[Federal Register Volume 76, Number 237 (Friday, December 9, 2011)]
[Rules and Regulations]
[Pages 76874-76890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31618]
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DEPARTMENT OF AGRICULTURE
Grain Inspection, Packers and Stockyards Administration
9 CFR Part 201
RIN 0580-AB07
Implementation of Regulations Required Under Title XI of the
Food, Conservation and Energy Act of 2008; Suspension of Delivery of
Birds, Additional Capital Investment Criteria, Breach of Contract, and
Arbitration
AGENCY: Grain Inspection, Packers and Stockyards Administration, USDA.
ACTION: Final rule.
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SUMMARY: The U.S. Department of Agriculture (USDA) Grain Inspection,
Packers and Stockyards Administration (GIPSA) is amending the
regulations issued under the Packers and Stockyards Act, 1921, as
amended and supplemented (P&S Act). GIPSA is amending the regulations
to clarify conditions for industry compliance with the P&S Act pursuant
to the Food, Conservation, and Energy Act of 2008 (the 2008 Farm Bill).
In response to comments and other public input received in response to
the proposed rule published in the Federal Register on June 22, 2010,
making necessary changes. The provisions finalized with this action
will clarify conditions for industry compliance with the P&S Act. Other
provisions listed in the June 22, 2010, proposed rule are not being
finalized at this time.
DATES: This rule is effective February 7, 2012.
FOR FURTHER INFORMATION CONTACT: Brett Offutt, Director, Policy and
Litigation Division, P&SP, GIPSA, 1400 Independence Ave. SW.,
Washington, DC 20250, (202) 720-7363, [email protected].
SUPPLEMENTARY INFORMATION: The supplemental information of this final
rule is composed of four sections. Section I provides a background of
the rulemaking. Section II provides a summary of provisions not being
finalized by this action. Section III provides a summary of provisions
being finalized. Section IV provides a summary of the comments received
on the proposed rule and at the relevant USDA/Department of Justice
(DOJ) Joint Competition workshops that occurred during the comment
period and describes how sections of the proposed rule have been
modified based on these comments. Section V provides the revised impact
analyses including those required by Executive Orders 12866 and 13563,
the Regulatory Flexibility Act, and the Paperwork Reduction Act.
I. Background
The P&S Act, As Amended by the 2008 Farm Bill
The P&S Act was enacted in 1921 ``to comprehensively regulate
packers, stockyards, marketing agents and dealers.''\1\ The P&S Act
provides that ``[t]he Secretary may make such rules, regulations, and
orders as may be necessary to carry out the provisions of this
chapter.'' \2\ The P&S Act also sets forth procedures for
administratively adjudicating certain enforcement actions.\3\ Title XI
of the 2008 Farm Bill requires the Secretary of Agriculture to issue a
number of regulations under the P&S Act, 1921, as amended. Among these
instructions, the 2008 Farm Bill directed the Secretary to identify
criteria to be considered in determining:
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\1\ Hays Livestock Comm'n Co. v. Maly Livestock Comm'n Co., 498
F.2d 925, 927 (10th Cir. 1974).
\2\ Id. section 408.
\3\ Id. sections 203, 309, 411.
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Whether an undue or unreasonable preference or advantage
has occurred in violation of the Act;
Whether a live poultry dealer has provided reasonable
notice to poultry growers of any suspension of the delivery of birds
under a poultry growing arrangement;
When a requirement of additional capital investments over
the life of a poultry growing arrangement or swine production contract
constitutes a violation of the Act;
If a live poultry dealer or swine contractor has provided
a reasonable period of time for a poultry grower or a swine production
contract grower to remedy a breach of contract that could lead to
termination of the poultry growing arrangement or swine production
contract; and
Whether the arbitration process provided in a contract
provides a meaningful opportunity for the grower or producer to
participate fully in the arbitration process.
In addition to developing criteria, the 2008 Farm Bill provided
that livestock and poultry contracts must specifically disclose the
right of the contract producer or grower to decline the requirement to
use arbitration to resolve any controversy that may arise under the
livestock or poultry contract.
On June 22, 2010, GIPSA published a Notice of Proposed Rulemaking
in the Federal Register that proposed language for implementing both
the Farm Bill provisions described above and a number of discretionary
provisions, including a ban on packer-to-packer
[[Page 76875]]
livestock sales, a requirement that dealers disclose their contracts,
and more. Some of these provisions proved to be controversial, and the
rule attracted more than 61,000 comments from the public (discussed
below). As a result of information obtained from the public, GIPSA has
reconsidered each of its proposed provisions. GIPSA has opted not to
finalize some of those provisions at this time; others are finalized
with changes. We will discuss in detail which provisions are finalized
by this action, which are not, and the input we received from the
public.
II. Summary of Provisions Not Being Finalized
Value-Added Production and Premiums
The proposed rule included several provisions related to the
potential use of price premiums and related types of contracts such as
marketing agreements in a manner that are potential violations of the
P&S Act. However, comments identified a number of concerns raised by
the proposed regulations related to price premiums and defining certain
production arrangements. Specifically, many felt that, taken together,
the proposed regulations would increase the potential for litigation
thereby jeopardizing the continued use of these agreements. The rapid
growth of value-added segments of the livestock industry based on
alternative marketing agreements (e.g. breed certifications, source
verification, production method certification) has been beneficial for
many producers and supported by consumer demand. GIPSA did not intend
to limit the use of such arrangements and we determined this final rule
would not include sections relating to price premiums and marketing
agreements. This includes subsection 201.211(b) of the proposed rule.
Related definitions in the proposed rule (i.e., ``Forward Contract,''
``Marketing Agreement,'' and ``Production Contract,'' proposed in
sections 201.2(q), (r) and (s)) are also not being finalized at this
time as the sections with which the definitions were associated are not
included in this final rule.
Recordkeeping
Section 201.94(b) of the proposed rule that would have required
packers, swine contractors and live poultry dealers to retain records
justifying differential pricing decisions is not included in this final
rule. As with sections related to price premiums, many comments
suggested this requirement would contribute to a potential unintended
consequence of eliminating or reducing the practice of offering price
premiums.
While many comments indicated this requirement would have required
the creation of new records, this was not the intention of the proposed
rule. While this final rule does not contain the proposed changes
regarding recordkeeping, this does not change the existing
recordkeeping requirements. We expect covered entities to continue to
comply with the existing requirements of 7 U.S.C. 221.
Packer-to-Packer Sales and Relationships With Dealers
Section 201.212 related to packer-to-packer sales and packer
relationships with dealers will not be finalized. Although some
comments supported inclusion of these provisions, many comments raised
serious concerns about potential adverse effects on the marketplace,
such as encouraging further vertical integration and reducing the
number of dealers and other buyers. While this section will not be
finalized, we expect covered packers and dealers to continue to comply
with the related portions of the Act (7 U.S.C. 192c-g) and existing
regulations (9 CFR 201.69-70).
Prohibitions and Requirements Related to Capital Investments
While section 201.217 of the proposed rule establishing specific
requirements related to capital investments is not included in this
final rule, the criteria required by the 2008 Farm Bill are being
finalized, in modified form. Considering the variation that exists with
respect to capital investments and payment terms in contracts, we
believe stating criteria that the Secretary may use to determine
whether certain terms in arrangements and contracts are in violation of
the P&S Act is more appropriate. The associated definition of ``Capital
Investment'' (proposed section 201.2(n)) will also not be included in
this final rule.
Definition of Competitive Injury and Likelihood of Competitive Injury
Sections 201.2(t) and (u) of the proposed rule provided definitions
for ``competitive injury'' and ``likelihood of competitive injury'' in
an attempt to provide more clarity on the meaning of these terms. These
definitions are not necessary for the purposes of this final rule and
therefore are not included.
Applicability of Contracts
We believe this paragraph is unnecessary considering the sections
related to price premiums and discounts are not included in the final
rule. To avoid confusion over whether GIPSA regulations cover
transactions between non-subject entities, we are deleting this
paragraph from this final rule.
Scope of Section 202(a) and (b)
Comments were sharply divided with respect to proposed provision
201.3(c) with respect to harm to competition. Those supporting the
proposal pointed out it would provide legal relief for farmers and
ranchers who suffer because of unfair actions, such as false weighing
and retaliatory behavior, without having to show competitive harm.
Opposing comments relied heavily on the fact that several of the United
States Courts of Appeals have ruled that harm to competition (or the
likelihood of harm to competition) is a required element of a violation
of sections 202(a) and (b) \4\ of the P&S Act.
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\4\ All cases in question have ruled relative to section 202(a),
while only one case has also referenced 202(b).
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Unfair, Unjustly Discriminatory, and Deceptive Practices or Devices
Section 201.210 of the proposed rule listed examples of conduct
GIPSA considers to be unfair, unjustly discriminatory or deceptive
practices or devices, in violation of section 202(a) of the P&S Act.
Undue or Unreasonable Preference or Advantage
Section 201.211 established criteria the Secretary may consider in
determining if conduct would violate section 202(b) of the P&S Act.
While many commenters provided examples of similarly situated poultry
growers and livestock producers receiving different treatment, several
comments asked for additional clarification about the language proposed
and were concerned about the impacts of the provision on marketing
arrangements and other beneficial contractual agreements.
Livestock and Poultry Contracts
Section 201.213 of the proposed rule required the submission and
potential publication of sample contracts. Most supporting comments
stated that implementation of this rule would assure fairness and
market transparency which would allow farmers and ranchers the
opportunity to make informed decisions, it would promote fair
competition, and it would allow efficient and evenhanded enforcement of
the P&S Act. Some comments expressed concern with the lack of clarity
and the ambiguity of this section of the proposed rule.
[[Page 76876]]
Tournament Systems
Section 201.214 of the proposed rule required live poultry dealers
that pay poultry growers on a tournament system to pay all poultry
growers raising and caring for the same type of poultry the same base
pay, and that would prohibit paying poultry growers less than the base
pay amount. The proposed provision also required that poultry growers
be ranked in settlement groups with other poultry growers that raise
and care for poultry in the same type of houses. Several comments were
received indicating that the proposed provision needs to be revised.
III. Summary of Provisions Finalized by This Rule
The majority of the sections of the proposed rule that were
required by the 2008 Farm Bill are being finalized with modifications.
These sections include criteria regarding suspension of the delivery of
birds (Sec. 201.215 of the proposal), additional capital investment
(Sec. 201.216 of the proposal), breach of contract (Sec. 201.218 of
the proposal), and arbitration (Sec. 201.219 of the proposal).
Suspension of the Delivery of Birds
This section indicates the various criteria the Secretary may
consider when determining whether a live poultry dealer has provided
reasonable notice to poultry growers of any suspension of the delivery
of birds under a poultry growing arrangement. These criteria include,
but are not limited to, a written notice at least 90 days prior to
suspension, written notice of the reason for the suspension of
delivery, the length of the suspension of delivery, and the anticipated
date the delivery of birds will resume.
