[Federal Register Volume 85, Number 8 (Monday, January 13, 2020)]
[Proposed Rules]
[Pages 1771-1783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00152]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 85, No. 8 / Monday, January 13, 2020 /
Proposed Rules
[[Page 1771]]
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
9 CFR Part 201
[Document Number AMS-FTTP-18-0101]
RIN 0581-AD81
Undue and Unreasonable Preferences and Advantages Under the
Packers and Stockyards Act
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: Comments are invited on the proposed establishment of a new
regulation under the Packers and Stockyards Act, which protects fair
trade, financial integrity, and competitive marketing for livestock,
meat, and poultry. The proposed regulation would specify criteria the
Secretary of Agriculture would consider when determining whether an
undue or unreasonable preference or advantage has occurred in violation
of that Act. Establishment of these criteria is required by a provision
of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill).
DATES: Comments on the proposed rule must be received by March 13,
2020.
ADDRESSES: Interested persons are invited to submit written comments
concerning this proposed rule. All comments must be submitted through
the Federal e-rulemaking portal at http://www.regulations.gov and
should reference the document number and the date and page number of
this issue of the Federal Register. All comments submitted in response
to this proposed rule will be included in the record and will be made
available to the public. Please be advised that the identity of the
individuals or entities submitting comments will be made public on the
internet at the address provided above.
FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Chief Legal Officer/
Policy Advisor; Packers and Stockyards Division, USDA AMS Fair Trade
Practices Program; phone: 202-690-4355; or email:
[email protected].
SUPPLEMENTARY INFORMATION: Section 202(b) of the Packers and Stockyards
Act, 1921 (the Act), as amended (7 U.S.C. 181 et seq.), specifies that
it is unlawful for any packer, swine contractor, or live poultry dealer
to either make or give any undue or unreasonable preference or
advantage to any particular person or locality in any respect. In
administering this provision of the Act, the United States Secretary of
Agriculture (Secretary) determines whether the conduct of regulated
entities is considered a violation of the Act.
In the past, each determination has been analyzed using general
principles in a case-by-case basis, exercising the regulatory
flexibility Congress provided when it passed the Act. Provisions of the
2008 Farm Bill (Public Law 110-234) require the Secretary to promulgate
regulations establishing criteria the Secretary would consider in
determining whether an undue or unreasonable preference or advantage
has occurred in violation of the Act. See Sec. 11006(1). The Secretary
originally delegated responsibility for establishing the required
criteria to the Grain Inspection, Packers and Stockyards Administration
(GIPSA), which subsequently merged with the Agricultural Marketing
Service (AMS). AMS now administers the regulations under the Act and
has undertaken this rulemaking. To meet the statutory requirement, AMS
proposes adding a new Sec. 201.211 to 9 CFR part 201--Regulations
Under the Packers and Stockyards Act (P&S regulations), retaining the
necessarily flexible framework for the Secretary's determinations,
while providing criteria that supports the transparency of the
Secretary's determinations. Accordingly, the regulated industry and the
public will have a reference to the general framework that AMS will use
to determine whether there is an unlawful preference or advantage under
section 202(b) of the Act.
Proposed Sec. 201.211 would require the Secretary to consider one
or more of four specified criteria when determining whether any undue
or unreasonable preference or advantage has been given or made to any
particular person or locality in any respect in violation of section
202(b) of the Act. The Secretary would not be limited to considering
only the four proposed criteria, but could also take other factors into
consideration as appropriate on a case-by-case basis. We discuss each
of the four proposed criteria later in this document.
A 60-day comment period is provided to allow interested persons to
respond to this proposed rule. All written comments received in
response to this proposed rule by the date specified will be
considered.
Background
The Packers and Stockyards Division (PSD) of AMS's Fair Trade
Practices Program oversees day-to-day administration of the P&S
regulations and is called upon to investigate alleged violations of
section 202(b) of the Act, many related to contractual dealings with
livestock producers, swine production contract growers, and poultry
growers. Other entities, including retailers and the public, can also
be harmed by violations of section 202(b). Difficulty lies in
determining whether particular instances of preferences or advantages
made or given to one or more persons or localities would be undue or
unreasonable and violations of the Act.
As mentioned above, the 2008 Farm Bill directs the Secretary to
establish criteria the Secretary will consider in determining whether
an undue or unreasonable preference or advantage has occurred in
violation of the Act. At the time the 2008 Farm Bill was enacted, what
is now PSD operated within GIPSA. GIPSA undertook the responsibility
for developing criteria for consideration. In June 2010, GIPSA
published a proposed rule (75 FR 35338; June 22, 2010) that was never
finalized, due to Congressional prohibitions included in the
Consolidated Appropriations Acts for fiscal years 2012 through 2015,
which disallowed any further work on the new criteria rulemaking. See
Sec. 721, Public Law 112-55, November 18, 2011; Sec. 742, Public Law
113-6, March 26, 2013; Sec. 744, Public Law 113-76, January 17, 2014;
and Sec. 731, Public Law 113-235, December 16, 2014. GIPSA resumed its
efforts to promulgate the required criteria in December 2016 with
publication of a second proposed rule
[[Page 1772]]
(81 FR 92703; December 20, 2016), but decided to take no further action
on that proposal (82 FR 48603; October 18, 2017).
The Secretary is issuing this NPRM to establish criteria to
consider when determining whether a violation of section 202(b) of the
Act has occurred as required by the 2008 Farm Bill. The proposed
criteria would provide an analytical framework to evaluate whether a
violation may have occurred. This proposed rule addresses a situation
occasionally encountered in the industry, namely the need to determine
whether a preference or advantage in a specific instance is undue or
unreasonable. AMS intends the proposed new regulation to establish a
framework for consideration of potential violations of section 202(b)
of the Act, to bring transparency to the Secretary's determination
process for the industry.
Proposed Provisions
This proposed rule would establish criteria the Secretary would
consider in determining whether an undue or unreasonable preference or
advantage has been made or given in violation of the Act, and therefore
establish an appropriate framework for analysis. It is not unusual for
buyers or sellers of livestock or poultry to receive advantages. For
example, as between two competing sellers, one may receive a better
price from a buyer. The Act only prohibits those preferences or
advantages that are undue or unreasonable. It follows that there are
legitimate reasons for the existence of preferences or advantages that
are not undue or unreasonable. Reasonable differences in contract terms
may result from negotiations over particular interests between the
parties. It is not the purpose of the Act to interfere with contract
negotiations or to upset the traditional principles of freedom of
contract. Nor does the Act statutorily create an entitlement to obtain
the same type of contract offered to other producers or growers.
However, greater clarity on the terms associated with grower contracts
could increase transparency in the marketplace and reduce the claims of
undue or unreasonable preference.
Under proposed Sec. 201.211, the Secretary would consider one or
more specific criteria when determining whether a packer, swine
contractor, or live poultry producer has made or given any undue or
unreasonable preference or advantage to any particular person or
locality in any respect. Proposed Sec. 201.211 lists four criteria for
consideration and would provide that the Secretary not be limited to
consideration of those four criteria.
Under proposed Sec. 201.211(a), the Secretary would consider
whether the preference or advantage under consideration cannot be
justified on the basis of a cost savings related to dealing with
different producers, sellers, or growers. Under proposed Sec.
201.211(b), the Secretary would consider whether the preference or
advantage in question cannot be justified on the basis of meeting a
competitor's prices. Under proposed Sec. 201.211(c), the Secretary
would consider whether the preference or advantage in question cannot
be justified on the basis of meeting other terms offered by a
competitor. Under proposed Sec. 201.211(d), the Secretary would
consider whether the preference or advantage in question cannot be
justified as a reasonable business decision that would be customary in
the industry.
Historically, the Secretary has considered some of these criteria
and other factors similar to these in determining whether or not to
bring an enforcement action regarding an alleged violation of the Act.
AMS has based its proposal on the experience of PSD, which has
administered the Packers and Stockyards Act and regulations and
understands what complaints are commonly made regarding compliance. AMS
is proposing this list of criteria that the Secretary would consider,
but it is also proposing that the Secretary have the flexibility to
consider other criteria that may be relevant on a case-by-case basis.
In doing so, AMS is attempting to strike a balance between the
interests of all segments of the industry. On the one hand, AMS is
charged with protecting producers, growers, retailers, and others,
including the public, from potential harm resulting from undue or
unreasonable preferences or advantages. On the other hand, AMS
recognizes that among the numerous complaints examined in the past,
many preferences and advantages made or given to individuals or groups
in the industry have been determined to be lawful, and relatively few
have been determined to be undue or unreasonable.
