Rule2025-00508
Poultry Grower Payment Systems and Capital Improvement Systems
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 16, 2025
Effective
July 1, 2026
Issuing agencies
Agriculture DepartmentAgricultural Marketing Service
Abstract
This final rule by the United States Department of Agriculture's (USDA or the Department) Agricultural Marketing Service (AMS or the Agency) amends the Agency's regulations under the Packers and Stockyards Act, 1921 (P&S Act or Act). The Act protects fair trade, financial integrity, and competitive markets for poultry. The final rule prohibits certain payment practices under poultry grower ranking systems (commonly known as tournaments) in contract poultry production for broiler chickens, requires live poultry dealers (LPDs) to adopt policies and procedures for operating a fair ranking system for broiler growers, and requires LPDs to provide certain information to broiler growers when the LPD requests or requires the grower to make additional capital investments. These regulations will increase transparency and address deception and unfairness in broiler grower payments, tournament operations, and capital improvement systems.
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[Federal Register Volume 90, Number 10 (Thursday, January 16, 2025)]
[Rules and Regulations]
[Pages 5146-5218]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00508]
[[Page 5145]]
Vol. 90
Thursday,
No. 10
January 16, 2025
Part VI
Department of Agriculture
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Agricultural Marketing Service
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9 CFR Part 201
Poultry Grower Payment Systems and Capital Improvement Systems; Final
Rule
Federal Register / Vol. 90, No. 10 / Thursday, January 16, 2025 /
Rules and Regulations
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
9 CFR Part 201
[Doc. No. AMS-FTPP-22-0046]
RIN 0581-AE18
Poultry Grower Payment Systems and Capital Improvement Systems
AGENCY: Agricultural Marketing Service, U.S. Department of Agriculture.
ACTION: Final rule.
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SUMMARY: This final rule by the United States Department of
Agriculture's (USDA or the Department) Agricultural Marketing Service
(AMS or the Agency) amends the Agency's regulations under the Packers
and Stockyards Act, 1921 (P&S Act or Act). The Act protects fair trade,
financial integrity, and competitive markets for poultry. The final
rule prohibits certain payment practices under poultry grower ranking
systems (commonly known as tournaments) in contract poultry production
for broiler chickens, requires live poultry dealers (LPDs) to adopt
policies and procedures for operating a fair ranking system for broiler
growers, and requires LPDs to provide certain information to broiler
growers when the LPD requests or requires the grower to make additional
capital investments. These regulations will increase transparency and
address deception and unfairness in broiler grower payments, tournament
operations, and capital improvement systems.
DATES: This rule is effective July 1, 2026.
FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Chief Legal Officer/
Policy Advisor, Packers and Stockyards Division, USDA AMS Fair Trade
Practices Program, 1400 Independence Ave. SW, Washington, DC 20250;
phone: (202) 690-4355; or email: <a href="/cdn-cgi/l/email-protection#70035e12021504045e1f1616050404304c1150180215164d" http: usda.gov">usda.gov</a>">s.brett.offutt@<a href="http://usda.gov">usda.gov</a></a>.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Executive Summary
II. Background
III. Summary of the Proposed Rule and Changes in the Final Rule
IV. Provisions of the Final Rule
V. Comment Analysis
VI. Regulatory Analysis
I. Executive Summary
The current broiler chicken industry is highly susceptible to both
unfairness and deception. Within the last 40 years, the poultry
industry has become highly integrated, with most LPDs operating as
``integrators'' who frequently own or control all segments of the
production process except growout. The growout stage of the production
process consists of growers raising young poultry to harvest size under
poultry growing arrangements (contracts). To pay the grower, most LPDs,
which will also be referred to as ``integrators'' throughout this rule,
use a relative performance or poultry grower ranking system, commonly
known as a tournament. Under the tournament system, poultry growers
compete against one another to determine payment for their services. As
discussed throughout this rule, growers cannot reasonably avoid certain
practices that cause them harm. Additionally, growers lack access to
certain information, which inhibits their ability to meaningfully
understand, negotiate, and enforce poultry growing contracts with LPDs,
including in relation to capital investments that LPDs request.
The Packers and Stockyards Act, 1921, as amended (P&S Act or the
Act) (7 U.S.C. 181 et seq.), authorizes USDA to issue regulations and
orders to prohibit unfair and deceptive practices by LPDs.
In a June 8, 2022, advance notice of proposed rulemaking (ANPR),
AMS sought comments and information to inform policy development and
future rulemaking regarding the use of poultry grower ranking systems
(87 FR 34814, June 8, 2022)). Commenters expressed both support and
concern about the use of tournaments in poultry production, with the
majority expressing support. Other commenters, especially advocacy
associations, objected to the current tournament payment system,
stating that tournament systems do not fulfill the integrators' claimed
purposes and that the tournament payment systems exemplify the
manipulative and unjust practices that Congress designed the Act to
prevent. These commenters cited integrators' arbitrary, unjust, or
punitive distribution of inputs and production variables, potentially
punitive manipulation of the group composition, and penalties for small
deviations below average performance. Some of these ANPR commenters
also stated that the rulemaking could help address bargaining power
imbalances for growers by providing proper enforcement, minimum base
pay, and other provisions.
Trade organizations commented on the ways input variability affects
pay and that LPDs lack incentives to take action to reduce
unpredictability in grower inputs and pay outcomes. AMS has observed
that monitoring and intervention to remedy unpredictability requires an
LPD to expend effort and incur cost, and that the LPD does not directly
benefit from the increased fairness to growers. Without an explicit
prohibition on unfair variability, LPDs lack compelling incentives to
operate their tournament system contracts fairly. Comments in response
to the ANPR, other available data and information, and AMS's Packers
and Stockyards Division's (PSD) expertise provided the basis for a
proposed rulemaking.
On June 10, 2024, AMS published the proposed rule, Poultry Grower
Payment Systems and Capital Improvement Systems, in the Federal
Register (89 FR 49002). In response to the proposed rule, AMS posted
755 comments, some with multiple signatories, over a 60-day comment
period. Comments were submitted by a variety of stakeholders, including
farmers' coalitions, government entities, advocacy organizations,
industry trade organizations, processors, producers, and other
individual interested parties. Stakeholders commented on the proposed
rule, as well as several specific questions containing alternate
proposals. The proposed rule covered, among other things, rate of
compensation for growers, transition and implementation costs, the
proposed duty of fair comparison, and reasonable recoupment for
required additional capital investments. Farmers' coalitions, advocacy
associations, government entities, and unaffiliated individual
commenters broadly supported the proposed rule, while the regulated
trade organizations and LPDs opposed the proposed rule. Live poultry
growers both supported and opposed the proposed rule. Many growers who
support the rule raised concerns of unfairness within the tournament
system, including that pay rates are influenced by factors outside
growers' control, that growers are forced to make new capital
investments that have poor to nonexistent return while putting growers
in more debt, and that growers must compete against fellow growers in
an unfair manner. Those growers who opposed the proposed rule felt that
the tournament system does a good job of rewarding effort, and that the
rule would upset this system by shifting money away from high-
performing growers and by reducing overall bird quality. However,
several growers that opposed the rule expressed concern that LPDs force
growers to make additional capital investments that do not produce an
economic return for the grower.
Section 407(a) of the P&S Act (7 U.S.C. 228(a)) authorizes the
Secretary of Agriculture (the Secretary) to make rules and regulations
as necessary to
[[Page 5147]]
carry out the provisions of the Act (7 U.S.C. 181 et seq.), and the
Secretary has delegated the responsibility for administering the Act to
AMS. See 7 CFR 2.22(a)(3)(iii) (delegating authority to administer the
Act from the Secretary to the Under Secretary for Marketing and
Regulatory Programs); 7 CFR 2.79(a)(17) (in turn, delegating authority
to administer the Act from the Under Secretary to the Administrator,
Agriculture Marketing Service). Under this authority, AMS issues this
rule to carry out the provisions of section 407 of the Act, as well as
provisions of sections 202(a) (7 U.S.C. 192(a)) (which prohibits ``any
unfair, unjustly discriminatory, or deceptive practice or device''),
401 (7 U.S.C. 221) (which requires an LPD to ``keep such accounts,
records, and memoranda as fully and correctly disclose all transactions
involved in his business''), and 410 (7 U.S.C. 228b) (which bans the
failure to pay ``the full amount due [to the] poultry grower on account
of such poultry'').
In this final rule, AMS amends 9 CFR part 201, subpart N, by adding
several new provisions, including: Sec. 201.106 regarding LPD
responsibilities for the design of broiler grower compensation
arrangements; Sec. 201.110 regarding the fair operation of broiler
grower ranking systems; Sec. 201.112 regarding disclosure requirements
for LPDs when requesting additional capital investments from broiler
growers; and Sec. 201.290 regarding severability. In particular, the
Agency is:
<bullet> Prohibiting LPDs from discounting or reducing a grower's
rate of compensation as disclosed in the broiler growing arrangement
based on the grower's grouping, ranking, or comparison to others (Sec.
201.106(a)).
<bullet> Establishing that it is a presumptive violation of the Act
when aggregate gross annual payments based upon a grouping, ranking, or
comparison of growers exceeds 25 percent of total gross payments to
growers in a complex on an annual-calendar year basis (Sec.
201.106(b)).
<bullet> For each of the three calendar years following the
publication date of the above-referenced provisions, requiring LPDs to
submit certain documentation to the Secretary when any contract
modification or renewal subject to the prohibition on discounts results
in a decrease in the prior annual-calendar year's complex-wide average
gross payment to the grower (Sec. 201.106(c)).
<bullet> Establishing a duty of fair comparison that requires LPDs
to design and operate their broiler grower ranking system to provide a
fair comparison among growers, with particular attention to certain
factors in the methods of comparison, including the distribution of
inputs and flock production practices, the time period of the
comparison, the conditions and circumstances for the comparison, the
reasonableness of efforts to resolve disputes, and how the LPD will
compensate growers when the LPD cannot conduct a fair comparison (Sec.
201.110(a)).
<bullet> Requiring LPDs to establish and maintain written
documentation of their processes for the design and operation of a
broiler grower ranking system that is consistent with the duty of fair
comparison and to retain all relevant written records for five years
(Sec. 201.110(b)).
<bullet> Requiring LPDs to provide growers with a Capital
Improvement Disclosure Document when an LPD requests that a grower make
an additional capital investment and requiring that LPDs make
reasonable efforts to assist the grower in translating the document, as
well as ensure that the grower is aware of their right to request
translation assistance (Sec. 201.112).
<bullet> Introducing a severability clause that specifies that it
is USDA's intent that the provisions in subpart N remain in effect even
if any provision or component of any provision is deemed unenforceable
(Sec. 201.290).
II. Background
A. Vertical Integration and Market Power
Today, the broiler chicken industry is highly vertically
integrated. That is, a single entity owns or controls nearly all the
steps of production and distribution, with the only partial exception
being the growout stage, during which broiler growers raise chicks on
their farms to slaughter weight. The USDA National Agricultural
Statistics Service's (NASS) Census of Agriculture (Agricultural Census)
reported that 96.2 percent of broilers were raised and delivered under
production contracts between LPDs and independent farmers, or broiler
growers.\1\ Under a production contract, the LPD provides the grower
chicks, feed, and veterinary treatment services, which the grower uses
to grow out the flock. The LPD maintains ownership of the chickens
throughout the production process. The grower provides the poultry
growing facility, flock management, labor, and utilities required
during flock growout.\2\ At the end of growout, the LPD collects and
weighs the mature poultry and pays the broiler grower for their
services.
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\1\ USDA, NASS, 2022 Census of Agriculture: United States
Summary and State Data, volume1, part 51, issued February 2024 pp.
51 and 411. <a href="https://www.nass.usda.gov/Publications/AgCensus/2022/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf">https://www.nass.usda.gov/Publications/AgCensus/2022/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf</a>.
\2\ Growout period is defined as the period of time between
placement of poultry at a grower's facility and the harvest or
delivery of such animals for slaughter, during which the feeding and
care of such poultry are under the control of the grower.
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To grow broiler chickens on a commercial scale, a grower must make
a substantial initial investment in housing. Over time, LPDs may
request or require that growers make additional capital investments to
upgrade housing and equipment, which are intended to improve efficiency
or respond to customer preferences (e.g., relating to the use of
antibiotics or other animal-raising concerns) during the contracting
relationship. Growers generally finance these long-term assets against
much shorter-term production contracts.\3\ This exposes growers to
financial risk and uncertainty around debt repayment and the recoupment
of their investments. For example, compared to other commodity
producers, broiler growers registered among the highest share of farms
in extreme financial stress, measured as carrying a term debt coverage
ratio less than one and a debt-to-asset ratio greater than 55
percent.\4\ Growers are thus dependent on LPDs--who control most
aspects of a grower's production--to recoup their substantial initial
and continuing investments.\5\ Growers also currently receive little to
no information about the purpose, process, and outcomes expected around
such investments.
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\3\ MacDonald, James M. ``Financial Risks and Incomes in
Contract Broiler Production.'' Amber Waves August 04, 2014. <a href="https://www.ers.usda.gov/amber-waves/2014/august/financial-risks-and-incomes-in-contract-broiler-production/">https://www.ers.usda.gov/amber-waves/2014/august/financial-risks-and-incomes-in-contract-broiler-production/</a> (last accessed 12/13/2023).
\4\ Nigel Key, Christopher Burns, and Greg Lyons, ``Financial
Conditions in the U.S. Agricultural Sector: Historical
Comparisons,'' EIB-211, U.S. Department of Agriculture, Economic
Research Service (2019), <a href="https://www.ers.usda.gov/webdocs/publications/95238/eib-211.pdf?v=4876.5">https://www.ers.usda.gov/webdocs/publications/95238/eib-211.pdf?v=4876.5</a> (In 2017, compared to other
commodity categories considered, poultry farms showed the greatest
share of farms in extreme financial stress--around four times that
of larger-scale general livestock and specialty crop, fruit, nut,
and vegetable producers and twice that of large-scale grain and
oilseed producers. Moreover, the percentage of poultry farmers in
extreme financial stress has been increasing since 2006).
\5\ For a discussion the difficulty in adapting of broiler grow
houses for other purposes see Tom Vukina and Porametr Leegomonchai.
``Oligopsony Power, Asset Specificity, and Hold-Up: Evidence from
the Broiler Industry.'' American Journal of Agricultural Economics
88 (2006).
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Currently, most LPDs operate with the benefit of substantial market
power and bargaining power in local markets to purchase grower
services. Broiler grower operations must be close (usually less than 50
miles) to an LPD's
[[Page 5148]]
feed mills, hatcheries, and processing plants due to the costs of
transporting feed to the grower's farm and the costs (including death
loss) associated with transporting finished chickens from the grower's
farm to the processing plant. This results in poultry production that
is often localized and regionally concentrated. Most growers have few
LPDs in their area with whom they can contract. Even where multiple
LPDs are present, there can be significant costs associated with
switching to a different LPD, including adjustments for differences in
technical specifications that LPDs may require. To switch LPDs, a
grower may need to invest in new equipment and learn to apply different
operational techniques for different breeds, target weights, and
growout programs. Facility-specific investments may inhibit the ability
of growers to switch to a competing LPD where different facility
specifications are required. Growers have recently complained of at
least one LPD penalizing growers that are trying to switch to an LPD's
competition. AMS referred the complaint to the Department of Justice
for enforcement under the Packers and Stockyards Act. The Department
secured a consent decree that stopped the conduct, prohibited its
recurrence, and compensated the harmed growers.\6\
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\6\ Final Judgment, United States v. Koch Foods, Inc., No. 23-
cv-15813, Dkt. No. 23 (N.D. III. Feb. 12, 2024). See also,
Zimmerman, Sarah, ``Department of Justice, ``Justice Department
Files Lawsuit and Proposed Consent Decree to Prohibit Koch Foods
from Imposing Unfair and Anticompetitive Termination Penalties in
Contracts with Chicken Growers,'' <a href="https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and-proposed-consent-decree-prohibit-koch-foods-imposing">https://www.justice.gov/opa/pr/justice-department-files-lawsuit-and-proposed-consent-decree-prohibit-koch-foods-imposing</a>.
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Owing to the vertical integration in the system, LPDs exercise
substantial control over growers' operations through the provision of
inputs, control over production practices, their tournament settlement
and comparison practices, and their level of performance in relation to
communication and dispute resolution. In this rule, AMS uses the term
``inputs'' to mean resources supplied by LPDs, such as chicks or feed.
Inputs often vary among growers, which impacts the growers' flock
performance, thereby unfairly skewing relative performance measures.
Likewise, LPDs determine production practices on growers' farms, and
those production practices affect growers' pay. AMS uses the term
``production practices'' to refer to features of the on-farm production
process that are determined by the LPD, such as density of bird
placement (number of chicks delivered or placed with a grower per
square foot of broiler housing), age at harvest, and weight at harvest.
These practices greatly impact grower compensation. If LPDs fail to
apply production practices evenly across grower participants in
tournaments, that unevenness also unfairly skews relative performance
measures.
Additionally, information asymmetry in poultry contracting
arrangements contributes to market inefficiencies and unfair and
deceptive practices. Asymmetric information occurs when one party to a
contract has more critical information than the other party.
Information asymmetry leads to market failure in the broiler production
industry as growers lack the information needed to make informed
business decisions, whereas LPDs know what each grower makes. This
increases LPDs' to set contractual terms in ways that benefit
themselves, while the grower lacks the information needed to
effectively negotiate compensation for the provision of growout
services or to make a comparison and switch to a competitor that offers
more competitive terms. Another feature of this information asymmetry
is that while LPDs know the amounts they have fixed for grower
compensation, growers do not know this amount, which can span a wide
range. Similarly, LPDs know the distribution of inputs as well as which
growers may be grouped together for settlement in the complex, while
growers cannot easily track that information. Exploiting this
information asymmetry, LPDs can adjust down compensation in ways that
are difficult for growers to know or competitively discipline the LPD,
e.g., by switching out. As highlighted by grower comments and based on
AMS's experience in evaluating grower concerns in this area, without an
accurate projection of purposes, processes, and outcomes related to
capital improvement programs, growers cannot accurately and effectively
evaluate their allocation of resources to cover necessary expenses \7\
or engage in rational decision-making around whether to pursue (or
resist) additional capital investments to improve and protect their own
financial interests. Additionally, having widely variable income
prevents growers from knowing which elements under their control they
can adjust, and how to adjust them, to correspondingly increase
compensation. This can cause growers to futilely expend extraneous
resources that do not yield proportionate increases in performance and
compensation.\8\ Information asymmetry also facilitates abusive
practices, whereas the provision of information would help growers and
AMS identify and halt those practices sooner. Disclosure is not an
absolute defense. Acts or practices can be unfair or deceptive and
violate section 202(a) of the Act even if they have been disclosed.
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\7\ For example, a grower without an accurate projection of
future income may forgo making an expenditure that costs less long-
term, e.g., making a bundled purchase for two pieces of equipment at
a reduced per-unit price. Instead, if they don't know if they can
afford a future purchase, they purchase the minimum amount--one
piece of equipment at a time at a higher unit price--to sustain
operations short-term.