Additional Capital Investments
This section indicates the various criteria the Secretary may
consider when determining whether a requirement of additional capital
investments over the life of a poultry growing arrangement or swine
production contract constitutes a violation of the P&S Act.
Breach of Contract
This section indicates the various criteria the Secretary may
consider when determining if a packer, swine contractor, or live
poultry dealer has provided a reasonable period of time for a poultry/
swine grower to remedy a breach of contract that could lead to
termination of a production contract. These criteria include, but are
not limited to, the form and substance of the notice following the
discovery of a breach of contract.
Arbitration
This section requires production contracts that require the use of
arbitration to include language on the signature page that allows the
producer or grower to decline arbitration. This section also includes
the criteria the Secretary may consider when determining if the
arbitration process provided in a contract provides a meaningful
opportunity for the poultry growers, swine production contract growers,
or livestock producers to participate fully in the arbitration process.
To implement this provision, it is necessary to clearly identify the
applicability of the regulations to live poultry dealers.
IV. Comments and Responses
The proposed rule published on June 22, 2010, (75 FR 35338)
provided a 60-day comment period to end on August 23, 2010. In response
to requests for an extension of time to file comments, on July 28,
2010, GIPSA extended the comment period to end on November 22, 2010 (75
FR 44163). GIPSA considered all comments postmarked or electronically
submitted by November 22, 2010. Over 61,000 comments were received. The
following discussion addresses written comments as well as comments
received at two public meetings, on June 25, 2010, and August 27, 2010,
that were conducted jointly by USDA and DOJ. Because two of these
``Workshops on Competition in Agriculture'' were held during the
comment period for the proposed rule, the Secretary announced that any
comments made in those forums would be considered comments on the rule.
Only a portion of the sections of the proposed rule are being finalized
at this time. The majority of the sections of the proposed rule that
were required by the 2008 Farm Bill are being finalized with
modifications. These sections include criteria regarding suspension of
the delivery of birds (Sec. 201.215 of the proposal), additional
capital investment (Sec. 201.216 of the proposal), breach of contract
(Sec. 201.218 of the proposal), and arbitration (Sec. 201.219 of the
proposal).
Definition--Principal Part of Performance
Summary of Comments: GIPSA received a few comments on this term
suggesting some clarification be added. For example, commenters
suggested that ``principal part of performance'' should be redefined to
say ``the forum for contentious proceedings (i.e., arbitration or
litigation) cannot be other than where the majority of the poultry or
livestock are located.'' An additional suggestion stated that this
definition should be revised to specifically apply to swine marketing
agreements, swine producers, and packers. Commenters recommended the
definition be divided into sections by contract type and species.
Agency Response: This term references the services provided under
livestock and poultry contracts and are used in conjunction with the
location where those services are rendered. These services involve the
raising and caring for livestock or poultry and would be provided in
the location where the livestock or poultry is located. Any
``contentious proceedings,'' however, concern the quantity or quality
of the services provided by the poultry grower or livestock producer
and not the location of the livestock or poultry. We determined no
changes to the definition were needed to address the location related
comments. Given the diverse and dynamic nature of the livestock
industry, we are not limiting the definition to swine marketing
agreements, swine producers, and packers, as suggested by the
commenter.
Definition--Additional Capital Investment
Summary of Comments: Many comments suggested the definition for
``additional capital investment'' should specify how additional capital
investment would be calculated. Some comments also suggested the
threshold was set too low if applied to the total operation. Comments
stated that if ``combined'' is meant to be a cumulative figure over
years, then that should be explained. In addition, they stated the word
``combined'' should be redefined to specify ``additional capital
investment means $25,000 or more * * * beyond the initial investment *
* *''. Another comment suggested ``additional capital investment''
should provide for a percentage of the initial capital investment such
as 10%, instead of a set amount of $25,000.
Agency Response: With respect to the comments requesting more
clarity, we have reduced the dollar amount from $25,000 to $12,500 and
added the phrase ``per structure.'' These changes were included to make
the definition more applicable across a range of sizes of operations
since those investments could vary depending on the number of houses a
poultry or swine production contract grower operates. Specifically, we
reduced the dollar amount so it would be more in relation to additional
investments on a per structure basis. We have also modified the
definition to clarify that the dollar amount relates to the total
aggregate investment ``over the
[[Page 76877]]
life of the poultry growing arrangements or the swine production
contracts.'' With respect to the comment on defining additional capital
investment as a percentage of the initial investment, we did not adopt
this suggestion. We believe the dollar amount of the additional capital
investment should stand alone and not be tied to the amount of the
initial capital investment.
Definition--Suspension of Delivery of Birds
Summary of Comments: We received only a few comments on this
definition. They presented some disagreement with the idea that a flock
should be delivered before the next payment date. The comments
expressed the belief that this was not practical, citing an example
where a flock was picked up on a Thursday and under the terms of the
contract, payment was due the next Thursday. In this example the
commenter argued it would be highly unusual for the next flock to be
delivered before that following Thursday and suggested some dealers
might have to lengthen the payment period for the current flock.
Agency Response: Because the definition bases the payment date on
section 410 of the P&S Act, which specifies a payment due date under
poultry growing arrangements as the fifteenth day after the week in
which the poultry was slaughtered, the example described by the
commenter would not have required a notice of suspension of bird
delivery under this rule. We made no changes to this definition based
on the comments received.
Applicability to Live Poultry Dealers
Summary of Comments: Almost all of the comments related to the
proposal to extend the regulations to all stages of a live poultry
dealer's production, including the hatcheries, were favorable. They
felt that pullet and breeder growers needed the same protections as
those growing broiler chickens. Opponents said the USDA had no legal
authority to subject eggs to the P&S Act. Other comments also indicated
the term ``laying hen'' was not typically used in the broiler or turkey
industry and the term ``pullets'' usually referred to birds that would
become broiler breeders.
Agency Response: Commenters are correct that the P&S Act provides
USDA no authority over eggs. It is for this reason we specifically
excluded hens that only produce table eggs from this provision. The
proposal does not include table eggs but rather those poultry classes
involved in producing birds for slaughter. In response to comments on
pullets, we are clarifying the exclusion by using the phrase
``excluding egg-type pullets, hens that only produce table eggs, and
breeder flocks for the egg industry.''
Effective Dates
Summary of Comments: In a comment to the rulemaking proposal one
party noted the ``Effective Dates'' was ``very curiously drafted'' as
it would leave open a comparison between a spot market transaction
after the effective date of the final regulations with a sale
transaction based upon a pre-effective date marketing agreement. That
commenter also asked whether a packer must ``justify'' a price
differential in such a case.
Agency Response: The final regulations will require no such
justification. A spot market transaction negotiated today will be
inherently different in form and substance from a marketing agreement
transaction consummated today based on terms negotiated when the market
agreement was signed and made effective. This will be true with or
without this rulemaking. The effective dates listed in this final rule
would not necessitate documentation for price differences between spot
market- and marketing agreement-based transactions. We made no changes
to the wording of this paragraph.
Suspension of Delivery of Birds
Summary of Comments: GIPSA received several comments in favor of
this provision. The comments generally said that growers were
struggling financially because there was too much time between flocks
and too few flocks. One comment stated that growers need 90 days to
make financial arrangements to mitigate the effects of a reduction in
cash flow caused by a suspension of deliveries. This time could be used
to adjust loan payments with banks or to arrange to grow poultry for
another poultry company. In addition, many growers agreed this would
cause a reduction in the use of extended layouts as a form of
retaliation, usually with no notice, for arbitrary reasons or to force
upgrades.
There were a few opposing comments from live poultry dealers,
stating that forcing them to work with a terminated grower for 90 days
would put their birds at risk. They argued that suspended growers have
no incentive to do a good job with their last flock and may even
abandon their operation putting the birds at risk. Also, growers who
are suspended because of poor flock management would put the birds at
risk and cause the live poultry dealer to receive inferior product. An
additional concern was for the safety of the live poultry dealer's
employees from physical threats following the suspension of deliveries.
Other comments opposed the rule saying it did not give live poultry
dealers the flexibility they needed to adjust to market conditions. For
example, live poultry dealers may need to suspend the delivery of birds
when the demand for product suddenly falls. There are times when a
business forecaster cannot know 90 days ahead of time that the company
will need to curtail production. Certain grower-specific reasons would
make it practically impossible to give 90 days' suspension notice, they
said.
One comment suggested the exact date of re-delivery following
suspension may be impossible to determine. They said GIPSA should
change the requirements for suspension of delivery notices to say the
notices did not have to state the date deliveries would resume.
A commenter suggested bankruptcy be added to the list of emergency
situations for which live poultry dealers might see a waiver of the
notice requirement in subsection (c) of the proposed rule.
Agency Response: While those in general support of and in
opposition to this provision spoke of bird delivery suspensions in the
same context as grower contract terminations, this section applies only
to extended layouts and not to terminations. Growers receiving a
written suspension of delivery notice would still have a growing
arrangement with the live poultry dealer and would expect to receive
additional flocks. Additionally, this section is a list of criteria the
Secretary may consider in determining whether reasonable notice of
suspension of birds has been given; not a list of prohibitions.
With respect to concerns that providing a notice of suspension
while the grower was in the midst of raising a flock would risk grower
neglect or nonperformance, we feel poultry growing arrangements
generally have other terms related to animal welfare or neglect that
could be exercised to address this concern. Therefore, we decided not
to adjust the section based on this comment. Similarly, threats against
live poultry dealer employees can be addressed through other contract
terms or reporting such actions to local law enforcement.
Some commenters suggested live poultry dealers could not plan 90
days in advance because of changes in the market. Considering the fact
live poultry
[[Page 76878]]
dealers coordinate the production process from the hatchery to
slaughter, we believe planning is generally possible under the 90-day
timeframe. Within this timeframe, live poultry dealers would usually
know with some certainty what their production needs were for the
current flock under production. A 90-day notice period would obligate a
live poultry dealer to place at most one additional flock after the
current flock. Finally, the rule provides a criterion to consider in
determining whether a live poultry dealer's ability to provide notice
has been impacted by a variety of unforeseen emergency situations.
While we agree the exact date that flock deliveries will resume may
not be known, this final rule only establishes some criteria to be
considered, and does not impose a specific requirement. Additionally,
the rule discusses the ``anticipated date,'' which implies some level
of uncertainty and adjustment if conditions change. We generally feel
providing an idea about the length of the suspension is an important
part of these criteria and included this in this final rule. With
respect to bankruptcies as emergencies, there have been bankruptcies of
live poultry dealers in recent years and we agree these events do
create emergency situations. We included bankruptcy among the list of
unforeseen emergency situations that the Secretary may consider when
determining whether or not reasonable notice has been given for
suspension of delivery of birds.
We made additional minor and non-substantive changes to the wording
and ordering of some words within paragraphs in this section for
clarity.