Legitimate disparities in contract terms could be attributed to
reasonable business negotiations between contracting parties. For
example, price differences offered to different sellers could reflect
differences in transportation costs to a slaughter facility or could
reflect one producer's ability and willingness to supply livestock in
the early morning hours to start the day's processing while others
cannot. Disparate contract terms are not considered undue or
unreasonable just because they are not identical.
For example, a live poultry dealer pays a premium to one poultry
grower who agrees to use experimental vaccines, thus putting the grower
at increased risk of financial loss if the vaccine proves to be
unsuccessful and the birds die or do not grow well. Based on the
criteria in proposed Sec. 201.211, the apparent preference or
advantage might be justified on the basis of the company saving the
expense of testing the vaccines though other means, and the premium
paid to the grower for providing the extra service of testing vaccines
and for accepting greater financial risk might not be considered undue
or unreasonable. In another example, a livestock packer pays higher
prices later in the day or week after competitors have raised the
market price. Based on the criteria in proposed Sec. 201.211, the
apparent preference or advantage might be justified as necessary to
meet competitors' prices, and the higher price might not be considered
undue or unreasonable. Finally, where a live poultry dealer's
competitors have offered long term contracts to their growers, the
poultry dealer finds that he must offer comparable terms to his growers
in the same locality. Based on the criteria in proposed Sec. 201.211,
the apparent preference given to growers in that locality is unlikely
to be considered undue or unreasonable because the difference in
contract terms might be justified by the need to meet a competitor's
other contract terms in that locality.
On the other hand, some preferences or advantages might be
considered undue or unreasonable if they are so unfair that they would
tend to restrain trade, creating such excessively favorable conditions
for one or more persons that their competitors would have reduced
chances of business success. For instance, premiums offered to one
person or locality but not offered to other persons or localities
similarly situated could constitute a violation of the Act. A livestock
packer negotiating preferential live basis prices with only one favored
livestock supplier and not with similarly situated suppliers, may be in
violation of the Act. PSD would examine the proposed criteria and
likely conclude that the packer cannot justify its actions on the basis
of cost savings, meeting a competitor's prices, meeting other terms
offered by a competitor, or as a reasonable business decision.
Under proposed Sec. 201.211(a) through (c), the Secretary would
consider whether preferences or advantages made or given to one or more
persons are
[[Page 1773]]
based on cost savings related to dealing with different producers,
sellers, or growers, or the need to meet a competitor's prices or other
contract terms. For example, a live poultry dealer offering a higher
base price to a favored grower, but not to other growers in the same
complex with the same housing types, may be in violation of the Act.
The Secretary would consider the proposed criteria. Under criterion
(a), there would be no cost savings in a higher base price. But under
criteria (b) and (c), the Secretary would consider whether the higher
base price meets a competitor's price or other terms. If the reason for
giving the favored grower the higher price cannot be justified by
meeting a competitor's price or other terms, then the higher base price
may be an undue or unreasonable preference or advantage.
Under proposed 201.211(d), the Secretary would consider whether the
preference or advantage cannot be justified as a reasonable business
decision that is customary in the industry. A packer, swine contractor,
or live poultry dealer may have a legitimate business reason for
treating some persons or groups more favorably than others. For
example, it is customary in the cattle industry for the packer to pay
freight expenses on live weight purchases, but not on carcass weight
purchases. Based on the criteria in proposed Sec. 201.211, it is
unlikely that the apparent preference or advantage to live weight
cattle sellers in that situation would be considered undue or
unreasonable because it could be justified as a reasonable business
decision that is customary in the industry. In another example, a live
poultry dealer may pay a premium to growers who construct new poultry
houses or update their houses with the latest technology. Based on the
criteria in proposed Sec. 201.211, such a premium might be justified
as a reasonable business decision that would be customary in the
industry, so it is unlikely that the Secretary would determine the
preference or advantage to be undue or unreasonable.
Live poultry dealers, packers, and swine contractors should enter
into contracts that do not discriminate, unless the differences are due
to cost, meeting competitors prices, or normal industry standards.
Preferences that are not grounded in ordinary business considerations
may be based upon reasons of unjust advantage. AMS believes these
criteria promote honest competition in the supply chain, instead of
advantages that could result from bribery or other influences.
Therefore, AMS focused on four criteria that promote honest
competition: Cost savings, meeting a competitor's prices, meeting other
terms offered by a competitor, and other reasonable business reasons
for preference and advantages.
While the agency expects a short-term increase in the cost of
review for livestock producers, poultry growers, and regulated entities
in existing contracts, in the long-term, innovative contracts should be
less costly to negotiate even when those contracts provide for
preferences and advantages. Because this framework of criteria could be
understood in the context of ordinary and customary business decisions,
regulated entities may more easily review contracts for compliance with
the Act.
By following a framework of criteria that promote fair dealing
based in rational decision-making, AMS promotes protection for
producers and localities that might be otherwise have been unable to
obtain preferential contract terms or price advantages. This,
therefore, should also improve the negotiating position of growers and
producers.
AMS expects that adding the proposed criteria described above to
the P&S regulations would provide a framework in which the Secretary
can consider potential violations of the Act, help the industry
understand what the Secretary would consider when evaluating violation
claims, and fulfill the Congressional mandate to establish criteria for
making determinations regarding potentially unacceptable conduct under
the Act.
Required Impact Analyses
Executive Orders 12866, 13563, and 13771 and the Regulatory Impact
Analysis
AMS is issuing this rule in conformance with Executive Orders 12866
and 13563, which direct agencies to assess all costs and benefits of
available regulatory alternatives and, if regulation is necessary, to
select regulatory approaches that maximize net benefits, including
potential economic, environmental, public health and safety effects,
distributive impacts, and equity. Executive Order 13563 emphasizes the
importance of quantifying both costs and benefits, reducing costs,
harmonizing rules, and promoting flexibility.
In the development of this proposed rule, AMS determined to take a
different approach to developing the necessary criteria than previous
rulemaking efforts. AMS determined that including the proposed criteria
as part of the framework for consideration of preferences and
advantages in buyer-seller contracts would best serve the needs of the
industry and fulfill the 2008 Farm Bill mandate. AMS expects the
proposed new regulation would bring transparency to considerations of
potential violations of section 202(b) of the Act and certainty to
industry members forging contracts related to the buying and selling of
poultry and livestock. The proposed rule is not expected to provide any
environmental, public health, or safety benefits.
This proposed rule has been determined to be significant for the
purposes of Executive Order 12866 and therefore has been reviewed by
OMB. This proposed rule is expected to be an Executive Order 13771
regulatory action. Details on the estimated costs of this proposed rule
can be found in the rule's economic analysis.
AMS is proposing a new Sec. 201.211, which would provide four
criteria in response to requirements of the 2008 Farm Bill for the
Secretary of Agriculture to consider in determining whether a packer,
swine contractor, or live poultry dealer has engaged in conduct
resulting in an undue preference or advantage to any particular person
or locality in any respect in violation of section 202(b) of the Act.
Based on its familiarity with the industry, PSD prepared an economic
analysis of proposed Sec. 201.211 as part of the regulatory process.
The economic analysis presents the cost-benefit analysis of proposed
Sec. 201.211. PSD then discusses the impact on small businesses.
This proposed rule is independent of previous rulemaking. PSD
reviewed certain cost projections developed in conjunction with
previous rulemaking in analyzing the regulatory impact of this proposed
rule. All costs and benefits described in this economic analysis
pertain to the language in this proposed rule.
Regulatory Impact Analysis
The 2008 Farm Bill requires the Secretary of Agriculture to
promulgate a regulation establishing criteria that the Secretary will
consider in determining whether an undue or unreasonable preference or
advantage has occurred in violation of section 202(b) of the Act. This
rulemaking is to fulfill that requirement.
Responsibility for establishing the required criteria was
originally delegated to the Grain Inspection, Packers and Stockyards
Administration (GIPSA), which subsequently merged with AMS. AMS now
administers the
[[Page 1774]]
regulations under the Act and has undertaken this rulemaking.
For this economic analysis, PSD considered the impact of three
alternatives for this proposed rule. PSD considered the impact of
maintaining the status quo, the impact of adopting regulatory language
that had been proposed in 2016, and the impact of adopting the current
proposed language.
