest
poultry companies was about 1.15
billion head, which was 3,357 times the
average family grower’s volume.
As the above discussion highlights,
there are large size differences between
poultry growers and the live poultry
dealers which they supply. These size
differences may contribute to unequal
14 MacDonald and Key (2012) Op. Cit. and Vukina
and Leegomonchai (2006) Op. Cit.
15 https://www.nationalchickencouncil.org/aboutthe-industry/statistics/broiler-chicken-industry-keyfacts/.
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bargaining power due to monopsony
market power or oligopsony market
power, or asymmetric information. The
result is that the contracts bargained
between the parties may have
detrimental effects on poultry growers
due to the structural issues discussed
above and may result in inefficiencies in
the marketplace.
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Hold-Up as a Potential Market Failure
Integrators demand investment in
fixed assets from the growers. One
example is specific types of poultry
houses and equipment the integrator
may require the grower to utilize in
their growing operations. These
investments may improve efficiency by
more than the cost of installation.
Typically, the improved efficiency
would accrue to both the integrator and
the grower. The integrator has lower
feed costs, and the grower performs
better relative to other poultry growers
in a settlement group. If the grower
bears the entire cost of installation, then
the grower should be further
compensated for the feed conversion
gains that accrue to the integrator. The
risk is that after the assets are installed,
the cost to the grower is ‘‘sunk.’’ This
means that if the integrator reneges on
paying compensation for the additional
capital investments, and insists on
maintaining the lower price, the grower
will accept that lower price rather than
receive nothing. This allows the
integrator to get the benefit of efficiency
gains, at no expense to them, with the
grower bearing all of the cost. This
reneging is termed ‘‘hold-up’’ in the
economic literature.16
Hold-up can have two consequences
that result in market failures. If the
growers do not anticipate hold-up, then
growers will spend too much on
investments because the integrator who
demands them is not incurring any cost.
That is inefficient. If the grower does
anticipate hold-up, they will act as if the
integrator was going to renege even
when it was not, resulting in too little
investment and loss of potential
efficiency gains.
Hold-up can be resolved with
increased competition. If an integrator
developed a reputation for reneging, and
growers could go elsewhere, the initial
integrator would be punished and
disincentivized from reneging in the
future. Unfortunately, in practice, many
growers do not have the option of going
elsewhere.
16 See for example, Benjamin Klein, Robert G.
Crawford, and Armen A. Alchian, ‘‘Vertical
Integration, Appropriable Rents, and the
Competitive Contracting Process,’’ The Journal of
Law and Economics 21, no 2 (Oct., 1978): 297–326.
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Data shown above in Table 4 indicate
that there are few integrators in these
markets, and that growers have limited
choice. Table 5, above, indicates the
level of concentration in the poultry
processing industry and shows that
integrators operate in concentrated
markets.
This rule would allow growers to file
complaints against integrators that
renege, giving some of the incentive
benefit of competition, without
compromising the efficiency of having
few large processors. In addition to
addressing the potential market failure
of hold-up, this rule would address
inefficiencies due to incomplete and
asymmetric information in poultry
markets. Poultry growers who lack
adequate information on the expected
revenue from a growing arrangement
may make inefficient investment
decisions. For instance, a grower may
invest too much money in building new
houses or purchasing upgrades relative
to what they would choose if they were
fully informed about the expected
return from those investments. By
requiring that growers be provided
sufficient information to make informed
business decisions, this rule would help
mitigate non-optimal investment by
growers and improves social welfare.
Contracting, Industry Structure, and
Market Failure: Summary of the Need
for Regulation
There are benefits of contracting in
the poultry industry, as well as
structural issues that may result in
unequal bargaining power and market
failures. These structural issues and
market failures would be mitigated by
relieving plaintiffs from the requirement
to demonstrate competitive injury. For
instance, contracting parties can
alleviate hold-up problems if they are
able to write complete contracts, and are
able to litigate to enforce the terms of
those contracts when there is an attempt
to engage in ex-post hold-up. Because
proving competitive injury is difficult
and costly, removing that burden
facilitate the use of litigation by
producers and growers to address
violations of the Packers and Stockyards
Act. If growers are able to seek legal
remedies, then their contracts would be
easier to enforce. This will incentivize
integrators to avoid exploitation of
market power and asymmetric
information, as well as behaviors that
result in the market failure of hold-up.
The result will be improved efficiency
in poultry markets. GIPSA has a clear
role to ensure that market failures are
mitigated so that poultry markets
remain fair and competitive. Section
201.214 seeks to fulfill that role by
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92729
promoting fairness and equity for
poultry growers.
Cost-Benefit Analysis of the Proposed
Rule
Costs of the Regulations Proposed on
June 22, 2010
GIPSA issued a proposed rule on June
22, 2010, with several new regulations,
many of which had the potential to
impact the poultry industry. A brief
summary of the regulations proposed in
2010 follows.
• Proposed § 201.3(c) stated that
certain conduct may be found to violate
sections 202(a) and/or 202(b) of the P&S
Act without a finding of harm or likely
harm to competition.
• Proposed § 201.210 would have
provided specific examples of conduct
that violate section 202(a) regardless of
whether the conduct harms or is likely
to harm competition.
• Proposed § 201.211 would have
provided specific criteria the Secretary
may consider when determining
whether an undue or unreasonable
preference or advantage or an undue or
unreasonable prejudice or disadvantage
has occurred in violation of section
202(b) of the P&S Act.
• Proposed § 201.213 stated that live
poultry dealers obtaining poultry under
a poultry growing arrangement must
submit a sample copy of each unique
contract or agreement to GIPSA for
posting on its Web site.
• Proposed § 201.214 would have
required live poultry dealers paying
growers on a tournament system to pay
growers raising the same type and kind
of poultry the same base compensation
and further required that growers be
settled in groups with other growers
with like house types. Proposed
§ 201.214 also would have prohibited
live poultry dealers from offering
poultry growing arrangements
containing provisions that decrease or
reduce grower compensation below the
base compensation amount.
• Proposed § 201.215 would have
provided specific criteria the Secretary
may consider when determining
whether a poultry grower was provided
with reasonable notice prior to
suspension of the delivery of birds to a
poultry grower.
• Proposed § 201.216 would have set
forth specific criteria the Secretary may
consider when determining whether a
requirement that a poultry grower make
additional capital investments
constitutes an unfair practice in
violation of the P&S Act.
• Proposed § 201.217 would have set
forth the conditions under which a
poultry grower may be required to make
additional capital investments.
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• Proposed § 201.218 would have
provided specific criteria the Secretary
may consider in determining whether a
live poultry dealer has provided a
poultry grower a reasonable period of
time to remedy a breach of contract.
• Proposed § 201.219 would have
provided specific criteria the Secretary
may consider when determining
whether the arbitration process in a
contract provides a meaningful
opportunity for the poultry grower to
participate fully in the arbitration
process.
GIPSA considered thousands of
comments before proposing the current
version of § 201.214. The following
provisions were in the 2010 rule, but
not in the currently proposed
regulation.
• Requirement that live poultry
dealers paying poultry growers on a
tournament system pay poultry growers
raising the same type and kind of
poultry the same base compensation,
and that poultry growers be settled in
groups with other poultry growers with
like house types (§ 201.214).
• Prohibition on live poultry dealers
from offering growing arrangements
containing provisions that decrease or
reduce poultry grower compensation
below the base compensation amount
(§ 201.214(a)).
• Requirement that live poultry
dealers submit sample contracts to
GIPSA for posting to the public
(§ 201.213).
Additionally, GIPSA has adjusted the
rule proposed in 2010 to give live
poultry dealers more flexibility in
suspending the delivery of birds and
requiring capital improvements and
those adjustments are reflected in
current proposed §§ 201.215 and
201.216, respectively.
GIPSA is issuing § 201.3(a) as an
interim final rule concurrently in this
issue of the Federal Register. GIPSA has
also revised and is currently proposing
new versions of §§ 201.210 and 201.211
concurrently in a separate proposed rule
in this issue of the Federal Register. In
December 2011, GIPSA issued as a final
rule §§ 201.215, 201.216, 201.217, and
201.218. Proposed § 201.217, capital
investments requirements and
prohibitions, was removed, and
proposed §§ 201.218 and 201.219 were
renumbered as §§ 201.217 and 201.218.
GIPSA has now revised § 201.214 and
instead of proscribing certain conduct,
new proposed § 201.214 would establish
criteria the Secretary may consider in
determining whether a live poultry
dealer has used a poultry grower
ranking system to compensate poultry
growers in an unfair, unjustly
discriminatory, or deceptive manner, or
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in a way that gives an undue or
unreasonable preference or advantage to
any poultry grower or subjects any
poultry grower to an undue or
unreasonable prejudice or disadvantage.
GIPSA received numerous comments
on the proposed rule in 2010. Although
many thousands of the comments
submitted contained general qualitative
assessments of either the costs or
benefits of the proposed rule, only two
comments systematically described
quantitative costs across the rule’s
provisions.
Comments from the National Meat
Association included cost estimates by
Informa Economics (the Informa Study).
The Informa Study estimated that the
proposed rule would cost the U.S.
poultry industry approximately $361.6
million.17 The Informa Study estimated
$26.0 million for the one-time direct
costs of rewriting contracts, additional
record keeping, etc., $33.4 million for
the ongoing direct costs, and $302.2
million for cost increases due to
efficiency losses.18 However, these cost
estimates assumed all of the 2010
proposed changes, many of which now
do not apply.
The Informa Study recognized that
the economic costs of the 2010 proposed
rule would take time to materialize. The
Informa Study estimated that only the
direct, one-time costs would occur
shortly after implementation and the
more significant impacts, such as
declining efficiency, would happen
more slowly and would not reach the
full impact until years 3 and 4 in the
poultry industry after the rule become
effective.19 Thus, the $361.6 million
cost estimate by the Informa Study was
for when the rule reached its full impact
in years 3 and 4. The Informa Study
further recognized that companies
would find ways to adapt to the
provisions of the rule and the impact of
the rule would decrease after year 4.20
The Informa Study posited that the
several elements in the proposed rule
would likely alter the integrator-grower
relationship in such a way as to slow
down the adoption of new technologies
that increase efficiency and reduce
costs.21 The Informa Study also posited
that the proposed rule would
significantly increase the threat of
17 Informa Economics, Inc. ‘‘An Estimate of the
Economic Impact of GIPSA’s Proposed Rules,’’
prepared for the National Meat Association, 2010,
Table 9, Page 53.
18 Ibid. Page 53.
19 Informa Economics, Inc. ‘‘An Estimate of the
Economic Impact of GIPSA’s Proposed Rules,’’
prepared for the National Meat Association, 2010,
Page 66.
20 Ibid, Page 67.
21 Ibid. Page 37.
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litigation, which would reduce
monetary incentives to encourage
innovation and investment in new
technology by growers. The resulting
slowdown in investment in new and
upgraded buildings would negatively
impact efficiency, measured by feed
conversion.
Comments from the National Chicken
Council included cost estimates
prepared by Dr. Thomas E. Elam,
President, FarmEcon LLC (the Elam
Study).22 The Elam Study estimated that
the proposed rule would cost the
chicken industry $84 million in the first
year increasing to $337 million in the
fifth year, with a total cost of $1.03
billion over the first five years.23 The
Elam Study identified $6 million as onetime administrative costs. The study
states that most of the costs would be
indirect costs resulting from efficiency
losses,24 while more than half of the
costs estimated would be due to a
reduced rate of improvement in feed
efficiency due to the proposed rule
slowing the pace of innovation in the
poultry industry. For litigation costs, the
Elam Study concluded that the litigation
costs are substantial, but unknown.
Again, these cost estimates were for all
of the 2010 proposed changes, many of
which now do not apply.
Estimates of the costs in the Informa
Study and the Elam Study were largely
due to business practices that live
poultry dealers were projected to alter
in reaction to the proposed rule rather
than changes in business practices
directly imposed by the rule proposed
in 2010. For example, the Elam Study
expected live poultry dealers to assay (a
test to determine the quality of feed)
each load of feed delivered to growers
to avoid litigation.25
GIPSA believes the cost estimates
presented in the Informa Study and the
Elam Study were overstated. The
studies relied on interviews that queried
the willingness of live poultry dealers to
alter their business practices. The
estimates, based on interviews, may
overstate costs because the live poultry
dealers would face adjustment costs
from the rule proposed in 2010 and had
incentives to respond that they would
discontinue current practices. GIPSA
also believes that certain adjustments
are unlikely to occur. For example,
GIPSA believes it is unlikely that live
poultry dealers would take on the costly
22 See Elam, Dr. Thomas E. ‘‘Proposed GIPSA
Rules Relating to the Chicken Industry: Economic
Impact.’’ FarmEcon LLC, 2010.
23 Ibid. Page 24
24 Ibid. Page 24
25 Elam, Page 18.
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task of assaying each load of feed solely
to avoid litigation.
Cost-Benefit Analysis of Proposed
§ 201.214
Regulatory Alternatives Considered
Executive Order 12866 requires an
assessment of costs and benefits of
potentially effective and reasonably
feasible alternatives to the planned
regulation and an explanation of why
the planned regulatory action is
preferable to the identified potential
alternatives.26 GIPSA considered three
regulatory alternatives. The first
alternative that GIPSA considered was
to maintain the status quo and not
propose the rule. The second alternative
that GIPSA considered was revising the
version of § 201.214 that GIPSA
published in 2010 and proposing it as
a new rule. This is GIPSA’s preferred
alternative as will be explained below.
The third alternative that GIPSA
considered was proposing a new version
of § 201.214, but instituting a phased
implementation of the proposed rule.
Under this alternative, proposed
§ 201.214 would only take effect when
a poultry growing contract expires, is
replaced, or modified. The costs and
benefits of the alternatives are discussed
in order below.
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Regulatory Alternative 1: Status Quo
If § 201.214 is never finalized, there
are no marginal costs and marginal
benefits as industry participants will not
alter their conduct. From a cost
standpoint, this is the least cost
alternative compared to the other two
alternatives. This alternative also has no
marginal benefits. Since there are no
changes from the status quo under this
regulatory alternative, it will serve as
the baseline against which to measure
the other two alternatives.
Regulatory Alternative 2: The Preferred
Alternative—Costs of the Proposed Rule
GIPSA expects that the direct costs of
proposed § 201.214 would consist of the
costs of developing a consistency
management system, providing income
projections to poultry growers, keeping
additional records, and reviewing and
re-writing poultry growing contracts to
ensure that poultry grower ranking
systems are not used in an unfair,
unjustly discriminatory, or deceptive
manner or in any way that gives an
undue or unreasonable preference,
advantage, prejudice, or disadvantage.
Based on its expertise regulating the
poultry industry over several decades,
GIPSA does not expect the proposed
26 See Section 6(a)(3)(C) of Executive Order
12866.
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rule to result in a decrease in the use of
poultry grower ranking systems, lower
capital formation, or decreases in
efficiencies in the poultry industry. The
only indirect costs that GIPSA
anticipates are the effects of the increase
in industry costs from the direct costs
on supply and demand and the resulting
quantity and price impacts on the retail
market for chicken and the related input
market for broilers.
To estimate the costs of the proposed
rule, GIPSA divided costs into two
major categories, direct and indirect
costs. GIPSA expects that direct costs
would be comprised of administrative
costs. Administrative costs include
items such as the following: (1)
Providing income projections to
growers; (2) development of companyspecific consistency management
systems (CMSs) to ensure poultry
grower ranking systems are not used in
an unfair, unjustly discriminatory, or
deceptive manner or in any way that
gives an undue or unreasonable
preference, advantage, prejudice, or
disadvantage; (3) additional record
keeping; (4) review of written contracts
by attorneys and the employees of
regulated companies; and (5) all other
administrative office work associated
with review of contracts.
Indirect costs include costs caused by
changes in supply and/or demand
resulting from the proposed rule.
Indirect costs also include potential
efficiency losses due to potential
changes in poultry grower ranking
systems.
Regulatory Alternative 2: Direct Costs—
Administrative Costs
To estimate administrative costs of
the proposed rule, GIPSA relied on its
experience reviewing the operations and
business records of live poultry dealers,
poultry growing contracts, and other
business records for compliance with
the P&S Act and regulations. GIPSA also
considered the impact of each criterion
contained in § 201.214 on
administrative costs.
Under § 201.214(a), the Secretary may
consider whether a live poultry dealer
has provided sufficient information to a
poultry grower to enable the poultry
grower to make informed business
decisions. Such information should
include information necessary to
calculate the expected income from the
poultry growing arrangement. Current
poultry growers who have been
compensated for multiple flocks under
a poultry grower ranking system may
already have sufficient information
because they have already established
income patterns by participating in the
poultry grower ranking system. The
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92731
criterion in proposed § 201.214(a)
would mainly apply to new growers,
those growers switching to different live
poultry dealers, or to growers
considering housing upgrades where
this information is not already available
to the poultry grower.
In the past, live poultry dealers
commonly provided prospective
growers with projection sheets that
would provide a grower with estimates
of the minimum and maximum
compensation they could expect under
a contract. GIPSA’s experience
conducting investigations and
compliance reviews in the poultry
industry has indicated that not all live
poultry dealers currently provide
projection sheets to poultry growers.
GIPSA expects that it would not be
difficult for live poultry dealers to
develop and provide projection sheets
for each contract type to all current and
prospective growers. GIPSA believes
that providing projection sheets to
growers that contained the minimum,
average, and maximum compensation
they can expect for the contract type
they are considering or under which
they are currently growing would be
sufficient information to enable the
poultry growers to make informed
business decisions about their future
compensation and whether the
compensation is sufficient to warrant
increasing capital investments, for
example.
Based on GIPSA’s experience
regulating live poultry dealers and
reviewing their records, it developed
time estimates for the number of hours
for company managers and information
technology (IT) staff to develop new
projection sheets or review and revise
existing sheets for each type of poultry
growing contract that contains a poultry
grower ranking system on which to base
grower compensation. GIPSA estimates
that there are 10 individual contract
types for each of the 133 live poultry
dealers who report to GIPSA. GIPSA
also developed time estimates for legal
staff to review the projection sheets and
for the company to deliver the
projection sheets to all current and
prospective growers. GIPSA estimates
that each projection sheet for each of the
1,330 unique contract types would take
eight hours of management and IT time
to prepare, and two hours of attorney
time to review and rewrite the contract.
In addition, it will take 0.2 hours of
administrative time to print, and mail
the projection sheets and revised
contracts for each of the 21,925
individual poultry production contracts
of which GIPSA is aware. GIPSA
multiplied the estimated hours to
conduct these tasks by the average
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hourly wages for managers and IT staff
at $58/hour, attorneys at $83/hour, and
administrative assistants at $34/hour as
reported by the U.S. Bureau of Labor
Statistics in its Occupational
Employment Statistics.27 GIPSA
estimates the development and delivery
of projection sheets to cost the poultry
industry $0.99 million.
The criterion in § 201.214(b) permits
the Secretary to consider whether a live
poultry dealer supplies inputs of
comparable quality and quantity to all
poultry growers in the ranking group
and whether there is a pattern or
practice of supplying inferior inputs to
one or more poultry growers in the
ranking group. Inputs include birds,
feed, medication, and any other input
supplied by the live poultry dealer.
The U.S. Food and Drug
Administration (FDA) approves all
medication that can be administered to
broilers that are grown for human
consumption.28 GIPSA believes that live
poultry dealers would not alter
medication to such an extent that
inferior medicine is consistently
supplied to a grower and that this
criterion would not be costly to the
industry.
GIPSA also believes that feed
provided by live poultry dealers would
be consistent across a group of growers
and that this criterion would not be
costly to the industry. Feed is produced
by live poultry dealers at a feedmill and
the same batch of feed is distributed to
growers until more feed is produced and
then that feed is distributed. The
process of the production and
distribution of feed ensures consistency
across the group of growers that receive
the same batch of feed. Once a batch of
feed is produced, live poultry dealers
truck it to growers according to
established routes and schedules. All
growers on the same route should
receive feed of similar quality.
The chicks supplied by a live poultry
dealer to a poultry grower have the
potential to be inconsistent and GIPSA
believes that live poultry dealers would
have to take action to ensure a poultry
grower is not consistently supplied with
inferior chicks. The factors that affect
chick quality include the age and breed
of the breeder stock and the conditions
at the hatchery. Hatchery conditions
affecting chick quality include, hatching
egg quality, time of collection, egg
storage temperature and humidity,
incubation temperature, incubator
27 All salary costs are based on mean annual 2015
salary adjusted for benefit costs, set to an hourly
basis. https://www.bls.gov/oes/. Accessed on August
26, 2016.
28 https://www.accessdata.fda.gov/scripts/
animaldrugsatfda/. Accessed on August 26, 2016.
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carbon dioxide concentration, and chick
hatching time in relation to being
removed from the incubator.29
It is possible that the rotation of
chicks being hatched and delivered
could result in the same grower(s)
receiving inferior chicks on a consistent
basis. In order to avoid the possibility of
consistent placement of inferior chicks
with the same grower, even if
unintentional, live poultry dealers
would likely respond by designing and
implementing a CMS to identify and
evenly distribute inferior chicks.