Additional Capital Investments Criteria
Summary of Comments: The comments on this section were mixed
between support for the criteria and opposition. Supporters generally
felt capital investment burdens were almost exclusively borne by the
producers and growers and at the same time, they had little choice
about whether or not to make the investments. These commenters felt the
criteria provided a framework for establishing a more equitable
balance. Comments opposed to this section generally expressed concern
the criteria could result in not being able to terminate long-term
contracts with poor producers or growers. Some comments also indicated
the need to differentiate between capital investments that are required
to repair or maintain a facility, which should be considered as capital
investments, and those that are an upgrade or to implement new
technology.
GIPSA also received some comments on specific criteria within the
section. The first criterion involved consideration of whether growers
had discretion in deciding against making capital investments. Comments
in support of this provision believed it would provide growers and
producers the ability to negotiate reasonable contract terms for animal
production including the ability not to be forced to upgrade or change
equipment without having input. Supportive comments also claimed this
was necessary because upgrades were usually required by the companies
although the grower or producer is the one who paid for them. Comments
opposed to this criterion argued it would hinder growers or producers
from making necessary improvements such as insurance requirements or
mandatory capital investments. Comments also noted typical production
contracts include insurance requirements and require insurance be used
to reconstruct and repair facilities in the event of a fire or tornado
or other natural damage. Under the proposal, these standard provisions
may be unfair practices because the grower or producer cannot elect to
keep the insurance proceeds.
Comments related to the paragraph on retaliation or coercion were
only supportive. The comments said this rule was necessary to protect
growers and producers from forced upgrades, retaliation or fear of
losing their production contracts or poultry growing arrangements.
Several commenters stated they had been or knew growers or producers
who were being threatened with reduced placements, pay reductions, or
contract revocation if they did not make upgrades. There were a few
comments related to the criteria about capital investments required
within 12 months of a planned significant reduction or end of
operations that stated the proposed rule confused swine contractors
with packers. Many comments from producers and growers supported this
section because they made expensive upgrades only to see a decrease in
the size of placements or to see the processing facility shut down. One
grower stated he was required to retrofit his houses to grow bigger
birds. The live poultry dealer declared bankruptcy a short time later
and the grower did not get chickens for several months.
Two comments questioned the need for a waiver for natural
disasters. They said such events should not give packers, swine
contractors or live poultry dealers opportunity to require upgrades
that go beyond necessary repairs. The comments also questioned why the
waiver would only apply to live poultry dealers.
A comment in support of the criteria related to whether some
growers or producers are required to make capital investments that
other similarly situated growers or producers do not have to make
claimed a particular firm required some growers to make more new
capital investments to their facilities than was required of others. A
few comments were against this criteria stating the phrase ``similarly
situated'' was not defined. Another comment said that to require all
poultry growers or swine production contract growers to make the same
additional capital investment is not always possible. There will be
circumstances that support requiring additional capital investments of
only some growers or producers but not all, even if the growers or
producers are otherwise similarly situated.
We received numerous comments in support of the criteria related to
the age of prior upgrades or capital investments and whether recent
upgrades had been completed. Comments from growers and producers
expressed concern with having to make frequent upgrades, receiving no
additional compensation for upgrades, and being given no choice about
making the upgrades or not. Some expressed the belief that the criteria
would discourage packers, swine contractors and live poultry dealers
from demanding often unnecessary upgrades which tended to keep poultry
growers and livestock producers in debt. One comment recounted being
required to make changes to their poultry houses only a short time
after the houses had been built according to company specifications.
Two comments argued the provision was unintelligible and it provided no
standards for determining whether additional capital investments
constituted an unfair practice.
Almost every comment received concerning the criteria related to
whether a grower or producer can be expected to recoup a required
capital investment was favorable. Comments by growers and producers
argued that any added compensation or enhanced efficiencies that might
result from additional capital investments did not cover the cost of
the investments. One comment stated that the wording regarding
recouping the investment was vague and would invite litigation. Another
comment said this criterion should be deleted because it was redundant
or in conflict with a paragraph in the proposed Capital Investment
Prohibitions (proposed section 201.217).
We received a small number of comments on the criterion which would
[[Page 76879]]
have the Secretary examine the amount of time a grower was given to
make a required capital investment. All of the comments supported this
criterion. Those commenting said that when the same capital investment
was required of all growers, resources and equipment would be in short
supply and expensive due to the increased demand. Growers therefore
need a reasonable amount of time to make the required capital
investment.
Agency Response: With regard to comments that the criteria could
eliminate the ability to terminate poor growers or producers, we note
that the section consists of criteria and not specific requirements.
Additionally, other terms within poultry growing arrangements and swine
production contracts provide for ways to terminate based on non-
performance and provide incentives to improve performance. We decided
to include this section in this final rule with some modifications.
Some commenters suggest that the criterion addressing the provision
of discretion to growers or producers would prevent any requirement for
additional capital investments or even contract terms that require
insurance proceeds to be used to rebuild. We believe these comments
ignore the fact that this section provides criteria and not
prohibitions. In the 2008 Farm Bill, Congress directed the Secretary to
establish criteria and not specific prohibitions. This criterion is
only a factor the Secretary may consider to evaluate whether a firm's
investment requirement practices violate the P&S Act. With regard to
comments that capital investments should not include maintenance and
repair costs, we note that this distinction was made as part of the
definition of ``additional capital investment.''
With respect to the comments regarding a waiver due to natural
disasters, we replaced the waiver provision with criterion and
thereafter merged it with the criterion related to significantly
reducing or ending operations. This will allow the Secretary to take
into account whether a packer, swine contractor or live poultry dealer
proffered justification, such as a catastrophic or natural disaster, or
other emergency, when a poultry grower or swine production contract
grower was required to make additional capital investments over the
life of the production contracts or growing arrangements. We also added
bankruptcy as a possible justification to be considered. A related
comment questioned why a waiver would only apply to live poultry
dealers. In the modified section, these justifications would not be
limited to live poultry dealers.
With respect to the comment on the meaning of the phrase
``similarly situated,'' we believe the meaning is plain and does not
require a definition within regulation. In determining whether two or
more growers are ``similarly situated,'' the Secretary will consider
whether poultry raised is of the same type, facilities are similar, and
if the houses are in the same geographic area, among other factors.
With respect to comments on the criterion related to the age of and
whether recent upgrades had been made, which felt the criteria was too
vague to identify what practices were prohibited, we disagree. Since
the criteria only provide factors that the Secretary may consider,
these are not meant to be bright-line prohibitions. The Secretary will
determine on a case-by-case basis whether the facts related to any
applicable criterion are a violation of the P&S Act. The only change
made to the wording of this criterion as a result of comments was to
include the phrase ``the number of'' before the phrase ``recent
upgrades or capital investments.''
With respect to the comment suggesting that criterion related to
recouping a capital investment was redundant with part of the proposed
section 201.217, we note section 201.217 was not included in this final
rule. Therefore this criterion was not removed. In addition to the
above modifications to proposed paragraphs in this section, this final
rule includes an additional criterion as a new paragraph (h) on whether
required equipment changes were for previously approved and functioning
equipment. This criterion is based on section 201.217(c) of the
proposed rule that we felt was better included in this section as a
criterion. The proposed paragraph required packers, swine contractors
and live poultry dealers to provide adequate compensation incentives to
poultry growers and swine production contract growers when requiring
equipment changes on previously approved equipment, provided that
equipment was in good working order.
Several comments on proposed section 201.217(c) said that GIPSA
failed to define what constituted ``adequate compensation incentives''
and ``good working order.'' The comments said that this would cause
disputes between the parties to poultry growing arrangements and
livestock production contracts. It was also argued that the paragraph
would preclude even necessary upgrades if a company could not afford to
provide funding. Some said that discouraging technological advances
would put the United States at a comparative disadvantage with other
competing countries by decreasing efficiency and providing
disincentives for innovation, including those that could improve food
safety. Although there were many comments received in favor of this
paragraph, many of them requested GIPSA define adequate compensation as
the full cost of the upgrade at the time the upgrade was required.
Regarding the discussion of adequate compensation incentives, we
feel this would place too large a financial burden on packers, swine
contractors and live poultry dealers. By moving this paragraph from
Sec. 201.217 to Sec. 201.216, we changed this provision from a
requirement to that of a criterion the Secretary would consider to
determine whether, in a particular instance, requiring a grower to make
additional capital investments is a violation of the P&S Act. Based on
the comments received, we feel this is the appropriate function for
this provision. With regard to the capital investment criteria (Sec.
201.216 in the proposed rule), we feel using these criteria to
determine whether certain arrangements are a violation of the P&S Act
is more appropriate given the variation that exists with respect to
capital investments and payment terms in contracts.
We made non-substantive wording changes to the introductory
paragraph for this section to emphasize there were several criteria
listed.
Reasonable Period of Time To Remedy a Breach of Contract
Summary of Comments: The 2008 Farm Bill required the Secretary to
establish criteria the Secretary would use to determine if a reasonable
period of time has been afforded to remedy a breach of contract that
could lead to termination of a growing relationship. The majority of
the comments supported the proposed section and felt that the list of
criteria was reasonable. Several parties commented that the regulation
did not allow processors to immediately terminate a growing agreement
if the grower failed to comply with the processor's internal food
safety or animal welfare requirements. Processors could be at risk for
product liability suits, recalls, adverse press and damage to
reputations if required to allow a grower to operate following a breach
involving food safety or animal welfare standards.
We received many comments on the paragraph related to providing
reasonable time to rebut an allegation
[[Page 76880]]
that there was a breach of contract. Many of the comments argued
against allowing growers time to provide rebuttals to significant
breaches. Typical examples of significant breaches included those
affecting animal welfare, abuse or food safety. Several comments said
describing a sufficient amount of time for rebuttal as being
``generally 14 days'' was too vague and should be eliminated or
explained further.
There were a few comments that stated certain paragraphs were vague
or unclear and that the section should be rewritten so it would be more
precise and less confusing.
Agency Response: With regard to the comments on animal welfare and
food safety, we agree with the concerns raised by these comments. As a
result, we added a sentence to the introductory paragraph which allows
the terms of a livestock contract or poultry growing arrangement to
control the actions of a packer, swine contractor or live poultry
dealer when food safety or welfare of animals is at stake.
With respect to the commenter that felt the term ``generally 14
days'' in proposed section 201.218(d) needed revision, we agree and
changed the wording to ``adequate time'' for rebuttal from the date of
the breach notice. Since this section is criteria and not specific
requirements, setting an exact time also did not seem appropriate.
With respect to the general comments regarding the need for better
clarity and suggested revisions to make the paragraphs more precise, we
agree. We made a number of changes to wording within criteria to make
their meaning more clear. Additionally, several criteria either seemed
redundant (e.g. the criterion related to arbitration) or duplicative of
other criteria (e.g. criteria regarding notice within 90 days of
breach) were not included in this final rule.
