Center for Rural Affairs

After having a bit of a rant about Pilgrim's Pride last week, I received a thoughtful response from a good friend in North Carolina who has an up-close and personal view of the situation faced by Pilgrim's Pride, its workers, and the farmers who produce chickens for the company. He graciously gave me permission to post his email here.

Scott is the Director of the Farm Sustainability Program at Rural Advancement Foundation International - USA. We like RAFI, and hope everyone will check out their website. You can read more about RAFI (and Scott) at the end of this blog post:

I think keeping on the table the financials for the poultry
integrators over the last few years is an important piece of the
puzzle, as is the fact that the commodity programs have allowed them
to buy grain at prices below the cost of production.

But to really understand how this thing works, you have to look at it
from the perspective of the growers who find themselves in this
mess. How they found themselves in this mess is a subject for
another day.

In case you didn't catch it, Pilgrim's Pride just announced the
closing of a processing plant just down the road from our office in
Pittsboro, NC, citing high grain and energy prices. People here are
looking at options. Most of the 836 workers who will lose their jobs
are Hispanic, and came or were brought to the area specifically to
work in that plant.

One of the interesting issues is that Pilgrim’s Pride leadership has
said that they will not cut off producers, but will cut them from the
“customary” 5 flocks / year to 4, and possibly reduce the number of
birds (“Pilgrim’s Pride to Cut Jobs for 836” Raleigh News and
Observer, March 13,2008. http://www.newsobserver.com/business/story/
998198.html).

This is a smart move by the company, allowing them to keep production
capacity operable in the hopes of expanding production in a year or
two. Because there are very few other integrators in the area, it
allows Pilgrim’s Pride to control additional production capacity, but
not have to pay for it. It’s not as though a producer with 60,000
birds to sell can run them down to the local processing plant and
sell them at the farmers market.

What the company does not say is how many of those producers bought
the operations, put in houses or invested in equipment upgrades
required by the company based on the company budgets that require the
“customary” 5 full flocks per year to cash flow. We have not seen
the Pilgrim’s Pride contract, but most industry contracts are for 10
or 15 years, but can be cancelled with 2 weeks notice.

In the big picture, a huge percentage of the assets of the poultry
industry are owned by the producers. A quick bit of “back-of-the-
envelope” math looks like this. According to news accounts, there
are 95 producers in that area. If you figure an average of four
houses for each producer, at a replacement value of $250,000, that is
about $95 million in farmer investment. I am not sure how much a
processing plant and hatchery are worth, but I am not sure it is that
much.

Like all integrators, Pilgrim’s Pride determines the cost of the
farmer’s investment, and therefore debt, determines the cost of the
inputs and the price paid at the end. The company controls the
farmer's income completely. They have the ability to trim the
farmer’s income to the level where the farmer can barely stay in
business, or will have to supplement their poultry operation with an
additional off-farm job, once again giving the companies their inputs
at below the cost of production.

It is also little recognized that agricultural lenders frequently
require farmers to put their homes up as collateral on farm loans
even if they can collateralize the loan with other assets. It is how
the banker makes sure that the farmer "has skin on the table." So if
the farmer cannot cash flow at the new production level, they face
losing their homes rather than just part of their land.

With no other companies to grow for, and single-use facilities that
require large-scale production to finance, farmers have no option
other than to get another job in town to finance their farming habit.

Back when I played Lacrosse in high school, we used to talk about a
"kill your buddy pass." That was when you passed the ball to someone
with a high, looping throw that everyone could see coming a mile
away. It assured that your teammate would get completely clobbered
as soon as he caught the ball. It has become my analogy for giving
someone something in such a way that you make sure that they will be
in huge trouble as soon as they receive it.

The company's assurance that they will not cut farmers off, but
reduce production is a true kill your buddy pass. It means that many
farmers will have to subsidize the production of poultry for the
companies or face losing their homes.

Don’t get me wrong. I am not suggesting that it would be somehow
better if the company cut farmers off. But the structure of the
industry, with farmers taking out loans that go for 10 or 15 years
based on contracts that last for a couple of months, is stacked to
benefit the company. After the announcement, the value of Pilgrim’s
Pride stock increased three percent.

How’s that for a return on investment.

Scott Marlow is the Director of the Farm Sustainability Program for
the Rural Advancement Foundation International - USA. RAFI-USA is a
non-profit organization based in Pittsboro, NC that addresses issues
of equity, diversity, and sustainability in agriculture and rural
communities. Scott’s responsibilities include directing RAFI-USA’s
farm advocacy program which provides in-depth financial counseling to
farmers facing financial crises and assistance for farmers in gaining
access to disaster assistance programs. His work also focuses on
assisting mid-scale farmers in making the transition to
environmental, higher-value markets. He is currently a member of the
steering committee of the National Task Force to Renew Agriculture of
the Middle, and is on the Board of the Southern Sustainable
Agriculture Working Group and the North Carolina Farm Transition
Network.

Scott holds a Bachelor’s degree in Political Science from Duke
University, and a Master’s degree in Crop Science from NC State.
Born in Pennsylvania, Scott has lived and worked in North Carolina
for 26 years.