[Federal Register Volume 85, Number 239 (Friday, December 11, 2020)]
[Rules and Regulations]
[Pages 79779-79802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27117]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

9 CFR Part 201

[Doc. No. AMS-FTPP-18-0101]
RIN 0581-AD81


Undue and Unreasonable Preferences and Advantages Under the 
Packers and Stockyards Act

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule establishes a new regulation containing 
criteria the Secretary of Agriculture will consider when determining 
whether an undue or unreasonable preference or advantage has occurred 
in violation of the Packers and Stockyards Act, 1921 (Act). A provision 
of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) 
requires the Secretary to establish the criteria. The Act protects fair 
trade, financial integrity, and competitive marketing for livestock, 
meat, and poultry.

DATES: Effective January 11, 2021.

FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Chief Legal Officer/
Policy Advisor; Packers and Stockyards Division, USDA, AMS Fair Trade 
Practices Program; phone: 202-690-4355 or email: 
<a href="/cdn-cgi/l/email-protection#4b186509392e3f3f65042d2d3e3f3f0b3e382f2a652c243d"><span class="__cf_email__" data-cfemail="5a097418283f2e2e74153c3c2f2e2e1a2f293e3b743d352c">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: The Act at 7 U.S.C. 202(b) specifies that it 
is unlawful for any packer, swine contractor, or live poultry dealer to 
either make or give any undue or unreasonable preference or advantage 
to any particular person or locality in any respect. In administering 
this provision of the Act, the United States Secretary of Agriculture 
(Secretary) determines whether the conduct of regulated entities is 
considered a violation of the Act.
    In the past, each determination was analyzed using general 
principles on a case-by-case basis, exercising the regulatory 
flexibility Congress provided when it passed the Act. Section 11006(1) 
of the 2008 Farm Bill (Pub. L. 110-234) requires the Secretary to 
promulgate regulations establishing criteria the Secretary will 
consider in determining whether an undue or unreasonable preference or 
advantage has occurred in violation of the Act. At that time, the 
Secretary delegated responsibility for establishing the required 
criteria to the Grain Inspection, Packers and Stockyards Administration 
(GIPSA). In 2017, GIPSA merged with the Agricultural Marketing Service 
(AMS). AMS now administers the regulations under the Act and undertook 
this rulemaking to meet the statutory requirement. This rule adds a new 
Sec.  201.211 to 9 CFR part 201--Regulations Under the Packers and 
Stockyards Act (P&S regulations). This rule retains a flexible 
framework for the Secretary's determinations, while providing criteria 
to support transparency in the Secretary's determinations. Accordingly, 
the regulated industry and the public now have a reference to the 
general framework that AMS will use to determine whether there is an 
unlawful preference or advantage under section 202(b) of the Act.
    Newly added Sec.  201.211 requires the Secretary to consider four 
specified criteria when determining whether any undue or unreasonable 
preference or advantage has been given or made to any particular person 
or locality in any respect in violation of the Act. The Secretary is 
not limited to considering only these four criteria but can also take 
other factors into consideration as appropriate on a case-by-case 
basis. We discuss each of the four criteria later in this document.
    AMS published a proposed rule regarding this matter in the Federal 
Register on January 13, 2020 (85 FR 1771). The proposed rule invited 
public comments on the addition of the proposed criteria to the P&S 
regulations. AMS allowed a 60-day public comment period for interested 
parties to submit comments. The comment period ended March 13, 2020. 
AMS received 2,351 comments on the proposed rule, of which 235 were 
unique. The remaining comments represented 48 groupings of similar 
comments, each group having at least 80 percent matching text. 
Commenters represented numerous segments of the livestock and poultry 
industry, from individual poultry growers and livestock producers to 
trade organizations representing producers, poultry companies, the meat 
packing industry, and state and national level agriculture groups. 
After considering the comments received, AMS determined to adopt the 
proposed criteria with two modifications. Analysis of the comments and 
AMS's responses are included later in this document.

Background

    As mentioned above, the 2008 Farm Bill directs the Secretary to 
establish criteria the Secretary will consider in determining whether 
an undue or unreasonable preference or advantage has occurred in 
violation of the Act. At the time the 2008 Farm Bill was enacted, what 
is now the Packers and Stockyards Division (PSD) of AMS's Fair Trade 
Practices Program operated within GIPSA. GIPSA undertook the 
responsibility for developing criteria for consideration. In June 2010, 
GIPSA

[[Page 79780]]

published a proposed rule (75 FR 35338 (June 22, 2010)) that was never 
finalized, due to Congressional prohibitions included in the 
Consolidated Appropriations Acts for fiscal years 2012 through 2015, 
which disallowed any further work on the new criteria rulemaking. See 
Sec. 721, Public Law 112-55, November 18, 2011; Sec. 742, Public Law 
113-6, March 26, 2013; Sec. 744, Public Law 113-76, January 17, 2014; 
and Sec. 731, Public Law 113-235, December 16, 2014. GIPSA resumed its 
efforts to promulgate the required criteria in December 2016 with 
publication of a second proposed rule (81 FR 92703 (December 20, 
2016)), but decided to take no further action on that proposal (82 FR 
48603 (October 18, 2017)). AMS accomplishes Congress's 2008 Farm Bill 
directive with the promulgation of this final rule that establishes the 
required criteria.
    The PSD oversees day-to-day administration of the P&S regulations 
and is called upon to investigate alleged violations of section 202(b). 
Many of the alleged violations related to contractual dealings between 
regulated entities and the livestock producers, swine production 
contract growers, and poultry growers with whom they do business. Other 
entities, including retailers and the public, can also be harmed by 
violations of section 202(b). Difficulty lies in determining whether 
particular instances of preferences or advantages made or given to one 
or more persons or localities would be undue or unreasonable and 
violations of the Act.

New Provisions

    Section 202(b) of the Act prohibits buyers to ``make or give any 
undue or unreasonable preference or advantage to any particular person 
or locality in any respect, or subject any particular person or 
locality to any undue or unreasonable prejudice or disadvantage in any 
respect.'' It is not unusual for buyers or sellers of livestock or 
poultry to receive advantages. For example, between two competing 
sellers, one may receive a better price from a buyer. The Act only 
prohibits those preferences or advantages that are undue or 
unreasonable. It follows that there are legitimate reasons for the 
existence of preferences or advantages that are not undue or 
unreasonable. Reasonable differences in contract terms may result from 
negotiations over particular interests between the parties. Some courts 
have gone so far as to say it is not the purpose of the Act to 
interfere with contract negotiations or to upset the traditional 
principles of freedom of contract.\1\ The Act does not create an 
entitlement to obtain the same type of contract offered to other 
producers or growers. However, greater clarity on the terms associated 
with grower contracts may increase transparency in the marketplace and 
reduce the number of claims of undue or unreasonable preference.
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    \1\ Jackson v. Swift Eckrich, Inc., 53 F.3d 1452 (8th Cir. 
1995), IBP v. Glickman, 187 F.3d 974 (8th Cir. 1999), Griffin v. 
Smithfield Foods, 183 F. Supp. 2d 824 (E.D.Va. 2002).
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    Under new Sec.  202.211, the Secretary will consider four specific 
criteria when determining whether a packer, swine contractor, or live 
poultry dealer has made or given any undue or unreasonable preference 
or advantage to any particular person or locality in any respect. 
Section 201.211 lists the criteria for consideration and provides that 
the Secretary is not limited to those four. Because Sec.  202(b) of the 
P&S Act prohibits any undue or unreasonable preferences or advantages, 
in addition to considering the specified criteria in Sec.  201.221, the 
Secretary may also consider other factors relevant to each situation on 
a case-by-case basis.
    Under Sec.  201.211(a), the Secretary will consider whether the 
preference or advantage in question cannot be justified on the basis of 
a cost savings related to dealing with different producers, sellers, or 
growers. Under Sec.  201.211(b), the Secretary will consider whether 
the preference or advantage in question cannot be justified on the 
basis of meeting a competitor's prices. Under Sec.  201.211(c), the 
Secretary will consider whether the preference or advantage in question 
cannot be justified on the basis of meeting other terms offered by a 
competitor. Under Sec.  201.211(d), the Secretary will consider whether 
the preference or advantage in question cannot be justified as a 
reasonable business decision.
    Historically, the Secretary has considered criteria similar to 
these when determining whether to commence disciplinary or judicial 
actions under the Act. PSD made these decisions on a case-by-case 
basis, examining the facts of each complaint separately. AMS chose 
these new criteria, and retained the flexibility to consider other 
criteria, based on this past experience. In doing so, AMS strikes a 
balance between the interests of all segments of the industry while 
carrying out its enforcement responsibilities. On the one hand, the law 
charges AMS with protecting producers, growers, retailers, and the 
public from potential harm resulting from undue or unreasonable 
preferences or advantages. On the other hand, AMS recognizes that among 
the numerous complaints the Secretary has examined in the past, many 
preferences or advantages given to individuals or groups have been 
determined to be lawful, while relatively few preferences or advantages 
were found undue or unreasonable.
    Disparate contract terms are not undue or unreasonable just because 
the terms are not identical. Some disparities in contract terms can be 
attributed to reasonable business negotiations between contracting 
parties. For example, price differences offered to different sellers 
may reflect differences in transportation costs to a slaughter facility 
or may reflect one producer's ability and willingness to supply 
livestock in the early morning hours. In the case of a live poultry 
dealer that pays a premium to a poultry grower who agrees to use 
experimental vaccines, the grower has increased risk of financial loss 
if the vaccine proves to be unsuccessful. Based on the criteria in 
Sec.  201.211, the apparent preference or advantage might be justified 
on the basis of the company saving the expense of testing the vaccines 
through other means. The premium paid to the grower for providing the 
extra service of testing vaccines and for accepting greater financial 
risk might not be considered undue or unreasonable. In another example, 
a livestock packer pays higher prices later in the day or week after 
competitors have raised the market price. Based on the criteria in 
Sec.  201.211, the apparent preference or advantage might be justified 
as necessary to meet competitors' prices, and the higher price might 
not be considered undue or unreasonable. Finally, where a live poultry 
dealer's competitors have offered long term contracts to their growers, 
the poultry dealer finds that he must offer comparable terms to his 
growers in the same locality. Based on the criteria in Sec.  201.211, 
the apparent preference given to growers in that locality might not be 
considered undue or unreasonable because the difference in contract 
terms might be justified by the need to meet a competitor's other 
contract terms in that locality.
    Some preferences or advantages, however, might be considered undue 
or unreasonable if they are so unfair that they would tend to restrain 
trade, creating such excessively favorable conditions for one or more 
persons that the competitors would have reduced chances of business 
success. In such a case, a higher price, referred to as a premium, 
offered to one person or locality but not offered to other persons or 
localities similarly situated could

[[Page 79781]]

constitute a violation of the Act. A livestock packer negotiating 
preferential live basis prices with only one favored livestock supplier 
and not with similarly situated suppliers, may be in violation of the 
Act. After considering the criteria in Sec.  201.211, the Secretary may 
conclude that the packer cannot justify its actions on the basis of 
cost savings, meeting a competitor's prices, meeting other terms 
offered by a competitor, or making a reasonable business decision.
    Under Sec.  201.211(a) through (c), the Secretary will consider 
whether preferences or advantages given to one or more persons are 
based on cost savings related to dealing with different producers, 
sellers, or growers or on the need to meet a competitor's prices or 
other contract terms. For example, a live poultry dealer offering a 
higher base price to a favored grower, but not to other growers in the 
same complex with the same housing types, may be in violation of the 
Act. The Secretary will consider all of the specified criteria. Under 
criterion (a), there would be no cost savings in a higher base price. 
Under criteria (b) and (c), the Secretary will consider whether the 
higher base price meets a competitor's price or other terms. If the 
reason for giving the favored grower the higher price cannot be 
justified by meeting a competitor's price or other terms, and if 
consideration of other factors particular to the situation does not 
suggest otherwise, the higher base price may be an undue or 
unreasonable preference or advantage.
    Under Sec.  201.211(d), the Secretary will consider whether the 
preference or advantage in question cannot be justified as a reasonable 
business decision. A packer, swine contractor, or live poultry dealer 
may have a reasonable business reason for treating some persons or 
groups more favorably than others. For example, in the cattle industry 
a packer may pay producers a premium for delivering cattle that meet an 
established certified beef program, such as ``Certified Angus Beef,'' 
because the packer can realize a greater profit from the sale of meat 
branded under those programs. Based on the criterion in Sec.  
201.211(d), it is likely that the apparent preference or advantage to 
sellers of cattle meeting certain specifications in that situation 
would be justified as a reasonable business decision and not considered 
undue or unreasonable. In another example, a live poultry dealer may 
pay a premium to growers who raise test flocks utilizing a new breed of 
chicken, as this provides the live poultry dealer with data from which 
it can make future business decisions. Based on the criterion in Sec.  
201.211(d), the premium might be justified as a reasonable business 
decision, so the Secretary might not determine the preference or 
advantage to be undue or unreasonable.
    Live poultry dealers, packers, and swine contractors should enter 
into contracts that do not discriminate, unless the differences are due 
to cost savings or meeting competitors' prices and terms or are 
legitimate business decisions. Preferences that are not grounded in 
ordinary business considerations may be based upon reasons of unjust 
advantage.
    It should be noted that an alleged preference or advantage being 
seemingly justified under one criterion does not automatically confer 
immunity against all other criteria. For example, a preference or 
advantage may still be deemed undue or unreasonable, even though it is 
apparently given to meet a competitor's offer, if the Secretary 
determines the preference or advantage was unreasonable based on 
another criterion. Thus, the criteria specified in Sec.  201.211 are 
not safe harbors, as suggested by some comments on the proposed rule.
    The flexibility in Sec.  201.211 to consider criteria other than 
the four specified in the rule allows the Secretary to determine 
whether other pertinent factors may have influenced the business 
decisions of contracting parties. For example, one comment submitted on 
the proposed rule recommended the Secretary consider whether an 
apparent preference or advantage could be ascribed to an emergency 
situation, such as a government requisition for food after a natural 
disaster or during a military crisis. While AMS did not add this 
particular criterion to the four specified in the rule, it is 
nevertheless a good example of the type of additional criteria the 
Secretary may consider. The discretion to consider other criteria, 
however, is not boundless.
    In addition to the criteria enumerated in Sec.  201.211, the 
Secretary may consider the overall competitive effects of any 
particular agreement. In doing so, the Secretary should apply the 
antitrust ``rule of reason'' analysis, as used by courts and antitrust 
agencies. Section 1 of the Sherman Act of 1890, 15 U.S.C. 1-38, 
prohibits agreements in ``restraint of trade.'' The Supreme Court 
interpreted this prohibition to be limited to unreasonable restraints. 
See Ohio v. American Express Co,, 138 S.Ct. 2274, 2283 (2018) (citing 
State Oil Co. v. Khan, 522 U.S. 3, 10 (1997)). Certain types of 
agreements (such as price fixing) are so likely to harm competition and 
to have no significant procompetitive benefit that they are challenged 
as per se unlawful. See FTC v. Superior Court Trial Lawyers Ass'n, 493 
U.S. 411, 432-36 (1990). All other agreements are evaluated under the 
rule of reason, which involves a factual inquiry into an agreement's 
overall competitive effect. As the Supreme Court has explained, rule of 
reason analysis entails a flexible inquiry and varies in focus and 
detail depending on the nature of the agreement and market 
circumstances. See California Dental Ass'n v. FTC, 119 S. Ct. 1604, 
1617-18 (1999); FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 459-61 
(1986); National Collegiate Athletic Ass'n v. Board of Regents of the 
Univ. of Okla., 468 U.S. 85, 104-13 (1984). The Supreme Court first 
applied this framework to antitrust cases under the Sherman Act in 
United States v. Addyston Pipe & Steel Co., 85 F. 271, 282-283 (CA6 
1898), aff'd, 175 U.S. 211 (1899). The rule of reason analysis focuses 
on the state of competition with, as compared to without, the relevant 
agreement. The central question is whether the relevant agreement 
likely harms competition by increasing the ability or incentive 
profitably to raise price above or reduce output, quality, service, or 
innovation below what likely would prevail in the absence of the 
relevant agreement. See ``U.S. Department of Justice & Federal Trade 
Commission, Antitrust Guidelines for Collaborations among Competitors 
U.S. Department of Justice & Federal Trade Commission, Antitrust 
Guidelines for Collaborations among Competitors the Licensing of 
Competitors the Licensing of Intellectual Property'' Sec.  1.2 (April 
2000). If the agreement raises competitive concerns, the analysis 
considers whether the agreement is necessary to achieve any 
procompetitive benefits that would offset competitive harm. Id. This 
rule provides the analytical framework for AMS to evaluate specific 
activity.
    While the agency expects a short-term increase in the cost of 
review for livestock producers, poultry growers, and regulated entities 
in existing contracts, in the long-term, innovative contracts should be 
less costly to negotiate even when those contracts provide for 
preferences and advantages. Because this framework of criteria can be 
understood in the context of legitimate business decisions, regulated 
entities may more easily review contracts for compliance with the Act.
    By following a framework of criteria that promote fair dealing 
based in rational decision-making, AMS promotes protection for 
producers and localities that might otherwise have

[[Page 79782]]

been unable to obtain preferential contract terms or price advantages. 
Therefore, this rule is expected to improve the negotiating position of 
growers and producers.
    AMS expects adding the criteria in Sec.  201.211 to the P&S 
regulations to provide a framework in which the Secretary will consider 
potential violations of the Act, help the industry understand what the 
Secretary will consider when evaluating violation claims, and fulfill 
the Congressional mandate to establish criteria for making 
determinations regarding potentially unacceptable conduct under the 
Act.