Arbitration
Summary of Comments: Almost all the comments on this section were
supportive. Comments from growers and producers felt this was an
important provision to protect their rights. Two comments expressed
concern that live poultry dealers may terminate their relationship with
growers that opted-out of arbitration when the live poultry dealers
need to decrease production. Several comments expressed general
opposition to the entire section and that anyone who did not like the
arbitration terms in a contract should simply not enter into the
contract instead of having a right to opt-out. One commenter identified
the criterion related to whether arbitration procedures comply with the
terms of the Federal Arbitration Act as an unnecessary addition to the
rule. There were several comments on the provision that said failure to
sign either the arbitration acceptance or declination statement voided
the contract. Comments from two parties recommended that in the
alternative, the rule should state failure to sign one of the elections
meant the grower was opting-out of arbitration without voiding the
contract. One other party suggested that if neither election is made
the required arbitration clause portion of the contract was void.
Agency Response: With regard to comments concerning growers or
producers being subject to retaliation for exercising their right to
opt-out, we agree with this concern. We also point out that terminating
relationships with growers because they exercised their right to opt-
out of required arbitration under Sec. 201.219 would be an unlawful
practice. With regard to general comments against the right to opt-out
of arbitration, we point out this provision was included in the 2008
Farm Bill. This provision implements section 210 of the P&S Act added
by the 2008 Farm Bill. We have not included the criterion related to
the Federal Arbitration Act in this final rule. We have concluded that
if terms in a contract violate the Federal Arbitration Act, the
remedies provided under that statute are better suited to address the
issue than the P&S Act. With regard to the comments on failure to
select the option to decline or to be bound by the arbitration terms,
we tended to agree with the comments that voiding the entire contract
was not necessary. We have modified the provision to say a failure to
sign either of the ``Right to Decline Arbitration'' statements will be
treated as if the contract producer or grower declined to accept the
required arbitration clause in the contract.
While the comments generally did not focus on the specific
arbitration criteria, we made a few changes to improve clarity. For
example, one criterion said GIPSA would examine the extent to which
impartial and unbiased neutrals would be used as arbitrators in
deciding if contract producers and growers were allowed to participate
fully in the arbitration process. In practice it is often the case that
each party to the dispute names a non-neutral arbitrator to serve on an
arbitration panel to hear and decide the dispute. Often, use of non-
neutral arbitrators is necessary so that the arbitrators are qualified
and have appropriate foundational knowledge of the industry to
understand the facts of the case so a proper ruling can be made. The
naming of a non-neutral arbitrator by a party to the arbitration
process does not necessarily restrict a contract producer or grower
from participating fully in the process. For these reasons, we removed
this criterion. As another example, we combined the provision about the
cost of arbitration with that of whether there are reasonable time
limits in the arbitration process.
Regulatory Impact Analysis
Summary of Comments: Thirty-seven comments were received on GIPSA's
compliance with the analytical requirements of Executive Order 12866.
Many of the comments favoring the proposed changes pointed to what they
viewed as the deleterious effects of increased concentration on
competition. For example, a number of commenters referred to declining
farm prices and the declining farm share of the retail value of meat
and poultry as indications that increased concentration had adversely
affected producers. However, few comments provided numerical estimates
of the economic benefits of the proposal.
Three comments, consisting of over 1,000 pages, expressed concern
that the economic impacts of the proposed rule would be economically
significant and submitted evidence that the proposed provisions might
have costs of more than $1 billion per year. Comments also suggested
the rule would hurt innovation and food safety and increase costs and
prices to consumers. Commenters noted that for the cattle and hog
industries adjustment costs would be related to the shifting away from
the use of marketing arrangement forms of procurement and contracts in
favor of the spot market and for poultry would entail overall losses of
production efficiency in the conversion of factor inputs to product
output. In the study prepared for the National Meat Association by
Informa Economics, 75 percent of the economic costs associated with the
proposed rule were associated with, in their view, relieving plaintiffs
from the burden of proving competitive injury.\5\
---------------------------------------------------------------------------
\5\ Informa Economics, Inc. ``An Estimate of the Economic Impact
of GIPSA's Proposed Rules,'' prepared for the National Meat
submitted as Appendix C to the National Cattlemen's Beef Association
and Appendix D of the National Pork Producers Council comment
submissions (henceforth referred to as the Informa Study).
---------------------------------------------------------------------------
The Informa study estimated the aggregate impact of the June 22,
2010, proposed GIPSA rule for the U.S. meat and poultry industry at
$1.64 billion (Table 1). The Informa study further estimated the value
of lost production based on their estimated on-going and adjustment
costs. The value of lost production totaled almost $1.1 billion or
[[Page 76881]]
about 66 percent of the total estimated costs. The estimates differ
because the total on-going and adjustment costs represent the cost to
each industry before markets adjust to the changes in output. The value
of lost industry production represents the cost to each industry after
markets adjust to changes in output.
Table 1--Informa Study--Adjustment Cost and Industry Output Effects, June 22, 2010 Proposed Rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Million $
-------------------------------------------------------------------------------- Lost
Total production as
Sector Total Informa Efficiency Quality and efficiency and Value of lost a percentage
costs costs demand costs quality and industry of total
demand costs production Informa costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beef.................................................... 879.8 401.9 377.7 779.6 591 67
Pork.................................................... 401.4 176.7 82.2 258.9 246 61
Poultry................................................. 361.6 302.2 0.0 302.2 236 65
Turkey.................................................. na na na na 14 na
-----------------------------------------------------------------------------------------------
Total............................................... 1,642.8 880.8 459.9 1,340.7 1,087 66
--------------------------------------------------------------------------------------------------------------------------------------------------------
na = not applicable.
Agency Response: This final rule contains several significant
changes based on the comments received during the comment period for
the June 22, 2010 proposed rule. Many of the proposed provisions
identified by commenters and in the Informa analysis as having the
largest effect in the market are not included in this final rule.
We have considered all the analyses and information provided in
comments as we completed the analysis for this final rule, but in some
cases it was of limited use and refinement of estimates was difficult.
For example, though the Informa study provided some insight into
understanding the costs and benefits associated with many of the major
proposed rule changes, it also has limitations. As detailed in the
Informa study, ``* * * it is important to recognize that it was
impossible to structure the interview process in a way that provided a
pure random sample and thus the information gleaned from the surveys
should not be used to make statistical inferences about industry
populations in a strict sense.'' \6\
---------------------------------------------------------------------------
\6\ Informa Economics, Inc. ``An Estimate of the Economic Impact
of GIPSA's Proposed Rules,'' p. 4.
---------------------------------------------------------------------------
It is also not clear whether those responding to the Informa survey
based their input on the estimated cost associated with the proposed
rule or a ``worst case'' scenario. As discussed by Gresenz et al.,
without a history of claims on which to base a prediction, it is
difficult to accurately estimate the potential threat.\7\ Gresenz et
al. further notes that individuals are likely to over-estimate the
likelihood that plaintiffs will win cases and decision makers may over-
react to the small possibility of having to pay large penalties. To the
extent this tendency to over-react to the small possibility of having
to pay large penalties is reflected in the Informa study estimates, the
Informa study costs over-estimate the costs associated with the
proposed rule. Similarly, the estimates of the economic costs provided
by Elam \[3]\ are potentially an over-estimate of the true costs
because of the significant changes to the proposed rule.
---------------------------------------------------------------------------
\7\ Gresenz, Carole Roan, Deborah H. Hensler, David M. Studdard,
Bonnie Dombey-Moore, and Nicholas M. Pace (1998). ``A Flood of
Litigation? Predicting the Consequences of Changing Legal Remedies
Available to ERISA Beneficiaries.'' RAND Issue Paper, IP-198.
\[3]\ Elam, Dr, Thomas E. ``Proposed GIPSA Rules Relating to the
Chicken Industry: Economic Impact.'' FarmEcon LLC (November 16,
2010).
---------------------------------------------------------------------------
V. Executive Orders 12866, 13563 and Other Analyses
Executive Orders 13563 and 12866 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
This final rule has been determined to be significant for the purposes
of Executive Order 12866 and, therefore, has been reviewed by the
Office of Management and Budget.
Need for Regulation
As discussed previously, Title XI of the 2008 Farm Bill requires
the Secretary of Agriculture to issue a number of regulations under the
P&S Act, 1921, as amended. Among these instructions, the 2008 Farm Bill
directed the Secretary to identify criteria to be considered in
determining:
Whether an undue or unreasonable preference or advantage
has occurred in violation of the Act;
Whether a live poultry dealer has provided reasonable
notice to poultry growers of any suspension of the delivery of birds
under a poultry growing arrangement;
When a requirement of additional capital investments over
the life of a poultry growing arrangement or swine production contract
constitutes a violation of the Act;
If a live poultry dealer or swine contractor has provided
a reasonable period of time for a poultry grower or a swine production
contract grower to remedy a breach of contract that could lead to
termination of the poultry growing arrangement or swine production
contract; and
Whether the arbitration process provided in a contract
provides a meaningful opportunity for the grower or producer to
participate fully in the arbitration process.
In addition to developing criteria, the 2008 Farm Bill provided
that livestock and poultry contracts must specifically disclose the
right of the contract producer or grower to decline the requirement to
use arbitration to resolve any controversy that may arise under the
livestock or poultry contract.
This rulemaking is necessary to fulfill statutory requirements.
The Use of Contracts in the Pork and Poultry Industry
Formal contractual arrangements cover a considerable share of U.S.
poultry and livestock production. Contracting can minimize transaction
costs, induce firms to make optimal investments in relationship
specific asset and create production efficiency gains. Agricultural
contracts can also lead to improvements in efficiency throughout the
supply chain for
[[Page 76882]]
products by providing farmers with incentives to deliver products
consumers want and produce products in ways that reduce processing
costs and, ultimately, retail prices.\8\
---------------------------------------------------------------------------
\8\ A comprehensive study of the benefits and costs associated
with contract marketing was conducted by RTI International (RTI).
The study did not examine poultry production. See RTI International.
2007. GIPSA Livestock and Meat Marketing Study. Prepared for Grain
Inspection, Packers and Stockyard Administration. U.S. Department of
Agriculture. Contract No. 53-32KW-4-028.
Table 2--Share of Commodity Production Under Contract, by Commodity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Share of production under contract (percent)
Commodity -----------------------------------------------------------------------------------------
1991-93 1996-97 2001-02 2005 2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cattle........................................................ na 17.2 21.0 17.6 29.4
Hogs.......................................................... na 34.2 62.5 76.2 68.1
Poultry and eggs.............................................. 88.7 83.8 92.3 94.2 89.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
na = Data not available for commodity detail.
Source: USDA, Economic Resource Service using data from USDA's Agricultural Resource Management Survey, 1996-2008 (all versions); and USDA's Farm Costs
and Returns Survey, 1991-93.
In general, contracts are used more widely in pork and poultry
production compared to cattle production. For example, in 2008
contracts covered 29 percent of cattle production. In comparison,
contracts covered about 90 percent of poultry production and about 68
percent of hog production. While both hog and poultry operations use
contracts extensively, there are important distinctions between the two
industries. As discussed by MacDonald and Korb \9\ (2011), hog contract
enterprises are usually part of larger, diversified farming businesses,
with the hog segment providing a relatively small share of the farm
income. The farmers typically have a range of alternative outlets for
contract hog production, and farm diversification provides a range of
alternative uses for their own time. Farm households that engage in
contract hog production have relatively high incomes compared with
other households--both farm and nonfarm.
