Undue and Unreasonable Preferences and Advantages Under the Packers and Stockyards Act, 1771-1783 [2020-00152]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 85, Number 8 (Monday, January 13, 2020)]
[Proposed Rules]
[Pages 1771-1783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00152]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 85, No. 8 / Monday, January 13, 2020 / 
Proposed Rules

[[Page 1771]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

9 CFR Part 201

[Document Number AMS-FTTP-18-0101]
RIN 0581-AD81


Undue and Unreasonable Preferences and Advantages Under the 
Packers and Stockyards Act

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: Comments are invited on the proposed establishment of a new 
regulation under the Packers and Stockyards Act, which protects fair 
trade, financial integrity, and competitive marketing for livestock, 
meat, and poultry. The proposed regulation would specify criteria the 
Secretary of Agriculture would consider when determining whether an 
undue or unreasonable preference or advantage has occurred in violation 
of that Act. Establishment of these criteria is required by a provision 
of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill).

DATES: Comments on the proposed rule must be received by March 13, 
2020.

ADDRESSES: Interested persons are invited to submit written comments 
concerning this proposed rule. All comments must be submitted through 
the Federal e-rulemaking portal at https://www.regulations.gov and 
should reference the document number and the date and page number of 
this issue of the Federal Register. All comments submitted in response 
to this proposed rule will be included in the record and will be made 
available to the public. Please be advised that the identity of the 
individuals or entities submitting comments will be made public on the 
internet at the address provided above.

FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Chief Legal Officer/
Policy Advisor; Packers and Stockyards Division, USDA AMS Fair Trade 
Practices Program; phone: 202-690-4355; or email: 
[email protected].

SUPPLEMENTARY INFORMATION: Section 202(b) of the Packers and Stockyards 
Act, 1921 (the Act), as amended (7 U.S.C. 181 et seq.), specifies that 
it is unlawful for any packer, swine contractor, or live poultry dealer 
to either make or give any undue or unreasonable preference or 
advantage to any particular person or locality in any respect. In 
administering this provision of the Act, the United States Secretary of 
Agriculture (Secretary) determines whether the conduct of regulated 
entities is considered a violation of the Act.
    In the past, each determination has been analyzed using general 
principles in a case-by-case basis, exercising the regulatory 
flexibility Congress provided when it passed the Act. Provisions of the 
2008 Farm Bill (Public Law 110-234) require the Secretary to promulgate 
regulations establishing criteria the Secretary would consider in 
determining whether an undue or unreasonable preference or advantage 
has occurred in violation of the Act. See Sec. 11006(1). The Secretary 
originally delegated responsibility for establishing the required 
criteria to the Grain Inspection, Packers and Stockyards Administration 
(GIPSA), which subsequently merged with the Agricultural Marketing 
Service (AMS). AMS now administers the regulations under the Act and 
has undertaken this rulemaking. To meet the statutory requirement, AMS 
proposes adding a new Sec.  201.211 to 9 CFR part 201--Regulations 
Under the Packers and Stockyards Act (P&S regulations), retaining the 
necessarily flexible framework for the Secretary's determinations, 
while providing criteria that supports the transparency of the 
Secretary's determinations. Accordingly, the regulated industry and the 
public will have a reference to the general framework that AMS will use 
to determine whether there is an unlawful preference or advantage under 
section 202(b) of the Act.
    Proposed Sec.  201.211 would require the Secretary to consider one 
or more of four specified criteria when determining whether any undue 
or unreasonable preference or advantage has been given or made to any 
particular person or locality in any respect in violation of section 
202(b) of the Act. The Secretary would not be limited to considering 
only the four proposed criteria, but could also take other factors into 
consideration as appropriate on a case-by-case basis. We discuss each 
of the four proposed criteria later in this document.
    A 60-day comment period is provided to allow interested persons to 
respond to this proposed rule. All written comments received in 
response to this proposed rule by the date specified will be 
considered.

Background

    The Packers and Stockyards Division (PSD) of AMS's Fair Trade 
Practices Program oversees day-to-day administration of the P&S 
regulations and is called upon to investigate alleged violations of 
section 202(b) of the Act, many related to contractual dealings with 
livestock producers, swine production contract growers, and poultry 
growers. Other entities, including retailers and the public, can also 
be harmed by violations of section 202(b). Difficulty lies in 
determining whether particular instances of preferences or advantages 
made or given to one or more persons or localities would be undue or 
unreasonable and violations of the Act.
    As mentioned above, the 2008 Farm Bill directs the Secretary to 
establish criteria the Secretary will consider in determining whether 
an undue or unreasonable preference or advantage has occurred in 
violation of the Act. At the time the 2008 Farm Bill was enacted, what 
is now PSD operated within GIPSA. GIPSA undertook the responsibility 
for developing criteria for consideration. In June 2010, GIPSA 
published a proposed rule (75 FR 35338; June 22, 2010) that was never 
finalized, due to Congressional prohibitions included in the 
Consolidated Appropriations Acts for fiscal years 2012 through 2015, 
which disallowed any further work on the new criteria rulemaking. See 
Sec. 721, Public Law 112-55, November 18, 2011; Sec. 742, Public Law 
113-6, March 26, 2013; Sec. 744, Public Law 113-76, January 17, 2014; 
and Sec. 731, Public Law 113-235, December 16, 2014. GIPSA resumed its 
efforts to promulgate the required criteria in December 2016 with 
publication of a second proposed rule

[[Page 1772]]

(81 FR 92703; December 20, 2016), but decided to take no further action 
on that proposal (82 FR 48603; October 18, 2017).
    The Secretary is issuing this NPRM to establish criteria to 
consider when determining whether a violation of section 202(b) of the 
Act has occurred as required by the 2008 Farm Bill. The proposed 
criteria would provide an analytical framework to evaluate whether a 
violation may have occurred. This proposed rule addresses a situation 
occasionally encountered in the industry, namely the need to determine 
whether a preference or advantage in a specific instance is undue or 
unreasonable. AMS intends the proposed new regulation to establish a 
framework for consideration of potential violations of section 202(b) 
of the Act, to bring transparency to the Secretary's determination 
process for the industry.

