Hogan Lovells 2024 Election Impact and Congressional Outlook Report
15 November 2024
On May 26, 2022, the United States Department of Agriculture (USDA) announced a long-anticipated proposed rule on performance-based poultry grower compensation, commonly called the “tournament system.” The proposal would require certain pieces of information be disclosed to poultry growers through the contract process, at flock placement, and at settlement. The proposal focuses heavily on disclosures and attestations. The proposal would also require integrators to implement executive-led auditing and oversight programs and to include attestations as to the accuracy of information provided to growers.
The Biden Administration has long highlighted three planned Packers and Stockyards Act (PSA) rulemakings as cornerstones of the Administration’s efforts to promote competition, reduce consolidation, and fight inflation. The tournament system proposed rule1 is the first of these proposals to be published. In announcing the proposal,2 USDA characterized its efforts as promoting transparency in tournament system contracts and dealings.
USDA will accept comments on the proposal for 60 days from the date the proposed rule is officially published in the Federal Register. As of the time of writing, the proposal has not been officially published in the Federal Register or listed in prepublication form, and so the exact date comments will be due is not known. This summary is based on an advance copy of the proposal shared with stakeholders by USDA.
The proposed rule focuses primarily on requiring certain information be disclosed to growers by live poultry dealers at various stages of the contract relationship, including when contracts are initiated, when capital investments are required, when chicks are placed, and when flocks are caught. In particular, AMS would require contracts include a newly created “Live Poultry Dealer Disclosure Document” (Dealer Disclosure Document) that would include historical payment information to growers, past litigation with growers, information about the minimum number of placements annually and minimum stocking densities, the expected value of contracts, and other mandatory disclosures. The Dealer Disclosure Document would also need to contain certain disclosure statements using phrasing mandated in the regulation. The proposed rule would require live poultry dealers establish an auditing framework to track and maintain the information to be disclosed, overseen by senior company executives. The proposal would also require integrators to provide certain information about flocks at the time of placement and details at settlement about inputs and placement for other growers in the settlement pool.
Notably, the current proposal is very different than previous attempts by USDA in 20103 and 20164to regulate poultry contracting, which proposed direct restrictions on contracting (neither of which were finalized). USDA’s Agricultural Marketing Service (AMS) appears to make a decision to focus specifically on disclosures, noting in the preamble its view that “many production contracts do not provide enough information for growers to assess their expected value, and important information relating to live poultry dealer obligations and practices should be better illuminated” and explaining that the “purpose of this proposed rule is to provide growers with this type of relevant information."5
We describe these requirements in detail below and include a sample layout in Appendix 1 of what a Dealer Disclosure Document might look like based on the information and disclosures required in the proposed rule.
This provision would revise current § 201.100 by adding items to the list of required disclosures live poultry dealers must make to growers and prospective growers and adding terms that must be specified in growing contracts. It would require live poultry dealers to provide certain documents to current poultry growers in the following situations:
Contract scenario |
Documents to be provided by live poultry dealer |
When live poultry dealer must provide documents |
Renewing, revising, or replacing an existing poultry growing contract or establishing a new contract that does not contemplate modifications to existing housing specifications |
*Note: Live poultry dealers (including all parent and subsidiary companies) slaughtering fewer than 2 million live pounds of poultry weekly (104 million pounds annually) are exempt from this requirement. |
7 days before signing the contract.
|
Entering a new poultry growing arrangement that will require an original capital investment |
|
Simultaneously with the housing specifications |
Offering or imposing modifications to existing housing specifications that could reasonably require the grower or prospective grower to make additional capital investments |
|
Simultaneously with the modified housing specifications |
Contents of the Live Poultry Dealer Disclosure Document
The proposed rule would require the Dealer Disclosure Document consist of a cover page, a series of disclosure information, and a signature page. The proposed rule states that, regardless of any confidentiality provision in the growing contract, a live poultry dealer cannot prevent a grower or prospective grower from discussing the terms of the contract offer or the Dealer Disclosure Document with government agencies, family members, and business associates and advisors. A sample of how the required information might be laid out is provided in Appendix 1. A summary of the required information is below:
Requirement to Establish a Governance Framework
The proposed rule would require live poultry dealers to establish and maintain a “governance framework” that audits the accuracy and completeness of the disclosures required in the Dealer Disclosure Documents and all obligations required under the PSA and its implementing regulations. The framework should include audits, testing, and reviews of representative samples of Dealer Disclosure Documents by the live poultry dealer’s principal executive officer(s).
The proposed rule would add a new section, § 201.214 that seeks to improve transparency in grower ranking pay systems. This section only applies to live poultry dealers using tournament contracts and requires them to maintain and furnish to growers the following records. The records must be maintained for 5 years.
Information about the grower’s placement
The following information regarding the grower’s placement must be furnished to the grower within 24 hours of flock delivery to the grower’s facility:
Information about distribution of live poultry dealer inputs to the grouping or ranking
At the time of settlement, the live poultry dealer must also provide the grower with a copy of a grouping, ranking, or comparison sheet showing the grower’s position in the grouping for that period. Note that the sheet must include the housing specification and actual figures that the grouping or ranking is based on for every grower, but it need not include the names of the other growers. The sheet must also disclose information about live poultry dealer-controlled inputs for every grower in the grouping, including the following:
AMS frames its proposed rule as addressing a perceived information asymmetry in poultry grower contracting. AMS explains in the preamble to the proposed rule that it hopes the proposed requirements benefit industry by providing more information in contract negotiations to lower grower uncertainty over revenue and profit estimates and improving growers’ ability to make business decisions like whether to make additional capital investments. AMS also hopes the transparency on placements and settlements could reduce grower concerns regarding live poultry dealer distribution of inputs and address concerns about deception and fraud.
AMS’s cost analysis estimates the combined costs to live poultry dealers for compliance with the reporting and recordkeeping requirements in proposed §§ 201.100 and 201.214 and related benefits to growers are as follows. The figures reflect significantly higher costs in the first year to set up recordkeeping and data collection, with lower costs in consecutive years once those systems are in place.
|
Cost to Live Poultry Dealers |
Cost to Growers9 |
Industry Total Cost |
Individual Grower Benefits |
First-Year |
$2,436,964 |
$2,448,284 |
$4,885,248 |
$3,158,000 |
Ten-Year Total |
$9,039,442 |
$11,452,718 |
$20,492,160 |
$31,580,000 |
Comments on the proposed rule will be due 60 days after it has been published in the Federal Register. AMS invites comments in particular on lists of questions specific to the Dealer Disclosure Document and proposed § 201.214, including the timing of furnishing the required documents, the burden of collecting the information, and other anticipated challenges from industry.
We will continue to monitor the development of this and related proposals. Please do not hesitate to contact us with any questions.
Click here for a sample layout of what a Dealer Disclosure Document might look like based on the information and disclosures required in the proposed rule.
Authored by Brian D. Eyink and Connie Potter.