---------------------------------------------------------------------------
\9\ MacDonald, James M. and Penni Korb, USDA Economic Research
Service. ``Agricultural Contracting Update: Contracts in 2008.''
Info. Bulletin No. 72, Feb. 2011.
---------------------------------------------------------------------------
In contrast, contract broiler enterprises are likely to be part of
smaller and less diversified farm businesses, and many broiler
operations have only a single live poultry dealer in their area. As a
result, their farm businesses are much more dependent on contract
production, and their income from contract production is much more
dependent on a single live poultry dealer. Operators of broiler farms
have lower household incomes, on average, than operators of hog farms,
and they depend far more on off-farm employment and income.
GIPSA maintains data on cattle, hogs, and sheep (collectively
referred to as `livestock') slaughterers and live poultry dealers from
the annual reports these firms file with GIPSA. Currently, there are
140 live poultry dealers (all but 16 are also poultry slaughterers and
would be considered poultry integrators) that would be subject to the
final rule. The Census of Agriculture (Census) indicates there are 727
swine contractors. An important factor in determining the economic
effect of the regulations is the number of contracts held by a firm.
Poultry/swine growers enter into a contract with one live poultry
dealer/swine contractor, whereas a live poultry dealer/swine contractor
may have a number of contracts with many growers. GIPSA records for
2007 indicated there were 20,637 poultry growing arrangements
(contracts) of which 13,216, or 64 percent, were held by the largest 6
live poultry dealers, and 95 percent (19,605) were held by the largest
21 live poultry dealers. By comparison, there were 8,995 contract swine
producers. Although there is a significant amount of concentration in
the poultry and livestock industries (Table 3), the literature has
typically not shown that buyers are able to exercise significant
amounts of market power against sellers nationally. As shown in Table
3, the concentration of the four largest hog slaughterers rose from 34
percent in 1980 to a high of 64 percent in 2003 and has remained
relatively stable since then.
Table 3--Four-Firm Concentration in Selected Livestock and Poultry Slaughter, 1980-2009
----------------------------------------------------------------------------------------------------------------
Percent of slaughter from four largest firms
-----------------------------------------------------------------------
Year Steers and
heifers Hogs Broilers Turkeys
----------------------------------------------------------------------------------------------------------------
1980.................................... 36 34 ................ ................
1995.................................... 81 46 ................ ................
2000.................................... 81 56 ................ ................
2001.................................... 80 57 ................ ................
2002.................................... 79 55 ................ ................
2003.................................... 80 64 ................ ................
2004.................................... 79 64 ................ ................
2005.................................... 80 64 ................ ................
2006.................................... 81 61 ................ ................
2007.................................... 80 65 57 51
2008.................................... 79 65 57 51
2009.................................... 81 63 53 58
----------------------------------------------------------------------------------------------------------------
Source: USDA, Grain Inspection, Packers and Stockyards Administration, Packers and Stockyards Program, 2010
Annual Report.
[[Page 76883]]
Though the four firm concentration for the poultry industry is
relatively lower than other industries, the poultry industry has been
almost completely vertically integrated for several decades.\10\ As a
result, the use of spot markets for poultry is virtually nonexistent.
Concentration in broiler and turkey slaughter has trended upwards since
2000. In 2009, the four largest broiler slaughterers posted a 4 percent
decline to 53 percent of the market share compared to 57 percent in
2008. The four largest turkey slaughterers posted a noticeable increase
of 7 percent to control of 58 percent of the market share in comparison
to 2008 at 51 percent.
The data in Table 3 are estimates of national concentration, but
the relevant economic markets for livestock may be regional or local,
and concentration in relevant economic markets is generally higher than
national measures indicate. For example, while poultry markets may
appear to be the least concentrated in terms of the four-firm
concentration ratios presented in Table 3, markets for poultry growers
are much more localized than markets for fed cattle or hogs, and local
concentration in poultry markets, in part due to the limited range in
transporting live birds compared to hogs or cattle, is much greater
than in hog and other livestock markets.
Insight into the need for the specific provisions specified by
Congress in the 2008 Farm Bill can be found in the testimony provided
at the joint USDA-DOJ hearing held on competition in the poultry
industry on May 10, 2010 in Normal, Alabama. Additionally, the need for
the provisions can be highlighted by examining data GIPSA collects on
poultry industry contract compliance which GIPSA initiated in fiscal
year 2009. These compliance reviews involve both determining whether
the live poultry dealer is complying with applicable regulations such
as sufficient notice of termination and checking whether a sample of
payments made under the terms of the contract were made properly. The
firms reviewed in the sample are drawn randomly and with a sample size
so that a 90 percent confidence level holds when inference in made
about the overall industry compliance based on the sample compliance
rate. In 2009, the overall industry compliance rate for livestock
dealers, markets, and packers over four areas (financial payments,
trade practices, records retention and contract terms) was 79.6
percent. This rate compares to a 60.0 percent rate for contract
compliance in the poultry industry.
Provisions of the Final Rule
As discussed earlier in the preamble, we are finalizing proposed
provisions that are required by the 2008 Farm Bill. Below we provide a
short summary of each provision.
Suspension of Delivery of Birds
Section 201.215 of this final rule establishes the criteria the
Secretary may consider when determining whether a live poultry dealer
has provided reasonable notice to poultry growers of any suspension of
the delivery of birds under a poultry growing arrangement. These
criteria include, but are not limited to, a written notice at least 90
days prior to suspension, written notice of the reason for the
suspension of delivery, the length of the suspension of delivery, and
the anticipated date the delivery of birds will resume.
Additional Capital Investments Criteria
Section 201.216 of this final rule provides the criteria the
Secretary may consider when determining whether a requirement of
additional capital investments over the life of a poultry growing
arrangement or swine production contract constitutes a violation of the
P&S Act.
Reasonable Period To Remedy Breach of Contract
Section 201.217 of this final rule provides the criteria the
Secretary may consider when determining if a packer, swine contractor,
or live poultry dealer has provided a reasonable period of time for a
poultry/swine grower to remedy a breach of contract that could lead to
termination of a production contract. These criteria include, but are
not limited to, the form and substance of the notice following the
discovery of a breach of contract.
Arbitration
Section 201.218 of this final rule requires production contracts
that require the use of arbitration to include language on the
signature page that allows the producer or grower to decline
arbitration. Section 201.218 also includes the criteria the Secretary
may consider when determining if the arbitration process provided in a
contract provides a meaningful opportunity for the poultry growers,
swine production contract growers, or livestock producers to
participate fully in the arbitration process.
Economic Assessment
Benefits
In the June 22, 2010 proposed rule, we asserted that the proposed
rule would have benefits but they are not quantified; however, we
discuss below the qualitative benefits that we believe are associated
with the final rule. In addition to the benefits expected from the
various provisions as outlined below, this action fulfills the mandates
specified in Title XI of the 2008 Farm Bill.
Suspension of Delivery of Birds
These new criteria may benefit poultry growers by allowing them to
make informed decisions on the future use of resources. Adequate notice
of suspension would give growers sufficient time to consider other
options for their poultry houses and for keeping up with loan payments,
and would help to address perceived equity concerns between dealers and
growers.
Additional Capital Investments Criteria, Breach of Contract, and
Arbitration
To the extent that market power exists and affects contracting,
these criteria will provide greater parity in contractual relations
between producers and the packer, swine contractor or live poultry
dealer. A fundamental decision facing both growers and integrators or
processors is given an uncertain future, how much capital should be
invested and what percentage of the risk should be borne by the grower
and the integrator or processor. To the extent integrators or
processors have market power, they can shift more risk on the grower.
The relatively large investment in poultry growing facilities makes it
difficult financially for growers to exit the industry once they enter
into the contract and contract compensation rates may be below the
grower's initial expectations. Additionally, poultry growers are also
restricted to a limited number of markets, frequently a single live
poultry dealer, due to the limitations on transporting live poultry.
Similarly, the breach of contract criteria may result in the packer,
swine contractor, or live poultry dealer opting to provide adequate
notice to a grower or provide sufficient time to remedy the breach.
Finally, the arbitration provisions are expected to facilitate poultry
growers, livestock producers, and swine production contract growers'
access to an effective arbitration process.
Costs
In conducting the cost-benefit analysis two comments submitted for
the proposed rule were used to develop initial cost estimates. These
comments are: ``An Estimate of the Economic Impact of GIPSA's Proposed
Rules,'' by Informa Economics, Inc.\11\ and
[[Page 76884]]
``Proposed GIPSA Rules Relating to the Chicken Industry: Economic
Impact,'' by Thomas E. Elam, President, FarmEcon LLC.\12\ The data from
the two comments were combined into a single data set to form industry
wide average cost estimates (nether study cited quantifiable benefits).
The average cost data constructed from the two comments, while useful,
had two limitations for the current analysis. First, the cost data had
to be allocated across the provisions. The procedure to allocate costs
across provisions was to identify the market failure the provisions
were attempting to mitigate as well as the potential costs of specific
provisions and to assign costs based on these two factors. Second, the
reported cost data, even if accurately allocated across provisions, was
for the original proposed rule whereas the provisions in the final rule
were modified based on submitted comments to reduce, and in some cases
substantially reduce the single greatest cost, which was the cost that
could potentially arise due to the potential for litigation or
administrative action.
---------------------------------------------------------------------------
\12\ Elam, Dr. Thomas E. ``Proposed GIPSA Rules Relating to the
Chicken Industry: Economic Impact.'' FarmEcon LLC (November 16,
2010).
---------------------------------------------------------------------------
Litigation costs were considered to have two cost components costs
related to adjustments in the industry to avoid potential litigation
and additional attorney fee costs. The industry adjustment cost varied
between the livestock and poultry sectors. Within the cattle and hog
industries comments suggested the adjustment costs would arise from the
reduction in market contracts with a corresponding increase in the
marketing of livestock on the spot market. The adjustment costs
reported in the comments that are associated with these changes were
related to percentage point decrease in market contracts associated
with the cattle and hog industries. In order to arrive at the
percentage point reduction in market arrangement usage due to perceived
threat of litigation in either industry, data on consumer and producer
surplus costs from reductions in marketing arrangements were utilized.
These data are reported in the 2006 GIPSA Livestock and Meat Marketing
study conducted by RTI.\13\ Associated with this surplus data were data
in the report on retail and farm prices, and quantities produced and
consumed. This data was used to obtain a cost measured in consumer and
producer surplus terms related to a unit percentage point reduction in
marketing contract usage. This unit cost data was then used to
determine the percentage point reduction implied by the species
specific industry adjustment costs. For example the $9.6 million
adjustment cost for Section 201.216 in hogs implies a 0.09 percentage
point reduction in the use of marketing contracts in the hog industry.
---------------------------------------------------------------------------
\13\ RTI International. 2007. GIPSA Livestock and Meat Marketing
Study. Prepared for Grain Inspection, Packers and Stockyard
Administration. U.S. Department of Agriculture. Contract No. 53-
32KW-4-028.
