Contract growers hoping the chicken industry offers a steady nest egg may instead be trapped by debt

CAMERON, Texas, Barry Shlachter, Star-Telegram via Crop-Choice.com, posted March 6, 2005: In 1999, a former high school physics teacher named Susan Martin became one of the country's 30,000 contract growers responsible for the vast majority of the chicken we eat.

She dreamed of succeeding in agribusiness, working with Sanderson Farms, a large Mississippi poultry processor with more than $1 billion in annual sales.

But two years later, Martin was losing money and carrying $460,000 in farm debt. Worse, Martin discovered that under the terms of her contract, she couldn't sue Sanderson, which she accused of misleading her. Nor could she afford the $23,000 cost of binding arbitration as required by the contract to resolve disputes. The American Arbitration Association's Dallas office rejected Martin's request to have the fees waived.

"It was hell," said Martin, 52, whose husband is a manager in an office furniture factory. She lost her farm near Cameron, south of Temple, and about $100,000 in equity. "The worst thing was being treated like a dog."

Mike Cockrell, Sanderson's chief financial officer, denied that the company has misled its 150 contract growers in Texas to whom, he said, it offers some of the most progressive contracts in the industry.

But poultry companies like Sanderson, Tyson and Pilgrim's Pride have increasingly come under criticism for their half-century-old system of contract growing, through which about 90 percent of U.S. chickens are now produced.

Under contract growing, which has helped keep the supermarket price of chicken low, the poultry companies own the flocks and supply the feed. Growers, who get a guaranteed price per pound, provide the labor, chicken houses, water, electricity and gas.

But many small farmers, who commonly borrow $700,000 or more to build chicken houses and subsequently must invest more to keep up with new technology and competing growers, find themselves deep in hock and unable to make a profit.

Critics like Wes Sims, president of the Waco-based Texas Farmers Union, say that predictions of growers' earnings are overstated, that they risk being cut off from fresh flocks for refusing costly upgrades demanded by companies, and that their heavy farm debt ensures that they renew unfair contracts, creating a system akin to modern-day serfdom.

Poultry companies counter by saying contracts are a boon to farmers, who are insulated from fluctuating market conditions by a set price, a guarantee that is also used in some hog production. And if the system is so flawed, they ask, why are there waiting lists of prospective growers eager to sign contracts?

"The best proof that the contract-growing system works is that people get in it, stay in many years and even apply to the company to build another chicken house," says Dick Lobb, spokesman for the National Chicken Council, an industry group in Washington.

One East Texas grower, who describes himself as "pro-Pilgrim's Pride," said reinvestment is a given in almost any business, including poultry.

"It's like factory equipment or a car," said the farmer, who asked not to be identified and would be interviewed only in his pickup driven out of sight from a public road for fear of retaliation. "After so many years, you need to replace it. Things change. You have to go with the flow."

Revolution

Beginning in the 1950s, contract growing revolutionized the way chickens are raised and sold throughout the United States. No longer do growers buy and raise chicks, then sell mature broilers to one of several competing processors with a handshake.

Under the current system, "integrator" companies such as Sanderson, Tyson and Pilgrim's Pride outsource the rearing of poultry to family farmers who are told how the poultry should be raised every step of the way.

Some poultry producers offer one- or three-year contracts; others can be from batch to batch, the industry standard up until the late 1990s. Sanderson has had a unique 15-year term since 1997.

Contracts deliver clear benefits to the family farmer, says Ray Atkinson, a Pilgrim's Pride spokesman.

No longer do they assume market risk and have to locate a buyer when their flocks are ready for sale. This allows them to earn a steady income on relatively little acreage, he said.

Easy trouble

But many growers get into trouble quickly, even though they're protected against falling prices.

Aside from wanting to retain family land, many farmers sign poultry contracts because they are confident of being above-average growers and therefore earning more, said Robert Taylor, an Auburn University agricultural economist.

But as other farmers upgrade with better technology or build more efficient chicken houses, those with older facilities will usually fall below average, he said.

All poultry companies pay farmers a price per pound, which is raised or lowered by how the grower ranks among others on the basis of feed converted to weight gain. A half-cent per pound can make the difference between profit and loss.