Proposed Provisions

    This proposed rule would establish criteria the Secretary would 
consider in determining whether an undue or unreasonable preference or 
advantage has been made or given in violation of the Act, and therefore 
establish an appropriate framework for analysis. It is not unusual for 
buyers or sellers of livestock or poultry to receive advantages. For 
example, as between two competing sellers, one may receive a better 
price from a buyer. The Act only prohibits those preferences or 
advantages that are undue or unreasonable. It follows that there are 
legitimate reasons for the existence of preferences or advantages that 
are not undue or unreasonable. Reasonable differences in contract terms 
may result from negotiations over particular interests between the 
parties. It is not the purpose of the Act to interfere with contract 
negotiations or to upset the traditional principles of freedom of 
contract. Nor does the Act statutorily create an entitlement to obtain 
the same type of contract offered to other producers or growers. 
However, greater clarity on the terms associated with grower contracts 
could increase transparency in the marketplace and reduce the claims of 
undue or unreasonable preference.
    Under proposed Sec.  201.211, the Secretary would consider one or 
more specific criteria when determining whether a packer, swine 
contractor, or live poultry producer has made or given any undue or 
unreasonable preference or advantage to any particular person or 
locality in any respect. Proposed Sec.  201.211 lists four criteria for 
consideration and would provide that the Secretary not be limited to 
consideration of those four criteria.
    Under proposed Sec.  201.211(a), the Secretary would consider 
whether the preference or advantage under consideration cannot be 
justified on the basis of a cost savings related to dealing with 
different producers, sellers, or growers. Under proposed Sec.  
201.211(b), the Secretary would consider whether the preference or 
advantage in question cannot be justified on the basis of meeting a 
competitor's prices. Under proposed Sec.  201.211(c), the Secretary 
would consider whether the preference or advantage in question cannot 
be justified on the basis of meeting other terms offered by a 
competitor. Under proposed Sec.  201.211(d), the Secretary would 
consider whether the preference or advantage in question cannot be 
justified as a reasonable business decision that would be customary in 
the industry.
    Historically, the Secretary has considered some of these criteria 
and other factors similar to these in determining whether or not to 
bring an enforcement action regarding an alleged violation of the Act. 
AMS has based its proposal on the experience of PSD, which has 
administered the Packers and Stockyards Act and regulations and 
understands what complaints are commonly made regarding compliance. AMS 
is proposing this list of criteria that the Secretary would consider, 
but it is also proposing that the Secretary have the flexibility to 
consider other criteria that may be relevant on a case-by-case basis. 
In doing so, AMS is attempting to strike a balance between the 
interests of all segments of the industry. On the one hand, AMS is 
charged with protecting producers, growers, retailers, and others, 
including the public, from potential harm resulting from undue or 
unreasonable preferences or advantages. On the other hand, AMS 
recognizes that among the numerous complaints examined in the past, 
many preferences and advantages made or given to individuals or groups 
in the industry have been determined to be lawful, and relatively few 
have been determined to be undue or unreasonable.
    Legitimate disparities in contract terms could be attributed to 
reasonable business negotiations between contracting parties. For 
example, price differences offered to different sellers could reflect 
differences in transportation costs to a slaughter facility or could 
reflect one producer's ability and willingness to supply livestock in 
the early morning hours to start the day's processing while others 
cannot. Disparate contract terms are not considered undue or 
unreasonable just because they are not identical.
    For example, a live poultry dealer pays a premium to one poultry 
grower who agrees to use experimental vaccines, thus putting the grower 
at increased risk of financial loss if the vaccine proves to be 
unsuccessful and the birds die or do not grow well. Based on the 
criteria in proposed Sec.  201.211, the apparent preference or 
advantage might be justified on the basis of the company saving the 
expense of testing the vaccines though other means, and the premium 
paid to the grower for providing the extra service of testing vaccines 
and for accepting greater financial risk might not be considered undue 
or unreasonable. In another example, a livestock packer pays higher 
prices later in the day or week after competitors have raised the 
market price. Based on the criteria in proposed Sec.  201.211, the 
apparent preference or advantage might be justified as necessary to 
meet competitors' prices, and the higher price might not be considered 
undue or unreasonable. Finally, where a live poultry dealer's 
competitors have offered long term contracts to their growers, the 
poultry dealer finds that he must offer comparable terms to his growers 
in the same locality. Based on the criteria in proposed Sec.  201.211, 
the apparent preference given to growers in that locality is unlikely 
to be considered undue or unreasonable because the difference in 
contract terms might be justified by the need to meet a competitor's 
other contract terms in that locality.
    On the other hand, some preferences or advantages might be 
considered undue or unreasonable if they are so unfair that they would 
tend to restrain trade, creating such excessively favorable conditions 
for one or more persons that their competitors would have reduced 
chances of business success. For instance, premiums offered to one 
person or locality but not offered to other persons or localities 
similarly situated could constitute a violation of the Act. A livestock 
packer negotiating preferential live basis prices with only one favored 
livestock supplier and not with similarly situated suppliers, may be in 
violation of the Act. PSD would examine the proposed criteria and 
likely conclude that the packer cannot justify its actions on the basis 
of cost savings, meeting a competitor's prices, meeting other terms 
offered by a competitor, or as a reasonable business decision.
    Under proposed Sec.  201.211(a) through (c), the Secretary would 
consider whether preferences or advantages made or given to one or more 
persons are

[[Page 1773]]

based on cost savings related to dealing with different producers, 
sellers, or growers, or the need to meet a competitor's prices or other 
contract terms. For example, a live poultry dealer offering a higher 
base price to a favored grower, but not to other growers in the same 
complex with the same housing types, may be in violation of the Act. 
The Secretary would consider the proposed criteria. Under criterion 
(a), there would be no cost savings in a higher base price. But under 
criteria (b) and (c), the Secretary would consider whether the higher 
base price meets a competitor's price or other terms. If the reason for 
giving the favored grower the higher price cannot be justified by 
meeting a competitor's price or other terms, then the higher base price 
may be an undue or unreasonable preference or advantage.
    Under proposed 201.211(d), the Secretary would consider whether the 
preference or advantage cannot be justified as a reasonable business 
decision that is customary in the industry. A packer, swine contractor, 
or live poultry dealer may have a legitimate business reason for 
treating some persons or groups more favorably than others. For 
example, it is customary in the cattle industry for the packer to pay 
freight expenses on live weight purchases, but not on carcass weight 
purchases. Based on the criteria in proposed Sec.  201.211, it is 
unlikely that the apparent preference or advantage to live weight 
cattle sellers in that situation would be considered undue or 
unreasonable because it could be justified as a reasonable business 
decision that is customary in the industry. In another example, a live 
poultry dealer may pay a premium to growers who construct new poultry 
houses or update their houses with the latest technology. Based on the 
criteria in proposed Sec.  201.211, such a premium might be justified 
as a reasonable business decision that would be customary in the 
industry, so it is unlikely that the Secretary would determine the 
preference or advantage to be undue or unreasonable.
    Live poultry dealers, packers, and swine contractors should enter 
into contracts that do not discriminate, unless the differences are due 
to cost, meeting competitors prices, or normal industry standards. 
Preferences that are not grounded in ordinary business considerations 
may be based upon reasons of unjust advantage. AMS believes these 
criteria promote honest competition in the supply chain, instead of 
advantages that could result from bribery or other influences. 
Therefore, AMS focused on four criteria that promote honest 
competition: Cost savings, meeting a competitor's prices, meeting other 
terms offered by a competitor, and other reasonable business reasons 
for preference and advantages.
    While the agency expects a short-term increase in the cost of 
review for livestock producers, poultry growers, and regulated entities 
in existing contracts, in the long-term, innovative contracts should be 
less costly to negotiate even when those contracts provide for 
preferences and advantages. Because this framework of criteria could be 
understood in the context of ordinary and customary business decisions, 
regulated entities may more easily review contracts for compliance with 
the Act.
    By following a framework of criteria that promote fair dealing 
based in rational decision-making, AMS promotes protection for 
producers and localities that might be otherwise have been unable to 
obtain preferential contract terms or price advantages. This, 
therefore, should also improve the negotiating position of growers and 
producers.
    AMS expects that adding the proposed criteria described above to 
the P&S regulations would provide a framework in which the Secretary 
can consider potential violations of the Act, help the industry 
understand what the Secretary would consider when evaluating violation 
claims, and fulfill the Congressional mandate to establish criteria for 
making determinations regarding potentially unacceptable conduct under 
the Act.

Required Impact Analyses

Executive Orders 12866, 13563, and 13771 and the Regulatory Impact 
Analysis

    AMS is issuing this rule in conformance with Executive Orders 12866 
and 13563, which direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits, including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity. Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, reducing costs, 
harmonizing rules, and promoting flexibility.
    In the development of this proposed rule, AMS determined to take a 
different approach to developing the necessary criteria than previous 
rulemaking efforts. AMS determined that including the proposed criteria 
as part of the framework for consideration of preferences and 
advantages in buyer-seller contracts would best serve the needs of the 
industry and fulfill the 2008 Farm Bill mandate. AMS expects the 
proposed new regulation would bring transparency to considerations of 
potential violations of section 202(b) of the Act and certainty to 
industry members forging contracts related to the buying and selling of 
poultry and livestock. The proposed rule is not expected to provide any 
environmental, public health, or safety benefits.
    This proposed rule has been determined to be significant for the 
purposes of Executive Order 12866 and therefore has been reviewed by 
OMB. This proposed rule is expected to be an Executive Order 13771 
regulatory action. Details on the estimated costs of this proposed rule 
can be found in the rule's economic analysis.
    AMS is proposing a new Sec.  201.211, which would provide four 
criteria in response to requirements of the 2008 Farm Bill for the 
Secretary of Agriculture to consider in determining whether a packer, 
swine contractor, or live poultry dealer has engaged in conduct 
resulting in an undue preference or advantage to any particular person 
or locality in any respect in violation of section 202(b) of the Act. 
Based on its familiarity with the industry, PSD prepared an economic 
analysis of proposed Sec.  201.211 as part of the regulatory process. 
The economic analysis presents the cost-benefit analysis of proposed 
Sec.  201.211. PSD then discusses the impact on small businesses.
    This proposed rule is independent of previous rulemaking. PSD 
reviewed certain cost projections developed in conjunction with 
previous rulemaking in analyzing the regulatory impact of this proposed 
rule. All costs and benefits described in this economic analysis 
pertain to the language in this proposed rule.