---------------------------------------------------------------------------
The method utilized to obtain the percent reduction, or efficiency
loss, in live bird production implied by the industry adjustment cost
reported by commenters used a poultry demand equation constructed from
elasticity data reported by USDA's Economic Research Service.\14\
Numeric analysis was used on the poultry demand equation while assuming
a perfectly inelastic supply to solve for the quantity per capita
consumption level that yielded a consumer surplus cost equivalent to
the industry adjustment cost. The resulting per capita reduction in
quantity demanded at the retail level was translated into live
production using 2009 population levels and a poultry yield per live
bird rate of 0.74 computed from data obtained from the National
Agricultural Statistics Service.\15\ The cost is assumed to be absorbed
by poultry processors. As example the $45.2 million adjustment cost
(table 4) implies a loss in farm level production efficiency of 0.4
percentage points.
---------------------------------------------------------------------------
\14\ Elasticity data is located at the USDA-ERS Web site at:
http://www.ers.usda.gov/Data/Elasticities/.
\15\ NASS Agricultural Statistics Board. Poultry--Production and
Value 2009 Summary April 2010 and 2010 Agricultural Statistics
Annual, Chapter VIII Dairy and Poultry Statistics.
---------------------------------------------------------------------------
For the provisions in the final rule, industry adjustment costs
were a relatively large cost in two of the four provisions: Section
201.216 (Additional capital investment criteria) and Section 201.217
(Reasonable period to remedy a breach of contract). For example,
contrasting the total costs of Section 201.215 (Suspension of delivery
of birds) with Section 201.216, the respective costs estimated from the
average costs reported by the comments range from less than $100,000
for Section 201.215 compared to $46.8 million for Section 201.216
(Table 3). While our allocation of the representative adjustment cost
data from the Informa and Elam studies provides one cost estimate for
the provisions, due to the limitations in the studies mentioned above,
GIPSA expects these provision estimates to be upper cost limits. The
basis for estimating a lower limit cost is explained in more detail
below after the discussion of the other costs in Table 4.
Table 4--USDA Final Rule Costs ($ Million) by Section and Species
----------------------------------------------------------------------------------------------------------------
Hog-pork ($M) Poultry ($M) Total ($M)
----------------------------------------------------------------------------------------------------------------
Section 201.215 Suspension of Delivery of Birds
----------------------------------------------------------------------------------------------------------------
Adjustment................................................ 0 0 0
Legal..................................................... 0 0 0
Administrative............................................ 0 ** **
-----------------------------------------------------
Total................................................. 0 ** **
----------------------------------------------------------------------------------------------------------------
Section 201.216 Additional Capital Investment Criteria
----------------------------------------------------------------------------------------------------------------
Adjustment *.............................................. 5.6-9.6 3.7-45.2 9.3-54.8
Legal..................................................... 0.2 0.7 0.9
Administrative............................................ 0.4 0.9 1.3
-----------------------------------------------------
Total................................................. 6.2-10.2 5.3-46.8 11.5-57.0
----------------------------------------------------------------------------------------------------------------
Section 201.217 Reasonable Period to Remedy Breach of Contract
----------------------------------------------------------------------------------------------------------------
Adjustment................................................ 5.0-6.0 2.8-7.0 7.8-13.0
[[Page 76885]]
Legal..................................................... 0.1 0.1 0.2
Administrative............................................ 0.1 0.2 0.2
-----------------------------------------------------
Total................................................. 5.2-6.2 3.0-7.2 8.2-13.4
----------------------------------------------------------------------------------------------------------------
Section 201.218 Arbitration
----------------------------------------------------------------------------------------------------------------
Adjustment................................................ 0.2 1.3 1.5
Legal..................................................... 0 ** **
Administrative............................................ ** ** **
-----------------------------------------------------
Total................................................. 0.2 1.4 1.6
-----------------------------------------------------
Overall total..................................... 11.5-16.6 9.8-55.5 21.3-72.1
----------------------------------------------------------------------------------------------------------------
* Table note: For provision 201.216 and 201.217, the adjustment costs are reported as ranges. The upper bound
was derived from costs allocated from the weighted average costs obtained from the combined Informa and Elam
comments. The lower bound estimates were developed from changes in marketing agreement usage in the hog case
and in the poultry case from reduced levels of production efficiency.
** Represent estimates of less than $100,000.
In addition to industry adjustment costs, the total cost in Table 4
includes administrative costs and estimated legal fees associated with
those provisions that had relative large adjustment costs. In the case
of Section 201.215, the total cost is comprised entirely of
administrative costs. The administrative cost itemization is described
in more detail in the Paperwork Reduction section.
Legal fees were developed from data for cases filed under the P&S
Act from 1926 to 2010 on the number of decisions by year; the court in
which the decision was reached; and the type case, i.e., financial,
trade practice, or competition. A 10-year moving average estimate of
annual legal fee cost incurred from these cases was used to derive an
annual legal fee cost of $11.7 million. This fee was doubled and
allocated across the species-provision categories using initially the
same proportion as the proportions generated from the allocation of the
adjustment costs in the average comment cost data. Final amounts were
adjusted based on the perceived risk of litigation that a provision-
species category might entail. For example, Section 201.215 (Suspension
of delivery of birds) was considered to have low liability based on its
similarity with the earlier GIPSA regulation published in the Federal
Register on Dec. 3, 2009, Vol. 74, pg. 63277 regarding poultry contract
terms and written notice to poultry growers regarding production
contracts.
Experience with implementation of the regulations published on Dec.
3, 2009, and the absence of reports by regulated industry participants
and measurable cost effects provides an alternate basis from which to
project industry adjustment costs. Based on any significant reductions
in marketing contract usage from past regulation affecting hog
contracts, such as the swine contract library, and the mentioned
poultry regulations for Section 201.216 and Section 201.217, a minimal
percent reduction in marketing contract usage was established for the
case of hogs and a similar percent reduction in production farm level
efficiency was established for poultry and then the imputed costs were
calculated using the reverse procedure described above. We assume a
0.01 percentage point reduction in contract usage and farm poultry
production efficiency for Section 201.216 and a 0.001 percentage point
reduction for Section 201.217. The associated adjustment costs imputed
by the reductions for Section 201.216 are $5.6 million for hogs and
$3.7 million for poultry. For Section 201.217 the imputed adjustment
costs for hogs are $5.0 million and $2.8 million for poultry.
These values provide ranges on the adjustment cost estimates for
Section 201.216 of $5.6 million to $9.6 million for hogs and $3.7
million to $45.2 million for poultry. For Section 201.217 the
adjustment costs range from $5.0 million to $6.0 million for hogs and
$2.8 million to $7.0 million for poultry. Summing over all costs and
provisions of the final rule for hogs, the final cost estimate is
expected to range between $11.5 million to $16.6 million. Similarly for
poultry, the estimated total cost is expected to range between $9.8
million and $55.5 million. The overall final rule is expected to have a
final cost ranging between $21.3 million and $72.1 million.
The range associated the adjustment costs reflect the variety of
actions regulated entities could take in response to the criteria being
finalized. Some entities may choose to take little or no action in
response to the finalization of the criteria. In these instances, the
more entities that choose this option, the lower the net cost to the
industry. Conversely, some entities may choose to impose multiple
changes in their business practices to limit their vulnerability to
complaint. The more entities that choose this option, the higher the
net cost to the industry, although the net cost is expected to be
within the range stated in Table 4.
Impact on Small Businesses
Pursuant to the requirements set forth in the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601-612), GIPSA has considered the
economic impact of this action on small entities. The purpose of the
RFA is to fit regulatory actions to the scale of businesses subject to
such actions in order that small businesses will not be unduly or
disproportionately burdened. The Small Business Administration (SBA)
defines small businesses by their North American Industry
Classification System Codes (NAICS). The affected entities and
corresponding size thresholds under the rule that would be defined as a
small business are: cattle producers (NAICS 12111); hog producers and
swine contractors (NAICS 112210); and broiler and turkey producers
(NAICS 112320 and 112330) are considered small businesses if their
sales are less than $750,000 per year. Live poultry dealers (NAICS
311615), and hog and cattle slaughterers (NAICS 311611) are considered
small businesses if they have fewer than 500 employees. The only
section of the final rule that applies to the beef industry is the
section related to arbitration (Sec. 201.218) and this only applies to
a small segment (< 5%) of the industry that utilizes production
[[Page 76886]]
contracts. So the final rule would not have any impact on livestock
auctions or marketing agencies, which are typically small businesses.
The regulatory impact analysis found the overall impact from this
section and the final rule as a whole on the beef industry to be very
small. Based on this estimate, we also expect the impact on small
businesses in the beef industry to not be significant. As detailed in
the regulatory impact analysis, almost all of the cost associated with
the rule relate to the pork and poultry industries, so we focus on
those two sectors for this analysis. The Census of Agriculture (Census)
indicates there are 727 swine contractors. The Census provides the
number of head sold by size classes for these entities, but not value
of sales. To estimate the size by the SBA classification, the average
value per head for sales of all swine operations is multiplied by
production values for firms in the Census size classes for swine
contractors. The estimates reveal about 300 entities had sales of less
than $750,000 in 2007 and would have been classified as small
businesses. Additionally, there were 8,995 hog producers with swine
contracts; about half of these producers would have been classified as
small businesses.
GIPSA also maintains data on cattle, hogs, and sheep (collectively
referred to as `livestock') slaughterers and live poultry dealers from
the annual reports these firms file with GIPSA. Currently, there are
140 live poultry dealers (all but 16 are also poultry slaughterers and
would be considered poultry integrators) that would be subject to the
proposed rule. According to U.S. Census data on County Business
Patterns, there were 64 poultry slaughter firms had more than 500
employees in 2006. The difference yields approximately 75 poultry
slaughters/integrators that have fewer than 500 employees and would be
considered as small businesses that would be subject to the final
regulation.
GIPSA records for 2007 indicated there were 20,637 poultry growing
arrangements (contracts) and 19,605 poultry growers holding the other
side of the poultry growing arrangement. All of these growers are small
businesses by SBA's definitions.
Section 201.215 Suspension of Delivery of Birds
In the 2008 Farm Bill, Congress required the Secretary establish
criteria that he may consider when determining whether a live poultry
dealer has provided reasonable notice to poultry growers of any
suspension of the delivery of birds under a poultry growing
arrangement. This 2008 Farm Bill provision is implemented through Sec.
201.215 of the final rule. This regulation establishes some criteria to
be considered by the Secretary, and does not impose specific
requirements or prohibitions on either large or small businesses. Under
a poultry growing arrangement, a live poultry dealer has discretion on
whether it will perform under the agreement (i.e., whether it will
place poultry on a poultry grower's farm). The poultry grower, however,
must raise and care for poultry placed on his or her farm by the live
poultry dealer as prescribed or be in breach of the contract. Poultry
growers have reported to GIPSA that there have been instances in which
a live poultry dealer has failed to place poultry on a poultry grower's
farm for an extended period of time without notifying the poultry
grower of the reasons for or the anticipated length of delay in placing
additional poultry. Without sufficient information, a poultry grower is
unable to protect his or her financial interests and make informed
business decisions.