\8\ Numerous commenters described how they would make all of the
upgrades recommended by the LPD technician and inexplicably place
last compared to other growers: ``Six months of down time spent
installing several more thousands of dollars of equipment. We've
grown two flocks since then and have failed to make enough money to
even pay the bank each time. We've had to take out a loan to even
survive our day-to-day life and are behind on all farm bills. We do
everything the company tells us, but when we finish in the negative,
were given all kinds of reasons for why our birds weren't good
enough. When speaking with other farmers and techs from other
companies, we're told that our weight and feed conversions are good,
but a couple of farms seem to continuously have unexplained
successful numbers. Basically, were losing money that goes to pay
the ones at the top. On one flock, 12 farms were pitted against each
other. Two farms performed at a level so high that isn't believable,
and three farms performed below the bottom level we can be paid at.
The integrator took the bottom three farms out of the tournament
calculation and compared the remaining farms without them. How fair
is it that they drop the bottom farms, but not the top ones? This
resulted in the farms that were close to average being pushed down
and making less money because the average was raised considerably
with the highflyers included and the bottom places excluded. The
company tells us that this helps us, but it doesn't. We've made the
decision to sell because we can't continue to put our children
through this'').
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LPDs often use incomplete contracts in broiler production. When a
contract is incomplete, the LPD interprets material terms in their
favor as the grower lacks the ability to require a fairer
interpretation. Contracts are incomplete when key terms basic to its
functioning are vague or missing. Incomplete contracts magnify risks
with respect to the performance of the other contractual party, leading
to other potential inefficiencies. For example, broiler production
contracts regularly disclaim LPD responsibility for input quality or
usability. Nor do they provide enforceable detail around LPD management
of tournament operations, including tournament groupings or dispute
resolution expectations. Moreover, the complexity of such pay systems
makes it difficult for growers to fully understand the potential range
of payments they are likely to receive or the ways in which LPD
performance or nonperformance may affect that pay, preventing them from
properly
[[Page 5149]]
evaluating the fairness of the contract before signing. Preventing LPDs
from injuring producers using these contracts is among the purposes of
the Act.\9\ Contracts may be viewed as complete, with no material gaps,
if the contract terms include the substantive legal, practical, and
economic promises, obligations, and contingencies needed to operate in
a poultry growing arrangement. These terms should be verifiable and
legally enforceable.
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\9\ See, e.g., Luke Herrine, ``Cutthroat Business,'' U. of
Alabama Legal Studies Research Paper Forthcoming, Aug. 2024,
available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4936628">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4936628</a>; Michael Kades, ``Protecting
livestock producers and chicken growers,'' Washington Center for
Equitable Growth (May 2022); Peter C. Carstensen, ``The Packers and
Stockyards Act: A History of Failure to Date,'' The CPI Antitrust
Journal (2) (2010), available at <a href="https://www.competitionpolicyinternational.com/assets/Uploads/CarstensenAPR-2.pdf">https://www.competitionpolicyinternational.com/assets/Uploads/CarstensenAPR-2.pdf</a>; Herbert Hovenkamp, ``Does the Packers and Stockyards Act
Require Antitrust Harm?'' (Philadelphia: Faculty Scholarship at Penn
Law, 2011), available at <a href="https://scholarship.law.upenn.edu/faculty_scholarship/1862">https://scholarship.law.upenn.edu/faculty_scholarship/1862</a>.
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Finally, contracts that require investments in contract-specific
assets give rise to the hold-up problem. The economic concept of hold-
up refers to a situation in which one or both parties to a transaction
must make investments in such contract-specific assets, and the two
parties may be unable to cooperate efficiently due to incomplete or
asymmetric information and the inability to write, enforce, or commit
to contracts. Once a party becomes locked into a transaction by making
a transaction-specific investment, they lose bargaining leverage and
become vulnerable to exploitation by the other party. Hold-ups occur in
broiler production due to market failures associated with incomplete
grower information, contract-specific investments, market power,
relative capital leverage, as well as insufficient enforcement of law
intended to maintain market integrity and prevent market abuses--
including unfair breaches of contract. Growers are commonly unable to
exercise contract rights to remedy LPD performance failures owing to
the risk of hold-up and to the necessity of timely remedies when
dealing with living birds. Examples from grower complaints include
failure to correct improper or insufficient feed delivery, the delivery
of successive inputs that are lower performing, or tournament groupings
that are suspect.
B. Tournament Practices
Since the 1990s, the broiler industry overwhelmingly uses the
tournament system to compensate growers. As discussed above, under a
tournament system the contract between the broiler grower and the LPD
provides for payment to the grower based on a grouping, ranking, or
comparison of broiler growers delivering broilers to the same company
during a specified period (usually one week). AMS will refer to this as
a settlement group. Under a typical tournament system, the broiler
grower receives a fixed payment per pound of broilers produced, that
LPDs often call a ``base pay rate,'' plus a calculation adjustment that
is supposed to be based on how efficiently, compared to other growers,
the grower used the resources provided by the LPD to produce each pound
of broilers (informally referred to as a performance adjustment).\10\
LPDs typically calculate the performance adjustment primarily by
comparing the feed conversion ratio (i.e., the quantity of feed
consumed by the flock divided by the weight of the flock delivered) to
the average ratio of all growers in the tournament settlement group.
Broiler growers whose feed conversion ratio is less than the average
ratio for that tournament settlement group receive a bonus above the
base pay rate, while those whose costs are above the average incur a
discount from the base pay rate.
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\10\ There is some inconsistency in the use of payment terms
across broiler contracts at different companies or complexes. Most
grower contracts define the term base pay rate as it is described in
this paragraph. However, some contracts instead use the term base
pay when referring to a fixed amount plus the performance
adjustment.
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LPDs benefit from the tournament system in several ways. The
tournament system provides LPDs control and certainty over total grower
compensation as a group. For each tournament, the LPD knows and sets
the total compensation that will be paid per pound of broilers produced
by the group. In other words, the LPD is never concerned about paying
an excess bonus for an individual flock because the LPD allocates the
pool of payments among growers through performance adjustments for
growers relative to the floating average performance (i.e., in today's
system, amounts above, or deductions from, the base pay rate). LPDs
(and growers, as discussed below) also get the benefit of utilizing a
floating average (relative to external shocks, such as weather, as
noted below) to incentivize performance. However, the tournament system
comes at a cost to growers: that of seeing payment for the services
they provide reduced for reasons outside of their control yet within
the control of the LPD. This outcome is magnified by the fact that
growers cannot easily switch over to a competitor LPD--even if the
competitor LPD offers more attractive compensation--due to the high
barriers to switching imposed partly by LPDs.\11\
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\11\ See, e.g., ``Settlement Administrator Angeion Group
Announces Proposed Settlement In Broiler Grow-Out Services Class
Action,'' PR Newswire (2024), <a href="https://www.prnewswire.com/news-releases/settlement-administrator-angeion-group-announces-proposed-settlement-in-broiler-grow-out-services-class-action-302252706.html">https://www.prnewswire.com/news-releases/settlement-administrator-angeion-group-announces-proposed-settlement-in-broiler-grow-out-services-class-action-302252706.html</a>
(In 2024, some of the largest LPDs agreed to settle grower claims
that the LPDs conspired with rivals to suppress pay by agreeing not
to hire growers from each other. Multiple commenters also described
the difficulty in switching.); United States Department of Justice,
United States Department of Agriculture, (May 2010), Public
Workshops Exploring Competition in Agriculture, <a href="https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10">https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10</a>.
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LPDs have long claimed that tournaments systems reward growers
financially for their experience, skill, effort, and investments in up-
to-date and efficient housing and equipment.\12\ The extent to which
the tournament actually incentivizes additional grower effort and
expenditure of resources, and whether those efforts and expenditures
were necessary and fair to growers, depends on a range of factors,
including the magnitude of the tournament but, in some circumstances,
also the design of the housing specification (e.g., the use of
automation and other technology), the type of bird being raised (e.g.,
some require special efforts), the availability of other payment
incentives, and the absence of arbitrary distortions in the allocation
of payments, among other factors. In theory, provided that all growers
in a tournament grouping were treated materially the same and the
variables within the tournament grouping were within the control of the
growers, a tournament system could insulate growers to some degree
against external shocks that affect all growers in the grouping. This
is because, in this scenario, performance is based on an average that
floats and adjusts to the particular external circumstances that all
growers in the pool experienced during the period.\13\ In reality, the
[[Page 5150]]
tournament system does not sufficiently protect from external shock. A
range of shocks and factors external to the growers--some of which are
within the control of the LPD--still adversely affect the overall
weight of the broilers in a tournament and thereby reduce the
compensation for all participating growers.
---------------------------------------------------------------------------
\12\ See, e.g., ``How the Tournament System Works,'' National
Chicken Council (informing farmers that: ``1 All farmers are
provided the same quality of chicks, the same feed, and access to
veterinary care. 2 Farmers who invest in more advanced facilities,
as well as use the best management practices will likely produce
higher quality chickens more efficiently. 3 Farmers receive a base
pay (per their contract) and potentially a bonus, based on the
health and quantity of the flock (tournament system).''); available
at <a href="https://www.chickencheck.in/faq/tournament-system/">https://www.chickencheck.in/faq/tournament-system/</a> (last accessed
May 22, 2024).
\13\ Knoeber and Thurman show that tournaments shift most of the
risks of broiler production from broiler growers to LPDs relative to
a fixed payment system. See Knoeber, C.R. and W.N Thurman. `` `Don't
Count Your Chickens . . .': Risk and Risk Shifting in the Broiler
Industry,'' American Journal of Agricultural Economics 77 (August
1995) p. 486-496.
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AMS has concluded that several widely adopted aspects of LPDs'
operations are unfair, deceptive, or both. First, without a clearly
stated base pay rate, LPDs deceive growers regarding their actual
minimum pay. The complexity and unpredictability of LPDs' current
operation of tournaments makes it difficult for growers to clearly
understand before entering into a contract the minimum amount they
could actually receive under the contract.\14\ For example, base pay
can be, but is not commonly, a guaranteed minimum pay.\15\ Second, if
performance pay--particularly performance pay that is based on
comparisons with other growers--is substantial relative to total
compensation, the arbitrary lottery-like aspects in a tournament system
operation will, in most circumstances, undermine its effectiveness as a
compensation scheme because compensation outcomes will not reflect the
effort or performance of growers, and is unfair and deceptive. Third,
arbitrary or unjustly discriminatory distribution of inputs, production
practices, tournament groupings, or communications and dispute
resolution--as key aspects of LPD performance under the contract--also
can create a system in which compensation does not reflect the effort
or performance of growers, deprives growers of the full amount due for
their performance, and is unfair. These provisions are meant to be
complementary and mutually reinforcing. AMS explains each of these
concerns in greater detail below, under section IV., ``Provisions of
the Final Rule.''
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\14\ United States v. Cargill Meat Solutions Corp., 1:22-cv-
01821-ELH (D. Md. July 25, 2022) (Wayne-Sanderson), pars. 153-56,
available at <a href="https://www.justice.gov/media/1238931/dl?inline">https://www.justice.gov/media/1238931/dl?inline</a>; AMS-
FTPP-22-0046-0913 (``As a third-generation contract poultry farmer,
this is one of the most unstable times I have witnessed or heard
about with the growers in the majority. For many years we have been
paid based on the tournament system, and for several years I viewed
it to be fair, but no longer. Currently, we as growers compete
against each other on a weekly basis to see who has the best cost.
The list used to be really tight on what cost of top versus bottom
grower, but in our complex alone, that is no longer the case. The
top grower is making a healthy check, while those below average are
not making enough to cover the cost of production and overhead. It
is no longer the ones that put in the effort of hard work that are
successful in this business''); Transcript, United States Department
of Justice, United States Department of Agriculture, Public
Workshops Exploring Competition in Agriculture: Poultry Workshop May
21, 2010, Normal, Alabama. Lee Schrader and John Wilson, ``Broiler
Grower Survey Report,'' in Farmers' Legal Action Group, Assessing
the Impact of LPD Practices on Contract Poultry Growers, ed.
Farmers' Legal Action Group (FLAG Survey) (September 2001). <a href="http://www.flaginc.org/publication/assessing-the-impact-of-LPD-practices-on-contract-poultry-growers/">http://www.flaginc.org/publication/assessing-the-impact-of-LPD-practices-on-contract-poultry-growers/</a> (In 1999, Lee Schrader of Purdue
University and John Wilson of Duke University surveyed over a
thousand broiler growers in ten of the largest broiler-growing
states (Alabama, Arkansas, Delaware, Georgia, Maryland, Mississippi,
North Carolina, South Carolina, Texas, and Virginia). Based on AMS'
experience, the survey results still provide a relevant reflection
of the views of growers today, including companies' representations
about compensation to growers).
\15\ See ``A Bird's Eye View of How Chicken Farmers Are Paid,''
National Chicken Council (informing farmers that: ``All farmers are
guaranteed a base pay from the chicken company per their
contract.''; ``No matter what, farmers get paid.''; and ``Bonuses
are given to farmers who raise healthy flocks and invest in their
farm. This is referred to as the tournament system.''); available at
<a href="https://www.chickencheck.in/faq/tournament-system/">https://www.chickencheck.in/faq/tournament-system/</a> (last accessed
May 22, 2024).
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As noted above, many broiler growers operate in regions with just
one to two LPDs.\16\ The local competitive conditions result in higher-
risk, lower-paying grower contracts that commonly subject the grower to
arbitrary and unfair payment; in particular, these contracts do not
guarantee growers an adequate minimum base pay rate, flock placements
and stocking densities, or length of contract in relation to the loan
obligations commonly necessary to engage in broiler growing. Because
LPDs control the distribution of inputs and assignment of production
practices, growers repeatedly tell AMS that they experience unfair and
deceptive operation of the contract. The typical tournament contract
introduces levels of complexity and uncertainty for growers in the
calculation of their compensation and in evaluating growers' return on
investments so as to render the payment system unfair and deceptive.
Furthermore, under that payment system, growers are commonly unable to
discover unscrupulous conduct by LPDs, compare offers from competing
LPDs, and plan and manage their businesses effectively. LPDs also say
growers will operate ``independently''--i.e., their individual effort
will produce commensurate higher compensation--though in practice their
comparison-based compensation pay is heavily dependent on the LPD's
inputs and comparison method, close supervision, responsiveness, and
the performance of others in their LPD-determined settlement group.
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\16\ MacDonald, James M. 2014, Technology, Organization, and
Financial Performance in U.S. Broiler Production, EIB-126, USDA
Economic Research Service, <a href="https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6">https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6</a> (Half of respondents
with two integrators in their area and over a third of those with
three integrators asserted that they could not shift to another
integrator).
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AMS concludes that the ``incentive system'' in its current form
does not excuse the unfair and deceptive operation of tournament
systems because factors outside of the grower's control impact
performance. Without adequate regulation under the current system, LPDs
fail to provide fair compensation for the grower's effort and deceive
the grower regarding tournament operation and pay.
C. Debt and Financial Vulnerabilities
Requests by LPDs for growers to make additional capital investments
are a pervasive part of the broiler growing industry such that Congress
required that LPDs disclose the possibility of such requests to growers
in their contracts (7 U.S.C. 197a(b)). These additional capital
investment requests occur against a backdrop of significant financial
vulnerability for growers, which implicates issues of potential
unfairness and deception. Under this system of capital improvement, the
LPD requests--and indeed, in practice, largely requires--growers to
invest in housing improvements with little to no information regarding
the purposes, processes, outcomes, or likely return to be achieved by
the investment. These omissions of material information critical to
growers' decision-making is unfair and deceptive. These additional
capital investments are highly particularized, which leaves the growers
investing in projects and investments that may be used only for growing
broilers with a particular LPD. Growers have long complained to AMS
that they face a perpetual cycle of debt owing to successive requests
by LPDs for additional capital investments, suppressing their returns
and leaving them even more vulnerable to the range of abuses outlined
above.
Indeed, the Figures below show a declining rate of return on assets
and higher debt to asset ratios carried by poultry operations compared
to cattle, dairy, and hog operations.
BILLING CODE P
[[Page 5151]]
[GRAPHIC] [TIFF OMITTED] TR16JA25.001
[GRAPHIC] [TIFF OMITTED] TR16JA25.002
[[Page 5152]]
BILLING CODE C
The higher debt to asset ratios carried by poultry operations are
driven, in part, by LPD requests for additional capital investments and
are also facilitated, partially, by loan guarantees authorized under
Federal law. Additionally, the gains from upgrades commonly flow to
LPDs, and so growers' higher debt levels are not always supported by
efficiency gains that would result from the additional capital
investments. Under those circumstances and because of the willingness
of lenders to loan due to guarantees, when growers are asked by LPDs to
make additional capital investments without critical information about
their purposes, processes, or outcomes, they are deprived of key
information relating to those decisions. This practice is both
deceptive and unfair because it deprives growers of their ability to
identify fundamentally coercive or otherwise unfair capital improvement
programs at an early enough time to seek AMS enforcement assistance in
halting them, if appropriate.
Accordingly, AMS adopts this final rule prohibiting practices that,
in AMS's view, violate the Act. The overall tournament system is highly
problematic for poultry growers, and it is crucial to implement some
guardrails for the industry to prevent unfair and deceptive contracting
practices.
III. Summary of the Proposed Rule and Changes in the Final Rule
In the June 2024 proposed rule, AMS proposed amending 9 CFR 201,
subpart N, by adding several new provisions: Sec. 201.106 regarding
LPD responsibilities for the design of broiler grower compensation
arrangements; Sec. 201.110 regarding the fair operation of broiler
grower ranking systems; Sec. 201.112 regarding disclosure requirements
for LPDs when requesting additional capital investments from broiler
growers; and Sec. 201.290 regarding severability.
AMS proposed adding Sec. 201.106, titled ``Broiler Grower
Compensation Design,'' to prohibit the reduction, or discounting, of
any compensation rate under the broiler growing arrangement based on a
grower's performance relative to other growers. The proposed provision
would have required broiler grower arrangements to clearly state the
grower's rate of compensation and not reduce that rate based on the
grower's performance relative to other growers. The arrangement could
provide for the rate of compensation to be increased based on that
comparison.
AMS proposed adding Sec. 201.110, titled ``Operation of Broiler
Grower Ranking Systems,'' to prevent unfair and deceptive practices in
LPDs' operation of ranking systems for broiler growers. Proposed
paragraph (a)(1) would have required LPDs to design and operate their
poultry grower ranking system to provide a fair comparison among
growers, and under proposed paragraph (a)(2), the Secretary would
evaluate specific factors to determine if the poultry grower ranking
system is reasonably designed to deliver a fair comparison among
growers. Proposed Sec. 201.110(a)(3) also included a requirement that,
when LPDs could not conduct a fair comparison, they must compensate
growers through a non-comparison method. Proposed paragraph (b)(1)
would have required documentation regarding the processes (policies and
procedures) the LPDs must establish and maintain for the design and
operation of poultry grower ranking systems for broiler growers that is
consistent with the duty of fair comparison. Under proposed paragraph
(b)(2), LPDs would have been required to review their compliance with
these processes, and under proposed paragraph (b)(3) they would have
been required to retain all written records relevant to their
compliance for no less than 5 years from the date of record creation.
