The System That Supplies Our Chickens Pits Farmer Against Farmer
Thursday, February 20, 2014
After reading Christopher Leonard's TheMeat Racket, a broadside against the contract-farming system, I decided to take a closer look at it.
I drove to North Carolina and ended up in the kind of place that supplies practically all of our chickens: A metal-sided, 500-foot-long structure near the town of Fairmont.
In the dim light, I see 30,000 little chicks scuttling around on the floor. "They're 12 days old," explains Craig Watts, who's growing these birds for Perdue Farms.
Perdue owns the chickens. It also supplies the feed that they eat. About a month from now, when the birds have grown to about 4.5 pounds, the company will send a truck to carry them away, and Watts will get paid. But he never knows how big his check will be.
"It's like that test you took in school -- you kind of want to know how you did, but you really don't? It's that kind of feeling," he says.
The uncertainty is part of a peculiar payment system that the chicken industry uses. It's often called a tournament. Critics say it's more like a lottery.
The companies set an average price that they will pay for raising the chickens -- in this case, 5 cents per pound. But some farmers will get more than that, and others less, depending on a formula that measures their performance. It's mainly based on feed efficiency: how much weight the chickens gained, compared to how much feed the company supplied.
The farmers are ranked, like teams competing in a sports league. The top-ranked farmer can get paid up to 50 percent more, per pound of chicken delivered, than the one at the bottom. "The pie doesn't change," Watts says. It's just divided into bigger and smaller slices.
The entire chicken industry uses this system, and Tom Vukina, an economist at North Carolina State University who's studied it, says that from an economic point of view, it's beautiful.
"It is really brilliant," says Vukina. It solves problems that academic economists have examined with high-powered theory. Problems such as how companies can make sure workers do a good job when they can't be monitored, or how to convince independent contractors to invest in new equipment.
"This thing has phenomenal, theoretically correct design features that [the industry] came up with knowing absolutely nothing about contract theory," Vukina says, chuckling. "It's actually remarkable! Totally mind-boggling!"
He says the result is efficient production, and society as a whole is better off.
Yet some people involved in contract farming say that it doesn't benefit everyone.
"It's at the expense of the farmer, because the farmer's not the one making money. The company is making money," says Benny Bunting, a former chicken farmer who now he works for the Rural Advancement Foundation International-USA, an organization devoted to farmers' rights. His job is to provide advice to farmers who find themselves in financial trouble.
We're sitting in Bunting's home in the small town of Oak City, N.C. Across from us is a wall of shelves filled with thick binders. Each binder bears the name of a farm family that ended up deeply in debt.
"Every one of them is a person's life," says Bunting. "The thing about my job is, most times, I meet people at the lowest time in their life, when they're in financial problems. That's what this represents."
Many of those farmers raised chickens. Bunting says they discovered, too late, that raising chickens is a raw deal.
To explain, he pulls out a brochure that Sanderson Farms, another poultry company, passed out while recruiting new farmers a few years ago. The cover shows brand-new chicken houses, gleaming and clean.
Turn the page, and the document shows how much a farmer can earn, in one year, from four big chicken houses: $222,856.
Imagine you're a farmer, Bunting says. Here's what you're thinking: "I'm going to make that, but I'm going to get a bonus on top of that. Because I'm going to be the top grower."
"That's the perception," Bunting continues. "Everyone thinks that they're going to be in the top percentile."
The brochure does lay out costs. There's one huge one: Building the chicken houses will cost a million dollars, which means taking on a mountain of debt.
But after making payments on that loan, the brochure estimates a farmer can clear $60,000 in profits. "That looks really good," Bunting says.
Then you get into the business, he says, and you discover that there are expenses the brochure didn't really mention, such as repairs, a tractor, and additional labor. That can eat up your profit.
On top of that, there's the uncertainty created by the tournament. This is not Lake Woebegon. No matter how hard the farmers work, half of them will be below average, and make less money than the numbers in the brochure. According to Bunting, it means they won't be making enough to service that debt.
The really unfair thing, according to Craig Watts, is that whether he ends up at the top or the bottom of the rankings is out of his control. It seems to depend mainly on which birds the company sent you.
"I've been a good grower, I've been a bad grower, and I've been an every point in-between grower, and I'm the same guy doing the same thing," he says. "I'm the only thing that's constant on that farm."
But once you owe all that money, he says, you're stuck, because those loans are secured by the land on your farm, or your home. "We've got ties to the land, and they exploit that, because we're going to do whatever it takes not to lose our farm," Watts says.
There's one more aspect of contract farming, beyond the simple arithmetic of income and expenses, that makes some farmers angry. It's the feeling that this is not a deal between equals.
"We've got to bite our tongue and do what they say, or face the consequences of being bankrupt," says Benny Bunting.
The chicken companies, for their part, say the contracts they offer farmers are, in fact, fair. William Roenigk, a senior vice president at the Chicken Council, which represents the poultry industry, points out that contract farming has been around for 50 years. Farmers know exactly how it works, he says. And new farmers still want to sign up.
"If this was not a good contractual relationship, overall, why would farmers who are not in the chicken business want to get into the chicken business?" he asks.
Charles Postles has raised chickens for 30 years in Milford, Del. He says it has been a good choice, and he has no problem with the tournament payment system. "It encourages producers to be efficient and to be vigilant in their management," he says. "I think that's a fair system."
It's hard to know how many contract farmers agree with Postles. In one survey of poultry farmers in Delaware, three quarters of those who responded were satisfied with their arrangement. But more than half of them also said that, in their opinion, the companies will retaliate if a farmer raises concerns. Many farmers didn't respond to the survey, which was commissioned by the chicken industry and conducted by the University of Delaware.
Complaints have been common enough that several years ago, the Obama administration proposed new rules to address them. The rules were supposed to give contract farmers more predictable minimum pay, and a better chance of getting compensation if a company treated them unfairly.
The chicken industry lobbied hard against those rules, and blocked many of them from going into effect.
In fact, contract farming is still expanding. It's now the way that most pork is produced, too.
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