Regulatory Impact Analysis

    The 2008 Farm Bill requires the Secretary of Agriculture to 
promulgate a regulation establishing criteria that the Secretary will 
consider in determining whether an undue or unreasonable preference or 
advantage has occurred in violation of section 202(b) of the Act. This 
rulemaking is to fulfill that requirement.
    Responsibility for establishing the required criteria was 
originally delegated to the Grain Inspection, Packers and Stockyards 
Administration (GIPSA), which subsequently merged with AMS. AMS now 
administers the

[[Page 1774]]

regulations under the Act and has undertaken this rulemaking.
    For this economic analysis, PSD considered the impact of three 
alternatives for this proposed rule. PSD considered the impact of 
maintaining the status quo, the impact of adopting regulatory language 
that had been proposed in 2016, and the impact of adopting the current 
proposed language.
    PSD considered the impact of taking no further action on a previous 
version of Sec.  201.211 GIPSA \1\ had proposed on December 20, 
2016.\2\ GIPSA subsequently provided notice in the Federal Register on 
October 18, 2017,\3\ that it would take no further action on the 2016 
proposed rule. Taking no action would result in no additional out-of-
pocket costs to businesses in the livestock and poultry industries but 
would not fulfill the requirements of the 2008 Farm Bill.
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    \1\ On November 14, 2017, Secretary of Agriculture, Sonny 
Perdue, issued a memorandum eliminating GIPSA as a standalone agency 
and transferred the regulatory authority for the Act to AMS. PSD has 
day-to-day oversight of the Packers and Stockyards activities in 
AMS.
    \2\ Federal Register, Volume 81, No. 244, pages 92703-92723.
    \3\ Federal Register, Volume 82, No. 200, pages 48603-48604.
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    AMS could have proposed the same regulatory language proposed as in 
the 2016 proposed rule. The 2016 proposed rule contained six criteria 
the Secretary would consider in determining whether conduct or action 
constitutes an undue or unreasonable preference or advantage and a 
violation of section 202(b) of the Act. To determine the impact of 
adopting the 2016 proposed rule, PSD looked to the estimated costs of 
the rule contained in the economic analysis discussed in detail in the 
notice of proposed rulemaking. The total first year costs of the 
proposed rule in 2016 were $15.37 million.
    This current rulemaking represents a different approach than 
previous rulemakings that would establish an analytical framework for 
considering whether a violation of section 202(b) of the Act has 
occurred. The proposed rule includes new criteria to bring transparency 
to the determination process for the industry. PSD estimates that the 
total first year costs of this proposed rule are $9.67 million.

Introduction

    As required by the 2008 Farm Bill, proposed Sec.  201.211 specifies 
criteria the Secretary would consider when determining whether an undue 
or unreasonable preference or advantage has occurred in violation of 
section 202(b) of the Act. The proposed criteria provide a framework to 
analyze whether a particular person or locality receives an undue or 
unreasonable preference or advantage as compared to other similarly 
situated persons or localities. AMS expects the proposed four criteria 
would clarify the legal standard for the public and promote honest 
competition, fair dealing, and improve the negotiating position of 
growers and producers.

Cost-Benefit Analysis

    PSD has estimated the costs and benefits of the proposed rule 
assuming the final rule is published and effective in May 2020. The 
costs and benefits of the proposed rule are discussed in order below.
A. Cost Estimation
    PSD believes that the costs of proposed Sec.  201.211 would mostly 
consist of the direct costs of reviewing and, if necessary, re-writing 
marketing and production contracts to ensure that packers, swine 
contractors, and live poultry dealers are not providing an undue or 
unreasonable preference or advantage to any livestock producer, swine 
production contract grower, or poultry grower compared to other 
similarly situated person or localities. PSD also believes that 
proposed Sec.  201.211 may lead to additional litigation costs to test 
court precedents relating to section 202(b) violations. In past cases, 
courts have considered whether a specific preference or advantage would 
be a violation of the Act if the preference or advantage did not harm 
competition. However, AMS does not intend to create criteria that 
conflict with case precedent, so PSD expects that court precedents 
relating to competitive harm are likely to remain unchanged.
    Proposed Sec.  201.211 does not impose any new requirements on 
regulated entities, but would serve as guidance for their compliance 
with section 202(b) of the Act. Since the proposed rule would clarify 
the Secretary's consideration of unlawful undue or unreasonable 
preferences or advantages, regulated entities should face less risk of 
violating the Act. Because of this reduced risk, and the fact that PSD 
does not expect court precedents requiring the demonstration of harm or 
potential harm to competition to change, PSD does not expect the 
proposed rule to result in a decrease in the use of alternative 
marketing agreements \4\ (AMAs), poultry tournament systems, or other 
incentive payment systems, or decreased economic efficiencies in the 
cattle, hog, and poultry industries. Additionally, PSD does not expect 
the proposed rule to inhibit the ability of regulated entities and 
producers and growers to develop and enter into mutually advantageous 
contracts.
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    \4\ AMAs are marketing contracts, where producers market their 
livestock to a packer under a verbal or written agreement. Pricing 
mechanisms vary across AMAs. Some rely on a spot market for at least 
one aspect of their prices, while others involve complicated pricing 
formulas with premiums and discounts based on carcass merits. The 
livestock seller and packer agree on a pricing mechanism under AMAs, 
but usually not on a specific price.
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    To estimate costs, PSD divided costs into two major categories, 
direct and indirect costs. In addition, PSD expects there are two 
direct costs: Administrative costs and litigation costs.
    With respect to direct costs, administrative costs for regulated 
entities would include items such as review of marketing and production 
contracts, additional record keeping,\5\ and all other associated 
administrative office work to demonstrate that they do not provide an 
undue or unreasonable preference or advantage to any livestock 
producer, swine production contract grower, or poultry grower compared 
to other similarly situated person or localities.
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    \5\ There are no additional mandatory record keeping 
requirements in the proposed rule. PSD expects that regulated 
entities may opt to keep additional records to justify advantages or 
preferences to demonstrate compliance with the proposed rule in case 
of a PSD investigation or private litigation action.
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    Litigation costs for the livestock and poultry industries would 
initially increase while precedent confirming decisions are 
established. However, since court precedents have generally required 
the demonstration of harm to competition, PSD expects the increased 
litigation costs would decline after initial court decisions. Once 
precedents are confirmed, PSD expects additional litigation to decline.
    With respect to indirect costs, those costs include costs caused by 
changes in supply and/or demand and any resulting efficiency losses in 
the national markets for beef, pork, and chicken and the related input 
markets for cattle, hogs, and poultry resulting from the direct costs 
of the proposed rule.
1. Direct Costs--Administrative Costs
    To estimate administrative costs of the proposed rule, PSD relied 
on its experience reviewing contracts and other business records 
commonly maintained in the livestock and poultry industries for 
compliance with the Act and regulations. PSD has data on the number of 
production contracts between swine production contract growers and

[[Page 1775]]