AMS proposed adding Sec. 201.112, titled ``Broiler Grower Capital
Improvement Disclosure Document,'' detailing in proposed paragraph (a)
that an LPD would be required to provide the grower with a Capital
Improvement Disclosure Document (Disclosure Document) upon requesting
that the grower make an additional capital investment. Paragraph (b) of
the proposed regulation described the disclosures that the LPD would be
required to include in the Disclosure Document. These disclosures
included a justification of the request, financial incentives for the
grower, specifications for construction, and a thorough analysis of the
grower's projected returns.
Lastly, AMS proposed adding Sec. 201.290, titled ``Severability,''
to ensure that if any provision of subpart N or component of any
provision is declared invalid, or if the applicability of any of these
provisions to any person or circumstances is held invalid, the validity
of the remainder of this subpart or the applicability thereof to other
persons or circumstances shall not be affected. Such a provision is
typical in AMS regulations that cover several different topics and was
proposed here as a matter of housekeeping.
Upon consideration of public comments on the proposed rule, AMS has
modified the proposed provisions as follows:
<bullet> Revised proposed Sec. 201.106 by designating the proposed
text as paragraph (a) and adding the paragraph heading ``Rate
transparency.''
<bullet> Added a new Sec. 201.106(b), ``Excessive variability,''
that establishes a presumptive violation of the Act when aggregate
gross annual payments based upon a grouping, ranking, or comparison of
growers exceeds 25 percent of total gross payments to growers in a
complex on an annual-calendar year basis.
<bullet> Added a new Sec. 201.106(c), ``Transition,'' that
requires that LPDs, for each of the three calendar years commencing
with and including the rule's effective date, submit to AMS a copy of
the prior and modified contract and any LPD Disclosure Document
prepared under Sec. 201.102 for any modified or renewed contracts
under specified conditions.
<bullet> Simplified proposed Sec. 201.110(b)(1)(i) and (ii)
(concerning LPDs' processes for determining inputs and production
practices) by removing the subparagraphs that itemized each component
of the required processes.
<bullet> Simplified proposed Sec. 201.110(b)(1)(iii) (concerning
LPDs' processes for grower comparison flexibility) by removing
subparagraphs (A) through (C) and placing those requirements into three
simple paragraphs: (b)(1)(iii), ``League composition;'' (b)(1)(iv),
``Evaluation period;'' and (b)(1)(v), ``Non-comparison.'' Accordingly,
AMS also redesignated proposed Sec. 201.110(b)(1)(iv), ``Communication
and cooperation,'' as paragraph (b)(1)(vi).
<bullet> Removed proposed Sec. 201.110(b)(2), ``Compliance
review'' and redesignated proposed Sec. 201.110(b)(3), ``Record
retention,'' as paragraph (b)(2).
<bullet> Revised proposed Sec. 201.112(a) and (b) to include the
paragraph headings ``Disclosure requirement'' and ``Disclosure
contents,'' respectively.
<bullet> Revised proposed Sec. 201.112(b)(1) through (3) to remove
the term ``relevant'' as a technical change, along with conforming
grammatical edits.
<bullet> Revised proposed Sec. 201.112(b)(5) to clarify that, in
addition to disclosing any required or approved manufacturers or
vendors, the Capital Improvement Disclosure Document must disclose all
financial benefits, if any, that the LPD or other affiliated persons
receives from the use of the required or approved manufacturer or
vendor.
<bullet> Revised proposed Sec. 201.112(b)(6) as a technical
stylistic change.
[[Page 5153]]
<bullet> Added a new Sec. 201.112(c) to require the LPDs to make
reasonable efforts to ensure that growers are aware of their right to
request translation assistance and to assist the grower in translating
the Capital Improvement Disclosure Document.
Section IV. below explains in detail AMS's reasons for making these
changes.
IV. Provisions of the Final Rule
Throughout this final rule, AMS's analysis of unfair and deceptive
trade practices in poultry contracts is informed by prior P&S Act case
law, States' unfair and deceptive practice laws, and, in particular,
the Federal Trade Commission (FTC)'s encapsulation of principles
governing unfairness, unfair methods of competition, and deception.\17\
AMS looks to the FTC's policy statements owing to the FTC's extensive
experience enforcing prohibitions against unfair practices, unfair
methods of competition, and deception arising under the FTC Act, which
are similar to provisions prohibiting unfair and deceptive practices
under section 202(a) of the P&S Act. Like section 202(a) of the Act,
section 5 of the Federal Trade Commission (FTC) Act also prohibits
unfair and deceptive practices and unfair methods of competition. In
1980, 1983, and 2022, the FTC adopted the aforementioned policy
statements summarizing its longstanding approaches to these matters
under its cases. While recognizing that the P&S Act is broader than the
FTC Act, AMS references these policy statements because they offer
useful guidance owing to the similarity of the statutory provisions and
case law histories.\18\ In addition, AMS recognizes the benefits to the
practical application of this final rule by grounding it on the well-
understood principles of unfairness, unfair methods of competition, and
deception as identified in the FTC policy statements. It is for these
reasons that the FTC Act has, in part, informed this final rule.
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\17\ Federal Trade Commission, Policy Statement on Unfairness,
1980, <a href="https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness">https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness</a> (last accessed Oct. 2024); Federal Trade Commission,
Policy Statement on Deception, 1983 available at <a href="https://www.ftc.gov/system/files/documents/public_statements/410531/831014deceptionstmt.pdf">https://www.ftc.gov/system/files/documents/public_statements/410531/831014deceptionstmt.pdf</a> (last accessed Oct. 2024); Federal Trade
Commission: Policy Statement on the Scope of Unfair Methods of
Competition Under Section 5 of the Federal Trade Commission Act,
Nov. 2022, available at <a href="https://www.ftc.gov/legal-library/browse/policy-statement-regarding-scope-unfair-methods-competition-under-section-5-federal-trade-commission">https://www.ftc.gov/legal-library/browse/policy-statement-regarding-scope-unfair-methods-competition-under-section-5-federal-trade-commission</a> (last accessed Oct. 2024).
Spencer Livestock Comm'n Co. v. USDA, 841 F.2d 1451, 1455 (9th
Cir. 1988); Armour & Co. v. United States, 402 F.2d 712 (7th Cir.
1968) (``Section 202(a) should be read liberally enough to take care
of the types of anti-competitive practices properly deemed `unfair'
by the Federal Trade Commission (15 U.S.C. 45) and also to reach any
of the special mischiefs and injuries inherent in livestock and
poultry traffic'').
\18\ Michael Kades, ``Protecting livestock producers and chicken
growers,'' Washington Center for Equitable Growth (May 2022).
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A. Broiler Grower Compensation Design (Sec. 201.106)
AMS is finalizing new Sec. 201.106, ``Broiler grower compensation
design,'' with two notable changes from the proposed rule. In the final
rule, AMS is retaining Sec. 201.106 as proposed and designating it as
paragraph (a), ``Rate transparency.'' AMS is adding paragraph (b),
``Excessive variability,'' and paragraph (c), ``Transition.'' Paragraph
(b) adds a presumption against excessive variability in performance
compensation to growers competing in a tournament. Paragraph (c)
provides for grower protections during the transition from the existing
payment systems to systems compliant with this final rule. Each
paragraph will be discussed further below.
Most large LPDs today include a tournament component as part of
their grower compensation arrangements. Under this type of arrangement,
if a grower's feed conversion ratio (i.e., the quantity of feed
consumed by the flock divided by the weight of the flock delivered) is
above the average of other growers in the tournament, the grower
receives a bonus; if the grower is below average, the LPD reduces the
grower's compensation. Under the tournament system, the contract
between the grower and LPD provides for payment to the grower based on
a grouping, ranking, or comparison of growers delivering broilers to
the same company during a specified period. These pay rates are
generally expressed in cents per pound. Applying these adjustments,
whether positive or negative, significantly affects growers' effective
rates of compensation and net income.
In its current form, the tournament system operates unfairly and
deceptively. Without clearly stated base rates of compensation, the
complexity of the tournament makes it difficult for growers to clearly
understand the minimum amount they could be paid. Moreover,
compensation based on relative performance when LPDs control the
operation of the tournament (such as the distribution of inputs and
assignment of production practices) creates the potential for growers'
performance to be determined by factors outside their control, thereby
making the tournament system an ineffective incentive system that is
arbitrary and unfair to growers. The tournament system also introduces
considerable complexity and uncertainty for growers in calculating
their anticipated total compensation and evaluating the potential
return on their investments. Furthermore, if the comparison-
compensation factor (i.e., the bonus or deduction) is a large
percentage of total compensation, that variance in total grower
compensation is no longer a legitimate business but simply shifts
economic risk from processors onto poultry growers without a
demonstrable countervailing benefit. Without additional guardrails, the
current tournament system creates significant risk of deception or
unfairness for growers under the Act.
AMS has not found any evidence that poultry tournament systems that
include deductions from the base pay rate or excessive variability in
grower compensation provide a benefit to growers or competition in the
market for grower services that outweighs the harm to growers.
Deductions in other livestock contracts commonly reflect performance
attributes of the animal itself, which is owned by the producer. Here,
the producer provides a service with no ownership interest in or role
in the selection of the animal. These deceptive and unfair payment
practices create an unfair competitive advantage for LPDs at the
expense of growers. Therefore, the widespread adoption of these types
of contracts has frustrated fair competition, instead of enhancing it.
Such discounting and pay variability also reflect the market power and
bargaining power of the LPD in dictating contract terms.
Section 201.106 will provide growers with greater clarity and
protection regarding the minimum payments they can expect under broiler
growing arrangements. This rule prohibits a range of unlawful behavior
by establishing a threshold presumption against excessive pay
variability, establishing a transition period to preserve existing pay,
and making minimum pay clear for growers. This rule will better enable
growers to compare contract terms, evaluate revenue generation, and
assess the value of additional capital investments.
i. Section 201.106(a)--Rate Transparency
AMS is finalizing new Sec. 201.106(a), which prohibits the
reduction of any rate of compensation under the broiler growing
arrangement on account of the grower's grouping, ranking, or comparison
to other growers. This provision is identical to that which was
proposed, except that the provision is
[[Page 5154]]
now designated paragraph (a), with the paragraph heading ``Rate
transparency.'' Under this provision, the broiler growing arrangement
must clearly state the compensation rate. The arrangement may not
provide for mechanisms or calculations that would reduce the
compensation rate based on the grower's performance relative to other
growers, but it can provide for the rate to be increased based on the
grower's performance relative to others. The broiler growing
arrangement could provide for the compensation rate to be increased
based on the broiler grower's performance relative to others, but in no
event could the rate be decreased or discounted by that comparison.
``Rate of compensation'' refers to any payment amount that the LPD
utilizes to compensate the grower under a broiler growing arrangement,
which could include ``base pay,'' ``minimum pay,'' or any other rate
defined in the contract. That rate would have to be prominently and
clearly defined as the guaranteed level of pay a grower will receive if
the grower performs to the minimum specifications of the relevant
provisions of the contract. To the extent that a broiler growing
arrangement had more than one rate of compensation, none of the rates
could be reduced or discounted by a comparison. Under existing AMS
regulations, a broiler growing arrangement must include all payment
terms in the contract (9 CFR 201.100(c)(2)).
Under section 202 of the P&S Act, AMS concludes that the practice
of discounting disclosed ``base'' pay rates in broiler contracts is an
unfair and deceptive practice. This practice forces growers to estimate
potential earnings using contractually stated ``base'' pay rates that,
under the tournament system, only half of the settlement group can
achieve. This unfair and deceptive practice obscures the value of the
contract, thereby frustrating comparisons with competing LPD contracts
in markets where growers are fortunate enough to have more than one or
two LPDs to contract with.
AMS expects that, under this regulation, LPDs will still be able to
elicit a competitive level of performance using a broiler compensation
design that conforms to the requirements of this final rule. The LPD
could reward performance for feed efficiency relative to the growers in
the settlement with a minimum base pay rate per pound and an upward
adjustment to the payment formula. Depending upon the facts and
circumstances, mere compliance with this regulation does not absolve an
LPD of its other legal obligations. A compensation structure without a
penalty or reduction from a true guaranteed minimum pay rate may
still--if the facts demonstrate it--result in other violations of the
Act.
ii. Section 201.106(b)--Excessive Variability
In the final rule, AMS is adding new paragraph (b), ``Excessive
variability,'' which establishes a presumption that an LPD has violated
section 202 of the Act when aggregate gross annual payments based upon
a grouping, ranking, or comparison of growers exceed 25 percent of
total gross payments to growers in a complex on an annual-calendar year
basis. AMS is adopting this approach because excessive variance in
total grower compensation arising from comparison-based compensation
would, generally, create excessive variability that is deceptive
because growers cannot reasonably assess the risk they are undertaking
or forecast, predict, or budget their business operations. Further,
excessive pay variance makes compensation dependent on arbitrary
criteria, random factors, or other criteria that the grower cannot
control or affect. When the comparison performance pay too
substantially affects compensation, it is unfair.
When growers perform reasonably under the terms of the production
agreement, excessive variability in performance pay arises at least in
part due to LPD-controlled factors or unavoidable inherent natural
variability. These factors are outside of the grower's control and
cannot be completely offset by grower effort or skill. LPDs design
ranking systems to allocate grower payments based upon grower effort
and skill. When factors other than grower effort and skill are
comingled with the metrics used to allocate pay, the practice is ripe
for potential abuse and unfairness because excessive variability in
performance payments unfairly reduces compensation to growers. This
unfairness to growers is particularly pronounced owing to high
indebtedness among growers, which leaves them more financially
vulnerable to harms from excessive income variability that does not
reasonably reflect their own efforts.\19\ That pay variability also
frustrates growers' ability to accurately assess, or reasonably
control, their rates of compensation and the overall financial risk
they undertake under a broiler growing arrangement, which is
particularly problematic given the risk they bear. The injury is not
offset by attendant benefits, since the practice tends toward
distorting the market's true pay amount and reducing growers' ability
to accurately assess, or reasonably control, their finances and make
informed business decisions.
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\19\ In contrast to contributions by the grower, LPDs contribute
much more significantly to overall performance by furnishing the
inputs, e.g., genetics, feed, nutrition, sex of chicks, and close
supervision of the grower's managing production.
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Though Sec. 201.106(a) addresses the problem of reductions to
rates of compensation that arise owing to groupings, rankings, or
comparisons of growers, it does not alleviate all potentially unfair
aspects of the tournament system or of the integrated model of broiler
production. The proposed rule indicated that AMS intended to engage in
case-by-case enforcement to remedy other aspects of tournament system
unfairness, including issues arising from excessive variability in
payments. In addition to a prohibition on discounting rates of
compensation, the proposed rule particularly highlighted the potential
importance of a 25 percent presumption on total compensation based on a
grouping, ranking, or a comparison (the tournament) to total of base
pay rate plus performance compensation. As AMS indicated in the
proposed rule, this approach could alleviate extreme variability as an
aspect of existing tournament system unfairness.
In the proposed rule, AMS included questions containing additional
proposals. One such proposal solicited comment on whether it is
presumptively unfair for comparison-based compensation to equal or
exceed 25 percent of total (base pay rate plus comparison-based)
compensation for any grower and asked a range of questions around the
appropriateness of the specific threshold, how to calculate it, and how
it would affect the industry.\20\ These questions included highlighting
the role of the 25 percent presumption as a potentially binding
constraint, and how LPDs might respond to the prohibition introduced in
Sec. 201.106(a) by modifying the compensation structures in grower
contracts. AMS's questions indicated that it could raise base pay and/
or limit performance payments--thus reducing the difference between top
and bottom performing growers--without increasing total grower
compensation expenditures. It also left open the possibility that LPDs
could potentially adjust their compensation structures in other ways,
such as by providing non-comparison-based incentives to growers they
might seek to reward (such as per pound or per square foot compensation
for housing known to provide efficiencies to the LPD) or deploy other
[[Page 5155]]
incentives (such as fixed performance bonuses).
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\20\ 89 FR 49002, 49011-49012 (June 10, 2024).
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In response to the proposed rule, growers and advocate commenters
overwhelmingly supported the need for additional limitations on
excessive variability in payment arising from rates of compensation,
with a particularly strong endorsement of the 25 percent limitation on
performance. Commenters underscored the importance of this limitation
for some of the reasons that AMS indicated in the proposed rule: that
it is necessary to protect growers from unfair reductions in payments.
To incentivize grower effort, LPDs allocate grower pay using
relative performance metrics; however, grower effort alone is an
insufficient determinant of grower performance. Growers' performance
depends on many factors, some of which are under the control of growers
while others are not. Some known factors, including a grower's skill
and effort, are within a grower's control. Other factors are outside a
grower's control, such as feed quality, chick quality, and the skill or
other efforts of other growers in the comparison group. Even if all
these known factors are accounted for, there is still some unavoidable
inherent natural variation in performance that would explain growers'
performance volatility, flock to flock, even if all the known factors
remain constant. The nature of this variability creates harm to growers
in reduced performance payments.
The use of flock performance metrics, specifically feed conversion,
as a proxy to grower effort is imperfect. Feed conversion itself is
affected by variables beyond grower effort. AMS is not aware of
existing technological innovations that could serve to better isolate
grower effort, which is exclusively under grower control. That is not
to say flock performance metrics serve no purpose in assessment of
grower effort and allocation of grower payments. AMS's experience in
analyzing performance payments suggest that ranking systems can be a
useful and reasonably equitable mechanism for pay allocation with
proper regulation and in proper magnitude. Within a reasonably
contained range--i.e., presumptively 25 percent of total compensation--
the tournament may offer a reasonable benefit to growers by enabling
LPDs to efficiently measure grower performance and guard against
natural forms of variability that would arise were compensation fixed
rather than floating (i.e., the comparison-based average of growers).
Yet at too high a level, the potential harms of comparison-based
compensation (performance pay dominating grower pay allocation without
rewarding commensurate differences in effort) outweigh the potential
benefits. That is unfair under section 202(a) of the Act because
compensation under the tournament becomes correlated to input
distribution (and other circumstances under the control of the LPD,
such as flock production practices or responsiveness to complaints),
which is commonly arbitrary--or, in some cases when not arbitrary, can
be punitive. Some growers who comply with the contract and are unfairly
penalized for factors beyond their control suffer unavoidable harm;
they are denied the full amount due for their growout services. While
growers can benefit from participation in the tournament, excessive pay
variability can cancel out those benefits as they are outweighed by the
harms.
Based on previous analysis of grower compensation data for a small
sample of broiler complexes, AMS is not aware of any complex with
performance payments that are as much as 26 percent of total payments.
Additionally, in United States v. Cargill Meat Solutions Corp.,
commonly referred to as ``Wayne-Sanderson,'' the final judgment also
contains a 25 percent limitation on performance payments.\21\ The
Wayne-Sanderson settlement is significant because it was agreed to by
one of the largest market participants and has not caused any
demonstrable harm to the company or to the market, nor is there any
evidence that it disincentivized grower effort or lowered performance.
