Poultry growers lean heavily on government-backed loans
After 20 years, Mississippi chicken farmer Kevin Kemp is getting out of the chicken business.
He raised millions of pounds of chicken since 1996, alongside his father and brother. But Kemp said even though he's done well as a poultry grower, raising chickens is "not all it's cracked up to be."
"The chicken industry has been good to a lot of people around here," Kemp said. "It just got to the point where I didn't enjoy raising chickens, because you had to put up with too much crap from the integrator."
By "integrator," Kemp means the big poultry companies, which deliver chickens to farmers as chicks, and pick them up six to eight weeks later as full-grown birds, ready to be slaughtered and sent to restaurants and grocery stores.
Kemp has experienced the immense control poultry companies put on growers — how they care for the birds, the way payments are determined, even dictating when growers replace equipment.
It is those restrictions that caught the attention of the Office of the Inspector General of the Small Business Administration, an office that provides oversight to improve the integrity, accountability and performance of the SBA.
In March, the Inspector General released a report looking into the relationship between poultry integrators and growers. It said the rules big poultry companies placed on chicken farmers means they are not independent small businesses, calling into question their eligibility for Small Business Loans.
Since the report was issued, the SBA has restricted the amount of land a farmer can buy and the length of loans.
Additionally, in September, the SBA proposed revisions to its loan program that would change the definition of an affiliation. Under the proposed rule, if a small business brought in more than 85 percent of its revenue from one business over the past three years, the SBA would consider the two to be affiliated and therefore, the small business may not be eligible for a SBA-backed loan.
The SBA is accepting public comment until Dec. 18.
Since 2010, poultry growers have taken out more than 3,000 loans backed by the SBA, totaling $2.9 billion, according to an analysis of Small Business Administration loan data by the Midwest Center for Investigative Reporting.
Under the program, known as the 7(a) program, the SBA guarantees to pay the lender as much as 85 percent if the loan fails.
The SBA defines small poultry farmers as operations making less than $750,000 a year.
Kemp, his brother and father, each of whom owned separate businesses but farmed alongside one another, received $1.3 million in SBA loans since 2010. Another Mississippi grower, Nguyen Poultry Farms, received $10.6 million in loans, according to SBA data.
"The integrator does own you." Kemp said. "But on the other hand, the small farmer, they couldn't make it without the SBA loans."
The Midwest Center reached out to Tyson, one of the largest food companies in the world, for comment on this story.
A spokesperson deferred comment to the National Chicken Council as well as this May's company announcement and the company's new Contract Poultry Farmers' Bill of Rights.
"We value the farmers who raise our chickens and work hard to maintain good relationships with them, but also know we can do better," said Doug Ramsey, group president of Poultry for Tyson Foods in the May release. "That's why we're taking steps to enhance how we interact with them."
According to the release, Tyson pays more than $800 million annually to more than 3,600 independent poultry farmers who contract to raise chickens for its operations.
According to their 2018 annual report, the company grossed more than $40 billion in sales.
The release also notes that the average farmer has been raising chickens for Tyson Foods for 15 years and some families have been raising chickens for the company for three generations.
"The National Chicken Council strongly disagrees with the (Inspector General) report's characterization of the relationship between chicken farmers and processors. The situation is no different than any other small business that enters into a contractual relationship to provide services to a larger company," said Tom Super of the National Chicken Council in an emailed statement.
Poultry farmers often get larger loans than other recipients of Small Business Administration 7(a) loans, in some cases, multiple loans that total hundreds of thousands of dollars over several years.
Analysis by the Midwest Center showed that between 2010 and 2016, the average loan to a poultry grower was $695,000, whereas the average for all SBA loans since 2010 is just $277,000. While other animal production operations took out fewer loans, cattle feedlots and hog producers also saw loans well above the average.
The Center also found that loans were made to poultry growers in 27 states, with nearly a third going to farmers in Mississippi and another third to growers in Georgia and Arkansas.
While most poultry growers have only taken out a few SBA 7(a) loans since 2010, some have sought credit multiple times from SBA. One grower took out 11 loans in the last eight years, totaling nearly $6.3 million in loans guaranteed by the Small Business Administration.
The Small Business Administration said loans to poultry growers are less likely to default than all other SBA loans. Since 2010, only 1.63 percent of loans to growers were classified as "charged off," meaning a payment had not been made in six months. This is compared to 2.74 percent of all SBA loans made during the same period.