Changes From the Proposed Rule

    As originally proposed, the regulation required the Secretary to 
consider one or more specific criteria listed in the regulation, and 
provided that the Secretary was not limited to considering those four 
criteria when determining whether an undue or unreasonable preference 
or advantage has been given in violation of the Act. One comment asked 
for clarification about whether the Secretary was required to consider 
at least one of the four specified criteria, in addition to being able 
to consider other criteria. The 2008 Farm Bill requires the Secretary 
to establish criteria that the Secretary will consider in determining 
whether an undue or unreasonable preference or advantage has occurred 
in violation of the Act. Therefore, based on its original understanding 
of the statute and on the comment, AMS revised the introductory 
paragraph of Sec.  201.211 to make it clear that the Secretary must 
consider all four specified criteria, and that the Secretary may also 
consider additional criteria, in determining whether an undue 
preference or advantage has occurred in violation of the Act.
    As originally proposed, criterion (d) would have required the 
Secretary to consider whether the alleged preference or advantage 
cannot be justified as a reasonable business decision that would be 
customary in the industry. Almost unanimously, public comments 
submitted in response to the proposal objected to the clause regarding 
whether a business decision is customary in the industry. Comments 
otherwise supporting the proposal said what is ``customary in the 
industry'' is ambiguous and could be open to broad interpretation. 
Comments opposed to the proposal generally opposed this clause 
specifically, asserting that illegal discrimination, retaliation, and 
use of unfair marketing practices have become customary in the industry 
and that the wording of the proposed provision would offer packers, 
swine contractors, and live poultry dealers a convenient justification 
for unacceptable actions. Based on the comments, AMS determined to 
remove the words ``that would be customary in the industry'' from the 
language of criterion (d). Thus, Sec.  201.211(d) provides that the 
Secretary will consider among other criteria whether the preference or 
advantage under consideration cannot be justified as a reasonable 
business decision.

Comment Analysis

    AMS received 2,351 comments on the proposed rule, some with 
multiple signatories. Comments are summarized by topic below and 
include AMS's responses.

Comment Period Extension

    Comment: AMS provided 60 days for public comment on the proposed 
rule. Twelve comments included requests that AMS extend the comment 
period by at least 90 days. Requesters said that the proposed rule and 
the issues it addressed are complex and important and that commenters 
needed more time to analyze their implications across the industry and 
provide meaningful comments. Requesters also noted the comment period 
overlapped with some states' legislative sessions and that commenters 
were dealing with ongoing stress created by continued low farm prices, 
both requiring commenters' focus at the time.
    AMS response: AMS proposed this rule following litigation that 
concerned a prior proposed rule on this subject. In the course of that 
litigation, the USDA committed to initiate timely rulemaking on this 
subject. As part of the rulemaking, the agency chose a 60-day comment 
period as it believed this to be an adequate amount of time for 
interested persons to review the proposal and to provide comment that 
the agency should consider. Therefore, AMS decided against extending 
the comment period beyond the deadline of March 13, 2020.

Criteria Generally

    AMS proposed four specific criteria the Secretary will consider 
when making determinations about whether an action could be considered 
a violation of the Act. Some comments addressed one or more criteria 
individually, while some addressed them generally. Here we address 
comments on the proposed criteria in general.
    Comment: Several comments supported the proposed criteria 
generally, saying farmers and ranchers have long been at a disadvantage 
due to uncertainty about what actions violate the Act. Comments agreed 
that the proposed criteria would provide much needed clarity for the 
industry and should minimize or eliminate legal uncertainty in the 
marketplace.
    On the other hand, numerous comments opposed the proposed criteria 
generally, saying they are inadequate, vague, ambiguous, and open to a 
wide variety of interpretations. These comments said the proposed 
criteria fail to address significant and harmful practices in the 
industry that are both anti-competitive and detrimental to farmer 
livelihoods. Comments also claimed that AMS had proposed specific 
conclusory criteria for determining when a violation has not occurred. 
These comments opposed the structure of the proposed regulation, saying 
that framing the criteria in negative terms (e.g., ``cannot be 
justified'') fails to articulate what would be considered an undue or 
unreasonable preference or advantage and a violation of the Act, thus 
failing to comply with Congress's mandate. Commenters claim that this 
is the reverse of Congress's directive and renders the Act's express 
prohibitions meaningless.
    Comments also criticized the criteria for being too general. They 
argued that different adjudicators may come to different conclusions 
when considering the same facts.
    For these reasons, comments asserted the criteria should establish 
standards on which to base decisions about whether a packer has 
violated the Act. Commenters asked for standards that state what 
conduct constitutes a violation. Comments urged USDA to develop clear, 
specific criteria, so that the violations would be unequivocal.
    AMS response: AMS attempted to balance the interests of all 
segments of the livestock, meat, and poultry industries. Producers and 
growers must be protected from potential harm resulting from undue or 
unreasonable preferences or advantages. At the same time, regulated 
entities may give preferences or advantages to individuals or groups 
for lawful reasons. AMS believes that the proposed criteria will 
provide a framework from which both producers and processors can 
benefit, while not harming consumers.
    Regarding the comments that suggest the rule should prohibit 
specific conduct--rather than providing criteria that can be applied 
across a wide range of behaviors--the 2008 Farm Bill directed the 
Secretary to establish criteria to consider when determining whether 
conduct gives an undue or unreasonable preference or advantage. AMS has 
chosen general criteria in this rule. Further, the criteria are not

[[Page 79783]]

conclusory; just because an action may appear justified under one 
criterion does not mean that it cannot be determined to be undue or 
unreasonable.
    The criteria comply with the promulgation requirement, whether they 
are written in positive or negative terms. The Farm Bill provides: ``As 
soon as practicable, but not later than 2 years after the date of the 
enactment of this Act, the Secretary of Agriculture shall promulgate 
regulations with respect to the Packers and Stockyards Act, 1921 (7 
U.S.C. 181 et seq.) to establish criteria that the Secretary will 
consider in determining (1) whether an undue or unreasonable preference 
or advantage has occurred in violation of such Act;'' Criteria are 
standards, rules, or tests on which a judgment or decision can be 
based. American Heritage Dictionary of the English Language (5th ed. 
2020). Criteria are typically ``reference point[s] against which other 
things can be evaluated; a characterizing mark or trait.'' Black's Law 
Dictionary (11th ed. 2019). Nothing in the 2008 Farm Bill suggests that 
the Secretary was called upon to describe these criteria in a positive 
or negative form. All that is required is that the criteria provide 
traits and standards that the Secretary can use as a base for judgment. 
AMS considered drafting criteria in a positive form and determined that 
the negative form better represented Congressional intent. Criteria 
used to evaluate whether preferences or advantages ``cannot be 
justified . . .'' in some manner could establish that an undue 
preference or advantage has occurred. Conversely, if written in a 
positive form, the criteria would be presented as exceptions, for 
example, a criterion could state that a preference or advantage is 
undue or unreasonable, unless it ``can be justified . . .'' in some 
manner.
    The Farm Bill does not require the Secretary to consider any 
specific factor or information in developing the criteria. AMS's 
criteria apply across a wide range of behaviors in multiple industries. 
This approach, rather than setting forth specific examples of unlawful 
conduct, provides the Secretary with the flexibility Congress intended 
when passing the Act. AMS made no changes to the rule as proposed based 
on these comments.
    Comment: One comment asked AMS to clarify whether the Secretary 
would be required to consider at least one of the four criteria 
specified in the proposed regulation, in addition to considering any 
other criteria that may be relevant to the situation.
    AMS response: AMS appreciates the comment requesting clarification 
of the proposed language. Our intention was to specify four criteria 
the Secretary is required to consider, and to provide flexibility for 
the consideration of additional criteria as appropriate for the 
situation. Accordingly, based on the comment, and to ensure that the 
meaning of the regulation is clear, we revised the introductory 
paragraph of proposed Sec.  201.211 to clarify that the Secretary will 
consider each of the criteria specified in the regulation and may 
consider additional criteria.

Unlimited Criteria for Consideration

    The proposed rule provides that the Secretary will consider certain 
criteria when determining whether a violation of section 202(b) of the 
Act has occurred. The proposed rule specifies four criteria for 
consideration but provides that the Secretary is not limited to 
considering those four.
    Comment: Many comments supported including flexibility to consider 
additional criteria on a case-by-case basis, explaining that there can 
be many other relevant factors to consider in different situations. 
Other comments argued that the provision is too ambiguous, and that its 
application is unclear. Some comments recommended the Secretary be 
required to consider only one of the listed criteria, or that 
consideration of other criteria be limited to certain situations.
    Some comments insisted the criteria list be exhaustive and not 
broad, as proposed. According to comments, no segment of the supply 
chain would know which practices are prohibited or permissible under 
the proposed language, making compliance with the Act nearly 
impossible, and exposing the contacting parties to unforeseeable 
liability and associated litigation and the cost of protecting their 
respective marketing arrangements.
    One comment opposed to the provision said that AMS's approach is 
inconsistent with Congress's directive in the 2008 Farm Bill to 
establish criteria and with the agency's stated desire to provide 
transparency to the process of determining whether a violation of the 
Act has occurred. The comment asserted that giving the Secretary 
flexibility to consider other criteria would give both the Secretary 
and other right of action plaintiffs who believe they have been wronged 
the opportunity to file complaints based on unspecified criteria.
    One comment supported the proposal not foreclosing the possibility 
that other activities could be violations of the Act. According to the 
comment, the four listed criteria identify the most familiar 
indications of unfair practices, but other non-competitive conduct 
might escape the scope of the identified criteria, or other criteria 
might be found to better capture predatory practices.
    Another comment suggested AMS clarify in the final rule that the 
four criteria specified in the proposed rule are broadly encompassing 
of all potential scenarios and that the Secretary will rarely, if ever, 
need to consider other criteria.
    AMS response: The final rule retains the provision allowing the 
Secretary to consider criteria other than the four set forth in Sec.  
201.211. The U.S. Supreme Court noted in 1922 in the case of Stafford 
v. Wallace, 258 U.S. 495, 521, that the Packers and Stockyards Act is 
``remedial legislation.'' A remedial measure ``is to be construed 
liberally, and so as to effectuate the purpose of Congress and secure 
the relief which was designed'' (U.S. v. Southern Pacific R. Co., 184 
U.S. 49, 56 (1902); Logan v. Davis, 233 U.S. 613, 628 (1914)). ``It 
would be an `unnatural construction' of a remedial statute to require 
an administrative agency `to sit idly by and wink at practices' which 
are subversive of effective regulation.'' (quoting American Trucking 
Assns. v. U.S., 344 U.S. 298, 311 (1953)).
    AMS does not consider the criteria exhaustive; rather, the criteria 
provide notice to the industry of the types of conduct that may be 
found unlawful. It would be impossible to develop an exhaustive list of 
specific criteria that would remain relevant for very long in an 
evolving market environment. The criteria in this rule respond to a 
need for clarity among industry participants regarding practices that 
could be deemed unduly preferential. Although it is unlikely that all 
future litigation will be avoided, AMS believes contracting parties may 
be able to avoid some litigation by applying the criteria and the 
principles behind them when drafting--and contracting for--marketing 
arrangements.
    Thus, this final rule allows the Secretary to consider other 
factors that may not be included among the four listed criteria, but 
are evidence of an undue preference or advantage, nonetheless. The rule 
gives the Secretary principles by which to analyze the conduct of 
regulated entities that may violate the Act, for the Secretary's 
investigations and administrative or judicial enforcement. The 
Secretary's analysis involves investigative methods currently in use, 
including examination of overall market conditions, competitors' 
pricing and practices, and individual entities' business records to 
substantiate and justify different pricing or other

[[Page 79784]]

differing treatment of suppliers or territories.
    These criteria are for the Secretary's determination of whether 
preferences are undue or unreasonable; the rule does not apply to 
private plaintiffs filing suits for damages under section 308 of the 
Act. Accordingly, no changes were made to the rule as proposed based on 
these comments.

Criterion (a)--Cost Savings

    The proposed rule requires the Secretary to consider certain 
criteria when determining whether a violation of the Act has occurred. 
The proposed rule lists four criteria for consideration but does not 
limit consideration to those four. The first of these, criterion (a), 
asks whether the preference or advantage under consideration cannot be 
justified on the basis of a cost savings related to dealing with 
different producers, sellers, or growers.
    Comment: One comment said this criterion is subjective and does not 
incorporate clear standards for its application in relation to dealing 
with different producers, sellers, or growers. Another asserted that 
this criterion's vagueness could be interpreted to mean that if a 
packer, swine contractor, or live poultry dealer is using a business 
practice that saves themselves money, it can be justified under section 
202(b) of the Act, no matter the impact on producers, sellers or 
growers.
    AMS response: AMS intends this criterion to be broad and flexible 
for the Secretary to apply it across a wide range of conduct in the 
livestock, meat, and poultry industries. In applying the criteria 
generally, the Secretary will examine the facts of each case and apply 
those facts to the criteria. Costs are relevant to many preferential 
contracts. If a preference does not have a cost-based justification, 
then the absence of a cost-based justification could indicate an undue 
or unreasonable preference or advantage. Or the Secretary may find that 
cost savings justify a preference given to one producer over another. 
No changes were made to the rule as proposed based on the comments.
    Comment: Several comments said that justifications under criterion 
(a) for costs savings based solely on volume should be prohibited to 
avoid discriminating against smaller livestock or poultry growers. 
Comments explained that an integrator can easily claim cost savings 
based on volume by contracting with a large-scale livestock or poultry 
grower over a smaller-scale livestock or poultry grower or an 
association of smaller growers. According to comments, this would 
result in small-to-medium sized growers routinely being unduly 
disadvantaged and undue preference being given to larger growers 
strictly based on size of operation. One comment said small farms are 
struggling to stay viable while larger farms are increasing in size. 
The comment argued that justifying a preference or advantage as a cost 
savings based solely on volume would only further contribute to the 
decline in sales and ultimately the viability of small and mid-sized 
poultry and livestock farms.
    AMS response: The rule is not intended to set forth prohibitions 
but rather to establish criteria the Secretary will consider when 
determining whether a preference is undue or unreasonable. A packer's 
justification of a preference based solely on the size of the grower 
operation as the comment suggests does not automatically make the 
packer's conduct lawful. The criteria are broad and flexible for the 
Secretary to apply criteria across a wide range of conduct in the 
livestock, meat, and poultry industries. In applying these criteria, 
the Secretary will examine the facts of each case and apply those facts 
to each of the criteria. In the comment's example, resulting cost 
savings would need to be clearly demonstrated to the Secretary's 
satisfaction, and other criteria would have to be considered. AMS 
believes it is up to contracting parties to negotiate terms in 
marketing arrangements that make business sense for all. Accordingly, 
no changes were made to the rule as proposed based on these comments.
    Comment: One comment said that criterion (a) should be revised to 
provide clear examples of when cost savings are or are not warranted. 
Other comments gave examples of when cost savings could be used as a 
justification for disparate treatment: When there are measurable and 
verifiable differences in carcass and meat quality, if those standards 
are applied to producers of all sizes; when there is a specified time 
of delivery or times of urgent need for delivery, if those criteria are 
offered to producers of all sizes; when there are volume-related 
savings that result from documented efficacies in the cost of 
procuring, transporting or handling livestock and conducting other 
transactions that occur outside of the plant.
    AMS response: The purpose of the regulation is to provide criteria 
that are broad enough to cover a majority of the types of conduct that 
could be found in violation of the Act. AMS believes that narrow 
examples do not encompass all of the situations that might result in an 
undue or unreasonable preference or advantage. Therefore, it is not the 
intention of the agency to set forth a laundry list of examples, but 
rather to establish criteria the Secretary will consider when examining 
the facts of wide-ranging types of conduct within the livestock, meat, 
and poultry industries. The comment's proposed examples present the 
underlying factual situation that the agency would consider. For 
illustrative purposes, AMS suggests as one example where cost savings 
used as justification for disparate treatment could be unlawful, the 
use of consumer coupons for meat products. Where a packer offers a 
coupon discount on the price of bacon in a specific geographic region, 
for example, and the resulting price is below the packer's cost in 
order to undercut competition, the behavior could represent an undue 
preference in that geographic region. After consideration, no changes 
were made to the rule as proposed based on these comments.
    Comment: Comments requested that the regulation specifically 
prohibit justifications under criterion (a) based on so-called 
efficiencies that occur within a processing plant or from operating the 
plant at full capacity. Comments explained for example that hog 
producers who pool their hogs and deliver a truckload that is the size 
commonly handled by a processing plant should be on the same footing as 
a larger single producer who provides the same size truckload to the 
plant.
    AMS response: The rule is not intended to set forth prohibitions 
but rather to establish criteria the Secretary will consider when 
determining whether a preference is undue or unreasonable. One of the 
criteria the Secretary will consider is whether there is a cost savings 
in dealing with one producer or grower over another. Based on the 
limited facts in the example provided by the commenter, plant operating 
efficiencies alone would not necessarily justify paying a single 
supplier more for hogs than several suppliers who pool hogs to provide 
similar volume. The general criteria still apply to the comment's 
example, even if there is no explicit ban on a particular preference or 
advantage. No changes were made to the rule as proposed based on these 
comments.