PSD considered the impact of taking no further action on a previous
version of Sec. 201.211 GIPSA \1\ had proposed on December 20,
2016.\2\ GIPSA subsequently provided notice in the Federal Register on
October 18, 2017,\3\ that it would take no further action on the 2016
proposed rule. Taking no action would result in no additional out-of-
pocket costs to businesses in the livestock and poultry industries but
would not fulfill the requirements of the 2008 Farm Bill.
---------------------------------------------------------------------------
\1\ On November 14, 2017, Secretary of Agriculture, Sonny
Perdue, issued a memorandum eliminating GIPSA as a standalone agency
and transferred the regulatory authority for the Act to AMS. PSD has
day-to-day oversight of the Packers and Stockyards activities in
AMS.
\2\ Federal Register, Volume 81, No. 244, pages 92703-92723.
\3\ Federal Register, Volume 82, No. 200, pages 48603-48604.
---------------------------------------------------------------------------
AMS could have proposed the same regulatory language proposed as in
the 2016 proposed rule. The 2016 proposed rule contained six criteria
the Secretary would consider in determining whether conduct or action
constitutes an undue or unreasonable preference or advantage and a
violation of section 202(b) of the Act. To determine the impact of
adopting the 2016 proposed rule, PSD looked to the estimated costs of
the rule contained in the economic analysis discussed in detail in the
notice of proposed rulemaking. The total first year costs of the
proposed rule in 2016 were $15.37 million.
This current rulemaking represents a different approach than
previous rulemakings that would establish an analytical framework for
considering whether a violation of section 202(b) of the Act has
occurred. The proposed rule includes new criteria to bring transparency
to the determination process for the industry. PSD estimates that the
total first year costs of this proposed rule are $9.67 million.
Introduction
As required by the 2008 Farm Bill, proposed Sec. 201.211 specifies
criteria the Secretary would consider when determining whether an undue
or unreasonable preference or advantage has occurred in violation of
section 202(b) of the Act. The proposed criteria provide a framework to
analyze whether a particular person or locality receives an undue or
unreasonable preference or advantage as compared to other similarly
situated persons or localities. AMS expects the proposed four criteria
would clarify the legal standard for the public and promote honest
competition, fair dealing, and improve the negotiating position of
growers and producers.
Cost-Benefit Analysis
PSD has estimated the costs and benefits of the proposed rule
assuming the final rule is published and effective in May 2020. The
costs and benefits of the proposed rule are discussed in order below.
A. Cost Estimation
PSD believes that the costs of proposed Sec. 201.211 would mostly
consist of the direct costs of reviewing and, if necessary, re-writing
marketing and production contracts to ensure that packers, swine
contractors, and live poultry dealers are not providing an undue or
unreasonable preference or advantage to any livestock producer, swine
production contract grower, or poultry grower compared to other
similarly situated person or localities. PSD also believes that
proposed Sec. 201.211 may lead to additional litigation costs to test
court precedents relating to section 202(b) violations. In past cases,
courts have considered whether a specific preference or advantage would
be a violation of the Act if the preference or advantage did not harm
competition. However, AMS does not intend to create criteria that
conflict with case precedent, so PSD expects that court precedents
relating to competitive harm are likely to remain unchanged.
Proposed Sec. 201.211 does not impose any new requirements on
regulated entities, but would serve as guidance for their compliance
with section 202(b) of the Act. Since the proposed rule would clarify
the Secretary's consideration of unlawful undue or unreasonable
preferences or advantages, regulated entities should face less risk of
violating the Act. Because of this reduced risk, and the fact that PSD
does not expect court precedents requiring the demonstration of harm or
potential harm to competition to change, PSD does not expect the
proposed rule to result in a decrease in the use of alternative
marketing agreements \4\ (AMAs), poultry tournament systems, or other
incentive payment systems, or decreased economic efficiencies in the
cattle, hog, and poultry industries. Additionally, PSD does not expect
the proposed rule to inhibit the ability of regulated entities and
producers and growers to develop and enter into mutually advantageous
contracts.
---------------------------------------------------------------------------
\4\ AMAs are marketing contracts, where producers market their
livestock to a packer under a verbal or written agreement. Pricing
mechanisms vary across AMAs. Some rely on a spot market for at least
one aspect of their prices, while others involve complicated pricing
formulas with premiums and discounts based on carcass merits. The
livestock seller and packer agree on a pricing mechanism under AMAs,
but usually not on a specific price.
---------------------------------------------------------------------------
To estimate costs, PSD divided costs into two major categories,
direct and indirect costs. In addition, PSD expects there are two
direct costs: Administrative costs and litigation costs.
With respect to direct costs, administrative costs for regulated
entities would include items such as review of marketing and production
contracts, additional record keeping,\5\ and all other associated
administrative office work to demonstrate that they do not provide an
undue or unreasonable preference or advantage to any livestock
producer, swine production contract grower, or poultry grower compared
to other similarly situated person or localities.
---------------------------------------------------------------------------
\5\ There are no additional mandatory record keeping
requirements in the proposed rule. PSD expects that regulated
entities may opt to keep additional records to justify advantages or
preferences to demonstrate compliance with the proposed rule in case
of a PSD investigation or private litigation action.
---------------------------------------------------------------------------
Litigation costs for the livestock and poultry industries would
initially increase while precedent confirming decisions are
established. However, since court precedents have generally required
the demonstration of harm to competition, PSD expects the increased
litigation costs would decline after initial court decisions. Once
precedents are confirmed, PSD expects additional litigation to decline.
With respect to indirect costs, those costs include costs caused by
changes in supply and/or demand and any resulting efficiency losses in
the national markets for beef, pork, and chicken and the related input
markets for cattle, hogs, and poultry resulting from the direct costs
of the proposed rule.
1. Direct Costs--Administrative Costs
To estimate administrative costs of the proposed rule, PSD relied
on its experience reviewing contracts and other business records
commonly maintained in the livestock and poultry industries for
compliance with the Act and regulations. PSD has data on the number of
production contracts between swine production contract growers and
[[Page 1775]]
swine contractors and poultry growers and live poultry dealers. PSD
estimated the number of cattle marketing contracts between producers
and packers based on the number of feedlots and the percentage of
livestock procured under AMAs. PSD then multiplied hourly estimates of
the administrative functions of reviewing and revising contracts by
average hourly labor costs for administrative, management, and legal
personnel to arrive at the total estimated administrative costs. PSD
measured all costs in constant 2016 dollars in accordance with guidance
on complying with E.O. 13771.\6\
---------------------------------------------------------------------------
\6\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf
---------------------------------------------------------------------------
Since packers, swine contractors, and live poultry dealers would
likely choose to review their contracts as a precautionary measure to
ensure that they are not engaging in conduct or action that in any way
gives an undue or unreasonable preference or advantage to any livestock
producer, swine production contract grower, or poultry grower, PSD
estimates that the regulated entities would review each contract or
each contract type once and would renegotiate any contracts that
contain language that could be considered a violation of section 202(b)
of the Act.
One may view this estimate as an upper bound to the direct cost of
the proposed rule, as not every packer, swine contractor, or live
poultry dealer would choose to conduct such a review. Some may choose
to ``wait and see'' what effect, if any, the rule had on the industry,
and if courts ruled on it in any way that would warrant such a review
of their contracts.
Based on PSD's experience, it developed estimates for regulated
entities of the number of hours for attorneys and company managers to
review and revise marketing and production contracts and for
administrative staff to make changes, copy, and obtain signed copies of
the contracts. For poultry contracts, PSD estimates that each unique
contract type would require one hour of attorney time to review and
rewrite a contract, two hours of company management time, and for each
individual contract, one hour of administrative time, and one hour of
additional record keeping time.\7\ PSD estimates that each of the 93
live poultry dealers who report to PSD rely on 10 unique contract types
on average. PSD data indicates that there are 24,101 individual poultry
growing contracts. PSD estimates that each of the 237 hog packers has
10 marketing agreements. The 2017 Census of Agriculture (Ag. Census)
\8\ indicates that the universe of swine production contracts in the
U.S. is 8,557. For hog production and marketing contracts, PSD
estimates that each production contract and marketing agreement would
require one-half hour of attorney time to review and rewrite a
contract, one hour of company management time, one hour of
administrative time, and one hour of additional record keeping time.