While Wayne-Sanderson had agreed to a 25 percent limitation on
performance payments, this final rule establishes that performance
payments above 25 percent are presumed to be unfair. This is because
performance pay variability causes injury to growers when the magnitude
of performance pay is so excessive. That is, the performance pay
significantly affects whether the grower is successful, yet the amount
depends on unavoidable variance and does not reflect grower
performance. In those circumstances, compensation no longer correlates
to factors within grower control, such as their effort and expertise.
This deprives growers of the value, both real and expected, of their
services. The vast majority of commenters who addressed the topic of
comparison-based compensation endorsed the idea of 25 percent as an
appropriate level for a presumption of this type.
---------------------------------------------------------------------------
\21\ United States v. Cargill Meat Solutions Corp., 1:22-cv-
01821-ELH (D. Md. July 25, 2022).
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We note that this presumption will provide guardrails in helping
LPDs set and maintain performance pay standards that achieve
appropriate goals, such as rewarding effort and skill against a
floating average that adjusts for common circumstances, like weather,
without unduly denying growers the expected value of their growout
services. This clarity will guide LPDs that need to modify existing
contracts to comply with this final rule, such as with Sec.
201.106(a). For example, absent the existence of Sec. 201.106(b), LPDs
could comply with Sec. 201.106(a) by decreasing base pay and
excessively increasing the proportion of pay that is dependent on
performance compensation. Such contract modifications would supercharge
pay variance in the tournament while penalizing growers under the guise
of complying with reforms designed to improve transparency and
fairness. The presumption under Sec. 201.106(b) helps ensure
continuity in compensation at an aggregate level because it guards
against excessive variability of performance pay relative to total pay.
To stay within the presumptive boundary set by Sec. 201.106(b), an LPD
must set a reasonable compensation rate for any new base payment under
the contract. AMS underscores that nothing in the rule prevents LPDs
from providing other forms of incentive compensation to growers for
reasons other than relative performance, such as payments for improved
facilities or utility subsidies. Overall, the 25 percent presumption
against excessive variability is useful to provide clarity and
consistency around when AMS may seek to investigate for case-by-case
compliance and enhances the fairness and transparency of compensation
rates in broiler growing arrangements. As such, it reflects a logical
outgrowth of the proposed rule.
Separately, AMS notes that it also expects to examine for excessive
variability other forms of performance payments that are based on how
efficiently a grower uses inputs supplied by the LPD: such payments
could emerge as a method for evading this provision's purpose. Examples
of such performance payment systems include what are commonly called
fixed metric performance payments, which predate the current
tournament, whereby growers' performance payments are tied to their
individual achievement of certain fixed metrics around efficient use of
inputs. AMS expects to examine these types of performance systems for
excessive variability for similar risks of unfairness, including
because the LPD provides the inputs and production
[[Page 5156]]
practices and in those circumstances would be setting the fixed
metrics.
In review of the presumption, AMS will consider other complex-
specific incentives as requested by the LPD that would otherwise not be
appropriate to consider as part of the rates that make up base payment.
For example, energy incentives may be considered differently because
they vary significantly based on geographic location, and so would
result in somewhat different application of the provision for growers
at different complexes. Where a relatively high degree of variability
in performance pay exists, even within the 25 percent, due in part to
energy incentive payments, AMS may examine whether the tournament is
unfair.
To rebut the presumption of unfairness triggered when comparison
compensation payments exceed 25 percent of total compensation, the LPD
may affirmatively demonstrate (i) that a given tournament's
compensation system allows all growers to be economically successful
without the need to receive any payments based upon a grouping,
ranking, or comparison of growers that exceed the amount covered by the
presumption; (ii) that payments to all growers that exceed the amount
covered by the presumption are sufficient to reflect the increased risk
of variability to all growers under that system; and (iii) that the
system is not otherwise unfair or deceptive. The Agency would examine
any rebuttal on a case-by-case basis to comport with the purposes of
the presumption to prevent LPDs from engaging in unfair or deceptive
practices or devices that harm poultry growers.
AMS adopted this provision after considering the case-by-case
presumption set forth in the proposed rule and public comments that
urged AMS to instead establish a greater limitation on excessive
variability of payments arising from performance, especially
comparison-based, compensation. Public comment regarding this
provision, and AMS's response to those comments, are discussed in
greater detail below in section V., ``Comment Analysis.''
iii. Section 201.106(c)--Transition
In the final rule, AMS is also adding new Sec. 201.106(c), which
requires that, for any contract modification or renewal subject to
Sec. 201.106(a) that results in a grower receiving less than the prior
year's complex-wide average gross payment, the LPD must submit a copy
of the prior contract and the modified contract, as well as any LPD
Disclosure Document prepared under Sec. 201.102 with respect to the
prior and the modified contract, to the Secretary.
AMS will monitor contracts to identify signs of the unfair exercise
of LPD bargaining power during this transition period. These could
include, for example, a predatory method of competition whereby an LPD
seeks to lower pay across the entire complex or discriminatory or
retaliatory conduct that seeks to lower the pay of some subset of
growers. Unfair conduct by the LPD could potentially arise where the
LPD seeks to undermine contractually agreed-upon earnings from the
previous contract irrespective of the tournament. One way for AMS to
identify such conduct could be through LPD Disclosure Documents
(currently required under existing 9 CFR 201.102), which would be
required if LPDs modify or replace contracts in seeking compliance with
this rule. The record-keeping and reporting requirements in this final
rule will further help identify any potential illicit exertions of
market power by allowing AMS to closely scrutinize contract
modifications that jeopardize grower welfare during the transition
period.
In keeping with the requirements in Sec. 201.102(d)(2), AMS
expects LPDs to explain why the annual gross payment averages for the
previous five years may not provide an accurate representation of
projected future payments. AMS also expects a distinct explanation of
how any changes the LPD is proposing under the new contract are
necessary to comply each part of final Sec. 201.106. That is, changes
made to comply with Sec. 201.106(a) and (b) should be explained. AMS
strongly encourages LPDs to explain changes needed to comply with Sec.
201.106(b) first, and then apply a conversion scale from whatever
updated approach is adopted to comply with Sec. 201.106(a).
AMS will evaluate the reported contract modifications and
associated documentation to assess grower welfare, given that growers
will be particularly susceptible to economic hold-up concerns. In
particular, AMS will consider the following variables: (1) the number
of flock placements annually; (2) the stocking density; and (3) the
distributional range of payments. If, upon consideration of these
variables, AMS identifies contract modifications that negatively impact
grower welfare or that include supply reductions from the complex, the
Agency will closely scrutinize the modifications, including rates, for
fairness and reasonableness.
It is crucial that growers are meaningfully informed about the
terms of the grower arrangements and the expected compensation for
their services so that they can make financially sound decisions and
identify potential economic hold-up. The reporting requirements will
only be in effect for three years including and from the effective date
of this rule.
During the three-year transition period, LPDs must evaluate average
grower compensation at the complex level for each of the three calendar
years commencing with and including the rule's effective date to
determine if they need to submit their contract to AMS for review. The
rule requires LPDs to use the average grower compensation across the
complex, because this analysis shows if an LPD has cut grower
compensation overall. The rule uses averages because performance-based
compensation is unpredictable on a grower-by-grower basis and because
using total grower compensation at the complex would be overinclusive.
For example, grower turnover might skew an analysis based on total
grower compensation. This makes the Sec. 201.106(c) method of
evaluation comparable to how unfair levels of performance-based
compensation are defined under Sec. 201.106(b).
AMS chose a transition period of three years for several reasons.
First, it is nearly impossible to evaluate the changes to grower pay
made to contracts within 180 days or even a single year with any level
of confidence. Many contracts are three, five, or ten years in length,
so it may take up to a year of payments to even begin evaluating the
financial effect of changes. Reviewing payments within a 180-day period
may not indicate what growers would earn in a year and would be limited
in scope and value; any conclusions based on that limited review would
be speculative, and violations of the Act cannot be based on
speculation. After a full year of operation following contract
modification, the realization of grower performance outcomes and
practical application of the compensation structure are known and
translated into actual grower payments. This will facilitate AMS's
analysis of the actual distribution of grower payments and overall
level of compensation that resulted from the new compensation structure
and allow for a more fulsome evaluation of fairness concerns. It also
allows AMS to consider the market environment as context for LPD
actions.
Additionally, this new rule may necessitate adjustments to the
compensation structures used in grower contracts, and it will take time
for growers to become used to the new regulation. AMS needs to look at
how the overall market is adjusting to this new reality and prevent
evasion during
[[Page 5157]]
that adjustment period. For example, an LPD may make a series of small
contract changes, which would require AMS to review the overall market
adjustments, not just the initial changes. Failure to capture the full
implications of the transition period would put growers at risk from
LPD market power and bargaining imbalances between LPDs and growers.
AMS underscores that this is a monitoring and reporting
requirement, owing to the ongoing risk to growers that the contracts
could be modified and re-modified during this transition period. This
contract review will help the Agency decide whether to conduct more
specific oversight and enforcement while the new regulatory regime is
implemented.
Three years is the period of financial information that banks
request from borrowers, such as growers, and so it provides a
reasonable period for AMS to engage in these market-monitoring
activities. After three years, AMS agents will continue to monitor
contracts and ensure they are following the requirements of this final
rule, but LPDs will not need to submit contract modifications.
In the proposed rule, we asked for public comment on this issue,
and received overall support for a provision to protect growers that
rely on existing contracts from holdups and potential market abuse.
Specifically, we asked the following question: ``To minimize transition
risks to growers, should AMS include a requirement that LPDs submit to
AMS for review any contracts modified or revised to comply with new
Sec. 201.106?'' \17\ The comments received in response to this
specific question were mixed in their support and are addressed below
in sections V.A.iv. and v.
Because the Secretary will subject the updated contracts to close
scrutiny for unfairness, the Secretary would seek access to the
dealer's business records. During any investigation, AMS may examine
any changes to average annual gross payment per pound for growers in
the complex and any changes to average payment per square foot
increased. Each investigation will consider the individual facts and
circumstances of each situation, as these considerations are important
in examining whether growers were held at least no worse off during the
contract modification process. Although the final rule is designed to
benefit growers and reduce unfair and deceptive practices, growers face
a significant risk of unfair practices owing to the risk of hold-up
when they may be required to change their contracts so that LPDs comply
with this rule. Based on AMS's experience implementing rules, LPDs may
seek during any compliance and implementation period to extract changes
to the contract unrelated to the regulatory requirements of this rule.
The purpose of providing contracts to AMS is to identify unfair
practices or otherwise unlawful reductions to payment that are
favorable to LPDs and harmful to growers.
B. Operation of Broiler Grower Ranking Systems (Sec. 201.110)
AMS is finalizing new Sec. 201.110, ``Operation of broiler grower
ranking systems,'' which regulates how LPDs operate ranking systems
(i.e., tournaments) for contract broiler growers, establishing a duty
of fair comparison when calculating comparison-based compensation among
a group of poultry growers in a settlement group. This section contains
factors for the Secretary to consider when evaluating whether LPDs have
abided by the duty of fair comparison requirement. When LPDs are unable
to make a fair comparison for one or more growers, they are required to
use a non-comparison compensation method as specified in the contract.
LPDs are required to document how they design and operate their poultry
grower ranking systems in a manner that is consistent with the duty of
fair comparison. The documentation must show that LPDs take measures to
mitigate the impact of inequitable distribution of inputs and flock
production practices on grower performance and, hence, comparison-based
compensation.
The purpose of the rule is to ensure that comparison-based
compensation reflects grower effort, not factors that injure the
grower, such as feed or chick quality or timing of feed delivery that
are outside of grower control but within the control of LPDs. The
problem this rule seeks to address is how LPDs manage variation in
quality or timing of inputs, flock production practices, and how LPDs
handle growers' concerns (i.e., groupings, responsiveness to problems).
AMS certainly believes that rewarding grower effort is fair, but unfair
and deceptive comparison systems are not.
For example, breeding hens have a lifecycle of 50 weeks. They
produce optimal chicks between weeks 20-34, but they also produce
chicks that have value outside the optimal window. The LPD has a
financial incentive to grow all these chicks to maturity, and thus will
distribute a mix of higher and lower quality chicks in any one
settlement period to its growers. Those growers receiving a higher
proportion of suboptimal chicks are disadvantaged in a relative
comparison to growers who received a higher proportion of optimal
chicks.
In theory, LPDs would provide uniformly high-quality inputs (such
as chicks and feed) and appropriate production practices (such as flock
density) to all growers to ensure maximum efficiency, product quality,
and profit. LPDs would also ensure tournament groupings are reasonably
random or otherwise not biased and would also reasonably control for
problems that growers faced (such as accidental delivery of the wrong
feed). However, inputs are natural systems and, therefore, variation in
input quality necessarily exists. This variation in input quality
affects performance. Moreover, human error can be present in vertically
integrated systems as well, for example, the accidental delivery of
feed designed for older birds. LPDs want to obtain the full value from
all usable inputs and are not inclined to dispose of lower quality
chicks or feed to ensure growers only get the highest quality inputs.
Thus, LPDs routinely distribute lower quality, lesser performing inputs
to their contract growers, even though growers who receive those inputs
will likely receive lower compensation than their peer growers in the
same tournament that receive higher quality, higher performing inputs.
Within a given poultry complex (group of growers serving a single
processing plant), a significant share of each grower's compensation is
determined by their rank in tournaments between growers at the complex,
even though a proportion of performance variation across growers is
attributable to variation in inputs, including feed and chick quality,
timing of feed delivery and flock pick-ups.
LPDs purport that this system works to promote fair competition in
the market for grower services. From an LPD's perspective, as outlined
in several public comments, a grower receiving poorly performing inputs
and a low rank in one tournament is how the system works; over the long
term, according to the commenter, the grower will likely receive
better-performing inputs that help to balance out one tournament's
losses. LPDs also stated in their public comments that they have no
incentive to furnish a grower with poorly performing inputs and/or
otherwise mistreat growers.
In practice, LPDs assertions do not bear out. LPDs have limited
financial incentive to expend extra efforts to evenly distribute
optimal inputs and production practices across growers in a
[[Page 5158]]
poultry settlement pool or even to some extent to promptly address
problems. LPDs have not provided supporting evidence that long-term
provision of inputs balance out uniformly. Even if over the long-term
the variability, on average, balances out, there will be growers who do
not benefit from the balancing or for whom the balancing comes too late
to address the harms caused by variability. LPDs' assurances of long-
term balancing out do not provide comfort to the grower facing
decreasing ability to pay for immediate operating expenses--and who
does not have the extra cash to buffer one tournament's losses.
Furthermore, under the current compensation system, LPDs have little
motivation to limit performance variability, exercise appropriate care
in input distribution, or generally create reasonable uniformity
regarding other aspects of tournament operations.
As growers and grower advocacy organizations have asserted, LPDs
often provide the ``noisy'' grower (who exercises their dissatisfaction
or seeks redress for bad treatment) ``bad'' or otherwise inappropriate
or untimely inputs or flock production practices, or even organize them
into comparison groupings designed to adversely affect their
performance. This can even occur for those seeking timely assistance or
correction for supposedly inadvertent mistakes (e.g., feed delivered to
new chicks that is designed for older birds, and hence is not edible by
the younger birds). Growers have consistently reported over the years
that LPDs commonly exercise punitive control over inputs, production
practices, tournament groupings, and the availability of assistance for
ordinary problems. These circumstances suggest an environment
characterized by unavoidable unfairness and oppressive methods that
adversely affect growers' and even LPDs' ability to compete on the
merits. Growers who receive bad treatment cannot competitively
discipline an LPD by negotiating better terms or choosing a different
LPD. They must accede to continued poor treatment by the LPD.
LPDs' practice of basing grower compensation on factors beyond
growers' control distorts the competitive market for grower services.
LPDs possess power--whether regionally, within the contract
relationship with growers who depend on that relationship to pay down
debt, and/or through information asymmetry (i.e., through knowing
detailed information about inputs and growers' finances while growers
know relatively little). This power allows them to reduce growers'
compensation to unfair levels they know growers can barely bear; in
turn, growers' reduced financial stability further reduces their
countervailing power. Another feature of this practice is that LPDs are
not actually allocating more funds to better compensate higher-
performing growers: they fix overall compensation to their growers from
tournament to tournament and deduct pay from those who performed below
the average to reward those who performed above average. In so doing,
they prevent growers from actually earning compensation commensurate to
services--a circumstance that numerous commenters described
experiencing but possessed little recourse to counterbalance, i.e.,
``Take it or leave it.'' This practice further erodes the competitive
conditions in the market for grower services. Numerous commenters
discussed how just a few below-average rankings caused them to not be
able to afford operational expenses and perform worse and worse; and/or
exit. By basing compensation on factors outside of actual grower
services, LPDs also distort the actual price signal for grower
services. And, by fixing overall compensation and deducting from the
bottom to reward the top, they prevent honest competitors that actually
allocate more funds for better-performing growers. Altogether, AMS
believes these are unfair and deceptive practices under the Act.
LPDs harm growers when they compare growers where inputs,
production practices, tournament groupings, and assistance are not
equitably distributed. Grower pay becomes undeservedly low and fosters
unlawful variability in both performance and compensation that have no
relationship to the grower's work, initiative, or skill. Growers have
no control over how inputs, production practices, tournament groupings
and assistance are allocated, owing to the vertically integrated model
of broiler chicken production. Unfair comparisons do not benefit
growers or competition, and indeed frustrate the LPDs' claimed purpose
of the tournament structure. The tournament is a form of performance
payment that is intended to incentivize grower deployment of effort,
skill, and investment to foster more efficient use of the inputs
provided by the LPD. Purportedly, tournaments capture actual
differences in grower performance during a given period, while
adjusting for overall conditions affecting performance, such as adverse
weather conditions, that affect all growers in the complex. The rule
sets out reasonable alternatives to these harms that do not undermine
the benefits to growers from the vertically integrated production
system or from using comparisons to establish flexible baselines for
evaluating grower performance, within its appropriate limits.
AMS notes that growers get paid by the pound and start with a
static number of chickens. Thus, they have contractually inherent
incentives to grow their chickens to the target weight and to minimize
the death loss of chickens, even in the absence of a performance
payment. Yet AMS also acknowledges that ensuring growers' use of the
minimum amount of inputs, such as feed, to achieve maximum growout is
also an important part of the overall mix of cost efficiencies. AMS
agrees, to the extent that the pool of growers in a tournament is
sufficiently random and that the necessary conditions for equitable
comparison are met, a tournament may spur growers to operate more
efficiently as they seek higher comparison-based compensation, while
reasonably guarding against commonly shared external conditions. Yet as
discussed in the proposed rule and reflected in comments from grower
groups and others, those conditions are often not met. Nor, indeed, are
arbitrary or inequitable differences in inputs and production practices
inherently essential features required to deliver the benefits of the
poultry industry's vertically integrated production and comparison-
based performance compensation system. In fact, arbitrary or
inequitable practices undermine these benefits, producing instead
arbitrary or otherwise inequitable grower pay differences that run
contrary to the industry's avowed purpose of the tournament system.\22\
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\22\ See, e.g., ``How the Tournament System Works,'' National
Chicken Council (informing farmers that: ``1 All farmers are
provided the same quality of chicks, the same feed, and access to
veterinary care. 2 Farmers who invest in more advanced facilities,
as well as use the best management practices will likely produce
higher quality chickens more efficiently. 3 Farmers receive a base
pay (per their contract) and potentially a bonus, based on the
health and quantity of the flock (tournament system).''); available
at <a href="https://www.chickencheck.in/faq/tournament-system/">https://www.chickencheck.in/faq/tournament-system/</a> (last accessed
May 22, 2024).