GIPSA considered making notification of suspension of birds a
requirement, but that is not what the 2008 Farm Bill mandated. GIPSA
also considered criteria with various notification time periods between
as little as 30 days and as great as 180 days. GIPSA considered the
effects of this range of days on small live poultry dealers and small
growers and believes that during the normal course of the poultry
production cycle, a live poultry dealer should generally know at least
90 days in advance that it will suspend delivery of poultry to a
poultry grower. Providing insufficient notification of suspension of
delivery would not give poultry growers, most of which are small
family-owned businesses, sufficient time to consider other options for
their poultry houses and for keeping up with loan payments, some of
which are government guaranteed loans. We believe establishing criteria
to consider when determining whether live poultry dealers have provided
sufficient notice of their intention to suspend delivery of poultry to
poultry growers may result in greater parity in contractual relations
between the grower and the live poultry dealer.
Finally, this section lists criteria the Secretary may consider
when determining if a violation of the P&S Act has occurred and not
requirements.
Section 201.216 Additional Capital Investments Criteria
In the 2008 Farm Bill, Congress required the Secretary to establish
criteria that may be considered when USDA is determining whether a
requirement of additional capital investments over the life of a
poultry growing arrangement or swine production contract constitutes a
violation of the P&S Act. While some live poultry dealers/swine
contractors may be considered as small businesses, there are
disproportionately more poultry/swine growers that are smaller
businesses. After evaluating all the alternatives identified, the
option being finalized was deemed the least burdensome on small
entities while fulfilling the mandate of the 2008 Farm Bill. GIPSA
believes the provisions of new Sec. 201.216 could be useful to small
poultry/swine growers when they are faced with deciding whether to make
financial investments in their business operations as a requirement to
entering into a contractual obligation with a live poultry dealer/swine
contractor. Again, as directed by Congress this regulation establishes
some of the criteria that may be considered by the Secretary regarding
additional capital investments, and does not impose specific
requirements or prohibitions on large or small businesses.
Section 201.217 Reasonable Period of Time To Remedy a Breach of
Contract
In the 2008 Farm Bill, Congress required the Secretary to establish
criteria that may be considered when determining if a packer, swine
contractor, or live poultry dealer has provided a reasonable period of
time for a poultry/swine grower to remedy a breach of contract that
could lead to termination of a production contract. GIPSA believes
Sec. 201.217 will benefit small poultry/swine growers because it could
result in live poultry dealers providing them with adequate time to
remedy a breach of contract. We believe establishing criteria to
consider when determining whether a packer, swine contractor or live
poultry dealer has provided a reasonable period of time to remedy a
breach of contract may result in greater parity in contractual
relations between them and the poultry/swine grower. After evaluating
all the alternatives identified, the option being finalized was deemed
the least burdensome on small entities while fulfilling the mandate of
the 2008 Farm Bill. It should be noted the majority of the comments
received on Sec. 201.217 were supportive of the regulation and felt
the proposed list of criteria was reasonable. This regulation
establishes some of the criteria the Secretary may consider when
determining if a packer, swine contractor, or live poultry dealer has
provided a reasonable time for a poultry/swine grower to remedy a
breach of contract and does not impose
[[Page 76887]]
specific requirements or prohibitions. Additionally, this section
satisfies the requirements of the 2008 Farm Bill.
Section 201.218 Arbitration
The 2008 Farm Bill requires that livestock contracts and poultry
growing arrangements contain an option for poultry growers and
livestock producers to accept or reject arbitration to settle disputes.
The 2008 Farm Bill also directed the Secretary to establish criteria to
consider when determining if the arbitration process provided in a
contract provides a meaningful opportunity for the poultry growers,
swine production contract growers, or livestock producers to
participate fully in the arbitration process. By establishing a list of
some of the criteria the Secretary may consider when determining if a
contract's arbitration provisions violate the P&S Act, the final rule
should help ensure that any arbitration terms are fair to both parties
to the contract. Fairness is especially important when one party to a
contract is significantly smaller and may have limited alternatives
such as is typically the case for cattle producers, poultry growers,
and swine production contract growers. We believe establishing criteria
to consider when determining whether growers and producers have been
provided a meaningful opportunity to participate in the arbitration
process may result in greater parity in contractual relations between
them and the packer, swine contractor or live poultry dealer.
The effect of the final regulations on all small businesses
described in the analysis is expected not to have a significant
economic impact on a substantial number of small business entities as
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).
Within this final rule, we provide a succinct statement of the need for
the rule; a summary of significant issues raised by commenters and an
assessment of those comments; changes made as a result of such
comments, including changes to minimize significant, negative economic
impacts; and estimates of the number of small businesses. We have,
therefore, complied with the Regulatory Flexibility Act.
Executive Order 12988
This final rule has been reviewed under Executive Order 12988,
Civil Justice Reform. These actions are not intended to have
retroactive effect, although in some instances they merely reiterate
GIPSA's previous interpretation of the P&S Act. Section 414 of the P&S
Act (7 U.S.C. 228c) addresses the issue of preemption.\16\ There are no
administrative procedures that must be exhausted prior to any judicial
challenge to the provisions of this final rule. Nothing in this final
rule is intended to interfere with a person's right to enforce
liability against any person subject to the P&S Act under authority
granted in section 308 of the P&S Act.
---------------------------------------------------------------------------
\16\ Section 414. Federal preemption of State and local
requirements.--No requirement of any State or territory of the
United States, or any subdivision thereof, or the District of
Columbia, with respect to bonding of packers or prompt payment by
packers for livestock purchases may be enforced upon any packer
operating in compliance with the bonding provisions under the Act of
July 12, 1943 (57 Stat. 422; 7 U.S.C. 204), and prompt payment
provisions of section 409 of this Act, respectively; Provided, That
this section shall not preclude a State from enforcing a
requirement, with respect to payment for livestock purchased by a
packer at a stockyard subject to this Act, which is not in conflict
with the Act or regulations thereunder: Provided further, That this
section shall not preclude a State from enforcing State law or
regulations with respect to any packer not subject to this Act or
the Act of July 12, 1943.
---------------------------------------------------------------------------
Executive Order 13175
This final rule has been reviewed with the requirements of
Executive Order 13175, Consultation and Coordination with Indian Tribal
Governments. GIPSA offered opportunities to meet with representatives
from Tribal Governments during the comment period for the proposed
rule, June 22-November 22, 2010 with specific opportunities in Rapid
City, SD on October 28th, 2010 and Oklahoma City, OK on November 3rd,
2010. All tribal headquarters were invited to participate in these
venues however, no tribe participated in the venues for consultation.
GIPSA has received no specific indication that the rule will have a
direct or substantial effect on tribes and has received no other
requests for consultation as of the date of this publication. Should
GIPSA receive any future requests for consultation, such requests will
be addressed as they arise.
Paperwork Reduction Act
This final rule is being issued in accordance with section 3507(d)
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Upon
OMB approval this package will be merged with 0580-0015. The costs
detailed below were reflected in the regulatory impact analysis' total
costs for the final rule and were derived from both that analysis and
the comments received on the proposed rule. Specifically, the proposed
rule discussed the paperwork burden on section-by-section basis. Only
the burden associated with those sections being finalized at this time
were included in the analysis below. Further, the information in the
proposed rule was amended as result of comments received in response to
the proposed rule.
The hours involved in conducting tasks associated with the final
rule were estimated using GIPSA expertise in administering the P&S Act
to develop the time required to maintain records, complete forms,
submit required information, for management review, and a legal review
for possible changes in contracts or business practices. Estimates are
based on GIPSA's experience reviewing business records in the normal
course of enforcing the P&S Act, and its work with data that is similar
in type and complexity to that to be reported. General cost and time
parameters used across more than one rule provision are detailed in the
table below.
Table 5--General Parameters Used for Estimates
------------------------------------------------------------------------
Parameter Value
------------------------------------------------------------------------
Admin. assistant salary ($/yr)................................. 55,000
Manager salary ($/yr).......................................... 75,000
Legal salary ($/yr)............................................ 80,000
Wage full cost, admin. asst. ($/hr)............................ 34
Wage full cost, manager ($/hr)................................. 46
Wage full cost, legal ($/hr)................................... 49
Live poultry dealer firms ().......................... 199
Swine contractor............................................... 727
Poultry producer and hatchery agreements ()........... 22,200
Swine production agreements ()........................ 8,995
Settlements per year per poultry agreement ()......... 5
Swine packer plants with 35 packers ()................ 55
------------------------------------------------------------------------
The administrative assistant annual salary is from information
obtained on average hourly earnings from the U.S. Bureau of Labor
Statistics, Table B-4 (release date 8-7-09), under the other services
line with added expenses outside of salary. Management salary
calculations are based on a $75,000 annual salary. Legal salary
calculations are based on an average corporate attorney with an $80,000
annual salary. All salaries are adjusted by a factor of 1.27 to account
for benefits and placed on an hourly basis as $/hour = (salary/year x
1.27 for benefits)/(40 hours/week x 52 weeks/year). Specific
administrative costs by provision were calculated as described below.
The total
[[Page 76888]]
annual administrative cost associated with the final rule is estimated
at $1.6 million (table 6).
Table 6--USDA Estimated Administrative Costs, by Section of Final Rule, by Species
----------------------------------------------------------------------------------------------------------------
Million $
Section -----------------------------------------------------
Pork Poultry Total
----------------------------------------------------------------------------------------------------------------
201.215 Suspension of delivery of birds................... 0.0 * *
201.216 Additional capital investments criteria........... 0.4 0.9 1.3
201.217 Reasonable period to remedy a breach of contract.. * 0.2 0.2
201.218 Arbitration....................................... * * *
-----------------------------------------------------
Total................................................. 0.4 1.2 1.6
----------------------------------------------------------------------------------------------------------------
* Defined as less than $100,000.
Specific administrative costs by provision were calculated as described below.
Section 201.215 Suspension of Delivery of Birds
One of the criteria the Secretary may consider in determining if a
live poultry dealer has provided reasonable notice of the suspension of
birds to a poultry grower is whether written notice of the suspension
of birds was provided. The additional information burden of providing
written notice of suspension of birds is based on 4,440 notices
delivered per year = (22,200 contracts x 20 percent) and an estimated
$75,480 industry cost per year = (4,440 notices x 0.50 hours to provide
notice x administrative assistant wage rate of $34 per hour).
Section 201.216 Additional Capital Investment Criteria
Live poultry dealers and swine contractors may choose to undertake
a review of their contracts in response to the list of some of the
criteria the Secretary may consider in determining whether an
additional capital investment requirement in their poultry growing
arrangement or production contract constitutes a violation of the P&S
Act. The cost of such a review includes an estimate of 0.20 proportion
of the agreements expiring, or requiring review per year. This yields
6,239 contracts reviewed per year = (22,200 poultry + 8,995 swine
production agreements) x 0.20. With the cost of contract review being
based on 37,434 hours total burden = 6,239 contracts x 6 hour/contract
to yield $1,272,756 for the cost of review = 37,434 hours x $34/hour
administrative assistant wage. The additional administrative cost for
live poultry dealers is estimated at about $900,000 compared to
$367,000 for swine contractors. These costs are expected to be incurred
annually.
