Down Contract Creek
Why should corporations buy land when on paper
they can own everything it produces?
by Brian DeVore
White Bear Lake, Minnesota
"The turkey growers thought they owned the birds," she recalls. "Well, according to the contract, they didn't."
Such unpleasant surprises are increasingly popping up in farm country these days as contracts become a staple of the production and marketing system. There have long been fears that the American family farm would cease to exist someday as an independent entity. The concern is that large corporations will physically take over the land, buildings and production capacity of these operations, consolidate them, and have paid employees run the show.
That's still a real threat. But recent trends indicate such a takeover may not always be so cut and dried. Contracting is using paper to take over some sectors of farming at an astonishing rate. In all, almost one-third of the crops and livestock produced in 1997 were contracted, according to the latest statistics available from the U.S. Department of Agriculture. That's more than double the amount of commodities produced under such agreements just a decade before.
A scenario beginning to emerge is one where individual family farmers do stay in existence, but as contract laborers for large agribusiness firms. These firms provide the raw material (baby pigs, seed, etc.), and the farmer supplies the labor, land and buildings. Everything is plugged into the system by the corporation: it prescribes what feed, chemicals, antibiotics and even management practices are used. Agricultural law expert Neil Hamilton puts it succinctly: "Why own the farm if you can own the farmer?"
That's a sharp contrast to the way food has been produced in this country throughout most of our history: A farmer raises corn or cattle with the assumption that when those commodities are ready to sell the local elevator or stockyard will pay the going market price. If the farmer doesn't like what one buyer is paying, he or she can shop around, or, in the case of field crops, use storage until prices get better. Such a system means farmers take all the risk if prices plummet. But it also means they are free to take advantage of any upswings in the market.
Contracts are nothing new to agriculture; they've been around for commodities like chickens since at least the 1950s.
Under a "marketing contract," a price is set for the commodity before it is produced. The farmer retains ownership of the commodity and any resources it takes to produce it right up until delivery. Forward price contracting of grain is an example of this ("I agree on this day, March 1, 1999, to deliver 5,000 bushels of number two yellow corn at $2.50 per bushel on Dec. 1, 1999). In most cases, it's up to the farmer how that commodity is raised. The way the predetermined price is set varies. With crops like corn, the Chicago Board of Trade's futures market plays a big part. In commodities such as hogs, a formula may be developed by packers that takes into account everything from the cash price of hogs to the cost of feed.
In a "production contract," the processor maintains more control of the product from beginning to end. For example, in a hog production contract, the company owns the animals and specifies what feed, medications and housing will be used to produce them. The farmer is responsible for the housing and manure handling facilities.
What is new is the astonishing rate at which these agreements are becoming the only way to market commodities off the farm. More than 90 percent of poultry is already produced under contract, and it's pretty much been that way since the 1970s. Hogs are fast headed down the same loading chute. In fact, the pork industry is currently in such a volatile state that it's difficult for government and land grant economists to get a bead on the exact number of pigs being contracted. USDA researchers estimated a few years ago that by now almost 38 percent of the hog market would be in a "captive" situation: either contracted or owned directly by packers. That proved to be a gross underestimate. In January, University of Missouri economist Glenn Grimes estimated that 64 percent of the hogs slaughtered that month were captive. Mike Erwin, a Meat Reporter for the USDA, told the Land Stewardship Letter in April that more like 70 percent of hogs are sold in captive markets.
Forty percent of U.S. fruit and vegetable production is done under contract. A smaller percentage - under 10 percent - of commodities such as corn, soybeans and wheat are contracted. However, one of the fastest growing segments of contracting is in "identity preserved" crops. These commodities have particular, high-value characteristics (more oil, for example) that have been inserted using traditional breeding or genetic engineering. Because of their unique traits, these crops have to be separated from the other commodities out there through special contracts.
Contracting, predict some experts, will change entirely the way we view the American farmer.
"I do see a future in family farming," says Michael Boehlje, a Purdue University economist who likes to make predictions about the long-term future of agriculture. "Do I see a future in independent family farming? That's tricky when you add that word. In 10, 15, 25 years, we will have family farms, but not independent like we know them now."
Beyond the fine print
Such predictions are bad news for anyone who believes creating a sustainable food system relies on farm operations that have the freedom to be innovative. One way farmers can be stripped of independence is to be put in a situation where a contract portrayed as a "risk sharing" document in fact becomes a way for risk to be "shifted," with the momentum tilted against the farmer side of the equation, says Hayes.
The complicated nature of contracts alone raises suspicions about just how much of a 50-50 deal they really are. It's natural for a packer, large hog producer, grain processor, or seed company to write a contract that protects their interests first, but often they use a maze of legal language to transport the agreement into the realm of unfairness, she says. The attorney once spent five or six hours examining a single contract. It ran six to seven pages single spaced; the calculation for determining how much the farmers would get paid alone ran several pages.