swine contractors and poultry growers and live poultry dealers. PSD 
estimated the number of cattle marketing contracts between producers 
and packers based on the number of feedlots and the percentage of 
livestock procured under AMAs. PSD then multiplied hourly estimates of 
the administrative functions of reviewing and revising contracts by 
average hourly labor costs for administrative, management, and legal 
personnel to arrive at the total estimated administrative costs. PSD 
measured all costs in constant 2016 dollars in accordance with guidance 
on complying with E.O. 13771.\6\
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    \6\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf
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    Since packers, swine contractors, and live poultry dealers would 
likely choose to review their contracts as a precautionary measure to 
ensure that they are not engaging in conduct or action that in any way 
gives an undue or unreasonable preference or advantage to any livestock 
producer, swine production contract grower, or poultry grower, PSD 
estimates that the regulated entities would review each contract or 
each contract type once and would renegotiate any contracts that 
contain language that could be considered a violation of section 202(b) 
of the Act.
    One may view this estimate as an upper bound to the direct cost of 
the proposed rule, as not every packer, swine contractor, or live 
poultry dealer would choose to conduct such a review. Some may choose 
to ``wait and see'' what effect, if any, the rule had on the industry, 
and if courts ruled on it in any way that would warrant such a review 
of their contracts.
    Based on PSD's experience, it developed estimates for regulated 
entities of the number of hours for attorneys and company managers to 
review and revise marketing and production contracts and for 
administrative staff to make changes, copy, and obtain signed copies of 
the contracts. For poultry contracts, PSD estimates that each unique 
contract type would require one hour of attorney time to review and 
rewrite a contract, two hours of company management time, and for each 
individual contract, one hour of administrative time, and one hour of 
additional record keeping time.\7\ PSD estimates that each of the 93 
live poultry dealers who report to PSD rely on 10 unique contract types 
on average. PSD data indicates that there are 24,101 individual poultry 
growing contracts. PSD estimates that each of the 237 hog packers has 
10 marketing agreements. The 2017 Census of Agriculture (Ag. Census) 
\8\ indicates that the universe of swine production contracts in the 
U.S. is 8,557. For hog production and marketing contracts, PSD 
estimates that each production contract and marketing agreement would 
require one-half hour of attorney time to review and rewrite a 
contract, one hour of company management time, one hour of 
administrative time, and one hour of additional record keeping time. 
For cattle processors, PSD estimates that each of the estimated 1,099 
marketing agreements would require one hour of attorney time to review 
and rewrite a contract, two hours of company management time, one hour 
of administrative time, and one hour of additional record keeping 
time.\9\
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    \7\ Again, there are no additional mandatory record keeping 
requirements in the proposed rule.
    \8\ https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf
    \9\ Ibid.
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    PSD multiplied estimated hours to conduct these administrative 
tasks by the average hourly wages for managers at $62/hour, attorneys 
at $84/hour, and administrative assistants at $36/hour as reported by 
the U.S. Bureau of Labor Statistics in its Occupational Employment 
Statistics to arrive at its estimate of contract review costs for 
regulated entities.\10\
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    \10\ All salary costs are based on mean annual salaries for May 
2018, adjusted for benefit costs, set to an hourly basis, and 
converted in to constant 2016 dollars. https://www.bls.gov/oes/. 
Accessed on April 9, 2019.
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    PSD recognizes that contract review costs would also be borne by 
livestock producers, swine production contract growers, and poultry 
growers. PSD estimates that each livestock producer, swine production 
contract grower, and poultry grower would, in its due course of 
business, spend one hour of time reviewing a contract or marketing 
agreement and would spend one-half hour of its attorney's time to 
review the contract. As with the regulated entities, one may view this 
estimate as an upper bound to the direct cost of the proposed rule, as 
not every producer or grower would choose to conduct such a review. 
Some may choose to ``wait and see'' what effect, if any, the rule had 
on the industry, and if courts ruled on it in any way that would 
warrant such a review of their contracts.
    PSD multiplied one hour of livestock producer, swine production 
contract grower, and poultry grower management time and one-half hour 
of attorney time to conduct the marketing and production contract 
review by the average hourly wages for attorneys at $84/hour and 
managers at $62/hour as reported by the U.S. Bureau of Labor Statistics 
in its Occupational Employment Statistics to arrive at its estimate of 
contract review costs for livestock producers, swine contract growers, 
and poultry growers. PSD then applied this cost to the estimated 1,099 
cattle marketing contracts, 2,370 hog marketing contracts, 8,557 hog 
production contracts, and 24,101 poultry growing contracts that have 
been reported to PSD.
    After determining the administrative costs to both the regulated 
entities and those they contract with, PSD added the administrative 
costs of the regulated entities and the livestock producers, swine 
production contract growers, and poultry growers together to arrive at 
the first-year total estimated administrative costs attributable to the 
regulation. A summary of the first-year total estimated administrative 
costs for proposed Sec.  201.211 appear in the following table:

                                    Table 1--First-Year Administrative Costs
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                                                 Cattle  ($        Hogs  ($       Poultry  ($       Total  ($
                 Regulation                      millions)        millions)        millions)        millions)
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201.211.....................................           $0.42            $3.05            $4.42            $7.89
----------------------------------------------------------------------------------------------------------------

    The first-year total administrative costs are $7.89 million for 
proposed Sec.  201.211, and include costs for cattle, hogs, and poultry 
because packers, swine contractors, live poultry dealers, livestock 
producers, swine production contract growers, and poultry growers would 
conduct administrative functions of contract review and record keeping 
in response to the regulation. The administrative costs are the highest 
for poultry, followed by hogs and cattle. This is due to the greater 
prevalence of contract growing arrangements in the poultry industry.

[[Page 1776]]

2. Direct Costs--Litigation Costs
    In considering the costs of the rules it proposed in 2016, GIPSA 
performed an in-depth analysis of litigation costs expected as a result 
of the package of four proposed new regulations.\11\ GIPSA estimated 
the total costs of litigating a case alleging violations of the P&S 
Act. The main costs are attorney fees to litigate a case in a court of 
law. The cost of litigating a case includes the costs to all parties 
including the respondent and the USDA in a case brought by the USDA and 
the costs of the plaintiff and the defendant in the case of private 
litigation.
---------------------------------------------------------------------------

    \11\ The four proposed rules were published on December 20, 
2016, in Volume 81, No. 244 of the Federal Register.
---------------------------------------------------------------------------

    To estimate litigation costs for the 2016 proposed rules, GIPSA 
examined the actual cases decided under the P&S Act from 1926 to 2014 
as reported by the National Agricultural Law Center at the University 
of Arkansas.\12\ The litigation costs estimated in the 2016 proposed 
rules are measured in constant 2016 dollars and are for regulated 
entities, producers, and growers. The 2016 analysis of litigation costs 
estimated that the interim final rule at Sec.  201.3(a) was the primary 
source of litigation costs and that the litigation costs for all four 
proposed rules were counted under Sec.  201.3(a).\13\ The 2016 analysis 
split out the estimated litigation costs between sections 202(a) and 
202(b).
---------------------------------------------------------------------------

    \12\ https://nationalaglawcenter.org/aglaw-reporter/case-law-index/packers-and-stockyards.
    \13\ The USDA withdrew Sec.  201.3(a) on October 18, 2017, in 
Volume 82, No. 200 of the Federal Register.
---------------------------------------------------------------------------

    The National Agricultural Law Center at the University of Arkansas 
has not reported any additional cases decided under the P&S Act since 
2015. Since proposed Sec.  201.211 would establish criteria for 
violations of section 202(b) and there has not been any new recent 
litigation reported by the National Agricultural Law Center at the 
University of Arkansas, PSD used the estimated litigation costs 
associated with section 202(b) from the 2016 proposed rules as the 
starting point for this proposed rule.
    The 202(b) estimated litigation costs serve as an upper boundary of 
estimated costs since the estimates assumed that Sec.  201.3(a) and 
Sec.  201.211 would both be promulgated. PSD estimates that there would 
be additional litigation when Sec.  201.211 becomes effective, even in 
the absence of Sec.  201.3(a). Therefore, PSD uses the following 202(b) 
litigation costs estimates in Table 14 from the 2016 proposed rule as 
the estimated first-year litigation costs assuming the rule becomes 
effective in May 2020.\14\
---------------------------------------------------------------------------

    \14\ Federal Register, Volume 81, No. 244, page 92580.

                                 Table 2--Projected First-Year Litigation Costs
----------------------------------------------------------------------------------------------------------------
                                                 Cattle  ($        Hog  ($        Poultry  ($       Total  ($
         Section 202(b)  of the Act              millions)        millions)        millions)        millions)
----------------------------------------------------------------------------------------------------------------
Total.......................................           $0.24            $0.04            $1.49            $1.77
----------------------------------------------------------------------------------------------------------------

    PSD expects proposed Sec.  201.211 would result in an additional 
$1.77 million in litigation costs in the first full year after the rule 
becomes effective. Using the number of complaints PSD has received from 
industry participants as an indicator, PSD estimates that the majority 
of the litigation will be in the poultry industry. Most of the 
complaints concerning undue or unreasonable preferences that PSD has 
received since 2009 have come from the poultry industry.
3. Total Direct Costs
    The total first-year direct costs of proposed Sec.  201.211 are the 
sum of administrative and litigation costs from above and are 
summarized in the following table.

                                      Table 3--First Year Direct Costs \15\
----------------------------------------------------------------------------------------------------------------
                                                 Cattle  ($        Hogs  ($       Poultry  ($       Total  ($
                  Cost type                      millions)        millions)        millions)        millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs.................................           $0.42            $3.05            $4.42            $7.89
Litigation Costs............................            0.24             0.04             1.49             1.77
                                             -------------------------------------------------------------------
    Total Direct Costs......................            0.66             3.09             5.91             9.67
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \15\ The detail in this table and other tables in this analysis 
may not add to the totals due to rounding.
---------------------------------------------------------------------------

    PSD estimates that the total direct costs of proposed Sec.  201.211 
to be $9.67 million. As the above table shows, the costs are highest 
for the poultry industry, followed by hogs and cattle. The primary 
reason is the high utilization of growing contracts and the 
corresponding higher estimated administrative costs in the poultry 
industry. To put this direct cost in perspective, the actual impact on 
retail prices from these direct costs would be less than one one-
hundredth of a cent.
4. Indirect Costs
    PSD estimates that the indirect costs of proposed Sec.  201.211 on 
the cattle, hog, and poultry industries are zero. For the purposes of 
this analysis, indirect costs are social welfare losses due to any 
potential price and output changes from the direct costs of proposed 
rule and in are addition to the direct costs (administrative and 
litigation costs) on regulated entities, producers, and growers who are 
directly impacted by the proposed rule. The economy will experience 
indirect costs, for example, if the proposed rule causes packers and 
live poultry dealers to reduce production, increasing the price of meat 
products and reducing the amount of meat consumed by consumers.
    As previously discussed, the regulation clarifies the Secretary's 
consideration of whether a conduct or action constitutes an undue or 
unreasonable preference or advantage. PSD does not expect, therefore, 
that proposed Sec.  201.211 would result in a decreased use of AMAs, 
use of poultry grower ranking systems or other incentive pay, reduced 
capital formation, inhibit development of new