For cattle processors, PSD estimates that each of the estimated 1,099
marketing agreements would require one hour of attorney time to review
and rewrite a contract, two hours of company management time, one hour
of administrative time, and one hour of additional record keeping
time.\9\
---------------------------------------------------------------------------
\7\ Again, there are no additional mandatory record keeping
requirements in the proposed rule.
\8\ https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf
\9\ Ibid.
---------------------------------------------------------------------------
PSD multiplied estimated hours to conduct these administrative
tasks by the average hourly wages for managers at $62/hour, attorneys
at $84/hour, and administrative assistants at $36/hour as reported by
the U.S. Bureau of Labor Statistics in its Occupational Employment
Statistics to arrive at its estimate of contract review costs for
regulated entities.\10\
---------------------------------------------------------------------------
\10\ All salary costs are based on mean annual salaries for May
2018, adjusted for benefit costs, set to an hourly basis, and
converted in to constant 2016 dollars. http://www.bls.gov/oes/.
Accessed on April 9, 2019.
---------------------------------------------------------------------------
PSD recognizes that contract review costs would also be borne by
livestock producers, swine production contract growers, and poultry
growers. PSD estimates that each livestock producer, swine production
contract grower, and poultry grower would, in its due course of
business, spend one hour of time reviewing a contract or marketing
agreement and would spend one-half hour of its attorney's time to
review the contract. As with the regulated entities, one may view this
estimate as an upper bound to the direct cost of the proposed rule, as
not every producer or grower would choose to conduct such a review.
Some may choose to ``wait and see'' what effect, if any, the rule had
on the industry, and if courts ruled on it in any way that would
warrant such a review of their contracts.
PSD multiplied one hour of livestock producer, swine production
contract grower, and poultry grower management time and one-half hour
of attorney time to conduct the marketing and production contract
review by the average hourly wages for attorneys at $84/hour and
managers at $62/hour as reported by the U.S. Bureau of Labor Statistics
in its Occupational Employment Statistics to arrive at its estimate of
contract review costs for livestock producers, swine contract growers,
and poultry growers. PSD then applied this cost to the estimated 1,099
cattle marketing contracts, 2,370 hog marketing contracts, 8,557 hog
production contracts, and 24,101 poultry growing contracts that have
been reported to PSD.
After determining the administrative costs to both the regulated
entities and those they contract with, PSD added the administrative
costs of the regulated entities and the livestock producers, swine
production contract growers, and poultry growers together to arrive at
the first-year total estimated administrative costs attributable to the
regulation. A summary of the first-year total estimated administrative
costs for proposed Sec. 201.211 appear in the following table:
Table 1--First-Year Administrative Costs
----------------------------------------------------------------------------------------------------------------
Cattle ($ Hogs ($ Poultry ($ Total ($
Regulation millions) millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
201.211..................................... $0.42 $3.05 $4.42 $7.89
----------------------------------------------------------------------------------------------------------------
The first-year total administrative costs are $7.89 million for
proposed Sec. 201.211, and include costs for cattle, hogs, and poultry
because packers, swine contractors, live poultry dealers, livestock
producers, swine production contract growers, and poultry growers would
conduct administrative functions of contract review and record keeping
in response to the regulation. The administrative costs are the highest
for poultry, followed by hogs and cattle. This is due to the greater
prevalence of contract growing arrangements in the poultry industry.
[[Page 1776]]
2. Direct Costs--Litigation Costs
In considering the costs of the rules it proposed in 2016, GIPSA
performed an in-depth analysis of litigation costs expected as a result
of the package of four proposed new regulations.\11\ GIPSA estimated
the total costs of litigating a case alleging violations of the P&S
Act. The main costs are attorney fees to litigate a case in a court of
law. The cost of litigating a case includes the costs to all parties
including the respondent and the USDA in a case brought by the USDA and
the costs of the plaintiff and the defendant in the case of private
litigation.
---------------------------------------------------------------------------
\11\ The four proposed rules were published on December 20,
2016, in Volume 81, No. 244 of the Federal Register.
---------------------------------------------------------------------------
To estimate litigation costs for the 2016 proposed rules, GIPSA
examined the actual cases decided under the P&S Act from 1926 to 2014
as reported by the National Agricultural Law Center at the University
of Arkansas.\12\ The litigation costs estimated in the 2016 proposed
rules are measured in constant 2016 dollars and are for regulated
entities, producers, and growers. The 2016 analysis of litigation costs
estimated that the interim final rule at Sec. 201.3(a) was the primary
source of litigation costs and that the litigation costs for all four
proposed rules were counted under Sec. 201.3(a).\13\ The 2016 analysis
split out the estimated litigation costs between sections 202(a) and
202(b).
---------------------------------------------------------------------------
\12\ http://nationalaglawcenter.org/aglaw-reporter/case-law-index/packers-and-stockyards.
\13\ The USDA withdrew Sec. 201.3(a) on October 18, 2017, in
Volume 82, No. 200 of the Federal Register.
---------------------------------------------------------------------------
The National Agricultural Law Center at the University of Arkansas
has not reported any additional cases decided under the P&S Act since
2015. Since proposed Sec. 201.211 would establish criteria for
violations of section 202(b) and there has not been any new recent
litigation reported by the National Agricultural Law Center at the
University of Arkansas, PSD used the estimated litigation costs
associated with section 202(b) from the 2016 proposed rules as the
starting point for this proposed rule.
The 202(b) estimated litigation costs serve as an upper boundary of
estimated costs since the estimates assumed that Sec. 201.3(a) and
Sec. 201.211 would both be promulgated. PSD estimates that there would
be additional litigation when Sec. 201.211 becomes effective, even in
the absence of Sec. 201.3(a). Therefore, PSD uses the following 202(b)
litigation costs estimates in Table 14 from the 2016 proposed rule as
the estimated first-year litigation costs assuming the rule becomes
effective in May 2020.\14\
---------------------------------------------------------------------------
\14\ Federal Register, Volume 81, No. 244, page 92580.
Table 2--Projected First-Year Litigation Costs
----------------------------------------------------------------------------------------------------------------
Cattle ($ Hog ($ Poultry ($ Total ($
Section 202(b) of the Act millions) millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
Total....................................... $0.24 $0.04 $1.49 $1.77
----------------------------------------------------------------------------------------------------------------
PSD expects proposed Sec. 201.211 would result in an additional
$1.77 million in litigation costs in the first full year after the rule
becomes effective. Using the number of complaints PSD has received from
industry participants as an indicator, PSD estimates that the majority
of the litigation will be in the poultry industry. Most of the
complaints concerning undue or unreasonable preferences that PSD has
received since 2009 have come from the poultry industry.
3. Total Direct Costs
The total first-year direct costs of proposed Sec. 201.211 are the
sum of administrative and litigation costs from above and are
summarized in the following table.
Table 3--First Year Direct Costs \15\
----------------------------------------------------------------------------------------------------------------
Cattle ($ Hogs ($ Poultry ($ Total ($
Cost type millions) millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs................................. $0.42 $3.05 $4.42 $7.89
Litigation Costs............................ 0.24 0.04 1.49 1.77
-------------------------------------------------------------------
Total Direct Costs...................... 0.66 3.09 5.91 9.67
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\15\ The detail in this table and other tables in this analysis
may not add to the totals due to rounding.
---------------------------------------------------------------------------
PSD estimates that the total direct costs of proposed Sec. 201.211
to be $9.67 million. As the above table shows, the costs are highest
for the poultry industry, followed by hogs and cattle. The primary
reason is the high utilization of growing contracts and the
corresponding higher estimated administrative costs in the poultry
industry. To put this direct cost in perspective, the actual impact on
retail prices from these direct costs would be less than one one-
hundredth of a cent.
4. Indirect Costs
PSD estimates that the indirect costs of proposed Sec. 201.211 on
the cattle, hog, and poultry industries are zero. For the purposes of
this analysis, indirect costs are social welfare losses due to any
potential price and output changes from the direct costs of proposed
rule and in are addition to the direct costs (administrative and
litigation costs) on regulated entities, producers, and growers who are
directly impacted by the proposed rule. The economy will experience
indirect costs, for example, if the proposed rule causes packers and
live poultry dealers to reduce production, increasing the price of meat
products and reducing the amount of meat consumed by consumers.