"I never did figure it out. With some of these contracts, we don't know what the relationship is between the grower and the company," says Hayes, adding that not even attorneys can always figure out whether a contract is giving the farmer a square deal. "I would like to say have a lawyer review the contract but... ."
A recent example of this confusion came to light in April, when Cargill was charged by the USDA with "unfair and deceptive pricing practices." This was based on the discovery that in 1997 Cargill's meat division, Excel, had changed the formula it used to pay for hogs. The formula was so complicated that farmers didn't even know the payment calculation had been altered. The change cost the affected farmers about $1 per hog sold in lost revenues.
But labyrinthine contracts aren't unique to meat production. A FLAG analysis of Monsanto's 1996 Roundup Ready Gene Agreement for soybeans shows that farmers are put at a disadvantage in a number of instances when they buy these genetically modified soybeans. For one thing, the farmer who holds one of these contracts agrees to allow Monsanto to inspect and test all fields planted to soybeans for three years, even if the Roundup Ready variety is only planted one year. Why? The seeds from genetically engineered crops can be saved and replanted in subsequent years. Monsanto wants to make sure farmers aren't paying for the seed once and then replanting Roundup Ready varieties. But what if farmers' conventional soybeans get pollinated by genetically modified plants growing in the area (a study published in the scientific journal Nature last year found that transgenic traits were 20 times more likely to pass to other plants by cross-pollination)? Are farmers then in violation of the contract? A farmer is considered in violation of the contract if any herbicide other than, no surprise here, Roundup, is used on the crop
The contract makes no concrete references to how the soybeans will perform in the field - whether they will provide specific levels of yield output or weed control. And if you find yourself in court because of Roundup Ready soybeans, be prepared to hit the road. Lawsuits related to the product have to be litigated before a judge in Missouri (Monsanto is based in St. Louis). This contract is no mere paper intimidation. Since 1997 Monsanto has investigated more than 500 farmers for "seed piracy" involving Roundup Ready soybeans, cotton, canola and other seeds. Some of these farmers have been fined tens of thousands of dollars. That number is likely to climb: at least half of this country's 70-million-acre soybean crop is Roundup Ready.
Legal and economic journals, as well as farm country coffee shops, are full of horror stories about contracts with hidden trip-wires. For example, some contracts make it impossible for a farmer to turn down shipments of sick feeder animals. A particularly sticky risk being foisted upon farmers by large livestock producers these days is liability for any manure produced by a contracting facility. When Minnesota's largest documented manure-caused fish kill occurred in 1997, the farmer running the guilty operation got jail time and a fine. Meanwhile, the company he was raising the pigs for Christensen Farms & Feedlots, Inc. - continued to climb the charts as one of the nation's largest pork producers.
Legal experts say farmers should be extremely cautious of provisions that allow the writer of a contract to basically take over operation of the farm. Consider this passage from a production contract summarized by Hayes: "If the integrator feels that the grower is in default, the grower may 'at its sole discretion enter the premises, remove the [animals], or take over the operation of the facility.' "
Some hog contracts involve the keeping of a financial ledger, complete with debits and credits. When hog prices are below a predetermined price, the farmer is charged a penalty. When prices are above that amount, the packer owes the farmer. The thinking is that during a market slump the packer could have made more money buying hogs on the open market than adhering to the contract, so it must recoup its losses. In theory, it should all balance out - with prices periodically swinging back in favor of the producer when the cash market for hogs rises above the contract price. But in an uncompetitive system increasingly controlled by a handful of packers (four firms control almost 60 percent of hog slaughter), it doesn't work out that way
Hog prices are in a long-term slump not seen in decades. Farmers are running up large debits in favor of the packers and are wondering if they will ever get out of the hole. Packers now have enough control, thanks to contracts, to flood the market with cheap hogs whenever the cash price creeps up, say some economists. Ending a contract while still in debt to a packer is considered in violation of the contract. So what happens? The farmer must continue to raise hogs until the debt is rectified. In short, such a system locks them into a kind of servitude with no end in sight.
"I guess I've got to hand it to the packers, they must have some smart lawyers," says one southeast Minnesota pork producer who has seen a neighbor's hog contract. That neighbor is seriously concerned that he may never get out of debt with the backer.
That kind of financial obligation has some in the legal profession concerned. Jim McPeak, a large Minnesota-based swine breeder, had a pair of attorneys take a look at a ledger-type contract, also called a "matrix contract." The lawyers - one is former Minnesota Supreme Court Chief Justice A.M. "Sandy" Keith - didn't like what they saw. They concluded that these kinds of contracts in effect violated the Packers and Stockyards Act of 1921, which was created to restrict "unfair" and "uncompetitive" packer practices.
