NCC: Proposed GIPSA regs costly for industry
November 17, 2010
by Meat&Poultry Staff
WASHINGTON – New regulations proposed by the US Department of Agriculture will cost the US broiler chicken industry more than $1 billion over five years in reduced efficiency, higher costs for feed and housing and increased administrative expenses, according to a study by the National Chicken Council.
This total, however, doesn’t include the additional potential costs of litigation, lost export sales and increased consumer prices, the study by FarmEcon LLC, an agricultural economics consulting firm, relays. The FarmEcon study was the first to specifically look at the impact on the US meat-chicken industry.
“The proposed rule changes are likely to slow the pace of innovation, increase the costs of raising live chickens, and result in costly litigation,” wrote Thomas Elam, FarmEcon president. “Higher costs would put upward pressure on chicken prices, and economic theory strongly suggests consumers would ultimately bear most of these costs.”
Proposed rules by USDA’s Grain Inspection, Packers & Stockyards Administration would force changes in the relationship between the nation’s chicken companies and independent farmers who grow chickens under contracts with the companies. They would also require changes in the production and marketing system for cattle and pigs. Although GIPSA claims the changes will have little economic impact, evidence is accumulating that the cost will be considerable.
GIPSA’s proposed rules would alter long-standing contractual and business relationships between chicken companies and independent growers, Elam wrote. “The changes are proposed are, in part, designed to broaden the scope of GIPSA authority, reduce the latitude to pay growers based on their performance, limit the ability of chicken companies to seek grower investments and set new requirements for cessation or reduction of delivery of birds to growers,” he added.
The most likely economic effects would be a reduction of performance-based competition among growers, a reduced rate of capital investment, a reduced rate of efficiency gains, higher chicken prices and reduced chicken exports, he continued.
Over time, the cost burden from all identified sources will increase, reaching about $337 million per year in 2015, he wrote. Over the first five years, the total identified cost is approximately $1.03 billion.
The US chicken industry has achieved “exemplary” efficiencies and technological and management improvements that have brought lower costs of production, lower prices for consumers and increased chicken production and exports, Elam noted. He predicts the GIPSA proposed rule would introduce inefficiencies into the system and make it more expensive to produce chickens.
For example, chicken companies do not normally run technical analyses, called “assays,” on every load of feed delivered to chicken farmers. Yet, the rule could require a feed analysis to be available for each load of feed delivered to a grower. Running and tracking the tests required would cost more than $20 million per year, Elam claimed.
Less-efficient use of the “growout houses” would lead to a need for about $150 million over five years in costs to operate additional space, and could cause the chicken companies to consider building their own growout houses, Elam added. More than 95% of chicken are now raised in growout houses owned by the farmers rather than the companies.
By changing the system under which farmers are paid by the companies to grow their chickens, the rule would also reduce the incentive for farmers to improve their facilities, Elam continued. Without the level of upgrades normally expected, more feed would be needed to produce the chickens, costing an extra $644 million over the years 2011-2015.
The FarmEcon study is available on the Web site here. It will be filed with the government as part of the industry’s comments on the proposed rule.