As previously discussed, the regulation clarifies the Secretary's
consideration of whether a conduct or action constitutes an undue or
unreasonable preference or advantage. PSD does not expect, therefore,
that proposed Sec. 201.211 would result in a decreased use of AMAs,
use of poultry grower ranking systems or other incentive pay, reduced
capital formation, inhibit development of new
[[Page 1777]]
contracts, or decreased economic efficiencies in the livestock, meat
and poultry industries. Accordingly, PSD does not project indirect
costs resulting from decreases in AMAs, reduced capital, efficiency
losses, or lost consumer and producer surplus. Indirect costs that
could theoretically be anticipated are due to shifts in industry demand
and supply curves resulting from the increases in industry direct costs
attributable to the proposed rule. These shifts may result in quantity
and price changes in the retail markets for beef, pork, and poultry,
and the related input markets for cattle, hogs, and poultry. However,
litigation costs are unrelated to the quantity of production--in other
words, they are not marginal costs--so it is not appropriate to include
them in the amount of a supply curve shift. Contract reviews and
revisions are somewhat related to production quantity, but even they
are less than fully compelling as a component of marginal cost. These
nuances are not reflected in the assessment that follows, and thus it
should be interpreted as a bounding exercise.
To calculate an upper bound on this type of indirect costs based on
supply curves shifting, PSD modeled the impact of the increase in
direct costs of implementing proposed Sec. 201.211 in a Marketing
Margins Model (MMM) framework.\16\ The MMM allows for the estimation of
changes in consumer and producer prices and quantities produced caused
by changes in supply and demand in the retail markets for beef, pork,
and poultry and the input markets for cattle, hogs, and poultry.
---------------------------------------------------------------------------
\16\ The framework is explained in detail in Tomek, W.G. and
K.L. Robinson ``Agricultural Product Prices,'' third edition, 1990,
Cornell University Press.
---------------------------------------------------------------------------
PSD modeled--again, as a bounding exercise--the indirect costs as
an inward (or upward) shift in the supply curves for beef, pork, and
poultry. This has the effect of increasing the equilibrium prices and
reducing the equilibrium quantity produced. This also has the effect of
reducing the derived demand for cattle, hogs, and poultry, which causes
a reduction in the equilibrium prices and quantity produced. Economic
theory suggests that these shifts in the supply curves and derived
demand curves will result in price and quantity impacts and potential
dead weight losses to society.\17\
---------------------------------------------------------------------------
\17\ A dead weight loss is the cost to society of an inefficient
allocation of resources in a market. Causes of deadweight losses can
include market failures, such as market power or externalities, or
an intervention by a non-market force, such as government regulation
or taxation.
---------------------------------------------------------------------------
To estimate the output and input supply and demand curves for the
MMM, PSD constructed linear supply and demand curves around equilibrium
price and quantity points using price elasticities of supply and demand
from the GIPSA Livestock Meat and Marketing Study and from USDA's
Economic Research Service.\18\ With the supply curves established from
this data, PSD then shifted the supply curves for beef, pork, and
chicken up by the amount of the increase in direct costs for each
industry. PSD calculated the new equilibrium prices and quantities in
the input markets resulting from the decreases in derived demand that
result from higher direct costs. This allows for the calculation of the
indirect cost from the lower relative quantity produced at the
relatively higher price when the industry's direct costs increase.
---------------------------------------------------------------------------
\18\ RTI International ``GIPSA Livestock Meat and Marketing
Study'' prepared for Grain Inspection, Packers and Stockyards
Administration, 2007. ERS Price Elasticities: http://www.ers.usda.gov/data-products/commodity-and-food-elasticities/demand-elasticities-from-literature.aspx.
---------------------------------------------------------------------------
The calculation of an upper bound on the price impacts from the
increases in direct costs from proposed Sec. 201.211 resulted in price
increases of less than one one-hundredth of a cent in retail prices for
beef, pork, and poultry. This is because the increase in direct costs
is very small in relation to total industry costs.\19\ The result is
that the price and quantity effects from the increases in direct costs
are indistinguishable from zero and, therefore, PSD concludes that the
indirect costs of proposed Sec. 201.211 for each industry are also
zero.
---------------------------------------------------------------------------
\19\ The $9.67 million increase in total industry costs from
proposed Sec. 201.211 is only 0.0043 percent of direct industry
costs of approximately $223 billion for the beef, pork, and poultry
industries.
---------------------------------------------------------------------------
5. Total Costs
PSD added all direct costs to the indirect costs (equal to zero),
to arrive at the estimated total first-year costs of proposed Sec.
201.211. The total first-year costs are summarized in Table 4.
Table 4--Total First Year Costs
----------------------------------------------------------------------------------------------------------------
Cattle ($ Hogs ($ Poultry ($ Total ($
Cost type millions) millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs..................................... $0.42 $3.05 $4.42 $7.89
Litigation Costs................................ 0.24 0.04 1.49 1.77
Total Direct Costs.............................. 0.66 3.09 5.91 9.67
Total Indirect Costs............................ 0.00 0.00 0.00 0.00
---------------------------------------------------------------
Total Costs................................. 0.66 3.09 5.91 9.67
----------------------------------------------------------------------------------------------------------------
PSD estimates that the total costs would be $9.67 million in the
first year of implementation.
6. Ten-Year Total Costs
To arrive at the estimated ten-year administrative costs of
proposed Sec. 201.211, PSD estimates that in each of the first five
years, 20 percent of all contracts will either expire and need to be
renewed each year or new marketing and production contracts will be put
in place each year. While PSD expects the costs of reviewing and
revising, if necessary, each contract would remain constant in the
first five years, it expects the administrative costs would be lower
after the first year because the direct administrative costs of
reviewing and revising contracts would only apply to the 20 percent of
expiring contracts or new contracts. PSD estimates that in the second
five years, the direct administrative costs of reviewing and revising
contracts would decrease by 50 percent per year as the contracts would
already reflect language modifications, if any, necessitated by
implementation of the regulation. PSD estimates that after ten years,
the direct administrative costs would return to where they would have
been absent the rule, and the additional administrative costs
associated with the rule would remain at $0 after ten years.
In estimating the estimated ten-year litigation costs of proposed
Sec. 201.211, PSD expects the litigation costs to be constant for the
first five years while courts are setting precedents for the
interpretation of Sec. 201.211. PSD expects that case law with respect
to the
[[Page 1778]]
regulation would be settled after five years and by then, industry
participants would know how PSD would enforce the regulation and how
courts would interpret the regulation. The effect of courts
establishing precedents is that litigation costs would decline after
five years as the livestock and poultry industries understand how the
courts interpret the regulation.
To arrive at the estimated ten-year litigation costs of proposed
Sec. 201.211, PSD estimates that litigation costs for the first five
years would occur at the same rate and at the same cost as in the first
full year of the rule ending in May 2021. In the sixth through tenth
years, PSD estimates that additional litigation costs would decrease
each year and return to where they would have been absent the rule in
the tenth year after the rule is effective and remain at $0 after 10
years. PSD estimates this decrease in litigation costs to be linear
with the same decrease in costs each year.
The ten-year total costs of proposed Sec. 201.211 appear in the
table below.\20\
---------------------------------------------------------------------------
\20\ As discussed above, PSD expects total administrative and
litigation costs to return to where they would have been absent the
rule and the additional costs associated with the rule would remain
at $0 after ten years.
Table 5--Ten-Year Total Costs--Years Ended May \21\
----------------------------------------------------------------------------------------------------------------
Administrative Litigation ($ Total direct ($
Year ($ millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
2021................................................... $7.89 $1.77 $9.67
2022................................................... 1.58 1.77 3.35
2023................................................... 1.58 1.77 3.35
2024................................................... 1.58 1.77 3.35
2025................................................... 1.58 1.77 3.35
2026................................................... 0.79 1.48 2.27
2027................................................... 0.39 1.18 1.58
2028................................................... 0.20 0.89 1.08
2029................................................... 0.10 0.59 0.69
2030................................................... 0.05 0.30 0.35
--------------------------------------------------------
Totals............................................. 15.74 13.31 29.05
----------------------------------------------------------------------------------------------------------------
Based on the analysis, PSD expects the ten-year total costs would
be $29.05 million.
---------------------------------------------------------------------------
\21\ PSD uses May 2021 as the end of the first year after the
proposed rule would be in effect for analytical purposes only. The
date the proposed rule becomes final is not known.
---------------------------------------------------------------------------
7. Present Value of Ten-Year Total Costs
The total costs of proposed Sec. 201.211 in the table above show
that the costs are highest in the first year, decline to a constant and
significantly lower level over the next four years, and then gradually
decrease again over the subsequent five years. Costs to be incurred in
the future are less expensive than the same costs to be incurred today.