Criteria (b) and (c)--Meeting Competitors' Prices and Other Terms

    Comments generally addressed jointly criteria (b) and (c). Under 
proposed criterion (b), the Secretary would consider whether the 
preference or advantage in question cannot be justified on the basis of 
meeting a competitor's prices. Under proposed

[[Page 79785]]

criterion (c), the Secretary would consider whether the preference or 
advantage cannot be justified on the basis of meeting other terms 
offered by a competitor. In general, comments said the two criteria are 
vague, favor packers and integrators, invite collusion, and conflict 
with confidentiality laws.
    Comment: Comments expressed concern that criteria (b) and (c) would 
disadvantage farmers and growers, who have no voice in negotiations 
between other farmers and competing packers and integrators. According 
to comments, packers and integrators could individually, or could 
conspire to, set low prices or otherwise impractical terms agreeable to 
one farmer and use criteria (b) and (c) to justify applying the same 
prices and terms to other farmers for whom those prices or terms would 
be unacceptable, unworkable, or--as the comment implies--fail to 
reflect the ordinary forces of supply and demand.
    AMS response: The criteria are neither requirements nor 
prohibitions. Nor are they justifications for unlawful behavior. In 
applying these criteria, the Secretary will carefully examine the facts 
of each case. In the example provided by commenters, low prices and 
other impractical terms given to one farmer for the purpose of 
justifying low prices and terms offered to other farmers would likely 
violate one or more of sections 202(c) through 202(g) of the Act. Price 
manipulation, for example, violates other sections of the Act. No 
changes were made to the rule as proposed based on these comments.
    Comment: Comments suggested that in a fully functioning competitive 
market with transparent price discovery, applying criterion (b) might 
be rational, but in the livestock and poultry sector, where commenters 
say price discovery and price transparency are broken at best, and in 
the case of poultry, completely nonexistent, criterion (b) is extremely 
dangerous to farmers. According to comments, criterion (b) invites 
competitors to collude on pricing because justification under this 
criterion would insulate them from scrutiny under section 202(b) of the 
Act.
    AMS response: Collusion to fix prices among packers, swine 
contractors, and live poultry dealers is prohibited under the Packers 
and Stockyards Act.\2\ When the Secretary considers a regulated 
entity's justification for granting a preference based on meeting 
either the prices or other terms offered by a competitor, the Secretary 
may also consider if this behavior resulted in other violations of the 
Act. The rule does not justify, require, promote, or encourage price 
fixing conduct. Regulated entities, however, legitimately receive 
information--in the form of market reports, open bids, and contract 
negotiations with sellers--that may result in granting legitimate price 
preferences to meet a competitor's price. No changes were made to the 
rule as proposed based on these comments.
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 192(d) & (f) (prohibiting conspiracies to 
manipulate or control prices).
---------------------------------------------------------------------------

    Comment: Comments cited USDA policy that protects the 
confidentiality of prices and terms of sale that packers pay for 
livestock under the Livestock Mandatory Reporting Act of 1999 (Pub. L. 
106-78, Title IX; October 22, 1999). According to comments, the 
proposed rule would establish a standard involving prices and other 
terms of sale as defense for a packer's alleged violation of the Act 
while the public is simultaneously precluded from knowing the prices 
and terms of sale offered by any particular packer. Thus, according to 
comments, the proposed rule appears to facilitate and promote collusion 
among packers to share confidential pricing and terms of sale 
information with each other to ensure that the prices and terms they 
offer are similar, if not identical, to the prices and terms offered by 
competitors.
    AMS response: This rule provides the Secretary with broad and 
flexible criteria to consider when determining if a preference is undue 
or unreasonable. The rule does not require, promote, or encourage 
regulated entities to agree to share prices and other contract terms 
between themselves. Nothing within this rule is intended to limit or 
conflict with the Livestock Mandatory Reporting Act of 1999 or any 
other Federal law. No changes were made to the rule as proposed based 
on these comments.
    Comment: Comments claimed criteria (b) and (c) encourage collusion 
and conspiracy between regulated entities and are in direct conflict 
with the overall intent of the statute, as well as the specific price 
manipulation and control prohibitions in sections 202(d) through 202(g) 
of the Act. One comment suggested criteria (b) and (c) seemingly 
incentivize collusion between competitors and could decrease 
competition in the livestock and poultry industries. The comment said 
proposed criterion (b) should be withdrawn, and criterion (c) should be 
modified to require packers, swine contractors, and live poultry 
dealers to provide verifiable proof that the decision to meet a 
competitor's terms results in performance of efficiency gains. The 
comment said that the regulations should make it clear that collusive 
behavior between competing firms is unacceptable.
    AMS response: This rule provides the Secretary with broad and 
flexible criteria to consider when determining if a preference is undue 
or unreasonable. The rule does not require, promote, or encourage 
collusion between packers, swine contractors or live poultry dealers. 
Other subsections of section 202 of the Act make clear that such 
conduct is prohibited. Subject entities are required by other sections 
of the P&S Act and regulations to keep adequate records of their 
business operations. Such records should provide adequate information 
for the Secretary to consider in making determinations under Sec.  
201.211. Accordingly, no changes were made to the rule as proposed 
based on these comments.
    Comment: Comments suggested regulated entities should be required 
to maintain and provide when challenged contemporaneous and detailed 
records to prove that costs, prices, and terms offered to one farmer 
are justified on the basis of meeting those given to other similarly 
situated farmers.
    AMS response: Entities regulated under the Packers and Stockyards 
Act are required to keep adequate records of their business 
operations.\3\ The regulations do not specify which records entities 
should keep. Regulated entities have the flexibility to determine what 
type of records best meet the needs of their individual businesses. AMS 
expects that these records would include those necessary to justify 
preferential terms offered to a producer on the basis of any of the 
criteria within this rule. No changes were made to the rule as proposed 
based on these comments.
---------------------------------------------------------------------------

    \3\ 7 U.S.C. 221; 9 CFR 201.94, 201.95.
---------------------------------------------------------------------------

Criterion (d)--Reasonable Business Decisions

    The fourth proposed criterion for the Secretary to consider is 
criterion (d)--whether the preference or advantage cannot be justified 
as a reasonable business decision that would be customary in the 
industry. Many comments addressed this particular proposal.
    Comment: Several comments supported the inclusion of criterion (d) 
with the other proposed criteria, saying in general that they appear 
all-encompassing. Those comments recommended no changes to proposed 
criterion (d). Other comments recommended clarifying criterion (d) to 
indicate what would be considered a reasonable business decision that 
would be customary in the industry. Many comments asked further that 
AMS list the marketing arrangements and other

[[Page 79786]]

business practices commonly expected to constitute legitimate business 
justifications. Some comments further recommended developing different 
lists for different industry sectors. Other comments asked that such 
lists not be considered finite, giving the industry room to adopt new 
types of acceptable arrangements in the future.
    One comment suggested the term ``reasonable business decision'' 
could change over time and vary from individual to individual and from 
one USDA administration to the next. The comment explained contracting 
parties might be uncertain about how a contract provision that appears 
reasonable today might be viewed at some point in the future. Thus, the 
comment recommended USDA define what it considers to be ``reasonable'' 
in making business decisions or simply limit any interpretation of what 
was a ``reasonable business decision'' to the relative positions, 
beliefs, and understandings of the contracting parties at the time and 
place the contract was entered into.
    AMS response: AMS has not defined or standardized the meaning of 
``reasonable'' in the regulation because the word ``reasonable'' 
assumes the commonly understood meaning of an objective standard. That 
is, a reasonable decision is a decision that a reasonable person would 
make under similar circumstances. Further, we do not agree that the 
regulation should attempt to identify every possible industry business 
decision or marketing arrangement that might be reasonable now and in 
the future. Rather, the Secretary can apply the timeless standard of 
reasonableness to examine an alleged preference or advantage. 
Accordingly, AMS made no changes to the rule as proposed based on these 
comments.
    Comment: Several comments asked AMS to clarify that just because an 
unfair practice may have become common within the industry, that does 
not mean it would be justified under proposed criterion (d) and not a 
violation of section 202(b) of the Act. Others said that the proposed 
criteria protected regulated entities from legal challenges to 
practices that are customary in the industry when a practice that is 
``customary'' may violate the Act. Many comments described practices 
they say are unfair but have become commonplace within the industry, 
such as retaliation, racial discrimination, favoritism, use of 
tournament systems in the poultry sector, poultry pay systems where 
buyers control most grower quality inputs, and giving ``sweetheart 
deals'' to certain ranchers or feeders in the cattle industry. Comments 
said that these practices, although they might be called ``customary,'' 
should not be justified under proposed criterion (d). Some comments 
recommended using examples from this list to develop other criteria for 
determining whether a preference or advantage is undue or unreasonable. 
Other comments asked that the qualifier ``that would be customary in 
the industry'' be decoupled from ``reasonable business decision,'' 
leaving the latter to stand on its own as a criterion. One comment 
suggested AMS could develop another criterion to incorporate 
``customary in the industry.''
    AMS response: While the agency's intent is to establish a criterion 
that would allow preferences supported by reasonable business 
decisions, AMS does not intend to legitimize unlawfully discriminatory 
practices in the industry. As noted, some comments raised concerns that 
some ``customary practices in the industry'' may also be unlawful 
preferences or advantages. Thus, comments have raised concerns which, 
after careful consideration, justify modification of the rule. 
Accordingly, based on consideration of comments, AMS revised proposed 
criterion (d) by deleting the phrase, ``customary in the industry,'' 
and providing that criterion (d) read, ``whether the preference or 
advantage cannot be justified as a reasonable business decision.''
    Comment: Many comments advocated removing criterion (d) entirely 
from the proposed regulation, arguing that both ``reasonable'' and 
``customary'' are subjective. Comments claimed application of criterion 
(d) would allow the Secretary to permit anticompetitive behavior of the 
type the Act was intended to prevent. Comments said AMS should instead 
adopt stronger rules that would fulfill Congress's intent to curb 
anticompetitive practices.
    AMS response: As explained above, AMS believes reasonableness is an 
objective measure with timeless application to the determination of 
whether a preference or advantage might be undue or unreasonable and a 
violation of the Act. Under this objective standard, what is reasonable 
does not rely on the intent of the individual. An objective legal 
standard ``is based on conduct and perceptions external to a particular 
person.'' \4\ Thus a ``reasonable-person standard'' is objective 
because it does not require a determination of what the regulated 
entity thinks. We removed the phrase ``customary in the industry'' from 
the language of criterion (d), and believe that change is sufficient to 
make the criterion a useful tool for the Secretary's determinations. 
Accordingly, we made no further changes to the rule as proposed based 
on these comments.
---------------------------------------------------------------------------

    \4\ STANDARD, Black's Law Dictionary (11th ed. 2019).
---------------------------------------------------------------------------

Additional Criteria for Consideration

    A few comments suggested additional criteria the Secretary should 
consider when determining whether certain actions are violations of 
section 202(b) of the Act.
    Comment: One comment suggested the Secretary consider the relative 
bargaining power of the parties involved in a dispute about an alleged 
violation. The comment gave the example of a poultry grower with five-
year-old chicken houses trying to negotiate a contract with a party who 
knows the grower has no other real options. The comment said this 
situation does not allow for true freedom of negotiation, and 
provisions should be developed to protect against the imbalance.
    AMS response: The example the commenter provides appears to 
illustrate a possible undue or unreasonable disadvantage imposed on the 
poultry grower. That is, poultry growers lack the economic resources to 
demand higher value for their work, and they are at a disadvantage. 
When they negotiate, they may receive a lower price under their 
contract. The relative strength of their bargaining power is a distinct 
disadvantage, leading to unfavorable terms to the poultry grower. The 
relative strength of bargaining power may be an additional factor to 
consider for a given preference or advantage, but, as the commenter's 
example illustrates, preferences or advantages are unlikely to result 
from the bargaining disparities between poultry growers and live 
poultry dealers. This rule is limited in scope to addressing undue or 
unreasonable preferences or advantages. Accordingly, AMS is making no 
changes to the rule as proposed based on this comment.
    Comment: Another comment recommended addition of a fifth criterion 
(e) and proposed the Secretary consider whether an apparent preference 
or advantage ``cannot be justified as needed to address a natural 
disaster or military necessity, such as but not limited to an emergency 
for which the Federal government has invoked its authority in relation 
to food supplies under the Stafford Act or the Defense Production 
Act.'' The comment explained that packers, swine contractors, and live 
poultry dealers might be required to award preferential contracts to 
certain farmers or localities

[[Page 79787]]

to address emergencies such as natural disasters or military 
necessities. The comment suggested that without the recommended 
language, entities might hesitate to forge such contracts, despite the 
proposed rule's provision that other factors besides the four listed 
criteria could be considered.
    AMS response: The commenter's suggestion of a fifth criterion (e) 
is appreciated and provides an example of a situation in which the 
Secretary's consideration of criteria should not be limited only to the 
four criteria set forth in the rule. Natural disasters and other 
emergencies would likely create situations in which a packer, swine 
contractor, or live poultry dealer may give a lawful preference or 
advantage to one producer as compared to another. A preference given in 
response to an Executive Order may also apply in these situations. 
While these are instances in which the Secretary would carefully 
examine the facts to determine whether a preference is undue or 
unreasonable, it is not necessary to explicitly include a criterion for 
this conduct. Accordingly, AMS is making no changes to the rule as 
proposed based on the comment.
    Comment: Some comments encouraged AMS to include as criteria for 
the Secretary's consideration whether the alleged preference or 
advantage given to certain farmers reflects retaliation or racial 
discrimination against others; reflects unreasonable reductions in 
payments based on tournament incentive systems or other payment 
arrangements where the company, rather than the farmer, controls inputs 
that factor into the farmer's pay; or reflects unreasonable 
``sweetheart'' deals given by companies to some farmers and ranchers to 
the disadvantage of others.
    AMS response: Existing law prohibits retaliation and racial 
discrimination.\5\ Issues of retaliation and racial discrimination 
typically would arise in complaints of undue or unreasonable prejudices 
or disadvantages. This rule is limited in scope to addressing undue or 
unreasonable preferences or advantages. AMS acknowledges, however, that 
retaliation and racial discrimination can be factors in cases of 
preferential treatment. Such conduct would also be considered by the 
Secretary under the broad authority granted by the Act when determining 
whether a preference is undue or unreasonable but need not be 
explicitly set forth in the rule. Accordingly, AMS is making no changes 
to the rule as proposed based on these comments.
---------------------------------------------------------------------------

    \5\ See, e.g., Agricultural Fair Practices Act of 1967, 7 U.S.C. 
2301-2036; Civil Rights Act of 1964, 42 U.S.C. 2000e-2000e-17.
---------------------------------------------------------------------------

    Comment: Several comments stated that there are important 
differences between the marketing arrangements and structures of the 
cattle, swine, and poultry industries and that, where appropriate, 
separate criteria should be developed to account for these differences.
    AMS response: The prohibitions of section 202 of the P&S Act apply 
to packers, swine contractors and live poultry dealers. The law does 
not specify prohibitions that apply only to cattle, or swine, or 
poultry. AMS proposed broad criteria that can apply across all segments 
of the livestock and poultry industries. If a behavior specific to only 
one segment of the livestock or poultry industry is unlawful, it will 
likely fit within one of the criteria set forth in this final rule. 
Criteria describing specific behaviors were not proposed as they could 
be viewed as limiting the Secretary's ability to enforce this 
regulation. Maintaining broadly written criteria also provides 
sufficient flexibility to easily adapt to changing technology and 
business practices used across the industry. Accordingly, no changes 
were made to the proposed rule based on the comments.