In a letter dated April 13, the attorneys wrote that these contracts "... appear to violate the Packers and Stockyards Act because there has been a significant reduction in producers who do not have long term contracts. It also appears a significant reduction in hog prices can be traced, at least in part, to the use of long term contracts. In large part, the tying of agricultural financing to the use of matrix contracts to collateralize the loans has flooded the market with producers who would otherwise have been unable to finance a hog production operation. If you look at the substance of the contracts, however, it is essentially the packers who are in the hog production business. The putative 'producers' simply disguise the transaction."
Pick up any issue of Feedstuffs, a weekly magazine covering agribusiness, and it will become clear the chicken industry serves as the template for how companies would like to "integrate" agriculture via contracts. To farmers, the chicken business is a warning sign of what road not to head down. Companies like Tyson Foods and Perdue contract with farmers for the production of virtually all their broilers. It has not been a marriage made in heaven. Numerous lawsuits have been brought by producers against large poultry integrators. The farmers have charged them with everything from purposely mis-weighing birds to arbitrarily pulling contracts with no prior notice. In general, the farmers have found their own political leaders to be little help in their fight to attain any degree of market fairness. In Mississippi, for example, the governor vetoed a 1996 bill that would have given greater protection to poultry producers. The law was not exactly radical policy reform. It would have stopped corporations from requiring producers to sign a contract under threat of coercion or the termination of an existing contract. It would also have allowed farmers to watch their birds being weighed and required forward notice of intent to terminate a contract.
As the problems in poultry have shown, part of the rub with contracting is that it ties a farmer to single-use facilities - expensive ones at that. For example, in 1997 Campbell Soup Co. closed its chicken processing plant in Worthington, Minn. That left 36 area contract farmers holding the bag in the form of large barns that could produce broilers and nothing else. Many of the farmers had contracts that guaranteed the company would buy chickens for up to eight or 10 years. Under the contract, the farmers assumed they would make little money at first, but expected to make more once the buildings were paid off (a single poultry barn can cost hundreds of thousands of dollars to build). Campbell left town before the farmers' facilities were paid off.
In December, about a dozen hog farmers were told their Murphy Family Farms contracts would be yanked because of the sagging hog market. The company's own promotional literature makes it clear that it takes at least 10 years to pay off the high-tech facilities required by the contract.
And many multiple-year contracts fail to recognize that animals like hogs are hard on facilities. Often the farmer will get a building paid off at the end of a 10-year contract, only to find that it's too worn-out to use without extensive repairs.
"There is nothing that makes the next generation feel more confined than inheriting single-use buildings and machinery," says Joel Salatin, a pioneering sustainable livestock producer from Virginia. "If we're going to romance the next generation into agriculture, we must give them flexibility."
Acting on contracting
Despite all these problems, there are still waiting lists of farmers wanting to sign a contact with a large agribusiness firm. That's because contracts have become so prevalent that they are becoming the only way to be involved in production agriculture. One prediction is that within 10 years there will be no market for traditional crop varieties that don't have special traits inserted by seed companies. And all that contracting is having a serious negative effect on that portion of the cash market still in existence. That became crystal clear this past winter, when hog prices dipped to lows not seen in decades as packing plants became bloated with too many contract hogs. According to the USDA's Economic Research Service, packers made up for having to buy all those contracted hogs they were legally bound to purchase by paying less for pigs on the open market. This sent more farmers rushing to attain a contract-secured price, helping to perpetuate the cycle.
As a recent report released by the Land Stewardship Project shows, all these contracts are making an open, competitive market almost impossible to attain and sustain.
Hayes, the FLAG attorney, isn't ready to dismiss contract farming out of hand. After all, contracts in theory can help farmers obtain some sort of price security in a very unsecure business. But these agreements will not consistently share the risk of food and fiber production until farmers can figure out a way to negotiate from a position of strength.
"Right now these contracts are written so that farmers have to either take them or leave them," says Hayes. Maybe it's time for farmers as a group to take the second option, she adds. "Farmers could just say no to contracting in general until they can get the power to negotiate better agreements."
Brian DeVore is editor of the Land Stewardship Letter, which is published by the Minnesota-based Land Stewardship Project, a private, nonprofit organization dedicated to fostering an ethic of stewardship for farmland and to promoting sustainable agriculture. DeVore has written about agriculture for Sierra, Whole Earth, Successful Farming, the Des Moines Register and Farm Futures. He was born and raised on a southwest Iowa crop and livestock farm, and served as a Peace Corps volunteer in Lesotho.
|Published in In Motion Magazine July 27, 1999
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