[[Page 1777]]

contracts, or decreased economic efficiencies in the livestock, meat 
and poultry industries. Accordingly, PSD does not project indirect 
costs resulting from decreases in AMAs, reduced capital, efficiency 
losses, or lost consumer and producer surplus. Indirect costs that 
could theoretically be anticipated are due to shifts in industry demand 
and supply curves resulting from the increases in industry direct costs 
attributable to the proposed rule. These shifts may result in quantity 
and price changes in the retail markets for beef, pork, and poultry, 
and the related input markets for cattle, hogs, and poultry. However, 
litigation costs are unrelated to the quantity of production--in other 
words, they are not marginal costs--so it is not appropriate to include 
them in the amount of a supply curve shift. Contract reviews and 
revisions are somewhat related to production quantity, but even they 
are less than fully compelling as a component of marginal cost. These 
nuances are not reflected in the assessment that follows, and thus it 
should be interpreted as a bounding exercise.
    To calculate an upper bound on this type of indirect costs based on 
supply curves shifting, PSD modeled the impact of the increase in 
direct costs of implementing proposed Sec.  201.211 in a Marketing 
Margins Model (MMM) framework.\16\ The MMM allows for the estimation of 
changes in consumer and producer prices and quantities produced caused 
by changes in supply and demand in the retail markets for beef, pork, 
and poultry and the input markets for cattle, hogs, and poultry.
---------------------------------------------------------------------------

    \16\ The framework is explained in detail in Tomek, W.G. and 
K.L. Robinson ``Agricultural Product Prices,'' third edition, 1990, 
Cornell University Press.
---------------------------------------------------------------------------

    PSD modeled--again, as a bounding exercise--the indirect costs as 
an inward (or upward) shift in the supply curves for beef, pork, and 
poultry. This has the effect of increasing the equilibrium prices and 
reducing the equilibrium quantity produced. This also has the effect of 
reducing the derived demand for cattle, hogs, and poultry, which causes 
a reduction in the equilibrium prices and quantity produced. Economic 
theory suggests that these shifts in the supply curves and derived 
demand curves will result in price and quantity impacts and potential 
dead weight losses to society.\17\
---------------------------------------------------------------------------

    \17\ A dead weight loss is the cost to society of an inefficient 
allocation of resources in a market. Causes of deadweight losses can 
include market failures, such as market power or externalities, or 
an intervention by a non-market force, such as government regulation 
or taxation.
---------------------------------------------------------------------------

    To estimate the output and input supply and demand curves for the 
MMM, PSD constructed linear supply and demand curves around equilibrium 
price and quantity points using price elasticities of supply and demand 
from the GIPSA Livestock Meat and Marketing Study and from USDA's 
Economic Research Service.\18\ With the supply curves established from 
this data, PSD then shifted the supply curves for beef, pork, and 
chicken up by the amount of the increase in direct costs for each 
industry. PSD calculated the new equilibrium prices and quantities in 
the input markets resulting from the decreases in derived demand that 
result from higher direct costs. This allows for the calculation of the 
indirect cost from the lower relative quantity produced at the 
relatively higher price when the industry's direct costs increase.
---------------------------------------------------------------------------

    \18\ RTI International ``GIPSA Livestock Meat and Marketing 
Study'' prepared for Grain Inspection, Packers and Stockyards 
Administration, 2007. ERS Price Elasticities: https://www.ers.usda.gov/data-products/commodity-and-food-elasticities/demand-elasticities-from-literature.aspx.
---------------------------------------------------------------------------

    The calculation of an upper bound on the price impacts from the 
increases in direct costs from proposed Sec.  201.211 resulted in price 
increases of less than one one-hundredth of a cent in retail prices for 
beef, pork, and poultry. This is because the increase in direct costs 
is very small in relation to total industry costs.\19\ The result is 
that the price and quantity effects from the increases in direct costs 
are indistinguishable from zero and, therefore, PSD concludes that the 
indirect costs of proposed Sec.  201.211 for each industry are also 
zero.
---------------------------------------------------------------------------

    \19\ The $9.67 million increase in total industry costs from 
proposed Sec.  201.211 is only 0.0043 percent of direct industry 
costs of approximately $223 billion for the beef, pork, and poultry 
industries.
---------------------------------------------------------------------------

5. Total Costs
    PSD added all direct costs to the indirect costs (equal to zero), 
to arrive at the estimated total first-year costs of proposed Sec.  
201.211. The total first-year costs are summarized in Table 4.

                                         Table 4--Total First Year Costs
----------------------------------------------------------------------------------------------------------------
                                                    Cattle  ($       Hogs  ($       Poultry  ($      Total  ($
                    Cost type                        millions)       millions)       millions)       millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs.....................................           $0.42           $3.05           $4.42           $7.89
Litigation Costs................................            0.24            0.04            1.49            1.77
Total Direct Costs..............................            0.66            3.09            5.91            9.67
Total Indirect Costs............................            0.00            0.00            0.00            0.00
                                                 ---------------------------------------------------------------
    Total Costs.................................            0.66            3.09            5.91            9.67
----------------------------------------------------------------------------------------------------------------

    PSD estimates that the total costs would be $9.67 million in the 
first year of implementation.
6. Ten-Year Total Costs
    To arrive at the estimated ten-year administrative costs of 
proposed Sec.  201.211, PSD estimates that in each of the first five 
years, 20 percent of all contracts will either expire and need to be 
renewed each year or new marketing and production contracts will be put 
in place each year. While PSD expects the costs of reviewing and 
revising, if necessary, each contract would remain constant in the 
first five years, it expects the administrative costs would be lower 
after the first year because the direct administrative costs of 
reviewing and revising contracts would only apply to the 20 percent of 
expiring contracts or new contracts. PSD estimates that in the second 
five years, the direct administrative costs of reviewing and revising 
contracts would decrease by 50 percent per year as the contracts would 
already reflect language modifications, if any, necessitated by 
implementation of the regulation. PSD estimates that after ten years, 
the direct administrative costs would return to where they would have 
been absent the rule, and the additional administrative costs 
associated with the rule would remain at $0 after ten years.
    In estimating the estimated ten-year litigation costs of proposed 
Sec.  201.211, PSD expects the litigation costs to be constant for the 
first five years while courts are setting precedents for the 
interpretation of Sec.  201.211. PSD expects that case law with respect 
to the

[[Page 1778]]

regulation would be settled after five years and by then, industry 
participants would know how PSD would enforce the regulation and how 
courts would interpret the regulation. The effect of courts 
establishing precedents is that litigation costs would decline after 
five years as the livestock and poultry industries understand how the 
courts interpret the regulation.
    To arrive at the estimated ten-year litigation costs of proposed 
Sec.  201.211, PSD estimates that litigation costs for the first five 
years would occur at the same rate and at the same cost as in the first 
full year of the rule ending in May 2021. In the sixth through tenth 
years, PSD estimates that additional litigation costs would decrease 
each year and return to where they would have been absent the rule in 
the tenth year after the rule is effective and remain at $0 after 10 
years. PSD estimates this decrease in litigation costs to be linear 
with the same decrease in costs each year.
    The ten-year total costs of proposed Sec.  201.211 appear in the 
table below.\20\
---------------------------------------------------------------------------

    \20\ As discussed above, PSD expects total administrative and 
litigation costs to return to where they would have been absent the 
rule and the additional costs associated with the rule would remain 
at $0 after ten years.