"These loans are to small rural farmers," said William Manger, Associate Administrator of the Office of Capital Access at the Small Business Administration at an April hearing before the House Committee on Small Business. "Many times there are not other ways they can access the capital."
Kemp said nearly every poultry grower he knows uses loans backed by the SBA or USDA's Farm Services Agency.
"I don't know of a soul around here, and I know a lot of poultry growers, that just walked into a bank, without SBA or FSA backing them," said Kemp.
The Inspector General's report said that because the growers are so tightly controlled, it is as if they are an extension of the big poultry companies, not independent operations.
"We found integrator control was exercised through a series of contractual restrictions, management agreements, oversight inspections and market controls, " Hannibal Ware, Inspector General for the Small Business Administration said at the April hearing. "This control overcame practically all of a grower's ability to operate their business independent of integrator mandates."
But Tom Super disagreed.
"These loans, approved by the federal government, go directly to small, independent family farms in rural America which has allowed people to start their own businesses, expand or diversify their farm operations, create jobs, and stay and work on their farms with their families," he stated. "If anything, the government should be doing more, not less, to drive growth and opportunity in the rural economies that feed America and the world."
Starting a poultry operation requires up-front investment in land and facilities known as broiler houses. Growers may use SBA 7(a) loans to get started, or to expand their business.
Kemp said at its height, his operation had 12 barns. In 1998, a new broiler house cost $100,000. His last houses cost more than $250,000.
According to a 2016 report for the National Chicken Council by agriculture industry consulting group FarmEcon LLC, grower payments per square foot of broiler house have increased by 13 percent since 1998.
Growers receive flocks of chicks from the same big poultry companies to which they'll return — Tyson Foods, Perdue Foods and Koch Foods are the three biggest. The grower doesn't own the chickens — they are just the caretakers while they grow to slaughter weight — generally around 6 lbs.
"You have no control over your bird size, you have no control over selling them, you have no control over the feed — they bring whatever feed they want. If the birds get sick, then you have no control over that," said Kemp. "You just have to sit back and watch them die and pick them up."
Growers are classified as independent farms. The integrator owns virtually all other aspects of the poultry businesses, including hatcheries, feed mills, veterinary care and processing plants.
Dr. Thomas Elam, president of FarmEcon LLC, said poultry companies began taking over hatcheries and feed mills in the 1950s, to get more consistent chicken cuts at regular times. Growers remained independent because raising chickens requires land, which is expensive.
"You have to have somewhere to put the manure," said Elam. "Poultry companies don't want to own the whole farm."
But birds were still coming back to integrators with inconsistencies. So integrators started implementing more and more restrictions.
Kemp said he remembers one incident that illustrates the integrator involvement.
One of Kemp's brother's houses, which were right next to his, had an electrical malfunction that cut off the ventilation system. The alarms that normally alert a farmer also failed and the entire flock died. Kemp, along with dozens of employees and others, showed up to clean up the dead chickens. But as he arrived, so did the broiler manager for the poultry company they were growing.
Kemp said the broiler manager demanded they stop everything and write an incident report.
But his brother said, "I've got a crew of people in here, let me get these dead chickens out of here, and then we'll sit down and do a report on it."
The two went back and forth, yelling at each other in the chicken house. Kemp said finally, his brother told the manager to get off his farm. But he refused to go.
They escorted him off the property, and while his brother went back to cleaning up, he called another poultry company for a new contract.
He and his brother grew for the same company. They knew their contract would be revoked.
"I knew Tyson was coming after him the next day. So Koch said, 'Yeah, we'll take you on, don't worry about it,'" said Kemp. He said it was painful, because he was successful with Tyson.
It's the control and rules, meant to reduce variables and give the integrators a consistent and reliable amount of chicken every time, that alarmed the Inspector General.
"When you can walk into your broiler house is controlled. Where you can walk in your broiler house is controlled. When the chicks are fed, when they're given medicine is controlled," said Ware. He said the consequences of failing to meet the standards are serious. "You can lose your flock and that automatically will cause you to default. That's controlling."
If that grower took out a loan backed by the SBA, the American taxpayer is the liable for the portion of that loan guaranteed by the agency.
"If you talk to the growers, they'll tell you that they're, I think the term I've heard is that they're 'slaves on their own land.' That's one opinion," said Elam. "A lot of these guys are very disappointed with the results they're getting — in some cases it's their fault, and in some cases it's the integrators fault, that didn't explain to them the business they were getting into."