GIPSA expects the same CMS to be
used to demonstrate that a poultry
grower ranking system is not used in an
unfair, unjustly discriminatory, or
deceptive manner, or in a way that gives
an undue or unreasonable preference or
advantage to any poultry grower or
subjects any poultry grower to an undue
or unreasonable prejudice or
disadvantage. Proposed § 201.214(c)
would allow the Secretary to consider
whether a live poultry dealer provides
poultry growers with dissimilar
production variables in the ranking
group in a manner that affects a poultry
grower’s compensation. Production
variables include, but are not limited to,
the density at which the live poultry
dealer places birds, the target slaughter
weights of the birds, and bird ages that
vary by more than seven days. The live
production and broiler management
teams must work together to ensure that
medication, bird densities, target bird
sizes, and the timing of the harvesting
of flocks does not consistently affect
grower rankings. Each live poultry
dealer, whether large or small, would
need to design and implement one CMS
to cover all of its breeding, hatching,
feedmill, and broiler operations. This
CMS would ensure that growers are not
treated inconsistently and that there is
not a pattern or practice of unfair,
unjustly discriminatory, or deceptive
treatment or undue or unreasonable
preference, advantage, prejudice, or
disadvantage.
GIPSA relied on its knowledge of the
poultry industry to estimate the cost of
designing and implementing a CMS that
could be used by both large and small
live poultry dealers. GIPSA estimates
that it would take 640 hours of
management and IT staff time to
develop a CMS. GIPSA estimates it
would take 8 hours per live poultry
dealer for its legal team to review the
CMS and 96 hours to train the breeding,
hatching, and broiler staff how to use
the CMS to ensure the uniform
29 The
University of Georgia Cooperative
Extension Service, ‘‘Hatchery Breeder Tip . . .
Chick Quality: An Update,’’ May 2005.
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distribution of inferior chicks. GIPSA
multiplied the estimated hours to
conduct these tasks by the average
hourly wages for managers and IT staff
at $58/hour, attorneys at $83/hour, and
administrative assistants at $34/hour as
reported by the U.S. Bureau of Labor
Statistics in its Occupational
Employment Statistics.30 GIPSA
estimates that if all 133 live poultry
dealers who report operations to GIPSA
develop and implement a CMS, the cost
would total $5.46 million. This estimate
overstates the cost because some of the
133 live poultry dealers do not use a
poultry grower ranking system. Rather
than risk underestimating the potential
cost, GIPSA chose to include all 133 live
poultry dealers in the calculations. We
have not estimated any capital costs
associated with the creation and
implementation of a CMS, as we believe
that there are none or existing
equipment would be used; however, we
seek comment on the validity of this
assumption and if commenters disagree
with it, to provide estimates of the
capital costs.
Each live poultry dealer that uses a
poultry grower ranking system to
calculate grower compensation would
need to keep additional records to
demonstrate that poultry grower ranking
systems are used in a fair manner after
applying the criteria in proposed
§ 201.214. Proposed § 201.214(d) allows
the Secretary to consider whether a live
poultry dealer has demonstrated a
legitimate business justification for use
of a poultry grower ranking system in a
manner that may otherwise be unfair,
unjustly discriminatory, or deceptive or
gives an undue or unreasonable
preference or advantage to any poultry
grower or subjects any poultry grower to
an undue or unreasonable prejudice or
disadvantage.
Based on GIPSA’s knowledge and
review of records kept by live poultry
dealers, GIPSA believes that the live
poultry dealers already keep very
detailed records regarding the
performance of each grower. The
records include all information needed
to calculate feed conversion such as
weights and quantities of inputs
provided, and all other data used to
determine grower performance and
compensation. Based on GIPSA’s
experience reviewing these records and
the business operations of live poultry
dealers, GIPSA estimates that live
poultry dealers will spend an additional
8 hours of time preparing records for
30 All salary costs are based on mean annual 2015
salary adjusted for benefit costs, set to an hourly
basis. https://www.bls.gov/oes/. Accessed on August
26, 2016.
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each poultry contract in order to be able
demonstrate that the poultry grower
ranking system is used in a fair manner
after applying the criteria in proposed
§ 201.214. GIPSA has data on the
number of production contracts between
poultry growers and live poultry
dealers. GIPSA multiplied 8 hours of
time by the average hourly wages of
$34/hour as reported by the U.S. Bureau
of Labor Statistics in its Occupational
Employment Statistics 31 and then
multiplied this total by the 21,925
individual poultry growing contracts
reported to GIPSA by live poultry
dealers to arrive at $5.96 million for
additional record keeping costs for live
poultry dealers. This record keeping
estimate includes keeping records to
demonstrate legitimate business
justifications for proposed § 201.214(d).
Given that proposed § 201.214 is a
new regulation, live poultry dealers
would need to review the contractual
language in their existing contracts with
respect to poultry grower ranking
systems to ensure that they are used in
a fair and non-preferential manner after
applying the criteria in proposed
§ 201.214. GIPSA again relied on its
experience and developed time
estimates for the number of hours for
attorneys and company managers to
review and revise verbal and written
production contracts and for staff to
make changes, copy, and obtain signed
copies of the contracts. For poultry
growing contracts, GIPSA estimates that
each of the 1,330 unique contract types
would take 2 hours of attorney time and
2 hours of company management time
to review and rewrite, and it would take
2 hours of administrative time to review
each of the 21,925 individual poultry
production contracts. GIPSA multiplied
the estimated hours to conduct these
administrative tasks by the average
hourly wages for attorneys at $83/hour,
managers at $58/hour, and
administrative assistants at $34/hour as
reported by the U.S. Bureau of Labor
Statistics in its Occupational
Employment Statistics.32
GIPSA recognizes that contract review
costs would also be borne by poultry
growers. GIPSA estimates the each
grower would spend 1 hour of time
reviewing a contract and would spend
1 hour of their attorney’s time to review
the contract. GIPSA multiplied 1 hour of
grower time and 1 hour of attorney time
to conduct the production contract
review by the average hourly wages for
31 Ibid.
32 All salary costs are based on mean annual 2015
salary adjusted for benefit costs, set to an hourly
basis. https://www.bls.gov/oes/. Accessed on August
26, 2016.
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attorneys at $83/hour and managers at
$58/hour. GIPSA then applied this cost
to the 21,925 poultry growing contracts
that have been reported to GIPSA to
arrive at the total contract review costs
that would be incurred by poultry
growers. GIPSA then added together the
contract review costs by live poultry
dealers and by poultry growers to arrive
at estimated contract review costs of
$4.96 million for the poultry industry.
GIPSA then added together all of the
estimated types of administrative costs
and the estimated first-year total
administrative costs appear in the
following table:
92733
Regulation 201.3(a) is broad in nature.
Section 201.214 simply provides clarity
and GIPSA believes that § 201.214 will
not lead to litigation above that already
expected as a result of § 201.3(a). Thus,
GIPSA considers the additional
litigation under § 201.3(a) to be the
baseline litigation costs for § 201.214
and that the litigation costs for
§ 201.3(a) already include the litigation
costs of § 201.214. Since those litigation
costs have already been counted under
§ 201.3(a), GIPSA does not allocate any
additional litigation costs to § 201.214
and for the purposes of this RIA, the
marginal litigation costs are zero.
TABLE 4—FIRST-YEAR ADMINISTRA- Regulatory Alternative 2: Total Direct
Costs of the Preferred Alternative
TIVE
COSTS
OF
PROPOSED
The total first-year direct costs of
§ 201.214
Administrative cost type
proposed § 201.214 would consist of
administrative and litigation costs
(which are equal to zero) from above
0.99 and they are summarized in the
following table.
$ millions
Projection Sheet Costs .........
Develop Consistency Management System ...............
Industry Record Keeping ......
Contract Review Costs .........
5.46
5.96
4.96
Total Industry Administrative Cost .................
17.37
TABLE 5—DIRECT COSTS OF
PROPOSED § 201.214
Cost type
($ millions)
Admin Costs .........................
Litigation Costs .....................
17.37
0.00
Total Direct Costs ..........
17.37
The first-year total administrative
costs would be $17.37 million for the
poultry industry. The two largest costs
would be industry record keeping and
the development of CMSs, followed by
record keeping and the costs of
developing projection sheets.
GIPSA estimates that the direct costs
of proposed § 201.214 would be $17.37
million.
A. Regulatory Alternative 2: Direct
Costs—Litigation Costs of the Preferred
Alternative
Interim final regulation 201.3(a) will
already be in effect if and when
§ 201.214 becomes effective. GIPSA
expects that § 201.3(a) will result in
additional litigation as this rule states
that certain conduct or action can
violate sections 202(a) and/or 202(b) of
the P&S Act without a harm or likely
harm to competition in all cases.
Section 201.3(a) formalizes GIPSA’s
longstanding position that, in some
cases, violations of sections 202(a) and
202(b) can be proven without
demonstrating harm or likely harm to
competition. Section 201.214 provides
clarity to the industry by establishing
criteria the Secretary may consider in
determining whether a live poultry
dealer has used a poultry grower
ranking system to compensate poultry
growers in an unfair, unjustly
discriminatory, or deceptive manner, or
in a way that gives an undue or
unreasonable preference or advantage to
any poultry grower or subjects any
poultry grower to an undue or
unreasonable prejudice or disadvantage.
Regulatory Alternative 2: Indirect Costs
of the Preferred Alternative
As discussed previously, GIPSA does
not expect proposed § 201.214 to result
in a decrease in the use of poultry
grower ranking systems, lower capital
formation, or decreases in efficiencies in
the poultry industry. The regulation
simply establishes the criteria under
which the Secretary may determine
whether live poultry dealers are using
poultry grower ranking systems in an
unfair, unjustly discriminatory, or
deceptive manner, or in a way that gives
an undue or unreasonable preference or
advantage to any poultry grower or
subjects any grower to an undue or
unreasonable prejudice or disadvantage.
The only indirect costs that GIPSA
anticipates are the effects of the increase
in industry costs from the direct
administrative costs on supply and
demand, and the resulting quantity and
price impacts on the retail market for
chicken and the related input market for
broilers.
GIPSA modeled the impact of the
increase in total industry costs resulting
from the direct costs of proposed
§ 201.214 in a Marketing Margins Model
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(MMM) framework.33 The MMM allows
for the estimation of changes in
consumer and producer surplus and the
quantification of deadweight loss or
gain caused by changes in supply and
demand conditions in the retail market
for chicken as well as the input market
for poultry growing services.
GIPSA modeled the increases in
industry costs resulting from higher
direct costs as an inward (or upward)
shift in the supply curve for chicken.
This has the effect of increasing the
equilibrium prices and reducing the
equilibrium quantity traded. This also
has the effect of reducing the derived
demand for poultry growing services,
which causes a reduction in the
equilibrium prices and quantity traded.
Established economic theory suggests
that these shifts in the supply curve and
derived demand curve and the resulting
price and quantity impacts will result in
a reduction in social welfare through a
deadweight loss.
To estimate the output and input
supply and demand curves for the
MMM, GIPSA constructed linear supply
and demand curves around equilibrium
price and quantity points using price
elasticities of supply and demand from
the USDA’s Economic Research
Service.34
GIPSA then shifted the supply curve
for chicken up by the amount of the
increase in total costs for the poultry
industry from Table 5 above. GIPSA
calculated the new equilibrium price
and quantity traded of chicken. GIPSA
also calculated the new equilibrium
price and quantity in the poultry
growing services market resulting from
the decreases in derived demand for
growing services. GIPSA calculated the
resulting social welfare changes in the
input and output markets.
The calculation of the price impact
from the increase in poultry industry
costs from proposed § 201.214 would
have in a price increase of
approximately two-hundredths of a cent
in the retail price of chicken.35 This is
because the increase in total industry
costs is very small in relation to overall
industry costs. The result is that the
resulting deadweight losses from the
increases in total industry costs is
indistinguishable from zero and
33 The framework is explained in detail in Tomek,
W.G. and K.L. Robinson ‘‘Agricultural Product
Prices,’’ third edition, 1990, Cornell University
Press.
34 ERS Price Elasticities: https://www.ers.usda.gov/
data-products/commodity-and-food-elasticities/
demand-elasticities-from-literature.aspx. Accessed
on August 26, 2016.
35 The $17.37 million increase in total industry
costs from proposed § 201.214 is only 0.04 percent
of total poultry industry costs of approximately $40
billion.
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To arrive at the estimated 10-year
costs of proposed § 201.214, GIPSA
estimates that contracts would expire at
a steady rate. Based on its expertise,
Regulatory Alternative 2: Total Costs of
GIPSA believes that 20 percent of
the Preferred Alternative
contracts would expire on a yearly basis
GIPSA added all direct costs to the
and thus, in the first five years, 20
indirect costs, which are equal to zero,
percent of all contracts would expire
to arrive at the estimated total first-year
and need to be renewed each year or
costs of proposed § 201.214. The total
new production contracts would be put
costs are summarized in the following
in place. Thus in years 2 through year
table.
5, contract review costs would be 20
percent of the costs of review in the first
TABLE 6—TOTAL COSTS OF
year because the costs of reviewing and
PROPOSED § 201.214
revising contracts would only apply to
the 20 percent of contracts that are
Cost type
($ millions)
expiring or are new contracts each year.
Admin Costs .........................
17.37 Based on GIPSA’s expertise, GIPSA also
Litigation Costs .....................
0.00 estimates that in years 2 through year 5,
Total Direct Costs .................
17.37 20 percent of all projection sheets
Total Indirect Costs ..............
0.00 would require updating each year, the
cost of operating and updating CMSs
Total Costs ....................
17.37 would be 20 percent of first-year
development costs, and that record
GIPSA estimates that the total costs of keeping costs would be 20 percent of
proposed § 201.214 to be $17.37 million the first-year cost as companies become
for the poultry industry in the first full
more efficient in record keeping and
year of implementation
learn which records are required. Based
on its expertise, GIPSA estimates that in
Regulatory Alternative 2: 10-Year Total
the second 5 years, the direct
Costs of the Preferred Alternative
administrative costs of revising
To arrive at the estimated 10-year
contracts, projection sheets, CMS
costs of proposed § 201.214, GIPSA
operation, and record keeping would
expects the costs to be constant for the
decrease by 50 percent per year as the
first 5 years while courts are setting
courts establish precedents, contracts
precedents for the interpretation of
would contain standard language, and
proposed § 201.214 if indeed it is
companies would become more efficient
finalized. GIPSA expects that case law
at ensuring poultry grower ranking
with respect to proposed § 201.214
systems are used in a fair manner after
would be settled after 5 years, and by
then, industry participants would likely applying the criteria in proposed
§ 201.214. The total 10-year costs of
know how GIPSA would enforce the
proposed § 201.214 appear in the table
proposed regulation and how courts
would interpret the proposed regulation below.
if finalized. The effect of courts
TABLE 7—TEN-YEAR TOTAL COSTS OF
establishing precedents is that
PROPOSED § 202.214
administrative costs would likely
decline after 5 years.
Total direct
Once courts establish precedents in
Year
($ millions)
case law, GIPSA expects the direct
administrative costs of reviewing and
2018 36 ..................................
17.37
revising contracts and developing
2019 ......................................
3.47
projection sheets would decrease
2020 ......................................
3.47
rapidly as contracts would already
2021 ......................................
3.47
2022 ......................................
3.47
contain any language modifications
2023 ......................................
1.74
necessitated by implementation of the
2024 ......................................
0.87
proposed rule, and projection sheets
2025 ......................................
0.43
would already have been developed for
2026 ......................................
0.22
most contracts. GIPSA also expects that
2027 ......................................
0.11
the direct costs of record keeping and
operating CMSs would decrease rapidly
Totals .............................
34.64
as courts set precedents on which
records would be required and how
Based on the analysis, GIPSA expects
detailed a CMS must be, and as
the 10-year total costs of proposed
companies become more efficient in
§ 201.214 would be $34.64 million.
ensuring that poultry grower ranking
systems are used in a fair manner after
36 GIPSA uses 2018 as the date for the proposed
applying the criteria in proposed
rule to be in effect for analytical purposes only. The
§ 201.214.
date the proposed rule becomes final is not known.
therefore, GIPSA concludes that the
indirect costs of proposed § 201.214 are
zero.
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would require showing of a harm to
competition for § 201.214 violations, the
regulated entities may still expect
litigation as private parties test the
Discount rate
($ millions)
The total costs of proposed § 201.214
courts application of § 201.3 as it relates
3 Percent ..............................
3.77 to § 201.214 violations. To reduce this
in the table above show that the costs
7 Percent ..............................
4.18 threat of litigation, regulated entities
are highest in the first year, decline to
a constant lower level over the next 4
may still incur the administrative costs
GIPSA expects that the annualized
detailed above. Should § 201.214
years, and then gradually decrease again
costs of § 201.214 would be $3.77
become finalized and courts still require
over the subsequent 5 years. Costs to be
million at a three percent discount rate
a showing of harm or potential harm to
incurred in the future are less expensive
and $4.18 million at a seven percent
competition, regulated entities may still
than the same costs to be incurred
discount rate.
voluntarily undertake the adjustment
today. This is because the money that is
costs detailed above.
Impacts on Costs of Interim Final
used to pay the costs in the future can
GIPSA expects proposed § 201.214 to
§ 201.3(a)
be invested today and earn interest until
reduce the costs of implementing
the time period in which the cost is
Concurrent with proposing § 201.214, § 201.3 by providing more clarity in the
incurred. After the cost has been
GIPSA is issuing an interim final
appropriate application of sections
incurred, the interest earned would still version of § 201.3(a). Section 201.3(a)
202(a) and (b) of the P&S Act as they
states that conduct or action can be
be available.
apply to poultry grower ranking
found to violate sections 202(a) and/or
To account for the time value of
systems. Section 201.214 provides
clarity to the industry by establishing
money, the costs of the regulations to be 202(b) of the P&S Act without a finding
of harm or likely harm to competition in criteria the Secretary may consider in
incurred in the future are discounted
all cases. As a stand-alone regulation,
determining whether a live poultry
back to today’s dollars using a discount
§ 201.3(a) formalizes GIPSA’s
dealer has used a poultry grower
rate. The sum of all costs discounted
longstanding position that, in some
ranking system to compensate poultry
back to the present is called the net
cases, violations of sections 202(a) and
growers in an unfair, unjustly
present value (NPV) of total costs.
202(b) can be proven without
discriminatory, or deceptive manner, or
GIPSA relied on both a three percent
demonstrating harm or likely harm to
in a way that gives an undue or
and seven percent discount rate as
competition.
unreasonable preference or advantage to
37 GIPSA
discussed in Circular A–4.
In its Regulatory Impact Analysis,
any poultry grower or subjects any
measured all costs using constant
GIPSA estimated the annualized costs of poultry grower to an undue or
dollars.
§ 201.3(a) would range from $6.87
unreasonable prejudice or disadvantage.
million to $96.01 million at a three
GIPSA calculated the NPV of the tenRegulatory Alternative 2: Benefits of the
percent discount rate and from $7.12
year total costs of the proposed
Preferred Alternative
million to $98.60 million at a seven
regulation using both a three percent
percent discount rate. The range of
GIPSA was unable to quantify all the
and seven percent discount rate and the
potential costs is broad and GIPSA
benefits of proposed § 201.214.
NPVs appear in the following table.
relied on its expertise to arrive at a point However, there are a number of
important qualitative benefits of
TABLE 8—NPV OF TEN-YEAR TOTAL estimate of expected annualized costs.
GIPSA expects the cattle, hog, and
proposed § 201.214 that merit
COSTS OF PROPOSED § 201.214
poultry industries to primarily take a
discussion. Proposed § 201.214 contains
‘‘wait and see’’ approach to how courts
several provisions that GIPSA expects
Discount rate
($ millions)
will interpret § 201.3(a) and only
would improve efficiencies and reduce
market failures. For regulations to
3 Percent ..............................
32.16 slightly adjust its use of AMAs, and
improve efficiencies for market
7 Percent ..............................
29.36 incentive or performance-based
payment systems. GIPSA estimates that
participants and generate benefits for
the annualized costs of § 201.3(a) at the
consumers and producers, they must
GIPSA expects the NPV of the 10-year point estimate will be $51.44 million at
increase the amount of relevant
total costs of § 201.214 will be $32.16
a three percent discount rate and $52.86 information to market participants,
million at a three percent discount rate
million at a seven percent discount rate
reduce information asymmetries, protect
and $29.36 million at a seven percent
based on an anticipated ‘‘wait and see’’
private property rights, or foster
discount rate.
approach by the cattle, hog, and poultry competition.
Proposed § 201.214(a) would reduce
industries.