                               Table 5--Ten-Year Total Costs--Years Ended May \21\
----------------------------------------------------------------------------------------------------------------
                                                           Administrative     Litigation  ($    Total direct  ($
                          Year                              ($ millions)        millions)          millions)
----------------------------------------------------------------------------------------------------------------
2021...................................................              $7.89              $1.77              $9.67
2022...................................................               1.58               1.77               3.35
2023...................................................               1.58               1.77               3.35
2024...................................................               1.58               1.77               3.35
2025...................................................               1.58               1.77               3.35
2026...................................................               0.79               1.48               2.27
2027...................................................               0.39               1.18               1.58
2028...................................................               0.20               0.89               1.08
2029...................................................               0.10               0.59               0.69
2030...................................................               0.05               0.30               0.35
                                                        --------------------------------------------------------
    Totals.............................................              15.74              13.31              29.05
----------------------------------------------------------------------------------------------------------------

    Based on the analysis, PSD expects the ten-year total costs would 
be $29.05 million.
---------------------------------------------------------------------------

    \21\ PSD uses May 2021 as the end of the first year after the 
proposed rule would be in effect for analytical purposes only. The 
date the proposed rule becomes final is not known.
---------------------------------------------------------------------------

7. Present Value of Ten-Year Total Costs
    The total costs of proposed Sec.  201.211 in the table above show 
that the costs are highest in the first year, decline to a constant and 
significantly lower level over the next four years, and then gradually 
decrease again over the subsequent five 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 would be used to pay the costs in the 
future could be invested today and earn interest until the time period 
in which the costs are incurred.
    To account for the time value of money, the costs of the regulation 
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 present value (PV) of total costs. PSD relied on 
both a three percent and seven percent discount rate as discussed in 
Circular A-4.\22\ PSD measured all costs using constant 2016 dollars.
---------------------------------------------------------------------------

    \22\ https://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf
---------------------------------------------------------------------------

    PSD calculated the PV of the ten-year total costs of the regulation 
using both a three percent and seven percent discount rate and the PVs 
appear in the following table.

                   Table 6--PV of Ten-Year Total Costs
------------------------------------------------------------------------
                      Discount rate                        ($ millions)
------------------------------------------------------------------------
3 Percent...............................................          $26.31
7 Percent...............................................           23.33
------------------------------------------------------------------------

    PSD expects the PV of the ten-year total costs would be $26.31 
million at a three percent discount rate and $23.33 million at a seven 
percent discount rate.
8. Annualized Costs
    PSD annualized the PV of the ten-year total costs (referred to as 
annualized costs) of proposed Sec.  201.211 using both a three percent 
and seven percent discount rate as required by Circular A-4 and the 
results appear in the following table.\23\
---------------------------------------------------------------------------

    \23\ Ibid.

                   Table 7--Ten-Year Annualized Costs
------------------------------------------------------------------------
                      Discount rate                        ($ millions)
------------------------------------------------------------------------
3 Percent...............................................           $3.08
7 Percent...............................................            3.32
------------------------------------------------------------------------

    PSD expects the annualized costs of Sec.  201.211 would be $3.08 
million at a three percent discount rate and $3.32 million at a seven 
percent discount rate.
    PSD also annualized the PV of the ten-year total costs into 
perpetuity of proposed Sec.  201.211 using both a three percent and 
seven percent discount rate following the guidance on complying with 
E.O. 13771 and the results appear in the following table.\24\
---------------------------------------------------------------------------

    \24\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf.

                Table 8--Annualized Costs Into Perpetuity
------------------------------------------------------------------------
                      Discount rate                        ($ millions)
------------------------------------------------------------------------
3 Percent...............................................           $0.69
7 Percent...............................................            1.21
------------------------------------------------------------------------

    PSD expects the costs of Sec.  201.211 annualized into perpetuity 
would be $0.69 million at a three percent discount rate and $1.21 
million at a seven percent discount rate. Based on the costs in Table 8 
and in accordance with guidance on complying with E.O. 13771, the 
single primary estimate of the costs of this proposed rule is $1.21 
million, the total costs annualized in perpetuity using a 7 percent 
discount rate.
B. Benefits
    PSD was unable to quantify the benefits of Sec.  201.211. However, 
proposed Sec.  201.211 contains several

[[Page 1779]]

provisions that PSD expects would improve economic efficiencies in the 
regulated markets for cattle, hogs, and poultry and reduce market 
failures. Regulations that increase the amount of relevant information 
available to market participants, protect private property rights, and 
foster competition improve economic efficiencies and generate benefits 
for consumers and producers.
    Proposed Sec.  201.211 would increase the amount of relevant 
information available to market participants and offset any potential 
abuse of buyer-side market power by clearly stating to all contracting 
parties the criteria that the Secretary will consider in determining 
whether conduct or action constitutes an undue or unreasonable 
preference or advantage in violation of 202(b) of the Act.
    The regulation would also reduce the risk of violating section 
202(b) because it would clarify the criteria that the Secretary will 
consider in determining whether the conduct or action in the livestock 
and poultry industries constitutes an undue or unreasonable preference 
or advantage and a violation of section 202(b) of the Act. Other 
benefits of clarifying the criteria may include: Reducing litigation 
risk; decreasing contracting costs; promoting competitiveness and 
fairness in contracting; and providing protections for livestock 
producers, swine production contract growers, and poultry growers.
    Benefits to the livestock and poultry industries and the cattle, 
hog, and poultry markets would also arise from improving parity of 
negotiating power between packers, swine contractors, and live poultry 
dealers and livestock producers, swine production contract growers, and 
poultry growers. The improvement in parity would come when contracting 
parties negotiate new contracts and when they review and renegotiate 
any existing contract terms that contain language that could be 
considered a violation of section 202(b) of the Act.
    Since the regulation would increase the amount of relevant 
information by clarifying what might be considered an undue or 
unreasonable preference, it would increase parity in negotiating 
contracts, and thereby reduce the ability to abuse buyer-side market 
power with the resulting welfare losses.\25\ Establishing parity of 
negotiating power in contracts promotes fairness and equity and is 
consistent with PSD's mission to protect fair trade practices, 
financial integrity, and competitive markets for livestock, meats, and 
poultry.\26\
---------------------------------------------------------------------------

    \25\ Nigel Key and Jim M. MacDonald discuss evidence for the 
effect of concentration on grower compensation in ``Local Monopsony 
Power in the Market for Broilers? Evidence from a Farm Survey'' 
selected paper American Agri. Economics Assn. meeting Orlando, 
Florida, July 27-29, 2008.
    \26\ See additional discussion in Steven Y. Wu and James 
MacDonald (2015) ``Economics of Agricultural Contract Grower 
Protection Legislation,'' Choices 30(3): 1 -6.
---------------------------------------------------------------------------

C. Cost-Benefit Summary
    PSD expects the ten-year annualized costs of Sec.  201.211 would be 
$3.08 million at a three percent discount rate and $3.32 million at a 
seven percent discount rate and the costs annualized into perpetuity to 
be $0.69 million at a three percent discount rate and $1.21 million at 
a seven percent discount rate. PSD expects the costs would be highest 
for the poultry industry due to its extensive use of poultry growing 
contracts, followed by the hog industry and the cattle industry, 
respectively.
    PSD was unable to quantify the benefits of the proposed regulation, 
but they explained numerous qualitative benefits that would protect 
livestock producers, swine production contract growers, and poultry 
growers, promote fairness and equity in contracting, increase economic 
efficiencies, and reduce the negative effects of market failures 
throughout the entire livestock and poultry value chain. The primary 
benefit of proposed Sec.  201.211 would be reduced occurrences of undue 
or unreasonable preferences or advantages and increased economic 
efficiencies in the marketplace. This benefit of additional enforcement 
of the Act would accrue to all segments of the value chain in the 
production of livestock and poultry, and ultimately to consumers.
Regulatory Flexibility Analysis
    The Small Business Administration (SBA) defines small businesses by 
their North American Industry Classification System Codes (NAICS).\27\ 
SBA considers broiler and turkey producers/growers and swine 
contractors, NAICS codes 112320, 112330, and 112210 respectively, to be 
small businesses if sales are less than $1,000,000 per year. Cattle 
feeders are considered small if they have less than $8 million in sales 
per year. Beef and pork packers, NAICS 311611, are small businesses if 
they have fewer than 1,000 employees.
---------------------------------------------------------------------------

    \27\ U.S. Small Business Administration. Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes. effective August 19, 2019. https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf
---------------------------------------------------------------------------

    The Packers and Stockyards Act regulates live poultry dealers, 
which is a group similar but not identical to the NAICS category for 
poultry processors. Poultry processors, NAICS 311611, are considered 
small business if they have fewer than 1,250 employees. PSD applied 
SBA's definition for small poultry processors to live poultry dealers 
as the best standard available, and considers live poultry dealers with 
fewer than 1,250 employees to be small businesses.
    PSD maintains data on live poultry dealers from the annual reports 
these firms file with PSD. Currently, 93 live poultry dealers would be 
subject to the proposed regulation. Seventy-Four of the live poultry 
dealers would be small businesses according to the SBA standard. 
Although there were many more small businesses than large, small 
business produced only about 6.5 percent of the poultry in the United 
States in 2017.
    Live poultry dealers classified as large businesses are responsible 
for about 93.5 percent of the poultry contracts. Assuming that small 
businesses would bear 6.5 percent of the costs, in the first year the 
regulation is effective, $222,687 \28\ would fall on live poultry 
dealers classified as small businesses. This amounts to average 
estimated costs for each small live poultry dealer of $3,009.
---------------------------------------------------------------------------