---------------------------------------------------------------------------
Because the tournament system determines a component of grower pay,
LPD practices that impair a fair comparison of grower performance cause
a misallocation of performance compensation, thereby unfairly reducing
the compensation that may otherwise be due to some growers. Studies
\23\ have shown that differences
[[Page 5159]]
in production practices and inputs, such as stocking density, slaughter
weight, bird gender, and breeder flock age, can impact the performance
metrics used in determining the performance adjustments in tournament
payment systems. If LPDs provide all growers in a tournament group
similar-quality inputs and compare growers using similar flock
production practices, or if they take steps to balance these
differences over time or otherwise adjust pay to account for the
relevant differences, these production factors under LPD control are
unlikely to unfairly affect growers.
---------------------------------------------------------------------------
\23\ Dozier III, W.A., et al. ``Stocking Density Effects on
Growth Performance and Processing Yields of Heavy Broilers,''
Poultry Science 84 (2005): 1332-1338; Puron, Diego et al. ``Broiler
performance at different stocking densities.'' Journal of Applied
Poultry Research 4.1:55-60 (1995). Burke, William and Peter J.
Sharp. ``Sex Differences in Body Weight of Chicken Embryos.''
Poultry Science 68.6 (1989): 805-810; Beg, Mah, et al. Effects of
Separate Sex Growing on Performance and Metabolic Disorders of
Broilers. Diss. Faculty of Animal Science and Veterinary Medicine,
Sher-e-Bangla Agricultural University, Dhaka, Bangladesh, 2016;
Wilson, H.R. ``Interrelationships of Egg Size, Chick Size,
Posthatching Growth and Hatchability.'' World's Poultry Science
Journal 47.1 (1991): 5-20; Washburn, K.W., and R.A. Guill.
``Relationship of Embryo Weight as a Percent of Egg Weight to
Efficiency of Feed Utilization in the Hatched Chick.'' Poultry
Science 53.2 (1974): 766-769; Weatherup, S.T.C., and W.H. Foster.
``A Description of the Curve Relating Egg Weight and Age of Hen.''
British Poultry Science 21.6 (1980): 511-519; University of
Kentucky/Kentucky Poultry Federation, Poultry Production Manual,
<a href="https://afs.ca.uky.edu/poultry/production-manual">https://afs.ca.uky.edu/poultry/production-manual</a> (<a href="http://uky.edu">uky.edu</a>), last
accessed 08/21/2023.
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However, when LPDs rank growers who received lower quality (i.e.,
lesser performing) inputs or less favorable flock production practices
against growers who received higher quality (i.e., higher performing)
inputs or more favorable flock production practices the former group
will likely receive lower pay than the latter group due to factors
beyond their control. The ranking in the tournament will not reflect
the grower's actual performance; it will reflect the inputs and flock
distribution practices the grower received and the grower's performance
relative to that of other growers. This is an unfair practice unless
the LPD took effective steps to make appropriate adjustments to the
compensation structure for this settlement group to reasonably
neutralize the impact of the inequitable distribution of inputs and
flock production practices within the ranking group. The problem this
section of the rule addresses is how tournaments can be designed to
effectively counteract the impact of inequitable tournament practices
and lead to a fair comparison in poultry ranking systems.
Some LPDs have taken steps to design their compensation systems to
appropriately account for the maldistribution of inputs and production
practices within a poultry ranking group. In response to the Advance
Notice of Proposed Rulemaking that preceded the proposed rule for this
final rule, LPDs and their trade associations described different steps
LPDs have taken to correct for the inequitable distribution of inputs
and production practices among growers and resulting comparisons. A
meat industry trade organization indicated that LPDs are known to
reduce unpredictability in grower outcomes by having contracts that
evaluate performance over multiple flocks and adjust pay for factors
outside growers' control. For example, some LPDs adjust payments for
different densities of birds placed or provide credits for excess
seven-day death loss.
Complementing these examples, AMS investigations have also found
that some LPDs will attempt to ensure that broiler growers do not
receive chicks from young laying hens too often because this can
negatively affect growers' tournament performance. Some LPDs will
communicate and correct ordinary problems on a timely basis. This helps
growers avoid unintentionally punitive outcomes than would otherwise be
the case. Yet, while LPDs assert that quality communication and fair
operation are universal, AMS has found through interviews and comment
review that LPD behavior currently depends extensively on the goodwill
of the LPD, commonly via the manager of the local complex, and LPDs are
not uniformly consistent in addressing issues that lead to unfair
outcomes. Some local complexes make discretionary decisions that harm
growers.
For instance, while LPDs regularly maintain extensive grower
manuals, LPDs are not obligated to have their manuals address the range
of situations that undermine a fair comparison or monitor whether the
local complexes comply with that manual in practice. Growers need a
poultry ranking system that meets a reasonably reliable standard. For
there to be fair payments under sections 202(a) and 410 of the Act,
LPDs must properly adjust their comparison-based compensation systems
used in poultry grower ranking systems. Rules, like this final rule,
must reasonably neutralize the impact of inequitable distribution of
inputs and flock distribution practices on poultry grower compensation.
Because different inputs and flock production practices affect
performance under the tournament, LPD decisions are an outsized
component of grower payments. When an LPD operates a tournament that
uses arbitrary or inequitable delivery of inputs and production
practices without establishing systems to mitigate material differences
in inputs and production practices among growers in a comparison group
or otherwise reasonably neutralize comparison impacts, the LPD has
committed an unfair and deceptive practice under the Act. Such a
practice is unfair because it uses criteria outside the growers'
control to evaluate their performance. It is deceptive because it
purports to evaluate growers on their effort when in fact it does not,
often leading to payment rates that are wildly fluctuating and
unpredictable. The duty of fair comparison established in this rule
also arises out of the Act's prohibitions on unfair practices, unjust
discrimination, the manipulation of prices, and failure to pay.
Comparison-based compensation systems can be used to proactively cause
harm to one or more growers by placing them in grower settlement groups
that are inappropriate based on distribution of inputs or flock
production practices. LPDs likewise can use league composition (i.e.,
the formation of settlement groups) to manipulate prices downward for a
given grower or group of growers. Finally, such practices can lead to a
failure to pay for services provided. Violations of the Act include an
LPD failing to maintain policies and procedures necessary to document
the company's compliance with those fair comparison duties, owing to
the Act's recordkeeping authorities (7 U.S.C. 221).
AMS is adding a new Sec. 201.110, ``Operation of broiler grower
ranking systems,'' to regulate LPDs' operation of poultry grower
ranking systems (i.e., tournaments) for broiler growers. Paragraph (a)
establishes an LPD duty of fair comparison in tournaments. This duty of
fair comparison requires LPDs to structure their tournament system to
provide a fair comparison among growers. AMS acknowledges that
sometimes a fair comparison is not possible due to unforeseen
differences in inputs or other circumstances, in which case an LPD must
compensate growers through a non-comparison method specified in the
contract that reflects a reasonable compensation to the grower for its
services. Paragraph (b) establishes basic documentation that LPDs must
maintain regarding how they design and operate their poultry grower
ranking systems for broiler growers.
i. Section 201.110(a)--Fair Comparison
Paragraph (a)(1) requires LPDs that use comparison-based
compensation systems for their poultry growers to design and operate
their poultry grower
[[Page 5160]]
ranking system (i.e., comparison-based compensations system) in a way
that provides a fair comparison among growers. This final rule uses in
various places the definition of ``poultry grower ranking system''--
commonly called the tournament contract--already set forth in PSD
regulations at Sec. 201.2.\24\ Recognizing that LPDs have long claimed
that tournament contracts are designed to promote efficiency, not
frustrate it, AMS has written this rule to affirm the duty to fairly
compare growers. Specifically, this rule requires LPDs to advance a
fair comparison among growers in a poultry ranking group based on
grower effort and skill. Measuring performance based on input quality--
which is outside of the grower's control--is unfair and deceptive. LPDs
have a multitude of means to maintain fair comparisons. This includes
correcting for: input quality variations, inappropriate feed type
delivery, gaps in feed delivery, variation in production practices such
as flock density, pick-up time or pick-up weight across the comparison
group. LPDs can manage fair comparisons through extending the period
over which the comparisons are made, adjusting payment for certain
inputs or production practice differences, or removing growers from
tournaments where a fair comparison is not possible. LPDs can ensure
league composition (ranking groups) are reasonably random and robust
enough to establish a fair comparison baseline. LPDs can also establish
processes for responding to complaints in a timely manner or making
appropriate adjustments to comparisons. But LPDs violate the Act when
they do not design and operate their comparison poultry compensation
system in a manner that delivers a fair comparison among growers within
any given ranking group.
---------------------------------------------------------------------------
\24\ Poultry grower ranking system means a system where the
contract between the live poultry dealer and the poultry grower
provides for payment to the poultry grower based upon a grouping,
ranking, or comparison of poultry growers delivering poultry during
a specified period.
---------------------------------------------------------------------------
Paragraph (a)(2) of Sec. 201.110 establishes the factors the
Secretary will consider in determining whether an LPD reasonably
designed or operated its poultry grower ranking system to deliver a
fair comparison among growers or whether the LPD must utilize a non-
comparison compensation method. This provision establishes a violation
for either the LPD's failure to design or failure to operate a poultry
grower ranking system to deliver a fair comparison among growers. In
the first instance, AMS could bring an enforcement action for an LPD's
failure to design the ranking system in a manner that would deliver a
fair comparison; such an action would be based upon the processes set
forth in the documentation required under paragraph (b) of this
section. In the second instance, AMS could bring an enforcement action
based upon an LPD's failure to operate the ranking system in a manner
consistent with the duty of fair comparison. Such a failure could be
because the LPD was not following the documented processes or because
in practice the documented processes do not deliver a fair comparison.
The factors listed in Sec. 201.110 (a)(2)(i) through (vi) are designed
to establish what constitutes reasonable delivery of a fair comparison.
That is, the Secretary will examine these factors when determining
whether the LPD has reasonably designed or operated their ranking
system. Reasonableness should be viewed as an objective test that
accounts for growers' contract expectations, basic considerations of
equity, and the LPD's ability and willingness to prevent harms to
growers resulting from factors outside growers' control. However, it
should also provide some flexibility to LPDs to achieve distinct goals
provided they are well-designed, justified, and not otherwise unfair or
deceptive.
Paragraphs (a)(2)(i) and (ii) of Sec. 201.110 address whether an
LPD's distribution of inputs and assignment of flock production
practices caused material differences in performance that growers
cannot avoid, and whether the LPD made appropriate adjustments to
compensation. Fair comparison of growers requires that growers do not
receive a distribution of inputs or assignment of production practices
that cause material differences in performance from other growers to
whom they are being compared and are caused by factors outside of a
grower's control. Material differences in performance are differences
that meaningfully (from the perspective of the grower) impact grower
payments.
To comply with these requirements, LPDs must identify inputs and
flock production practices under their control that impact grower
payment and ensure that these factors do not meaningfully impact grower
payments. LPDs also must improve their monitoring of how inputs and
flock production practices are allocated across growers, and, as
appropriate, adjust such allocations to reduce the unequal distribution
among growers within a settlement group or across a given time period.
An LPD could still provide certain growers with different inputs, for
example because an LPD believed certain growers were better at raising
particular types or quality of birds (e.g., chicks from older hens),
provided it adjusted compensation if material differences in
performance affected the comparison. The LPD would also be free to use
a non-comparison method for those growers.
LPDs must adjust how grower pay is calculated if a fair comparison
is impractical due to unavoidable inequitable allocations. For example,
the LPD may determine that a five-flock average may be appropriate for
determining a grower's pay when the LPD provided chicks for that grower
are later discovered to be diseased, and no fair comparison is
reasonably possible, practical, or appropriate for that grower within
the tournament for that flock. Any adjustment to how grower
compensation is determined must use a non-comparison method specified
in the contract that reflects reasonable compensation to the grower for
its services. The contract should set forth the preferred approach(es)
of the parties. Ensuring that agreed-to payment adjustments are fair
will be part of regular AMS poultry compliance reviews. An average of
the last five settlements by the grower is considered a non-comparison
method for the purpose of the tournament settlement that the grower is
being excluded from, even though the average is affected by the
previous comparisons (unless unusual facts and circumstances call into
question the fairness of such an approach).
Section 201.110(a)(2)(iii) addresses whether the designated time
period used in an LPD's comparison is appropriate, including whether
the LPD uses one or more groupings, rankings, or comparisons of growers
to mitigate the effects of any differences in inputs over the
designated time period. Fair comparison of growers does not require
that LPDs provide all growers precisely equal inputs and identical
production practices for each flock. This rule permits LPDs to minimize
production inefficiencies that would arise from a standard requiring
strict equality in inputs, while avoiding an unfair comparison of
grower performance. If the LPDs compare growers fairly over reasonable
period of time, randomly selecting inputs is one way, in most cases, to
minimize the effect of the flock-to-flock variance in inputs. Companies
may use non-random distribution, including temporarily correct for what
would otherwise be an inequitable distribution of inputs under an
otherwise random system, provided they ensure comparisons are fair.
[[Page 5161]]
AMS considers a period of one year or less to be a reasonable
timeframe across which to compare growers' performance because it
provides sufficient time to limit variation from one event while
ensuring that LPDs treat growers fairly over a reasonable timeline. The
one-year period coincides with commonly used five-flock averages and
with one-year comparisons used in some live poultry growing
arrangements.
Paragraph (a)(2)(iv) of Sec. 201.110 addresses whether conditions
and circumstances outside the control of the LPD render comparison
impractical or inappropriate. A settlement group may have differences
in LPD-provided inputs, LPD-assigned production practices, or other
factors beyond the control of LPDs and growers that render a reliable
comparison impossible. The Secretary will consider the facts and
circumstances applicable to each case. One example might be the
previously described situation where an LPD unknowingly delivered
chicks to a grower that are later discovered to be diseased so that no
fair comparison is possible.
Section 201.110(a)(2)(v) addresses whether an LPD has made
reasonable efforts to resolve in a timely manner grower concerns
regarding the LPD's exercise of discretion over the implementation of
its fair comparison processes. In determining compliance with this
requirement, through compliance reviews or in response to a complaint,
AMS will consider whether an LPD has demonstrated enough responsiveness
and commitment to resolving legitimate concerns to avoid potential
secondary harm to the grower. What constitutes ``reasonable efforts''
and ``timely'' resolution of a grower's concerns will depend on the
facts and circumstances of each case, with particular attention placed
on whether and how the situation adversely impacts the fairness of the
comparison(s) for the grower. For example, if a grower raises immediate
and urgent concerns about feed quality, such as the delivery of feed
meant for older chicks than the grower has, the LPD should have in
place processes to--and in fact, actually--resolve this concern as soon
as possible to minimize any additional undue damage to the grower's
flock due to lack of proper nutrition. If a grower raises concerns
about feed persistently being delivered late or in an insufficient
quantity, the Agency will examine the LPD's ``reasonable efforts''
taken to adjust the delivery method. Additionally, an LPD is prohibited
from retaliating against a grower in any manner for raising concerns as
to whether a fair comparison method was used.
Lastly, Sec. 201.110(a)(2)(vi) states that the Secretary shall
consider any other factor relevant to a fair comparison among broiler
growers in a poultry ranking system. This provision gives AMS the
authority to address any other facts or circumstances that adversely
affected the fairness of the design or operation of the poultry grower
ranking system. AMS will determine compliance by examining the facts
and circumstances, and in particular, whether the LPD took specific
actions to undermine the comparison process. For example, this prong
allows AMS to consider whether an LPD's intentional grouping of certain
growers in a poultry ranking group to manipulate or adversely affect
comparison-based outcomes constitutes a violation of the Act.
When determining whether an LPD has designed and operated its
broiler grower ranking system to provide a fair comparison among
growers, AMS will consider the fair comparison factors set forth in
Sec. 201.110(a)(2) against how and to what degree comparison factors
account for total grower compensation. When relative grower performance
pay accounts for a very small portion of grower compensation, AMS
expects differences in inputs and flock production practices to cause
fewer material differences in pay. AMS expects this dynamic to operate
on a sliding scale; the smaller the role of comparison pay in total
grower compensation, the smaller the effect of variations in inputs and
flock production practices on total compensation. AMS will also
consider the design of the formula to determine its impact on the
magnitude or distribution of compensation, if any.
In some situations, differences among LPD-provided inputs, LPD-
assigned flock production practices, or factors beyond the control of
both LPDs and growers make a reliable comparison impossible,
impractical, or inappropriate for one or more growers. In such cases,
Sec. 201.110(a)(3) requires that an LPD must fairly compensate growers
through a non-comparison method specified in the contract that reflects
reasonable compensation to the grower or growers for their services.
For example, if an LPD is unable to pick up a flock in a timely manner
because of processing disruptions (as occurred during the COVID-19
pandemic), the LPD may remove the grower from the settlement rather
than compare that grower's flock performance against growers delivering
flocks of a significantly different age. In such cases, the LPD must
compensate the grower using a reasonable non-comparison alternative.
Multiple approaches could be considered reasonable depending on the
circumstances, and LPD costs are an appropriate consideration as part
of those particular facts and circumstances. AMS is aware that LPDs
often pay the grower an amount equal to the average rate they received
over their previous five flocks. The non-comparison method is intended
to fairly compensate the grower. Therefore, absent special
circumstances where a rationale and an agreement to do otherwise are
reasonable and appropriate (and documented as such), the non-comparison
compensation method needs to equal or exceed the pay that the
comparison-based compensation rate would have delivered. AMS will rely
on the documentation of written processes set out in Sec. 201.110(b),
as well as the facts and circumstances of specific occurrences, to
evaluate compliance.
ii. Section 201.110(b)--Documentation
Paragraph (b) of Sec. 201.110 details the documentation an LPD
must establish and maintain of its processes for the design and
operation of its poultry grower ranking system for broiler growers that
is consistent with the duty of fair comparison. This paragraph has
changed considerably from the proposed rule to provide greater
flexibility in meeting the terms of this regulation. AMS also revised
paragraph (b) in response to commenters' concerns that the specific
documentation requirements laid out in the proposed rule were very
similar to documentation requirements delineated in existing
regulations at Sec. 201.102(b) and that burdening LPD service
technicians with increased paperwork would take away from their core
responsibilities of attending to the production needs of growers.
In the final rule, Sec. 201.110(b) sets forth documentation
requirements regarding LPDs' duty to ensure the fair design and
operation of broiler grower ranking systems. Under section 401 of the
Act, AMS is authorized to prescribe ``the manner and form in which such
accounts, records, and memoranda shall be kept'' whenever the Secretary
finds that the records of an LPD do not fully and correctly disclose
the LPD's business transactions (7 U.S.C. 221). Paragraph (b)(1)
requires that LPDs establish and maintain written documentation of
their processes for the design and operation of a poultry grower
ranking system that is consistent with the duty of fair comparison.
