Cleaning Up Big Chicken

Finally things are moving. Antitrust enforcers just cracked down on giant poultry processors stealing from workers and farmers in the chicken industry. And more is coming.

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Today, the Department of Justice Antitrust Division filed an antitrust suit and a series of consent decrees to start cleaning up the poultry industry. Here’s Bloomberg:

Cargill Inc., Sanderson Farms Inc., and Wayne Farms LLC signed an agreement with the Justice Department to pay $84.8 million to resolve allegations that the chicken product makers violated antitrust law by improperly communicating about worker wages and benefits.

The proposed consent decrees, filed as part of a lawsuit Monday by the DOJ’s Antitrust Division in the US District Court for the District of Maryland, name data consulting firm Webber, Meng, Sahl and Company as the companies’ information broker. The company and its president Jonathan Meng are also named as defendants.

There’s a lot here, so I’m going to unpack what’s happening and the long-term impact on both the industry itself, and on antitrust law. Let’s start at the beginning.

In 2014, reporter Chris Leonard published The Meat Racket: The Secret Takeover of America's Food Business. In it, he traced the rise of chicken baron John Tyson and his corporation Tyson Foods, exploring the decline of the independent poultry farmer in the face of the roll-up of every part of the industry by large vertically integrated processors. At roughly the same time, a young reporter named Lina Khan published an article in the Washington Monthly called “Obama’s Game of Chicken,” covering the same story.

This work by Leonard and Khan was perhaps the most influential set of stories put forward by reporters in the meat industry for the 2010s, because they showed how consolidation was affecting the ability of people who work to collect the fruits of their labor. The content went everywhere, from members of Congress to an episode of John Oliver’s show watched by 12 million people online. Both Leonard and Khan looked backwards, and illustrated how a series of political fights in the Obama administration had fostered consolidation in the industry.

Poultry farming had traditionally been a way to make some extra money by raising chickens, and then selling them in markets to a variety of potential buyers. In the 1950s, most of it shifted to the ‘contracting system,’ where a farmer would contract with a single firm that would provide their chicks and feed, and then buy their grown chickens. The market system delivered a reasonable living for the farmer in both cases, with the contracting system enabling more predictable volume for the processor. In the market system, the farmer could sell to any number of butchers, whereas in contract system, if the farmer didn’t like their processor, they could switch at the end of the season to a different one. In both cases, power was decentralized.

But in the 1980s, because of the consumer welfare revolution in antitrust, four firms ended up consolidating much of the industry and further increasing volume. Tyson was one of these winners, and it engaged in innovative practices to sell more specialized chicken, like creating, for instance, the chicken nugget product for McDonald’s. But it also implemented something called the ‘tournament’ system, which is akin to a sharecropper or plantation model. This system allows the processor to pay the poultry farmer not a fixed amount per pound of meat, but to rank him against his fellow farmers and pay more or less depending on whether he produces healthier and bigger birds. The higher the farmer’s rank, the better the price. (This system has spread all over the economy - it is how independent pharmacists get compensated by PBMs, for instance.)

At first glance, a tournament system seems like a good idea. If you do better you get more, and isn’t that what we should encourage? But when it’s a monopolist in charge, then the tournament model isn’t a way to encourage efficiency, it becomes a mechanism to exert control. In this system, processors could choose to give worse chicks and feed to a farmer the foreman doesn’t like, and thereby drive that farmer out of business. Further, processors weigh the chickens out of sight of the farmer, giving them yet more levers of control. The farmer, with fixed investment in his farm, cannot switch to a different processor, because there aren’t any. Over time, processors demanded that farmers take out bigger and bigger loans to upgrade their farms, with the threat in the background of being pushed towards bankruptcy if they complained. Fear drove poultry farming, and kept the farmers silent as their incomes declined.

The tournament system wasn’t the only problem with consolidation, of course. The large processors allegedly engaged in price-fixing against consumers and firms that bought chicken, and against their own workers in their processing facilities. It was such a significant set of violations that the DOJ actually put chicken executives on trial for criminal price-fixing, which requires a much higher burden of proof than an ordinary civil case. (To be fair to the chicken executives, they were acquitted by a jury.)

Over the last decade, political fights over chicken farming, and agricultural consolidation more broadly, have raged. The USDA in 2016 tried to put forth mild rules against the tournament system, but the Trump administration withdrew them upon taking office. Under Biden, the USDA has some more mild rules on the tournament system, and The White House has messaged on this problem noting that inflation, at least in meat, was being impacted by much higher meatpacking margins.

It hasn’t seemed promising for a long time. The USDA has been pretty meek under Biden. And a few days ago, the Department of Justice Antitrust Division officially let through the Cargill-Sanderson Farms acquisition in the poultry industry, which a lot of people thought the Division would challenge. I still don’t fully understand the logic of allowing this merger, as consolidation is already at dangerous levels.

But then today, the Antitrust Division stepped into this morass in a big way with a lawsuit and several consent decrees against a data consulting firm and multiple poultry processors (Cargill, Sanderson Farms Inc. and Wayne Farms). The gist of the charges is that these firms were exchanging information about what they were paying their employees, both directly and with the help of a data consultant (which is a common way to engage in a pricing conspiracy). The DOJ Antitrust Division didn’t just bring a Sherman Act case, but used a different law - the Packers and Stockyards Act - to also attack the tournament system itself.

The resolution of this complex series of actions is as follows. The firms have to pay $85 million in restitution to the workers they cheated, which is some measure of justice. The data consultant is effectively banished from the industry, the tournament system is somewhat curtailed, and there will be a compliance monitor to go through the industry’s dirty laundry for the next decade. There’s also going to be more.

It’s the first Packers and Stockyards Act claim in the history of the Antitrust Division; normally it’s the USDA that enforces that law. But the USDA doesn’t have the capacity to do so right now, and so is allowing the Antitrust Division to borrow their jurisdiction and enforce the law. This is an unusually cooperative attitude and represents the ‘whole of government’ policy put forward last year by the Biden administration on competition. It’s not the norm yet, just a few weeks ago the DOJ antitrust enforcers were calling the USDA’s main sugar expert ‘captured’ in a merger trial when she testified on behalf of the defendants. But on the DOJ Antitrust press release page, it was USDA’s Senior Advisor for Fair and Competitive Markets Andy Green who had a quote talking up the relationship of their new tournament regulations and this antitrust action.

Finally, while the complaint only names a few defendants, it also noted that the conspirators in the action represented more than 90% of the poultry processing plant jobs in the US. What explains this gap? It turns out there are still investigations going on and the DOJ will probably be bringing more cases. In other words, this announcement isn’t nearly enough, but it is a real penalty to dominant firms, and a real start in restructuring a large and important industry