    \28\ Estimated cost to live poultry dealers of $3,412,301 x 6.52 
percent of firms that are small businesses = $222,687.
---------------------------------------------------------------------------

    As of February 2019, PSD records identified 381 beef and pork 
packers actively purchasing cattle or hogs for slaughter. Many firms 
slaughtered more than one species of livestock. Of the 381 beef and 
pork packers, 172 processed both cattle and hogs, 144 processed cattle 
but not hogs, and 65 processed hogs but not cattle.
    PSD estimates that small businesses accounted for 23.1 percent of 
the cattle and 19.2 percent of the hogs slaughtered in 2017. If the 
costs of implementing proposed Sec.  201.211 are proportional to the 
number of head processed, then in first full year the regulation would 
be effective, PSD estimates that $126,501 \29\ in additional costs 
would fall on beef packers classified as small businesses. This amounts 
to estimated costs of $407 for each small beef packer.
---------------------------------------------------------------------------

    \29\ Estimated cost to beef packers of $547,643 x 23.1 percent 
of firms that are small businesses = $126,501.
---------------------------------------------------------------------------

    In total, $81,603 \30\ in additional first-year costs would be 
expected to fall on pork packers classified as small

[[Page 1780]]

businesses, and $30,863 \31\ would fall on swine contractors classified 
as small businesses. This amounts to average estimated costs for each 
small pork packer of $356, and average estimated costs for each small 
swine contractor of $286 in the first year the regulation would be 
effective. To the extent that smaller beef and pork packers rely on AMA 
purchases less than large packers, the estimates might tend to 
overstate costs.
---------------------------------------------------------------------------

    \30\ Estimated cost to hogs and pork of $1,959,550 x 19.2 
percent of slaughter in small businesses x 21.7 percent of costs 
attributed to packers = $81,603.
    \31\ Estimated cost to hogs and pork of $1,959,550 x 2.01 
percent of contracted hogs produced by swine contractors that are 
small businesses x 78.3 percent of costs attributed to contractors = 
$30,863.
---------------------------------------------------------------------------

    Ten-year annualized costs discounted at a three percent rate would 
be $61,097 for the cattle and beef industry, $32,463 for the hog and 
pork industry, and $119,271 for the poultry industry. This amounts to 
annualized costs of $196 for each beef packer, $103 for each pork 
packer, $82 for each swine contractor, and $1,612 for each live poultry 
dealer that is a small business. The total annualized costs for 
regulated small businesses would be $212,830.
    Ten-year annualized costs at a seven percent discount rate would be 
$64,458 for the regulated cattle and beef industry, $35,416 for the 
regulated hog and pork industry, and $125,696 for the poultry industry. 
This amounts to ten-year annualized costs of $207 for each beef packer, 
$112 for each pork packer, $90 for each swine contractor, and $1,699 
for each live poultry dealer that is a small business. The total ten-
year annualized costs at 7 percent for regulated small businesses would 
be $225,570.
    The table below lists the estimated additional costs associated 
with the proposed regulation in the first year. It also lists 
annualized costs discounted at three percent and seven percent discount 
rates, and annualized PV of costs extended into perpetuity discounted 
at three and seven percent.

                      Table 9--Estimated Industry Total Costs to Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                   Pork packers
                                                   Beef packers      and swine        Poultry
                  Estimate type                         ($)         contractors     processors      Total  ($)
                                                                        ($)             ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................         126,501         112,466         222,687         461,653
10 years Annualized at 3 Percent................          61,097          32,463         119,271         212,830
10 years Annualized at 7 Percent................          64,458          35,416         125,696         225,570
Annualized Total Cost into Perpetuity Discounted          13,720           7,290          26,784          47,794
 at 3 Percent...................................
Annualized Total Cost into Perpetuity Discounted          23,492          12,907          45,810          82,209
 at 7 Percent...................................
----------------------------------------------------------------------------------------------------------------

    In considering the impact on small businesses, PSD considered the 
average costs and revenues of each regulated small business impacted by 
proposed Sec.  201.211. The number of small businesses impacted, by 
NAICS code, as well as the costs per entity in the first-year, ten-year 
annualized costs per entity at both the three percent and seven percent 
discount rates, and annualized PV of the total costs extended into 
perpetuity discounted at three and seven percent appear in the 
following table.

                                                Table 10--Per Entity Costs to Regulated Small Businesses
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Number of                       Ten-year        Ten-year
                          NAICS                                small      First year ($)    annualized      annualized     Perpetuity 3%   Perpetuity 7%
                                                            businesses                     costs--3% ($)   costs--7% ($)        ($)             ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
112210--Swine Contractor................................             108             286              82              90              19              33
311615--Poultry Processor...............................              74           3,009           1,612           1,699             362             619
311611--Beef Packer.....................................             311             407             196             207              44              76
311611--Pork Packer.....................................             229             356             103             112              23              41
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The following table compares the average per entity first-year and 
annualized costs of proposed Sec.  201.211 to the average revenue per 
establishment for all regulated small businesses 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 
included in the table as the more conservative estimate.

               Table 11--Comparison of per Entity Cost to Revenues for Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                                 Ten-year       Annualized cost
                                       Average revenue    First-year cost    annualized cost    to perpetuity as
                NAICS                 per establishment    as percent of      as percent of        percent of
                                             ($)            revenue (%)        revenue (%)        revenue (%)
----------------------------------------------------------------------------------------------------------------
112210--Swine Contractor............            485,860               0.06               0.02              0.007
311615--Poultry Processor...........         13,842,548               0.02               0.01              0.004
311611--Beef Packer.................          6,882,205               0.01               0.00              0.001
311611--Pork Packer.................          6,882,205               0.01               0.00              0.001
----------------------------------------------------------------------------------------------------------------


[[Page 1781]]

    The revenue figures in the above table come from U.S. Census data 
for live poultry dealers and cattle and hog slaughterers, NAICS codes 
311615 and 311611, respectively.\32\ Ag. Census data have the number of 
head sold by size classes for farms that sold their own hogs and pigs 
in 2017 and that identified themselves as contractors or integrators, 
but not the value of sales nor the number of head sold from the farms 
of the contracted production. To estimate average revenue per 
establishment, PSD used the estimated average value per head for sales 
of all swine operations and the production values for firms in the Ag. 
Census size classes for swine contractors. The results in Table 11 
demonstrate, the costs of proposed Sec.  201.211 as a percent of 
revenue are less than one percent.\33\
---------------------------------------------------------------------------

    \32\ https://www.nass.usda.gov/Publications/AgCensus/2017/
Full_Report/Volume_1,_Chapter_1_US/
    \33\ There are significant differences in average revenues 
between swine contractors and cattle, hog, and poultry processors, 
resulting from the difference in SBA thresholds.
---------------------------------------------------------------------------

    Although the Packers and Stockyards Act does not regulate livestock 
producers or poultry growers, PSD recognizes that they will also incur 
contract review costs. PSD estimates that each livestock producer and 
poultry grower would, in its due course of business, spend one hour of 
time reviewing a contract or marketing agreement and would spend one-
half hour of its attorney's time to review the contract. As with the 
regulated entities, one may view this estimate as an upper bound to the 
direct cost of the proposed rule, as not every producer or grower would 
choose to conduct such a review. Some may choose to ``wait and see'' 
what effect, if any, the rule had on the industry, and if courts ruled 
on it in any way that would warrant such a review of their contracts.
    PSD multiplied one hour of livestock producer, swine production 
contract grower, and poultry grower management time and one-half hour 
of attorney time to conduct the marketing and production contract 
review by the average hourly wages for attorneys at $84/hour and 
managers at $62/hour as reported by the U.S. Bureau of Labor Statistics 
in its Occupational Employment Statistics to arrive at its estimate of 
contract review costs for livestock producers, swine contract growers, 
and poultry growers. The result is that each small livestock producer 
and each small poultry that sells livestock or raises poultry on a 
contract is expected to bear $104 in first year costs, $23 in ten year 
annualized costs discounted at 3 percent, $25 in ten year annualized 
costs discounted at 7 percent, and $9 discounted into perpetuity at 7 
percent. Table 12 lists expected costs to livestock producers and 
poultry growers that are small businesses.

