New Poultry Contracting Regulation’s Potential Effects on Broiler Growers

The USDA’s Transparency in Poultry Grower Contracting and Tournaments ruling became effective on February 12, 2024. This ruling modifies the Packers and Stockyard Act by adding several additional requirements to be met by “Live Poultry Dealers,” or what most contract growers know as integrators or poultry companies. The rule requires integrators to provide two disclosure documents: The “Live Poultry Dealer Disclosure Document” and the “Tournament Specific Input Disclosure.” A fact sheet covering the rule and its requirements can be found here:

The USDA also has a webinar that goes into further detail about the rule:   In this webinar, USDA states that they expect implementation to evolve for each company as they make changes to comply, and they will work with companies to assist in compliance. 

One of the requirements of interest is for integrators to guarantee an absolute minimum number of flocks per year and a minimum number of birds placed, or pounds of birds produced, per year on the contract grower’s farm. The results of this part of the ruling could be both positive and negative for growers. 

On one side there is the contract broiler grower who has invested a large amount of capital to build a farm. A new broiler farm consisting of four 54’ x 500’ barns can cost $2 million or more to build and get ready for birds. The grower then must cover the utility and labor cost of growing the birds, both of which are steadily increasing. With interest rates above 7% currently, a grower would face over $400,000 in annual costs for his loan and expenses. This makes any form of income guarantee important to growers, as well as lenders. Before the new ruling, the best information available was company-provided estimates for grower income based on averages over time. The new ruling requires companies to guarantee a minimum number of birds per flock and flocks per year but not flock payments or final gross revenue. Under typical competitive pay programs, final flock payments are affected by bird growth, which is affected by on-farm management and cannot be guaranteed. Thus, the final flock payment to a specific farm could still vary significantly from company averages and is unknown until the end of the flock. This kind of income risk can make farm budgeting difficult and can drive growers to a defensive cost-saving posture as their only predictable form of income protection. Such cost-saving management decisions can negatively impact the birds’ performance and decrease the income potential for the grower and increase cost of production for the company. In such cases, a guarantee of income could be beneficial if it were sufficient to cover all or most known cash flow needs. Some companies had begun implementing modified pay programs with some income guarantees before this ruling came out. 

On the company side, the placement guarantee rule leaves out the biological variability of producing broilers. There is an old saying, “don’t count your chicks before they hatch.” Poultry companies must plan months ahead and “count the chicks” before the eggs are laid. Sometimes, these expectations are not met for uncontrollable biological reasons, and there just aren’t enough chicks to go around. There is no language in the ruling that takes this into consideration. 

There is also no language that addresses problems that can and do occur at the farm and company level that could interrupt timely placement and affect a farm’s number of flocks placed per year – whether that be planned, like plant maintenance or holidays, or unavoidable, like an HPAI outbreak. Sometimes, individual farms must perform maintenance or repair damage that would delay flock placement for several days or longer on that farm. Sometimes, integrators may need to respond to market downturns with placement changes. Such situations would typically only affect a percentage of a company’s broiler growers and only for a short time as well, though longer impacts have been known to occur in times of severe market struggles, like what happened with COVID-19. If the timing of any of these situations were right, they may keep an affected farm from getting the stated minimum number of flocks in one year.  

These real-world situations may result in companies not contractually guaranteeing what they normally may expect growers to receive, nor what they desire to process through the plant, but instead guaranteeing significantly less to avoid running afoul of the rule. This makes obvious sense and protects the company, but creates additional problems for the grower, especially when it comes to securing financing for new facilities. There is a significant possibility that financial institutions would only be able to calculate income potential generated from the guaranteed minimums. Such a decreased income could hinder growers from obtaining loans. 

Another important requirement is that companies must provide average grower revenue numbers per square foot by housing type, low to high by quintile, and across time. These could be used as a basis of income for financial determinations. It could be argued that, except for house type and quintile breakdown, this is the same as the overall average gross returns that integrators have been providing in pro forma documents before the ruling. The biggest difference is that this would give potential growers a snapshot of what pay could be, both high and low, and how it can vary rather than a single-point average. The problem is that under typical competitive pay programs now, grower income is subject to change for every flock. Therefore, a farm could and likely will fall within each of the quintiles at some point in time. Therefore, if a grower was wanting to estimate revenue based on the least risk, he would be forced to only consider the lowest quintile pay as his basis for a decision. This conservative evaluation may project an artificially negative outlook on starting a poultry farm both for growers and financial institutions.  

Brothers, Dennis. “New Poultry Contracting Regulation’s Potential Effects on Broiler Growers.Southern Ag Today 4(19.3). May 8, 2024. Permalink