Costco Puts Nebraska on the Poultry Production Map

By Kayla Sargent

In a time when Nebraska farmers and ranchers are facing horrendous flood damages coupled with several years of marginal income, the financial strain is nearly unbearable for many producers.

“We are struggling,” Nebraska Farmers Union President John Hansen said.  “That’s one of the reasons people whom are in desperate situations will try anything to help themselves.”

This is where Costco’s new chicken operation could come into play.  Lincoln Premium Poultry was established in 2016 to serve as Costco’s poultry management company for the new complex currently under construction in Fremont, Nebraska.  The $450 million state-of-the-art processing facility, hatchery, and feed mill, all owned by Costco, will produce the retailer’s popular $5 rotisserie chickens sold nationwide. Local farms are expected to invest another $350 million collectively to build individual poultry buildings — estimated to cost nearly $1 million each — in order to fulfill the bird contracts for Costco.

Nebraska has never been known for large-scale chicken production, yet Costco chose the state for convenient access to feedstuffs.  Hansen explained that the Costco project “would put Nebraska on the poultry production map.”

“Let’s be clear about one thing though,” Hansen said.  “This is a new enterprise and the two things that Nebraska farmers know virtually nothing about is major poultry production and poultry contracts.”

So Nebraska Farmers Union began doing research in order to educate their members about the new business venture.  The organization reached out to experienced poultry producers and legal professionals whom had previous experience with poultry contracts.

“We hope that Costco producers are fairly treated.  We want folks to be able to ask questions, go in with their eyes open, and if there is any room to swing your boom and negotiate at all, doing it up front is the time to do it,” he explained.

Grower contracts are rather complex and outline details such as ownership of equipment, costs of production, and liabilities for each party.  Being aware and fully understanding the contract before signing is critical.

“Really, it’s your liability, it’s your marketing year, it’s all these things boiled into one piece of paper that’s going to decide at the end of the day whether or not you make any money,” Hansen said.

However, historically most poultry contracts are non-negotiable, according to Hansen.  When he started researching poultry contracts, he asked a friend who is a grower in another state for lawyer recommendations.  The friend jokingly asked,  ‘why do you need a lawyer?’.  The companies don’t generally negotiate contracts on an individual producer basis.

This became evident to Hansen when attempting to research the Costco contract specifically.  He said the first “red flag” was the fact that Costco would not provide Nebraska Farmers Union with a copy of a contract despite the fact that they were representing a large group of potential growers.  The group was able to obtain a contract from members and they found several issues of concern.  For example, the fifteen year time period.

“How in the world would you possibly know where you are going to be or what kind of shape you’re going to be in in fifteen years?,” Hansen questioned.

There is no option to transfer ownership of the operation, even in the case of an emergency.

“There’s a lot of folks producing for poultry contracts today that have not had an increase in their base compensation for 15 years,” Hansen said.

He also said there is a clause that would make the producer liable for any upgrades or physical changes the company deems necessary.

“What does that mean?  That means all of the sudden you have to upgrade your whole system just when you thought you kind of had it paid for and you’re starting to make some money?  Now all of the sudden that little clause ties you down,” he said.

Hansen said when he suggested contract changes, Costco was not receptive to negotiation that would benefit the producer.  Basically, the retailer brushed off the organization’s concerns with a brief letter thanking them for their interest.  The letter said their concerns were addressed in the contract, yet an updated version was still not made available to Nebraska Farmers Union. Hansen urged caution and awareness for those producers considering a grower contract with Costco.

“Now we see the ultimate in vertical integration with the Costco model because it is cradle-to-grave where they own the birds, they own the feed plant, they own the processing plant, and they’re also the retailer,” he explained.  “There is no market at all in that system.  They’re only ‘take-it or leave-it’, non-negotiated contracts,” Hansen said.

Vertical integration has led to the loss of a broiler chicken market in the U.S. today, Hansen explained.

“There is no market whatsoever for broilers in the country.  You can’t go anywhere and say, ‘well, the price of broilers went up today.’  There is no way to just produce broilers and then sell them to different folks.  There’s no marketing system,” he said.

Instead, broiler chicken production has converted into a “raw material procurement system.”

“There’s a fundamental difference in control, operation, and benefit between a truly healthy, functioning marketing system and, in contrast, a vertically integrated, industrialized, raw material procurement system,” Hansen explained.

This may be concerning for growers investing millions into a production facility.  He explained that once a producer enters a contract and agrees to build the facilities, essentially the only way to pay it off is “do everything you can to stay in the good graces of the company and not get crossways with them.”

Hansen explained that producers who may “cause trouble and ask too many questions,” like requesting independent weighs or using multiple scales, may be at risk for having contracts pulled.  He used the example of independent weighs as there have been instances of processors stealing weight from the producers.

“Almost all of the major poultry processors in the country, at one time or another, have been caught systematically stealing weight from their own producers at the scale,” Hansen said.

Once a contract is pulled, according to Hansen, it can be difficult to renew with another company “because the blacklist is honored by all of the other processors.”  So, should a producer lose a contract, the chances of bankruptcy are high, Hansen said.

“Unless you have a pile of other land or unless your building is getting fairly close to being paid for, you’re in bankruptcy.  What else do you do with the poultry building if you don’t raise poultry in it?  Store hay in it?  It’s a very large and very expensive machinery shed,” he said sarcastically.

The binding terms of a contract, the costs of production, and the loss of markets all need to be considered carefully in the vertically integrated system.  These system models are becoming more common among large retailers, Hansen said, comparing the similarities of Walmart’s new beef supply chain plan.  Systems that remove competition from the marketplace are damaging producers’ bottom line, Hansen said.

“We are at an unprecedented place in American history relative to the amount of concentration that our regulatory agencies and elected officials have allowed and tolerated,” he said. “In the case of agriculture, this is the most concentrated our ag inputs sector has ever been and it is also, by far, the most concentrated that the marketing system we sell into has ever been.”

“The reason family farmers and ranchers are going broke isn’t because we aren’t good producers and we’re not extremely good at what we do.  It’s because we just have not gotten paid,” he said.


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