UNDER CONTRACT- The Hidden Risks for Chicken Farmers

8 October 2015 - // Features
Sally Lee
Sustainability Manager, Technimark LLC.

Industrialized poultry production means 19.5 trillion chickens produce over 86 million pounds of meat every year, which means billions in profits. But as corporate multinationals increase their global power, the farmers are increasingly exploited, facing severe risks including bankruptcy. Revolve investigates why experts call the modern-day poultry contract a form of serfdom.

A global surge in poultry production  is changing the way we produce food. Lauded by economists and industry officials, the vertically-integrated industry has become a model for processing hogs, cattle, even seeds – because it appears to return high profits to shareholders under the guise of economic efficiency. A flood of foreign investment is replicating this model with the growth of transnational corporations and a flurry of international mergers. A closer  look at the real effects of  poultry production where it  all started – the “chicken-belt”  in the United States  – reveals the systematic  exploitation of farmers.

Insight into India

According to the UN Food and Agriculture Organization (FAO), per capita meat consumption doubled between 1980 and 2005 in developing countries, and consumption of eggs more than tripled. A perfect example of this burgeoning market trend is the sudden growth of chicken consumption in India. Associate Professor of poultry science at the University of Agricultural Sciences in Bangalore, Dr. Chidananda explains that the surge is part of a broader transition in India’s food economy. “Income is increasing, and the young generation wants to eat more meat,” he said. “The cold chains are also increasing. We have Metro, we have Food World… we even have Walmart coming to India. The potential in the Indian food industry is huge.”

Dr. Chidananda’s research has focused on the emergence and impact of contract farming in the poultry industry in India. He notes that traditionally, poultry was a luxury item in India that was more expensive than other meats such as mutton. Most chicken is sold through what is called a “wet-market,” where shop keepers slaughter and dress the chicken at the moment of purchase. However in the past decade, brand-name shops owned by poultry integrators such as “Star Chicken” have opened in major cities, selling pre-cut and frozen chicken sourced through contract production at lower-than-market prices.

Dr. Chidananda claims that “this strategy, at least in part, reflects an effort by the integrators to increase profits by turning poultry into a low-margin, high-volume business.” In other words, the integrator benefits from a competitive advantage of the sheer volume of their production, compared to independent producers, and can afford to sell it cheaper. By changing the nature of the market, they push independent growers and wholesalers out of business overtime, creating a sort of domino effect of concentration.

Tyson Foods is the U.S.-based multinational corporation at the top of the global chicken chain. According to Watt Poultry Magazine, Tyson slaughters almost two billion chickens annually and leads in production of “ready to cook” poultry products. Technically India does not allow for the import of chicken (although the WTO may soon force India to import U.S. poultry). But through a joint venture with Godrej Agrovet, Tyson has gained access to the growing Indian market, by opening two plants in the Bangalore area to process chickens raised by farmers who hold contracts with Godrej.

Poultry farmers in India are being recruited by integrators to sign production contracts modelled after the system developed in the United States which has left many family farmers facing bankruptcy. Photo: Marcello Cappellazzi

The entrance of big players, such as Tyson, means big changes – for farmers in particular. Raising poultry under contract with a national integrator for 7 years before being cut-off, an anonymous farmer described the type of business relationship farmers can expect: “We do not get a copy of the contract,” he said. When asked if he could negotiate or discuss his costs with the company, he said: “We are scared to negotiate because they would stop bringing birds.” 

He described a process of going to an office in town and signing 50-60 pages of agreements without being able to read or understand the details. He also explained that in order to build his two poultry houses, he took out a significant loan. Ten years later, he has only paid a small portion of the loan and is still struggling under the debt. Where he used to house 20,000 chickens, he now rents his houses as empty sheds to a sculptor of Ganesh statues and a dog-care facility. 

“In reality the farmers are not happy,” says Dr. Chidananda. “If I raised a loan and started production, I would never be able to pay off the loan. Rather I would continue doing a job, slave to pay the interest on the banks side, and grow the chickens for the companies, and I remain stuck in the middle.”

What Really Came First: The Contract

The use of contracts with poultry growers started in the United States in the 1940s and became overwhelmingly popular, coinciding with dramatic growth in the industry – a remarkably similar trajectory to India’s current transformation. Until the 1940s, U.S. chicken production was still largely decentralized, and the majority of chicken farms were backyard or independent operations (PEW 2011). Then, over a 10-year period until 1950, the U.S. marketplace saw a decrease in the number of chicken farms by 98%, and a simultaneous increase in the sales of poultry by 1,400% (USDA 2007).

The sudden changes were a result of two trends – increasing production thanks to technological development, and the beginnings of vertical integration and consolidation in the industry.

The introduction of the Confined Animal Feeding Operation – known now as the CAFO, led to exponential growth in production capacity for broilers. The CAFO is an indoor “house” that is designed to be also a feeding system, and today can manage 30,000-40,000 birds in a single structure (PEW 2011).

Capitalizing on this potential, feed mills and processors merged to form what would eventually become known as “integrators,” or large livestock firms, such as Tyson, Pilgrim’s Pride, Perdue, and other major firms in the meat market today. As they bought up portions of the supply chain, they could control the inputs, and adjust output levels to reign in overproduction, essentially fine-tuning the industry to maximize profit.

The company owns everything except the farm.Why would this one piece remain off the balance sheet?