Called the ranking, or tournament system, farmers found on the bottom rung during three or more flock growing periods may be pressured to improve productivity by upgrading facilities, or poultry companies can drop them.

"Some call it the gladiator system, because you are trying to kill your competitor, your own neighbor," said Laura Klauke of the Rural Advancement Foundation International-USA, a North Carolina-based advocacy group working for passage of legislation to improve contracts.

Individual growers can end up being "serfs with a mortgage," Auburn's Taylor said.

"By the time they get the $700,000 loan for chicken houses paid off, the companies ask them to make expensive upgrades," he said. "They get caught up in a debt trap. The grower has to take whatever he is offered, especially after he's been 'captured' -- deeply indebted."

And over the past half-century, the poultry industry has become highly consolidated, meaning that few growers have an alternative should there be a falling out with their processor.

This leads to many farmers feeling trapped, said Ann Stanaland, who grew chickens with her husband near Nacogdoches. Even if they opt to sell, none can recoup their investment if there's no current contract to go with the farm. Without a contract, the value of the property often collapses.

Even if multiple poultry companies already operate in the same area, there's little incentive to pick up a rival's farmer.

"Why sign a farmer with 5-year-old houses when there's a waiting list of people willing to build brand new ones?" said a former Pilgrim's Pride field representative who declined to be named because of fear of retaliation against relatives who are growers.

Of 14 farmers interviewed for this article, only two current growers agreed to be identified by name.

Royce Johnson of Center has raised chickens since before contract growing was introduced more than four decades ago and has watched the system evolve.

"They call us 'contract growers,' " Johnson said. "But they tell us everything we do. If there's just a personality conflict with your company service tech, you can lose your contract over that. You can talk to another company, but Tyson wouldn't sign another farmer that Pilgrim's cut off."

Taylor, the Auburn economist, questions some of the criticism of the big companies.

"I doubt that their motivation is to keep the growers in bondage," Taylor said. "If new technology comes along that's better for them, they get the grower to adopt it even though it may not be better for the grower's bottom line."

The company-grower relationship, Taylor said, "is very one-sided. For a market to work, you need a balance of power."

Stanaland said Pilgrim's Pride "put a gun to our heads," forcing them to accept a new contract by refusing to deliver chicks. Without a new batch, it would be impossible to repay the farm loan.

Pilgrim's Atkinson, however, said the company has signed statements by Texas growers who acknowledge that it does not retaliate against disgruntled farmers.

Leaps of faith

To be sure, many of the stories following chicken growers' paths into the industry reflect leaps of faith.

A.T. Terry, a Texas-born broiler grower in Lynchburg, Tenn., who studied agricultural economics at Texas A&M University, said he borrowed $384,000 to buy five chicken houses three years ago so his family could experience a rural lifestyle.

But Terry said he was cut off by Tyson last month after demanding to watch his birds being weighed at a company facility. The investment is now worthless without a contract, he said.

Tyson, asked for comment, did not refer to Terry's case specifically but said all its growers are allowed to watch the weighing under federal law.

And Chris Burger was a Florida state trooper who raised chickens as a sideline, as many contract growers do.

After years of good relations with a large poultry company, Cagle's Inc. of Atlanta, troubles began when Burger joined a growers' association to better present common grievances.

Burger is one of very few to overcome a binding arbitration clause and prevail in court in what is considered a landmark case.

But he says his $700,000 award in 2001 went to cover farm debts. He says the five-year court battle cost him his marriage, his home and two farms. At one point, he was reduced to sleeping in his car and showering at the state police barracks.

Contract disputes

Some growers complain that the poultry companies mislead the growers from the start.

Houston lawyer Mel Smith said Susan Martin, the Cameron farmer, and other family farmers he tried to represent were shown a Sanderson contract before borrowing money to build chicken houses.

But on the eve of the first flock's delivery, a lengthier contract was presented to the now-heavily indebted farmers, who had little choice but to sign, Smith said.

Cockrell said the breeder contracts in Texas were changed only to "correspond to growers' concerns." Moreover, they were sent to farmers several weeks in advance for review by growers and their attorneys, he added.

Martin said she never received such a preview contract. Another former grower, Roy White of Sharp, said he, too, hadn't seen the final contract until shortly before a flock was to be delivered.

