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November/ December 2012 Obama’s Game of Chicken

The untold story of how the administration tried to stand up to big agricultural companies on behalf of independent farmers, and lost.

By Lina Khan

Until the 1950s, most chicken farmers did business the same way their grandfathers had. They bought their chicks, feed, and assorted supplies from various dealers, raised the birds, and then hauled them to a marketplace, where they would sell to whichever butcher offered the best price. This system worked until World War II, when the government’s decision to ration red meat, but not chicken, catalyzed a boom in Americans’ poultry consumption. By 1945, Americans were eating three times the poultry they had been eating just five years earlier. This new appetite for chicken continued after the war. Farmers, though, had a hard time managing production given the short life cycle of chickens, and the result was drastic price fluctuations and volatility in the poultry market.

In the midst of this rapid change, many of the companies that supplied farmers with chicks and feed introduced a new way of doing business: the contracting model. Under this arrangement, farmers would buy all their chicks and feed from a single supplier, raise the birds, and then sell them back to the same company, which had already agreed, according to a contract, to buy the birds at market price. The contracting model, which promised to stabilize prices, hence income, for both farmers and processing companies, took off like wildfire. In 1950, 95 percent of broiler producers were selling into the traditional open market; by 1958, 90 percent were selling on contract. Gradually, the hog and cattle industries adopted the contracting model too.

Some farmers and ranchers mistrusted this new system. At a 1958 meeting in Des Moines, one hog farmer voiced the central worry: “Will we be able to control our own farming?” But through the 1960s and ’70s, such worries seemed largely unfounded. If a farmer didn’t like the terms o-ered by one company, he could, at the end of the contract period, simply switch to another. The basic balance of power between the farmers and
the companies remained in place.

The change that finally upended this balance came in 1981. A group of Chicago School economists and lawyers working in the Reagan administration introduced a new interpretation of antitrust laws. Traditionally, the goal of antitrust legislation had been to promote competition by weighing various political, social, and economic factors. But under Reagan, the Department of Justice narrowed the scope of those laws to promote primarily “consumer welfare,” based on “efficiency considerations.” In other words, the point of antitrust law would no longer be to promote competition by maintaining open markets; it was, at least in theory, to increase our access to cheap goods. Though disguised as an arcane legal revision, this shift was radical. It ushered in a wave of mergers that, throughout the course of the following decades, would transform agriculture markets.

Although the change was strongly opposed by centrists in both parties, a number of left-wing academics and consumer activists in the Democratic Party embraced the new goal of promoting efficiency. The courts also soon began to reflect this political shift. In 1983, after Cargill, the nation’s second-largest meatpacker, moved to purchase Spencer Beef, the third largest, a rival meatpacker named Montfort filed a lawsuit claiming that the acquisition would harm competition in the industry. In a 6-2 decision three years later, the Supreme Court ruled in favor of Cargill. The decision set a precedent limiting competitors’ ability to challenge mergers, and helped catalyze a rapid series of buy-ups across the agriculture industry. In 1980, the four biggest meatpacking companies in the country controlled 36 percent of the market. Ten years later, their share had doubled, to 72 percent.

As mentioned above, today the share of the market controlled by the four biggest meatpackers has swelled to 82 percent. In pork, the four biggest packers control 63 percent. In poultry, the four largest broiler companies—Tyson, Pilgrim’s
Pride, Perdue, and Sanderson—control 53 percent of the market. In all these sectors—but especially poultry—these numbers greatly understate the political effects of concentration. At the local level, which is what matters to the individual farmer, there is increasingly only one buyer in any region.

The practical result of all this consolidation is that while there are still many independent farmers, there are fewer and fewer processing companies to which farmers can sell. If a farmer doesn’t like the terms or price given by one company, he increasingly has nowhere else to go—and the companies know it. With the balance of power upended, the companies are now free to dictate increasingly outrageous terms to the farmers.

At the hearing in Alabama in 2010, poultry farmers laid out how the arrangement now works. Staples, for example, described how processing companies routinely demand equipment upgrades that push independent farmers into heavy debt. In order to keep up with the companies’ facility requirements, farmers often must mortgage their farms and homes. With contracts often lasting only sixty days, and no real option to switch processing companies at the end of the contract period, farmers must either accept the terms they’re given—and stay on the company’s good side—or risk bankruptcy. “[W]ith the contracts that we’re offered now it’s either a take-it or leave-it situation,”
Staples said.

Tom Green, another Alabama farmer at the hearing, recounted what happened when he contested a contract that included a mandatory arbitration clause that would take away his right to a jury trial if a dispute arose. When he took issue with the clause, the processing company refused to work with him. Absent other options, Green and his wife, Ruth, lost their farm. “Ruth and I chose to stand up for our principles,” Green, a former infantryman and pilot in Vietnam, said at the hearing. “We did not give up a fundamental right to access the public court … which is guaranteed by our Constitution, regardless of price. I had flown too many combat missions defending that Constitution to forfeit it. It was truly ironic that protecting one right, we lost another. We lost the right to property.”

