What About Vertical Integration?

[Econ101]

What vertical integration does is that it allows the management to exert more market power. In the case of chickens, for instance, the integrators have complete control over the feed. There is no independent check on their actions. If you don't like their actions, too bad, there is no other competitor to buy feed from or to go to. Even if you did want to use a different supplier for feed because you were being cheated by the feed mill, you couldn't sell your birds to another processor. The complexes are geographical monopsonies, meaning there is only one place to go for the birds when harvest time comes around.

Integrators don't even follow the regulations on the books as far as the information required on feed tickets being accurate. Much of the information on the ticket required by the regulations was meant to stop some of the abuses that were widespread in the industry. The only problem is that if the integrators do not follow these regulations, there is no penalty. With no penalty, there is no inducement to follow the law. There is a penalty for the farmer who calls them on it and complains. The integrators take care of the complainers in the usual methods. If the farmer wants to sell his assets and get out of the business, guess who has the final say so on allowing the potential buyer to get a contract---you guessed it, the integrator. They thus control the value of the asset. With so much control over the value of the assets that someone else owns, the capital is captive capital.

There were a few people who knew they were being cheated on feed deliveries (which is a main factor in how you get paid) and they wanted to install at their own expense, scales on their farm so that the feed trucks could get weighed. The integrators wouldn't let them. Even GIPSA backed the integrators on these requests, as GIPSA had the authority to certify the scales the feed is weighed on. The scales are under the complete control of the integrators. So is the mix and quality of the feeds delivered.

Another control of vertical integration is the chick quality. Since farmers are compared to each other for rate of pay, this is a real important factor. No amount of good management can undo the damage of diseased chicks. Unfortunately, it may be economically better for the integrator to give diseased chicks with a die ration of 20% to farmers and the integrators still make money on that batch. In almost every case like that, the farmer loses money on that batch of birds and has to put forth his labor, capital, and time for a negative return. The company still has a positive return so what do they care? All information regarding bird quality is controlled by the integrators and can not be questioned. Playing games with growers with this method of power is commonplace in the industry.

Another control the contract system gives to integrators is unlimited and unannounced rights to visit the farm any time day or night. You don't control the property any more. Even if asked, there is no courtesy call. Often times farmers have noticed problems with their equipment and setup right after a field agent has been on the property. They want access to every building on the farm and all parts, not just the parts the chickens are housed on.

I wanted address one of the other patterns of the integrators. RR mentioned that a lot of the farmers he knows are doing fine. In his area, they may be. It has been a common practice of all of the big integrators to support research to find "better ways" of raising birds. Much of this research is done on the public's dime. What the integrators are really after are excuses to be able to differentiate and discriminate against growers. Poultry houses are usually amortized over 15 or 20 years because they are so expensive. Integrators have a benefit when all of the farmers are in debt and have no other way to pay for those buildings than to raise birds for the plant. If the farmers had no debt, they could just give the finger to the integrator after being cheated and producing birds while losing money. If they have a mortgage to pay, they can't stop growing birds, even if they make nothing on their labor.

Integrators have come up with these new designs for poultry houses that are cost prohibitive for the older houses to be changed over to. They pay the farmers who build the new houses more money per lb. for the same bird---after all, they say, the new buildings are so expensive. They then put all the farmers into the same tournament system without counting all the costs. This gives the new farmers the equivalent of 50,000 lbs of feed or more per growout. When the ranking in the tournament system happens, the new farmers get paid more money because of this advantage. They actually take money from the other older farmers who are not getting the "premium" pay for the new housing structure. With this tournament system, they mine the equity out of the old farms to help pay for the new farms because whatever "bonus" is given to the new farmer in the ranking where they got the equivalent of 50,000 lbs of extra feed, comes from the other farmers in the group who did not get this advantage.

The only thing a producer has that a processor wants is supply. If the processor can secure his supply with many contracts, he can let one go here and there to teach a lesson. In the poultry industry it is simple--just increase the velocity of the growouts of other growers and take up the slack or increase the numbers of poultry in the barns.

The goal is to keep the farmers indebted. It keeps a consistent supply of chickens for the processing plant (legitimate business reason excuse Tyson wanted in the 11th circuit Pickett decision) with the farmers having no bargaining power. Any farmer who tries to get the farmers together against these type of actions, like Tom Greene, is put out on the stake to die. The cost of going through the justice system for Tom Green and his family is substantial. For Con Agra it was nothing. They have lawyers on staff to handle these "events".


Sure VI is more efficient. There only needs to be one profit on the different aspects of the business---feed, chicks, etc. The question is, in the long run, who does it benefit?