Christopher Leonard, author of The Meat Racket

Today, integrators typically own all aspects of the supply chain except the farm. They own the breeding process (several even own their chicken genetic lines), they own the hatchery where the chicks are born, they own the feed mill that produces their own blend of feed, and they have a staff of veterinarians and “field techs” that supervise farmer activity in raising their birds. Indeed the farmers they contract with never own the birds they raise, they remain the integrator’s property from the point they are dropped off as chicks, until the company picks them up five weeks later and drives them to their slaughter and processing facility. 

The role of the farmers in a contract model is not what most people would recognize as “farming.” In his book The Meat Racket author Christopher Leonard charts the transition of Tyson’s farmers from independent business partners in cooperation with their integrator to what he calls “serfdom.” “The company owns everything except the farm,” he said. “Why would this one piece remain off the balance sheet? A Tyson foods top attorney said that “with a contract model they could get the benefit of controlling the farm… but they would not have to sink their capital into what is really a crummy investment of these chicken houses.”

And thus evolves the modern poultry production contract. Interestingly, in terms of overall investment in the poultry industry, the integrators typically invest about 50% (processing facilities, transportation and logistics, inputs, etc) and the farmers invest another 50% of the capital, which is generally represented in large loans in the ballpark of $500,000 to over $1,000,000 each. Despite the balance of capital investment, the power dynamic is extremely one-sided. The decision-making powers and ownership over the final product remains solely with the integrator. Land and labor investments remain with the farmers, along with a disproportionate experience of production risk.

Risky Business on the Farm

To understand what the transformation in India and other developing poultry industries might bring, one just has to listen to the stories of the veteran producers in the South of the United States. 

Mitchel and Karen Crutchfield were growers for Tyson for 25 years in Arkansas. “This is my grandfather’s land,” Karen explained. “This was sold as a long-term investment,” she said of the four poultry houses she and her husband built, a total investment of around $600,000. “They said you get out of debt and then you’ll see real money. That was basically false advertisement.”

In 2012, the Crutchfields, in their late 60s, were well on their way to paying off their houses. They had taken out a 15-year loan, and had only three years left to go when Tyson decided to upgrade the houses of its growers in their area. To pay for the upgrade, the Crutchfields would have had to refinance their loan all together. “We would have been 80 years old in the chicken houses in our wheel chairs,” said Karen.

They were still able to raise healthy birds without the upgrade. They refused to reinvest their loan, and told Tyson they would go without the upgrade. As a result, they and several other growers were cut-off from their contract. All they received was a letter in the mail. Today the Crutchfields are facing bankruptcy and fighting against the loss of their farm, house, and even their cattle business.

Debt cycle of poultry growers. Photo: REVOLVE

Meanwhile in North Carolina, Craig Watts is still growing chickens for Perdue as he has done for more than 20 years. “You figure contract, you figure security, you think this will pay out in 10 years,” he said. “But I had to start a separate business to support my chicken habit. You’ve got two options: stay in it or lose your farm.” Watts’ name is recognized by many in the business today, as he recently has become an outspoken whistleblower on the green-washing of false animal welfare claims in the industry, and the exploitation of growers.

In Mississippi, Paul Brown sat in his living room next to his wife and daughter in the house he built by hand just two years before. “Who is stupid enough to take everything you have ever worked for, and get in bed with a company that says they are going to pay you… but they are going to pay you by their scales,” he said. “If you are comfortable with that, you’d be as big a fool as I was. That cost me 27 years.” Brown and his wife quit their Tyson contract three weeks before, after realizing they were at a point of bankruptcy with no other options. The poultry investment they made in 10 houses had ruined their cattle business, and destroyed their savings. 

They said you get out of debt and then you’ll see real money. That was basically false advertisement.

Karen Crutchfield, poultry grower in Arkansas

Across the U.S. south-east, thousands of family farmers could tell similar stories. The problems farmers face in squeezing a livelihood out of contract poultry production are complex. The integrators have a powerful lobby, regulation is scant and poorly enforced, and retaliation is a common practice in the industry. As a result, farmers rarely – if ever – speak out about their situation. But the most poignant example of the exploitation of farmers in the poultry industry is a mechanism built into the contracts themselves called “tournament payment.”

Culture of Misinformation

In 2010, the United States Department of Justice, charged with investigating and enforcing anti-trust regulations, held joint hearings with the U.S. Department of Agriculture to collect testimonies and evidence regarding corporate concentration in poultry production. In footage from the hearings, a representative of the National Chicken Council asks: “With all due respect… why knowing what you know, at least from your comments, would you get into a business that you feel is not a good business?”

A farmer from the Contract Poultry Growers Association of the Virginias stood up to respond: “I bought the largest poultry farm in West Virginia and Virginia five years ago. And I can tell you the reason why I got into it is that the company lied.”

Despite the decades of struggle that have put thousands of family farmers out of business, the poultry industry is still signing up hundreds of new farmers, with new and bigger loans than ever before. Fear has a silencing effect in the farming community, and intimidation and retaliation from companies for speaking out has prevented many farmers from sharing their stories.

Chickens at an industrial farm. Photo: Egor Myznik/ Unsplash

At the same time, academic institutions, extension offices and industry representatives alike continue to market the poultry contract as a reliable, stable means of making a living. The brochures and websites do not mention things like tournament payment or forced upgrades.

It is precisely this culture of misinformation that Dr. Chidananda is hoping will be prevented in the developing market in India. “We have diversity in the marketplace in India still,” he said. “If we can keep it, keep the rights of farmers, we can prevent what has happened in the United States.”

Sally Lee
Sustainability Manager, Technimark LLC.

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