Regulatory Alternative 2: Annualized
GIPSA recognizes that courts, after the information asymmetries and result in
Costs of the Preferred Alternative
implementation of a finalized § 201.3(a), poultry growers making informed
may opt to continue to apply earlier
business decisions such as whether to
GIPSA then annualized the NPV of
precedents of requiring the showing of
enter the industry and in which capital
the 10-year total costs (referred to as
improvements to invest. Growers having
annualized costs) of proposed § 201.214 harm or potential harm to competition
in section 202(a) and 202(b) cases. This
more complete information would result
using both a three percent and seven
has the potential to affect the costs of
in more efficient levels of capital in the
percent discount rate as required by
§ 201.214 and 201.211 should they
growing industry than with less
Circular A–4 and the results appear in
become finalized. GIPSA expects that
information. Less information may lead
the following table.38
even if courts continue to require
to too much or too little capital. More
showing of harm or potential harm to
complete information in the growing
competition in section 202(a) and 202(b) industry would allow live poultry
37 https://www.whitehouse.gov/sites/default/files/
cases, that firms would likely still incur dealers to send price signals to growers
omb/assets/regulatory_matters_pdf/a-4.pdf.
costs of complying with § 201.214. Even about levels of capital they desire. For
Accessed on August 26, 2016.
38 Ibid.
if regulated entities expect that courts
example, if a live poultry dealer desires
Regulatory Alternative 2: Net Present
Value of Ten-Year Total Costs of the
Preferred Alternative
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TABLE 9—ANNUALIZED COSTS OF
PROPOSED § 201.214
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its birds be grown with a more capitalintensive housing type, it can increase
its base payment rate in a grower
ranking system for that particular
housing type and provide projection
sheets to growers so they can assess
whether to upgrade. Live poultry
dealers would have to increase the base
compensation to a high enough level to
spur the additional capital investment
in upgrades. Similarly, too little
compensation may result in under
investment in capital, which is also
inefficient.
Proposed § 201.214(b) would
encourage live poultry dealers to supply
inputs of more consistent quantity and
quality to all growers. Thus, inferior
chicks, which are more costly to grow,
would likely be distributed more
uniformly across growers. This would
facilitate a level playing field and foster
fair competition in poultry grower
ranking systems. If proposed § 201.214
is finalized and becomes effective,
growers would be compensated for their
performance based more accurately on
their skill and less so on the quality of
inputs provided. The more efficient
growers would receive more
compensation in poultry grower ranking
systems, which sends a signal to expand
their offering of growing services. Less
efficient growers would earn less, which
sends a signal to reduce their offering of
growing services or, at the extreme, to
exit the industry. The result is lower
costs to the industry as poultry grower
ranking systems would incentivize the
more efficient growers to expand and
less efficient growers to contract or exit
the industry.
Proposed § 201.214(c) would also
provide a similar benefit to the industry.
Under this section, the Secretary may
consider whether a live poultry dealer
includes poultry growers provided with
dissimilar production variables in the
ranking group in a manner that affects
a poultry grower’s compensation. The
live poultry dealer would be expected to
assure that growers are treated
consistently as compared to other
growers in the settlement group. This
would allow growers to compete in
poultry grower ranking systems on their
skill level and not be disadvantaged by
factors outside of their control. The
result, again, is lower costs to the
industry as the poultry grower ranking
system would likely incentivize the
more efficient growers to expand and
the less efficient growers to reduce
operations or exit the industry.
Proposed § 201.214(d) would benefit
the industry by allowing the Secretary
to consider whether a live poultry
dealer has demonstrated a legitimate
business justification for use of a
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poultry grower ranking system that
would otherwise violate the P&S Act.
This is a benefit for live poultry dealers
as it provides a level of protection
against potentially frivolous litigation.
Another important qualitative benefit
of proposed § 201.214 is the increased
ability for the enforcement of the P&S
Act for use of poultry grower ranking
systems in a manner that does not result
in a harm or likelihood of harm to
competition. This occurs through
§ 201.3(a), which states that conduct can
be found to violate sections 202(a) and/
or 202(b) of the P&S Act without a
finding of harm or likely harm to
competition and more specifically
through § 201.210(b)(10) which clarifies
that absent demonstration of a
legitimate business justification, failing
to use a poultry grower ranking system
in a fair manner after applying the
criteria in § 201.214 is unfair, unjustly
discriminatory, or deceptive and a
violation of section 202(a) of the P&S
Act regardless of whether it harms or is
likely to harm competition.
A simple example is a live poultry
dealer consistently supplying inferior
chicks to a particular grower. The
grower is harmed by this conduct
because the grower consistently underperforms in the poultry grower ranking
system and receives lower
compensation than if the grower had
been provided higher quality chicks.
This can be considered an unfair and
deceptive practice under section 202(a)
and/or as subjecting the grower to an
unfair disadvantage under section
202(b). The impact of this harm to the
grower is very small when compared to
the entire industry and there is no harm
to competition from this one instance.
Because there is no harm or likely harm
to competition, courts have been
reluctant to find a violation of section
202(a) or (b) of the P&S Act in such a
situation, despite the harm suffered by
the individual poultry grower.
However, if similar, though unrelated,
harm is experienced by a large number
of growers, the cumulative effect does
result in a harm to competition. The
individual harm is inconsequential to
the industry, but the sum total of all
individual harm has the potential to be
quite significant when compared to the
industry and therefore, courts have
found harm or likely harm to
competition in such a situation. The
regulations in this proposed rule, in
conjunction with § 201.3(a), clarify that
consistently supplying inferior chicks,
absent demonstration of a legitimate
business justification, would constitute
unfair, unjustly discriminatory, or
deceptive practices or devices under
section 202(a) of the P&S Act or the
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giving of an undue or unreasonable
preference, advantage, prejudice or
disadvantage under section 202(b) of the
P&S Act.
The sum of all individual harm is
likely to increase total industry costs of
producing poultry due to an inefficient
allocation of resources. The cost of all
unfair, unjustly discriminatory, or
deceptive practices, or undue or
unreasonable preferences or advantages
to any poultry grower or undue or
unreasonable prejudices or
disadvantages are reflected in higher
costs of producing poultry, with some
portion of these costs passed along to
consumers in the form of higher prices.
GIPSA expects proposed § 201.214
coupled with §§ 201.3(a) and
201.210(b)(10) to increase enforcement
actions against live poultry dealers for
use of poultry grower ranking systems
in a manner that violates sections 202(a)
and/or 202(b) when the use of the
poultry grower ranking system does not
harm or is not likely to harm to
competition. Several appellate courts
have disagreed with USDA’s
interpretation of the P&S Act that harm
or likely harm to competition is not
necessary in all instances to prove a
violation of sections 202(a) or 202(b). In
some cases in which the United States
was not a party, these courts have
concluded that plaintiffs could not
prove their claims under section 202(a)
and/or (b) without proving harm to
competition or likely harm to
competition. One reason the courts gave
for declining to defer to USDA’s
interpretation of the statute is that
USDA had not previously formalized its
interpretation in a regulation.
Section 201.3 addresses that issue and
§§ 201.214 and 201.210(b)(10) provide
clarity regarding the circumstances
under which use of a poultry grower
ranking system, absent demonstration of
a legitimate business justification,
would constitute an unfair, unjustly
discriminatory, or deceptive practice or
device under section 202(a) of the P&S
Act or the giving of an undue or
unreasonable preference, advantage,
prejudice or disadvantage under section
202(b) of the P&S Act. GIPSA expects
the result would be additional
enforcement actions successfully
litigated, which will serve as a deterrent
to using a poultry grower ranking
system in a manner that violates
sections 202(a) or (b) of the P&S Act.
Successful deterrence would likely
result in lower overall costs throughout
the entire production and marketing
complex of all poultry and chicken.
Benefits to the industry and the
market also arise from establishing
parity of negotiating power between live
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poultry dealers and poultry growers by
reducing the ability to abuse market
power with the resulting deadweight
losses.39 Establishing parity of
negotiating power in contracts promotes
fairness and equity and is consistent
with GIPSA’s mission ‘‘[T]o protect fair
trade practices, financial integrity, and
competitive markets for livestock, meats
and poultry.’’ 40
Regulatory Alternative 2: Cost-Benefit
Summary of the Preferred Alternative
GIPSA expects the annualized costs of
§ 201.214 will be $3.77 million at a
three percent discount rate and $4.18
million at a seven percent discount rate.
GIPSA was unable to quantify the
benefits of the regulations, but
explained numerous qualitative benefits
derived from increased information and
reduced information asymmetries. The
regulation contains several provisions
that GIPSA expects will: (1) Improve
efficiencies in the formation of capital
in the poultry growing industry; and (2)
lower costs to the industry as grower
ranking systems will incentivize the
more efficient growers to expand and
less efficient growers to reduce
operations or exit the industry. Another
benefit of proposed § 201.214 is the
deterrent effect of increased
enforcement of the P&S Act for
violations of section 202(a) or (b). This,
in turn, would reduce instances of
unfair, unjustly discriminatory, or
deceptive practices or devices and
undue or unreasonable preferences,
advantages, prejudices, or disadvantages
and increased efficiencies in the
marketplace. At the same time, allowing
the Secretary to consider legitimate
business justifications for use of a
poultry grower ranking system in a
manner that might otherwise be seen as
a violation of section 202(a) or (b) of the
P&S Act would provide a level of
protection against potentially frivolous
litigation. Thus, proposed § 201.214
would likely increase efficiency, lower
costs, and reduce market failures in the
poultry industry. These benefits would
accrue to all segments of the poultry
value chain, and ultimately consumers.
Regulatory Alternative 3: Contract
Duration—Phased Implementation
GIPSA considered a third regulatory
alternative of phased implementation.
Under this third alternative, proposed
§ 201.214 would only apply to poultry
growing contracts when they expire, are
altered, or new contracts are put in
place. Consider for example, a poultry
growing contract with 3 years remaining
in the contract when the regulations
become effective. Proposed § 201.214
would not be applicable to this contract,
under phased implementation, until the
contract expires after 3 years and is
either modified or replaced.
Regulatory Alternative 3: Cost
Estimation of Phased Implementation
GIPSA estimated the costs of phased
implementation by multiplying the
majority of the ten-year total costs of the
preferred alternative (Table 7) for each
year of the first 10 years the rule would
be in effect by the percentage of
contracts expiring or altered in the same
year. The data on contract lengths for
broiler production appear in the table
below.
TABLE 10—PRODUCTION AND
MARKETING CONTRACT DURATIONS
Broiler
production 41
(%)
Contract duration
Short Term < = 12 months ...
Medium Term 13–60 months
Long Term > 60 months .......
92737
The data in the table above show that
65.2 percent of broiler production
contracts have a duration of 12 months
or less and 84.4 percent have a duration
of 60 months or less. Only 15.64 percent
of broiler production contracts are
longer than 60 months in duration.
For the first year of the regulation,
GIPSA multiplied the costs of § 201.214
by 65.20 percent. The one exception is
the cost of the development of CMSs.
GIPSA’s experience reviewing poultry
growing contracts suggests that most
live poultry dealers have some contracts
that are of a short-term duration.
Therefore, GIPSA estimates that all live
poultry dealers would have to develop
a CMS in the first year after the
implementation of the regulation.
GIPSA allocates 100 percent of CMS
development costs in the first year
under the phased implementation
alternative. All other direct
administrative costs are multiplied by
65.20 percent in the first year.
For years 2 through 5, GIPSA
followed the same procedure and
adjusted total industry costs by 84.4
percent, the number of contracts that are
5 years or less in duration. For years 6
through 10, GIPSA applied 100 percent
of the preferred alternative costs to
reflect the full phase in of costs.
The following tables show the 10-year
total costs of the phased implementation
alternative. The 10-year total costs for
each year of the preferred alternative
(Table 7) are also shown for
convenience.
65.20
19.20
15.60
TABLE 11—PHASED IMPLEMENTATION TOTAL COSTS OF § 201.214
Preferred
alternative
($ millions)
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Year
2018
2019
2020
2021
2022
2023
2024
2025
2026
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
.................................................................................................................................................................
39 MacDonald, J. and N. Key. ‘‘Market Power in
Poultry Production Contracting? Evidence from a
Farm Survey.’’ Journal of Agricultural and Applied
Economics. 44(4) (November 2012): 477–490.
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Discusses evidence for the effect of concentration
on grower compensation.
40 See additional discussion in Steven Y. Wu and
James MacDonald (2015) ‘‘Economics of
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17.37
3.47
3.47
3.47
3.47
1.74
0.87
0.43
0.22
Phased
implementation
($ millions)
13.23
2.93
2.93
2.93
2.93
1.74
0.87
0.43
0.22
Agricultural Contract Grower Protection
Legislation,’’ Choices 30(3): 1–6.
41 USDA’s Economic Research Service
Agricultural Resource Management Survey (ARMS)
2011.
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TABLE 11—PHASED IMPLEMENTATION TOTAL COSTS OF § 201.214—Continued
Preferred
alternative
($ millions)
Year
Phased
implementation
($ millions)
2027 .................................................................................................................................................................
0.11
0.11
Totals ........................................................................................................................................................
34.64
28.32
GIPSA estimates that the first-year
total costs of § 201.214 under the phased
implementation alternative would be
$13.23 million and the 10-year total
costs would be $28.32 million. As the
table shows, the costs in the first 5 years
are lower under the phased
implementation option than under the
preferred alternative because regulated
entities with contracts longer than 1
year are not covered until the contracts
expire, are modified, or replaced.
GIPSA expects the annualized costs of
§ 201.214 under the phased
implementation option to be $3.07
million at a three percent discount rate
and $3.38 million at a seven percent
discount rate.
Regulatory Alternative 3: Benefits of the
Phased Implementation Alternative
The benefits of phased
implementation are identical to the
benefits of the preferred alternative with
the exception of when the benefits will
Regulatory Alternative 3: NPV of 10be received and the amount of the
Year Total Costs of Phased
benefits. Like the costs, the benefits will
Implementation
be received only when contracts expire,
are modified, or new contracts are put
GIPSA calculated the NPV of the 10in place. Moreover, benefits to be
year total costs of proposed § 201.214
received in the future are worth less
under phased implementation using
than benefits received today. The
both a three percent and seven percent
discount rate as required by Circular A– benefits will be received in the same
4. The NPVs are shown in the following proportion of the total costs and are
based on contract durations. The
table.
benefits of phased implementation are
less than under the preferred alternative
TABLE 12—NPVS OF TEN-YEAR
TOTAL COSTS OF PROPOSED because the full benefits will not be
§ 201.214—PHASED IMPLEMENTA- received until all contracts have
expired, been modified, or replaced by
TION
new contracts. The full benefits of
phased implementation will be received
Discount rate
($ millions)
beginning in year 6.
3 Percent ..............................
7 Percent ..............................
26.18
23.77
GIPSA expects the NPV of the 10-year
total costs of § 201.214 under the phased
implementation option to be $26.18
million at a three percent discount rate
and $23.77 million at a seven percent
discount rate.
Regulatory Alternative 3: Annualized
Costs of Phased Implementation
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GIPSA then annualized the costs of
§ 201.214 using both a three percent and
seven percent discount rate as required
by Circular A–4 and the results appear
in the following table.
Regulatory Alternative 3: Cost-Benefit
Summary of Phased Implementation
GIPSA expects the annualized costs of
§ 201.214 under the phased
implementation option to be $3.07
million at a three percent discount rate
and $3.38 million at a seven percent
discount rate. The benefits will be
received in the same proportion as total
costs and are based on contract
durations. The benefits of the phased
implementation alternative are less than
under the preferred alternative because
the full benefits will not be received
until all contracts have expired, been
altered, or replaced by new contracts.
Cost-Benefit Comparison of Regulatory
Alternatives
TABLE 13—ANNUALIZED COSTS OF
PROPOSED § 201.214—PHASED IMThe status quo alternative has zero
PLEMENTATION
Discount rate
3 Percent ..............................
7 Percent ..............................
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18:20 Dec 19, 2016
marginal costs and benefits as GIPSA
does not expect any changes in the
($ millions)
industry. GIPSA compared the
annualized costs of the preferred
3.07
3.38 alternative to the annualized costs of the
phased implementation alternative by
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subtracting the annualized costs of
phased implementation from the
preferred alternative and the results
appear in the following table.
TABLE 14—DIFFERENCE IN
ANNUALIZED COSTS OF PROPOSED
§ 201.214 BETWEEN THE PREFERRED ALTERNATIVE AND THE
PHASED IMPLEMENTATION ALTERNATIVE
Discount rate
3 Percent ..............................
7 Percent ..............................
($ millions)
0.70
0.80
The annualized costs of the phased
implementation alternative is $0.70
million less expensive using a three
percent discount rate and $0.80 million
less expensive using a seven percent
discount rate. As is the case with costs,
the benefits of the preferred alternative
will be highest for the preferred
alternative because the full benefits will
be received immediately and not when
contracts have expired, been altered, or
replaced by new contracts as is the case
under the phased implementation
alternative.
Though the phased implementation
alternative would save between $0.70
million and $0.80 million on an
annualized basis, this alternative would
deny the protections offered by
proposed § 201.214 to a substantial
percentage of poultry growers for five or
more years based on the length of their
production contracts. As the data in
Table 10 show, 15.6 percent of poultry
growers have contracts with durations
exceeding five years. Under the phased
implementation alternative, these
growers would continue to be exposed
to the potential market failures
discussed above until their contracts
expire or are renewed. GIPSA
considered all three regulatory
alternatives and believes that the
preferred alternative is the best
alternative as the benefits of the
regulation will be captured immediately
by all growers, regardless of the length
of their contracts.
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Regulatory Flexibility Analysis
The Small Business Administration
(SBA) defines small businesses by their
North American Industry Classification
System Codes (NAICS).42 Live poultry
dealers, NAICS 311615, are considered
small businesses if they have fewer than
1,250 employees. Broiler and turkey
producers, NAICS 112320 and 112330,
are considered small businesses if their
sales are less than $750,000 per year.
GIPSA maintains data on live poultry
dealers from the annual reports these
firms file with GIPSA. Currently, there
are 133 live poultry dealers that would
be subject to the proposed regulations.
According to U.S. Census data on
County Business Patterns, there were 74
poultry slaughter firms that had more
than 1,000 employees in 2013.43 The
difference yields approximately 59
poultry slaughters that have fewer than
1,000 employees and would be
considered small businesses that would
be subject to the proposed regulations.
Another factor, however, that is
important in determining the economic
effect of the regulations is the number
of contracts held by a firm. GIPSA
records for 2014 indicated there were
21,925 poultry production contracts in
effect, of which 13,370, or 61 percent,
were held by the largest six live poultry
dealers, and 90 percent (19,673) were
held by the largest 25 live poultry
dealers. These 25 live poultry dealers
are all in the large business SBA
category, whereas the 21,925 poultry
growers holding the other end of the
contracts are almost all small businesses
by SBA’s definitions.
To the extent the proposed rule
imposes costs, these costs are expected
to be borne by live poultry dealers. The
costs likely include legal review of
contracts, record-keeping,
administrative costs, developing a CMS,
and developing projection sheets.
Live poultry dealers classified as large
businesses are responsible for about
89.7 percent of the poultry growing
contracts. Assuming that live poultry
dealers classified as small businesses
will bear about 10.3 percent of the costs,
expected costs in the first year for live
poultry dealers classified as small
businesses would be $1.8 million.44
Expected 10-year costs annualized at a
three percent discount rate for live
poultry dealers classified as small
businesses would be $387,000. Expected
10-year costs annualized at a seven
percent discount rate for live poultry
dealers classified as small businesses
would be $429,000.
In considering the impact on small
businesses, GIPSA considered the
average costs and revenues of each
small business impacted by § 201.214.
The number of small businesses
impacted by § 201.214, by NAICS code,
as well as the per entity, first-year and
annualized costs at both the three
percent and seven percent discount
rates appear in the following table.
TABLE 15—PER ENTITY COSTS TO SMALL BUSINESSES OF § 201.214
NAICS
Number of
small
business
First year
($)
Annualized
costs—3%
($)
Annualized
costs—7%
($)
311615—Poultry ..............................................................................................
59
30,246
6,563
7,278
The following table compares the
average per entity first-year and
annualized costs of § 201.214 to the
average revenue per establishment for
all firms in the same NAICS code. The
annualized costs are slightly higher at
the seven percent rate than at the three
percent rate, so only the seven percent
rate is shown as it is the higher
annualized cost.
TABLE 16—COMPARISON OF PER ENTITY COST TO SMALL BUSINESSES OF § 201.214 TO REVENUES
Average
first-year
cost per
entity
($)
Average
annualized
cost per
entity
($)
Average
revenue per
establishment
($)
First-year
cost as
percent of
revenue
(%)
Annualized
cost as
percent of
revenue
(%)
311615—Poultry ......................................
mstockstill on DSK3G9T082PROD with PROPOSALS
NAICS
Number of
small business
59
30,246
7,278
13,842,548
0.22
0.05
The revenue figure in the above table
come from Census data for live poultry
dealers, NAICS code 311615.45
As the results in Table 16
demonstrate, the first-year and
annualized costs of § 201.214 as a
percent of revenue is small at less than
one percent.
Based on the above analyses regarding
§ 201.214, GIPSA certifies that this rule
is not expected to have a significant
economic impact on a substantial
number of small business entities as
defined in the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.). While confident
in this certification, GIPSA
acknowledges that individual
businesses may have relevant data to
supplement our analysis. We would
encourage small stakeholders to submit
any relevant data during the comment
period.
Executive Order 12988
42 See: https://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sstd_tablepdf.pdf.
Accessed on August 26, 2016.