This is because the money that would be used to pay the costs in the
future could be invested today and earn interest until the time period
in which the costs are incurred.
To account for the time value of money, the costs of the regulation
to be incurred in the future are discounted back to today's dollars
using a discount rate. The sum of all costs discounted back to the
present is called the present value (PV) of total costs. PSD relied on
both a three percent and seven percent discount rate as discussed in
Circular A-4.\22\ PSD measured all costs using constant 2016 dollars.
---------------------------------------------------------------------------
\22\ https://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf
---------------------------------------------------------------------------
PSD calculated the PV of the ten-year total costs of the regulation
using both a three percent and seven percent discount rate and the PVs
appear in the following table.
Table 6--PV of Ten-Year Total Costs
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... $26.31
7 Percent............................................... 23.33
------------------------------------------------------------------------
PSD expects the PV of the ten-year total costs would be $26.31
million at a three percent discount rate and $23.33 million at a seven
percent discount rate.
8. Annualized Costs
PSD annualized the PV of the ten-year total costs (referred to as
annualized costs) of proposed Sec. 201.211 using both a three percent
and seven percent discount rate as required by Circular A-4 and the
results appear in the following table.\23\
---------------------------------------------------------------------------
\23\ Ibid.
Table 7--Ten-Year Annualized Costs
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... $3.08
7 Percent............................................... 3.32
------------------------------------------------------------------------
PSD expects the annualized costs of Sec. 201.211 would be $3.08
million at a three percent discount rate and $3.32 million at a seven
percent discount rate.
PSD also annualized the PV of the ten-year total costs into
perpetuity of proposed Sec. 201.211 using both a three percent and
seven percent discount rate following the guidance on complying with
E.O. 13771 and the results appear in the following table.\24\
---------------------------------------------------------------------------
\24\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf.
Table 8--Annualized Costs Into Perpetuity
------------------------------------------------------------------------
Discount rate ($ millions)
------------------------------------------------------------------------
3 Percent............................................... $0.69
7 Percent............................................... 1.21
------------------------------------------------------------------------
PSD expects the costs of Sec. 201.211 annualized into perpetuity
would be $0.69 million at a three percent discount rate and $1.21
million at a seven percent discount rate. Based on the costs in Table 8
and in accordance with guidance on complying with E.O. 13771, the
single primary estimate of the costs of this proposed rule is $1.21
million, the total costs annualized in perpetuity using a 7 percent
discount rate.
B. Benefits
PSD was unable to quantify the benefits of Sec. 201.211. However,
proposed Sec. 201.211 contains several
[[Page 1779]]
provisions that PSD expects would improve economic efficiencies in the
regulated markets for cattle, hogs, and poultry and reduce market
failures. Regulations that increase the amount of relevant information
available to market participants, protect private property rights, and
foster competition improve economic efficiencies and generate benefits
for consumers and producers.
Proposed Sec. 201.211 would increase the amount of relevant
information available to market participants and offset any potential
abuse of buyer-side market power by clearly stating to all contracting
parties the criteria that the Secretary will consider in determining
whether conduct or action constitutes an undue or unreasonable
preference or advantage in violation of 202(b) of the Act.
The regulation would also reduce the risk of violating section
202(b) because it would clarify the criteria that the Secretary will
consider in determining whether the conduct or action in the livestock
and poultry industries constitutes an undue or unreasonable preference
or advantage and a violation of section 202(b) of the Act. Other
benefits of clarifying the criteria may include: Reducing litigation
risk; decreasing contracting costs; promoting competitiveness and
fairness in contracting; and providing protections for livestock
producers, swine production contract growers, and poultry growers.
Benefits to the livestock and poultry industries and the cattle,
hog, and poultry markets would also arise from improving parity of
negotiating power between packers, swine contractors, and live poultry
dealers and livestock producers, swine production contract growers, and
poultry growers. The improvement in parity would come when contracting
parties negotiate new contracts and when they review and renegotiate
any existing contract terms that contain language that could be
considered a violation of section 202(b) of the Act.
Since the regulation would increase the amount of relevant
information by clarifying what might be considered an undue or
unreasonable preference, it would increase parity in negotiating
contracts, and thereby reduce the ability to abuse buyer-side market
power with the resulting welfare losses.\25\ Establishing parity of
negotiating power in contracts promotes fairness and equity and is
consistent with PSD's mission to protect fair trade practices,
financial integrity, and competitive markets for livestock, meats, and
poultry.\26\
---------------------------------------------------------------------------
\25\ Nigel Key and Jim M. MacDonald discuss evidence for the
effect of concentration on grower compensation in ``Local Monopsony
Power in the Market for Broilers? Evidence from a Farm Survey''
selected paper American Agri. Economics Assn. meeting Orlando,
Florida, July 27-29, 2008.
\26\ See additional discussion in Steven Y. Wu and James
MacDonald (2015) ``Economics of Agricultural Contract Grower
Protection Legislation,'' Choices 30(3): 1 -6.
---------------------------------------------------------------------------
C. Cost-Benefit Summary
PSD expects the ten-year annualized costs of Sec. 201.211 would be
$3.08 million at a three percent discount rate and $3.32 million at a
seven percent discount rate and the costs annualized into perpetuity to
be $0.69 million at a three percent discount rate and $1.21 million at
a seven percent discount rate. PSD expects the costs would be highest
for the poultry industry due to its extensive use of poultry growing
contracts, followed by the hog industry and the cattle industry,
respectively.
PSD was unable to quantify the benefits of the proposed regulation,
but they explained numerous qualitative benefits that would protect
livestock producers, swine production contract growers, and poultry
growers, promote fairness and equity in contracting, increase economic
efficiencies, and reduce the negative effects of market failures
throughout the entire livestock and poultry value chain. The primary
benefit of proposed Sec. 201.211 would be reduced occurrences of undue
or unreasonable preferences or advantages and increased economic
efficiencies in the marketplace. This benefit of additional enforcement
of the Act would accrue to all segments of the value chain in the
production of livestock and poultry, and ultimately to consumers.
Regulatory Flexibility Analysis
The Small Business Administration (SBA) defines small businesses by
their North American Industry Classification System Codes (NAICS).\27\
SBA considers broiler and turkey producers/growers and swine
contractors, NAICS codes 112320, 112330, and 112210 respectively, to be
small businesses if sales are less than $1,000,000 per year. Cattle
feeders are considered small if they have less than $8 million in sales
per year. Beef and pork packers, NAICS 311611, are small businesses if
they have fewer than 1,000 employees.
---------------------------------------------------------------------------
\27\ U.S. Small Business Administration. Table of Small Business
Size Standards Matched to North American Industry Classification
System Codes. effective August 19, 2019. https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf
---------------------------------------------------------------------------
The Packers and Stockyards Act regulates live poultry dealers,
which is a group similar but not identical to the NAICS category for
poultry processors. Poultry processors, NAICS 311611, are considered
small business if they have fewer than 1,250 employees. PSD applied
SBA's definition for small poultry processors to live poultry dealers
as the best standard available, and considers live poultry dealers with
fewer than 1,250 employees to be small businesses.
PSD maintains data on live poultry dealers from the annual reports
these firms file with PSD. Currently, 93 live poultry dealers would be
subject to the proposed regulation. Seventy-Four of the live poultry
dealers would be small businesses according to the SBA standard.
Although there were many more small businesses than large, small
business produced only about 6.5 percent of the poultry in the United
States in 2017.
Live poultry dealers classified as large businesses are responsible
for about 93.5 percent of the poultry contracts. Assuming that small
businesses would bear 6.5 percent of the costs, in the first year the
regulation is effective, $222,687 \28\ would fall on live poultry
dealers classified as small businesses. This amounts to average
estimated costs for each small live poultry dealer of $3,009.
---------------------------------------------------------------------------
\28\ Estimated cost to live poultry dealers of $3,412,301 x 6.52
percent of firms that are small businesses = $222,687.
---------------------------------------------------------------------------
As of February 2019, PSD records identified 381 beef and pork
packers actively purchasing cattle or hogs for slaughter. Many firms
slaughtered more than one species of livestock. Of the 381 beef and
pork packers, 172 processed both cattle and hogs, 144 processed cattle
but not hogs, and 65 processed hogs but not cattle.