Section 201.217 Reasonable Period of Time To Remedy a Breach of
Contract
One of the criteria the Secretary may consider in determining if a
packer, swine contractor or live poultry dealer has provided a poultry
grower or swine production contract grower reasonable time to remedy a
breach of contract that could lead to contract termination is whether
written notice of the breach was provided. The estimate of the burden
to provide such written notice is based on 31,195 poultry growers and
swine contracts affected. This yields 6,239 notices per year = 20
percent of the contracts as the annual rate of contract breeches for a
per year cost of $212,126 per year cost = (time burden of 1 hour to
provide notice x 6,239 notices x $34 per hour administrative assistant
wage rate). The additional administrative cost for live poultry dealers
is estimated at about $150,000 per year compared to $61,000 per year
for swine contractors.
Section 201.218 Arbitration
One of the criteria the Secretary may consider in determining if
the arbitration process provides a meaningful opportunity for the
grower or producer to participate fully in the arbitration process, if
that is the dispute resolution mechanism they have chosen in the
agreement or contract, is whether the right of the contract producer or
grower to use arbitration is conspicuously stated in the contract. The
estimate of the burden to provide such a statement in all contracts is
based on 31,195 poultry growers and swine contracts affected. Assuming
that all contracts are new, amended, altered, modified, renewed, or
extended over a five year period, the total would be $265,158 = (time
burden of 0.25 hour to provide notice x 31,195 contract x $34 per hour
administrative assistant wage rate). The annual average cost would be
$53,032 with the additional cost for live poultry dealers estimated at
about $38,000 per year compared to $15,000 per year for swine
contractors. It is assumed that such language would eventually become
part of the contract template and this cost would go down over time.
E-Government Act Compliance
GIPSA is committed to complying with the E-Government Act, to
promote the use of the Internet and other information technologies to
provide increased opportunities for citizen access to Government
information and services, and for other purposes.
List of Subjects in 9 CFR Part 201
Confidential business information, Reporting and recordkeeping
requirements, Contracts, Poultry, Livestock, Arbitration.
For the reasons set forth in the preamble, we amend 9 CFR part 201
as follows:
PART 201--REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT
0
1. The authority citation for part 201 is revised to read as follows:
Authority: 7 U.S.C. 181-229, 229c.
0
2. In Sec. 201.2, add reserved paragraph (l) and paragraphs (m)
through (o) to read as follows:
Sec. 201.2 Terms defined.
* * * * *
(l) [Reserved]
(m) Principal part of performance means the raising of, and caring
for livestock or poultry, when used in connection with a livestock or
poultry production contract.
(n) Additional capital investment means a combined amount of
$12,500 or more per structure paid by a poultry grower or swine
production contract grower over the life of the poultry growing
arrangement or swine production contract beyond the initial investment
for facilities used to grow, raise and care for poultry or swine. Such
term includes the total cost of upgrades to the structure, upgrades of
equipment
[[Page 76889]]
located in and around each structure, goods and professional services
that are directly attributable to the additional capital investment.
The term does not include costs of maintenance or repair.
(o) Suspension of delivery of birds means the failure of a live
poultry dealer to deliver a new poultry flock before the date payment
is due to a poultry grower for the previous flock under section 410 of
the Act.
Sec. Sec. 201.3 and 201.4 [Redesignated as Sec. Sec. 201.4 and
201.5]
0
3. Sections 201.3 and 201.4 are redesignated as Sec. Sec. 201.4 and
201.5 respectively.
0
4. A new Sec. 201.3 is added to read as follows:
Sec. 201.3 Applicability of regulations in this part.
(a) Applicability to live poultry dealers. The regulations in this
part when applicable to live poultry dealers shall apply to all stages
of a live poultry dealer's poultry production, including pullets,
laying hens, breeders and broilers, excluding egg-type pullets, hens
that only produce table eggs, and breeder flocks for the egg industry.
(b) Effective dates. The regulations in this part, when governing
or affecting contracts, shall apply to any poultry growing arrangement,
swine production contract, or any other livestock or poultry contract
entered into, amended, altered, modified, renewed or extended after
February 7, 2012.
0
5. Add reserved Sec. Sec. 201.213 and 201.214 and Sec. Sec. 201.215
through 201.218 to read as follows:
Sec.
201.213 [Reserved]
201.214 [Reserved]
201.215 Suspension of delivery of birds.
201.216 Additional capital investments criteria.
201.217 Reasonable period of time to remedy a breach of contract.
201.218 Arbitration.
* * * * *
Sec. 201.213 [Reserved]
Sec. 201.214 [Reserved]
Sec. 201.215 Suspension of delivery of birds.
The Secretary may consider various criteria when determining
whether or not reasonable notice has been given by a live poultry
dealer to a poultry grower for suspension of delivery of birds. These
criteria include, but are not limited to:
(a) Whether a live poultry dealer provides a poultry grower written
notice at least 90 days prior to the date it intends to suspend
delivery of birds under a poultry growing arrangement;
(b) Whether the written notice adequately states the reason for the
suspension of delivery, the length of the suspension of delivery, and
the anticipated date the delivery of birds will resume; and
(c) Whether a catastrophic or natural disaster, or other emergency,
such as an unforeseen bankruptcy, has occurred that has prevented a
live poultry dealer from providing reasonable notice.
Sec. 201.216 Additional capital investments criteria.
The Secretary may consider various criteria in determining whether
a requirement that a poultry grower or swine production contract grower
make additional capital investments over the life of a production
contract or growing arrangement constitutes a violation of the Act.
These criteria include, but are not limited to:
(a) Whether a packer, swine contractor or live poultry dealer
failed to give a poultry grower or swine production contract grower
discretion to decide against the additional capital investment
requirement;
(b) Whether the additional capital investment is the result of
coercion, retaliation or threats of coercion or retaliation by the
packer, swine contractor or live poultry dealer;
(c) Whether the packer, swine contractor or live poultry dealer
intends or does substantially reduce or end operations at the slaughter
plant or processing facility or intends or does substantially reduce or
end production operations within 12 months of requiring the additional
capital investment, absent the occurrence of a catastrophic or natural
disaster, or other emergency, such as unforeseen bankruptcy;
(d) Whether the packer, swine contractor, or live poultry dealer
required some poultry growers or swine production contract growers to
make additional capital investments, but did not require other
similarly situated poultry growers or swine production contract growers
to make the same additional capital investments;
(e) The age and number of recent upgrades to, or capital
investments in, the poultry grower's or swine production contract
grower's operations;
(f) Whether the cost of the required additional capital investments
can reasonably be expected to be recouped by the poultry grower or
swine production contract grower;
(g) Whether a reasonable time period to implement the required
additional capital investments is provided to the poultry grower or
swine production contract grower; and
(h) Whether equipment changes are required with respect to
equipment previously approved and accepted by the packer, swine
contractor, or live poultry dealer, if existing equipment is
functioning as it was intended to function unless the packer, swine
contractor, or live poultry dealer provides adequate compensation
incentives to the poultry grower or swine production contract grower.
Sec. 201.217 Reasonable period of time to remedy a breach of
contract.
The Secretary may consider various criteria when determining
whether a packer, swine contractor or live poultry dealer has provided
a poultry grower or swine production contract grower a reasonable
period of time to remedy a breach of contract that could lead to
contract termination. These criteria do not limit a packer, swine
contractor or live poultry dealer's rights under a contract or
agreement where food safety or animal welfare is concerned. These
criteria, include, but are not limited to:
(a) Whether the packer, swine contractor or live poultry dealer
provided written notice of the breach of contract to the poultry grower
or swine production contract grower upon initial discovery of that
breach of contract if the packer, swine contractor or live poultry
dealer intends to take an adverse action, including termination of a
contract, against the poultry grower or swine production contract
grower based on that breach of contract by the poultry grower or swine
production contract grower;
(b) Whether the notice in paragraph (a) of this section includes
the following:
(1) A description of the act or omission believed to constitute a
breach of contract, including identification of the section of the
contract believed to have been breached;
(2) The date of the breach;
(3) The means by which the poultry grower or swine production
contract grower can satisfactorily remedy the breach, if possible,
based on the nature of the breach; and
(4) A date that provides a reasonable time, based on the nature of
the breach, by which the breach must be remedied.
(c) Whether the packer, swine contractor or live poultry dealer
took into account the poultry grower's or swine production contract
grower's ongoing responsibilities related to the raising and handling
of the poultry or swine under their care when establishing the date by
which a breach should be remedied; and
(d) Whether the poultry grower or swine production contract grower
was
[[Page 76890]]
afforded adequate time from the date of the notice of the alleged
breach to rebut the allegation of a breach.
Sec. 201.218 Arbitration.
(a) In any livestock or poultry production contract that requires
the use of arbitration the following language must appear on the
signature page of the contract in bold conspicuous print: ``Right to
Decline Arbitration. A poultry grower, livestock producer or swine
production contract grower has the right to decline to be bound by the
arbitration provisions set forth in this agreement. A poultry grower,
livestock producer or swine production contract grower shall indicate
whether or not it desires to be bound by the arbitration provisions by
signing one of the following statements; failure to choose an option
will be treated as if the poultry grower, livestock producer or swine
production contract grower declined to be bound by the arbitration
provisions set forth in this Agreement:
I decline to be bound by the arbitration provisions set forth in
this Agreement ------------------ ------
I accept the arbitration provisions as set forth in this
Agreement------------------------''
(b) The Secretary may consider various criteria when determining
whether the arbitration process provided in a production contract
provides a meaningful opportunity for the poultry grower, livestock
producer, or swine production contract grower to participate fully in
the arbitration process. These criteria include, but are not limited
to:
(1) Whether the contract discloses sufficient information in bold,
conspicuous print describing all the costs of arbitration to be paid by
the poultry grower, swine production contract grower, or livestock
producer, and the arbitration process and any limitations on legal
rights and remedies in such a manner as to allow the poultry grower,
livestock producer or swine contract production grower to make an
informed decision on whether to elect arbitration for dispute
resolution;
(2) Whether provisions in the entire arbitration process governing
the costs and time limits are reasonable;
(3) Whether the poultry grower, livestock producer, or swine
production contract grower is provided access to and opportunity to
engage in reasonable discovery of information held by the packer, swine
contractor or live poultry dealer;
(4) Whether arbitration is required to be used to resolve only
disputes relevant to the contractual obligations of the parties; and
(5) Whether a reasoned, written opinion based on applicable law,
legal principles and precedent for the award is required to be provided
to the parties.
J. Dudley Butler,
Administrator, Grain Inspection, Packers and Stockyards Administration.
[FR Doc. 2011-31618 Filed 12-8-11; 8:45 am]
BILLING CODE P