43 https://factfinder.census.gov/faces/
tableservices/jsf/pages/
productview.xhtml?src=bkmk. Accessed on August
26, 2016. The U.S. Census data reports data in
thousands making 1,000 the closest number of
employees to SBA’s small business classification of
1,250 employees.
44 Estimated first year costs of $17.37 million ×
10.27 percent of firms that are small businesses =
$1.8 million.
45 Source: https://www.census.gov/data/tables/
2012/econ/susb/2012-susb-annual.html. Accessed
on November 29, 2016.
VerDate Sep<11>2014
18:20 Dec 19, 2016
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Frm 00037
Fmt 4702
Sfmt 4702
This proposed rule has been reviewed
under Executive Order 12988, Civil
Justice Reform. These actions are not
intended to have retroactive effect,
although in some instances they merely
reiterate GIPSA’s previous
interpretation of the P&S Act. This
proposed rule would not pre-empt state
or local laws, regulations, or policies,
unless they present an irreconcilable
conflict with this rule. There are no
E:\FR\FM\20DEP1.SGM
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92740
Federal Register / Vol. 81, No. 244 / Tuesday, December 20, 2016 / Proposed Rules
administrative procedures that must be
exhausted prior to any judicial
challenge to the provisions of this
proposed rule. Nothing in this proposed
rule is intended to interfere with a
person’s right to enforce liability against
any person subject to the P&S Act under
authority granted in section 308 of the
P&S Act.
Executive Order 13175
This proposed rule has been reviewed
in accordance with the requirements of
Executive Order 13175, ‘‘Consultation
and Coordination with Indian Tribal
Governments.’’ Executive Order 13175
requires Federal agencies to consult and
coordinate with tribes on a governmentto-government basis on policies that
have tribal implications, including
regulations, legislative comments or
proposed legislation, and other policy
statements or actions that have
substantial direct effects on one or more
Indian tribes, on the relationship
between the Federal Government and
Indian tribes or on the distribution of
power and responsibilities between the
Federal Government and Indian tribes.
GIPSA has assessed the impact of this
rule on Indian tribes and determined
that this rule does not, to our
knowledge, have tribal implications that
require tribal consultation under EO
13175. If a tribe requests consultation,
GIPSA will work with the Office of
Tribal Relations to ensure meaningful
consultation is provided where changes,
additions, and modifications identified
herein are not expressly mandated by
Congress.
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.
mstockstill on DSK3G9T082PROD with PROPOSALS
E-Government Act Compliance
GIPSA is committed to compliance
with the E-Government Act, to promote
the use of the Internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
List of Subjects in 9 CFR Part 201
Contracts, Poultry, Livestock, Trade
Practices.
For the reasons set forth in the
preamble, we propose to amend 9 CFR
part 201 to read as follows:
VerDate Sep<11>2014
19:57 Dec 19, 2016
Jkt 241001
PART 201—Regulations Under the
Packers and Stockyards Act
1. The authority citation for Part 201
continues to read as follows:
■
Authority: 7 U.S.C. 181–229c.
2. Amend § 201.210 by adding
paragraph (b)(10) to read as follows:
*
*
*
*
*
(b) * * *
(10) Failing to use a poultry grower
ranking system in a fair manner after
applying the criteria in § 201.214.
■ 2. Add new § 201.214 to read as
follows:
■
§ 201.214
Poultry grower ranking systems.
The Secretary may consider various
criteria when determining whether a
live poultry dealer has engaged in a
pattern or practice to use a poultry
grower ranking system to compensate
poultry growers in an unfair, unjustly
discriminatory, or deceptive manner, or
in a way that gives an undue or
unreasonable preference or advantage to
any poultry grower or subjects any
poultry grower to an undue or
unreasonable prejudice or disadvantage.
These criteria include, but are not
limited to:
(a) Whether a live poultry dealer
provides sufficient information to
enable a poultry grower to make
informed business decisions. Such
information should include the
anticipated number of flocks per year,
the average gross income from each
flock, and any other information
necessary to enable a poultry grower to
calculate the expected income from the
poultry growing arrangement;
(b) Whether a live poultry dealer
supplies inputs of comparable quality
and quantity to all poultry growers in
the ranking group; and whether there is
a pattern or practice of supplying
inferior inputs to one or more poultry
growers in the ranking group. Inputs
include birds, feed, medication, and any
other input supplied by the live poultry
dealer;
(c) Whether a live poultry dealer
includes poultry growers provided with
dissimilar production variables in the
ranking group in a manner that affects
a poultry grower’s compensation.
Production variables include, but are
not limited to, the density at which the
live poultry dealer places birds, the
target slaughter weights of the birds, and
bird ages that vary by more than seven
days; and
(d) Whether a live poultry dealer has
demonstrated a legitimate business
justification for use of a poultry grower
ranking system that may otherwise be
unfair, unjustly discriminatory, or
PO 00000
Frm 00038
Fmt 4702
Sfmt 4702
deceptive or gives an undue or
unreasonable preference or advantage to
any poultry grower or subjects any
poultry grower to an undue or
unreasonable prejudice or disadvantage.
Larry Mitchell,
Administrator, Grain Inspection, Packers and
Stockyards Administration.
[FR Doc. 2016–30429 Filed 12–19–16; 8:45 am]
BILLING CODE 3410–KD–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2016–9501; Directorate
Identifier 2016–NM–137–AD]
RIN 2120–AA64
Airworthiness Directives; The Boeing
Company Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to adopt a new
airworthiness directive (AD) for The
Boeing Company Model 777 airplanes.
This proposed AD was prompted by
reports of uncommanded altitude
display changes in the mode control
panel (MCP) altitude window. This
proposed AD would require replacing
the existing MCP with a new MCP
having a different part number. We are
proposing this AD to address the unsafe
condition on these products.
DATES: We must receive comments on
this proposed AD by February 3, 2017.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE.,
Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
For service information identified in
this NPRM, contact Boeing Commercial
Airplanes, Attention: Data & Services
Management, P.O. Box 3707, MC 2H–65,
Seattle, WA 98124–2207; telephone:
206–544–5000, extension 1; fax: 206–
766–5680; Internet: https://
www.myboeingfleet.com. You may view
SUMMARY:
E:\FR\FM\20DEP1.SGM
20DEP1
]]>Agencies
[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Proposed Rules]
[Pages 92723-92740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30429]
-----------------------------------------------------------------------
DEPARTMENT OF AGRICULTURE
Grain Inspection, Packers and Stockyards Administration
9 CFR Part 201
RIN 0580-AB26
Poultry Grower Ranking Systems
AGENCY: Grain Inspection, Packers and Stockyards Administration, USDA.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Department of Agriculture's (USDA) Grain Inspection,
Packers and Stockyards Administration (GIPSA), Packers and Stockyards
Program (P&SP) is proposing to amend the regulations issued under the
Packers and Stockyards Act, 1921, as amended and supplemented (P&S
Act). The proposed amendments will identify criteria that the Secretary
may consider when determining whether a live poultry dealer's use of a
poultry grower ranking system for ranking poultry growers for
settlement purposes is unfair, unjustly discriminatory, or deceptive or
gives an undue or unreasonable preference, advantage, prejudice, or
disadvantage. The proposed amendments will also clarify that absent
demonstration of a legitimate business justification, failing to use a
poultry grower ranking system in a fair manner after applying the
identified criteria is unfair, unjustly discriminatory, or deceptive
and a violation of section 202(a) of the P&S Act regardless of whether
it harms or is likely to harm competition.
DATES: We will consider comments we receive by February 21, 2017.
ADDRESSES: We invite you to submit comments on this proposed rule. You
may submit comments by any of the following methods:
Mail: M. Irene Omade, GIPSA, USDA, 1400 Independence
Avenue SW., Room 2542A-S, Washington, DC 20250-3613.
Hand Delivery or Courier: M. Irene Omade, GIPSA, USDA,
1400 Independence Avenue SW., Room 2542A-S, Washington, DC 20250-3613.
Internet: https://www.regulations.gov. Follow the on-line
instructions for submitting comments.
Instructions: All comments should make reference to the date and
page number of this issue of the Federal Register. Regulatory analyses
and other documents relating to this rulemaking will be available for
public inspection in Room 2542A-S, 1400 Independence Avenue SW.,
Washington, DC 20250-3613 during regular business hours. All comments
received will be included in the public docket without change,
including any personal information provided. All comments will be
available for public inspection in the above office during regular
business hours (7 CFR 1.27(b)). Please call the Management and Budget
Services staff of GIPSA at (202) 720-8479 to arrange a public
inspection of comments or other documents related to this rulemaking.
FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Director, Litigation
and Economic Analysis Division, P&SP, GIPSA, 1400 Independence Ave.
SW., Washington, DC 20250-3601, (202) 720-7051,
s.brett.offutt@usda.gov.
SUPPLEMENTARY INFORMATION:
[[Page 92724]]
Background on Prior Rulemaking
GIPSA previously published a notice of proposed rulemaking on June
22, 2010, which included requirements regarding a live poultry dealer's
use of a poultry grower ranking system when determining payment for
grower services. That proposed rule would have required live poultry
dealers paying growers on a tournament system to pay growers raising
the same type and kind of poultry the same base pay and further
required that growers be settled in groups with other growers with like
house types. Upon review of public comments received both in writing
and through public meetings held during the comment period in 2010, we
have elected not to publish this rule as a final rule, but rather have
modified proposed Sec. 201.214 and are publishing it as a proposed
rule and requesting further public comment.
Background on Current Rulemaking
The P&S Act (7 U.S.C. 181 et seq.) sets forth broad prohibitions on
the conduct of entities operating subject to its jurisdiction. For
example, section 202(a) of the P&S Act prohibits packers, swine
contractors, and live poultry dealers from engaging in any unfair,
unjustly discriminatory, or deceptive practices. 7 U.S.C. 192(a).
Section 202(b) of the P&S Act prohibits packers, swine contractors, and
live poultry dealers from making or giving any undue or unreasonable
preference or advantage to any particular person, or subjecting any
particular person to any undue or unreasonable prejudice or
disadvantage. 7 U.S.C. 192(b). These broad provisions, which have not
previously been interpreted in regulations, make enforcement difficult
and create uncertainty among industry participants regarding
compliance.
GIPSA is proposing these regulations to clarify when certain
conduct in the poultry industry related to poultry grower ranking
systems violates sections 202(a) or 202(b) of the P&S Act. A poultry
grower ranking system, sometimes called a ``tournament,'' is the
process used by live poultry dealers to determine final payment to
poultry growers upon settlement of each flock. Under a poultry grower
ranking system, growers whose flocks are slaughtered during the same
settlement week are paid according to a structure that compares
growers' feed efficiency and live weight of the grown birds delivered
to the plant. Growers with better performance according to a live
poultry dealer's standards are ranked higher than growers with lower
performance and, therefore, receive more compensation.
Poultry grower ranking systems are widely used by live poultry
dealers operating as vertically integrated companies. The vertically
integrated company is responsible for every step of the poultry
production process except the raising and caring of the live birds
meant for slaughter. Independent farmers, acting as contractors and
referred to as ``poultry growers,'' perform this function. The
vertically integrated live poultry dealer provides the chicks,\1\ feed,
and medication to poultry growers who house and feed the birds under a
contract. The poultry grower grows the birds to market size (preferred
weight for slaughter) and then, after slaughter, receives a settlement
check for that flock. The payment received depends on how efficiently
the poultry grower converted feed to meat as compared to the other
poultry growers in the settlement group.
---------------------------------------------------------------------------
\1\ Poultry grower ranking systems are used extensively in
broiler production. The ranking systems are also used in turkey
production. References in this document to chicks, chickens, or
broilers are also relevant to the use of grower ranking systems in
turkey production.
---------------------------------------------------------------------------
GIPSA has received complaints from poultry growers alleging unfair
treatment in poultry grower ranking systems. Many of the underlying
factors in these complaints were shared with GIPSA in the comments to
the 2010 proposed rule. The 2010 proposed rule (Sec. 201.214) would
have required live poultry dealers paying growers on a tournament
system to pay growers raising the same type and kind of poultry the
same base pay and further required that growers be settled in groups
with other growers with like house types. Comments in favor of the
proposed rule most often cited the imbalance in power and control
between the poultry companies and the growers. Most common among the
reasons for supporting the proposed rule was the control the poultry
company has over inputs. Growers have no control over numerous inputs
that ultimately determine pay. In particular, the poultry companies
control the following inputs and production variables: Chick health,
number of chicks placed, feed quality, medications, growout time, breed
and type of bird, weighing of the birds, and weighing of the feed.
Commenters complained that the poultry grower ranking system is a poor
indicator of the grower's abilities and performance in growing
chickens. One commenter pointed out that bird age can vary as much as 9
days in a group. Due to the relatively short growing period for
poultry, there can be significant differences in bird size, and as a
result, grower pay, in birds just a few days apart in age. Comments
also expressed concern that company employees who are also poultry
growers get preferential treatment and may get better birds or get to
keep flocks longer.
Comments opposed to the proposed rule overwhelmingly cited the loss
of the incentive for growers to perform. For example, commenters
complained that ``there will be no incentive available for above-
average growers,'' ``the pay system rewards the ones who strive to do
best,'' it ``will take money from the most progressive growers,'' and
``is grossly unfair to the most productive and successful growers, only
benefits the least productive and least successful.'' Those opposed to
the proposed rule commented that everyone should not be paid the same,
that competition is good for the industry, and that those that spend
money and expend effort should be rewarded. Some commenters stated
there will not be enough like houses to group together for ranking
purposes.
A few commenters offered recommendations. Specifically, they
suggested ``same type and kind'' of poultry should be defined as same
breed, age range, sex, and target weight. Also, they suggested that the
base pay rate should reflect grower's cost of production plus a
reasonable rate of return. Other commenters suggested that GIPSA should
clarify that incentive pay would still be allowed under the proposed
rule. In GIPSA's experience reviewing live poultry dealer records, some
poultry companies use the base pay as the minimum pay rate, so
implementing the provision regarding base pay would not be difficult.
Several comments said that ``like house type'' was poorly defined.
Depending on the interpretation, there could be many different
categories of like house types in which case, there could be very few
growers in a given settlement group.
Commenters critical of the poultry grower ranking system focused on
the live poultry dealer's control over the inputs. Inputs and other
factors influencing performance and pay are not equal among growers.
Commenters noted that variations in chicks, feed, and medications have
a significant influence on the poultry grower's performance, but the
grower has no control or influence over the quality of those inputs. As
an example, one comment stated that male chickens have higher average
weight gain than female chickens. Therefore, if one grower gets a
higher percentage of male chickens than other growers, that grower
could
[[Page 92725]]
have an advantage in the ranking system over growers who receive all or
a higher percentage of female chickens. The breed of the poultry is
also a factor. Growers who receive a breed that does not perform as
well, due to the characteristics of that breed, are disadvantaged
compared to growers who receive a better-performing breed. Another
factor noted by commenters was the age of the breeder flock and that
chicks from breeder hens that are very young or very old are known to
be inferior to chicks from hens that are of prime egg-laying age.
Commenters stated that poultry growers who get all or a higher
percentage of chicks from very old or very young breeder hens are at a
disadvantage compared to growers who receive chicks from hens in the
prime weeks of laying good eggs. Citing these examples, commenters
pointed out the ways live poultry dealers could give preferential
treatment to some growers by delivering superior chicks to their farms.
Other comments focused on the quantity and quality of feed. One
poultry grower commented about the effect on rankings when the live
poultry dealer assumes that the grower receives more feed than the live
poultry dealer actually delivered. The grower explained that a 200
pound under-delivery of feed in a system where production costs are
averaged to ten-thousandths of a cent, would affect the rankings and
cause the grower to be paid less than other growers in the settlement
group. Another grower commented that he had received a delivery of bad
feed that made the chickens sick. Although the live poultry dealer
replaced the bad or spoiled feed, the damage had been done and the
grower's flock ranked at the bottom of the poultry grower ranking for
that settlement group. These commenters were expressing their
frustration with the poultry grower ranking system that relied on
inputs over which they had no control.
Recognizing that not all inputs are the same, in proposed new Sec.
201.214, GIPSA is not proposing that all poultry growers receive the
same quality inputs, or that growers only be ranked in settlement
groups where all growers receive the same quality inputs. In each
settlement group, it is very likely that the live poultry dealer will
place chicks on some farms that are inferior to other chicks simply due
to the variation in the birds. Likewise, feed quality or the delivery
quantity may vary.
Unlike the proposed rule published in 2010 regarding poultry grower
ranking systems, this proposed rule would not prohibit or prescribe
certain conduct, nor would it prescribe specific payment to be made to
growers. Instead, after consideration of the comments received, we are
proposing a rule that encourages better sharing of information with
growers and fairness in areas under a live poultry dealer's control.
Proposed new Sec. 201.214 sets forth criteria that the Secretary may
consider to determine whether live poultry dealers have used the
poultry grower ranking system in a manner that violates sections 202(a)
or (b) of the P&S Act.
Proposed new Sec. 201.214, ``Poultry Grower Ranking Systems''
would establish a non-exhaustive list of criteria the Secretary may
consider when determining whether a live poultry dealer has violated
the P&S Act with respect to the use of a poultry grower ranking system.
Under proposed Sec. 201.214(a), the Secretary may consider whether the
grower is provided enough information to make informed decisions
regarding the grower's poultry production operation. Such information
would include the anticipated number of flocks per year and the average
gross income from each flock. Because most growers borrow substantial
sums of money to build and upgrade houses to meet the live poultry
dealer's specifications, a grower would want a contract of sufficient
length and with sufficient poultry production to repay the loan. For
that reason, it is important for the poultry grower to know the
anticipated average gross income from each flock in order to plan
accordingly for future earnings and investments. Live poultry dealers
should disclose information necessary to enable the grower to make
informed decisions.
Under proposed Sec. 201.214(b), the Secretary may consider whether
a live poultry dealer supplies inputs (e.g., birds, feed, and
medication) of comparable quality and quantity to all poultry growers
in the ranking group. When considering the inputs provided by the live
poultry dealer to the poultry grower and the growout specifications
established for the poultry grower, GIPSA does not require uniformity,
but rather fairness among the growers in a settlement group. Growers
are not paid based solely on their individual performance, but as
compared to other growers in a settlement group. When a grower received
inputs of either superior or inferior quality as compared to the inputs
provided to other growers, that grower may be at either an advantage or
disadvantage when flocks are settled depending on the quality of the
inputs received. Under proposed Sec. 201.214(b), the Secretary may
also consider whether there is a pattern of supplying inferior inputs
(e.g., birds, feed, and medication) to one or more poultry growers in
the ranking group. With regards to supplying inferior birds, as
discussed above, lower quality chicks may result from very young or
very old breeder hens, from a poultry breed that does not perform as
well as other breeds in the growout, or for other reasons. If a poultry
grower consistently receives lower quality or inferior chicks, the
grower will experience higher mortality rates and lower efficiency. The
grower will rank lower in the settlement group and receive less
compensation as compared to the other growers in the settlement group.
Similarly, if a poultry grower receives lower quality feed, or if the
grower receives less feed than the quantity used to calculate payment,
the grower's performance will suffer as compared to other growers in
the settlement group. Also, if a grower's flock needs medication, but
the live poultry dealer fails to provide the medication, or if one
flock is placed on a different treatment schedule, the flock
performance may suffer as compared to other flocks in the settlement
group. Under proposed Sec. 201.214(c), the Secretary may consider
additional company-controlled factors that could affect a grower's
performance in a settlement group.
Proposed Sec. 201.214(d) provides that the Secretary may consider
whether the live poultry dealer has demonstrated a legitimate business
justification for conduct that may otherwise be unfair, unjustly
discriminatory, or deceptive, or that gives an undue or unreasonable
preference or advantage to any poultry grower or subjects any poultry
grower to an undue or unreasonable prejudice or disadvantage. A
legitimate business justification for certain conduct may be sufficient
to find that the conduct does not violate the P&S Act. We request
comment on the types of conduct that might be considered for a
legitimate business justification, in order to give further context to
this provision in the final rule.
Concurrent with the publication of this proposed rule, GIPSA is
also proposing another rule in this issue of the Federal Register that,
among other things, would clarify the conduct or action by packers,
swine contractors, or live poultry dealers that GIPSA considers unfair,
unjustly discriminatory, or deceptive and a violation of section 202(a)
of the P&S Act. Specifically, this proposed rule includes Sec.
201.210, ``Unfair, unjustly discriminatory, or deceptive practices or
devices by packers, swine contractors, or live poultry dealers,'' which
includes in paragraph (b) a non-exhaustive list of conduct or action
that, absent
[[Page 92726]]
demonstration of a legitimate business justification, GIPSA believes is
unfair, unjustly discriminatory, or deceptive and a violation of
section 202(a) of the P&S Act, regardless of whether the conduct harms
or is likely to harm competition. Currently, proposed Sec. 201.210(b)
contains nine examples. In this rule, GIPSA is proposing to add to
proposed Sec. 201.210(b) a tenth example, Sec. 201.210(b)(10) GIPSA
also considers a live poultry dealer's failure to use a poultry grower
ranking system in a fair manner after applying the criteria in Sec.