Other Recommended Modifications to the Proposed Rule

    A number of comments recommended modifications to the proposed 
rule. Many comments referred to USDA's previous rulemaking efforts to 
establish the mandated criteria for considering alleged violations of 
Sec.  202(b) of the Act and recommended proposed provisions from 
earlier attempts be reintroduced. Several comments addressed perceived 
inadequacies in the current regulations and enforcement of the Act.
    Comment: Numerous comments called for the addition of specific 
protections for farmers, including ranchers and growers, and provided 
examples of the types of protection they sought. Comments asked for 
protection that would allow farmers to file complaints, identify 
wrongdoing, speak with the media and elected officials, and form and 
join farmer associations without the threat of retaliation. Comments 
asked for protection against discrimination of any kind, including 
national origin, sex, race, religion, disability, political beliefs, 
marital or family status, or any other protected category. Comments 
said the proposed rule does not provide that protection, despite there 
being several documented cases of discrimination in the industry. 
Several comments asked that the rule include detailed, specific 
protections for contract poultry and livestock producers that apply to 
all forms of poultry and livestock, that are suitable for the future of 
the industry, are enforceable, and provide for real consequences for 
violations of section 202(b) of the Act.
    AMS response: Congress directed the Secretary in the 2008 Farm Bill 
to establish criteria to guide the Secretary's consideration of facts 
in determining whether an apparent preference or advantage is undue or 
unreasonable and a violation of the Act. Protection against some of the 
unfair and discriminatory practices described by commenters is afforded 
under existing laws and under other provisions of the P&S 
regulations.\6\ Farmers have the right to file complaints regarding 
wrongdoing, speak with media and elected officials, and form and join 
farmer associations. If retaliation occurs, there is likely 
discrimination, which may be unlawful under the P&S Act or other laws. 
While this rule cannot specify protections for every grievance 
suggested by comments, AMS believes the establishment of the criteria 
in this rule serves broadly as protection for industry members and 
others who may be subjected to undue or unreasonable preferences in 
violation of the Act. Accordingly, no changes were made to the proposed 
rule based on these comments.
---------------------------------------------------------------------------

    \6\ See, e.g., Packers and Stockyards Act, 9 U.S.C. 192(a)-(g); 
7 CFR 201.216-201.218; 7 CFR 203.12 (policy statement); Agricultural 
Fair Practices Act of 1967, 7 U.S.C. 2301-2036; Civil Rights Act of 
1964, 42 U.S.C. 2000e-2000e-17; Sherman Act, 15 U.S.C. 1-7; Clayton 
Antitrust Act, 15 U.S.C. 12-27, 29 U.S.C. 52-53.
---------------------------------------------------------------------------

    Comment: Comments asked that the rule require contract prices to be 
based on clear, transparent, and predictable standards. Comments said 
prices should not be based on inputs the packing or processing company 
provides that may dictate the health of animals or the quality of feed. 
Comments also called for enforcement of fair pricing systems that don't 
involve price fixing or collusion. Other comments said that poultry 
integrators should be required to communicate clearly to all their 
contracted growers about actions that appear to be, but are not, undue 
preferences, such as the examples provided in the proposed rule's 
preamble. Comments further recommended that this communication be 
required at the time of signing contracts between growers and 
integrators and in routinely updated communications from the integrator 
to all the growers under contract with that integrator.
    AMS response: Comments appear to suggest that live poultry dealers 
should

[[Page 79788]]

be required to discuss with poultry growers information about the 
business of other poultry growers. This rule does not require that 
confidential business information of some poultry growers be shared 
with other poultry growers. P&S regulations currently require that live 
poultry dealers furnish growers with a copy of their contract and all 
applicable terms.\7\ Live poultry dealers must also provide settlement 
sheets and all information and supporting documents needed to compute 
payment. This rule does not change these existing disclosure 
requirements. Accordingly, no changes were made to the rule as proposed 
based on these comments.
---------------------------------------------------------------------------

    \7\ 9 CFR 201.100.
---------------------------------------------------------------------------

    Comment: Some comments suggested the proposed rule could be 
improved by the addition of implementation and enforcement methods. One 
comment suggested that the proposed rule include a methodology for the 
determination process the Secretary would employ prior to considering 
whether the allegedly undue or unreasonable preference or advantage 
meets the proposed criteria. According to the commenter, establishing 
such a methodology would provide a more standardized structure and make 
the process less subjective. Other comments asked AMS to establish 
methods to continuously review and monitor industry practices to ensure 
new practices are not evolving that would circumvent the purposes of 
the Act.
    AMS response: The suggestions to establish implementation and 
enforcement methods have merit, but do not address the establishment of 
criteria for the determination of whether and are therefore outside the 
scope of this rule. The Act sets forth the Secretary's investigative 
and enforcement authority over packers, swine contractors, and live 
poultry dealers. These powers and procedures establish the methodology 
to be followed in applying the criteria. Accordingly, no changes were 
made to the proposed rule based on these comments.
    Comment: One comment suggested the rule could be improved by 
codifying the need to show competitive harm, and the comment provided 
regulatory applicability language for such a provision. The comment's 
recommended language would require the Secretary to find that the 
challenged conduct or action lacks a legitimate business justification 
and harms--or is likely to harm--competition to bring a claim under 
sections 202(a) and (b) of the Act.
    AMS response: Several, but not all, U.S. Circuit Courts of Appeal 
have established case precedent requiring a showing of harm to 
competition.\8\ For that reason, USDA previously withdrew the December 
2016 interim final rule that would have codified that harm to 
competition is not required to prove a violation. Given the history and 
conflicting opinions on this topic, AMS does not believe that this 
rulemaking is the appropriate avenue for interpreting the statute's 
intent. Accordingly, AMS is making no changes to the rule as proposed 
based on this comment.
---------------------------------------------------------------------------

    \8\ For courts ruling that 202(b) cases require a showing of 
harm to competition for violations see Wheeler v. Pilgrim's Pride 
Corp., 591 F.3d 355 (5th Cir. 2009)(sections 202(a) and (b) of the 
P&S Act) and Terry v. Tyson Farms, Inc., 604 F.3d 272 (6th Cir. 
2010)(sections 202(a) and (b) of the P&S Act).
---------------------------------------------------------------------------

    Comment: Another comment suggested the proposed rule could be 
improved by first distinguishing between preferences, advantages, 
prejudices, and disadvantages; and second by defining what would be 
considered undue or unreasonable versions of each.
    AMS response: The terms ``preferences'' and ``advantages'' have 
already been defined by the Judicial Officer. Giving an advantage to 
any person and not to other similarly situated persons is making or 
giving a preference. Conferring a benefit on any person and not on all 
similarly situated persons is making or giving an advantage. (See In 
Re: IBP, Inc., 57 Agric. Dec. 1353 (July 31, 1998)). Thus, AMS finds it 
unnecessary to codify those definitions in the rule. Accordingly, AMS 
is making no changes to the rule as proposed based on the comments.
    Comment: Several comments said that AMS should not finalize this 
rule but should instead adopt provisions from prior rules. This 
included two rules GIPSA published in December 2016 (81 FR 92703 and 81 
FR 92723, December 20, 2016). One comment characterized the 2016 rules 
as making progress toward an antitrust framework that would protect 
farmers. One comment recommended restoring provisions from the June 
2010 proposed rule. Comments preferred provisions from all those rules 
that would have formally established that proof of actual or likely 
competitive harm is not needed for violations of section 202(b); 
created lists of ``per se'' and likely violations of the Act (such as 
attempted delays of payment and ``hold-up'' scenarios, respectively); 
established that any conduct which harms or likely harms competition is 
a violation of the Act; and provided more specific, grounded criteria 
for evaluating violations of section 202(b), including whether a grower 
is treated fairly as compared to other similarly situated growers who 
have engaged in lawful assertion of their rights, or is treated 
differently due to arbitrary reasons unrelated to the grower's 
livestock or poultry operation. Comments claim that the provisions of 
those rules would better address the current competitive imbalance in 
the market.
    Comments asked that many different provisions of the prior rules be 
incorporated into this rule. Comments asked for explicit prohibition 
against the use of tournament incentive system. Some comments also 
urged a ban on packer ownership of livestock, which is currently 
permitted. Comments also said that certain cattle procurement 
agreements, when offered selectively to some cattle sellers and not 
others, should be identified as per se violations of section 202(b) of 
the Act. Other comments listed specific conduct that commenters believe 
should be considered per se violations of the Act and recommended they 
be added to the regulations.
    One comment recommended USDA republish for public comment a 
petition submitted to GIPSA in 1996 calling for rules to restrict 
certain procurement practices in the meat packing industry.\9\ 
According to the comment, the petition's proposal would better define 
undue preference in live cattle markets, facilitate reestablishing 
price discovery for domestic and import markets, and lessen the pending 
threat of beef plant closures and the corresponding loss of good paying 
jobs.
---------------------------------------------------------------------------

    \9\ Filing of a Petition for Rulemaking: Packer Livestock 
Procurement Practices; 62 FR 1845, published January 14, 1997.
---------------------------------------------------------------------------

    AMS response: The prior rulemakings referenced in these comments 
contained greater breadth of rulemaking and proposed a number of 
prohibited acts. This rule does not have the same breadth as those 
previous rules. Nor does this rule expand on earlier rulemaking. As 
explained in the proposed rule, this rule represents a fresh start at 
fulfilling the 2008 Farm Bill mandate to establish criteria to consider 
when determining whether conduct makes or gives an undue or 
unreasonable preference or advantage. The criteria established in this 
rule can be applied across a wide range of behaviors and meets the 2008 
Farm Bill mandate.
    Further, some of the examples of prohibited behaviors comments 
cited from abandoned rulemaking would be examples of undue or 
unreasonable prejudices or disadvantages, rather than preferences or 
advantages, and are therefore outside the scope of this rule.

[[Page 79789]]

Accordingly, AMS is making no changes to the rule as proposed based on 
these comments.
    Comment: Some comments recommended that the examples of potentially 
undue or unreasonable preferences or advantages given in the proposed 
rule's preamble be codified as explicit violations of section 202(b). 
Comments explained that doing so would help bring the proposed criteria 
into line with the purpose of the Act and the 2008 Farm Bill mandate 
from Congress. Comments cited examples of premiums offered to one 
person or locality but not offered to similarly situated other persons 
or localities, livestock packers negotiating preferential live basis 
prices with only one favored livestock supplier and not with similarly 
situated suppliers, and live poultry dealers offering a higher base 
price to a favored grower but not to other growers in the same complex 
with the same housing types.
    AMS response: As explained in an earlier comment response, AMS has 
chosen not to codify a list of per se violations because we believe 
that narrow examples cannot possibly encompass all of the situations 
that might result in an undue or unreasonable preference or advantage. 
The purpose of the regulation is to provide criteria that are broad 
enough to cover a majority of the types of conduct that could be 
violations of the Act. Further, AMS believes the criteria established 
in this rule are aligned with the purposes of the Act and the 2008 Farm 
Bill mandate because they provide the framework the Secretary will use 
when examining the facts of wide-ranging types of conduct within the 
livestock, meat, and poultry industries. Accordingly, no changes were 
made to the proposed rule based on these comments.

Competitive Harm

    Many comments addressed the notion of competitive harm and whether 
proof of such harm or likelihood of such harm is required to bring 
claims of violation of section 202(b) of the Act. Past findings in the 
Fifth, Sixth, Tenth, and Eleventh Circuits have held that under the Act 
plaintiffs must show competition, and not just an individual, is or is 
likely to be injured through preferences or advantages given to certain 
individuals or localities.\10\ Other Circuits that are often cited for 
the proposition--in the Fourth, Seventh, Eighth, and Ninth Circuits--
did not go so far. For example, courts in those circuits have agreed 
with USDA that certain violations of the Packers and Stockyards Act are 
``unfair practices'' because those practices harm competition, or 
courts have opined on whether a specific practice would require harm to 
competition.\11\ In past rulemaking efforts to establish the mandated 
criteria, USDA reiterated its position that harm to competition is not 
required in all cases under the Packers and Stockyards Act. AMS 
explained in the preamble of the current proposed rule that this 
rulemaking is independent of previous rulemaking efforts to establish 
the mandated criteria to guide determinations about undue and 
unreasonable preferences and advantages under the Act and did not make 
a policy statement about competitive harm.
---------------------------------------------------------------------------

    \10\ London v. Fieldale Farms Corp., 410 F.3d 1295 (11th Cir. 
2005) (section 202(a) of the P&S Act); Been v. O.K. Indus., Inc., 
495 F.3d 1217 (10th Cir. 2007) (section 202(a) of the P&S Act); 
Wheeler v. Pilgrim's Pride Corp., 591 F.3d 355 (5th Cir. 2009) 
(sections 202(a) and (b) of the P&S Act); Terry v. Tyson Farms, 
Inc., 604 F.3d 272 (6th Cir. 2010)(sections 202(a) and (b) of the 
P&S Act).
    \11\ De Jong Packing Co. v. U.S. Dep't of Agric., 618 F.2d 1329 
(9th Cir. 1980) (agreeing with USDA that conspiracy to fix 
``subject'' term in bidding is harmful to competition); IBP, Inc. v. 
Glickman, 187 F.3d 974 (8th Cir. 1999) (agreeing with USDA on rights 
of first refusal can harm to competition); Philson v. Goldsboro Mill 
Co., 164 F.3d 625, Nos. 96-2542, 96-2631, 1998 WL 709324 (4th Cir. 
Oct. 5, 1998) (finding retaliation requires a showing of likelihood 
of harm to competition); Jackson v. Swift Eckrich, Inc., 53 F.3d 
1452 (8th Cir. 1995) (finding that while allegations disparate 
contracting requires a showing of harm to competition, breach of 
contract and fraud claims under the Packers and Stockyards Act did 
not require harm to competition).
---------------------------------------------------------------------------

    Comments: Comments from the meat production, livestock production, 
and poultry segments of the industry expressed concern that AMS did not 
take a position on competitive harm in the proposed rule. Comments 
representing the interests of some livestock producers and poultry 
growers advocated clarifying that plaintiffs do not have to prove 
competitive harm to the entire industry to bring a case claiming undue 
and unreasonable practices. Comments said the burden of proof against 
large companies is too high for most farmers and that companies should 
not be allowed to continue unlawful practices just because a farmer 
cannot show harm to the entire industry.
    One comment said it seems false to state in the proposed rule that 
AMS does not intend to create criteria that conflict with case 
precedent, when case precedent is mixed on the issue of the need to 
show competitive harm. The comment suggests AMS is apparently siding 
with the approach that requires demonstration of competitive harm to 
the entire industry. The comment perceived the proposed rule to be an 
unprecedented failure because it did not address the issue of 
competitive harm.
    Comments asserted USDA has the authority and responsibility to 
issue rules for enforcing the Act that may conflict with court 
precedent under the Supreme Court doctrine of Chevron deference. 
According to comments, by not affirming in the proposed rule its 
historic position that a violation of section 202(b) may occur in some 
circumstances without a showing of competitive injury or likelihood of 
competitive injury, USDA could set a precedent that undermines its own 
policymaking power and codifies what commenters called judicial 
overreach and novel interpretation of the Act that contradicts the will 
of Congress. Thus, according to comments, the proposed rule leaves the 
Act largely unenforceable for individual farmers and ranchers.
    One comment questioned AMS's refusal to adhere to its historic 
position on competitive harm and cited the October 2017 withdrawal of 
the December 2016 interim final rule on the Scope of Sections 202(a) 
and (b) of the Packers and Stockyards Act, which said: ``Contrary to 
comments that GIPSA failed to show that USDA's interpretation was 
longstanding, USDA has adhered to this interpretation of the P&S Act 
for decades. DOJ has filed amicus briefs with several federal appellate 
courts arguing against the need to show the likelihood of competitive 
harm for all violations of 7 U.S.C. 192(a) and (b).'' One comment said 
Congress has not amended section 202(b), so there is no apparent 
justification for USDA's refusal to assert its longstanding 
interpretation regarding the statute. Another said by not affirming its 
historic policy on competitive harm AMS is dismissing the possibility 
of industry reform and violating the intent of the Act.
    Comments representing packers, swine contractors, and live poultry 
dealers disagreed with farmer comments and said the proposed rule must 
clarify that plaintiffs should be required to prove competitive injury 
across the industry to bring a claim of undue or unreasonable 
preference or advantage and violation under the Act. Comments argued 
that failure to recognize case precedent on competitive harm, in 
conjunction with the ``plus other criteria'' approach in the proposed 
rule, could create uncertainty about whether certain preferences or 
advantages are justifiable under the law and subject the industry to 
needless, costly lawsuits.