PSD estimates that small businesses accounted for 23.1 percent of
the cattle and 19.2 percent of the hogs slaughtered in 2017. If the
costs of implementing proposed Sec. 201.211 are proportional to the
number of head processed, then in first full year the regulation would
be effective, PSD estimates that $126,501 \29\ in additional costs
would fall on beef packers classified as small businesses. This amounts
to estimated costs of $407 for each small beef packer.
---------------------------------------------------------------------------
\29\ Estimated cost to beef packers of $547,643 x 23.1 percent
of firms that are small businesses = $126,501.
---------------------------------------------------------------------------
In total, $81,603 \30\ in additional first-year costs would be
expected to fall on pork packers classified as small
[[Page 1780]]
businesses, and $30,863 \31\ would fall on swine contractors classified
as small businesses. This amounts to average estimated costs for each
small pork packer of $356, and average estimated costs for each small
swine contractor of $286 in the first year the regulation would be
effective. To the extent that smaller beef and pork packers rely on AMA
purchases less than large packers, the estimates might tend to
overstate costs.
---------------------------------------------------------------------------
\30\ Estimated cost to hogs and pork of $1,959,550 x 19.2
percent of slaughter in small businesses x 21.7 percent of costs
attributed to packers = $81,603.
\31\ Estimated cost to hogs and pork of $1,959,550 x 2.01
percent of contracted hogs produced by swine contractors that are
small businesses x 78.3 percent of costs attributed to contractors =
$30,863.
---------------------------------------------------------------------------
Ten-year annualized costs discounted at a three percent rate would
be $61,097 for the cattle and beef industry, $32,463 for the hog and
pork industry, and $119,271 for the poultry industry. This amounts to
annualized costs of $196 for each beef packer, $103 for each pork
packer, $82 for each swine contractor, and $1,612 for each live poultry
dealer that is a small business. The total annualized costs for
regulated small businesses would be $212,830.
Ten-year annualized costs at a seven percent discount rate would be
$64,458 for the regulated cattle and beef industry, $35,416 for the
regulated hog and pork industry, and $125,696 for the poultry industry.
This amounts to ten-year annualized costs of $207 for each beef packer,
$112 for each pork packer, $90 for each swine contractor, and $1,699
for each live poultry dealer that is a small business. The total ten-
year annualized costs at 7 percent for regulated small businesses would
be $225,570.
The table below lists the estimated additional costs associated
with the proposed regulation in the first year. It also lists
annualized costs discounted at three percent and seven percent discount
rates, and annualized PV of costs extended into perpetuity discounted
at three and seven percent.
Table 9--Estimated Industry Total Costs to Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
Pork packers
Beef packers and swine Poultry
Estimate type ($) contractors processors Total ($)
($) ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................ 126,501 112,466 222,687 461,653
10 years Annualized at 3 Percent................ 61,097 32,463 119,271 212,830
10 years Annualized at 7 Percent................ 64,458 35,416 125,696 225,570
Annualized Total Cost into Perpetuity Discounted 13,720 7,290 26,784 47,794
at 3 Percent...................................
Annualized Total Cost into Perpetuity Discounted 23,492 12,907 45,810 82,209
at 7 Percent...................................
----------------------------------------------------------------------------------------------------------------
In considering the impact on small businesses, PSD considered the
average costs and revenues of each regulated small business impacted by
proposed Sec. 201.211. The number of small businesses impacted, by
NAICS code, as well as the costs per entity in the first-year, ten-year
annualized costs per entity at both the three percent and seven percent
discount rates, and annualized PV of the total costs extended into
perpetuity discounted at three and seven percent appear in the
following table.
Table 10--Per Entity Costs to Regulated Small Businesses
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Ten-year Ten-year
NAICS small First year ($) annualized annualized Perpetuity 3% Perpetuity 7%
businesses costs--3% ($) costs--7% ($) ($) ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
112210--Swine Contractor................................ 108 286 82 90 19 33
311615--Poultry Processor............................... 74 3,009 1,612 1,699 362 619
311611--Beef Packer..................................... 311 407 196 207 44 76
311611--Pork Packer..................................... 229 356 103 112 23 41
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following table compares the average per entity first-year and
annualized costs of proposed Sec. 201.211 to the average revenue per
establishment for all regulated small businesses in the same NAICS
code. The annualized costs are slightly higher at the seven percent
rate than at the three percent rate, so only the seven percent rate is
included in the table as the more conservative estimate.
Table 11--Comparison of per Entity Cost to Revenues for Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
Ten-year Annualized cost
Average revenue First-year cost annualized cost to perpetuity as
NAICS per establishment as percent of as percent of percent of
($) revenue (%) revenue (%) revenue (%)
----------------------------------------------------------------------------------------------------------------
112210--Swine Contractor............ 485,860 0.06 0.02 0.007
311615--Poultry Processor........... 13,842,548 0.02 0.01 0.004
311611--Beef Packer................. 6,882,205 0.01 0.00 0.001
311611--Pork Packer................. 6,882,205 0.01 0.00 0.001
----------------------------------------------------------------------------------------------------------------
[[Page 1781]]
The revenue figures in the above table come from U.S. Census data
for live poultry dealers and cattle and hog slaughterers, NAICS codes
311615 and 311611, respectively.\32\ Ag. Census data have the number of
head sold by size classes for farms that sold their own hogs and pigs
in 2017 and that identified themselves as contractors or integrators,
but not the value of sales nor the number of head sold from the farms
of the contracted production. To estimate average revenue per
establishment, PSD used the estimated average value per head for sales
of all swine operations and the production values for firms in the Ag.
Census size classes for swine contractors. The results in Table 11
demonstrate, the costs of proposed Sec. 201.211 as a percent of
revenue are less than one percent.\33\
---------------------------------------------------------------------------
\32\ https://www.nass.usda.gov/Publications/AgCensus/2017/
Full_Report/Volume_1,_Chapter_1_US/
\33\ There are significant differences in average revenues
between swine contractors and cattle, hog, and poultry processors,
resulting from the difference in SBA thresholds.
---------------------------------------------------------------------------
Although the Packers and Stockyards Act does not regulate livestock
producers or poultry growers, PSD recognizes that they will also incur
contract review costs. PSD estimates that each livestock producer and
poultry grower would, in its due course of business, spend one hour of
time reviewing a contract or marketing agreement and would spend one-
half hour of its attorney's time to review the contract. As with the
regulated entities, one may view this estimate as an upper bound to the
direct cost of the proposed rule, as not every producer or grower would
choose to conduct such a review. Some may choose to ``wait and see''
what effect, if any, the rule had on the industry, and if courts ruled
on it in any way that would warrant such a review of their contracts.
PSD multiplied one hour of livestock producer, swine production
contract grower, and poultry grower management time and one-half hour
of attorney time to conduct the marketing and production contract
review by the average hourly wages for attorneys at $84/hour and
managers at $62/hour as reported by the U.S. Bureau of Labor Statistics
in its Occupational Employment Statistics to arrive at its estimate of
contract review costs for livestock producers, swine contract growers,
and poultry growers. The result is that each small livestock producer
and each small poultry that sells livestock or raises poultry on a
contract is expected to bear $104 in first year costs, $23 in ten year
annualized costs discounted at 3 percent, $25 in ten year annualized
costs discounted at 7 percent, and $9 discounted into perpetuity at 7
percent. Table 12 lists expected costs to livestock producers and
poultry growers that are small businesses.
Table 12--Total Costs to Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
Cattle feeders Hog producers Poultry
Estimate type ($) ($) growers ($) Total ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................ 111,866 459,707 2,501,106 3,072,679
10 years Annualized at 3 Percent................ 24,274 99,754 542,727 666,755
10 years Annualized at 7 Percent................ 26,917 110,614 601,812 739,342
Annualized Total Cost into Perpetuity Discounted 5,451 22,401 121,876 149,728
at 3 Percent...................................
Annualized Total Cost into Perpetuity Discounted 9,810 40,313 219,329 269,452
at 7 Percent...................................
----------------------------------------------------------------------------------------------------------------
The Ag. Census indicates there were 575 farms that sold hogs or
pigs in 2017 and identified themselves as contractors or integrators.
About 19 percent of swine contractors had sales of less than $1,000,000
in 2017 and would have been classified as small businesses. These small
businesses accounted for only 2 percent of the hogs produced under
production contracts.