201.214 to be an unfair, unjustly discriminatory, or deceptive practice
or device and a violation of section 202(a) of the P&S Act regardless
of whether it harms or is likely to harm competition.
IV. Required Impact Analyses
Executive Order 12866 and Regulatory Flexibility Act
This rulemaking 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. As a required part of the
regulatory process, GIPSA prepared an economic analysis of proposed
Sec. 201.214. The first section of the analysis is an introduction and
discussion of the prevalence of contracting in the poultry industry as
well as a discussion of potential market failures. Next, GIPSA
discusses three regulatory alternatives it considered and presents a
summary cost-benefit analysis of each alternative. GIPSA then discusses
the impact on small businesses.
Introduction
GIPSA issued a proposed rule on June 22, 2010, which included Sec.
201.214. GIPSA has revised the 2010 version of Sec. 201.214 and is now
proposing a new Sec. 201.214. The rule GIPSA proposed on June 22,
2010, included several requirements regarding live poultry dealers' use
of tournament systems. That section of the proposed rule would have
required live poultry dealers paying growers on a tournament system to
pay growers raising the same type and kind of poultry the same base
compensation and further required that growers be settled in groups
with other growers with like house types. The rule also prohibited live
poultry dealers from offering poultry growing arrangements containing
provisions that decrease or reduce grower compensation below the base
compensation amount.
Upon review of public comments received both in writing and through
public meetings held during the comment period in 2010, GIPSA elected
not to publish this rule as a final rule and has removed the
requirements and prohibitions in the rule proposed on June 22, 2010.
GIPSA has re-written Sec. 201.214 and is proposing this regulation
to establish criteria the Secretary may consider in determining whether
a live poultry dealer has used a poultry grower ranking system to
compensate poultry growers in an unfair, unjustly discriminatory, or
deceptive manner, or in a way that gives an undue or unreasonable
preference or advantage to any poultry grower or subjects any poultry
grower to an undue or unreasonable prejudice or disadvantage.\2\
Coupled with Sec. 201.3(a), which is being published as an interim
final rule concurrently in this edition of the Federal Register and
proposed Sec. 201.210(b)(10), which is discussed below, the criteria
clarify whether a live poultry dealer's use of a poultry grower ranking
system violates sections 202(a) and/or 202(b) of the P&S Act.
---------------------------------------------------------------------------
\2\ A tournament system is a type of poultry grower ranking
system.
---------------------------------------------------------------------------
Interim Final Sec. 201.3(a) states that certain conduct or action
can be found to violate sections 202(a) and/or 202(b) of the P&S Act
without a finding of harm or likely harm to competition in all cases.
Proposed Sec. 201.210(b)(10) would add to proposed Sec. 201.210(b),
which is published as part of a separate proposed rule in this edition
of the Federal Register, another example of conduct or action by a live
poultry dealer that absent demonstration of a legitimate business
justification, GIPSA considers an unfair, unjustly discriminatory, or
deceptive practice or device and a violation of section 202(a) of the
P&S Act regardless of whether the conduct or action harms or is likely
to harm competition. Specifically, proposed Sec. 201.210(b)(10) would
clarify that absent demonstration of a legitimate business
justification, GIPSA considers the failure to use a poultry grower
ranking system in a fair manner after applying the criteria in proposed
Sec. 201.214 to be an unfair, unjustly discriminatory, or deceptive
practice or device and a violation of section 202(a) of the P&S Act
regardless of whether it harms or is likely to harm competition. Since
Sec. 201.210(b)(10) relies on the criteria in Sec. 201.214, the
estimated costs and benefits of Sec. 201.210(b)(10) are included in
the estimated costs and benefits of Sec. 201.214.
The criteria in proposed Sec. 201.214 would include whether a live
poultry dealer has provided sufficient information to enable a poultry
grower to make informed business decisions. The criteria would also
address whether the inputs, including birds, feed, and medication,
provided by live poultry dealers to poultry growers are of consistent
quality and quantity. The criteria would recognize the non-uniformity
of inputs provided by live poultry dealers to growers and discourage
the live poultry dealer from consistently providing superior or
inferior inputs to growers in a manner that consistently affects grower
compensation. The criteria also would consider whether live poultry
dealers have provided poultry growers with dissimilar production
variables such as the density at which the live poultry dealer places
birds, target bird sizes, and age of birds at slaughter that affects
the performance and grower ranking. Finally, the criteria would
consider whether a live poultry dealer has demonstrated a legitimate
business justification for conduct that may otherwise be unfair,
unjustly discriminatory, or deceptive or gives an undue or unreasonable
preference or advantage to any poultry grower or subjects any poultry
grower to an undue or unreasonable prejudice or disadvantage.
Prevalence of Poultry Contracts and Poultry Grower Ranking Systems
The production of poultry is highly vertically integrated with live
poultry dealers owning or controlling most segments of the value chain.
Live poultry dealers typically own the breeding stock, the hatcheries,
the feedmills, the live birds, and they own and operate the slaughter
operations. Live poultry dealers typically contract out the growing
operations for their live birds to independent poultry growers. Live
poultry dealers who own or control most segments of the value chain and
contract out the growing operations of live birds are commonly referred
to as integrators.\3\
---------------------------------------------------------------------------
\3\ For the purposes of this Regulatory Impact Analysis, the
terms live poultry dealer and integrator are used interchangeably.
P&SP has jurisdiction over live poultry dealers, most of which are
also integrators. The only time the Regulatory Impact Analysis will
refer to integrators is when another author uses the term integrator
as in Table 2.
---------------------------------------------------------------------------
Broilers are almost exclusively grown under production contracts.
In 2012, 96.4% of broilers were grown under contract, while 68.5% of
turkeys were grown under production contracts. Under a production
contract, the live poultry dealer provides the poultry grower with many
inputs including the live chicks, feed, and medications. The poultry
grower in turn provides the housing, labor, water, electricity, fuel,
[[Page 92727]]
and provides for waste removal. At the end of the grow-out period, the
live poultry dealer typically picks up the birds for slaughter. The
payment to the poultry grower for the growing services is often
determined by a poultry grower ranking system outlined in the
production contract.
Under a typical poultry grower ranking system, all growers who grew
birds that were shipped to the same plant in the same week are grouped
together for payment purposes. Their cost per pound of live weight is
averaged using standard costs for chicks and feed. Live poultry dealers
then rank the growers based on cost. Live poultry dealers typically
reward growers with lower costs by providing higher compensation for
their growing services. Live poultry dealers typically provide less
compensation to growers with higher costs.
Contracting is an important and prevalent feature in the production
of poultry. The following table shows the share of poultry, by type,
produced under contract over the years that the Census of Agriculture
has published data on commodities raised and delivered under production
contracts.
---------------------------------------------------------------------------
\4\ Agricultural Census, 2007 and 2012. https://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/ and https://www.agcensus.usda.gov/Publications/2007/Full_Report/Volume_1,_Chapter_1_US/.
Table 1--Percentage of Poultry Raised and Delivered Under Production Contracts \4\
----------------------------------------------------------------------------------------------------------------
Poultry 2002 2007 2012
----------------------------------------------------------------------------------------------------------------
Broilers (%).................................................... 98.0 96.5 96.4
Turkeys (%)..................................................... 41.7 67.7 68.5
----------------------------------------------------------------------------------------------------------------
Benefits of Contracting in Agricultural Production and the Poultry
Industry
Agricultural production contracts have many benefits. They help
farmers and livestock producers manage price and production risks,
elicit the production of products with specific quality attributes by
tying prices to those attributes, and facilitate the smooth flow of
commodities to processing plants encouraging more efficient use of farm
and processing capacities. Agricultural production contracts can also
lead to improvements in efficiency throughout the supply chain for
products by providing farmers with incentives to deliver products
consumers desire and produce products in ways that reduce processing
costs and, ultimately, retail prices. Poultry production contracts are
a specific type of agricultural production contract that are widely
used due to the benefits of growing poultry under production contract
arrangements.
There are benefits to both live poultry dealers and poultry growers
from entering into agricultural production contracts, referred to as
contract poultry growing arrangements \5\ in the poultry industry.
Contract poultry growing arrangements allow for a sharing of risk
between the live poultry dealer and the poultry grower. Contract
poultry growing arrangements have provided poultry growers with
predictable income and access to financing to invest in more efficient
types of houses. More efficient housing may lead to higher compensation
under poultry grower ranking systems. Contract poultry growing
arrangements have benefited live poultry dealers by shifting the
capital expenses of growing poultry to the poultry growers.
---------------------------------------------------------------------------
\5\ Under section 2(a)(9) of the P&S Act, a ``poultry growing
arrangement'' is defined as ``any growout contract, marketing
agreement, or other arrangement under which a poultry grower raises
and cares for live poultry for delivery, in accord with another's
instructions, for slaughter.''
---------------------------------------------------------------------------
The pervasive use of contract poultry growing arrangements has
benefited the poultry industry and consumers by increasing the rate of
adoption of new technology, increasing feed conversion, and increasing
the ability of the industry to respond to changes in consumer
demand.\6\ The prevalence of contract poultry growing arrangements in
the poultry industry is evidence of the benefits to growers, live
poultry dealers, and consumers.
---------------------------------------------------------------------------
\6\ Vukina, Tomislav, ``Vertical Integration and Contracting in
the U.S. Poultry Sector,'' Journal of Food Distribution Research,
July 2001.
---------------------------------------------------------------------------
Structural Issues in the Poultry Industry
As the above discussion highlights, there are important benefits
associated with the use of agriculture contracts in the poultry
industry. However, if there are large disparities in the bargaining
power among contracting parties resulting from size differences between
contracting parties or the use of market power by one of the
contracting parties, the contracts may have detrimental effects on one
of the contracting parties and may result in inefficiencies in the
marketplace.
For example, a contract that ties a grower to a single purchaser of
a specialized commodity, even if the contract provides for fair
compensation to the grower, still leaves the grower subject to default
risks should the contractor fail. Another example is a contract that
covers a shorter term than the life of the capital (a poultry house,
for example). The grower may face the hold-up risk that the contractor
(live poultry dealer) may require additional capital investments or may
impose lower returns at the time of contract renewal. Hold-up risk is a
potential market failure and is discussed in detail in the next
section. These risks may be heightened when there are no alternative
buyers for the grower to switch to, or when the capital investment is
specific to the original buyer.\7\ Some growers make substantial long-
term capital investments as part of poultry production contracts,
including land, poultry houses, and equipment. Those investments may
tie the grower to a single integrator. Costs associated with default
risks and hold-up risks are important to many growers in the industry.
The table below shows the number of integrators that broiler growers
have in their local areas by percent of total farms and by total
production.
---------------------------------------------------------------------------
\7\ See Vukina and Leegomonchai, Oligopsony Power, Asset
Specificity, and Hold-Up: Evidence From The Broiler Industry,
American Journal of Agricultural Economics, 88(3): 589-605 (August
2006).
[[Page 92728]]
Table 4--Integrator Choice for Broiler Growers \8\
----------------------------------------------------------------------------------------------------------------
Can change to
Integrators in grower's area \9\ Farms Birds Production another
integrator
----------------------------------------------------------------------------------------------------------------
Number Percent of total Percent of
farms
----------------------------------------------------------------------------------------------------------------
1............................................... 21.7 23.4 24.5 7
2............................................... 30.2 31.9 31.7 52
3............................................... 20.4 20.4 19.7 62
4............................................... 16.1 14.9 14.8 71
>4.............................................. 7.8 6.7 6.6 77
No Response..................................... 3.8 2.7 2.7 Na
----------------------------------------------------------------------------------------------------------------
The data in the table show that 52 percent of broiler growers,
accounting for 56 percent of total production, report having only one
or two integrators in their local areas. This limited integrator choice
may accentuate the contract risks. A 2006 survey indicated that growers
facing a single integrator received 7 to 8 percent less compensation,
on average, than farmers located in areas with 4 or more
integrators.\10\ If live poultry dealers already possess some market
power to force down prices for poultry growing services, some contracts
can extend that power by raising the costs of entry for new
competitors, or allowing for price discrimination.\11\
---------------------------------------------------------------------------
\8\ MacDonald, James M. Technology, Organization, and Financial
Performance in U.S. Broiler Production. USDA, Economic Research
Service, June 2014.
\9\ Percentages were determined from the USDA Agricultural
Resource Management Survey (ARMS), 2011. ``Respondents were asked
the number of integrators in their area. They were also asked if
they could change to another integrator if they stopped raising
broilers for their current integrator.'' Ibid. p. 30.
\10\ MacDonald, J. and N. Key. ``Market Power in Poultry
Production Contracting? Evidence from a Farm Survey.'' Journal of
Agricultural and Applied Economics. 44(4) (November 2012): 477-490.
\11\ See, for example, Williamson, Oliver E. Markets and
Hierarchies: Analysis and Antitrust Implications, New York: The Free
Press (1975); Edlin, Aaron S. & Stefan Reichelstein (1996)
``Holdups, Standard Breach Remedies, and Optimal Investment,'' The
American Economic Review 86(3): 478-501 (June 1996).
---------------------------------------------------------------------------
Many poultry processing markets face barriers to entry, including:
(1) Economies of scale; (2) high asset-specific capital costs with few
alternative uses of the capital; (3) brand loyalty of consumers,
customer loyalty to the incumbent processors, and high customer
switching costs; and (4) governmental food safety, bio-hazard, and
environmental regulations. Consistent with these barriers, there has
been limited new entry.
However, an area where entry has been successful is in developing
and niche markets, such as organic meat and free-range chicken.
Developing and niche markets have a relatively small consumer market
that is willing to pay higher prices, which supports smaller plant
sizes. Niche processors are generally small, however, and do not offer
opportunities to many producers or growers.
Economies of scale have resulted in large processing plants in the
poultry processing industry. Barriers to entry limit the expansion of
choice for poultry growers who have only one or two integrators in
their local areas with no potential entrants on the horizon. The
limited expansion of choice of processors by poultry growers may limit
contract choices and the bargaining power of growers in negotiating
contracts.
One indication of potential market power is industry
concentration.\12\ The following table shows the level of concentration
in the poultry slaughtering industry for 2007-2015.
---------------------------------------------------------------------------
\12\ For additional discussion see MacDonald, J.M. 2016
``Concentration, contracting, and competition policy in U.S.
agribusiness,'' Competition Law Review, No. 1-2016: 3-8.
\13\ These data were compiled from Packers and Stockyards
industry annual reports, a proprietary data source.
Table 5--Four-Firm Concentration in Poultry Slaughter \13\
------------------------------------------------------------------------
Year Broilers (%) Turkeys (%)
------------------------------------------------------------------------
2007.................................... 57 52
2008.................................... 57 51
2009.................................... 53 58
2010.................................... 51 56
2011.................................... 52 55
2012.................................... 51 53
2013.................................... 54 53
2014.................................... 51 58
2015.................................... 51 57
------------------------------------------------------------------------
The table above shows the concentration of the four largest broiler
and turkey processors has remained relatively steady at between 50 and
60 percent.
The data in Table 5 are estimates of national concentration and the
size differences discussed below are also at the national level, but
the economic markets for poultry may be regional or local, and
concentration in regional or local areas may be higher than national
measures.\14\ The data presented earlier in Table 4 highlight this
issue by showing the limited ability a poultry grower has to switch to
a different integrator. As a result, national concentration may not
demonstrate accurately the options poultry growers in a particular
region actually face.
---------------------------------------------------------------------------
\14\ MacDonald and Key (2012) Op. Cit. and Vukina and
Leegomonchai (2006) Op. Cit.
---------------------------------------------------------------------------
Another factor GIPSA considered in proposing Sec. 201.214 is the
contrast in size and scale between poultry growers and the live poultry
dealers they supply. The disparity in size between large oligopsonistic
buyers and atomistic sellers may lead to market power. The National
Chicken Council states that in 2016, approximately 35 companies were
involved in the business of raising, processing, and marketing chicken
on a vertically integrated basis, while about 25,000 family farmers had
production contracts with those companies.\15\ That comes to about 714
family-growers per company. Collectively, the family-growers produced
about 95 percent of the nearly 9 billion broilers produced in the
United States in 2015. The other 5 percent were grown on company-owned
farms. That means the average family-grower produced about 342,000
broilers. As Table 5 shows, the four largest poultry companies in the
United States accounted for 51 percent of the broilers processed. That
means the average volume processed by the four largest poultry
companies was about 1.15 billion head, which was 3,357 times the
average family grower's volume.
---------------------------------------------------------------------------
\15\ https://www.nationalchickencouncil.org/about-the-industry/statistics/broiler-chicken-industry-key-facts/.
---------------------------------------------------------------------------
As the above discussion highlights, there are large size
differences between poultry growers and the live poultry dealers which
they supply. These size differences may contribute to unequal
[[Page 92729]]
bargaining power due to monopsony market power or oligopsony market
power, or asymmetric information. The result is that the contracts
bargained between the parties may have detrimental effects on poultry
growers due to the structural issues discussed above and may result in
inefficiencies in the marketplace.
Hold-Up as a Potential Market Failure
Integrators demand investment in fixed assets from the growers. One
example is specific types of poultry houses and equipment the
integrator may require the grower to utilize in their growing
operations. These investments may improve efficiency by more than the
cost of installation. Typically, the improved efficiency would accrue
to both the integrator and the grower. The integrator has lower feed
costs, and the grower performs better relative to other poultry growers
in a settlement group. If the grower bears the entire cost of
installation, then the grower should be further compensated for the
feed conversion gains that accrue to the integrator. The risk is that
after the assets are installed, the cost to the grower is ``sunk.''
This means that if the integrator reneges on paying compensation for
the additional capital investments, and insists on maintaining the
lower price, the grower will accept that lower price rather than
receive nothing. This allows the integrator to get the benefit of
efficiency gains, at no expense to them, with the grower bearing all of
the cost. This reneging is termed ``hold-up'' in the economic
literature.\16\
---------------------------------------------------------------------------
\16\ See for example, Benjamin Klein, Robert G. Crawford, and
Armen A. Alchian, ``Vertical Integration, Appropriable Rents, and
the Competitive Contracting Process,'' The Journal of Law and
Economics 21, no 2 (Oct., 1978): 297-326.
---------------------------------------------------------------------------
Hold-up can have two consequences that result in market failures.
If the growers do not anticipate hold-up, then growers will spend too
much on investments because the integrator who demands them is not
incurring any cost. That is inefficient. If the grower does anticipate
hold-up, they will act as if the integrator was going to renege even
when it was not, resulting in too little investment and loss of
potential efficiency gains.
Hold-up can be resolved with increased competition. If an
integrator developed a reputation for reneging, and growers could go
elsewhere, the initial integrator would be punished and disincentivized
from reneging in the future. Unfortunately, in practice, many growers
do not have the option of going elsewhere.
Data shown above in Table 4 indicate that there are few integrators
in these markets, and that growers have limited choice. Table 5, above,
indicates the level of concentration in the poultry processing industry
and shows that integrators operate in concentrated markets.
This rule would allow growers to file complaints against
integrators that renege, giving some of the incentive benefit of
competition, without compromising the efficiency of having few large
processors. In addition to addressing the potential market failure of
hold-up, this rule would address inefficiencies due to incomplete and
asymmetric information in poultry markets. Poultry growers who lack
adequate information on the expected revenue from a growing arrangement
may make inefficient investment decisions. For instance, a grower may
invest too much money in building new houses or purchasing upgrades
relative to what they would choose if they were fully informed about
the expected return from those investments. By requiring that growers
be provided sufficient information to make informed business decisions,
this rule would help mitigate non-optimal investment by growers and
improves social welfare.
Contracting, Industry Structure, and Market Failure: Summary of the
Need for Regulation
There are benefits of contracting in the poultry industry, as well
as structural issues that may result in unequal bargaining power and
market failures. These structural issues and market failures would be
mitigated by relieving plaintiffs from the requirement to demonstrate
competitive injury. For instance, contracting parties can alleviate
hold-up problems if they are able to write complete contracts, and are
able to litigate to enforce the terms of those contracts when there is
an attempt to engage in ex-post hold-up. Because proving competitive
injury is difficult and costly, removing that burden facilitate the use
of litigation by producers and growers to address violations of the
Packers and Stockyards Act. If growers are able to seek legal remedies,
then their contracts would be easier to enforce. This will incentivize
integrators to avoid exploitation of market power and asymmetric
information, as well as behaviors that result in the market failure of
hold-up. The result will be improved efficiency in poultry markets.
GIPSA has a clear role to ensure that market failures are mitigated so
that poultry markets remain fair and competitive. Section 201.214 seeks
to fulfill that role by promoting fairness and equity for poultry
growers.
Cost-Benefit Analysis of the Proposed Rule
Costs of the Regulations Proposed on June 22, 2010
GIPSA issued a proposed rule on June 22, 2010, with several new
regulations, many of which had the potential to impact the poultry
industry. A brief summary of the regulations proposed in 2010 follows.
Proposed Sec. 201.3(c) stated that certain conduct may be
found to violate sections 202(a) and/or 202(b) of the P&S Act without a
finding of harm or likely harm to competition.
Proposed Sec. 201.210 would have provided specific
examples of conduct that violate section 202(a) regardless of whether
the conduct harms or is likely to harm competition.