I think some of you need to call Tom Greene, the growers in the Bryan area, and if they aren't overwhelmed by it and will answer your questions, you will learn a little about the potential dangers that the beef industry is facing. I did. I learned a lot more than I ever wanted to know.

Things will be a little different in the beef business because cattle are a different animal, but when the controls are there, the board of directors at Tyson, Swift, or any other company will do what they can get away with to keep all the money earned in the business. They are already getting away with it in the substitutes.

I think everyone forgets that the cheating in the poultry industry already directly affects the value of beef because poultry is a main substitute for beef. If poultry costs less, there will be less "demand" for beef. All the cheating and control of the poultry industry has already cost the beef industry untold billions in revenue because poultry is cheaper to produce, has higher profit margins for poultry dealers, and they can continue to get more suppliers in while playing their ponzi scheme on old growers making them subsidize new entrants.

 

[Mike]

How about when they weigh the chickens after they've caught?

Do they let you look at the scales? :lol:

The scam Tyson was pulling on the pig growers was a pretty good one too.

They would charge the grower for insurance on the hauling of the finished pigs back to the processing plant...............................

They got away with this for years before enough growers grew balls to buck them on it.

If there was any money to be made on these grower deals, Tyson would be growing their own. :roll:

 

[rider]

This is too much injustice... When all is said and done, who reaps the benefit?

There probably does need to be more watchdogs out there monitoring quality feed, quality chicks, and ensuring fair practices. Who will pay for this? Surely not the integrators. They find their way out of everything. The integrators also make everything so complicated that not even a Philadephia lawyer could figure out what's going on. Not so different from Enron... until ...

How come it the little guy who gets %*^*&^$# very time?

 

[Mike]

Arbitration Agreement in Chicken Grower Contract Withstands Multiple Challenges

A Mississippi federal court rejected an array of challenges to the validity of an arbitration agreement contained in a chicken grower contract and granted a motion to compel arbitration.

In Steed v. Sanderson Farms, Inc., No. 2:05cv02146-KS-MTP, 2006 WL 2844546 (S.D. Miss. Sept. 29, 2006), Elizabeth and Don Steed entered into a contract with Sanderson to become contract broiler chicken growers. The contract included an arbitration agreement requiring "[a]ny controversy or claim arising between the parties…including…the arbitrability of any dispute relating to this Agreement" to be settled by binding arbitration.

The Steeds sued Sanderson for fraudulently inducing them to sign the contract and for misrepresenting the chicken house requirements, causing them additional expenditures. Sanderson Farms then filed a motion to compel arbitration. In response, the Steeds challenged the validity of the arbitration agreement from several angles.

First, Don Steed argued that he was not bound to arbitrate because only his wife had signed the contract. The Court applied the doctrine of equitable estoppel, "which precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes." Because many of the claims Mr. Steed asserted arose from contract, or his wife's dealings with the contract, the Court held that he was equitably estopped from arguing that the contract's arbitration provision did not apply to him.

Second, the Steeds argued that their claim of fraudulent inducement, because it occurred prior to signing the agreement, was not covered by the arbitration clause. The Court held that the broad language of the arbitration agreement, which included disputes over "arbitrability," extended to claims of fraudulent inducement.

Next, the Court rejected the Steeds' argument that the contract was unconscionable. The Court held that the contract was not procedurally unconscionable because the Steeds had a choice as to whether or not to contract with Sanderson as broiler growers and were given time to read the agreement and ask related questions.

The Court also found that the contract was not substantively unconscionable, even though it acknowledged that the arbitration agreement was one-sided, permitting Sanderson to terminate the contract without resorting to arbitration, but requiring the Steeds to arbitrate all disputes. "One-sidedness is simply one factor a court may consider in determining whether an arbitration clause is substantively unconscionable." The Court held that it was not enough to void the contract between the Steeds and Sanderson Farms.

Finally, the Steeds argued that cost of arbitration was prohibitive. However, the Court rejected this claim because the Steeds did not apply for diminution or waiver of fees as allowed by the arbitration administrator. Additionally, Sanderson offered to pay all the costs of arbitration.

After rejecting each of the Steeds' arguments, the Court concluded that the arbitration agreement was valid and granted Sanderson Farm's motion to compel arbitration.
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[Econ101]

I think in the case of arbitration, the courts have done themselves in. The constitution clearly states:

"ARTICLE THE NINTH

[Amendment VII]

"In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

Amendment VII (the Seventh Amendment) of the United States Constitution, which is part of the Bill of Rights, codifies the right to jury trial in certain civil trials. The Supreme Court has not extended the amendment to the states under the Fourteenth Amendment, as it has for many other components of the Bill of Rights. (From Wikipedia)



It is clear that our courts have denied the right of a person to a jury with arbitration clauses in contracts. Where have contract terms ever been able to trump the rights in the constitution?