[[Page 79790]]

    Comments argued that while Congress intended with the Act to combat 
restraints on trade and promote healthy competition in the livestock 
industry, it did not intend to discourage what comments called regular, 
healthy business competition. Comments referenced findings under other 
antitrust laws to assert that under the Act, alleged violations of 
sections 202(a) and (b) must show antitrust injury, which requires 
proof that competition as a whole was harmed by the defendant's 
conduct. Comments urged AMS to interpret sections 202(a) and (b) as 
requiring proof of actual or likely harm to competition to reinforce 
the Act's purpose, which according to comments is to protect 
competition in the industry.
    One comment recommended AMS address both sections 202 (a) and (b) 
when discussing injury to competition because, according to the 
comment, both are rooted in antitrust jurisprudence and both require 
injury to competition as a prerequisite to establishing a violation. 
According to the comment, addressing injury to competition in the 
context of only section 202(b) risks creating unnecessary confusion 
about the interpretation of section 202(a).
    AMS response: Given the history and conflicting opinions on this 
topic, AMS does not believe this rulemaking on preferences and 
advantages is the appropriate avenue for interpreting the statute's 
intent with respect to all portions of sections 202(a) and (b) of the 
Act.
    The 2008 Farm Bill requires the Secretary to establish criteria to 
consider when determining if conduct is an undue or unreasonable 
preference or advantage. The criteria the Secretary establishes through 
the rulemaking are not exclusive, and pertain only to part of section 
202(b) of the Act, which also prohibits undue or unreasonable 
prejudices and disadvantages. Whether competitive injury is required to 
establish a violation of the Act is a broader question applicable to 
the full provisions of sections 202(a) and 202(b) and is therefore 
outside the narrow scope of this rule. Accordingly, AMS is making no 
changes to the rule as proposed based on these comments.

Starting Over

    Comment: Several comments urged AMS to abandon the proposed rule 
and start the rulemaking process all over. Comments claimed the 
proposed rule is inadequate and fails to meet the Congressional mandate 
to provide clear criteria for determining whether certain conduct or 
actions would be violations of section 202(b) of the Act. Other 
comments said the proposed rule failed to incorporate recommendations 
submitted in a June 2019 letter to AMS by associations representing 
farmers' interests and recommendations in a July 2019 letter to USDA 
from 17 members of Congress, both of which advocated stronger 
protections for farmers. Still other comments said the proposed rule 
does nothing more than fulfil a congressional mandate, while 
maintaining the status quo.
    Some comments said AMS should start over because the proposed rule 
reduces and eliminates competition, facilitates corporate abuse of 
concentrated and predatory market power, invites collusion, and allows 
manipulation of live cattle prices.
    One comment said the proposed rule was well intentioned, but does 
not accurately reflect needed modernization changes and improvements 
within the packers and stockyards industry. The comment urged USDA to 
withdraw the proposed rule and convene a livestock industry stakeholder 
summit to outline a course of action.
    AMS response: The purpose of the rule is to provide criteria that 
are broad enough to cover a majority of the types of conduct that could 
be found in violation of the Act. It is not the intention of the agency 
to set forth a laundry list of examples, as many of the commenters 
suggest, but rather to establish criteria the Secretary will consider 
when examining the facts of wide-ranging types of conduct within the 
livestock, meat, and poultry industries. AMS is committed to finalizing 
the rule as required by the 2008 Farm Bill mandate to establish such 
criteria and fulfilling USDA's commitment to the Court to complete the 
rulemaking expeditiously. Therefore, AMS is neither withdrawing nor 
making changes to the rule as proposed based on these comments.

Additional Concerns Raised by Comments

    Comment: Numerous comments expressed doubt that the proposed rule 
would remedy what they identified as serious problems in the livestock 
and poultry industry. Comments said farmers have little market power in 
dealings with large meat packing and poultry processing companies. 
Comments described what they called systematic discrimination and 
unchecked abusive treatment of farmers. Comments provided data 
demonstrating declines in farm prices that are not reflected in 
consumer prices, and they warned that the demise of small and family 
farms threatens U.S. food security, the economic health of rural 
communities, and the environment. Comments claimed finally that USDA 
does not act in the interest of small farmers.
    AMS response: AMS appreciates the comments that expressed these 
concerns. Moreover, AMS understands the struggles farmers face across 
the U.S. Some of the concerns raised could be the result of preferences 
or advantages given by packers, swine contractors or live poultry 
dealers. Whether those preferences or advantages are undue or 
unreasonable is for the Secretary to determine utilizing the criteria 
set forth in this rule. The criteria are written broadly to cover wide 
ranging behaviors in the industry, including some of those identified 
by commenters, rather than narrowly addressing specific conduct. Some 
other concerns raised by the commenters are outside the scope of the 
Packers and Stockyards Act. AMS encourages commenters to continue the 
dialogue with USDA on these important issues so that together we can 
make improvements.

Regulatory and Economic Impact Analysis

    Comment: Several comments addressed the regulatory impact analysis 
included (RIA) in the proposed rule. Most of those comments concerned 
statements in the analysis that some found contradictory. Comments 
asserted the RIA's cost-benefit analysis shows that the rule will have 
no meaningful impact on the anti-competitive and improper practices 
that are already in place. According to comments, the statement that 
AMS does not expect the proposed rule to result in a decrease in the 
use of alternative marketing agreements (AMAs), poultry tournament 
systems, or other incentive payment systems; or decreased economic 
efficiencies in the cattle, hog, and poultry industries shows that the 
proposed rule is essentially toothless. Comments argued that the Act 
was not intended to maximize economic efficiencies, but to provide for 
a fair, competitive marketplace by preventing abuses by large, 
supposedly ``efficient'' entities. One comment asserted that if AMS 
does not expect the proposed rule to change anything about the current 
state of the market nor give farmers any more protection than they 
currently have, the total cost to industry of this rule is effectively 
zero and the cost-benefit analysis in the final rule should reflect 
this.
    AMS response: AMS believes the rule will have a meaningful impact 
on anti-competitive practices that may exist in the industry. Although 
the cost benefit

[[Page 79791]]

analysis in the proposed rule did not quantify projected benefits, it 
provided qualitative descriptions of the types of benefits expected 
from establishment of the proposed rule, such as improved parity of 
negotiating power between contracting parties with a clearer understand 
of what constitutes an undue or unreasonable preference or advantage 
under the Act.
    The rule is not intended to dictate to industry the types of 
marketing arrangements employed. Understanding how the Secretary will 
evaluate allegations of violations of section 202(b) of the Act should 
induce packers, live poultry dealers, and swine contractors to 
reevaluate--and adjust if necessary--marketing agreements to make sure 
they comply with the law.
    Even though the number and type of marketing agreements may not 
change because of the rule, this rule, like most rules, is expected to 
generate some costs. As explained in the RIA, most of the estimated 
costs for the final rule are associated with reviewing and, if 
necessary, adjusting contracts to make certain they comply with the 
rule.
    Finally, AMS would like to distinguish operational efficiency of a 
firm from market efficiency. The operational efficiency of a firm 
improves when it can produce a good or service at a lower cost. A 
characteristic of market efficiency, on the other hand, is that the 
prices of goods or services represent unbiased indicators of their 
value to consumers and society, and contribute to the public benefit. 
The most efficient firm operations do not always lead to the most 
efficient markets. For example, industries in which unit costs 
continually decline with increased scale, such as water and electric 
utilities are considered natural monopolies. The firm that emerges as 
the monopolist in those industries will be the most operationally 
efficient, but if left unregulated, would be able to exploit its market 
power, for example by restricting output and charging a higher price. 
AMS believes this rule does not impede operational efficiency of the 
regulated firms, but does inhibit practices that could reduce market 
efficiency. Market efficiency, therefore, should be considered when 
evaluating the costs and benefits of this regulation.
    AMS is making no changes to the rule or the RIA as proposed based 
on these comments.
    Comment: One comment expressed concern with two statements in the 
regulatory impact analysis. The first projects that the proposed rule 
may lead to increased litigation costs to test case precedents 
regarding violations of the Act. The second states that AMS does not 
intend to create criteria that conflict with case precedent. The 
comment asked why, if the latter is true, did AMS not reduce confusion 
and the need for further litigation and affirmatively state the need to 
prove competitive harm in the regulation. Comments suggested that 
reinforcing the need to demonstrate injury or likely injury to 
competition would eliminate much of the precedent-confirming litigation 
that AMS anticipates flowing from the final rule, which in turn would 
significantly reduce the anticipated costs of the rule.
    AMS response: This rule is intended to establish criteria the 
Secretary will consider when determining whether conduct is an undue or 
unreasonable preference or advantage. Whether competitive injury is 
required for a violation of sections 202(a) or 202(b) of the Act is 
beyond the narrow scope of this rule. Additionally, as explained 
earlier, the criteria in this rule pertain to the Secretary's 
evaluations of alleged misconduct and not to those of the courts. Even 
if AMS were to state a position on the need to show competitive harm, 
it would do little to limit litigation, as those opposing that position 
would likely challenge it in the courts. Thus, it is anticipated that 
litigation costs will increase initially as market participants--who 
choose to do so--test the provisions of the new regulation in court. 
Accordingly, AMS is making no changes to the rule as proposed based on 
the comment.
    Comment: One comment questioned the claim in the RIA that the 
proposed rule would ``increase the amount of relevant information 
available to market participants and offset any potential abuse of 
buyer-side market power by clearly stating to all contracting parties'' 
the criteria for violations. The comment says it is not clear what 
basis AMS has to make this claim if all potential violations can be 
justified by cost savings, and no current customary practices across 
the industry will be considered a violation.
    AMS response: AMS believes that establishment of the criteria in 
this rule will provide clearer information to market participants about 
how the Secretary will evaluate allegations of misconduct under section 
202(b) of the Act. AMS anticipates that as producers and growers become 
aware of this information, they will be better able to negotiate fair 
contract terms with packers, contractors, and integrators considered to 
wield greater market power. AMS disagrees with the comment's conclusion 
that all potential violations can be justified by cost savings and that 
no currently customary practices will be considered violations. In 
fact, this rule gives the Secretary flexibility to consider multiple 
factors other than cost savings to determine whether a preference or 
advantage is undue or unreasonable. Removal of the ``customary in the 
industry'' clause from proposed criterion (d) also clarifies that the 
Secretary can make determinations about industry decisions and 
practices based on their reasonableness and not on whether they are 
widely adopted. AMS is making no changes to the rule as proposed based 
on this comment.

Miscellaneous Comments

    Comment: One comment argued that the Secretary of Agriculture and 
those appointed by the Secretary should not act as judges in matters of 
law and that allegations of violations of the Act should only be tried 
in courts of law.
    AMS response: The Act clearly establishes that the Secretary has 
authority to enforce administratively violations of section 202(b) 
against packers and swine contractors. Congress granted the Secretary 
authority to investigate persons subject to the Act and provided for 
administrative enforcement of violations. Changing these authorities is 
beyond the scope of this rule. Accordingly, AMS is making no changes to 
the rule as proposed based on the comment.
    Comment: Once comment interpreted the RIA's statement that it is 
not the purpose of the Act to interfere with contract negotiations or 
to upset the traditional principles of freedom of contract to mean that 
the proposed rule is not expected to decrease the use of differing 
contracting structures, such as the incentive-based contracting 
arrangements often used in the poultry industry. The comment said it is 
crucial that the proposed rule not disrupt the existing contracting 
structures commonly used by the industry, and that any preferences or 
advantages arising from the use of these types of arrangements be 
evaluated first on whether they cause injury or likely injury to 
competition, and second based on the four criteria in the proposed 
rule.
    AMS response: As explained in earlier comment responses, AMS does 
not intend the rule to promote or prohibit any particular types of 
contracting arrangements. This rule is intended only to establish 
criteria the Secretary will consider when determining if a preference 
or advantage is undue or unreasonable. Whether competitive injury is 
required to prove a violation is a concept broader than the narrow 
focus of this rule. Accordingly, AMS is making no changes to the rule 
as proposed based on the comment.

[[Page 79792]]

Required Impact Analyses

Executive Orders 12866, 13563, and 13771 and the Regulatory Impact 
Analysis

    AMS is issuing this rule in conformance with Executive Orders 12866 
and 13563, which direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits, including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity. Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, reducing costs, 
harmonizing rules, and promoting flexibility.
    In the development of this rule, AMS determined to take a different 
approach to developing the necessary criteria than had been taken in 
previous rulemaking efforts. AMS determined that including the criteria 
as part of the framework for consideration of preferences and 
advantages in buyer-seller contracts would best serve the needs of the 
industry and fulfill the 2008 Farm Bill mandate. AMS expects the new 
regulation to bring transparency to considerations of potential 
violations of sections 202(b) of the Act and certainty to industry 
members forging contracts related to the buying and selling of poultry 
and livestock. The rule is not expected to provide any environmental, 
public health, or safety benefits.
    This rule has been determined to be significant for the purposes of 
Executive Order 12866 and therefore has been reviewed by OMB. This rule 
has also been determined to be an Executive Order 13771 regulatory 
action. Details on the estimated costs of this final rule can be found 
in the rule's economic analysis.
    AMS is adding a new Sec.  201.211, which provides four criteria in 
response to requirements of the 2008 Farm Bill for the Secretary of 
Agriculture to consider in determining whether a packer, swine 
contractor, or live poultry dealer has engaged in conduct resulting in 
an undue preference or advantage to any particular person or locality 
in any respect in violation of section 202(b) of the Act. Based on its 
familiarity with the industry, PSD prepared an economic analysis of new 
Sec.  201.211 as part of the regulatory process. The economic analysis 
presents the cost-benefit analysis of implementing Sec.  201.211. PSD 
then discusses the impact on small businesses.
    This rule is independent of previous rulemaking. PSD reviewed 
certain cost projections developed in conjunction with previous 
rulemaking in analyzing the regulatory impact of this final rule. All 
costs and benefits described in this economic analysis pertain to the 
language in this final rule.

Regulatory Impact Analysis

    The 2008 Farm Bill requires the Secretary of Agriculture to 
promulgate a regulation establishing criteria that the Secretary will 
consider in determining whether an undue or unreasonable preference or 
advantage has occurred in violation of section 202(b) of the Act. This 
rulemaking fulfills that requirement.
    Responsibility for establishing the required criteria was 
originally delegated to the Grain Inspection, Packers and Stockyards 
Administration (GIPSA), which subsequently merged with AMS. AMS now 
administers the regulations under the Act and has undertaken this 
rulemaking.
    For this economic analysis, PSD considered the impact of three 
alternatives for this rule. PSD considered the impact of maintaining 
the status quo, the impact of adopting regulatory language that had 
been proposed in 2016, and the impact of adopting the language in this 
final rule.
    PSD considered the impact of taking no further action on a previous 
version of Sec.  201.211 GIPSA \12\ had proposed on December 20, 
2016.\13\ GIPSA subsequently provided notice in the Federal Register on 
October 18, 2017,\14\ that it would take no further action on the 2016 
proposed rule. Taking no further action would result in no additional 
out-of-pocket costs to businesses in the livestock and poultry 
industries but that action would not fulfill the requirements of the 
2008 Farm Bill.
---------------------------------------------------------------------------

    \12\ On November 14, 2017, Secretary of Agriculture, Sonny 
Perdue, issued a memorandum eliminating GIPSA as a standalone agency 
and transferred the regulatory authority for the Act to AMS. PSD has 
day-to-day oversight of the Packers and Stockyards activities in 
AMS.
    \13\ Federal Register, Volume 81, No. 244, pages 92703-92723.
    \14\ Federal Register, Volume 82, No. 200, pages 48603-48604.
---------------------------------------------------------------------------

    AMS could have proposed the same regulatory language as in the 2016 
proposed rule. The 2016 proposed rule contained six criteria the 
Secretary would consider in determining whether conduct or action 
constitutes an undue or unreasonable preference or advantage and a 
violation of section 202(b) of the Act. To determine the impact of 
adopting the 2016 proposed rule, PSD looked to the estimated costs of 
the 2016 rule as described in that rule's economic analysis, which was 
provided in the 2016 notice of proposed rulemaking. The total first 
year costs of the 2016 proposed rule were projected to be $15.37 
million.
    This current rulemaking represents a different approach than used 
in previous rulemakings and establishes an analytical framework for 
considering whether a violation of section 202(b) of the Act has 
occurred. The final rule includes new criteria to bring transparency to 
the determination process for the industry. PSD estimates that the 
total first year costs of this rule are $9.67 million.
Introduction
    As required by the 2008 Farm Bill, Sec.  201.211 specifies criteria 
the Secretary will consider when determining whether an undue or 
unreasonable preference or advantage has occurred in violation of 
section 202(b) of the Act. The criteria provide a framework to analyze 
whether a particular person or locality receives an undue or 
unreasonable preference or advantage as compared to other similarly 
situated persons or localities. AMS expects the four criteria to 
clarify the legal standard for the public, promote honest competition 
and fair dealing, and improve the negotiating position of growers and 
producers.
Cost-Benefit Analysis
    PSD estimated the costs and benefits of the final rule assuming its 
publication and effectuation in May 2020. The costs and benefits of the 
final rule are discussed in order below.
A. Cost Estimation
    PSD believes that the costs of Sec.  201.211 would mostly consist 
of the direct costs of reviewing and, if necessary, re-writing 
marketing and production contracts to ensure that packers, swine 
contractors, and live poultry dealers are not providing an undue or 
unreasonable preference or advantage to any livestock producer, swine 
production contract grower, or poultry grower compared to other 
similarly situated person or localities. PSD believes some in the 
industry may initiate litigation to test the new regulations, resulting 
in additional costs.
    Section 201.211 does not impose any new requirements on regulated 
entities, but it serves as guidance for their compliance with section 
202(b) of the Act. Since the rule clarifies the Secretary's 
consideration of unlawful undue or unreasonable preferences or 
advantages, regulated entities should face less risk of violating the 
Act. The rule does not prohibit the use of

[[Page 79793]]

alternative marketing agreements \15\ (AMAs), poultry tournament 
systems, or other incentive payment systems, and is not expected to 
decrease economic efficiencies in the cattle, hog, and poultry 
industries. Additionally, PSD does not expect this rule to inhibit the 
ability of regulated entities and producers and growers to develop and 
enter into mutually advantageous contracts.
---------------------------------------------------------------------------

    \15\ AMAs are marketing contracts, where producers market their 
livestock to a packer under a verbal or written agreement. Pricing 
mechanisms vary across AMAs. Some rely on a spot market for at least 
one aspect of their prices, while others involve complicated pricing 
formulas with premiums and discounts based on carcass merits. The 
livestock seller and packer agree on a pricing mechanism under AMAs, 
but usually not on a specific price.
---------------------------------------------------------------------------

    To estimate costs, PSD divided costs into two major categories, 
direct and indirect costs. In addition, PSD expects there are two 
direct costs: administrative costs and litigation costs.
    With respect to direct costs, administrative costs for regulated 
entities would include items such as review of marketing and production 
contracts, additional record keeping,\16\ and all other associated 
administrative office work to demonstrate that they do not provide an 
undue or unreasonable preference or advantage to any livestock 
producer, swine production contract grower, or poultry grower compared 
to other similarly situated person or localities.
---------------------------------------------------------------------------

    \16\ There are no additional mandatory record keeping 
requirements in the final rule. PSD expects that regulated entities 
may opt to keep additional records to justify advantages or 
preferences to demonstrate compliance with the final rule in case of 
a PSD investigation or private litigation action.
---------------------------------------------------------------------------

    Litigation costs for the livestock and poultry industries will 
initially increase until there is a body of case law interpreting the 
regulations. Once the courts establish precedent, PSD expects 
additional litigation to decline.
    With respect to indirect costs, those costs include costs caused by 
changes in supply and/or demand and any resulting efficiency losses in 
the national markets for beef, pork, and chicken and the related input 
markets for cattle, hogs, and poultry resulting from the direct costs 
of the rule.