Proposed Sec. 201.211 would have provided specific
criteria the Secretary may consider when determining whether an undue
or unreasonable preference or advantage or an undue or unreasonable
prejudice or disadvantage has occurred in violation of section 202(b)
of the P&S Act.
Proposed Sec. 201.213 stated that live poultry dealers
obtaining poultry under a poultry growing arrangement must submit a
sample copy of each unique contract or agreement to GIPSA for posting
on its Web site.
Proposed Sec. 201.214 would have required live poultry
dealers paying growers on a tournament system to pay growers raising
the same type and kind of poultry the same base compensation and
further required that growers be settled in groups with other growers
with like house types. Proposed Sec. 201.214 also would have
prohibited live poultry dealers from offering poultry growing
arrangements containing provisions that decrease or reduce grower
compensation below the base compensation amount.
Proposed Sec. 201.215 would have provided specific
criteria the Secretary may consider when determining whether a poultry
grower was provided with reasonable notice prior to suspension of the
delivery of birds to a poultry grower.
Proposed Sec. 201.216 would have set forth specific
criteria the Secretary may consider when determining whether a
requirement that a poultry grower make additional capital investments
constitutes an unfair practice in violation of the P&S Act.
Proposed Sec. 201.217 would have set forth the conditions
under which a poultry grower may be required to make additional capital
investments.
[[Page 92730]]
Proposed Sec. 201.218 would have provided specific
criteria the Secretary may consider in determining whether a live
poultry dealer has provided a poultry grower a reasonable period of
time to remedy a breach of contract.
Proposed Sec. 201.219 would have provided specific
criteria the Secretary may consider when determining whether the
arbitration process in a contract provides a meaningful opportunity for
the poultry grower to participate fully in the arbitration process.
GIPSA considered thousands of comments before proposing the current
version of Sec. 201.214. The following provisions were in the 2010
rule, but not in the currently proposed regulation.
Requirement that live poultry dealers paying poultry
growers on a tournament system pay poultry growers raising the same
type and kind of poultry the same base compensation, and that poultry
growers be settled in groups with other poultry growers with like house
types (Sec. 201.214).
Prohibition on live poultry dealers from offering growing
arrangements containing provisions that decrease or reduce poultry
grower compensation below the base compensation amount (Sec.
201.214(a)).
Requirement that live poultry dealers submit sample
contracts to GIPSA for posting to the public (Sec. 201.213).
Additionally, GIPSA has adjusted the rule proposed in 2010 to give
live poultry dealers more flexibility in suspending the delivery of
birds and requiring capital improvements and those adjustments are
reflected in current proposed Sec. Sec. 201.215 and 201.216,
respectively.
GIPSA is issuing Sec. 201.3(a) as an interim final rule
concurrently in this issue of the Federal Register. GIPSA has also
revised and is currently proposing new versions of Sec. Sec. 201.210
and 201.211 concurrently in a separate proposed rule in this issue of
the Federal Register. In December 2011, GIPSA issued as a final rule
Sec. Sec. 201.215, 201.216, 201.217, and 201.218. Proposed Sec.
201.217, capital investments requirements and prohibitions, was
removed, and proposed Sec. Sec. 201.218 and 201.219 were renumbered as
Sec. Sec. 201.217 and 201.218.
GIPSA has now revised Sec. 201.214 and instead of proscribing
certain conduct, new proposed Sec. 201.214 would establish criteria
the Secretary may consider in determining whether a live poultry dealer
has used a poultry grower ranking system to compensate poultry growers
in an unfair, unjustly discriminatory, or deceptive manner, or in a way
that gives an undue or unreasonable preference or advantage to any
poultry grower or subjects any poultry grower to an undue or
unreasonable prejudice or disadvantage.
GIPSA received numerous comments on the proposed rule in 2010.
Although many thousands of the comments submitted contained general
qualitative assessments of either the costs or benefits of the proposed
rule, only two comments systematically described quantitative costs
across the rule's provisions.
Comments from the National Meat Association included cost estimates
by Informa Economics (the Informa Study). The Informa Study estimated
that the proposed rule would cost the U.S. poultry industry
approximately $361.6 million.\17\ The Informa Study estimated $26.0
million for the one-time direct costs of rewriting contracts,
additional record keeping, etc., $33.4 million for the ongoing direct
costs, and $302.2 million for cost increases due to efficiency
losses.\18\ However, these cost estimates assumed all of the 2010
proposed changes, many of which now do not apply.
---------------------------------------------------------------------------
\17\ Informa Economics, Inc. ``An Estimate of the Economic
Impact of GIPSA's Proposed Rules,'' prepared for the National Meat
Association, 2010, Table 9, Page 53.
\18\ Ibid. Page 53.
---------------------------------------------------------------------------
The Informa Study recognized that the economic costs of the 2010
proposed rule would take time to materialize. The Informa Study
estimated that only the direct, one-time costs would occur shortly
after implementation and the more significant impacts, such as
declining efficiency, would happen more slowly and would not reach the
full impact until years 3 and 4 in the poultry industry after the rule
become effective.\19\ Thus, the $361.6 million cost estimate by the
Informa Study was for when the rule reached its full impact in years 3
and 4. The Informa Study further recognized that companies would find
ways to adapt to the provisions of the rule and the impact of the rule
would decrease after year 4.\20\
---------------------------------------------------------------------------
\19\ Informa Economics, Inc. ``An Estimate of the Economic
Impact of GIPSA's Proposed Rules,'' prepared for the National Meat
Association, 2010, Page 66.
\20\ Ibid, Page 67.
---------------------------------------------------------------------------
The Informa Study posited that the several elements in the proposed
rule would likely alter the integrator-grower relationship in such a
way as to slow down the adoption of new technologies that increase
efficiency and reduce costs.\21\ The Informa Study also posited that
the proposed rule would significantly increase the threat of
litigation, which would reduce monetary incentives to encourage
innovation and investment in new technology by growers. The resulting
slowdown in investment in new and upgraded buildings would negatively
impact efficiency, measured by feed conversion.
---------------------------------------------------------------------------
\21\ Ibid. Page 37.
---------------------------------------------------------------------------
Comments from the National Chicken Council included cost estimates
prepared by Dr. Thomas E. Elam, President, FarmEcon LLC (the Elam
Study).\22\ The Elam Study estimated that the proposed rule would cost
the chicken industry $84 million in the first year increasing to $337
million in the fifth year, with a total cost of $1.03 billion over the
first five years.\23\ The Elam Study identified $6 million as one-time
administrative costs. The study states that most of the costs would be
indirect costs resulting from efficiency losses,\24\ while more than
half of the costs estimated would be due to a reduced rate of
improvement in feed efficiency due to the proposed rule slowing the
pace of innovation in the poultry industry. For litigation costs, the
Elam Study concluded that the litigation costs are substantial, but
unknown. Again, these cost estimates were for all of the 2010 proposed
changes, many of which now do not apply.
---------------------------------------------------------------------------
\22\ See Elam, Dr. Thomas E. ``Proposed GIPSA Rules Relating to
the Chicken Industry: Economic Impact.'' FarmEcon LLC, 2010.
\23\ Ibid. Page 24
\24\ Ibid. Page 24
---------------------------------------------------------------------------
Estimates of the costs in the Informa Study and the Elam Study were
largely due to business practices that live poultry dealers were
projected to alter in reaction to the proposed rule rather than changes
in business practices directly imposed by the rule proposed in 2010.
For example, the Elam Study expected live poultry dealers to assay (a
test to determine the quality of feed) each load of feed delivered to
growers to avoid litigation.\25\
---------------------------------------------------------------------------
\25\ Elam, Page 18.
---------------------------------------------------------------------------
GIPSA believes the cost estimates presented in the Informa Study
and the Elam Study were overstated. The studies relied on interviews
that queried the willingness of live poultry dealers to alter their
business practices. The estimates, based on interviews, may overstate
costs because the live poultry dealers would face adjustment costs from
the rule proposed in 2010 and had incentives to respond that they would
discontinue current practices. GIPSA also believes that certain
adjustments are unlikely to occur. For example, GIPSA believes it is
unlikely that live poultry dealers would take on the costly
[[Page 92731]]
task of assaying each load of feed solely to avoid litigation.
Cost-Benefit Analysis of Proposed Sec. 201.214
Regulatory Alternatives Considered
Executive Order 12866 requires an assessment of costs and benefits
of potentially effective and reasonably feasible alternatives to the
planned regulation and an explanation of why the planned regulatory
action is preferable to the identified potential alternatives.\26\
GIPSA considered three regulatory alternatives. The first alternative
that GIPSA considered was to maintain the status quo and not propose
the rule. The second alternative that GIPSA considered was revising the
version of Sec. 201.214 that GIPSA published in 2010 and proposing it
as a new rule. This is GIPSA's preferred alternative as will be
explained below. The third alternative that GIPSA considered was
proposing a new version of Sec. 201.214, but instituting a phased
implementation of the proposed rule. Under this alternative, proposed
Sec. 201.214 would only take effect when a poultry growing contract
expires, is replaced, or modified. The costs and benefits of the
alternatives are discussed in order below.
---------------------------------------------------------------------------
\26\ See Section 6(a)(3)(C) of Executive Order 12866.
---------------------------------------------------------------------------
Regulatory Alternative 1: Status Quo
If Sec. 201.214 is never finalized, there are no marginal costs
and marginal benefits as industry participants will not alter their
conduct. From a cost standpoint, this is the least cost alternative
compared to the other two alternatives. This alternative also has no
marginal benefits. Since there are no changes from the status quo under
this regulatory alternative, it will serve as the baseline against
which to measure the other two alternatives.
Regulatory Alternative 2: The Preferred Alternative--Costs of the
Proposed Rule
GIPSA expects that the direct costs of proposed Sec. 201.214 would
consist of the costs of developing a consistency management system,
providing income projections to poultry growers, keeping additional
records, and reviewing and re-writing poultry growing contracts to
ensure that poultry grower ranking systems are not used in an unfair,
unjustly discriminatory, or deceptive manner or in any way that gives
an undue or unreasonable preference, advantage, prejudice, or
disadvantage.
Based on its expertise regulating the poultry industry over several
decades, GIPSA does not expect the proposed rule to result in a
decrease in the use of poultry grower ranking systems, lower capital
formation, or decreases in efficiencies in the poultry industry. The
only indirect costs that GIPSA anticipates are the effects of the
increase in industry costs from the direct costs on supply and demand
and the resulting quantity and price impacts on the retail market for
chicken and the related input market for broilers.
To estimate the costs of the proposed rule, GIPSA divided costs
into two major categories, direct and indirect costs. GIPSA expects
that direct costs would be comprised of administrative costs.
Administrative costs include items such as the following: (1) Providing
income projections to growers; (2) development of company-specific
consistency management systems (CMSs) to ensure poultry grower ranking
systems are not used in an unfair, unjustly discriminatory, or
deceptive manner or in any way that gives an undue or unreasonable
preference, advantage, prejudice, or disadvantage; (3) additional
record keeping; (4) review of written contracts by attorneys and the
employees of regulated companies; and (5) all other administrative
office work associated with review of contracts.
Indirect costs include costs caused by changes in supply and/or
demand resulting from the proposed rule. Indirect costs also include
potential efficiency losses due to potential changes in poultry grower
ranking systems.
Regulatory Alternative 2: Direct Costs--Administrative Costs
To estimate administrative costs of the proposed rule, GIPSA relied
on its experience reviewing the operations and business records of live
poultry dealers, poultry growing contracts, and other business records
for compliance with the P&S Act and regulations. GIPSA also considered
the impact of each criterion contained in Sec. 201.214 on
administrative costs.
Under Sec. 201.214(a), the Secretary may consider whether a live
poultry dealer has provided sufficient information to a poultry grower
to enable the poultry grower to make informed business decisions. Such
information should include information necessary to calculate the
expected income from the poultry growing arrangement. Current poultry
growers who have been compensated for multiple flocks under a poultry
grower ranking system may already have sufficient information because
they have already established income patterns by participating in the
poultry grower ranking system. The criterion in proposed Sec.
201.214(a) would mainly apply to new growers, those growers switching
to different live poultry dealers, or to growers considering housing
upgrades where this information is not already available to the poultry
grower.
In the past, live poultry dealers commonly provided prospective
growers with projection sheets that would provide a grower with
estimates of the minimum and maximum compensation they could expect
under a contract. GIPSA's experience conducting investigations and
compliance reviews in the poultry industry has indicated that not all
live poultry dealers currently provide projection sheets to poultry
growers.
GIPSA expects that it would not be difficult for live poultry
dealers to develop and provide projection sheets for each contract type
to all current and prospective growers. GIPSA believes that providing
projection sheets to growers that contained the minimum, average, and
maximum compensation they can expect for the contract type they are
considering or under which they are currently growing would be
sufficient information to enable the poultry growers to make informed
business decisions about their future compensation and whether the
compensation is sufficient to warrant increasing capital investments,
for example.
Based on GIPSA's experience regulating live poultry dealers and
reviewing their records, it developed time estimates for the number of
hours for company managers and information technology (IT) staff to
develop new projection sheets or review and revise existing sheets for
each type of poultry growing contract that contains a poultry grower
ranking system on which to base grower compensation. GIPSA estimates
that there are 10 individual contract types for each of the 133 live
poultry dealers who report to GIPSA. GIPSA also developed time
estimates for legal staff to review the projection sheets and for the
company to deliver the projection sheets to all current and prospective
growers. GIPSA estimates that each projection sheet for each of the
1,330 unique contract types would take eight hours of management and IT
time to prepare, and two hours of attorney time to review and rewrite
the contract. In addition, it will take 0.2 hours of administrative
time to print, and mail the projection sheets and revised contracts for
each of the 21,925 individual poultry production contracts of which
GIPSA is aware. GIPSA multiplied the estimated hours to conduct these
tasks by the average
[[Page 92732]]
hourly wages for managers and IT staff at $58/hour, attorneys at $83/
hour, and administrative assistants at $34/hour as reported by the U.S.
Bureau of Labor Statistics in its Occupational Employment
Statistics.\27\ GIPSA estimates the development and delivery of
projection sheets to cost the poultry industry $0.99 million.
---------------------------------------------------------------------------
\27\ All salary costs are based on mean annual 2015 salary
adjusted for benefit costs, set to an hourly basis. https://www.bls.gov/oes/. Accessed on August 26, 2016.
---------------------------------------------------------------------------
The criterion in Sec. 201.214(b) permits the Secretary to consider
whether a live poultry dealer supplies inputs of comparable quality and
quantity to all poultry growers in the ranking group and whether there
is a pattern or practice of supplying inferior inputs to one or more
poultry growers in the ranking group. Inputs include birds, feed,
medication, and any other input supplied by the live poultry dealer.
The U.S. Food and Drug Administration (FDA) approves all medication
that can be administered to broilers that are grown for human
consumption.\28\ GIPSA believes that live poultry dealers would not
alter medication to such an extent that inferior medicine is
consistently supplied to a grower and that this criterion would not be
costly to the industry.
---------------------------------------------------------------------------
\28\ https://www.accessdata.fda.gov/scripts/animaldrugsatfda/.
Accessed on August 26, 2016.
---------------------------------------------------------------------------
GIPSA also believes that feed provided by live poultry dealers
would be consistent across a group of growers and that this criterion
would not be costly to the industry. Feed is produced by live poultry
dealers at a feedmill and the same batch of feed is distributed to
growers until more feed is produced and then that feed is distributed.
The process of the production and distribution of feed ensures
consistency across the group of growers that receive the same batch of
feed. Once a batch of feed is produced, live poultry dealers truck it
to growers according to established routes and schedules. All growers
on the same route should receive feed of similar quality.
The chicks supplied by a live poultry dealer to a poultry grower
have the potential to be inconsistent and GIPSA believes that live
poultry dealers would have to take action to ensure a poultry grower is
not consistently supplied with inferior chicks. The factors that affect
chick quality include the age and breed of the breeder stock and the
conditions at the hatchery. Hatchery conditions affecting chick quality
include, hatching egg quality, time of collection, egg storage
temperature and humidity, incubation temperature, incubator carbon
dioxide concentration, and chick hatching time in relation to being
removed from the incubator.\29\
---------------------------------------------------------------------------
\29\ The University of Georgia Cooperative Extension Service,
``Hatchery Breeder Tip . . . Chick Quality: An Update,'' May 2005.
---------------------------------------------------------------------------
It is possible that the rotation of chicks being hatched and
delivered could result in the same grower(s) receiving inferior chicks
on a consistent basis. In order to avoid the possibility of consistent
placement of inferior chicks with the same grower, even if
unintentional, live poultry dealers would likely respond by designing
and implementing a CMS to identify and evenly distribute inferior
chicks.
GIPSA expects the same CMS to be used to demonstrate that a poultry
grower ranking system is not used in an unfair, unjustly
discriminatory, or deceptive manner, or in a way that gives an undue or
unreasonable preference or advantage to any poultry grower or subjects
any poultry grower to an undue or unreasonable prejudice or
disadvantage. Proposed Sec. 201.214(c) would allow the Secretary to
consider whether a live poultry dealer provides poultry growers with
dissimilar production variables in the ranking group in a manner that
affects a poultry grower's compensation. Production variables include,
but are not limited to, the density at which the live poultry dealer
places birds, the target slaughter weights of the birds, and bird ages
that vary by more than seven days. The live production and broiler
management teams must work together to ensure that medication, bird
densities, target bird sizes, and the timing of the harvesting of
flocks does not consistently affect grower rankings. Each live poultry
dealer, whether large or small, would need to design and implement one
CMS to cover all of its breeding, hatching, feedmill, and broiler
operations. This CMS would ensure that growers are not treated
inconsistently and that there is not a pattern or practice of unfair,
unjustly discriminatory, or deceptive treatment or undue or
unreasonable preference, advantage, prejudice, or disadvantage.
GIPSA relied on its knowledge of the poultry industry to estimate
the cost of designing and implementing a CMS that could be used by both
large and small live poultry dealers. GIPSA estimates that it would
take 640 hours of management and IT staff time to develop a CMS. GIPSA
estimates it would take 8 hours per live poultry dealer for its legal
team to review the CMS and 96 hours to train the breeding, hatching,
and broiler staff how to use the CMS to ensure the uniform distribution
of inferior chicks. GIPSA multiplied the estimated hours to conduct
these tasks by the average hourly wages for managers and IT staff at
$58/hour, attorneys at $83/hour, and administrative assistants at $34/
hour as reported by the U.S. Bureau of Labor Statistics in its
Occupational Employment Statistics.\30\ GIPSA estimates that if all 133
live poultry dealers who report operations to GIPSA develop and
implement a CMS, the cost would total $5.46 million. This estimate
overstates the cost because some of the 133 live poultry dealers do not
use a poultry grower ranking system. Rather than risk underestimating
the potential cost, GIPSA chose to include all 133 live poultry dealers
in the calculations. We have not estimated any capital costs associated
with the creation and implementation of a CMS, as we believe that there
are none or existing equipment would be used; however, we seek comment
on the validity of this assumption and if commenters disagree with it,
to provide estimates of the capital costs.
---------------------------------------------------------------------------
\30\ All salary costs are based on mean annual 2015 salary
adjusted for benefit costs, set to an hourly basis. https://www.bls.gov/oes/. Accessed on August 26, 2016.
---------------------------------------------------------------------------
Each live poultry dealer that uses a poultry grower ranking system
to calculate grower compensation would need to keep additional records
to demonstrate that poultry grower ranking systems are used in a fair
manner after applying the criteria in proposed Sec. 201.214. Proposed
Sec. 201.214(d) allows the Secretary to consider whether a live
poultry dealer has demonstrated a legitimate business justification for
use of a poultry grower ranking system in a manner that may otherwise
be unfair, unjustly discriminatory, or deceptive or gives an undue or
unreasonable preference or advantage to any poultry grower or subjects
any poultry grower to an undue or unreasonable prejudice or
disadvantage.
Based on GIPSA's knowledge and review of records kept by live
poultry dealers, GIPSA believes that the live poultry dealers already
keep very detailed records regarding the performance of each grower.
The records include all information needed to calculate feed conversion
such as weights and quantities of inputs provided, and all other data
used to determine grower performance and compensation. Based on GIPSA's
experience reviewing these records and the business operations of live
poultry dealers, GIPSA estimates that live poultry dealers will spend
an additional 8 hours of time preparing records for
[[Page 92733]]
each poultry contract in order to be able demonstrate that the poultry
grower ranking system is used in a fair manner after applying the
criteria in proposed Sec. 201.214. GIPSA has data on the number of
production contracts between poultry growers and live poultry dealers.
GIPSA multiplied 8 hours of time by the average hourly wages of $34/
hour as reported by the U.S. Bureau of Labor Statistics in its
Occupational Employment Statistics \31\ and then multiplied this total
by the 21,925 individual poultry growing contracts reported to GIPSA by
live poultry dealers to arrive at $5.96 million for additional record
keeping costs for live poultry dealers. This record keeping estimate
includes keeping records to demonstrate legitimate business
justifications for proposed Sec. 201.214(d).
---------------------------------------------------------------------------
\31\ Ibid.
