Government report disqualifies poultry farmers as small businesses

When you pick up a chicken at the supermarket, you might not necessarily think you’re supporting a small business. Rarely do you associate a trip to the chain grocer with “shopping small.” But according to the government, there are small businesses in the chicken supply chain — the chicken farmers themselves — that are increasingly funding their operations with guaranteed loans from the Small Business Association.

But now chicken farmers’ status as small business owners is being called into question. In a report released on March 6, the Office of the Inspector General (OIG) found that some poultry farmers who had received SBA loans were actually ineligible, because poultry companies “exercised such comprehensive control over the growers” that farmers were not, in fact, operating as independent small business owners. The report found that the SBA has given out nearly $2 billion in loans to such ineligible operations.

Virtually all broiler chickens produced in the United States are grown under contract to a poultry company. The top four poultry companies — Tyson Foods, Pilgrim’s Pride, Sanderson Farms, and Perdue — have become highly vertically integrated, meaning they control the chicks, feed, antibiotics, slaughter, and processing that brings a chicken to your grocery store. The farmers are responsible for the land, equipment, and structures required to raise the chickens — the costliest and highest-risk parts of the business.

“The industry’s terms saddle chicken farmers with so much of the risk and so little of the reward,” says Olivia LaVecchia, a research associate at the Institute for Local Self-Reliance. “These farmers are so tightly controlled that it’s almost like the SBA was lending not to small businesses but to giant companies.”

At issue for the OIG is the contract relationship between farmers and processors. The agency’s report found that approximately $1.8 billion in poultry loans made under the SBA’s flagship 7(a) loan program may have gone to farmers who are ineligible for the program, because poultry growers and poultry companies are “affiliated.”

The report defines affiliation as “when one [entity] controls or has the power to control the other.” The OIG found that the growers and the processors are affiliated because the contractual mandates, oversight, inspection processes, and market power exerted by the processors make it functionally impossible for growers to “operate their businesses independent of integrator mandates.” Given that poultry companies are much too large to qualify for SBA lending programs, that affiliation disqualifies many contract poultry farmers from SBA loans.

Paul Wolfe, of the National Sustainable Agriculture Coalition, wrote in an email that the report is “hugely important.” He says it reflects what he and other advocates have been hearing from farmers: that “large poultry companies are increasingly steering their farmers to SBA.” The SBA has a loan cap of $5 million, which is higher than other government lenders, including the Farm Service Agency.

Beyond serving as a tool poultry companies can use to exert power over farmers, the OIG found that poultry contracts were risky because they were so short-term. A 2016 report from the National Chicken Council, a trade association for the poultry industry, found that the majority of poultry contracts were for less than a year, with 42 percent of growers operating on flock-to-flock contracts. Once a poultry farmer finds herself without a contract, her assets lose value rapidly. The OIG’s analysis found that farmers without a contract lost between 62 and 94 percent of the value of their SBA-funded facility, which could impair their ability to repay their loans.

SBA lending is unique because the agency can guarantee a loan up to 85 percent — meaning that if the farmer defaults, the government is on the hook to the lender to repay most of the loan. Wolfe notes that these loans are “a lose-lose situation for the taxpayer and the farmers, because a large portion of the contracts have no guarantee they will continue” and because when farmers default, the burden falls on taxpayers. The guarantee can also serve as an incentive for lenders to take on more risk than they would without government backing.

SBA lending to poultry farmers has changed dramatically in the past four years. The SBA is approving far more poultry loans as a share of its agricultural lending, from 61 percent of loans in 2012 to 76 percent in 2016. The SBA’s poultry loans totaled $534 million in 2016, compared with $159 million in 2012. And the loans themselves have gotten substantially bigger, rising 91 percent in the four-year period. The average 7(a) poultry loan was worth $1.4 million in 2016, up from $741,000 in 2012.

What’s more, a greater share of that lending is being handled by lenders with “delegated authority,” meaning they undergo less approval than other lenders. In 2012, the SBA itself signed off on 89 percent of 7(a) poultry loans, but by 2016, 69 percent of the loans were approved by lenders with delegated authority. Two lenders in particular have come to dominate delegated SBA poultry lending — North Carolina’s Live Oak Bank and Arkansas’ First Financial Bank. Those two banks accounted for the majority of lending in both dollar value and number of loans distributed in 2017.

The OIG report concluded that the SBA should perform a review of the ineligible loans and take a closer look at the relationship between farmers and processors to determine future SBA lending in the sector. Wolfe notes that the Farm Service Agency, which also lends in the poultry sector, should also “read this report and evaluate its own procedures for providing loans to large livestock and poultry operations based on similar contracts.”

The broiler chicken industry had a market value of nearly $26 billion in 2016.