1. Direct Costs--Administrative Costs

    To estimate administrative costs of the rule, PSD relied on its 
experience reviewing contracts and other business records commonly 
maintained in the livestock and poultry industries for compliance with 
the Act and regulations. PSD has data on the number of production 
contracts between swine production contract growers and swine 
contractors and poultry growers and live poultry dealers. PSD estimated 
the number of cattle marketing contracts between producers and packers 
based on the number of feedlots and the percentage of livestock 
procured under AMAs. PSD then multiplied hourly estimates of the 
administrative functions of reviewing and revising contracts by average 
hourly labor costs for administrative, management, and legal personnel 
to arrive at the total estimated administrative costs. PSD measured all 
costs in constant 2016 dollars in accordance with guidance on complying 
with E.O. 13771.\17\
---------------------------------------------------------------------------

    \17\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf
---------------------------------------------------------------------------

    Since packers, swine contractors, and live poultry dealers will 
likely choose to review their contracts as a precautionary measure to 
ensure that they are not engaging in conduct or action that in any way 
gives an undue or unreasonable preference or advantage to any livestock 
producer, swine production contract grower, or poultry grower, PSD 
estimates that the regulated entities will review each contract or each 
contract type once and will renegotiate any contracts that contain 
language that could be considered a violation of section 202(b) of the 
Act.
    One may view this estimate as an upper bound to the direct cost of 
the rule, as not every packer, swine contractor, or live poultry dealer 
will choose to conduct such a review. Some may choose to ``wait and 
see'' what effect, if any, the rule has on the industry, and whether 
courts rule on it in any way that would warrant such a review of their 
contracts.
    Based on PSD's experience, it developed estimates for regulated 
entities of the number of hours for attorneys and company managers to 
review and revise marketing and production contracts and for 
administrative staff to make changes, copy, and obtain signed copies of 
the contracts. For poultry contracts, PSD estimates that each unique 
contract type would require one hour of attorney time to review and 
rewrite a contract, two hours of company management time, and for each 
individual contract, one hour of administrative time, and one hour of 
additional record keeping time.\18\ PSD estimates that each of the 93 
live poultry dealers who report to PSD rely on 10 unique contract types 
on average. PSD data indicates that there are 24,101 individual poultry 
growing contracts. PSD estimates that each of the 237 hog packers has 
10 marketing agreements. The 2017 Census of Agriculture (Ag. Census) 
\19\ indicates that the universe of swine production contracts in the 
U.S. is 8,557. For hog production and marketing contracts, PSD 
estimates that each production contract and marketing agreement would 
require one-half hour of attorney time to review and rewrite a 
contract, one hour of company management time, one hour of 
administrative time, and one hour of additional record keeping time. 
For cattle processors, PSD estimates that each of the estimated 1,099 
marketing agreements would require one hour of attorney time to review 
and rewrite a contract, two hours of company management time, one hour 
of administrative time, and one hour of additional record keeping 
time.\20\
---------------------------------------------------------------------------

    \18\ Again, there are no additional mandatory record keeping 
requirements in the final rule.
    \19\ https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
    \20\ Ibid.
---------------------------------------------------------------------------

    PSD multiplied estimated hours to conduct these administrative 
tasks by the average hourly wages for managers at $62/hour, attorneys 
at $84/hour, and administrative assistants at $36/hour as reported by 
the U.S. Bureau of Labor Statistics in its Occupational Employment 
Statistics to arrive at its estimate of contract review costs for 
regulated entities.\21\
---------------------------------------------------------------------------

    \21\ All salary costs are based on mean annual salaries for May 
2018, adjusted for benefit costs, set to an hourly basis, and 
converted in to constant 2016 dollars. http://www.bls.gov/oes/. 
Accessed on April 9, 2019.
---------------------------------------------------------------------------

    PSD recognizes that contract review costs will also be borne by 
livestock producers, swine production contract growers, and poultry 
growers. PSD estimates that each livestock producer, swine production 
contract grower, and poultry grower will, in its due course of 
business, spend one hour of time reviewing a contract or marketing 
agreement and will spend one-half hour of its attorney's time to review 
the contract. As with the regulated entities, one may view this 
estimate as an upper bound to the direct cost of the rule, as not every 
producer or grower will choose to conduct such a review. Some may 
choose to ``wait and see'' what effect, if any, the rule has on the 
industry, and whether courts rule on it in any way that would warrant 
such a review of their contracts.

[[Page 79794]]

    PSD multiplied one hour of livestock producer, swine production 
contract grower, and poultry grower management time and one-half hour 
of attorney time to conduct the marketing and production contract 
review by the average hourly wages for attorneys at $84/hour and 
managers at $62/hour as reported by the U.S. Bureau of Labor Statistics 
in its Occupational Employment Statistics to arrive at its estimate of 
contract review costs for livestock producers, swine contract growers, 
and poultry growers. PSD then applied this cost to the estimated 1,099 
cattle marketing contracts, 2,370 hog marketing contracts, 8,557 hog 
production contracts, and 24,101 poultry growing contracts that have 
been reported to PSD.
    After determining the administrative costs to both the regulated 
entities and those they contract with, PSD added the administrative 
costs of the regulated entities and the livestock producers, swine 
production contract growers, and poultry growers together to arrive at 
the first-year total estimated administrative costs attributable to the 
regulation. A summary of the first-year total estimated administrative 
costs for Sec.  201.211 appear in the following table:

                                    Table 1--First-Year Administrative Costs
----------------------------------------------------------------------------------------------------------------
                                                 Cattle ($         Hogs ($         Poultry ($        Total ($
                 Regulation                      millions)        millions)        millions)        millions)
----------------------------------------------------------------------------------------------------------------
201.211.....................................           $0.42            $3.05            $4.42            $7.89
----------------------------------------------------------------------------------------------------------------

    The first-year total administrative costs are $7.89 million for 
Sec.  201.211, and include costs for cattle, hogs, and poultry because 
packers, swine contractors, live poultry dealers, livestock producers, 
swine production contract growers, and poultry growers would conduct 
administrative functions of contract review and record keeping in 
response to the regulation. The administrative costs are the highest 
for poultry, followed by hogs and cattle. This is due to the greater 
prevalence of contract growing arrangements in the poultry industry.
    Based on comments received to the proposed rule, AMS abbreviated 
criterion (d) in the final rule by removing the ``customary in the 
industry'' clause from proposed criterion. Since all contracts will 
likely be reviewed in their entirety for potential violations of the 
Packers and Stockyards Act, AMS does not expect the removal of this 
clause to appreciably reduce the amount of time for the administrative 
functions of contract review and additional record keeping. Thus, AMS 
expects the costs in the final rule to be unchanged from the proposed 
rule.
2. Direct Costs--Litigation Costs
    In considering the costs of the rules it proposed in 2016, GIPSA 
performed an in-depth analysis of litigation costs expected as a result 
of the package of four proposed new regulations.\22\ GIPSA estimated 
the total costs of litigating a case alleging violations of the Act. 
The main costs are attorney fees to litigate a case in a court of law. 
The cost of litigating a case includes the costs to all parties 
including the respondent and the USDA in a case brought by the USDA and 
the costs of the plaintiff and the defendant in the case of private 
litigation.
---------------------------------------------------------------------------

    \22\ The four proposed rules were published on December 20, 
2016, in Volume 81, No. 244 of the Federal Register.
---------------------------------------------------------------------------

    To estimate litigation costs for the 2016 proposed rules, GIPSA 
examined the actual cases decided under the Act from 1926 to 2014 as 
reported by the National Agricultural Law Center at the University of 
Arkansas.\23\ The litigation costs estimated in the 2016 proposed rules 
are measured in constant 2016 dollars and are for regulated entities, 
producers, and growers. The 2016 analysis of litigation costs estimated 
that the interim final rule at Sec.  201.3(a) was the primary source of 
litigation costs and that the litigation costs for all four proposed 
rules were counted under Sec.  201.3(a).\24\ The 2016 analysis split 
out the estimated litigation costs between sections 202(a) and 202(b).
---------------------------------------------------------------------------

    \23\ http://nationalaglawcenter.org/aglaw-reporter/case-law-index/packers-and-stockyards.
    \24\ The USDA withdrew Section 201.3(a) on October 18, 2017, in 
Volume 82, No. 200 of the Federal Register.
---------------------------------------------------------------------------

    The National Agricultural Law Center at the University of Arkansas 
has not reported any additional cases decided under the P&S Act since 
2015. Since new Sec.  201.211 establishes criteria for violations of 
section 202(b) and there has not been any recent litigation reported by 
the National Agricultural Law Center at the University of Arkansas, PSD 
used the estimated litigation costs associated with section 202(b) from 
the 2016 proposed rules as the starting point for this analysis.
    The section 202(b) estimated litigation costs serve as an upper 
boundary of estimated costs since the estimates assumed that Sec.  
201.3(a) and Sec.  201.211 would both be promulgated. PSD estimates 
that there would be additional litigation when Sec.  201.211 becomes 
effective, even in the absence of Sec.  201.3(a). Therefore, PSD uses 
the following section 202(b) litigation costs estimates in Table 14 
from the 2016 proposed rule as the estimated first-year litigation 
costs assuming the rule becomes effective in May 2020.\25\
---------------------------------------------------------------------------

    \25\ Federal Register, Volume 81, No. 244, page 92580.

[[Page 79795]]



                                 Table 2--Projected First-Year Litigation Costs
----------------------------------------------------------------------------------------------------------------
                                                 Cattle ($          Hog ($         Poultry ($        Total ($
          Section 202(b) of the act              millions)        millions)        millions)        millions)
----------------------------------------------------------------------------------------------------------------
Total.......................................           $0.24            $0.04            $1.49            $1.77
----------------------------------------------------------------------------------------------------------------

    PSD expects Sec.  201.211 will result in an additional $1.77 
million in litigation costs in the first full year after the rule 
becomes effective. Using the number of complaints PSD has received from 
industry participants as an indicator, PSD estimates that the majority 
of the litigation will be in the poultry industry. Most of the 
complaints concerning undue or unreasonable preferences that PSD has 
received since 2009 have come from the poultry industry.
3. Total Direct Costs
    The total first-year direct costs of Sec.  201.211 are the sum of 
administrative and litigation costs from above and are summarized in 
the following table.

                                      Table 3--First Year Direct Costs \26\
----------------------------------------------------------------------------------------------------------------
                                                     Cattle ($        Hogs ($       Poultry ($       Total ($
                    Cost type                        millions)       millions)       millions)       millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs.....................................           $0.42           $3.05           $4.42           $7.89
Litigation Costs................................            0.24            0.04            1.49            1.77
                                                 ---------------------------------------------------------------
    Total Direct Costs..........................            0.66            3.09            5.91            9.67
----------------------------------------------------------------------------------------------------------------

    PSD estimates the total direct costs of Sec.  201.211 to be $9.67 
million. As the above table shows, the costs are highest for the 
poultry industry, followed by the hog and cattle industries. The 
primary reason is the high utilization of growing contracts and the 
corresponding higher estimated administrative costs in the poultry 
industry. To put this direct cost in perspective, the actual impact on 
retail prices from these direct costs would be less than one one-
hundredth of a cent.
---------------------------------------------------------------------------

    \26\ The detail in this table and other tables in this analysis 
may not add to the totals due to rounding.
---------------------------------------------------------------------------

4. Indirect Costs
    PSD estimates that the indirect costs of Sec.  201.211 on the 
cattle, hog, and poultry industries are near zero. For the purposes of 
this analysis, indirect costs are social welfare losses due to any 
potential price and output changes from the direct costs of the rule 
and are in addition to the direct costs (administrative and litigation 
costs) on regulated entities, producers, and growers who are directly 
impacted by the rule. The economy will experience indirect costs, for 
example, if the rule causes packers and live poultry dealers to reduce 
production, increasing the price of meat products and reducing the 
amount of meat consumed by consumers.
    As previously discussed, the regulation clarifies the Secretary's 
consideration of whether a conduct or action constitutes an undue or 
unreasonable preference or advantage. PSD does not expect, therefore, 
that Sec.  201.211 will result in a decreased use of AMAs, use of 
poultry grower ranking systems or other incentive pay, reduced capital 
formation, inhibit development of new contracts, or decreased economic 
efficiencies in the livestock, meat, and poultry industries. 
Accordingly, PSD does not project indirect costs resulting from 
decreased use of AMAs, reduced capital, efficiency losses, or lost 
consumer and producer surplus. Indirect costs that could theoretically 
be anticipated are due to shifts in industry demand and supply curves 
resulting from the increases in industry direct costs attributable to 
the final rule. These shifts may result in quantity and price changes 
in the retail markets for beef, pork, and poultry, and the related 
input markets for cattle, hogs, and poultry. However, litigation costs 
are unrelated to the quantity of production--in other words, they are 
not marginal costs--so it is not appropriate to include them in the 
amount of a supply curve shift. Contract reviews and revisions are 
somewhat related to production quantity, but even they are less than 
fully compelling as a component of marginal cost. Litigation and 
administrative costs, however, are part of fixed costs of regulated 
entities. If the increase in fixed costs is significant enough, it 
could lead some firms to exit the industry in the long run. These 
nuances are not reflected in the assessment that follows, and thus it 
should be interpreted as a bounding exercise.
    To calculate an upper bound on this type of indirect costs based on 
supply curves shifting, PSD modeled the impact of the increase in 
direct costs of implementing Sec.  201.211 in a Marketing Margins Model 
(MMM) framework.\27\ The MMM allows for the estimation of changes in 
consumer and producer prices and quantities produced caused by changes 
in supply and demand in the retail markets for beef, pork, and poultry 
and the input markets for cattle, hogs, and poultry.
---------------------------------------------------------------------------

    \27\ The framework is explained in detail in Tomek, W.G. and 
K.L. Robinson ``Agricultural Product Prices,'' third edition, 1990, 
Cornell University Press.
---------------------------------------------------------------------------

    PSD modeled--again, as a bounding exercise--the indirect costs as 
an inward (or upward) shift in the supply curves for beef, pork, and 
poultry. This has the effect of increasing the equilibrium prices and 
reducing the equilibrium quantity produced. This also has the effect of 
reducing the derived demand for cattle, hogs, and poultry, which causes 
a reduction in the equilibrium prices and quantity produced. Economic 
theory suggests that these shifts in the supply curves and derived 
demand curves will result in price and quantity impacts and potential 
dead weight losses to society.\28\
---------------------------------------------------------------------------

    \28\ A dead weight loss is the cost to society of an inefficient 
allocation of resources in a market. Causes of deadweight losses can 
include market failures, such as market power or externalities, or 
an intervention by a non-market force, such as government regulation 
or taxation.
---------------------------------------------------------------------------

    To estimate the output and input supply and demand curves for the 
MMM, PSD constructed linear supply and demand curves around equilibrium 
price and quantity points using price elasticities of supply and demand 
from the GIPSA Livestock Meat and Marketing Study and from USDA's

[[Page 79796]]

Economic Research Service.\29\ With the supply curves established from 
this data, PSD then shifted the supply curves for beef, pork, and 
chicken up by the amount of the increase in direct costs for each 
industry. PSD calculated the new equilibrium prices and quantities in 
the input markets resulting from the decreases in derived demand that 
result from higher direct costs. This allows for the calculation of the 
indirect cost from the lower relative quantity produced at the 
relatively higher price when the industry's direct costs increase.
---------------------------------------------------------------------------

    \29\ RTI International ``GIPSA Livestock Meat and Marketing 
Study'' prepared for Grain Inspection, Packers and Stockyards 
Administration, 2007. ERS Price Elasticities: http://www.ers.usda.gov/data-products/commodity-and-food-elasticities/demand-elasticities-from-literature.aspx.
---------------------------------------------------------------------------

    The calculation of an upper bound on the price impacts from the 
increases in direct costs from Sec.  201.211 resulted in price 
increases of less than one one-hundredth of a cent per pound in retail 
prices for beef, pork, and poultry. This is because the increase in 
direct costs is very small in relation to total industry costs.\30\ The 
result is that the price and quantity effects from the increases in 
direct costs are indistinguishable from zero and, therefore, PSD 
concludes that the indirect costs of Sec.  201.211 for each industry 
are also zero.
---------------------------------------------------------------------------

    \30\ The $9.67 million increase in total industry costs from 
Sec.  201.211 is only 0.0043 percent of direct industry costs of 
approximately $223 billion for the beef, pork, and poultry 
industries.
---------------------------------------------------------------------------

5. Total Costs
    PSD added all direct costs to the indirect costs (near zero), to 
arrive at the estimated total first-year costs of Sec.  201.211. The 
total first-year costs are summarized in Table 4.