Additionally, there were 8,557 swine producers in 2017 with swine
contracts, and about 41 percent of these producers would have been
classified as small businesses. PSD estimated an additional 2,370 pork
producers had marketing agreements with pork packers. If 41 percent are
small businesses, then 4,480 hog producers could incur contract review
costs. PSD estimated as many as 1,099 cattle feeders had marketing
agreements or contracts that could need adjustment due to the proposed
rule. If 98 percent are small businesses, 1,078 could bear costs of
reviewing contracts. Table 13 compares cost to revenues for producer
unregulated producers that are small businesses.
PSD records indicated poultry processors had 24,101 poultry
production contracts in effect in 2017. The 24,101 poultry growers
holding the other end of the contracts are almost all small businesses
by SBA's definitions.
Table 13--Comparison of Total Cost to Revenues for Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
Ten-year Annualized
Number of First-year annualized cost to
NAICS small Average cost as cost as perpetuity as
businesses revenue ($) percent of percent of percent of
revenue (%) revenue (%) revenue (%)
----------------------------------------------------------------------------------------------------------------
112212--Cattle Feeders.......... 1,078 305,229 0.03 0.01 0.003
112210--Hog Producers........... 4,480 333,607 0.03 0.01 0.003
112320--Poultry Growers......... 24,101 181,545 0.06 0.01 0.005
----------------------------------------------------------------------------------------------------------------
Ten-year annualized cost savings of exempting small businesses
would be $212,830 using a three percent discount rate and $225,570
using a seven percent discount rate. The cost savings annualized into
perpetuity of exempting small businesses would be $47,794 using a three
percent discount rate and $82,209 using a seven percent discount
[[Page 1782]]
rate. However, one purpose of proposed Sec. 201.211 is to protect all
livestock producers, swine production contract growers, and poultry
growers from unfair and unreasonable preferences or advantages,
regardless of whether the producer or grower and the packer, swine
contractor, or live poultry dealer to which they sell or contract is a
large or small business. PSD believes that the benefits of proposed
Sec. 201.211 would be captured by all livestock producers, swine
production contract growers, and poultry growers. For this reason, AMS
did not consider exempting small business from the proposed rule.
The number of regulated entities that could experience a cost
increase is substantial. Most regulated packers and live poultry
dealers are small businesses. However, the expected costs are not
significant. For all four groups of regulated entities: Beef packers,
pork packers, live poultry dealers, and swine contractors, average
first year costs are expected to amount to less than one tenth of one
percent of annual revenue. Ten-year annualized costs discounted at 7
percent are highest for swine contractors at two one hundredths of a
percent of revenue. Annualized expected costs of $90 and $112 for swine
contractors, and pork packers, respectively are near the cost of one
hog. An annualized expected cost of $207 for beef packers is much less
than the cost of one fed steer. Expected costs for live poultry dealers
are higher, but as percent of revenue, expected costs to live poultry
dealers are very low. AMS expects that the additional costs to small
packers, live poultry dealers, and swine contractors will not change
their ability to continue operations or place any of them at a
competitive disadvantage.
The number of unregulated entities that could experience a cost
increase is also substantial. Most effected livestock producers and
poultry growers are small businesses. Expected costs are not
significant. The expected first year cost for each unregulated
livestock producer or poultry grower is $104. Annualized expected 10-
year costs discounted at 3 percent are $23. Costs as percent of revenue
are expected to be well below 1 percent. AMS expects that $23 per year
will not change any producers' or poultry grower's ability to continue
operations or place any livestock producer or poultry grower at a
competitive disadvantage.
As discussed in the Regulatory Impact Analysis, AMS does not expect
welfare transfers among market segments or within segments. Estimated
changes in prices and quantities are indistinguishable from zero. AMS
does not expect proposed Sec. 201.211 to cause changes in production
or marketing for small businesses, and the increase in direct costs is
very small in relation to total costs.
Based on the above analyses, AMS does not expect that proposed
Sec. 201.211 would have a significant economic impact on a substantial
number of small business entities as defined in the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). However, AMS seeks public
comment on whether proposed Sec. 201.211 will have a significant
economic impact on a substantial number of small business entities
before making a determination.
Civil Rights Review
AMS has considered the potential civil rights implications of this
rule on members of protected groups to ensure that no person or group
would be adversely or disproportionately at risk or discriminated
against on the basis of race, color, national origin, gender, religion,
age, disability, sexual orientation, marital or family status,
political beliefs, parental status, or protected genetic information.
This proposed rule does not contain any requirements related to
eligibility, benefits, or services that would have the purpose or
effect of excluding, limiting, or otherwise disadvantaging any
individual, group, or class of persons on one or more prohibited bases.
AMS has developed an outreach program to ensure information about the
proposed regulation and the opportunity to comment on it is made
available to socially and economically disadvantaged or limited
resource farmers, producers, growers, and members of racial and ethnic
minority groups.
Paperwork Reduction Act
This proposed rule does not contain new or amended information
collection requirements subject to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.). It does not involve collection of new or
additional information by the Federal Government. According to PSD
records, there were approximately 312 bonded packers; 1,326 market
agencies selling on commission; 4,582 livestock dealers and commission
buyers; and 95 live poultry dealers regulated under the Act in 2018.
The 2017 Census of Agriculture indicated that there were 575 swine
contractors in 2017. The 2017 Census of Agriculture also indicated that
there were 826,733 livestock producers and poultry growers. None of
these entities would be required to submit forms or other information
to AMS or to keep additional records in consequence of this proposed
rule.
E-Government Act
USDA is committed to complying with the E-Government Act by
promoting the use of the internet and other information technologies to
provide increased opportunities for citizen access to Government
information and services, and for other purposes.
Executive Order 13175
This rule has been reviewed in accordance with the requirements of
Executive Order 13175--Consultation and Coordination with Indian Tribal
Governments. Executive Order 13175 requires Federal agencies to consult
with tribes on a government-to-government basis on policies that have
tribal implications, including regulations, legislative comments or
proposed legislation, and other policy statements or actions that have
substantial direct effects on one or more Indian tribes, on the
relationship between the Federal Government and Indian tribes or the
distribution of power and responsibilities between the Federal
Government and Indian tribes.
The USDA's Office of Tribal Relations (OTR) has assessed the impact
of this rule on Indian tribes and determined that this rule may have
tribal implications that require continued outreach efforts to
determine if tribal consultation under Executive Order 13175 is
required.
If a tribe requests consultation, AMS will work with the OTR to
ensure meaningful consultation is provided where changes, additions,
and modifications identified herein are not expressly mandated by
Congress.
Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the
Office of Information and Regulatory Affairs designated this rule
as not a major rule as defined by 5 U.S.C. 804(2).
Executive Order 12988
This proposed rule has been reviewed under Executive Order 12988--
Civil Justice Reform. This proposed rule is not intended to have
retroactive effect. This proposed rule would not preempt state or local
laws, regulations, or policies, unless they present an irreconcilable
conflict with this rule. There are no administrative procedures that
must be exhausted prior to any judicial challenge to the provisions of
this rule. Nothing in this proposed rule is intended to interfere with
a person's right to enforce liability against any
[[Page 1783]]
person subject to the Act under authority granted in section 308 of the
Act.
List of Subjects in 9 CFR Part 201
Confidential business information, Reporting and recordkeeping
requirements, Stockyards, Surety bonds, Trade practices.
For the reasons set forth in the preamble, USDA proposes to amend 9
CFR part 201 as follows:
PART 201--REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT
0
1. The authority citation for part 201 continues to read as follows:
Authority: 7 U.S.C. 181-229c.
0
2. Section 201.211 is added to read as follows:
Sec. 201.211 Undue or unreasonable preferences or advantages.
The Secretary will consider one or more criteria when determining
whether a packer, swine contractor, or live poultry dealer has made or
given any undue or unreasonable preference or advantage to any
particular person or locality in any respect in violation of section
202(b) of the Act. These criteria include, but are not limited to,
whether the preference or advantage under consideration:
(a) Cannot be justified on the basis of a cost savings related to
dealing with different producers, sellers, or growers;
(b) Cannot be justified on the basis of meeting a competitor's
prices;
(c) Cannot be justified on the basis of meeting other terms offered
by a competitor; and
(d) Cannot be justified as a reasonable business decision that
would be customary in the industry.
Dated: January 6, 2020.
Bruce Summers,
Administrator, Agricultural Marketing Service.
[FR Doc. 2020-00152 Filed 1-10-20; 8:45 am]
BILLING CODE 3410-02-P