This rule requires documentation to include
[[Page 5162]]
written processes, referred to as policies and procedures, regarding
the process for (i) inputs under LPD control, (ii) flock production
practices (iii) league composition, (iv) the evaluation period, (v)
non-comparison factors, and (vi) LPD communication and cooperation with
growers. These processes must provide a general description of the
items that the rule requires to be included, with sufficient detail to
provide a typical user of the documentation--such as a local poultry
complex manager that directs the operation of the complex's
tournament--with an understanding of how duty of fair comparison is to
be operationalized within this complex's poultry grower ranking
systems.
To simplify the documentation requirements and minimize paperwork
burdens for poultry complex service technicians, AMS revised paragraph
Sec. 201.110(b)(1)(i), ``Inputs under live poultry dealer control,''
from what was proposed by removing subparagraphs (b)(1)(i)(A) through
(E), which delineated detailed requirements pertaining to
identification, management, and adjustment of differences in input
distribution to growers, and how LPDs adjust compensation calculations
based on the inputs a grower receives. In the final rule, paragraph
(b)(1)(i) contains no subparagraphs and simply requires that the LPD's
written processes include how and when the LPD assigns, adjusts, or
otherwise accounts for similarities and differences of quality and
quantity in the delivery of inputs to growers. The removal of
subparagraphs (A) through (E) simplifies the requirement by including
one all-encompassing requirement that LPDs must explain how they
assign, adjust or otherwise account for similarities and differences of
quality and quantity in the delivery of inputs to growers. Revised
paragraph (b)(1)(i) clearly requires that LPDs address all the ways
that variation in inputs can impact a poultry growing ranking system,
while giving LPDs flexibility in how to mitigate the impact of uneven
distribution of LPD-provided inputs on fair comparison in the
tournament and, hence, comparison-based grower pay. In sum, AMS
determined that the deleted subparagraphs were not needed to establish
that LPDs must explain in their written documentation how they account
for the possible distortions and resulting inequities that can manifest
in poultry grower ranking systems when they fail to properly account
for variations in inputs.
Under paragraph (b)(1)(i), LPDs are required to create a written
process for how and when the LPD assigns, adjusts, or otherwise
accounts for similarities and differences of quality and quantity in
the delivery of inputs to growers. This provision requires LPDs to have
a defined process governing how they will ensure the duty of fair
comparison is met. Such a process needs to explain how the LPD will
operate its poultry complex and its related poultry grower ranking
system, so growers have fair opportunity to compete on a level playing
field in individual flock settlements or in a comparison settlement
that stretches beyond individual flocks, where the impact of variation
in quality, quantity, or timing of inputs may be significantly reduced
or eliminated. LPDs unfairly harm growers when they distribute inputs
in a manner that disadvantages a grower relative to other growers in
said tournament(s) and base their compensation accordingly. Growers
cannot control the nature of the inputs they receive from their LPD,
whether that be quality of chicks or feed, appropriateness of feed
delivered for stage of growth, gaps in feed delivery, or delivery of
veterinary services. Receipt of low-quality, insufficient, or
inappropriate inputs can unfairly impact growers' performance in
tournaments if the LPD does not have appropriate processes in place for
mitigating such variation in input delivery. LPD processes required
under paragraph (b)(1)(i) must include ongoing accounting and
monitoring of inputs supplied to each producer using objective measures
of quality and performance that are generally accepted in the industry.
Such monitoring and accounting should aim for as minimal variation as
possible in input delivery quality or quantity across the members of
one or more grower poultry ranking groups, and appropriate mechanisms
for detecting and correcting for input variations in a timely manner.
Such processes should address key areas of concern, including
allocation of chicks that differ in quality and performance, variation
in quality or quantity of feed, or variation in medication across
grower groupings. LPDs may include policies and procedures for
balancing disparity of inputs either within a single flock or over
multiple flocks as appropriate and feasible.
In the final rule, AMS also simplified Sec. 201.110(b)(1)(ii),
``Flock production practices,'' from that which was proposed. AMS
removed subparagraphs (b)(1)(ii)(A) through (E), which described, in
detail, the processes LPDs must include in the design and operation of
their poultry grower ranking systems pertaining to assignment of flock
density at delivery, timing of pick-up, adjustment of comparison based
on different assignment flock production practices, and adjustment of
compensation calculations based on the grower's receipt of specific
flock production practices. In the final rule, paragraph (b)(1)(ii)
contains no subparagraphs and simply requires that written processes
include how and when the LPD assigns, adjusts, or otherwise accounts
for differences in production practices. The removal of subparagraphs
(A) through (E) simplifies the requirement by including one all-
encompassing requirement that LPDs must explain how they assign,
adjust, or otherwise account for similarities and differences regarding
assignment of flock production practices. Revised paragraph (b)(1)(ii)
clearly requires that LPD address the ways that variation in flock
production practices assigned to growers can impact a poultry growing
ranking system, while providing flexibility on the appropriate
processes LPDs can establish to mitigate the negative impact LPD-
assigned production practices can have on fair comparison in the
tournament(s) and, therefore, comparison-based grower pay. In sum, AMS
determined that the deleted subparagraphs were not needed to establish
that LPDs must explain how they account for the possible distortions
and resulting inequities that can manifest in poultry grower ranking
systems when LPDs fail to account for variations in flock production
practices.
Under paragraph (b)(1)(ii), LPDs must maintain written
documentation of its processes for how and when the LPD assigns,
adjusts, or otherwise accounts for differences in production practices
across growers in a poultry ranking system. Similar to paragraph
(b)(1)(i), such processes should include ongoing monitoring of how
flock production practices are allocated across different growers in
one or more poultry grower ranking systems, and mechanisms for
adjusting for disparities in flock production allocations in a
reasonable time frame such that additional harm does not result. Such
processes governing flock production processes should cover how and
when the LPD assigns density at delivery; how and when the LPD manages
pickup of birds with respect to slaughter weight and bird age; how and
when the LPD adjusts how a grower is compared to other growers with
different assigned flock production practices or otherwise adjusts the
flock production practices the grower receives; any steps the LPD takes
to adjust compensation
[[Page 5163]]
calculations based on suboptimal allocation of flock production
practices to growers; and how and when the LPD minimizes, adjusts, or
otherwise accounts for differences in production practices. LPDs can
unfairly manipulate grower payments when they compare growers even
within a single tournament settlement group within which the LPD has
assigned different types of production practices to growers in the
group. Under this rule, LPDs must develop policies and procedures that
describe the processes for ongoing accounting and monitoring of LPD-
determined flock production practices allocated to each producer. The
LPD's processes must provide a consistent approach to minimize
differences in production practice assignments and describe methods to
compensate growers for differences that result in harms.
In the final rule, AMS also simplified paragraph (b)(1)(iii) of
Sec. 201.110 from what was proposed. In the final rule, AMS removed
subparagraphs (A) through (C) from paragraph (b)(1)(iii) and instead
separated out the requirements into three distinct paragraphs:
(b)(1)(iii), ``League composition;'' (b)(1)(iv), ``Evaluation period;''
and (b)(1)(v), ``Non-comparison.''
Under the final rule, paragraph (b)(1)(iii), ``League
composition,'' requires LPDs to create written processes governing
league composition, which is how LPDs assign groups of growers to
settlement groups. AMS revised this paragraph for simplicity and
readability. Formerly, the provision was contained in paragraph
(b)(1)(iii)(C), reading, ``If the live poultry dealer groups growers
for settlement in any manner other than the one used in recent
settlements, how the dealer determines such groupings.'' Settlement
groupings, also called league composition, are most commonly based on
their chronological availability for slaughter within the complex but
could also be based on housing type or other commonalities across a
group of growers. Generally, the settlement grouping is determined by
flock placement timing, which commonly varies based on the timing needs
of the growers. For example, growers may need additional time between
flocks for cleaning, maintenance, vacation, or other similar reasons.
Paragraph (b)(1)(iii) of this rule serves to identify practices or
circumstances that diverge from these ordinary reasons for determining
settlement groupings. While legitimate reasons exist for deviating from
a strict chronological availability-based grouping, this provision is
principally meant to ensure that LPDs do not use league composition to
interfere with fair comparison by intentionally grouping specific
growers together to lower the pay of one or more members of the
settlement group, or to otherwise manipulate pay to deliberately
benefit certain growers over others.
Under Sec. 201.110(b)(1)(iv) of the final rule, ``Evaluation
period,'' the LPD is required to maintain written documentation of how
it establishes a reasonable time period over which the LPD evaluates
the duty of fair comparison. This provision was proposed with slightly
different phrasing as paragraph (b)(1)(iii)(A). This provision requires
the LPD to describe its process for how it determines the number of
settlement groupings over which grower comparisons will be made. The
duty of fair comparison requires that LPDs design and operate their
poultry growing ranking systems to provide a fair comparison among
growers. This means that the comparison must genuinely reflect effort
by the growers, not variability in inputs or flock production
practices, which are outside of the growers' control and thus not
criteria that form the basis of a fair comparison. It may be that over
the course of a year variations in inputs or flock production practices
will cancel each other out. The evaluation period must account for the
length of its growers' contracts and the reasonable expectation of
renewal. If the duty of fair comparison requires five flocks, then the
contracts need to span at least five flocks, or if they do not, there
must be a very high likelihood that the contract will be renewed such
that the growers will receive the five flocks and thus be subject to a
fair comparison that evens out fluctuations in input quality or
quantity or flock production practices.
In the final rule, Sec. 201.110(b)(1)(v), ``Non-comparison,''
requires that an LPD's written processes explain when the LPD might
remove a grower from a ranking group, and how the LPD will compensate
growers removed from a ranking group to satisfy the non-comparison
compensation method required under Sec. 201.110(a)(3). This provision
was proposed as paragraph (b)(1)(iii)(B) in similar language. There are
myriad reasons why an LPD may decide to remove a grower from a ranking
group. For example, LPDs may not have enough comparable growers with
which to make a reliable comparison in the current grouping and may use
growers settling in previous periods to make a reliable comparison.
Likewise, a specific grower may have received undesirable inputs or an
assignment of production practices that materially impacted the
grower's performance, necessitating the removal of the grower from the
grouping and compensation under a non-comparison compensation method.
Under this provision, the LPD is required to explain how and when the
LPD removes a grower from a ranking group because the grower received
unfavorable inputs or production practices and how it will fairly
compensate such growers through a non-comparison compensation method.
In the final rule, Sec. 201.110(b)(1)(vi), ``Communication and
cooperation,'' is very similar to the provision as proposed, with the
only notable change being the paragraph designation: in the proposed
rule, the paragraph was designated paragraph (b)(1)(iv); in the final
rule, the paragraph is designated paragraph (b)(1)(vi). This paragraph
requires LPDs to create written processes for how the LPD will resolve
a grower's concerns with the LPD's exercise of discretion over the
implementation of the policies required by this section, including the
timeliness of the resolution. A tournament system cannot be fair if it
fails to permit growers to contest, without fear of retribution,
negligent or malicious actions taken by the LPD that may impact grower
performance. The rule provides flexibility on how LPDs can satisfy this
requirement. A range of procedures are available, such as timely
communication with complex management, communication with LPD
headquarters, and grower councils, wherein disputes are resolved with
input from other growers. The implementation of processes to manage and
resolve grower disputes can serve to alert LPDs to potential unfairness
in their comparison of growers and enable them to resolve issues in a
timely manner.
In the final rule, AMS removed proposed Sec. 201.110(b)(2),
``Compliance review.'' In the proposed rule, this paragraph delineated
detailed compliance review procedures for the processes set out in
paragraph (b)(1) of this section. AMS removed this requirement in
response to comments that such self-audits are a somewhat burdensome
requirement for LPDs that can be eliminated with minimal effect on
effective compliance. Rather than requiring self-audits, AMS will
review the policies and procedures required under Sec. 201.110(b)(1)
through its ongoing compliance review process. This will ensure regular
review of LPDs' compliance with the provisions of this
[[Page 5164]]
regulation with minimal additional recordkeeping burden on LPDs.
In the final rule, Sec. 201.110(b)(2), ``Record retention,''
mirrors that which was proposed, with the only notable change being the
paragraph designation: in the proposed rule, the paragraph was
designated paragraph (b)(3); in the final rule, the paragraph is
designated paragraph (b)(2). This paragraph requires LPDs to retain all
written records relevant to their compliance with paragraph (b) for no
less than five years from the date of record creation. These records
should be made available to AMS upon request. Relevant records include,
for example, copies of existing processes (policies and procedures);
written documentation of LPD processes used within the last five years,
including documentation of inputs and flock production practices
provided to growers; written documentation of league composition;
written documentation of grower complaints and their resolution; board
minutes discussing compliance with this section for five years from the
date of the board meeting; current and expired grower contracts for
five years for the date of last effectiveness of the contract;
disclosures provided to growers for five years from the date of the
disclosure is provided to the grower; information on payments to
growers or other forms of adjustment made to ensure a fair tournament,
etc. Under the regulation, LPDs must retain these records for five
years to enable the Agency to monitor the evolution of compliance
practices over time in this area and to ensure that records are
available for what may be complex evidentiary cases. As noted earlier
in this section, section 401 of the P&S Act authorizes AMS to prescribe
the manner and form in which LPDs keep business records. This
recordkeeping requirement will enhance LPD management's ability to
establish and monitor compliance, as well as AMS's ability to supervise
and enforce the rule.
iii. Compliance and Enforcement
Compliance with Sec. 201.110(b) requires LPDs to retain records
that document the LPD's design and operation of broiler grower ranking
systems in a manner that is consistent with the duty of fair
comparison. These policies and procedures are necessary to document
compliance precisely because the options for delivering a fair
comparison are so diverse. Policies and procedures developed pursuant
to this rule should describe the LPD's framework for assigning inputs
and LPD-determined flock production practices, comparing grower
performance, and resolving growers' concerns regarding the LPDs'
implementation of its policies and procedures. Recordkeeping should
enable periodic review by the LPD to examine and report on the LPD's
compliance with its established written processes and, as such, with
its compliance with the duty of fair comparison.
Enforcement of Sec. 201.110 can occur in several ways. Growers can
contact AMS-PSD to submit a complaint regarding an alleged violation of
Sec. 201.110. PSD would then investigate, which could lead to referral
to DOJ for appropriate action or, where failure to pay is implicated,
to USDA enforcement through administrative action.\25\ AMS will also
review LPD contracts, along with other required records from the LPD,
in connection with routine compliance reviews and investigations to
ensure LPD compliance. Injured individuals also have a right to proceed
directly in Federal court.
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\25\ Additional information on reporting violations of the P&S
Act can be found here: <a href="https://www.ams.usda.gov/services/enforcement/psd/reporting-violations">https://www.ams.usda.gov/services/enforcement/psd/reporting-violations</a> (last accessed 11/13/2023).
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C. Broiler Grower Capital Improvement Disclosure Document (Sec.
201.112)
AMS is finalizing new Sec. 201.112, ``Broiler grower Capital
Improvement Disclosure Document,'' which requires that LPDs provide
growers with a Capital Improvement Disclosure Document (Disclosure
Document). Paragraph (a) requires that when an LPD requests that a
grower make an additional capital investment, the LPD must provide the
grower with a Disclosure Document. Paragraph (b) describes the required
disclosures in the Disclosure Document. AMS made slight modifications
to provisions of paragraph (b), which will be described below. AMS also
modified proposed Sec. 201.112 in response to public comment by adding
a new paragraph (c), which requires the LPD to assist with translating
the Disclosure Document.
The inclusion of Sec. 201.112 is necessary because LPDs often
request or require that growers make costly additional capital
investments, which may benefit LPDs and growers in some ways, but may
also be problematic and unfair. The LPD requesting an additional
capital investment may be deploying bargaining leverage and forcing the
grower to bear unreasonable risk, and the purposes, processes, and
outcomes of the additional capital investment may be opaque,
complicated, or otherwise difficult to evaluate. Additional capital
investments can also further serve to lock in growers to specific LPDs,
making it harder to switch. Growers, however, are often not in a
position to choose not to make an additional capital investment. Many
growers come under significant pressure from LPDs to make a requested
additional capital investment. Even when a grower has sufficient
bargaining leverage to negotiate the terms of compensation, the LPD may
not provide sufficient information for the grower to assess the full
risk and reward of undertaking the additional capital investment.
Indeed, based on AMS's knowledge of industry disclosure practices and
decades of hearing complaints from growers, growers today often
undertake additional capital investments for the LPD without the
opportunity to fully understand the additional capital investment's
purpose, design, risks, and impacts on their financial well-being; or,
are pressured in some way to make those investments.\26\ Information
asymmetry impairs growers' ability to negotiate, effectively exercise
independent decision-making to reject an additional capital investment,
and, more broadly, manage their farming operation upon choosing
[[Page 5165]]
to make the additional capital investment. When information asymmetries
prevent growers from evaluating whether they are able to recoup their
investment or whether they can engage in other farming practices that
could achieve the goals of the additional capital investment, growers
cannot effectively protect their financial interests or freely exercise
decision-making with respect to their farming operation. Growers and
AMS may also be unable to identify circumstances where LPDs are seeking
to compete through additional capital investment practices that shift
or hide costs to growers, which subverts the competitive process.
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\26\ MacDonald, James M. 2014, Technology, Organization, and
Financial Performance in U.S. Broiler Production, EIB-126, USDA
Economic Research Service, <a href="https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6">https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6</a> (In a 2011 survey of
contract growers, sixty percent of growers making any capital
expenditures reported that the LPD required those expenditures).
AMS-FTPP-22-0046-0799 (``Poultry companies require capital
improvements that do not improve my bottom line. I must pay for the
capital improvements, which may not be a capital improvement that
will benefit my operation. It will not benefit the quality of the
bird. The benefit is not clearly proven or explained, just I am
required to make the improvement or get paid less or dropped as a
grower.''); AMS-FTPP-22-0046-0737 (``For years, I've been forced to
upgrade my farms facilities at my own expense just to maintain
contracts. These costly and often unnecessary upgrades, dictated by
companies like [name redacted], have left me in debt and struggling
to cover basic expenses. The financial burden is unsustainable and
has made it incredibly challenging to keep my farm afloat''); AMS-
FTPP-22-0046-0176 (``For way too long these poultry integrators have
been let off the hook for bullying, forcing their contract growers
into making large investments in upgrades that will never see a
payback beyond the initial investment to build the infrastructure to
keep their growers under their total control and blaming growers for
everything that goes wrong . . .''). United States Department of
Justice, United States Department of Agriculture, (May 2010), Public
Workshops Exploring Competition in Agriculture, <a href="https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10">https://www.justice.gov/archives/atr/events/public-workshops-agriculture-and-antitrust-enforcement-issues-our-21st-century-economy-10</a> (``It's
typical for growers to be asked to do expensive upgrades on their
poultry houses before this first loan of this building has been paid
off. I know because I was one of those growers. The threats put
before you, the communication, the threat is put before you, if you
do not do this, they're not going to bring you any more chickens to
grow'').