---------------------------------------------------------------------------
Given that proposed Sec. 201.214 is a new regulation, live poultry
dealers would need to review the contractual language in their existing
contracts with respect to poultry grower ranking systems to ensure that
they are used in a fair and non-preferential manner after applying the
criteria in proposed Sec. 201.214. GIPSA again relied on its
experience and developed time estimates for the number of hours for
attorneys and company managers to review and revise verbal and written
production contracts and for staff to make changes, copy, and obtain
signed copies of the contracts. For poultry growing contracts, GIPSA
estimates that each of the 1,330 unique contract types would take 2
hours of attorney time and 2 hours of company management time to review
and rewrite, and it would take 2 hours of administrative time to review
each of the 21,925 individual poultry production contracts. GIPSA
multiplied the estimated hours to conduct these administrative tasks by
the average hourly wages for attorneys at $83/hour, managers at $58/
hour, and administrative assistants at $34/hour as reported by the U.S.
Bureau of Labor Statistics in its Occupational Employment
Statistics.\32\
---------------------------------------------------------------------------
\32\ All salary costs are based on mean annual 2015 salary
adjusted for benefit costs, set to an hourly basis. https://www.bls.gov/oes/. Accessed on August 26, 2016.
---------------------------------------------------------------------------
GIPSA recognizes that contract review costs would also be borne by
poultry growers. GIPSA estimates the each grower would spend 1 hour of
time reviewing a contract and would spend 1 hour of their attorney's
time to review the contract. GIPSA multiplied 1 hour of grower time and
1 hour of attorney time to conduct the production contract review by
the average hourly wages for attorneys at $83/hour and managers at $58/
hour. GIPSA then applied this cost to the 21,925 poultry growing
contracts that have been reported to GIPSA to arrive at the total
contract review costs that would be incurred by poultry growers. GIPSA
then added together the contract review costs by live poultry dealers
and by poultry growers to arrive at estimated contract review costs of
$4.96 million for the poultry industry.
GIPSA then added together all of the estimated types of
administrative costs and the estimated first-year total administrative
costs appear in the following table:
Table 4--First-Year Administrative Costs of Proposed Sec. 201.214
------------------------------------------------------------------------
Administrative cost type $ millions
------------------------------------------------------------------------
Projection Sheet Costs.................................. 0.99
Develop Consistency Management System................... 5.46
Industry Record Keeping................................. 5.96
Contract Review Costs................................... 4.96
---------------
Total Industry Administrative Cost.................. 17.37
------------------------------------------------------------------------
The first-year total administrative costs would be $17.37 million
for the poultry industry. The two largest costs would be industry
record keeping and the development of CMSs, followed by record keeping
and the costs of developing projection sheets.
A. Regulatory Alternative 2: Direct Costs--Litigation Costs of the
Preferred Alternative
Interim final regulation 201.3(a) will already be in effect if and
when Sec. 201.214 becomes effective. GIPSA expects that Sec. 201.3(a)
will result in additional litigation as this rule states that certain
conduct or action can violate sections 202(a) and/or 202(b) of the P&S
Act without a harm or likely harm to competition in all cases. Section
201.3(a) formalizes GIPSA's longstanding position that, in some cases,
violations of sections 202(a) and 202(b) can be proven without
demonstrating harm or likely harm to competition. Section 201.214
provides clarity to the industry by establishing criteria the Secretary
may consider in determining whether a live poultry dealer has used a
poultry grower ranking system to compensate poultry growers in an
unfair, unjustly discriminatory, or deceptive manner, or in a way that
gives an undue or unreasonable preference or advantage to any poultry
grower or subjects any poultry grower to an undue or unreasonable
prejudice or disadvantage.
Regulation 201.3(a) is broad in nature. Section 201.214 simply
provides clarity and GIPSA believes that Sec. 201.214 will not lead to
litigation above that already expected as a result of Sec. 201.3(a).
Thus, GIPSA considers the additional litigation under Sec. 201.3(a) to
be the baseline litigation costs for Sec. 201.214 and that the
litigation costs for Sec. 201.3(a) already include the litigation
costs of Sec. 201.214. Since those litigation costs have already been
counted under Sec. 201.3(a), GIPSA does not allocate any additional
litigation costs to Sec. 201.214 and for the purposes of this RIA, the
marginal litigation costs are zero.
Regulatory Alternative 2: Total Direct Costs of the Preferred
Alternative
The total first-year direct costs of proposed Sec. 201.214 would
consist of administrative and litigation costs (which are equal to
zero) from above and they are summarized in the following table.
Table 5--Direct Costs of Proposed Sec. 201.214
------------------------------------------------------------------------
Cost type ($ millions)
------------------------------------------------------------------------
Admin Costs............................................. 17.37
Litigation Costs........................................ 0.00
---------------
Total Direct Costs.................................. 17.37
------------------------------------------------------------------------
GIPSA estimates that the direct costs of proposed Sec. 201.214
would be $17.37 million.
Regulatory Alternative 2: Indirect Costs of the Preferred Alternative
As discussed previously, GIPSA does not expect proposed Sec.
201.214 to result in a decrease in the use of poultry grower ranking
systems, lower capital formation, or decreases in efficiencies in the
poultry industry. The regulation simply establishes the criteria under
which the Secretary may determine whether live poultry dealers are
using poultry grower ranking systems in an unfair, unjustly
discriminatory, or deceptive manner, or in a way that gives an undue or
unreasonable preference or advantage to any poultry grower or subjects
any grower to an undue or unreasonable prejudice or disadvantage.
The only indirect costs that GIPSA anticipates are the effects of
the increase in industry costs from the direct administrative costs on
supply and demand, and the resulting quantity and price impacts on the
retail market for chicken and the related input market for broilers.
GIPSA modeled the impact of the increase in total industry costs
resulting from the direct costs of proposed Sec. 201.214 in a
Marketing Margins Model
[[Page 92734]]
(MMM) framework.\33\ The MMM allows for the estimation of changes in
consumer and producer surplus and the quantification of deadweight loss
or gain caused by changes in supply and demand conditions in the retail
market for chicken as well as the input market for poultry growing
services.
---------------------------------------------------------------------------
\33\ The framework is explained in detail in Tomek, W.G. and
K.L. Robinson ``Agricultural Product Prices,'' third edition, 1990,
Cornell University Press.
---------------------------------------------------------------------------
GIPSA modeled the increases in industry costs resulting from higher
direct costs as an inward (or upward) shift in the supply curve for
chicken. This has the effect of increasing the equilibrium prices and
reducing the equilibrium quantity traded. This also has the effect of
reducing the derived demand for poultry growing services, which causes
a reduction in the equilibrium prices and quantity traded. Established
economic theory suggests that these shifts in the supply curve and
derived demand curve and the resulting price and quantity impacts will
result in a reduction in social welfare through a deadweight loss.
To estimate the output and input supply and demand curves for the
MMM, GIPSA constructed linear supply and demand curves around
equilibrium price and quantity points using price elasticities of
supply and demand from the USDA's Economic Research Service.\34\
---------------------------------------------------------------------------
\34\ ERS Price Elasticities: https://www.ers.usda.gov/data-products/commodity-and-food-elasticities/demand-elasticities-from-literature.aspx. Accessed on August 26, 2016.
---------------------------------------------------------------------------
GIPSA then shifted the supply curve for chicken up by the amount of
the increase in total costs for the poultry industry from Table 5
above. GIPSA calculated the new equilibrium price and quantity traded
of chicken. GIPSA also calculated the new equilibrium price and
quantity in the poultry growing services market resulting from the
decreases in derived demand for growing services. GIPSA calculated the
resulting social welfare changes in the input and output markets.
The calculation of the price impact from the increase in poultry
industry costs from proposed Sec. 201.214 would have in a price
increase of approximately two-hundredths of a cent in the retail price
of chicken.\35\ This is because the increase in total industry costs is
very small in relation to overall industry costs. The result is that
the resulting deadweight losses from the increases in total industry
costs is indistinguishable from zero and therefore, GIPSA concludes
that the indirect costs of proposed Sec. 201.214 are zero.
---------------------------------------------------------------------------
\35\ The $17.37 million increase in total industry costs from
proposed Sec. 201.214 is only 0.04 percent of total poultry
industry costs of approximately $40 billion.
---------------------------------------------------------------------------
Regulatory Alternative 2: Total Costs of the Preferred Alternative
GIPSA added all direct costs to the indirect costs, which are equal
to zero, to arrive at the estimated total first-year costs of proposed
Sec. 201.214. The total costs are summarized in the following table.
Table 6--Total Costs of Proposed Sec. 201.214
------------------------------------------------------------------------
Cost type ($ millions)
------------------------------------------------------------------------
Admin Costs............................................. 17.37
Litigation Costs........................................ 0.00
Total Direct Costs...................................... 17.37
Total Indirect Costs.................................... 0.00
---------------
Total Costs......................................... 17.37
------------------------------------------------------------------------
GIPSA estimates that the total costs of proposed Sec. 201.214 to
be $17.37 million for the poultry industry in the first full year of
implementation
Regulatory Alternative 2: 10-Year Total Costs of the Preferred
Alternative
To arrive at the estimated 10-year costs of proposed Sec. 201.214,
GIPSA expects the costs to be constant for the first 5 years while
courts are setting precedents for the interpretation of proposed Sec.
201.214 if indeed it is finalized. GIPSA expects that case law with
respect to proposed Sec. 201.214 would be settled after 5 years, and
by then, industry participants would likely know how GIPSA would
enforce the proposed regulation and how courts would interpret the
proposed regulation if finalized. The effect of courts establishing
precedents is that administrative costs would likely decline after 5
years.
Once courts establish precedents in case law, GIPSA expects the
direct administrative costs of reviewing and revising contracts and
developing projection sheets would decrease rapidly as contracts would
already contain any language modifications necessitated by
implementation of the proposed rule, and projection sheets would
already have been developed for most contracts. GIPSA also expects that
the direct costs of record keeping and operating CMSs would decrease
rapidly as courts set precedents on which records would be required and
how detailed a CMS must be, and as companies become more efficient in
ensuring that poultry grower ranking systems are used in a fair manner
after applying the criteria in proposed Sec. 201.214.
To arrive at the estimated 10-year costs of proposed Sec. 201.214,
GIPSA estimates that contracts would expire at a steady rate. Based on
its expertise, GIPSA believes that 20 percent of contracts would expire
on a yearly basis and thus, in the first five years, 20 percent of all
contracts would expire and need to be renewed each year or new
production contracts would be put in place. Thus in years 2 through
year 5, contract review costs would be 20 percent of the costs of
review in the first year because the costs of reviewing and revising
contracts would only apply to the 20 percent of contracts that are
expiring or are new contracts each year. Based on GIPSA's expertise,
GIPSA also estimates that in years 2 through year 5, 20 percent of all
projection sheets would require updating each year, the cost of
operating and updating CMSs would be 20 percent of first-year
development costs, and that record keeping costs would be 20 percent of
the first-year cost as companies become more efficient in record
keeping and learn which records are required. Based on its expertise,
GIPSA estimates that in the second 5 years, the direct administrative
costs of revising contracts, projection sheets, CMS operation, and
record keeping would decrease by 50 percent per year as the courts
establish precedents, contracts would contain standard language, and
companies would become more efficient at ensuring poultry grower
ranking systems are used in a fair manner after applying the criteria
in proposed Sec. 201.214. The total 10-year costs of proposed Sec.
201.214 appear in the table below.
---------------------------------------------------------------------------
\36\ GIPSA uses 2018 as the date for the proposed rule to be in
effect for analytical purposes only. The date the proposed rule
becomes final is not known.
Table 7--Ten-Year Total Costs of Proposed Sec. 202.214
------------------------------------------------------------------------
Total direct
Year ($ millions)
------------------------------------------------------------------------
2018 \36\............................................... 17.37
2019.................................................... 3.47
2020.................................................... 3.47
2021.................................................... 3.47
2022.................................................... 3.47
2023.................................................... 1.74
2024.................................................... 0.87
2025.................................................... 0.43
2026.................................................... 0.22
2027.................................................... 0.11
---------------
Totals.............................................. 34.64
------------------------------------------------------------------------
Based on the analysis, GIPSA expects the 10-year total costs of
proposed Sec. 201.214 would be $34.64 million.
[[Page 92735]]
Regulatory Alternative 2: Net Present Value of Ten-Year Total Costs of
the Preferred Alternative
The total costs of proposed Sec. 201.214 in the table above show
that the costs are highest in the first year, decline to a constant
lower level over the next 4 years, and then gradually decrease again
over the subsequent 5 years. Costs to be incurred in the future are
less expensive than the same costs to be incurred today. This is
because the money that is used to pay the costs in the future can be
invested today and earn interest until the time period in which the
cost is incurred. After the cost has been incurred, the interest earned
would still be available.
To account for the time value of money, the costs of the
regulations to be incurred in the future are discounted back to today's
dollars using a discount rate. The sum of all costs discounted back to
the present is called the net present value (NPV) of total costs. GIPSA
relied on both a three percent and seven percent discount rate as
discussed in Circular A-4.\37\ GIPSA measured all costs using constant
dollars.
---------------------------------------------------------------------------
\37\ https://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf. Accessed on August 26, 2016.
---------------------------------------------------------------------------
GIPSA calculated the NPV of the ten-year total costs of the
proposed regulation using both a three percent and seven percent
discount rate and the NPVs appear in the following table.
Table 8--NPV of Ten-Year Total Costs of Proposed Sec. 201.214
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... 32.16
7 Percent............................................... 29.36
------------------------------------------------------------------------
GIPSA expects the NPV of the 10-year total costs of Sec. 201.214
will be $32.16 million at a three percent discount rate and $29.36
million at a seven percent discount rate.
Regulatory Alternative 2: Annualized Costs of the Preferred Alternative
GIPSA then annualized the NPV of the 10-year total costs (referred
to as annualized costs) of proposed Sec. 201.214 using both a three
percent and seven percent discount rate as required by Circular A-4 and
the results appear in the following table.\38\
---------------------------------------------------------------------------
\38\ Ibid.
Table 9--Annualized Costs of Proposed Sec. 201.214
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... 3.77
7 Percent............................................... 4.18
------------------------------------------------------------------------
GIPSA expects that the annualized costs of Sec. 201.214 would be
$3.77 million at a three percent discount rate and $4.18 million at a
seven percent discount rate.
Impacts on Costs of Interim Final Sec. 201.3(a)
Concurrent with proposing Sec. 201.214, GIPSA is issuing an
interim final version of Sec. 201.3(a). Section 201.3(a) states that
conduct or action can be found to violate sections 202(a) and/or 202(b)
of the P&S Act without a finding of harm or likely harm to competition
in all cases. As a stand-alone regulation, Sec. 201.3(a) formalizes
GIPSA's longstanding position that, in some cases, violations of
sections 202(a) and 202(b) can be proven without demonstrating harm or
likely harm to competition.
In its Regulatory Impact Analysis, GIPSA estimated the annualized
costs of Sec. 201.3(a) would range from $6.87 million to $96.01
million at a three percent discount rate and from $7.12 million to
$98.60 million at a seven percent discount rate. The range of potential
costs is broad and GIPSA relied on its expertise to arrive at a point
estimate of expected annualized costs. GIPSA expects the cattle, hog,
and poultry industries to primarily take a ``wait and see'' approach to
how courts will interpret Sec. 201.3(a) and only slightly adjust its
use of AMAs, and incentive or performance-based payment systems. GIPSA
estimates that the annualized costs of Sec. 201.3(a) at the point
estimate will be $51.44 million at a three percent discount rate and
$52.86 million at a seven percent discount rate based on an anticipated
``wait and see'' approach by the cattle, hog, and poultry industries.
GIPSA recognizes that courts, after the implementation of a
finalized Sec. 201.3(a), may opt to continue to apply earlier
precedents of requiring the showing of harm or potential harm to
competition in section 202(a) and 202(b) cases. This has the potential
to affect the costs of Sec. 201.214 and 201.211 should they become
finalized. GIPSA expects that even if courts continue to require
showing of harm or potential harm to competition in section 202(a) and
202(b) cases, that firms would likely still incur costs of complying
with Sec. 201.214. Even if regulated entities expect that courts would
require showing of a harm to competition for Sec. 201.214 violations,
the regulated entities may still expect litigation as private parties
test the courts application of Sec. 201.3 as it relates to Sec.
201.214 violations. To reduce this threat of litigation, regulated
entities may still incur the administrative costs detailed above.
Should Sec. 201.214 become finalized and courts still require a
showing of harm or potential harm to competition, regulated entities
may still voluntarily undertake the adjustment costs detailed above.
GIPSA expects proposed Sec. 201.214 to reduce the costs of
implementing Sec. 201.3 by providing more clarity in the appropriate
application of sections 202(a) and (b) of the P&S Act as they apply to
poultry grower ranking systems. Section 201.214 provides clarity to the
industry by establishing criteria the Secretary may consider in
determining whether a live poultry dealer has used a poultry grower
ranking system to compensate poultry growers in an unfair, unjustly
discriminatory, or deceptive manner, or in a way that gives an undue or
unreasonable preference or advantage to any poultry grower or subjects
any poultry grower to an undue or unreasonable prejudice or
disadvantage.
Regulatory Alternative 2: Benefits of the Preferred Alternative
GIPSA was unable to quantify all the benefits of proposed Sec.
201.214. However, there are a number of important qualitative benefits
of proposed Sec. 201.214 that merit discussion. Proposed Sec. 201.214
contains several provisions that GIPSA expects would improve
efficiencies and reduce market failures. For regulations to improve
efficiencies for market participants and generate benefits for
consumers and producers, they must increase the amount of relevant
information to market participants, reduce information asymmetries,
protect private property rights, or foster competition.
Proposed Sec. 201.214(a) would reduce information asymmetries and
result in poultry growers making informed business decisions such as
whether to enter the industry and in which capital improvements to
invest. Growers having more complete information would result in more
efficient levels of capital in the growing industry than with less
information. Less information may lead to too much or too little
capital. More complete information in the growing industry would allow
live poultry dealers to send price signals to growers about levels of
capital they desire. For example, if a live poultry dealer desires
[[Page 92736]]
its birds be grown with a more capital-intensive housing type, it can
increase its base payment rate in a grower ranking system for that
particular housing type and provide projection sheets to growers so
they can assess whether to upgrade. Live poultry dealers would have to
increase the base compensation to a high enough level to spur the
additional capital investment in upgrades. Similarly, too little
compensation may result in under investment in capital, which is also
inefficient.
Proposed Sec. 201.214(b) would encourage live poultry dealers to
supply inputs of more consistent quantity and quality to all growers.
Thus, inferior chicks, which are more costly to grow, would likely be
distributed more uniformly across growers. This would facilitate a
level playing field and foster fair competition in poultry grower
ranking systems. If proposed Sec. 201.214 is finalized and becomes
effective, growers would be compensated for their performance based
more accurately on their skill and less so on the quality of inputs
provided. The more efficient growers would receive more compensation in
poultry grower ranking systems, which sends a signal to expand their
offering of growing services. Less efficient growers would earn less,
which sends a signal to reduce their offering of growing services or,
at the extreme, to exit the industry. The result is lower costs to the
industry as poultry grower ranking systems would incentivize the more
efficient growers to expand and less efficient growers to contract or
exit the industry.
Proposed Sec. 201.214(c) would also provide a similar benefit to
the industry. Under this section, the Secretary may consider whether a
live poultry dealer includes poultry growers provided with dissimilar
production variables in the ranking group in a manner that affects a
poultry grower's compensation. The live poultry dealer would be
expected to assure that growers are treated consistently as compared to
other growers in the settlement group. This would allow growers to
compete in poultry grower ranking systems on their skill level and not
be disadvantaged by factors outside of their control. The result,
again, is lower costs to the industry as the poultry grower ranking
system would likely incentivize the more efficient growers to expand
and the less efficient growers to reduce operations or exit the
industry.
Proposed Sec. 201.214(d) would benefit the industry by allowing
the Secretary to consider whether a live poultry dealer has
demonstrated a legitimate business justification for use of a poultry
grower ranking system that would otherwise violate the P&S Act. This is
a benefit for live poultry dealers as it provides a level of protection
against potentially frivolous litigation.
Another important qualitative benefit of proposed Sec. 201.214 is
the increased ability for the enforcement of the P&S Act for use of
poultry grower ranking systems in a manner that does not result in a
harm or likelihood of harm to competition. This occurs through Sec.
201.3(a), which states that conduct can be found to violate sections
202(a) and/or 202(b) of the P&S Act without a finding of harm or likely
harm to competition and more specifically through Sec. 201.210(b)(10)
which clarifies that absent demonstration of a legitimate business
justification, failing to use a poultry grower ranking system in a fair
manner after applying the criteria in Sec. 201.214 is unfair, unjustly
discriminatory, or deceptive and a violation of section 202(a) of the
P&S Act regardless of whether it harms or is likely to harm
competition.
A simple example is a live poultry dealer consistently supplying
inferior chicks to a particular grower. The grower is harmed by this
conduct because the grower consistently under-performs in the poultry
grower ranking system and receives lower compensation than if the
grower had been provided higher quality chicks. This can be considered
an unfair and deceptive practice under section 202(a) and/or as
subjecting the grower to an unfair disadvantage under section 202(b).