The Office of the Inspector General did not review all 3,195 loans to poultry growers, so a spokesperson said they wouldn't extrapolate that every poultry grower is ineligible for 7(a) loans.
The office reviewed just 11 loans. An SBA OIG spokesperson did say the operations and relationships with the integrator were very consistent in those reviewed.
The report said that poultry farmers face a lack of security in their relationships with integrators.
According to the National Chicken Council report, more than half of poultry growers have contracts lasting a year or less. Yet the average length of an SBA loan to growers was 12.5 years.
"Typically, when they open those farms, when they build them, they will get a multi-year contract, that then goes to a year-to-year contract," said Elam. He said the contracts generally shorten once a grower has paid down the loan.
The Inspector General said if an integrator contract falls through, it becomes very hard for a grower to make money.
"When the flock placement isn't right and their flock placement goes away, so does the loan, and here comes the guarantee," said Ware, referring to the SBA guarantee on the loan.
But the National Chicken Council report showed that, in 2014, only 109 farmers had their contracts terminated, less than 1 percent of all growers.
Elam did acknowledge that losing a contract puts the operation at a severe disadvantage. The Inspector General report found when a poultry farm loses its contract and defaults, it loses an average of more than three quarters its value. One farm lost 94 percent of its value.
The National Chicken Council report says short contracts allow growers freedom to change integrators. But the Inspector General says that's only a benefit if multiple integrators are available.
A 2015 USDA Economic Research survey showed that in 2014, a fifth of growers said there was just one integrator in their area, and another 30.2 percent had just two. That leaves little ability for growers to shop around.
Elam agreed that if a farmer lacked options, it would undermine the industry's claim that growers are independent.
"To the extent that these farms are pretty dependent on one integrator, it'd be a little more hard to argue that they're independent," said Elam.
Kemp said even where multiple integrators are available, it's not easy to switch. Each company prefers different equipment, meaning thousands of dollars in loans. He said it used to be easier to change companies, but it seems like integrators won't take a competitor's grower.
"You can't just go work for the other guy," said Kemp.
In addition to strict rules and short contracts, integrators also require growers to make costly improvements to their facilities.
Kemp once had relatively new houses that were underperforming.
"I pulled the waterers out and put different style waterers in — $60,000. That didn't really help my performance." said Kemp. "I had three or four of the big dogs come out, with Tyson. They said, 'Oh, you've got the wrong feeders in here.' I had built the houses for Peco, but I'd swapped up to Tyson, so that was another $70-80,000."
Kemp said his flock's performance gained slightly, but it didn't justify the cost.
Upgrades may help growers get chickens to slaughter weight slightly faster, but the beneficiary is the integrator. More efficient feeders, for example, mean less feed costs to the poultry company.
"The farmers feel compelled to make those investments," said Elam. "That's a little sketchy at times, as to whether or not that investment's going to benefit the farmer or is it going to benefit the integrator."
The USDA Economic Research Service survey showed that at least 39 percent of growers made investments into their operation of more than $10,000, with nearly a third saying they were required by integrators.
Kemp said even with improvements, there's always a chance a flock will underperform from the beginning.
"God knows that happens all the time — If they bring you knotty or sick birds, right off the bat, then you're screwed," said Kemp. He said the grower knows they will lose several thousand dollars. "You just eat the flock, and you still have to pay for gas and electric and labor."
The Inspector General recommended that a review be conducted of poultry loans backed by the Small Business Administration. The SBA looked into the loans, and found that despite the IG's concerns, SBA loans to poultry farmers were valid.
"We determined that the contract in place did not create affiliation between the small rural farmer and the integrator, because the ability to profit and bear the risk of loss due to their own efforts was still apparent with the small rural farmer," said Manger.
At the hearing, Manger noted a few new restrictions on loans to poultry growers.
"We have now limited the term of the loan to 15 years," said Manger. "We also have now limited the amount of farmland that can be acquired, only to the amount of farmland that is necessary for the specific business. We found, in some instances, additional farmland was being acquired."
Kemp is selling his chicken houses, but his family is still in the poultry business. His brother still grows and after working on the family operation, Kemp's son-in-law is buying his houses.
"I told him, 'Son, find something else to do.' But he said, 'No, I'm buying them,'" said Kemp.
His son-in-law will have to get his own contract with an integrator, which may mean additional upgrades and potentially loans backed by the SBA before he begins to see a profit.
The nonprofit news outlet Midwest Center for Investigative Reporting provided this article to The Associated Press through a collaboration with Institute for Nonprofit News.