Of all the abuses farmers described to officials in Alabama, the one they kept returning to was the “tournament system,” a payment scheme designed, according to the processing companies, to promote efficiency among farmers. Unlike a traditional market, where every pound of chicken of the same grade fetches the same price, the tournament system allows companies to pit one farmer against another by ranking each farmer based on how he performs in “competition” against his fellow farmers. The idea is that the healthier and heavier the chickens a farmer produces with a set amount of feed, the higher he’s ranked in relation to the entire set of farmers who deliver their birds to the same processing plant on that same day. The higher he’s ranked, the more a processing company pays him per pound.

Lina Khan is a reporter and policy analyst with the Markets, Enterprise and Resiliency Initiative at the New America Foundation.

Comments

  • DC M on November 14, 2012 10:55 PM:

    Too many people for the planet requires terrible crowded factory farming. Churches and corporations need new consumers to grow. How it fix and how to make changes in a bad economy when many are on foodstamps or less and cant afford organics and free range ?
    As it is, people like me on fixed incomes often have deficiencies and if forced to live on high priced organics and happy chickens we wouldn't last long.

  • Florence Dezeix on November 16, 2012 7:43 PM:

    Thank you for writing this article. It is good to know the facts. Fear of scarcity plays in the hands of agribusiness. It would be interesting to compare what percentage of their income a family in America spends in food. People in Europe spends a higher percentagd on real food, not juices, power bars, vitamins. i appreciate the time and effort spent in writing this article,
    Sincerely,

  • Holly on November 17, 2012 11:53 AM:

    Good history. But is the story really over?
    I hope that in Obama's second term, we can return to efforts to protect independent farmers from exploitation by big processing companies and abuses by large agribusiness.

  • Melissa on November 18, 2012 7:31 AM:

    Fear of scarcity and concerns over end prices to consumers are an issue linked to the (I believe erroneous ) perception that we need animal protein in every meal. Cheaper sources of protein are available in legumes for example and it might help put a lot of things in perspective to look at things from this angle. Ie potential allies in this fight, strategies to help counter the meat packers power etc..

  • Joanne on November 18, 2012 11:05 AM:

    Good article and information.
    Somebody or something is paying for all the cheap meat being produced by the corporate ag system. Our culture needs to be more mindful and conservative in our eating habits (and living habits) many have gotten use to an over-consumtive way of life as being the norm. Education on these issues is important.
    Support local small farms and grow your own. Support, in some way, local businesses, community associations, non-profits that are working for good change. It is happening everywhere. Help it grow - "be the change"!.

  • DG on November 20, 2012 4:20 PM:

    Well-researched and well-written article, thank you. We need to circulate petitions to the White House to get the President back on track with these issues, which are complex, but not that complex that they cannot be solved. Thank you for this information.

  • Heaterman on November 20, 2012 11:22 PM:

    One of the biggest road blocks to "local" production/consumption is the enormous burden placed on slaughter houses and packing operations by USDA. It is against the law to process and sell meat which has been butchered in anything but a USDA inspected facility. We need to get some of the ludicrous rules regarding meat processing thrown out so competition can come in under the big packing operations or things will only continue to get worse.
    This is a good example.......Farmer Jones has a cow that breaks her leg and needs to go to the slaughter house. Since the "mad cow" tempest in a teapot, USDA has decreed that any animal has to be able to walk in under its own power. Obviously, there is nothing wrong with the broken legged cow or the meat it will provide but because USDA says it has to walk, all that can be done with it out on the farm is to be killed and buried. What a waste!!! People all over the world are starving, even people right here in the country. Why can't USDA regulate with a little common sense?

  • Name Withheld on November 26, 2012 8:19 PM:

    Great article. The only problem was the faint left-leaning political bias that was unproductive. It was the corporate interests that killed this agricultural markets reform. Not a Republican conspiracy. That needed to be made more clear.

  • Anonymous on November 26, 2012 8:34 PM:

    We all get to vote 3 times a day. Buy organic and non-GMO foods. Many organic products are only 10% more expensive than their pesticide-laden counterparts. Organic bananas usually only cost a couple cents more per pound than regular bananas, for example. Shop at Whole Foods, Trader Joe's, your Saturday farmer's market, and online. If you're concerned about the extra cost, buy in bulk and cut back on some of the frivolous purchases. Right now, organic foods are only 5% of the market. But if we keep buying them, they will grow and grow.

  • Jeanne Rohl on February 21, 2013 12:38 PM:

    If you think that this systematic destrucion of agriculture is do any paricular politcal party you folks need to do more research and stay totaly unbiased. This is a good article and very informative for those who don't know what has been going on since the turn of the last century. Even before that if you want to get really technical. The powers that be, want the land. They will get it just as they did from the First Nations people. We farmers and ranchers have only been the pawns. I used to counsel poultry farmers and hog farmers who were caught in these traps. They(the government, the multi nationals, the trade entities and the processors know exactly what they're doing. Who controls the food supply controls the people. Good reading for anyone who actually wants to educate themselves on this issue. I recommend the NORM Primer (National Organization for Raw Materials Economics, FOODOPOLY and Dollar Harvest for starters. Read the policies of the Committee For Economic Development. This all has been carefully planned and implemented. Don't know if there is much we can do about it now. No one would believe it or labeled us "conspiracy quacks". The jokes on the non farm consumer and the packman theory of pushing your neighbor out(because YOU are the BETTER farmer don't cha know)by the Bank lenders. LOL We got us a "cheap food policy" while all said groups above have reaped billons of stolen profits off the backs of a few.