The impact of this harm to the grower is very small when compared to
the entire industry and there is no harm to competition from this one
instance. Because there is no harm or likely harm to competition,
courts have been reluctant to find a violation of section 202(a) or (b)
of the P&S Act in such a situation, despite the harm suffered by the
individual poultry grower.
However, if similar, though unrelated, harm is experienced by a
large number of growers, the cumulative effect does result in a harm to
competition. The individual harm is inconsequential to the industry,
but the sum total of all individual harm has the potential to be quite
significant when compared to the industry and therefore, courts have
found harm or likely harm to competition in such a situation. The
regulations in this proposed rule, in conjunction with Sec. 201.3(a),
clarify that consistently supplying inferior chicks, absent
demonstration of a legitimate business justification, would constitute
unfair, unjustly discriminatory, or deceptive practices or devices
under section 202(a) of the P&S Act or the giving of an undue or
unreasonable preference, advantage, prejudice or disadvantage under
section 202(b) of the P&S Act.
The sum of all individual harm is likely to increase total industry
costs of producing poultry due to an inefficient allocation of
resources. The cost of all unfair, unjustly discriminatory, or
deceptive practices, or undue or unreasonable preferences or advantages
to any poultry grower or undue or unreasonable prejudices or
disadvantages are reflected in higher costs of producing poultry, with
some portion of these costs passed along to consumers in the form of
higher prices.
GIPSA expects proposed Sec. 201.214 coupled with Sec. Sec.
201.3(a) and 201.210(b)(10) to increase enforcement actions against
live poultry dealers for use of poultry grower ranking systems in a
manner that violates sections 202(a) and/or 202(b) when the use of the
poultry grower ranking system does not harm or is not likely to harm to
competition. Several appellate courts have disagreed with USDA's
interpretation of the P&S Act that harm or likely harm to competition
is not necessary in all instances to prove a violation of sections
202(a) or 202(b). In some cases in which the United States was not a
party, these courts have concluded that plaintiffs could not prove
their claims under section 202(a) and/or (b) without proving harm to
competition or likely harm to competition. One reason the courts gave
for declining to defer to USDA's interpretation of the statute is that
USDA had not previously formalized its interpretation in a regulation.
Section 201.3 addresses that issue and Sec. Sec. 201.214 and
201.210(b)(10) provide clarity regarding the circumstances under which
use of a poultry grower ranking system, absent demonstration of a
legitimate business justification, would constitute an unfair, unjustly
discriminatory, or deceptive practice or device under section 202(a) of
the P&S Act or the giving of an undue or unreasonable preference,
advantage, prejudice or disadvantage under section 202(b) of the P&S
Act. GIPSA expects the result would be additional enforcement actions
successfully litigated, which will serve as a deterrent to using a
poultry grower ranking system in a manner that violates sections 202(a)
or (b) of the P&S Act. Successful deterrence would likely result in
lower overall costs throughout the entire production and marketing
complex of all poultry and chicken.
Benefits to the industry and the market also arise from
establishing parity of negotiating power between live
[[Page 92737]]
poultry dealers and poultry growers by reducing the ability to abuse
market power with the resulting deadweight losses.\39\ Establishing
parity of negotiating power in contracts promotes fairness and equity
and is consistent with GIPSA's mission ``[T]o protect fair trade
practices, financial integrity, and competitive markets for livestock,
meats and poultry.'' \40\
---------------------------------------------------------------------------
\39\ MacDonald, J. and N. Key. ``Market Power in Poultry
Production Contracting? Evidence from a Farm Survey.'' Journal of
Agricultural and Applied Economics. 44(4) (November 2012): 477-490.
Discusses evidence for the effect of concentration on grower
compensation.
\40\ See additional discussion in Steven Y. Wu and James
MacDonald (2015) ``Economics of Agricultural Contract Grower
Protection Legislation,'' Choices 30(3): 1-6.
---------------------------------------------------------------------------
Regulatory Alternative 2: Cost-Benefit Summary of the Preferred
Alternative
GIPSA expects the annualized costs of Sec. 201.214 will be $3.77
million at a three percent discount rate and $4.18 million at a seven
percent discount rate. GIPSA was unable to quantify the benefits of the
regulations, but explained numerous qualitative benefits derived from
increased information and reduced information asymmetries. The
regulation contains several provisions that GIPSA expects will: (1)
Improve efficiencies in the formation of capital in the poultry growing
industry; and (2) lower costs to the industry as grower ranking systems
will incentivize the more efficient growers to expand and less
efficient growers to reduce operations or exit the industry. Another
benefit of proposed Sec. 201.214 is the deterrent effect of increased
enforcement of the P&S Act for violations of section 202(a) or (b).
This, in turn, would reduce instances of unfair, unjustly
discriminatory, or deceptive practices or devices and undue or
unreasonable preferences, advantages, prejudices, or disadvantages and
increased efficiencies in the marketplace. At the same time, allowing
the Secretary to consider legitimate business justifications for use of
a poultry grower ranking system in a manner that might otherwise be
seen as a violation of section 202(a) or (b) of the P&S Act would
provide a level of protection against potentially frivolous litigation.
Thus, proposed Sec. 201.214 would likely increase efficiency, lower
costs, and reduce market failures in the poultry industry. These
benefits would accrue to all segments of the poultry value chain, and
ultimately consumers.
Regulatory Alternative 3: Contract Duration--Phased Implementation
GIPSA considered a third regulatory alternative of phased
implementation. Under this third alternative, proposed Sec. 201.214
would only apply to poultry growing contracts when they expire, are
altered, or new contracts are put in place. Consider for example, a
poultry growing contract with 3 years remaining in the contract when
the regulations become effective. Proposed Sec. 201.214 would not be
applicable to this contract, under phased implementation, until the
contract expires after 3 years and is either modified or replaced.
Regulatory Alternative 3: Cost Estimation of Phased Implementation
GIPSA estimated the costs of phased implementation by multiplying
the majority of the ten-year total costs of the preferred alternative
(Table 7) for each year of the first 10 years the rule would be in
effect by the percentage of contracts expiring or altered in the same
year. The data on contract lengths for broiler production appear in the
table below.
---------------------------------------------------------------------------
\41\ USDA's Economic Research Service Agricultural Resource
Management Survey (ARMS) 2011.
Table 10--Production and Marketing Contract Durations
------------------------------------------------------------------------
Broiler
Contract duration production
\41\ (%)
------------------------------------------------------------------------
Short Term < = 12 months................................ 65.20
Medium Term 13-60 months................................ 19.20
Long Term > 60 months................................... 15.60
------------------------------------------------------------------------
The data in the table above show that 65.2 percent of broiler
production contracts have a duration of 12 months or less and 84.4
percent have a duration of 60 months or less. Only 15.64 percent of
broiler production contracts are longer than 60 months in duration.
For the first year of the regulation, GIPSA multiplied the costs of
Sec. 201.214 by 65.20 percent. The one exception is the cost of the
development of CMSs. GIPSA's experience reviewing poultry growing
contracts suggests that most live poultry dealers have some contracts
that are of a short-term duration. Therefore, GIPSA estimates that all
live poultry dealers would have to develop a CMS in the first year
after the implementation of the regulation. GIPSA allocates 100 percent
of CMS development costs in the first year under the phased
implementation alternative. All other direct administrative costs are
multiplied by 65.20 percent in the first year.
For years 2 through 5, GIPSA followed the same procedure and
adjusted total industry costs by 84.4 percent, the number of contracts
that are 5 years or less in duration. For years 6 through 10, GIPSA
applied 100 percent of the preferred alternative costs to reflect the
full phase in of costs.
The following tables show the 10-year total costs of the phased
implementation alternative. The 10-year total costs for each year of
the preferred alternative (Table 7) are also shown for convenience.
Table 11--Phased Implementation Total Costs of Sec. 201.214
------------------------------------------------------------------------
Preferred Phased
Year alternative ($ implementation
millions) ($ millions)
------------------------------------------------------------------------
2018................................ 17.37 13.23
2019................................ 3.47 2.93
2020................................ 3.47 2.93
2021................................ 3.47 2.93
2022................................ 3.47 2.93
2023................................ 1.74 1.74
2024................................ 0.87 0.87
2025................................ 0.43 0.43
2026................................ 0.22 0.22
[[Page 92738]]
2027................................ 0.11 0.11
-----------------------------------
Totals.......................... 34.64 28.32
------------------------------------------------------------------------
GIPSA estimates that the first-year total costs of Sec. 201.214
under the phased implementation alternative would be $13.23 million and
the 10-year total costs would be $28.32 million. As the table shows,
the costs in the first 5 years are lower under the phased
implementation option than under the preferred alternative because
regulated entities with contracts longer than 1 year are not covered
until the contracts expire, are modified, or replaced.
Regulatory Alternative 3: NPV of 10-Year Total Costs of Phased
Implementation
GIPSA calculated the NPV of the 10-year total costs of proposed
Sec. 201.214 under phased implementation using both a three percent
and seven percent discount rate as required by Circular A-4. The NPVs
are shown in the following table.
Table 12--NPVs of Ten-Year Total Costs of Proposed Sec. 201.214--
Phased Implementation
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... 26.18
7 Percent............................................... 23.77
------------------------------------------------------------------------
GIPSA expects the NPV of the 10-year total costs of Sec. 201.214
under the phased implementation option to be $26.18 million at a three
percent discount rate and $23.77 million at a seven percent discount
rate.
Regulatory Alternative 3: Annualized Costs of Phased Implementation
GIPSA then annualized the costs of Sec. 201.214 using both a three
percent and seven percent discount rate as required by Circular A-4 and
the results appear in the following table.
Table 13--Annualized Costs of Proposed Sec. 201.214--Phased
Implementation
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... 3.07
7 Percent............................................... 3.38
------------------------------------------------------------------------
GIPSA expects the annualized costs of Sec. 201.214 under the
phased implementation option to be $3.07 million at a three percent
discount rate and $3.38 million at a seven percent discount rate.
Regulatory Alternative 3: Benefits of the Phased Implementation
Alternative
The benefits of phased implementation are identical to the benefits
of the preferred alternative with the exception of when the benefits
will be received and the amount of the benefits. Like the costs, the
benefits will be received only when contracts expire, are modified, or
new contracts are put in place. Moreover, benefits to be received in
the future are worth less than benefits received today. The benefits
will be received in the same proportion of the total costs and are
based on contract durations. The benefits of phased implementation are
less than under the preferred alternative because the full benefits
will not be received until all contracts have expired, been modified,
or replaced by new contracts. The full benefits of phased
implementation will be received beginning in year 6.
Regulatory Alternative 3: Cost-Benefit Summary of Phased Implementation
GIPSA expects the annualized costs of Sec. 201.214 under the
phased implementation option to be $3.07 million at a three percent
discount rate and $3.38 million at a seven percent discount rate. The
benefits will be received in the same proportion as total costs and are
based on contract durations. The benefits of the phased implementation
alternative are less than under the preferred alternative because the
full benefits will not be received until all contracts have expired,
been altered, or replaced by new contracts.
Cost-Benefit Comparison of Regulatory Alternatives
The status quo alternative has zero marginal costs and benefits as
GIPSA does not expect any changes in the industry. GIPSA compared the
annualized costs of the preferred alternative to the annualized costs
of the phased implementation alternative by subtracting the annualized
costs of phased implementation from the preferred alternative and the
results appear in the following table.
Table 14--Difference in Annualized Costs of Proposed Sec. 201.214
Between the Preferred Alternative and the Phased Implementation
Alternative
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... 0.70
7 Percent............................................... 0.80
------------------------------------------------------------------------
The annualized costs of the phased implementation alternative is
$0.70 million less expensive using a three percent discount rate and
$0.80 million less expensive using a seven percent discount rate. As is
the case with costs, the benefits of the preferred alternative will be
highest for the preferred alternative because the full benefits will be
received immediately and not when contracts have expired, been altered,
or replaced by new contracts as is the case under the phased
implementation alternative.
Though the phased implementation alternative would save between
$0.70 million and $0.80 million on an annualized basis, this
alternative would deny the protections offered by proposed Sec.
201.214 to a substantial percentage of poultry growers for five or more
years based on the length of their production contracts. As the data in
Table 10 show, 15.6 percent of poultry growers have contracts with
durations exceeding five years. Under the phased implementation
alternative, these growers would continue to be exposed to the
potential market failures discussed above until their contracts expire
or are renewed. GIPSA considered all three regulatory alternatives and
believes that the preferred alternative is the best alternative as the
benefits of the regulation will be captured immediately by all growers,
regardless of the length of their contracts.
[[Page 92739]]
Regulatory Flexibility Analysis
The Small Business Administration (SBA) defines small businesses by
their North American Industry Classification System Codes (NAICS).\42\
Live poultry dealers, NAICS 311615, are considered small businesses if
they have fewer than 1,250 employees. Broiler and turkey producers,
NAICS 112320 and 112330, are considered small businesses if their sales
are less than $750,000 per year.
---------------------------------------------------------------------------
\42\ See: https://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf. Accessed on August 26, 2016.
---------------------------------------------------------------------------
GIPSA maintains data on live poultry dealers from the annual
reports these firms file with GIPSA. Currently, there are 133 live
poultry dealers that would be subject to the proposed regulations.
According to U.S. Census data on County Business Patterns, there were
74 poultry slaughter firms that had more than 1,000 employees in
2013.\43\ The difference yields approximately 59 poultry slaughters
that have fewer than 1,000 employees and would be considered small
businesses that would be subject to the proposed regulations.
---------------------------------------------------------------------------
\43\ https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk. Accessed on August 26, 2016. The U.S.
Census data reports data in thousands making 1,000 the closest
number of employees to SBA's small business classification of 1,250
employees.
---------------------------------------------------------------------------
Another factor, however, that is important in determining the
economic effect of the regulations is the number of contracts held by a
firm. GIPSA records for 2014 indicated there were 21,925 poultry
production contracts in effect, of which 13,370, or 61 percent, were
held by the largest six live poultry dealers, and 90 percent (19,673)
were held by the largest 25 live poultry dealers. These 25 live poultry
dealers are all in the large business SBA category, whereas the 21,925
poultry growers holding the other end of the contracts are almost all
small businesses by SBA's definitions.
To the extent the proposed rule imposes costs, these costs are
expected to be borne by live poultry dealers. The costs likely include
legal review of contracts, record-keeping, administrative costs,
developing a CMS, and developing projection sheets.
Live poultry dealers classified as large businesses are responsible
for about 89.7 percent of the poultry growing contracts. Assuming that
live poultry dealers classified as small businesses will bear about
10.3 percent of the costs, expected costs in the first year for live
poultry dealers classified as small businesses would be $1.8
million.\44\ Expected 10-year costs annualized at a three percent
discount rate for live poultry dealers classified as small businesses
would be $387,000. Expected 10-year costs annualized at a seven percent
discount rate for live poultry dealers classified as small businesses
would be $429,000.
---------------------------------------------------------------------------
\44\ Estimated first year costs of $17.37 million x 10.27
percent of firms that are small businesses = $1.8 million.
---------------------------------------------------------------------------
In considering the impact on small businesses, GIPSA considered the
average costs and revenues of each small business impacted by Sec.
201.214. The number of small businesses impacted by Sec. 201.214, by
NAICS code, as well as the per entity, first-year and annualized costs
at both the three percent and seven percent discount rates appear in
the following table.
Table 15--Per Entity Costs to Small Businesses of Sec. 201.214
----------------------------------------------------------------------------------------------------------------
Number of small Annualized Annualized
NAICS business First year ($) costs--3% ($) costs--7% ($)
----------------------------------------------------------------------------------------------------------------
311615--Poultry............................. 59 30,246 6,563 7,278
----------------------------------------------------------------------------------------------------------------
The following table compares the average per entity first-year and
annualized costs of Sec. 201.214 to the average revenue per
establishment for all firms in the same NAICS code. The annualized
costs are slightly higher at the seven percent rate than at the three
percent rate, so only the seven percent rate is shown as it is the
higher annualized cost.
Table 16--Comparison of Per Entity Cost to Small Businesses of Sec. 201.214 to Revenues
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average revenue
Number of small Average first- Average per First-year cost Annualized cost
NAICS business year cost per annualized cost establishment as percent of as percent of
entity ($) per entity ($) ($) revenue (%) revenue (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
311615--Poultry................................... 59 30,246 7,278 13,842,548 0.22 0.05
--------------------------------------------------------------------------------------------------------------------------------------------------------
The revenue figure in the above table come from Census data for
live poultry dealers, NAICS code 311615.\45\
---------------------------------------------------------------------------
\45\ Source: https://www.census.gov/data/tables/2012/econ/susb/2012-susb-annual.html. Accessed on November 29, 2016.
---------------------------------------------------------------------------
As the results in Table 16 demonstrate, the first-year and
annualized costs of Sec. 201.214 as a percent of revenue is small at
less than one percent.
Based on the above analyses regarding Sec. 201.214, GIPSA
certifies that this rule is not expected to have a significant economic
impact on a substantial number of small business entities as defined in
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). While confident
in this certification, GIPSA acknowledges that individual businesses
may have relevant data to supplement our analysis. We would encourage
small stakeholders to submit any relevant data during the comment
period.
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, although in some instances they merely reiterate
GIPSA's previous interpretation of the P&S Act. This proposed rule
would not pre-empt state or local laws, regulations, or policies,
unless they present an irreconcilable conflict with this rule. There
are no
[[Page 92740]]
administrative procedures that must be exhausted prior to any judicial
challenge to the provisions of this proposed rule. Nothing in this
proposed rule is intended to interfere with a person's right to enforce
liability against any person subject to the P&S Act under authority
granted in section 308 of the P&S Act.
Executive Order 13175
This proposed rule has been reviewed in accordance with the
requirements of Executive Order 13175, ``Consultation and Coordination
with Indian Tribal Governments.'' Executive Order 13175 requires
Federal agencies to consult and coordinate with tribes on a government-
to-government basis on policies that have tribal implications,
including regulations, legislative comments or proposed legislation,
and other policy statements or actions that have substantial direct
effects on one or more Indian tribes, on the relationship between the
Federal Government and Indian tribes or on the distribution of power
and responsibilities between the Federal Government and Indian tribes.
GIPSA has assessed the impact of this rule on Indian tribes and
determined that this rule does not, to our knowledge, have tribal
implications that require tribal consultation under EO 13175. If a
tribe requests consultation, GIPSA will work with the Office of Tribal
Relations to ensure meaningful consultation is provided where changes,
additions, and modifications identified herein are not expressly
mandated by Congress.
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.
E-Government Act Compliance
GIPSA is committed to compliance with the E-Government Act, to
promote the use of the Internet and other information technologies to
provide increased opportunities for citizen access to Government
information and services, and for other purposes.
List of Subjects in 9 CFR Part 201
Contracts, Poultry, Livestock, 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
0
1. The authority citation for Part 201 continues to read as follows:
Authority: 7 U.S.C. 181-229c.
0
2. Amend Sec. 201.210 by adding paragraph (b)(10) to read as follows:
* * * * *
(b) * * *
(10) Failing to use a poultry grower ranking system in a fair
manner after applying the criteria in Sec. 201.214.
0
2. Add new Sec. 201.214 to read as follows:
Sec. 201.214 Poultry grower ranking systems.
The Secretary may consider various criteria when determining
whether a live poultry dealer has engaged in a pattern or practice to
use a poultry grower ranking system to compensate poultry growers in an
unfair, unjustly discriminatory, or deceptive manner, or in a way that
gives an undue or unreasonable preference or advantage to any poultry
grower or subjects any poultry grower to an undue or unreasonable
prejudice or disadvantage. These criteria include, but are not limited
to:
(a) Whether a live poultry dealer provides sufficient information
to enable a poultry grower to make informed business decisions. Such
information should include the anticipated number of flocks per year,
the average gross income from each flock, and any other information
necessary to enable a poultry grower to calculate the expected income
from the poultry growing arrangement;
(b) Whether a live poultry dealer supplies inputs of comparable
quality and quantity to all poultry growers in the ranking group; and
whether there is a pattern or practice of supplying inferior inputs to
one or more poultry growers in the ranking group. Inputs include birds,
feed, medication, and any other input supplied by the live poultry
dealer;
(c) Whether a live poultry dealer includes poultry growers provided
with dissimilar production variables in the ranking group in a manner
that affects a poultry grower's compensation. Production variables
include, but are not limited to, the density at which the live poultry
dealer places birds, the target slaughter weights of the birds, and
bird ages that vary by more than seven days; and
(d) Whether a live poultry dealer has demonstrated a legitimate
business justification for use of a poultry grower ranking system that
may otherwise be unfair, unjustly discriminatory, or deceptive or gives
an undue or unreasonable preference or advantage to any poultry grower
or subjects any poultry grower to an undue or unreasonable prejudice or
disadvantage.
Larry Mitchell,
Administrator, Grain Inspection, Packers and Stockyards Administration.
[FR Doc. 2016-30429 Filed 12-19-16; 8:45 am]
BILLING CODE 3410-KD-P