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AMS has identified as deceptive those LPD contracting practices
that fail to disclose key information about additional capital
investments. Growers make critical investment decisions in reliance on
the information required by this rule, most of which is not currently
provided by LPDs. AMS emphasizes that disclosure under new Sec.
201.112 is not, and is not intended to be, a remedy to unfairness in
and of itself; rather, disclosure provides AMS and growers with
information necessary to enforce their rights under existing Sec.
201.216, ``Additional capital investments criteria,'' and the P&S Act
more broadly, when terms are unfair. Without sufficient, simple, and
clear disclosures, growers cannot assess the benefits or risks of
making the investment. Indeed, given the role of performance pay in
determining total grower compensation under the tournament, some
voluntary additional capital investments may seem mandatory if growers
want to maintain existing revenue levels, even if growers don't fully
understand the purposes and expected outcomes of the requested
additional capital investment. Furthermore, growers experience
considerable pressure to accept LPDs' additional capital investment
requests given LPDs' market power, or substantial bargaining power, and
growers' relatively weak market position, including commonly a lack of
meaningful choice among LPDs. A majority of broiler growers cannot
change LPDs if their current relationship sours.\27\
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\27\ MacDonald, James M. 2014. Technology, Organization, and
Financial Performance in U.S. Broiler Production, EIB-126, USDA
Economic Research Service (Roughly 22 percent of growers operate in
a pure monopsonistic local market, and that 52 percent of broiler
growers (farms), accounting for 55 percent of broilers produced and
56 percent of total production, report having only one or two LPDs
in their local areas).
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AMS notes that the existing regulation in Sec. 201.216 is intended
to allow the Agency to partially mitigate additional capital investment
problems for growers. The existing regulation sets forth criteria for
whether additional capital investments would be an unfair practice or
other violation of the Act, including whether the grower can decide
against the additional capital investments; whether the additional
capital investments were a result of coercion, retaliation, or threats
by the LPD; and whether the additional capital investments can result
in reasonable recoupment, or adequate compensation for the additional
capital investments, among other non-exhaustive criteria. However, AMS
has found that the presence of the criteria alone is insufficient to
effectively address problems stemming from additional capital
investments. For example, insufficient information about additional
capital investments impacts the criteria at Sec. 201.216(a) that seek
to preserve the grower's discretion to decline an additional capital
investment. Lacking sufficient information about additional capital
investments, a grower cannot effectively assess whether they would
still be able to compete against other growers without the additional
capital investment.
The Act requires production contracts to disclose the possibility
of additional capital investment (7 U.S.C. 197a(b)). However, the
majority of contracts contain no information relating to when or how
additional capital investments may be required, nor the costs or risks
of any such additional capital investment, nor what, if any, limits
there are on an LPD's ability to unilaterally impose additional capital
investments that do not materially improve production efficiency or
meet consumer demands. To better enable growers and AMS to guard
against unfairness and to prevent deception, LPDs must disclose more
information regarding the purposes, processes, and outcomes of
additional capital investments they request from broiler growers. The
disclosures must occur before growers take on the financial burden and
risks of the additional capital investment. The provision of such
information is not, in and of itself, the cure for unfairness, but
rather a key tool for AMS and growers to halt abusive practices by
arming them with the ability to identify those challenges sooner. The
disclosures required in Sec. 201.112 accomplish these goals.
Furthermore, the act of disclosing information does not, in and of
itself, render the action lawful. Even if disclosed, certain actions
may be unfair or deceptive practices under the P&S Act. Disclosure
alone does not mitigate the legal or ethical ramifications of such
practices.
The Agency has an existing regulation, 9 CFR 201.216, which sets
forth a non-exclusive list of criteria the Secretary may consider in
determining if a required additional capital investment violates the
Act. In future cases, the Sec. 201.112 disclosures on additional
capital investments will improve the Secretary's analysis of Sec.
201.216. Whether the Secretary considers recoupment of the additional
capital investment to be reasonable includes consideration of the
projected returns under Sec. 201.112(b)(6), the contract terms, and
the return to an average grower operating under the LPD's contract. AMS
underscores the importance of length of the contract to secure a full
opportunity for recoupment. AMS recognizes that growers in many
instances cannot avoid the LPD's unfair exercise of market power or
bargaining leverage, and that the LPD failing to sufficiently and
fairly compensate growers for an additional capital investment is not a
cognizable benefit to growers or to competition.
i. Section 201.112(a)--Disclosure Requirement
In the final rule, paragraph (a) of Sec. 201.112 requires that
when an LPD requests that a broiler grower make an additional capital
investment, the LPD must provide the broiler grower with a Disclosure
Document that contains the information required by paragraph (b) of
this section. AMS slightly modified this provision from the proposed
rule by adding the paragraph heading, ``Disclosure requirement.''
Information provided in the Disclosure Document will help growers
protect themselves at an earlier stage--before the investment--from
unfair practices, by enabling them to report to AMS potentially unfair
additional capital investment practices or bring their own action.
Improved documentation will also enable AMS to take earlier and more
effective action against problematic additional capital investment
practices. Transparency will also enable some growers, where sufficient
choice exists, to make better additional investment decisions.
Importantly, clear disclosure of additional capital investment
parameters will enhance growers' ability to enforce their rights
relating to unfair practices under Sec. 201.216 (such as recoupment
and discretion to refuse to make an additional capital investment), as
well as other provisions of the P&S Act and regulations. Disclosure
alone is
[[Page 5166]]
not a remedy for an additional capital investment that is unfair, but
the disclosures required by new Sec. 201.112 will create a record that
will facilitate the Agency's ability to enforce the Act under existing
Sec. 201.216.
This requirement applies prospectively to requests for additional
capital investments. However, if the LPD has previously provided any
disclosure to the grower that was incomplete or inaccurate, the company
should consider revising it and providing an updated copy to the grower
to minimize the risks of having engaged in a violation of deceptive
practices.
ii. Section 201.112(b)--Disclosure Contents
Section 201.112(b) lists the items the Disclosure Document is
required to disclose. AMS slightly modified this provision from the
proposed rule by adding the paragraph heading, ``Disclosure contents.''
The required disclosures must be prominently presented in a clear,
concise, and understandable manner. Paragraph (b)(1) requires that the
Disclosure Document provide the purpose of the additional capital
investment for both the LPD and the grower and a summary of all
research and other supporting material that the LPD has relied upon in
justifying the additional capital investment. LPDs almost always have
superior information regarding the outcomes of and risks around the
contemplated additional capital investment. LPDs commonly research and
design additional capital investments and usually have a plan or
intended outcomes with respect to their request for the adoption of an
additional capital investment. Growers have limited to no access to
that information, yet they are often asked to expend hundreds of
thousands or even millions of dollars to implement additional capital
investments. As part of any assessment of risks or benefits relating to
an additional capital investment, growers must be provided the
information necessary to understand the intended purpose of the
additional capital investment and have access to any research or other
supporting material regarding that additional capital investment. For
example, growers may make different decisions about their approach to
additional capital investment depending on whether it is intended to be
performance-enhancing (e.g., tunnel ventilation), whether it is
intended to enable a change in the product offered (e.g., a switch to
``No Antibiotics Ever''), or whether it changes the nature of the
controls and risks (e.g., automation and monitoring). Omissions of this
information prevent growers from making an informed business decision,
negotiating effectively for adequate compensation, or determining if
and how the original bargain for exchange has been modified or altered.
Thus, an LPD's failure to adequately disclose this information is
deceptive and harmful to growers because that failure imposes undue
financial risk and increases the likelihood of a poor financial outcome
on the investment.
Paragraph (b)(2) of Sec. 201.112 requires LPDs to provide clear
additional capital investment financial incentives and schedules to
growers. Under paragraph (b)(2), LPDs are required to disclose to the
grower all financial incentives and compensation associated with the
additional capital investment. The Disclosure Document shall clearly
delineate how long such financial incentives or changes in grower
compensation will last and the degree to which benefits accruing to
growers making such investments are contingent on how widely they are
adopted by other growers. Compensation and financial incentives are
broad terms and may include changes to grower base pay or performance
pay, payments specifically linked to adoption of the particular
technology resulting from the additional capital investment, and any
other changes to the economics of the grower's relationship with the
poultry company associated with making the additional capital
investment or its implementation once made. Clearly disclosing
financial incentives will assist the grower in assessing the relative
risks of non-recoupment, as the reliability of those incentives may
vary based on the duration of the contract and whether other growers
are likely to incorporate the additional capital investment technology
in a way that would make recoupment through performance pay less
reliable.
Paragraph (b)(3) of Sec. 201.112 requires that LPDs disclose all
construction schedules related to the request for the additional
capital investment. Clearly disclosing expected grower construction
schedules and other repayment schedules also will assist the grower in
assessing incentives and risks relating to borrowing, construction, and
payment timing. This disclosure will position growers to better analyze
the business risk in undertaking an additional capital investment,
including the operational risks relating to implementing the additional
capital investment and risks of LPD strict enforcement of these
implementation requirements. For example, comments (discussed in
further detail below in section V., ``Comment Analysis'') noted
concerns about LPDs not being sufficiently lenient regarding
construction schedules. By enabling growers to clearly understand each
component of the additional capital investment requested by the LPD,
the required disclosures will address key information asymmetries that
exist between the LPD and the grower with respect to LPD's purposes,
bases, and expectations for an additional capital investment. Growers
will be better positioned to evaluate the true costs and risks from the
additional capital investment, as well as the operational implications
for their farming enterprise.
As proposed, paragraphs (b)(1) through (3) of Sec. 201.112
included language requiring that LPDs describe within their Disclosure
Document: (1) ``any relevant'' research or other supporting material
that the LPD has relied upon in justifying the additional capital
investment; (2) ``all relevant'' financial incentives and compensation
for the grower associated with the additional capital investment; and
(3) ``all relevant'' construction schedules related to the request for
additional capital investment. After consideration and review of public
comments, it became clear that the term ``relevant'' as proposed was
ambiguous and confusing. Commenters expressed uncertainty regarding how
to determine compliance with these requirements. Some stakeholders
believed that the term ``relevant'' created an ambiguous requirement
that could result in the inclusion of unnecessary documents that may
not in fact be ``relevant'' to satisfy the required disclosures. AMS
finds these comments persuasive and, thus, AMS has struck the term
``relevant'' from paragraphs (b)(1) through (3) of Sec. 201.112. After
the change, paragraphs (b)(1) through (3) require LPDs to submit: (1)
all research and other supporting material that the LPD has relied upon
in justifying the additional capital investment; (2) all financial
incentives and compensation for the grower associated with the
additional capital investment; and (3) all construction schedules
related to the request for additional capital investment. The removal
of the word ``relevant'' will ease the burden on LPDs by removing
ambiguity regarding which disclosures are required to be included in
the Disclosure Document. This technical change does not increase the
burden of the disclosure requirement; it merely removes ambiguous
phrasing while retaining the same disclosure requirement proposed in
the proposed
[[Page 5167]]
rule. This change will prevent inconstancies in LPDs' interpretation of
what disclosures are required by paragraphs (b)(1) through (3).
In the final rule, Sec. 201.112(b)(4) requires that LPDs disclose
their expectations regarding housing specifications associated with the
additional capital investment. LPD housing specifications are critical
components to any additional capital investment. The provision of these
basic details regarding the additional capital investment will enable a
grower to understand the workings, process, and design characteristics
of the requested additional capital investment. They thus would enable
a grower to identify business risks associated with undertaking the
additional capital investment, as well as any unfair or otherwise
impermissible additional capital investment practices prohibited under
Sec. 201.216. This provision remains unchanged from the proposed rule.
In the final rule, AMS revised Sec. 201.112(b)(5). As proposed,
paragraph (b)(5) required that LPDs disclose any required or approved
manufacturers or vendors. In the proposed rule, AMS solicited comment
on whether paragraph (b)(5) should also require the disclosure of any
material financial benefits that the LPD, or any officer, director,
employee or family member of any such person, receives from the use of
the required or approved vendor.\28\ Commenters indicated that LPDs
should not be allowed to require growers to use certain equipment or
vendors, especially when those LPDs hold any amount of financial
interest in those equipment companies or specifically required vendors.
Therefore, in the final rule AMS expanded paragraph (b)(5) to require
disclosure not only of required or approved manufacturers or vendors,
but also all financial benefits that the LPD or any officer, director,
decision-making employee, or close family member thereof receives from
the use of the required or approved manufacturer or vendor.
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\28\ 89 FR 49002, 49025 (June 10, 2024).
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In the additional capital investment Disclosure Document, the LPD
must disclose any required or approved manufacturers or vendors, and
any financial benefits that the LPD or its officers (such as CEO,
President, Secretary, etc.), members of its board of directors,
decision-making employees, or close family members of any such person,
will receive from using such a manufacturer or vendor. Decision-making
employees refers to those employees who are involved with the decision-
making for the additional capital investment and its implementation. A
close family member covers an immediate or other family member where a
reasonable person would question the impartiality of the business
judgment of the decision-maker. This component of the Disclosure
Document applies to possible conflicts of interest that may influence
specifications for required or approved manufacturers or vendors.
The additional language is similar to an existing disclosure
requirement under the Federal Trade Commission's Franchise Rule, but
requires disclosure of benefits from more individuals.\29\ AMS found
this addition persuasive because it is designed to promote a similar
purpose by protecting the more financially vulnerable party--who is
making a significant investment--from incurring debt or otherwise
expending scare resources, not solely to achieve the investment's
purpose, but rather as a reflection of the presence of a conflict of
interest on the part of the less financially vulnerable party (the
LPD).
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\29\ 16 CFR 436.5(h)(6).
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Section 201.112(b)(6) requires that LPDs provide a financial
analysis of projected returns the grower can expect related to the
additional capital investment, including any assumptions, risks, or
uncertainties, sufficient to allow the grower to make their own
projections. The language of the final rule is slightly simplified from
that proposed to remove the hyphenated text and incorporate that same
language closer to the end of the sentence. This technical change
improves the readability of the provision without changing its meaning
as proposed. This provision is designed to enable the grower to
evaluate the reliability of the financial returns that the grower could
receive over the duration of the contract. Such information would
include, where relevant, assumptions regarding the expected likelihood
of whether other growers will adopt the additional capital investment
and the impacts on the reliability of returns in relation to the
incentives. Financial analysis of projected returns is critical to
enabling growers to understand the opportunities, and hence the risks,
they may be taking on. For example, revenue projections should include
assumptions that can be relied upon by growers in relation to annual
flock placements, stocking density, and the expected distribution of
performance pay. Omission of this information is central to the
inability for growers to effectively identify whether they can
adequately recoup the additional capital investment or whether the
additional capital investment is otherwise unfair.
Disclosure under Sec. 201.112 is more detailed than LPD disclosure
under the existing regulation in Sec. 201.102(d)(2). The existing
disclosures provide guidance to the grower with respect to the relative
risks associated with contracting with the LPD to prevent deception
before it harms the producer. The disclosures required in this final
rule focus on ensuring that growers are aware of known or reasonably
expected sources of returns, risks, and costs (including costs such as
labor, operating, maintenance, and other costs associated with a
request for an additional capital investment). Thus, Sec.
201.102(d)(2)(i) and (ii) \30\ is a focused revenue disclosure, and
references situations where contracts are modified due to additional
capital investment or otherwise and requires a projection from LPDs
when contract modifications dilute the value of the 5-year revenue
tables required in Sec. 201.102(d)(1). If Sec. 201.112 is applicable
to the LPD and incorporates what is otherwise required under Sec.
201.102(d)(2)(i) and (ii), the LPD can use one set of disclosures for
both Sec. 201.112 and Sec. 201.102(d)(2)(i) and (ii).
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\30\ (2) If poultry housing specifications for broiler growers
under contract with the complex are modified such that an additional
capital investment may be required, or if the 5-year averages
provided under paragraph (d)(1) of this section do not accurately
represent projected grower gross annual payments under the terms of
the applicable broiler growing arrangement for any reason, the live
poultry dealer must provide the following information:
(i) Tables providing projections of average annual gross
payments to broiler growers under contract with the complex with the
same housing specifications for the term of the broiler growing
arrangement at five quintile levels or by mean and standard
deviation expressed as dollars per farm facility square foot.
(ii) An explanation of why the annual gross payment averages for
the previous 5 years, as provided under paragraph (d)(1) of this
section, do not provide an accurate representation of projected
future payments, including the basic assumptions underlying the
projections provided under paragraph (d)(2)(i) of this section.
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Finally, Sec. 201.112(b)(7) requires that LPDs include in the
Disclosure Document a specific statement that the Disclosure Document
has not been reviewed by USDA, and that false and misleading statements
or material omissions may violate State and/or Federal laws.\31\ The
statement must also indicate that violations of Federal and State laws
may be determined to be unfair, unjustly discriminatory, or
[[Page 5168]]
deceptive and unlawful under the P&S Act, as amended. AMS does not
intend for the Disclosure Document to be a means by which LPDs may
waive any unfairness provisions in law or regulation. AMS maintains
that a determination of unfairness is dependent on the facts and
circumstances of each case. The required statement must also include
Packers and Stockyard Division contact information that growers can use
to report violations and other concerns. Lastly, the statement must
provide website contact information for those seeking additional
information on rights and responsibilities under the P&S Act. This
provision is unchanged from the proposed rule.
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\31\ This mirrors language in the FTC Franchise Rule at 16 CFR
436(e)(2) that refers to the FTC's position on Francise Disclosure
Documents (FDDs), specifying that while the FTC requires franchisors
to provide accurate disclosures, it does not verify the content of
the FDD, nor does it endorse the franchise offering.
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AMS underscores that the information required to be set out in the
Disclosure Document is not currently provided to most growers or in all
circumstances. These omissions present material risk of deceiving
growers, as well as subjecting them to potentially unfair practices
which they are unable to identify at an early enough stage to halt them
in their incipiency.
iii. Section 201.112(c)--Translation
In the final rule, Sec. 201.112 contains a new paragraph (c). In
the proposed rule, AMS asked commenters what considerations, if any,
AMS should take into account with respect to the timing, delivery, or
readability with respect to the Disclosure Document.\32\ AMS also
specifically asked commenters whether it should include a provision
requiring that LPDs make reasonable efforts to assist growers in
translating the Disclosure Document and to ensure that growers are
aware of their right to request translation assistance.\33\ In response
to the proposed rule, including specific questions posed related to
translation, some commenters requested that translations of the
Disclosure Document be made available in languages other than English.
Therefore, AMS is adding paragraph (c) to Sec. 201.112, which requires
that, upon delivery of the Disclosure Document to the grower the LPD
must make reasonable efforts to ensure that the grower is aware of
their right to request translation assistance and must assist the
grower in translating the Disclosure Document. Reasonable efforts
include, but are not limited to, providing current contact information
for professional translation service providers, trade associations with
translator resources, relevant community groups, or any other person or
organization that provides translation services in the poultry grower's
geographic area. Depending on the facts and circumstances (such as
convenience, expense, and timeliness of the translation), reasonable
efforts may also include allowing the grower access to a computer-
generated translation of the Disclosure Document and additional time to
review any translated Disclosure Document. An LPD may not restrict a
broiler grower or prospective broiler grower from discussing or sharing
the Disclosure Document for purposes of translation with a person or
organization that provides language translation services. Nothing in
the rule prevents companies from providing a translation, provided it
is complete, accurate, and not misleading.
