Just when you had gotten into a marketing groove and come to terms with your packer, the government wants more controls applied to how you reach those terms. Like most things, some participants will welcome the proposed changes, while others will view them as a major interference.

 USDA’s Grain Inspection, Packers and Stockyards Administration has released a proposed rule to define the terms of Section 202 of the Packers and Stockyards Act of 1921. The new rule is to address how contracts are used for livestock and poultry production and marketing.

“This proposed rule will help ensure a level playing field for producers by providing additional protections against unfair practices and addressing new market conditions not covered by existing rules,” said USDA Secretary Tom Vilsack.

The intent of the new rule is to “clarify when certain conduct in the livestock and poultry industries represents the making or giving of an undue or unreasonable preference or advantage, or subjects a person or locality to an undue or unreasonable prejudice or disadvantage.”

If you think that is vague, you’re not alone.

One of the stipulations will require packers, contractors and dealers to keep written records that justify differential pricing. But there’s more. “The proposal also establishes criteria to determine if an undue or unreasonable preference has occurred, such as a packer offering better price terms to producers who can provide larger volumes of livestock of equal quality without providing legitimate justification,” says Steve Meyer, president of Paragon Economics.

According to the National Pork Producers Council’s initial review, the proposed rule as written goes well beyond the parameters required in the 2008 Farm Bill. As a result, NPPC has expressed concern that it will limit producers’ marketing options.

“It appears the proposed rule would have a negative effect on pork producers’ ability to enter into arrangements to sell their hogs — and for packers to procure them,” says David Warner, NPPC’s communications director. “Overall, NPPC believes the proposed rule is overly broad and vague.”

Warner says parts of the proposed rule fall outside the scope of the mandate of the 2008 Farm Bill, including the section on unfair, unjustly discriminatory and deceptive practices, as well as sections on purchasing practices and contracts.

There is a fear that the rule will prevent contracts from addressing a producer’s unique situation. Jacob Bylund, an attorney with Faegre & Benson law firm, Des Moines, Iowa, provides a scenario of two contract producers who offer similar quality and quantity of animals but require different terms to accommodate their own particular risk-management requirements. “The proposed rule will reduce the packer’s ability to make unique offerings tailored to each of the hypothetical producers,” he notes. 

For One — For All

Under the proposed rule, the parties entering into a swine production or marketing contract would be required to report the terms set out in a contract to GIPSA. The rule also gives GIPSA the authority to require the packer or swine contractor to offer the same terms to other producers. “The proposed rule would make it unlikely for a packer or swine contractor to accommodate specific contract arrangements requested by a producer because the contract would then need to be offered on a broader basis — to others,” Bylund says.

Packers also have concerns. “Any variation in contract templates offered to producers will need to be publically disclosed. The rule would likely result in a decrease in the variety of contracts that packers offer,” Bylund adds.

Some are optimistic that changes will be made so that the final rule will not limit producers’ ability to use contracts. “Maintaining and improving producers’ options in using contracts is vital to the pork industry,” says Eldon McAfee, attorney with Beving, Swanson & Forrest in Des Moines. “While there is concern that GIPSA’s proposed rules will have the unintended effect of limiting producers’ contract options, don’t forget that the purpose as directed by Congress is to eliminate unfair, unreasonable and discriminatory practices. Differences in contracts that are not discriminatory must be allowed.”

One of the problems with the proposal is that the rules are ambiguous in many places, according to McAfee. “Making sure the final rules are balanced so that similarly situated producers are on equal footing with packers and contractors will benefit all pork producers.”

For now, the rule is only in the proposal stage. Comments are invited and will be reviewed before a final rule is issued by USDA. In an announcement on July 26, USDA granted a 90-day extension of the original deadline. Comments are now due by Nov. 22.

While it welcomed the extension NPPC officials feel the proposed rule as currently drafted would be a “disaster for pork producers,” and restrict marketing arrangements and limit producers’ ability to negotiate better prices for their animals.

“That’s a recipe for stifling innovation, driving up costs and creating legal uncertainty,” according to Sam Carney, NPPC president.                      

In addition to the extension, USDA issued a “Misconceptions and Explanations” document on the proposed rule — an unusual move, particularly during a public comment period. (To view the document and to see how you can submit your comments, go to porkmag.com/business.)

“The purpose of the comment period is for everyone to let GIPSA know how the proposed rules would affect them,” McAfee says. “All producers should take the time to review and analyze the proposed rules, as well as the information that is being put out by others.  In analyzing this information, make sure it is objective and unbiased.” 

More Lawsuits in the Future?

Another aspect that’s troubling to many is the provision that makes it easier for farmers to file suits under the Packers and Stockyards Act. Bylund is concerned that the proposed rule falls short in preventing frivolous and unnecessary litigation which would disrupt day-to-day business.

Under current law, those who sue must show that a company has not only harmed them but also hurt competition in the overall meat industry. The new law would require a producer to show only that a company has engaged in “unfair” or “discriminatory” acts against him/her. Some fear this provision of the proposed rule carries the potential of unleashing a wave of litigation.

GIPSA Rule at  a Glance

The following are some key provisions set out in USDA’s  Grain Inspection, Packers and Stockyards Administration proposed contracting rule:

  • Packers and swine contractors would be required to maintain written records that provide justification for differential pricing or contract terms. A legitimate reason must be provided for differential treatment.
  • Packers would be banned from selling livestock to other packers.
  • Private contracts would be made public as soon as 10 days after the terms had been settled.
  • Producers would not have to prove competitive harm to make  anticompetitive allegations.
  • If it is determined that “undue or unreasonable preference or advantage, or an undue or unreasonable prejudice or disadvantage” has occurred, it could be a violation of the act. For example: A violation could occur when a packer or swine contractor offers better price terms to producers who can provide larger volumes of livestock than to a group of producers who collectively can provide the same volume of livestock of equal quality.