                              Table 12--Total Costs to Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                  Cattle feeders   Hog producers      Poultry
                  Estimate type                         ($)             ($)         growers ($)      Total ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................         111,866         459,707       2,501,106       3,072,679
10 years Annualized at 3 Percent................          24,274          99,754         542,727         666,755
10 years Annualized at 7 Percent................          26,917         110,614         601,812         739,342
Annualized Total Cost into Perpetuity Discounted           5,451          22,401         121,876         149,728
 at 3 Percent...................................
Annualized Total Cost into Perpetuity Discounted           9,810          40,313         219,329         269,452
 at 7 Percent...................................
----------------------------------------------------------------------------------------------------------------

    The Ag. Census indicates there were 575 farms that sold hogs or 
pigs in 2017 and identified themselves as contractors or integrators. 
About 19 percent of swine contractors had sales of less than $1,000,000 
in 2017 and would have been classified as small businesses. These small 
businesses accounted for only 2 percent of the hogs produced under 
production contracts.
    Additionally, there were 8,557 swine producers in 2017 with swine 
contracts, and about 41 percent of these producers would have been 
classified as small businesses. PSD estimated an additional 2,370 pork 
producers had marketing agreements with pork packers. If 41 percent are 
small businesses, then 4,480 hog producers could incur contract review 
costs. PSD estimated as many as 1,099 cattle feeders had marketing 
agreements or contracts that could need adjustment due to the proposed 
rule. If 98 percent are small businesses, 1,078 could bear costs of 
reviewing contracts. Table 13 compares cost to revenues for producer 
unregulated producers that are small businesses.
    PSD records indicated poultry processors had 24,101 poultry 
production contracts in effect in 2017. The 24,101 poultry growers 
holding the other end of the contracts are almost all small businesses 
by SBA's definitions.

                 Table 13--Comparison of Total Cost to Revenues for Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                                     Ten-year       Annualized
                                     Number of                      First-year      annualized        cost to
              NAICS                    small          Average         cost as         cost as      perpetuity as
                                    businesses      revenue ($)     percent of      percent of      percent of
                                                                    revenue (%)     revenue (%)     revenue (%)
----------------------------------------------------------------------------------------------------------------
112212--Cattle Feeders..........           1,078         305,229            0.03            0.01           0.003
112210--Hog Producers...........           4,480         333,607            0.03            0.01           0.003
112320--Poultry Growers.........          24,101         181,545            0.06            0.01           0.005
----------------------------------------------------------------------------------------------------------------

    Ten-year annualized cost savings of exempting small businesses 
would be $212,830 using a three percent discount rate and $225,570 
using a seven percent discount rate. The cost savings annualized into 
perpetuity of exempting small businesses would be $47,794 using a three 
percent discount rate and $82,209 using a seven percent discount

[[Page 1782]]

rate. However, one purpose of proposed Sec.  201.211 is to protect all 
livestock producers, swine production contract growers, and poultry 
growers from unfair and unreasonable preferences or advantages, 
regardless of whether the producer or grower and the packer, swine 
contractor, or live poultry dealer to which they sell or contract is a 
large or small business. PSD believes that the benefits of proposed 
Sec.  201.211 would be captured by all livestock producers, swine 
production contract growers, and poultry growers. For this reason, AMS 
did not consider exempting small business from the proposed rule.
    The number of regulated entities that could experience a cost 
increase is substantial. Most regulated packers and live poultry 
dealers are small businesses. However, the expected costs are not 
significant. For all four groups of regulated entities: Beef packers, 
pork packers, live poultry dealers, and swine contractors, average 
first year costs are expected to amount to less than one tenth of one 
percent of annual revenue. Ten-year annualized costs discounted at 7 
percent are highest for swine contractors at two one hundredths of a 
percent of revenue. Annualized expected costs of $90 and $112 for swine 
contractors, and pork packers, respectively are near the cost of one 
hog. An annualized expected cost of $207 for beef packers is much less 
than the cost of one fed steer. Expected costs for live poultry dealers 
are higher, but as percent of revenue, expected costs to live poultry 
dealers are very low. AMS expects that the additional costs to small 
packers, live poultry dealers, and swine contractors will not change 
their ability to continue operations or place any of them at a 
competitive disadvantage.
    The number of unregulated entities that could experience a cost 
increase is also substantial. Most effected livestock producers and 
poultry growers are small businesses. Expected costs are not 
significant. The expected first year cost for each unregulated 
livestock producer or poultry grower is $104. Annualized expected 10-
year costs discounted at 3 percent are $23. Costs as percent of revenue 
are expected to be well below 1 percent. AMS expects that $23 per year 
will not change any producers' or poultry grower's ability to continue 
operations or place any livestock producer or poultry grower at a 
competitive disadvantage.
    As discussed in the Regulatory Impact Analysis, AMS does not expect 
welfare transfers among market segments or within segments. Estimated 
changes in prices and quantities are indistinguishable from zero. AMS 
does not expect proposed Sec.  201.211 to cause changes in production 
or marketing for small businesses, and the increase in direct costs is 
very small in relation to total costs.
    Based on the above analyses, AMS does not expect that proposed 
Sec.  201.211 would 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.). However, AMS seeks public 
comment on whether proposed Sec.  201.211 will have a significant 
economic impact on a substantial number of small business entities 
before making a determination.
Civil Rights Review
    AMS has considered the potential civil rights implications of this 
rule on members of protected groups to ensure that no person or group 
would be adversely or disproportionately at risk or discriminated 
against on the basis of race, color, national origin, gender, religion, 
age, disability, sexual orientation, marital or family status, 
political beliefs, parental status, or protected genetic information. 
This proposed rule does not contain any requirements related to 
eligibility, benefits, or services that would have the purpose or 
effect of excluding, limiting, or otherwise disadvantaging any 
individual, group, or class of persons on one or more prohibited bases. 
AMS has developed an outreach program to ensure information about the 
proposed regulation and the opportunity to comment on it is made 
available to socially and economically disadvantaged or limited 
resource farmers, producers, growers, and members of racial and ethnic 
minority groups.
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. According to PSD 
records, there were approximately 312 bonded packers; 1,326 market 
agencies selling on commission; 4,582 livestock dealers and commission 
buyers; and 95 live poultry dealers regulated under the Act in 2018. 
The 2017 Census of Agriculture indicated that there were 575 swine 
contractors in 2017. The 2017 Census of Agriculture also indicated that 
there were 826,733 livestock producers and poultry growers. None of 
these entities would be required to submit forms or other information 
to AMS or to keep additional records in consequence of this proposed 
rule.
E-Government Act
    USDA is committed to complying with the E-Government Act by 
promoting 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.
Executive Order 13175
    This 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 
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 the 
distribution of power and responsibilities between the Federal 
Government and Indian tribes.
    The USDA's Office of Tribal Relations (OTR) has assessed the impact 
of this rule on Indian tribes and determined that this rule may have 
tribal implications that require continued outreach efforts to 
determine if tribal consultation under Executive Order 13175 is 
required.
    If a tribe requests consultation, AMS will work with the OTR to 
ensure meaningful consultation is provided where changes, additions, 
and modifications identified herein are not expressly mandated by 
Congress.
Congressional Review Act
    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the
    Office of Information and Regulatory Affairs designated this rule 
as not a major rule as defined by 5 U.S.C. 804(2).
Executive Order 12988
    This proposed rule has been reviewed under Executive Order 12988--
Civil Justice Reform. This proposed rule is not intended to have 
retroactive effect. This proposed rule would not preempt state or local 
laws, regulations, or policies, unless they present an irreconcilable 
conflict with this rule. There are no administrative procedures that 
must be exhausted prior to any judicial challenge to the provisions of 
this rule. Nothing in this proposed rule is intended to interfere with 
a person's right to enforce liability against any

[[Page 1783]]

person subject to the Act under authority granted in section 308 of the 
Act.

List of Subjects in 9 CFR Part 201

    Confidential business information, Reporting and recordkeeping 
requirements, Stockyards, Surety bonds, Trade practices.

    For the reasons set forth in the preamble, USDA proposes to amend 9 
CFR part 201 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. Section 201.211 is added to read as follows:


Sec.  201.211   Undue or unreasonable preferences or advantages.

    The Secretary will consider one or more criteria when determining 
whether a packer, swine contractor, or live poultry dealer has made or 
given any undue or unreasonable preference or advantage to any 
particular person or locality in any respect in violation of section 
202(b) of the Act. These criteria include, but are not limited to, 
whether the preference or advantage under consideration:
    (a) Cannot be justified on the basis of a cost savings related to 
dealing with different producers, sellers, or growers;
    (b) Cannot be justified on the basis of meeting a competitor's 
prices;
    (c) Cannot be justified on the basis of meeting other terms offered 
by a competitor; and
    (d) Cannot be justified as a reasonable business decision that 
would be customary in the industry.

    Dated: January 6, 2020.
Bruce Summers,
Administrator, Agricultural Marketing Service.
[FR Doc. 2020-00152 Filed 1-10-20; 8:45 am]
 BILLING CODE 3410-02-P