Tensions between poultry producers and growers were spotlighted four years ago when one disgruntled East Texas farmer took matters into his own hands.

On Jan. 8, 2001, Barry Townsend broke into Sanderson's Bryan plant, fatally shot a company official, wounded another and then took his own life.

Townsend's troubles started before the incident.

He was on probation for assaulting a stepdaughter and had been questioned by police after a woman -- a possible acquaintance -- was run over and killed in a parking lot a week earlier.

Townsend's widow told police that the couple were earning half the money they expected from Sanderson and that flock deliveries were erratic.

Before firing the first shots, Townsend ordered his two victims to call his wife and apologize.

In an interview with police, Lucinda Townsend explained her husband's demand by saying, "I feel like we're being lied to all the time" by Sanderson Farms.

But Barney Allen, one of 150 Sanderson contract growers in Texas, blames the Townsends' problems on their inability to run a business.

"Some people get in over their head," said Allen, 70, who has been a farmer and rancher for more than four decades, including eight years as a Sanderson contract producer.

"There are people who work for Sanderson I don't like," he said. "But overall, the company is the best thing that ever happened to our county."

Allen, who lives in Robertson County in East Texas, says that his four pullet houses earn him "a little less than $10,000 a month" and that he saves thousands more by substituting chicken litter for manufactured fertilizer for his cattle pastures.

Looking to the law

Texas, unlike Iowa, Kansas, Illinois and Georgia, has no specific law protecting contract farmers from unfair practices by poultry integrators. And farmers like Martin who have tried to organize growers' associations in Texas say company pressure brought such efforts to an end after one or two meetings.

"The [poultry companies] pretty much control you, and if you complain, they can cut you off," said Larry Owens, an Agriculture Department official who sees both good and bad in contract growing.

Cost and contractual obstacles have served to curb legal remedies. But three East Texas farmers are suing Pilgrim's Pride in a Texarkana federal court, alleging they were unfairly pressured to accept what they considered unfavorable new contracts before their old ones expired.

Two ended up signing because they needed new flocks to cover large loan payments on their chicken houses. The third, Don Davis, was able to refuse because his debt was smaller, but he said a promised flock was not delivered by Pilgrim's. A trial date is expected to be announced April 4.

Pilgrim's Pride has denied any wrongdoing and noted that the plaintiffs are just three of the 2,000 Pilgrim's Pride growers in Texas. "Relations are generally strong," the company said.

Even in states such as Alabama and North Carolina, where growers' associations have been formed, growers lack the clout to pass legislation, said Taylor, the Auburn economist.

But last year Georgia and Illinois followed Kansas in passing legislation that gave growers the right to have their contracts reviewed by their own attorneys and see statistical data used to determine compensation.

After failing the first time around in Tyson's backyard, a similar growers' rights bill was passed by the Arkansas Legislature and now awaits the governor's signature. Aside from making arbitration voluntary, it says farmers cannot be prohibited from comparing contract terms or discussing common problems.

Still, competition among growers has hindered alliances.

"It's made us independent, so we can't get together," said Johnson, the East Texas farmer. "If only half of the growers would get together, we'd solve this problem easily."

Bottom line

Perhaps one surprise is that relatively few growers default.

Taking the bankruptcy route is not an option among small-town farmers in East Texas "if you want to maintain your pride and good family name," says Stanaland, the former Nacogdoches grower.

But the bottom-line figures are worrisome, economists say.

A 2003 analysis by Dan Cunningham -- a University of Georgia agricultural economist -- estimated that cash flow, adjusted for inflation, for an average broiler grower dropped to $5,965 in 2003 from $12,065 in 1993.

Taylor, the Auburn economist, says a poultry company can earn a 15 percent to 30 percent return on its investment, while a contract grower would be better off taking a $6.50-an-hour job and putting the amount of his down payment in a low-interest-paying CD.

Lobb, the National Chicken Council spokesman, questioned that, noting that Taylor factored in a labor cost for the owner-farmer and family members, even when no money changed hands.

But at least one company, Sanderson Farms, cites an annual $5,000 labor cost in recruitment material for family farmers.

"While it may not be the most lucrative form of agricultural production, it is among the steadiest," Lobb said. "Both sides need the contract system."


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