                                         Table 4--Total First Year Costs
----------------------------------------------------------------------------------------------------------------
                                                     Cattle ($        Hogs ($       Poultry ($       Total ($
                    Cost type                        millions)       millions)       millions)       millions)
----------------------------------------------------------------------------------------------------------------
Admin Costs.....................................           $0.42           $3.05           $4.42           $7.89
Litigation Costs................................            0.24            0.04            1.49            1.77
Total Direct Costs..............................            0.66            3.09            5.91            9.67
Total Indirect Costs............................            0.00            0.00            0.00            0.00
                                                 ---------------------------------------------------------------
    Total Costs.................................            0.66            3.09            5.91            9.67
----------------------------------------------------------------------------------------------------------------

    PSD estimates that the total costs will be $9.67 million in the 
first year of implementation.
6. Ten-Year Total Costs
    To arrive at the estimated ten-year administrative costs of Sec.  
201.211, PSD estimates that in each of the first five years, 20 percent 
of all contracts will either expire and need to be renewed each year or 
new marketing and production contracts will be put in place each year. 
While PSD expects the costs of reviewing and revising, if necessary, 
each contract will remain constant in the first five years, it expects 
the administrative costs will be lower after the first year because the 
direct administrative costs of reviewing and revising contracts would 
only apply to the 20 percent of expiring contracts or new contracts. 
PSD estimates that in the second five years, the direct administrative 
costs of reviewing and revising contracts will decrease by 50 percent 
per year as the contracts would already reflect language modifications, 
if any, necessitated by implementation of the regulation. PSD estimates 
that after ten years, the direct administrative costs will return to 
where they would have been absent the rule, and the additional 
administrative costs associated with the rule will remain at $0 after 
ten years.
    In estimating the estimated ten-year litigation costs of Sec.  
201.211, PSD expects the litigation costs to be constant for the first 
five years while courts are setting precedents for the interpretation 
of Sec.  201.211. PSD expects that case law with respect to the 
regulation would be settled after five years and by then, industry 
participants will know how PSD would enforce the regulation and how 
courts would interpret the regulation. The effect of courts 
establishing precedents is that litigation costs would decline after 
five years as the livestock and poultry industries understand how the 
courts interpret the regulation.
    To arrive at the estimated ten-year litigation costs of Sec.  
201.211, PSD estimates that litigation costs for the first five years 
will occur at the same rate and at the same cost as in the first full 
year of the rule ending in May 2021. In the sixth through tenth years, 
PSD estimates that additional litigation costs will decrease each year 
and return to where they would have been absent the rule in the tenth 
year after the rule is effective and remain at $0 after 10 years. PSD 
estimates this decrease in litigation costs to be linear, with the same 
decrease in costs each year.
    The ten-year total costs of Sec.  201.211 appear in the table 
below.\31\
---------------------------------------------------------------------------

    \31\ As discussed above, PSD expects total administrative and 
litigation costs to return to where they would have been absent the 
rule and the additional costs associated with the rule will remain 
at $0 after ten years.

                               Table 5--Ten-Year Total Costs--Years Ended May \32\
----------------------------------------------------------------------------------------------------------------
                                                                  Administrative   Litigation ($   Total direct
                              Year                                 ($ millions)      millions)     ($ millions)
----------------------------------------------------------------------------------------------------------------
2021............................................................           $7.89           $1.77           $9.67
2022............................................................            1.58            1.77            3.35
2023............................................................            1.58            1.77            3.35
2024............................................................            1.58            1.77            3.35
2025............................................................            1.58            1.77            3.35
2026............................................................            0.79            1.48            2.27
2027............................................................            0.39            1.18            1.58
2028............................................................            0.20            0.89            1.08
2029............................................................            0.10            0.59            0.69

[[Page 79797]]

 
2030............................................................            0.05            0.30            0.35
                                                                 -----------------------------------------------
    Totals......................................................           15.74           13.31           29.05
----------------------------------------------------------------------------------------------------------------

    Based on  the analysis, PSD expects the ten-year total costs will 
be $29.05 million.
---------------------------------------------------------------------------

    \32\ PSD uses May 2021 as the end of the first year after the 
rule is in effect for analytical purposes only. The date the rule 
becomes final was not known at the time of the analysis.
---------------------------------------------------------------------------

7. Present Value of Ten-Year Total Costs
    The total costs of Sec.  201.211 in the table above show that the 
costs are highest in the first year, decline to a constant and 
significantly lower level over the next four years, and then gradually 
decrease again over the subsequent five years. Costs to be incurred in 
the future are less expensive than the same costs to be incurred today. 
This is because the money that would be used to pay the costs in the 
future could be invested today and earn interest until the time period 
in which the costs are incurred.
    To account for the time value of money, the costs of the regulation 
to be incurred in the future are discounted back to today's dollars 
using a discount rate. The sum of all costs discounted back to the 
present is called the present value (PV) of total costs. PSD relied on 
both a 3 percent and 7 percent discount rate as discussed in Circular 
A-4.\33\ PSD measured all costs using constant 2016 dollars.
---------------------------------------------------------------------------

    \33\ https://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf.
---------------------------------------------------------------------------

    PSD calculated the PV of the ten-year total costs of the regulation 
using both a 3 percent and 7 percent discount rate and the PVs appear 
in the following table.

                   Table 6--PV of Ten-Year Total Costs
------------------------------------------------------------------------
                Discount  rate  (percent)                  ($ millions)
------------------------------------------------------------------------
3.......................................................          $26.31
7.......................................................           23.33
------------------------------------------------------------------------

    PSD expects the PV of the ten-year total costs would be $26.31 
million at a 3 percent discount rate and $23.33 million at a 7 percent 
discount rate.
8. Annualized Costs
    PSD annualized the PV of the ten-year total costs (referred to as 
annualized costs) of Sec.  201.211 using both a 3 percent and 7 percent 
discount rate as required by Circular A-4 and the results appear in the 
following table.\34\
---------------------------------------------------------------------------

    \34\ Ibid.

                   Table 7--Ten-Year Annualized Costs
------------------------------------------------------------------------
                Discount  rate  (percent)                  ($ millions)
------------------------------------------------------------------------
3.......................................................           $3.08
7.......................................................            3.32
------------------------------------------------------------------------

    PSD expects the annualized costs of Sec.  201.211 would be $3.08 
million at a 3 percent discount rate and $3.32 million at a 7 percent 
discount rate.
    PSD also annualized the PV of the ten-year total costs into 
perpetuity of Sec.  201.211 using both a 3 percent and 7 percent 
discount rate following the guidance on complying with E.O. 13771. The 
results appear in the following table.\35\
---------------------------------------------------------------------------

    \35\ https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/memoranda/2017/M-17-21-OMB.pdf.

                Table 8--Annualized Costs into Perpetuity
------------------------------------------------------------------------
                Discount  rate  (percent)                  ($ millions)
------------------------------------------------------------------------
3.......................................................           $0.69
7.......................................................            1.21
------------------------------------------------------------------------

    PSD expects the costs of Sec.  201.211 annualized into perpetuity 
would be $0.69 million at a 3 percent discount rate and $1.21 million 
at a 7 percent discount rate. Based on the costs in Table 8, and in 
accordance with guidance on complying with E.O. 13771, the single 
primary estimate of the costs of this final rule is $1.21 million, the 
total costs annualized in perpetuity using a 7 percent discount rate.
B. Benefits
    PSD was unable to quantify the benefits of Sec.  201.211. However, 
the rule contains several provisions that PSD expects to improve 
economic efficiencies in the regulated markets for cattle, hogs, and 
poultry and reduce market failures. Regulations that increase the 
amount of relevant information available to market participants, 
protect private property rights, and foster competition can improve 
economic efficiencies and generate benefits for consumers and 
producers.
    Section 201.211 will increase the amount of relevant information 
available to market participants and offset any potential abuse of 
buyer-side market power by clearly stating to all contracting parties 
the criteria that the Secretary will consider in determining whether 
conduct or action constitutes an undue or unreasonable preference or 
advantage in violation of section 202(b) of the Act.
    The regulation will also reduce the risk of violating section 
202(b) because it clarifies the criteria the Secretary will consider in 
determining whether the conduct or action in the livestock and poultry 
industries constitutes an undue or unreasonable preference or advantage 
and a violation of section 202(b) of the Act. Other benefits of 
clarifying the criteria may include reducing litigation risk; 
decreasing contracting costs; promoting competitiveness and fairness in 
contracting; and providing protections for livestock producers, swine 
production contract growers, and poultry growers.
    Benefits to the livestock and poultry industries and the cattle, 
hog, and poultry markets also arise from improving parity of 
negotiating power between packers, swine contractors, and live poultry 
dealers and livestock producers, swine production contract growers, and 
poultry growers. The improvement in parity comes when contracting 
parties negotiate new contracts and when they review and renegotiate 
any existing contract terms that contain language that could be 
considered a violation of section 202(b) of the Act.
    Since the regulation increases the amount of relevant information 
by clarifying what might be considered an undue or unreasonable 
preference, it increases parity in negotiating contracts, and thereby 
reduces the ability to abuse buyer-side market power with the

[[Page 79798]]

resulting welfare losses.\36\ Establishing parity of negotiating power 
in contracts promotes fairness and equity and is consistent with PSD's 
mission to protect fair trade practices, financial integrity, and 
competitive markets for livestock, meats, and poultry.\37\
---------------------------------------------------------------------------

    \36\ Nigel Key and Jim M. MacDonald discuss evidence for the 
effect of concentration on grower compensation in ``Local Monopsony 
Power in the Market for Broilers? Evidence from a Farm Survey'' 
selected paper American Agri. Economics Assn. meeting Orlando, 
Florida, July 27-29, 2008.
    \37\ See additional discussion in Steven Y. Wu and James 
MacDonald (2015) ``Economics of Agricultural Contract Grower 
Protection Legislation,'' Choices 30(3): 1-6.
---------------------------------------------------------------------------

C. Cost-Benefit Summary
    PSD expects the ten-year annualized costs of Sec.  201.211 to be 
$3.08 million at a 3 percent discount rate and $3.32 million at a 7 
percent discount rate and the costs annualized into perpetuity to be 
$0.69 million at a 3 percent discount rate and $1.21 million at a 7 
percent discount rate. PSD expects the costs will be highest for the 
poultry industry due to its extensive use of poultry growing contracts, 
followed by the hog industry and the cattle industry, respectively.
    PSD was unable to quantify the benefits of the new regulation, but 
they explained numerous qualitative benefits that would protect 
livestock producers, swine production contract growers, and poultry 
growers; promote fairness and equity in contracting; increase economic 
efficiencies; and reduce the negative effects of market failures 
throughout the entire livestock and poultry value chain. The primary 
benefit of Sec.  201.211 is expected to be reduced occurrences of undue 
or unreasonable preferences or advantages and increased economic 
efficiencies in the marketplace. This benefit of additional enforcement 
of the Act accrues to all segments of the value chain in the production 
of livestock and poultry, and ultimately to consumers.

Regulatory Flexibility Analysis

    The Small Business Administration (SBA) defines small businesses by 
their North American Industry Classification System Codes (NAICS).\38\ 
SBA considers broiler and turkey producers/growers and swine 
contractors, NAICS codes 112320, 112330, and 112210 respectively, to be 
small businesses if sales are less than $1,000,000 per year. Cattle 
feeders are considered small if they have less than $8 million in sales 
per year. Beef and pork packers, NAICS 311611, are small businesses if 
they have fewer than 1,000 employees.
---------------------------------------------------------------------------

    \38\ U.S. Small Business Administration. Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes. Effective August 19, 2019. https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019.pdf.
---------------------------------------------------------------------------

    The Packers and Stockyards Act regulates live poultry dealers, 
which is a group similar but not identical to the NAICS category for 
poultry processors. Poultry processors, NAICS 311611, are considered 
small business if they have fewer than 1,250 employees. PSD applied 
SBA's definition for small poultry processors to live poultry dealers 
as the best standard available, and it considers live poultry dealers 
with fewer than 1,250 employees to be small businesses.
    PSD maintains data on live poultry dealers from the annual reports 
these firms file with PSD. Currently, 93 live poultry dealers would be 
subject to the new regulation. Seventy-Four of the live poultry dealers 
would be small businesses according to the SBA standard. Although there 
were many more small businesses than large, small businesses produced 
only about 6.5 percent of the poultry in the United States in 2017.
    Live poultry dealers classified as large businesses are responsible 
for about 93.5 percent of the poultry contracts. Assuming that small 
businesses would bear 6.5 percent of the costs, in the first year the 
regulation is effective, $222,687 \39\ would fall on live poultry 
dealers classified as small businesses. This amounts to average 
estimated costs for each small live poultry dealer of $3,009.
---------------------------------------------------------------------------

    \39\ Estimated cost to live poultry dealers of $3,412,301 x 6.52 
percent of firms that are small businesses = $222,687.
---------------------------------------------------------------------------

    As of February 2019, PSD records identified 381 beef and pork 
packers actively purchasing cattle or hogs for slaughter. Many firms 
slaughtered more than one species of livestock. Of the 381 beef and 
pork packers, 172 processed both cattle and hogs, 144 processed cattle 
but not hogs, and 65 processed hogs but not cattle.
    PSD estimates that small businesses accounted for 23.1 percent of 
the cattle and 19.2 percent of the hogs slaughtered in 2017. If the 
costs of implementing Sec.  201.211 are proportional to the number of 
head processed, then in the first full year the regulation is 
effective, PSD estimates that $126,501 \40\ in additional costs would 
fall on beef packers classified as small businesses. This amounts to 
estimated costs of $407 for each small beef packer.
---------------------------------------------------------------------------

    \40\ Estimated cost to beef packers of $547,643 x 23.1 percent 
of firms that are small businesses = $126,501.
---------------------------------------------------------------------------

    In total, $81,603 \41\ in additional first-year costs would be 
expected to fall on pork packers classified as small businesses, and 
$30,863 \42\ would fall on swine contractors classified as small 
businesses. This amounts to average estimated costs for each small pork 
packer of $356, and average estimated costs for each small swine 
contractor of $286 in the first year the regulation is effective. To 
the extent that smaller beef and pork packers rely on AMA purchases 
less than large packers, the estimates might tend to overstate costs.
---------------------------------------------------------------------------

    \41\ Estimated cost to hogs and pork of $1,959,550 x 19.2 
percent of slaughter in small businesses x 21.7 percent of costs 
attributed to packers = $81,603.
    \42\ Estimated cost to hogs and pork of $1,959,550 x 2.01 
percent of contracted hogs produced by swine contractors that are 
small businesses x 78.3 percent of costs attributed to contractors = 
$30,863.
---------------------------------------------------------------------------

    PSD then annualized the present value of ten-year total costs of 
the proposed rule on regulated entities, multiplied by the percent of 
small business. Ten-year annualized costs discounted at a 3 percent 
rate would be $61,097 for the cattle and beef industry, $32,463 for the 
hog and pork industry, and $119,271 for the poultry industry. This 
amounts to annualized costs of $196 for each beef packer, $103 for each 
pork packer, $82 for each swine contractor, and $1,612 for each live 
poultry dealer that is a small business. The total annualized costs for 
regulated small businesses would be $212,830.
    Ten-year annualized costs at a 7 percent discount rate would be 
$64,458 for the regulated cattle and beef industry, $35,416 for the 
regulated hog and pork industry, and $125,696 for the poultry industry. 
This amounts to ten-year annualized costs of $207 for each beef packer, 
$112 for each pork packer, $90 for each swine contractor, and $1,699 
for each live poultry dealer that is a small business. The total ten-
year annualized costs at 7 percent for regulated small businesses would 
be $225,570.
    The table below lists the estimated additional costs associated 
with the regulation in the first year. It also lists annualized costs 
discounted at 3 percent and 7 percent discount rates, and annualized PV 
of costs extended into perpetuity discounted at 3 and 7 percent.