It is concerning who we actually have in Congress and what they are doing to our country. Here is a clip from a 2004 paper on the arbitration. The upholding of arbitration requirements instead of the seventh amendment to the constitution is pretty alarming, but it has come from big business. Big business is using it to commit white collar crimes and not be held accountable. It is further erosion of our democracy and the rule of law.

June 04, 2004 — Andrew Wheat


King's Court

he vested interests that bankrolled the Texas Supreme Court during much of retiring Chief Justice Tom Phillips' 16-year reign could have left him alone last month to draft his resignation in peace. Instead they kept hammering the Phillips Court with briefs, demanding that it overturn adverse decisions by lower courts. It was a reminder that powerful business interests will continue to be behind—and in front of—the court long after its current chief is gone.

Some of the most powerful political and financial influences on the Phillips Court have been business opponents of consumer lawsuits, whose leaders include James Leininger and brothers David and Richard Weekley. These three businessmen, who collectively are associated with $167,037 in campaign contributions to the sitting justices, have stakes in four cases on the high court's 2004 docket. Already this year the Texas Supremes have faced three lemon-home appeals from the Weekley family's David Weekley Homes. The justices also are deliberating on a class-action lawsuit that consumers filed against State Farm and Wendy Gramm. Gramm sat on the board of State Farm, Texas' top auto insurer, and still chairs the board of Leininger's Texas Public Policy Foundation (TPPF) think tank, which shapes many of the state's GOP policies. Leininger and Wendy Gramm—wife of ex-Senator Phil Gramm—carry great influence with Governor Rick Perry, who will have appointed four of the high court's nine justices once he names chief Phillips' successor.

WARNING: WENDY ON BOARD
From 1994 through 2001 Wendy Gramm simultaneously served on the boards of State Farm Mutual Automobile Insurance Company and Enron Corp. Both Wendy and Phil Gramm promoted the deregulatory agenda that fueled Enron's astonishing $60 billion rise and fall. Phil Gramm sponsored a 2000 bill that aided Enron by deregulating financial markets. After Wendy Gramm deregulated energy futures markets as chair of the U.S. Commodities Futures Commission in the early 1990s, Enron stuck her on its see-no-evil corporate board. Last month, Gramm and 11 other ex-Enron board members tentatively agreed to pay $86.5 million to settle a bit of the $3 billion in pension-fund claims filed by ex-Enron employees. Although Gramm did not admit wrongdoing, the proposed settlement would bar her from being a trustee of federally regulated pension plans for five years.

This April, Texas Supreme Court justices heard arguments in a case that alleges that another company ran amok on Wendy's watch. As a mutual insurer, State Farm Mutual Auto Co. ostensibly is owned by its policyholders, who have stakes in company dividends. The policyholder plaintiffs in State Farm Mutual Auto and Wendy Gramm v. Lopez alleges that Gramm and other board members shortchanged policyholders on dividends after State Farm Mutual reported a $37 billion surplus in 1997. An Edinburg trial judge certified the lawsuit as a class action on behalf of all of the company's policyholders in Texas (including three high-court justices). State Farm appealed the judge's certification of this class to an intermediate appeals court, which affirmed the class. In 2002, the Supremes ruled that they lacked jurisdiction to intervene in the matter. In a 2003 reversal, however, the high court agreed to hear State Farm's appeal, after all.

The Gramms' clout with this all-Republican court is impressive. In 2001 Governor Rick Perry appointed Wendy to another board: the Texas A&M Regents. After Enron's implosion, Phil Gramm's Senate war chest contributed $612,000 to Governor Perry in 2002. Perry recently took a Bahamas policy junket with TPPF's director and James Leininger, whose family and corporate PAC has contributed $52,700 to the justices. The new chief justice whom Perry picks to complete Phillips' term is likely to take office before the court rules in the State Farm-Gramm case.

Another Perry appointee, Insurance Commissioner Jose Montemayor, has filed two fanciful friend-of-the court briefs on behalf of State Farm (which this year is paying Montemayor's predecessor more than $200,000 in lobby fees). A 2001 Texas Department of Insurance (TDI) brief warns the court that indulgent insurers could pay so much money in policyholder dividends that they would not have sufficient cash to cover catastrophic claims. During recent oral arguments, justices asked what remedies mutual policyholders have if an insurer with huge surpluses fails to pay dividends. A follow-up brief by TDI—which approves some of the highest insurance rates in the nation—responded: "While individual policyholders do not have an avenue in the courts for relief, the market and the regulatory environment work together to keep the surplus from being too large."

