Small business loans to vertical integrators questionedSmall business loans to vertical integrators questioned
OIG report criticizes poultry farmers' use of small business loans due to poultry companies’ comprehensive control over the growers.
March 15, 2018
The ability for farm families to be part of a vertical supply chain and obtain loans to build facilities may be significantly hampered following a recent report on loans to poultry growers.
The Small Business Administration’s (SBA) Office of Inspector General (OIG) issued a report recently on the $1.8 billion in SBA loans made to poultry growers that may be ineligible under current regulations. It found that poultry companies “exercised such comprehensive control over the growers” that they no longer qualify as small businesses.
The broiler industry’s structure is vertically integrated, and production and processing are controlled by the integrators. In this structure, integrators own and operate the hatcheries and deliver flocks of chicks to contract growers, which own the broiler housing and provide the utilities and labor to raise the flocks to market weights.
These integrators pay contract fees to the growers and supply feed, veterinary services, technical supervision and flock transportation. After five to nine weeks, depending on bird size, live market birds are shipped from grower farms to the integrator’s processing plant for slaughter and marketing.
The report explains that although poultry loans have accounted for the largest portion of 7(a) agricultural loans, the poultry industry’s share and size has grown over time. the poultry industry's portion increased from 61% of all 7(a) agricultural loans in fiscal 2012 to 76% in 2016, while the average size of 7(a) poultry loans originated in a fiscal year increased 91% -- from $741,000 in 2012 to $1.4 million in 2016.
The OIG report detailed how SBA was guarantying loans to the contract growers -- which the agency claimed were affiliative enterprises -- due to the comprehensive control the integrators have over the growers.
“We found that integrators exercised comprehensive control over the growers through a series of contractual mandates and restrictions, management agreements, operating procedures, oversight, inspections and market controls that overcame practically all the grower’s ability to operate their business independent of integrator mandates,” the report explained.
Additionally, OIG revealed that the huge increase in SBA loans to these facilities has been linked to just two banks and that the buildings funded by the loans are worth just a fraction of the their cost without a contract in place.
The report noted that without an integrator contract, the houses themselves are worthless. “As observed in our review, a reduction of flock placements, the withholding of flocks or the outright cancellation of the contract directly affected the viability of the grower’s business. Therefore, the integrator requirements appeared to have overcome the ability of the growers to operate as independent businesses,” OIG stated.
Last fall, the U.S. Department of Agriculture rescinded the Farmer Fair Practices Rule, which made it possible for poultry and livestock farmers to take legal action if they felt that these corporations were engaging in unfair practices.
Mike Weaver, president of the Organization for Competitive Markets, said the Farmer Fair Practices rules and other market safeguards are needed “to ensure poultry growers can operate as small businesses and stop subsidizing increased production for these multinational corporations by American taxpayers.”
During the Senate Small Business Committee's consideration of S. 2283 on March 13, Sen. Cory Booker (D., N.J.) offered -- and the committee passed -- an amendment responding to the OIG report.
Paul Wolfe, senior policy specialist at the National Sustainable Agriculture Coalition, said, “We are grateful for Sen. Booker’s commitment to transparency and fairness and fully support his amendment requiring SBA’s director of the Office of Credit Risk Management to report to Congress on whether and how the Office of Capital Access has addressed the charges of the OIG.”
Risk of losing family farms
John Blanchfield, consultant for Agricultural Banking Advisory Services, said the report’s findings raise big questions about the future of contract farming and the role with integrators.
Blanchfield explained that when a farmer goes to the local bank, that bank looks to SBA to offer a high-percentage guarantee on those lines of credit. The biggest guarantor of farm loans is USDA’s Farm Service Agency.
“If individuals can’t access capital from a local bank with a guarantee, at best, they’ll just end up as employees of Perdue or Tyson,” Blanchfield said.
He added, “I know how controversial integration is, but the current system still allows individuals to do what they want to do: farm.”
Today, the focus is on the poultry supply chain, but tomorrow it could be on hogs due to the increasing amount of integration in that segment. Farmers today are even raising flowers and then moving them down line to retailers.
“It’s how agriculture is going. You can argue whether it is good or bad, but that’s how they system works,” Blanchfield said.
The question remains: If all of these independent growers are seen as an affiliate of their end-of-the-line buyers, does it only intensify further consolidation and lead to the eventual elimination of the family farmer?
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