[[Page 79799]]



                      Table 9--Estimated Industry Total Costs to Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                   Pork packers
                                                   Beef packers      and swine        Poultry
                  Estimate type                         ($)         contractors     processors      Total  ($)
                                                                        ($)             ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................        $126,501        $112,466        $222,687        $461,653
10 years Annualized at 3%.......................          61,097          32,463         119,271         212,830
10 years Annualized at 7%.......................          64,458          35,416         125,696         225,570
Annualized Total Cost into Perpetuity Discounted          13,720           7,290          26,784          47,794
 at 3%..........................................
Annualized Total Cost into Perpetuity Discounted          23,492          12,907          45,810          82,209
 at 7%..........................................
----------------------------------------------------------------------------------------------------------------

    In considering the impact on small businesses, PSD considered the 
average costs and revenues of each regulated small business impacted by 
Sec.  201.211. The number of small businesses impacted, by NAICS code, 
as well as the costs per entity in the first-year, ten-year annualized 
costs per entity at both the 3 percent and 7 percent discount rates, 
and annualized PV of the total costs extended into perpetuity 
discounted at 3 and 7 percent appear in the following table.

                                                Table 10--Per Entity Costs to Regulated Small Businesses
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Number  of                       Ten-year        Ten-year
                          NAICS                                small        First year      annualized      annualized     Perpetuity 3%   Perpetuity 7%
                                                            businesses          ($)        costs-3%  ($)   costs-7%  ($)        ($)             ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
112210--Swine Contractor................................             108            $286             $82             $90             $19             $33
311615--Poultry Processor...............................              74           3,009           1,612           1,699             362             619
311611--Beef Packer.....................................             311             407             196             207              44              76
311611--Pork Packer.....................................             229             356             103             112              23              41
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The following table compares the average per entity first-year and 
annualized costs of Sec.  201.211 to the average revenue per 
establishment for all regulated small businesses in the same NAICS 
code. The annualized costs are slightly higher at the 7 percent rate 
than at the 3 percent rate, so only the 7 percent rate is included in 
the table as the more conservative estimate.

               Table 11--Comparison of Per Entity Cost to Revenues for Regulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                                     Ten-year       Annualized
                                                      Average       First-year      annualized        cost to
                      NAICS                         revenue per       cost as         cost as      perpetuity as
                                                   establishment   percentage of   percentage of  percentage  of
                                                        ($)           revenue         revenue         revenue
----------------------------------------------------------------------------------------------------------------
112210--Swine Contractor........................        $485,860           $0.06           $0.02          $0.007
311615--Poultry Processor.......................      13,842,548            0.02            0.01           0.004
311611--Beef Packer.............................       6,882,205            0.01            0.00           0.001
311611--Pork Packer.............................       6,882,205            0.01            0.00           0.001
----------------------------------------------------------------------------------------------------------------

    The revenue figures in the above table come from U.S. Census data 
for live poultry dealers and cattle and hog slaughterers, NAICS codes 
311615 and 311611, respectively.\43\ Ag. Census data have the number of 
head sold by size classes for farms that sold their own hogs and pigs 
in 2017 and that identified themselves as contractors or integrators, 
but not the value of sales nor the number of head sold from the farms 
of the contracted production. To estimate average revenue per 
establishment, PSD used the estimated average value per head for sales 
of all swine operations and the production values for firms in the Ag. 
Census size classes for swine contractors. The results in Table 11 
demonstrate, the costs of Sec.  201.211 as a percent of revenue are 
less than 1 percent.\44\
---------------------------------------------------------------------------

    \43\ https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US.
    \44\ There are significant differences in average revenues 
between swine contractors and cattle, hog, and poultry processors, 
resulting from the difference in SBA thresholds.
---------------------------------------------------------------------------

    Although the Packers and Stockyards Act does not regulate livestock 
producers or poultry growers, PSD recognizes that they will also incur 
contract review costs. PSD estimates that each livestock producer and 
poultry grower will, in its due course of business, spend one hour of 
time reviewing a contract or marketing agreement and will spend one-
half hour of its attorney's time to review the contract. As with the 
regulated entities, one may view this estimate as an upper bound to the 
direct cost of the rule, as not every producer or grower will choose to 
conduct such a review. Some may choose to ``wait and see'' what effect, 
if any, the rule has on the industry, and whether courts rule on it in 
any way that would warrant such a review of their contracts.

[[Page 79800]]

    PSD multiplied one hour of livestock producer, swine production 
contract grower, and poultry grower management time and one-half hour 
of attorney time to conduct the marketing and production contract 
review by the average hourly wages for attorneys at $84/hour and 
managers at $62/hour, as reported by the U.S. Bureau of Labor 
Statistics in its Occupational Employment Statistics, to arrive at its 
estimate of contract review costs for livestock producers, swine 
contract growers, and poultry growers. The result is that each small 
livestock producer and each small poultry that sells livestock or 
raises poultry on a contract is expected to bear $104 in first year 
costs, $23 in ten-year annualized costs discounted at 3 percent, $25 in 
ten-year annualized costs discounted at 7 percent, and $9 discounted 
into perpetuity at 7 percent. Table 12 lists expected costs to 
livestock producers and poultry growers that are small businesses.

                              Table 12--Total Costs to Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                      Cattle      Hog  producers      Poultry
                  Estimate type                    feeders  ($)         ($)        growers  ($)     Total  ($)
----------------------------------------------------------------------------------------------------------------
First-Year Costs................................        $111,866        $459,707      $2,501,106      $3,072,679
10 years Annualized at 3%.......................          24,274          99,754         542,727         666,755
10 years Annualized at 7%.......................          26,917         110,614         601,812         739,342
Annualized Total Cost into Perpetuity Discounted          $5,451         $22,401        $121,876        $149,728
 at 3%..........................................
Annualized Total Cost into Perpetuity Discounted           9,810          40,313         219,329         269,452
 at 7%..........................................
----------------------------------------------------------------------------------------------------------------

    The Ag. Census indicates there were 575 farms that sold hogs or 
pigs in 2017 and identified themselves as contractors or integrators. 
About 19 percent of swine contractors had sales of less than $1,000,000 
in 2017 and would have been classified as small businesses. These small 
businesses accounted for only 2 percent of the hogs produced under 
production contracts.
    Additionally, there were 8,557 swine producers in 2017 with swine 
contracts, and about 41 percent of these producers would have been 
classified as small businesses. PSD estimated an additional 2,370 pork 
producers had marketing agreements with pork packers. If 41 percent are 
small businesses, then 4,480 hog producers could incur contract review 
costs. PSD estimated as many as 1,099 cattle feeders had marketing 
agreements or contracts that could need adjustment due to the new rule. 
If 98 percent are small businesses, 1,078 could bear costs of reviewing 
contracts. Table 13 compares cost to revenues for producer unregulated 
producers that are small businesses.
    PSD records indicated poultry processors had 24,101 poultry 
production contracts in effect in 2017. The 24,101 poultry growers 
holding the other end of the contracts are almost all small businesses 
by SBA's definitions.

                 Table 13--Comparison of Total Cost to Revenues for Unregulated Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                                     Ten-year       Annualized
                                     Number of                      First-year      annualized        cost to
              NAICS                    small          Average         cost as         cost as      perpetuity as
                                    businesses     revenue  ($)   percentage  of  percentage  of  percentage  of
                                                                      revenue         revenue         revenue
----------------------------------------------------------------------------------------------------------------
112212--Cattle Feeders..........           1,078        $305,229            0.03            0.01           0.003
112210--Hog Producers...........           4,480         333,607            0.03            0.01           0.003
112320--Poultry Growers.........          24,101         181,545            0.06            0.01           0.005
----------------------------------------------------------------------------------------------------------------

    Ten-year annualized cost savings of exempting small businesses 
would be $212,830 using a 3 percent discount rate and $225,570 using a 
7 percent discount rate. The cost savings annualized into perpetuity of 
exempting small businesses would be $47,794 using a 3 percent discount 
rate and $82,209 using a 7 percent discount rate. However, one purpose 
of Sec.  201.211 is to protect all livestock producers, swine 
production contract growers, and poultry growers from unfair and 
unreasonable preferences or advantages, regardless of whether the 
producer or grower and the packer, swine contractor, or live poultry 
dealer to which they sell or contract is a large or small business. PSD 
believes that the benefits of Sec.  201.211 will be captured by all 
livestock producers, swine production contract growers, and poultry 
growers. For this reason, AMS did not consider exempting small business 
from this final rule.
    The number of regulated entities that could experience a cost 
increase is substantial. Most regulated packers and live poultry 
dealers are small businesses. However, the expected cost increases for 
each entity are not significant. For all four groups of regulated 
entities--beef packers, pork packers, live poultry dealers, and swine 
contractors--average first year costs are expected to amount to less 
than one tenth of one percent of annual revenue. Ten-year annualized 
costs discounted at 7 percent are highest for swine contractors at two 
one hundredths of one percent of revenue. Annualized expected costs of 
$90 and $112 for swine contractors and pork packers, respectively, are 
near the cost of one hog. An annualized expected cost of $207 for beef 
packers is much less than the cost of one fed steer. Expected costs for 
live poultry dealers are higher, but as a percent of revenue, expected 
costs to live poultry dealers are very low. AMS expects that the 
additional costs to small packers, live poultry dealers, and swine 
contractors will not change their ability to continue operations or 
place any of them at a competitive disadvantage.
    The number of unregulated entities that could experience a cost 
increase is also substantial. Most affected livestock producers and 
poultry growers are small businesses. Again, expected costs for 
individual entities are not significant. The expected first year cost 
for each unregulated livestock producer or poultry grower is $104. 
Annualized expected 10-year costs discounted at 3

[[Page 79801]]

percent are $23. Costs as a percent of revenue are expected to be well 
below 1 percent. AMS expects that $23 per year will not change any 
producer's or poultry grower's ability to continue operations or place 
any livestock producer or poultry grower at a competitive disadvantage.
    As discussed in the Regulatory Impact Analysis, AMS does not expect 
welfare transfers among market segments or within segments. Estimated 
changes in prices and quantities are indistinguishable from zero. AMS 
does not expect Sec.  201.211 to cause changes in production or 
marketing for small businesses, and the increase in direct costs is 
very small in relation to total costs.

Comments on the Regulatory Flexibility Analysis

    In the proposed rule, AMS solicited public comment on whether Sec.  
201.211 as proposed would have a significant economic impact on a 
substantial number of small business entities. None of the public 
comments specifically addressed the Regulatory Flexibility Analysis in 
the proposed rule. However, several comments were submitted by small 
farmers who said they find it increasingly difficult to compete in the 
consolidated livestock and poultry industries. Many comments expected 
the proposed rule, particularly proposed criterion (d), to legitimize 
what they characterized as unfair, but customary, business arrangements 
in which they feel powerless to affect more favorable contract terms 
for themselves.
    In response to comments, AMS revised the language of criterion (d) 
to provide that the Secretary can determine whether a preference or 
advantage is undue or unreasonable and a violation of the Act by 
considering whether the action is the result of a reasonable business 
decision. AMS removed the proposed language that examined whether the 
action was also customary in the industry, thus addressing some of the 
concerns expressed by comments. AMS does not expect revision of 
criterion (d) to impact the conclusions of this analysis.
    Based on the above analyses and the comments received, AMS does not 
expect Sec.  201.211 to have a significant economic impact on a 
substantial number of small business entities as defined in the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

Civil Rights Review

    AMS has considered the potential civil rights implications of this 
rule on members of protected groups to ensure that no person or group 
would be adversely or disproportionately at risk or discriminated 
against on the basis of race, color, national origin, gender, religion, 
age, disability, sexual orientation, marital or family status, 
political beliefs, parental status, or protected genetic information. 
This rule does not contain any requirements related to eligibility, 
benefits, or services that would have the purpose or effect of 
excluding, limiting, or otherwise disadvantaging any individual, group, 
or class of persons on one or more prohibited bases. AMS has developed 
an outreach program to ensure information about the regulation is made 
available to socially and economically disadvantaged or limited 
resource farmers, producers, growers, and members of racial and ethnic 
minority groups.
    In its review, AMS conducted a disparate impact analysis, using the 
required calculations, which resulted in a finding that Asian 
Americans, Pacific Islanders, and Native Hawaiians met the condition 
for adverse impacts. The regulation itself would provide benefits to 
all farmers and ranchers equally. AMS will institute enhanced efforts 
to notify the groups found to be adversely impacted of the regulation 
and its benefits. It is of particular importance that impacted 
individuals and groups be made aware of the benefits the new regulation 
may provide them. AMS will specifically target seven organizations 
representing the interests of these impacted groups for outreach.

Paperwork Reduction Act

    This rule does not contain new or amended information collection 
requirements subject to the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.). It does not involve collection of new or additional 
information by the Federal Government. According to PSD records, there 
were approximately 312 bonded packers; 1,326 market agencies selling on 
commission; 4,582 livestock dealers and commission buyers; and 95 live 
poultry dealers regulated under the Act in 2018. The 2017 Census of 
Agriculture indicated that there were 575 swine contractors in 2017. 
The 2017 Census of Agriculture also indicated that there were 826,733 
livestock producers and poultry growers. None of these entities are 
required to submit forms or other information to AMS or to keep 
additional records in consequence of this rule.

E-Government Act

    USDA is committed to complying with the E-Government Act by 
promoting the use of the internet and other information technologies to 
provide increased opportunities for citizen access to Government 
information and services, and for other purposes.

Executive Order 13175

    This rule has been reviewed in accordance with the requirements of 
Executive Order 13175--Consultation and Coordination with Indian Tribal 
Governments. Executive Order 13175 requires Federal agencies to consult 
with Tribes on a government-to-government basis on policies that have 
Tribal implications, including regulations, legislative comments or 
proposed legislation, and other policy statements or actions that have 
substantial direct effects on one or more Indian Tribes, on the 
relationship between the Federal Government and Indian Tribes, or on 
the distribution of power and responsibilities between the Federal 
Government and Indian Tribes.
    The USDA's Office of Tribal Relations (OTR) has assessed the impact 
of this rule on Indian Tribes and determined that this rule may have 
Tribal implications that require continued outreach efforts to 
determine if Tribal consultation under Executive Order 13175 is 
required, but OTR does not believe that consultation is required at 
this time.
    If a Tribe requests consultation, AMS will work with the OTR to 
ensure meaningful consultation is provided where changes, additions, 
and modifications identified herein are not expressly mandated by 
Congress.

Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a major rule as defined by 5 U.S.C. 804(2).

Executive Order 12988

    This rule has been reviewed under Executive Order 12988--Civil 
Justice Reform. This rule is not intended to have retroactive effect. 
This rule does not preempt state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule. There are no administrative procedures that must be exhausted 
prior to any judicial challenge to the provisions of this rule. Nothing 
in this rule is intended to interfere with a person's right to enforce 
liability against any person subject to the Act under authority granted 
in section 308 of the Act.

List of Subjects in 9 CFR Part 201

    Confidential business information, Reporting and recordkeeping

[[Page 79802]]

requirements, Stockyards, Surety bonds, Trade practices.

    For the reasons set forth in the preamble, USDA amends 9 CFR part 
201 as follows:

PART 201--REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT

0
1. The authority citation for part 201 continues to read as follows:

    Authority:  7 U.S.C. 181--229c.


0
2. Section 201.211 is added to read as follows:


Sec.  201.211   Undue or unreasonable preferences or advantages.

    The Secretary will consider the following criteria, and may 
consider additional criteria, when determining whether a packer, swine 
contractor, or live poultry dealer has made or given any undue or 
unreasonable preference or advantage to any particular person or 
locality in any respect in violation of section 202(b) of the Act. The 
criteria include whether the preference or advantage under 
consideration:
    (a) Cannot be justified on the basis of a cost savings related to 
dealing with different producers, sellers, or growers;
    (b) Cannot be justified on the basis of meeting a competitor's 
prices;
    (c) Cannot be justified on the basis of meeting other terms offered 
by a competitor; and
    (d) Cannot be justified as a reasonable business decision.

Bruce Summers,
Administrator, Agricultural Marketing Service.
[FR Doc. 2020-27117 Filed 12-10-20; 8:45 am]
BILLING CODE P


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