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\32\ 89 FR 49002, 49025 (June 10, 2024).
\33\ Ibid.
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This addition of translation assistance is necessary because
language barriers can prevent poultry growers from understanding the
Disclosure Document, which would thwart the purpose of Sec. 201.112.
If growers do not have a reasonable opportunity to understand the
Disclosure Document due to language barriers, the goal of remedying
deception is thwarted. Notably, the translation requirements under
Sec. 201.102(g)(4) apply to Sec. 201.112 if the latter is applicable
to the LPD and incorporates what is otherwise required under Sec.
201.102(d)(2)(i) and (ii) in a single disclosure that meets the
requirements of both Sec. 201.112 and Sec. 201.102(d)(2)(i) and (ii).
iv. Compliance and Enforcement
Compliance with Sec. 201.112 requires LPDs to include the
information and topics described in Sec. 201.112(b)(1) through (7) in
the Disclosure Document and provide that document to growers when
requesting an additional capital investment. LPDs are also required to
inform growers of their right to request translation assistance and/or
assist growers with translation of the Disclosure Document, if
necessary.
Enforcement of Sec. 201.112 could occur in several ways. Growers
could contact AMS (PSD) to submit a complaint regarding an alleged
violation of Sec. 201.112. PSD would investigate, which could lead to
a referral to DOJ for appropriate action or, where failure to pay is
implicated, USDA enforcement through administrative action.\44\ As
necessary for compliance enforcement or during investigations, PSD will
review Disclosure Documents to ensure completeness. Injured individuals
also have a right to proceed in Federal court.
D. Severability (Sec. 201.290)
AMS is adding Sec. 201.290, ``Severability,'' to subpart N to
confirm that if any provision of this rule, any component of any
provision, or any provision of subpart N is declared invalid or if the
applicability thereof to any person or circumstances is held invalid,
it is AMS's intention that the validity of the remainder of the
provision or the applicability thereof to other persons or
circumstances shall not be affected thereby with the remaining
provision, or component of any provision, to continue in effect. Such a
provision is typical in AMS regulations that cover different topics and
is included here as a matter of housekeeping.
This rule aims to address different harms common in the broiler
production industry: lack of payment transparency in broiler growing
arrangements, unfairness in tournament operations, and lack of
disclosure from LPDs regarding additional capital investments. Each of
the new sections can operate independently in the absence of the
others. Conduct that violates one section is not dependent on
protections put in place by other sections. For example, if an LPD
discounts the rate of compensation provided in a broiler grower
arrangement in violation of Sec. 201.106, the Agency would still be
able to enforce this provision even if the provision requiring the fair
operation of broiler grower ranking systems (Sec. 201.110) were struck
down. These are not inextricably connected regulations: Sec. 201.110
focuses on establishing a fair comparison among growers in a
tournament, while the focus of Sec. 201.106 is ensuring clear (no
discounting) and reliable (not unreasonably variable) rates of
compensation disclosed in the contract. As another example, if the
provision regarding additional capital investments (Sec. 201.112) was
struck, AMS would still retain criteria under Sec. 201.216 to evaluate
whether requiring an additional capital investment constitutes a
violation of the P&S Act.
AMS intends that the severability provision operate to the fullest
extent possible. For example, under Sec. 201.110(b)(1), ``Policies and
procedures,'' if the league composition requirement in paragraph
(b)(1)(iii) is severed, this does not necessarily negate the benefits
or make unenforceable the other processes requirements contained in
paragraphs (b)(1)(i) (inputs under LPD control), (ii) (flock production
practices under LPD control), and (iv) (evaluation period), etc.
Similarly, AMS intends that the severability provision apply to all of
subpart N. If one of the new regulations implemented via this final
rule is severed, this does not make
[[Page 5169]]
unenforceable the existing provisions in subpart N. In other words, if
the benefits of a section in subpart N remain intact without the
unenforceable provision, AMS's intent is to retain the enforceable
provisions of the section. AMS notes that this discussion is
illustrative and not exhaustive.
V. Comment Analysis
Overview
The Poultry Grower Payment Systems and Capital Improvement Systems
proposed rule, published on June 10, 2024, received 758 comments, some
with multiple signatories, over a 60-day comment period. Of these
comments, 671 were in clear support of the rule (the majority of these
consisting of form letters from advocacy campaigns), while 13 comments
were in clear opposition to the rule and the remaining 74 were
ambiguous or unclear. A variety of stakeholders commented on the
proposed rule, including farmers' coalitions, government entities,
advocacy organizations, industry trade organizations, processors,
producers, and other non-affiliated, individual parties. Topics that
garnered considerable attention in the proposed rule, both positive and
negative, included the rate of compensation, transition and
implementation costs, the duty of fair comparison, and reasonable
recoupment of required additional capital investments. A common theme
among the majority of supportive comments, particularly by growers, was
the fear of retaliation underlying their concerns about LPD practices.
Many farmers' coalitions, advocacy groups, and individual producers
argued that LPDs would easily find ways to deny producers fair payment,
especially during the industry's transition to adopt the proposed
changes. For example, while many commenters supported Sec. 201.106's
25 percent comparison-based compensation presumption, most of these
supporters requested other changes to the final rule, such as requiring
performance-based pay to be applied at the individual level and pairing
it with a requirement of a fair minimum base pay. Other common
recommendations for financial safeguards included making the option for
non-comparison-based pay more accessible to producers and requiring
that producers' contracts be long enough to ensure a reasonable rate of
return for their loans.
Another common theme among commenters was the fear of LPD
retaliation against producers who made unfairness claims, requested
non-comparison-based pay, refused to take on an additional capital
investment, etc. Many individual producers shared personal experiences
of retaliation, often in the form of intentionally unequal inputs and
threatened or actual contract termination, for speaking out against
unfair practices. Many commenters emphasized the inherent power
imbalance between both parties, pointing out that producers, who carry
high amounts of debt, depend on LPDs for paying down the debt.
Moreover, commenters described feeling or receiving intimidation
against making unfairness claims and pressure to adhere to unfair
terms. For instance, commenters described receiving unexpected
deductions or variability in pay and had no choice but to accept their
circumstance. Commenters recounted struggling to make ends meet as a
result. If they ranked lower than other growers for one or more
settlements, the resulting decrease(s) in compensation left them unable
to afford necessary expenses. Some commenters stated that experiencing
these losses forced them to sell their families' farms, driving them
out of the industry entirely. Many commenters requested that the final
rule include specific protections against retaliation for producers who
made unfairness claims against their LPD or who refused to take on an
additional capital investment required by their LPD. Many other
commenters requested greater protections for producers who receive
unequal inputs from their LPDs, describing numerous input variables
that can be and have been exploited by LPDs to deliberately lower
producers' placement in their tournament.
Conversely, comments in opposition, many from industry
representatives, defended the current system and expressed concerns
about the proposed rule. These commenters asserted that the rule is
unfair to growers who are successfully operating in the current system
and that the rule would unfairly punish high performers. These
commenters also stated that the rule disregarded the self-interest of
LPDs in ensuring grower success. Opposing commenters further stated the
rule would be overly burdensome for the industry to implement.
A. Section 201.106
i. Transparency in Pay
Comment: Many commenters, especially growers and advocacy
organizations, highlighted the need for stronger protections, greater
transparency, and a more equitable balance of power within the poultry
industry. Commenters emphasized that greater transparency from LPDs is
essential for a fair and equitable payment system. Specific concerns
stemming from inadequate transparency included the inability to predict
income due to fluctuations in flock-to-flock payments, and payments
below the base price due to factors outside of growers' control.
Commenters also suggested safeguards to prevent unfair payment
deductions related to stocking density and other external factors.
Advocacy groups raised concerns about the potential for LPDs to exploit
the system and drive down grower base pay.
Other commenters, especially industry stakeholders, emphasized
existing measures and cautioned against government intervention. These
commenters asserted that growers face no uncertainty regarding income
or input costs and opposed a fixed base price. They also asserted that
most contracts already include minimum compensation floors and
expressed concern that raising base pay would be unsustainable and lead
to higher consumer prices. One commenter suggested that AMS identify
and address potential gaps in grower education and outreach.
AMS response: AMS agrees with the comments that asserted the need
for stronger protections, greater transparency, and a more equitable
balance of power. Accordingly, AMS modified the proposed Sec. 201.106
to include provisions that further these goals. Paragraph (a) will
prevent LPDs from reducing a poultry grower's compensation based on the
grower's ranking, grouping, or comparison to others. This will improve
growers' ability to predict income. As discussed below, paragraph (b)
will establish a presumptive limit on comparison-based performance pay,
which will enhance growers' ability to predict their income from a
contract by reducing variability from that rate due to fluctuations in
flock-to-flock payments. Paragraph (c) works to prevent LPDs from
exploiting their market power and associated bargaining power by
requiring LPDs to notify the Administrator if there are any contract
modifications that result in a reduced payment to poultry growers.
Existing regulation fails to protect poultry growers from injury in
the manner Congress intended. Contrary to LPDs' claims, growers do face
uncertainty regarding income, because the payment they will receive is
not known until the growing cycle is complete and all growers' outputs
are compared and performance payments are distributed. AMS has
consistently heard reports from growers receiving
[[Page 5170]]
deductions or excessively variable compensation from LPDs such that
their compensation does not align with the LPDs' initial
representations.\34\ Accordingly, a high percentage of growers'
operations have sustained net negative incomes--an outcome that growers
most likely do not anticipate before agreeing to contract with their
LPDs.\35\ Moreover, AMS has reviewed broiler growing contracts for
decades during routine regulatory reviews of LPD's payment practices.
While many contracts that AMS has reviewed already include minimum
compensation provisions, these provisions are not an industry-wide
practice, and do not cure the deception or unfairness arising from
deductions in the rates of compensation in the contract, especially the
base price, because the minimum price could be far below the base price
or even the lower bounds of base plus performance pay. Moreover,
requiring that minimum compensation be disclosed allows growers who
have the option of contracting between multiple LPDs to meaningfully
compare their options, enhancing competition in the market for grower
services in certain geographies. Nor is this an unworkable or
unreasonable requirement; some LPDs have already adopted the reforms
included in this final rule, and so this regulation builds on existing,
successful models that that commenters said some LPDs have already
found workable and effective.
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\34\ United States v. Cargill Meat Solutions Corp., 1:22-cv-
01821-ELH (D. Md. July 25, 2022) (LPDs did not adequately disclose
the risk inherent in the tournament systems to growers, so growers
could not reasonably evaluate the range of potential financial
outcomes, manage their risks, or compare competing poultry
processors); AMS-FTPP-22-0046-0777 (``[W]e were told our houses
would be paid off raking in the money in 10 years[.] I am now out to
twice that still in debt. . .''); AMS-FTPP-22-0046-0876 (``In our
communications with growers, we have learned that when they signed
their initial poultry contract, most had expectations that their
contract relationship with a poultry company would be one of mutual
respect where both parties shared in the risks and rewards of
producing chicken for consumers. They expected a transparent system
that would reward them for their hard work and management services.
Instead, what they quickly found was a dictatorial system that gives
growers an unpredictable and often inadequate income stream, and
allows poultry companies to shift risks onto growers, without fairly
sharing in the economic rewards commensurate with their financial
investment and services provided''); AMS-FTPP-22-0046-0156
(``Frequently, that deception begins even before poultry growers
sign their contracts. It is a common story for growers to be
attracted by unrealistic financial models and integrators' promises
of support. Once the contracts are signed, though, growers find
themselves on the short end of a massive power imbalance'').
\35\ MacDonald, James, Technology, Organization, and Financial
Performance in U.S. Broiler Production, EIB-126, USDA Economic
Research Service (2014), <a href="https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6">https://www.ers.usda.gov/webdocs/publications/43869/48159_eib126.pdf?v=1829.6</a> (In 2011, nearly a
third of smaller farms and nearly a fifth of larger farms realized
negative net farm income); AMS-FTPP-22-0046-0780 (``I've been a
poultry grower for almost 15 years and it is a shame that you have
to have multiple jobs just to make ends meet. . . Everyone is
struggling in this economy right now and we have massive debt loads,
insurance and utilities have skyrocketed parts are extremely high
and even just the basic necessities to live are at critical levels.
. .'').
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Also, contrary to some commenters' claims, nothing in the
regulation requires the base pay to be increased or otherwise be fixed
in a manner that would affect supply or the price of chicken for
consumers; rather, it is designed to address inadequate poultry grower
compensation arising from deceptive and unfair practices by LPDs.
Simply, Sec. 201.106(a) enables LPDs to continue to set a base pay and
provide bonuses based on a grower's grouping, ranking, or comparison to
others, or through other payment incentives schemes. AMS acknowledges
that grower education and outreach may be useful but believes that the
responsibility to eliminate deception starts with the legal
responsibilities Congress placed on the LPDs when it amended the
Packers and Stockyards Act. This includes clear contract terms and
transparent communication between LPDs and growers.
AMS notes that Sec. 201.102 requires disclosure of stocking
density in production contracts. Reductions in stocking density are
best addressed under those disclosure requirements. AMS acknowledges
that Sec. 201.106 may not address every form of unfair practice that a
grower may experience, such as reductions in flock placements or
stocking density, and AMS remains committed to robust enforcement of
section 202 of the Act to address the full range of potentially unfair
practices that growers may face.
AMS agrees that USDA-sponsored education and outreach helps
growers' make informed decisions. AMS is taking steps to increase
producer education and outreach, including, for example, by
establishing the <a href="http://farmerfairness.gov">farmerfairness.gov</a> portal to facilitate ease of access
for submitting complaints. AMS intends to expand education and outreach
regarding this rule and other regulatory requirements. Disclosure and
education, although beneficial, are unlikely to address unfairness
because of the substantial difference in bargaining power between LPDs
and growers. AMS's responsibility, however, is to enforce the Act.
Better information concerning an unfair practice does not make the
practice fair, nor alleviate the need for regulation.
ii. Performance Pay
Comment: Growers and supporting organizations highlighted the need
for a more balanced system that protects growers from income volatility
and unfair deductions related to factors outside of their control. Many
commenters explicitly endorsed a 25 percent cap, citing the potential
to curb the negative impacts of the tournament system while preserving
performance-based incentives. Several advocacy groups supported
calculating the variance at the individual grower level rather than the
complex level to allow growers to make more informed financial
calculations, better determine whether they are being treated unfairly
by LPDs, and to limit the potential for favoritism and retaliation
against individual growers. To strengthen fairness and transparency,
commenters emphasized the need for objectively measurable bonus
criteria and the importance of pairing the cap with a fair minimum base
pay. One commenter suggested allowing exceptions for exceeding the 25
percent cap with proper justification. Another pointed to the bonus cap
model in the turkey industry and a farm bureau suggested a 20 percent
pay difference between growers. Several commenters indicated that
bonuses should be linked to factors within a grower's control.
Some industry representatives emphasized the role of performance
incentives in driving productivity. Commenters argued that limiting
performance bonuses would disincentivize growers and negatively impact
productivity. Some commenters questioned the basis for the 25 percent
figure.
Many stakeholders expressed concern about the feasibility of case-
by-case enforcement to ensure fair comparison-based bonuses. Comments
reveal a consensus among stakeholders that case-by-case enforcement
alone is insufficient to guarantee fair comparison-based compensation.
Advocacy organizations argued that case-by-case enforcement is
ineffective and inefficient and places an undue burden on growers who
seek redress. These organizations cited past instances in which this
approach failed to adequately protect grower interests. One commenter
raised a concern about case-by-case enforcement's vulnerability to
changing political landscapes, thereby creating uncertainty for growers
and potentially discouraging them from reporting unfair practices. Many
stakeholders advocated for clear regulations and proactive measures to
prevent unfair bonuses rather than
[[Page 5171]]
relying solely on enforcement. For example, one commenter requested
that USDA establish guidelines defining unfair performance payment
structures, proposing a presumption of unfairness for bonuses exceeding
25 percent of total compensation. The commenter also suggested that
contracts offered to indebted growers could serve as potential evidence
of anti-competitive practices, particularly by processors with
significant market power.
AMS response: In the proposed rule, AMS specifically inquired
whether it is presumptively unfair for comparison-based compensation to
equal or exceed 25 percent of total compensation (base pay rate plus
comparison-based) for any grower and asked a range of questions around
the appropriateness of the specific threshold, how to calculate it, and
how it would affect the industry. These questions included inquiries
highlighting the role of the 25 percent presumption as a potentially
binding constraint and how LPDs might respond in the compensation
structures.
AMS agrees with the majority of commenters suggesting that
comparison-based performance pay should be presumptively limited in
order to balance the interests of growers and LPDs and prevent unfair
outcomes. Grower concerns regarding thin margins, debt load, input
variability, and tournament composition invoke equity issues that must
be balanced with performance and productivity incentives. While useful
as an incentive and a means to allocate pay, flock performance metrics,
specifically feed conversion, as a proxy to grower effort are
imperfect. Feed conversion itself is affected by variables beyond
grower effort. AMS is not aware of existing technological innovations
that could serve to better isolate grower effort or a measurement that
would be exclusively under grower control.
Flock performance metrics serve some purposes in the assessment of
grower effort and the allocation of grower payments. AMS's experience
in analyzing performance payments suggest that ranking systems can be a
useful and reasonably equitable mechanism for pay allocation with
proper regulation in magnitude. Performance payments can reward grower
effort without being an unlawfully deceptive or unfair practice.
In considering the appropriate form of regulation, AMS considered
the variety of grower ranking systems currently in practice and the
possible evolution and redesign of those systems, such that the purpose
of the regulation would be resistant to circumvention while also
providing an appropriate level of flexibility to maintain an incentive
structure. As referenced in the proposed rule, a presumptive limitation
on performance pay magnitude strikes that balance. As a presumption,
enforcement will occur based on an inquiry into specific factual
circumstances. Based on currently available information, a bright line
standard is likely to be overly rigid and may serve to deprive
successful growers of the expected value of their services. Allowing
LPDs to provide a rebuttal to justify exceeding the prescribed
performance pay magnitude is a desirable feature for growers and LPDs
alike because payment systems may reflect different circumstances at
different complexes. Again, facts and circumstances matter, in
particular around the variability of performance for the birds in
question, the housing specifications, etc., as 25 percent may still be
an appropriate limit. Whether the LPD took appropriate measures to
comply with the duty of fair comparison under Sec. 201.110 or
otherwise mitigated other identifiable risks of unfair variability
relating to the larger magnitude of the tournament will also be
important. To underscore, AMS expects the presumption will not be
easily overcome.
AMS acknowledges that some commenters preferred application of the
presumption at the individual settlement level. AMS is concerned that
application at the individual level will be difficult to monitor and
enforce and could also result in overly rigid limitations on individual
performance outcomes in flock settlements. That could dilute or distort
grower performance incentives
[…truncated; see source link]Indexed from Federal Register on January 16, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.