The lawyers who drafted these TDI briefs worked for current and former Texas Attorneys General Greg Abbott and John Cornyn. Both Abbott and Cornyn were justices on the Texas Supreme Court. These two former high-court justices got more than $100,000 apiece for their attorney general campaigns from hospital-bed magnate James Leininger.

WEEKLEY APPEALS
Current Texas Supreme Court justices have taken $31,000 in campaign contributions from the family that owns Houston-based David Weekley Homes. These justices took another $83,337 from the state's leading business tort group, Texans for Lawsuit Reform (TLR), headed by Richard Weekley.

The Weekley family's interest in the civil-justice system is apparent from the docket at the Texas Supreme Court, which already has seen three Weekley Homes cases this year. After Austin's Richardson family alleged that it was harmed by mold and toxic materials in its Weekley home (see "Privatizing Justice," TO 6/21/02), lower courts forced the parents into arbitration but kept the claims of the children—who did not sign an arbitration contract—in court. Weekley appealed to the Texas Supreme Court to force the kids into arbitration, too. Last year the justices agreed to hear this appeal by one of their leading benefactors.

In 2003, after Weekley appealed the Richardson case, rumors circulated that the homebuilder's representatives were privately lobbying justices to hear its appeal. Because such private judicial lobbying violates the Texas Code of Judicial Conduct, Texans for Public Justice requested copies of the then-sitting justices' calendars. Five justices provided all or part of their calendars, while colleagues Craig Enoch, Nathan Hecht, Priscilla Owen, and Steven Smith provided nothing. The only remedy to this refusal is a circular appeal back to the same court. (In order to fend off legislation to subject judges to the same open-records rules that shine disinfecting light on the actions of all other state officials, the court in 1999 adopted its own self-administered and self-policed disclosure rules.) An out-of-court legal settlement of Richardson v. David Weekley Homes last March prevented the court from having to choose between servicing a powerful patron or depriving kids of their right to a jury trial.

Nonetheless, ex-Supreme Court Justice Raul Gonzalez—the defense attorney who appealed the Richardson case for Weekley Homes—has filed two new appeals this year urging the high court to impose arbitration on consumers who are claiming damages from Weekley-built lemon homes. One of the new appeals has a familiar ring. A Grapevine widower, Vernon Forsting, claims that Weekley built a home for both he and his daughter's family that had numerous structural defects. The plaintiffs allege that the bungling efforts by Weekley workers to fix these problems sickened Forsting's asthmatic daughter with dust and contaminants. Lower courts forced Forsting into arbitration but allowed daughter Patricia Von Bargen to pursue her claims in court. Again, Weekley Homes is urging the Supremes to trounce lower courts by imposing arbitration on someone who never signed away her right to a jury trial.

Efforts to strip jury-trial rights even from those who did not forfeit them by signing arbitration contracts have prompted concern even in unexpected quarters. The last friend-of-the-court brief filed in the now-settled Richardson case urged the court not to make a knee-jerk ruling for arbitration. That brief came not from the American Civil Liberties Union but from Halliburton subsidiary Kellogg Brown & Root (KBR).

This is all the more extraordinary given that Halliburton—under Dick Cheney's stewardship in 1997—imposed arbitration on workers who never signed arbitration contracts. Instead, Halliburton simply notified employees that anyone showing up for work in the new year was tacitly "waiving all rights… to a trial by jury." Overturning two lower courts, Chief Justice Phillips wrote a 2002 opinion that imposed this unsigned contract on a Halliburton worker. Yet Halliburton's KBR, which frequently signs subcontracts lacking arbitration clauses, recently told the court that it is concerned about "the circumstances under which non-signatories may be compelled to arbitrate."

With Phillips at the helm, the Texas Supreme Court has excelled at ruling for the powerful business interests that underwrite its justices' expensive campaigns. Almost certainly the court will continue this legacy this fall, when Phillips heads to Houston to teach law and passes the gavel to a new chief picked by Governor Perry.

Frequent Observer contributor Andrew Wheat is research director of Austin-based Texans for Public Justice.

Will politicians sell out constituents for their own benefit? If they think they can get away with it they will.

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[Sandhusker]

Mike, "If there was any money to be made on these grower deals, Tyson would be growing their own. "

It's kind of like the saying, "Why buy the cow with the milk is free." You take the grower with $500,000 invested in barns; Tyson controls them same as owning them, but they didn't have to lay out a red cent or take on a bit of risk. They would be fools to do anything different, and they're certainly not fools.